Good day, ladies and gentlemen, and welcome to the Q3 2017 Badger Meter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Rick Johnson, Senior Vice President of Finance and Chief Financial Officer. Sir, you may begin.

Thank you very much, Brian. Good morning, everyone. Welcome to Badger Meter's third quarter conference call. I want to thank all of you for joining us. As usual, I will begin by stating that we will make a number of forward-looking statements on our call today. Certain statements contained in this presentation, as well as other information provided from time-to-time by the Company or its employees may contain forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors. Let me reiterate some of our guidelines. For competitive reasons we do not comment on specific individual product line profitability other than in general terms, nor do we disclose components of cost of sales, for example, copper. More importantly, we continue our practice of not providing specific guidance on future earnings. We believe specific guidance does not serve the long-term interest of our shareholders. Now on to the results. After the market closed yesterday, we released our third quarter 2017 results. While the bottom line did not match our expectations, sales were record for any third quarter at just over $100 million. This is an increase of $3.7 million or 3.9% over last year's third quarter sales of $96.3 million. Let's talk about some of the details. Municipal water sales represented 74.7% of total third quarter sales compared to 77.4% in the third quarter last year. Municipal water sales increased 3/10 of 1% to 74.7 million in the third quarter from 74.5 million last year. This is the net impact of higher commercial water meters sales and the inclusion of about $800,000 of sales from D-Flow which we acquired earlier…

Thank you, Rick and thank all of you for joining us today. This was an interesting quarter for us with record sales but lower earnings as Rick discussed. Although utility metering sales were relatively flat, we have seen an overall softening in the utility market over the past six months when several of our competitors reported their second quarter results they had significant decreases in sales. Therefore, we feel good that we've been able to hold our own position and most likely we've seen an increase in our market share. In addition, we continue to see significant increases in our sales of our newer products both the E-series ultrasonic meters and the ORION cellular radios. We are currently working to integrate the technology of our recent acquisition D-Flow into our ultrasonic meters and expect that project will be completed later next year. Also the introduction earlier this year of the LTE version of the ORION cellular radio has driven a lot of interest in this leading edge technology resulting in many utilities initiating pilot tests which we expect will further increase sales in 2018. We saw a significant rebound in our flow instrumentation business driven both by the continued improvement in the oil and gas markets, as well as the impacts of sales channel reorganizations that we completed over the past year. A recently announced distribution agreement with DNOW LP for our global sales into the oil and gas industry did not have any significant impact on this quarter but is expected to drive even more growth in future periods. Margins were softer than usual this quarter primarily due to a significant impact from copper prices. In the third quarter of last year, copper averaged $2.16 per pound but increased 35% over the past year to average $2.91 per pound during the third quarter. We purchased a substantial amount of brass for our meter manufacturing which is primarily composed of copper. Since September 30 copper prices have continued to increase to well over $3 per pound. However most commodity and analysts believe this pricing level is not sustainable and they expect to see price decreases going into 2018. Nevertheless we are prepared to announce price increases to offset higher material costs, as well as expected price increases in resin due to the impacts of Hurricane Harvey on resin producers in the Houston area. These increases will be announced in the fourth quarter but will not have any impact until the first quarter of 2018. It should be noted that when copper prices have jumped in past years, our industry has generally been successful in passing along pricing to offset those increases. We see no reason to expect it to be different in the future. Overall, we continue to be confident about the future of our business and our ability to generate shareholder value on a long-term basis. With those comments, we would like to take your questions.

[Operator Instructions] And your first question will come from the line of Nathan Jones with Stifel. Please proceed.

Rich, I wonder if you could give us a little more detail on the plan price increases in the fourth quarter. Do you think they're going to cover all of the raw material increases? Do you think there will be a lag to that past the first quarter or just how should we think about that price cost dynamics for you guys over the next few quarters?

Yes, what we will do is over the next 30 days, we'll go through and queue up that increase. We need to give our distributors, and certain customers notice at least 30 days notice if not more. So over the next 30 days we'll go through and figure out which products how much and adjust our pricing sheets, all of that will be effective January 1,that's our target. Now obviously over the next 30 days, we’re going to be watching the cost of copper too. This morning it's at $3.17, so it's jumped again on the London Exchange last night. A lot of that increase is being driven by news out of China. The problem we all have with China is we don't know how much copper they have in their stocks over there, they don't release, they don't announce that. So they are always the wildcard. So it went up so quickly in the last few weeks could also go down just as quickly. So we're going to be watching that and adjusting that increase for whatever happens with the price of copper but we are shooting at a moving target.

And the other thing Nathan is, while we'll announce it in the fourth quarter, we could get orders yet in under the old prices for delivery in the first quarter. So to your point there could be a bit of a lag where it really doesn't fully kick-in until the second quarter.

Yes, generally in the past we've announced a price increase and obviously we have contracts, we don't do contracts for more than a year at a fixed price. It they go beyond the year we got a producer price index adjustment in them, but we have contracts that will be coming up for renewal every month over the next year and as they come up for renewal, we'll factor in those price increases. The ones that have PPI adjustments will factor those and as soon as we can but then any new contracts will be led at new prices. So, unfortunately it does take a ramp up. If we target an overall dollar amount that we’re after to offset the impact of brass, it takes us a while to get there. On the positive side we also gain on the downside. If brass starts coming down again, it takes a while for that pricing to adjust down from competitive pressure and so we gain on there. So just like when brass hit or when copper hit $4 a pound several years ago and we went out and put in price increases to offset that, we expect this to follow along the same guidelines here. So there may be some short-term negative impact but we will get it in there.

So, sound like a couple quarters a margin headwind there. I understand that this is not the way to go, but if we assume that copper was flat from here, would you think that by say the second quarter of next year that you would be - you would have recaptured all of that price cost differential?

That would be our goal, yes.

You did mention in the press release that there was some other expenses in that that also drag down gross margin. Were they related to the acquisition or were they one-time in nature and any color you can give us on the size of that?

I would think for the most part they were one time in nature and frankly just higher the last year, you also got to remember our comp last few that gross profit percentage was 40.1%, that's a little bit higher than normal. So I mean when we say higher cost, higher than last year just simply because of that factor.

So any color you can give us on the magnitude of that?

Most of the decrease in gross profit percentage was driven by the copper. I mean most of this other stuff was 100,000 here, 100,000 there nothing of substance.

Except we did have a significant payment to a search firm for our new COO that we hired. So it's not in the margin but it's down in the - I’m sorry, it’s down in the SG&A cost but that was in there too.

And your next question will come from line of Tate Sullivan with Sidoti. Please proceed.

Can you follow-up your comment on some softening in the market, I mean historically what's that due to? Is it due to multiple areas been done with the replacement cycle - replacing their older meters or what are the current factors in that side?

What we're seeing right now is some of the larger projects that were in the queue are getting pushed out, delayed and it's always a question as to what causes this. We have to go out in the field and get anecdotal evidence. In some cases it's all this talk out of DC about a possible infrastructure build, and people are saying well maybe there'll be some federal money that will help and so we're going to delay a project. So we're hearing some of that talk out in the field. But generally we know our competitors are hearing it too because if you go back to the second quarter conference calls from the competitors who disclosed the water portion of their business and there's three major ones out there that do that are public, they all said that they were down anywhere from 5% to 13%. So when we saw that we were relatively flat, that's why I thought like we were probably gaining a little bit of share. But there have been delays, I have no reason to believe any projects have been canceled, they will still come, question is will we get them in the fourth quarter or the first quarter.

And the other thing we’re seeing Tate is, if you recall it end of the second quarter we had just introduced the - effectively the LTE product, right, and what we’re finding is while there is very much interest in that, people are not - they are not buying the thousands of them, they are buying a 100 of them and putting them on test. So we’re seeing a lot more pilots right now which in a sense in our mind is just delaying sales – so and I do agree with Rich there is nothing fundamental out there that suggest there is a reason for this. It’s just kind of a bland year and it’s been a bland year through three quarters.

And then I thought you mentioned valves in your comments and is that valves that go with meters in your industrial business or what valve business you have in your mind?

In our flow instrumentation side of our business which is about 20% to 25% of our business which by the way was up 16% over last year so it was a good increase. So within that business one piece of it is valves. We also do vortex meters, we also do turbine meters, the Coriolis mass meters, Meg meters. So there's a lot of other ones in there but one piece of it is valves. It is the one thing that is not directly flow measurement, but it's a good business for us it's profitable and we do link the valves up with meter sometimes to form a complete control loop. But that business itself our valve business is - thank you John it’s being handed to me. Our valve business is about $3.5 million a quarter so it's about $14 million a year.

And then to follow up the brass the copper comments and the brass, do your ultrasonic meters even use brass compared to the older meters?

Our E-series ultrasonic meters are offered in both plastic and stainless steel, okay. We will be converting them and offering them in brass. We initially came out with them in stainless steel because stainless steel was actually the same price as brass and we felt that the market would be willing to pay a premium to have stainless steel which is viewed as an even better material. What we found out is that the market really doesn't care whether it's brass or stainless steel they just want metal. So we started a project to develop in brass. Now if brass gets too expensive than the stainless steel is a better option, but right now they are offered only in stainless steel. But you have to remember that all of our large meters, all of our large meters are in brass and that - those are the ones that take up a large quantity of brass.

And our next question will come from line of John Quealy with Cannacord. Please proceed.

First question Rich or Rick, can you breakout mechanical versus AMR/AMI and any third-party Itron color you can give us?

So you’re talking about meters without radios versus meters with radios.

Exactly that's right, thanks, Rich.

And I'm just looking at this that's a hard one to say.

And let’s try and answer it this way, I mean we have settled basically it’s the same underlying meter either way with or without the radio. We’ve been saying that we’re shipping 60%, 65% on average of the meters that we’re shipping have radios okay. Now that varies quarter-to-quarter depending upon the particular product that’s why I think Rich is kind of hesitating a little as he looks overall deep down. But that number continues to grow. The installed base out in the field is probably about 55% that’s out there have radios and if we keep having an input rate that’s approaching let’s say 65% that number will continue to grow, it’s just matter of how fast that’s going to grow.

Other two more, so Rich would love your thoughts on Itron Silver Spring pushes them more electricity more IOT, what do you think that does to market share name share in the U.S. radio AMR/AMI market for water if anything?

Yes, Silver Spring did not play heavily in water they were really much more of an electric focused company. And obviously Itron the majority of their business is electric that is where their big focus is. We focus only on water so we didn't see the purchase of Silver Spring as having a huge impact on the competitive market out there on the waterside. I think it does have an impact on the electric side, but we don't really see it as having a big impact on water.

And then last, so the creation of the COO role, and welcome you guys have run a pretty great business over a number of years why now Rich and what should we think about you know leadership transition if that's part of this? Thanks guys?

That's a good question and we do have Ken Bockhorst sitting here who is our new COO who has just - I believe it's his second day of work. So welcome Ken and when I mentioned that we paid a lot of money for search firm, it was the best money we ever spent, and he agrees. So we’re excited to have Ken joining us. The fact the matter is I am 62 years old, and Rick is older, slightly older and so we recognize that over the next couple of years we’re going to have to have a shift in leadership here. The good thing is that the officer team that has driven this company for the past 10 years to where it is today is very stable and is here and is going to continue, it's a younger team, younger meaning in their early 50s, so we’re going to have them around a while, but bringing in Ken helps us setup the transition for down the road. So this has been something that the Board of Directors has been working on for the past several years. We ran a formal search we were fortunate to get somebody of Ken's caliber in here and now – he will take on that COO role and hopefully be moving up as we go forward. But it'll give us plenty of time for overlap to make sure that he and other people are comfortable with this management team as we go forward. We will be bringing Ken out for investor meeting so all of the analysts, investors will have a chance to meet Ken and talk to him and I think you’re going to find out that his operating style, his vision very much fits with Badger Meter. One of the things I think we’re going to be looking for is getting a little more aggressive in M&A and that is one of Ken's strong points. So that’s going to help us to. So I hope that all helps.

Our next question will come from the line of Brian Rafn with Morgan Dempsey. Please proceed.

I think and correct if I'm wrong launched the ORION Cellular the LTE two-way in July was in the second quarter. Is there pent-up demand and delays on orders or is there in subsequent quarters or is it just kind of rollout with pilots?

So just to clarify Brian we launched the ORION Cellular about three years ago as a 3G product and simply because the LTE networks weren’t available for data yet the LTE chips for data became available late last year. We immediately launched the project to move to the LTE platform and that new version with the LTE chips was released in April. So I do believe we saw a little bit of a delay people waiting for the LTE and I still think there is some pent-up demand because we’re getting a lot of inquiries, we’re doing a lot of pilot shipping of people who were waiting for the LTE, but they didn’t come in as soon as the LTE was released to say now give me 10,000. Instead they said give me 50 or 30 and we’ll put them out there and try them for a few months and make sure they work okay before we commit to larger volumes. I'm still convinced that this is going to be the technology of the future for our industry because the whole idea of not having all that infrastructure makes so much sense that I think people are going to want to go this way.

Yes, with some of the 51,000 water meter or water utilities are these test pilot programs in the hundreds of utility OEMs or is it just dozens or what’s…?

No it's hundreds, it's hundreds.

Okay.

So we believe it bodes well for future demand I think we’re going to continue to see that I think we’re going to continue to see our two fastest growing products being the E-series water meters the ultrasonic water meters especially once we finish integrating the D-Flow technology next year which will make the product even more competitive with the mechanical meters. We’re going to see that and then on the radios we’re going to see cellular and both of them we have seen since introduction strong double-digit growth every year and I think we’re going to continue to see that.

And Rich - the question on mechanical versus the AMR/AMI I think in your presentation in August you guys got a installed base of about 58% meters with radios and I think Rich is comment was your or the actual delivery now is more like 60% to 65% if I were to add on the BEACON advance meter analytics you guys kind of being a leader in that what might that be would that be still less than 1% or 2% how fast is that add-on that add junk of technology being put on with the radios?

The BEACON is also coming on fast and it's coming on fast in two ways one is that when somebody buys cellular okay and I'm looking for Kim to look at me just make sure I'm okay my VP of Sales I always like her to be staring at me when I'm saying this. So that if I say the wrong thing she can frown. But I think I'm right on this the BEACON is sold with the cellular product.

And the network product.

Right, I'm saying first it sold with all of the cellular, but and some of our network customers and even some of our drive by customers have said you know we want that BEACON analytics to. So we've got being sold across a much broader base than just the cellular. So as cellular goes up so does BEACON but then were also picking up these other customers to. I would say in a few years we’re going to be able to phase out some of our older our legacy products and focus much more on the BEACON as our main product. The nice thing to is that with the cellular obviously we gather monthly fees okay and even with the BEACON product there are annual fees that we get from that. So as we've always said in the past we are not driving towards software as a service as a company, but it is becoming more and more of our revenue stream as we go forward.

I’ll just one more Rich as I'm looking at your markets share chart here and your presentation North American water you guys are very quickly catching Neptune you have any comment and kind of that top tier oligopoly Neptune, Sensus and Badger Meter kind of where you might see that goal over the next few years?

And you guys always let me talk about competitions so I won't disappoint. I'll make a few comments here first off the market share is very difficult in our industry because if you add up everybody's claim market share you get to about 120%. So not everybody is being honest on the market share and the analysts that do market share analysis I don't think always get the facts right. What I would say is we have ever been company excluded right - present company excluded. No I’m talking about the companies that sell the service of analyzing market share, but I would say that Badger and Neptune both have a market share that is very close. So we’re probably the two top companies as far as selling the meters in North America. Since this is somewhere below us and then down you got less than that at Mueller and Master Meter and some of these other smaller players in the marketplace. Neptune has been a little slow on new product introduction, but now they have announced a cellular product. So they’re three years behind us on that, but they are coming out with cellular and I'm kind of glad of that because it does confirm that cellular is a good product going in the future. We’re not the only ones out there with it they've also announced an ultrasonic meter and they’re going to be starting to sell that. So again that validates our ultrasonic technology when the two leading companies in the marketplace are selling that technology. Sensus does not have cellular has not chosen to go cellular they are still selling their fixed network called FlexNet and they have chosen magnetic meter as their solid-state metering. I think there are issues with magnetic that will make ultrasonic more competitive in the future. And meanwhile Mueller does not have either cellular or a solid-state meter. So basically when you look at the competitive situation that's where we are we feel we’re in the strongest competitive situation having been in the ultrasonic metering business for seven years and the cellular business for three years while our largest competitor is just starting this year on both of those. I think that puts us in a very strong position.

And our next question will come from the line of Richard Eastman with Robert W. Baird. Please proceed.

I wanted to ask a Rick couple of things no I’m just kidding. Hey just – I just want to make him up actually just from a municipal standpoint I think the reference was that the international business was lower I think you specifically mentioned Middle East, but if you look at the utility business was the domestic residential business up you know low single digits mid-single digits how did the domestic business perform there?

The domestic municipal water business is essentially flat Q3-over-Q3.

And then and does that include the commercial piece - was the first commercial meters up?

Commercial was up.

Local singles is that close enough.

Yes, that’s fine.

And then just a question around late in the quarter any hurricane impacts more on the industry I know both in the Houston market, but more so in the Florida market I think your exposure in Florida is somewhat limited at Badger. But was there any cramping up in the industry in terms of demand installed, I mean what's your thought Rich on the on the impact there. I mean when we had Sandy it kind of held up spend. So maybe just any thoughts there?

Yes, I do think there's some impact. Fortunately we did not have a major project going on in Houston. We didn't have a major project going on in Miami or anything like that nobody did. So there was not a major project where somebody was selling $1 million a quarter in meters that that got interrupted. In case of Sandy it did. We had some large project going on in that area and when that hurricane came through, it was a big impact. Now we do have regular meter sales to those - to not only Houston but the area around it. No question it got interrupted…

But I would say it didn't have a profound third quarter impact of anything. We're still waiting to see if it's going to have an impact in the fourth quarter but then likely that would rebound in the first quarter if it did happen.

And the other impact of it Rick is as I mentioned briefly was resin. We don't buy our resin out of the Houston area but most of our resin suppliers keep their feedstock out of the Houston refineries and so there was an interruption there. We don't think we’re going to have a supply issue but prices may take a temporary jump. Again, we’re going to factor that into our price increasing.

And just your reference on the large projects, is that large projects kind of stalling out a bit. Is that a domestic comment, I mean is that around large projects domestically or is this again kind of international.

No, that was a domestic comment.

So it’s domestic.

The opportunities we have in the Middle East are very spotty very project related when one of the Emirates or somebody will decide to do a major project. So that's more project related.

I was curious. Is the state of Illinois kind of mandated? I think this was during the third quarter certainly earlier this year. They kind of mandated, the municipalities have to ensure that they have no more than like 10% unaccountable water by 2019 and there was a project triggered there and I not to be too surgical here but you guys have some exposure to Illinois in the Midwest, is that either a trend or is that at all impactful? Certainly tighten up on this unaccountable water.

Clearly everybody wants to tighten up on unaccountable water the question is do they have the political will to do it. You may recall that we were metering Chicago, we got it one-third metered. People are surprised to hear the City of Chicago is not fully metered about two-thirds of the people in Chicago pay a flat rate for their water, therefore you will never know if there's unaccountable water there. They'll never be able to track it down. So and under Mayor Daley, they had a metering program and when Rahm Emanuel came in, he stopped the metering program. So two-thirds of Chicago still sits unmetered. Now when they get a state mandate like that, obviously the first thing you would have to do is meter if you're going to try to reduce unaccounted for water because you can't control which can measure. If they can measure they don't even know what their percentage is. And that’s a problem, so that would say that more of the Illinois municipality should start metering. The question really is Rick, what penalties were put in. It's very easy for the legislator pass a law saying, let's hit this target by 2019 but if there is no penalties it doesn't mean anything. The California…

I was just going to bring up California. California has the law in the books that by 2025 every home in California will have a water meter. So as I say, look for big sales in 2024 because they didn't fund it. It was an unfunded mandate. It's those kind of issue that when we hear that stuff, it doesn't have an immediate impact on our business although again when I heard about Illinois, it can't hurt.

One last question. When I look at both accounts receivables and inventories, inventories stepped up you know in the second quarter from the first but then you know stepped up again in the third by about 3 million and then AR stepped up another 4.5 million. Just given where the sales number came in, can you just explain maybe why AR stepped up as well as in the first?

It was simple. September was better than July and August and you know it's - our DSOs is up slightly but there's really no significant collection issues. It's more a function of timing than anything else and quite frankly the same thing in inventory, there's really nothing that suggests that there's any issues one way or another.

… with terms or anything?

No, we haven't changed any of the distributor terms.

And our next question will come from the line of [indiscernible] with WAM. Please proceed.

Just a follow-up on the balance sheet. If you look at your accounts payable year-over-year and this is excluding a 4 million from the D-Flow acquisition, your tables went from $19 million to $23 million this is excluding the 4 million D-Flow at the 20% increase while your sales are down in a year-over-year. So, I'm just curious what's going on with the tables?

My first answer is I've no idea but I'm not aware of any particular issues - are you comparing us to December 31?

No, I’m comparing you to third quarter of last year quarter year-over-year.

The third quarter of last year it could be the function of the days or when we paid the bills.

That's right. A very often that's a function of what day of the week the month ends on because bills are usually processed on the Fridays and so it's purely timing.

It's nothing more than timing.

I know you answered the question on receivables, but just to reiterate again. When I look at year-over-year, third quarter last year to third quarter this year. Your receivables are up not 20%, so I know you just - is there something underneath you're seeing on a more longer-term basis?

Frankly, is our distributor to instead of paying us in 30 days are paying us in 45, yes. You know we've got it. And there are some business issues that work here but nothing that's of a concern to us at this time.

And my second question is, you referenced in the release that you're seeing some customers upgrade their system as they way to adopt your cellular products. Can you get some color as to what type of upgrades for example a customer would need to make and how much would it cost them for you - for them to adopt your cell product?

I think you misunderstood what I said. There is no requirement for our customer to upgrade their system in order to adapt our cell product. If they adopt our cell product they also use the software the BEACON software that goes with it, just like if you were to buy a printer, you would probably use the printer driver that goes with it. And the BEACON software of course comes with a lot of analytics and other capability but that's a very easy software to put in. Now very often though some of these customers have home-grown billing systems and the BEACON software has to be mapped into their billing systems that can get a little tricky but generally there is no system upgrade they have to do in order to use the cellular system.

I’m taking this straight out of the release, it's that several major municipal water projects for the third quarter are now expected in the future as customers upgrade their systems?

What we're saying is, they plan to upgrade the system so instead of placing the order now - instead of buying - again my example, set of buying a thousand meters, all right, they bought 100 and put them on test pilot just to see how they work and that eventually they'll make the purchasing decision sometime in the future.

But on the reference to upgrade the system from what they bought 15 years ago.

…is not their IT system, it's upgrading their system of meter reading.

Correct.

And we probably should been clear about that. We're talking about their meter reading system not their IT system.

[Operator Instructions] And our next question will come from the line of Jose Garza with Gabelli and Company. Please proceed.

I guess just talking about that the DNOW distribution, if you just kind of give more color and then what is that mean for your existing kind of oil and gas business and if there's any kind of other additional partnerships you're kind of looking for on the flow side, instrumentation side.

The flow instrumentation business we go to market primarily through distribution and when I said we reorganized our distribution channels what we did was we started focusing on the end markets instead of the product. So we've in the past may have had a distributor who is specialized in turbine meters and a distributor who specialized in impeller meters. What we've done now is we reorganized where we have a distributor who perhaps specializes in breweries or a distributor who specializes in dairies or oil and gas. So I'm sorry and I'm using the word distributor I apologize, I just got a note I should be using the word rep these are reps not distributors. These are primarily reps okay. So we have reps that now focus on various industries and specializing those industries. That has helped us a lot because now a rep goes and it can sell any type of meter that is needed in that particular industry and that's a good thing. It was a big coup for us we feel to get DNOW because we were going to the oil and gas market with a lot of smaller more decentralized reps and DNOW is really a very large international, they’re an international company that services oil and gas markets all around the world. And so having an agreement with them where they are wrapping Badger's flow instrumentation products I think it’s really going to open a lot more doors for us and help us get out there. So that's what really DNOW does for us.

And just remind me is that an exclusive partnership?

It is exclusive outside of North America. Within North America we have some other reps also.

And for the rest of your business, I mean in the flow instrumentation side are there opportunities that you guys are looking at that I guess similar that would be - similar to DNOW?

Yes, we’re always looking at opportunities to improve distribution channels. We have some distributors now that we picked up over the last year that we really like, but there's always opportunities to find other ones that specialize in different areas and we’re going to be pursuing those.

Thank you. And our next question will come from line of Brian Rafn with Morgan Dempsey. Please proceed.

Just kind of a maybe a five year outlook relative to kind of the larger municipal national sales accounts, any big cities looking at add projects that not for you, but just for the industry that you know might be good?

There are some big cities out there that we've talked about in the past that will be - that keep saying they’re going to be looking at doing a major project. They from time-to-time put out our request for information. They may form a committee to look into it or in those cities talking to them. Miami-Dade is probably one of the big classic elephants out there. They've not done anything, but they’ve run tests, they’ve run pilots so they're out there. Detroit is talking about doing something new so there always a possibility. There are other cities in some of the major cities in Ohio are opportunities for us. So those are the ones that that could still pop over the next several years that could be pretty big game changers.

And it’s important clearly from a sales and marketing side I keep being told to put up my mic I hope everybody can hear me, but from a sales and marketing but also you got to remember that that they don't have the same impact on the business let's say that they do in the electric industry because usually when we get those the multiyear contracts, okay and they get spread out. So even when we had Chicago now what six, seven years ago, all right it got spread out over three to five years and it had an impact. It's nice to have that steady order, but you can also sell a lot of small cities the same amount of meters in a given year.

Also people tend to forget that the size of a city can be deceiving. For example, a lot of people think Atlanta would be a huge customer, the city of Atlanta. City of Atlanta is only 300,000 people, it's not that bigger city. However, the surrounding area is huge the metro area when we’re selling water meters we’re generally not selling to the Metro area we’re selling to the municipality. And so what some people think of is a large city isn't necessarily one. The larger cities tend to be the ones in Texas like Houston and Dallas and some of those because they don't have that many people living in high rises, it spread out more whereas other cities like Atlanta you would be surprised that they aren't as large as you would think.

That gets another question Rich, as you’ve seen with police departments, fire departments like you got up on the North Shore, Milwaukee - they get our old fire department it’s not municipal its several municipalities. Do you see that urbanization better developing or is it strictly one city one municipal utility?

We have not seen that developing for decades all I've heard about is the coming consolidation of water utilities and it is not happened. There has not been the consolidation. Now the reason people predicted it, it was because electric and gas it tends to be consolidated, also sewage tended to be consolidated along the water basins. It just has not happened in water and we don't see anything driving it.

And we’ll see plenty of signs if it does come because they got to get the police departments, the fire departments and the library systems done before water would ever happen.

And then just one final one, I always laugh at your comments which Chicago the other comment were being on meters like horses and carriages. If you look at the large municipal projects going forward, is it install of meters for this kind of unmetered unaccountable water or is it primarily with big products it’s going to be just the conversion of radios and all that.

With the big projects it’s going to be primarily radio conversions. Most of the large cities are metered, Chicago is kind of an exception. And there are also a lot of unmetered communities in the Central Valley of California, but there’re smaller communities to. So when I'm talking about Detroit's and Miami's they’re metered, we’re talking about the opportunity to sell them radios. But very often with the radios come meter changeups.

And our next question will come from the line of Richard [indiscernible]. Please proceed.

Just a couple of quick questions primarily pertaining to the President Trump attempt to lower the tax rate, I’m kind of wondering how does Badger Meter believe the customers will react in terms of pricing. Do you think you guys will see some pressure where the customers want to reduce prices and see some of that tax benefit pass through?

I don't expect that and the reason I say that is unlike the electric industry where there are 3,000 or 2,300 electric utilities in the United States and therefore there are some very large utilities that have a lot of buying power. The water industry is very fragmented, there are 51,000 water utilities in United States and so you don't have the large ones with a lot of buying power. And so we haven't seen that in the past. Generally pricing pressure in our industry comes from internal rivalry and I'm kind of quoting Michael Porter's Five Forces that's where you - for all you MBAs out there, that's where you see the pricing pressure in our industry. So if anything it would be that we would all start competing more aggressively and driving prices down. I think that's why when we do a price increase for something like brass, we can get it through. And then generally as brass prices come down, we don't go out an announce a huge price decrease instead you just start seeing bids and quotes pushing pricing down over period of time based on competitive pressures that's what really happens in our industry.

And then let's just say Badger Meter didn't see any pricing pressure and the company recognized the full benefit of the tax cut. I mean valuations aren’t really right for a buyback. So could you give us some color on maybe what you guys might do with that benefit, I mean could it be placed towards acquisitions or R&D or what would be those early thinking?

Yes, so first off we would tend to benefit from that more so than some other companies, and the reason I say that is if you look at our effective tax rate, it tends to be higher than other companies in our industry. And mainly because we have more of our operations solely in the United States and therefore we tend to pay the higher tax rate. Companies like Honeywell which owns Sensus, and I'm sorry Xylem which owns Sensus I said that wrong, okay Honeywell which owns Elster, they have a large percentage of their operations outside the United States and therefore they have a lower tax rate so the benefit isn’t great for them. So let me first point out that, yes, we would stand the benefit more significantly from some of the others. What we would do is if we had additional resources, we would definitely want to deploy them and would want to deploy them probably in acquisitions that would be our biggest opportunity. And as I said, we have a desire to get a little more aggressive on acquisitions then we have in the past. I think the Board wanted to be a little more settled on our succession plans going forward before they jump on something major and now that we've got that better settled I think will be - you'll see us get more aggressive.

And then just a last question just an easy one here. Sorry, if I missed it. But can you just tell me what the business looks like now in terms of new installation versus replacement?

You know that's always a very hard thing for anybody in our industry to answer and the reason is if I ship 100 meters to the City of Chicago, I don't know how many of those meters are being put into new housing versus being used in replacement. But having said that, if our industry sells about 6 million meters in the United States a year and that's probably a reasonable round number, okay and if there are 1.5 million new housing starts in the United States every year, and let's say 80% of those new housing starts are on municipal water 20% are on private wells, you can guess that of the 6 million maybe a little over 1 million is going into new housing and the 5 million - a little bit less than 5 million is going into replacement.

Replacement is a much higher percentage in our industry.

Thank you. Ladies and gentlemen this concludes our question-and-answer session for today. So now, it's my pleasure to hand the conference back over to Mr. Rich Meeusen, Chairman, President and CEO for some closing comments and remarks. Sir?

Thank you, Brian, and all I'll say is that obviously we had a record year last year. We had two record quarters this year. The third quarter was a little disappointing and the stock price I always say are - stock price tends to overreact on good news and overreact on bad news so the stock price has drop down to a level that we haven't seen well since July. So our stock price is back down to where it was in July. It had had a significant run-up just in the last couple of months and it's back down to the July levels but we still are very confident about where our business goes in the future. We tend not to focus a lot on stock price and try to manage that. We tend to instead manage our business for the long-term and that's our focus. We think will be able to offset this higher brass. We know we’ll be able to offset this higher brass with price increases which we are working on. There will be a temporary disruption but the long-term fundamentals of our business are still there, they are still strong and we have a lot of confidence and our ability is to continue to generate shareholder value. So with that, I'll thank everybody for joining us. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.