Badger Meter, Inc. (NYSE:BMI) Q1 2023 Earnings Call Transcript April 20, 2023
Badger Meter, Inc. beats earnings expectations. Reported EPS is $0.66, expectations were $0.55.
Operator Ladies and gentlemen, welcome to the First Quarter 2023 Badger Meter Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded.It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy and Treasurer. Please go ahead, Ms. Bauer.Karen Bauer Good morning, and thank you for joining the Badger Meter first quarter 2023 earnings conference call.On the call with me today are Ken Bockhorst, Chairman, President and Chief Executive Officer; and Bob Wrocklage, Chief Financial Officer.The earnings release and related slide presentation are available on our website.Quickly, I will cover the safe harbor, reminding you that any forward-looking statements made during this call are subject to various risks and uncertainties, the most important of which are outlined in our press release and SEC filings.On today’s call, we will refer to certain non-GAAP financial metrics.
Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used.With that, I will turn the call over to Ken.Ken Bockhorst Thanks, Karen, and thank you for joining our first quarter earnings call.The Badger Meter team started off the year continuing the exceptional performance of 2022, delivering record revenue and profit while still achieving yet another positive book-to-bill ratio. Operating profit margin improved, benefiting from both gross profit margin expansion and continuing SEA expense leverage.Early in the quarter, we completed the Syrinix acquisition, adding pressure monitoring and acoustic leak detection capabilities to our broad smart water solutions. We’re pleased with the integration progress and the early discussions we’re having with customers about our expanded offerings, reinforcing our views on the complementary and scalable nature of the acquisition.I’ll provide an update on the macroenvironment and outlook later in the call, but for now, I’ll turn the call over to Bob to go through the details of the quarter.Bob Wrocklage Thanks, Ken, and good morning, everyone.Turning to Slide 4.
Our total sales in the first quarter were $159 million, an increase of 20% compared to the $132.4 million in the same period last year, representing an all-time record sales quarter for Badger Meter.Total utility water product line sales increased 20% year-over-year, as we experienced continued strong order demand, sequentially improving supply chain dynamics and ongoing price realization. Strong orders and shipments associated with utility cellular AMI adoption, including higher ORION Cellular endpoint and BEACON Software as a Service sales continued. Additionally, we saw increased sales of meters, including E-Series Ultrasonic meters in residential and commercial applications. Finally, while the impact was relatively small, Syrinix sales were included for the full quarter.
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The strong demand environment resulted in another record utility water backlog exiting the quarter, even with the record top-line sales performance.Sales for the flow instrumentation product line increased an exceptional 22% year-over-year, led by solid demand in water related markets and improved component supply availability. Order trends were strong with our emphasis on water related applications outperforming general industrial end markets.Turning to margins. We are very pleased with the operating margin expansion of 150 basis points in the quarter, with both gross margin expansion and continuing SEA spend leverage contributing to the improvement. Gross profit dollars increased $12 million year-over-year, and, as a percent of sales, improved 120 basis points to 39.5%, at the higher end of our normalized range.
The combination of higher volumes, favorable mix, including higher SaaS revenues, value-based pricing and some leveling off of input cost inflation drove the improvement.SEA expenses in the first quarter were $37.8 million, an increase of approximately $6 million year-over-year, due primarily to personnel related costs, including higher headcount, salaries, sales commissions and travel. The addition of Syrinix with its related intangible asset amortization also contributed to the increase. Despite the higher spend levels to support growth, SEA as a percent of sales declined 40 basis points to 23.7% from 24.1% in the comparable prior-year quarter. Note that historically the first quarter tends to be on the higher end for SEA leverage and we would expect modestly improved sequential leverage in the remainder of the year.With higher interest rates, we are seeing some return on our cash balance, as noted in the interest income line.
To address the related topical question on the strength of our banking partners, we are not with — involved with any of the named troubled banks, we have no debt, and we’ve reviewed asset makeup and other data with our primary banking partners and do not anticipate any concerns.The income tax provision in the first quarter of 2023 was 24.3% compared to 23.7% in the comparable prior-year quarter.In summary, consolidated EPS was $0.66, a robust 35% improvement from $0.49 in the prior-year comparable quarter.Working capital as a percent of sales was 23.1%, a 100 basis point increase from the record low 22.1% at calendar year end, but still improved from 24.7% in the prior-year comparable period. While working capital did increase to support growth, we continue to carefully manage customer payments and strategic inventory investments.Free cash flow of $13.7 million was improved from a year ago, primarily on higher earnings and reflects the typical seasonality with incentive compensation and retirement plan contributions earned in 2022 based on those strong results and then made in the first quarter.With that, I’ll turn over the call back over to Ken.Ken Bockhorst Thanks, Bob.Turning to our outlook, I remain excited about the opportunities ahead.
With continued robust order pacing, a strong bid funnel and record backlog, we remain confident that our exceptional customer support and winning portfolio of digital smart water solutions position us well for sustainable growth.To-date, we’ve seen no evidence that the higher interest rate environment or the banking sector consternation are having an impact on customer budgets. In addition, with 85% of meter volumes being replacement driven, an increasing level of replacement radio volumes and recurring software revenue, we expect very limited impact from any potential moderation in new residential or commercial construction markets.I’m also encouraged by the sequential improvement in supply chain dynamics. Coupled with moderation in the rate of input cost inflation, value-based pricing and continued SEA leverage, we continue to expect gradual operating margin improvement in 2023.Our cash on hand, overall strong free cash flow generation and debt-free balance sheet provide us with ample capacity to further invest in both organic and acquisition-enabled growth.Finally, we were proud to be named for the first time as one of Barron’s 100 Most Sustainable Companies.
We have a long history of working to grow our business and our positive impact in the world by enabling our customers to do the same. This type of recognition demonstrates that it is possible to deliver both strong financial and sustainability performance.In closing, I want to thank our team for their ongoing commitment and efforts in serving our customers.With that, operator, please open the line for questions.
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Question-and-Answer Session Operator Certainly. [Operator Instructions]
The first question comes from the line of Nathan Jones of Stifel. Please proceed.Nathan Jones Good morning, everyone.Ken Bockhorst Hi, Nathan.Karen Bauer Hi, Nathan.Bob Wrocklage Good morning, Nathan.Nathan Jones Just want to — just going to start with a question around supply chain.
Some pretty positive commentary, I think, in your prepared remarks and in the press release this morning. Can you just talk about where supply chain is now compared to, say, where it was last year, where it was in 2019 before COVID? Is it still a problem with throughput, or you kind of back to normal capacity utilization today?Ken Bockhorst Yeah. So, as we’ve talked throughout this entire challenging time was supply chain. We’re still not back to pre-COVID supply chain reliability, but we’re certainly in the best position that we’ve been ever since COVID. So, 2021 was extremely difficult. 2022 remained extremely difficult and started to improve a bit at the end of the year, and certainly Q1 is the best that we’ve seen. Now that doesn’t mean that we still didn’t have some challenges that limited some output, but overall, the way that we’ve thought that it was going to play out is the way that we’re seeing it.
We do still think there’ll be some intermittent challenges in the first half of the year, but again still improving. And then, we think towards the back half of the year, it will be perhaps hard to predict, but perhaps back to pre-COVID levels.Nathan Jones Fingers crossed, right? Are metrics like on-time delivery and past due backlog still a little bit below where you would have been in 2019? And it sounds like maybe hoping to be back to that level by the end of ’23.Ken Bockhorst Yeah. So, we have a very high bar in expectations for on-time delivery and past due backlog. And admittedly yes, they’re — on-time delivery is lower than we expect of ourselves and past due backlog is higher, but I definitely think as we start to see supply chain improve, which then also leads to some better efficiency and throughput, that we’ll be making progress in those areas coming forward.Nathan Jones Let’s say hypothetically that the supply chains are back to normal by the end of 2023, is there a meaningful amount of backlog for you to work down?
Or is the record backlog more a result of obviously very strong? Or it is — if it’s still going up as supply chains are improving? Just trying to get a sense of how much of that kind of backlog should get worked down, or whether that’s — something that’s going to stay consistently high.Ken Bockhorst Yeah. So, as with many things, it’s a multi-variable situation. So, the backlog is perhaps inflated a bit because demand has been so hot and supply chain has caused some things to be later in backlog. There is the very positive side of it as we’ve talked for years now about growing technology adoption, so now we’re selling a larger portion of radios with meters. So just by pure definition, the backlog is going to be higher than it used to be because of the average sell price of a bundle.
So, I think we’re going to continue into the future at an elevated rate versus pre-COVID, but it’s still certainly elevated beyond where I think it will normalize after we get through the supply chain operational challenges.Nathan Jones Great. Thanks for taking the questions. I’ll get back in queue.Ken Bockhorst You bet. Thanks.Operator Thank you. The next question comes from Ryan Connors of Northcoast Research. Please proceed.Ryan Connors Good morning. Thanks for taking my questions, and congrats to the team on another great number.Ken Bockhorst Yeah. Hi, Ryan. Thanks.Karen Bauer Hi, Ryan.Ryan Connors So, my first question was just on — sure. First question was just on price versus volume. I apologize if I missed it, but I didn’t hear any kind of breakdown there.
Are you able to provide any breakdown on top-line in that regard?Ken Bockhorst Yeah. So, we haven’t quite disclosed that, but it is certainly much more volume driven than it is price.Ryan Connors Okay. And then, my other question was, as I mentioned, you’ve had great numbers here. You’ve been, I think, kind of outperforming your peers really for the last year or plus. Is it your view that anything is going on here that you’re actually taking share? And what would be your comment on that? Or do you just believe that you’re participating in some more systemic factors in the markets that’s lifting all boats? And just trying to break down the relative contributions there, because certainly you’ve made some good bets on technology with cellular and otherwise.Ken Bockhorst Yeah.
So, we generally maintain the Midwest humble approach and usually shy away from making claims about taking share. But I think if you look at our competitors, we clearly have performed and delivered, I think, significantly more than most of them throughout this period and also carry an elevated backlog. So, when you look at some of the areas where we’ve seen the outsized growth, I think being first in Ultrasonic has been extremely beneficial for us. Being on the lead and changing, if you will, the way the AMI market views the value within it, our cellular approach certainly, I believe, is taking share on the AMI side. Coupled that with our best-in-class software package that comes with that and the continued — over the last several years, 45% CAGR on software.