Yahoo Finance Badger Meter, Inc. (NYSE:BMI) Q1 2024 Earnings Call Transcript
Badger Meter, Inc. (NYSE:BMI) Q1 2024 Earnings Call Transcript April 18, 2024
Badger Meter, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen welcome to the First Quarter 2024 Badger Meter Earnings Conference Call. My name is Carla and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporation Strategy, and Treasurer. Please go ahead, Ms. Bauer.
Karen Bauer: Good morning, and thank you for joining the Badger Meter first quarter 2024 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'll turn the call over to Ken.
Ken Bockhorst: Thanks, Karen, and thank you for joining our first quarter earnings call. We began 2024 extending our 2023 track record of solid execution and differentiated financial performance delivering record revenue, operating profit, and EPS results for the first quarter. Early in the quarter, we completed the Telog and Unity network monitoring acquisition, adding to our suite of smart water offerings along with onboarding their talented team. Early discussions with customers reinforced their trust in Badger Meter to bring them complimentary hardware-enabled software solutions. I'll come back to discuss a few common investor topics and our outlook later in the call, but for now, I'll turn it over to Bob to go through the details of the quarter.
Bob Wrocklage: Thanks, Ken, and good morning everyone. Turning to slide four, our total sales in the first quarter were $196 million, an increase of 23%, compared to $159 million in the same period last year, representing another all-time record sales quarter for Badger Meter. Total utility water product line sales increased 29% year-over-year, which as we've noted, represents the easiest comp of the prior year. We continue to experience strong demand for our suite of utility smart water solutions, which benefited from ongoing favorable water industry fundamentals coupled with increased adoption of our innovative offerings. Strong cellular AMI demand, including higher sales of ORION Cellular endpoints, E-Series Ultrasonic meters, and BEACON Software-as-a-Service continued.
Additionally, water quality, pressure, and network monitoring sales contributed to the top-line growth. Sales for the flow instrumentation product line declined 3% on a difficult prior year comparison, namely the 22% growth last year that benefited from supply chain easing and related backlog conversion. Flow instrumentation sales were up 13% sequentially and order trends remained solid within water-related applications. While we don't provide guidance, I will remind you that in fiscal 2023, revenue increased sequentially 11% from Q1 to Q2, partially benefiting from the easing of supply chain constraints which will not reoccur in 2024. Turning to margins. We were very pleased with the operating margin expansion of 290 basis points in the quarter, reaching a record high of 18.6%.
Gross profit dollars increased $14.4 million year-over-year and as a percent of sales remained in the upper half of our normalized range at 39.3%. SEA expenses in the first quarter were $40.6 million, an increase of approximately $3 million year-over-year and up just over $1 million from the fourth quarter, due primarily to personnel-related costs, including higher headcount, salaries, sales commission, and R&D spend. Despite this increase in growth spending, SEA as a percent of sales declined 300 basis points to 20.7% from 23.7% in the comparable prior year quarter. We would expect absolute SEA spending to increase as we progress throughout the year with additional growth investment and spending. The income tax provision in the first quarter of 2024 was 23.5%, modestly below the prior year's 24.3%.
In summary, consolidated EPS was $0.99 in the first quarter of 2024, a 50% improvement from $0.66 in the prior year comparable quarter. Primary working capital as a percent of sales was 21.9%, a 20 basis point improvement from 22.1% at calendar year end. We continue to carefully manage working capital investments to support growth. Free cash flow of $18.8 million was higher than the prior year's $13.7 million. As always, the first quarter reflected typical seasonality with incentive compensation and retirement plan contributions earned in 2023 that were then made in the first quarter. With that, I'll turn the call back over to Ken.
Ken Bockhorst: Thanks, Bob. I want to take the opportunity to expand on a few of the more common investor topics, starting with perhaps a simple one, but actually, a common misunderstanding an ultrasonic or static meter and smart metering are two different things. Meter technology choices for example, mechanical or ultrasonic are distinct from meter reading technology choices such as manual read, drive-by, or AMI. Smart metering includes a radio endpoint attached to a meter which communicates data from the meter back to the utility or homeowner. A mechanical meter can be smart when connected to a radio endpoint and conversely, an ultrasonic or static meter could also be manually read. Second, a common topic with investors is our growth algorithm and our endorsement of high single-digit utility water growth over a strategic cycle.
Firstly, when we say strategic cycle, we typically mean a five-year period. We used to talk about a mid-single-digit growth rate for the company as a whole, and even after the strong performance of the past several years, we have increased that strategic cycle rate of growth to high-single-digits. We have confidence that our expanding suite of offerings, competitive positioning, customer relationships, strategy, and our team continue to position us well to grow sales and earnings at this higher rate. We have resilient industry fundamentals, but the reality is while our anticipated growth rate has increased, it will likely continue to be uneven in its realization from quarter-to-quarter and year to year. It's the nature of the industry and the impact of dollar changes on our rate of growth.
For example, if we grew sales the same dollar amount in 2024 as we did in 2023, that rate of growth would be a full 500 basis points lower by simple law of larger numbers. So while some may question why our growth would slow, we would say over a cycle, it has increased. The third topic we often get asked about is whether we are seeing any federal infrastructure funds being made available for our solutions. The answer is nothing meaningful at this point. We have long stated that we didn't anticipate or count on much in the way of infrastructure or other government funding to drive growth, and that is still the case. We do have certain Buy America-compliant products. We recently provided a comment letter to the EPA in response to their market-wide request for information on various requirements.
We did that in coordination with WWEMA, the industry trade association representing nearly all of the meter providers in North America. The goal of providing this comment letter was simply to advocate for our customers to support them if they were to decide to utilize infrastructure funds by easing the administrative burden and cost of project by project waivers for certain electronic components that simply cannot meet BABA requirements across the industry. Another question we often get asked is about gross margins. Most of you have heard Bob reference the Led Zeppelin classic Stairway To Heaven in response to this question. We have several long-term structural sales mix gross margin tailwinds with growth in AMI, ultrasonic meters, water quality, and software.
At the same time, while rational, we have competitors. We have customers who request that we oversee turnkey project installations, and as we move up the technology curve in our products, the complexity of those solutions naturally carry higher support costs. As such, there is not a gross margin stairway to heaven. We are extremely proud of our profit margin improvement trajectory over time, with both gross margin and SEA leverage contributing. Finally, we are often asked to describe how we win in the market. There are many aspects of our business model and strategy that collectively have proven successful for our growth. In the interest of time, I'll highlight just two. First our choice matters broad portfolio of solutions with 50,000 utilities of differing sizes, needs, and challenges and a variety of wastewater and other industrial customers, providing them tailorable and customizable solutions to best meet their needs and preferences is highly valued.
The second is innovation and the breadth of complementary solutions beyond metering and AMI. For example, water quality and network monitoring, pressure, and leak detection, and robust in-house developed software. Specific to our innovative and infrastructure-free cellular AMI, while others may be attempting to imitate, we have a decade head start and millions of endpoints installed with an array of customer reference accounts that routinely attest to its delivered benefits. Hopefully, these insights helped shed additional color on topics of interest for our shareholders. Finally, turning to the outlook and then onto your questions, we continue to see robust order pacing and a strong bid pipeline that positions us well for continued sales and earnings growth.
As Bob noted, but it bears repeating our year-over-year sales and earnings comparisons become more difficult as the year progresses. Our cash on hand, overall strong ability to generate free cash flow, and debt-free balance sheet provide us with ample capacity to further invest in both organic and inorganic growth. Finally, we were proud to again be named the Barron's list of 100 most sustainable companies, and as a USA top workplace. These types of recognition demonstrate that our holistic approach to corporate responsibility positions us well to deliver long-term shareholder value. With that operator, please open the line for questions.
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