BADGER METER INC Q4 FY2024 earnings call

• Fourth quarter results were strong with sales, operating profit, earnings per share, and cash flow metrics all performing well. - Announced the acquisition of SmartCover, which provides sewer and lift station monitoring offerings. - In 2024, the company delivered 18% sales growth, surpassing $800 million in revenue with a five-year top-line CAGR of 14%. Software revenue exceeded $56 million, representing 6.7% of sales with a 28% compound annual growth rate over five years. Operating profit margins expanded 450 points over five years. - The acquisition of SmartCover used $185 million in cash, equivalent to about 5 times SmartCover's 2024 sales of approximately $35 million. The macro drivers in the water sector, such as labor availability, aging infrastructure, regulation, and climate-related severe weather events, support strong adoption of SmartCover's solutions. - SmartCover's solutions include sewer level monitoring, lift station monitoring, and bring strong talent, and it has recurring revenue dynamics and a leading market position.

In the fourth quarter of 2024, Badger Meter achieved 13% quarterly sales growth. The total utility water product line sales saw a 14% year-over-year increase, driven by solid demand across the BlueEdge suite of utility smart water solutions, including cellular AMI adoption. The flow instrumentation product line had a slight 1% year-over-year growth, with core water-related applications offsetting declines in other end markets. Operating margins expanded by 150 basis points to 19.1%. Gross profit margins were 40.3%, a 110 basis point improvement from the prior year comparable quarter. SEA expenses in the fourth quarter were $43.5 million, an increase of about $4 million year-over-year, but SEA as a percent of sales decreased by 40 basis points to 21.2% due to higher sales. Consolidated EPS in the fourth quarter of 2024 was $1.04, a 24% improvement from $0.84 in the prior year comparable quarter. Primary working capital as a percent of sales at December 31, 2024 was 20.8%, down from 23.8% at the previous year end. The company generated a record free cash flow of $47.4 million in the quarter.

• The company expects high single-digit average top line growth. - Gross margin is anticipated to remain in the normalized range of 38% to 40%. - The acquisition of SmartCover will lead to EPS being dilutive in 2025 and accretive in the following year. - The company has significant financial flexibility with over $100 million in cash on the balance sheet and an untapped revolver, enabling execution of growth strategies.

• Uncertainty regarding tariffs, including unknown impact on Mexico manufacturing exposure and difficulty in modeling the effects of tariffs. The company is working to mitigate risks but has no clear idea of how tariffs will play out.

Q: Andrew Krill asked about tariffs and Mexico manufacturing exposure, and contingency plans.

A: Kenneth Bockhorst stated that the company sources little from China, has engaged in reshoring, and has a strong operation in Nogales, but it's difficult to model the impact of tariffs as their exact effect is unknown.

Q: Andrew Krill also inquired about 2025 growth confidence.

A: Kenneth Bockhorst responded that confidence is on par with that in the third quarter, and the ongoing positive tone remains.

Q: Robert Mason asked about SmartCover demand drivers.

A: Kenneth Bockhorst said it's a combination of regulation, labor availability, extreme weather events, and market opportunity.

Q: Robert Mason asked about SmartCover recurring revenue.

A: Robert Wrocklage replied that roughly a third of the $35 million trailing revenue is recurring in the form of software and maintenance service, and another 20% is aftermarket product replacement service.

Q: Nathan Jones asked about revenue cadence and SmartCover competition.

A: Robert Wrocklage mentioned that the second quarter had some noise, and SmartCover is a market leader with unique capabilities that set it apart from potential competitors like sewer pump manufacturers.

Q: Scott Graham asked about backlog deployment and SmartCover integration.

A: Kenneth Bockhorst stated that backlog flow is normal, and SmartCover can be integrated with the BlueEdge portfolio for bundle sales to existing customers.