BADGER METER INC Q1 FY2025 earnings call

• Completed acquisition of SmartCover in late January and are onboarding new colleagues to capture sales and synergy opportunities. • Delivered strong operating performance with 13% sales growth, record operating margins (22.2%), and robust EPS improvement. • Discussed tariffs, noting operations in Nogales, Mexico (USMCA exemption), US-based facilities facing potential tariffs on electronics, and finished goods from European facilities. • SEA expenses increased by $5.4 million YOY to $46 million, but SEA as a percent of sales was flat excluding SmartCover. • Generated strong free cash flow of $30 million, up 60% from the prior year comparable quarter.

Total sales grew 13% year over year in Q1 2025. Excluding SmartCover, sales increased 10%. Total utility water product line sales increased 16% year over year, or 12% when excluding SmartCover revenue for the two months since acquisition. Flow instrumentation product line sales decreased nearly 5% year over year but had sequential improvement of 7% from Q4 2024. Gross profit margins were 42.9%, a 360 basis point improvement from the prior year. Software was the top revenue growth contributor, up 25% in the quarter. Utility water growth was led by cellular AMI adoption, Orion cellular endpoints, and Beacon software.

• Second quarter represents difficult prior year comparison. • Long-term average revenue growth outlook is high single digits with modest margin improvement. • Balance sheet is strong with ample capacity for organic and inorganic growth while navigating macro volatility.

• Uncertainty and volatility in the tariff picture. • Potential impact of tariffs on input costs, including from China, Southeast Asia, Israel, and export controls on elements like bismuth which affect components like brass ingots.

Q: Any more color on favorable products customer mix benefits and if tariffs stable would gross margins moderate back to 38%-40%?

A: Kenneth Bockhorst and Robert Wrocklage discussed that while there were favorable mix elements in Q1, mitigation actions for tariffs lag input cost increases, and the 42.9% gross margin had durable and episodic elements.

Q: Any signs of customers pulling back on spending?

A: Kenneth Bockhorst stated they haven't seen customers pulling back, citing the replacement-driven nature and durable market even in difficult times like COVID.

Q: Quantify tariff impact on COGS and customer order patterns?

A: Robert Wrocklage said it's difficult to quantify exactly, and Kenneth Bockhorst noted 75% of revenue is direct to end users with no large pull-forward orders, and 25% through distribution also normal.

Q: Triggers for tariff concerns and mix in orders?

A: Kenneth Bockhorst mentioned change in USMCA and issues with copper/bismuth; mix in orders has many factors but software growth is meaningful.

Q: Price increases and customer contracts?

A: Kenneth Bockhorst said price increases are forthcoming but not aggressive, and Robert Wrocklage discussed evolution of multiyear price hold requests due to inflation lessons.

Q: Receivable line increase?

A: Robert Wrocklage said small part due to SmartCover addition, mostly timing difference between Q4 and Q1 sales.