Badger Meter, Inc.

Ladies and gentlemen, welcome to the second quarter 2025 Badger Meter earnings conference call. After the prepared remarks, there'll be an opportunity to ask questions. If you'd like to ask a question, you can do so by pressing star followed by the number one on your telephone keypad. It's now my pleasure to turn the conference over to Barbara Novarini, head of investor relations. Please go ahead.

Thank you. Good morning. And thank you for joining the Badger Meter second quarter 2025 earnings conference call. I'd like to introduce myself as the new Head of Investor Relations. With me on the call today are Ken Bockhorst, Chairman, President, and Chief Executive Officer, and Bob Rockledge, Chief Financial Officer. The earnings release and related slide presentation were made available this morning on our website. Quickly, I will cover the safe harbor, reminding you that any forward-looking statements made during this call are subjects 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.

Thanks, Barb. Welcome to our second quarter 2025 earnings call. I'm pleased to report another quarter of record sales and solid financial results that demonstrated disciplined execution and the durability of the drivers that support technology adoption across the water industry. Against difficult comps in the prior year quarter, sales grew 10% year-over-year, or 5%, excluding the Smart Cover acquisition. Despite trade-related cost headwinds, gross margins continued to trend above our normalized range of 38% to 40%, and we generated robust free cash flow in the quarter. Halfway through the year, I remain encouraged by the resilience of our business as we face ongoing macroeconomic, trade, and policy uncertainty. Our proven history of differentiated operational execution, combined with ongoing customer demand and momentum in technology adoption trends, positions us to successfully navigate this near-term uncertainty while supporting the long-term goals of our customers. Bob will review the details of the quarter, and then I'll be back to provide some thoughts on BlueEdge and our outlook. Go ahead, Bob.

Thanks, Ken, and good morning, everyone. Turning to slide three, total sales of $238 million in the second quarter of 2025 represented an increase of 10% year-over-year, or 5% sales growth when excluding just over $10 million in sales from Smart Cover in its first full quarter under our ownership. Total utility water product line sales increased 11% year over year or 6% excluding smart cover. As expected, moderating core sales growth from recent double digit levels was primarily a function of the difficult second quarter sales comparison, which was the high watermark for the prior year. In the quarter we delivered higher sales of meters, beacon software as a service, water quality and remote monitoring solutions. Sales for the flow instrumentation product line were essentially flat year over year as lower demand and the de-emphasized array of market applications offset modest growth in water related end markets. Turning to profitability, operating earnings increased 8% year over year to $44.9 million with operating margins down 40 basis points to 18.8% from the prior year's 19.2%. The structural mixed benefit of technology adoption by our customers continues to benefit gross margins, which expanded 170 basis points to 41.1% in the second quarter from 39.4% in the prior year quarter. As expected, this did represent a sequential decline from 42.9% in the first quarter of the year, which you'll recall was the result of favorable customer and product mix that quarter that did not repeat this quarter. Gross margin in the second quarter of 2025 also continued to benefit from ongoing operational excellence initiatives, while recently implemented price increases partially mitigated certain tariff-related cost pressures in the quarter. Year to date, we've adeptly managed the controllable aspects of the known tariff landscape. However, the trade environment remains fluid. As an example, copper prices recently spiked on copper-specific tariff concerns. Although we primarily use recycled brass in our ingot recipe, secondary markets like these do experience ripple effects when the primary commodity is impacted. Last quarter we walked you through the manufacturing and supply chain footprint supporting our U.S. sales, along with the tariff-related exposures and mitigation efforts. While announced and rumored tariff rates by country and commodity continue to evolve, our underlying tariff-related exposures and mitigation actions remain the same. Most importantly, we continue to see the competitive playing field as level in terms of both exposures and planned mitigation actions, including any potential targeted pricing actions. That said, the ongoing trade uncertainty and lag impact of mitigation actions once again prompts us to leave our normalized gross margin range of 38 to 40% unchanged for now, despite another quarter of gross margin performance above 40%. SEA expenses in the second quarter were $52.9 million, an increase of approximately $9.1 million year-over-year, due primarily to the addition of Smart Cover, including $1.6 million of intangible asset amortization. Excluding the acquisition, SEA expenses increased $3.3 million, the result of higher personnel costs to support growth and approximately $1 million of deferred compensation expense resulting from the year-over-year change in stock price that is unique to this quarter. The income tax provision in the second quarter of 2025 was 24.5%, modestly above the prior year's 23.8%. Consolidated EPS was $1.17 versus $1.12 in the prior year quarter. Primary working capital as a percent of sales at June 30th, 2025 was 21.8%, consistent with the prior quarter end and about 200 basis points better than a year ago. Free cash flow increased 19% year over year to $40.6 million, largely due to higher earnings and working capital differential between years. With that, I'll turn the call back over to Ken.

Thanks, Bob. Next, I'd like to talk about the progress we've made since the launch of BlueEdge last year. As a reminder, BlueEdge is the brand that unifies the comprehensive suite of products and solutions wastewater systems beyond the meter. In June, our booth at the ACE Trade Show in Denver, which is our industry's biggest event of the year, highlighted the various use cases of our extensible solutions and included Smart Cover for the first time. We also featured our new Field App, which brings the power of our Beacon software to utility field personnel, and we introduced Cobalt, which leverages machine learning for advanced insights within our Beacon platform. Our booth was the physical representation of our evolution beyond the meter. Today, our Blue Edge portfolio of water management solutions provides tremendous value to customers, and it was exciting to see the energy in our booth, as well as the enthusiasm that both longstanding and soon-to-be new customers have for our solutions. Well, it's only been a year since we've launched this concept. We've already seen meaningful momentum in our efforts to inform utilities of the advantages of our Blue Edge solution. Furthermore, we've elevated our already strong reputation as a trusted partner. A long-term relationship with us means that we'll be there to enable our customers as they evolve and plan for the future. We're seeing increasing numbers of RFPs that ask for solutions beyond the meter, and our offering elevates our standing in the bid process while providing tangible reasons for us to continue our partnership with customers post-sale even after their AMI projects are complete. In summary, we're very pleased with the strong start to this evolving aspect of our long-term strategy. Finally, turning to the outlook, we routinely highlight that our business can be uneven quarter to quarter and year to year. It is simply the nature of the business given utility replacement cycles, project deployment schedules, project phase in, phase outs, et cetera. The difficult second quarter comparison from a year ago that Bob discussed earlier is just one example of that phenomenon. Another example is that we did have a number of AMI projects wrap up in the second quarter. While we already have new AMI projects in hand to replace them, the timing of the start of those projects is such that we expect absolute sales to decline sequentially in the third quarter of 2025. Despite the moderation in sales, we still expect sales growth year over year, excluding smart cover. Nevertheless, despite the macroeconomic, trade, and policy uncertainty we've experienced year to date, The multiple long-term secular trends fueling growth where we are positioned in the water industry remains strong. Our core products and solutions are critical to the operations of the water utility, commercial, and industrial customers. As a reminder, the meter is the cash register of the utility and remains a priority for investment. Thus, our ongoing conviction in high single-digit revenue growth over the long term is underpinned by these enduring favorable industry fundamentals along with customer order and demand trends, project awards, pending and future RFP activity, and the competitive positioning of our broad portfolio of solutions to best address water challenges. We continue to generate strong cash flow and retain a balance sheet with significant financial flexibility to withstand macroeconomic pressure while pursuing both organic and strategically relevant inorganic investments, all while paying a dividend that has grown in line with earnings for over three decades. After nearly six months of integration, we remain on track to deliver the anticipated sales and cost synergies associated with the Smart Cover acquisition. We've made tangible progress in leveraging Badger Meter resources across Smart Cover's business, continue to identify go-to-market opportunities for Smart Cover as part of our Blue Edge suite of solutions. Finally, I'd like to call on our recently published 2024 sustainability report. proud that the collective efforts of our team allowed us to exceed and raise our targets for greenhouse greenhouse gas intensity production while also delivering record 2024 financial results our continuous improvement philosophy towards sustainability efforts continues to produce favorable outcomes as it has across the entire business in summer and summary we're carefully managing through uncertainty in the broader environment by focusing on what we can control in the near term while diligently executing against the long-term strategic plan that we're confident will continue to create value for both our customers and our shareholders. With that operator, please open the line for questions.

Thank you. Please press star followed by the number one if you'd like to ask the question and ensure your devices are muted locally when it's your turn to speak. If you change your mind or your question's already been answered, you can withdraw your question by pressing star followed by the number two. Our first question today comes from Nathan Jones with Stiefel. Please go ahead. Your line is open.

Good morning, everyone. Good morning, Nathan. I guess my question is going to be on the SG&A expense line. Just looking at it sequentially, it's kind of gone up about $7 million, which was, I think, more than people were looking for. You've got an extra quarter of smart cover in there, and that one time, deferred comp number in that. Can you talk about the other investments that have been made there to support future growth, I guess, and X the million-dollar write-up of deferred comp? Is this kind of $52 million a new level of SG&A that we should be expecting going forward?

Yeah, well, I think you've picked up on, I think, the two main pieces that are relevant to the quarter, Nathan. Certainly, yes, a full three months of Smart Cover's SEA run rate, which of course we mentioned that acquisition is above line average organically. And then when you add the intangible amortization to that, which again, we've sized for the year and the quarter, that's certainly an element of that uptick sequentially. You've also picked up on the very unique item to the quarter, that being the deferred comp expense to the tune of about a million bucks. So absent those items, essentially SEA growth year over year is up two to $3 million. And it's ongoing investment to support the wonderful things that we're doing in the marketplace in terms of continuing to evolve our software offering to keep it leading best in class, continue to bring innovative product development to market that differentiates not only our meter to cash products, but are around the meter technologies and continue to drive adoption of those technologies, which remain very early stage.

in terms of us and north american water utility adoption and so yeah i mean those are those are pieces of it obviously we don't guide but you've picked up on the outliers that would help to inform your outlook moving forward i i guess the the 1.6 million of intangible amortization is any of that um like inventory step up or something that goes away or is that what you expect the continuing level of amortization to be

Yeah, that is entirely the intangible asset amortization. The inventory step up that was a small amount in association with the acquisition passed out in the first quarter. So essentially, that's the continuing run rate for the life of those varying lives intangible that we disclose in the financials.

Okay, so there's no reason to expect it to be less than $52 million in the SG&A line going forward.

Yeah, we'll leave that to you to figure out, but Ultimately, you picked up on the two unique pieces.

Fair enough. I guess then maybe you could provide a little bit more color. I mean, you've answered a few of the things there, Bob. But just on what kind of capabilities, let's not call them expenses, we'll call them capabilities, have been added to the business to support future growth?

Yeah, so Nathan, as you reflect on the past, So some of it's just the random things of continuing to increase capacity on some of the product lines that we continue to invest in, and some of it is investing in, of course, people. As we go through our five-year strategic plans every year and we look forward on what the new skills and new offerings are, we're going to have some times that drives investing in different kinds of skills that we currently have today, continuing to invest in our software business that we're totally excited about. All the things that we told you over the years that we're investing in to grow, it's just a matter of continuing to do that. And frankly, we still feel, taking the smart cover piece aside, our ability to grow at a rate faster than our investment in SEA, that still is intact.

I think that's the key there, is that there's nothing unique about the rate of investment in this quarter Is there anything different than what we've been doing for the last four or five years in terms of our primary cash capital allocation priority of organic investment in the business? It's just the way I think it's sequencing on a year-over-year basis and in concert with those two unique items that you mentioned to start your question.

Thanks very much for taking my questions.

Our next question comes from Scott Graham with Seaport Research Partners. Please go ahead.

Yes. Hi. Good morning. I have a similar question to Nathan. Just want to maybe come at it a little bit differently. You were, I thought, pretty clear in your bullet points here on the SEA that the 1.6 million stays, but the 1 million of variable deferred comp is unique to the quarter. to infer that that means that that goes away next quarter?

Not in its entirety, but when you experience a quarter where the stock price goes up over $50 from beginning to end and you have liabilities associated that track that, there's going to be an oversized impact that is absolutely unique to the second quarter.

Understood. That's clear. Thank you. But one other question, though, around this, Bob, you also, I think, indicated that if you strip those out there was a three million dollar core increase now if my calculations are right here that that three million dollar core increase on a year-over-year basis is about the same as your sales number sales increase in total which would suggest that maybe there was a little bit more because you typically get leverage off of that line would suggest maybe a little bit more investment in this quarter although you just said That was not the case. So maybe you can connect those dots for me.

So I think the simplest way to say this is that we're comparing to a quarter of SEA as a percent of sales at 20.2%, which is abnormally low, stripping out all the noise in the quarter. So in essence, stripping out smart cover for all intents and purposes, we'd have been at 20.7%. So yes, there is a 50 basis point increase, but that is in any way different than where we've been historically or in recent quarters and is still indicative of our ability to leverage SEA over time, just not quarter to quarter.

Yeah, I mean, we... Thank you for that clarity.

Yeah.

Okay. So then let me just ask this one last question, if I may. The third bullet point says that strategic price increases mitigated certain power of impacts, which suggests to me that you were maybe price cost negative in the quarter. And then if that's the correct assumption, should you essentially be price cost neutral for the rest of the year?

So I think you're picking up on the right dynamic. Certainly our book of business here varies in terms of go-to-market. Sometimes we're direct. Other times we're through distribution. Sometimes we have PO to PO pricing. Other times we have long-term contracts, right? The pricing actions implemented in the quarter were implemented in, call it, mid-April. And by default, they won't be effective on everything that we shipped in the quarter. To the extent tariff cost pressures remained static, which I don't think anyone is saying those to be the case, You're exactly right in your diagnosis of how we've characterized the second quarter results. I think what remains to be seen and the main priority reason why we're not redrawing a gross margin line or normalized gross margin range in this quarter, despite again, once again, having 41.1% gross margins is the uncertainty associated with tariff costs. So the last part of your question is difficult to answer, not knowing exactly what the forthcoming reciprocal tariff impacts are, as well as then the tariff around copper, which at this time is just a rumored statement, nothing that's been firmly implemented. And so that's the overall hesitancy to tell you that we're going to be cost neutral moving forward because the cost side can change while equally the price side can change as well.

Thanks very much.

Our next question comes from Andrew Crow with Deutsche Bank. Please go ahead.

Hi, thanks. Good morning, everyone. Wanted to follow up on the comments about the AMI projects in the funnel and it being a little unclear when they might start. Is this like a change where they've been deferred or pushed out a little bit, or is this more normal course of business? And can you maybe also just

generally uh comment on like muni activity in general i think there's been some fears maybe of like a little bit of softness there thanks yeah so andrew um yeah so as we talk about all the time in this business it can be uneven from quarter to quarter so we're just basically letting you know it's not a stacked bar where you add one quarter to the next and it can be So not a concern for the long term in any way. It doesn't change our view on high single digits through the cycle. Just pointing out that we still expect to grow next quarter and into the future, but it's just not a stack bar from sequential. In terms of total just market demand, like we always have, we continue to spend a lot of time talking to customers in several pieces of the cycle on who's working with you know, consulting firms on AMI projects that we'll see in three to five years, how we're doing on RFPs that are currently in motion, things that are currently being rolled out, orders, backlog.

Andrew Tucci- Okay great that's very helpful and then a quick clarification on the comments about sales being down quarter over quarter into three Q just was that a total sales comment or more core sales, so, in other words, like kind of stripped out smart cover and your core dollars are down as well, thanks.

Andrew Tucci- yeah.

Andrew Tucci- yeah so the script specifically clarified excluding smart cover so essentially core core growth. with then obviously the non-comparability of Smart Cover in Q3-25 not being in Q24.

Okay, great. Thanks, guys.

Thank you. Our next question comes from Rob Mason with Baird. Please go ahead.

Yes, good morning, Ken, Bob. Maybe I'll just pick up real quick around Smart Cover. So the sales in the quarter look like they were, and this is the guess, you know, the first full quarter we're seeing of smart cover, um, you know, above the run rate of sales that they, uh, reported last, um, calendar year. So I'm just curious, you know, is that reflective of seasonality in the business? Is that, um, kind of underlying organic growth, uh, just how we should be thinking about, you know, 10 million contribution this quarter anyway, of smart cover sales and you know, how the, um, you know, maybe a quarter to quarter pattern should look there.

Yeah, so I'll make a general comment that I see Bob wanted to jump into. So let me just talk in general about how excited we are about the Smart Cover acquisition. So we've had it about five months now. I mentioned the great reaction that we had at ACE, a lot of the feedback that we're getting within the market. getting a lot of positive momentum from both market and just through the integration that we've had thus far. I think we couldn't be more pleased with the results that we've had thus far and the team that's on board. So feel great about the long-term fundamentals there. I think Bob was going to make a point on sales alternative to him, but I just wanted to be clear that everything that we think that we've, everything that we thought we knew about Smart Cover is proven to be true very early on.

Yeah, I mean, you hit the main point, which is, of course, I know everybody's immediate concern is quarter to quarter, but our long-term growth outlook for Smart Cover is multi-year, if not multi-decade. Again, referencing back to the sewer line monitoring portion of this business is virtually greenfield with very low digital adoption in the less than one half of 1%. So essentially, we believe not only in the revenue growth in the short term, but the long term. I would say this has little to do with seasonality and entirely to do with advancing our positioning as a leader in the market and helping utilities solve primarily four main use cases in what generally tends to be out of sight, out of mind, in fact, underground infrastructure that is blind spots for those utilities. And so, yes, we're pleased with the revenue growth thus far, but certainly have high aspirations as we move forward as well.

You know, Bob, you know, my quick math around the contribution from Smart Cover at the EPS level, you know, I know this is a GAAP number, of course, you know, would have been in the neighborhood of kind of six, seven cents dilutive in the court year over year.

Yeah, you're not too far off, as I'll remind everyone, you know, we said at acquisition, EPS decretive in year one, and certainly a path to EPS contributions shortly thereafter, primarily in year two. So as you can imagine, a lot of that is about market adoption and the great sales opportunities and sales growth that we mentioned, while also leveraging what at the current time is an above line average SCA business, but that we think over time provides well above line average incrementals, both through the combination of software attachment rate and then leveraging the cost base.

Yep. If I could sneak in one more real quick, just again, We'll have to see how the tariffs around copper ultimately play out. But if you think that there could be some added cost to copper and that ultimately flows through to scrap brass, do you think that could have any influence on the adoption rate between mechanical and solid-state feeders? I mean, does the pricing differential that exists today, does that narrow? Does it make the value proposition for solid state stronger? Relatively.

Well, yeah. So the first thing I would remind everyone, Robin, I know you know this is we have a great ultrasonic line. So even if that were to happen, we think that wouldn't that certainly would not be a negative effect. We can just lock people up from from mechanical to ultrasonic within our portfolio. Secondly, people I know there's this myth be smart too with the communication software and there are tangible reasons why a lot of utilities still want to buy a mechanical gear so along the way we feel that we have a strong ability to continue to to mitigate the cost issues and continue to sell a lot of mechanical meters and if someone wants to walk up that ultrasonic we're happy to help them do that too

Very good. Thanks, Ken.

Thank you. Our next question comes from Jeffrey Reeve with RBC. Please go ahead.

Thanks. Good morning. You mentioned you're progressing as expected on smart cover integration. Could you remind us the cost synergy opportunity, where you are today in capturing it, and maybe how quickly you can expect to realize the remaining upside? And is this mostly an SEA cost out opportunity?

So, so, um, I don't, I'm looking at Bob. I don't believe we ever signed the cost on opportunity publicly.

Yeah. So I think, let me just clarify. So certainly when we talk about the most dramatic and impactful synergies of the smart cover acquisition is all about commercial synergies, accelerating what was already great standalone organic revenue growth by advancing the connectivity of the technology to our existing installed base, whether that's direct at customers or through distribution. So a number one priority from a synergies perspective is commercial synergies. As it relates to cost, the comment I made earlier was about leveraging an existing SEA cost base. So prior to Badger's ownership, Smart Cover was private equity owned, and they were in basically revenue growth mode. So they invested heavily in advancing the technology and software and having the right feet on the street for sales. And so they carried a higher leverage of lever level of SCA coming into our acquisition. We're not saying we're reducing that. We're saying we're able to lever that as the incremental sales growth that we bring to the table through our great access to market and long tenured customer relationships occur. There are certain aspects of cost synergies when you start to look at the product side, meaning The product that Smart Cover sells for sewer line monitoring has PCBAs and has batteries in it and are components that we're familiar with buying. And whereas we buy hundreds of thousands, if not millions of those parts and components, Smart Cover in history has only sold smaller amounts. And we believe we can leverage certain of those components through our supply chain and otherwise, but that is absolutely secondary to the primary synergy, which is commercial synergies. And so a big part of taking this from EPS decretive in year one to EPS accretive in years two, three and beyond is all about the top line revenue growth and then not having to invest in SEA at a rate commensurate with that great high organic above line average sales growth.

Got it. Thank you. And maybe just switching gears, there has been some discussions about potential cuts to the EPA budget. Do you have a sense of how that could impact demand for metering? Maybe at a high level, how would you break down customer project funding between muni budgets and federal support like state revolving funds?

Yeah, so, Jeffrey, there's a lot of ways that utilities have to fund their projects and regardless of whatever funding may or may not be available. So, of course, there are state revolving funds, which may be reduced some in the new bill, but they still exist. In the WIPIA, low-cost interest loans are still out there and very supported by the government, by the federal government. And then you've got utilities have the ability to raise rates. They have the ability to issue municipal bonds. There's a myriad of ways that the funding happens, and this is where And as you can imagine, we always do that, but we've done that even more so in the last three months with all the noise around this and continue to remain quite positive on the ability to grow high single digits through the cycle because utilities are still talking about investing and they have the means to do that for where we've positioned ourselves in the water industry, which your question All right, thank you.

Thanks. Just as a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. We'll just pause here. We have no further questions in the queue, so I'll hand back over to Barbara for any closing comments.

Thank you, operator, and thank you all for joining our call today. For your planning purposes, our third quarter 2025 call is tentatively scheduled for October 21st, and I'll be around all day to take any follow-up questions you may have. Thanks, and have a great day.

This concludes our call. Thank you very much for joining. You may now disconnect your lines.