Good morning and thank you for joining the Badger Meter third 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’ll turn the call over to Ken.

Thanks, Karen, and thank you for joining our third quarter earnings call. The Badger Meter team delivered another record quarter with continued strong sales, operating profit and EPS growth year-over-year.

Demand for our differentiated and tailorable digital smart water solutions remains robust and improving supply chain dynamics allowed us to make modest headway into the elevated backlog. I want to thank all of our employees for their focused efforts in serving our customers.

I’ll provide an update on the macro environment and market outlook later in the call. For now, I’ll turn it over to Bob to go through the details of the quarter.

Thanks, Ken, and good morning everyone. Turning to slide 4, our total sales in the third quarter reached yet another record at $186.2 million, an increase of 26%, compared to $148 million in the same period last year.

This increase was on top of 15% year-over-year growth in Q3 last year, and 13% in the prior year. To put our multi-year organic sales trend line into perspective.

Third quarter 2023 sales are more than 60% above pre-COVID-19 2019 levels, which equates to about 13% compounded annual growth on an organic basis. Total utility water product line sales increased 31% year-over-year with broad-based growth across the portfolio of utility smart water solution offerings.

Continued robust order demand and normalization of supply chain conditions resulted in strong manufacturing output. Similar to last quarter, we delivered on meaningfully higher cellular AMI demand, including ORION Cellular endpoints, E-Series Ultrasonic meters, and BEACON Software as a Service revenues.

Additionally, water quality and pressure monitoring sales contributed to the top-line growth. Sales for the flow instrumentation product line increased 2% year-over-year with solid demand in water related markets, partially offset by modestly lower sales associated with deemphasized general industrial applications.

Turning to margins, solid execution at both the gross margin and SEA lines contributed to the 80 basis-point increase in operating margins in the quarter, reaching 16.9% versus 16.1% last year. Gross profit dollars increased $15.2 million year-over-year and as a percent of sales increased 20 basis points to 39.1% versus 38.9% last year with higher volumes and favorable product mix contributing to the improvement.

We were pleased with overall gross margins, again in the upper half of our normalized range. SEA expenses in the third quarter were $41.3 million, an increase of $7.6 million year-over-year, which included higher personnel related costs such as headcount, salaries, and variable compensation, as well as R&D expenses.

The addition of Syrinix with its related and tangible asset amortization also contributed to the dollar increase. Despite the higher spend levels to support growth, SEA as a percent of sales declined 50 basis points to 22.2% from 22.7% in the comparable prior year quarter.

While operating income grew 31%, we increased EPS an exceptional 44% to $0.88 in the third quarter compared to $0.61 in the prior year quarter. The delta includes the benefit from interest income earned on our increasing cash balance.

And in addition, the quarter’s 20.3% income tax rate benefited from discrete equity compensation transactions occurring in the quarter. We continue to expect our normalized effective income tax rate to be plus or minus 25%.

Working capital as a percent of sales was 22.7% compared sequentially to 23.4% last quarter end. While overall working capital including inventory has increased in total dollars to support growth, we did see an improvement in inventory as a percent of sales and continue to expect modest inventory reductions as we move forward.

Free cash flow of $28.4 million improved from a year ago, primarily on higher earnings. We remain on track for 100%-plus free cash flow conversion of net earnings for the full year.

With that, I’ll turn the call back over to Ken.

Thanks Bob. Turning to slide 5.

As Bob mentioned earlier, we’ve delivered meaningful growth over the past several years leveraging our expanding portfolio of digital smart water solutions to solve our customers’ evolving water challenges. While the word meter is a part of the Badger Meter name and remains a prominent element of our offering, the growth that we’ve had had and will continue to deliver goes far beyond the meter.

As the macro challenges of labor shortages, aging infrastructure, water conservation, and climate events continue to drive much needed investment into critical water systems, Badger Meter’s broad portfolio of customizable solutions spanning metering, sensors, instruments, communication, software and support offerings is uniquely positioned to serve the evolving needs of our utility and other customers. The total available market globally is valued at approximately $20 billion, giving Badger Meter ample opportunity to continue to grow and expand these offerings in the U.S.

and other select regional markets. It also gives us ample opportunity to add to our portfolio of solutions and other sensors and hardware enabled software via organic and disciplined M&A investments.

We’ve demonstrated our ability to capitalize on these growth opportunities and we remain well positioned to further build on our track record of value creation. Looking ahead, we have the constructive outlook for the remainder of the year and see a solid foundation for profitable growth in 2024.

As noted in the release, as we close out 2023, we continue to expect solid year-over-year sales growth, taking into account the fewer operating days in fourth quarter with U.S. holidays.

As supply chain dynamics improved, we’ve been able to begin improving lead times. These improving dynamics have also aided manufacturing efficiencies, benefiting the gradual margin expansion we’ve consistently discussed.

One additional item to note, we are monitoring the evolving conflict in the Middle East and its potential impact related to partners in the region. Awards, orders, and bid funnel activity remain strong, supported by the well-understood macro drivers facing the water industry.

The replacement-driven underlying demand activity as well as our ability to leverage our water-related hardware and communication offerings, to accelerate software and data analytics across the water ecosystem position us well for future growth. With that, operator, please open the line for questions.

Yes. Good morning, everyone.

It sounded like -- you made the comment, you were able to work backlog down a little bit, but you characterized that it is still elevated. I am just curious within that, higher backlog, is there any portion of that that you would think is in the delinquent category or there is an accelerated need to work the backlog down?

Yes. So, Rob, as we’ve discussed before, so when we talk about backlog, what we are talking about is, what we have POs for that customers are interested in getting right now.

So in our backlog, we don’t talk about the two-, three-, five-year, longer-term AMI deployments that we ha book. So, as we think about backlog, I don’t think about it in past due.

I just think about this, these are things that customers are looking for us to provide. So, as we start to improve lead times and eat into that actionable right in front of us today backlog, that’s actually a good thing for customers.

And if we continue to improve lead times and eat that down a bit, I would feel happy about that. Overall, we are extremely excited about order rate.

So, that optimism has not changed on that front.

Understood. Ken, could you just characterize what the pricing environment looks like now that some of the supply chain headwinds that had been out there and commodity costs as well have settled down?

And just give us maybe a framework for what you are seeing, either on list prices or in particular, just how the RFP and bidding process is playing out with respect to pricing.

Yes. It’s remaining largely unchanged from what we’ve talked about in the other quarters.

While some things are moderating, inflation is still real. There are parts of the economy that still certainly aren’t great as we talked about inflation and interest rates and other things that are out there.

But for the most part, the work that we did three years ago and really embarking on a value creation, value pricing model has certainly paid dividends for us throughout a difficult operating environment, but largely pricing dynamics haven’t changed.

If I could sneak one last one in, this was just a comment on the slide presentation, which is certainly appreciated. I did notice in the slide deck, where you reference ASPs around some of your solutions, broad ASPs, I understand, but just on the manual meter side, around $70 pricing, if I’m not mistaken, that was back in January that was at a $50 to $60 range.

Can you just speak to what the dynamic is pushing that up, whether that’s all price or does that include some blended mix between mechanical and e-meters or just kind of the underlying movement in that number?

So I would say, again, I don’t know how great we are at keeping those numbers current, but there’s probably a bit of price increase that’s occurred over multiple timeframes between those being updated. I think also, likewise, you’ve got kind of core meter, bare meter plus registration being included in that.

So I think if that’s your specific question that reflects kind of whatever was in the market at that point in time.

This is Adam Farley on for Nathan. A quick one on the fewer selling days in 4Q.

Should we be expecting a sequential decline in 4Q revenue?

So we don’t give guidance, but I think you’re walking away with an obvious takeaway, which is with fewer working days, likelihood that that’s a potential. That’s I think effectively what we’re saying.

Okay. Fair enough.

And then shifting gears, could you talk about strategic investments and how we should think about that driving revenue growth?

So, I think if you just look at our history in totality, the strategic investments are what have brought us to the point that we’re at, whether that was being first in our market with ultrasonic meters, or first in our market with cellular radios or bringing the water quality portfolio and developing our own software. In many cases it’s continuing to invest in keeping and advancing our lead in cellular, keeping or advancing our lead in software as a service, our software offering, continuing to integrate water quality and Syrinix into the broader portfolio and cross selling.

So, the long answer is yes. The short answer is yes.

I mean, we continue to follow our capital allocation priorities of number one, R&D investment and priding ourselves in keeping our innovation leader status increasing dividends annually in line with earnings and disciplined M&A, so that hasn’t changed. That’s same as it’s been.

I think, I’d augment kind of that first capital allocation priority of organic investment in the business, everyone always thinks of innovation as being R&D, but we equally think of innovation in the space of operational efficiency and capacity expansion. And so, we’ve been investing over the last several years to be able to drive higher capacity and output, which of course allows us to then deliver on those higher order rates and higher growth numbers that you’re asking about.

So, it’s equal parts, but it’s contributory from innovation as well as operational efficiency focus and capital investment to support capacity.

I’ll ask first, just sales have been very strong for several quarters in a row and I think you’re on track for strong double-digit growth in 2023, and that’s on top of basically double-digit growth the prior two years. So, I’m just wondering, is the kind of historical, like mid to high single digit growth rate for this industry?

Do you think it’s structurally moved higher or should we expect to kind of go back towards that range again?

Yes. So, if you rewound a couple of years ago, we used to refer to it as mid-single digits.

So, we have changed into that high single digit mode. And as you know, we don’t provide guidance in the quarter or the annual basis.

Things can tend to be uneven at times, but for the most part, through the strategic cycle, we’re really comfortable thinking in the high single digit range year-over-year.

So, when we say high single digit over the strategic cycle, we’re talking 5- or 10-year cycles. So, to get a compounded annual growth rate of high single digits, there may be years that are up 15, 16, and there may be years that are only up 5.

So we’re simply talking about that trend line over a CAGR style. So, I do think -- again, we don’t guide obviously, but I think the ability to sustain double-digit growth even in this market, it’s not doable, repeatable every year, annually over that strategic cycle.

And next just on like capital allocation, any update on how you’re thinking about your approach there just as your cash balance continues to grow, and maybe an update on like the deal pipeline, anything you’re looking at? Thanks.

Sure. Yes, so deal pipeline remains strong.

We have, as we’ve always maintained over the last several years, a really healthy target rich environment of companies that are in this water quality space. We’d be certainly interested in building that out more, software side, anything that has global footprints in the select regional markets that we’re looking at, similar to what ATi, s::can and Syrinix have brought to us.

So, good funnel. We remain disciplined.

We think we have a really good idea of where value does get driven within our industry, and that’s where we’ll continue to look for value creation opportunities and M&A.

And if I could sneak one last quick one. I think last quarter you noted that book-to-bill was over 1.

Can you give an update on that for third quarter?

Well, yes. So, as I talked about with that improving lead time situation, we had a really strong order period that we’re really proud of.

We just had an exceptionally strong shipment period that was slightly better, and I do mean slightly.

A couple of things. Good morning.

Impressive expense control. I mean, your revenue growth exceeded my expectations but expenses were under.

Can you just talk about maybe the composition in selling and administration expenses? Is R&D at higher levels than historically to enter more water quality -- real water quality markets and any integration expenses?

It’s just, I continue to expect you to have more expenses, but it seems like you manage it quite well.

Yes. So I certainly won’t dissect the $41 million of SEA.

But I think the way to think about that, Tate, is exactly what we’ve been saying for the last four years is that, SEA leverage because of our -- I am going to say a term I hate to say, growth algorithm. Because of our growth algorithm, we believe while still being an innovator and doing the things that you talked about, R&D, integrating new businesses that we’ve acquired, et cetera, we can still do all those great things, but grow SEA at a rate slower than sales.

And that creates automatic SEA leverage. I mean, we are not more than three years removed from a time when we were running at 25%, 26% SEA as a percent of sales, and we just closed the quarter at 22.2%.

And I think for the full year, we are in that kind of high 22% range. So, the story of SEA leverage is real improvement over the last three years, and we believe to continue that while being steadfast and being invested in organic investment as our capital allocation priority number one.

We continue to gain that leverage as a point of operating and EBITDA margin expansion. So, there is nothing unique in the third quarter.

It is more of the continuation of that trend that we have been talking about over the last three years.

Great. Thank you.

And then the addressable market slide, thank you for including it. And then, to understand the meter market part of that, I mean, I would -- if it is fair to categorize mostly the replacement market, how much of the $20 billion -- remaining $20 billion market, I mean, I thought maybe you are creating, so to speak.

I mean, are you creating some of the real time water quality markets and the software markets? Are you are you replacing existing solutions?

Can you talk more about the pie chart in there?

What’s exciting to us, and I know sometimes the acquisitions that we’ve done can appear small. But given our brand name, our 118-year history, things we’ve done in the water market, when we add these companies like ATi, s::can and Syrinix, it opens up these much larger markets to us.

And as we continue to integrate and develop software, it opens up these other markets to us. We do tend to enjoy and look for niche opportunities within these spaces.

We are not looking to follow some of the giants and some of these spaces that have established markets that are more difficult to get into. For example, our water quality, Hach is a really strong, great business, but there is room for several other technologies and everyone to be successful in a wonderfully large growth market.

Thank you, operator. Thanks, everyone, for joining our call today.

For your planning purposes, our year-end call is tentatively scheduled for January 26, 2024. I’ll be around all day to take any follow-up questions you have.

Have a great day.