Badger Meter, Inc. (NYSE:BMI) Q4 2023 Earnings Call Transcript
Badger Meter, Inc. (NYSE:BMI) Q4 2023 Earnings Call Transcript January 26, 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 Fourth Quarter 2023 Badger Meter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is recorded. It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy and Treasurer.
Karen Bauer: Good morning, and thank you for joining the Badger Meter fourth quarter and full year 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'll 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 all for joining our call. We capped off a record year with strong fourth quarter results across sales, operating profit earnings per share and cash flow metrics. Demand trends remained robust, and our continued manufacturing conversion allowed us to again make modest headway into the order backlog. Shortly after year-end, we added to our suite of smart water offerings acquiring the Telog/Unity network monitoring assets, as previously announced. I want to thank all of our employees for their efforts in delivering another fantastic year for Badger Meter. I'll talk more about the acquisition, provide a recap of the year and discuss our outlook later in the call. 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 4. Our total sales in the fourth quarter were in line with our expectations at $182.4 million, up 24% compared to $147.3 million in the same period last year. This brought our full year 2023 sales to a new milestone exceeding $700 million, specifically $703.6 million or 24% above 2022 sales of $565.6 million. Total utility water product line sales increased 28% year-over-year in the fourth quarter and the same percentage on a full year basis. As we have noted all year, demand for our suite of utility smart water solutions continued to benefit from underlying secular growth drivers, coupled with the differentiated performance of our innovative offerings.
In the quarter, we delivered on continuing strong cellular AMI demand, which translated into higher sales of ORION Cellular endpoints, E-Series Ultrasonic meters and BEACON Software-as-a-Service revenue. Additionally, water quality and pressure monitoring sales contributed to the top line growth. There were a few highlights within the full year sales growth that I'd like to touch on. First, Software-as-a-Service revenues exceeded $42 million in 2023, up 27% year-over-year. Our international utility revenue grew more than 30% year-over-year, albeit from a small base. Syrinix, which we acquired at the beginning of 2023, delivered pro forma sales growth of approximately 60%, also from a small base, a sign of both broader market adoption and our early integration efforts.
And while we again saw a slight increase in the penetration of ultrasonic meters as a percent of our metering units, mechanical meters continuing to command a leading position in the North American utility market for customers of all sizes for a variety of fundamental reasons. Turning to the flow instrumentation product line. Sales grew modestly in the quarter and were up 7% on a full year basis with solid demand experienced in water-related markets partially offset by lower sales associated with the deemphasized general industrial markets. Looking at margin performance, continued strong execution at both the gross margin and SEA lines contributed to the robust 230 basis point increase in operating margins in the fourth quarter, reaching a record 17.6% and versus 15.3% in the comparable quarter last year.
Gross profit dollars increased $14.5 million year-over-year and as a percent of sales increased 50 basis points to 39.2% and versus 38.7% last year. The combination of higher volumes and favorable product mix led to the solid year-over-year improvement. We remain pleased with overall gross margins demonstrating the gradual yet durable structural mix benefit inherent within our smart water portfolio. SEA expenses in the fourth quarter were $39.4 million, an increase of $4.9 million year-over-year, which included higher personnel-related costs such as headcount, salaries and annual bonus incentives. The addition of Syrinix with its related intangible asset amortization also contributed to the dollar increase. Yet as we have demonstrated all year, even with the higher spend levels to support growth, SEA as a percent of sales declined 180 basis points to 21.6% in the fourth quarter from 23.4% in the comparable prior year period.
Our effective income tax rate for the fourth quarter was a bit higher than the full year average at 26.1%. Incorporating that effective tax rate as well as interest income on our cash balances, we delivered EPS of $0.84 compared to $0.60 in the prior quarter, representing a 40% improvement. Working capital as a percent of sales was 22.1% consistent with the prior year-end. While overall working capital increased in total dollars to support growth, we were pleased with the overall working capital efficiency. Recognizing we have improvement opportunities in inventory as we move forward. Free cash flow for the fourth quarter was a record $35.9 million and improved from a year ago primarily on the higher earnings. For the full year, free cash flow was a record at $98.1 million with free cash flow conversion of net earnings at 106%.
With that, I'll turn the call back over to Ken.
Ken Bockhorst: Thanks, Bob. Turning to Slide 5, I want to spend a few minutes on our recently announced tuck-in acquisition. The Telog brand of remote telemetry units, or RTUs, along with the Unity monitoring software, bring additional capabilities to our smart water offerings in the form of remote monitoring access across utility wastewater, storm water and source water applications. It also brings talent with the expertise to assist our customers in applying these capabilities. For example, the acquired hardware portfolio adds certain complementary products such as hydrant mounted pressure devices and flexible RTUs for external sensor integrations. These products are cellular enabled and add flexibility and edge computing for real-time monitoring.
The devices connect seamlessly to a secure cloud software platform with a GIS-centric interface robust device management, flexible dashboards and a suite of analytical tools that enable data-driven decision-making. Application examples range from the monitoring of water depth at an aquifer or well in a water stressed region utilizing a single sensor to a full suite of instruments at a pumping station to monitor flow, level, pump health, water quality, pressure and more. While overall modest in size with sales and purchase price in the mid-single-digit range in millions, we believe these added solutions bolster our growing capabilities in full network monitoring and continue to competitively differentiate Badger Meter's suite of offerings in the market.
Moving on to Slide 6, finishing out 2023 represents a bit of a milestone for me, 5 years as the CEO of Badger Meter. During that time, the Badger Meter team has done a tremendous job evolving and advancing what was already a good business into a great one, through developing and executing on our growth strategy. First and foremost, I'd call out our evolution to a smart water management company effectively leveraging our innovation leadership and targeted acquisitions to build on the suite of tailorable solutions ready to address the persistent macro challenges facing the water industry. We've executed a multiyear transition to more direct sales efforts, building out our team of experts across smart metering, advanced communication technologies, water quality, full water network monitoring and software.
We've built on the trust earned over our nearly 119 years, becoming an even more valued partner to our customer base. We've advanced the culture of continuous improvement across not just operations, but working capital management, pricing excellence, talent management and development and sustainability really across all of our enterprise business processes, which have enabled our record results. The tangible outcome of these efforts are displayed here on Slide 7. We've distinguished our performance by executing our strategies exceptionally well in the face of a multitude of macro challenges. For example, in the past 5 years, we've delivered over 13% and compounded annual growth rate in total sales now exceeding the $700 million milestone revenue run rate.
We've grown our software revenues at a 28% CAGR to over $42 million. We've improved our margins, reaching 16% operating profit as a percent of sales in 2023, with 220 basis points of improvement over pre-COVID levels despite inflation and supply chain challenges. We've reduced our working capital intensity and consistently generated free cash flow in excess of 100% of net earnings, enabling our ability to continue as the innovation leader in our market, return cash to shareholders in the form of dividends, achieving dividend aristocrat status with a track record of 31 years of consecutive annual dividend increases. And to execute value accretive acquisitions to further enhance our portfolio of smart water solutions. I couldn't be more proud of the global team's achievements over the past 5 years.
Finally, turning to our outlook, I'm even more excited about the next 5 years as I've been about the past 5. At a macro level, our solutions continue to see growing adoption as we address the variety of persistent macro water challenges customers face enabling them to be more efficient, resilient and sustainable with their water systems. Our durable business model is underpinned by replacement driven demand, secular AMI adoption drivers and expanding need for real-time water quality information and a growing proportion of recurring SaaS revenues. Our strong backlog, along with constructive customer budgets and inventory levels are supportive of future sales growth. Although as we've consistently communicated, the rate of top line growth is expected to moderate from recent levels and will not be linear in delivery.
This rate of growth moderation is simply law of larger numbers math. Finally, while not anticipated to be meaningful, incremental opportunities associated with infrastructure funding could provide modest potential upside, and we are well-positioned to capitalize on them. The continuation of positive structural sales mix and SEA leverage drivers demonstrated in our business are expected to provide gradual margin improvement year-over-year. Finally, our cash flow generation and debt free balance sheet provide us with ample capacity to execute our capital allocation priorities, including an attractive funnel of organic and inorganic strategic growth investments. I want to again thank the entire Badger Meter team for their tremendous efforts and accomplishments in 2023, and I look forward to executing on the many opportunities ahead.
With that, operator, please open the line for questions.
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