Badger Meter, Inc. (NYSE:BMI) Q2 2023 Earnings Call Transcript
Badger Meter, Inc. (NYSE:BMI) Q2 2023 Earnings Call Transcript July 20, 2023
Badger Meter, Inc. beats earnings expectations. Reported EPS is $0.76, expectations were $0.65.
Operator: Ladies and gentlemen, welcome to the Second Quarter 2023 Badger Meter Earnings Conference Call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] As a reminder, today's conference is being recorded. It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy and Treasurer. Please go ahead.
Karen Bauer: Good morning, and thank you for joining the Badger Meter second 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.
Ken Bockhorst: Thanks, Karen, and thank you for joining our second quarter earnings call. We were very pleased with our second quarter performance, delivering an all-time record revenue quarter, strong operating profit margin improvement and 33% EPS growth year-over-year. Demand levels remain resilient with a book-to-bill, again, above 1. I want to thank our global Badger Meter team for their efforts once again delivering exceptional execution and support of our customers. We published our 2022 sustainability report a few weeks ago, and I'll highlight key elements of our ESG progress in addition to providing 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.
Bob Wrocklage: Thanks, Ken, and good morning, everyone. Turning to Slide four. Our total sales in the second quarter were $175.9 million, an increase of 28% compared to the $137.8 million in the same period last year, representing another all-time record sales quarter for Badger Meter. Total utility water product line sales were 32% above prior year levels and increased 14% sequentially from the first quarter, with broad-based increases across the portfolio of utility smart water solution offerings. Strong order demand, sequentially improving supply chain dynamics and ongoing value-based pricing actions benefited sales. Most notably, we experienced higher shipments associated with utility adoption of our differentiated cellular AMI solution, including ORION Cellular endpoints and BEACON Software as a Service.
Additionally, volumes increased inclusive of both mechanical and E-Series ultrasonic meters for residential and commercial applications. Sales for the flow instrumentation product line increased 6% year-over-year, led by solid demand in water-related markets and improved component supply availability, while general industrial end market demand was muted. Turning to margins. We were very pleased with the operating margin expansion of 80 basis points in the quarter reaching 16.8%. Gross profit dollars increased $14.7 million year-over-year, and as a percent of sales, were 39.5%, at the higher end of our normalized range and just shy of last year's 39.7%. SEA expenses in the second quarter were $39.9 million, an increase of approximately $7 million year-over-year, which included higher personnel-related costs, encompassing headcount, salaries, sales commissions, incentive compensation and travel.
The addition of Syrinix with its related intangible asset amortization also contributed to the increase. Despite the higher spend levels to support growth, SEA as a percent of sales declined 100 basis points to 22.7% from 23.7% in the comparable prior year quarter. The impact of higher interest income year-over-year was partially offset by a modestly higher tax rate of 25.8% in the second quarter of 2023 compared to 24.4% in the comparable prior year period. In summary, consolidated EPS was a record $0.76, a robust 33% improvement from $0.57 in the prior year comparable quarter. Working capital as a percent of sales was 23.4% compared to 23.1% last quarter end and 23.8% at the prior year comparable period. While inventory remains elevated to support growth, we do expect to drive modest strategic inventory reductions in the back half of the year.
Free cash flow was $20.1 million improved from a year ago on higher earnings, partially offset by higher working capital and capital expenditures. 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.
Photo by RephiLe water on Unsplash
Ken Bockhorst: Thanks, Bob. Turning to Slide five. A few weeks ago, we published our 2022 sustainability report, highlighting our progress related to various environmental, social and governance matters. Badger Meter has a long history of working to grow our business and our positive impact on the world by enabling our customers to do the same. With 95% of our revenue stemming from water-related applications, we understand the crucial role of our offerings play in augmenting water efficiency and affordability, reducing water loss, optimizing asset life, promoting sustainability and providing resiliency across the water cycle. At the same time, we strive to reduce our environmental impact by minimizing emissions, energy, waste and water usage in our own operations.
After just two years of strong progress in reducing both our absolute greenhouse gas emissions and related intensity, we exceeded our original goal, paving the way for a new 50% intensity reduction from our 2020 baseline by 2030. We are furthering our competitive advantage by attracting and retaining key talent to support our growth by enhancing our culture where employees are energized by our purpose valued for their contributions, encouraged to share ideas and have opportunities to grow their careers. More than 15% of our workforce was promoted last year with 30% of open roles filled through internal promotions and 17% of roles via employee referrals. We achieved 93% participation in our global engagement survey, resulting in another manufacturing industry Best Places to Work award.
In short, we are committed to increasing shareholder value by delivering both strong financial and ESG performance. Turning to our outlook. I couldn't be more pleased with our execution, the performance of our team and the opportunities ahead. Despite the more difficult sales comparisons as we look at the back half of 2023, we continue to expect solid year-over-year sales growth, building off the momentum of the first half of the year. Improving supply chain and inflation dynamics bode well for continued gradual margin expansion with gross margins within our normalized range and continued SEA leverage expected. Awards, orders and bid funnel activity remains strong, supported by the well-understood macro drivers facing the water industry. These include workforce retirements and shortages, aging infrastructure, severe weather events and water conservation, among others.
While macroeconomic uncertainty remains as well as the potential for higher interest rates to curb demand in some sectors, the underlying secular drivers within our markets, coupled with replacement-driven activity and recurring software revenue, provide durability to our long-term growth outlook. Before I turn the call over for Q&A, I want to highlight five key reasons we believe Badger Meter remains a compelling investment opportunity. First, we are an industry leader with a differentiated and expanding portfolio of smart water solutions developed through organic investment and acquisitions tailored to address growing customer water challenges. We have favorable secular trends driving multiyear market demand. With cash on hand, strong free cash flow generation and a debt-free balance sheet, we have ample capacity to execute on our capital allocation priorities, investing in R&D, strategic acquisitions and returning cash to shareholders, building on our dividend aristocrat status.
We have positive structural sales mix, coupled with SEA leverage opportunity, which will continue to deliver margin expansion. And last, but certainly not least, we have a tremendous team committed to serving customers and engaged in driving exceptional results. With that, operator, please open the line for questions.
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