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Badger Meter Inc. (NYSE:BMI)

Q1 2008 Earnings Call

April 16, 2008; 11:00 am ET

Executives

Richard Meeusen - Chairman, President and CEO

Rick Johnson - Senior Vice President of Finance, Treasurer and CFO

Analysts

Richard Eastman

Steve Sanders

Ryan Connors

Richard Verdy

Nick Philip

Patrick Orkin

Pim Corel

Chip Moore

Operator

Good day ladies and gentlemen and welcome to the Badger Meter 2008 first quarter conference call. (Operator Instructions) I would now like to introduce your hosts for today’s call, Mr. Richard Meeusen, Chairman, President and CEO and Mr. Rick Johnson, Senior Vice President of Finance, Treasurer and CFO. You may proceed.

Richard Johnson

Good morning everyone. This is Rick Johnson and thank you very much for attending our first quarter conference call. I want to thank all of you for joining us.

As usual, I will begin by stating that we will make a number of forward-looking statements on our call today. Certain statements contained in this presentation as well as other information provided from time to time by the company or its employees may contain forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see our 2007 Form 10-K for a list of words or expressions that identify such statements and the associated risk factors.

Also, I will give you my quarterly remainder about our guidance. For competitive reasons, we do not comment on specific individual line profitability nor do we disclose components of cost of sales; for example, copper. More importantly, we will continue our practice of not providing specific guidance on future earnings. We believe guidance does not serve the long-term interest of our shareholders.

Now on to the first quarter results. Yesterday afternoon after the market closed we released our first quarter 2008 results. We are pleased to report that sales, earnings from continuing operations and diluted earnings per share are all first quarter records. Further, sales and earnings from continuing operations are records for any quarter. Because of slightly more shares outstanding, diluted earnings per share tied for the all time record with last year’s third quarter.

Sales were $68.4 million, an increase of nearly 30% from $52.7 million in the first three months of 2007. The increase was driven by increased sales of our AMR products, notably Orion as well as increased sales in manual read and commercial meters due primarily to price increases. While we had a very strong first quarter, I would also like to remind you that the first quarter of 2007 was unusually weak due to the timing of orders. This must be considered when making a comparison between the years.

Let me talk about the breakdown of sales. Residential and commercial water meter sales represented 81.2% of total sales for the first quarter compared with 76.6% last year. These sales were $55.5 million, an increase of $15.2 million or 37.8% compared with $40.3 million for the last year. As I indicated, the increase was due to volume increases in units utilizing AMR or AMI technology and higher prices on manual read and commercial meters.

Sales of products with the remarketed Itron technology increased 8% over the first quarter last year. Sales of our own Orion product increased 51% over the first quarter of 2007. Industrial products represented 18.8% of total sales for the first quarter of 2008 compared with 23.4% last year. These sales increased about $600,000 or 4.2% of the last year’s levels. The overall change was the impact of increased sales in certain product lines offset by slight declines in others.

Gross margins for the quarter improved to 35.8% compared to 30.9% last year. Increased sales volumes, higher prices and better factor utilization, all played a role in the margin improvement. We do however continue to be affected by increases in commodity and component costs and will carefully be monitoring the effects of these increases on our overall cost structure.

While our selling, engineering and administrative costs for the first quarter as a percent of sales are actually slightly less than the first quarter of last year, they are nevertheless up nearly $2.7 million. We have increased expenses associated with our efforts to get the Orion product established in the natural gas industry. In addition, there are increased consulting costs related to sales process enhancements, increased research and development costs and obviously higher incentive costs due to increased revenues.

Interest expense is down between the first two quarters due primarily to the fact that our debt balances continue to decline. This will probably be the last time I can make that comment for a while; as Rich will discuss further, subsequent to the end of this quarter, we did announce that we had acquired the technology for our Galaxy brand for nearly $25.7 million.

For the near term, we are using our short-term lines of credit to finance this as we determine an appropriate capital structure going forward. Our debt as a percentage of total capitalization was under 12% at March 31 and the acquisition while significant will likely result in that debt percentage staying under 30% as we move forward.

Our effective tax rate for the quarter is 37.4%, very close to the 37% used in the first quarter last year.

Earnings from continuing operations for the first quarter of 2008 were a record $6 million compared to $2.5 million last year. On a diluted basis, earnings per share from continuing operations were $0.41 for the quarter compared to $0.17 for the same quarter in 2007 and as I have noted, this ties the record set in the third quarter of last year. There are no significant changes to our financial position as of the end of the quarter. In the next quarter, you will see the $25.7 million that we spent on the Galaxy intangible assets as well as the corresponding increased debt.

With that, I will now turn the call over to our President and CEO, Rich Meeusen.

Richard Meeusen

Thanks Rick. I would also like to thank all of you for joining us today.

We are pleased to start 2008 with such a strong quarter. As Rick mentioned, continued market acceptance of our Orion automatic meter reading technology, improved margins and the startup of the Chicago contract all contributed to a record quarter. But I want to remind you again however that our business can be somewhat volatile on a quarter-to-quarter basis, but we believe that our focus on the long-term results can generate good growth in both sales and earnings from year-to-year.

This was the first full quarter of daily installations of plastic meters and Orion radios as part of the large Chicago contract. To refresh your memory, this project involves providing and installing Orion radios and plastic meters on a total of $162,000 new and existing water meters in the city. During this quarter, we recorded $2.2 million of sales to Chicago.

Given the fact that this is a $40 million project over a 36-month schedule, we would expect to average $3.3 million per quarter. However, our schedule does call for slower installations in the first and fourth quarters of each year, with higher installations in the second and third quarters. This is due primarily to anticipate the first quarter weather impacts and fourth quarter holiday schedules. We still expect to be able to complete the entire project within the three-year timeframe.

During our last conference call in February, I made two statements about the first quarter, one of which turned out to be wrong and one was right. First, I said that I didn’t think the winter weather in Chicago would have a negative impact on our project. Obviously, I was not anticipating one of the toughest winters in the history of the Midwest which did have some impact on the schedules. However, I also said that we were not seeing any major first quarter impact on our business from the slowdown in the economy and in that statement, I was right. So, I am one for two; that’s good for baseball, not so hot for CEOs and that’s why I don’t normally give guidance.

With that behind me, I would like to discuss the Galaxy acquisition now. Over the past 20 years, Badger has resold technologies of other companies, like the Itron technology with a lot of success. However, we have found that we are more successful when we sell our own proprietary technologies. The outstanding success of Orion is a perfect example. When we own the technology, we control all the marketing and R&D which enables us to better target the product for our markets and to make the improvements we feel are necessary to meet the customer needs.

Badger Meter has sold the Galaxy fixed network meter reading technology for several years under our license with Miltel Communications Ltd., an Israeli company. This license would have expired in 2013. We knew we had significant opportunities for this technology but our distributors and customers were justifiably concerned about the contract expiration. We also had plans to continue to improve the Galaxy product with our own R&D efforts including integrating the reading systems of Galaxy and Orion into one software package called READCENTER.

For all these reasons, we determined that purchasing all the rights to the technology was the appropriate next step for Badger Meter. The immediate impact of this acquisition will be a reduction in unit costs and a related margin improvement for the Galaxy units as we will now be purchasing the components directly from Miltel’s suppliers. Given that cost savings and the incremental sales of the Galaxy product line, we expect that this acquisition will have no dilutive effect in 2008 and will be accretive in subsequent years.

I should also remind you that fixed base systems have historically had a very slow acceptance rate among utilities. According to the most recent Scott Report, the fixed base systems represent only 7% of all metering technologies in water on a cumulative basis through 2006 as compared to 13% for electric residential and 32% for electric commercial customers. However, we are now seeing a greater number of increase in formal RFPs with fixed base AMI systems among our water customers. This makes the acquisition of the Galaxy technology even more important.

Also we have recently introduced the Galaxy Pit unit which uses the same superior sealing technology that we currently use on our Orion product. We continue to believe that Galaxy is the most competitive AMI product in the water industry and we are now at a point where acceptance of fixed network technology in our industry is increasing.

We are frequently asked about the impact of copper prices on our business. The copper prices continue to increase which negatively affects our water meter margins. However, it’s important to remember that Badger Meter is the only US water meter Company with a complete line of plastic meters. We are also the only Company that operates the low profile residential water meter which exceeds American Water Works Association standards and has the same accuracy and long life as our standard meter but does all of this in a smaller body that uses one-third less metal. As a result, Badger has competitive price advantage in the marketplace and that advantage actually increases as copper prices rise.

On the last few calls, we have updated you on the progress of construction of our new facility in Nogales, Mexico. This 120,000 square foot facility will enable us to meet the growth requirements of our business and to shift certain manufacturing functions into Mexico to achieve significant cost reductions. While we have had a few delays in the construction, we expect this facility to be operational in the fourth quarter.

So let me conclude by repeating that we are very pleased with the record-setting quarter and we remain optimistic about our long-term opportunities.

At this time, we will take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Richard Eastman. You may proceed.

Richard Eastman

Rich or Rick, could you perhaps just give us a general sense of what price contributed year-over-year on a net basis, I mean to total sales? Can you just give us a sense of that?

Richard Meeusen

The sense I can give you Rick is that on the manual read and commercial meters, it’s more significant than it is in the AMR products obviously because the AMR also includes the radio. I would say that we had a fairly substantial increase in the commercial meters driven primarily by price. Volumes are up slightly in both the manual reads and the commercial meters so a lot of the increase we are seeing is price.

Richard Eastman

Okay, all right. And when you look at the quarter, I guess I know that Chicago was maybe on track or a little bit behind due to weather, but when I look at the Chicago piece of business, was there anything in the quarter from a shipping standpoint -- in other words, hardware versus service revenue recognition that maybe allowed you to capture more margin than you would on a normalized basis there? Again, it was shipments perhaps geared towards hardware -- the service fees?

Richard Meeusen

No, Rick. Rick, this is Rich. The mix was pretty much the same mix that the whole project is between installation and hardware and the revenue recognition delay that happens because the meter’s -- we don’t recognize the revenue until the meters are installed and inspected and accepted in the city. That delay obviously pushed some fourth quarter activity into the first quarter but pushed an equal amount of first quarter into the second. So really for the quarter, you do have a good look at what a quarter would be. And as I said, it’s a $2.2 million quarter. I think on a normal basis, had we not had the weather, we might have been up around $2.5 million, $2.6 million, something like that. So weather had a little impact but there wasn’t anything unusual in there.

Richard Eastman

Okay. And then just the last question Rich, kind of a bigger picture -- when we look at the first quarter, typically a first quarter seasonally is going to be 23% to maybe 25% of your sales for the full year. When you look back at the quarter, was there anything in the quarter from a shipment standpoint that would maybe suggest seasonally it was a bit stronger than historic?

Richard Johnson

Well, this is Rick. I'm going to try answering that. There is nothing that suggests -- I mean there was a strong -- it was a very strong quarter, but if you go back to 2006, okay, the first quarter was our strongest quarter of the year. We are not telegraphing anything here at all, we are just – Rich’s comment. We can't predict quarter-to-quarter. We managed for the long-term and we are confident at that outlook. Beyond that, we really can't say much.

Richard Eastman

Okay. All right, thank you.

Operator

Your next question comes from Steve Sanders. You may proceed.

Steve Sanders

Good morning.

Richard Meeusen

Good morning.

Steve Sanders

Good quarter.

Richard Meeusen

Thanks Steve

Steve Sanders

Just a question on Galaxy. Do you expect the margin profile there to be essentially in line with what you see from Orion?

Richard Meeusen

Yes, we do. Steve, the AMR technology -- obviously when you get into the network technologies, the costs are a little higher to the customer because of all the fixed base equipment that they have to install versus just a laptop on the front seat of a car. So the cost is higher but margin as a percent is comparable to the drive-by.

Steve Sanders

Okay. And then in terms of the interest in Galaxy, are you seeing significantly larger deal sizes or all over the map, how would you characterize that?

Richard Meeusen

We are seeing everything from the 5,000 unit order up to the tens of thousands getting close to a hundred thousand, in those ranges. I mean we haven’t seen a city of Chicago adopt a Galaxy or something like that but those medium size utilities which to a great degree are the suite spot of our business, that’s where we were seeing a lot of activity.

Steve Sanders

Okay. And then on the plastic meters; I think you talked -- maybe this was the prior call about those meters representing 15% or so of your meter shipments on the residential side versus less than 10% I think in the prior year. Excluding the impact of Chicago, are you still seeing that mix shift significantly toward the plastic meters?

Richard Meeusen

I think even without Chicago, we are seeing a little tick-up because we did have some large plastic meter sales last year to Mexico which were not -- which we haven’t seen yet this year. Those tend to be lumpy orders. You will have the city placed a large order once in a while but generally we are seeing just good steady slow growth and acceptance in the plastic meters.

Steve Sanders

Okay. And then sort of the big picture question, Rich; should we think about your water meter market share as being a natural limit on your AMR, AMI share over the long haul or how are you thinking about that?

Richard Meeusen

We are certainly not thinking of it as a limit. In other words, we are not only trying to sell to historically Badger customers. We are aggressively out there calling on the competitive customers. We feel with Orion and Galaxy, we have a compelling argument for them to look at making a change and in fact, we have the ability to put Orion and Galaxy on competitor meters and the reason why that’s significant, we were using universal product to do that; the reason why that’s significant is when we go into a city and say “we would like you to consider adopting Orion or Galaxy,” they say “well, I’ve already got this installed base of competitor meters,” sometimes, it’s even a mixed base. Some of them have Badger and other products. Being able to install our technology on other peoples’ meters, let's just get our foot in the door of the utility and then hopefully, eventually, capture the meter business to and have the whole package.

Steve Sanders

Okay, and so it’s fair to say you are having some significant success with Orion that would -- in terms of retrofit that would lead you to believe that you can continue to go.

Richard Meeusen

Correct. And I think we are taking competitive accounts out there with this technology.

Steve Sanders

Okay. A couple of quick questions and then I’ll hop off. Just a little more color on the

Nogales delay and then Rick, if you can give us some guidance on the interest rate on the debt and amortization related to the acquisition, that would be helpful and I’ll get back in queue, thanks.

Richard Meeusen

Color on the Nogales delay -- it’s probably two to three months behind right now; just various issues, construction issues and we are looking through those. On the debt right now, we are financing it with short-term debt and actually, we are floating commercial paper. The interest rate on that short-term is 3%. I indicated in my comments we are taking a look at what should our ultimate capital structure be, but I'm not in a big rush because I mean I kind of like where I am in that now. Let me also say that the few months delay that we are seeing on the Nogales project is not impacting our production capability at all. We are still able to meet all of the demand we have and we are going to be in there by the end of the year and that’s going to be fine from our point of view.

Steve Sanders

Okay, thank you.

Operator

Your next question comes from Ryan Connors. Please proceed.

Ryan Connors

Good morning guys. Congratulations on a great quarter and the nice TV appearance today, Rich, you looked good.

Richard Johnson

Thanks Ryan. For those of you who don’t know what Ryan is referring to, Rich did appear this morning on CNBC, ‘Walk on the Street’. They contacted us and asked us to appear on this. So that was kind of a nice opportunity.

Ryan Connors

Yes, great stuff. So I wondered if you could just comment on kind of the macro situation a little bit and how that’s impacting your outlook. I mean obviously, the housing market is extremely weak. There are some fears out there that these macro issues will at some point impact municipal spending and presumably water infrastructure spending at least a little bit. Obviously, that does not appear to be having any impact whatsoever on you guys. So I wonder if you can just talk to that a little bit and whether those concerns that are out there on the macro issues are completely unfounded as regards to Badger or whether at some point, there is some impact there on your business.

Richard Meeusen

Ryan, we have not seen the impact. I know the economy is slowing down; housing starts are off. Our water utility customers are continuing to place the orders, continuing to move the projects along, people are still paying their water bills; so the money is still flowing. So we are not seeing that impact. That having been said, I'm not going to say we are totally immune to any slowdown in the economy. I think I said last quarter that if our economy goes into a full-blown recession for a while and I know there are people arguing as to are we in a recession or aren’t we, but if it becomes very significant, historically, we have seen some utilities saying, there is a lot of unemployment in our city; there are a lot of employers laying off; this is not the time for us to launch a new project. We have seen that in past decades. We have not seen it yet this year but I just want to keep reminding you that if it gets bad, we could see some of that pushback. At this point, we don’t see it.

Ryan Connors

Okay. And then secondarily just on the SG&A increase, Rick, you mentioned that some of the components there are variable but other things you mentioned like R&D and moving Orion towards the natural gas market and so forth, those seem to be more of a fixed nature. On balance, is it fair to say that SG&A will continue to run at a somewhat higher absolute level or -- anyway you can give us a little more color or characterize your outlook there, it will be helpful.

Richard Johnson

It’s a good question. Without the closing specifics, I think some of the increase in the first quarter and I would say $0.5 million to $0.75 million were probably some one-time charges that we incurred. But there is variability that will as increased sales come, we are going to have increased incentives and increased costs. So a lot of those costs are variable. Beyond that, there is really not much more I can tell you. You did mention R&D. I think we will continue it at levels of R&D similar to what we have spent in the past.

Ryan Connors

Okay, great. That’s all very helpful guys. Thank you so much.

Richard Johnson

Okay.

Operator

Your next question comes from Richard [Verdy]. You may proceed.

Richard Verdy

Good morning gentlemen, nice quarter.

Richard Johnson

Thank you.

Richard Meeusen

Thanks.

Richard Verdy

Just a quick question; most of my questions have already been answered. When you guys go out for these bids on these projects, what’s primarily discussed? Is it price? Do you guys compare -- mention what you guys have done in the past? Can you just give me a little bit color on that?

Richard Meeusen

I’ll take the first stab. First of all they don’t let Rich and me go on sales calls too often, so -- and there is a good reason for that but I think when your talking an AMR, AMI product right, it is more that just price. It is primarily features, it’s the adaptability, it’s the ease of use. All of those play a role and we believe that we are superior in all of those. If your talking for instance to the commodity price, a manual read meter, yeah then it is more in price that’s the drive but right now it’s the features that’s what it can do you, it’s the ease of installation, how fast can we convert? What about the backroom operation? Is it easy to use once they get the data. All of those play a huge role in making the decision and on that I think we have the upper hand.

Richard Johnson

And Rich let me add something else. First off we got way too many Riche’s and Rick’s around.

Richard Meeusen

Yeah right

Richard Johnson

This Rich -- let me add something else. The success of Orion, we believe one of the major reasons for the success of Orion has been its ease of use. There are 53,000 water utilities in the United States, they tend to be smaller sized utilities and they don’t have large IS departments and they want something that’s very easy to use and that’s what has really been the hallmark of Orion. We are doing the same thing with Galaxy. When we compare Galaxy to every other network product on the market, it’s eased of use. So when we get in these situations very often it isn’t price driven. The utility wants to run a pilot, they want to try some and see how easy it is to use and when they start seeing that they realize what a good product we’ve got. The other aspect of our product is the PIT applications. The PIT applications is a very brutal application for those -- you done know meters that down in it’s on the [inaudible] about 60% of them in the United States are. Putting electronics in those pits that are filled with water is very, very difficult and our competitors have had trouble with that. Badger has the best pitch sealing process in the world and it’s been very successful in Orion. We are using the same process on Galaxy and so those are the types of the things that a lot of customers are now starting to focus more on. The ease of use and that PIT application.

Richard Verdy

Okay another question. A few months ago on an Itron call they had motioned that a lot their, the contract wins they have had are delaying on the decision of whether or not to go with AMR/AMI. Can you talk a little but about what you guys are experiencing there?

Richard Meeusen

Right. Itron has become very electric focused, appropriately given the mix of their business and given the opportunities that are out there and they are -- and as I understand it, they are seeing delays by the electric companies. We are not seeing those same delays on the water side. We are seeing utilities recognizing the value proposition. It’s a little simpler on the electric side because what they are really looking for is a leading may be some leak information, some tamper information, but they are not looking for time of day billing or load management or any of those things that you see on the electric side that complicate matters. So, in our simpler world it’s an easier decision for the utilities to make. We are not seeing that slowdown.

Richard Verdy

Okay and thank you, and just one last question -- housekeeping for taxes. Sorry if I missed this already but what should we be thinking about going forward here?

Richard Johnson

Look, the way I answer that question is the estimate we use for a quarter generally on a year-to-date basis is our estimate for the full year. It will change as we go out through the year depending upon what states we sell into and the like, but those are best estimate of where we think we are going to be at year end.

Richard Verdy

Okay excellent. Alright, thanks again and a great quarter.

Richard Meeusen

Thanks.

Operator

Your next question comes from Nick Philip. You may proceed.

Nick Philip

Hey guys, quick question on new customer growth trends. Last quarter you noted that you gained about 400 new customers last year and I think you said it was about 1 per day or something. I was wondering if you could talk about these transits this year.

Richard Meeusen

Right. We are still seeing roughly that pace, if not a little bit better. We have well over 1000 Orion customers and we are still picking them up at roughly that pace.

Nick Philip

Okay, thanks.

Operator

And your next question comes from Patrick [Orkin]. You may proceed.

Patrick Orkin

Good morning, congratulations on a great quarter.

Richard Meeusen

Thanks Pat.

Patrick Orkin

Couple of questions on the Galaxy Technology acquisition. You guys had mentioned that previously some customers or potential customers were concerned that you guys did not own the technology. Do you think you were actually precluded from some contract wins because of -- for that reason.

Richard Meeusen

No, I don’t think it was so much that as it was the willingness of our distributors to really get behind the product and push it with that concern and the willingness of customers to test it -- to put it in as a Beta site or to put in a pilot. Now that we own it we think we are going to get over that hurdle very, very quickly. People are going to realize that we have a long term commitment to this product and they are going to want to get behind it.

Patrick Orkin

Okay and then you mentioned a penetration rate for fixed, water fixed networks in the US, but I missed that; what was that?

Richard Meeusen

Well, we estimate and it can only be an estimate now because we are into replacement cycles and that kind of muddies the waters, but we estimate that about 25% of the meters in the US have radios on them. We think the estimate for gas is more like 30%, 35% and electric might be even 35% or 40%, so we really think water has the biggest potential out there.

Patrick Orkin

Okay, very good and then any changes on the competitive front on the fixed network side since last quarter?

Richard Meeusen

No, not really. The same players are out there with their fixed networks and we are all competing with them. I think one of the big advantages Badger now has is that we have customers that are really interested in looking at a hybrid system, where they want all the benefits of Orion but they might want a fixed network in their industrial parks, they are heavy users or in their hard to read areas like jaded communities, airports, air force basis.

So we are starting to see more interest in customers saying “I am an Orion customer but can I put Galaxy in certain areas” and that’s why we got this read center software that lets us read both at the same time. That’s our chance and we think that we are going to be very successful with it, but as far as our competitors we are not seeing a lot of change out there.

Patrick Orkin

Can you migrate from Orion to galaxy, without any change to the module?

Richard Meeusen

You can. The problem is Orion is designed to transmit a few thousand feet, whereas Galaxy is designed to transmit up to a mile or even more depending upon the circumstances. So, if you wanted to migrate you are going to need more fixed units to do that migration.

Patrick Orkin

Right. Okay, very good thank you.

Richard Meeusen

You’re welcome.

Operator:

(Operator Instructions) and your next question comes from [Pim Corel]. You may proceed.

Pim Corel

Hi, a question on capital funding. In the K you said that the capacity exists to increase production levels with minimal, additional, capital expenditures after the completion of the Mexico facility. Should we assume that CapEx in ’08 declines by about $6 million from ’07?

Richard Johnson

Hi. Off the top of my head that does not sound -- I mean that sounds fair. Once we get the Mexican plant done, I would expect on a going-forward basis CapEx not to exceed depreciation expense.

Pim Corel

All right thank you.

Richard Meeusen

Okay

Operator

Your next question comes for John Quealy. You may proceed.

Chip Moore

Hi it’s actually Chip Moore on behalf of John. Congratulations on a great quarter guys.

Richard Meeusen

Thank you

Chip Moore

Can you touch on how the low pro is going? Maybe give us a ballpark view of the contributions there?

Richard Meeusen

As we had said last quarter we had just started it up. We sold -- right now its only in the 5000 units or so per quarter, so its contributing a small amount right but from the fourth to -- in the fourth quarter we did about 3000 units, we did 5000 in the first quarter, so its starting to ramp up. A lot of the utilities want to run a pilot on it before they make a commitment and so we’ve got an awful lot of marker on pilot test and it is performing very well.

Chip Moore

Great. That’s helpful and getting back to Chicago, when should we be thinking about any potential follow on outside of 162,000?

Richard Meeusen

Actually I’m very excited about that. You have to remember that 162,000 is about one third of the buildings in Chicago. Two thirds of the building do not have meters. Now we don’t have a contract to meter that are the two third, our $40 million contract is to just go out to the one third that is already metered, put radios on them and change out about half those meters which are the older ones. But that leaves two thirds of that city available to be metered. Right now the Chicago project is going well. The city is very happy with what we are doing, they are happy with the performance of the product. We have no reason to believe that when this three year project is done there isn’t going to be more opportunity for us down the road.

Chip Moore

Okay and what about the potential for any other sizable water projects, and if any on time need of announcements, or a possible locations?

Richard Meeusen

Oh you mean as far as other large cities besides Chicago?

Chip Moore

Right exactly.

Richard Meeusen

We have nothing at this time to talk about

Chip Moore

Alright and if I could just throw one last one in. Would you ever start to look for another contract manufacturer for Galaxy as long as you start to ramp up there?

Richard Meeusen

You mean as opposed to where its being manufactured now?

Chip Moore

Right.

Richard Meeusen

Yes and in fact we are. Because right now most of the suppliers to Miltel were located in the Middle East. As part of our deal with Miltel we told them that we are going to start looking for come either in the U.S or Mexico or even in China to provide some of the components for us. Remember that we are just buying the radio board from Miltel. We do all the packaging and sealing and the antenna work and everything else over here. So it’s a mater of where we buy that radio board and we believe there are places we can buy that with the lower the cost and we are currently investigating that.

Chip Moore

Okay thanks guys.

Richard Meeusen

Okay.

Operator

And you have a follow up question from Richard Eastman. You may proceed.

Richard Eastman

Hi Rich just the follow up on that kind of particular question. When we walk up -- do the map here on this accusation and we say it’s neutral to earnings this year, we’ve got the expense item on the $27 million, we have some amortization obviously from the purchase accounting. We have six -- I think the number you disclosed at one point was we had about six pilots in the field for Galaxy. Do we have any of those six pilots that we’ve been given the thumps up to move to full deployment. In other words when you say that acquisition is neutral, do we have a revenue number in there internally that makes it neutral.

Richard Meeusen

Yeah first off, so that we are not confused, maybe the six pilot number is old. We are in installation on all of those projects and some of them done. We have projects that are done. So we are up to about a dozen Galaxy projects that are either in process or done and we have others in the pipe line that are coming. So we are no longer in the pilot phase on Galaxy. We probably wouldn’t have made the acquisition if we are still in the pilot phase. We feel pretty confident about what we are seeing coming down the road and your right, there are some cost associated with this between the interest cost and the amortization cost. You might be talking about $0.9 a share, either $0.9 a share something like that per year and so it’s a part here this year, but we do feel that between the cost savings and the orders that we have disability on right now, we are going to be break even on that this year and we’ll have some good contribution next year.

Richard Eastman

Okay, all right and then just one question on the commercial meters within the utility business, of course the commercial meters. Did you say that business was up? Did you give a number there? Can you just give us a sense of how much it was up and was that all price or was there some volume gains?

Richard Johnson

There were some amount of volume gains but the majority of that was price increases.

Richard Eastman

Okay

Richard Johnson

Well and some of that price is also a mix between the products. So you may have some more expensive products and less expensive products that are affecting it all. So, clearly the metal cost because the commercial meters are the heaviest product we sell that’s where a lot of the cost increases are.

Richard Eastman

And just to clarify that, you said the utility business was up -- I’m sure 37%, 38%. Okay, so how much was the commercial piece up?

Richard Johnson

Commercial was up about 44%.

Richard Eastman

Okay. All right thank you.

Richard Johnson

Again though Rick, a weak first quarter last year.

Richard Eastman

I recall. Thank you.

Richard Johnson

Thank you

Operator

At this time we have no question I would like to turn it back to Mr. Rich Meeusen.

Richard Meeusen

I want to thank everybody for joining us today. We are obviously very pleased with the results we were able to turn in for this quarter. It was a very good quarter and we appreciate everybody’s support, so thank you.

Operator

Thank you for attending today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Badger Meter Inc. Q1 2008 Earnings Call Transcript
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