Badger Meter Inc

NYSE:BMI

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:02] Ladies and gentlemen, welcome to the third quarter 2020 Badger Meter earnings conference call. At this time, all participants are in listen only mode after the speakers presentation will be a question and answer session to ask a question during the session. Certainly the press star one on your telephone. If you require any further assistance, please press star zero. Please note this call is being recorded. It is now my pleasure to turn the conference over to Karen Bauer, vice president of Investor Relations Strategy and Treasurer. Please go ahead.

[Karen Bauer, VP of IR, Strategy and Treasurer]

[00:00:36] Good morning and thank you for joining the Badger Meter third quarter 2020 earnings conference call. I hope you are all doing well and staying safe on the call. With me today, our Kenai, of course, chairman, president and chief executive officer, and Bob Rockledge, 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 financial metrics. Our press release and slides provide a reconciliation of the gap to gap financial metrics used. With that, I'll turn the call over to Ken.

[Ken Bockhorst, Chairman, President and CEO]

[00:01:23] Thanks Karen and thank you for joining our third quarter earnings call. I want to start by thanking the global Badger Meter team for their continued commitment and efforts to safely serve and support our customers around the globe. While the majority of our non production employees continue to work from home. We have many dedicated employees at our manufacturing sites and with customers all adhering to the many layered health and safety protocols. As you read in this morning's release, our financial performance in the quarter rebounded, reflective of the resiliency of the critical municipal water market. As a matter of fact, we delivered a record quarter in terms of EPS and tied the record for quarterly sales. We improved manufacturing output and experienced more consistent order demand after the trough and activity last quarter stemming from the rapid onset of widespread pandemic lockdowns. Not surprisingly, and as we anticipated, most flow instrumentation and markets remain challenged. Bob will walk you through the details of the quarter, and after that, I'll come back and talk further about the market outlook and what we're hearing from customers in the current environment.

[Bob Wrocklage, CFO]

[00:02:24] Thanks, Ken, and good morning, everyone. As you can see on slide four, total sales for the third quarter were one hundred and thirteen point six million, compared to one hundred eight point six million in the same period last year, an increase of five percent. As we noted, last quarter, activity levels began to improve as lockdown started to be lifted in mid-May and into June, and this activity stabilization continued out throughout the third quarter in municipal water. Overall, sales increased 11 percent, a roughly equal combination of improved order rates and recovery of the backlog built in Q2, which, as we noted last quarter, was the result of lockdown induced manufacturing disruptions which limited our output. Positive revenue, mixed trends continued with further adoption of smart metering solutions, including Orion cellular radios and beacon software as a service revenue, along with ultrasonic meter penetration. As noted and as anticipated, solo instrumentation failed to find 18 percent year over year reflective of the broadly challenged markets and applications served globally. Operating profit as a percent of sales was seventeen point two percent, a 210 basis point increase from the prior year fifteen point one percent, with improved gross profit margins and SG&A leverage contributing to the strong result. Gross margin for the quarter was thirty nine point six percent, up 120 basis points year over year. Margins benefited from higher sales volumes and positive sales mix, notably the overall trends of ultrasonic meter adoption and AMAI implementations, including higher beacon software as a service in Arian cellular radio sales. While copper prices, which serve as a proxy for brass, have been increasing, our average price cost in the third quarter was effectively neutral compared to the prior year, due in part to the normal purchasing the production lag. Finally, a reminder that prior year results included a non-recurring, discrete warranty provision associated with a product sold only outside North America.

[00:04:21] FDA expenses for the third quarter were twenty five point five million, down 300000 dollars a year over year, with higher personal costs mostly offset by lower travel trade show and other ongoing pandemic impacted expenses. The expense run rate was two point three million dollars higher than the second quarter's twenty three point two million, reflecting the lifting of the temporary cost actions taken in the second quarter in response to the rapid onset of the pandemic. The income tax provision in the third quarter of 2020 was twenty three point nine percent, slightly higher than the prior year, twenty two point one percent rate. In summary, EPS was 51 cents in the third quarter of 2020, an increase of 16 percent from the prior year, EPS of 44 cents. Working capital as a percent of sales was 23 percent, relatively in line with the prior two quarters. We again delivered strong free cash flow, which at nineteen point one dollars million was consistent with the prior year comparable quarter, despite the deferral of our federal income tax quarterly instalment payment under the Kharia from the second quarter into the third quarter, our year to date free cash flow of sixty seven point eight dollars million was 22 percent higher than the prior year fifty five point six million. And it's currently tracking at 187 percent conversion to net earnings. We ended the quarter with approximately ninety four million dollars of cash on the balance sheet as we paid down the small euro line of credit with excess cash. We continue to have full access to our untapped 125 million dollar credit facility. Our stable balance sheet and ample liquidity remain a clear source of strength for Badger Meter. With that, I'll turn the call back over to Ken.

[Ken Bockhorst, Chairman, President and CEO]

[00:06:01] Thanks, Bob. Unfortunately, much of the globe, including the majority of U.S. states, are experiencing a resurgence in covid cases. Thankfully, medical professionals are better prepared now to treat individuals with the knowledge gained about the disease. While this continues to create uncertainty. We are optimistic that extensive lockdowns will not again become a necessity regardless. We remain fully prepared to manage safely in support of our customers in the critical and essential water sector. Our municipal water customer base is large and diverse. The potential for some to experience difficult budgetary challenges exist due to a variety of contributing factors. However, as we've continued to learn from our active dialogue across the spectrum of customers, their activities are essential and in many cases regulated. Some are implementing temporary cost reduction measures, measures such as hiring freezes and travel restrictions. Restrictions over spending on critical and necessary activities, which includes metering solutions required for billing and controlling nonrevenue water, continues. In many respects, our large and diverse customer base means that there will not be a sole or single response, as each municipal operation is unique with different needs and priorities. Municipal water bid tenders and awards are mostly proceeding as planned. Although a few have incurred extended timelines or deferrals, there have been no widespread or significant cancellations, and most daily order activity has returned to near normal. Our supply chain and logistics partners continue to operate with new safety protocols and processes in place to address the needs of customers with no critical shortages currently, in spite of all the challenges and uncertainty. I am extremely pleased with the level of execution of our team, as evidenced by our operational and financial results through the first nine months of 2020.

[00:07:42] Most of this fiscal year, we've been managing in a pandemic environment with countless changes to how all of us do business in severe economic shock to the global economy. Despite that backdrop, we have delivered municipal water sales growth strong even at the margin expansion, robust working capital management and cash flow, and an increase in earnings per share. It is a true testament to the criticality of the water industry and the exceptional Badger Meter team. Now, turning to the outlook, let me start at a granular level where I do want to highlight a few items in terms of near-term outlook. First, the benefit of the backlog conversion into sales we saw in Q3 on a year to date basis. It is neutral and created in Q2, recovered in Q3. But as you analyze the municipal water growth rate in the quarter order, activity alone accounted for a solid mid single digit growth rate in sales. The second, as Bob noted, copper prices on average have turned it up. And with our normal leg, this will be a factor in Q4. I'll remind you that while still important, the impact of stress on our cost structure has been moderating over time as we sell more software and radios versus primarily meters. Lastly, you may recall we had a seasonally strong fourth quarter of municipal water sales a year ago, which creates a tougher comp for the balance of 2020.

[00:08:56] Turning to the more important, longer term dynamics, it is clear that covid-19 will have a profound impact on the global water sector. And we will, and we believe it will be a catalyst for increased adoption of smart water solutions. Our customers have a need for holistic, integrated solutions that are operational that operationalize real time data. These digitally enabled solutions, such as our smart meter and my offering, reduce overall costs and offer safer remote solutions. These factors are in addition to the secular drivers that have already been evolving, such as the need to reduce nonrevenue water, drive conservation, address the aging workforce of utilities and connect within consumers. With our robust cash flow and ample liquidity we are actively investing in and developing products and solutions to address these challenges. This includes both organic and acquisition driven growth geared toward augmenting our offerings, offerings in attractive adjacencies, serving water related markets and applications. For example, added sensors and instruments for complementary and complementary data elements such as pressure and temperature, which are used to determine system health. It also includes expanding functionality of our ion water software that helps drive consumer engagement to close out the prepared remarks. I'm pleased with our financial performance, the resilience of our business model and our organization's response to these unprecedented times. We will continue to stay close to the rapidly changing employment implications of the pandemic and both near-term operations and longer term trends and are prepared to successfully manage all aspects within our control. With that operator, please open the line for questions.

[Operator]

[00:10:33] At this time, I'd like to remind everyone in order to ask a question, please. Press star and the number one on your telephone keypad. Your first question comes from the line of Rick Eastman from Baird. Your line is open. Yes.

[Richard Eastman, Robert W. Baird]

[00:10:47] Good morning. At least to answer the question, just a couple of things in Libya, all of the reactors above. But can you tell us some color maybe around? The incremental gross margin here, you know, with the mixed benefits and I know Kopper's kind of moved around here have been mostly favorable, but maybe turning against us a little bit. But again, the incrementals here, you know, kind of suggest that as we move into 21, you know, our gross margin can comfortably kind of inch above, you know, 40 percent. And I'm just I'm just curious if I'm missing any puts and takes there or maybe, like I said, but maybe you could just throw some color around that.

[Bob Wrocklage, CFO]

[00:11:34] Yes, I think if you hit a couple of key drivers.

[Richard Eastman, Robert W. Baird]

[00:11:39] You can barely hear you, can you hear me now? That's better for sure.

[Bob Wrocklage, CFO]

[00:11:46] Sorry about that Mike problem. I think you addressed the mixed comment, which is certainly relevant. If you look over, you know, the last eight or nine quarters consistently, we've been able to generate gross margins in the upper quarter of that upper half, I should say, of that normalized 36 to 40 percent range. So I think you continue to see that tightening when you speak to incrementals in the quarter. Think just on paper, the incrementals appear pretty robust. And you see, that's you know, one of the reasons is, as I had mentioned in the prepared comments, just reminding of the prior year discrete item. And so when you effectively normalize for that, had that that headwind a year ago, the incrementals really fall into that 30 percent range, which is very consistent with what we've talked about as kind of long term incremental decremental for the business. So I think once you normalize that that juicy incremental paper to reflect that one time item, I think you'll see they fall very close to where we've anticipated. Now to your comment on, you know, the ability to continue to drive margins north of gross margins. Again, north of 40 percent. I think I've consistently been on record that certainly Mix's is a driver and we continue to see that. So I do see that tightening of the range in the gross margin performance. At the same time, I like to always remind folks that we still, at the end of the day, operate in an oligopoly in the marketplace. And while, while rational, we're part of a narrow set of competitors. And I think that that constant competition within that narrow set of competitors continues to, you know, drive that constant expansion down over time. So I think you're right in terms of that incrementing north. But I just I caution against this kind of Stairway to Heaven concept that we've talked about in the past.

[Richard Eastman, Robert W. Baird]

[00:13:34] Ok, I understand. And then just as a follow up, can you know, if I'm looking at if I look at the second and third quarter revenue in nineteen. You know, versus the second and third quarter revenue in aggregate, entwining, you know, and I just kind of stack those comps, you know, which kind of falls out of it is about, you know, a point and a half of growth and year over year. And it just, you know, what's your perspective on that? I mean, the suggestion is that maybe things are accelerating. You know, you kind of mentioned, you know, maybe mid single digit type of growth coming out of, you know, into the third quarter. But I'm just I'm just kind of curious, you know, when you stack the comps and kind of, you know, try to try to factor out, you know, the covid impact here on the business. Is it is it your sense that, you know, we are accelerating, you know, off of this kind of low single digit type of trailing growth, maybe into the, you know, into the mid single digits here?

[Ken Bockhorst, Chairman, President and CEO]

[00:14:39] Yeah, so, you know, if you look at, you know, the impact of our industry, we've said this I think several times, you know, when it can be uneven and sometimes you get these periods where it may be down and it doesn't react to a situation like covid, like a snack bar. So, you know, what happened in Q2 doesn't just roar back in Q3 and Q4. So, you know, the previous quarter to that, we were six percent Q4. Last year, we were eight percent here. We would have been mid single digit this quarter. Yeah, I feel I feel pretty comfortable that we've moved into this, you know, back to the near normal state of mid single digit growth for utility terms.

[Bob Wrocklage, CFO]

[00:15:18] That perspective's over a multiple quarter horizon. Yeah, yeah.

[Richard Eastman, Robert W. Baird]

[00:15:21] Yeah. OK, fair enough. Thank you. Sure.

Operator[00:15:28] Your next question comes from the line of Nathan Jones from Stifel. Your line is open.

[Nathan Jones, Stifel Nicolaus]

[00:15:34] Good morning, everyone. Morning, Ken. Maybe I could just follow up on the orders of. It doesn't sound like they're very widespread, but could you give us a little bit more detail about what customers are saying on the order delays, kind of how long they thought the delays that you're seeing, how widespread they are? And do you think that something that's going to correct itself in fairly short order or is that something that, you know, utilities away what their budgets are going to look like next year with some potential revenue headwinds from things like that?

[Ken Bockhorst, Chairman, President and CEO]

[00:16:09] Yeah, Nathan, so it's mostly on the bedside, not the order side, so the orders are again back to somewhat of what we think is near normal and on the bids. It's been it's been, you know, mostly what we hear. It's a matter of months, not a matter of years. So these aren't these aren't long term deferrals. It's generally around the fact that, you know, it's still somewhat inefficient. People aren't all working together. So being able to do a really solid bid, sometimes a little more difficult with people being remote, not us, but I mean customers. So in general, we've seen some beds move to the right, but it's really not been enough to be to be concerning.

[Nathan Jones, Stifel Nicolaus]

[00:16:48] So your view of that is it's really more covid disruption and disruption.

[Bob Wrocklage, CFO]

[00:16:55] Yeah, I would say that that, you know, we obviously are spending a ton of time feedback in the field with our customers, Bob and I and the leadership team are engaging constantly with our sales force. And yeah, that I would say that is generally the case, I think. I was going to say, I think, you know, Ken's comments are really addressed on kind of the sequencing and pacing of Q2 to Q3, to Q4, you know, your question, I think, was maybe reaching a bit more into 2021 and budget cycles. And clearly, we've all acknowledged the challenges that exist in that space. But I think coming back to the point in the prepared remarks and in just some of the discussions we've had, you know, is this concept of we have a very diverse customer base on the water utility side of the business, and each utility need is different. So there is not a one size fits all single response. And I think, you know, just like static of metering, adoption and RMI preference is very utility. I think the budget response and the attitudes towards cost containment versus nonrevenue water management and other trends is different. The utility, the utility. And that's what we see playing out.

[Nathan Jones, Stifel Nicolaus]

[00:18:08] You know, certainly hearing that that is the number one thing on the block for cutting spending, maybe when it comes to expenses in your own business. You know, you mentioned in in that press release this morning that there's some travel and covid related expenses to do assume that they're coming back into the business. At some point you're seeing some, you know, rising copper prices here. You talked about 30 per cent incremental margins with some expenses coming back into the business. Should we expect you guys to be able to maintain that kind of core 30 per cent incremental despite some of these expenses coming back into the business in the short term?

[Ken Bockhorst, Chairman, President and CEO]

[00:18:49] Yeah, Nathan, I would say the short answer is yes. And, you know, we like every other industry, every other company, you know, we've really learned a lot about what can be done now with our travel and entertainment expense and how effective some of these, you know, technology tools have become to conduct business. So we certainly will be very prudent as we as we continue to analyze which of these which of these trends are going to stick and which of these are still going to require going out to visit people. So, you know, we've been working very closely with our customers. And, you know, we go in and we see customers whenever they want to be seen. We follow all the safety protocols. So, you know, some of that some of that activity has occurred. But clearly, we will keep a close eye on making sure that we can continue to conduct business the best efficient way possible going forward and maintaining that margin.

[Nathan Jones, Stifel Nicolaus]

[00:19:44] Excellent. Thanks very much for taking my questions. Sure.

[Operator]

[00:19:49] Andrew Buscaglia from Beerenberg. Your line is open.

[Andrew Buscaglia, Berenberg]

[00:19:54] Hey, guys, could you talk a little bit about your year, generate a lot of cash these days, your cash position pretty high and I know talk about more, you know, Vietnam and in the past, keep us updated on anything going on there. But secondly, are what are you planning to do with your cash? You know, it's building pretty robust. And you talked a little bit about investing in digital solutions. Maybe you can talk about where you're investing specifically.

[Ken Bockhorst, Chairman, President and CEO]

[00:20:27] Yeah, so, Andrew, you know, our capital allocation priorities, clearly based on the strength of our cash balances and balance sheet, are clearly intact. So, one, we're going to continue to invest in internal R&D. We've got some great projects that we continue to work on and the media and communication side. We also are investing in developing out some of our own internal software capabilities to augment the Beacon platform. Second is increasing dividends in line with earnings. So we did increase our dividend again for the 10th consecutive year. And thirdly, of course, is the M&A space. And, you know, coming into the pandemic, we have a strong funnel of opportunities that we're excited about that that we're talking to, not auctions. So they're not time bound. So it's been it's been nice. And that way that we've been able to maintain communications, although traveling, of course, has been difficult, but we still have we still have a really strong funnel of opportunities that that are actionable. And it's just trying to get through diligence and being able to get them over the finish line that that is primarily been the challenge. So our capital allocation priorities remain the same. We would like to be moving down the path that we've stated before of, you know, perhaps adding water quality to our water quantity strength, perhaps adding more data and analytics, which, of course, the market is continuing to look for more of. So capital allocation priorities are the same. Do I wish we could go faster? Sure. But that's one of the that's one of the regrets of covid.

[Andrew Buscaglia, Berenberg]

[00:22:02] Ok. And you start you talk about there seeing some acceleration here with the smart water metering and you put together a pretty good quarter. Is there anything, any reason to believe you? You're picking up some share gains here or, you know, your conversations with. Municipalities, are there any reason to believe you could be picking up share in the future, given that sort of an acceleration in want to spend on these products and you guys have a pretty broad offering?

[Ken Bockhorst, Chairman, President and CEO]

[00:22:33] Well, yes. So first off, you know, as we've been pretty open about, this is a very difficult market to take share in. So am I extremely confident in the product offering that we have, that we're providing value to our customers with our choice that we offer with whatever kind of meter they want, whichever type of communication platform, and providing them with data that helps them monitor and operate their business. I feel great about that. Do I think we're winning share? I think we're certainly holding our own and doing quite well.

[Andrew Buscaglia, Berenberg]

[00:23:07] Thank you.

[Operator]

[00:23:12] Bob Shaw now from RBC. Your line is open.

[Unidentified Analyst]

[00:23:16] Thank you. I have an interesting question for you. Smart water systems represent my opinion, one of the great growth opportunities that we have here. Sensors connected to devices, basically meters that we have, especially for one of the biggest pain points, which is water leakage in aging infrastructure. I was wondering if Badger has been working on ways to using sophisticated acoustical devices, for example, to find leaks, to identify changes in pressure that could predict a major water break or other problems here.

[Ken Bockhorst, Chairman, President and CEO]

[00:24:04] Hey, Bob, thanks. Yes, good question. So, you know, as we continue to take the stance of being the innovator in this market, one of the things that that we are excited about that we released last year, in fact, was the three and four inch TV series ultrasonic meters that come standard with pressure and temperature sensors that that then gets communicated through our beacon system. You know, in pressure, of course, can be an indicator of pipe failures. Temperature could also be an important factor. And as I was just talking about, with what we're looking to invest in organically and through M&A, that's in the laneway of your question. So obviously, smart water smart metering are critical to operations. And I think we've got a really good position with our brand name, our customer relationships and ability to offer those services in the future.

[Unidentified Analyst]

[00:24:56] All right, thank you. You're welcome.

[Operator]

[00:25:01] Again, if you'd like to ask a question, please, press star in the number one on your telephone keypad. Ryan Connors from Bennington Scattergood. Your line is open.

[Ryan Connors, Boenning & Scattergood]

[00:25:11] Great. Thanks for taking my question. Sure. You've been pretty comprehensive already, but I did have a couple more. So one thing I wanted to chat about warranties. I mean, warranty charges. I mean, that's a fact of life in the media space. You had one in 19, you had one in 16. Are there any issues there we should be thinking about, you know, as it relates to everything you've been through this year, factory interruptions not only for yourself, but for component vendors. And then you talk about the shift in new technology. There's always, you know, some things to work out, anything there that could arise as we move forward.

[Ken Bockhorst, Chairman, President and CEO]

[00:25:50] Well, to your point, in any industry, you're going to have warranty charges from here and there. But there is not anything that that I think is substantial that anyone should need to be concerned about.

[Ryan Connors, Boenning & Scattergood]

[00:26:03] Ok, fair enough. And the other one. You know, at last call, second quarter call, can you talked about, you know, the whole federal infrastructure bill and I guess your take was that it would be a positive if it was executed quickly and efficiently, but maybe less so if it was, you know, dragged out. The process was dragged out and created uncertainty about funding and so forth. And any update there? I mean, obviously, we're days from the election now and the update there on what you're thinking customers are thinking in terms of how this could shake out in the next 12 months, whether this could be a positive or what kind of the prevailing view is in the marketplace on federal stimulus.

[Ken Bockhorst, Chairman, President and CEO]

[00:26:45] Can you tell me who is going to win? I can't. I believe so. You know, again, it's one of those things where truly any anytime there is an infrastructure package for the long term, which we continually beat the drum on, it's going to be good for our industry and it's going to be good for us. You know, it gets into so many different factors of is it a Democratic sweep? And then they can just do whatever they want fast. Perhaps that could be good, is it? Republicans share the Senate and there's gridlock as it happens to be. I can't predict the myriad of things that will come out of it. But I do believe that that there is a I do believe that there is a general feeling that the country wants and needs infrastructure stimulus. But again, I'm just going to I'm going to hope that when it happens, it happens quickly. But either way, it's going to be good for us for the long term. And, you know, I still. Completely believe in the fundamentals of what we're doing and smart metering and smart water, that we're going to be OK regardless of what happens, but it can be helpful.

[Ryan Connors, Boenning & Scattergood]

[00:27:54] Got it. OK, well, thanks for your time and congrats on a great run from stock. Thank you.

[Operator]

[00:28:02] Your next question comes from the line of Rick Eastman from Baird. Your line is open.

[Richard Eastman, Robert W. Baird]

[00:28:07] Sorry, going back again. Of course, you know, when you look at the utility business in any business, can you give us a sense of, you know, the six and eight inch ultrasonic meters that have come in the market, whether it was the commercial business piece of muni water, did that outgrow the residential properties? Was there any hope here in the new product introductions?

[Ken Bockhorst, Chairman, President and CEO]

[00:28:36] So you would mention six and eight inch, so those are not a new launch for us yet. It's obviously something that's in the funnel. But when we talk about Q3, standalone residential outpaced commercial, but that often flips quarter to quarter. So I wouldn't necessarily draw too many conclusions from that. But clearly, the current quarter growth was driven more by residential and commercial against it. OK.

[Richard Eastman, Robert W. Baird]

[00:28:59] And then just one last question, just around the globe, as does the whole business. You know, as you look at that business here and, you know, you talked about us staying, you know, lower for longer, which is understandable. I'm kind of getting any sense that that business is just, you know, bottoming from a quarterly revenue standpoint. And you could make that argument when you look at it. But what's your sense in terms of, you know, is this a bottom for that business and really, you know, kind of stabilized here?

[Bob Wrocklage, CFO]

[00:29:32] Yes. So in in in all honesty on this one, this one's a little more difficult for us to predict. Right. We have a great handle on the smart meter market. But you got to remember, full instrumentation for us is a series of small, you know, small playing and in oil and gas and petrochem and auto and wastewater HVAC and what we see in wastewater and HPC sustainability that was down less and even petrochem has been has been OK. But then the oil and gas autogiro are more damaged. So it's hard for us to give you a straight of an answer as we feel on the utility side. But I think it's I think it's probably bottomed. I mean, we revenue we were slightly up in Q3 versus Q2 or activity is a little higher. The other thing about that business now that I'm rambling out of the bet, is that that's more global in nature for us. So as we saw the pandemic sweep across it, it started in Asia where we have some Asia revenue for full instrumentation. Then it hit Europe next. Then it hit the U.S. next. And now you've got the resurgence of cases. So I'm pretty comfortable saying it's going to be lower for longer. I'm not pretty comfortable being able to predict what and when I do.

[Ken Bockhorst, Chairman, President and CEO]

[00:30:52] I do think you can think sequentially. Q2 is down 22 percent year over year, Q3 down 18 percent year over year. I do think we think that that pace of decline moderates in the short term moving forward, but it's still clearly lower, clearly lower for a longer.

[Richard Eastman, Robert W. Baird]

[00:31:18] Is that business starts to come back and, you know, we can all look out to a positive year over year quarter somewhere. But how would the impact on the gross margin as that business, you know, starts to approach some sort of year over year growth rate, would it be accretive to the gross margin?

[Bob Wrocklage, CFO]

[00:31:32] Yes, I think we talked about this a little bit last quarter, Rick, that, you know, really where we stand today is there is not a tremendous amount of margin differential between the two product lines. So growth in one decline in the other doesn't necessarily have an oversized impact. And so really, they're very similar margin gross margin profiles when you compare municipal water versus flow instrumentation, product lines. So I think that answer was.

[Richard Eastman, Robert W. Baird]

[00:31:57] Again with the assumption that balanced sales means the decremental there. For the current time, so as it rebounds, she did a nice rebound on the gross margin there with. We're dealing with hepatologist, OK? All right, very good. Thank you again and a tremendous quarter on this work.

[Ken Bockhorst, Chairman, President and CEO]

[00:32:18] Thank you.

[Operator]

[00:32:21] Tate Sullivan from Maxim Group. Your line is open.

[Tate Sullivan, Maxim Group]

[00:32:25] Oh, thank you. And thank you for the comments and other muni water revenue growth year over year. Very impressive. I mean, it's usually a smaller portion, but any help from international or with the whole all us driven that revenue growth rate?

[Ken Bockhorst, Chairman, President and CEO]

[00:32:41] Yeah, U.S. U.S. revenue. That's the majority of the activity. Anyway, the international is so small. Even if it was a percent growth, it would sound great. But it's U.S..

[Tate Sullivan, Maxim Group]

[00:32:52] Ok, thank you. And then more, if you put me on the beaten cell cycle, who is not selling Beacon to existing customers and is still dependent on getting the newer water meters inside the homes, or can you do something on the water mainlines? Or can you talk about the Beacon cell cycle that have to go to jail together with selling bulk and you sell the water meters?

[Bob Wrocklage, CFO]

[00:33:10] So, it doesn't need the sale of a meter, but it does need the sale of an Iranian radio. So if you have a fully installed meter bass, you could decide a utility could decide to come back and buy the cellular radios and then upgrade with the beacon software as a service package. Typically, what we see is the full admire bad where people do go out and they're looking at, you know, upgrading the meters so they can capture their nonrevenue water, upgrading the communication so they can get the efficiencies of and say for operations and efficiencies of getting billing records and getting all that other information. So normally it's full, but it doesn't have to be.

[Ken Bockhorst, Chairman, President and CEO]

[00:33:51] But also tested at the same time. Your question mentioned that, you know, the assumption that the radios are only at the at the at the cash register, at the metering point, there are other use case applications within utilities. Where are cellular radios are being used on supply lines as well as hydrant hydrants elsewhere in the distribution network. So it's not just a use case in the home or in the commercial business can also be used on supply lines or other points within the distribution system.

[Tate Sullivan, Maxim Group]

[00:34:21] Thank you. That's it. That's what I was wondering. And then also on that, you quantify before the per cent of revenue of picante off of that today or that it's similar to what you've said historically.

[Bob Wrocklage, CFO]

[00:34:31] Yeah. So 2019, if you recall, it was roughly four percent for the year and it has continued to grow this year.

[Tate Sullivan, Maxim Group]

[00:34:40] Ok, and then integrating water quality and my last one, thank you for that integrated water quality capability into existing meters or future meter sales. That could that be internally developed or still mostly driven by M&A?

[Ken Bockhorst, Chairman, President and CEO]

[00:34:56] You know, so it's one of those things where it could be internally developed, but it could be faster with M&A. So that's kind of answering it both ways, but.

[Tate Sullivan, Maxim Group]

[00:35:06] Perfect. OK, thank you very much. You're welcome.

[Operator]

[00:35:10] There are no further questions, phone calls back over to the president.

[Karen Bauer, VP of IR, Strategy and Treasurer]

[00:35:16] Great. Well, thank you all for joining our call today for your planning purposes, our fourth quarter full year. Twenty call is tentatively scheduled for Friday, January 29. I'll be around all day to pick any follow up questions. You might have a great day. Thank you.

[Operator]

[00:35:33] This concludes today's conference call. You may now disconnect.