Good day, ladies and gentlemen, and welcome to the Q1 2013 Badger Meter Earnings Conference Call. My name is Rachel, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. Now I'd like to turn the call over to Richard E. Johnson, Senior Vice President, Finance, CFO, and Treasurer. Please proceed.
Thank you very much, Rachel. Good morning, everyone, and welcome to Badger Meter's 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 risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors. Let me reiterate some of our guidelines. For competitive reasons, we do not comment on specific individual product line profitability, other than in general terms, nor do we disclose components of cost of sales, for example, copper.
More importantly, we continue our practice of not providing specific guidance on future earnings. We believe specific guidance does not serve the long-term interest of our shareholders. Yesterday, after the market closed, we released our first quarter earnings for 2013. As you saw, sales for the three months ended March 31st, 2013, decreased $4.4 million or 5.8% to $71.8 million, compared to $76.2 million in the same period last year. The decrease was due to lower sales of both municipal and industrial products, although the industrial products show an increase year-over-year because last year we had only two months of the Racine Federated product lines in our results. This year we had three months of sales. Municipal water sales represented 65.1% of sales for the first quarter of 2013.
These sales decreased $5.5 million, or 10.5%, from $52.3 million in the first quarter of last year to $46.8 million in this year's first quarter. Our municipal water business has always been very seasonal, primarily due to the fact that many utilities slow down or even stop meter replacement activity during the winter months, causing our first and fourth quarters to usually be weaker than our second and third quarters. During the winter months, snow cover causes difficulty in locating pit meters. Excessive snow can also cause some utilities to divert funds and crews from meter replacement to snow removal activities. Recently, we were able to obtain snow cover statistics from the Rutgers University Global Snow Lab.
We found a strong correlation between first quarter snow cover data and our first quarter municipal water meter sales, noting that increased first quarter snow cover resulted in lower first quarter sales and vice versa. The decrease in this year's first quarter municipal water meter sales follows that pattern. The snow cover in the contiguous 48 states was 22% below normal last year, but 15% above normal this year. We believe that this unusual 47% increase in snow cover was a primary contributor to our weaker first quarter. We saw a similar pattern in 2011, when first quarter snow cover was 25% above normal and our municipal water sales were also down in that quarter. Often, these weather events cause delays in meter orders, with a weaker first quarter followed by a stronger second quarter, as we saw in 2011.
Similarly, we also expect to see a stronger second quarter this year. In addition, we looked at states that were hard hit by Hurricane Sandy and found that sales were down nearly 30% in those states. We attribute this to the current focus on repairing and replacing infrastructure in the communities affected by the hurricane. The meters will come later. While sales of residential meters were down nearly 10% and commercial meter sales are down almost 17%, both compared to 2012's first quarter, we don't believe that this is anything more than our normal lumpiness. It is likely that other lingering factors, such as continuing concerns over municipal budgets, now more due to sequestration concerns, and housing starts also played a role. We truly believe weather was the main culprit for the sales decline quarter-over-quarter.
Industrial flow products represented 36% of sales for the first three months of 2013. As I noted, these sales did increase by $500,000 or 2.3% to $22 million from $21.5 million last year. The increase was solely due to including an extra month of the Racine product sales in the results. On a comparable basis, industrial product sales on average are down 13%-14%, which we find to be similar to other industrial manufacturers who are seeing an overall weakness in industrial orders. Specialty applications represented 4.3% of sales for the first quarter of 2013. These sales increased $600,000 in the first quarter to $3 million from $2.4 million in the same period last year. Included in this group is the concrete products line from Racine, which has three months this year versus two months last year.
The gross margin as a percent of sales was 34.9% in the first quarter, compared to 37.9% last year. Clearly, the lower volume of products sold had a negative impact on our factory utilization, resulting in the lower margin percentage. Selling, engineering, and administration expenses increased about 8.8% over the same period in 2012. This increase was due to having three months of expenses for Racine compared to two last year, amortization of the intangibles associated with that acquisition, and amortization of software installed as we integrate our industrial product line systems. Those three items constitute the majority of the increase quarter-over-quarter. Interest expense is up slightly due to the higher average debt balances this quarter compared to the first quarter of last year. The provision for income taxes for the quarter had an effective tax rate of 35.1% compared to 37.4% last year.
Our estimate for the year is the same at 37.4%, although we were able to recognize the R&D tax credit for 2012 in this quarter. The legislation for that credit was passed shortly after the first of the year, making it a first quarter event. That brought the percentage down this quarter to 35.1%. As a result of all this, net earnings from continuing operations were $2.9 million, or $0.20 per diluted share, as compared to $6.2 million or $0.42 per diluted share last year. Our financial condition remains strong. Despite lower than anticipated earnings, we still generated $4.7 million of cash from operations, a portion of which was used to reduce debt. At the end of the quarter, debt as a percentage of total capitalization was approximately 27%. With that, I'll turn the call over to Rich Meeusen, Badger Meter's Chairman, President, and CEO, for his comments.
Rich?
Thank you, Rick, and thank all of you for joining us today. I know that this gets turned into a transcript. Just to clarify something Rick did misstate. He said that industrial sales were 36% of total sales for the first quarter. He meant 30.6%. There's no confusion later. As Rick discussed, this was a challenging quarter for us, it also exemplifies the lumpiness in our municipal water business that we've discussed in the past. First quarter sales can be significantly impacted, both favorably and unfavorably, by weather patterns. However, all of our utility customers still need to replace aging meters, many are moving forward with technology improvements. As such, we believe that these unusual quarterly dips tend to even out over time. There were a couple other significant announcements included in our earnings release on which I want to expand.
The first is the recent acquisition of Aquacue, a small Silicon Valley software technology company. As we've discussed in the past, our fixed network meter reading systems are able to provide large volumes of data to our municipal water utility customers. We currently offer state-of-the-art advanced metering analytics software to help our customers analyze and act on the available data. We are also working to expand and improve our software offerings with more features and greater capability. Aquacue has developed and patented unique technology that will significantly enhance our product offerings. With this acquisition, we've made a significant leap forward on our technology development roadmap. We will be able to integrate the Aquacue technology into our systems to provide the water utility market with a unique and full-featured meter reading and analysis system.
We expect to introduce new products in the early part of next year that utilize the Aquacue technologies. The second announcement is also very significant. In January of this year, one of our competitors, Elster AMCO Water, LLC, announced their decision to stop producing and selling mechanical water meters in North America effective June 30th of this year. This decision not only created an opportunity for all of the remaining companies to win this available market share, it also had the potential to impact Elster customers who had long-term water meter supply contracts. When we were informed of Elster's decision, we immediately contacted them offered to work together to assist their customers in a smooth transition to the Badger Meter mechanical water meters. After working out the details, we reached an exclusive agreement last month.
Elster AMCO has recently notified its customers that they have selected Badger Meter as the recommended supplier for mechanical water meters after June 30th. We are currently in the process of making joint sales calls at those customers with both Elster and Badger Meter salespeople to work out the details for each customer. We view this as a significant opportunity for Badger Meter, and we've been very impressed with the cooperation shown by Elster AMCO, as well as their concern for their customers. We believe that this agreement will have a positive impact on the second half of this year. With that, we would be happy to take any questions you may have.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch tone telephone. If your question has been answered or if you wish to withdraw your question, press star followed by two. Press star one to begin, and please stand by for your first question. Your first question comes from the line of Ryan Connors of Janney Montgomery. Your line is now live. Please proceed.
First off, on this Elster agreement, pretty interesting. Is there anything you can tell us about the economics or the structure of that? I know you probably can't get into specifics, but just any additional color on exactly what the composition of that is.
There are two aspects to it. One is that we have agreed to make these joint sales calls and offer those customers an opportunity to move smoothly from Elster mechanical meters to Badger. In most cases, that means that we will take those customers at Elster's pricing or as close thereto as possible. That's not perhaps as strong a margin as we have seen in the past, we think in a transition period, it'll be beneficial, and it'll certainly contribute to our throughput in our factory and contribute to our margins. The second aspect of it is that Elster, to their credit, is also very concerned about supporting warranty on their customers going forward.
We have worked with Elster on a warranty agreement where we will continue to work with Elster after June 30th to help customers resolve warranty issues with any Elster products that may come up. Badger will obviously be reimbursed for that from Elster. Our number one concern was to make sure that those customers are properly serviced and able to get the meters that they need going forward. Those are the two major aspects of the agreement.
Got it. Okay. Then just a question on the, obviously you mentioned weather as a headwind. Is there any way you can disaggregate the underlying strength or lack thereof in the municipal market in general? Obviously, it's a market where there's a lot of debate on the trajectory there.
You're right, it is question-based. It's very hard, Ryan, as you know, to look at one quarter, and even eliminating the snow effect, say, this is what's happening in one quarter. This is a market that moves slowly over a long period of time, and I think it would be very hard to say. We know that anecdotally, talking to our customers, there's still concerns about budgets, municipal budgets, and whether or not the federal government is going to be able to continue to fund the Drinking Water State Revolving Fund that go into all the states, which is a source for money for a lot of the utilities. We know that that's a concern. On the other hand, we have not heard utilities saying, as a result, we're going to delay any major projects or we're going to stop replacing meters.
Certainly, the replacement cycle has to be done. In many states, it's by law. That's going to continue. I'm fairly confident that we're going to continue to see good growth going forward with the industry. We just run into these hiccups from time to time, whether it's weather or government or whatever, and it makes the lumpiness in our business.
Got it. Last one from me. There seems to be a greater interest among utilities in fixed networks lately. I wanted to get your view on whether you agree with that and whether you're seeing that in the marketplace. Related to that, talk about how the traction of the AMA product has progressed.
Yeah. You are right, Ryan. We are seeing more and more interest in shifting from mechanical read meters directly to fixed networks rather than going mechanical to drive-by to fixed networks. I think the customers that are taking on drive-by still want it, they still like it, and they're still moving forward with that. Customers used to have one option, go from a local read meter, a manual read meter, to drive-by. Now they have two options, drive-by or fixed network. There is a lot of interest in the fixed networks. One of the things we've seen is there's concern about the amount of infrastructure. For some of our competitors, they have less infrastructure, although a more expensive alternative. Our particular offering has more infrastructure, us and others, us, Itron, Neptune. We all have a little more infrastructure, although a lower cost offering in total.
It's a question of what the customers prefer. Some customers like the less infrastructure, some customers like the lower cost, and it's what they want to go to.
Okay. That's very helpful. Thanks for your time this morning.
Ryan, Rick has an additional comment.
I think you're also starting to see utilities whose customers are asking for this.
Thank you. Your next question comes from the line of Rich Eastman of Robert W. Baird. Please proceed.
Yeah, Rick, I know you were answering that question, but you weren't by the mic or something.
All right. Can you hear me now?
If you want to answer it as part of this, feel free.
Hold on a second, Rick. We may have a technical problem here.
Can you hear me now?
Yes.
Okay, good.
Okay.
Let me try and answer-
Go ahead and finish that answer if you want.
I just want to finish, because I think the other thing is utilities are starting to get demands from their customers to have information available online, and really that dovetails in with our Aquacue acquisition, where this idea that, if I'm a water customer, I want to sign into my local utility. Eventually, I may want to pay the bill on that and all that because this whole generation, this next generation of people coming up, have done nothing but doing things on the web. I think water utilities, and this dovetails into why there's more interest in networks, are going to have to go that route in order to be able to respond to that. That was the answer to that question.
Okay.
It took me forever to get on, but I'm finally got it.
Thank you for the previous caller. Hey, can you just tell us, I know we want to get away from talking to RFI's sales on a quarterly basis now that it's annualized. Can you just give us the first quarter of 2013 sales for RFI. Was there any growth there year-over-year and what that incremental number was?
Well, no. I think we commented on a comparable basis, industrial orders, pretty much across the board were down, and that I think I said 13, 14% when you put three months against three months.
Okay.
That includes our industrial and RFI.
Our legacy business.
As a whole.
I can't really do that math. Was RFI sales, for the quarter, $11 million or something like that? What I'm curious of.
Probably.
Was there growth at RFI year-over-year? Secondarily, was the gross margin relatively consistent at RFI?
Yes.
Okay. Yes and yes.
Margin was consistent, there was no growth. When we talk about industrial being down 13%-14%, most of that is RFI. They brought more to the table than our old legacy businesses.
Okay. All right. Got you. Then Rick, in the SG&A line, you mentioned kind of these three items, amortization, the extra month, and the IT system spend to integrate. Was there any expenses from the Aquacue acquisition, or does that SG&A run out at a $20 million a quarter run rate for the balance of the year?
Yes. There were obviously some expenses, that acquisition, from a cost standpoint, was not that significant to us where it rises to the point where it influences that number. Rick, if you pull out the one month of RFI,
Yeah
instead of an 8% increase, you're looking at about a 2% increase. Yes. Our core expenses went up about 2% year-over-year. It really wasn't that significant. The biggest impact of the increase was the fact that there was one more month of all the RFI expenses in there.
Okay. Obviously, the sales number here was a little bit light, so it kind of exposed just the base inflation in the business?
Correct
looked bigger than it should've been.
Correct.
Yeah. Just two things I wanted to circle up from a revenue perspective. We bumped into something, this Natural Resources Defense Council and a few utilities were talking about increasing the standards for residential meters to tighten the accuracy. I don't know if that gets any momentum, the combination of that with concerns about State Revolving Funds funding by the feds, do those two things, are they going to impact the business longer term, or is that just a quarter or two?
Yeah, this is Rich. I have not heard anything about the Natural Resources Defense Council calling for tighter meter standards. Meters right now, the standard is a ±1.5% accuracy. I'm not quite sure how tightening up that standard is going to dramatically impact the environmental situation in the U.S. around water.
Okay.
I do think there is concern over government funding, as I've spoken in the past.
Okay. Rich, this agreement with Elster, why was that necessary? Again, Elster's got 8%-10% share. You guys are number 1 or number 2 in mechanical meter sales. You know where they reside. Do we have to pay them a royalty or anything on the co-marketing and co-sales, or why is that necessary to gain share in that space?
Eastman, I have to give you credit. That's a decent question.
Gee, thanks. I figured I'd keep going till I hit one.
Right. Yeah. Even a blind chicken finds a piece of corn once in a while. Sorry.
It's all right.
The fact is that when Elster made this announcement, it started a scramble by us and all of our competitors to call on those customers. We all went in, and we started saying, "Those customers, we're the company you should switch over to." We felt that there was an opportunity to get a competitive advantage in the scramble. The competitive advantage would be to, instead of walking in cold and saying, "I know the other competitors have just been in here, but I'm different, and you should consider using my meters." To walk in with the Elster salesperson that this customer's been working with for maybe the last 10, 20 years, and who the customer frankly trusts. This is a relationship business.
This is a huge opportunity for Badger Meter where, unlike our competitors, we're walking in with the salesperson who knows that customer, who has worked with that customer, who has served that customer very well. That salesperson is saying, "We are recommending that you switch over to Badger Meters and not one of the other competitors." That is the reason it was, to us, a very valuable opportunity. Secondly, no, there is no royalty. Elster was not looking for anything like that. What Elster's number 1 concern was, to their credit, was they wanted to serve their customers well. They wanted to make sure that their customers were not negatively impacted by this decision for mechanical meters, and that's what the focus is on.
They're still anticipate playing in the e-meter market, though?
Yes, I believe so. I believe Elster is still going to be selling electronic meters and other devices in North America.
Understand. Okay. Well, thank you.
Thank you. Your next question comes from the line of Chip Moore of Canaccord Genuity. Please proceed.
Morning. I was wondering if you could talk a little bit about the competitive environment in general and any changes you're seeing out there. We talked a little bit about Mueller last quarter. Any updates there?
Well, I think obviously the thing that has changed the competitive environment for us in the last few months is that Elster decision. Elster is no longer actively pursuing new accounts. That certainly is having an impact on the dynamics in the marketplace. I think anytime you take some capacity out of a marketplace, it opens an opportunity for perhaps some improved pricing, and some opportunity to gain market share, and that's what's happening right now.
Sort of on the opposite end of that spectrum, is there any sort of near-term opportunity for competitors to price more aggressively? Are you seeing anything like that?
I think we're all starting to see that.
Okay. On the acquisition, does that address something specific that your customers were looking for, or is this more of a longer-term opportunity?
Well, I would say it's longer term because we intend to be able to start introducing products as early as the first quarter of next year as a result of this acquisition. If you consider that long term, in the software business, that's long term. In the hardware business or in the water meter business, that's maybe not long term. I think it does address some specifics. I'm being purposely vague. I don't want to go into a lot of detail because I don't necessarily want to telegraph to our competitors exactly what we're going to be coming out with.
Sure. That's fair. Just lastly, back to the weather, just some historical context. You touched on it in terms of last winter, it seemed like we had no snow, then I think it was a couple of years ago, we kept getting hit with storms. Just how this compared versus that period, you saw a pretty big snap back sequentially, I think, in that Q2 of 2011, how you see that playing out. Thanks.
If you look at the last 10 years, the data from records, you'll find that the two first quarters that had the highest amount of snow cover in the contiguous 48 states was the first quarter of 2011 and the first quarter of 2013 out of the last 10 years. Interestingly, the first quarter of 2011 for us was a very weak quarter. I think we did about $0.22 that quarter, and the first quarter of this year was very weak. Again, if you look, you'll see that the second quarter of 2011 came back stronger. Likewise, the first quarter of 2012 was an unusual quarter in that it lacked snow, and we had a very strong first quarter. We've always known that these patterns exist.
We haven't exactly had numbers to correlate them. This now gives us some numbers, I think it is a pretty strong correlation, all other things being equal.
Thanks.
Thank you. Your next question comes from the line of Hasan Doza of Water Asset Management. Please proceed.
Good morning, guys. How are you?
Morning.
Just a couple of follow-up questions. You had mentioned that competitors are scrambling after the Elster market. My question would be, are your competitors being rational when they are competing for Elster's market share? What competitive pricing environment are you seeing specifically as they scramble for these Elster meters?
I would say thus far, we're seeing that they are being rational. We know that Elster had some fairly aggressive pricing on some of those accounts, and Elster recognized it, and I think frankly, the customers recognized it too, that it wasn't the kind of pricing that could be sustained long term. As we're getting in and talking to those accounts, they realize that prices have to come up on those types of accounts in order for any of us to be able to provide and service those customers on a reasonable basis. I haven't seen anybody going in there and doing the opposite, trying to cut prices further or being overly aggressive. I think there's a lot of rationality we're seeing in the marketplace.
Go ahead.
I also think we've seen some customers that they're under a two, three-year contract that has simply gone to the next bidder. If the contract was awarded a year ago, it just went to the next bidder and just continued on. We won't see the full impact of this until some of those bid periods are over also.
Essentially, if you are a city and you signed a two-year contract with Elster, can you or can you not buy meters from someone else? Or what's going to be the arrangement between now and when the contract expires in terms of getting supply of Elster meters?
Yeah, that's too hard a question because it varies literally by city by city. Okay. There are some cities that have just gone to the next bidder and have continued. There are some cities that are continuing to work with Elster. They're bringing us to the table. To answer specifically for an overall answer like that, it's just not possible.
The one fact we do know is that after June 30th, they will not be able to get Elster mechanical meters. That's a definite fact. They all know that basically the other companies are willing to step up and provide them meters, perhaps at a different price, but we're all there willing to provide them. Where Badger has a bit of an advantage is we are being brought to the table by Elster, which means that Elster's relationship with that customer can, to some extent, benefit Badger.
Okay. In relation to the acquisition, I understand it's a small acquisition, $14 million, Aquacue. As you mentioned, the company is not generating significant revenues today, how do you think about in your acquisition portfolio in terms of your accretion, years to accretion, and also the rate of return that you would want to earn in any acquisition? Can you help me understand as to how can we get to accretion, and what type of returns do you think you can earn on this $14 million that you invested in this company?
You mentioned any kind of acquisition, so let's back up. There are two types of acquisitions. There is one where we are acquiring an existing company with an existing customer base and existing sales and EBITDA, such as Racine Federated. Racine Federated was immediately accretive on our acquisition. It has done very well for us. We have been very pleased with it. We were able to take some cost out of it through the integration, and we were able to cross-sell to a lot of our customers and take a much stronger market share. That has been very good for us. In the case of Aquacue, this is a technology acquisition. This is not an acquisition of an ongoing business that has strong sales and EBITDA and margin and all of that.
This is purely acquiring a company in order to get the intellectual property out of it and to get the employees who are all engineers and who will continue to work for Badger Meter and continue to develop the products that they have developed so far and integrate them into Badger's products. There is not an immediate accretion on it. If anything, it adds a little bit to our engineering expense for the rest of the year, in the terms of these additional employees and the amortization of the patents and that sort of thing. Where we look at it is, in 2014, as we introduce the new products that integrate the Aquacue technology, we should be able to gain market share then and grow our business, and that is where we start seeing the accretion from the acquisition.
Okay. In terms of housing starts, if you look at the last three months in the first quarter, would you be able to quantify how many new meters you saw coming into your portfolio because of the increase in housing starts during the first quarter?
That is something we have never been able to quantify. The problem is, when we send meters to a city, they do not tell us these meters are going in new houses versus these meters being used for replacement. The city or the distributor buys the meters, they put them on the shelf, and we are unable to get that data back. The best we can do is take a look at the overall housing starts in America and make some inference about whether or not we are generating meter sales as a result of those housing starts. Clearly, compared to where housing was at the trough of about 500,000 new residential houses in America, we are up from that, and it is helping us. Where we were before the recession, when we were doing 1.5, 1.6 million houses a year, we still have a long ways to go.
Would you be at least able to quantify, because housing starts, from the bottom, as you mentioned, 500,000, they're at 1 million. If housing starts went up by 500,000, say in the one-year period, from the data that you have, how many new incremental meters did Badger Meter take in from the bottom of the housing starts? Do you have that data?
Well, first, I'm not sure housing starts went from a half a million to 1 million in one year.
They're projected to.
An annualized rate, okay, is what you're saying.
Yeah. Exactly. If you kind of follow that correlation, wouldn't you be able to get a sense as to how many new meters that you have gotten since the beginning of the housing starts?
Right. You could take the number of new houses. You could assume that maybe 80% of them have meters because 20% are on private wells. You could take that 80% and assume that we got 30% market share and come up with a number, yes.
Okay. Last question, guys. On Hurricane Sandy, you guys kind of mentioned the lingering effects of Hurricane Sandy impacting the sales this quarter. I'm a little bit surprised because, Hurricane Sandy was a fourth quarter event last year, I didn't really hear a lot of impact in your fourth quarter results. Why is it showing up now? Secondly, it is a long-term reconstruction project, when do you expect the sales that were destroyed from Hurricane Sandy to return to Badger Meter?
Well, let's answer your first question. It's more of a first quarter because there's always inventory on the shelves at the local utility. All right? We were shipping in the fourth quarter to replenish the normal replacement. When did Hurricane Sandy hit? October. It was October, right?
Yeah, October. Yeah.
October, somewhere in there, at the end of October. Basically, from that point forward, they didn't put orders in because they weren't taking many more meters off the shelves at their local locations. Now, as far as when it returns to normal, it's a long-term recovery thing. It's kind of like Hurricane Katrina was years ago. In certain cases, you have to rebuild the homes first before you can worry about putting a meter in. I think there weren't as many homes destroyed as there were things disrupted. I think over time, that'll come back, and I know it's coming back just based upon the news articles, but it's over time. Clearly that had an impact.
When we look at the eight states directly affected and see a 30% sales decline, plus talking to our salespeople who have been out there, they're not worried about putting in meters right now in those locations. They're worried more about testing the infrastructure, making sure that any floodwaters didn't do damage, replacing pumps, and the like. I expect that part to resume shortly.
Okay. Thank you very much, guys. Have a good day.
Okay. You take care.
Thank you. Ladies and gentlemen, just a reminder, if you wish to ask a question, press star followed by one on your touch tone phone. If your question has been answered, it is star two to withdraw your question. Our next question comes from the line of Bob Chernow . Please proceed.
This is Bob Chernoff from RBC. My question is, are you getting any synergy from the companies you have purchased for your robotic manufacturing system that you have for industrial pumps, I mean, industrial meters?
Bob, I am not sure what you mean by our robotic manufacturing system for industrial meters. I am kind of lost on that one.
This is the system that you have in your Milwaukee factory, that doesn't really require much setup time, that you do the large meters for beer and soda, those type of things. Are you getting other business from the companies? That's been one of the smaller portions of your business. I'm just curious if these acquisitions are helping that area out or not.
Right. Well, yes, we make some industrial products here in Milwaukee, with the acquisitions and probably the two that were most significant to that were Racine and Cox, which we made a couple of years ago. Cox makes the meters for John Deere and Caterpillar and companies like that. Racine makes meters for a much broader version. We have not brought any of that production into the Milwaukee facility. We've left that production in the Racine and Phoenix facilities where they are. We have been able to have our industrial engineers get involved and find ways to increase productivity. We're making a major investment in Racine to improve their flow testing, using our knowledge of flow testing. We've been able to get some synergies out of that, and we will continue to see them going forward.
Great. Thank you.
Thank you. Your next question comes from the line of Richard Eastman of Robert W. Baird. Please proceed.
Just one follow-up. Rick, when you mentioned and talked to the utility piece of the business, you suggested residential was down 10% and commercial down 17%-ish. Just from a mix perspective, within residential, the down 10% number, was your local reader, just mechanical meter business down more or less than that? In other words, was the automation piece down more and hence a negative kind of gross margin mix impact?
Yeah. The actual, the plain vanilla water meters, the manual read meters, that was up slightly. Again, that's not a big piece of the business, we did see a slight increase there.
There was some mix impact in there, Rick, to answer your question.
Okay. It must have been fairly substantial, though. If your shop overhead on the manual meter reader side, if your volumes were up a little bit, your automation, again, was down pretty meaningfully then, huh, the automation piece?
That's a fair comment.
That's a fair comment, yep.
Okay. Copper, again, thinking about the one quarter lag, copper was actually a bit of a negative for you in this quarter, but it'll turn positive, I think, right?
Well, if it stays down around the $320 it's at this morning, it certainly will.
It was a small negative this quarter.
Yes. Okay. All right. Thanks again.
Okay.
Thank you for your question. There are no further questions, now I'd like to turn the call over to Richard Meeusen for closing remarks.
Thank you. In closing, let me reiterate that while this was another challenging and lumpy quarter, we are optimistic about the rest of 2013 and beyond. We're excited about the opportunities that both the Aquacue acquisition and the Elster AMCO agreement represent for our company, and we'll be working hard to integrate those and to pursue those opportunities. Thank you for the time today.
Thank you. Ladies and gentlemen, that concludes your participation in today's conference call. Thank you for joining. You may now disconnect. Good day.