ESCO Technologies Inc (ESE) 2005 Q3 法說會逐字稿

Good day and welcome to the ESCO third-quarter 2005 conference call. Today's call is being recorded.

With us today are Vic Richey, Chairman and CEO; Chuck Kretschmer, President and COO; and Gary Muenster, Vice President and CFO. And now to present the forward-looking statements and for introductions, I would like to the call over to Ms. Pat Moore, Director, Investor Relations. Please go ahead.

Good morning, everyone. As usual, if you have not received the press release, it is available on our website at ESCOTechnologies.com or by dialing 314-213-7216.

Statements made during this call regarding the level of revenue contributions from each segment, future investments, potential acquisitions, further deployment of our TWACS system by TXU, the Company's successful negotiation of a contract with PG&E, growth in the AMR market and of our IOU programs, fiscal 2005 revenues, cash flow, EBIT, EBIT margins, EPS, fiscal 2005 corporate operating expenses, the success of cost reduction efforts and effective tax rates, the longer term revenues and earnings of the Company, the Company's financial control systems' compliance with the Sarbanes-Oxley Act, and other statements which are not strictly historical or forward-looking statements within the meaning of the Safe Harbor provisions of the federal securities laws.

Investors are cautioned that such statements are only predictions and speak only as of the date of this call. The Company's actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment, including but not limited to, the risk factors referenced in the Company's press release issued today, which is an exhibit to the Company's Form 8-K also filed today. The Company disclaims any intent or obligation to update these forward-looking statements.

In addition, during this call, the Company may discuss some non-GAAP financial measures in describing the Company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the above-mentioned Form 8-K and accompanying press release on the Company's website, ESCOTechnologies.com, under the links "Investor Relations," "Financial Reports and SEC Filings."

I will now turn the call over to Vic.

Good morning and welcome to our quarterly conference call. As indicated in our press release, we have pockets of our business where we are fighting some headwinds. However, the strength we're seeing in communications, as evidenced by our recent accomplishments in the investment utility market continues to suggest we can make substantial and sustained progress.

Following some comments from Gary covering our third-quarter performance, I will follow up with some additional perspective on our business outlook and initiatives. Gary?

Good morning. As noted in the release, our third quarter and year-to-date EPS was favorably impacted by a 15.7% effective tax rate recognized in Q3. The primary driver of the lower tax rate was the true-up of the prior year estimated foreign-sourced income out of our DCSI subsidiary in Puerto Rico.

The actual pretax amounts were finalized in June during our book-to-tax reconciliation as part of our filing the corporate tax return. Previously, we had estimated a lower amount of pretax earnings being generated out of Puerto Rico based on lower PREPA deliveries and the fact that we were utilizing additional subcontract manufacturers located outside of Puerto Rico to meet our growing demand.

Our estimate proved to be light based on the greater-than-anticipated cost savings on the modules that we manufactured and delivered out of our Puerto Rican subsidiary. Absent this prior year true-up, our Q3 effective tax rate would have been approximately 33%, and this was driven by higher current year foreign earnings throughout the Company.

Sales increased slightly in both the current quarter and year-to-date periods as compared to prior year. Although Q3 sales were up in total, the mix changed in the period reflecting decreased sales in the communications segment with its higher EBIT margins contributions and replaced by test segment sales, which carry lower margins when compared to communications.

Within the communications segment, the lower sales of AMR products, as described in the release, were partially offset by increased SecurVision deliveries. Communications sales in Q4 are expected to increase approximately $5 million over Q3 with increases in both AMR products as well as SecurVision products.

Test sales increased in the quarter as well as year to date, primarily due to continued strong demand for EMC products throughout the world. Filtration sales were relatively flat in the third quarter due to ongoing softness in the automotive sector. Commercial aerospace aftermarket sales in filtration remain strong.

SG&A increased approximately $2 million in the third quarter compared to prior year. A large part of this increase is driven by the AMR business as a result of our delivered investment in marketing, new product development and program management -- spent in conjunction with our expectations to further expand our position in the IOU market. In total, the SG&A outlook for the fourth quarter is expected to be slightly higher than the third quarter.

GAAP earnings per share of $0.95 increased substantially in the third quarter, primarily driven by the favorable tax rate mentioned earlier. For the 9-month comparisons, the prior year EPS included a $0.07 charge related to the Puerto Rico plant shutdown and the $0.14 charge in discontinued operations related to the Microset businesses prior to their divestiture.

In our outlook section, we raised our total year EPS guidance based on the revised effective tax rate resulting from the Q3 true-up as well as a more favorable profit contribution from our foreign operations for the fiscal year. Our June balance sheet remains very strong with a net cash position of approximately $85 million.

Third-quarter cash flow was slightly lower than planned due to a substantial cash receipt from a large AMR customer, which was expected in Q3 and is now projected for Q4. The delay and the timing of this receipt allows us to project Q4 cash flow to be greater than $15 million, which will result in a net cash balance of approximately $100 million at September 30th.

We continue to actively market the Puerto Rican property but have not been successful in finding a buyer to date. The current book value is approximately 3.6 million.

On the governance front, we continue working diligently on the implementation of the 404 certification requirements of Sarbanes-Oxley. Since 2005 is the first year of implementation, we expect this project to cost approximately $1.5 million and are confident that the cost in 2006 should be around 50% less. The project to date is going well. And we feel confident, and we are in excellent shape to be in full compliance by our September 30, 2005 deadline.

I will be happy to address any specific financial questions during the Q&A. And now, I will turn it back over to Vic.

Thanks Gary. As our release suggests, the current challenges we have at ESCO are primarily in the filtration segment. Although, the commercial aircraft business is improving, and a relocation of production from Puerto Rico to Juarez yielded good results. For the most part, these positives are only mitigating the impact of the softness in our automotive business, the increases in resin prices, and a reduction of the sales defense spares.

We continued to work on our cost infiltration. Without the market cooperation, we don't anticipate results in the near-term that are dramatically different from what we saw in the third quarter.

In the test segment, we have a strong market position and a substantial foothold in Asia, the fastest-growing region for our products. And as such, we have plenty of opportunity to grow. While we get solid returns in the test segment, our margins have room for improvement.

In that regard, we are well into a structured initiative to reduce our material costs, consolidate our supplier base. We are continually working to reduce overall operating costs. I expect that through a combination of sales leverage and an improved cost picture, we will deliver meaningful margin improvement over the next 12 to 18 months.

The real opportunity for step change in our performance is through the accelerated growth of our advanced metering business. We made really significant progress in the third quarter in establishing a foundation to move to the next level. Although the contract has not yet been finalized, at PG&E, we have the opportunity to provide product to cover all 5 million endpoints in their service territory. We are actively working with PG&E to definitize the contract.

At TXU, we are on contract for 265,000 endpoints, which we anticipate deploying in fiscal years '05 and '06. Recent comments in TXU's quarterly press release suggests that they are actively considering accelerating -- or acceleration of their advanced metering program, given the legislation that was recently passed in Texas that allows for rate recovery of advanced metering investments over a 3-year timeframe.

We were also gratified by TXU's comments, which highlighted the significance of the benefits that are going to be delivered utilizing the two-way communication system as contrasted to a more basic AMR technology.

Beyond PG&E and TXU, as we previously indicated, we are installing a pilot level system at another substantial IOU. The current schedule at this third IOU, as we understand it today, would be to run our file system in parallel with competitors' offering for a period of about 9 months and then make both the technology and a build-out decision. We feel particularly well-positioned to support this customer, should they choose to move forward.

We are also actively engaged with a number of other IOUs. The unprecedented activity in the IOU space together with the continued activity in the COOP market, albeit somewhat more competitive, taken together with the inroads we have made in municipal space to get that our organic growth prospects are very significant. In addition, we are working hard to broaden our offering in advanced metering through acquisitions.

I guess under the heading of late-breaking news related to our advanced metering business, as you know, yesterday, the president signed into law the federal energy bill. Among other things, the bill requires all states to conduct investigative proceedings within the next 2 years related to the implementation of demand response in advanced metering.

The bill also requires that the Federal Energy Regulatory Commission and the Department of Energy conduct assessments of demand response and make recommendations on how to expand advanced metering programs. In my view, this legislation provides additional stimulus to -- and extends an already vigorous advanced metering market.

Overall, why we don't see a significant growth over the next 3 quarters, we should see extraordinary growth for an extended period of time, as the IOU programs begin to ramp up in the latter part of '06. In terms of specific guidance for '06, we will provide it in November, as we have in the past, together with an update on our major IOU opportunities.

So with that, I would be glad to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Steve Sanders, Stephens, Inc.

I wanted to see if you could expand on your comments about the COOP side -- new competitors, existing competitors with better products, broad pricing pressure? Or just whatever color you could there would be helpful.

Sure. As we have talked about on many occasion is the prime competitor. There is Hunt Technologies. They continue to be a solid competitor. They came out with a new product a year or so ago, which they are calling TS2. And in addition, Canon, which is a company that historically has provided load-control product has also re-entered the fray, if you will, with the product -- which also is a powerline-based product.

I would say that -- a couple things I would say about it -- we know that that's always going to be a competitive market. There is some pricing pressure, some more than we've seen in the past. But I have to say that -- but I am comfortable with our competitive position here, really from almost any dimension -- including cost, functionality, reliability, the fact that the Company is backed or the product is backed by a substantial company being DCSI and then us as well.

So I view this more as some folks trying to get some market share. But I really like our long-term opportunities here. In addition, we have also been able to make some inroads in the municipal market as well. We sold over 50,000 units into the municipal market this year, and that's really coming from almost a 0 base last year.

And on the water-gas AMR acquisition initiative, it seems like a -- several quarters ago, you were feeling pretty good about that. And then the past quarter or two, maybe that was less of a focus. I just wanted to see if you could bring us up-to-date on what you're seeing there?

I wouldn't say it is a lack of focus, Steve, as much as it just our -- have yet been able to close anything. I would say given where we were last quarter, I think we are starting to make some progress again. So that is still a priority for us. It is something we want to get done and feel confident that we will get done.

And then on the -- I think it was 5 million of higher revenues expected in 4Q in communications, and a portion of that was SecurVision. Can you provide some more detail on your SecurVision expectations in the quarter?

Yes, it will be up a bit in the fourth quarter versus what it was in the third quarter. We don't have clear view into next year. It probably will be lower next year for the year than it was this year. It's really somewhat dependent on the traction we're able to get. If you remember, we were playing a little bit of catch-up this year from a redesign of the product earlier in the year. So we had some customer -- a major customer that we were delivering to, which we have now caught up with. And so, we are back to delivering to new customers.

Steve, this is Gary. Let me just add a little more to that -- just we are really a little bit at the mercy of Bank of America's installation pace on that. So as we were playing catch-up, as you noticed in Q1 and Q2, we had substantial revenues that dropped down in Q3. And basically what has happened is, the customer is caught up in their installation profile, so they are back on track in Q4. So relative to Q3, actuals in SecurVision, you should see it at about 33 to 50% higher in Q4.

Rick Eastman, Robert W. Baird.

Just a couple questions just surrounding the comm business as well. Could you just talk -- maybe give us an update on PREPA and why -- is that business -- where is that business in reference to its contract term?

This year, we will deliver about $13 million. And so going into next year, we have less than $10 million left to deliver on that project. So it is winding down. We have been delivering on that project for probably 7 years now.

6 or 7.

And I think people do kind of forget that it is a very large deployment that we have there. We have well over 1 million meters or will happen. That's brought almost, about $115 million of revenue into the business.

Largely, does that 10 million largely get booked in the first half? Is that how we should view that?

No, it really goes across the year. Their deployment cycle is much slower than what we see at some of the other investor-run utility.

And then also you talked about some revenue being pushed into the fourth from the third. And obviously, you are capturing in this 5 million number. But what is that rate related to?

That was just product that the customers -- we just didn't deliver within a third quarter that's not going into the fourth quarter. So it was not anything specific.

Shipping schedule, okay.

Right.

And then also, is there any way in the test business to get some protection on the cost side there? Some of these are government contracts, and some of these are longer-term -- 3-year type installs and projects. Is it difficult to get pricing protection on the raw materials side or on the installed cost side?

The install is what's really hurt us. We talked about for the last 2 quarters -- was some of these government jobs that were -- that over ran. The real issue there was not the material as much as it was the installation.

What happens is -- since we do all our own installation is that most of this is embassy work. You have to have cleared installers, and you have to have top-secret clearance instances. And so you have a limited number of those folks. And what is happened is -- we will have a schedule for an installation at an embassy, and we will put those in place and the schedules of those -- and then as the schedules change, then we will have an overlap between some of the projects that we had not anticipated. And we won't have the installation resources available. So we have to go and subcontract that. And obviously, that's a much more expensive proposition.

So what we are doing to ensure that that is not the case in the future is we are putting additional language in the contracts that as the schedules change, we will be reimbursed for that or they will have to give some flexibility on the schedule.

So this is one of these things where they all kind of stacked up on top of each other and unfortunately had an impact on us. But we are going to try to remedy that through some additional contractual language.

And then just one last question. Good to see the split. Obviously, still looking on the acquisition side, is there any discussion or how high a priority discussion are you having about a potential dividend?

I would say that still our priority would be to make some acquisitions. We think there are good opportunities out there. I know I've been saying that for a while. But it's one of those things, where we want to do the right thing, and it's going to take some patience. But we still feel strongly that is the best utilization of our cash.

Patrick Forkin, Tejas Securities.

First off, congratulations on the PG&E project and the TXU project. Those are both high profile. And I know you guys have been working on those for a while. With respect to PG&E, can you help us at all with the timeframe on when you may have a contract signed on the full deployment?

Yes, I really can't, Pat. We are in discussions with those guys. It's ongoing. I think it would really be inappropriate for me to talk anything about the negotiations that are underway.

And is it your thoughts that contract will be subject to regulatory approval?

It certainly is. As we put in our press release that we issued back in June, that is one of the steps. And if you go to their website, which I am sure you have, it's very clear that that is part of the cycle -- the approval cycle. Maybe not necessarily the contract itself, our contract, but the decision for full deployment certainly has to go through regulatory approval.

In their filings -- their recent filings, PG&E seems to be pretty confident that they are going to get that approval. I assume you guys feel the same way?

Well, we hear the same things you do. They certainly are being fairly positive in all the statements they are making.

And then on TXU, they had mentioned in their earnings release last year, as you mentioned, the acceleration or potential acceleration of that program. And that they would have 80,000 endpoints in place before the end of calendar '05. Do you know, is that pretty much the pace that you guys had anticipated when you announced the 265,000 endpoints?

Yes, that is consistent with what we had anticipated.

And are you guys -- is ESCO actually doing the installation on that project?

No, we are not doing the installation, and it's typical. We have never done the actual installation our self. We have been responsible for it, but we always go to a third -- a subcontractor to do that. So it's not something that we would take on our own. But we have taken that responsibility in the past, but it is not something we are doing at TXU. And as we outlined in the PG&E press release, should we go to contract there, that's not something that we would have responsibility for there either.

And then on PG&E and TXU, if TXU gets expanded here, at the time you signed those contracts, would you guys release more financial information?

Oh, absolutely. To the extent that we expand those, that's going to be a material event for us, and we will share that information.

Have you got much traction from the PG&E selection? I mean it is a high-profile engagement. And it looks like some of the other investor-owned utilities in California have sort of -- they are changing track here, especially San Diego Gas and Electric. Are you guys seeing an opportunity to revisit at San Diego?

Well, we are certainly trying to take advantage of all those things. And what is going on in California, you're right. There has been some reassessment. I think the PUC is staying fully engaged with all the major utilities out there. So we are trying to keep our folks active both on the regulatory side as well as the business side to ensure that as those major customers do make decisions that we are in a good position to participate.

James Gentile, Sidoti & Co.

As you discussed with your PG&E contract, with your PG&E negotiation that this is ongoing, could you kind of give us more insight to the more important aspects that you are bringing to the deal table with PG&E, without regard to timeframe but in other respects?

I am not sure I understand the question. I'm sorry.

I know that you don't want to comment on the potential timeframe of the PG&E contract. But that can't be the only negotiation factor with regard to the -- in terms of price, in terms of number of rollouts per month or whatever else. Have you gotten as far as taking the calendar out of it but just making sure that everything else with regards to the contract is okay?

We're spending a lot of time obviously, James, going through making sure that we get a fair contract here as we progress through this thing. So all of those variables that I think you are talking about as far as deployment schedules, price and that sort of thing -- that's part of the universal negotiations.

But have there been any particular points that you have discussed with regards to your negotiations with the customer that are more complete than not? And what else is out there before we start seeing a finalized contract?

Well again, the contractual -- the contract negotiation is a pretty sensitive thing. And so we are not going to talk about specifics. As far as the timing of the contract here, there is some amount of time before the contract really needs to be done if you look at what their talking about from the deployment. So there is nothing specific that has come up that concerns us but not anything really we want to talk about in specific terms either.

If I could take a shot at James. I don't think there is anything extraordinary about it other than the magnitude of the thing. So the working out of the statement, the working a deployment schedule and that kind of thing is necessarily more complex, and that adds time. But in and of itself, it's not specifically different from the other programs that we would undertake.

I guess essentially, the question is -- at any point during this contract negotiation, is your ability to work with this customer at risk?

I'm not sure how to even answer that. As Chuck says, the only difference in this and other projects is just the magnitude of the project. But we are working with them.

(OPERATOR INSTRUCTIONS). Ben Sun, Adams Harkness.

First quarter regarding the metering M&A, in terms of target, could you provide a little bit color whether it would be a gas or water? Is there any preference or anything on that?

And second, in terms of pricing, with more clarity now from the California contract outcome, are the potential M&A candidate asking prices becoming more reasonable? Can you comment on that?

I didn't hear the end of your second question. But let me just answer the first one. Most of the people that we look at for gas and water, the technology would be relevant to both because again we won't be able to use the powerline base or we would be doing that already. So it's going to be an RF-based system of some type. And those would have the ability to do gas or water. I think it's necessarily preference for one over the other. If we are successful in bringing somebody on board that can handle the technology that they'll handle both types of customers.

And Ben, this is Gary; I will address the second part. As we're exploring our due diligence and looking at the potential candidates out there, one of the unique features that we see is -- yes, the market is growing and that sort of thing. But the businesses that we are in, we have had a lot of experience in the acquisition side in filtration, as you see in these other filtration deals that are going on, they are commanding pretty substantial multiples on the buy side.

And so what we are seeing in the marketplace for our AMR candidates is multiples that we would call reasonable and fair -- certainly not at the level of the filtration transactions that have been happening but certainly not at the level at test transactions.

So I would say they are kind of middle of the pack. And I think reasonable to slightly rich but certainly not what you are seeing in the comps that are going on in the filtration space at the moment.

And second question -- just in terms of the RFP activities that you guys are seeing out there compared to let's say a quarter ago -- are we still seeing a pretty strong inflow of such activities?

Yes, I would say that it is consistent with what we have seen over the past couple quarters, which is substantially better than what we saw a year ago. So it is still pretty active.

And then on the filtration side, in the auto market, I'm just wondering if you can provide a little bit more color in terms of the near-term outlook. Has the situation pretty much bottomed? Or it's going to get worse in terms of volume, pricing? Anything there would be helpful.

I think it is probably -- I would say hopefully, it has bottomed out. We think it's probably going to be level going forward. What the -- a little bit of the unknown now is with the employee discounts a lot of folks are doing and whether that is going to be sustainable or not or whether they are just drawing down some inventory. But we don't see it getting significantly worse than what it is today.

And then on the test side, business has been doing very well, and China looks like a very promising opportunity. Can you -- is there a way to provide a little bit more color on the potential? What is the accessible market there near-term or long-term?

Well, the near-term, it really looks good, and I think longer term as well. What we're seeing is a lot of the folks are starting to move more R&D into China. And as they do that, that's what really drives our business. Because if you look at our test chamber, it is for new product development. So while more and more companies both out of Europe, Japan and the U.S. are moving more R&D activities there, that is really helpful for us.

Probably the biggest place where we are seeing growth is on the wireless side. Because that is a lot of the work that is being done there. We also, I believe I mentioned in the press release, we are successful at deploying a system to their equivalent, I would say at the FCC. And so that has really been very good for us. Because a lot of the customers that go there for some type of testing or valuation -- see our chamber, see the performance of the chamber. So that is nothing but a positive for us.

And finally just a number of questions. Within the new orders booked for this quarter, could you break out the SecurVision versus the rest?

The SecurVision was about 3.5 million in Q3.

And the AMR, I assume is essentially all the lot.

Yes. Well, no. Within there, it had a piece of the TXU contract -- was in there, and the balance was COOPs.

Chugroon Conner (ph), Upper Arch Capital (ph).

Vic, I was wondering what the opportunity is on the international side? I guess we tend to focus a lot on the U.S. opportunity given the energy bill. I'm curious as to what ESCO's opportunity would be overseas -- Europe, Canada, that kind of thing?

There has been a little more activity. We have been very much focused on the domestic market. There have been some things going on in Ontario area, as we have talked about on a couple calls. That seems to continue to move forward. It does seem to be moving forward as quickly as some had anticipated, but we are fully engaged there.

Also there has been a little resurgence of interest in South America and some parts of Asia. So I would say that the activity level there is picking up a little bit. We are well-positioned to work in those areas. But our main focus has been domestic.

And just one follow-up -- I looked at the operating margins on the communications side, and they were down quite a bit year-on-year. What do you think is kind of a normalized level of margins for this business on a longer-term basis, assuming that you don't have the massive lumpiness of orders quarter-to-quarter?

A little bit of that is going to be driven by the volume. A little bit as well on types of investments that we're making. We have been doing that. And with some of the larger utilities, they are looking for obviously a little better pricing. We think we have good opportunities to take advantage of those volumes in getting a lower cost profile as well. So I don't see a significant change in the margins. We still should be able to maintain something in the high 20s.

Let me add something to that just generally, Vic's comments obviously on volume are important. But as we continue to ramp up the G&A, just to kind of add a little more color that the gross margin contributions that we're seeing are actually increasing slightly. But as we continue to invest in the SG&A, we are really ramping this Company up structurally on the administrative side to be able to handle the content we are going to be passing through in a late '06, '07 kind of timeframe.

So as we ramp up the G&A, it is temporarily muted the margins, still in the mid to upper 20s. But we think once we get the G&A stabilized to suit the volume we are projecting in the future here, I think you're going to see it advance a little bit more northward. Because with the subcontract manufacturing, we're going to get substantial leverage off of that. So as the volume increases and the G&A stabilizes, I think you will see the EBIT margins at the impressive levels that they were historically.

And just one last question that is -- I know you talked about you being in trials with certain investor-owned utilities, and I think you said there's a 3 to 4, perhaps more I'm not sure. What size are these contracts? Are we talking PG&E? Are we talking TXU-sized contracts? Is there any kind of indication on how big these companies are thinking about in terms of an implementation, whether you get it or not? I'm just curious as to size -- that is just the overall size of what you are dealing with right now.

There's a mix of things out there. But the ones where we have some current activity are pretty substantial investor-owned utilities. So larger rather than -- unlike a Bangor Hydro, where it was a smaller investor-owned utility. These are much larger than that.

Scott Blumenthal (ph), Emerald Advisors.

Most of my questions have been asked, so I just have a couple of short ones. There has been some discussion about the PG&E negotiations. And I was just wondering if you had any idea as to the timeframe and how long those would take. What is your earliest estimate? And how long could something like that go, since you guys seem to be pretty confident that you will be able to conclude them satisfactorily?

Yes, as I mentioned earlier, we really are not going to talk to a specific schedule just because it's a dynamic thing. And I do not think there's really any benefit in having a specific schedule. You have to understand that PG&E is also working with other vendors at the same time, not for the electric side but for the gas and installation and things like that. So it's kind of hard to put a timeframe on this that would be effective or be --

Could this go on for 2 years, 3 years? Is that possible?

No, I think if you look at what -- I think the short answer to that is what they are currently talking about from a deployment standpoint. If you look at their website, they were very specific about the timeframe. And their current view is that next year, they are going to be having a deployment. So obviously, that would necessitate a contract to be completed months prior to that.

Tim Hasara, Kennedy Capital.

With respect to the TXU opportunity, beyond the current pilot at 265,000, what is the total opportunity of endpoints at TXU?

It's roughly 3 million units. And I would say that this really is not a pilot. 265,000 units, this is an initial deployment. I'm not trying to shade this in a different semantics, but they really are not looking at this as a pilot. They actually did a pilot of about 2,500 units or so earlier in the year. And so now, I would say they have now initiated a deployment.

So a total of 3 million endpoints and presumably then -- could you give any sort of forecast of what you expect them to -- would you expect them to do all 3 million over the course of time. I am not necessarily saying with you, but would that be the expectation you would have?

That would certainly be our hope. Typically with a system like ours, a full deployment is what a utility wants to do to get the full benefit of advanced metering. So particularly with our system, since it is substation based, they really get the benefit when they have a full deployment.

And just a follow up on your comments regarding the energy bill. Clearly, it was just signed yesterday, and it's very new. But what sort of timeframe do you see with that from utilities that have not looked at your technology?

What they are requiring is that within a year that all of the states look at it. So they start looking at it. And within 2 years that they complete this review. So it would seem that sometime between now and the next 18 months that a lot of the states are going to be fully engaged in this process. But some of it probably will start pretty much immediately. And some already have.

The fact that California has done as much as they have, and I think that's probably the best way to look at it. If you look at what California went through and what the PUC went through prior to making their decision, those are the types of things that all states are now required to do. Obviously, some are going to take it a lot more seriously than others. Some are going to want to push this forward and others maybe not as much.

But at least now, all the states have to go through the process, as well as some of the federal agencies have to go through the process.

So if nothing else, it is really going to generate a lot of interest activity. People are now going to be required to really understand what is out there. And I like the fact that we do have some large deployments, people that can go and look at and talk about and evaluate and see that -- yes in fact, demand/response in advanced metering is not a concept. It is something that is deployed and working well in a number of locations.

And currently, Florida Power and Light is currently -- are they an AMR customer currently?

No, they are a load control customer.

And I would presume since that is installed there that they're -- are they currently looking at the opportunity for AMR?

We don't really talk specifically about the customers unless we have an ongoing -- unless we have a contract with them that everybody is interested in talking about. But what we have there today is about 800,000 load control units that they have had deployed for a number of years.

And that's not the maximum endpoints they have. Is that correct?

They actually have customers in excess of 3 million.

And one other question -- when you made the comments about filtration and the valuations in the filtration business. It just seems like you made yourself an argument that you should look at strategic alternatives relative to filtration and deploy that capital to possibly your higher growth AMR. And why wouldn't you, if you are making the case that AMR valuations are high -- or filtration valuations are high, you should not look at that opportunity right now?

Well, we always look at all the different alternatives (technical difficulty). We do take time to look at the different alternatives of the business. But those valuations on the filtration side are strong right now. They are varying out on the AMR side as well. But either we always look at -- or continue to look at all our strategic alternatives.

Andrew Shirley, Ivory Capital.

I was wondering if you could comment on what level of TXU contribution is expected in the fourth quarter guidance. Whether it is number of modules, or revenue or percentage of contracts?

I think we have about $2 million that we anticipate in the next quarter.

And can you tell me roughly what percent of the total contract that is?

No, we have not talked about the total contract amount to date. And customers specifically asked us not to do that.

You mentioned before in terms of the energy bill language that certain states proceeding in different ways. Is it your understanding that it is fairly easy for a state to drag their feet on this and come to a quick conclusion that they do not want to install AMI? Or does it seem to you like the federal government is really pushing for this to be installed throughout the country?

Well, that obviously remains to be seen. But I think it would have been easier for them to drag their feet and come to that conclusion maybe 2 years ago than it is now. My view is -- if the state comes back too quickly and says, doesn't work for us. It's going to be very easy for other people to point back and say, well, why don't you go talk to this utility or that utility or this PUC, where it has been successful.

There's not really differences between states that would inherently make it more appropriate than not for one state or the other. So I think people are going to have to take it serious. They are going to have to do their homework. And even as we've seen it in California, the utilities have come back with different answers. It appears that the PUC is pretty actively saying -- you really got to go do your homework again because maybe you didn't fully evaluate what we asked you to evaluate.

So it will vary from state to state. But given the number of deployments, both of our products and other people's product around the country, I do not think it is something people can just give lip service to.

And lastly, in terms of some of the -- I think the requirements in this pharmie (ph) doing language for time of use, pricing, critical peak pricing and real-time pricing -- those all kind of sound the same to me. Can you comment on whether RF technology is able to accomplish those things as you understand it?

If you have a fixed network, RF system, it should be able to do that. The real issue is you have to be able to communicate effectively on a very frequent basis. So it's really dependent on the reliability of being able to get those integral readings on a very frequent basis and very frequent at a high level of reliability.

So my view is that we have the best way to do that with the powerline because you don't have interference issues. You don't have dropped read issues that you might have with another system. But certainly, any system that would be able to do this would have to be some type of fixed network system.

And I guess one more thing -- in terms of broadband over powerlines, can you maybe touch quickly on the compatibility of powerline technology versus RF technology as it relates to broadband over powerline?

As far as compatibility, it's really not an issue. Our system does today operate in harmony with a number of -- with other BPL systems. We've got 6 or 7 deployments, both on the IOU side as well as the cooperative side, where we have installed base and there is a BPL trial in the same area. So there's not a -- it is not an issue of not being able to operate together.

Are there any synergies between powerline and BPL? Or are you essentially on the same footing as RF in terms of -- if both functionality were employed in concert?

If you look at how they could be used in concert, either with ours or I would say with a RF system. Probably the easiest way they could be used in concert with is a backhaul mechanism. Today, we backhaul from substations. RF deployments have other backhaul areas, where we will use anything from telephone to T1 lines to cable or whatever to get the information from the substation back to a central location.

So I would say that it is pretty consistent with the type of use that an RF system would have.

Scott Blumenthal, Emerald Advisors.

Just one more question, if I may. Have you had any -- are there any continuing internal developments with related to these water and gas RF-based systems? Or are we just still talking at this point about an acquisition candidate?

We are doing that as well. In fact, as we've talked about a couple times and issued a press release on working with Badger on a short haul RF gas and water product. We have deployed that now. And in addition to that, we're looking to work with other partners as well as doing internal development of that.

Now I think it's important to point out the differentiation between what we are doing there and the type of company that we would look to acquire or the type of technology. Because what we're doing is developing product where there is already an electric meter that can interface with that gas or water meter.

What we aren't working on today is where you have a stand-alone gas or stand-alone water utility. The solution that we have today working with Badger and internally on would not address that. So that is something that would at least currently require an acquisition.

And Mr. Richey, it appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks.

I appreciate everybody's interest and continued interest in ESCO. And we will be talking to you next quarter.

That concludes today's conference. Thank you for attending.