ESCO Technologies Inc (ESE) 2007 Q1 法說會逐字稿

Good day everyone. And welcome to the ESCO first quarter conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, and Gary Muenster, Senior Vice President and CFO. And now to present the forward-looking statement and for introductions, I would like to turn the call over to Ms. Pat Moore, Director of Investor Relations. Please go ahead, ma'am.

(technical difficulty) TNG's software, the success of our product development activities, and other statements which are not strictly historical, are forward-looking statements within the meaning of the Safe Harbor provisions of the federal securities laws.

These statements are based on current expectations and assumptions, and actual results 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 earlier today, which is an exhibit to the Company's Form 8-K filed today.

We undertake no duty to update or revise any forward-looking statement. (technical difficulty) while 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 measure can be found in the above-mentioned Form 8-K, and accompanying press release on the Company's website at escotechnologies.com under the links, Investor Relations, Financial Reports and SEC filings. I will now turn the call over to Vic.

I'm going to let Gary go ahead and talk about our first quarter results and the outlook for the remainder of 2007.

As noted in the release we reported a loss of $0.05 a share compared to a positive $0.08 a share in the first quarter of last year. The primary drivers of this profit swing are laid out in detail within the release. Although net earnings in the current quarter were lower than our original expectations of breakeven, the impact of this first quarter loss does not change our sales and EPS expectations for the fiscal year in total. We continue to expect 2007 EPS to be in the range of $1.50 to $1.65 a share.

Addressing our previous breakeven expectations for the first quarter, we had a few planned revenue and profit items pushed out of the quarter, and additionally we incurred some cost previously expected later in the year. These timing items contributed significantly to our lower-than-expected operating results. And while having a negative impact in the first quarter, they merely changed the characteristics of the individual quarters within the fiscal year.

Addressing the first quarter timing items. Historically the Test business has always had some inherent timing risk surrounding the completion of our large chamber projects, which could move revenue and profit between a particular quarter or two, based on the readiness of the site where the products are being installed. With that said, and while we always allow for some delays in our planning, it is absolutely unprecedented to have five individual projects simultaneously having site preparation issues causing our projects to be delayed.

These projects are independent of one another and involve five distinct customers in locations ranging from Japan to Saudi Arabia. An example of one site readiness issue is a result of a customer originally planning to put our product in an existing facility, and then changing the installation to a new building under construction.

The other major timing items occurred at DCSI, involving over $1 million of AMR products, which we shipped prior to the quarter end, but were not received by the customers until the first week of January. Due to the contract terms, we're not able to record the related revenue and profit in the quarter. Absent these timing items, our first quarter results were in line with our internal plan, both on a sales and EBIT basis.

Our balance sheet remains exceptionally strong, as we ended the quarter with $28 million in cash and no debt outstanding. We used nearly $9 million of cash during the quarter, which was consistent with our plan, and was driven by investments in capital equipment, TNG software upgrades, and the inventory build to support the 30% increase in Q2 expected sales.

Entered orders clearly were the bright spot in the quarter, where we booked $146 million in new business, bringing our total backlog to slightly over $300 million at December 31. This reflects an increase of nearly $48 million, or 19%, from the start of the year. Of particular interest was the receipt of nearly $16 million in orders from PG&E at DCSI and Hexagram, which Vic will talk about in more detail in his commentary. All three business segments reported significantly positive book-to-bill ratios, aggregating to 148% of Q1 sales. The order momentum has remained strong through January as well.

Moving on to our '07 guidance. Our current expectations of EPS revenues and EBIT margins for the fiscal year in total are consistent with our guidance provided in November. As a continuing reminder, the Electric portion of the PG&E contract is subject to revenue recognition deferrals contingent upon the delivery of TNG Version 3.0, currently expected during the fourth quarter. Additionally, fiscal '07 includes $9.1 million of amortization related to purchase accounting and TNG software, and $2.8 million of stock option expense.

Although we cannot currently recognize revenue on the PG&E contract, we continue to incur additional indirect costs such as engineering and R&D associated with this contract and other IOUs in the pipeline that reflected in the P&L in the first quarter and in the projections for '07. Regarding PG&E deliverables, we have billed and collected nearly $7 million in the last six months related to these contracts.

Consistent with my message in previous calls, EBIT within the Communications segment will continue to be impacted by increases in SG&A. The majority of this spending is a result of our outlook for the AMI business and in our ongoing pursuit of AMI market opportunities.

In closing, we continue to expect fiscal '07 cash generation to be approximately $50 million. And we plan to spend approximately $10 million continuing our investment in the additional upgraded versions of TNG, and nearly $15 million on other capital projects.

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

I think Gary has provided a thorough review of the first quarter results and full year outlook. Given the strength of our orders during the quarter, I have a high level of confidence of our ability to meet the full year forecast. I would also like to point out that the performance improvement in the second half of the year is not just limited to our ability to recognize DCSI's PG&E contract revenue, as we will see improvement from all the business segments.

I will now provide you with my perspective of what is happening in each of our segments. In the Test segment, as Gary mentioned, we did encounter some slight site delay issues that will negatively impact the first half of this year. However, these timing issues should not prevent the Test segment from meeting their full year plan. On the positive side, the progress we're making internationally will be the primary driver of our improved second half Test performance.

We have been able to stay ahead of the competition because of our new product introductions and our physical presence in Asia. As I mentioned in the press release, we entered significant new orders in India, Korea, and China during the first quarter. Investments we have made over the several years in Asia are really paying off.

In Filtration, the improved second half performance were driven primarily by sales from orders already in backlog and continuing strong commercial aerospace business.

I would like to highlight one new program that will contribute to our second half growth in Filtration. Filtertek recently was awarded a contract by More Energy to produce fuel cell vents. The Filtertek fuel cell vents will be using Moore's Energy's Medis 24 by 7 portable power pack, which can be used to recharge a variety of handheld devices, such as cellular phones, PDAs, gaming devices, and digital cameras. Revenues associated with this contract are anticipated to be approximately $15 million over the next four years.

Looking at communications, while the impact of the PG&E ramp up and revenue recognition is obviously the significant driver of improved second half performance, we continue to see new opportunities across all businesses within this segment. We had a strong first quarter for orders, and the RFP activity remains strong. During my recent business to PG&E I was really pleased with the positive feedback they provided. We installed our latest version of TNG Version 1.6.3 over the New Year's holiday. And the product is working well.

PG&E remains very positive about the project, and are working diligently to ramp up installations this spring. We are currently installing DCSI substations, Hexagram data collection units and a limited number of endpoints. This is to validate PG&E's processes and ensure a smooth ramp up.

As mentioned in the release, Hexagram has been selected for the Kansas City water project. This is a significant win for Hexagram in that it is another large city utility, which sees the benefit of a fixed network water deployment. We believe this win is indicative of the acceleration towards the adoption of fixed network systems in a water market.

During the quarter Nexus continued to make inroads with its customer-facing energy Prism product, including wins with [Pattern Ellis Electric Cooperative], which is one of the largest co-ops in the nation; Eugene Water and Electric Board; and Puget Sound Energy. I am especially excited about the Pattern Ellis project, because they are an existing customer of DCSI, which provides us another opportunity to showcase and integrate solutions.

Shifting to the strategic outlook for Communications, it is through our integrated solutions like Pattern Ellis, PPL, Wisconsin Public Service, and PG&E where I think we offer the best value proposition to our customers. We continue to expand our portfolio of products and services to enable our utility customers to provide the highest level of customer care in the industry.

In addition to our proven and robust AMI system architectures and software, providing communication links between the utility and the home, we are now further developing the products behind the meter to facilitate mass demand response. This includes an upgrade of our current in-home display to a more functional home gateway with the ability to communicate directly with the meter and a variety of in-home devices.

We have shared our product roadmap with both existing and prospective customers, and are encouraged by the positive feedback we have received. Our goal is to provide an opportunity for customer interaction and choice in making decisions related to demand response initiatives. At the same time the system architecture will be designed to provide our utility customers with required control of demand response activities in emergency situations.

Important in the design of the gateway is providing customer choice with respect to gateway devices, such as thermostat, in-home displays, and other sensing devices. As I mentioned on our last call, these gateway devices will be capable of communicating with accepted or standard industry protocols, such as ZigBee. The gateway will be compatible with both DCSI and Hexagram system architectures, and therefore the gateway will function with the customer's choice of communication platforms.

Also, we see tremendous opportunities for our Nexus software business to provide solutions and applications associated with the gateway, which will enable more direct customer interaction in energy consumption and conservation.

In closing, I remain confident we are taking the Company in a proper direction, and we're making prudent investments which will ensure our long-term success. I would be happy to answer any questions at this time.

(OPERATOR INSTRUCTIONS). James Gentile, BB&T Capital Markets.

I was just wondering if you can articulate the differences between the TNG 1.6.3 that was installed at PG&E over the New Year's holiday and the final version, 3.0.

The major things are improved outage. It has more load control. It is a expansion of the capability to access more devices, so the whole expandability piece of it. The way I look at it, and there are a number of other smaller things, but those are the major ones. I guess the other major one is just an increased ability to automate the process, so you can go out and collect this data.

It is really -- the way look at it, 1.5 kind of got us back to what we had with the existing product that we delivered in a lot of different places. And now we're just adding additional functionality that this customer, and hopefully other customers, will need as well.

That is mostly out outage protection and load control?

Those are the two biggest ones.

And then --.

Let me add one other thing. Besides the bandwidth issues, it really is an acceleration of the speed. When you take this thing from 1 million endpoints to 5 million, the speed is critical. And the scalability of that from 1 to 5 and maintaining a faster speed is really what you're going to see in some of the coding as you move up food chain on that.

Then with regard to the order received from PG&E, the $16 million in the quarter approximately, what is that -- what does that mean essentially? We're looking for $25 million in revenue for the full year. Is this the beginning of that chunk of business being received officially, or is this weighted towards Hexagram, which is not tied to the revenue recognition issues at DCSI?

Yes, a couple of things. The way this contract works, we get purchase order releases. So we're going to get these probably on a quarterly basis. I think we'll have more insight obviously as to what they're going to be as we go forward, but we'll have releases for hardware. As far as this particular one, it was more heavily weighted toward DCSI than it was for Hexagram. But the other point I want to make, the $25 million you're talking about, that is just for DCSI within a year, so we called that number out.

And you did forecast the $60 million plus in Hexagram. How much of that again is PG&E?

Around $20 million.

Fantastic. Thanks.

Richard Eastman, Robert Baird.

Just as a follow-up, just so we can follow the order flow, can you break the $15.5 million down? In the back page of the release you talked about orders for HEX and DCSI. Is it possible to do that, Gary?

Yes, the DCSI portion of that in round terms is $10 million. I think it is $9.8 million. And then the balance of it is Hexagram.

Okay.

And then just to kind of add a little more color to James' question, Rick. I don't know if you are building this out as well. To get to the DCSI portion part of my commentary on the $7 million booked and collected, quite a bit of that -- I would say $5 million of that relates to that same revenue that is being deferred. If you take that $5 million plus $16 million, we are pretty well on track if those things get delivered and the TNG gets installed to hit our milestones. So you need to add those two numbers together.

Just what I look at the balance sheet, and I look at the deferred income number, should that number be going up versus down?

You're looking at the long-term portion because the biggest piece that is related to TNG is in the short-term portion. So it is embedded in there where it says other current liabilities.

Then just a question, Vic, on the Filtration business, and in particular at Filtertek, the guidance has stayed fairly consistent there. And we got off to kind of an auto-related slow start. Is it still very doable to get a 7 to 9% revenue increase at Filtertek for the year? Is that all coming from this new contract that you mentioned or --?

That is not all of it, but we have a lot of insight into what is going to happen in the second half of the year. So the numbers that we have laid out there, we obviously have a pretty high level of confidence in them or we wouldn't have put those out. But it really comes from across the board. This new contract does help. I think we're delivering $2.5 million or so in tooling, and then another $1 million or so in actual product. But there's growth in the other pieces of Filtertek as well.

Is there any margin issues in the backlog at Test with the chamber awards, are those at good margin or --?

As we have talked about before, the large chambers themselves typically are not as profitable as some of the other products, like the components and MRI rooms and so forth. But this delay, there won't be any impact with that. Is not like we are on-site with product waiting to install it, where we're accumulating costs. It is just the fact that those weren't -- those buildings weren't prepared for us to go do that. The numbers we have in there are still consistent with what our view for the year is.

Just the last question. Can you give us an update on the EDESUR? I'm going to massacre that but --.

You did about as well as I do. That's okay.

That was kind of tied up a little bit in negotiations. Has there been any follow-up activity there?

No, we're delivering product there.

I think there was some question as to whether that project would expand. There's some other utilities that might --?

Okay. There has not been anything formal there. It is are belief in the longer-term, it only makes sense for them to expand in the residential side of it. Obviously, we're talking to them about that, because what they're going to have all the substation equipment in place. And so it would be a matter of then going back and touching the residents.

There are two other utilities there. I don't anticipate them doing anything until we have a little more product in the field and are seeing some results. But we're going to have that project deployed here in the next six months or so. It is not a long-term project for other folks to wait and see. We're pretty happy with what is going on there.

John Quealy, Canaccord Adams.

A couple of questions. First on the shortfall, DCSI looks like about $1 million of AMR was pushed out. Was that related to TXU at all, if you can comment on that?

And then secondly on the order flow strength that you are seeing continuing here into fiscal Q2, can you give us an indication whether it is IOUs coming back after a little bit of an air pocket, or COOPs hanging tight there?

I will take the first part of that. Relative to the push out, it was all COOP-related. Obviously with the holidays in the middle there not everybody was where they needed to be and that sort of thing at the customer site. But it really related to about 30 customers, and none of them were the IOUs.

This was a lot of things that were shipped out of our subcontract manufacturers that, for the one reason or another, the last week of December were not received at the customer's location. The documentation came in after the first of the year. And the COOP customers in a lot of cases have delivery terms on the customer contracts, so we can't recognize revenue until there's a formal receipt. Nothing related to IOUs.

As far as the orders and we are seeing, if you look at the first quarter we had about $25 million of COOP. We had PG&E contract, and then we had the bits and pieces from smaller investor-owned utilities. So far -- and then so that is on the Communications side. The Test side, I think we mentioned, we had a really good orders profile there as well. And that driven primarily by this large -- or the overage at least was driven by this large contract -- automotive contract we got in India.

Going into the first quarter, we mentioned the Kansas City job, which is a good one for Hexagram. We got a couple of good sized jobs in the Test business. There haven't been any large investor-owned utilities other than the water job that we mentioned that we have gotten any input from so far this year though.

Is that one going to be 100% Hexagram in Q2 for the order, or is it going to be sort of traunches?

No, we will enter that the entire order.

The last two questions. Staying with Hexagram for a minute, you had about $400,000 of development and production startup costs. Number one, was that surprising to you, or is this sort of on plan and it just highlighted the details for us? Could you tell us how that is going at Hexagram, if you would?

Things are going well. Let me just talk about the two projects. I won't say that we had total insight into that amount. We knew we were having some cost issues, some of which kind of slopped over into the second quarter, and is reflected in our revised guidance.

But really there is two projects. One is we have upgraded and taken some cost out of our collection unit. And so that has cost us a little bit more to get that development done than what we thought. The second piece of it is -- I believe I have talked with everyone and they have insight in the fact that Hexagram also is going to provide some number of electric products. And they were integrating with Landis & Gyr's FOCUS product in the first quarter. That was a little more difficult than what we had thought.

Both of those projects are completed now though. The development is done. And so we've got that behind us, and so we feel good about the products. But it took a bit longer to get those things completed of what we had anticipated.

Lastly, Vic, in terms of the $25 million in sales and $10 million of EBIT riding on acceptance from PG&E in the Q4 period, I think you have alluded to some of the capabilities that need to get proved out in the latest version of software. But you've got seven months to do this. How do you feel you are going in terms of (technical difficulty) versus milestone? Is it the next quarter or two is critical here, or when should we hear some sort of statements from you folks about saying if you have passed the sort of hardest (indiscernible) of the milestones, or is that an incorrect way to look at this?

No, a couple of things. We obviously have a very detailed plan laid out that gets us to successful completion within the year. We have a detailed plan to do that. We have come a long way, I believe, in the development disciplines necessary to do that.

Probably the thing that gives me the most encouragement is the fact that when we put 1.6.3 in place over the first part of the year, it came up and it was working very well, very quickly. So where we have -- it has been kind of an iterative process. I would say every time we have had a release it has improved. But we put this in and got it up and running, reading meters very quickly. And PG&E did a very detailed analysis of it, ran the system themselves, wouldn't let us touch it for a couple weeks. And it performed exceptionally well.

That is the thing that probably gives me the most comfort going forward. Having said that, there is risk. There is always going to be risk with software development, but we do have a plan to get that completed this year. If that changes, obviously we would immediately let everyone know.

Patrick Forkin, Tejas Securities.

With respect -- Vic, a follow-up on the Hexagram development cost and Landis & Gyr. Is that a fixed network product or short hop or --?

It will go right on to their network. So this will be a two-way electric RF system, fixed network.

When would that be available?

We currently have some deployed. We actually are delivering that to one utility in Indiana currently. We have also provided a limited number of those to another investor-owned utility for test. So we're actually delivering that product.

Great. There were some mention of Puget Sound, I think, Energy in your prepared comments, and I didn't quite catch what you were saying there.

That was with the Nexus -- the customer-facing Nexus software solution.

Then with respect to DCSI, some of the money that is being spent on product development behind the meter, I guess the thermostats and anything you might put on appliances. Do you guys actually -- do you have any orders for those types of products yet?

The one thing that we have committed to do for those types of products is with PG&E we have to provide a real-time energy output device. So that will entail putting something in the meter that will communicate with something in the home. As I think you're aware, we do have an in-home display today that was really developed in conjunction, not only with these types of products, but really to facilitate our prepayment product that we have introduced. As far as the next generation in in-home gateway product, we don't currently have orders for those.

How much development is left on that?

It will probably be sometime next year before we have a product that is salable.

Very good. Then lastly --.

If I could, just one thing, because I know people -- a lot of people are developing these types of products. The one thing that I think that we bring to the party that makes me feel the best about our ability to be able to do that is, what you really have to have is a very reliable, very robust way to collect the time of use data, and collect the hourly data. We are proving that in a number of places. And most recently really with PPL, what we're doing with DCSI's [AS] product with Nexus software, I believe -- I'm confident that is the largest deployment where they are actually collecting and utilizing hourly data. That is really going to be the backbone of any of these other devices that go inside the home.

Very good. And then the last question, the consolidation in the industry continues here. The [Selnet] deal closed. Any comments in general on the consolidation, and specifically what the battle plan is for you guys along those lines?

I'm not sure how much more there will be. I'm sure there will be some. We continue to look for opportunities to expand our business. We will continue to do that. But we don't have anything today that we can really talk about, but we do think there are a number of opportunities for us to continue to grow our business. Obviously, organically, and we're doing that, but also through acquisition.

Any changes on the competitive front from last quarter, especially on the Electric side?

No.

(OPERATOR INSTRUCTIONS). Stuart Bush, RBC Capital Markets.

I just wanted to follow-up on John Quealy's questions about the acceptance of Version 2.0 in the fourth quarter. You mentioned that would it take a couple of weeks of testing with the Version 1.6.3 at PG&E where they just tested out. Should we expect sort of the timeframe? I guess my question comes to at what point in the quarter do you need to absolutely deliver it by to get it accepted by the end of the quarter?

That is a variable. Obviously, the testing parameters that they're lying out can be measured in days or weeks. Obviously, our internal plan is we're not going to come charging up to September 29 and hope the thing gets in on time. I don't want to show our hand in great detail, but we have laid out an internal plan that in our opinion, based on the development path we have, as Vic said the detailed plan, that we should have sufficient time to get our piece put it to allow them to test.

And as Vic was saying over the New Year's holiday, I think it was about three days to get it in and debugged. In this two-week testing period it looks like it is pretty consistent with what they are planning. And so if you just back off of that, if we can get this thing put in in the first or second week of September, I think we're comfortable. if we come charging up to September 28 -- we're not going to wait until September 28 to tell you, because again, this comprehensive plan we have.

And the other nice part of it is there is another iterative step. 2.0 gets put in here between those two. And if we can keep that iterative step on process and on plan that will give us further confidence. As Vic said, the confidence level well from 1.5 to 1.6 to 1.6.3 has continued to be favorable. And obviously our internal expectation is 2.0 will go in equally as well. And if that stays on track, then 3.0 should be on track. We will have at least one or two more swipes at the pacing items to keep you informed from the risk profile of that.

Is there some sort of metrics that you guys track as far as how it is accepted? Is there a -- does a feature set need to be a certain percent complete in order to gain acceptance or -- I just know that sometimes things do get challenging with having every little feature work in a large scalable software program like this.

There is a very detailed list of functionality that we have to provide with the system. That is very clearly understood what that is. So that is what we're working against.

Once version 3.0 is in, if we look towards fiscal '08, is there any other large development barriers to completing the remainder of the PG&E rollout?

No. What they are doing is -- it is not to say we won't continue to work on the software, because we will. But there is not any additional functionality that has been contracted for that PG&E is looking for that is not going to be fulfilled in Version 3.0.

Lastly, I was hoping you could expand a little bit on this new in-home display, this gateway appeal towards the demand response market, and how you feel that will position you against other competitors also moving into this industry? And if your product can do across platforms to other AMI implementations, and if other demand response solutions can come into yours? Is it swappable out, or is there some sort of element that ties one gateway into each system?

What we have today, again as I mentioned to Pat, we've got the conduit in a home, if you will, the ability to communicate with our meter, and now the ability to communicate with an in-home device. Our in-home device that we're delivering today is a one-way device. So what that allows a utility to do is to send information, whether it be pricing data or other information, directly to the customer on his in-home device. What it doesn't do is provide an interface between the meter and this device, or between this gateway device and other products within the home.

So what we're doing is we're going to put a communication device, a ZigBee device, in the meter that will allow it to provide real-time energy usage to this in-home gateway. Then in addition, because it ZigBee-based, anyone will be able to provide, whether it be a setback thermostat or various load control devices, or something on an appliance so that this gateway can communicate with it. So by using a common standard, we will be able to interface with a lot of off-the-shelf products and other people's products. And ours will be able to interface with both DCSI's product, their system, as well as Hexagram's.

So are you seeing this as a separate productline that eventually will contribute significantly to the business?

I would certainly hope so. It would provide -- there are additional product that would be provided as a result of this. But if you look at a lot of the filings, both in California, the RFPs that have come out from there, as well as other places across the country, this is really where the industry is going. They want to be able to get some of their savings by providing the consumer the ability to pay less at certain times of the day, or to go on certain type of demand response programs. And so this really is where the industry is going. But it will result hopefully in us installing additional product that we don't sell today.

Just one last comment, if you can come. Have you seen any indication yet of if utilities are looking to do some of these gateways -- have them installed themselves, or if they are looking to outsource that kind of project?

Ideally, they would like for the customer -- the consumer to be able to go and buy these -- some of the devices off-the-shelf, some of the controllers and things like that. That would be their ideal situation. I don't think we're far enough down the road to understand how realistic that is. But they would like to give the consumer as much choice as possible, and obviously that is what we would like to do as well.

[John Flanagan], Fundamental Equities.

Gary, are you guys on the 787 program with the filter products?

Yes, we do have a couple of components that are integrated into a couple of the systems there.

How about on a 747-8?

Yes. 747 is really the project that is the award I called out separately on there. So we have been a legacy supplier on the 747 since its origination. I don't know how many years ago that was, but a lot of years. So every time they upgrade a version and put a dash behind it our product is right along with it.

They are very optimistic on the delivery, so it should be good business.

Yes, it has been a good year or so for that business.

Steve Sanders, Stephens, Inc.

On the $62 million in bookings in Communication, I think you called out the COOP you needed about $25 million, and PG&E you needed about $16 million. The other $20 million, anything notable in there, TXU, Kentucky? What else can you tell us about that?

It is a little bit of all of that. Nexus has obviously some nice business in there. Florida Power and Light, another step up in their control program. That is probably $1.5 million to $2 million. So there is a bunch of $1 million and $2 million COOPs on the hardware side. And then Nexus made a nice contribution.

Vic, on the PG&E feedback you have been getting, I think originally we were expecting that Electric and Gas would proceed along a similar path in terms of installations. Is that still the way we should think about it?

I would say generally. Again, the gas piece of it is not as large as the electric. But their push is to get as much product in the field as they can once they get ramped up. What they are looking to do is do portions where they can deploy both products at once. I would say that for the near-term we can kind of see these two kind of march in lock step.

Would you say $10 million at DCSI, is that primarily substation equipment, is it a mix? What can you tell us?

It is a mix, but they are trying to get a good bit of substation equipment into the field, because you obviously have to get that out there first, so that as you put the meters in -- plus that is a little more time-consuming. Then when you get the meters in you can actually start billing from them.

Did you give us a rough timeline on delivering against the $16 million? Is that over three months, undetermined, a couple months? How does that look?

I would say within six months. As Vic said, with the substation equipment you are not shipping in thousands of them. And so we're going to ship them as they can put them in. So I would say it will ramp up. There will be a little bit in the second quarter, a lot more in the third, and the balance in the fourth. I would think of it as a six months kind of plan.

Some additional color on the later than planned transition of manufacturing. I think that was around Hexagram. You may have commented on that already.

I did. We just had not gotten the total arrangement with one of the subcontract manufacturers that they were going to be using. And so we were just a little delayed in getting that piece up and running, but I think we're back on track with that now.

Then beyond PG&E, the Hexagram RFP activity, water still dominating. I know you mentioned Kansas City, but are you seeing much in the way of new gas opportunities, or how do we think about that over the next year or so?

No, I would say the majority of what we are seeing is water. Most of the gas typically comes with another contract, like it did at PG&E. Most of the activity that we are seeing, that we have insight into anyway today, is more on the water side.

It appears we have no further questions. I would like to turn the call back over to you for any further comments or closing remarks.

All right. I just what wrap up by saying thanks for your interest again today. And we will talk to you next quarter. Thanks.

Ladies and gentlemen, this does conclude today's conference. We would like to thank everyone for their participation. And had a wonderful rest of your day.

Thank you.

Thank you.