ESCO Technologies Inc (ESE) 2008 Q3 法說會逐字稿

Good day and welcome to the ESCO third quarter conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, and Gary Muenster, Executive Vice President and CFO.

And now to present forward-looking statements and for introductions, I'd like to turn the conference over to Ms. Pat Moore, Director of Investor Relations. Please go ahead.

Good afternoon, everyone. Statements made during this call regarding the timing and amounts of fiscal 2008 and 2009 expected results; cash flow and net debt; the timing and success of PG&E contract negotiations; future contract awards; the timing and amounts of expected Aclara RF gas products; the success of AMI pilots; success in international markets, 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 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 statements, whether as a result of new information, future events or otherwise.

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 third quarter results press release issued earlier today, and found 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.

Thanks, Pat. Given where we are in a fiscal year, and considering the recent volatility in our stock price, I thought it would be helpful to take a slightly different approach with my commentary in this quarter's call.

I'll provide a few comments related to PG&E and on the balance of the business, followed by Gary, who will discuss the financial highlights for the quarter and the year. And then we'll open up for questions and answers.

First of all, I'd like to address the recent churn regarding PG&E and the status of their MI deployment, as there has been a lot of discussion recently about what decisions have been made and what impact these decisions have or will have on ESCO.

My current perspective remains consistent with the message that I've communicated previously, and is based on the following information. I've had several recent conversations with senior management responsible for the AMI project. This information has been substantiated by internal formal communications within the customer organization. And this perspective has been validated by the customer's ongoing testimony to the California Public Utility Commission.

The bottom line is this -- PG&E has made no quantity commitments to our competitor beyond an estimated 150,000 units. The quantities ordered is similar to the 188,000 Aclara RF electric units ordered by PG&E earlier this year. Currently, we are well into our contract negotiations with PG&E regarding Aclara's RF electric solution, and we are confident this new contract will be finalized very soon.

Additionally, we continue to negotiate to resolution of the power line systems contract. We hope to have this resolved over the next few months.

Regarding PG&E electric, I want to reiterate that we do not have any PG&E electric product assumed for the remainder of '08 beyond what has been ordered. And we have none in our outlook for fiscal 2009. And we will not assume any additional electric revenues from PG&E until we receive a formal quantity commitment via purchase order. As I have said for months, any PG&E electric business is pure upside to our outlook.

Additionally, we continue developing enhancements to our RF electric product to provide the most robust solution available to PG&E, as well as other large utility customers. It is important to note that Aclara is not standing still in the product development area, and we're confident that the additional functionality we have in the pipeline, along with our proven networking capabilities, will allow us to continue to win our fair share of new contract awards.

Switching to the gas side of this project, as you saw in the release, we continue to book orders and deliver significant quantities to PG&E for their gas deployment. To date, we have received orders for over 1.6 million gas units, which represents about 40% of the total 4 million unit deployment. Based on my recent conversation with senior management validated during the PUC testimony, PG&E does not have any plans to change vendors on their gas deployment. They continue to be very pleased with our system performance and advanced functionality. It is my belief that the calendar year '09 will see a major ramp up in the gas units deployed at PG&E.

To wrap up on PG&E, I'd summarize by saying that all of the Aclara products ordered and delivered to PG&E have performed as committed, and the benefits the customers has realized have been positive, and they continue to utilize the system.

Moving on to the rest of the business, I would like to highlight some of our recent strategic accomplishments, because I firmly believe that as a result of these actions, ESCO has positioned itself for success today and well into the future.

Strategically, we have dramatically improved our overall growth prospects and profitability over the past 12 months. This began by divesting Filtertek, which was a low growth, low margin business with exposure to several challenging end markets. And we replaced that revenue with Doble, which is a high growth, high margin business, which participates in a fast-growing utility services sector. Doble's end markets are very large and the growth opportunities resulting from the aging infrastructure, as well as the somewhat untapped international electric utility marketplace, is very exciting. We will continue to pursue international opportunities, both organically and through accretive acquisitions, such as LDIC, which we announced earlier this week.

LDIC gives us an opportunity and distribution platform to broaden Doble's reach overseas, as well as giving us a chance to bring LDIC's state-of-the-art products into the domestic market through Doble's extensive customer base.

The result of these M&A actions is that we have significantly enhanced our Utility Solutions margins and our filtration margins, while expanding our international footprint.

On the AMI front, we continue to invest in new products and advanced technologies, which has allowed us to demonstrate significant progress in broadening our offering of AMI solutions to ensure future growth in this large market. Throughout 2008, we significantly expanded our AMI group's international market efforts by focusing on Central and South America, which we strongly believe is going to be a very large market for us for a long time.

Utilities we're actively engaged have expressed a strong willingness to move forward with some level of AMR/AMI deployment over the next six to 12 months. And the number of total meter end points in these areas is very large. We have also recently won our first AMI pilot in Europe, and we are active in discussions with several large utilities in Asia and other parts of the Far East. While Asia may be a bit slower to develop, compared to South America, the number of meter end points where we are involved is also very large.

Finally, I would like to highlight a few recent wins across the Company, which will benefit our future growth. At PTI, our first Airbus contract, worth up to $150 million over the next 10 years; at VACCO, our continued success in a crew exploration vehicle; in Test, our recent win in India with NATRIP; with Aclara, our success at Idaho with our power line solution; the $68 million New York City Water project, which represents the largest AMI water job in North America; our recent selection by the City of Toronto for their AMI water solution; our selection at Baltimore for an RF electric and gas pilot; our ongoing success in gaining several additional international pilots; and finally, the fact that we've added nearly 50 new AMI customers to our Aclara business so far this year is quite impressive.

Despite a challenging economic environment, I am very encouraged by our current position in all of our end markets, and I'm convinced that we're in a better -- we're better positioned for meaningful growth across all three business segments. I remain focused on our goal, which is to deliver on our commitments to increase shareholder value.

Now I'll turn it over to Gary, so he can cover the financial results and the balance of our outlook for '08. In addition, he is going to share how we see '09 shaping up and where our growth is expected to come from in each segment, as we finalize our plan for next year.

Thanks, Vic. As noted in the release, adjusted EPS from continuing operations was $0.60 a share, excluding the $0.10 of non-cash amortization related to TWACS NG software and purchase accounting related assets.

GAAP EPS was $0.50 a share, which represents a 67% increase over the prior year third quarter, in spite of a more challenging economic environment. When looking at the third quarter from an operational perspective, I am very pleased with our year-over-year results, which I have detailed in the release.

A few highlights include -- total sales increased 37%, with the Utility Solutions Group growing nearly 74% and filtration up over 15%. EBIT and EBITDA increased over 70% with the Utility Solutions Group EBIT more than doubling during the quarter. We entered nearly $160 million in new orders and have increased our backlog again during the quarter. This order amount included another $31 million of PG&E business, followed by an additional $7 million of business in July. This brings the total cumulative PG&E order book to 2.2 million units with an aggregate value of $140 million.

For the comparable nine month period of operations, you will note that every operating metric for the year-to-date period was up substantially over the prior year, in spite of higher interest expense, additional amortization, and a higher effective tax rate in fiscal 2008.

My only additional comment here is to highlight the Utility Solutions Group performance compared to the prior year, where sales increased 86% and EBIT was up nearly 250%. On the balance sheet, I remain very comfortable with our current capital structure, and am pleased that we continue to reduce our net debt outstanding, which was about $208 million at June 30, resulting in a 2.3 times leverage ratio.

Regarding cash flow, net cash provided by operating activities on a continuing ops basis was over $51 million, and we expect to generate over $20 million in cash from operations during the fourth quarter.

Entered orders continue to be a bright spot with our book-to-bill being over 100% again, bringing our total backlog to $283 million at June 30. I mentioned the PG&E orders a few moments ago, but additionally, I want to point out that these order numbers do not include the recent announcements of nearly $150 million in new business opportunities, including as Vic mentioned, the Idaho Power, New York City Water job, City of Toronto, and the recent win and Test at NATRIP. All of these wins certainly validate our enthusiasm towards our growth prospects going forward.

Moving on to our guidance for the balance of '08, we are holding our outlook for sales, and we narrowed the range of EPS as we were getting near the end of the year. Our EPS range represents a 40% increase over the $1.28 GAAP amount reported in 2007. We expect EPS, adjusted for certain intangible assets and purchase accounting items, to be in the range of $2.22 to $2.27 a share.

Next, I'd like to share some preliminary thinking about how we see fiscal '09 and its plan beginning to shape up, which we will have finalized for the next call. Vic just addressed a few of the specifics on our strategy, and now I'll provide a little more color around our growth opportunities as we currently see them.

Our filtration businesses continue to show very solid growth prospects heading into '09, led by our commercial aerospace business. The number of new aircraft being placed in service continues to grow year-over-year at a rate of approximately 5%. And we don't see this changing as we enter '09. While some may view higher fuel costs as a potential detriment to our growth in this area, we are seeing somewhat of an opposing situation. As the airlines continue to seek out more fuel-efficient planes to replace their aging fleet, we will benefit from this on both the OEM side and the aftermarket side, as we have more content on the newer planes compared to the planes that are being taken out of service.

For example, at several airlines, MD-80's are being retired and replaced with 737's, where we have a significantly higher content amount per plane. Additionally, our space business at VACCO continues to win more than its fair share of new awards. As Vic mentioned, the crew exploration vehicle, which relates to the shuttle replacement, has already been approved by NASA and we are beginning production and design next year. These situations in filtration bode well for us in growing that business.

Moving to the Test business, while facing some economic challenges domestically, we continue to see significant growth opportunities in Asia and other international markets. Based on our current bid and proposal activities, which remain very high, Asian customers such as NATRIP and others do not seem to be slowing down their planned spending on new product design and development, which will benefit us in the near-term and the long-term.

Within Utility Solutions, we will continue to benefit meaningfully from Doble, where next year we will realize a full 12 months of high margin results versus the ten months that we owned them in 2008. Besides the favorable calendar impact, we continue to see reasonable organic growth at Doble, supplemented by the recent LDIC acquisition.

On the AMI side, we fully expect to see a meaningful ramp-up of gas products in '09 to our West Coast customer. Along with the start-up of both Idaho Power and the New York City projects, which both will be incremental to our fiscal '08 performance.

Our co-op and muni outlook continues to be solid with sales levels expected to be consistent with or slightly above the current year. In addition, we fully expect that certain of our international AMR/AMI market opportunities will begin some level of deployment in 2009, which again, will be additive when compared to this year.

Wrapping up the AMR/AMI discussion, I want to highlight the fact that our Aclara fixed network water solution seems to be really taking a dominant market position in the US, evidenced by the recent large wins in New York and Toronto, and based on current opportunities where we seem to be taking the leadership position. Keep in mind that the water market is very large, and is also in the early stages of its migration towards a fixed network solution. We fully expect to continue to capitalize on this situation with our RF electric -- I'm sorry, our RF water product.

Finally, as Vic mentioned -- and while we do not believe this will be the case, we have not included any PG&E electric product sales and profits in our outlook and again, this will be purely upside.

So, in summary, we are very pleased with our financial performance in fiscal '08 and we see our financial outlook as we enter '09 looking very solid, as we have numerous opportunities across all three business segments, which will help us realize meaningful growth.

I'll be happy to address any specific financial questions to this in the Q&A. And now I'll turn it back over to Vic.

Okay. 0Those are our prepared remarks, a little longer than normal, but I wanted to make sure everybody had a clear perspective of what was going on and how we saw the future position of the business. I'd be glad to -- we'd be glad to answer any questions now.

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

A couple of questions. First on PG&E, just roughly what were the sales in the quarter? And have you started shipping the Aclara RF for the electric?

On the sales side, we shipped about 350,000 units, worth about $23 million.

And to answer the second piece, we're just starting to ship those products to -- that product to PG&E.

In the fourth quarter.

Right.

Okay, and then Vic, I think you indicated that you expect to see a pretty significant increase on the gas side there in 2009. Just as a starting point, what are you expecting for 2008 in terms of gas shipments, just rough dollars?

Do you have that, Gary? I think Gary's got it. Are you talking about the dollar amount on the gas side?

Yes. Yes, just by year-end, what's our starting point to think about in '09?

Yes, what we've shipped so far through the quarter-end was about 700,000 units and another 100,000 in July. And so looking at July, let's just assume that that's the trend and call it 100,000 to 125,000 a month. And so that equates to about 6 million or 7 million a month. So we should do somewhat consistent with what we did in Q3, which is like I said, the $22 million to $23 million.

Okay. And then, Gary, on the numbers, it looks like you guys had a pretty sizable Q-to-Q sales increase, but gross margin was down 100 bips, maybe a little bit more than that. Is that mix or is there something else going on there?

No, it's mostly mix. I would say looking across the business segments within filtration, VACCO had an outstanding quarter in the shipments of their defense spares, Q3 of last year versus this. And in some cases, there's 10 or 15 points of margin. And then as you look at the mix in the Test business, we ended up selling more large chambers and less components. And there's probably a 15% to 20% margin differential there. So there's nothing unusual that warranted our concern other than the volatility of the mix that we see on a quarter-to-quarter basis.

Okay. And then a couple of others. On the other expense line, $0.5 million, anything unusual there?

No, nothing out of the ordinary.

Okay. And then it looks like based on your revised tax rate guidance, that you picked up maybe $0.10 or so, which would imply that something slept relative to what you were expecting a quarter ago?

Yes, let me address that. Some of the -- it's back to the Test business a bit -- some of the chambers that we had thought were going to be able to recognize revenue on or they were going to shift in the third quarter, shifted out a quarter. I would say that was the majority of it. And most of that comes back in the fourth quarter.

Okay. All right. And then just two final questions and then I'll get out of the way. Vic, you referenced your '09 outlook. I guess are you talking about the $3 cash number that you guys put out there several years ago, which would tie to something in the $2.50 to $2.60 range now, since you haven't really issued anything formal -- is that what you're referencing when you mention nothing in PG&E electric as it relates to your '09 outlook?

Well, the point I was trying to make with the PG&E is I think there's been a lot more activity and a lot more concern about whatever is going to happen at PG&E. I told you what I know today. And I don't know what is going to happen tomorrow or next week or next year. So, I had to make that clear.

But I wanted to make sure everybody understood what we knew, first of all. And second of all, I wanted to make sure that people knew that we had already made that assumption -- that while certainly our thought is that we're going to get more of that product. We want to make sure everybody understands there's not an assumption of that in our forecast, both for the remainder of the year beyond what we already have or going forward.

As far as '09, as you know, the $3.00 that we have out there was a target. And I think as we've talked about to a lot of folks over the past six months or so, that's more of a cash EPS now. And we don't know that we're going to get exactly that number; it was the target we were shooting for.

So we're not prepared today to give guidance for '09 other than to say currently based on everything we see and as Gary shared with you, that we do anticipate certainly our earnings being better next year than they are this year.

Okay. And on the international side, did you add a couple of pilots since the last call? Can you just essentially repeat your comments there? What's new? What's incremental to what you talked about in the past?

We started another pilot in South America. And as I mentioned, we did win a first pilot in Europe.

Okay, all right. Thanks a lot.

Kevin Maczka, BB&T Capital Markets.

Gary, just a question about -- going back to some of your commentary from the call last quarter, I think you used the term -- confidence factor -- a number of times. And I'm just wondering, as you sit here today, three months forward, you're maintaining your revenue guidance for the year. You're trimming the high end of your EPS guidance by $0.05. And your outlook is still very positive for next year. But I guess, as it relates to Q4 and the next year, just give some more color around that confidence factor that you've got now.

Yes, I would say, and Vic touched on it, looking at Utility Solutions and filtration, we understand the delivery schedules there. And the majority of it's in our control, it's manufacture and deliver. But within Test, there's so many projects currently in the works and they're spread all over the world. And there's quite a few situations that honestly, just get outside of your control.

For instance, if you're putting a test lab at Sony over in the Far East, and if the parent building isn't fully constructed in time for the application of our product to be installed, then that can slip at a month or two.

And so I would say everything that we need to hit our numbers is in backlog today. We are not sitting here today hoping that something gets booked and shipped. It really is, I'd say, the only thing that wavers the confidence from 100% is the fact that within the Test segment, there are certain aspects of those large chambers that are outside of our control.

And so if there is any risk in Q4, it's going to be something that doesn't happen in September but shifts to October. And again, it's very important to understand that the things we need to do are in backlog. Okay? So sitting here today, I remain very confident. But the caveat is, let's say if two or three of these chambers move to the right, you're talking a couple of pennies; you're not talking $0.20 and $0.30. And again, whatever moves to the right doesn't impact cash flow, because of the way we get deposits, down payments and milestone payments along the way. It's purely a revenue recognition issue that could possibly move to the first quarter. And that's why we narrowed the top end of our range.

Okay, got it. And then shifting gears over to margins, as I look at the three major business units you report and some of the prior guidance that you've given for full year margins, it would kind of suggest that we're not really on pace to still make those milestones, particularly on the utility side and the Test side. And I guess the Test is more understandable with some projects being delayed. But can you just give some more color around your margin expectations for Q4 and as it relates to '09?

Let me just make a general comment and then Gary can follow up. I mean, again, you have to remember that fourth quarter is going to be our biggest quarter by far. And so inherently that's going to result in higher margins really across the board, because our plan is to have a very solid up fourth quarter.

Yes, and taking that forward -- and again, I'll just lightly touch on the three segments -- but within filtration, where we're at, at about 17% EBIT and roughly $31 million in sales, again, relative to the individual components we have there, looking at what we have in backlog and yet to be shipped, we can see just sequentially more than a 10% increase in sales in Q4 infiltration. And so in round numbers, that's $3 million or $4 million additional sales that we expect in the fourth quarter. And with that -- we tend to run 50% to 55% incremental margins on that.

So, as you get up to the volume levels we're talking about for Q4, you have a substantial amount of the margin that falls right through the bottom line. So the expectations infiltration for Q4 are north of 20%. Okay? So when you blend it all together, we're very confident on what our original expectations were there.

Again, on Test, the sales increase from Q4 versus Q3 is about 40% higher. Because again, the majority of these chambers are well into the construction phase, they're all in backlog, and it really is just a matter of between the customer situations on-site and other things, can we deliver somewhere in the mid to upper 40s in revenue. And we were just down there a week or two weeks ago with the Test folks at our July ops review. And again, there's some risk in things moving a little bit, but the risk is not substantial.

So when you put incremental revenues through that Test business and somewhere in the neighborhood of $45 million to $48 million relative to $33 million, you're covering your fixed costs so substantially that you're going to have an unusually high margin pull-through in that situation where it would not be unrealistic to think of this at as -- at 14% to 15% EBIT coming through Q4 on that high margin.

Looking at Utility Solutions, again, we expect not just as I mentioned earlier, what's going to be going on with the PG&E gas, there is also some positive momentum at Doble. There is positive momentum through the other aspects of this. And so we expect sales there to be up potentially $15 billion to $20 million more over the $93 million that we've booked there.

And so, again, when you pull that type of volume through, and again, it's all in backlog, it's being manufactured as we speak, and as long as we get it out, which we don't feel a lot of risk, you're going to pull through a pretty substantial margin on that incremental sales there.

So, it's a longer answer than you might have been looking for, but you have to look at the three pieces and you look at the volume and the incremental margins that pull through at these volume levels, it's not -- we're not sitting here with our fingers crossed, hoping that every star lines up to hit these numbers.

All right. No, that's fine, Gary, long is good. I appreciate the color. But just one final one, if I could. If you could just describe a little bit to us in more detail, the utility orders that you received, nearly $100 million in the quarter. And I guess $31 million of that was PG&E related. But I thought, Vic, I heard you say you'd signed up some 50-odd AMI customers year-to-date. Just describe the size of maybe some of the orders that might be coming from them or the Doble portion of that order book.

Yes, well, the thing I was talking about with the 50 new AMI customers, those are strictly an Aclara group. So as I remember it, I think there were about 22 of those were on the electric side, the majority of them being co-ops, but also Idaho. And then we add the Aclara RF piece, where we had a number of smaller water jobs and we also had New York. We also had Toronto. We also had the pilot at PG&E. And then I think there were about seven new software customers year-to-date.

And I think maybe the other number you were talking about is really kind of subsequent to the end of the quarter; we've entered about $115 million total of orders. And that's New York, Toronto, Idaho, and then this large automotive chamber in India that we entered.

And then the Doble business, I think, has been very consistent at something over $20 million a quarter, as far as orders there. And most of that ships -- I won't say always within a quarter, because they have these long-term contracts, but that's pretty consistent business thus far.

Okay. And how big was the Toronto business again, Vic?

That's going to be somewhere around $30 million, maybe a bit larger.

Okay, guys. Thank you.

Carter Shoop, Deutsche Bank.

A few quick questions here. For PG&E, when we talked about that business accelerating in '09 versus '08, will we see an acceleration versus the current run rates? Or are we just going to see the year-over-year increase as a result of staying at existing shipping rates?

I think it's a little of both. And keep in mind that the ramp-up on the gas side really didn't begin in earnest until about halfway through the second quarter. And just to kind of put some numbers around it, in the first quarter, we did in round terms about $10 million. In the second quarter, we did about $10 million; and then we ramped up to, as I said, the $22 million or so and we're on track for that.

So if you just assume it's flat with Q3 and Q4 at $20 million to $22 million, you're looking at an $80 million -- four quarters at $20 million versus something in the neighborhood of $60 million this year. But -- so that's assuming a normalization of today's run rate which is consistent Q3, Q4, so if there's some additional acceleration, which is what our belief is, you should be able to see something incrementally better than that.

So you're comparing 12 months or four quarters out of $20 million, versus two at $10 million and two at $20 million, so you get that benefit working in your favor plus the opportunity to accelerate on top of the $20 million, if that's in fact what PG&E's intent is.

Yes, but the thing we don't know today -- and I don't disagree with anything Gary said -- but the thing we don't know today is how quickly are we going to be able to deploy those. And so they're in a ramp-up phase just like we're in a ramp-up phase in deploying those products. And so they need to be able to, I think, prove to themselves that they're going to be able to deploy at the same level they're being delivered.

And that leads to my next question. Do you have visibility in regards to how many gas and electric meters they've shipped of yours versus how many you've shipped them?

I think that -- you mean as far as installed? I think the number of installations that they have is something over 750,000. And that's gas and electric.

Do you have a breakout, by any chance, between the gas and electric?

I think they've deployed around 200,000 electric and the rest would be gas.

In regards to Doble, it appears that business is maybe tracking a little bit behind original expectations. Is that the case? Or do you usually see a pretty large seasonal uptick in the September quarter with that business?

I would say it is tracking really right on what we thought. I mean, it's the only issue I think we had to (inaudible) mark-ups and things. But they're really right on or maybe even just a tad ahead of where they were anticipated to be at this time. Typically, their big month is in December. So we don't see any big tick in the fourth quarter, but they're right on track with what we had projected.

Yes, they -- Carter, in Q2, which obviously was the first full quarter, they did a little over 21. And this quarter, they did right at 21. So I wouldn't think of that as missing expectations by any stretch.

I think what we had said when we made the acquisition that they were going to be doing about $80 million in sales on an annualized basis.

Okay, maybe my notes are incorrect -- I had $80 million to $90 million for 10 months. I'll go over and double-check that.

That would be --

That's all I have. Thank you.

Okay.

Patrick Forkin, Tejas Securities.

I was wondering if we could drill in to these water projects a little bit. First, on New York City -- what does the ramp up look like there? When are you guys going to start shipping in meaningful quantities? And what's the project period there?

Yes, our understanding is that we will be shipping some product in the first quarter of '09. Maybe even a little bit in the fourth quarter of '08, but what we'd be doing there really, fairly small amounts, some of the data collection units to start getting the infrastructure in place. What they say now is that -- and I think what they've said probably is they plan a three-year deployment.

Okay, you're talking about your fiscal quarters?

Yes.

Okay. And then on Toronto?

I think that was probably going to be more -- probably our second quarter of '09. And their deployment schedule currently is a five-year deployment.

Okay. And then on Idaho, is that a shorter deployment period there?

I think it's going to be a three-year as well.

Okay.

We're starting to ship some substation equipment out there in the fourth quarter as well.

Okay. And then in some of the proceedings or the press on New York, there was some discussion about exploring using the Hexagram or Aclara network to look at metering -- you know, picking up the electric meters. Have you guys been involved in those discussions or do you have any input there?

I don't think that's anything we're really in a position to talk about right now. I mean, obviously, once we get the infrastructure in, any meters that are resident underneath that would be Canada, so, for us to pick up.

Okay. And then Vic, in your prepared comments, did you mention that there were maybe some other significant water engagements that you were involved in?

There's a couple of others, yes, that we're looking at.

Okay. Would they be on the same scale as New York and Toronto?

Probably not as big as New York but they would be more in the Toronto type size.

Okay, very good. Thank you.

Ian Fleischer, FBR Capital Markets.

Just -- could you touch on the recent acquisition announcement and how that kind of folds into Doble and the benefits with respect to that offering?

Sure. There's a couple of things. And quite honestly, this was an acquisition candidate that Doble had identified, really and talked to us about during the process, the acquisition process with Doble. But LDIC is a company that does very much what the same types of products that Doble does. They do really primarily partial discharge, though. And that's a test process that's much more common in Europe, although we're starting to see it more in the US as well.

So what it does for us is it really expands the product offering we have. It gives us a more euro-centric product, if you will, as well. It also gives us a base in Europe and obviously what we want to do is accelerate our international growth, because that's where we see the best growth.

So having a well-established company, this is a company that's been around for quite some time in Germany and in Switzerland, that has a good distribution network throughout Germany, I think is going to help us. Also, they have an excellent product development group there as well and access to good engineers. So we will do a lot of the European product development in that facility or with that group.

So what it does, it really expands our products. It expands the opportunity in Europe and allows us, I think, to accelerate that opportunity. This company is pretty well known at Doble. They've been working with them for a number of years.

Okay, great. And so when you think about your Utility Solutions segment overall right now, are there other -- do you think there's other opportunities, acquisition opportunities, to continue to build out that segment? Or do you feel that you're pretty much at where you think you'll be?

I think we'll continue to look for things. I would say that particularly on the Doble side or that side of the business, they continue to look for opportunities. And it's really how we're going to expand internationally, and in some ways, we already have, as I have mentioned before, a number of international locations. If we can get a little more critical mass there in some of these fast-evolving countries, we would really take a hard look at that. We're doing a little bit of the old-fashioned way with a smaller group and growing around, but if another -- if other opportunities like LDIC present themselves, we certainly would take a hard look at that.

Okay. Just finally, if you could maybe just rank your near-term opportunities on the AMR/AMI side, internationally with respect to Central South America, Europe and Asia?

Yes, I'd say certainly that the best near-term opportunities are in Central and South America, without a doubt. You get the small foray into Europe. But I would say probably the next one would probably be in Asia, because we think we've got some good opportunities there; having some good discussions with customers there. But certainly Central and South America remains at the top of the list.

(OPERATOR INSTRUCTIONS). Chip Moore, Canaccord Adams.

It's actually John Quealy. Just a quick follow-up on PG&E and the outlook in the next couple of quarters in terms of the booked orders. Does the revenue mix or recognition change, given what I think PG&E had in their deployment plan about having the network infrastructure fully deployed in '09, and the meters continuing on past that time? Does that impact the price per end point for you folks in the next couple of quarters, as you help fulfill that goal?

No, I don't -- hey, John, this is Gary. I don't think you're going to see any really differential. If the mix between the data collection units and the end points tilts one way or the other, obviously the relationship of the unit price is obviously a big difference between a meter and a collector unit. But there's a lot less collector units.

So you can still continue to think of this in the neighborhood of $55 to $60 of a blended end point product. So I don't see anything as the quantity differentials come through that's going to impact anything there.

Okay, great. And then lastly on Doble, can you comment a little bit -- and I'm sorry if you did already -- about any cost optimization efforts, where you folks are in that way? And also, as you look to '09 -- fiscal, that is -- what's your outlook for Doble organically, ex-acquisition? Do you think it's an up year or product cycles coming or what's your thoughts there?

Let me answer the second part of it first. We do think that we will have an up year at Doble next year over this year -- ex the acquisition, obviously, that's going to help it. We anticipate some growth there organically as well.

As far as the cost optimization, we have made the decision to stay in the facility that we're in. We're doing some relay out of that. We had already -- they had already started some outsourcing of some of the project and we're going to continue to do what they had set out to do. But we're all going to relay out the plant that we have in place to make sure that we are optimizing that as much as possible.

It is running as a stand-alone business. We don't intend to change that. So, you know, you're not going to see a consolidation that you would see if we were consolidating plans or something of that nature.

Great. And just one other -- again, I don't know if anyone asked this -- but in terms of the momentum, seems like there's a lot of chatter about STAR Networks and AMI versus Mesh, and can you comment about what you're seeing in terms of RFPs in characterizations of Mesh versus Point?

I think that everybody we're responding to, a large number of our RFPs, I think the Mesh folks are doing the same thing. And I think it's just going to be a matter of saying how each of these systems really work at the end of the day. I think there's some inherent advantages to having a point-to-point system. I think there's some misconception that (technical difficulty) [at] point-to-point, you've only got one opportunity to make that connection. And the reality is the way our systems are set up, that we typically will pick up a signal from a meter by two or three, sometimes even more data collection units.

So, it is a very robust system, in that you're not counting on just one line of contact between the meter and the DCU. The other thing -- and I know people probably get tired of hearing me say this, but I will continue to say it -- I mean, this point-to-point system has proven its scale. And it's proven to be able to handle the data loads that are required and it's proven to be able to scale up. So I would say that's, again, the biggest advantage that we have today.

Great. Thanks, guys.

Rick Eastman, Robert Baird.

Vic, is the pilot that you are deploying in Europe, is that on the electric side?

Yes.

And is that -- presumably, that's RF?

It is not.

So it's power line?

Yes.

I thought there was some issues with the technology being deployed in Europe just from the number of transformers and some physical issues?

It varies from place to place. I thought you were going to ask about the [50 hertz] and we've been working with a partner on that. But no, this is an opportunity where the technology should work very well. So, that's yet to be seen, but there were several other companies who were down selected, but we were selected to do a pilot there.

Okay. And then any update on Encore in terms of that remaining territory? I know they chose another vendor to take a quick look. But is there any additional business there that either came in through a booking or you expect soon?

Well, we have not gotten any additional bookings there. We remain in discussions with Encore. And I'm not really sure how that's going to play out. As you probably know, people that follow the Texas situation, I would say the PUC has gotten very active there. There's been a lot of discussions about what the final requirements are going to be. And I think until some of that gets shaken out, we're not going to have a clear vision on what our full opportunity is there. But we are engaged with them and I would say we've had folks down there probably three times in the past two months.

I see. Okay. And then just one last question. On the New York City water project, is that $68 million, how does that come through the P&L and what profit margin? Does that include any install? Are you the project manager on that? Or does that come in with a typical hardware/software margin?

It's a straight hardware sale. And obviously, the software that's engaged in that project is not one like we had historically with the new developments at TNG. So, it's a units of delivery system. We deliver the product -- can't recall who the installation company is off hand, but that's not our situation.

So we're -- it's going to be a straight, standard commercial delivery product. I'm not allowed to comment specifically on the margins other than to say that they're consistent with the run rate that we have there. So some of the noise that might have been tossed around that we bought into that system I would say is absolutely untrue.

Can you just give us -- how many end points is that?

875. About 875.

Yes, I think that -- yes. 875 is what New York called it.

Okay, great. Thank you.

Patrick Forkin, Tejas Securities.

Just a follow-up to Rick's question on the European pilot. Vic, did you say you're working with a partner on that project?

Yes.

Can you give us any --

I'm not sure we've ever disclosed that. And I'm not sure -- there's no benefit to doing that. I would just tell you it's a meter manufacturer outside of the US that we've been doing some other deployments with. And they were -- kind of took the lead on that. But it's a company we've been working with for several years, and have been a great product with probably two years ago.

I wasn't going to ask the name because I need you wouldn't give it. But I was just kind of curious as to the size and timing on that? The number of end points in the pilot?

It's a pretty small pilot. I would say it's like 3,000 end points or something like that. It's not going to be deployed probably in the next four months or so. They really haven't given a strong indication on when they're going to go forward, but I think a decision would be made some time in '09.

Okay, very good. Appreciate it.

You bet.

That concludes today's questions. Now I'd like to turn the call back over to Mr. Mike Richey.

All right. Well, this is Vic Richey, and I appreciate everybody's attention and interest today. I think we have a lot of good things going on. I think we've made a lot of progress over the past 12 months. And I look forward to finishing up this year and having a strong '09. So thank you very much.

That concludes today's conference and thank you for attending.