Itron Inc (ITRI) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the Itron Inc. fourth-quarter and year-end 2007 earnings conference call. Today's call is being recorded. For opening remarks, I would like to turn the conference over to Deloris Duquette. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. On the call today we have LeRoy Nosbaum, our Chairman and CEO; Steven Helmbrecht, our Chief Financial Officer; Malcolm Unsworth, Chief Operating Officer for Actaris; and Philip Mezey, Chief Operating Officer for Itron North America. The earnings release that we issued today includes an outlook for revenue, earnings and adjusted EBITDA for 2008.

We will also talk about other issues on today's call that could be forward-looking in nature. The outlook and other forward-looking information we are providing is based on what we know today and is subject to a number of risks and uncertainties. I encourage you to read the forward-looking disclosure in our press release, which alerts you to a number of factors that can cause a difference between our expectations and our actual results. You should also refer to our 2006 Form 10-K and other related SEC filings for more complete disclosures of specific risks and uncertainties related to our business. We do not assume any obligation to update or revise forward-looking statements, although we may do so from time to time.

Our earnings release includes non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. Schedules reconciling GAAP to non-GAAP financial information are included with our press release and are also available on Itron's external website.

Today, we're going to follow a format that is similar to last quarter, where Steve will to start the call with the financial highlights discussion, then Malcolm and Philip will each give operational updates for their respective businesses, after which LeRoy will wrap up our prepared remarks with some of his thoughts about 2008. We will finish with a question-and-answer period.

I would also like to make you aware that with this call, we posted a presentation on our website under the investor section that includes pertinent points that each officer will discuss today. Now I would like to turn the call over to Steve Helmbrecht, Itron's CFO.

Thank you, Deloris. We have provided a lot of detailed financial information in the release and Malcolm and Philip will each review performance for their operating segments. So I will provide a financial review of the quarter and the year compared to the guidance we issued in the third quarter. Then I will focus on corporate expenses and some items below the operating income line, and of course, spend some time on our debt, cash flow and EBITDA results.

So let's start with the results for the fourth quarter. We had record revenue of $481 million, which was $47 million or 11% higher than the third quarter. The $47 million increase in revenue from the third quarter came from both business units. Itron North America revenue was higher by $24 million and Actaris core revenue increased by $7 million. Also, Actaris benefited from a $15 million increase in revenue over the third quarter because of a stronger Euro. Our revenue was about $30 million higher than guidance we issued in our third-quarter earnings release.

Why were our revenues so much above guidance? Certainly, the $15 million impact of a stronger Euro contributed to the increase, and I would like to point out that, although the strong Euro contributed about $15 million in additional revenue, it also affects cost of sales and operating expenses. Therefore, the stronger Euro contributed less than $1 million to operating income.

Non-GAAP operating margin was 12% for the quarter, which is about where we expected it to be. And in total, the $30 million in higher revenue positively impacted the quarter by about $0.10 per share. Although the effect of foreign currency changes was minimal to operating income, we saw a negative impact of the stronger Euro in our other income and expense line, primarily in the form of unrealized losses due to do the FX effect of our inter-company balances. Inter-company interest payable balance in our UK subsidiary was higher than expected. We're waiting for the receipt of a tax clearance certificate and will settle the balance upon receipt, which should mitigate most of this risk going forward. We recorded unrealized and realized losses, which, in total, negatively impacted the quarter by about $0.09 per share.

We had an effective non-GAAP tax rate for the quarter of 6% and a rate of 25% for the full year. The lower rate was due to several onetime benefits during the quarter, including a onetime tax benefit related to authorization of the tax structure we set up when we closed the acquisition. As well, we had a onetime benefit during the quarter related to consolidation of our Brazilian operations. In total, onetime tax benefits added about $0.10 per share for the quarter. For 2008, we believe that a full-year non-GAAP effective rate of 28% is appropriate at this time, as we do not foresee similar onetime benefits next year.

Our diluted share count included 1.4 million shares related to our convertible notes, as our average stock price during the quarter was approximately $89 per share. These notes will continue to be a factor in dilution going forward. To give you an idea of the effect on dilution, we have included a graph that depicts stock price on the bottom and related dilution on the left. This should help frame the potential impact for those of you developing models.

EPS of $0.81 for the quarter, and $2.81 for the year, was somewhat higher than our guidance due to the combination of factors I just discussed. We had a very good quarter from a cash flow perspective. We sold our former headquarters building, which generated about $7 million in cash proceeds in December and we used these proceeds to pay down debt.

During the quarter, we made a total of $36 million in debt prepayments, which means that we made debt prepayments during the full year of $67 million and total payments, including scheduled payments, of $76 million. Although our balance sheet reflects a net reduction of only $32 million in debt. The difference is due to revaluing the Euro and pound sterling debt using higher year-end FX rates due to the depreciation in the U.S. dollar.

Adjusted EBITDA for the year was in excess of $225 million, which was about in line with our expectations. Cash flow from operations for the year was $133 million or $38 million higher than 2006. Cash flow from operations in the fourth quarter of $44 million was very strong. Altogether, we generated about $93 million in free cash flow during the year, quite an improvement from the $63 million we generated in 2006. We ended the year with a ratio of 5.5 times debt to EBITDA and an interest coverage ratio of 2.5 times. Keep in mind that these ratios are calculated based on full year EBITDA for Actaris and includes the add-back of approximately $13 million in stock-based compensation expense. As discussed previously, we are focused on generating cash flow to pay down bank debt.

I look forward to future calls to update you on our progress in 2008. And with that, I would like to turn the call ever to Malcolm Unsworth, COO for Actaris.

Thank you, Steve and good afternoon, everyone. I'm going to talk about a number of topics including Actaris results for both the quarter and the year, the effect that the stronger Euro was having, move on to discuss some of the activity and momentum we see in the Actaris operating segment and our customer base and finally, close with some thoughts and our expectations for 2008 and beyond.

So let's start with the quarterly results. Revenue was $303 million. That reflects a $22 million increase over the third quarter. The higher revenue consisted of about $7 million more in increased sales and about $15 million positive effect from the stronger Euro. All segments were strong with electric sales at about 40%, gas 32% and water sales about 28%, which is similar to Q3. With the strong Q4 sales, Actaris contributed about $834 million in revenue to Itron's results for the year, higher than we originally expected. Some, of course, due to the strengthening of the Euro, but also due to increased sales. Pro forma Actaris revenue for 2007 was about $1.2 billion, which reflects an 18% increase over full-year 2006 Actaris revenue of $981 million. Keep in mind that the pro forma amounts are in U.S. dollars. Core Actaris revenue growth in 2007 was about 8%, and the remainder of the growth was due to the stronger Euro. An 8% growth in a traditionally 5 to 6% growth business is phenomenal. In general, we're very pleased with both the Actaris performance and the dedicated employees throughout the Company.

Margins were 1.4% lower than the previous quarter. The decrease was due to product mix, lower factory absorption, and additional reserves for profit-sharing. Operating expenses of $70 million for the quarter are $5.6 million higher than the third quarter. About $2.3 million reflects a true increase in expense mainly due to year-end compensation plans, higher commissions and audit fees. The remainder is due to the strong Euro in the fourth quarter. All in all, as Steve indicated, the Euro did not impact Actaris's non-GAAP operating income materially.

Meter shipments have continued to increase in the time we have owned Actaris. Total meter shipments in the fourth quarter were $4.4 million versus $4.1 million in the third quarter, reflecting a 7% increase. Increased shipments were primarily driven by sales to electric and water utilities.

Actaris non-GAAP operating margins were 11.6% for the fourth quarter, somewhat down from the second and third quarters due to higher indirect cost of sales and operating expenses, yet non-GAAP operating margin for the year was a healthy 13.5%. Bookings for the fourth quarter were $298 million.

For the entire year, Actaris had a book-to-bill ratio of 1 to 1, which is reflective of the metering business. As we have stated before, as Actaris moves towards more project-based business, the book-to-bill ratio will vary from 1 to 1 on a quarterly basis.

So let's talk a bit about the business. I have now been part of the Actaris organization for almost a year, and we have made excellent progress in a lot of areas. We have been through the IT and financial integration and are beginning serious work on our Section 404 compliance efforts for Sarbanes-Oxley. And at the same time, we continue to exchange technology, systems, and purchasing synergies. We are focusing our attention within each business line on AMR and AMI systems. Because Actaris has traditionally been a meter supplier, the structure of electric, gas and water business lines has served them very well. However, as Actaris customers become more focused on advanced metering and systems, it is becoming increasingly important for our group to develop further AMR, AMI expertise, and we have, therefore, realigned the business line organizations, incorporating a more focused systems, services, software, project management and consulting groups. We showed progress during the quarter on a number of fronts.

Prepayment gas and electricity metering opportunities are developing worldwide, including [Azure Bijon], Germany, Poland, Russia, and Malaysia, to name a few, as well as our continued solid business in the UK and South Africa. In the UK, we have launched our new prepayment product, EnergyPoint, that improves payment methods for end customers. In addition, we won a four-year contract to provide prepayment managed services for 600,000 meters to EDS energy in the UK. This brings the total number of Actaris managed meters to well over a million, again a very nice progress with products and services beyond traditional meters.

We have received orders in the Middle East for multi energy automatic meter reading projects, that include water, cooling, electric, and gas meters and all associated system management. We have secured a significant order in Sardinia for our new higher accuracy residential water meters. And in general, the number of RFIs for smart metering continue to increase.

One of the largest AMI projects in Europe is electricity to France, which has announced plans to replace their install base of 35 million meters with advanced smart meters by 2017. High-level plans call for testing of technology and consortium partners to occur throughout 2009 and deployment of about 300,000 meters to be tested in the field through 2011. Rollouts of the 35 million meters would begin in 2012, and we are participating in these trials.

I would like to wrap up by talking about 2008. We don't give guidance by operating segment, but I want to leave you with some of my thoughts on the year ahead. Pro forma revenue growth for 2008 over 2007 is expected to be about 5 to 7%. This is not really different from what Actaris has been experiencing over the past few years, but the mix is changing, driven by higher meter sales in both current and new geographical areas, but also by increased AMR, AMI, and prepayment metering products and services. We would expect margins and operating expenses to be similar to 2007, but with increased investment in R&D. However, we do not see a material change in non-GAAP operating margins in 2008 from 2007.

So what could make our results better? And conversely, what could affect them negatively? First, on the positive and negative sides, the exchange rate. It is great when the Euro strengthens. However, we will be affected if it weakens. We could have more sales of prepayment and AMR meters than we are currently projecting. However, this is largely limited by the pace in which utilities evaluate and decide to move forward. On the negative side, we could see costs impacted by our raw materials, including copper, but we have tried to mitigate this effect.

All in all, we feel very positive about the year ahead. Actaris people continue to be infused about the acquisition and the potential that it brings, and I will update you on our progress as we go through the year. And with that, I would like to turn it over to Philip.

Thank you, Malcolm and good afternoon, everyone. I will now give an overview similar to Malcolm's for Itron North America. To begin with, we had a great quarter. Revenue exceeded $177 million, the highest quarterly revenue Itron North America or legacy Itron has had in our thirty-year history, which was a nice comeback from the performance and concerns in the third quarter. You may recall that we talked quite a bit about the slowdown in the North American market on our last call, which was primarily driven by delayed AMR shipments and decisions related to AMI adoption. We subsequently talked about the fact that for the first time in our recollection, the decline in new housing starts has had some effect on shipments, not only Itron shipments, but total shipments in the industry. Because there has been some confusion about this lately, I would like to emphasize that we are acknowledging the drop in housing and the subsequent minor effect on regular meter shipments, but the majority of our revenue in North America is driven by AMR and AMI projects, not regular electric meter shipments.

Looking at the fourth quarter, you can see that we reversed the downward trend we were experiencing in the first three quarters. In fact, meter shipments for the quarter were 39% higher than they were in the third quarter. Additionally, the number of meters shipped with AMR was more than double the shipments in Q3. Part of this increase was driven by our ability to deliver more meters and modules in support of our ongoing AMR deployment projects, such as Mid-American and Trinidad and Tobago. And while Q4 is traditionally a higher quarter, we experienced a very strong surge of year-end buying for both meters and modules, including a very strong quarter in Canada. These year-end buying patterns tend to fluctuate and are, therefore, very difficult to predict.

Margins for the quarter were in line with expectations, despite a $2.1 million reserve of some inventory related to components for the first version of our OpenWay product. Although we had to take a charge, this is actually a positive because we are further along in our development and cost reduction efforts than we expected to be, and we will release our second version of the product in advance of shipping any meters in volume. Bad for gross margin this quarter, but good for shipments for those meters in 2008, as they will be based on a lower-cost version of the product.

Operating expenses continue to be higher than last year, but are higher for the right reasons -- increased focus and efforts on research and development, which will pay dividends in the future.

So for a quick recap of North America's financial results for the year, revenue was down from 2006, but only by $14 million or 2% for the year, despite the tough $100 million comp we had with Progress Energy and any effect we may have experienced from lower new housing starts and delayed AMR decisions. Gross margins were in line with 2006 and operating margins were a presentable 12%, even though we continued to invest heavily in R&D and sales efforts for AMI.

So now, let's talk about what's going on in the North American market in general. The highlight of our quarter was our announcement in December that we had been awarded the AMI contract with southern California Edison for their SmartConnect program, which includes the deployment of over 5 million new AMI meters. This is the largest contract in the history of Itron, which we believe validates our product strategy, our strong positioning in the market and momentum in the industry itself. We are very excited to be in this industry during this time of important changes and the adoption of advanced metering, but with a caution that we expressed on the last call. There will likely be a number of announcements for this advanced technology in 2008, ours and others, but there will be limited revenue until 2009 and beyond. This is not new information, just a reminder.

We had a good bookings quarter in North America of $150 million. Total INA bookings for 2007 were $638 million, which reflects a book-to-bill ratio of about 1.1 to 1. Keep in mind that we did not book the entire $480 million SCE contract, only that portion of the contract for which we have received firm purchase orders. This means that we still have about $470 million left in revenue under contract not reflected in backlog related to this contract, which gives us nice visibility into 2008 and the next few years. As a reminder, we expect the SCE contract to deploy starting in 2009 and ending in 2012.

We were also very pleased to have booked eight meter data management deals in the fourth quarter, which we see validating our strategy that the move to advanced metering will drive increasing awareness of the uses of critical energy data to help solve a wide range of pressing utility and end-user challenges.

So what does this all mean for 2008? Although we do not give guidance for our individual operating segments, it's appropriate to give some color around our expectations and what could go right and what could go potentially wrong. We have been asked quite a bit about the impact of housing starts on our business and the potential for future negative impact. We don't think we will be affected in 2008 beyond anything we may have already experienced in 2007. Although housing starts are down, we feel that we have already factored the downturn into our business plan.

The next question is likely about the economy in the U.S. If we do enter a recession, will our business be impacted? Although no one can guarantee that we will not be affected if the U.S. enters a recession, if you look at historical patterns, utility capital spending has traditionally not been impacted in recessionary periods. And in fact, at times, capital spending by utilities picks up during times of decreasing interest rates. Utilities tend to plan on and spend to a longer-term vision of needs. And because they are, by and large, in a regulated industry, they are not as impacted by short-term changes and trends in spending patterns. If there is a recession, operations and maintenance budgets are more likely to be affected than capital budgets. So while we're not projecting any negative impact on our business related to the economy next year, we will certainly watch and monitor what our customers are doing and saying.

So where does that leave us? We think that 2008 will look a lot like 2007 for the first three quarters, driven primarily by shipments against normal AMR projects and meter shipments, both for new housing and replacement meters, as well as our continued focus on building our software, consulting and services businesses. We expect our Q4 revenue will trend up from the flatter first three quarters for two reasons. The first being that we traditionally experience a higher Q4, as you have just seen, but also because if you look at the rollout plans of those utilities that are planning on deploying AMI, shipments will begin to ramp up modestly in the fourth quarter of 2008. If projects are delayed for some reason, it could impact the increased revenue that we are expecting in 2008, but should not materially affect the core business itself.

Margins are expected to remain in the low 40% range for 2008. We had talked about initial AMI shipments having lower margins, but we do not expect this to impact our overall INA margin. This is helped to some degree by our positioning and timing of the second version of the OpenWay product. We expect operating margins will also look similar to 2007. We will continue to invest in R&D in 2008 and are comfortable with that margin range.

So I will close my comments by again saying, what an exciting time it is in this industry. We will be watching the progress at AMI and AMR systems across our customer base, both for those projects that have been announced and for those that are expected to be announced, and I look forward to discussing further opportunities and progress with you on our next call.

And with that, I will turn it over to LeRoy.

Thank you, Philip and Malcolm. Great quarter. Good afternoon, everyone. Thank you for joining and your interest in Itron.

Let me start today with a few comments about year-end results and then I will move to guidance for 2008. First of all, it was a very nice quarter. Actaris and INA both had very good fourth-quarter sales, moved product through factories and turned in great results, much of it during holidays, which is always a challenge. As well, our cash flow is great, which means Itron people were not only watching cash, but working hard to collect it. Revenue of $1.464 billion for the year, almost $30 million more than I'd guided to you on the last call. Frankly, North American utility fourth-quarter spending surprised us. I did not expect the level of use it or lose it money that showed up in December. And Philip has already talked about housing starts.

Earnings for the quarter were also above our own expectation, which produced a year-end result of $2.81, again, above the guidance I gave you at the end of Q3. While not all of the goodness created by $30 million in additional revenue dropped to the bottom, for the reasons Steve, Malcolm and Philip have explained, we did do better than we expected.

So the question comes, have we lost visibility? I would answer that question no, we have not lost visibility. However, there are some things that are very difficult to predict, and at the end of Q3, there was a lot going on. With housing, with AMI projects, year-end spending or not, that made prediction very difficult. As well, forecasting of our Actaris business is still being tuned, and they are adjusting to quarterly focus.

One more point on '07 results, our strong cash flow. Free cash flow of $93 million during the year, which allowed us to make debt prepayments of $67 million. We raised a lot of money to acquire Actaris. We are paying the debt off ahead of schedule, thanks to our operations around the world.

As we move into 2008, our visibility at both Actaris and Itron are quite good for the front half of the year. At Actaris, the second half should be normal, so visibility there is good. At Itron North America, AMI clouds the back end of '08 somewhat, which I will talk about more in a moment.

In general, 2007 was an extraordinary year for Itron. True, North America was flat, and while that is discouraging, if we look at '07 in isolation, that is the wrong perspective. Water AMR continues to grow. Gas AMR continues to grow, and in fact, had its best year ever for Itron in terms of gas AMR shipments.

From a revenue perspective, electric has slowed down in North America, as electric utilities transform themselves and prepare for AMI, which should produce an extraordinary '09 and beyond as evidenced by the $480 million contract we closed with Southern California Edison, which I believe substantiates the validity of our OpenWay product and the huge R&D effort that is bringing it to fruition.

Itron closed the acquisition of Actaris in April of 2007, fulfilling two of our broad strategy goals, expanding our global footprint and positioning Itron for a technology migration in the electric, gas and water meter business worldwide. While our revenue jumped approximately $1 billion on an annual basis, our potential increased even more when we think in terms of AMR and AMI around the globe in the years to come. As Malcolm has detailed today and in the last earnings call, integration goes well. We are beginning to find synergies we knew existed and some that have been pleasant surprises. We are exceptionally pleased with Actaris.

Let's turn now to 2008. We are guiding to revenue at 1.87 to $1.91 billion. At midpoint, an approximate 29% increase over 2007. Non-GAAP earnings per share at $3.20 to $3.45; at midpoint, an 18% increase on the bottom line. So with a 29% increase on the top, why only an 18% increase on non-GAAP bottom line? Where is the other 11%?

There are about 1.9 million more shares, 33 million in total, for 2008. Our tax rate in '08 will be 28% versus 25% in '07 and variable compensation expense is going up in a few areas.

As I said earlier, I feel very good about the whole year for Actaris and I think we have good visibility into the first half of the year for Itron North America. The second half for INA is affected by the rollout of AMI projects and pilots. We have been reasonably cautious about timing on projects, so at this point, I would call guidance fairly middle of the road, not optimistic or conservative, showing a relatively flat year for INA in revenue, but with the potential for great contract signings that will build business for 2009 and beyond.

At Actaris we look for growth in the traditional 5 to 7% range, as Malcolm mentioned. We've talked a lot today about currency fluctuations. Let me remind you that generally, we manufacture locally in the countries we serve. Accordingly, currencies going up or down do not generally help or hurt our day-to-day operations.

So what does 2009 and beyond look like? The base business at Actaris continues to grow at 5 to 7% per year. INA business in water and gas continue to grow in the mid to high single-digit range. The electric business in North America materially affects the outlook. As you know, Itron has signed a contract for 5 million points of OpenWay at Southern California Edison, which will deploy from 2009 to 2012. We are currently talking to more than 20 other utilities, some large, some medium-size that are also considering AMI in some form over the course of the next five years' period of time.

We have been fairly public about CenterPoint and competing for business at Detroit and San Diego and their intention in aggregate to deploy another combined 10 million points over a similar period of time.

Will that return North America to double-digit growth rates? The math would bear that out. Be cautious, for the numbers get increasingly large. And while the growth in revenue dollars is very exciting, as the numbers get bigger and bigger, double-digit growth year-on-year gets increasingly difficult.

I will say again, 2009 and beyond have the potential for exciting growth in North America. On the horizon, similar potential begins to occur in Europe, and with time, the rest of the world. As we go through 2008, the picture will continue to develop and we will share our thoughts as we go along. With that, let's open for questions.

(OPERATOR INSTRUCTIONS). John Quealy, Canaccord Adams.

Good afternoon, folks. Congrats on the quarter and the year. And thanks for all the detail on the slides here. LeRoy, can we come back to the question of visibility and a bit of a surprise this quarter at least in Itron North America. Can you dig down a little bit deeper if you could on -- you did give us a little forward look on electric being a little bit weaker, vis-a-vis gas and water, but can you comment -- what was the most surprising as we went through Q4 as the North American market seemed to have that last gas spending or I think you called it use it or lose it. It seems like --

John, just that, to be honest about it. I never thought we would see the level of fourth-quarter buying that we saw from utilities. And frankly, a testament to Philip's folks, it all came in December. We had a huge December.

And as we ended Q3, I was somewhat concerned that we were going to continue to have a slow fourth quarter, a little bit too cautious perhaps. And so I was some pleasantly surprised as we started moving through Q4. It held up nice in the first two months and then December was just gangbusters. As well, we got the good fortune in Canada to receive a very nice order for commercial industrial meters that was a material order, that we were able to get out and ship. And so that helped the quarter as well.

Now when you are looking into '08, can you give us any sensitivity around AMI and guidance? I know Philip talked about Q4 being some modest uptick in volumes for deployment in '09, but can you frame the sensitivity? We've seen a couple of utilities, most notably CenterPoint. We're waiting for regulatory filings there. How does that impact your outlook on timing in terms of any sensitivity you can give us on guidance?

John, as you know, we've been very cautious about forecasting volumes in 2008. In fact, in public filings you see even a large contract like Southern California Edison has very modest deployment targets in 2008 on the order of 10,000 units. And so, we are anticipating only as we have said, a modest revenue contribution in '08 from AMI. So it's in the -- I mean I would just say at really low levels.

And my final two questions, first, for LeRoy, how has the utility market responded since the Southern California win, whether it's a change in RFP structure, whether it's a change in rigor in terms of RFP proposals? What has changed in your mind at least in Itron's competitive view, with winning that So Cal business this past quarter?

Sure. A couple of things. For one, I think that from a public utility commission perspective, a lot of commissions sort of look favorably on the fact that a lot of regulatory review is occurring in California, Southern California Edison, by going out for that large contract with us sort of substantiates the value of what's going on there. I'd say the other thing that's going on is Southern California Edison has been very public about the rigor with which they investigated Itron and our potential competitors. And so a lot of utilities are talking to Edison about why they made the decisions they made. I think for some, that will give comfort. Others will choose different directions. We're not going to get all the business, but I do think Edison is providing a substantial base of information to their fellow utilities and they are sharing it quite openly because their fundamental perspective is we're moving in a new direction; we want other utilities to move with us so that we build a market here and we have a very strong market going forward. So I think it's just been great. We're noticing that, John, all over.

And I'm sorry. Just one follow-up to that. In terms of capacity, LeRoy, how many simultaneous AMI jobs of the sort of So Cal CenterPoint Detroit type scope could you folks handle with your current footprint right now?

Capacity, John, we are in great shape. As we've said on previous calls, we have added capacity -- just raw capacity, machine capacity in Oconee. We continue to add capacity during 2008, and we have floor space to continue to add capacity should we need it in 2009 and beyond. So from a factory perspective, we will take all the simultaneous projects that somebody can muster.

I think we have a different issue frankly with installing and commissioning new AMI systems. In that regard, we can handle four, five, six of those in a simultaneous startup mode. The good part about this is none of this is coming to fruition all at the exact same time.

And the real issue there is these are highly complex systems and sure, we could add more people that can do all of that kind of complex work, but ultimately, you'd have a lot of very talented people standing there with little to do. So I think projects are phased out nicely, quite frankly, in the United States and I know Malcolm is looking to Philip to add some expertise quite frankly to what Malcolm is beginning to face in Europe in terms of deploying large-scale systems and exactly how to go about it. So I'm feeling real good right now, John. We have spent a lot of time in Q4 and a little bit in Q3 adding some very talented systems folks that can take that project stuff forward for us.

And Steve, for my last one, on the cash flow, are we looking for a similar type number, especially when we're talking about any debt prepayments and scheduled payments this year in '08?

Yes, John, we provided some information in terms of our forecasted cash flow and also CapEx. Next year we're looking at about 60 to $65 million in CapEx, which is higher than the $40 million this year, but it is planned, and some of that actually relates to some AMI-related activity that we pushed out from a 2007 to 2008 overall. And in terms of overall cash flow from operations, we're looking at about 180 to $200 million this year, which would net out to free cash flow between 120 to $140 million.

Great. Thank you, folks.

Stuart Bush, RBC Capital Markets.

I know you've talked about what you see as a limited impact from currencies since your COGS are locally currencies as well, but can you talk about any hedging strategy you may employ to minimize further variability to your U.S. dollar results?

Sure, Stuart. This is Steve. Let me start by saying that we have hedged a large percentage on the balance sheet or running through the P&L FX risk, in that both our Euro debt and sterling debt have been effectively hedged out completely. That leaves the potential for some movement in the FX related to inter-company balances and transactions. And in the fourth quarter, there was a pretty significant move relative to trend between sterling and the Euro and we had some inter-company balances related to our overall strategy of lowering our cost of capital and also our effective tax rate by having inter-company balances, and that produced some unexpected loss in the fourth quarter. As I mentioned, we have worked to mitigate that risk going forward so that there will always be some amount of FX risk related to some of this just trade payables inter-company. But this related more to an interest payable, and I said, again, that's more isolated and onetime and we wanted to highlight that.

So if you step back and look at that then, we really have hedged out a high percentage of that.

And then, I just would close by saying that our original strategy of borrowing in three tranches in euros, sterling and in U.S. dollars, was done quite intentionally to effectively match a ratio of what we are seeing EBITDA coming from in those currencies; and that has had some mitigating effect in terms of overall movement in the Euro or in sterling relative to the dollar. So we, overall, are quite pleased with the hedging that we've put in place. We did have some unexpected movement in the fourth quarter and we are working to address that.

And the hedging is in the financial markets?

Yes. I mean for example, we engaged in -- we have a swap in place that effectively -- interest rate swap that effectively translated the UK debt to U.S. dollar debt. And I will highlight that our U.S. dollar debt is floating rate on LIBOR as well as the sterling debt, so we have seen some goodness recently in the form of the reduced Fed funds rate and reduced LIBOR. So again, we put together a pretty full plan in terms of what we wanted to do and executed on that and it's primarily using financial markets or a declaration of debt as hedge as well.

Okay great. And if you guys can talk -- (technical difficulty)

You just cut out. Did we just cut out or did you?

(OPERATOR INSTRUCTIONS). Mr. Bush? You are open again. I apologize.

We're sorry. You cut out. We couldn't hear your question.

Yes. My second question was if you could talk a little bit more about the second generation of OpenWay and with the charge that you took there. And if the second generation is more around feature enhancements or just cost reductions in the design? And how this flowed through to the higher margins than we had expected to see in the first large win at Southern Edison?

Sure. It's Philip. We fully expect to release a number of generations of this product, as you have pointed out, both to enhance features and to drive down our manufacturing costs. And the fact is that the product is evolving very quickly and this R&D investment again is coming along very, very well. So in fact, we are a bit ahead of schedule in terms of driving down some of these costs and had prepurchased some inventory around a specific technology that has already been outdated as a result of really the innovation that is going on. So in this generation that's coming out, we are, in fact, reducing our manufacturing costs. But I would also say adding features at the same time.

I would point out that the feature capability of OpenWay is both in the heart of our platform itself, but one of the great innovative things about the platform is that it has downloadable firmware and a very strong firmware platform, so we are adding features as well at the software level, and we will continue to do that.

Is there any way you can quantify the cost reductions in a percentage basis that you have made between the first and second generations and what you see going forward as well?

Stuart, it's LeRoy. Yes. We can obviously quantify it. We're not going to do that publicly. We seem to have our competitors listening to this call more often than I would care to have, so I will take a [buy] on that one.

Okay. Thanks a lot.

Michael Horwitz, Pacific Growth Equities.

Nice quarter and thank you for the transparency. Just I want to clear up one point that I'm sure I will be asked tomorrow. So with the strong fourth quarter, it still appears with your Q1 guidance that momentum is quite strong just the same. So even though there was a bit of a budget flush, when I look at the midpoint of your Q1 guidance, it's not that far off from what you just reported, especially when you factor in the currency exchange benefit.

Yes, Michael, I will say that both groups, the Actaris group and Itron North America are looking at a first quarter that we're very pleased with and we've scrubbed those quite well, and quite recently, and so I'm very comfortable today with the quarter guidance we're giving, and it's going to be a good start to the year.

Good. Fair enough. So moving on to AMI, so all of us are waiting on San Diego and Detroit, but you mentioned quite a few other discussions you're having. How should we see this play out? Are we going to hear from more utilities besides those two we're all waiting on through the end of the year as they make their AMI decisions?

Well I made the comment, so I'll answer the question, although Philip, feel free to add if you feel so. We are talking, as I said, to over 20 different utilities right now about AMI. Some of those discussions are going to end up with RFIs and RFPs and ultimately orders, and I think as the year progresses, you are going to hear more about several of those. Some of those discussions, quite frankly, because the discussion and the work around an AMI project is quite protracted, as we have all seen both in California and elsewhere now. Some of those won't come to fruitful orders or even RFPs until sometime in 2009.

Now while that sounds a little stretched out, it's perfect because we're going to generate in this industry, not just Itron, a huge amount of interest through '08, and it's going to continue through '09. And so it's sort of latter both interest and revenue starting in '09 out into the future, which I'm frankly, excited for Itron about and I think it bodes well for the industry as well. So you are going to hear a few more major announcements I believe as we go through 2008 here. And you're going to keep hearing them as we go into 2009.

And then, when you don't win or when we do hear about other people winning, is it a technology decision and something about your offering doesn't fit into that particular region or into that particular utilities setup and so therefore your offering isn't a good fit? And could you ever see yourself continue in a joint venture and bring on additional partners so that you can open up some of those opportunities?

Yes. First of all, there are a number of projects out there that we would classify as AMR plus, that really don't meet the full functional footprint of what we initially designed OpenWay to address. And there are other projects that have a very strong tilt towards a smart grid focus, where we may, in fact, work with partners in order to address other concerns. So yes, we are absolutely considering broadening the channel by working with partners; that is fundamental to the design and the name of the product, OpenWay, that it is a modular product that allows us to work with others.

Great. And so maybe in some instances, where some of us may not have contemplated your ability to operate at certain utilities, that could change as you decide to increase your partnerships or your channels as you say?

Yes, it would.

Absolutely, Michael.

Last question. Could you just give me some qualitative statements on how something like a Southern California at us and beyond just deploying endpoints, will affect revenues even beyond those deployment schedules, so additional revenue opportunities within that kind of region and additional functionality services and what have you, and maybe what the tail looks like after these deployments occur?

Well, the component beyond endpoints, of course, there's infrastructure, there's significant implementation services associated with the project itself. And then, in a number of these instances, there are opportunities for ongoing operations. However, that is not currently the case with the Southern California Edison contract.

When you deploy a project like that though, Michael, I'm sure that you know this, there will generally be follow-on orders for growth or replacements within those businesses. So generally there are orders that follow on that are outside the project, but it's that kind of nature.

Right. Good. Thank you.

Steve Sanders, Stephens, Inc.

LeRoy, I wanted to see if you could expand a little bit on your synergies comment between Itron and Actaris, and maybe distinguish between opportunities you are seeing on the sales side versus the cost side?

Well, let me say that on the cost side, we knew going into this that we were going to do some very nice things just because of volumes or raw materials, whether it's copper, which continues to go up every day and I'm pleased to say we are actually spending far less on copper today than the open market purchases are having to spend; or circuit boards or plastic resin, where, again, we've been able to affect some serious decrease before Actaris acquisition prices. So good stuff there, and we expected that. We didn't expect, and we still haven't looked for or found or even tried to, synergies from say we have overlap here or overlap there and we're going to get rid of people or factories. It isn't there and I don't think through time we will find it there. But we have been pleased, to the points you made, at some sales opportunities. And so we have begun to look not only at the things we thought about, but quite frankly, I'm quite pleased with some interest we're getting in prepayment metering in the United States by AMI customers. And the work that the Actaris people have done on that particular system is really quite advanced and quite exciting. And I think some of that kind of technology moving to the United States is going to pay dividends for us. Maybe not in 2008, but as we look at some of the things we are doing and Philip's group is doing with AMI, I think we're going to see some real benefits and some real opportunities from the prepay technology that's gone on at Actaris.

I also think we see some things in some particular meter areas, and I'm going to be a little careful about specifics here. But there are some meter products in water and gas space that are tied to AMR that could get really interesting in the U.S. And so we have been looking at that on a combined basis and thinking about how we might extend that capability because we think that could really not only increase our meter business in the U.S., but our AMR business in the U.S. as well, so we're doing some of that work there.

And then one of the things that Malcolm is sort of challenging Philip to do is to help him with some system aspects of what we do every day in the United States and help the folks at Actaris in Europe and elsewhere get better at that so that we can be more effective in selling systems and we can be more effective in delivering systems not only in Europe, but around the world. So those are the places I sort of think of to that question.

Okay, that's helpful. And then on the Actaris side, you've given us some good detail on the seasonality in the Itron business. But for Actaris, is there much in the way of quarter-to-quarter seasonality either in overall revenues or in mix?

Yes, it's Malcolm. The seasonality is interesting. In the third quarter, you have a lot of countries that actually go on vacation. So that sort of goes down in revenue. Fourth quarter is reasonably seasonal, but at the same time, you do have vacations in the last two weeks of the year. On the heat side of the business, in the first quarter, there's a phenomenon in Germany where we have requirements that meters last a particular period of time and the clock starts on those meters January 1st, so we see significant orders in the heat business, which is a good part of our business in Q1. So, yes, there is some seasonality with our business as well. So I hope that sort of answered your question.

Yes, there is a little bit of seasonality, Steve, but it doesn't vary dramatically from quarter to quarter and they don't have a distinct quarterly revenue pattern like Itron North America does, I guess I would say.

Correct.

Okay. And then Malcolm, could you just revisit your comment about the contract with EDF in the UK? I just didn't get exactly what that was.

Yes, it's actually EDF UK Energy. We have a prepayment business that we take care of in the UK, significant prepayment business. And we manage the service for that for the utility. And we have a back office that we do all of the work for them. And we don't actually talk to the end customer, but the utility refers to us when there's a question on prepayment. So it's a significant piece of the business going forward, which is different than what we've done before on just regular products. It is actually a service business with recurring revenues going forward.

Okay. And then Philip, could you just bring us up to date on what you are seeing on the fixed network side in the water business? I think you guys have a few trials that are coming up on their six to 12-month anniversary. Just generally wanted to hear your commentary on the water side.

Sure. We do see continued interest in fixed networks on the water side. We have two pilots that we have spoken about in Dallas and Detroit, that are coming along and are entering a period of -- we hope expansion, and as well as using those pilots as references for other business that we see developing in 2008. And Leroy has spoken to the continued growth in the water business and that is one of the sources.

Okay. Thanks very much.

Carter Shoop, Deutsche Bank.

I wanted to start off with a question for Malcolm. Could you help us better understand how Actaris is going to market with its AMI offering? In North America, obviously, Itron has a one meter, an OpenWay meter. In Europe, we have a more fragmented market, where you need specific types of meters for different locales. Can you talk about how Actaris is looking to penetrate the European market? Do you expect to have several different types of AMI meters, or is it going to be more like the North America market, where you will have an off-the-shelf product for the entire European market?

Well, just looking, if you just talk about electric only for a second, electric only, if you look at the various countries, specific countries require specific technologies. If you look at Sweden, for example, they're very strong with GPRS. If you look at Denmark, they are the same, and they have started to make deployments there, which we are active in those areas, where we have a GPRS offering. If you look at France and you look at some of the other locations, they want a PLC offering, and we have a PLC solution. So we offer PLC technology. We offer GPRS. We offer solutions that are not -- it's a bit technical, but it's called a daisy chain offer off our master meter. And then at the same time, if you have dual fuel, you have areas like the Netherlands that would like to do PLC measurement. They haven't made their decision yet, but they have dual fuel with gas as well. So you have to have electric measurement and then gas measurement. And in certain locations in the Netherlands, they want to go with water. So they do have water, gas and electric which is a full offering that we have. So there's PLC; there's GPRS. So we have a full suite of the solution, including some of our software packages that we tied together, including an MDM solution, that we have, which is our IEE meter data management services that we've got. So we have a full offering of AMI. Each one of these locations or these countries are quite large, and they are quite slow to take off. But as the European council starts to make significant changes, I think they will start to see some changes going forward in the next few years.

So I could talk all day. There's 27 countries in the European Union and each one of them is going to do something slightly different. Italy did theirs, so, as I say, I could talk all day. It's different.

Okay. That's helpful. It seems like there are a couple countries which will be announcing a new AMI contract within the next year. Do you feel Actaris is well positioned for wins in that geography now? Or is it going to be a few years out until we were able to integrate some of Itron's technology into their products until Actaris becomes a little bit more cost competitive and technologically competitive in that market?

Well, I'm not certain which country that you're talking about, but we are piloting some of our projects today with a couple of utilities. And there's a number of consortiums that I talked about and we are participating in each one of those. So yes, it's not going to happen overnight. They take their time. I think to the latter end of 2010, is a good time when you will start seeing some significant changes going forward. But we are participating in many of those consortiums.

Great. That's helpful. Thank you. Is there a chance we could get a breakout for the book to bill by division for the quarter?

I think that they talked about that in each of the scripts. Their bookings number. Malcolm booked $298 million against the $303 million and Philip booked $150 million against his $177 million.

That's helpful. Thank you. And then the last question, when we look at the 20 utilities in the North America market who you are having discussions with in the AMI market, is there any way to maybe hedge, about how many of those 20 utilities you think will be coming out with an RFP in the next year? Would you be willing to go that far?

No, it's too speculative at this point. We are chasing a handful of RFPs right now. How many more will come out during the next year of that 20 is just impossible to say.

Okay. Great. Thanks a lot and congratulations on a good quarter.

Sanjay Shrestha, Lazard.

Terrific. First of all, again, congratulations on a good quarter guys and thanks for a lot of visibility. Most of my questions have been answered, but just a couple of quick ones. Again, not complaining about it. R&D is very important. You guys have done a great job at that, but it seems like the OpenWay is technologically gotten a lot of acceptance traction. So there are areas you guys are spending as well. But at what point will we start to see that sort of structure to become earnings leverage and we start to see a gradually declining trend on your R&D line and the leverage with the two companies being put together?

Sanjay, two answers. In North America, some place through 2009, unless we see an opportunity that I don't foresee today, we should be able to start trimming sales in North America. Now, having said that, I think at exactly the same time, we will start letting more sail out it in Malcolm's group in Actaris.

And the fact of the matter is, if you are just a bread and butter electric gas and water meter manufacturer, your R&D levels are pretty low, but that's not a very exciting business. The exciting part about Actaris is it's going to move to a technology business, and that technology shows up both in what we put on top of meters for automatically reading them or AMI as well. You begin to do some things in meters that you haven't ever done before. So I'm perfectly comfortable with beginning in let's say the -- we've expanded R&D level at Actaris for '08; we're going to expand it more in '09. And I'm sure all of my R&D engineers are listening to this and drooling at this point. But it's the way to keep competitive.

If you look at us in the world, the thing we can do that many of our competitors cannot us we cab spend R&D money. And if we do it productively, which I think we're very good at, we will stay ahead and we will stay with the market shares we've got.

That's a very fair point. So now going back to the market share point, one thing I just want to clarify earlier. Obviously, you guys have been very clear about it that '08 is going to be a year of contract announcement, bookings and not the year where you see a lot of revenue opportunity with a large AMI project in North America. But when you talked about the '08 guidance, you said it's not aggressive, it's not conservative, it's sort of like the middle of the line. Now, are you baking in potential revenue recognition associated with some of the AMIs, vis-a-vis your Southern Cal Edison or are some of those things actually contributing to the revenue in '08? Or you are actually not taking that into consideration?

Sanjay, there's a very small amount of AMI revenue in the back end of '08, but it's small. And we've been very careful about how much of that we put in, but feel pretty middle of the road.

Fair enough. One last question, then, guys. Obviously this is a long-term opportunity for us, nevertheless a huge one. I think you guys touched on $35 million opportunity in France and you know some testing phases and potential rollout over the next year or two, 300,000. So in that particular opportunity, who would be some of the biggest competitors that you guys would come up against and how should we think about that as the sort of like going to go to a bunch of different players or you guys have a phenomenal position now with Actaris and Itron together? How should we think about that?

One of the things that EDF liked to do is to have inter-operability. Inter-operability is something where they can leverage one meter manufacturer against another. So it's important that we participate in many of these trials, which we are doing. Eventually, they would like to have a number of meter manufacturers. And if you take $35 million and divided it when they start and when they finish, it's probably going to be over a five to seven-year period. And if you take $35 million, it's 5 to $7 million a year. Take the number of competitors that are there, which are traditional competitors, some in Europe that don't participate in North America, and you can divide by that and come up with a number per year. So that's primarily it.

Got it. That's great. Once again, congratulations and thanks a lot, guys.

Patrick Forkin, Tejas Securities.

Congratulations on the quarter and the year. LeRoy, in recent calls, you have talked about your best guess on timing of announcements at CenterPoint, San Diego and Detroit; most of those maybe occurring in the first half of '08 here. Has there been any change in your assessment on that timing?

Pat, not at all.

Okay. And then from a competitive standpoint, it looks like to us that you are picking up traction, especially in California and that you may get two out of the three contests out there. Are you seeing anything in North America on the AMI front? Are you seeing any changes in some of the competitive offerings or sort of the lineup of who, your number one and number two competitors?

Pat, I would say that the competitive landscape for the last couple of quarters has been pretty stable, same players out there, all competing in the same way, so we're not seeing any new participants; we're not seeing any surprises from anybody. Various guys are getting traction in various places. There's a lot of competition. And on some days it's fun and on some days it's a little more worrisome. But I don't discount the competition out there. They are all bright guys; they're all aggressive. And at every one of these, you got to work real hard ride up to you got the order and then you got to work real hard to keep it.

Okay. And then Philip, you had talked about the $470 million from So Cal Edison that's not in backlog yet, and I know they are only deploying 10,000 endpoints in '08. How should we be looking at '09? Would that be maybe 15 to 20% of that $470 million number?

Yes. The deployment is pretty ratable over this declared five-year period. It will ramp up in the beginning, so we won't quite see the full speed hit its stride in the middle and then tail off at the end. But it is a spread deployment over those years. And I would also remind you that Southern California Edison has been quite upfront with the fact that they are -- have a second meter supplier and so please do not count on all of those endpoints going to Itron. But we certainly do intend to win the lion's share of them.

Although the amount of revenue that we talk about when we talk about that contract and the amount that's left, only taking to consideration about 80% of that meter business.

Yes.

Okay. And then the last question really for Philip and Malcolm. Malcolm, you had talked about some of the European countries having the GPRS requirement. How come we don't see more GPRS deployments or utilities looking at GPRS deployments in North America? Is it strictly just the operating cost?

Well, if you take the GPRS communication link, we tend to use GPRS, at what we call a concentrator level. If you want to use GPRS at the meter level, it's quite expensive. If you put that modem into the meter and communicate from a meter in the house using GPRS to a collection engine, it's quite expensive. So we do a specific kind of design where just the collector is GPRS.

In Europe, that's the solution that they chose for initially in Sweden, and probably GPRS in Sweden is a lot -- it's a lot more solid than it is here in North America. And it's been around a lot longer, so it's a lot more tried and true.

Pat, I would say that given the way that the telecommunications and particularly the wireless carriers consolidated in the United States, there is really a patchwork of technology underlying the GPRS implementations, a patchwork of companies that built that infrastructure in North America. And so some of the technical underpinnings are a little bit less even I would say than they are in parts of Europe, and, as you pointed out also the pricing plans available in the United States tend to be flat rate and not as packet-oriented, and so the economics of GPRS in North America are somewhat less favorable than they are in Europe.

Okay, very good. Thank you.

Ajit Pai, Thomas Weisel.

A couple of quick questions. I think the first is much more on the integration. On the cost side, are there anymore -- I think you had a very modest set of acquisition-related integration expenses on internal controls and financial reporting, etc. Do we see those continuing a little bit more, and are there any savings that you've identified that will fall off even greater than that once those are over?

This is Steve. We will see in 2008 and have factored in, in guidance we provided, some additional costs in '08 related to compliance with internal controls and Sarbanes-Oxley. And then we would expect that to tail off after 2009. And that's fully expected as part of the integration of Actaris and rolling through Sarbanes-Oxley and the controls worldwide. We've also seen quite a bit of goodness below the line in the form of tax and how we have structured this transaction, pushing debt down as well, and we incurred some additional costs that needed to be expensed immediately that did show up in G&A in '07, and we would expect to see that start to trend down a bit as well.

Right.

This is LeRoy. The one I would add that Steve didn't mention is we've completed the front end of a worldwide IT strategy. I think probably not in '08, but maybe into '09, we're going to see some nice cost benefit on the IT front as we sort of rework some of the contracts we have with a variety of suppliers into a smaller number of suppliers and squeeze some dough out there.

Got it. So for modeling purposes, the way we should think about some of those expenses is that they'd probably continue through '08?

Yes, I would keep them at the same basic relative percentage of revenue as they were in '07. We (multiple speakers) a lot of modification in '08. I think we talked fairly publicly about the fact that we don't see a lot of operating leverage in '08.

Yes. And is there any switch that has to be flipped to integrate systems or is most of the system integration from a broader perspective already over?

Most of that is already over. We were quite fortunate that the software system, accounting system and manufacturing system that Actaris was using was also one that we were using. We were both running off MFG Pro so the plug in there, while not without work, went pretty smoothly.

Got it. And then just looking at the prepayments that you talked about on the debt side, what -- which particular tranche or debt are you paying -- the British pounds and euros or some of the U.S. debt?

It's been some across the board. We made payments on our Euro tranche, GDP tranche and some in the U.S. dollar tranche as well. And we have -- as we look ahead, we will be continuing to make prepayments really across all three tranches.

I would add that where we do have excess cash flow, we tend to focus on paying down the U.S. dollar debt as well because we had some hedges in those other two currencies. So where we, and in fact, are in process of making another prepayment the next -- this month, actually, as well on the U.S. dollar tranche as well. So we have scheduled that together.

And as I mentioned before, our U.S. dollar debt and sterling debt effectively are floating on U.S. LIBOR, which has significantly gone down here in the last month because of the recent Fed action, so we did see some goodness there as well.

Right. But you are not focused on buying back any of your convertible debt?

No. We, right now are focused on applying the free cash flow to pay down bank debt across all three tranches.

Okay, got it. And then, just looking at emerging markets, could you give us some color as to what you are seeing there and whether it's an attractive market for you to be focused on? And whether there's been in your traditional business, which is metering and the AMR side as well, would there have been any sort of more intense competition from any Chinese player or you think that clear competition from the emerging markets will actually fire out?

Let me just talk a little bit about AMR activity. About two years ago, we saw activity from three or four countries with requests for information. Two years later, we're now seeing 30 countries who have shown interest in automatic meter reading. So we are responding to requests for information on each of those. If you take a look at many of the other countries, or many of the countries outside of Europe, they are starting to take off. If you look at the Chinese suppliers, it's not just Chinese. It's Chinese, it's Indian suppliers. There's a lot of local companies that supply products locally, both water, gas and electric products. And are the Chinese doing -- shipping products worldwide? Only in certain countries, not everywhere. So there are some countries where we are seeing competition from the Chinese, but it's not everywhere.

Got it. But there have been no changes in your pricing environment in the developed world and even North America and Western Europe?

Not material.

Not material, and it's falling basically long-term trends and price declines in these two markets even today?

Well I would say that the long-term trends have been we see price pressure from big deals, whether it's a big AMI deal like an Edison or a Progress Energy or others. Malcolm sees the same kind of stuff worldwide. In general, the price of bread and better meters outside the United States is lower than it is here because they are a different meter; they don't have to carry as much current. They're oftentimes not quite as benefit-rich or feature-rich, so there's sort of a different level of product that one sees outside the United States.

But with the shift to the AMI and high interest in AMI, you're not watching either an acceleration or a deceleration in ASP declines in the traditional business in any particular geography? Like in North America -- within North America itself, you haven't seen any trend that is noticeable?

No, it isn't. And Deloris alluded to a core piece here, Ajit, that will help you a little bit. If you think about the meters that are shipped in North America, most of them these days have AMR or AMI on them. And so the other piece that is -- that which is just core meters, bread and better kind of stuff, the volumes are getting lower where you don't get that price pressure you used to see.

Got it. Okay thank you so much.

Operator, I just was going to do a time check. Do we have any others holding for questions?

We have two more questions in the queue.

Okay, well let's let those go and then we will cut it off there.

Chris Summers, Greenlight Capital.

Wanted to know what tax rate are you guys using for your '08 guidance of $3.20 to (multiple speakers)?

28%.

28%, Chris.

Okay, got it. Secondly, I noticed on the balance sheet that a couple of the liabilities decreased. The warranties dropped by $3.3 million and the pension plans dropped by $4.9 million. Did that flow through the income statement? And what kind of drove those decreases in the liabilities?

We didn't have a material change in pensions overall, and that didn't really drive that. Could you say again which line item you were looking at in the balance sheet and I'll answer that for you?

Sure. The pension plan benefits dropped from 65.5 to 60.6. And then also, if you add your short-term and long-term warranties, those dropped by about $3.5 million also. I was just wondering if you had reversals or if there is (multiple speakers)

Chris, really it's nothing out of the (multiple speakers) it's normal course. As warranty gets utilized, it will drop off the balance sheet; same with the pensions. They are insubstantial changes to our balance sheet in all fairness.

That's really, in the case in pensions, it's future assumptions as related to investment rates as well as FX, but there have been no fundamental change in our pension plans, nor any material change in warranty as well.

Got it. And then one last one. I heard you guys earlier talking about hedging on your debt. Did I hear you correctly that you have now hedged out all of your Euro and sterling exposure?

What we have done with the Euro debt is it's there really as a hedge to the net investment of Actaris in and of itself. So any change in the value of the debt does not impact the income statement. It does flow through other comprehensive income. So what I meant there was that there's no P&L exposure from that.

We did cap the rate as well and entered into it so that we have a cap on the Euro debt as well, which is a separate transaction. And we are pleased with that, given the bias more in Europe is towards rate increases than decreases.

Got it. So from an economic perspective, that debt is still in a currency that's tied to those operations. You didn't make a currency gamble (multiple speakers)

That's exactly right. We did not. And in fact, it hedges about a third of Actaris's EBITDA -- Euro denominated EBITDA in total, and that's about where we wanted to be. So that's why we picked that level of borrowing in the first place when we broke up our overall borrowing the three tranches. And we are pleased with that level.

Got it. Thanks a lot, guys.

David [Smith], Longbow Capital.

Good afternoon, guys. Just some questions first on CenterPoint. How many incremental units should we look at for the remainder of 2008 with CenterPoint?

We don't give quantities per customer, David.

So basically, should we assume incremental though or is there basically -- is this on hold right now until I guess the filing hasn't gone in yet -- is that right?

The filing hasn't gone in yet, so it would probably be inappropriate to comment on timing at this point in time.

Okay. So beyond the I guess the 10,000 or X number of units that have gone out for the pilot, right now, there wouldn't be anything else I guess in the backlog, would there?

Not in the backlog. That's correct.

There's nothing in the backlog, no.

Okay. And then as far as CenterPoint timing goes, is there any update you can give us on that?

Not really, David. We are waiting for them to sort of settle between their public utility commission and their board of directors as to how they want to capitalize this. And when they figure that out, my guess is they will make some kind of public announcement in the form of a submittal to their PUC, which you will see it when we see it.

Okay. So as far as them evaluating it, it's really no more evaluation going on really?

No, there's no technical evaluation or any of that. I mean between the two principal parties there, ourselves and IBM, all of that has been rung out really, really well. And so we're now in the sort of the get the paperwork done period of time.

Now is there any indications that we might see a hurdle with the PUC commission at all? Is that a matter of (multiple speakers)

Well, the point I would make and I'd be a little bit careful here because I don't want to get between my customer and their commission. Texas Public Utility Commission has been extraordinarily supportive of AMI in general and CenterPoint projects specifically. So there's always hurdles. They're going to argue over how much the rate payer is going to take on and how much the shareholder is going to take on, but that's standard process with the utility world.

So as far as the delay goes, from what you're telling me, it sounds more like an internal thing before they present it.

That's a characterization.

Yes.

I guess I thought this was supposed to go in in December's timeframe, but it sounds more like a procedural thing before they submit it, right?

Well, none of these are simple. There's a lot of -- I'd go back to a term you used, a lot of hurdles. Hurdles are -- how do we want to put the project together? How do we want to capitalize it? What do we have to give up at the PUC in terms of what rate payers are going to fund. And so there's a lot of work to do. It just plain isn't simple. And California is a good example of that, where the three utilities there have been working on that now for the better part of three years.

Okay. I guess jumping over to California, is there any approval that has to be met right now in California before this goes through? If --

San Diego is approved; PG&E I think is approved and Southern California Edison goes for approval here in another couple of months.

Q3 was their high-level timing for approval.

Okay. And then just jumping over to your guidance, is there any currency benefit in the '08 sales guidance as it stands now?

Well we've assumed a rate of 1.4 for the year. What we've done is started off at a higher rate and had that decrease throughout the year, so certainly there's currency assumptions in there, yes.

Okay. And then, just the last point. You had talked specifically a little bit on the residential side, some weakness in I believe you said October, November and then December picked up. But will we attribute that jump in December really to kind of a dry inventory chain? And then what are you seeing kind of in January, February as far as the cadence goes there? Has that maintained itself?

Now I've got about four people looking at me asking me not to get my foot in my mouth again.

We can't talk about January, February, obviously.

Yes, I won't talk about January or February. But let me say that as we got into Q4, we went back in the first couple of months to what I would call more normal levels. And then frankly, December was a gangbuster level in North America. I don't think it's wrong to posit that from the beginning of '07, the precipitous fall in housing starts probably caused some inventories to build up. I think we might have seen some effect of that in Q3 with more downward trend in shipments, and then by the beginning of Q4, I suspect that we had worked off a bit of a bubble. Do I -- can I quantify that with exact numbers? No, but I've talked to enough people that I think we saw some of that.

Okay. That's great. Thanks, LeRoy.

You bet. I think that's it.

Operator, was that --?

That is all of our -- I apologize?

Was that the end of the questions?

That is all the questions we have, yes.

Okay. Thank you, everybody, for joining us today. If you have any follow-on questions, feel free to give me a call.

That does conclude today's conference. We thank you for your participation. Have a great day.