Itron Inc (ITRI) 2008 Q2 法說會逐字稿

Good day, everyone. Welcome to the Itron Inc. second quarter 2008 earnings conference call. Today's call is being recorded. For opening remarks and introductions I'd like to turn the call 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; Malcolm Unsworth, our President and COO; Steve Helmbrecht, our Chief Financial Officer; 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 2007 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. As we have done in previous quarters, supplemental information is posted on our website under the investor section that includes some of the pertinent points that each officer will discuss today. Steve will start the call today with a discussion about our financial results and then Philip and Malcolm will each give operational updates for their respective businesses, after which LeRoy will wrap up with our prepared remarks with some of his thoughts. We will finish with a question and answer period. Now, I'd like to turn the call over to Steve Helmbrecht, Itron's CFO.

Thank you, Delores. Philip and Malcolm will discuss the performance of the operating segments, so I will focus on the overall financial results for the quarter including corporate expenses and items below the operating income line including interest expense and taxes. I will also talk about the equity offering we did in May and discuss our ongoing focus on generating cash flow to further reduce debt and interest expense, and I will comment on our financial outlook for the remainder of the year. Keep in mind when I talk about our results for the Second Quarter of this year compared to last year, that we completed the acquisition of our Actaris Metering Systems on April 18, 2007, so Second Quarter 2007 results don't include two to three weeks of our Actaris activity.

We have strong financial results with record Second Quarter revenue of $514 million, 28% higher than 2007 Second Quarter revenue of $402 million and above our guidance range of 470 million to $490 million. Itron North America Second Quarter revenue was $165 million, and Actaris Second Quarter revenue was $349 million both better than expected. Philip and Malcolm will explain the operational drivers for these strong results in more detail.

Corporate unallocated expenses in the quarter were $9.8 million, about $2 million higher than the Second Quarter of 2007, primarily due to increased compensation expenses and Actaris related acquisition expenses for tax consulting and Sarbanes-Oxley implementation. Non-GAAP operating margin was 13% for the quarter, which is similar to the Second Quarter of 2007 and about 1 percentage point higher than the First Quarter 2008 driven by the higher revenue, increased gross margins, and lower operating expenses as a percentage of revenue. Our non-GAAP tax rate for the quarter of 26.2% was slightly better than our expectations; however I would like to remind everyone that our rate can and will fluctuate. The rate can change depending on tax credits and by the mix of revenue by country, some with higher rates and others with lower.

Non-GAAP net income for the quarter was $36 million with EPS of $1.02 per share. This was significantly higher than we expected due to the increased revenue during the quarter at better than expected operating margins combined with a lower tax rate. Non-GAAP net income for the first six months was $63 million or $1.85 per share. Non-GAAP net income for the quarter included other expenses of approximately $2 million, for an impact of $0.04 per share. Related primarily to foreign exchange losses on trade and interCompany receivables and payables. While we expect to see some level of quarterly gains and losses from changes in foreign exchange rates, we are evaluating additional hedging transactions to reduce the financial impact of these changes. Our diluted share count included 1.7 million shares related to our convertible notes as our average stock price during the quarter was approximately $96 per share.

You will notice that we have continued to classify our convertible notes as short-term. This is due to the fact that our stock price exceeded 120% of the strike price for 20 days before the end of the quarter making the notes eligible for conversion. As mentioned last quarter, we do not expect the notes will be converted as they are trading at a premium in the market.

We had adjusted EBITDA for the quarter of $79 million which equates to an EBITDA margin of 15.5%. For the first half of the year, our adjusted EBITDA was in excess of $151 million. We had a very good quarter from a cash flow perspective with continued focus on reducing our trade working capital. Cash flow from operations was $64 million, one of the highest levels ever. Our CapEx was $16 million or about 3% of revenue on track with our forecast which resulted in free cash flow for the quarter of $48 million. For the first six months we generated $91 million in free cash flow which is more than double our free cash flow for the first six months of 2007.

In May we completed a very successful equity offering of 3.4 million shares raising $311 million in net proceeds. There were two key objectives of the offering. One, reduce our debt balance and strengthen our balance sheet and two, reduce interest expense and lower the cost of our bank debt. Now that we have reduced our debt to EBITDA ratio below 4.5 times we achieve an automatic 25 basis point reduction in our interest rate on the $806 million remaining in bank debt to LIBOR plus 175 basis points. We used about $265 million of the proceeds of the offering to pay down debt. We repaid the remaining balance on our pound-sterling denominated bank debt, about $77 million. We made a $185 million repayment on our US dollar denominated bank debt and we repurchased about $4.4 million of our $125 million in senior subordinated notes, leaving $42 million of unused net proceeds from the equity offering which is primarily why you see increased cash on the balance sheet. Our cash balance was $153 million as of June 30. We will continue to evaluate our strategy for cash going forward including the appropriate level of cash to maintain on our balance sheet.

In addition to the $265 million in debt payments from the equity offering, we made an additional $38 million of scheduled payments and optional prepayments on our bank debt for over $300 million in debt payments during the quarter. Our debt to EBITDA ratio declined from 5.3 times at March 31, to 4.2 times at June 30, and our interest coverage ratio increased from 2.7 times to 3.6 times. In the 14 months since we closed the Actaris acquisition we've repaid a total of $426 million in bank debt and we will continue to use free cash flow to reduce debt with a focus on the US dollar bank debt and the senior subordinated notes. During the quarter, we entered into an interest rate swap to fix the rate on $200 million in US dollar bank debt, so at June 30, we had $1.27 billion in total debt at a blended interest rate of 5.1%. Much of it is now effectively fixed rate. We have 86% fixed rate debt and 14% floating, and we have achieved a very balanced ratio with 63% of the debt classified as senior secured debt and 37% subordinated.

From a currency perspective, 66% of our debt is US dollar debt and 34% is euro debt. We are comfortable with the euro debt in our capital structure as the interest expense acts as a hedge to Actaris' euro denominated operating income. While we are on the subject of currency rates, I remind you that the appreciating euro has benefited us in the form of higher Actaris revenue, about 50% of which is denominated in euros. Obviously the higher euro/dollar exchange rate affects Actaris' cost of sales and operating expenses as well, which has an offsetting impact on operating income and EBITDA. With those activities in mind, I will talk about our outlook for the remainder of 2008.

For the full year 2008 we expect revenues to be between $1.91 billion and $1.95 billion, an increase of 20 million to $30 million over First Quarter guidance. Non-GAAP diluted EPS which excludes expenses related to amortization of intangibles and debt fees is expected to be between $3.35 and $3.50 which is higher than the $3.25 to $3.45 we indicated on our First Quarter call. Adjusted EBITDA is expected to be in excess of $285 million. For the third quarter, we expect revenues to be between 465 million and $480 million.

There are several items worth pointing out when thinking about our expectations for the year. Our expectations for Actaris are based on an average foreign exchange rate of $1.50 per euro for the second half of the year. We expect our non-GAAP effective tax rate for the year to be about 26.5% which is lower than the 28% rate we talked about last quarter and we expect our outstanding shares for the year to be approximately $35 million.

In summary we are very pleased with our financial results for the quarter. With that I'd like to turn the call over to Philip Mezey, COO, for Itron North America.

Thank you, Steve, and good afternoon, everyone. I thought I would briefly talk about North Americas financial results and then spend a bit more time on more recent developments. We had a great Second Quarter. Revenue grew 16% over the Second Quarter last year and 11% over the first half of the year, which has actually exceeded our expectations. Our revenue of $165 million was higher than we expected and was primarily driven by two factors. First, we had slightly better than expected book and ships business and second, we had customers requesting shipment of products in the Second Quarter that we originally expected would ship in the second half of the year. We shipped 1.3 million electric meters during the quarter, 13% more than we shipped in the Second Quarter of last year, over 60% of those meters had Itron AMR embedded in them compared to 40% in the Second Quarter last year.

Margins of 40% were in line with expectations but when compared to last year, they are lower due to fewer C&I meter shipments in the quarter, the effect of shipping some of our first version AMI units and the costs associated with that and increased service costs related to the anticipated need for field service personnel associated with the large contracts that we have just signed. As we had talked about on previous calls, we believe it was prudent to go and get the AMI implementation expertise in house so that we can hit the ground running on these deployments. Operating expenses were similar to the Second Quarter of last year, although there was a shift to increased R&D and marketing expenses that was offset by lower G&A and amortization of intangibles expense. Operating margins on a non-GAAP basis were 15.9% for the quarter which were similar to the Second Quarter last year. Bookings for the quarter were $122 million or about 0.8 to 1 book-to-bill ratio. We did not book any additional revenue for our contract with Southern California Edison. Also, keep in mind that these numbers do not reflect bookings for the AMI contracts that we have just announced as they were signed in the third quarter.

At the end of June, we had $470 million of revenue related to SCE that has not been contracted for but has not been reflected in our bookings or backlog. We made great progress on the AMI contract front during the quarter which culminated in the announcements over the past two weeks. We are excited about all of our agreements. It's very nice to have won these deals as it shows the industry is really moving forward.

Let me touch briefly on the status of the four agreements that have been publicly announced. Southern California Edison has installed additional quantities of open way meters in order to test integration and the other components of their Smart Connect program. They have submitted their business case to the Commission and are awaiting final approval which should be in the third quarter. SCE expects to install some additional meters in the First Quarter of 2009 and deployment should begin in earnest in the Second Quarter. CenterPoint Energy submitted their revised AMI deployment plans to the Commission in April. CenterPoint is still in negotiations with the Commission over the broader rollout and have asked for a 60 day extension to work out details. The smaller initial rollout of 125,000 units is in a separate filing that should be decided in mid August. The Commission and CenterPoint remain very positive about moving forward and Itron is confident of favorable outcomes on both filings.

DTE Energy is in the process of finalizing their initial phase deployment plans. We expect that they will install between 10,000 and 30,000 Smart Meters in the next 12 months for testing and analysis. As long as the initial phase goes as planned which means the system is working as intended and the expected benefits are substantiated they plan to begin their full deployment of the system. We expect the timing of that will be in the last half of 2009.

And last but certainly not least, our contract announced today with San Diego Gas & Electric. San Diego is particularly exciting for us because it is a turnkey contract. We have our open voice system, electric meters, gas end points and communication and our meter data management system, Itron enterprise addition, and we are responsible for installing the system. We look forward to working with San Diego on their project which has been approved the Commission and is funded; however the Commission will need to approve the contract as part of the process. San Diego is in the process of installing 5,000 meters and gas modules for their initial testing phase over the next couple of months and then after Commission approval of the contract, they plan to begin full system deployment in February of 2009 and have the deployment completed by mid 2011. I would say that's not bad work for a quarter, although I certainly don't let my sales team off that easily.

If we move beyond these high profile customers I can share with you that AMI activity remains strong and I would also point out that we continue to sell AMR systems and ship AMR meters and modules every day. Our contract with Northwest Natural Gas where we were chosen as the vendor to expand their mobile AMR system in Portland is just one example of that level of activity. So while AMI remains a very exciting potential for us and for the industry, AMR systems continue to generate revenue for us each and every month as well as all of the other products and services that we offer. We continue to be a leader and trusted supplier to the energy and water industries for a variety of solutions.

Before I hand it over to Malcolm, I would like to say a few words about our expectations in North America for the rest of the year. I opened today by stating we had a great quarter and we did, which helps to ensure that the year is on track. When we look at revenue increases, the majority were driven by customers accelerating their orders, not necessarily by orders that we did not expect. We are reluctant to increase revenue guidance more than we have for the year at this time. Based on the level of activity out there, we may have upside in the year but at this point we think it would be more prudent to keep expectations for the year in check and then monitor the status over the next quarter before committing to any revenue increases from expectations in North America. So we will now turn our focus to execution of these important contracts, and we'll update you in the coming quarters on the strength of our core business and the exciting opportunities we have with expanding our AMI business. And with that, I will turn it over to Malcolm.

Thank you, Philip and good afternoon, everyone. I'm going to started to with a review of Actaris's financial results and as I have in previous quarters give you some information about the results and the effect that foreign currency is having on them and then I wanted to spend some time talking about the activity that's taking place outside of North America which continues to be very interesting. After that I thought I would finish up with a status update on how things are going with my new position in terms of identifying opportunities between the two operating segments.

So let's start with our results. Revenue was $349 million for the quarter. This was the highest revenue quarter in Actaris's history. Revenue during the quarter was about $17 million higher than our internal expectations. About $14 million of the increase was due to the stronger euro in the quarter and about $3 million was due to increased sales. Each business unit contributed to revenue growth. The electric business unit was strong and accounted for 39% of the quarters revenue, while gas and water accounted for 32 and 29% respectively. Gross margins of 32% were higher than normal for the Second Quarter in a row. We had an increased proportion of gas meterships, and commercial and industrial electricity meters shipped during the quarter, and we also had lower indirect cost of sales. While both of these occurrences had a nice effect on results this quarter, we do not expect that margins will be as high the remainder of the year, but expect they will be closer to 30%.

Operating expenses of $85 million for the quarter were 24% of revenue. Expenses were higher than expected by about $3 million because of the stronger euro. It's hard to compare operating expenses to the Second Quarter of last year because there was an in process R&D charge of $36 million, but as a percentage of revenue, they're in line. The stronger euro increased the non-GAAP operating income about $1.1 million more than expected, which had an EPSE effect of about $.03. Total meter shipments for the Second Quarter were $5.2 million versus $4.3 million in the Second Quarter of last year which is a 24% increase. Although keep in mind that we did not own Actaris for the full quarter in 2007 and we're missing about two to three weeks of shipments and the associated financial impact. Actaris' non-GAAP operating income was $51 million for the quarter, compared to non-GAAP operating income of $40 million for the Second Quarter of 2007. Bookings for the quarter were $310 million or a 0.9 to 1 book-to-bill ratio. This is lower than the First Quarter but for the year, our book-to-bill ratio is almost 1 to 1 which is typical for this business.

Now let's talk about what's going on in the industry. You may have noticed a press release that we issued on Monday stating that we have been chosen as a meter and communications provider to EODF, the distribution Company of electricity to France's AMI project, which once installed, will be the largest AMI project in the world. As a reminder, EDS intends to replace all of their 35 million meters with advanced Smart Meters.

The consortium led by Actos Origin was chosen to participate in the 300,000 meter pilot and we are one of the meter and communication vendors. We will ship 100,000 Smart Meters and 3500 power line carriers concentrators as part of the pilot which is expected to begin late next year and runs through 2011. Replacement of the 35 millimeters is expected to begin in 2012 and be completed by 2017. We believe that being a meter and COMS provider for the first phase provides us with a strategic advantage for participation in the complete AMI project.

In the UK, the total number of customers in the managed services for prepayment metering systems exceeded 2 million in June. We continue to grow this activity through additional customers and enhancing offering. In June of the Your Electric conference in Barcelona, the European Union of Electricity industry similar to EEI in the US issued a position paper on building a European smart (inaudible) framework. This conclusion of the working group was a full retail market opening and the greater emphasis on energy efficiency, customer service, and smart grids would make the introduction of Smart Meters an inevitable step in the medium term. The belief is that it is not a question of whether the meter should be introduced but instead where and how should they be introduced.

In April 2008, the UK government introduced an amendment to the Energy Bill regarding the aspiration that all consumers will have a Smart Energy Meter installed in 10 years. This was followed by an in depth report in July from UK national consumer council on such a program. Once again, these few examples are just the tip of the iceberg that demonstrates the activity and mind set in Europe regarding advanced metering and we find the building momentum very encouraging for the future.

Let me touch on a couple of thoughts related to our expectations for Actaris for the remainder of the year. We have had a very good first half and the results were driven by a couple of things. The replacement of water and heat meters in Germany in the First Quarter, increased gas meter shipments and higher shipments of commercial and industrial electricity meters in the Second Quarter. Both of these have been very good for revenue and financial results, and although neither of them will be a factor in the second half of the year. We are pleased that we're on track with our revenue plan for the year.

Shipments have occurred earlier than expected, and while we do see the potential for some upside in revenue from our current expectations, at this point, there are also some factors that could impact us on the negative side. For example, Germany has discontinued a tax incentive that was previously in place to encourage construction. But any effect that should that should have offset with a healthy second half in other parts of the world such as France and Asia. So considering these and other factors we think that at this point, it is prudent to leave our guidance in place and then monitor our progress as we move through the second half of the year. I would like to close with an update of my new position and some of the activities that has taken place in the last three months.

First of all I've handed most of the day-to-day responsibility for Actaris' operations to Marcel Regnier, and he's doing a great job and I have reengaged with Philip Mezey on a more detailed level so I have been able to come back up to speed on what has been taking place in North America. Which obviously has been very exciting given the contracts through Southern California Edison, CenterPoint, Detroit DTE, and more recently San Diego Gas and Electric. Philip and his team are doing an excellent job in changing the environment so as I meet with my direct reports and with their direct reports I've seen some areas that I think need to concentrate on in order to drive more efficiency in the two businesses. My top priority over the rest of the year will be continued technology discussions between Actaris and I&E, push Actaris in the direction similar to North America, as being more of a turnkey AMI provider, organizational fine tuning where appropriate, accelerate new product introductions, and continually challenge the manufacturing organization to work together for purchasing and other synergies, and finally insure we achieve all of the necessary financial compliance requirements. I am really excited to be in this position at this time in the industry because it is so many possibilities and I look forward to talking to you about our progress in the coming quarters. And with that I would like to turn it over to LeRoy.

Thank you, Malcolm. Good afternoon, everyone. Thanks for your interest in Itron and being on the call. With a good reports from Steve, Philip and Malcolm I'll keep my comments quite short, but what I'd like to do is simply point out a few takeaways from this record Second Quarter earnings release. Let me start with AMI. Great orders in the last couple of weeks for Itron's OpenWay. We've been working very hard at DTE in San Diego so these wins in particular are gratifying. These two contracts point out what we have been saying for some time, progress may go slower than hoped for, but these things do finally get done and there is real potential in AMI. As Philip said there are other potential projects on which we are engaged, utilities are actively looking at AMI, and Itron's OpenWay, and while some will wait to see what happens with early contracts in California and elsewhere, others will move forward more quickly.

Last week, I attended the summer meeting of the National Association of Regulatory Commissioners, where I was on two panels. One on AMI, and one on energy efficiency. My most significant take away from that conference was the strong level of support for AMI. There are questions to answer regarding how to treat low and fixed income consumers. There will always be issues regarding how to divide the burden of big projects between rate payers and shareholders. There was, however, an overwhelming sentiment to move forward with AMI and actually get these systems installed.

So let's talk about deployment of systems. When shipments on contracts with Southern California Edison, CenterPoint, DTE, and San Diego begin in earnest in 2009, Itron will see a significant acceleration of revenue as projects ramp up. While the exact timing of that acceleration is still somewhat uncertain, it will be significant by the end of the year if not by the beginning of the second half. Accordingly we think it's reasonable to begin to think about IMAs 2009 revenue growth in the mid to low teens range. Certainly, we will have a ramp as we move through the first half of 2009, so I just want to remind everyone that growth does not immediately appear on January 1.

As to gross margins for INA in 2009, we need to be careful. Exactly how deliveries, revenue recognition, and various product versions will affect gross margins, is still influx. Earlier product versions have poor margins, so at this point, we would not be is surprised if overall margins for INA next year had some modest downward pressure, particularly in the first half of the year.

Let's move on to Actaris. Great performance so far this year, ahead of target, lots of activity on all fronts. We're particularly pleased with the win on EDS pilot project, which Malcolm talked about. In and of itself, EDF will be a fantastic project, but more significantly, this large rollout coupled with other forward momentum signifies great prospects for AMI in Europe in the years to come. As you heard from Steve, our financial performance continues to be very good. Earnings above forecast. We continue to pay down debt ahead of schedule. We are in great financial shape.

Let me close with a word of conservatism. Itron had a great first half. Some of that was business that customers took earlier than we had forecast for both INA and Actaris. For Actaris and INA, demand was a bit better overall than we had expected.

So how are we thinking about the second half? First, reassured.We have a good first half on which to build and achieve our 2008 business plan. But we are being some prudent, as well, recall that in the US, our meter factory shuts down for two weeks in July, and in Europe, most of Actaris is shut down for the month of August. These will have some effect on the third quarter as they always do. For the rest of the year, we've raised guidance a bit, $25 million at the mid point on revenue, $0.10 on the bottom and $0.05 on the top of the range for non-GAAP EPS. Now is not the time to be too optimistic, nor is it time for pessimism about the rest of 2008. We think it is time to look at the rest of the year in both a realistic and prudent manner.

We look for revenue in Q3 between $465 million and $480 million, and EPS somewhat more heavily weighted to Q4 than to Q3. Do not come off this call thinking we are nervous about the rest of this year or next year, for we are not. There are, however, a lot of moving parts. The transition to AMI from AMR electrically, with deployment schedules that are still a bit fluid, and economic climate in the world and the US, and what all of us would call questionable territory, however, 2008 is shaping up to be a very very nice year for Itron both in terms of contract announcements and in terms of our own financial performance. With that, let's open up for questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Stuart Bush with RBC Capital Markets.

Yes, hi, guys, great quarter.

Thanks, Stuart.

LeRoy I want to see if you could expand a little on the discussion you mentioned at that conference. Outside of California mandates what is your forecast of how the Public Utility Commissions will balance, the likely need to raise consumers electricity rates from higher coal and net gas prices and their willingness to prove these CapEx pass throughs for AMI projects?

Yes, Stuart, that's a great question and frankly, it was one of much discussion through the days of the conference that I attended because they clearly have an issue. They know that they're going to be pressed to raise rates because of just pass throughs as you mentioned but frankly, they also view that AMI and all that comes with it is one of the available tools to give to consumers to actually lower not their rate but lower potentially the amount of electricity or natural gas you're consuming but as well get off a system peak, so thereby reducing the bill they have to pay at the end of the month. The other important thing they look at relative to AMI is the new level of consumer information that is continuously available because of in home networks and display was that allow that consumer to have an idea every day of the month how much money they have spent and how much they're going to spend if they keep on doing what they have been doing so it is really quite interesting. I made the sort of bold statement that we are are out of time as opposed to running out of time and a couple of commissioners picked up on that as they talked about installing AMI systems and the need for them and actually used my phrase, we are already out of time. So I was quite encouraged.

Okay, great. And then my next question is about your comments about how AMI margins could pressure as you ramp the business next year, but as you scale, do you expect the margins to trend back to the low 40s that you achieved in the legacy AMR business and what type of scale or time frame do you think it will take to get there?

First part of the question absolutely. I mean, that low 40s, 40% odd range is certainly our minds are wrapped around and where we're targeting. The issue on that is there is a phase in of various product releases and exactly when the phase in occurs is one-time frame. The next issue you have to deal with is when the customers are actually going to take that. Because we have it available doesn't mean that a customer has fully approved that particular product version and so as I said that still is somewhat fluid. It really is, Stuart so I can't answer that question definitively at this time because there's too many moving parts but we would expect as we move through the first half and then get into the second half margins continually look better not only because of versions but also because of volumes, and as you guys know, volumes do wonderful things in factories and through the second half of last year volumes will start making an appreciable difference.

Okay, great. And then I have a last question for Philip and I just wanted to know if he could clarify why we saw such a pull forward in the AMR meter and module business in North America? Was there some overriding factor that drove several customers to accelerate orders or what's sort of the underlying driver that's going on there?

Stuart, we've seen that kind of acceleration before on some of these larger projects where the project is moving along smoothly, the customer is getting benefits and actually sees an advantage in just the rolling out somewhat more rapidly. So I would say there really is a market of the success we're having on some of our larger deployments that we have demand from them.

Okay, and then just one real quick one if I can. I notice that you didn't publicize the contract amount for the whole San Diego project. Are you going to be able to do that at some point or what'sthe -- why weren't you able to do that as you did with Southern California Edison?

Yes, I think that we generally don't put the amounts in the contracts anymore but if you think about it in the $260 million range we're going to be close.

Okay, great. Well thanks, great quarter guys.

Thanks.

We'll move to Steve Sanders with Stephens, Inc.

Good afternoon.

Hi, Steve.

Congratulations on the San Diego deal and the quarter and Detroit as well. I guess first question on OpenWay maybe for Philip. If you could just kind of bring us up-to-date on where you are in terms of the feature set and the design relative to what you're expecting in terms of volumes on some of these announced projects?

So in terms of Steve overall development progress, things are going along well, plus or minus a couple of weeks here on rolling out the features that we have discussed in the public and committed to our customers, so I'm very very pleased with the level of development activity and the work that we're doing with our customers in order to prove these projects out in the field. We are focusing just now on releasing what we are calling Version 1.5, so a substantial upgrade of the Version 1.0 meters that we had deployed initially at CenterPoint that initial 10,000 and then we'll be releasing a 2.0 release here in the next several months, so good progress and very close and open work with our contracted customers on the features that are in the pipeline and matching those diversions and getting them certified. Again, the fluidity that LeRoy mentioned has something to do with how many of these Version 1.5 meters we're going to be shipping and in stalling in relation to the 2.0 meters that are also on the horizon as well.

Okay. All right, that's helpful. Sorry about that. And then Malcolm, I think you talked about some acceleration on the gas side in the quarter, and on the C&I side. Can you just provide some additional color on that, Q2 versus Q1, where shipments particularly in gas were up pretty significantly?

Yes, we had some orders that were, we could ship earlier from Q3 into Q2. We shipped those sooner on C&I meters and on gas, it was just an increase in demand for gas meters. It could be -- theoretically It could be end of year spending for some of these customers because their year doesn't always end in December, so that was one of the things, so it was an anomaly that we were quite surprised by. It was good.

Okay. And then on the water side, I think you had some good things in the First Quarter associated with Germany but really the volumes are relatively flat Q to Q, so can you dig in there a little bit more for us and maybe talk generally I think you've indicated in the past that you see the water AMR/AMI side as increasingly attractive opportunity for you, so really two questions. One, water strength 2Q versus a tough 1Q comp and your current AMR/AMI thinking there.

Just to answer your question on the first half strength of water, it's water and heat, and there's a requirement which has a five year replacement time frame in Germany. So effective basically the first week of January, we have a huge amount of shipments out of the water group for primarily for Germany. With regards to the second half, obviously that doesn't happen in the Second Quarter, that doesn't happen in the Second Quarter, but we're finding that one of the strongest areas for AMR in Actaris is water. We're finding that we've got lots of justification that customers are going to our AMR solutions and there we're seeing strength in that so it's penetrating throughout Europe and throughout the rest of the world for AMR for water.

Okay and then a follow-up on the EDS side, you've given us a lot of detail on the project. Ultimately, will it be three meter companies and two data companies or how should we think about that?

Well, the consortium as you know consists of Actos, and then interoperability is something that EDF are very strong about. Obviously if there are three meter providers which is, you know the other two, that theoretically they would split it three ways but you never know with EDF. They could introduce another meter provider but we have to have interoperability with the communications, so if one supplier goes down, the other one can take its place. So interoperability is very important within the EDF projects.

Okay, and final question for Steve, 3Q just margin trends, I know you talked about Actaris, a tough comp 32% on the gross line, but generally, should we think about 3Q pro forma operating margins as closer to 1Q than 2Q, are you still making some pretty significant investments in front of the AMI projects on the OpEx line, just whatever color you could provide there?

Sure. We see gross margins on a combined basis in the 33, 33.5% overall, in terms of Q1 it's going to look more, Q3 it's going to look more like Q1 as well with operations, continuing to invest in R&D, a couple themes are consistent here still. The increased R&D spending which we had planned on doing and then we are continuing to transition in Sarbanes-Oxley and the year of implementation in some areas where we're seeing some additional corporate spending this year in order to finalize those types of projects as well. We would expect to see some of that continue in Q3.

Okay, thank you.

Thanks.

Next we'll take John Quealy with Canaccord Adams.

Hi, congratulations. Can you hear me all right?

Hi, John, good.

Just one housekeeping first, on the operating expenses that are delayed, are we going to see more product development, sales and marketing or how is that mix going to go forward in the back half of the year?

It's mostly going to be R&D, John. Actaris was not able to ramp R&D to the extent we thought they would but we still expect they will toward the end of the year. Percentage wise I don't think that it changes dramatically but that would be the area that you increase.

Okay. And future debt payments in terms of optional prepayments, Steve, what's your thought in the back half of the year in terms of future debt payments?

Sure. We expect for the year operating cash flow to be somewhere between 200 million to $220 million. We could trend a little higher on CapEx in the second half of the year as we ramp up some equipment related to the AMI rollout so we would expect free cash flow somewhere in the 140 million to $150 million and I think it would be reasonable to expect that most of that free cash flow, incremental free cash flow will be used to delever, continuing to delever, and as I mentioned we'll focus on the US dollar debt primarily but we'll also continue to prepay euro debt.

John, just because you may not have the numbers in front of you, free cash flow year-to-date was $91 million so it would be that delta between the projected that we would use to pay down the next level.

Okay, another 50, 60, just more qualitative questions now. On the competitive side, a lot of chatter about San Diego and Detroit for awhile now. Those look like they're fairly well in expectations. What's your thoughts about competitiveness from Itron's perspective on several other big deals that are in various stages of progression? Does the turnkey status of San Diego change that at all, just your thought about the latest bidding opportunities.

Well, John, I'll start, this is LeRoy and Philip may have a follow-up comment. I don't know that winning San Diego changes anything except for the fact that some utilities will look at that win and perhaps be bolstered by the fact that Itron has now won four serious contracts so some fairly bright people have looked at our product OpenWay and have judged it to be the right directional move. There are a number of contracts out there, or projects if you will that we are pursuing hardly, or pursuing quite aggressively. We intend to be successful. We'll see how they lay out.

One point I would make is this environment is very very competitive. We are going head-to-head with a bunch of good companies that have great products as well as we do and so none of this is easy and it continues to be both price competitive and feature function competitive, and we do see some segmentation of the market where high feature rich products like OpenWay are successful and then in some areas, utilities frankly don't want as much feature and that's a harder, that's a bit of a harder situation for us because we have a very feature rich product so it's an interesting market. Philip any other thoughts beyond that?

No, John, what have we done for you lately?

Yes, well, exactly. The last two questions, in terms of deployment we've seen a lot of variability and push outs on deployment. How comfortable are you that the Q2 time frame for SoCal, just from a logistical standpoint and maybe political standpoint is a good time frame? Can you just comment on what your interpretation of utilities and regulators are right now?

John, I can. I think we're seeing this much more clearly now as we're getting closer the pressure is increasing for these projects to move forward and to start generating results, regulators are inpatient to see progress as well, so I think as we are moving closer through the selection process, you're going to see these deployments proceed as per the published schedules for the most part.

Okay, and my last question for Malcolm, I understand the mix issues, the first half of this year benefiting Actaris. Now that you've had the Company fully integrated for a year at least on paper, can you give us an update in terms of supply chain efficiencies, additional margin opportunities, as a combined entity, where we are in terms of innings of that, are we halfway through getting some of the synergies or not?

Well, we've obviously got the folks together and we have negotiated specific contracts with electronic suppliers and some battery suppliers for some of our other areas and obviously when you start doing negotiations, they don't take effect immediately, so we've seen some of that. Is it going to come a little bit more in the second half? We're always trying to negotiate better deals, so I see what we reflected on the guidance going forward does include some of those, yes.

And the only other thing that I would add John, I mean certainly, we are subject as is everyone else to some rising commodity costs. What we've been able to do to a large degree is take some of those savings that Malcolm's group has been able to identify and mitigate a lot of those effects.

Great. Thanks. Congratulations again.

Thanks.

Thank you.

We'll take Sanjay Shrestha with Lazard Capital Markets.

Great. All of my questions have been answered guys. Congratulations on a great quarter.

Great. Thank you.

(OPERATOR INSTRUCTIONS) We'll move on to Michael Horwitz with the Stanford Group.

Hi, everyone. So there was some word out today that Silver Spring went ahead and got awarded a contract from PG& E, albeit the meter part of it wasn't announced, and they are a recent partner of yours, is there any commentary on where you might start with PG& E or any timeliness you might expect around PG& E, also given the fact that next week in San Francisco there is a meeting about Smart Meters, the PG& E Smart Meter hearings here in San Francisco next week so anything to comment around that?

I mean, Michael we're pleased for Silver Spring and the announcement and I think that it's now pretty clear about why it is we were so interested putting out that press release and working with Silver Spring on qualifying a meter under their network and no as PG&E has not made public any information and their meter suppliers I think we'll stay with that.

Fair and then with regard just to clarify on some comments around CenterPoint, there has been commentary regarding what Stuart was asking earlier, especially in Texas, and there is some hearings scheduled but I believe you said that you filed for extensions. Can you just clarify how that's working with CenterPoint and the PUC there and the extensions that you filed?

So let's be clear. We did not file an extension. CenterPoint continues in discussions with the regulator for a 60 day period and productive back and fourth in order to move this thing forward. So I would just say that, reiterate that CenterPoint and we feel optimistic about progress and in that process and see the project moving forward.

Okay, and then--.

Michael, this is LeRoy. A point of clarification. There's actually two issues in front of the Texas Public Utility Commission. One is a full rollout issue and that is what Philip just described. The other one is a smaller, 125,000 point rollout that is on a quicker time scale. That one if it remains on schedule should get decided by mid August, that is the current scheduling at least.

All right that's great. Thanks for clearing that up. And then the last thing, back to this timeline question, each utility it seems has their own timeline in the way they're going to roll it out and Detroit appears to be longer than the San Diego announcement today. Are there any specific reasons that we can point to, to understand why that is or is that just the D&A of those particular utilities and the way they roll things out? And then maybe as a follow-up, are there any issues that you've found in 1.0 or what you believe 1.5 might solve that any of these utilities have come to witness now and so that's why they've chosen the various deployment cycles?

Michael, I'll start with the rollout stuff and let Phillip talk to the versions. The rollout stuff is largely, I liked your expression, a D&A issue. It depends on how the utility is going to fund it. To some extent it depends on their service territory, depends on what they've committed to in front of the Public Utility Commission, their own internal capitalization issues can drive a whole bunch of this, in other words when do they have funding available and how are they going to fund the various projects, so it's the pretty much an individual utility by individual utility thing. What I can tell you is my sense is that from a approval body perspective, i.e. the Commissions, they're pushing for quicker and so I like that state of play right now. Philip, why don't you comment on version stuff.

Sure. There are two dynamics there, the first is I think I mentioned we're very forthright with our customers and do present forward road maps. There are no surprises in the versions and features that are being made available with the versions we're working very closely with these customers, so they're planned. That being said we are learning as we are going along and I think it is a strength of ours that we are able to learn from our field deployments and strengthen the product. There are two areas I would point out in particular where I think we have done a terrific job of reacting to some challenges and they are around security and around dramatically increasing the bandwidth of the network that we're deploying, and so I would say that we are reacting quickly and coming up with some really terrific functionality.

Great. Well, congratulations. Nice quarter.

Thank you.

We'll move to Paul Coster with JPMorgan.

Thank you. I'd just like to follow-up on the last question actually. It sounds like at the moment, it's an iterative process with these four big contracts anyway as regards to the technology. Do you anticipate as you proceed through the pilot phases that eventually there will be a really hard lock down on the technical specifications as you go into mass deployment?

Paul, yes, I would. I mean, the product is stabilizing very quickly and I think that the delta between releases will decrease, that being said, I mean this is an area in which there is tremendous amount of activity and discussion going on about new products, plugging electric hybrid vehicles and self-generation and all kinds of things that where we see opportunity for continued investment and feature growth over a long period of time. So we really plan to continue on this very typical product life cycle.

Paul, let me add a comment there. It is LeRoy. I mean, one of the features and one of the fundamentals from the beginning of OpenWay was extensibility, and so what we have done with virtually every one of these customers is opened up a broad range of possibilities that as we go through these processes both pilots and subsequent iterations of installations and ideas that customers and we generate, we can quickly make product alterations and provide as Philip has talked, these new product functions and features without turning the whole project upside down.

So I guess what I'm trying to get to is the risk is actually a good risk, it's potential project, or functional scope creep, what I guess I'm trying to figure out is do we have the risk of sort of PG&E situation where they launch into it and then there is sort of disruptive technology coming up behind?

I see, Paul. Yes, what's different and I think very exciting about OpenWay, I suppose there are other providers that may have this as well is is that it's not just a hardware platform. I mean, this downloadable firmware means that the device can be improved as it is out in the field, so we are able to deliver additional functionality even after deployment is well under way. So no, I do not see a start-stop here as we are able to enrich the functionality of the overall platform.

That's good, and the other question I had, is as we get to each phase of these various programs, I'm sure the criteria differ by utility but what kind of criteria are they using to determine whether to proceed to the next phase? Is it business criteria, behavior of consumers, technical criteria, if you could just give us some color there.

Sure. I mean, there are initial technical criteria pertaining to the general performance of the system, and those are general and common throughout the deployments, but as you mentioned there are business criteria in some of these pilots as well in which they are essentially testing out the business case of the ability of the system to do things like detect outages and trigger certain types of events that will allow for operational savings within the utility and so those types of trials are built in as well.

And I guess I'd like to add that this is mostly at the first phase of any of these projects. I mean, I don't want people to get the impression that there's milestones throughout this three to four year period where they will continue to evaluate. A lot of this is because it's newer technology, it's newer for customers and they're looking for that background in order to justify taking that to the Commission for their finalized project.

And then lastly, each phase is requiring a committment from you, a fairly sizeable one in some cases. Are there any penalties on the utilities if they do not proceed or change their mind part way through the program?

Well, by far the largest penalty is that they choose not to proceed with us. There are in selected cases various business issues that have been negotiated in the contract but again those pale in comparison to the visibility of an unsuccessful project.

Yes. Got it. Thanks.

Next we'll take Carter Shoop with Deutsche Bank.

Good afternoon.

Hi, Carter.

Wanted to ask a question about the pipeline for AMI deals. Over the past couple quarters, you've mentioned that there's about 28 or more medium and large size utilities that you're currently talking to for the AMI business. Can you discuss how many if any of those could potentially ramp to volume in 2009 that are not currently announced?

Carter this is LeRoy. We're not prepared to go there at this point. Let me just say that the activity on AMI in general continues to be very strong. Many utilities are talking to us and our competitors obviously about potential projects and to give you an estimate of how many of those are going to start ramping up in 2009 we're just not prepared to go there. Some based on our inability to predict the ones we know about really really well and the exact timing of those, so yes, I know it's frustrating not to be able to pin down that funnel, if you will, we're just too new in this process, I think, as an industry to do it.

Fair enough. Can you maybe comment on what the largest change was in regards to the new meter going from the OpenWay 1.5 from or to the 1.5 from the 1.0 and if that had anything to do with the CenterPoint contract potentially being delayed?

Oh, Carter, no. It's not. It was, this is a standard manufacturing life cycle in which we were taking an externally purchased disconnect switch in the original product with altogether too many components in it and we go through a cycle of building applications specific integrated circuits, reducing the overall component counts, we've shifted to a built in house switch, we're just generally making the product faster, better, cheaper.

Would you be willing to comment about the kind of ASP decline that you're seeing from this new meter form factor? Are we talking 10, 20% decline in the meter cost?

There is no ASP decline, Carter. This is part of what we talked about as far as the cost reductions that any product goes through in its life cycle, and we've been quite forthcoming about the process that in the beginning, our products are less cost effective and we do exactly what Philip has been describing which is to come out with newer versions that are less cost. That does not affect the selling price necessarily. It's an internal cost.

And as to the specifics of that, Carter, we would never talk about that on a call like this. This is far too public a communication process.

No, that's understandable. Last question for you, when we look at the base Itron North America business, it looks like bookings were down roughly 35% year-over-year. Obviously we're going to see the traditional AMR business start to come off as the AMI business ramps in the out years. How do you think about the pace of decline in the AMR business out the next several years? I assume that that 35% decline in orders is a little bit aggressive but any way to help us think about that?

Well, we've been pretty public about the fact that our orders in any given quarter bump around. If you look at us traditionally they always have so to make something of a quarter-over-quarter year-over-year decline I think is reading too much into it. I mean, we just announced close to $1 billion worth of business. I don't think a 0.8 book-to-bill ratio at this point in time should be a concern for anyone. We have talked about the fact that AMI will cannibalize AMR going forward on an electric basis but we don't have any projections as to how much that will be at this point.

Fair enough. Thank you.

Next we'll take Jason Feldman with UBS.

Good afternoon.

Hi, Jason.

I was hoping you might be able to comment a little bit, you substantially reduced leverage following the equity offering. Any change in your outlook for acquisitions? Are there any areas you're looking at more actively with more flexibility on the balance sheet?

Yes, Jason, at this point, no. So let me sort of qualify that. I mean, we have said fairly frequently that until midish next year, we're going to concentrate far more on paying down debt than actively seeking acquisitions. Notwithstanding maybe a tuck in thing here or there that will be smallish, I would say to you we have some areas in mind that we continue to monitor and watch but we are not actively looking at anything. But your question is well placed because as is our leverage gets better and better than we begin to think about where might we deploy some capital to extend what we do in the utility space both technologically and geographically, and there are a number of good areas to think about probably as I said nothing too seriously, too midish next year.

Okay. And following-up there was an earlier question regarding the competitive environment. I'm sure it's a lot easier to walk into some of these negotiations with four big contracts under your belt in terms of the credibility that that gives you with respect to your AMI offering. It does look though like in the US market there, a couple new entrants to the US market who are getting at least an order here or there, a couple bigger companies over in Europe, Alcatel Lucent, Schneider Electric talking about entering the Smart Metering market, any major change in the competitive dynamics?

Well, I don't know the competitive dynamics have changed much beyond what you just said. First of all, there have been a couple of small companies in the United States, smallish, Silver Springs a great example and some of thee small companies have been awarded pilots and we'll see where it goes beyond that and I'm not trying to demean the great awards they have gotten. In some cases, they have been awarded pilots by companies who like to engage with smallish companies, in other cases we have hardly completed and we were not successful. It does not surprise, I don't think, anybody who has been in this industry for a long time that some of the big electrical equipment manufactures we mentioned a couple of Europe, Schneider being one of them are looking at this market and saying this thing looks like it's really really big because it is potentially really really big and we be in it and that's exactly how they go about doing that remains to be seen, but their interest certainly is not a great surprise and there's probably a small handful of those kinds of guys around the world. We'll see how that plays out. The dynamic in the market itself has not particularly changed I don't think in the last 9 to 12 months.

And then last thing, now that we have at least I imagine some information from some of the pilots and trials that have gone on, a lot of the discussion I think seems to focus on the whether the systems actually working technically. Do you have any data or views on whether in these trials they've been able to measure the degree of customer acceptance of the customers given certain incentives are actually willing to change their behavior in a consistent manner? Has there been any feedback?

Jason, I would say so far there's still not been a deployment of significant size to be able to do more than make what I'll call projections off of very sketchy data, and so one of the things that we utilities will watch closely I think as we move through 2009 is now that we've got hundreds of thousands rather than thousands of customers engaged with this stuff, what are they doing, how are they reacting? In general, I will refer to my time with commissioners last week, they are very encouraged that consumers are in fact going to react favorably to these kinds of programs.

Okay. Thank you very much for your time.

Thank you.

We'll move to Ajit Pai with Thomas Weisel Partners.

Yes, good afternoon.

Hi, Ajit.

Just want to understand the sort of margin structure of the new AMI contracts that have announced a significant number of them, so you have some sort of, if you can apply some color on the broad terms, nothing real specific on a particular contract but I think the margin structure you had indicated during your analyst day was how much a project could be internally provided with internal equipment and services and some of it being outsourced, you've given us good color there but what we would love to get is that as the volumes ramp the pricing for these contracts over three or four years is it a flat pricing that they've already fixed the total contract amount over the next three to four years as volumes ramp? Do the prices come down you're providing your customers? Or how do we understand the leverage over there? And also the pilots that you agreed to do right now, are you breakeven on those pilots on the operating income line?

In general, the contracts that we've signed especially the high level Board contracts that we've signed they're already fixed price contracts so there's no decelerators in there as you're alluding to going forward. So that's why we talked about that for Itron in the beginning, we would have a little bit depressed margins on that equipment but over time we expect them to return to more normal level. We don't discuss pilots on an individual basis in general.

Yes, although, Ajit, if what you're referring to are some of these initial rollouts that are taking place in the four major contracts that we've announced those are under the general contract terms and are not under different financial conditions.

So they would be financial terms on the top line are very similar, just because of the lack of ramping, the possibility is still unknown at least for the initial phase. Is that fair?

Yes.

Yes. But the cost of the meter, the cost of the deployment, the cost of the services to your customers to the smaller pilot deployments is the same as for the overall contract?

They're part of it.

Okay. Thank you so much.

Yes.

Next we have Patrick Forkin with Tejas Securities.

Good afternoon, and congratulations on a great quarter and all of the recent project wins. On, Malcolm, just a couple of questions on ERDF. Your portion of that initial project, the 100,000 end points and the related data collectors on the PLC platform, is that an existing Actaris product or is that a new product?

We have shipped similar products to it but we have, it's a new platform. It is a new platform for this product, and we have a period of time to get that completed and then installed as I say over the next couple of years, so we've done a lot modeling with that. We've actually done some prototypes and a little bit more than prototypes, we're at that stage. So it's a fairly new product with technology that already exists. Okay?

Yes, that's good. So the other 200,000 end points in that project, are they on a PLC platform as well just with different providers?

Yes. It has to be interoperable and that's what EDF insisted about.

Okay, so when the whole $35 million end point project is done, it gets basically on a PLC platform?

That is correct, yes.

Okay, good. And on the PLC platform, earlier in your status update you were talking about new product development in bringing Actaris and Itron North America together, do you guys have any plans on the PLC side in North America?

We're always looking at that. We're always looking at what the alternatives are, and what one technology may be good in another location but it may not be good in the US. So it depends on the speed of the data that's going through the system.

And Pat, to date, if we do have a PLC requirement for any system that we put out there, we do have a partner that we have today that provides PLC technology, so it's not like we can't provide that today. It's just that we work with a different Company to resell that.

Okay. Very good. Thank you.

Yes. Thank you.

Operator, we're about 15 minutes over our time we thought. Is there very many other questions or?

We have two other questions.

We'll take those two and then I think that will be it.

We'll move to [Craig Watner] with [Doleman's Capital Management].

Thanks for taking the call. I'm just trying to understand the guidance a little bit. You guys beat by $0.20 this quarter and you're taking up the full year by $0.10 when the tax rate is going down and you're getting accretion from the equity offering. What specifically is changed to the negative?

I guess I wouldn't say anything has changed to the negative. I mean, we certainly did take up guidance. We aren't taking anything down. It's up both on the revenue and as well as EPS, and remember, we also issued more shares during the quarter, so that certainly had a dilutive impact on EPS for the year that we've been able to not only make up, but go beyond that. I think that both Philip and Malcolm stated that things were occurring earlier in the year than we expected but we're still having a very strong, healthy year.

So expenses are going to be higher then?

No, I think everything is in line with what we talked about.

Okay. I'm just trying to reconcile the $0.20 beat this quarter or the $0.10 full year raise.

Remember, we have more shares outstanding at this point in time going forward.

Right. Well, that was pay paid down too, but one other question. Was there an FX impact or an exchange impact on your bookings and backlog that you could break out?

Well, there always is because of the euro but that's suggested. The bookings come in at the rate that they're denominated in when they come in but we don't quantify that.

And do you adjust the backlog level up as well?

No. I don't know. Probably but it's immaterial.

Okay, thank you.

And we'll move to Hasan Doza with Luminus Management.

Hi, guys, thanks for taking the call. Most of my questions have been answered. Just wanted to clarify one item on the competitive environment. Would you guys mind giving us a little more color as to the nature of the competition meaning as you see more of a competitive environment, do you see it, the competition based on price, functionality, product differences, like what is the nature of the competition?

Competition tends to come down to the following places. One, the complexity of functionality. We are seeing in general very feature rich product offerings which we offer and utilities in some cases demanding that feature richness. In other utilities we see a less feature rich requirement and there we see some competitors who have less feature rich products that tend to cost less, providing some pretty stiff competition so kind of lays out like that.

And have you guys seen any new entrants coming into the US market? Like who would you qualify as new competitors who you hadn't seen before in the RFPs in the US market?

Not in the last year. And we have not seen people, maybe more specific to your question, we have not seen people from outside the US come to the US and compete at all effectively in the AMI market. Or AMR for that matter.

Okay, thank you.

Sure.

Sure.

Operator, let me make a few comments and then we'll close for the day. Just a few more thoughts as we come to the end of a great call. Thanks for all of the good questions. I'd like to point out first of all that over the course of the last quarter, we have shipped $514 million of product and services of which there was very little AMI, and in the rush to talk about AMI on this call and in the market in general, I think oftentimes people overlook the fact that we do have this huge engine of business around the world. Actaris record quarter. Itron North America almost the best quarter we've ever had. We generated in the quarter $64 million in net cash out of operations while spending over $30 million in research and development to ensure a strong future not only for Itron but for our investors. I don't think anybody in this business says that or can say it. We are prepared for today and we are preparing for tomorrow while generating extraordinary cash in the business.

We have now booked AMI contracts worth over $1.4 billion and that's not the end of it. But I think as we think about Itron today and we any about Itron particularly in 2009, we are building a book of business in AMI that is really going to project us into some very nice growth rates, some very nice cash flow, and some very nice returns for our shareholders. So I would close by saying from this seat at least, our prospects look pretty good. Thanks for joining us.

Thanks.

That does conclude today's call. We thank everyone for your participation. There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 888-203-1112, or 719-457-0820 with passcode of 5261462 or go to the Company's website at www.Itron.Com. Thank you for your participation.