Itron Inc (ITRI) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Itron, Incorporated fourth quarter 2008 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. 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; Marcel Regnier, 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 2009. 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 for 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 can enhance 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. Supplemental information is posted on our website under the Investors tab with the pertinent points that each officer will discuss today.

We have a lot of information to cover on today's call so our scripted remarks will be longer than usual. We are willing to remain on the call a bit longer than we normally do to ensure that we are answering any questions that you may have. We will start the call with an overview of our financial results, followed by operational updates, and then Malcolm will talk about his new position. We will finish with LeRoy's thoughts on his new role. Now I would like to turn the call over to Steven Helmbrecht, Itron's CFO.

Thank you, Deloris. We have provided detailed financial information in the release so I will give an overview of our results for the fourth quarter and full year 2008. I will also talk about our debt including our recent issuance of equity in exchange for convertible notes, and will then turn the call over to Malcolm. We faced some headwinds in the fourth quarter, with slower year end spending in the US coupled with significant strengthening of the dollar. We had revenue of 432 million in the quarter, which was 48 million or 10% lower than the fourth quarter of 2007. Gross margin for the quarter was 34%, which compares favorably to 33% in the fourth quarter 2007. Due to increased Actaris revenues in higher margin regions. Operating expenses for the quarter were comparable to the prior year, but were higher as a percentage of revenue due primarily to increased Actaris sales and marketing and R&D expense as well as expenses related to Sarbanes-Oxley compliance.

Non-GAAP operating margin was 11.2% for the quarter, down from 12% for the fourth quarter of '07, due primarily to the increased operating expenses and the lower revenues. We had a non-GAAP effective tax rate of 27% for the quarter and the year, a bit higher than our expectations due to the impact of exchange rates on foreign earnings. Non-GAAP diluted EPS was $0.71 for the quarter compared with $0.81 in the fourth quarter of 2007. For the year, we had revenue of 1.91 billion, compared with 1.46 billion for 2007, an increase of about 30%. Keep in mind the Actaris results for 2007 were from the April 18th acquisition date.

Our non-GAAP operating margin was 12.1% for the year compared to 12.5% in 2007, due primarily to increased compensation and R&D expenses as well as the expenses for Sarbanes-Oxley compliance. We are wrapping up the Sarbanes-Oxley project for Actaris which we launched in 2007. This was an extensive project and we are pleased with the results in terms of the assessment of our internal controls. As a result, we expect the ongoing compliance cost for Sarbanes-Oxley in 2009 to be much lower than the cost incurred in 2007 and 2008. Non-GAAP diluted EPS for the year was 336 compared with 281 in 2007, an increase of 20%. Cash flow from operations was 37 million for the quarter and 193 million for the year. Our capital expenditures for the year were back end loaded with 22 million for the quarter and 63 million for the year. Capital expenditures in the quarter were primarily for AMI related equipment in North America and for automation of our Electricity Metering Manufacturing in the UK. We had free cash flow of 15 million for the quarter and 130 million for the year.

Turning to liquidity, our cash balance was 144 million as of December 31. We have about 65 million in unused capacity on a revolver line. The rest is currently being used for letters of credit and bonds. Our accounts receivable remained healthy. We had adjusted EBITDA for the quarter of 60 million and an EBITDA margin of 14%. Our adjusted EBITDA for the year was 280 million with an EBITDA margin of 14.7%. As a reminder to our debt investors, we make several adjustments including the addback of stock compensation expense when calculating EBITDA for debt ratios. Stock compensation expense for the year was 16.5 million.

At December 31, we had about 1.2 billion in total debt at a blended interest rate of about 4.6%. During the quarter, we made 4 million in debt purchase including the repurchase of 1 million in senior subordinated notes. We made lower debt prepayments in the fourth quarter in order to maintain a higher level of liquidity and for the year we made debt payments of 388 million. Our debt to EBITDA ratio was 4.1 times at December 31, and we were in compliance with our debt covenants. As we move into 2009, starting at the end of Q1, our credit agreement calls for a tightening in these covenants with a maximum debt to EBITDA ratio of four times and a minimum interest coverage ratio of 3.5 times.

In January, we issued about 2.25 million shares of common stock in exchange for 121 million in face value of our convertible notes. These exchanges reduced our convertible debt from 345 million to 224 million. Including the exchange, we have reduced our debt by 585 million since the April 2007 acquisition, a debt reduction of over 35%.

A few comments about the exchange. First, the notes have been and continue to be an important part of our capital structure. We issued the notes in 2006 and they helped fund the Actaris acquisition, but it has been 2.5 years since issued the notes and this exchange reduced the balance by about a 1/3. We estimate the exchange will be dilutive to 2009 EPS by approximately $0.17 a share which we have already taken into account in our guidance issued today. The accounting for the convertible notes is getting increasingly complex. A new accounting pronouncement became effective on January 1st, which will result in additional non-cash interest expense of about 9.5 million in 2009. Also, the exchange will result in a one time non-cash charge of about 10 million pretax.

Additional non-cash interest expense and loss on exchange are excluded from our non-GAAP earnings guidance for 2009. There will be more information in our Form 10-K filing and Deloris and I can take offline additional questions related to the exchange and the new accounting rules.

I will now turn the call over to Malcolm to discuss our outlook for 2009.

Thank you, Steven and good afternoon everyone. Guidance for 2009 is very difficult. So we thought it appropriate that I talk about it as I am responsible for the results of '09. Obviously we find ourselves in an economy that is bad and from our perspective continues to worsen. The US housing start report this morning of 466,000 is clearly indicative. As we came out of 2008, we said year end spending was disappointing, especially in the US, and it was. As we have come through January and moved through February, business in the US continues to decline. The question now becomes will it continue to worsen or level off. The answer to that is unclear.

In addition, as we move through the first two months of '09, foreign exchange and currencies other than the Euro have weakened relative to the US dollar. For example, since last month the deterioration on non-Euro currency, primarily the Brazilian Real and the British Pound, have decreased our 2009 projected revenues in US dollars by approximately 20 million. So while our modeling at $1.30 for the Euro has been close, others have deteriorated, and therefore it is quite hard to know what the year will be.

Unfortunately, as it has been well publicized, San Diego has chosen to delay their OpenWay rollout in order to upgrade to a higher level of platform security. A move that is not helpful from an '09 perspective but one with which we cannot argue either. Philip will talk more about this in his prepared remarks. The net of this is that we have moved our guidance range for '09 down to reflect uncertainty, particularly in the front half of the year and the reality of San Diego moving out. Our new revenue range for 2009 is 1.78 billion to 1.88 billion. Earnings per share range is $3.35 to $3.75, and EBITDA is 270 million to 290 million. We take no pleasure in lowering guidance for 2009, but at this point we think it is a prudent think to do.

Now let's move to Philip and Marcel for their respective operation reviews.

Thank you, Malcolm and good afternoon everyone. I thought I would highlight a few things from the quarter, but spend most of my time today talking about some of the broader issues in the industry and market and try to address some misconceptions that may exist. First, a few highlights of the quarter. North America revenue for the quarter of $153 million was 8% lower than the same period of 2007, primarily due to lower than usual year end spending from utilities in the US. When we gave guidance in the third quarter we said that this could be a risk.

In 2008 our quarterly revenue pattern was a bit different from normal years. Instead of a slower first half, we experienced more revenue in the first nine months of the year than we were expecting, but by year end, between the economy and financial markets, many utilities did not adhere to their normal use-it-or-lose-it budget spending and instead began delaying those purchases that were discretionary, thus we end up at the lower end of our revenue guidance. INA also had lower gross margin during the quarter compared to 2007 primarily due to the lower revenue. Unabsorbed overhead was a bit higher and our product mix was not as favorable as last year. Expenses were basically in line and INA ended the year with non-GAAP operating margins for the quarter and year of about 16%, slightly lower than 2007 non-GAAP operating margin of 17% but not out of line considering all the work that we did this year bringing OpenWay to market. INA bookings during the quarter were very impressive at $422 million which gave us a total bookings for 2008 of $1.25 billion.

For Q4 a large part of this was the electric AMI portion of our contract with CenterPoint Energy for 334 million, whose project was approved by the Public Utility Commission of Texas in December. While we are pleased with the AMI bookings, the fact that Q4 core business bookings excluding AMI were only $88 million indicates a concerning slow down in our core business in North America. However, with that said, we still delivered over $628 million of core business in the past year. I will speak more about our thinking about the economy, but the most significant factor here, again, is the impact that AMI project consideration has on our AMR and base electric metering business.

Last week at DistribuTech, one of our customers made a presentation in which they commented publicly on the rollout plans. I would like to clarify a few misconceptions that have arisen after that presentation. Inferences were drawn from this change in deployment plans, both in terms of revenue impact to Itron and the reasons the change was made. Questions were raised about whether or not the security function of OpenWay was the major reason for the delay.

Last week we issued a press release providing more detail on our latest software release, which further enhances our security capabilities and has been a part of our road map for quite some time. To clarify, the customer has chosen to implement the enhanced version of security that our new release provides and their intent to test the software thoroughly until August. We applaud them for this. It will affect the initial deployment schedule for 2009 but it will provide our customer with the right solution, and that is more important in the long-term. There have also been some concerns expressed about Itron's ability to successfully launch OpenWay into a fast-evolving Smart Grid marketplace. Let me assure you, OpenWay works and works well.

I would remind you that we are currently working with and deploying the technology at four very large high-profile customers. That alone is validation of the liability of the system. However, remember that large projects of this kind are of the similar magnitude to an ERP or billing system replacement with schedules that frequently shift around. Our shipment forecast for AMI changes monthly, some up and some down. We feel that it is not fruitful for us to comment on the shipment or deployment plans for our individual projects, and we are further restrained by confidentiality provisions with each of these customers; therefore, we are not able to speculate on our customers' future deployment schedules.

Just to remind you of the specifics, we have secured four significant contracts for nearly 14 million Smart Metering end points. Three of the four contracts include the deployment of gas modules, all of our customers are proceeding with their deployments. Each is thoroughly testing the complete system, including advance metering functionality, disconnect switch, home area networking and advanced security. Each is integrating the system into their information architecture, including media data management and billing systems. Each is planning large scale roll outs involving project teams of potentially hundreds of individuals. Both San Diego Gas and Electric and CenterPoint are beginning their deployments next month. Solid milestones expressing confidence in OpenWay.

Our customers are performing extensive audits on our manufacturing facilities, design and implementation methodologies, quality assurance, and deployment readiness. We are thankful to have customers that demand excellence and are making us a stronger supplier and partner. While some vendors may versions of their Smart Meters deployed in greater quantities, it is important to understand that those meters may not be the full featured versions that are now required as part of an advanced metering infrastructure or Smart Grid deployment. They may not have disconnect ability in the meter or home area network capability. They may not have outage notification or firmware download. They may not have the full software capabilities needed in this more open and interactive environment. They may not have the full range of functionality to support Smart Grid demands. They may not be as feature rich as our system, so any comparison to numbers deployed in the field is likely to be an unfair comparison.

There has also been a lot of speculation about new entrants in this market. We understand that as this industry expands and becomes more attractive, it will attract a broader group of competitors and partner, some of which are much larger outside of the utilities space than we are. Of course, there is room for other companies that bring a new level of expertise.

We do not necessarily see them as competitors and in deed, we may end up partnering with them as we do with IBM, CapGemini, SAP, Microsoft and others. Recently Google announced that they were entering the Smart Grid space. By making energy information more relevant and actionable to consumers, Google is providing complementary solutions to ours. To anticipate a question about how the economy is affecting North America business I would like to make a few points. We are worried about the affects in sharp drop in housing starts, which drives a portion of our recurring base business. Some of our customers appear to be capital constrained or do not wish to pay the premium to access the capital markets, which has caused several orders to push further into the year. Regionally declining economic activity has led to declines in energy consumption which may alter the spending priorities of some of our customers. Growing uncollectibles on energy bills may slow utility cash flow, which may change spending priorities. On the upside, the stimulus package may increase utility spending on projects that have already selected technology and mobilized.

While all of these factors may play a role in 2009, we have not identified a trend, whether by commodity, market segment or access to capital that describes how the economic slowdown is affecting our business. Rather, we are experiencing selective declines and delays. We have dealt with this concern in several ways by forecasting lower revenues, particularly in the first half of the year, by being proactive on cost control, and finally by acknowledging that all of us cannot know how this is going to play out. Our current guidance does reflect a more conservative forecast for 2009. We continue to execute on our plans with our customers and feel good about the prospects that lie ahead despite the environment we are in.

I look forward to talking with you about our progress on these projects and other opportunities during the year. With that I will turn it over to Marcel.

Thank you Philip and good afternoon everyone. I am going to briefly touch on the fourth quarter, but spend most of my time today talking about the current environment and my view of 2009. Actaris revenue was $279 million for the quarter, which is about 34 million or 11% less than last year. All of the revenue decrease was caused by the stronger dollar in the current quarter compared to last year, which is actually is a 1% increase in Euro and I will come back to the issue of currency effect. Gross margins of about 30% in the quarter were higher than last year, primarily due to better material costs, higher volumes and more favorable product mix.

Operation expenses of $76 million was 3 million higher than last year despite some benefits from the higher dollar. Actaris operating expenses increased in all categories because of continuing investment in R&D and expanding market reach, higher amortization and intangibles expense and increased costs associated with the implementation of Sarbanes-Oxley. Actaris non-GAAP operating margin of 11% for the quarter was lower than last year due to the combination of lower revenue and higher expenses. Yet for the year non-GAAP operating margin of 13% was comparable to last year.

Bookings for the quarter was $311 million or about a 1.1 to 1 book-to-bill ratio. We secure the three-year contract worth $20 million on revenue production services in Brazil. We have been winning $14 million contract for AMI in Abu Dhabi and we have very positive feedback from our customer (inaudible) on the implementation of the AMI contract we sold in '08. All in all, a very good quarter. So what are we facing from our customers and are we being affected by the economic slow down and the financial crisis? I would not say that we are not seeing anything that is causing us concern related to the economic environment. For example, we are seeing in Spain a contraction of meter demand because of a dramatic shrink of the construction industry, and we see some of this in other regions like Scandinavia.

We are watching on a daily basis the activity of the utility industry in Europe. Although we don't see any major impact on the traditional book and ship meter industry, as most of the meter market is driven by a replacement, and installing meters on previously unmetered residences. And keep in mind that our product are the core element of measurement which sets the bill of our customers. The Actaris business cannot be reviewed without considering the large diversity of regions, countries and economic environments in which we operate. Let's have a look at other regions. In South America, Asia, south Africa the economy is less affected and our forecast is still positive mid term demand is increasing. All together, our bid activity at the moment is showing more than 100 projects worth more than 1 billion Euro, which shows a significant increase in activity. As well, revenue production solutions for prepayment systems and services are more and more seen as a smart way to secure utility revenues and we seek currently increased demand in the UK, in southern African countries and new regions like central and east Europe and Asia. And Actaris is the undisputable leader in this business. So the momentum for AMR and AMI is still increasing with major ongoing projects, mostly in Europe and the Middle East. ERDF, the distribution branch of EDS, keeps its project on track. In fact, we should see the first mass rollout tender awarded later this year. Other projects are also ongoing like in UK with the Smart Metering law passed recently in '08 and many others. A very exciting time actually.

What is mostly affecting our results is a stronger US dollar related to the currencies in which we operate. Although we focus on the Euro in our (inaudible) since it is the largest portion of our revenue, we operate in 27 different currencies like the British Pound, the Brazilian Real, the Hungarian Forint, etc. and all have been hit hard by the economical crisis. The British Pound is actual experiencing a much larger negative impact than the Euro. All together, we are projecting an average mid single-digit growth in our business in 2009 in local currencies and in volumes. Fortunately for reporting reasons it will look like Actaris is declining in terms of US dollars.

One last item that I will touch on is that in 2009 the Actaris brand will be replaced by the Itron brand and we will begin to operate as one branded company on the worldwide basis. We are very excited about the opportunity to be more closely associated with the Itron name and its expanded capabilities. In 2009 we will change the name of our reporting segment to Itron International, rather than Actaris. I look forward to updating you throughout the year on our operational results, and with that, I would like to turn that over to Malcolm.

Since Steven, Philip and Marcel did such a good job of covering the results for the quarter from what we are seeing in the business climate from both an economic and financial impact, I thought I would spend time talking to you about my views for the future as CEO of Itron. This transition plan has been in the making for well over a year. Working in conjunction with our Board of Directors, we knew a smooth transition of LeRoy's day-to-day responsibility and leadership was of the utmost importance for Itron. I have spent a great deal of time with LeRoy since I joined Itron in 2004 helping to develop strategy and guiding the Company.

In my role as President, I have become familiar with all of the various operating, financial and support functions in Itron on a worldwide basis. For a number of years I have been an active participant in board meetings and in operations and strategic roles, and as you have seen, elected to the Board of Directors last quarter. As many of you have seen I have become much more visible in the industry and with investors. I feel ready to take on this position and I'm excited about leading this Company at a time when this industry is going through such a phenomenal transformation on a global basis. There is no doubt in my mind that Itron is in the best positioned company in the world to take advantage of the opportunity that this transformation will provide.

So what do I envision the future of Itron holds? I believe we are entering a time where a focus on this industry and the competition that we have will become even more intense. Itron has always had a reputation for focusing on our customers and we have not strayed outside of the utility space. We understand this industry like no other and many companies, especially new entrants, underestimate the challenges of this industry. The adoption rates, the preferences that may not be the same as other industries, the need to be economical in deployments because of regulatory oversight, the need to develop solutions in highly accurate reliable products that are designed for long life and that live in excessive climates within very narrow tolerance limits and the desire to minimize risk. With over 100 years of experience we have the ability to understand our customers and their circumstances, regulatory, operational and their customers like no one else. Some would say this is a disadvantage because the industry is changing. We believe it is a strength and one of the best advantages we have, because we know what it takes to be successful. Especially in this well established regulated risk intolerant industry. We have learned from the school of hard knocks and understand the demands this industry puts on us.

My challenge from our Board is simple, continue to profitable grow this Company. We are a critical element in the Smart Grid and in the war to infrastructure upgrade in which the stimulus package has allocated $6 billion. We will consider other Smart Grid opportunities in order to maximize our business prospects. We will continue to operate as we always have without the height but with true understanding of the industry in which we operate. Understanding the needs our customers actually have, not what someone suspects they have, and we will continue to provide our customers with the breadth of solutions and guidance to lead them through this transformation.

We will continue to -- practice of customer intimacy. We will develop relationships with our customers. We have a compelling value proposition that is supported by a diverse and experienced group of nearly 9000 people, providing guidance based on experience to help our customers to determine the best course. We will be there for our customers over the long term and have their best interest at heart. We are not focused only on short-term gains. We will also continue to focus on operational excellence, developing products and solution that are high quality, exceeding the standards our industry demands yet are economically feasible. By focusing on local presence, we believe in employing people in the countries in which we do business. The countries in which our customers live. We believe we have an advantage in the US because we produce American made products and develop solutions and deliver services with Americans, and that is replicated around the world with local presence, local content, local management and local employees. What better position to be in for any stimulus in a country [that want] to provide.

2009 will be a challenging year for every one and we will be no exception. We are taking a cautious approach to the year. While we still believe there can be upside from a variety of sources including a stronger economy, a stimulus package that is structured in a way that it can accelerate projects or generate new projects. We also realize there can be downsides, deployments that are delayed to a variety of reasons, including perception of a worsening crisis and the desire to hold onto capital and not spend. However, we still expect stronger earnings which in this environment is good news.

I want to close by saying I'm very excited about this opportunity I have been given. I want to thank LeRoy for growing this Company and ensuring that he has been so well run for so many years. A company that has all the right people, the right products and the solutions set, the right geographic coverage to lead customers transformation over the next decade. I look forward to being the one who delivers on that promise. With that, I will turn it over to LeRoy.

Thank you, Malcolm. Good afternoon everyone. I expect all of you want some color around the leadership change. Before I do that, let me make a couple of comments about '09. As we look at 2009 we are no better than anyone at knowing how the year will play out. As you heard Marcel say, 2009 is holding its own so far, evidence of the great balance that the Actaris acquisition brings to Itron, notwithstanding issues of currency fluctuations.

Clearly, the year is back-end loaded in the US and that loading is OpenWay with our four existing contracts. I certainly agree with Philip that predicting exact schedules for those contracts is not something we should be doing publicly. What I know for sure about 2009 is that with the acquisition of Actaris, now Itron International, we position Itron to be a major player in AMI, AMR, Smart Metering and Smart Grid around the world. I know for sure Itron North America has won four major OpenWay contracts. We are delivering the most advanced smart meter product you can buy on those contracts and it works. It is the cornerstone of the Smart Grid future for those utilities. On Smart Grid and Smart Metering, I know for sure, everyone knows how to say the words. Everyone is positioning themselves as the leader in this new world and, when the dust settles, Itron will be there. We have the depth of resource, people, factories, financial, the understanding of the industry better than most and we have the respect of the industry in which we have been a major player for over 100 years.

Let me now turn to the transition from myself to Malcolm as CEO. First, let me congratulate Malcolm. He is the right person at the right time. As the Board and I began to look for a replacement for me, it was clear that Malcolm's experience in the utility world both in the US and internationally was excellent and critical. Having run Itron US, Itron Actaris and the electric and water and gas meter business for Schlumberger as well as CellNet, Malcolm is uniquely qualified.

For some of you, it has been obvious that we have been moving through a succession process at Itron for some time. Today's announcement is the culmination of that process. So why now? The now of this is largely my decision. since 2000 when I became Itron's CEO, we have made great progress. The opportunity ahead of Itron is even greater. Grids will be modernized. Infrastructure for water and gas will be upgraded. Meters will be made smart. The opportunity is exciting and it is large. The energy, leadership and commitment required are equally large. I have had my time. It has been great. Quite frankly, there are other things I want to do.

Between now and the end of the year, my duties as the Executive Chairman will fall into several areas. Obviously the whole area of energy policy, industry thought leadership and Itron's role therein has become more important. I will focus a great deal of effort in this area, both in strategy development and execution. Itron's positioning in Smart Grid is an area where I have ideas and can provide some counsel to Malcolm and to others. From time to time, I will continue to be involved in Investor Relations. You haven't gotten rid of me yet. Finally, I will be a resource to Malcolm, the board, in whatever role they see fit.

With that, we will open up to questions and because there is a lot of us today, I will some traffic cop but ask the question of whom you think is the right person to respond to you. Operator, please start the questioning.

(Operator Instructions). We will take our first question from Steve Sanders, Stephens Inc.

Good afternoon, everyone. First, to you LeRoy, congratulations on moving to the next phase on all your successes over the years. We have obviously enjoyed working with you and wish you the best.

Thanks, Steve.

To Malcolm, obviously, well deserved congratulations to you as well.

Thank you, Steve.

A couple questions on the guidance. I think if we go back to late October, the assumptions were in the neighborhood of a 5 to 10% North America decline on the revenue side, 140 million or so for AMI and 4 or 5% organic growth for Actaris. I guess the organic growth for Actaris remains in that 4 to 5% level. Can you talk about the revenue assumptions relative to the 5 to 10% North America and 140 million of AMI?

Yes, Steve, the two areas in the US is really the decline in the economy. We noticed that recently as they are taking effect and we have put that into our guidance, and the pushout, obviously, of one of our AMI customers that also pushed that out. That's where we see the reduction in the North American business

Steve, I would add a little bit to that. I think when you are saying 5 to 10% decline in North America, you are talking about our high level indication of core business. We feel that that actually might be a bit light. We would expect the core business has a contraction of 10 to 15%. That combined with the moving around schedules of AMI led us to a more prudent forecast at this point in time.

On gross margin line for North America versus Actaris, obviously we have volume issues to deal with in North America. Can you provide an update on what the puts and takes are on gross margin for the two pieces?

If you look at the overall gross margins, they are pretty flat. We have 33.8% versus 33.9. It moves around a little bit around Actaris and INA, but not really too much, were are about 40% I believe for North America and the difference is [30%] for Actaris.

Okay. The range in the first quarter is relatively wide. If you have some color on that, it would be appreciated. Where is the flex for you guys in terms of spending in the first half to help keep operating margins at a reasonable level?

Steve it is LeRoy. I will take the first half and then I will let Malcolm talk about slacks. A little bit to your prior question as well. We are coming to today frankly looking at a precipitous decline in housing and a slowdown that we simply weren't seeing in the October, November time frame or even toward the very end of the year. It is just slowing down. We are using wide ranges. We are using wide ranges.

And if for all of you that seems to indicate that we are not quite sure where this thing is going, it is because we are not quite sure where this thing is going. Fortunately on the Actaris side, Marcel's business is really holding up in most areas. It is growing in some. There is a couple of stinky areas as he mentioned. In the US, quite frankly, it is largely a slowdown in meter business that is causing us to create wide ranges, and then of course, as Malcolm and Philip both said a pushout of some AMI as we all know about has caused a general mid-point reduction in the guidance. Malcolm can talk a little bit about what flex we have, and I'd ask them both to talk about what we have done already as well as what we have that we can do going forward.

One of the things that we have done in North America is obviously scrutinize the budget for 2009. We have already done some reduction in force throughout the organization. We have also frozen some salaries where needed and have been very prudent about what we are doing for new headcount going forward if we need it. We have put policies in place that are scrutinized by all -- any headcount request scrutinized by Philip and scrutinized by myself and reviewed very carefully.

We have also look to what happens if the economy goes even worse. We have got flexible plans that we put in place. On the Actaris side we have got maybe about 20% of our employees are either temporaries or contractors, and we put a flexible plan in place to say, okay, we want to make sure both in North America and in Actaris that we keep our core employees. And that is very critical for us. So we have made those changes. Okay?

Okay. Just final question for Steve. Pro forma for the convert exchange, roughly where are we midway through this quarter on the total leverage ratio and what is the guideline for free cash flow in '09?

Steve, the reduction of debt 120 million or so is about a 0.4 time reduction pro forma had we done that in -- before the end of the year. We chose to wait until January for a number of reasons, but that's what it did on a pro forma and we wanted that additional cushion given the softness in the first half of the year. In terms of operating in free cash flow, we expect our CapEx to be slightly lower this year than next year, 50 to 60 million. We expect some of this will be affected by timing, but we expect operating cash flow to be flat or so, perhaps a little lower than 2008. Just given the timing and second half loading of the year.

Okay. Thanks very much.

Next we will go to Preetesh Munshi from Piper Jaffray.

Hi thanks for taking my question. Congratulations Malcolm and LeRoy, just -- quickly, on the utilities, we have been talking to a lot of utilities and what we are hearing is that even though CapEx are being slashed across the board, they are trying not to touch the Smart Grid spending. What are you hearing from the other utilities? Of course, we have the four large projects. What are you hearing from the other utilities now versus what you were hearing a couple months ago?

Interestingly the comments that I made it is hard to identify a trend, certainly amongst our large customers, I absolutely agree, they are absolutely trying to protect the capital that has been allocated toward their Smart Grid projects. I would not characterize any schedule changes on those large projects as being driven around capital. Where the capital conservation gets us in some of the smaller recurring orders, and it may not even be in the large IOU space. We do quite a lot of business in the co-op and [muni] space. There are broad segments in which we see some pressure on capital but I would not necessarily characterize it as those large Smart Grid projects that have already been cost justified and approved by the commission.

I think we have made statements before that when utilities put out those kind of guidance ranges, a lot of times they are talking about very large projects, such as transmission or generation projects, not necessarily at the distribution or Smart Metering level.

Would you be able to quantify how many utilities are you actually talking to actively, who are probably sitting on the sidelines who are waiting for things to stabilize? Is there some way to get a handle around that?

Yes. We are talking about 20 utilities who are asking us about advanced metering and some form of pilot all the way up to full deployment. I would not characterize them as sitting on the sidelines waiting. They are in a variety of stages. Some of them clearly are taking a look at the economy and it is having an effect on their thoughts of timing. Others are moving ahead with small pilots. There is a whole range of categories there in that 20 but there is still quite a lot of activity.

One question on competition, are you seeing any changes there either with the financing difficulties or with the macro difficulties, some of the smaller players? How are you seeing changes in the competitive landscape, if anything?

We measure the number of competitors we have both in water, gas and electric, we have seen a couple of additional players potentially in the market but nothing really unusual. There is quite a lot of competitors when you have got this amount of money that is going to be dished out in the next few years. So competition is pretty intense but no real change to the number of competitors.

And one last question regarding the stimulus, obviously there is $4.5 billion allocated. How do you actually see it trickling through the system? When can we expect to start seeing some benefits from that spending?

What a great question. To that end I was in Washington only a week and a half ago. Clearly what happens is the DOE is writing a grant process that will be a template for utilities to apply for that 4 plus billion dollars. They will submit grants just like grants are always submitted, measuring themselves against benchmarks for what DOE is looking for. DOE has some oversight, a Senate subcommittee on energy. Nicely that is chaired by a Washington State Senator who quite frankly we know well, but far more importantly Senator Maria Cantwell understands Smart Grid and utilities which is fantastic.

Now as to your question, when do we start seeing money flow? There are some requirements in the stimulus package that timeline all of this and in some theory in about 120 days we should be seeing some grants that are processed and funds allocated to. The interesting part about that is the DOE does have the right to delay that if they find they are up against it. One of the things at the DOE right now is they are very short-staffed because they have been underfunded for some time. I will give you my guess which is toward the end of the third quarter, we will get some idea of some utilities that are toward the front of the line and early in the fourth quarter, I think we start seeing some money that is being handed out. One great question -- maybe two -- is one, how much will go for Smart Meters versus other Smart Grid elements and the other question which is yet to have really been flushed out. Are we going to peanut butter money across hundreds of projects or are we going to look at tens of projects and try to really jump start those? And I have not been able to determine what the answer to that question is.

Great. Hopefully it works out well. Thanks a lot guys, and congratulations, and I will jump back in queue.

Thank you.

Next we will go to Stuart Bush of RBC Capital Markets.

Hello, LeRoy and Malcolm, congratulations. I just wanted to, if I could, triangulate all the different pieces you have given us here for 2009. I know you gave a wide range. The core US business you said 10 to 15% down. Malcolm, you mentioned that the business in the US could worsen or level off. Could you give us an idea of where we would be in that range if we were to level off where we are today?

Probably about midpoint.

We give guidance to where North America is, and we go through a significant budget process, customer by customer. We reflect where we are going to be. About the middle of the range is where we are for our guidance for North America.

And is there some broad assumptions on the currency levels embedded in that guidance that you can share?

We have certainly talked about the Euro being 1.3 which is sort of a proxy for the Actaris business or now the Itron International business. We are certainly using different currency rates for the Pound and the other currencies. The Pound actually we are using about a 1.4 at this point in time. The bad news is we never report revenue like that. Those are our broad assumptions with the Euro and Pound in the current guidance.

A question for Marcel, on the international -- the replacement cycle, my understanding was many areas it is mandated by governments that a replacement cycle of meters, happens faster than the technical end of life of meters. Do you see any significant risks that governments could really relax that replace and mandate to give some spending relief to utilities?

Thank you. As you just understood, the major portion of our business is replacement. And always keep in mind the large diversity of countries and customers, and it is mostly highly regulated. However, regulation would be by the low or by the internal processes or by our customers. All in all, we would rather see an intensification of the replacement regulation than the other way around, we don't see anything in the other directions so far.

You don't think there is any chance that regulation could be relaxed, given that a lot of these utility customers around the world may have similar economic pressure?

I think with all the issues on the involvement and energy protection and water conservation, the regulators, whoever they are, more and more concern about accuracy and effectiveness and performance of their meters, and to our knowledge today none of them are considering extending them to a lifetime.

One last little question to Steve, do you have guidance as to how much stock comp we should expect in the year?

Yes, for 2009 it is somewhere in the $16 million range.

Thanks, guys.

Next we will go to John Quealy of Canaccord Adams.

Good afternoon. Congratulations Malcolm and LeRoy. On the guidance, the 335 to 375, Malcolm, when you talked about will it worsen or will it decline, can you talk a little bit about the assumptions on the lower end of the guidance? How conservative have you baked in on that lower end in terms of lack of visibility moving forward?

As I said earlier, we actually go through every particular customer that we have and look at where we feel they are going to come in at. The middle of our guidance is where we are looking out from our budget standpoint and we have moved it both negative and forward looking at what we think our customers will -- if there is going to be any move out or move in. And so that range we have spent quite a bit of time going over it. I think the range we have had is on average around $90 million range on the revenue side.

The only thing I would add, we are certainly not precise with ranges. It would be that there is a further cannibalization (inaudible) of our AMR in our core business, (inaudible) we talk about that 10 to 15% now so the lower range of guidance would mean there is more cannibalization than we are expecting now, and it could also mean those AMR projects are delayed more than what we are thinking they would be. On the upside, the opposite of that would be true I suppose.

In terms of international, I understand the reasons for accelerated OpEx over on that side. Can you talk about what should we look for new product innovations over there, or how should we look at that moving through the year in international?

Are you talking about a range of R&D or specific products coming out?

It sounds like you are spending a lot of money over there, in selling and R&D, etc. My point is when should we see the effects of that, whether it is a new product launch or specific contracts exactly?

It is Malcolm. One of the things we do, John, is we look at every particular opportunity we have in North America. We do exactly the same in Actaris. As we said, there's about 100 projects worth $1 billion and those range from water, gas electric and they range from fixed network solutions that we have got with our products we have launched, and they range from AMR and AMI solutions. We have obviously in our forecast some of those opportunities that we have put into the latter half of the year for Actaris. As far as all of the products that we put into our forecast, we really don't put unreleased products into our revenue guidance for that particular year. So any particular revenue for new products that are not released today will be in 2010.

Two final questions, one with regard to San Diego in particular, given the push to the right. Can you comment based on capacity in the calendar 2010 time frame? Can you absorb any accelerations in some of these contracts as they push to the right in a 2010 time frame? So '11, '12 they still hit the PUC mandates. So how do you think about that in your discussions with your customers?

We say bring it on, John. Yes, we have the capacity. And as we have discussed on prior calls the approach that we use of investing in automation gives us the ability to scale up our capacity even within the Oconee facility significantly beyond where it is today. You have seen the capital. Heard us comment on the capital expense we continue to invest in that capital and therefore have the capacity and the plant and have the ability to expand it significantly. Yes, we have plenty of room.

And then a last comment, more in competitive philosophy, you have been very focused on winning four very large contracts in the trailing 18 months. There is a number of other contracts that seem to be opening up with off ramps, whether it is a pilot or delay on PUC etc. Will there be a change in philosophy about what types of contracts Itron pursues aggressively versus the trailing style?

Yes, John, there will, as the product matures and we get a significant number of units installed on these initial contracts, it will put us in a position to be able to compete much more broadly than we have been able to in the past 18 months.

Thanks.

Next we will go to Paul Coster with JPMorgan.

LeRoy, we will miss you. Malcolm, welcome to the fray.

Thank you, Paul.

Clearly things deteriorated quite recently with respect to the North American core business. Can I go back and make sure I understand exactly what the lead indicators of that deterioration were?

I will give you a couple of them and if Phillip or Malcolm want to chime in, please do so. Quite frankly, as we came through the end of the year, we did see what we thought we would see, or were afraid we would see quite frankly, was less revenue in Q4 of use it or lose it money. We were so hopeful to be honest, that it was a Q4 phenomena we wouldn't see a continuing deterioration of general purpose business in the US. The fact of the matter is we are continuing to see -- as Phillip pointed out -- not universally, not everywhere, not in every region in the country but a degradation in general business that is clearly tied to the economy being driven, to your point, leading indicator-wise, what is going on in a particular region. Are we having even worse housing starts than the general average? Are we having declines in revenue for utilities because their customers are using less energy, whether that is electric or gas? Are we seeing -- which in fact this latest housing report had a serious drop off in multi family dwellings, which for someone in the meter business is a wonderful business because you get to sell a whole bunch of them at once. We are seeing that kind of activity -- not everywhere in the US but in enough areas in the US to cause us to ask the question, we understand where we are today, is it going to continue to get worse?

It seems to be a bit of a shock this morning at 466,000 new personal dwellings being under construction. I'm not going to be real damn surprised if it is 300,000 next month. It is slowing down and it is slowing down hard. The question, and part of the reason for our wide range, is how much slower is it going to get, and when are we going to see this thing start to move in the other direction. Maybe some of the stimulus helps, maybe some of the mortgage stuff helps, maybe some of the home loan stuff that they are tinker-toying around with in Washington helps. If you can tell me when that is all going to start turning things around, we can be a little tighter on ranges and better predictors. I don't know if Philip or Malcolm has anything to add to that.

To the extent that some of your clients are simply stretching out their upgrade cycle, to AMI for a second, is it a riskless decision on their part or is it likely to be a spring loaded uptake of meters some time late this year or early next year you think?

You specifically, Paul, referenced AMI customers, which in the prior conversation had been about base business. In general where there had been schedule adjustments on AMI projects, the end dates of the projects have not shifted because, I know you are aware that these utilities --

I was excluding AMI from that comment. Upgrade cycles, are they being stretched out, is there a risk to clients? Is there a benefit to you in terms of kind of spring-loaded rebound in demand for that type of business?

There could be. I would characterize -- it's to your -- I think an underlying premise you've got there. The business does not appear to be going away. It appears to be delayed.

Probably too early to tell, Paul.

Thanks very much.

Next we will go to Carter Shoop of Deutsche Bank.

Wanted to first touch on the management succession. It seemed a bit abrupt to me. Can you talk just a little bit about some of the behind the scenes movements there. And also, LeRoy, you said it was largely your decision to step down. Can you talk about some of the other factors, please?

Sure, Carter, let's talk about the behind the scenes stuff. Clearly, over two years ago, the Board and I entered into a succession process and that process was not -- we had picked one person in particular -- it was a discussion around do we have sufficient internal candidates or are we, at some time in the future, going to have to look outside the Company for a successor to me as CEO. We did not, in a meeting or couple hour discussion, come to a conclusion on that. We had a very thorough process of the Board spending a great deal of time, not only with Malcolm, but with Phillip, with Steve, with Marcel, with other candidates and other people around Itron to judge the depth of the talent pool in general and candidates in specific that might potentially move into a CEO role at some time.

We went through that process. It was a very successful, interesting process. And then the board, largely with input from me but more the Board than my decision, narrowed down to several candidates, and ultimately, for the reasons I stated earlier, narrowed down to Malcolm. We fully had an idea even when Malcolm was at Actaris that, as we moved through this period of succession, broadened experience both in running Actaris and running Itron North America, which Malcolm had done previously, and in running the whole thing was important. And so as part of that plan we moved Malcolm into the President and Chief Operating Officer role which is now about a year's period of time. That was sort of the process.

Throughout that process, we had not -- let me say -- earmarked a particular date in certain that I was going to retire. But I was pretty forthright with the board that it wasn't going to be five years hence, so we needed to be thinking about it so we could have a reasonably orderly transition. As to the time, I will tell you the Board, as most Boards would, would have loved me to stay on another year or two years. The fact of the matter is the end date on this thing was totally my discretion. It is pretty easily calculated. I am going to be 63 years old in another month. I have about 20 good years of hard activity, and I have got a laundry list of things I want to do including a growing interest in Gentlemen's horse ranch, and I am running out of time to do it. And it is that simple.

At what point did we determine that Malcolm would be taking over the CEO position, and why aren't we giving investors a little bit more of a heads up here? It seems like a very abrupt change with only one month transition.

First of all, I would say it is not abrupt at all, as we indicated he would be President and Chief Operating Officer. Ever since we have done that, I have had nothing but questions that Malcolm is the obvious successor and when are you going to retire? Your perception notwithstanding, I think the transition has been really quite orderly. Having said that, at the point at which we made him President, I mean, it was pretty clear, unless he should falterer in the interim period, that he was going to be the successor.

I would also add that the fact that LeRoy will be Executive Chairman allows for almost a year of transition. Certainly the feedback has not been that this is abrupt in any way.

This is Malcolm. One of the things that LeRoy obviously wanted to do was make sure I spent time with him with investors. And so I started doing that about nine months ago and have spent a lot of time with Deloris on the road, both with and without LeRoy. The transition from an investor standpoint has been fairly -- about six to eight months of a fairly smooth transition. And as far as running the Company, with the experience of an international business and also running the North American side for a while, the board felt that that was adequate for the time being now. So the change was made. And LeRoy is going to be here until the end of the year as Chairman.

In transitioning into guidance, would this be viewed, Malcolm, as your guidance as CEO, or is this more viewed as LeRoy's ownership in regards to providing guidance here? Do you feel that this is your -- the first stamp on the Company here or do we have that happening next quarter?

One of the things that my experience has led to is you start this process of a budget fairly early. You look at all the various attributes of the business and put together a plan for a year -- especially on the uncertainty that we have. so it is 100% mine. And the guidance is 100% mine, as well as the budget is 100% mine. LeRoy has obviously had a significant part of putting that together with his guidance in the last few months, but it is my budget.

That's helpful. In regards to Actaris, on a constant currency basis, how much did that grow either in the second half of the year or the fourth quarter of '08?

In the fourth quarter I think they grew about 1% in Euros. I think for the year it is mid single-digits, but Carter, I don't know that we had calculated that specific (inaudible). It's been mid-single digits, which is about what we are expecting next year as well.

So mid single-digits for the full year and low single-digits for the second half of the year, and then next year mid single-digits?

Yes.

In local currency.

We are expecting an acceleration in that business next year. In regards to North America, excluding AMI, it looks like the book-to-bill was 0.6 this quarter, 0.7 last quarter, you are only expecting that business to be down 10 to 15% year-over-year. Do we need to see a pretty significant re-acceleration in bookings over the second half of the year to meet the current guidance?

I don't know if we need an acceleration. Certainly we need to book some business going forward --

Yes, Carter, part of that business is recurring business that does not always show up in that book-to-bill ratio. There are elements of professional services, software, other components that -- no, I think we can absolutely make the numbers without a dramatic shift in that ratio.

(multiple speakers) 0.6 book to bill we can get that down to the 15% number?

The other thing I would add is Philip goes into the year with $312 millions of backlog. It is not all AMI. It is a bunch of core business as well.

I'm sorry. I thought I was talking about the business excluding AMI.

I understand that, but the 312 million is not all AMI. It is core business as well.

And then last quarter you talked about 1.4 million AMI endpoints for calendar '09. Would you be willing to comment on the outlook now?

We are not commenting on quantities. We addressed that right up front. We are not going to continue on quantities.

Last question for you, on the convert, you exchanged about 1/3 third of it into shares. Are there any restrictions around converting more of that into shares in calendar 2009?

No.

Thank you.

Next we will go to Ben Schuman of Pacific Crest Security.

Thanks for taking my call. Can you guys talk about your competitive position for large stand alone gas, AMI deals and how you feel about that market in terms of RFP activity and deployments over the next couple of years?

Ben, it is Philip. We feel very strongly that we have a very competitive product. Of course we have the overwhelming market share in terms of gas end points that form the basis of any one of those deployments and have a strong resume in fixed network technology and very aggressively pursuing the opportunities that are currently on the market.

The other thing I would add is that we don't have just one solution. One of the reasons Itron has always been adopted by the utility industry is we have a mobile solution for gas, we have a high powered mobile solution for gas, we have a fixed network stand alone solution for gas, we have a combo solution for gas. We don't only have one technology to sell into that industry.

Okay. Looking at the sequential AMR of meter decline in the quarter, are you experiencing tapering off of any big AMR contracts like a Mid American, or is this related to the economy and housing starts and AMI decision making?

It is a great point. Yes, there are several large projects and Mid American is certainly the largest of those that are essentially complete in 2008.

Will we see more of those coming off line in 2009 and 2010, or are those large AMR projects pretty much finished?

Pretty much finished.

Next we will go to Jason Feldman of UBS.

Congratulations to Malcolm and LeRoy. First, a quick clarification, the 4.6% blended interest rate assumption, did that include the expected additional non-cash expense associated with the new accounting rules for the convert?

This is Steve. That's on a cash basis overall, it doesn't include the additional interest expense pursuant to the new accounting.

That is on a cash basis. But the guidance itself, does that assume -- the extra non-cash expense associated with the rules?

We are planning on excluding that from the non-GAAP EPS. Our guidance does not reflect that.

Which would make it then comparable to last year, correct?

Correct.

Got it. Earlier there was a discussion or a question about the stimulus bill that the rules -- the grants seeking a process would be expected within about 120 days. Over the next couple months, how are utilities thinking about that period of time? Are they using that as an excuse to delay considering the big projects, or are they willing to try and figure out what they to do but won't actually start deploying until they know how to apply for the money?

Certainly, so far these -- again, these four large customers while the stimulus bill may provide an opportunity for them are proceeding a pace. I think it is as an added opportunity. We do not (multiple speakers)

Let me make an additional comment here which I think is absolutely critical and hopefully will turn out to be important. I think one of the measures the DOE will use on this is how many jobs can you actually create and in what time frame. If utilities are smart, they are readying themselves to be able to instantly start once they get the money, so when they fill out that grant app, they can create an aura of we are truly, as the words have been used, shovel ready. So I don't think we are going to see utilities sitting back and waiting.

It is the latter point I was trying to get at, I was more referring to new potential opportunities rather than the four existing contracts. The utilities are still in negotiations or in discussions saying let's get ready, because if we are going to go ahead but we may not actually deploy that first end point or actually buy it until we can apply for the money. But they are still talking about it or making plans for it. Is that fair?

The possibility exists -- none of our prospects have spoken to us in that way.

Okay. Got it. Last question on the Actaris operating margins. I certainly understand the reason for higher operating expenses in a variety of areas, how should we think about that trending? Is the fourth quarter what we should think about going forward or is it a reversion back to the first or second quarter of the year?

We don't give guidance on exactly Actaris versus Itron North America operating expenses per se. What we would say is we think our operating expenses come down as a percentage of revenue in '09 over '08. I was going to say you should see those savings in G&A and amortization and a bit in sales and marketing.

Thanks.

Ajit Pai from Thomas Weisel Partners.

Just a couple of broad questions. The first one is on your balance sheet, I think you have taken significant steps from the end of '07 to the end of '08 to shore up the balance sheet. Are there any actions that you are planning on in the near-term -- how do you expect the balance sheet to change over the next 6 to 9 months?

This is Steve. We are going to continue to focus on paying debt, and the primary source of that will be free cash flow. It is something we have talked about consistently. In terms overall on the balance sheet, one thing we will see over the next year is, because of the new accounting for the convert, you will see a lower balance on the convert than the actual face value. That's part of the accounting. As I said, I can take that offline with Deloris. Just a heads up for the Q1 10-Q, and that is consistent with the accounting with that new instrument, what you will see on the balance sheet. We don't really expect to see any significant new changes next year, other than the overall focus on continuing to reduce debt.

So there isn't any need -- a perceived need to issue any equity anymore?

We have a primary focus on repayment, but we continue to look at other options. It would be inappropriate to say we are done with equity or looking at other options. We will continue to assess where we are and continue to maintain covenant and cushions in that area.

The second question is just looking at your gross margins. I think over the past -- at the beginning of the decade where the gross margins for Itron were sort of in the mid-40s. There has been a gradual decline. And then when you acquired Actaris, I think part of the story was that the Actaris gross margins were about 1,000 basis points or so lower. Over time you have managed to get some of those gains to actually get those margins higher.

So on a go forward basis, just given the drop in revenue levels, is it fair to assume that even if you have a decline in revenues, that the gross margins of the overall Company won't decline any further from where they were in the fourth quarter or perhaps would be in the first quarter? And how do we think about the gross margins especially when you have pushouts with AMI, and volumes are important over there with the ramp being pushed out, do you think the gross margins will stay depressed longer than they would have otherwise?

It is Malcolm, Ajit. On the Actaris side, one of the changes we are seeing in the industry is there is going to be more and more Smart Meters over the next period of time, and Smart Meters have higher margins as a percent. On the North American side, we have a new product that we are launching and we see in the second half of the year that those margins will start to increase because we have gotten different versions coming out with -- which are reduced costs. So the margins over time, they certainly will continue to grow. Now the question is just exactly how much -- I'm not really certain right now. As we go more and more with Smart Metering, those margins will increase.

You haven't seen any sort of pricing erosion, just given the current slow down, and having aggressive competitors. The pricing environment is still fairly rational?

I would say there is a significant amount of pricing pressure. You can imagine with new entrants coming into the space, aggressively forward pricing, multi-year contracts that there is a significant amount of price pressure in the AMI space. And I think that that does really pose a challenge on the gross margin level. Again, as Malcolm alluded to, our focus there is in making our manufacturing more efficient and lowering our total manufacturing cost in order to address that.

And what about on the traditional core meter side, not the AMI but the AMR and traditional meters. Is the pricing environment over there relatively stable?

It is very competitive.

But there has not been any inflection point in terms of pricing deteriorating any faster than it has been over the past five to seven years?

No.

Got it. Thank you so much.

Next, we will go to Mark Rogers of Gagnon Securities.

Thank you. First question is on San Diego Gas and Electric. I was wondering if their move to ask for a higher security platform could be replicated amongst the other three major contracts you have?

So the comments I made in my remarks was that this security release has been a part of our roadmap for quite some time, so there is no -- to these four customers, there is no surprises there. And incorporation of that release has been a part of their deployment plans and thoughts from the beginning. So no, we don't expect this to trigger changes in the other project deployment plans.

Currencies seem to have been a bit of an annoyance this past quarter. What are your plans for hedging currency, if any?

This is Steve. We do not plan to try to hedge revenue because we view that as being speculative. That said, we feel we have hedged in some sense a number of ways. One is by having a diversified business around the world. Although in the last three months we have seen the dollar appreciate almost across the board relative to all currencies. We are looking at hedging certain types of transactions and we have implemented for hedges for inter-company balances, for example, that has reduced some of the noise that was going through the other income expense line. But that said, we do have exposure, obviously, overall to this fluctuation in interest rates, particularly in revenue line.

Okay. And another question on Actaris, when you guys acquired Actaris, one of the things you highlighted as a strength of the Company was the Actaris brand. So why the switching of the Actaris brand to Itron International? In my opinion fairly soon, given that you guys have acquired them for less than two years?

This is LeRoy. I will start with that and then if Marcel wants to make a comment, that is clearly appropriate. First of all, the strength of the Actaris brand was one not so much of the name itself but the quality of the product and the quality of the people and the breadth of presence around the world. By the way, just harkening back to the way talked about that, I can certainly see why the strength of the name would have been something that it seemed we were talking about. We were far more focused on presence and product and on their great people experience. Interesting thing, I made quite the deal when we bought them of differing from the norm for some companies and saying which are not going to change this name.

The reason we weren't going to change it, in my view at least, was I didn't want people fussing over that. I didn't want them spending a moment on that issue. I wanted them working with customers, selling product, making money, just like they always have. Over the course of the period of time since we have bought them, we have moved from a period of -- sort of we are Actaris. We are proud of Actaris. Quite frankly, many Actaris people saying to me and Malcolm as we would travel around the world to meet with these people, when are you going to change the name to Itron?

We let this thing go to a point in time when quite frankly my judgment, maybe more mine than anybody's was that the Actaris people were ready for the name change. The Actaris people were wanting to identify with Itron because Itron was moving beyond just being in the meter business to being in the systems and being in the solutions business. Clearly, Itron's moniker, if you would, rather than being a meter company. In my mind that certainly is sort of the essence why we wanted to change now. Marcel wants to make a comment.

First of all, I would probably here say thank you very much to (indiscernible). This transition to Itron has by any means not been forced. It has been total consensus between the Itron management and Actaris management. And yes, Actaris is/was a very well respected brand. Why? Because of the quality of the product, the systems, and the people. We are in the business to business industry, and the value of the brand is the result of the value of the offer.

Would it make any sense to keep two brands while we were and are more and more combining our offers and our technologies? The answer is obviously no. Then we could spend time thinking about what is the best time. We talked about that together and we said, well, 2009 is a good timing. So here we go. And we are all excited

Between now and the end of the year, we will have that transition taken care of.

Okay.

Go ahead.

I'm sorry. My final question, housing has been a -- you guys have mentioned housing and the decline in housing several times this call. Housing has been awful for a year and plus. I'm wondering, were you guys projecting or modeling internally a housing recovery in Q4 and maybe even Q1 of 2009, and it hasn't come yet?

No, we were not modeling a flip in housing at all. I will say two fundamental things. I have been in this business 40 years. In the 40 years I have been in the business, the meter business, this is the first time the decline in housing starts, which clearly started long before this month, has had any material affect on the purchase of electric water and gas meters. It just has not historically. This time, however, as evidenced by what was today the announcement of the lowest annualized housing starts in the 50 years they have been keeping records, this time it has. We didn't think it would. We didn't think the decline would be as precipitous and protracted as it has been, but if anybody was flying the flag of this should not make a material difference to us, it was me.

Because in my 40 years of history, it never has. You can go back and look at the stats on that and you can't find it. But I'll tell you what, this time is different. As we all know we are in a period of time here that we have not seen in my entire lifetime. It's just different. We are in a real different world right now.

Okay. Thank you.

Operator, can you let me know how many calls are in the queue for questions.

We have five questions in the queue.

Okay. That should be the end then we will take all five.

We will move on to our next question from Michael Horwitz from Stanford Group.

Thanks for taking my call, and I will just be brief because there has been a lot of detail. Just to be clear on the San Diego situation and your plan -- you are supportive of them pushing out like this because you planned for this new security release. Are there any other situations where you may have planned adjustments on your offering with other carriers -- or with some of the other utilities? How should we look at that? I know somebody asked the question earlier about if this could push into some other peoples plans, but maybe not on the security front. Anything else we should look at with your offering that people are looking for where they might sway a bit?

So the system is designed so that changes can be made to it over the air. It is certainly our expectation as it is our customers' that we will continue to develop new function and capability, and the customers will have that ability to apply those new releases and functionality over the air so we don't get into a situation which you are describing of inconveniencing our customers or delaying. So, no, it is our hope that the platform that we now have available to them will allow them to proceed with their deployments and to perform dynamic upgrades once the system has actually physically been deployed in the field.

Okay. Great, thank you.

Sure.

Next we will go to Richard Verdi from Sturdivant & Co.

Good evening, thank you for taking my call. Just a real quick question. Steve, I see here the debt to EBITDA ratio is just over four times, is there a target of maybe 3.5 times or 3 times, and if so how long do you think it would it take to get there?

As answered in one of the prior questions, on a pro forma basis with the paydown we are at about 3.7 times. And we expect that trend, as you said, over the course of 2009 and keeping in mind our covenants continue to decline in future years, so we set those up particularly to focus on continuing to repay debt. But that said, as I mentioned before, it is our main focus on cash flow but we have been opportunistic in paying down debt or exchanging as well, where we think that is appropriate.

Thank you that was helpful. Just a broad question here, what are you guys seeing in the water side of the business, are you seeing a lot of opportunity, is it slowing down. Can you just generally speak about that?

Let me just talk globally about it first of all. Remember we have got global operations in Actaris where we cover the rest of the world, and we've got US -- a little metering business in the US but mostly the AMI, AMR business in the US. We haven't seen a slowdown really in our water metering business and our water AMR business. I am really going to hand this over to each particular -- to Philip and also to Marcel just for a couple of brief comments on the water side. We are not seeing a huge slow down in that area, so Philip.

When I made the comment that we have not identified a trend by commodity, by that I meant is it just electric, gas or water. We had a nice year in water in 2008, and we are actually projecting another nice year of above average growth. So water has been a strong spot for us.

And Marcel.

Marcel speaking. On top of my mind what is specific to the water industry is that today something like 30% of connections which have no meter, which is just about 300 million points across the world. One of them being UK, and UK is moving more and more into water metering. So for those reasons we are still very positive on the water business line of the Company.

Okay. Thank you very much, and congrats Malcolm and LeRoy.

Thank you.

Next we will go to Alex Kurtz from Merriman Curhan Ford.

Yes, thanks for taking the question. If you could reiterate the tax rate -- the effective tax rate for 2009, then looking at OpEx, where are the levers again? I think Deloris, you were talking about G&A and sales and marketing, could you be a little bit more specific around where you can make those improvements and what the levels would look like from Q4 to Q1? Thank you.

This is Steve. On the tax rate we expect about 27% for 2009 similar to 2008, but that can fluctuate a bit based on the mix of business over the course of the year.

Regarding our OpEx, remember we had some significant expenses in 2008 regarding Sarbanes-Oxley. We have taken those out for 2009, not completely but we have taken them down. We see a basic flat or reduced spending in OpEx.

Yes, Alex, we obviously don't give guidance quarter to quarter for operating expenses, but you can infer from our guidance we are expecting a lower Q1. So operating expenses as a percent of revenue will probable be a bit higher in the first quarter. But what we were talking about before is kind of a year average.

Okay. Thank you very much.

We will take our final question from Sanjay Shrestha from Lazard Capital.

Thank you. First of all, LeRoy, Malcolm, congratulations. (multiple speakers) pretty transparent about the transition here. Quick question. When you talk about the low end of the number for 2009, LeRoy, given your experience in this industry, are we sort of baking in that the Euro goes against us and things are going to get worse, because -- when you gave your preliminary guidance before, you said it is going to be probably flat year-over-year. Am I hearing you right that we are maybe being a bit more conservative given sort of the uncertain world we are in right now?

You are hearing me absolutely correctly, we are being more conservative.

Okay.

Without question.

So now in terms of us being at that low end versus that high end, do we need to see both, let's say the stimulus package hitting as well as some of the large AMI moving forward, or could we get there even with just one? In terms of sort of coming in at the higher end of that range?

Certainly for North America would say yes, you could do it with just one.

Okay.

Obviously, a change in currency rates one way or another could put you at either end of that guidance range.

That was what I was trying to get at. So if both happens, and currency goes against you guys, there is still a buffer that could end up coming into the high end of the range?

Yes, it depends on how hard the currency goes against us. If it does -- currency going to be an interesting issue all year long because I think we could see some pretty wild swings from the year to back of the year.

In terms of the ongoing deleveraging and anticipated phenomenal cash generation next year, so is there a chance that we are probably just going to continue to focus on deleveraging, or given the environment are you starting to see some attractive opportunity that might make sense as a tuck-in acquisition and things along those lines?

We won't avoid a very attractive tuck-in acquisition, but our entire focus is on delevering given just the state of the economy and the state of the world right now. So we are far more focused on just delivering. But if something was extremely attractive and it was not a budget bender, yes, we might consider it.

Got it. That's great, thanks a lot guys.

There are no further questions at this time.

Operator, this is LeRoy. I am going to make a couple of closing remarks and then turn it to Delores. First of all, let me say -- I could say it has always been fun, it hasn't always been fun, guys. There have been moments of challenge but always respectful, and I appreciate that. It has been an interesting tour of duty. I appreciate your following of Itron, your interest in us, and your support of what we are trying to do here.

This is a great Company with seriously great employees. My moving out of the picture does nothing more than create space for Malcolm to step into and take this thing to even a higher level. There is a huge opportunity ahead of us. We happen to be in a goofy year, none of us want to be here, none of you, not any of us either. But we are where we are, and our great strength is that we will get through this in good style. We will come out the other side with even better performance and better opportunities. With that, thanks for a good time since the year 2000. Delores.

I just like to say thanks for joining us on the call, sorry it was so long today. Hopefully we answered all the questions but feel free to give me a call if you have any follow-up questions. Thanks, operator.

Ladies and gentlemen, an audio replay of today's conference will be available this afternoon. You can access the audio replay by dialing 888-203-1112 or 719-457-0820 with the passcode of 5350842, or go to the Company's website, www.Itron.com. This concludes today teleconference. We would like to thank you for your participation, and have a great day.