Itron Inc (ITRI) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Itron, Incorporated fourth quarter 2009 earnings conference. Today's conference is being recorded. For opening remarks, I would like to turn the conference over to Deloris Duquette. Please go ahead.

Good afternoon everyone, and thank you for joining us today. On the call today we have Malcolm Unsworth, our President and CEO, Steve Helmbrecht, our Chief Financial Officer and Randy Dwiggins, our incoming Vice-President of Investor Relations. Steve will begin by giving us a financial overview of the quarter and year and then Malcolm will discuss his initiatives for the year and give you some information about our expectations for 2010. After that, we will take your questions. Our earnings release included non-GAAP financial information that we believe enhanced your overall understanding of our current and future performance. We also have a supplemental slide deck that is intended to augment our prepared remarks as well as provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will talk about today. You can find this supplemental information on our corporate website under the Investor Relations tab.

We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release, in the comments made during this conference call and in the risk factor section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I would like to turn the call over to Steve Helmbrecht, Itron's CFO.

Thank you, Deloris. I will give an overview of our results for the fourth quarter and full year 2009. We will talk about our capital structure and actions to strengthen our balance sheet, and we will comment on our outlook for 2010. There are a couple items in the quarter that had an impact on our earnings, both positive and negative, to bring to your attention. We performed and completed an analysis of our operations in Brazil which led to a decision to discontinue certain product lines and streamline service operations. The total expense related to this initiative was about $8 million and negatively impacted non-GAAP EPS by about $0.20. Our tax benefit during the quarter and the year resulted from lower tax on repatriation of foreign earnings and an increase in R&D credits and foreign tax credits which positively impacted EPS by about $0.14. With that, I will move now to our operating results.

In our last earnings call, we talked about Q3 being a tough quarter. But we said there were some encouraging indicators in the fourth quarter in terms of a firming up of our AMI delivery schedules and increase in our 12 month backlog. After three quarters of consecutive declines, we had growth in Q4 with revenue of $477 million, which was $44 million, or 10% higher than the fourth quarter of 2008 and about $68 million higher than our revenue in the third quarter of 2009. Our revenue growth was driven by a number of factors. We saw significant growth in AMI shipments in Itron North America. Our OpenWay shipment in the fourth quarter were more than double the third quarter as we moved toward a full ramp rate on these projects. AMI revenue accounted for over 35% of total Itron North America revenue for the quarter. We were encouraged by some year end utility spending. In particular, we saw year end orders for gas modules which drove part of the growth. In International, revenues declined about 5% compared to the fourth quarter of 2008 in constant US dollars. Gross margin for the quarter was 30.5%, which compares unfavorably to 33.6% in the fourth quarter of 2008. Itron North America gross margins were 3 percentage points lower this year than last year. Product mix is a big factor. We had a higher percentage of AMI shipments during the 2009 quarter at lower margin at lower margin whereas 2008 revenue included a higher mix of AMR meters and modules. In Itron International, gross margin for the quarter was negatively impacted by the expenses related to discontinuing product lines and streamlining our operations in Brazil. Without this expense, gross margin would have been comparable to 2008.

Moving to operating expenses, total OpEx spending was up somewhat from 2008, primarily due to foreign exchange rates, but remained in line as percentage of revenue. Despite the higher revenue during the quarter, our non-GAAP operating income continues to be low. Non-GAAP operating margin was 8.6% for the quarter, down from 11.2% in the fourth quarter 2008, due primarily to the lower gross margin and increased expenses. We had a non-GAAP tax benefit of 16% for the quarter and a non-GAAP tax benefit of 2.9% for the year. Better than our expectations due to lower tax on repatriation of foreign earnings and the impact of R&D credits and foreign tax credits. Non-GAAP diluted earnings per share was $0.82 for the quarter compared with $0.71 in the fourth quarter of 2008. For the year, we had $1.7 billion in revenue compared with $1.9 billion in 2008. FX drove about half the decline with the rest coming as a result of the economic slowdown, uncertainty related to stimulus spending and the transition to AMI.

In International, we saw about a 4% decline for the year in constant US dollars. Our non-GAAP operating margin is 8.5% for the year compared with 12.1% in 2008, due primarily to the decreased revenue in gross margin. Non-GAAP diluted earnings per share for the year was $2.12 compared with $3.36 in 2008, a decrease of 37%. Our fully diluted share count for the year increased from $35 million to $39 million shares as a result of the equity offering and convertible debt exchange in 2009. Cash flow from operations for the quarter was healthy at $54 million with $141 million in cash flow from operations for the year. Capital expenditures were $15 million for the quarter and $53 million for the year. We had free cash flow of $39 million for the quarter and $88 million for the full year. Drivers for free cash flow in the quarter included the impact of FX rates, lower interest expense and lower CapEx.

Turning to liquidity,our cash balance was $122 million as of December 31. We have about $75 million in unused capacity on our $115 million revolver line. The rest is currently being used for standby letters of credit and performance bonds. And we have an ability to increase our revolver by $75 million or more. We had adjusted EBITDA for the quarter of $58 million and an adjusted EBITDA margin of 12%, our best quarter of performance this year. However, our adjusted EBITDA for the year was $189 million, with an adjusted EBITDA margin of 11.2%, significantly below our 14.7% EBITDA margin in 2008.

As reminder to our debt investors, we add back stock compensation expense when calculating EBITDA for debt ratio purposes. Stock compensation expense for the year was about $17 million. We had about $52 million in cash interest expense in 2009 compared with about $72 million in 2008. In addition, we had about $8 million in debt fee amortization in 2009 compared with about $9 million in 2008. At December 31, we had about $800 million in total debt at a blended interest rate of about 5.6%. During the quarter, we made $39 million in debt payments, equal to our free cash flow. For the year, we reduced debt by $397 million inclusive of debt repayments as well as shares we issued at the beginning of the year in exchange fir the convertible notes. Since the April 2007 acquisition of Actaris, we have reduced our debt by over $850 million, a reduction of over 50%, bringing our debt-to-total capital ratio at December 31 down to 36%. Our debt to EBITDA ratio was 3.9 times at December 31, well within our maximum covenant of 4.5 times. As we move into 2010, our credit agreement calls for continued tightening of our covenants with a maximum debt to EBITDA ratio of 4.25 times at the end of Q1 and 3.5 times at the end of 2010. We are comfortable with the gradual tightening of the covenants as it is consistent with our objective to grow EBITDA and repay debt.

Bookings for the quarter were $397 million for a book-to-bill ratio of 0.83 to 1. For the full year, we had bookings of $1.8 billion for a book-to-bill ratio of 1.1 to 1. Bookings in the current period were much lower than 2008 Q4 bookings of $733 million, which included $334 million related to our AMI contract with CenterPoint Energy. Our 12 month backlog increased from $749 million to $807 million during the quarter, due primarily to the inclusion of scheduled shipments of our OpenWay AMI solution in 2010. Our total backlog at December 31 was $1.5 billion.

Moving now 2010, Malcolm will provide a framework in terms of key financial drivers and growth rates. I want to provide a few points in addition to the information contained in the supplemental slides. We have control of our operating expenses such that we can hold the rate of OpEx growth at lower level than top line growth. We expect operating expenses comprised of sales and marketing, R&D and G&A to be in line with 2008 levels in terms of percentage of revenue. We have factored into our budget and intend to restore certain compensation and benefits that we discontinued in 2009, including the restoration of our 401K match, reinstating our regular compensation review processes and bonus and profit sharing plans. These are reflected in our margin and profitability expectations. For the year, we expect our non-GAAP effective tax rate to be in the low to mid-20s percentage range. We had many one time items in 2009 related to foreign tax credits which will not be repeated in 2010. This effective rate range is inclusive of the $5 million manufacturing tax credit in the US we were awarded in January. We expect capital expenditures to stay in the range of slightly north of 3% of revenue, focused primarily on increasing capacity and upgrading technology.

In closing, we faced a lot of challenges in 2009. We reduced costs, but more importantly, we continued to invest in automating our manufacturing processes in both the US and our international facilities in order to take full advantage of the huge global AMI opportunities. With the steps we took to reduce debt and strengthen our balance sheet, we have positioned Itron for solid earnings and cash flow growth in 2010 and beyond.

Before turning over the call, I would like to recognize to Deloris Duquette, who has been our VP of investor relations since 2006 and has served during a time of significant growth brought on by the Actaris acquisition as well as growth in investor interest and analyst coverage during that time. Deloris is rejoining the North America business unit as VP, Sales Development and Operations to manage sales operations including proposals, business cases and training. Doloris' successor will be Randy Dwiggins. Randy has been with Itron for nine years in a variety of roles, and for the past two and a half years has been based in Brussels as the controller for the international business unit. He will be moving back to Liberty Lake as we transition this role in Q1. I will now turn the call over to Malcolm.

Thank you, Steve, and good afternoon, everyone. As you can see, our fourth quarter results reflected a turnaround for us operationally. Our North America revenue was $27 million more than last year because we had some year end spending from customers. And more importantly, our AMI deployments are finally ramping after years of testing. As well, foreign exchange rates were finally moving in our favor when compared to 2008. Good news to end a very tough year, and a great start to 2010.

I wanted to cover a couple of things today. Give you a status update on some of our major North American AMI projects, talk about what is going on in the energy and water industry on the global basis, and then end with some thoughts on 2010. So here is where we are with our major AMI rollouts. We announced in late January that we had shipped 1 million OpenWay end points, a great milestone and obviously, that number is growing every day. We continue to make great progress on our AMI deployments, and I'm feeling positive about the system, its capabilities and our customer projects. Several of our customers received stimulus funding, and some of them may accelerate their deployments. This could increase the rates of OpenWay shipments even higher than we originally planned. We have already taken steps to increase our production capacity if needed, and we are putting in place plans for execution.

The press has focused on the Department of Energy stimulus grants for smart grid, but don't forget that the Environmental Protection Agency has issued grants in the water space. Our water business has been awarded nearly 200,000 automation and leak detection end points for customers that received stimulus funding. Very exciting. We are also aggressively competing for a number of North American AMI projects, and I feel that we are now in a much stronger position than we were in 2009, mainly because we have over 1 million end points in the field, and more are being installed every day. And this makes a big difference to new customers. But also, we have system enhancements that will be released this year in OpenWay that include higher transmission rates and full IP to the meter.

The industry itself continues to be quite strong, and the emphasis on upgraded infrastructure, including smart metering and smart grid technologies, continue to be at an all-time high in North America. We had a couple of nice acknowledgements over the past few months. The first was in January when our smart grid solutions were recognized for their contribution to a robust clean energy economy by the US Department of Energy with the award of tax credits for clean energy manufacturing in the United States. We also received a Grid Vision award from the International Engineering Consortium. This award recognizes Itron's significant advances towards a smarter,more efficient and more reliable power grid and specific listed our OpenWay system and our IEE meter data management software. I think these awards validate what we have been saying all along about the importance of smart metering and in particular, our OpenWay and meter data management solutions.

Grant recipients in the US are finalizing their plans for deploying approved projects. These approvals take many forms, including commission approval, board of directors approvals, vendor selection, potential trials and other actions. Even though it's been more than three months since grant recipients were announced, there have been very few contract announcements. This will likely change over the next several months as more utilities get closer to finalizing their projects.

On the international front, that have been several actions. I attended a conference on climate change in Copenhagen in December. While there were not any formal actions or dates that came out of the conference, there was certainly alignment in terms of acknowledging the challenges the world is facing and acknowledging that smart metering systems are at the cornerstone of the answers to those growing problems. We announced a 1 million point water AMR contract with Yorkshire Water in the UK, which is our largest water AMR project to date. This contract incorporates our European designed AMR system, Everblue, along with our US hand held technology and meter reading software, MVRS. We won another Everblue contract in Mumbai. The first ever water AMR project in India.

IEE, our meter data management software, is increasingly recognized as a key element in smart metering and smart grid systems globally. And we have been able to achieve and maintain a global leadership position with awards in Europe and Australia, as well as in the US. We have returned our strategy in Brazil and see excellent opportunities. We also had a number of successes in other countries in our pipeline of requests for proposals, and pricing for smart meters in AMI systems continues to be at record highs. These awards, particularly the hand held system and IEE wins, validate our long term strategy of intracompany technology transfers. Now let's talk about 2010. Our service and manufacturing organizations will be highly focused on executing against our current North American AMI contracts. Our worldwide sales organizations are all focused on winning new AMI and AMR business and growing our overall metering business. Our marketing and product development teams are driving product and systems strategies and offerings and increasing coverage in many of the countries in which we do business. And finally, we will continue to focus on managing costs, growing operating income and reducing debt.

Here is our over -- general overall outlook for 2010. We expect that our international revenue will likely remain at low single digit growth rates in local currency over 2009. For North America, we expect 2010 revenue will be 25% to 35% higher than 2009. When thinking about growth rates, both international and North America, recognize that there may still be economical certainty which could make actual revenue trends towards the lower end of the ranges, as well as other opportunities that could make them trend towards the higher end. We believe that gross margins for the full year of 2010 will be somewhat similar to what we were for the full year of 2009 and that we expect to return to low double digit non-GAAP operating margins.

Let me close out by saying that we weathered 2009 better than some companies. But what is important is that we use 2009 to build a very stable base from which to grow upon, starting in 2010. Over the past three years, we have invested heavily in our next generation technology for the smart grid. Nearly $150 million in CapEx and R&D, and we expect to begin to capture good returns on that investment. Our systems have been tested by our customers, all of whom have very high expectation. The systems are performing well, and more meters and modules are being deployed as we speak. We also continue to win other business just beyond electric AMI solutions in the US as evidenced by our announcements of Yorkshire Water, Mumbai, Sand Springs, Alabama Gas and others. I am very excited about 2010, a year of incredible opportunities. And with that, I would like to open it up for questions.

Thank you. (Operator Instructions). Our first question will come from Paul Coster with JPMorgan.

Good afternoon. It's actually Mark Strouse on behalf of Paul. Malcolm, some of the near-term opportunities that you expect to be announced over the next few months, how many of those are actually related to the stimulus and how much is related to just an uptick in spending now that the stimulus spending -- stimulus grants are finally out of the way?

We are involved with quite a few of those activities, but we don't really comment on any particular one in particular. But we are looking at a few of those. We are actively involved.

Got it. Okay, thanks. And then can you help us understand the time line, I guess, for the actual funds to start flowing for the stimulus? Based on you know. The way we understand it is the top ten recipients are supposed to -- are expected to sign contracts with Department of Energy sometime in 1Q. I guess first of all, is that accurate? And then, when would you expect the rest of the contracts to be signed?

Obviously, we can't talk to our utility customers. But there are concerns about tax impact on these awards, and that's going on between the Department of Energy and the IRS. So as far as what's going to be awarded in the next quarter, I honestly can't tell you.

Okay. Thanks very much.

Thanks.

And we will move now to Stuart Bush with RBC Capital Markets.

Hi, good afternoon.

Hi, Stuart.

Can you talk a little bit about your margin outlook for the OpenWay product? I know that you have some initiatives in place to replace some of the components of basics in there, and when and how we should expect that margin outlook to change given that it seems to be a pretty competitive environment these days.

Just to give you an idea, we have included -- if you take a look at the margins that we have talked about, we have actually included those changes in those -- in what we've just talked about. But as we've said many times, we expect that by the end of the year, we will have the next generation of OpenWay Version 2 in production. It will be close to the end of the year.

And Mark, just -- we've talked about this before, just to clarify it a little bit -- Stuart, I'm sorry, to clarify it a little bit. The product will be available, we've talked about the second half of the year. We also talked about each utility is on their own timeline for implementing that. So just because it's available does not mean that that's going to be rolling through our financials.

Okay. One follow-up question on the last one about the debate among the utilities about the tax implications for the DOE stimulus funds. I know that there has been some concerns about the term sheets. Can you talk through a little bit more about how you think some of those issues and what the whole range of issues are to be resolved before utilities go ahead and accept some of the stimulus money?

Obviously, I can't talk for what the utilities are discussing. But we have had some of those that actually have said that they -- I think it has been public statements that they may turn it down because of certain restrictions or whatever. I really don't know. It's going to be a case by case business, I'm assuming. So we just work with our utility potential customers and work through as we go case by case.

Okay. Thanks. I will get back in queue.

Thanks, Stuart.

Now we will move to Steve Milunovich from Banc of America.

Great, thank you. Looking at your total backlog, it actually peaked in the third quarter and was down in the fourth. Is that a function mostly then of not seeing a lot of recent awards? Do you expect your total backlog to rise in 2010, and how do you feel about your market share trend?

Let me talk a little bit about total backlog. If you take a look at the history of what we have done over the past few years, we have a fairly lumpy business, to be quite honest with you, especially in North America. It's a little less lumpy in international. But we have situations where we have very large bookings which will increase the backlog and then we may have an award not that quarter, but the following quarter.

So as far as the total backlog, we have still got $1.5 billion in backlog with an $807 million 12 month backlog, which is pretty incredible for us. But as I say, these bookings can vary. With regards to market share, we expect that we will get back to similar market shares than what we had before, but I don't think we are going to be completely back where we used to be. So going forward now that we are really deploying significant numbers, especially on the electric side, I think we will start to gain some market shares again from people like Howard Scott and Scott Report. Okay?

I got you. And can you weigh in on the issue of what the utility is most focused on? Is it a network decision first and meter decision second? And how do you feel about your communications products, and would you consider selling with someone like Silver Spring on the meter side, or do you just want to sell your full solution?

We do offer a complete solution set, but we also offer a meter on its own. We also offer our communications technologies to other meter providers. So we really have a complete suite of offerings that we use. We don't favor one versus the other. There is a lot of business out there, and I would like to win it. So either whether we use the communication our own, somebody else's, our meter, it's fine by me.

Thanks.

We'll move down to Elaine Kwei with Piper Jaffray.

Yes, hi there. Of the 1 million OpenWay meters that have been installed, can you give us any idea of how the installations look by region and what portion of those have been activated with full communications functionality?

How can I say this? We have -- each particular customer deploys his territory differently. But it's just region by region within that particular customer, and it gets turned on with contractual obligations that we have. They are all slightly different. But as far as I'm concerned, we are -- we have communication contracts where we've got specific percentages that we have to meet on a daily read rate, on a weekly read rate. So we are pretty much in line with what our customers are expecting right now.

And Elaine, just to add, when the units that we are shipping out are inclusive of communication and meters, and so basically, the communication is right there with the meters being installed to form the networks. It's not like we have to layer a separate network on the mesh technology that is already being installed.

Right, and it sounds -- but it sounds like it turns on in a sequence manner. It's not as if it's plug and play right away.

I would not characterize it like that. I would characterize it more so as plug and play.

Okay, great. And in California, the utilities have gotten some pushback on the meters, smart meters due to increased build and disconnects, and with at least one utility getting audited and advocacy groups calling for pauses in installations, is this -- do you see this as any potential risk to 2010 expectations, and is there anything that Itron can do to help address those concerns, or is it just up to the utilities?

Well, first of all, we don't talk about any of our competitors' solutions. We are not privy to that information. With our own solutions, we have to have a complete test solution that we put together. It's taken us three years to do testing. Every particular customer that we've got where we're deploying have done significant testing with end to end testing all the way from meter to communications systems. So we are very confident that our solutions are working fine. I really can't comment on other utilities that's not doing too well.

Great. Thank you.

Okay.

We will go now to John Quealy with Canaccord Adams.

Hi, good evening. First, thank you Deloris, and good luck.

Thank you.

Secondly, on gross margins, Malcolm, if you look quarter-on-quarter in North America, gross margins were up over 300 basis points. Obviously, it would be good to assume -- I assume OpenWay is helping that gross margin ramp. But then you're talking about pressure, and perhaps you can talk about in a little bit more detail about Itron North America and gross margin expectations moving through 2010, because they certainly did pop up in that geography, or was there some other mix issue going on there?

Volume does an awful lot for factories. I've been in this business a long time, and if you put a lot of volumes through locations, you get lots of absorbed overhead versus unobserved overhead in Q3. So a lot of that, John, is based on that. Hopefully we will see more goodness as we go forward with that.

And as a follow-up, if I could, on the international side of the business, low single digit local currency growth kind of where we were last year. Can you talk about how you get additional level of comfort given that the European macro fear is certainly alive and well. Obviously, you've retooled Brazil. Can you tell us how you are getting comfortable with that growth profile and local currency next year?

We are not really seeing very much. When you think about the -- we were down, I think we said 4% year-over-year, John. And if you think the countries that have got problems right now, which is Portugal island, Spain and Greece, they represent less than 5% of our revenue for the Company. So it's not going to be a significant change. And we've not seen any significant changes with some of our larger European countries that we do business with. Just, as I say, so those four don't represent a huge amount, and we are still actively participating with many of those countries, even though they have got some problems economically.

Thank you.

Thanks, John.

And our next question will come from Sanjay Shrestha with Lazard.

Good afternoon, guys. Couple of quick questions. First off, can you talk a bit about the -- when do you guys and how do you guys see this (inaudible) and opportunity materialize for you guys, and what sort of timeline you we talking about on that?

I'm sorry, Sanjay, we missed that word. Could you repeat your question?

Sure. The opportunity internationally with the EDFEN and being -- if you guys could talk about how you potentially see that opportunity materialize for you guys.

EDRS is something that is a customer of the American (inaudible) for some time. I think we have mentioned this to you before. There's one of three of us working on this contract. Their deployment schedule start in 2000 -- their main deployment schedule starts in 2012. And then obviously, the pilot, or the phase one starts in 2010 this year. So we see that really starting to take off, as I say, in 2012.

Got it. Now coming back to this stimulus money one more time. In terms of the North American guidance we talked about, right, so does the low end take into consideration that because of the clarity, or lack thereof surrounding the tax issue on the stimulus money, some of the projects doesn't materialize, and that's how we end up coming to the low end of the growth expectation, and the high end then says there is some clarity? Or the whole tax issue is not even baked in this guidance, and if incremental money does end up flowing, there is further upside to the North American revenue that you guys talked about.

On the low side, Sanjay, it's -- obviously, it's the economy on the highest side. We do not have any of the acceleration of stimulus money in our thoughts for 2010. So if we do get some stimulus money accelerations, it will make a positive impact with us.

That's great.

We have not -- that's not on the high end, no.

Got it. That's good to know that. And one -- another follow-up on that, guys. So how do you sort of see the year progress out? I think, Malcolm you made a comment that we saw the lowest point in the third quarter. So is it one of those where throughout the year, we are going to see nice year-over-year growth, or are the numbers second half skewed? Or how should we think about a bit more distribution of the revenue throughout the year?

We -- one of the things that we thought about is we gave -- I gave some numbers between what, 25% and 35%? It's probably going to be fairly level.

Okay, perfect, perfect. And one last question from me, guys. And again, first, also congratulations on a great quarter and one last thing for me is, what type of pricing pressure are you guys seeing, if at all, in North America? And even with that pricing, it seems like the margin is growing nicely. So can you talk even a bit more about if there is pricing pressure as a lot of the guys, smart grid as a team and too many players seem to get into the market. Is that more than enough for you guys to offset that any pricing pressure from continued volume growth?

The one piece of good information is that we've got -- we've signed contracts with pricing that is firm over the life of the contract, which is good news for us. Obviously, as new contracts come in, in any particular business, you've always got price pressure. We are not seeing huge amounts of price pressure, but you never know. They could be -- it could come in. Right now, we are not seeing huge amounts, but things could change.

Okay. That's great. Thanks a lot, guys.

Thanks, Sanjay.

Steve Sanders at Stephens has our next question.

Good afternoon, everyone. Good quarter. Congratulations.

Thanks, Steve.

First, maybe a question on the North American business. Should we think about the production levels and the shipment levels as we move through 2010 as being sort of a gradual increase from what we saw in the fourth quarter? Or based on the schedule that you see from your customers, is there going to be more lumpiness quarter-to-quarter in terms of production and/or shipments?

Probably a -- as we said, it's a gradual ramp over quarter-by-quarter. Obviously, the important part is making sure you can produce the products on time. At the same time, make sure you can stall them at the same time. So it's -- we've got a gradual ramp from, as I say, Q4 2009 all the way through to Q4 2010.

Okay. That's helpful. And then two quick follow-ups. One is, are you actually on some of the North American RFPs? Are you bidding the OpenWay solution along with a meter only or a com only? Are you doing that fairly regularly now? And then the second question is just, can you drill down a little bit more on what you did in Brazil and how that positions you better or whether that costs you revenue here in the short term? Just some additional detail on Brazil as well.

We're not really seeing the meter proposals, the proposals that are coming out for different solutions of meters and communications? It's mostly, we're bidding our OpenWay solution and our full suite of offering. And I'm going to let Steve talk a little bit about Brazil to answer that question.

Steve, Brazil, your question around what we did there was really to look at our product portfolio and to write off some slow moving inventory and really make decisions and rationalizing the product portfolio and as well as look at our service business and streamline that as well. We don't see that impacting our revenue going forward, because it was, by definition, those are the areas that we weren't seeing growth. I might add too that Brazil is one of the few areas globally where we had any real overlap between legacy Itron business and Actaris internationally. So it's really where we have seen some -- a focused attention here over the last six months or so.

Okay. That's helpful. Thank you.

Thanks, Steve.

Now we will hear from Carter Shoop at Deutsche Bank.

I got disconnected earlier, so I apologize if this question was already asked. If you back out the $8 million from Brazil in the fourth quarter, your gross margin was 32% in the quarter. You are essentially guiding that to be flat year-over-year, despite double digit top line growth. Malcolm, to your point, your volume is -- can bring some goodness. What are some of the headwinds in the first and second quarter of 2010 that is going to limit gross margin expansion for the 4Q levels?

I'm trying to think. We have got deployment schedules in place for North America. We've got all of those installation levels that we are working on. I don't really see any headwinds. You do have -- there could be some fluctuations in commodity prices, but we have got those contracts all laid out.

Carter, just to add to that, a couple of items is, I did mention increased -- some increased compensation expenses which didn't have in 2009, that has been reflected in our overall view for the year. As well as some increase in service levels that tie into our AMI solutions, which will have some impact on gross margin percentages, but not negative to gross margin dollars. As we take on some level of responsibility overall for projects and solutions as we deploy these large projects.

That's helpful. And a quick follow up on the gross margin side. Are there restructuring charges or any other kind of one time charges baked into that 2010 guidance figure?

No.

Second question for you. In regards to refinancing, there is no guidance provided on opportunities there. I imagine that you'll deploy free cash flow to reduce debt in addition to that. How much of the cash currently under balance sheet are you willing to deploy for debt reduction? Another way to look at it is, how much cash do you feel you have to keep on your balance sheet for normal operating (inaudible)?

Well, both for normal operating and for some level of tax optimization with our overseas cash, we are comfortable to $75 million,$85 million level and could bring our cash level down if need be to that. As mentioned, we are at about 121, 122 at the end of the year, but had pretty good pay downs over the course of the quarter, and that's going -- as you said, that is going to be our primary focus, is using free cash flow to continue to pay down debt.

Great. As last question, can you remind us about the timetable for enhancements to the OpenWay platform, in particular the full IP to the meter and also, the increased bandwidth?

We will be doing that by, probably the second half of the year, Q -- not by quarters but by second half of, I think second half in total for IP and also for high transmission rates.

Great. Last question if I may. It sounded like you are expecting the year to be relatively consistent on a quarterly basis. So you are not anticipating a lot of seasonality then, in the first quarter? Is that the right way to think about it?

That's correct. Yes.

Thank you very much.

You're welcome, Carter.

We'll move to Ben Kallo with Baird.

Good afternoon, Just drilling down to guidance for 2010 a little more. How many of those AMI contracts are baked into the guidance? Is it the four main ones in Glendale, or is there something else baked in there? And then I have a follow-up.

They are all in there, all the ones that we have signed.

But no other new ones?

We don't comment on individual. There could be new business in there, we are just not talking about it specifically.

Okay, and then in the past, I think analyst day before last, the last one, you talked about the AMI margin getting up close to the historical AMR margin, so high 30%, low 40%. Is that still the expectation, or is it different now that you have been out there in the market and deployed a million meters?

No. There is two components to what we have got for North American margins. One of them is product margin and the other one is service margins, as Steve said earlier. So when you put -- the total operating margin will grow, but as far as the individual gross margins, you have got product margins and service margin. And the service margin, you can't bid that too high. So overall, the total margins won't get close. The total margins will not be like they were with AMR business, just to reflect that.

Okay, great. Thank you.

We will hear from Ben Schuman at Pacific Crest Securities.

Hi, guys. Can you give a quick update on the AMI rollouts in Europe, how that is evolving in terms of technology and timing of pilot activity and large rollouts in places like UK and Spain? And also, a quick assessment of your competitive position in those countries would be helpful.

Not a problem, Ben. Obviously, the request for -- if you look at what they are doing, the big one in France as EDRF, I think we've said that 2012 to 2017. You said the UK. They've got similar timelines, 2012 probably starting. Spain is the same. They are all around about the same timeframe. It may not be exactly in 2012, it could be a tad before. But I don't think it is going to be much earlier. But they have all got requirements to get all those installations done by about, as we said, about 2018 and 2017. They have got theoretically until 2020, but they have got to get them done earlier than that. So all starting, as I said Ben, probably 2012.

And how about your competitive position? Do you sort of see the same set of players in those regions? Or do you think maybe the Chinese meter companies will be there as well? How do you sea that playing out?

It's country by country. We have a fairly decent market share in Europe on water, gas and electric, and if you look on the electric side, we think that we are quite well positioned to continue with the same sort of market share that we have today, on the electric side for these smart grid installations.

Okay, and then really quickly on the North America pipeline for AMI, do you expect to see several more large IOU deals emerge this year? Or is that going to be mostly smaller deployments?

I think there will be a couple of announcements that will come out this year. Yes?

Okay. Thank you very much.

Thanks, Ben.

We'll move on to Paul Clegg at Jefferies.

Hi, thanks for taking my questions, and congratulations on the nice results for the quarter.

Thank you.

I was hoping to get an update on the status of Detroit Energy. I don't think that is one we've heard about in a little while.

On Detroit?

Yes.

Well, obviously, stimulus is going to play a role in that. Right now, we've got the pilot of 30,000 points, and we are continuing to work with them on a weekly basis. They're finalizing plans right now, so we are working with them. So I can't really tell you that they will do something tomorrow or do something in next month or the month after. But they -- we are working with them, and they're finalizing their plans.

Okay. And then on currency, currency had a nice top line impact for the quarter, it looks like. Was that largely offset on the expense side, or does it have a net favorable impact for the quarter? And obviously, I'm asking because the currency situation has changed a lot since the fourth quarter.

Yes. The FX impact currency for the full year did have some negative impact for us overall as it flows through the bottom line of EBITDA. We've talked about that before, in terms of we are not hedged completely in that regard. So we did see some overall for the year. But for the quarter, we really didn't see a big impact from FX on overall EBITDA results or earnings at that level. Not for the quarter, but for the overall for the year. And clearly, we are seeing a lot of fluctuation right now with FX with the dollar. I've mentioned before, that doesn't affect our core competitive positioning, but does impact our dollar denominated results. And with the recent appreciation of the dollar, we should see some headwinds in that regard.

Got you.. And is that -- are you anticipating some headwinds in the guidance that you gave?

No, we are not. Overall, we are comfortable where the rates, overall where we are, in terms of that in currency and where we talked about. And also, we were talking about specifically international growth this year in terms of local currency growth and not adjusting for that very reason. We wanted to give you a sense of the growth at this core level.

Got you. So if you still saw the dollar where it is today, you might see some translation headwind?

There's some translation adjustment one way or the other, compared to the average rates for the whole year '09.

And then just a strategic question here. Is there any risk of the utilities waiting a bit for your gen 3 AMI product, leaving a gap in orders in front of its introduction?

One of the things that we make sure we have designed is a over the -- downloadable solution. And so whatever we deploy is, you don't have to go and change out the meter. So you can download it over --

Okay, very good. And then just finally, there is some examples I guess of PSC environments becoming, let's say, more challenging in certain states. As you talk to utilities about AMI, are you getting a sense that that's entering into their thinking at all, in terms of getting favorable decisions on rate approvals? Is there any sort of -- are there any delays being caused by sort of a negative transition of the PSC environment?

When it comes to approvals through the Public Service Commission, they have been very favorable so far on some of these AMI solutions. Some particular -- one in particular delayed it a little bit, but I don't think there is any major issues with the Public Service Commissions. I was down in Washington, not last week, the week before, and they are all very favorable towards the smart grid implementations.

Okay, thanks very much.

Now we will hear from Colin Rusch with ThinkEquity.

Thanks so much and congratulations. A follow-up on your recent announcement on the Indian market. Can you talk a little bit about the Asia/Pacific opportunity, specifically in Australia, India, China and South Korea? Just in terms of quotation activity and discussions there and on implementing and upgrading the newer technology.

In particular in Australia, we -- there are a number of things -- a number of areas at work in Australia. Water is one of them. We made a recent announcement that we won some -- an AMR project on the water side. We have gotten some announcements recently with regards to our meter data management systems, and that usually is a precursor to lots of activity going on with AMI. So we are well positioned in Australia.

In India, yet we are now working very closely with Mumbai, where we have won an AMI or -- it's sort of an AMI, AMR solution for water again. So we are seeing that part of the world quite active. When it comes to China, they recently made an announcement that they are going to award -- they awarded 2.6 million smart meters to about 16 companies. All of those companies are Chinese companies. So it's definitely moving in a direction of changing the landscape from regular metering to smart metering across all of those countries. As I say both on the -- I saw about Europe, but it's certainly happening as well in the Asia parts of the world.

And a follow-up on that, are you seeing different types of approaches to the North American market where you are selling the full OpenWay suite to breaking up the solution into pieces in the Asia/Pacific markets at all?

It's a sort of mixed bag. We are willing to do whatever the utility would like us to do. If they want to have -- if the proposal comes out as four RFIs, we will work with them. We will provide meters and coms separately and meter data management solutions, et cetera. So we have got a portfolio of products that will allow us to do that, which is a complete end to end solution or individual, so.

Perfect, thanks so much.

Thank you.

Jeff Osborne with Thomas Weisel Partners has our next question.

Great, congratulations on the strong topline results. I just had a couple questions. Could you, Malcolm, touch on the increased bandwidth that you announced with some of the features you will be offering with that? In particular, will you be able to leverage your network to do some distribution automation capability?

Sure, we have about -- I think the announcement that we made is ten times what we are today. And that allows us to do a whole series of solutions for utilities by increasing the bandwidth and the speed.

Okay. And then on the, I think Deloris was hinting at this earlier, but you mentioned you will have the new product refresh out in the second half of this year. But just historically speaking for the Company, when you add product refreshes, what was the qualification time to get that tested through the labs and in the field for the customers? Maybe if you had something in AMR or some other type of technology in the past that you can comment on. Is it a couple quarter process or a couple weeks?

It varies. It can range from two months to six months, and then it really sort of varies by customer. But anywhere from two to four to six months.

Understand. And then just the last question I had was investors tend to focus on the 100 utilities that did win stimulus. But can you comment on the 300 that didn't? What are you seeing them do after the herculean efforts that they put forth? And coming up with plans, are you seeing RFP activity accelerate from those types of utilities?

It's an interesting situation, because there are 300 that didn't get anything, and now they have got to go back to the regular solution of a business case and working out what they do. And it's a case-by-case situation with each one of these 300 utilities.

Okay, thanks much.

You're welcome.

We will go now to Scott Graham with Ladenburg Thalmann.

Hey, good afternoon, and congratulations, Deloris.

Thanks, Scott.

I wanted to ask you -- you're welcome. I wanted to ask you about the North American sales number, maybe drill down to that a little bit. Because that was a pretty big number in recognizing that this really isn't a seasonal business. I guess my question is, did we get more of the incremental growth, say sequentially from the third quarter from an acceleration in the new contract -- in the new contracts that you have and are deploying? Was that the core business? Was it both? Can you give us an idea where that came from?

Most of the revenue that we have in the backlog -- remember, we have got an $804 million backlog. A significant part is a schedule for AMI deployments that has always been in there. It's been in there for quite sometime. We've talked about it over the phone before, and it's not acceleration. We have no acceleration in those plans. It's all just a regular deployments that we have had from day one.

So then the four big contracts that are set to ship over and are shipping, three of them at least, unless all four of them are, there was no pull forward here. This was really organic, what you were talking about.

It is exactly what we have been saying for quite some time, is that these contracts that we have are being deployed. We've got -- we've heard this for a long time from everybody. Yes, the solution's working perfectly. We are deploying as we speak, and we've got these ramp rates that have been there for quite sometime. So now we were deploying everything.

Got you. Okay. If I -- tell me if my math is correct here. If I were to take from the electricity meters number of 1.14 million in North America and deduct from there the AMI of 490,000, am I getting a true North American non-AMI meters number there?

Yes, but what you have got to watch, Scott, is that consists of regular meters, it can be AMR enabled meters, it can be GG meters, et cetera. But yes, those are non --

Fair enough. So that business looks like then it declined by about 30% this quarter (inaudible) AMI.

Well, we have been talking all along about the cannibalization of that business. And I think in Steve's prepared remarks, he said the great (inaudible) in North America AMI, but it was offset by some of that decline. That's correct.

That's exactly my question. So this is not surprising to you at all, okay.

No.

So the meters with AMR, here is another question, and really want to dovetail this into emerging markets. Meters with AMR grew about 10% year-over-year now, even though it was an easy comparison. Up is up. And I'm wondering if, was a lot of that now starting to come from some new merging market? Because I know you have a tremendous opportunity there, or are they still kind of locked in or some of these emerging markets now may be jumping -- thinking about jumping right to AMI. Maybe characterize, if you would, where the emerging market opportunity that you've talked about, where you guys are on that.

From a standpoint of emerging markets of AMI, very, very little of our European business and our international business today is AMI solutions. So it's the traditional business. We do have some smart payment solutions that re in there, which have been doing for a number of years. But there is no real growth numbers there for any of the smart solutions. We have obviously -- we were seeing some activity in the Middle East for AMI, which includes water, gas, electric and heat metering. And then in Africa, we have got prepayment solutions. But overall, we have not really seen any huge growth numbers yet but that's there for the future, and that's what we have been talking about earlier as far as emerging countries.

Maybe I said it wrong. I was referring to the AMR, improvement in the meters that were up 10% year-over-year in the quarter and was wondering --

And I wouldn't make a trend of that.

Pardon?

Honestly, I wouldn't make a trend of that. It just happened to be the mix during the quarter.

Okay, fine. Thank you. That's all I had.

You're welcome. That's fine. Erin, I'm just doing a time check. It's been an hour, and how many -- is there any more questions holding?

Yes, ma'am.

How many?

Four at this time.

Okay, why don't we take those four and then we will be done.

Okay, we'll first go to Jake Greenblatt from Barclays Capital.

Yes, thanks. This is [Michel Shelton], Barclays Capital. A follow-up on the biggest question on AMI, how do you see the AMI revenue for North American business trend on a sequential basis going forward? Is it going to be relatively stable, given the deployment schedules are not accelerating? Or are we seeing it pick up gradually here?

We have in 12 month backlog, we said $804 million. That is the releases that we had for quite some time on those AMI projects. The public -- the filings have shown you what their deployment schedules are, both from southern Cal, both from San Diego. So if you look at the filings, we are in line with what the filings are. And it's been that way right from the beginning. So it's fairly level. And obviously, as we move into the future, we will start adding more and more from the 12 month -- from the large -- from the total backlog to the 12 month backlog. But right now, it's fairly level.

Okay, great. And have you -- can you talk about any free cash flow guidance for the year? I'm sorry, I missed the early part of the call. Can you talk about any kind of free cash flow generation for the year?

This is Steve. I didn't give specific number and won't do that, and we certainly see substantial improvement in our free cash flow year-on-year to 2009. And as mentioned, we will be deploying that free cash flow to pay down debt.

Okay, great. Thank you very much.

Thank you.

We will move now to Mark Rogers with Gagnon Securities.

Thank you. Just looking ahead to 2011, and I apologize if that's looking a little far ahead, but I'm looking at debt to EBITDA covenant. And is it safe to say that in the first half of this year, given how long it took for contracts to materialize from backlog to revenue for the four existing AMI contracts, is it safe to say that within the first half of this year, the Company needs to book a large AMI contract like one of the four that you already have in order to continue generating the EBITDA that's necessary to stay above the covenant threshold?

No, in fact, we're -- as I mentioned, we have about three-quarters of turn of cushion. And as we look out, we see improvement of that over time.

Thank you.

We will go now to [Scott Kirk] from T Cap.

Hi, thanks for -- Deloris, thanks for staying late to take my question. I just want to make sure I understand the guidance correctly. You are guiding North America revenue up 25% to 35%. Is that correct, Malcolm?

Yes, that's correct.

Okay, did you give any comment around international revenue? Yes, we said low single digits.

In local currency.

In local currency, yes. Okay, and then going to the margin flattish, you are talking about corporate margin being flattish, around 32% from last year.

Yes, the annual numbers, yes.

Which is -- I've got 32. And then operating margin, I think you said a low double digits. Is that correct?

That's correct, yes.

Up from 8.5 for '09?

Yes.

So a little bit of leverage on the margin.

Yes.

Okay, and thank -- did you give any kind of comment to the backlog or the bookings going forward?

No, we didn't say that, no. We've obviously got the backlog information that you have access for in the supplemental slides.

Is there something in that information that pertains to the trend going forwards with the schedule -- the engagement schedules that you laid out?

No,. It's looking backwards.

Okay, thank you.

Thanks a lot.

And finally, we will take a follow-up question from Stuart Busch from RBC.

Yes, hi. Just wanted to follow up on your OpEx charges in the Q4 quarter. I notice they took a bump up. Was that -- should we be expecting that similar run rate going forward? Or was there is a lot of end of year payments there?

Again, some of that OpEx mentioned -- Stuart, this is Steve, in terms of we had some of those charges. But as we look ahead and as I mentioned in my prepared remarks, we were looking at overall OpEx as percent of revenue more in line with '08 numbers and not with '09.

OpEx as a percentage of revenues similar to '08?

Yes.

Okay. Thank you.

Without amortization, Stuart.

Yes, and -- Stuart, yes, excluding amortization of intangibles.

Right, of course. The pro forma OpEx.

Yes.

Okay. Thanks a lot.

And that's all the question we have.

Okay, well I would like to thanks for your interest in Itron, and if you have any more questions, don't hesitate to call Deloris Duquette and then -- or Randy Dwiggins in his new role. So thanks very much for your interest.

Thank you. There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1-888-203-1112 or 1-719-457-0820 with the pass code of 5300243, or go to the Company's website at www.itron.com. Again, that concludes our conference. Thank you for joining us.