Itron Inc (ITRI) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Itron Inc. first quarter 2010 earnings conference call. Today's call is being recorded.

For opening remarks, I would like to turn the call over to Ranny Dwiggins. Please go ahead, sir.

Okay. Thank you. Good afternoon, everyone, and thank you for joining us.

On the call today we have Malcolm Unsworth, our President and CEO, and Steve Helmbrecht, our Chief Financial Officer. Steve will begin by giving us a financial review of the quarter, and then Malcolm will provide a business update. After that we'll take your questions.

Our earnings release includes non-GAAP financial information that we believe enhances 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 the supplement 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 can differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call, and in the risk factors section of our 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.

With that, I would like to turn the call over to Steve.

Thank you, Ranny, and good afternoon.

I'll give an overview of our results for the first quarter, and we'll talk about cash flow and repayment of debt. First, I would like to make a comment on the tax benefit for the quarter. The benefit resulted, in part, from the receipt of a clean energy manufacturing tax credit awarded as part of the American Recovery and Reinvestment Act. In addition, we had a benefit related to the reduction of tax reserves for certain foreign subsidiaries. In total, these tax-related items positively impacted non-GAAP EPS by about $0.26.

With that, I will move to our operating results. We had a good quarter, with strong earnings and cash flow from operations, as well as a sizable increase in our 12-month backlog. Revenue in the quarter was $499 million, which was $111 million, or 29%, higher than the first quarter of 2009, and about $22 million higher than the fourth quarter of 2009. Our revenue growth was driven primarily by record revenue of $243 million in Itron North America. We had significant growth, with OpenWay shipments in the first quarter equal to our total OpenWay shipments for all of 2009. Our increased level of research and development spending over the past few years is beginning to produce strong returns, with OpenWay revenue contributing approximately 45% of total Itron North America revenue for the quarter.

Although international revenues increased by about 3% compared to the first quarter 2009, they declined about 6% in constant U.S. dollars, due to continued soft demand and economic conditions in certain markets. The Euro to U.S. dollar rate increased to an average of $1.38 in Q1 versus $1.31 in Q1 2009, and the dollar appreciated against other major currencies we do business in as well. Stronger foreign occurrence resulted in approximately $22 million in additional international revenue compared to Q1 2009. Gross margins for the quarter was 31.8%, compared with 33.4% in the first quarter of 2009.

Itron North America gross margins were 4.6 percentage points lower this quarter than last year. The decline in margin in North America was primarily due to a change in product mix, with increased shipments of first generation OpenWay meters at lower gross margin. In addition, we had increased low margin service revenue, as well as increased compensation expense. In Itron International, gross margin for the quarter was 31%, comparable with the prior year.

Total operating expenses, excluding amortization of intangible assets, were about $108 million, an increase of about $10 million, due mostly to increased compensation expense resulting from the reinstatement of bonus and profit sharing plans, 401-K match and regular compensation reviews. As a percentage of revenue, operating expenses decreased to 21.6% in 2010 compared to 25% in 2009. Amortization expense declined from $23.5 million last year to $17.8 million this year.

Non-GAAP operating margin was 10.3% for the quarter, up from 8.3% in the first quarter of 2009, due primarily to the much higher revenue and lower growth in operating expenses. We had a non-GAAP tax benefit of 4% in the quarter, compared with an expense of 32% in the first quarter of 2009, due to the tax items I mentioned. Non-GAAP diluted EPS was $1.01 for the quarter, compared with $0.33 in the first quarter of 2009.

Our non-GAAP fully diluted share count for the quarter was 40.9 million shares, compared with 36.5 million shares in 2009, primarily as a result of a convertible debt exchange and an equity offering in 2009. Our diluted share count included approximately 130,000 shares related to our $224 million in convertible notes, as our average stock price during the quarter was approximately $67 per share. At a stock price above $65, the convertible notes will continue to be a factor in dilution going forward.

Cash flow from operations for the quarter was a record $66 million. Capital expenditures were $16 million for the quarter, and we had record free cash flow of $50 million for the quarter. We had adjusted EBITDA for the quarter of $66 million, compared with $43 million in the first quarter of 2009, an increase of 54%. Adjusted EBITDA margin was 13.2%, compared with 11% in the first quarter 2009. Cash interest expense was $12.6 million in the quarter, compared with $15.5 million in Q1 2009.

At March 31st we had about $726 million in total debt, at a blended interest rate of about 5.3%. During the quarter we made $53 million in debt payments, about equal to our free cash flow. Our debt-to-total capitalization ratio at March 31st was 35%. Since the acquisition of Actaris in April 2007, we have repaid over $900 million in debt, inclusive of the Convertible Debt Exchange. Our debt-to-EBITDA ratio was 3.2 times at March 31st, well below our maximum covenant of 4.25 times.

Bookings for the quarter were $481 million, for a book-to-bill ratio of about 1 to 1. Bookings were lower than Q1 2009 bookings of $625 million, which included $260 million related to our OpenWay contract with San Diego Gas and Electric. Our 12-month backlog increased from $807 million to $981 million during the quarter, due primarily to the inclusion of additional scheduled shipments of our OpenWay product. Our total backlog was approximately $1.5 billion at March 31st, comparable to our total backlog at the December 31st and March 31, 2009.

Moving now to the full-year 2010, we expect our non-GAAP effective tax rate to be in the mid-20s range for the next three quarters, which brings our expectation of an annual non-GAAP tax rate in the high teens, excluding any additional discrete items. With the recent appreciation of the dollar versus the Euro, our expectations for the whole year are based on a Euro-dollar rate of $1.36.

In closing, we had a very good start to 2010. We had strong topline growth, and our efforts to limit operating expense growth resulted in improved operating margin and cash flow. With continued focus on using free cash flow to reduce debt, we are strengthening our balance sheet and are well positioned to support our growing business.

I will now turn the call over to Malcolm.

Thank you, Steve, and good afternoon, everyone.

I'm delighted that the positive momentum that began in the fourth quarter of 2009 is continuing into the first quarter of 2010. Revenue for the quarter of $499 million was $111 million greater than the first quarter of last year, a 29% growth. Bookings are very good at $481 million, given that we did not have any large OpenWay bookings in the quarter. And, as Steve already pointed out, we had excellent cash flow and non-GAAP earnings per share, and I'm thrilled the operating margins are moving in the right direction. 2010 is off to a great start.

I want to cover several things with you today. I'll give you an update on our major North American OpenWay projects, talk about other developments in North American gas and water markets, cover what's happening internationally, and lastly, provide an update on the rest of the year.

With regards to our OpenWay contracts, installations continue to successfully ramp. Our Q1 OpenWay shipments of 1 million units equal the total for all of last year. Our execution and deployment on these contracts is going well, and continues to be a top priority. To date three of our customers, Glendale, Center Point and DTE, have announced they've finalized their agreements regarding stimulus grants with the DOE. As we've previously noted, Center Point announced they intend to use the money to accelerate their deployments from five years to three years. This had a positive effect on our 12-month backlog. And DTE just made their announcement this week, and we are very encouraged that they have notified us of their intent to move forward with their first-phase deployments. As a reminder, total backlog at the end of Q1 does not include DTE.

Interest in AMI systems remains high. We expect that several AMI projects will be announced in the next few months, as a number of utilities finalize their AMI and Smart Group plans. Our goal obviously is to win as much as this business as we can, and I feel we're very well positioned. Also during the quarter we installed additional OpenWay production equipment in our factory in Minnesota, relieving a potential bottleneck in the manufacturing process at our Oconee facility, and ensuring continuity of supply for our customers.

Beyond electric AMI, we saw strong performance in our gas and water businesses in North America. During the quarter we signed an agreement with Oklahoma Natural Gas for an expansion of their mobile AMR gas system in Oklahoma City in Tulsa. We also signed a number of AMI water contracts in the quarter that were related to stimulus funds from the EPA. Sand Springs and Stillwater are two examples.

Last month at a distributor trade show in Tampa, we announced our new gas AMI system, which is part of our ChoiceConnect solution. We have also released our new water AMI solution for ChoiceConnect. There is a very high level of interest for these two offerings, which include the ability to migrate from mobile AMR to a fully functional two-way AMI solution, with many added benefits for gas and water utilities. This proves once again that our ChoiceConnect system, which focuses on operational benefits, continues to be a compelling story, with technical advancements that enable the benefits of AMI by layering on network infrastructure. We believe there will be a convergence of AMR and AMI technologies, and that our ChoiceConnect system will be an integral part of that solution.

And as a final comment on Itron North America, we reached three major milestones this quarter. Since inception, we have now shipped more than 30 million gas modules, more than 30 million CENTRON meters, and now more than two million OpenWay units.

Now let's trun to International. The economy in Europe is recovering more slowly than in the U.S.. However, we are seeing in bright spots, especially with our Smart Payment and AMI offerings, which gives us confidence for the remainder of the year. We recently announced an important win for gas prepayment contracts with Azerigas in the Azerbaijan Republic. In fact, this contract represents the second phase of a project that began last year. This is important for two reasons. One, it demonstrates the opportunities to help utilities in developing countries to address enhanced customer service. And two, this is a great example of leveraging the synergies we're realizing with one of Itron's highly successful technologies in one part of the world, in this case a technology developed in South Africa, to other parts of the world with similar requirements.

We see continued progress in the UK and France on their AMI direction. The UK is entirely deregulated, even to the meter level. So a centralized, interoperable communications solution is expected. We feel that we are very well positioned as we provide meters, systems, and managed services to most of the major energy supply companies. In France, our portion of the first phase of the ARDF AMI project for 300,000 PLC meters and network concentrators is on schedule, and is planned to be completed this year. And using similar technology, we've been selected for AMI projects similar, involving a number of French municipal electric utilities. Also, SEI, one of the EDS companies, selected Itron to provide a key component of a smart-grid solution that enables secure and safe integration of renewable energy sources into electricity networks.

Global interest in advanced metering applications for gas and water utilities continues to be high. During the quarter we announced two major water AMR contracts, Yorkshire Water in the UK, and the municipality of Mumbai in India. These activities demonstrate a key Itron competitive strength -- our global footprint, and our leading market position.

You will recall that my focus this year is in three areas. First, execution of our current North American OpenWay contracts; our networks, smart meters, and gas module deployments are clearly on track, and we continue to focus on this objective. With two million OpenWay points deployed, the message is clear -- Itron is gaining momentum.

The second are I discussed was winning new business. We booked $481 million dollars in the quarter, and our proposal pipeline is strong, and we are aggressively competing for new business.

My third area of focus is managing costs, growing operating income, and reducing debt. We clearly made great strides this quarter.

So let me conclude my remarks with some comments about 2010. We expect the total Company revenue growth rate over last year to be between the high teens and low 20s. Let me provide some color around this. We have a record backlog of $981 million, as well as a good pipeline of potential business. We also have uncertain economic conditions around the world. Large projects in North America, where implementation schedules are subject to change for many reasons; and changing exchange rates, which, at the moment, are creating headwinds.

Although we feel it's important to provide you with our current revenue expectations, it is just as important to point out some of the factors that could cause our actual results to exceed or fall short of these expectations. We expect that the full-year gross margin percent should be similar to 2009, and operating expenses for the full year as a percent of revenue will be similar to the 2008 percentage, excluding amortization of intangibles. Non-GAAP operating margins is targeted at a low double-digit percentage.

In summary, we are very excited about 2010. We are finally getting the returns on the investments we've made in R&D, manufacturing and services over the past three years.

And with that, I would like to open it up for questions.

Thank you, sir.

(Operator Instructions)

And we'll take our first question from John Quealy with Canaccord.

Hi. Good afternoon. Good quarter, guys. A couple of questions. First, in the Itron North America business, for the quarter it looks like EBIT margins on a GAAP basis were up about 140 basis points from Q4. Assuming no material change in the gas and the water in the legacy AMR business, is it safe to assume you moved up about 140 basis points on double the manufacturing of OpenWay? Is that a decent correlation to look at?

Yes. This is Steve, John. Yes, I think that's reasonable.

And right now the mix out of Oconee, AMI, non-AMI, it's about 55%-ish AMI meters right now?

I think so, maybe a little bit higher than that.

Okay. So that's -- all that being said -- what did you say it was?

45% OpenWay roughly in total.

Okay. So when you look at this guidance of full -- you know, for the whole Company now, when you go to the high teens, low 20s, what type of OpenWay capacity are you talking about in Oconee? Is it going to 60 or 70? How should we think about that? And the second part of that question is, for every movement in capacity, do we get a linear or nonlinear change in that EBIT?

Well, a couple of things, John. You know that we have added some more capital equipment into our operation in Waseca. We did that this quarter, which gives us additional capacity for, as you know, for our printed circuit boards. As far as the -- as far as the capacity, you know, yes, we are, we are running -- I think we're running three shifts, but I could be wrong. But we do have, we do have overtime capability. So we've got -- we've got expansion in that -- in that area. And your second question again, John, was what?

Just in terms of the margin expansion, you know, assuming that gas and water in non-AMI stayed constant in North America, as that mix goes up of OpenWay versus non OpenWay in Oconee, are we looking for a linear change in up margins? What are the sensitivities we should be thinking about with op margin expansion, given what we all would assume is increasing penetration of OpenWay, given the public deployments of three or four big customers?

Well, this is Steve. A couple of things. Clearly as we see volume increases, we are going to see some goodness in terms of absorption overall, one. We also have a healthy mix of non OpenWay business that will continue over time. And that certainly, you know, is reflected in the bookings. We talked overall about this quarter without any substantial OpenWay bookings. So while we see a good mix at the 45, 55, we see, and Malcolm talked about, strength in the water and gas businesses.

But overall in terms of Impact on EBITDA, we will see some absorption and some improvement. At the same time, we are taking on these projects. We've talked about service revenues as well that will have some impact on the downside, as we flow that through as we take on prime responsibilities for some of these projects.

Okay. And just two more questions from me, one on international, down a little bit more than I thought with local currency. It looks like electric meter volumes were down. Is it cannibalization, AMR, AMI, is it market share? Is it just lumpiness in Europe? Can you talk about that a little bit?

You know, we've seen declines in the basic electric meters that were affected by the economic conditions, and really a bit of a slow start to this year, but no real -- no real issues going forward, John.

Okay. And my last question back to North America, AMI and OpenWay, so, Malcolm, right now the 660,000 meters that DTE have announced that they want to do a pilot of or initial deployment under stimulus, that is not in 12-month or full year backlog; and then what about Center Point gas? Is that in there as well? And then my last follow onto that is, you folks have come on late and hard at the SoCalGas opportunity. Regardless of whomever wins that, have you noticed the change in characterization of utility customers to receive you, and the receptiveness of Itron, given you've got 2 million deployed now?

I thought it was one question, John.

You know, I took some liberties. Sorry.

Well, first of all, DTE is not in the backlog and neither is Center Point -- and neither is Center Point. That's not in the backlog.

Center Point Gas.

Center Point Gas, that's not in -- so that would be additional.

As far as SoCalGas, we're just competing with like with the other competitors as well. I really -- you know me, I never comment on that until a decision is made, John.

Just to color that, John, this is Steve. Yes, overall we are seeing interest in ChoiceConnect in our gas offerings overall, as Malcolm mentioned. So clearly we've been focusing on that in some of the recent trade shows, and showing customers and prospects what we're doing in that area.

We had very good acceptance of the AMI gas introduction at DistribuTECH. It was excellent.

Great. Thank you.

Thank you, John.

And we'll take our next question from Steve Sanders with Stephens Inc.

Good afternoon, everyone.

Hi, Steve.

Good quarter. Just back to the guidance and the revenue line, last quarter you gave us a breakdown of what you expected North America versus what you expected internationally; can you just revisit that? It feels like North America is trending quite a bill higher, and maybe international is a bit of a disappointment relative to your expectations. Can you just give us the domestic stricken versus international revenue breakdown?

We sort of decided that we'd just give you the total numbers, you know, Steve. Sometimes, you know, this volatility with exchange rates, some up, some down. We've basically given low teens to mid 20s as the total, without breaking it down to INA or into INL.

Okay. Is it fair to say generally that relative to a few months ago, your domestic revenue expectations have gone up, your international have gone down?

What can I say? We -- I do believe that is correct.

Okay. Just a question on the -- on the EEM sale that was announced recently. Just what's included in that? What was the rationale? Is there a P&L impact that we would notice? And does this say anything about kind of the potential over the long run for you to capture some incremental revenue opportunities around the data and energy management that's coming out of the smart grid?

Good question, Steve, but the EM suite was actually -- we brought that on when we acquired the Silicon Energy acquisition. Very small piece of the business, very limited number of customers, and it won't impact the business at all. So we just wanted to focus on the rest of it rather than, you know, have that included in our offerings. So no, it just addresses a different customer base, Steve.

Okay. And then, and then finally, just to make sure I understand it, the Center Point acceleration is now in the 12-month backlog. There is nothing significant in there for DTE. So absent a significant win during the current quarter, should we think about the 12-month backlog starting to flatten out or decline? How should we think about that? You know, and understanding that there are always big deals out there that can change that answer pretty quickly.

And I'm -- as we move forward and we start making shipments, I mean, the backlog is a calculation of, you know, of orders and revenue. But obviously we've -- we're not going to comment on anything going forward. But there's still quite a few large deals that have got to be decided upon in the next -- in the next few months. So we'll see. We'll see what happens.

Okay. Thanks very much.

Okay.

Thank you.

And next we'll hear from Carter Shoop with Deutsche Bank.

Good afternoon. Congratulations on a good quarter.

Thank you, Carter.

Can you talk about the pipeline of activity for non-AMI programs? You obviously had a strong bookings quarter, both in North America and Europe. Can you comment a little bit about what you see in your immediate pipeline?

Yes. We -- one of the things that we've been priding ourselves on all along is that we have certainly not abandoned our AMR products. In fact, what we've done is converted them over from AMR, as you said on the -- on my script was AMR to AMI. And so the projects that we're actually looking at are AMR projects that have been now converted into AMI. So we're seeing this convergence now of going from a standard -- on our gas side, for example, it's a standard product now that's two-way communication.

So not only are we seeing our legacy products shifting from AMR to AMI, the product itself now is a dual product. As we said, there's a convergence between the two. There's a lot of activity that's going on on the gas side, and lots of activity, as we've seen, on the water side. We're just launching our new ChoiceConnect 100W product. So, yeah, we're seeing activity.

Okay. And then on the water side, it looks like the meters are up about 21% sequentially. Was that primarily internationally? I assume it's primarily internationally, given your footprint there relative to North America. Can you talk about a couple of the big drivers there? You know, do we start shipping in Mumbai and also in Yorkshire this quarter?

No. They're not included in our shipment numbers in the UK, nor in Mumbai, not in this quarter, no. So -- but we are seeing some, some activity there. As you said, we've increase. And the first quarter, remember, is also a good quarter for heat meters as well, basically mandated out of Germany. So a lot of it comes from there.

Okay. Last question, can you quantify the compensation expenses quarter-over-quarter? You mentioned how they started to increase here in the first quarter of 2010. Any way to comment on what that is sequential increase was?

This is Steve. It's really reflected overall in the -- because of compensations spread across, you know, all aspects of category, it's hard to quantify that per se. So we tried to quantify in terms of talking about margins themselves and gross margin line, but also operating expenses of percentage revenue really being in line with the 2008 numbers overall, and so that's reflected in the results for Q1. And as we're looking out over the course of the year, we've really pretty much included that as well. So that's in place.

When you look at that, when you look at kind of the segment breakdown for operating income, you saw that corporate number jump up from about $7 million to $11 million quarter-over-quarter. Do you anticipate that corporate expense to continue to increase throughout the year or is that kind of a good run rate going forward?

It's a good run rate.

Great. Thank you very much.

Thanks, Carter.

And next we'll hear from Benjamin Schuman with Pacific Crest Securities.

Hi, guys. Good afternoon.

Hi, Ben.

Can you comment quickly on how much of the Q1 bookings number in North America came from water roughly?

Not particularly. I don't have that at my fingertips, no.

Okay. And with --

I'll get back afterwards on that.

Okay. Great. Thanks. With international revenue down, currency neutral due to the economic conditions, but given kind of the solid bookings number, do you see we'll see maybe some overpronounced seasonality in the international revenues here?

I'm not really certain, Ben, to be honest with you. You know, we've had -- we've had a couple of quarters where we've seen in declines, but, you know, some good bookings this quarter. I'm not certain. Usually Q1 is pretty heavy on the water side in certain parts of Europe because of regulation, and that's the heat side. But no, I'm not really seeing -- I don't really -- and Steve --

I was going to say no, we don't see a lot of seasonality and, again, strong bookings for the quarter do give us confidence going in the rest of the year as we think about international in that regard. But Malcolm did talk about a number of large bookings that really didn't have a lot of shipments in the first quarter. So we have, you know, as Malcolm said, business by business there's some seasonality in the water, heat in the first quarter, but, overall, no, we don't see that.

The goal obviously, Ben, is to get the kind of projects that we've got in North America, which are quite large. We did get Mumbai, and we also booked the Yorkshire Water Project, and then we've got the Azerigas one, and they've got -- gave a deployment schedule. So that sort of takes out a little bit of the seasonality once you get some of these large contracts. And it's really seasonality on when the installation of these AMI and AMR projects so --

Great. With the UK, Malcolm, looking at making some kind of determination on the AMI central coms model in the next few months, is there a particular technology or communications model that Itron is advocating for that market?

We -- remember that this is -- there's approximately 47 million points in the UK. It's very, very deregulated. So yes, central coms are needed. As far as what central coms technology, it hasn't been determined, and it's not yet law. It is just a recommendation to go with central coms.

We have some very, very good relationships with all of the energy providers. So, you know, I'm feeling quite good about it. And we've got our pay-as-you-go system, we've got our smart payment system. So there will be a melding of the two of those, I think, going forward. But, no, there's not been a decision yet on any of the -- on any of the central coms.

Okay. But from an Itron standpoint, you wouldn't favor one form of coms over another?

No. Not in this light. We'll just integrate whatever is the central coms into our Smart Metering solution.

Last one. Just to follow up on Steve's question, can you give us what the enterprise energy management revenue was in 2009 just for modeling purposes?

It was fairly minimal. Just to give a sense, it was less than five employees in the group, and fairly minimal overall in terms of revenue impact.

So maybe a couple million?

Yes. It's not material at all.

Okay. Great. Thank you.

Thank you, Ben.

And we'll take our next question from Andrew Wessel with Macquarie Capital.

Good afternoon. I just wanted to follow up on Steve's questions about the revenue guidance. I understand you're not breaking out the geographies, that's fine. If you take the weight weighted average growth from the previous guidance, that would be low single digits -- I'm sorry, low teens, excuse me. Now you're talking about high teens to low 20%. I'm just wondering how much of that came from better than expected in the first quarter versus improved outlook in the rest of the year?

I think it came from both. It split out the difference, but certainly, you know, seeing Q1 results. And also it came from the backlog, which is the $981 million, clearly while that's a 12-month number, which will extend into 11, it gives us indication as orders are firming up. And, again, that's something Malcolm mentioned, is that there's a lot of fluid at this to this right now as plans are being made, deployment schedules are rolling out, the 12-month backlog we feel is a very good reflection of that, certainly see that increase.

Okay. Great. My second question is about the manufacturing capacity. My understanding, and I see you sort of addressed the percentage of AMI coming from South Carolina earlier, but my understanding is that the capacity there would have been able to handle a whole lot more. So I'm a little curious as to why you're expanding it in the other facility rather than keeping it, you know, getting more scale in the South Carolina facility?

There are a couple of reasons for that. One is to -- to be prepared for scale, if necessary. The second is around business continuity planning. And these are large projects for our customers, and they want to see the ability to have continuous supply in certain scenarios. And by having a backup capability online now in our Minnesota plant, that enables that. And so that's something that we've committed to a number of customers as well, and bringing that online helps us achieve that as well.

So it is beyond increasing capacity and addressing any potential bottlenecks. It's also helping us in terms of ensuring a reliable supply going forward.

Remember, we do not have a capacity problem.

Okay. Great. Great. Then the last question is sort of a general question. You've put out a handful of press releases in the past few months about contract winds, generally internationally. My question is just at what point do you decide whether or not to issue the press release? I mean, obviously you have a ton of smaller contracts. Presumably it's only the big ones that get announced publicly in realtime. It is a matter of the number of meters, the dollar amount, strategic I implications? How do you decide whether or not to issue a press release for these wins?

You know, the customer also has a big say in this as well. Sometimes they do like to present will the fact that they're, you know, advancing their technology with the customer. So it's a joint decision between the customer and us.

Okay. Great. Thank you very much, guys.

Thank you, Andrew.

And we'll take our next question from Charles Fishman with Prichard Capital.

Hi. Just one question. What percentage of the stimulus awards now have -- at least the ones that are relevant for you guys, have been signed at this point between the Company and the DOE?

There are approximately, I believe, about 40. It's public -- it's public information. There's about 40 out of 100 that have been signed, but many of those have not made their vendor choices yet.

And, well, there was about 100 in total, but, yes, a lot of those weren't really relevant to your business?

There was -- there were 400 applications, over 400 applications. There was 100 accepted. And there were approximately, you know, 18 million end points that were, that were in question to be determined. And about half of those have been spoken for. So probably about 9 million all together that were up for, up for decisions, and they haven't all been made yet so --

Okay. Thank you.

We're participating in them.

Very good. Thank you.

Okay. Thanks, Charles.

Next we'll hear from Stuart Bush with RBC Capital Markets.

Good evening, Malcolm and Steve. Great quarter.

How are you?

Good. My first question is about the margin outlook on your electric AMI business. Can you talk about progress on the cost cuts there on the design, for example, with the ASICs? So including benefits from scale, are you passing those on in your RFP bids to stay competitive, or is there a chance of margin expansion?

Remember what we've -- I mean, I've talked on this many times with you guys. As far as the ASIC development, it's completely on schedule. We've talked about that potentially being accepted in the second half of the year. However, obviously, we want to make sure that they get accepted by the customer. The 40 million points we have under contract are, you know, we set prices.

So, no, that won't affect anything we've got going forward. We're not going to give it away. We'll keep most of it. So pretty much on plan. And, as you said, we'll keep the -- we'll try to keep the margin, not give it all away. But, you know, we can [discern] that later.

Sure. And then what can you comment on the prospects for there to be recurring revenues out of some of these AMI projects? For example, do you expect going forward that you would be able to sell more updates to customers, or are those basically rolled into the initial contract?

Some of our updates are when there are changes to either the product or the requirements. Obviously if there are opportunities to do something, because it is firmware downloadable upgrade over the air. So there could be opportunities. They're not baked into any of our plans right now. But that gives us a differential advantage over our competition, because we are down downloading firmware right to the edge device or right to the end point. And the -- you know, potentially all the way down to using a Zigby communication link. So right now there's nothing in there. Whether you can, we'll see. We'll see in the future.

Okay. So there's nothing in your current contracts that prevent you from potentially tapping into that later on?

It sounds like a good opportunity, if we could.

Okay. About, you know, PG&E, there has been some concerns about customer billing accuracy. And the Public Utility Commission there instituted a third-party consultant to review this project. I was wondering if you expect other commissions to do something similar, and if you've noticed any heightened public relation concerns by utilities for these smart grid projects?

First of all, I definitely don't comment on other vendors' solutions, I will not comment on that. But has there been other activity? You know, in -- most of the big installations right now are going on in California. So you've got the California utilities that could, you know, potentially do something. Then we've also got Texas as well. It really is up to the utility with the Commission. And if the Commission decides to do some investigation, they will certainly use third-party -- third-party tests. You know, we've seen this in -- you know, we've seen this in California. Will we see it in Texas? I'm not exactly certain. But we welcome it. We absolutely welcome the situation with that, Stuart.

Great. Then the last question is for Steve, on your expectations on debt paydown. Do you expect that you'll continue targeting paydown of debt in the range of quarterly free cash flow? And can you give us any thoughts you have on a target debt-to-EBITDA ratio that you're looking for?

We do expect to continue to deploy our free cash flow or use that for debt repayments over time. And there is some seasonality, you've seen that in the past in that flow of free cash flow over the course of a year. Certainly I'm not saying that will be the same amount each quarter. But in terms of our strategy right now, it is to continue to repay debt.

And long longer term, comfortable in the two times or less debt to EBITDA, and the way to get there is both reduce debt and improve EBITDA over time. So clearly we're very pleased with, you know, the progress that's been made, particularly in Q1, with the fairly significant improvement in that ratio, and all of the other ratios that go with that as well. So our needs in terms for cash in terms of CapEx are fairly modest, it hasn't changed, about 3% of revenue. And we -- you can see some of the other working capital metrics have just been -- you know, the operating groups are doing a very, very good job of ramping this business in a cash-efficient way.

Okay. Great. Thanks, guys.

Thanks.

And next we'll hear from Colin Rusch with ThinkEquity.

Thanks for taking the question, guys. As we hear reports about competitors struggling to implement their AMI solutions, is there an opportunity for Itron to pick up some of that business? How should we think about how that hits the income statement for you guys?

You know, as I say, I'm not really commenting on other -- other choices that customers have used. They take their time on making decisions. Utilities are -- they will try something, if it works, great, if it doesn't work they'll -- you know, they'll refresh the technology.

And, you know, if other utilities' selections don't work, we'll be in there. We always are in it for the long haul. We're there for -- to support the customer, and we're always presenting our solutions to both existing customers, new customers, and competitors' customers. I mean, yed, we're always, we're always showing what we've got. Having 2 million now in the field is very, very helpful, as far as having shipped 2 million. So we're always looking at opportunities, Colin.

Great. And then the second question, just changing gears into the water opportunity, you know, we've seen an increasing amount of interest and activity on developing projects. Can you talk a little bit about the potential for acceleration in bookings in that part of the market, particularly for international opportunities?

There's a significant amount of activity that's going on right now in the water industry. You know, last month or the month before there was an article that appeared in National Geographic on the scarcity of water. If you start looking at the contracts that we've got and we've booked in Yorkshire and also in the UK, there's a significant number of meters that -- customers that do not have metered solutions. In the -- we talked about Mumbai; there's 185 million gallons of lost water to date out of just Mumbai.

There's an immense opportunity worldwide, as far as I'm concerned. There are 300 million customers in the world that are not metered. That gives us the opportunity to sell both meters and also AMR and leak-detection solutions. So I'm thrilled about the fact that there's lots of opportunity on the water space.

Great. Thanks so much.

Okay.

(Operator Instructions)

And next we'll hear from Vishal Shah with Barclays Capital.

Hey, guys, this is Jake [Greenblad] for Vishal Shah. Thanks for taking my question. I wanted to ask a question about OpenWay deployment. I notice you guys said that you shipped about 1 million units this quarter, which I believe is the same amount that you shipped all of last year. How can we think about that going forward for the rest of the year?

Obviously all of the contracts that we have are public disclosure. They've got their deployment plans filed with the commissions, so we follow those plans. As we talked about with Center Point, it's public knowledge that they've gone from five years down to three years. We've baked that into the -- into our -- into our 12-month backlog. So we follow whatever the guidelines are that our utilities have filed. So that's what we do.

Okay.

If they accelerate, we can accelerate.

All right. That makes sense. So the DTE contract you said was not yet in the backlog. Do you have any expectation as to when that will be firm enough to put into the backlog?

This quarter.

This quarter. Okay. And then just a quick follow-up on the AMR business. You said you expected to convert a lot of those AMR contracts into AMI contracts. It looks like it was down about 25% quarter-over-quarter. Can we continue to see the shifting at that rate, or do you think it would slow down? Any comments there?

The convergence between AMR and AMI is significant. What we're finding is that we have a significant market share on gas. Gas AMI -- gas AMR, the product that we ship today is an AMI solution, it is not an AMR solution. You can use it for AMR, which is one-way communication, if you wish, but it actually has a two-way communicating device.

So what we're finding is that the AMR business is turning into AMI business. So we're saying -- is the traditional business going to decline? No. As far as I'm concerned, it's a change going to AMI from AMR. So our technology is completely changing to everything that we're shipping, or everything that we produce and have designed is now AMI.

Great. Thanks, guys.

Okay.

And next we'll hear from Sanjay Shrestha with Lazard.

Congratulations. I got disconnected here, so I apologize if this was asked earlier. How are you guys? One thing on the revenue guidance here, previously you guys said if the stimulus money started to flow, that would be an upside and that's not in your guidance. Now there's a clearance from a tax standpoint. Is it now sort of the revenue numbers you guys are talking about from this year is reflective of your belief that you're now more confident that stimulus-related is going to contribute to 2010 growth? Is that how we should think about it?

Okay. Sanjay, if you just think about -- and I'm going to reiterate what we said earlier.

Sure.

The Center Point stimulus money of $200 million is now reflected in our 12-month backlog.

Okay.

So what they've done is the money that they have received has gone from five years to two years. So yes, we're starting to see some of that.

Okay.

Obviously the Detroit Edison booking has a significant number of -- or has money in for stimulus money, so that will make a difference.

Okay. Perfect, perfect. One quick follow-up then, guys. In terms of you guys gaining such an unbelievable attraction with your OpenWay here in this market, how would you characterize the competitive landscape? And even the customer feedback, which used to be very strong for you guys, has it gotten even stronger despite all new players, smaller and bigger ones, coming into the market?

You know, there was a significant thought of -- as far as this time last year we hadn't produced and shipped -- we hadn't shipped really any OpenWay products. And the big deal was we didn't have enough in the ground. We've now shipped 2 million. It's working well, and I'm very confident about the future, Sanjay.

Okay. Terrific. Again, congratulations on a great quarter, guys.

Thank you.

And next we'll hear from Sean Hannan with Needham & Company.

Yes. Good afternoon. Thank you.

Hi, Sean.

Hi. So really quick, you've touched on a couple of comments throughout the call around the international outlook, and that also there is some sluggishness there today. But perhaps if there's a way, Malcolm, can you provide a little color around what is it that you're maybe seeing in terms of discussions that are starting to opening -- starting to open up that may have been previously clamped down due to the macroenvironmental pressures? And what of these regions do you view, if any, that are more likely to and navigate discussions aggressively in the medium term, say, the next 12 to 18 months?

The Energy Service Directive is what's been the term in Europe.

Hello?

Yes. Can you hear me? I said the Energy Service Directive is what's been -- is what's driving the requirements in Europe. And obviously they have to, "they" being the 27 member states and all of the various utilities, have to have their deployments done by 2020. Some countries are ahead of others. But is it going to happen? Are things going to accelerate with that in the next 18 months? I would probably say no. I think it's going to be a bit later. I think a lot of pilots will come in in the next 18 months, as we've demonstrated with the EDRF, we've got 100,000 points there that are being deployed this year. Then obviously you've got Spain, you've got the UK. There will be activity over the next 18 months. But is there going to be mass deployments like the U.S.? My answer is I doubt it.

And the gentleman's line has disconnected, sir.

If we can go on to our next question with Scott Graham with Ladenburg Thalmann.

Yes. Hi, good afternoon. My line was also disconnected, which is why I'm at the bottom of the queue I guess. I think we're having some issues here. Nevertheless, I wanted to ask you how you were seeing your bookings? Contemplate raw materials, inflation, and maybe if you would differentiate between 12-month backlog and the total backlog, if there is a differentiation?

I'm sorry, can you repeat that one more time? Sorry, Scott.

Sure. Okay. The question is, we have raw materials now inflating across the board. And I was asking how -- how you contemplate that within your bookings? And is there a difference between bookings that are headed to, let's say, the 12-month backlog versus the total backlog?

Scott, this is Ranny Dwiggins. As far as raw material and that sort of thing, we are seeing some increases in prices. Nothing really significant at this point. It hasn't had a big impact on our operations. We monitor that very, very carefully. It's extremely important. And we have purchasing folks all of the time focused on that, and making sure they're making smart buys and coordinated purchases.

As far as how we segment that between the backlog and new bookings and that sort of thing, you know, those costs impact us as we -- as we manufacture the units, and we book those -- book those estimated costs into our forward-looking numbers that we've talked about today in terms of gross margins and that sort of thing.

Are you still there, Scott?

He has disconnected.

I'm not sure what -- okay. This is Steve. Just to add to Randy's answer, in terms of the backlog itself, it's a revenue backlog. So costs notwithstanding, it's indication.

But the point I was going to add to that is as we get more visibility in the form of firm orders in backlog, that actually is helping us in costing, in the sense that that's giving our purchasing managers and others more visibility into the future that they certainly factor into their supply decisions. And overall, we feel we do a very good job in managing costs in that regard in our inventory management, which requires a very tight interaction between the purchasing agents and the selling groups in terms of understanding forward demand.

(Operator Instructions)

And we'll take our next question from Ben Kallo with Robert W. Baird.

Hi. Good evening. Thanks for taking my question. As you look at the market and the end points that have been awarded, speaking of electricity AMI here in the U.S., what would you calculate your market share as today? And then how do you see that changing going forward?

Of the awarded contracts I think we basically have approximately 35%-ish of what's been awarded. As far as what's going forward, I'm not certain, [Robert]. Obviously we compete every day for business, and, you know, we're diligently going after all of these accounts. So we're always looking at opportunities.

Is that announced contracts, the number you gave? Some contracts have been announced that you've won, or are there contracts you've won that haven't been announced that you are including in that number?

The ones that have been announced, that's right.

Okay. And then could you, could you -- I think Stuart asked this about the technology upgrade, and how that was affecting whether you were going to get benefit on the margin side of AMI going forward, or if you were going to pass that on through your customer through lower prices to them? So are you competing more heavily on price now on some of these RFPs that are about to be awarded?

You know, we've competed on this business forever, to be honest with you. We've been in the business a long time. We now how to --- we know how to negotiate contracts. We know how to continually focus on reducing costs, improving functionality. So it's just something that we're used to.

Do you give it to customers? It depends, you know. Do you take it and give it to your shareholders? It depends. Obviously it's a -- it's something we're always looking at. So I don't think there's any one answer there, Ben.

Great. And then going forward in Europe, could you -- could you elaborate on the gas AMI opportunity there, the size of that opportunity?

The gas AMI opportunity for Europe is what you're saying, right?

Yes. Exactly.

Well, there are huge -- the difference between gas companies in Europe and gas companies in the U.S., let me just talk a little bit about that. You've got -- I'll give you an example, Gaz de France. Gaz to France has got about 11 million points. In the UK there are 20 million gas endpoints, but it's not one large utility. You've got -- you've got ETAL Gas that's got about 11 million points.

So you've got very large utilities in Europe that are going to be going forward with some of the changes. And it's a little bit different than it is in the U.S.; they're bigger and they make some significant decisions when it comes to changing out technology. So the opportunities are very, very large in Europe for gas. And the opportunities in the U.S. are very large as well. We have a very large market share there. So overall the -- our gas AMI solution is -- is starting to take hold in the U.S, and at the same time there's a lot of interest in what we're doing in the U.S. overseas as well.

Okay. Thanks for taking my questions.

Thank you.

And we'll take our next question from Michael Coleman with Sterne, Agee. Mr. Coleman, your line is open.

Good afternoon. 0050

Hello.

Hi there. Hi, Michael.

Good. I was disconnected as well, so I'll be quick with my question in case I'm disconnected again. But the Minnesota facility, could you kind of -- one, is the configuration similar to South Carolina? The second is, are you producing meters, manufacturing meters there now? The third, you know, what was the CapEx associated with that facility? And did you incur any start-up costs, noncapitalized start-up costs in the quarter, or will you in the second quarter, associated with the Minnesota facility?

Well, first of all, I just want to explain that the Minnesota facility is not a new facility. We've had this facility really for years and years with Itron. It does not make electricity meters. It specializes in battery technology for gas and water modules. It also has significant Made-in-America solutions for the gas and water utility.

And so what we've done, as Steve said earlier, for business continuity we moved -- we developed and installed some equipment that would duplicate what we were doing in South Carolina. So, Steve, do you want to comment a bit more on that?

Yes. Michael, the strategy was to increase capacity and, again, provide that continuity in the circuit board assembly area, particularly for OpenWay meters. And so the cap ex was around $4 million or $5 million in total, very little operating start-up charges. It's an established factory, well run, and, as Malcolm mentioned, running our high-volume manufacturing today for both water and gas, and historically for electricity when we were in that business in the past. So a lot of experience there.

And, again, that product is then shipped and that comes out of that is then incorporated into the final assembly in South Carolina, and that's how we were able to increase capacity overall. So really as an expenditure and deployment of capital, it's actually fairly modest.

Okay. Good. And I wanted to go back to something. Again, I was disconnected. But you were talking about that the AMR is turning into AMI. And I think, Malcolm, you said to an earlier question that everything you've produced and shipped is now AMI. Do I understand that correctly?

It's not quite everything. The gas and water products that we've got are now being converted over to AMI, and they're two-way communicating devices. We still ship a substantial amount of AMR products, but our new developments are all AMI developed, whether they're water or gas. As I say, there are still a significant number of one-way communicating devices.

Is that all of your question, sir?

Okay. Next question, Operator, please.

Yes, sir.

(Operator Instructions) And we'll take our next question from Mark Rogers with Gagnon Securities.

Thank you. You have guided to high teens, low 20s total revenue growth. Previously you talked about 25% to 35% growth in North America and low double -- low single-digit growth in international, correct?

Yes, that's correct.

And earlier in the call you said that you're getting slightly more bullish on North America, slightly more bearish internationally. So what I'm trying to understand is with the high teens, low 20s revenue growth, that would imply something in the order of 50% year-over-year growth in North America. And with gross margins at 2009 levels, how -- I mean, how do you get those gross margins, given that the incremental growth in North America is mostly AMI?

Well, as Malcolm said, we're not going to talk about the growth rates for either of the two individually, but as we talked about overall -- and, again, I'm not going to comment on the growth rate per Itron North America. But as we look forward in our gross margins, we're comfortable with what we have given in terms of indication of gross margin overall. There are a number of moving parts. I think we've tried to talk about that today, both prepared remarks and in our answers, and what's driving that. So it's hard to boil that down to one factor. But, overall, we are focusing on that level of gross margin, and as we -- as Malcolm indicated in his remarks, an overall growth rate that we've indicated for the year. So we're comfortable with that.

Okay. And then if I could ask one more. You said you have roughly 35% of the end points of the awarded contracts. Of the remaining 65%, what -- where are you the incumbent meter provider, whether that, you know, be legacy or AMR?

You know, Mark, we have been providing central meters, we said we shipped 30 million central meters.

Yes.

We almost ship to nearly all of these -- many, many, many utilities and customers in the U.S.. So, you know, I don't really know what to say to you. We've been in the business a long time. We've been shipping and producing our CENTRON product since 1998. So we have -- we're at significant numbers of these, of these locations, whether it be metering or many of the AMR customers as well, so --

Thank you.

Okay.

Thanks, Mark.

Okay. Operator, do we have any more calls in the queue?

I do have a followup question from Ben Kallo with Robert W. Baird.

Okay. We'll take that question then, and then after that wed like to close out the call.

Before we take the question, I'd just like to say we notice that there are a number of technical difficulties today. It sounds like several people have dropped off the line, or were dropped. We apologize for that, and will definitely check into that and make sure we get that corrected for next time around. So let's take our last question, please.

Mr. Kallo has disconnected at this time, sir.

Okay.

We do have one other person in the queue, Mr. Jeff Osborne with TWP.

Okay. We'll take that one, and then let's cut it off after that, please.

All right, sir. Mr. Osborne, your line is open.

Okay. Thanks. I got disconnected twice myself. Two questions. Strategically, Malcolm, do you see over the next few years getting into distribution automation in a broader scope? Also I wanted to verify, I think originally the DTE contract was for roughly $350 million, although I think subsequently to that you broadened your scope or entered into a relationship with SmartSynch, the communication partner. So I was trying to get a sense if that contract provider would be the same, if that's hopefully added to the backlog in the near term?

With regards to distribution automation, one of the things is important to understand, and I did say this in our -- in the prepared remarks. We have now working with a -- with some customers outside of North America that actually have put in smart grid solutions with the -- with EDF, using that as a further analysis up the grid.

As far as the U.S., we know that we have utilized partners. We've got 75 partners now that we're working with. So obviously we can't provide a complete solution for everything. So we partner with a number of people. And so that's the -- that's the plan that we have today. Will it change going forward? You know, I'm always looking at alternatives. But today we've got, as I say, 75 partners. Now maybe you could repeat your question about DTE, I'm sorry?

Just as a follow-up to the prior question around DA, it just seemed logical to me as you increase the through-put of your network and you move to an IP-based platform with your new ASIC, that perhaps you would start offering your own projects there are capture the revenue and margin yourself, as opposed to giving it to a partner? Maybe we could talk about that in the future.

With DTE, I believe the original contract was for $350 million. I was just trying to get a sense of your extended partnership with SmartSynch, is that still a fair number to use in terms of the contract value to that offering? Also, if you could break out what the electric versus gas component would be? And if you think both would be added to the backlog at the same time?

Yeah, Jeff, I don't have that information at my fingertips, but I'll tell you what would be good for you. We have a 2010 investor day in New York on May 26th. I think it would be a good opportunity for you and anybody else that's on the call, especially to -- we'll get the invitations out to come and take a look and see what the strategy is going forward. So we'll give you more information then. So I think that would be a good time to do that.

Okay. Thank you.

Thank you, Jeff.

That is all of the questions we have. I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, everyone, for joining us on the call today. And please give us a call, please give me a call or Marni Pilcher a call if you have any questions.

And thank you for your interest in Itron, guys. Thank you.

Thank you. And that concludes today's conference. 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 passcode of 4641152, or go to the Company's website, www.itron.com.

Once again, today's conference has concluded. We thank you for your participation. You may now disconnect.