Itron Inc (ITRI) 2015 Q3 法說會逐字稿

Good day everyone and welcome to the Itron Q3 2015 earnings conference call. Today's call is being recorded. For opening remarks I would like to turn the call over to Barbara Doyle. Please go ahead.

Thank you very much and welcome to the Itron's third quarter 2015 earnings conference call. We issued a press release earlier today announcing our results. The press release includes replay information for today's call. We have also prepared presentation slides to accompany our remarks on this call. The presentation is available through the webcast and through our corporate website under the investor relations tab.

On the call today we have Philip Mezey, Itron President and Chief Executive Officer; and Mark Schmitz, Itron Executive Vice President and Chief Financial Officer. Following our prepared remarks we will open up the call to take questions using the process that the operator described. Before I turn the call over to Philip please let me remind you of our non-GAAP financial presentation and our Safe Harbor statement.

Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our investor relations website. 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 and the comments made during this conference call and in the risk factors section of our form 10K and other reports and filings with the Security and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Now please turn to page 4 in the presentation and I'll turn the call over to our CEO, Philip Mezey

Thank you Barbara. Good afternoon everyone and thank you for joining us on the call today.

Innovation continues to transform the utility industry the [embedded] computing power has become highly affordable customers are increasingly expecting dynamic information in services. Standards-based communication networks are displacing proprietary networks driving new efficiencies; for example in smart cities an internet of things applications and interoperability an industrial communications is driving new IOT opportunities. These catalysts are driving utility business needs, customer activity, and long-term industry growth. At Itron utility week we just held October over 1000 customers and partner convened to share success stories and learn about new solutions. It's an exciting event where we connect Itron strategies and our research and development to our customers need to leverage these catalysts in their business models. As we drive this innovation forward we are also driving operational and business improvements, we are executing a restructuring plan that will deliver $40 million of annual savings in 2017. I've also chartered Mark Schmitz, our CFO and Tom Dietrich, COO to drive additional alignment in our resources and processes for more efficiency profitability and consistency in everyday business.

While there is more work we have to do, we are progressing on that path with underlying improvement in our operational results in the third quarter. Total revenues of $469 million grew by 4% compared with the third quarter of last year on a currency adjusted basis. Non-GAAP EPS of $0.43 increased from $0.39 last year. An adjusted EBITDA margin of 8.9% expanded from 8% last year. The improvement was driven by the electricity segment. Our electricity business performance this year underscores our confidence that our strategy for technology innovation, growth, and cost efficiency will deliver our high single-digit EBITDA margin target in the electricity business by the end of 2016.

We're also progressing in our gas and water businesses. Performance in both segments improved sequentially from the second quarter. Our North American gas business continues to be strong, and our EMEA's smart gas volumes are increasing. Smart gas shipments to the Netherlands are ramping up. We shipped 100,000 units in Q3 to net to here which is a record quarterly shipment on that project. Italian natural gas distributor, Linea Distribuzione, is finalizing the installation of 70,000 Itron smart gas meters and an important pilot program for which Itron will also provide managed services over the next year. As a leading supplier of gas meter communication technology, Itron has delivered more than 50 million gas end points in North America. We're very excited to be bringing our proven solutions to customers in EMEA.

Importantly, we are making progress our cost reduced smart gas meters in EMEA. Our new meter design for Intel gas is now in the final customer approval phase. We will see visible manufacturing costs and benefits in 2016 when the meter is in production. In addition, we successfully passed GRDS customer acceptance test on our gas par meters. We will ship our first batch of meters in this quarter for field testing ahead of the mass deployment scheduled to begin in the second half of 2016.

In water, we made progress on the North American customer warranty replacement. Through Q3 we've shipped 27% of the total volume of modules to be replaced. We're on schedule for this campaign and will ship nearly 60% of the total by the end of this year. I visited our communication module factory in Minnesota last week, the team is focused and working diligently to complete the warranty replacements as well as deliver customer requirements. Because of this focus our North American water revenues in Q3 were up 10% year over year and there have been no significant shipment delays to our alliance partners.

Let me also update you on Itron's restructuring which is an important initiative to achieve mid- teens EBITDA margin target by 2017. We've been moving quickly since completing the works council and labor negotiations this summer. We are more than 50% complete with the workforce reductions and expect to be 70% complete by the end of the year. These reductions will deliver more than $15 million of annualized savings beginning in 2016. We're executing the plan as scheduled and we're on track to be substantially complete by the end of 2016, which will deliver a total of $40 million of annualized savings beginning in 2017.

With that I'll turn the call over to Mark.

Thank you, Philip and good afternoon.

In Q3 our electricity segment exhibited strong revenue growth coupled with gross margin expansion. Gas showed sequential gross margin expansion, although gas continued to be affected by not yet cost optimized first-generation smart meters in some European markets and by manufacturing inefficiencies. Our reported results would be $0.11 higher than shown were it not for impairment of $4.3 million of deferred tax assets in Brazil. That impairment or valuation allowance was taken in Q3 due to the deteriorating economic outlook in that country.

Slide 4 in our presentation summarizes consolidated company revenue for the third quarter of 2015 compared with the third quarter of last year. Revenues were $469 million for the quarter compared with $496 million in 2014. Currency exchange rates decreased revenues by $46 million. On a constant currency basis, revenue grew by $19 million or 4% driven by strong sales performance in the electricity business. The electricity segment grew 9% in total and 17% in North America, gas and water were each about flat from last year.

As you can see on slide 5, non-GAAP earnings per share were $0.43 for the quarter compared with $0.39 last year. Foreign currency negatively impacted non-GAAP EPS by 5% year over year and an increase tax rate also took away $0.04. High revenue and gross margin driven by the electricity segment accounted for $0.15 increase year over year, while higher operating expenses decreased earnings by $0.04. We continue to have temporary redundant costs in product development and G&A while in the process of executing our restructuring plans.

Slide 6 summarizes key financial metrics for the quarter; gross margin expanded 90 basis points to 31.3%, recall that last year the growth margin was impacted by cost incurred on a large open way contract in North America. Non-GAAP operating margin for the quarter at 6.8% compares favorably to a year ago by 120 basis points while EBITDA at $41.9 million is 6% better than last year. Non-GAAP EPS at $0.43 is $0.04 better than the year ago quarter despite the tax valuation allowance in Brazil we recorded this quarter.

Free cash flow was weak in the quarter at a negative $10 million and a negative $13 million year to date. This accounted for by higher inventories, the timing of accounts payable disbursements, higher cash taxes, and the cash requirements for our restructuring program. Higher inventories are a reflection of higher output levels at our North American factories and product changeovers to new technology products in North America and Europe we are focused on action plans to bring inventories down in the fourth quarter.

We continue to have ample liquidity and end the quarter with $109 million in cash and availability under our credit facilities of about $240 million. During the quarter, we used $12 million to repurchase 382,000 shares of our common stock pursuant to the $50 million repurchase authorization granted by our Board in February of this year. Year-to-date, we have repurchased approximately 1.1 million shares for a total of $38 million.

Turning to segment performance beginning with slide 7; electricity revenue grew by 9% on a constant currency basis year over year, gross margin improved by 490 basis points to 27.5%. Non-GAAP operating margin improved by 710 basis points to 4.7% and we achieved 6% EBITDA margin in the quarter. This reflects improvement in gross margin, reduced operating expenses driven by restructuring, and cost containment programs, as well as strong revenue growth. We continue to be encouraged by electricity's growth and improvement in is margins.

Moving to slide 8; water revenues were down by 12% compared with last year and grew 1% in constant currency. North America posted a 10% increase year over year, this was offset by decreased revenues in Latin America. Unfavorable economic conditions and constrained spending in Brazil are impacting sales and we expect this will continue for the remainder of the year. Gross margin was down by 70 basis points largely due to adjustments in warranty reserves and increased costs on professional services contracts. Non-GAAP operating margin declined by 210 basis points to 12 9% due to increased product development investment combined with flat revenue growth.

Now turning to the gas segment on slide 9, gas revenues of $137 million were flat with last year in constant currency. Modest growth in EMEA was offset by lower sales in the Asia Pacific region. Higher volumes in smart meters in Western Europe more than offset the impact of lower standard meters. Gross margin was 33.6% down 220 basis points year over year, but it had improved, it improved 200 basis points compared with Q2. And we expect further improvements in the fourth quarter.

Non-GAAP operating margin in the gas segment decreased 490 basis points due to lower gross profit combined with flat top line growth. There was sequential improvement of 140 basis points over Q2.

Bookings and backlog are shown on slides 10 and 11. Booking were $337 million in the quarter with a book-to-bill ratio of 0.72 to 1. Backlog continues to be healthy at $1.2 billion and 12 month backlog at $727 million. Recall the pattern of bookings can be very uneven quarter to quarter. In Q4 we expect to see a book to bill ratio well above 1 to 1 given pending contracts.

We remain optimistic about Q4 and are focused on operational improvements. Our outlook on taxes has not fundamentally changed if not for the valuation allowance in Brazil, our effective tax rate this quarter would have been in the mid 20s. We're taking steps to normalized and reduce the volatility of our tax rate. We mentioned last quarter that we're putting in place reductions and freezes on several categories of discretionary spending. These cuts remain in place and in some cases are being intensified in order to better ensure satisfactory results in Q4 and a positive outlook for 2016.

With that, I'll turn the call back over to Philip.

Thanks Mark.

I firmly believe we have the right strategy in place to build upon our leadership in the utility industry. However, we have been underperforming, our shareholders have told us this and we agreed. To achieve our inherent potential and deliver value for our customers and our shareholders we are moving faster, we are making bold decisions and we're taking aggressive actions to improve the consistency in our results. This begins with me and my new leadership team, Mark Schmitz and Tom Dietrich have deep expertise in company transformation and in driving growth.

They bring this experience and a fresh perspective to Itron. Mark and Tom are committed to work with me to set a new standard of performance at Itron. They're committed to a level of precision and discipline in our everyday business that will increase the consistency, predictability and quality of our results. I've asked Mark to drive new rigor in our key indicator measurements, ensure we deliver the benefits of our G&A shared services model, and examine where our processes can be improved to mitigate the volatility in our tax rate. In addition Tom will lead our thorough top to bottom assessment of our R&D manufacturing and supply chain processes to identify other opportunities to unlock potential.

I've also recently made a change in our gas leadership. I've named Carl Porter as President of the gas segment replacing Marcel Regnier. Carl was a former CEO of a large gas investor owned utility and he currently heads Itron's North America gas business. He has profitably and consistently grown our North American gas business to one of Itron's highest performing groups. He has the track record and ability to drive our global gas business to higher levels of performance. I want to recognize Marcel's passion for our business and his dedication over 34 years at Itron, Actaris, and Schlumberger, I thank him and wish him the best.

We're also focused on growth and delivering compelling innovation to our customers. We now have our software and services organizational plan place under Bruce Douglas. This centralized function is committed to improving the predictability of our projects, improving the margin performance our existing service business, and building off of our current business of more than 250 managed services customers in North America alone. Bruce will also expand our portfolio of analytic based offerings leveraging Itron's research capabilities and deep domain expertise.

On the solutions side we made an exciting announcement to our customers at Itron utility week in October. We unveiled or OpenWay Riva communications and distributed intelligence platform at Itron's next-generation solution across electricity, gas, and water utilities. Itron Riva is our core technology that enables distributed intelligence across a broad range of field devices. Our standards-based approach at every level of the solution ensures interoperability down to the device level. We believe Itron OpenWay Riva is beyond anything else in the industry. It's the key innovation to drive growth for Itron in the area of smart cities in the Internet of things. For example many of our water customers are cities. OpenWay Riva enables new synergies across water departments and the cities they support.

Further, connecting energy and water meters with other sensors on the distribution systems, along with new city-based application all under a single platform create even more value for utilities, cities, and citizens. OpenWay Riva also enables an open ecosystem approach for developers to build new applications for devices that will accelerate innovation and open new possibilities for customer services. With OpenWay Riva, Itron is leveraging our research and development investment to bring this next-generation technology to all three end markets, electricity, gas, and water, streamlining the cost of developing and maintaining disparate network Systems.

Our software and solutions group will further leverage this investments as we build additional service based solutions to deliver outcomes for our large base of 8000 utility customers. As well as addressing new potential opportunities in municipal management, renewable energy monitoring, and smart cities. I'm very excited about the future we're helping our customers to create with our OpenWay Riva innovation. My entire team recognizes the inflection point in front of us and we are taking it.

Operator, let's open up the call to take some questions.

Thank you.

(Operator Instructions)

Tyler Frank, Robert Baird. Please go ahead

Hi guys thanks for taking the question. Can you just talk about what you are seeing in the overall market. Obviously people are going to look to the book to bill ratio this quarter and the declining backlog, but do you expect that tick up over the next few quarters based on are different tender offers that you are seeing in the market currently?

Yes Tyler we do. As Mark mentioned, that backlog, those bookings are lumpy. We fully expect that the fourth quarter will be as strong bookings quarter for us. There is a tremendous amount of market activity in North America, a great deal of tender activity, as well as in Europe we are into this period here where we have visibility in 2016, in France, in Italy, the Netherlands and an increasing level of activity in the UK and other markets. So it's a combination of both. Bookings activity that we will see over the next several quarters and forward revenue visibility for deals that we do not see in our backlog because they are book to bill.

Thanks and in terms of the restructuring, do you see further opportunity in different segments of the business and whether that involves restructuring or just more of a internal focus on efficiencies. Is there more opportunity to expand margins through either efficiencies or restructuring?

Yes, I mean we are looking at that continuously. We went through an analysis process of products by geography, by customer across our electricity gas and water businesses and as you know this restructuring plan is really aimed at the findings that we got there. The plan that Tom Dietrich is undertaking, the study that he has undertaking looking at our comprehensive sourcing strategy as well as our R&D process we'll look for continued opportunities for us to increase efficiency and improve our overall performance.

Great. Thanks guys.

John Quealy, Canaccord Genuity.

Hey good afternoon everyone can you hear me?

Yes John thanks.

Hey Philip, so a couple questions, so for water, if you add back FX you're basically in line at 15% margins. Electricity has been working nicely. I understand the cadence on Gen1 and Gen 2 gas in terms of getting those gas margins up, can you just give us a little bit of a look into, is this a first half 2016 or back half 2016 when the gas margins rebound little bit.

Yes. We see some steady progress there, as it's both this as you pointed out these meters being certified with the better TMC, but also as we start shipping GrDF in some of these other European contracts that we expect volume improvement. Yes, with continued improvement actually beginning in Q4 this year.

I will just add to that John, to say that you'll see, we do feel pretty confident. We'll see some accretion in gross margin and gas in quarter four and then an important second-generation product gets launched in quarter one of next year, so you should look to see some improvement. I'm not going to say great, not huge strides, but steady strides in gas margins.

Okay. Great. In terms of the restructuring and severance maybe Mark to you, what do we look for at the year end in terms of one-time charges just from a model perspective I know we have got two or three different sets of numbers flying around here about what is restructuring in the near term versus potentially long-term, can you just summarize for us Mark, what we should expect in the Q4 period, and then again what the target is for 2016 into 2017?

No I can't really talk to that in terms, unless your asking about cash, you're not asking about cash you are asking about charges right?

Yes, no that's right this is the charge side.

No it wouldn't be appropriate to talk right now to about what we foresee in terms of furthering restructuring charges. Right now there aren't any that we can speak to, but as Philip said a minute ago, we are continuing to seek operational efficiencies, improvements in manufacturing supply chain, any of those things could at some point result in a further restructuring action, but none that we can speak of at this time.

Okay great. And then just two final ones, maybe more for Philip on this marketing side. So we've seen some initial rate cases been filed in the summertime about smart whether it's meter endpoints, or DA, or DR, talk about the competitive positioning here, the markets changed substantially since the last round of bigger RFPs four, five years ago, so can you talk about how the competitive landscape shifting and that leads to my second question off the heels of Elster there's another large meter manufacturer that we understand is in the process of being sold. Would you even consider bidding on those type of assets? Thanks.

So to the competitive landscape what we're seeing is a further push to a standards-based network to being able to leverage the assets that are put out in the field for extended business cases and that may be across electricity or electricity and gas, but also increasingly in awareness that the same network maybe shareable with a city. And so this broad capability of the network offering is becoming increasingly important. In an area where as you've heard in our comments we feel we have a particularly strong position, so we're very pleased with our competitive position in those, in those opportunities.

In terms of considering market consolidation actually, the numbers that were published in Howard Scott report for North America for last quarter show us increasing market share across electricity, gas, and water. We're pleased with our competitive performance there, and really see the strongest opportunity for us in driving up the value chain and really adding more value through a software and services offering rather than necessarily being a market consolidated.

All right. Thanks guys.

Patrick Jobin, Credit Suisse.

Hi this is [Mahiv] on behalf of Patrick Jobin. Looking ahead into 2016 can you talk if you're looking at growth in that year given the backlog is at roughly around $1.2 billion right now and as a follow up when do you see RFP activity picking up so that you see more backlog additions for 2016 or 2017?

I'll take the first response. I think Philip will also want to fill in a couple blanks. On 2016 we are optimistic, the deal flow is pretty substantial and I would say that at this point, bear in mind we are still working on budgetary activity for 2016, but I think I can say with some confidence our outlook for 2016 is to see a somewhat higher rate of revenue growth than we've seen in 2015.

Now when will you, your question is when will we see bookings pick up and actually we just talked about that a few minutes ago. I'll just repeat that quarter four looks good from a booking standpoint. It'll almost definitely be substantially stronger than quarter three, I think I said in my remarks that we saw it well above a 1 to1 ratio and that is true.

Yes and to the last part about when will there be RFP activity sufficient to drive bookings, there's plenty of RFP activity to accelerate bookings and again these large bookings numbers are fairly lumpy based upon regulatory and customer approvals, but in terms of the question of does market activity support growth in 2016, the answer is absolutely yes.

Thanks. And just living on the EBITDA guidance for high teens by mid 2017 which market or business segments do you think will drive growth from today? And when and how should we think about the software and manage services business contributing to your margin structure?

Actually, we see all three segments contributing to the increase in EBITDA performance as we move towards that mid teens target overall. Probably the most significant driver, however, would be the electricity segment and I say that because just in raw numbers it is the largest weighted the more heavily weighted of the three segments. It also has the largest absolute increase as we look forward, and remember that I think we stressed several times that we say, we've said we are looking for high single-digit numbers in that segment and Philip always mentions that, that's the floor, no the ceiling. So think of electricity as being the biggest driver, but we are expecting improvements in each of the three segments, in software and service --

To the last part about software and services we expect the software and services number to be accretive to the existing margins of electricity, gas, and water business, so as that develops it is, contributes to where we fall in that mid teens scale it is an accretive to it.

That's helpful. And finally a question on tax rate. How should we think about it for Q4 and next year?

Okay. First of all, if we had not had the valuation allowance in our Brazilian deferred tax assets, quarter three would have been mid-20%s, and we expect to see quarter four in that same mid-20%s category. Can't give you guidance on 2016 yet, I mean I will only say, well, in February we will provide that guidance in tax rate as we typically do. But we are looking at methods to reduce this in my view unnecessary volatility that we've had in our effective tax rate.

Thanks for taking my question.

Thank you.

You're welcome.

Noah Kaye, Oppenheimer & Company.

Thanks, so just a quick question to start off with. Updates to previous guidance for the year. You know you'd given revenue and earnings guidance just I didn't see it in this last release, so can you just comment on that please?

No, we are not updating guidance for the year for 2015. And I'll just make a couple of comments on that to say with regard to quarter four we are optimistic. Bear in mind that quarter three would've been $0.54 per share if we hadn't had the impairment of our deferred tax assets in Brazil. We're caring good momentum into Q4. It's normally our strongest quarter.

Electricity continues to improve. We're expecting sequential improvement both in electricity and in gas. The tax rate will be lower and we have discretionary expense controls that are on and getting more strict. So I might just add that there was between $10 million and $15 million of revenue slippage from the quarter three quarter four, that give us a little bit of a tailwind too, so are optimistic.

Okay terrific. Thanks for the color. Second question, the introduction of the new solar gateway, basically bringing Riva to solar monitoring, it gives you even more touch points and connectivity points into the home as well as expanded offering with third-party solar ownership providers. Just kind of to pivot off of that, how is Riva expanding the range of let's call it addressable devices in the field in machine to machine networking for you? And what else besides in the solar and smart cities are seeing as promising new applications for Riva?

Great question. Thank you. So we had announced before an electric offering that is to say a power device. This last announcement is the battery-powered side of this and we see a tremendous range of opportunity in the battery-powered world. The powered world examples there are electric vehicle charging stations, as you pointed out solar, other distribution automation devices, but there are a wide range of other potential applications in distributed monitoring applications.

We've talked about pipeline safety, leak detection, the ability to detect pressure variations, corrosion, all kinds of things that affect distribution networks, but moving beyond that to new market opportunities, we're looking at industrial applications where you haven't, you need and intrinsically safe device with a battery that lasts in the 15 year range where we have a very strong communications capabilities. So what are examples of those? It could be in a city, something like parking, but there are a wide range of potential other industrial applications, so we are absolutely looking at how we can take this strong network and endpoint technology to markets beyond our existing utility markets.

Great and I mean with the solar and you've obviously seeing significant unit growth here in the US which is benefiting your business, could you just kind of give us a snapshot of I don't know what you might call non-metering product type revenues as a percentage of overall revenues today? And where you think that may trend to over the next couple of years?

Yes I would say non-metering revenues now are very small although growing. Some of the solar businesses that we are currently doing is actually in providing a communicating meter that's separately measuring solar output although we are working towards embedding communications directly into the inverter. And so you know I think a reasonable goal would be to look at getting that type of non-metering revenue into the range of 10% of the total hardware business.

Excellent thank you so much for the color.

Sure.

(Operator Instructions)

Andrew Hughes Bank of America Merrill Lynch.

Okay thanks guys and congrats on a really good OpEx control in the quarter. Following on that, can you just talk a little bit about how much that contributes to your confidence in the fourth quarter bottom line guidance remaining unchanged at this point?

Yes I can comments. We're pretty pleased with the stringent expense controls in place. We've probably saved while I know we've saved about $4 million in combination between travel, entertainment, and restrictions on hiring.

As we move forward, I mean the travel entertainment alone I think it's going to generate the $1 million a month for the remainder of the year in savings. We've got a number of other expense controls that are being put in place that might reduce OpEx by a further $2 million, we're looking at everything. I mean it's of course over in late innings for 2015, but it's not too late and we're turning over every rock to try to reduce operations expense.

That's great. And Philip you've spoken earlier on the call about seeking some margin improvement in the services business. Can you just give us a flavor of what exactly you're looking at in targeting there to continue to improve margins there?

Sure, you know for those of you who have followed us for some time there have been at one time or another, a project charges in which we have not, we could have done better job at designing project effort estimates and properly executing projects. The focus that I'm expecting from Bruce Douglas in this dedicated services line is in raising our internal awareness and level of execution in our service delivery business. In a business that historically has been very focused on the hardware that it's provided out in the field, we have many opportunities to tighten up how it is that we deliver these increasingly complex solutions to our customers. So with Bruce, and Tom, and Mark I would say all of these areas, we are focusing on probably bidding, capturing, describing, and executing these services deals in order to improve our overall margin outcome and improve the predictability of the service delivery business and we have a some very promising opportunities there.

And one last one for Mark, I think you mentioned there is $12 million left on the repurchase authorization can you just remind us up until when that is valid until when the repurchase period might end?

You know actually there is $25 million remaining under that $50 million authorization and extends up to February of 2016.

Great. Thanks guys.

You're welcome.

Jeffrey Osborne Cowen and Company.

Great. Excuse me. Just two questions. One you might have addressed these, but the Q4 bookings strength Philip is that coming from framework deals like Duke and others that you have already been awarded or are these actually due, kind of new, new contracts, it has always been a bit unclear to me what the true backlog is given you have several things in your back pocket that you've been technically awarded, but you just don't have a firm delivery date on.

Yes, so I mean it's both Jeff. But the frame deals, I mean are only booked and ship within the quarter, so the thing that would build the backlog well above 1-to-1 would be, yes, booking of a large contract or multiple large contracts.

Got it. And just the second question I had, just with the RFPO activity accelerating here over the past couple of months and then the outlook pretty positive, what are you seeing in terms of the pricing environment both with your partnership with Cisco, but also with the expectations of utility customer themselves given that there have been a bit of a lull in the market. Is pricing down substantially versus the past cycle or consistent with your expectations just how do we think about that and especially in relationship to expanding EBITDA margins? On electric side?

So as we talk about that right we're sort of gravitating toward a discussion mainly about North America in which pricing expectations are consistent with what we have seen. Of course we continue to reduce costs and to look for ways to expand our margins. But the North American pricing picture overall has remained, has remained stable.

And Europe, just any activity there and any changes and how does Riva address that?

So in Europe, how Riva addresses that is that in the comments that we made in the electricity business review is that there is selected market that are auction based in which we may choose not to participate. Riva gives us a vehicle for competing for those markets that are not just simply low price oriented, but where there are an extended value proposition. We put out a release today that we've qualified for in Austria for a consortium that's doing interoperability work, we've mentioned before a pilot we are doing Salzburg that's actually a Riva based pilot where there is a great deal of interest in the extended capabilities of the Riva offering. So in markets that are going to simple power line carrier auction based sort of a scenario we may choose to participate or not based upon volumes and availability of product, but we really are focusing on the higher value opportunities.

Understand. Makes sense. I appreciate all the detail Philip, thank you.

Thanks Jeff.

Andrew Weisel Macquarie Capital.

Thank you very much. First just a quick one. When you updated the guidance three months ago for 2015, had you already anticipated the $0.11 drag that you pointed out in the release today or is that incremental?

We had not anticipated the specific $0.11 impact of the Brazilian valuation allowance no.

Okay. Next question is there any update on the warranty issue that you talked about last quarter? You talked about the insurance claim being filed and you didn't expect any potential insurance recovery by the end of 2015, any update there on your expectations either for likelihood or timing?

Yes I can comment on it. First of all with regard to the charge itself, we did make a slight adjustment in the warranty reserve for the water communication module item, it was about, it was $1.5 million increase and these things happen from time to time I mean it will go up a little bit it'll go down a little bit, but those estimates get refined labor costs, recycling cost, and things like that do cause that to move a little bit.

With regard to the insurance claim, what I can say is that we've been in contact with our insurance carrier, it's a well-known carrier that we've been in business with for years. They are the carrier is in the process of completing its due diligence on the claim. And as we mentioned a while ago, we're on schedule in terms of product replacements, so with about 27% of total replacement volumes having been shipped through quarter three. So that's about as much as I can say on that at this point.

All right. Appreciate the detail. And then my last question is you mentioned hiring Tom as COO and hope to find more operational improvements and potential efficiencies beyond the current $4 million targeted from the restructuring programs already underway. My question is could some of those next efforts or programs come before the end of 2016 when the current one is done? In other words could there be overlapping programs or should we think as $40 million target by the end of 2016 and anything incremental would come thereafter?

First off I'd like to point out that not all of the improvements and opportunities that Tom is chasing will express themselves in the form of restructuring, so there is a fair amount of discussion here about restructuring charges and there are many areas that Tom is looking at that have to do with just ongoing operational improvements and efficiency opportunities. And those have actually already begun from the day that he hit the ground running, the tempo has increased around here and there are a whole series of opportunities for improvement that begin today.

So in answer to the question are we sort of sequencing these things, the answer is no, the, a number of improvements are already underway. That being said we've announced that Tom is engaged in a very thorough review of sourcing in R&D. We've engaged AT Kearney in outsole consultant to assist us with that and we want to give him the time to, to really study that and come back with results and we'll be very happy to update with those on upcoming calls.

Got it. Thanks so much.

You're welcome.

Sven Eenmaa, Stifel.

Thanks for taking my question. I want to ask about the 12 month backlog around $77 million here. I've seen some of the GrDF and ERDF expected shipments for the tail end of the next year are in that number. What are your expectations for these businesses or these shipments? Are they expected to be margin accretive to the current margin levels where you are currently, or do you see them just as the volume and somewhat an earnings driver?

So to the question of are GrDF, ERDF present in the 12 month backlog the answer is a small portion of them is. As you recall, we were awarded a very significant contract with GrDF and booked only about a third of that overall contract, with ERDF we were awarded a significant portion of the first tranche of the 3 million meters the next round of the so called G3 linking meters will go out to bid in the first half of 2016 and we have qualified product and will bid on that tender when it is available. To the question of is, are those volumes overall accretive, we derive as you point out volume and efficiency and overall benefit from them and will through the life of those projects continue to improve the margin profile for both of those offerings.

Ladies and gentlemen we have no further questions at this time.

So in closing, Q3, was strong operational progress improvement over Q2 and we see a growing momentum in the business as we've discussed heading into the fourth quarter and into 2016 and look forward to updating you on our progress on the next call. Thank you all very much.

Thanks operator, we'll conclude now.

You're welcome and again ladies and gentlemen this does conclude today's conference call. There will be an audio replay of today's conference available this afternoon. You can access by dialing 1-888-203-1112 or 1-719-457-0820 with a passcode of 9516999 or go to the company's website www.Itron.com.