Itron, Inc.
Q3 2007 Earnings Call Transcript

Published: 2 Nov 2007

[Operator:]

Good day, everyone. And welcome to the Itron Third Quarter2007 Earnings Conference Call. Today's call is being recorded. For openingremarks I'd like to turn the call over to Deloris Duquette. Please go ahead,ma'am.

[Deloris Duquette:]

Good afternoon, everyone and thank you for joining us today.Today's call is going to follow a little different format than we have had inthe past because in addition to LeRoy Nosbaum, our Chairman and CEO and SteveHelmbrecht, our Chief Financial Officer. We also have on the call today MalcolmUnsworth, Actaris' Chief Operating Officer and Philip Mezey, Chief OperatingOfficer for Itron North America. The earnings release that we issued today includes anupdated outlook for revenue, earnings and adjusted EBITDA for 2007. Today'scall will also include other discussions that could be forward-looking innature. The business outlook and other forward-looking informationwe are providing is based on what we know today and is subject to a number ofrisks and uncertainties. I would like to encourage you to read theforward-looking disclosures in our press release, which alerts you to a numberof factors that can cause a difference between our expectations and our actualresults. You should also refer to our 2006 Form 10-K for a morecomplete disclosure of specific risks and uncertainties related to ourbusiness. Itron does not undertake any obligation to update or reviseforward-looking statements, although we may choose to do so from time to time. Our earnings release also includes non-GAAP financialmeasures that we believe enhance your overall understanding of our current andfuture performance. Schedules reconciling GAAP to non-GAAP financialinformation are included with our press release and are also available onItron's external website. Steve is going to start the call today with a financialhighlights discussion. After that Malcolm and Philip will both give operationalupdates for their respective businesses and then LeRoy will wrap up with ourprepared remarks with some of his thoughts about the business. We will hold aquestion-and-answer period after these remarks. Now, I'd like to turn the call over to Steve Helmbrecht,Itron's CFO for the financial highlights discussion.

[Steve Helmbrecht:]

Thank you, Deloris. And good afternoon everyone. We provideda lot of financial information in the press release today, so I will focus onseveral aspects of our financial results that I think are worth pointing outand discussing in more detail. Total revenues were $434 million for the quarter, which wasabout the mid point of the revenue guidance we provided in our last earningscall. This is a new record for Itron and is the first time in which we had afull quarter of Actaris revenue. Total company gross margin during the quarter was 33%. ItronNorth America gross margin of 41% was slightly lower than the 2006 gross marginof 42% primarily due to lower absorption in our meter manufacturing caused bylower volumes. Remember that in 2006 we were still shipping largequantities of meters for our Progress Energy project. Operating expenses duringthe quarter were $116 million. Corporate unallocated expenses were up for boththe quarter and year-to-date periods from the previous year. Some of the increase in expense is due to the integration ofActaris, including tax consulting work and services related to internalcontrols and compliance and we had an impairment charge of approximately$900,000 during the quarter for our old headquarters building, which amounts toyear-to-date impairment charges of about $1.6 million. We have an agreementwith the buyer and expect to finalize the sale of the building by the end ofthe year. Non-GAAP operating margin, which excludes expenses relatedto any inventory accounting adjustments and in-process R&D was 13% for boththe quarter and year-to-date periods. Our non-GAAP operating margin continuesto be lower than 2006 primarily due to our increased R&D spending as wellas higher G&A expenses. Non-GAAP net income which excludes expenses related to theinventory accounting adjustment and in-process R&D as well as amortizationof intangibles and debt fees was $21 million or $0.65 per share in the thirdquarter and $61 million or $1.99 per share year to date. I would like to point out that our GAAP results include atax benefit related to legislation, which passed during the quarter in Germanyand United Kingdom to reduce tax rates. Our non-GAAP rate was 31% for theperiod and our non-GAAP results did not benefit from the tax rates decreasesbecause the deferred taxes relate primarily to intangible assets, which areexcluded from our non-GAAP results. Total company new order bookings were a record $440 millionfor the quarter, which is slightly more than a 1 to 1 book-to-bill ratio. ItronNorth America had a book-to-bill ratio in the quarter of 1.2 to 1, whileActaris' book-to-bill was 0.94 to 1. Total backlog was $668 million at September 30, compared to$656 million at June 30. Although our rate of growth has slowed in NorthAmerica while AMI systems are in consideration. We do continue to book businesson a regular basis and total backlog has now grown each quarter during theyear. Our cash flow from operations was nearly $90 million for thefirst nine months, compared to $87 million for the first nine months of 2006.We had some growth in inventories related to projected fourth quarter sales.Capital expenditures for the first nine months were $30 million and were $12million for the quarter approximately 3% of revenue. Adjusted EBITDA was $67 million for the quarter and $158million for the first nine months. As a reminder to investors in our bank debt,our reported adjusted EBITDA does not add back stock-based compensationexpense, which was $3 million for the quarter and $9 million for the first ninemonths. And our reported adjusted EBITDA for the first nine months of the yeardoes not of course include any Actaris results from January 1 to the close ofthe acquisition in April. We made prepayments of 5 million pounds sterling and 15million euros during the quarter, which equates to approximately 30 million inbank debt prepayments with a total of 34 million in principal reductions. During the quarter we entered into an interest rate swap tofix the euro tranche of our senior debt during the quarter to mitigate anyfuture increases in euro pound rate. The interest rate on our euro debt isapproximately 6.7%. Additionally we entered into a cross-currency swap in whichwe effectively converted our pound sterling debt into US dollar debt. As ofSeptember 30, we had a balance of $1.14 billion in bank debt with a weightedaverage rate inclusive of the impact of the swaps of 6.95%. Including our $345 million in convertible notes and $125million in senior subordinated debt we had a debt structure at September 30 ofabout 57% fixed rate debt and 43% floating rate debt. We are comfortable withthat mix at this point, noting that all the floating rate debt is now indexedto US LIBOR rates. During the quarter there were several changes related to our$345 million in convertible subordinated debt, which we issued in 2006. Becauseof an increase in our stock price, we issued an announcement in early Octoberthat stated our convertible notes maybe converted during the fourth quarter atthe option of the note holder. Although the notes are convertible, we believe it isunlikely that a significant portion of the convertible notes would be convertedat this time because the market value of the notes exceeds the value thatholders of the convertible notes would receive upon conversion. The changes had a few effects. First, the notes must now beclassified as short-term rather than long term. Second, our interest expensefor the quarter was higher than expected due to accelerated amortization of$6.6 million in prepaid debt fees. Third, our higher stock price caused the convertible debt tobecome more dilutive during the quarter. During the quarter, the convertibledebt added approximately 1.2 million shares to our fully diluted sharecalculation for non-GAAP EPS. Now, I will turn the call back to LeRoy.

[LeRoy Nosbaum:]

Thanks, Steve. Before Malcolm goes through his operationalupdate I just want to say a few words about our approach in Itron, since thisis the first time we've had a detailed operational update for Actaris, Malcolmwill spend a bit more time today framing his thoughts for 2007. And updating us on what is going on in each of Actaris'businesses, electric, gas and water. After that Philip will speak, not in asmuch detail as Malcolm since this is more of an update on status in NorthAmerica and then I will come back and close. So with that, Malcolm.

[Malcolm Unsworth:]

Thank you, LeRoy and good afternoon everyone. I wanted totake some time today to talk to you about some of the activities that arehappening in the Actaris business segment. Beginning with a brief review of ourQ3 financial results, expectations going forward and then go into some detailon what is happening in each of our markets, electric, gas and water. If you look at Actaris' revenue for the quarter, it was $281million, about 40% of our quarterly revenue was generated by the electricbusiness unit approximately 32% from gas and 28% from water. This is notunusual, although our businesses have fluctuations from quarter to quarter. Actaris ships over 4.1 million meters during the quarter,almost 1.5 million electricity meters, 30% of which were prepayment and AMOmeters, 900,000 gas meters which is up from 775,000 meters shipped in theprevious quarter and almost 1.8 million water and heat meters, which iscomparable to the prior period. At this point, we continue to see steady growth for ourproducts. We have a very large geographically diverse customer base that isvery beneficial to us. Bookings for the quarter were $264 million, whichrepresents a 0.94 book-to-bill ratio from such key clients as electricity toFrance, gas to France, British Gas, Endesa, E.ON, RWE, Veolia and National Gridjust to name a few. Our book-to-bill ratio is generally 1 to 1 on an annualbasis but historically varies quarter-to-quarter depending on the timing oftenders. Gross margins were about 30%, which was 1% lower than the margins inthe second quarter but is quite normal for our business. Actaris gross margins vary depending on product mix. Forexample, in the first half of the year we shipped higher volumes of heat metersand prepayment meters, which are at higher margins and resulted in first halfmargins of 31%. Shipments of prepayment meters are expected to be lower in thelast half of the year, so 29 to 30% margins are more typical. We see competitive pressure in all business lines and we areimproving product features and reducing cost to offset these pressures inparticular copper and aluminum prices remain at a high level. Operating margins of 7% for the quarter included about $19million of amortization of intangibles. On a non-GAAP basis our operatingmargins would have been 14%, which is consistent with the 13% that we had inthe second quarter. Although, we don't expect large changes in our operatingexpenses going forward we will be increasing our R&D spending to capitalizeon the continuing interest in AMI, smart metering and prepayment opportunitiesin Europe and the rest of the world. Now, I'll switch and discuss some of the industry trends,starting with an overview and then try to give you a little color on what ourbusiness and geographies are seeing. In October I attended a conference in Vienna called MeteringEurope that is similar to the DistribuTECH and [AORA] conferences in the US.The conference was extremely well attended with an abundance of meter andcommunication suppliers but what struck me the most was a significant interestin discussions around smart metering and AMI. This bodes well for the future growth of the company. Muchof Actaris' business is for traditional meters with a growing number ofcommunication technology embedded in these meters such as GPRS, PLC and RF. But possibilities for large-scale meter change-outs isextremely encouraging due to mandates and liberalization across Europe, whichis a significant change in the utility landscape. Increased functionality,higher frequencies of meter reading and improved water and energy services ischanging rapidly. Let me give you some examples, there are a large number ofvery large utilities in Europe, some with over 30 million customers. Becausethese utilities are so large it is quite likely that they will mandate theirown smart metering platform or design and will ask meter providers to build andprovide products that adhere to their specifications. Interoperability between meter manufacturers and systemsproviders is likely to be required as these very large utilities want to ensurecontinuity of supply for their proprietary systems and therefore will requiremore than one supplier. Actaris is a trusted reliable metering provider, which helpsus to participate in these large metering opportunities. The remainingutilities comprising 200 million or so electric meters in Europe may follow apattern more like utilities in the United States in which they look to AMO andAMI vendors to provide them with a complete integration solution. Effective July 1, 2007 the European Union issued a directivethat customers will have the ability to choose energy providers. This directiveagain bodes well for Actaris and Itron solutions. In addition, the Europe Uniondrivers are environmental and conservation rather than just economic. Now moving on to our gas business we continue to see steadygrowth in gas meters. At this point we are the leading provider to many of thelarge natural gas providers in the world but especially true in Western adEastern Europe, which positions us well for automation plans that may come inthe future. Gas metering at this point does not have the same drivers orurgency of automation as electricity does but dual fuel utilities are includingreading gas meters in their automation plants. However, many gas-only utilitiesaround the world are talking about automation for their gas meters as well. Automation will be driven by more traditional means such ascost efficiencies and customer service and the prepayment gas meter business isgrowing in emerging markets. And last by certainly not least let's talk aboutour water and heat business. Water is a smaller portion of our revenue at this point butwe see areas of growth such that it could eventually be a business that growsat a faster rate such as we are seeing in India. About 30% of the water used inthe world is not metered an excellent opportunity for growth because withoutmeters usage is impossible to control. Combine this with AMR and then add to the fact that mostutilities replace the water meter when they convert to AMR this is an excellentpotential for both areas. Itron is the leader in both areas in providing metersand providing AMR solutions. I would like to finish by touching on how the integration ofActaris is progressing. Steve and LeRoy stated that we have already completedmost of the mechanical integration efforts, financial reporting, IT systems andday-to-day communication. So what's not done and what are we currently working on? Imoved to Brussels in April, and I visited many of Actaris' manufacturing, salesand R&D locations, visited trade shows, met many customers, partners andsystem integrators in order to understand and take full advantage of synergies,technology, hardware and software from Itron into Actaris and vice-versa forshort-term and long-term gains. I am pleased to report that the opportunities aresignificant. As an example, 20 Actaris executives spent four days at the ItronUser Conference in Orlando, reviewing products, talking about system sales,justifications and mass deployment experiences. And in addition Actaris showedItron US customers what Actaris has to offer. I am very encouraged by the efforts and progress that wehave made in such a short time and I've very excited about the potential for thisbusiness going forward. I look forward to talking to you in future calls. And with that, I will turn the call over to Philip Mezey,Itron North America's Chief Operating Officer.

[Philip Mezey:]

Thanks, Malcolm. And now on to Itron North America. Let'sstart with our third quarter financial results. Revenue for the quarter was$153 million, a decrease of $11.5 million from 2006, primarily due to twothings. As we've mentioned 2006 for Itron North America was a tough compbecause of our contract with Progress last year. However, we did expect that second half revenues in 2007would be higher than the first half. So the tough comp explanation isovershadowed by the fact that AMI has slowed down our North America businesseven more than we had expected. Our gas and water AMR businesses is still quite strong butour electric business has been affected. Shipments of electric meters in NorthAmerica are down 27% for the current quarter, compared to last year and down33% year-to-date. We think that revenue in the fourth quarter will be up fromthis quarter as we have more meaningful shipments against our contract withMidAmerican and Trinidad & Tobago, but for the full year we are expectingItron North America revenue will be about $25 million less than it was in thefull year of 2006. Gross margins and operating expenses should be similar toQ3. We actually had a very strong bookings quarter. We booked$175 million in Itron North America, which equates to a book-to-bill ratio of1.2 to 1. This was driven in part by a contract that we announced with Trinidad& Tobago in the Caribbean that was about $40 million. This is the largest international AMR deal that we have everbooked and validates that our traditional, migratable fixed-network AMRplatform continues to be a proven solution for utilities choosing to automate. We also received several large California energy efficiencycontract awards for our consulting and analysis team, totaling $14.5 million.Additionally we announced a significant meter data management deal with Nuon, aDutch utility, that we see as a model for taking our software offerings toother overseas customers. All-in-all a very good bookings quarter which gives usvisibility going into next year. So let's switch topics and talk more broadlyabout what's going on from a market perspective in North America. I'm going to start by first talking about two recentindustry conferences, AMRA and our 25th annual Itron users Conference that washeld last week in Orlando in which we had close to 800 Itron customers attend. Both conferences were well attended and both validated forme the importance and attention that AMI is generating in the industry today.The tone at AMRA was very upbeat with many utilities looking at options forsmart metering solutions to solve their problems today or to position them wellfor tomorrow. At our User's conference we saw a similar tone and level ofinterest, particularly in our AMI offering, OpenWay. So let's talk a bit aboutOpenWay. I'm sure that you have read our release today on the work that we havedone with CenterPoint. OpenWay has passed an important milestone of fielddeployment and market viability. We look forward to the next stage of deployment as ourpartner CenterPoint works to realize their vision of the smart grid. Our fieldtrial at Southern California Edison continues, as does our work with severalother large-scale utility customers interested in deployment of advancedmetering. Many of these opportunities have public filings includingtheir deployment schedules, and since we are coming to a time in which many ofthese utilities have stated that they will make a decision and because many ofthese decisions require Board and Commission approval and may containconfidentiality language, we will not discuss them any further until customershave made their decision and are amenable to discussing their projectspublicly. So in summary we are competing for business every day. We'reexcited about the marketplace moving to advanced metering solutions. We areprogressing with our products and field deployments. We will continue to deliver a broad range of solutionsacross water, gas and electricity with our existing products and increasinglywith OpenWay. And while we are very excited about OpenWay and our marketopportunity, we caution that these projects will generally not startsignificant roll-outs and therefore significant shipments of meters or gasmodules until the later part of 2008. And with that, I'll turn it over to LeRoyto talk in a bit more detail about the business and 2008 expectations.

[LeRoy Nosbaum:]

Thank you, Philip. Given the good reviews by Steve, Malcolmand Philip I'll make a couple supporting comments and talk a bit about 2007 and2008. Let me start by talking about our expectations for '07 in the context ofour third quarter results. Revenues at $434 million were right in the middle of our ownguidance. We're seeing a North America market that is taking a bit of a pauseas utilities that would have ordinarily been taking shipments of AMR arelooking at and in some cases deciding upon AMI. While we've discussed this on previous calls, in allfairness we're not expecting as high a second half for our North Americabusiness as we thought a few months ago. On the expense side we continue tospend on marketing, research and development for OpenWay, and in corporateunallocated we had expenses for some one-time items that Steve mentioned. In some respects Q4 will look quite similar, so we havetamped down our guidance for Itron for the rest of the year with revenues at$1.425 to $1.435 billion and earnings per share of $2.65 and $2.75. So if we are in the range on our last quarter's revenueguidance, why is our non-GAAP earnings guidance for the year down $0.10 to$0.25? On the expense side we have about $0.05 increase including the one-timeissues that Steve talked about. On the revenue side we have more Actaris and less ItronNorth America, which has a 10 point gross margin swing, 30 points versus 40,and results in about a $0.22 decrease. And our share count goes up due to theconvert, which is about another $0.04. On the good side we do expect a somewhat lower tax rate, sothat's how we get to the $2.65 and $2.75 projection. A couple of othertakeaways for the quarter. Include a book-to-bill ratio of over 1 to 1. Sowhile we may have a bit of pause in North America, business is still good inNorth America and at Actaris. AMI opportunities are progressing very nicely in NorthAmerica as well as beginning to show promise in Europe. The issues around AMIare not if but when, as exact timing is difficult to predict. As many of you have read in our press release we issued thismorning, Itron's OpenWay technology has been thoroughly tested at CenterPointwhere 10,000 points have been installed since spring. The results met and in some cases exceeded expectations.This is a major milestone, particularly as this is OpenWay's first large-scaledeployment. Perhaps we can now talk about opportunities and less about whetheror not the technology will work. At this point AMI is the most important factor as we thinkabout the market for the rest of this year and through 2008 and 2009. As youheard Philip say, we have many very promising opportunities for AMI orders forour OpenWay product. A number of those opportunities will start with Phase 1 ortrial orders in the range of 10,000 units not different from what we've seen atCenterPoint. Those initial installations will occur in 2008. The results will be judged toward the end of 2008. Volumeshipments will begin at the end of 2008 and on into 2009. As we givepreliminary guidance for next year, we are forecasting these trial orders. Weare not forecasting major OpenWay shipments until 2009. In some sense that is good news as we're working very hardduring the rest of this year and into next to integrate and cost-reduce theOpenWay product offering. Some of you might ask, "Have AMI deployments ingeneral slipped to the right?" For some utilities, absolutely, but not for any alarmingreason. These projects simply take a long time to put in place. They arehundreds of millions of dollars and the utility process necessarily has to beprudent at the staff, the executive and the Commission level. While we'reseeing flattish '07 for North America and modest growth for '08 because ofutilities delaying AMR decisions and considering AMI deployments, the marketopportunities appear to be very strong. Itron is doing well in the competitive environment and I'mquite pleased with our progress and our prospects. So what are our high-levelexpectations for 2008? Compared to 2007 there is a dramatic change resultingfrom the acquisition of Actaris occurring partway through the year. We think a 30% or so increase in revenue is appreciate. Ifyou normalize 2007 for Actaris, Itron overall revenue growth is probably morein the 6% to 8% range '08 over '07. As far as EPS or earnings growth goes, thatgets a little harder to bracket. On the expense side we have some goodness and we have somecontinued pressures. Some of the one-time expenses in 2007 will potentially goaway. We should get the old building sold. Spending on the acquisition and allthat goes with it will be down. On the other hand, R&D spending on AMI, OpenWay in theUS and other AMI developments in Europe will continue at high levels. While weare in the heat of competition for this new market, it is no time tounder-invest in this very important area. AMI also causes some fairly largerevenue and margin swings. Exact shipping schedules have not yet firmed up. We do knowthat initial product shipments will be at lower margins than we would like assignificant sub-cost savings on the product do not come into play until laterin 2008. So if revenue grows 30% over 2007, a similar growth inearning is not out of line. However, it could also be 5 to 10 points lessdepending on how the year plays out. We'll firm this up on our Q4 earningscall. Now I'd like to say just a few words about Actaris. The morewe get to know the Actaris people, the more we are truly impressed. This is areally first-class organization. They have performed very well on all theintegration tasks we have asked them to do. As we have discussed before, the opportunities with Actarisare tremendous. Whether it's growing market share in electric, gas and watermeters or opportunities for advanced metering, we're really quite delighted.The potential market for AMI in Europe feels about like the US did two yearsago, confirming our belief that increasing levels of technology will eventuallybe deployed on meter platforms, thus changing the nature of the industry inEurope just as it has in the US. We're getting this acquisition under ourbelts. We are readying our combined product platforms, and I'm very pleasedwith the potential opportunities in Actaris' markets. With that, let's open itup for questions.

[Operator:]

Thank you. Certainly. (OPERATOR INSTRUCTIONS) And our firstquestion comes from Steve Sanders from Stephens Inc. Steve Sanders - Stephens Inc Good afternoon.

[LeRoy:]

Hi, Steve. Steve Sanders - Stephens Inc First maybe a question for Philip on the meter side. I knowyou talked about the tough comp progress and some of the I guess lack ofacceleration in the second half. But specific to the meter business, do youfeel like you're holding your share around where it's been over the past coupleof years?

[Philip Mezey:]

Yes. Yes, absolutely, Steve. We had one very large projectlast year that really increased overall volumes in the market and we areholding our share quite well.

[Steve Sanders -Stephens Inc:]

Okay. And then a similar question for Malcolm. I think youreferenced increasing competitive pressures. Is it the same cast of charactersor somebody new? Just some additional color on that would be helpful. Malcolm - Unsworth Remember, there's three markets, water, gas and electric.And we have similar competitors throughout the world. They are the big 3 ineach one of the markets. So yes, we get the same competitive pressures acrossthe world with the same competitors.

[Steve Sanders -Stephens Inc:]

Okay. And then congratulations on the CenterPoint trial. Iknow you don't want to go into a lot of detail on these big deals, but this oneI think you've talked in the past about once they file with the regulators thenit's maybe as long as six months before the final decision is made. Can youjust remind us of how that plays out?

[Philip Mezey:]

Sure, Steve. It's actually once the filing is made, which weanticipate later this quarter or at latest early next year, there ispotentially up to 150-day comment period in the regulatory process in Texas.And that period can be shortened if a settlement is reached which would allowus then to proceed.

[Steve Sanders -Stephens Inc:]

Okay. And I guess you don't want to talk about specificother large deals that we're certainly all aware of, but a general question. Itseems like several of these deals, California and other places, are expected tobe making decisions by early '08. Does it still feel like that kind of timelineis reasonable?

[Philip Mezey:]

Yes, it does, Steve Steve Sanders -Stephens Inc Okay. And then LeRoy, you talked about obviously some lowermargins on the initial OpenWay shipments. But as you think about OpenWay goinginto 2009 when you get some of the cost-outs done and the volumes pick up,should we think about the margin profile for that product as being comparableto Itron's historical North America business?

[LeRoy Nosbaum:]

Absolutely.

[Steve Sanders -Stephens Inc:]

Okay. And then just a final question for Steve, I'm sure wecan figure this out, but the share count in the fourth quarter, what is itgoing to be with the convert? And stock price, etcetera?

[Steve Helmbrecht:]

It will be approximately 31 million, 31.5 or so for theyear. But it's a little hard--I just want to put a caveat there--the convertitself is affected by the underlying stock price. But when you look at theother known items that would be the equity offering we did earlier this yearand stock option activity to date that gets fully reflected in the fourthquarter. That part I can speak more affirmatively. The convert has some variability, so I don't want to firm upspecifically a count there other than to say that I see it as slightly higherthan the count for the third quarter just because of the full-year rollout.

[Steve Sanders -Stephens Inc:]

Right. Right. But you're using 31.5 for the year?

[Deloris Duquette:]

Yes, we're using about 31.5 for the year. That's exactlyright.

[Steve Sanders -Stephens Inc:]

Okay. Thanks very much.

[LeRoy Nosbaum:]

Thanks, Steve.

[Operator:]

(Operator Instructions) We'll move now to Michael Horwitzwith Pacific Growth Equities.

[Michael Horwitz -Pacific Growth Equities:]

Hello.

[LeRoy Nosbaum:]

Hi.

[Michael Horwitz -Pacific Growth Equities:]

A question a bit about your commentary about '08. Your 30%number that you use both on the top and bottom line appears to be in line withwhat the street's expecting right now, and I'm assuming you have a temperedview in your mind based on what's occurring in your North American business. Sofor you to make those kinds of comments I'm assuming that you've factored thatin and what's going on currently.

[LeRoy Nosbaum:]

Yes. I mean, Michael, it's fair to say that our '07 NorthAmerica business has been shoved to the right because of what's going on withAMI. It doesn't continue to move right forever, and so we think that asbusiness particularly in the back half of '08 begins to load back up and AMIdecisions are made, trials are awarded and major orders will be awarded. Theyjust won't start shipping until the very backend of '08

[Michael Horwitz -Pacific Growth Equities:]

And I just have.

[Deloris Duquette:]

I'm sorry, Michael. What I would just add on that is you'reabsolutely right, the street currently reflects about a 30% percent growthrate. What we think may change a little bit is the mix of that business. Sowith the North America a little bit slowed down, a little bit delayed in '08Actaris' business properly takes over a bigger part of that and that's what maybe affecting the bottomline, which is what LeRoy reflected on.

[Michael Horwitz -Pacific Growth Equities:]

Okay. Fair enough. And then I believe that it's consistentwith the way that people have thought about AMI deployment for the end of '08to get some of those trial orders going and shipments. And really this is a'09, 2010 deployment in volume. Is that correct?

[LeRoy Nosbaum:]

Absolutely, Michael. Yes. For the industry. It's not just anItron issue. I mean, the marketplace is sort of in that mode.

[Michael Horwitz -Pacific Growth Equities:]

And then maybe a higher level question. Are you seeing anydifference -- as new applications are developed and we've seen kind of a takingoff so to speak in the demand response area is that causing discussions tochange at all about AMI deployments? Are they looking to add on this additionalfunctionality? Is that accelerating the thought processes as utilities see someof these applications that they can deploy in their networks?

[LeRoy Nosbaum:]

Well, I mean, I'll make a comment and then turn to Philip.He might have a view different or additive. I think we did see in fact in onecase PG&E come back out and think about in-home networks, which wouldfacilitate demand-side management off an AMI network. In general however all ofthe other stuff that's on the street has a very high-level of demand-sidemanagement already on it, so while I wouldn't say that we are seeing it added Iwould say that it was there from Day 1. Philip, you've got a view?

[Philip Mezey:]

Yes, not a lot to add there, Michael. I mean, I think thatthe market coalesced very quickly on a richer function set than we thought ayear ago that included a disconnect switch and home area networking in additionto downloadable firmware and these are the features in these advanced metersbecause there were additional grid-based applications and demand response. Sowe have a richer set of functions, which we have included in the OpenWayproduct.

[Michael Horwitz -Pacific Growth Equities:]

And this may be obvious, but given your success and thehistory of the company and large-scale employment of AMR and other things, Imean, that's got to be helping you win some of these big AMI deployments. Andit's hard for me to see a lot of other competitors, albeit I know it's verycompetitive, but that have shown that skill set. Is that a big argument in yourfavor? Do you find that that's what the discussion's about, how deployment'sgoing to work and your ability to execute?

[LeRoy Nosbaum:]

You know it's interesting. We see a lot of discussion aroundhow deployments are going to go, but clearly in a couple of the majors and infact some of it's been talked about publicly third-party deployment companieshave been awarded the contract for the deployment. I think one of the things that we did get credited with isthe fact that we do understand all of the ins and outs of those majordeployments and that we do see some of the potential customers we've beentalking to favorably look upon Itron because of our long and historied experiencethere. But to be fair, Michael, we see some third-party people who are willingto amass lots of bodies and do the deployment work. We will in many cases bemanaging them but that is the way it is spacing out.

[Michael Horwitz -Pacific Growth Equities:]

All right. Great. I'll jump back into the queue. Thank you.

[LeRoy Nosbaum:]

Thanks.

[Operator:]

(Operators Instruction). We move now to Sanjay Shrestha withLazard Capital Management. Graham Mattison -Lazard Capital Management Hi guys. It is actually Graham Mattison. Sanjay is stuck ona plane. How are you?

[Deloris Duquette:]

Hi Graham. Good. Graham Mattison -Lazard Capital Management I just have a general question looking at -- I mean, what doyou see is the biggest thing that's changed in your outlook for 2007 just inthe last three months? I mean, what's--is it just the AMIs are taking longer ortaking market share away from the regular meters? Could you just give a littlemore color on that?

[Deloris Duquette:]

Sure. I'm going to start, and then if LeRoy wants to color.What we've seen change in the last couple months is AMI has delayed some ordersthat we thought may have come in. But we've replaced that business in generalwith Actaris business so we really haven't moved much on the revenue line.However, it's a dramatically different margin as LeRoy discussed in hisprepared remarks and so what's coming through to the bottom line is a lowermargin that is affecting us. It probably affected us by about $0.22 from what we thoughtit would be. Additionally we do have a little bit higher expenses than weprojected. Steve talked about some of those one-time expenses we didn't see.And in addition quite frankly, we didn't expect the large dilution for ourstock for the convert and that affected us about $0.04 as well. Does thatanswer your question? Graham Mattison -Lazard Capital Management Yes. Definitely but would this push out mainly theopportunity in 2008 and 2009 as bigger than if it's moving more towards AMI.

[LeRoy Nosbaum:]

Certainly. But you can ask yourself whether you don't have asnowplow effect. And you know we'll see I mean, I completely believe thatsooner or later these customers are going to buy either AMI or AMR. Thequestion is when, not if, in either case. And they're trying to make decisions.So does that market opportunity push to the right and does it ultimatelysnowplow up? Potentially, I don't know that we know enough today to say thatfor sure exactly as to when. Graham Mattison -Lazard Capital Management But in terms your on-time outlook and your market outlooknothing has changed?

[LeRoy Nosbaum:]

Fantastic. No, nothing at all. Graham Mattison -Lazard Capital Management Got it. And then one --

[LeRoy Nosbaum:]

Go ahead. Graham Mattison -Lazard Capital Management I'm sorry. I was just going to ask a housekeeping questionon R&D?

[LeRoy Nosbaum:]

Sure. Graham Mattison -Lazard Capital Management Is the Q3, the number we saw in Q3, is that a good run rategoing forward? Or as more of these AMI tests are successful will we see a sortof slowdown in R&D spending? Or is there going to be a jump in that in2008?

[LeRoy Nosbaum:]

Yes. Let me say that I think the Q3 rate's a good one goingforward with a little dither on either side of it. And as we move into '08, I'mlooking at these two guys. I'm hoping that ultimately we begin to see atail-down in North America. But there is much that has to be done yet inEurope. We will borrow some of the North America technology butclearly Malcolm and his gang are going to have to spend some R&D moneysthat they are not currently spending. So I think if I was modeling, I would doexactly what you suggest and that's use Q3 with a little dither on either side. Graham Mattison -Lazard Capital Management Okay. Great. Thank you very much. I'll jump back in queue.

[Operator:]

And now we move to Paul Coster with JP Morgan.

[Paul Coster:]

Thank you. So LeRoy, you don't believe there is a great dealof R&D left to do in North America to get AMI OpenWay ready. Is thatcorrect?

[LeRoy Nosbaum:]

No. I didn't say that Paul so that would be, well, I didn'tmean to say that. That is what you heard.

[Paul Coster:]

I'll try not to put words in your mouth, sir.

[LeRoy Nosbaum:]

So let me describe it like this. We have spent a huge amountof money this year and will continue through the very front end of next year onwhat I would call fundamental R&D. We will spend more moneys next year inNorth America particularly into the third quarter on what I'll call costreduction and integration. So what we're doing in that period of time is making what weare already successfully trialing at CenterPoint cost less and be easier for usto manufacture in volumes. So that number of sort of general R&D does notgo down in the first half in North America. As we move into the second half in North America of '08, Ithink we'll begin to see some tail-off in pure R&D. But we'll also see somebuild up in R&D. I'm guessing it's about that in Malcolm's Actaris group.For the very same reason, just a different customer set requirements.

[Paul Coster:]

So the AMI programs are going to proceed, but the complexityof these programs is such that it's going to take longer than perhaps some ofus were expecting. Is there any common thread across all of the known RFPs oris each one very different, the cause of the sort of perceived delay anyway?

[LeRoy Nosbaum:]

Well, in some sense there is a very common thread. They'reall real expensive and so you're talking about hundreds of millions of dollars.Let's just border it between $300 million and $600 million round numbers. Andutilities have gotten very cautious as they build business cases, go to theirBoards for capital and as well go to their Commissions for some kind ofregulatory treatment whether it's rates or some other mechanism. So I think everybody's gotten real careful. I do think thatas we come to the end of the year, here we'll see a number of decisions thatpeople have been talking about as we sort of come into December and then gointo January. So I don't know that besides that there's any common theme thathas caused delays. These things just take a while.

[Paul Coster:]

But I'm not hearing that there's technical reasons for thedelay. It's all to do with politics and budgets and so on. Is that correct?

[LeRoy Nosbaum:]

All of that.

[Paul Coster:]

Okay. Malcolm, you said something which is intriguing to me.It sounded like you are getting higher margin from your -- I think you saidheat products and also AMI products in Europe. If that's correct why is it thatyou're able to get higher margins on AMI whereas Malcolm, North America at themoment is not enjoying economies of scale on that product suite?

[Malcolm Unsworth:]

So the definition of AMI has to be carefully reviewedbecause we have an AMI business that is our prepayment business and ourprepayment business is our own proprietary business which was the same a fewyears ago with our AMO business in Itron. On the heat side, we have a very interesting business onheat because you have to replace the heat meters every five years. And we havea very good design and very good products and competition is still stiff but wehave good margins there as well. But as a percentage of our huge amount ofbusiness, it's not really that large to be quite honest with you today. Andthat's what we're focusing on.

[Paul Coster:]

Okay. My last question is, Malcolm, now that you've had achance to really get under the covers, the gross margin difference betweenActaris and Itron. Is it a true economic difference or is it the accountingmethodologies used in the two businesses?

[Malcolm Unsworth:]

Let me just cast that and do a comparison to the meterbusiness that I took over in Schlumberger in 2000. Predominantly, the meterbusiness there was an energy-only business and our margins were in the mid 20s. When you introduce communication modules and you own thetechnology, your margins will grow. So long as it's proprietary business, yourmargins will increase. And the margins today as you can see from Itron are inthe 40s. That's the goal obviously that we want to do for Actaris. But it's notgoing to be done in five minutes. It's going to be the long haul. But that'sexactly the same kind of thing we want to do.

[Paul Coster:]

All right. I got it. Thank you very much.

[LeRoy Nosbaum:]

Thanks Paul.

[Operator:]

And Stuart Bush with RBC Capital Markets has our nextquestion.

[Stuart Bush:]

Good afternoon.

[Deloris Duquette:]

Hi.

[LeRoy Nosbaum:]

Hi.

[Stuart Bush:]

My question is about if you can give us an idea of thetiming after an AMI commercial order is announced. How long it takes and whatneeds to happen before the shipments start?

[Philip Mezey:]

Well, Stuart, it's Philip. We would of course start out withsome kind of typically viability phase as you heard this phase that we talkedabout with Center Point and that will not be atypical at all. So some periodfrom 6 to 12 months for initial rollout evaluation in business case development.And then we are seeing three to five year cycles for full deployment of theproduct. Some of those actually ramping up in the back after the projectactually.

[Stuart Bush:]

Well, I guess my question is once you're able to actuallyput the order in backlog, how long then until you actually start shipping outand seeing revenue?

[LeRoy Nosbaum:]

Well, virtually immediately. Yes. Stuart, the issue is notone of our being able to ship the product. It is an issue of a trial in alllikelihood being done at this stage of this market. But we can ship productvirtually instantaneously. Now there is a little bit of reality which is maybethe question you're looking for and we just haven't hit on the right answeryet, which is once you say go what do you have to do? Well, there is a certain amount of logistic stuff that youwill do and that logistic stuff is probably going to take a quarter or so. Youset up cross stocks so that's material being shipped in and thenre-disseminated. You set up processes for hanging up in our case radiocollectors. All of our RF competitors would have the same sort of process. Andthen you have a bit of work on the systems side but much of the system workwould have been gone through in the trial period. That's one of the things. One of the real pieces of work that happens when you install10,000 units is not the installation of those 10,000 units. It's getting al thedata that they produce through both the data gathering, the data managing andthen as well the knowledge applications depending on who provides those. Sothere's a lot of work there but generally that gets covered off in the earlyPhase 1 period of time. But maybe you were asking how long does it really take toget going? It's about a quarter

[Stuart Bush:]

Okay. Yes. And sort of tying into that, I know you said thatthe initial AMI margins will be lower than eventually they will be. Is the mainimpact here from price concessions to win reference customers? Or is there moreof a--I guess there's also an element of scaling up that you get costadvantages over time. So how does that sort of map out? Which one is much moreof a priority in the beginning on these first few?

[LeRoy Nosbaum:]

Stuart, I'll answer that very definitively. There's notprice concessions to win reference customers. This is a scale over time. This is a very interesting market in that in utility lorerarely do you see the utility industry, some en masse, buying literallymillions of units out of the blocks. And that's what's going on here. And sothe utility industry in general is shocking the vendor community with somepretty stiff ramp-up rates early on, and all of us just have a period of timewhen we are doing integration, when we are doing good work in factories. And frankly one of Itron's serious advantages is that we'revery used to doing that kind of stuff. But it is work that has to be done andit's not done overnight.

[Stuart Bush:]

Okay, great. And then one last housekeeping question. Maybeyou can help me a bit on the tax rate. I know you mentioned you had some stuffout of Germany and the UK that affected some of the intangibles. It looks likethe tax percent on the non-GAAP numbers was also reduced. What should we beassuming for non-GAAP tax rate blended for the whole year?

[Deloris Duquette:]

I would use 28% at this point in time, Stuart.

[Stuart Bush:]

And so that would be much lower than for Q4?

[Deloris Duquette:]

Yes. So the full year we're thinking is more in the 28%range. That's correct.

[Steve Helmbrecht:]

That's a blended rate, Stuart. That takes into account somecredits and discrete items.

[Stuart Bush:]

So can you give me the -- okay. All right. Thanks a lot.

[Deloris Duquette:]

Thank you.

[LeRoy Nosbaum:]

Thanks, Stuart.

[Operator:]

And now we'll move to John Quealy with Canaccord Adams.

[John Quealy -Canaccord Adams:]

Hi. Good afternoon. A couple questions. First on the metervolumes in North America is it just the functionality of the market as a wholepushing off solid-state meters as the sort of core base of smart metering andAMI? Or is it a conscious decision of you folks to rather push out metershipments in the near term to grab the AMI component in the long term, if yousee what I'm saying?

[Deloris Duquette:]

Well, not really, John. I mean, the fact that we're talkingabout our AMR business has been delayed as well with the AMI decision. What'smade up most of the bulk of our meters that we've shipped over the past coupleof years, they've been predominantly AMR enabled. That's the business thatslowed down and so that's affecting our meter shipments as well.

[John Quealy -Canaccord Adams:]

Maybe I should ask you a different way. In terms ofcompetition, the other solid-state folks, is it just a dearth of marketopportunity or are you being a little bit more selective on the business you'regoing after in terms of volume?

[LeRoy Nosbaum:]

No, not being selective at all, John. It is dearth ofactivity. If you look at us historically in the last several quarters,something like 75% of meters we ship, have AMR embedded in them. We're seeing amaterial reduction in the number of meters. We're shipping simply becauseutilities are slowing down their purchase while they're considering AMI.

[John Quealy -Canaccord Adams:]

And just a couple housekeeping. Free cash flow or operatingcash flow expectations for '07, could you give us an update?

[Steve Helmbrecht:]

Sure. We expect operating cash flow combined base to besomewhere $115 million to $125 million. CapEx for the year of about $40million, give or take. And free cash flow between $75 and $85 million. That'sof course impacted by working capital assumptions, but we're comfortable withthat right now. And just another housekeeping is depreciation expense for theyear as well. It's about $40 million. It's about equal to CapEx and what weexpected.

[John Quealy -Canaccord Adams:]

And I may have missed this one but AMR units in Actaris. Didyou give those out for the quarter? I think they're about half a million lastquarter?

[Deloris Duquette:]

Yes. We did not give those out but they are similar thisquarter, actually.

[John Quealy -Canaccord Adams:]

Okay. Thanks a lot of.

[Operator:]

Jason Feldman with UBS is next.

[Jason Feldman:]

Good afternoon.

[LeRoy Nosbaum:]

Hi, Jason.

[Jason Feldman:]

Just a couple quick questions. Most things seem to have beenanswered. But in North America, have you seen any kind of changes in thecompetitive environment? And specifically I'm kind of referring to GE'sannouncement with AEP several weeks ago?

[LeRoy Nosbaum:]

Yes. Jason, we took great note of that. Obviously, GE is avery large company that can spend money very quickly and in large amounts. Wehave been tracking with interest what they're doing with AEP which at thispoint is talking about a very comprehensive smart grid, intelligent gridapplication that has quick frankly a little bit to do with meters, smart metersor AMI, and a huge amount to do with automating the grid. And it's worth noting that AEP and GE have a very historiclove relationship. I mean, they do a lot of stuff together. So if GE was goingto come and announce something we were not surprised particularly to see itthere. That's the only place we've seen them make an announcement with aspecific customer. That being said, they are going around the country talkingabout their concept for a quite expansive, intelligent grid. We'll see where all that goes. We have not seen it upset anyapple carts anywhere in terms of utilities that were already in the process ofan RFP for AMI. I'll leave it at that.

[Jason Feldman:]

Okay. Also with respect to kind of the change in the outlookfor the second half of the year. You know you noted a shift in revenues thisyear toward Actaris, kind of more than you thought. What parts of Actaris arejust doing better than you expected three, six months ago? Because that seemsto be the implication, right? I mean is that parts of it from a revenueperspective are better than you thought?

[Malcolm Unsworth:]

If you take a look at each particular business segment,water, gas and electric, each one of them are performing quite well. I thinkthe gas side is doing very well. Electric has some very good production in thefirst half of the year and it's tapered off a little bit in the second half butwhen you look at year on year, they've both done extremely well. And if you look at the water side it's continuing to gainmarket share. So each particular business segment is performing very well.

[Jason Feldman:]

Okay. So just broad-based strength from Actaris as a whole?

[Malcolm Unsworth:]

Yes.

[Jason Feldman:]

Okay. And then last quick question here. You were talkingabout the currency swaps very early on in the call and I'm not sure if Iunderstood properly. But it sounds like you're now swapping some of your poundsterling exposure to US dollar. And I thought the whole reason for the multi currency debtfinancial was to match your cash flows to the underlying currency of the debt.Are you essentially reversing that now?

[Steve Helmbrecht:]

In some sense, yes. Our objective is well as to minimizeearnings volatility on a quarterly basis from changes in exchange rate. And ourEuro debt is a hedge of our net investment. Our Actaris investment is in Euros.We do have reasonably large sterling business, but as we analyze the impact ofthat, we would have to revalue that debt as their fluctuation return in thedollar in sterling. And we felt the best way to mitigate that fluctuation wouldbe the swap that’s sterling debt back to you as dollar it’s really drove thatas well in terms of our analysis and again more in the balance securing thelowest cost of debt it with cash flows and EBITDA. But also minimize quarterlyearning fluctuation driving by revaluation of debt. We feel this was the bestway to do that.

[Jason Feldman:]

Okay. Got it. Thank you very much.

[Deloris Duquette:]

Thanks, Jason.

[Operator:]

And we’ll now move to Ajit Pai with Thomas Wiesel Partners.

[Ajit Pai:]

Yes. Good afternoon.

[Deloris Duquette:]

Good afternoon.

[Ajit Pai:]

A quick question about, emerging markets, I think I heardyou mention Eastern Europe, you also mention India and some growth there. Couldyou give us some color as to the combine business now, Actaris and Itron. Whatpercentage is you feel broad business is in the emerging markets. And also yousaid very broadly rate the growth rates in those markets. And the margin wherethe EPS is lower and as the margin structure is lower or higher?

[Deloris Duquette:]

Ajit, we don't disclose revenue by those kind of countries,so we really can't give you any color around that right now. I guess what wecould say is the majority of Actaris' revenue still continues to come fromEurope, although we are starting to see revenue from these markets.

[Ajit Pai:]

And on the margin structure side, where the DSP and marginsare comparable with, the European business in this new market and the evaluativegrowth rates are?

[LeRoy Nosbaum:]

Yes. I mean, Ajit as the point I make there is, you have tobe careful if they talk about apples-and-apples and not, very complicatedleaders with electronic and versus – very uncomplicated mechanical leaders. So four instances, in Indonesia we make bread and buttermechanical electric leaders, those don’t have the kind of, margin that a leaderyou make in Europe is got either prepaid device AMR device, I mean thedeferential here margin is quite substantial. So in generally we have less complexity no electronics hasnow, I can talk about that a little while ago, you have lower margins. And oneof the things, we think the world does is to move to greater complexity oftechnology on top of basic leader platforms. And that allows us to bringsmargins up beginning as it did in US, extending to European this is going outnow. And then in developing countries across time. One of thegreat examples of that is if you look at China, we don’t -- we make all gasleaders in China, but we really don’t sell a lot of leader product expect verycomplicated leader product in China, because margins on that stuff are justmiserable. And so we look it, we look at geographic quite to decidewhether we want to expand any kind of, effort to get there or not. Malcolmmentioned one which is India would and we have hope next tickly around thewater. Because water is a very precious commodity there as elsewhere. And welook for that business to be very nice in future.

[Ajit Pai:]

Got it. Thank you.

[Deloris Duquette:]

Thanks, Ajit.

[Operator:]

And now we have Patrick Forkin with Tejas Securities.

[Patrick Forkin -Tejas Securities:]

Good afternoon.

[Deloris Duquette:]

Hi, Pat.

[LeRoy Nosbaum:]

Hi, Pat.

[Patrick Forkin -Tejas Securities:]

Couple of questions on the competitive front in NorthAmerica with respect to solid-state leaders. It sounds like you guys are, youhave totally integrated the remote connect, disconnect switch under the glass.How many of you meter competitors have done the same thing.

[Philip Mezey:]

I mean, Pat, it's Philip -- we've seen -- I've seen a numberof samples deployed of competitors actually at AMRA that claim to have thedisconnect. I think that's a game of maturity and volume, but I fullyexpect based upon the interest in the disconnect switch that that is atemporary competitive differentiator for us and that all of the major playersare going to be working hard on that problem. We have a terrific solution..

[Patrick Forkin -Tejas Securities:]

Okay. So would you say that’s a major, that’s a broadinterest among utilities now?

[Philip Mezey:]

In the mind space, yes I believe it is.

[Patrick Forkin -Tejas Securities:]

Okay. And then with respect to competition on the AMI sideif you can just review the top two or three companies that you are seeing outthere in some of the competitive proposals you are working on?

[Philip Mezey:]

Sure. I think they fall into two broad categories. Thelarger, established players, by that meaning Cellnet and Elster. And then a number of either new marketing entering orsmaller players that are experimenting with newer technology. And so we’ve seen census so to spring in a couple of othertrillion that have either announced pilots or we known to be working on variouspilot projects.

[Patrick Forkin -Tejas Securities:]

Okay. And then last question on the regulatory front therewere proposed cases that would actually remind awards to the utilities forselling less electricity under the various demand response programs. And then earlier this week, Duke was out talking about thesame type of thing in some of their Midwest territories. LeRoy any thoughts onwhether that is going to really take hold in California. What the opportunities are for that this spread across thecountry, what it might mean for AMI business?

[Steve Helmbrecht:]

Well, I don't know about California in specific but the factthat the California PUC is allowing all of those utilities to put those hugepurchases in a rate base sort of underpins that. I have heard Jim Rogers in Duke speak on his concept aboutbeing paid to deliver megawatts or -- he's got a different Save-A-Watt. It'snot an unreasonable concept. And I spent sometime recently with a couple Commissionersthat would say conceptually it is not an idea that we would immediately turnfrom, the doubles and the details on that one path. But if you think about the fact that utility gets paidfundamentally for servicing if they can do that, by effecting conservationpretty hard of commission to stand up and say we are not going to let you to dothat. I think the fight really is in the detail and exactly howthey're going to get to do it.

[Patrick Forkin -Tejas Securities:]

Okay. Very good. Thank you.

[Deloris Duquette:]

Thanks.

[Operator:]

And now we'll move to Chris Sommers with Greenlight Capital.

[Chris Sommers -Greenlight Capital:]

Hey, guys. I guess a couple questions. One, a majority ofyour EBIT now comes from overseas. I was wondering what your benefit was fromcurrency translation in the third quarter?

[Deloris Duquette:]

We haven't really quantified that to be perfectly honestwith you, Chris. Obviously the Euro is moving in the right direction for ourActaris business and we are translating it at a higher rate. But in allfairness I don't have it quantified.

[Steve Helmbrecht:]

Yes, we didn't quantify that but we clearly came in at ahigher rate than we had originally expected. And with as we look forward withright now the Euro and dollar at about a 144 rate. We are looking about clearly that as a contributor to theincreased relative revenue from Actaris in the third quarter was the actualrate coming in higher. But I don't have a number right here to quantify that.

[Chris Sommers:]

Got it. And then secondly your guidance for the rest of theyear implies that the fourth quarter revenue is going to be higher than thethird quarter. I was wondering if you could comment on kind of what you'reseeing so far given that Actaris seemed to slow down a bit in the third quarterbecause it ended the quarter with about nine book to bill. So with the majority of your revenue slowing down leavingthe third quarter, what are you seeing that gives you the comfort to raise thefourth quarter revenue versus the third quarter?

[LeRoy Nosbaum:]

Chris, a couple of points there. Don't get fixated on thebook-to-bill for Actaris. That flips right around potentially in Q4 and is overwon. And a good deal of it if not most of it gets shipped in Q4.So there isn't the lag if you will on the Actaris shipping that you see in awhole lot of the business in North America because far, far less of theirbusiness is project-based business. And so don't--I'm not saying you shouldn't look at it, butunderstand that it's a very different book-to-bill than US is. We were verycareful as we looked at the fourth quarter knowing how we were going to comeinto the end of Q3 to do a very careful bottoms-up sales forecast withMalcolm's guys and Philip's guys. We are feeling very good about the numbers we've given youfor Q4.

[Chris Sommers -Greenlight Capital:]

Okay. Great. Thanks a lot of guys.

[LeRoy Nosbaum:]

Sure.

[Deloris Duquette:]

Thanks.

[Operator:]

And now we have Michael Horwitz with Pacific GrowthEquities.

[Michael Horwitz -Pacific Growth Equities:]

Hi. I feel it necessarily to do maybe a bit of a follow-upon all these timing questions and the way that these contracts can roll out forAMI because I do think that it has now gotten a bit confusing with the multipleanswers and questions. Given what your stock's doing right now in the after-marketit might be helpful if we walk through. CenterPoint you're able to make thisannouncement today. Now we have a bit of a process to go through over the nextfew months. But it still implies the middle of next year, given yourearlier comments, that then that will start to become a volume situation. Andif that is the case, can you also explain some of the other opportunities thatare out there and if those are in similar timelines and exactly how that mightmap out? Because I do think some of your prepared comments may havebeen a bit different than when you answered some questions.

[LeRoy Nosbaum:]

Michael, I will answer that question to the degree we can.So first of all let's start about CenterPoint. Your assumption on CenterPointis not incorrect. If they move through their own internal process and they movethrough the process with their Public Utility Commissions, there is areasonable chance and I would agree with your statement that in the middle of '08they are shipping volume product. But understand that CenterPoint is different than almost ifnot every other major AMI prospect out there on the street, whether it'sSouthern California Edison or San Diego Gas and Electric or Detroit, which arethree of them that everybody talks about, or PG&E. Those guys haven't comethrough a 10,000-point trial period. And all of those guys some time between now and we think atthis point early in the first quarter will be making vendor selections, atwhich point they will start something like a 10,000 point trial. That trialwill go on for the better part but probably not all of 2008. The technologywill either be valued as worth going forward with or not. And then the largerdeployment will commence. To the point Stuart finally got me to understand, there'sprobably a quarter's worth of time between actually saying, Okay. Let's goahead and do the full deployment," and when people start ramping up. And so as I said in my prepared remarks, I think we need tobe very careful to understand that while the prospects are huge and in fact ifyou add them all up they're well over $2 to $3 billion, all that stuff's notgoing to start shipping in volume in 2008. So I'm trying to be very careful to forewarn all of you tomodel carefully because this stuff just takes time to progress through apilot--which by the way CenterPoint is a good example of--stuff installed,beginning at the very front end of this year, and then finally they're comingout of it. You saw our announcement this morning. So that gives you amodel at least of the timing of the pilot. And then you go to full award, andthen you go on. So hopefully that helped a little bit.

[Michael Horwitz -Pacific Growth Equities:]

I think that was great, and thank you for doing that. Andthen so the timing which seems to be in line with my expectations that this isreally a 2009, 2010. And beyond volume deployment, given your commentary aboutguidance on '08, I would have suspected if you thought there was volume in '08and if the street thought there was volume in '08, that number would have beena lot of bigger. So I just wanted to be clear that I feel like it's prettywell understood how volume works in '09 and 2010. So thank you for explainingthat.

[Deloris Duquette:]

Thank you.

[LeRoy Nosbaum:]

No problem at all, and thank you for asking for theclarification. And to a point Philip made, and I know some of you guys want usto say more about individual prospects out there. I mean, utility companies ingeneral are in very sensitive places right now with their Boards and with theirCommissions. And so virtually every one of us has been asked, whetherit's Itron or one of our competitors would you guys just shut up about what wedoing? We do not want you talking. It's too sensitive right now and you knowwhat? When somebody who might give me a $400 million order saysshut up, generally I listen.

[Michael Horwitz -Pacific Growth Equities:]

Thank you.

[Deloris Duquette:]

Thank you, Michael. Shauna, can you tell us if we have verymany other questions on the phone? We're a little over.

[Operator:]

There are two left in the queue.

[Deloris Duquette:]

Okay. We'll take the last two.

[Operator:]

Okay. Our next question comes from Steve [Weephel] withStandard Life Investment.

[Steve Weepel -Standard Life Investment:]

Hi, guys.

[LeRoy Nosbaum:]

Hey, Steve.

[Deloris Duquette:]

Hi, Steve.

[Steve Weepel -Standard Life Investment:]

This relates to the last point you made, and I realize --and that you're not in control of the timeline of the data releases, but canyou give us some idea of who you think is furthest ahead in the process andmaybe the order in which the utilities might come to the market with someannouncements.

[LeRoy Nosbaum:]

Well, I think in an obvious way clearly CenterPoint is maybeas far down the road on process as anybody is, but you would have got that oneyourself. I think the four that are out there right now that everybody knowsabout that are probably as far in the process as you can be without actuallygiving people orders are Southern California Edison, San Diego, CenterPoint ornot CenterPoint, but PG&E and then Detroit. And in some respects those guys are bowed in the same placeand depending on issues they have individually with their Commissions or theymight have with their Boards, and I'm going to explain why that occurs here ina moment, I think toward the end of this year, very front of next year, you'regoing to see them all sort of coming out of what is a little bit of quiet. One of the things that a utility has to do on these things,say it's $300 to $600 million, is they sort of get into a negotiating roundrobin with Commissions, Commission staffs and their own Boards as to howthey're going to deal with capital requirements, how they're going to deal withembedding this either in a rate base or taking other kind of regulatoryconsideration for that stuff. It is just not determinant how long that kind of a processtakes. There's a little trial ballooning that goes on. There's a littlenegotiation that goes on. And so to try to be more definitive is just silly onone hand because nobody knows. They don't even know. And so one of the things you can do, though, is to watchfilings at those utilities. They'll make filings that are public with theirPublic Utility Commissions, and you guys read those just like we do. In fact, Ithink you get them before we do. I just haven't figured out how.

[Steve Wheepel -Standard Life Investment:]

Do you think the vendor selection has been made and its nowjust the process that has to be followed?

[LeRoy Nosbaum:]

No, I think in the ones I mentioned vendor selection hasnot. I do think you've seen some narrowing down, which we've all talked abouton previous calls. A couple players at Southern Cal, a couple of players in themix at San Diego. I really don't know at PG&E. I'll be fair on that one.And a couple of players in the mix at Detroit.

[Steve Wheepel -Standard Life Investment:]

Okay. Thank you.

[Deloris Duquette:]

Thank you.

[LeRoy Nosbaum:]

You bet.

[Operator:]

And our final question comes from Jay Hingorani withStandard & Poor's Financial.

[Jay Hingorani -Standard and Poor’s Financial:]

Yes, thanks for taking my call. Just real quick, youprovided EBITDA guidance, about 220 with some upside. And in the past you'vementioned how EBITDA is probably the appropriate way to look at companies inyour space being valued. I just wanted to ask you real quick, that upside, can youjust kind of give us a little color on what you see happening or how that canhappen? And then just talk about where does year-to-date and kind of round outthat picture if you will?

[Deloris Duquette:]

Well, sure, Jay. I mean, we put in our earnings release whatour EBITDA has been for the quarter so far or for the year-to-date period, andI believe it was $158 million. So what we said in our earnings release today is we expectedthat that would be greater than $220 million for the year, so obviously there'ssome upside implied in that. Our cash has come in a little bit from what we projected inall fairness because our earnings aren't what we projected a quarter or so ago.Does that answer your question?

[Jay Hingorani -Standard and Poor’s Financial:]

Sort of. And then you're still looking at industry range ofbetween 12 and 15 times?

[Deloris Duquette:]

Are you talking about our get to EBITDA for our covenants?

[Steve Helmbrecht:]

I think valuation.

[Jay Hingorani -Standard and Poor’s Financial:]

Yes, I'm talking about…

[Steve Helmbrecht:]

We don't comment on our valuation multiple.

[Deloris Duquette:]

We don't comment on our valuation.

[Steve Helmbrecht:]

The other comment I'd want to just clarify again is that wedo have debt investors who look at covenant sort of, ratios on a last 12 monthbasis. And the point we were trying to make is of course what wereport financially only includes Actaris from the day we acquired the company.And that clarifies, we want to be clear in terms of what we are disclosing inreported EBITDA and our forecast for the year. And then in addition, we do have stock comp expense, whichwe do not add back in that number but it is a relevant measure for our debtinvestors and we like to provide that information as well.

[Jay Hingorani -Standard and Poor’s Financial:]

Okay. Good enough. I'll follow up offline as well. Thankyou.

[LeRoy Nosbaum:]

Thanks, Jay.

[Operator:]

And that does conclude today's question-and-answer session.Ms. Duquette, I'll turn the conference back over to you for any closingremarks.

[Deloris Duquette:]

Okay. Thank you, everyone, for joining us today. And asalways if you have any follow-up questions please feel free to call.

[Operator:]

There will be an audio replay of today's conferenceavailable this afternoon. You can access the audio replay by dialing 1-888-203-1112 or1-719-457-0820 with a passcode of 4780106. Or go to the company's website, www.itron.com. That does conclude today's conference call. Once again wethank you for your participation.