Itron, Inc.
Q4 2008 Earnings Call Transcript

Published: 19 Feb 2009

[Operator:]

Good day, everyone and welcome to the Itron, Inc. fourth quarter 2008 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Ms. Deloris Duquette. Please go ahead.

[Deloris Duquette:]

Good afternoon, everyone, and thank you for joining us today. On the call today, we have LeRoy Nosbaum, our Chairman and CEO, Malcolm Unsworth, our President and COO, Steve Helmbrecht, our Chief Financial Officer, Marcel Regnier, Chief Operating Officer for Actaris, and Philip Mezey, Chief Operating Officer for Itron, North America. The earnings release that we issued today includes an outlook for revenue, earnings and adjusted EBITDA for 2009. We will also talk about other issues on today's call that could be forward-looking in nature. The outlook and other forward looking information we are providing is based on what we know today and is subject to a number of risks and uncertainties. I encourage you to read the forward-looking disclosure in our press release which will alert you to a number of factors that could cause a difference between our expectations and our actual results. You should also refer to our 2007 Form 10-K and other related SEC filings for more complete disclosures for specific risks and uncertainties related to our business. We do not assume any obligation to update or revise forward-looking statements although we may do so from time to time. Our earnings release includes non-GAAP financial information that we believe enhance your overall understanding of our current and future performance such as reconciling GAAP, non-GAAP financial information are included with our press release and are also available on Itron's external Web site. Supplemental information is posted on our Web site under the investors tab with the pertinent points that each officer will discuss today. We have a lot of information to cover on today's call so our scripted remarks will be longer than usual. We are willing to remain on the call a bit longer than we normally do to ensure that we are answering any questions that you may have. We will start the call with a full review of our financial results followed by operational update and then Malcolm will talk about his new position and we will finish with LeRoy's thoughts on his new role. Now I would like to turn the call over to Steve Helmbrecht, Itron's CFO.

[Steve Helmbrecht:]

Thank you, Deloris. We have provided detailed financial information in our release so I will give an overview of our results for the fourth quarter and full year 2008. I will also talk about our debt including our recent issuance of equity in exchange for convertible notes and will then turn the call over to Malcolm. We face some headwinds in the fourth quarter with slower year end spending in the U.S. coupled with significant strengthening of the U.S. dollar. We had revenue of 432 million in the quarter which was 48 million or 10% lower than the fourth quarter of 2007. Gross margin for the quarter was 34% which compares favorably to 33% in the fourth quarter 2007. Due to increased Actaris revenues in higher margin region, operating expenses for the quarter were comparable to the prior year over higher as a percentage of revenue due primarily to increased Actaris sales and marketing and R&D expense as well as expenses related to Sarbanes-Oxley compliance. Non-GAAP operating margin was 11.2% for the quarter, down from 12% from the fourth quarter of '07 due primarily to the increased operating expenses and the lower revenues. We had a non-GAAP effective tax rate of 27% for the quarter and the year a bit higher than our expectations due to the impact of exchange rates on foreign earnings. Non-GAAP diluted EPS was $0.71 for the quarter compared with $0.81 in the fourth quarter of 2007. For the year, we had revenue of $1.91 billion, compared with $1.46 billion for 2007, an increase of about 30%. Keep in mind the Actaris results for 2007 were from the April 18th acquisition date. Our non-GAAP operating margin was 12.1% for the year compared with 12.5% in 2007 due primarily to increased compensation and R&D expenses as well as the expenses for Sarbanes-Oxley compliance. We are wrapping up the Sarbanes-Oxley project for Actaris since we launched in 2007. It was an extensive project and we are pleased with the results in terms of the assessment of our internal controls. As a result we expect the ongoing compliance cost for Sarbanes-Oxley in 2009 to be much lower than the cost incurred in 2007 and 2008. Non-GAAP diluted EPS for the year was 336 compared with 281 in 2007, an increase of 20%. Cash flow from operations was 37 million for the quarter and 193 million for the year. Our capital expenditures for the year were back end loaded with 22 million for the quarter and 63 million for the year. Capital expenditures in the quarter were primarily for AMI related equipment in North America and for automation of our electricity metering manufacturing in the UK. We had free cash flow of 15 million for the quarter and 130 million for the year. Turning to liquidity our cash balance was 144 million as of December 31st. We have about 65 million in unused capacity on a revolver line. The rest is currently being used for letters of credit and bonds. Our accounts receivable remain healthy. We had adjusted EBITDA for the quarter of 60 million and an EBITDA margin of 14%. Our adjusted EBITDA for the year was 280 million with an EBITDA margin of 14.7%. As a reminder to our debt investors we make several adjustments including the add back of stock compensation expense when calculating EBITDA for debt ratios. Stock compensation expense for the year was 16.5 million. At December 31st, we had about 1.2 billion in total debt at a blended interest rate of 4.6%. During the quarter we made 4 million in debt payments including the repurchase of 1 million in senior subordinated notes. We made lower debt prepayments in the fourth quarter in order to maintain a higher level of liquidity. For the year we made debt payments of 388 million. Our debt to EBITDA ratio is 4.1 times December 31 and we were in compliance with our debt covenants. As we move in to 2009 starting at the end of Q1, our credit agreement calls for a tightening in these covenants with maximum debt to EBITDA ratio of four times and a minimum interest coverage ratio of 3.5 times. In January we issued about 2.25 million shares of common stock in exchange for 121 million in face value of our convertible notes. These exchanges reduced our convertible debt from 345 million to 224 million, including the exchange we have reduced our debt by 585 million since the April 2007 acquisition, a debt reduction of over 35%. A few comments about the exchange. First, the notes have been and continue to be an important part of our capital structure. We issued the notes in 2006 and help to fund the Actaris acquisition. It has been 2.5 years since we issued the note and this exchange reduced the balance by about a third. We estimate the exchange will be diluted in 2009 EPS by approximately $0.17 a share which we have already taken into account in our guidance issue today. The accounting for the convertible notes is getting increasingly complex. A new accounting pronouncement became effective on January 1st which will result in additional non-cash interest expense of about 9.5 million in 2009. Also, the exchange will result in a one-time non-cash charge of about 10 million pretax. Additional non-cash interest expense and loss on exchange are excluded from our non-GAAP earnings guidance for 2009. There will be more information in our Form 10-K filing and Deloris and I can take offline additional questions related to the exchange in the new accounting rules. I will now turn the call over to Malcolm to discuss our outlook for 2009.

[Malcolm Unsworth:]

Thank you, Steve, and good afternoon, everyone. Guidance for 2009 was very difficult. So we thought it appropriate that I talk about it since I am responsible for the results of '09. Obviously we find ourselves in an economy that is bad and from our perspective continues to worsen. The U.S. housing report this morning was 466,000 is clearly effective. As we came out of 2008 we said year end spending was disappointing, especially in the U.S. and it was. As we have come through January and moved through February, business in the U.S. continues to decline. The question now becomes will it continue to worsen or level off. The answer to that is unclear. In addition, as we move through the first two months of '09 foreign exchange and currencies other than the Euro have weakened relative to the U.S. dollar. For example, since last month, the deterioration of non-Euro currency, primarily the Brazilian real and the British pound decreased our 2009 projected revenues in U.S. dollars by approximately 20 million. So while our modeling at $1.30 for the Euro has been quote, others have deteriorated and therefore, it is quite hard to know what the year will be. And unfortunately, as it's been well publicized San Diego has chosen to delay their OpenWay rollout in order to upgrade to a higher level of platform security. A move that is not helpful from an '09 perspective, for one which we could not argue either. Philip will talk more about it in his prepared remarks. In Actaris is that we have moved our guidance range for '09 down to reflect uncertainty, particularly in the front half of the year and the reality of San Diego moving out. Our new revenue range for 2009 is 1.78 billion to 1.88 billion. Earnings per share range is $3.35 to $3.75 and EBITDA is 270 million to 290 million. We take no pleasure in lowering guidance for 2009. But at this point we think it is a prudent thing to do. Now let's move to Philip and Marcel for their respective operations reviews.

[Philip Mezey:]

Thank you, Malcolm and good afternoon, everyone. I thought I would highlight a few things from the quarter but spend most of my time today talking about some of the broader issues in the industry and market and try to address some misconceptions that may exist. First, a few highlights of the quarter. North America revenue for the quarter of $153 million was 8% lower than the same period of 2007 primarily due to lower than usual year end spending from utilities in the U.S. When we gave guidance in the third quarter we said this could be a risk. And in 2008 our quarterly revenue pattern was a bit different from normal years. Instead of the slower first half we experienced more revenue in the first nine months of the year than we were expecting but by year end between the economy and financial markets many utilities did not adhere to their normal use it or lose it budget spending and instead began delaying those purchases that were discretionary. Thus we end up at the lower end of our revenue guidance. INA also had lower gross margin during the quarter compared to 2007 primarily due to the lower revenue. Unabsorbed overhead was a bit higher and our product mix was not as favorable as last year. Expenses were basically in line and INA ended the year with non-GAAP operating margins for the quarter and the year of about 16%, slightly lower than 2007 non-GAAP operating margin of 17% but not out of line considering all of the work that we did this year bringing OpenWay to market. INA bookings during the quarter were very impressive at $422 million which gave us a total bookings for 2008 of $1.25 billion, for Q4, a large part of this was the electric AMI portion of our contract with CenterPoint Energy for 334 million whose project was approved by the Public Utility Commission of Texas in December. While we are pleased with the AMI bookings the fact that Q4 core business bookings excluding AMI were only $88 million indicates a concerning slowdown in our core business in North America. However, with that said, we still delivered over $628 million of core business in the past year. I will speak more about our thinking about the economy but the most significant factor here again is the impact that AMI projects consideration has on our AMR and base electric metering business. Last week at Distribute Tech one of our customers made a presentation in which they commented publicly on the rollout plans. I would like to clarify a few misconceptions that have risen after that presentation. Inferences were drawn from the change in deployment plans both in terms of revenue impact to Itron and the reasons the change was made. Questions were raised about whether or not the security function of OpenWay was the major reason for the delay. Last week we issued a press release providing more detail on our latest software release which further enhances our security capabilities and has been a part of our road map for quite some time. To clarify, the customer has chosen to implement the enhanced version of security that our new release provides and the intent to test the software thoroughly until August. We applaud them for this. It will affect the initial deployments scheduled for 2009 but it will provide our customer with the right solution and that is more important in the long-term. There have also been some concerns expressed about Itron's ability to successfully launch OpenWay into a fast evolving smart grid marketplace. Let me assure you, OpenWay works and works well. I would remind you that we are currently working with and deploying the technology at four very large our high profile customers. That alone is validation of the viability of the system. However, remember that large projects of this kind are of the similar magnitude to an ERP or billing system replacement with schedules that frequently shift around. Our shipment forecast for AMI changes monthly, some up and some down. We feel that it is not fruitful for us to comment on the shipment or deployment plans for our individual projects and we are further restrained by confidentiality provisions with each of these customers. Therefore, we are not able to speculate on our customers future deployment schedules. Just to remind you of the specifics, we have secured four significant contracts for nearly 14 million smart metering end points. Three of the four contracts include the deployment of gas modules, all of our customers are proceeding with their deployments. Each is thoroughly testing the complete system, including advanced meter functionality, disconnect switch, home area networking and advanced security. Each is integrating the system into their information architecture including meter data management and billing systems. Each is planning large scale rollouts involving project teams of potentially hundreds of individuals. Both San Diego Gas and Electric and CenterPoint are beginning their deployments next month. Solid milestone expressing confidence in OpenWay. Our customers are performing extensive audits on our manufacturing facilities, design and implementation methodologies, quality assurance and deployment readiness. We are thankful to have customers that demand excellence and are making us a stronger supplier and partner. While some vendors may have versions of their smart meters deployed in greater quantities, it's important to understand that those meters may not be the full featured version that are now required as a part of an advanced metering infrastructure or smart grid deployment. They may not have disconnect ability in the meter or home area network capability. They may not have outage notification or firmware download. They may not have the full software capabilities needed in this more open and interactive environment. They may not have the full range of functionality to support smart grid demands. They may not be as feature rich as our system. So any comparison the numbers deployed in the field is likely to be an unfair comparison. There has also been a lot of speculation about new entrants in this market. We understand that as this industry expand and becomes more attractive, it will attract a broader group of competitors and partners, some of which are much larger outside of the utility space than we are. Of course, there is room for other companies that bring a new level of expertise. We do not necessarily see them as competitors and indeed we may end up partnering as we do with IBM, Cap Gemini, SAP, Microsoft and others. Recently Google announced that they were entering the smart grid space by making energy information more relevant and actionable to consumers, Google is providing complementary solutions to ours. To anticipate the question about how the economy is affecting North American business I would like to make a few points. We are worried about the effect of the sharp drop in housing starts which drives a portion of our recurring base business. Some of our customers appear to be capital constrained or do not wish to pay the premium to access the capital markets which has caused several orders to push further into the year. Regionally, declining economy activity has led to declines in energy consumption which may alter the spending priorities of some of our customers. Growing uncollectables on energy bills may slow utility cash flow which may change spending priorities. On the upside, the stimulus package may increase utility spending on projects that have already selective technology and mobilized. While all of these factors may play a role in 2009, we have not identified a trend, whether by commodity, market segment or access to capital that describes how the economic slow down is affecting our business. Rather, we are experiencing selective declines and delays. We have dealt with this concern in several ways by forecasting lower revenues, particularly in the first half of the year, by being proactive on cost control and finally by acknowledging that all of us cannot know how this is going to play out. Our current guidance does reflect a more conservative forecast for 2009. We continue to execute on our plans with our customers and feel good about the prospects that lie ahead despite the environment we are in. I look forward to talking with you about our progress on these projects and other opportunities during the year. And with that I will turn it over to Marcel.

[Marcel Regnier:]

Thank you, Philip and good afternoon, everyone. I am going to briefly touch on the fourth quarter but spend most of my time today talking about the current environment and my view of 2009. Actaris revenue was $279 million for the quarter which is about 34 million or 11% less than last year. All of the revenue decrease was caused by the stronger dollar in the current quarter compared to last year which is actually a 1% increase in Europe and I will come back to the issue of currency effect. Gross margins of about 30% in the quarter were higher than last year primarily due to better material costs, higher volumes and more favorable product mix. Expenses of $76 million was 3 million higher than last year despite some benefits from the higher dollar. Actaris operating expenses increased in all categories because of continuing investments in R&D and expanding market reach. Higher amortization and intangibles expense and increased costs associated with the implementation of Sarbanes-Oxley. Actaris non-GAAP operating margin of 11% for the quarter was lower than last year due to the combination of lower revenue and higher expenses. Yet for the year non-GAAP operating margin of 13% was comparable to last year. Bookings for the quarter was $311 million or about 1.1 to 1 book to bill ratio. We secure the three year contract worth $20 million on revenue production services in Brazil. We have been winning $14 million contract for AMI in Abu Dhabi and we have a very positive feedback from our customer Kata Farrel [ph] on the implementation of the AMI contract we sold in '08. All in all, a very good quarter So what are we facing from our customers and are we being affected by the economic slow down and the final surprises. I would not say that we are not seeing anything that is causing us concern related to the economic environment. For example, we are seeing in Spain a contraction of retail demand because of a dramatic shrink of the construction industry and we see some of this in other regions like Scandinavia. We are watching on a daily basis the activity of the utility industry in Europe. Although we don't see any major impact on the traditional book and ship meter industry, as most of the meter market is driven by a replacement, and installing meters on previously unmetered residences and keep in mind that our products are the core element of measurement which sets the bill of our customers. Actaris business cannot be reviewed without considering the large diversity of regions, countries and economic environments in which we operate. Let's have a look on those regions. In South America, Asia, South Africa the economy is less affected and our forecast is still positive, mid term demand is increasing. Altogether, our bid activity at the moment is showing more than 100 projects worth more than 1 billion Euro which shows a significant increase in activity. As well, revenue solutions repayment systems and services are more and more seen as a smart way to secure utility revenue and we seek currently increased demand in the UK, in South African countries and also in new regions like Central and east Europe and Asia. And Actaris is the undisputed leader in this business. So the momentum for AMI is still increasing with major ongoing projects, mostly in Europe and the Middle East. And the ERDs the distribution branch of EDS keeps its project on track. In fact, we should see the first mass rollout tender awarded later this year. Other projects are also ongoing like in UK with the smart metering law passed recently in '08 and many others. Very exciting time actually. What is mostly affecting our expected results is a stronger U.S. dollar related to the currencies in which we operate. Although we focus on the Euro in our mission since it is the largest portion of our revenue, we operate in 27 different currencies like the British pound, the Brazilian Real, the (inaudible) and all have been is harped by the economical crisis. The British pound is actually experiencing a much larger negative effect than the Euro. Altogether we are projecting an average mid single digit growth in our business in 2009 in local currencies and in volumes. Unfortunately, for our (inaudible) results it will look like as Actaris is declining in terms of U.S. dollars. One last item that I will touch on is that in 2009 the Actaris brand will be replaced by the Itron brand and we will begin to operate as one branded company on the worldwide basis. We are very excited about the opportunity to be more closely associated with the Itron name and its expanded capabilities. And in 2009 we will change the name of our reporting segment to Itron International, rather than Actaris. I look forward to updating you on our operational results and with that, I would like to turn it over to Malcolm.

[Malcolm Unsworth:]

Thank you, Marcel. Good afternoon. Steve, Philip and Marcel did a good job of covering the results in the quarter what we are seeing in the business climate from both an economic and financial impact, I thought I would spend time talking to you about my views for the future as CEO of Itron. This transition plan has been in the making for well over a year. Working in conjunction with our board of Directors, we knew that a smooth transition of LeRoy's day-to-day responsibilities and leadership was of the utmost important to Itron. I have spent a great deal of time with LeRoy since I joined Itron in 2004, hoping to develop strategy and guiding the company. In my role as President, I have become familiar with all of the various operating, financial and support functions in Itron on a worldwide basis. For a number of years I have been an active participant in board meetings and in operations and strategic role and as you have seen, elected to the board of Directors last quarter. As many of you have seen I have become much more visible in the industry and with investors. I feel ready to take on this position and I'm excited about leading this company at a time when this industry is going through such a phenomenal transformation on a global basis. There is no doubt in my mind Itron is the best positioned company in the world to take advantage of the opportunities that this transformation will provide. So what do I envision the future of Itron holds? I believe that we are entering the time where the focus on this industry and the competition that we have will become even more intense. Itron has always had a reputation of focusing on our customers and we have not strayed outside of the utility space. We understand this industry like no other and many companies, especially new entrant under estimate the challenges of this industry, the adoption rates, the preferences that may not be the same as other industries, the need to be economic in deployments because of regulatory oversight, they need to develop solutions in highly accurate reliable products that are designed for long life and live in excessive climates within narrow tolerance limit and the desire to minimize risk. With over 100 years of experience we have the ability to understand our customers and their circumstances, regulatory, operational and their customers like no one else. Some would say that this is a disadvantage because the industry is changing. We believe it is a strength and one of the best advantages we have because we know what it takes to be successful especially in this well established regulated risk intolerant industry. We have learned from the school of hard knocks and understand the demands this industry puts on us. My challenge from our board is simple. Continue to profitably grow this company. We are a critical element in the smart grid and in the war to infrastructure upgrade in which the stimulus package has allocated $6 billion. We will consider other smart grid opportunities in order to maximize our business prospects. We will continue to operate as we always have without the hype but with true understanding of the industry in which we operate. Understanding the needs our customers actually have, not what someone suspect they have and we will continue to provide our customers with the bred of solutions and guidance to lead them through this transformation. We will continue to practice of customer intrinsic. We develop relationships with our customers. We have a compelling value proposition supported by diverse and experienced group of nearly 9000 people providing guidance based on experience to help our customers to determine the best course. We will be there for our customers over the long-term and have their best interest at heart. We are not focused only on short-term gains. We will also continue to focus on operational excellence, developing products and solution that are high quality exceeding the standards our industry demands yet are economic feasible. By focusing on local presence we believe in employing people in the countries in which we do business. The countries in which our customers live. We believe we have an advantage in the U.S. because we produce American made products and develop solutions and deliver services with Americans and that is replicated around the world with the local presence, local content, local management and local employees. What better positions to be in for any stimulus in a country that wants to provide. 2009 will be a challenging year for every one and we are no exception. We are taking a cautious approach to the year. While we still believe there can be upside to a variety of the sources including a stronger economy, a stimulus package that are structured in a way that can accelerate projects or generate new projects. We also realized there can be downside, deployments that are delayed due to a variety of reasons, including perception of a worsening crisis and the desire to hold onto capital and not spend. However, we still expect stronger earnings which in this environment is good news. I just want to close by saying I'm very excited about this opportunity I have been given. I want to thank LeRoy for growing this company and ensuring that it has been so well run for so many years. The company that has all the right people, the right products and the right solutions set, the right geographic coverage to lead customers (inaudible) next decade I look forward to being the one that delivers on that promise. With that, I will turn it over to LeRoy.

[LeRoy Nosbaum:]

Thank you, Malcolm. Good afternoon, everyone. I expect all of you want some color on the leadership change. Before I do that, let me make a couple comments about '09. As we look at 2009 we are no better than anyone at knowing how the year will play out. As you heard Marcel said 2009 is holding its own so far, evidence of the great balance that the Actaris acquisition brings to Itron notwithstanding issues of currency fluctuations. Clearly, the year is back end loaded in the U.S. and that loadings OpenWay with our four existing contracts. I certainly agree with Philip to predicting exact schedules for those contracts is not something we should be doing publicly. What I know for sure about 2009 is that with the acquisition of Actaris, now Itron International, we position Itron to be a major player in AMI, AMR, smart metering and smart grid around the world. I know for sure Itron North America has won four major OpenWay contracts. We are delivering the most advanced smart meter product you can buy on those contracts and it works. It is the cornerstone of the smart grid future for those utilities. On smart grid and smart metering, I know for sure, everyone knows how to say the words. Everyone is positioning themselves as the leader in this new world. And when the dust settles, Itron will be there. We have the depth of resource, people, factories, financial, the understanding of the industry better than most and we have the respect of the industry in which we have been a major player for over 100 years. Let me now turn to the transition from myself to Malcolm as CEO. First, let me congratulate Malcolm. He is the right person at the right time. As the board and I began to look for a replacement for me, it was clear that Malcolm's experience in the utility world both in the U.S. and internationally, was excellent and critical. Having been with Itron U.S., Itron Actaris and the electric, water and gas meter business for Slumber Jay [ph] as well as CellNet, Malcolm is uniquely qualified. For some of you it has been obvious that we have been moving through a succession process at Itron for some time. Today's announcement is the culmination of that process. So why now? Now this is urging my decision. Since 2000 when I game Itron's CEO, we have made great progress. The opportunity ahead of Itron is even greater. Grids will be modernized. Infrastructure for water and gas will be upgraded. Meters will be made smart. The opportunity is exciting and it is large. The energy, leadership and commitment required are equally large. I’ve had my time. It’s been great. Quite frankly, there are other things I want to do. Between now and the end of the year, my duties as the Executive Chairman will fall into several areas. Obviously, the whole area of energy policy, industry thought leadership and Itron's role therein has become more important. I will focus a great deal of effort in this area, both in strategy, development and execution. Itron's positioning in smart grid is an area where I have ideas and can provide some counsel to Malcolm and to others. From time to time, I will continue to be involved in investor relations. You haven't gotten rid of me yet. And finally, I will be a resource to Malcolm, the board, in whatever role they see fit. With that, we will open up the questions and because there is a lot of us today, I will some traffic cop but ask the question of whom you think is the right person to respond to you. Operator, please start the questioning.

[Operator:]

(Operator instructions) We take our first question from Steve Sanders with Stephens, Inc. Steve Sanders – Stephens, Inc. Good afternoon, everyone. First, to you LeRoy, congratulations on moving to the next phase on all your successes over the years. We have obviously enjoyed working with you and wish you the best.

[LeRoy Nosbaum:]

Thanks, Steve. Steve Sanders – Stephens, Inc. To Malcolm, obviously, well deserved congratulations to you as well.

[Malcolm Unsworth:]

Thank you, Steve. Steve Sanders – Stephens, Inc. A couple questions on the guidance. I think if we go back to late October, the assumptions were in the neighborhood of 5% to 10% north American decline on the revenue side, 140 million or so for AMI and then 4% or 5% organic growth for Actaris. I guess the organic growth for Actaris remains in the 4% to 5% level. So can you just talk about the revenue assumptions relative to the 5% to 10% North American and 140 million of AMI?

[Malcolm Unsworth:]

Yes, Steve, the two areas really in the U.S. is the decline in the economy. We noticed that recently has taken effect from what we put into our guidance and the push out obviously one of our AMI customers that's also pushed that out. That's where we see the reduction in the North American business.

[Deloris Duquette:]

Steve, I would just add a little bit to that I think when you are saying 5% to 10% decline in North America, you are talking about our high level indication of core business? Steve Sanders – Stephens, Inc. Yes.

[Deloris Duquette:]

We feel that that actually might be a bit light. We would expect that core business now has a contraction of somewhere between 10% and 15%. So that combined with the moving around schedules of AMI led us to a more prudent forecast at this point. Steve Sanders – Stephens, Inc. Okay. And then on the gross margin line for North America versus Actaris, obviously we got some volume issues to deal with North America. But can you provide an update on what the puts and takes are on gross margin for the two pieces?

[Malcolm Unsworth:]

If you look at the overall gross margins, the overall gross margins are pretty flat. We got 33.8% versus 33.9. It moves around a little bit around between Actaris and INA, but really not too much, about 40% I believe there in the North America and the difference is that (inaudible) Actaris. Steve Sanders – Stephens, Inc. Okay. And the range in the first quarter is relatively wide. If you have some color on that it would be appreciated. And then where is the flex for you guys in terms of spending in the first half to help keep operating margins at a reasonable level?

[LeRoy Nosbaum:]

Steve, it's LeRoy. I will take the first half of that and then I will let Malcolm talk about slacks. A little bit to your prior question as well. We are coming to today frankly looking at a precipitous decline in housing and a slow down that we simply weren't seeing in the October, November time frame or even toward the very end of the year. It is just slowing down. And so we are using wide ranges. We are using wide ranges. And for all of you that seems to indicate that we are not quite sure where this thing is going, it's because we are not quite sure where this thing is going. Fortunately, on the Actaris side, Marcel's business is really holding up and most there is growing in some and there is a couple of sticky areas as he mentioned. In the U.S. quite frankly, it is largely slow down in meter business that is causing us to create wide ranges and then of course as Malcolm and Philip said, push out (inaudible) we all know about as cause the general mid point reduction in the guidance. Malcolm can talk a little bit about what flex we have and I would ask them both they talk about that what we have done already as well as what we have that we can do going forward.

[Malcolm Unsworth:]

One of the things that we have done in North America is obviously scrutinize the budget for 2009 and we have already done some reductions in force throughout the organization and we have also frozen salaries when needed and been very prudent about what we are doing for a new headcount going forward if we needed. The policy is in place that scrutinize by both – all any headcount requests scrutinized by Philip and scrutinized by Marcel. They reviewed very, very carefully. We have also looked to what happens if the economy goes even worse. And so we got flexible times that we put in place and on Actaris side, we got in about maybe 20% of our employees are either temporaries or contractors and we put a flexible time in place to say okay. We want to make sure both in North America and in Actaris that we keep core employees and that's very, very critical for us. So we made those changes. Steve Sanders – Stephens, Inc. Okay. And just final question for Steve. Pro forma for the convert exchange. Roughly where are we mid way through this quarter on the total leverage ratio and what's the guideline for free cash flow in 09?

[Steve Helmbrecht:]

Steve, the reduction of debt 120 million or so is about a 0.4 times reduction pro forma and had we done that in before the end of the year we chose to wait till January for a number of reasons, but that’s would have done our pro forma line of that additional cushion given the softness in the first half of the year. In terms of operating in free cash flow we expect our CapEx to be slightly lower this year than next year. About 50 to 60 million and we expect some of this will be affected by timing, but we expect operating cash flow to be flat or so perhaps little lower than 2008 just given the timing of the second half or at the end of the year. Steve Sanders – Stephens, Inc. Right. Thanks very much.

[LeRoy Nosbaum:]

Thanks Steve.

[Operator:]

Next, we will go to Preetesh Munshi from Piper Jaffray.

[Preetesh Munshi:]

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

[LeRoy Nosbaum:]

Interestingly the comments that I made about is hard to identify a trend, certainly amongst our large customers, I absolutely agree that they are absolutely trying to protect the capital that's been allocated to their smart grid projects. And I would not characterize any schedule changes on those large projects as being driven around capital where the capital conservation gets us in some of the smaller recurring orders and it may not even be in the large IOU space. We do quite a lot of business in coop and muni space. I mean so there are broad segments in which we see some pressure on capital but I would not necessarily characterize it as those large smart grid projects that have already been cost justified and approved by the commission.

[Deloris Duquette:]

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

[Preetesh Munshi:]

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

[LeRoy Nosbaum:]

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

[Preetesh Munshi:]

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

[Malcolm Unsworth:]

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

[Preetesh Munshi:]

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

[LeRoy Nosbaum:]

Fictitiously what a great question that and to that end I was in Washington only about a week and a half ago. Clearly what happens now is the DOE is writing a grant process that will be a template for utilities to apply for that 4 plus billion dollars. They will submit grants just like grants are always submitted measuring themselves against benchmarks for what DOE is looking for. DOE has some oversight, a Senate sub committee on energy. Nicely that's chaired by Washington state senator who quite frankly we know well but far more importantly, Mary Kant [ph] – Senator Mary Kant well understand smart grid and utilities which is fantastic. Now as to your question, when do we start seeing money flow? Well, there are some requirements in the stimulus package that time line all of this and in some theory in about 120 days we should be seeing some grants that are processed and funds allocated to. The interesting part about that is the DOE does have the right to delay that if they find they are up against it. One of the things at the DOE right now is they are very short staffed because they have been under funded for some time. So I will give you my guess which is toward the end of the third quarter, we are going to get some idea of some utilities that are toward the front of the line and early in the fourth quarter, I think we start seeing some money that is being handed out. One great question – maybe two, is one, how much will go for smart meters versus other smart grid elements and then the other question which is yet to have really been flushed out. Are we going to peanut butter money across hundreds of projects or are we going to look at let’s say tens of projects and try to really jump start those and I have not been able to determine what the answer to that question is.

[Preetesh Munshi:]

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

[LeRoy Nosbaum:]

Thank you.

[Malcolm Unsworth:]

Thank you.

[Operator:]

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

[Stuart Bush:]

Hi, LeRoy and Malcolm, congratulations.

[LeRoy Nosbaum:]

Stuart, thank you.

[Stuart Bush:]

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

[Deloris Duquette:]

Probably about midpoint.

[Malcolm Unsworth:]

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

[Stuart Bush:]

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

[Deloris Duquette:]

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

[Stuart Bush:]

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

[Marcel Regnier:]

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

[Stuart Bush:]

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

[Marcel Regnier:]

I think with all the issues on the involvement and energy prediction and water conservation, the regulator whoever they are more and more concerned about (inaudible) and effectiveness and performance of the meter and to our knowledge today none of them are considering extending lifetime.

[Stuart Bush:]

Okay, great. And then one last little question to Steve, do you have the guidance for how much stock comp we should expect in the year?

[Steve Helmbrecht:]

Yes, for the year 2009 somewhere about $16 million range.

[Stuart Bush:]

Great. Thanks, guys.

[LeRoy Nosbaum:]

Thanks, Stuart

[Operator:]

Next we will go to John Quealy of Canaccord Adams.

[John Quealy:]

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

[Malcolm Unsworth:]

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

[Deloris Duquette:]

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

[John Quealy:]

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

[Deloris Duquette:]

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

[John Quealy:]

It sounds like you are spending a lot of money over there on selling in R&D, et cetera, my point is when should we see the effects of that whether it's a new product launch or specific contracts exactly?

[Malcolm Unsworth:]

One of the things that we do – this is Malcolm, John, is we look at every particular opportunity we have in North America. We do exactly the same in Actaris. As we said, there is about 100 projects worth a billion dollars and those range from water, gas electric and they range from fixed network solutions that we got without products that we have launched and they range from AMR and AMI solutions. So we have obviously in our forecast some of those opportunities that we put into the latter half of the year for Actaris. As far as all of the products that we put into our forecast, we really don't put unreleased products into our revenue guidance for that particular year. So any particular revenue for new products that are not released today will be in 2010.

[John Quealy:]

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

[Steve Helmbrecht:]

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

[John Quealy:]

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

[Steve Helmbrecht:]

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

[John Quealy:]

Great. Thanks, folks.

[Deloris Duquette:]

Thanks, John.

[Operator:]

Next we will go to Paul Coster with JP Morgan.

[Paul Coster:]

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

[LeRoy Nosbaum:]

Thank you, Paul.

[Paul Coster:]

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

[LeRoy Nosbaum:]

Well, as far as – I will give you a couple of them and if Philip or Malcolm wants to chime in, please do so. Quite frankly, as we came through the end of the year, we did see what we thought we would see or we’re afraid we would see quite frankly which was less revenue in Q4, use it or lose it money. And we were some hopeful to be honest that it was a Q4 phenomena and that we wouldn't see a continuing deterioration of general purpose business in the U.S. The fact of the matter is we are continuing to see – as Philip pointed out, not universally, not everywhere, not in every region in the country but a degradation in general business that is clearly tied to the economy being driven to your point leading indicator wise, what’s going on in a particular region. Are we having even worse housing starts than the general average? Are we having declines in revenue for utilities because their customers are using less energy, whether that’s electric or gas? Are we seeing, which in fact this latest housing report had, a serious drop off in multifamily dwellings which for somebody in the meter business is a wonderful business because you get to sell a whole bunch of them at once. We are seeing that kind of activity not everywhere in the U.S. but in enough areas in the U.S. to cause us to ask the question, we understand where we are today, is it going to continue to get worse? It seems to be a bit of a shock this morning that 466,000 new personal dwellings being under construction. I'm not going to be real damn surprised if it is 300,000 next month. It is slowing down and it is slowing down hard. The question and part of the reason for our wide range is how much slower is it going to get. And when are we going to see this thing start to move in the other direction. Maybe some of the stimulus helps. Maybe some of the mortgage stuff helps. Maybe some of the home loan stuff that they take or toying around in Washington helps. If you can tell me when that all going to start turning things around, we can be a little tighter on ranges and better predictors. I don’t know Philip or Malcolm has any add on that

[Malcolm Unsworth:]

Alright. Got it. That’s right.

[Paul Coster:]

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

[Philip Mezey:]

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

[Paul Coster:]

I was excluding AMI from that. You just upgrade cycles are they being stretched out. Is there a risk to clients? Are there benefits to you in terms of spring loaded rebound in demand for that type of business?

[Philip Mezey:]

There could be.

[LeRoy Nosbaum:]

I would characterize, I think an underlying premise you got there the business does not appear to be going away. It appears to be delayed.

[Deloris Duquette:]

Probably too early to tell, Paul.

[Paul Coster:]

Okay. Thanks very much.

[Operator:]

Next we will go to Carter Shoop of Deutsche Bank.

[Carter Shoop:]

Good evening. Wanted to first touch on the management succession. It seems that this abrupt to me. Can you talk to us a little bit about some of the behind the scenes movements there and also LeRoy you mentioned it was largely your decision to step down. Can you talk about some of the other factors there, please?

[LeRoy Nosbaum:]

Sure, Carter, let's talk about the behind the scene stuff. Clearly, over two years ago, the board and I entered into a succession process and that process was not – we had picked one person in particular but it was a discussion around do we have sufficient internal candidates or are we at some time in the future going to have to look outside the company for a successor to me as CEO. We did not in a meeting or a couple hour discussion come to a conclusion on that. We had a very thorough process of the board spending a great deal of time, not only with Malcolm, but with Philip, with Steve, with Marcel, with other candidates and other people around Itron to judge the depth of the talent pool in general and candidates in specific that might potentially move into a CEO role at some time. We went through that process. It was very successful, interesting process and then the board largely with input from me but more the board than my decision, narrowed down to several candidates and ultimately for the reasons I stated earlier, narrowed down to Malcolm. We fully had an idea even when Malcolm was at Actaris that as we moved through this period of succession, broadened experience both in running Actaris and running Itron North America, which Malcolm had done previously, and then running the whole thing was important. So as part of that plan we moved Malcolm into the President and Chief Operating Officer role for which is now about a year's period of time. So that was sort of the process. Throughout that process, we had not – let me say earmarked a particular date in certain that I was going to retire, but I was pretty forthright with the board that it wasn't going to be five years hence. So we needed to be thinking about it so that we could have a reasonably, orderly transition. As for the time, Carter, I will tell you that the board as most boards would, would have loved me to stay on another year or two years. The fact of the matter is the end date on this thing was totally my discretion and that's pretty easily calculated. I'm going to be 63 years old in another month. I've got maybe 20 good years of hard activity and I've got a laundry list of things I want to do including growing interesting gentleman’s horse ranch, and I am running out of time to do it, it is that simple.

[Carter Shoop:]

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

[LeRoy Nosbaum:]

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

[Deloris Duquette:]

And I suppose I would also add the fact that LeRoy is going to be executive Chairman allows for almost a year of transition. So certainly the feedback has not been that this is abrupt in any way.

[Malcolm Unsworth:]

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

[Carter Shoop:]

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

[Malcolm Unsworth:]

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

[Carter Shoop:]

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

[Deloris Duquette:]

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

[Carter Shoop:]

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

[Deloris Duquette:]

Yes.

[Malcolm Unsworth:]

In local currency I believe.

[Carter Shoop:]

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

[Deloris Duquette:]

I don't know if we need an acceleration. Certainly we need to books in business going forward. Part of that –

[Steve Helmbrecht:]

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

[Carter Shoop:]

We kind of 0.6 book to bill we can get that down to 10% to 15% number?

[Deloris Duquette:]

This thing I would add it look good into the year with $312 million backlog, so it's not all AMI. It's a bunch of core business as well.

[Carter Shoop:]

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

[Deloris Duquette:]

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

[Carter Shoop:]

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

[Deloris Duquette:]

We are not commenting on quantities. We addressed that upfront. We are not going to continue to comment on quantities.

[Carter Shoop:]

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

[Deloris Duquette:]

No.

[Carter Shoop:]

Thank you.

[Deloris Duquette:]

You're welcome.

[Operator:]

Next we will go to Benjamin [ph] of Pacific Crest Security.

[Benjamin:]

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

[Philip Mezey:]

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

[Deloris Duquette:]

And the other thing I would add, Ben, is we don't have just one solution. And one of the reasons that Itron always been adopted by the utility industry as we have a mobile solution for that, we have a high powered mobile solution for gas, we have a fixed hour standalone solution for that, we have a combo solution for gas. So we don't only have one technology to sell into that industry.

[Benjamin:]

Okay. And looking at the sequential AMR of meters decline in the quarter, are you experiencing tapering off of any big AMR contracts with a mid American or is this just related to the economy and housing starts and AMI decision making?

[Steve Helmbrecht:]

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

[Benjamin:]

Okay. And will we see more of those coming off line in 2009 and 2010 or are those large AMR projects pretty much finished?

[Steve Helmbrecht:]

Pretty much finished.

[Benjamin:]

Okay. Thanks.

[Operator:]

Next we will go to Jason Saltman [ph] of UBS.

[Jason Saltman:]

Good afternoon and congratulations to Malcolm and LeRoy Nosbaum. First, a quick clarification, the 4.6% blended interest rate assumption, did that include the effective additional non-cash expenses associated with the new accounting rules for the convert?

[Steve Helmbrecht:]

No, that’s on a cash, this is Steve. That’s on a cash basis overall. It doesn't include the additional interest expense pursuant to the new accounting.

[Jason Saltman:]

So that's on a cash basis. But the guidance itself, does that assume, the extra non-cash expense associated with the rule?

[Deloris Duquette:]

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

[Jason Saltman:]

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

[Deloris Duquette:]

Correct.

[Jason Saltman:]

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

[Malcolm Unsworth:]

Certainly, so far these – again, these four large customers while the stimulus bill may provide an opportunity for them are proceeding a pace. I think it is an added of opportunity. We do not see this is delaying so far.

[LeRoy Nosbaum:]

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

[Jason Saltman:]

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

[Steve Helmbrecht:]

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

[Jason Saltman:]

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

[Deloris Duquette:]

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

[Jason Saltman:]

Thank you very much.

[Deloris Duquette:]

Sure.

[Operator:]

Next we will go to Ajit Pai from Thomas Weisel Partners.

[Ajit Pai –Thomas Weisel Partners:]

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

[Steve Helmbrecht:]

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

[Ajit Pai –Thomas Weisel Partners:]

Is there no need, perceived need to issue any equity anymore?

[Steve Helmbrecht:]

Well, as I said, have a primary focus on repayment but we continue to look at other options. I think it would be an appropriate to say we are done with equity or looking at other options. We will continue to assess where we are and continue to maintain covenants and cushions in that area.

[Ajit Pai –Thomas Weisel Partners:]

Got it. The second question is just looking at your gross margins, I think over the past – the beginning of the decade where the gross margins for Itron were in the mid-40s, there has been this gradual set of decline but then when you acquired Actaris, I think part of the story was that the Actaris gross margins were I think about a thousand basis points or so lower. And over time you have managed to get some of those gains – do actually get those margins higher. So on a go forward basis, just given the drop in revenue level is it fair to assume that even if you have a decline in revenues that the gross margins of the overall company won't decline any further from where they were in the fourth quarter or perhaps would be in the first quarter? And how do we think about the gross margins especially when you have push outs in AMI, and volumes are important over there, with that ramp getting pushed out, do you think that the gross margins will stay depressed longer than they would have otherwise?

[Malcolm Unsworth:]

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

[Ajit Pai –Thomas Weisel Partners:]

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

[Philip Mezey:]

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

[Ajit Pai –Thomas Weisel Partners:]

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

[Philip Mezey:]

It is very competitive.

[Ajit Pai –Thomas Weisel Partners:]

That’s having any inflection point in terms of pricing deteriorating any faster than it has been over the past five years to seven years.

[Philip Mezey:]

No.

[Ajit Pai –Thomas Weisel Partners:]

Got it. Thank you so much.

[LeRoy Nosbaum:]

Thank you.

[Operator:]

Next we will go to Mark Rogers [ph] of (inaudible).

[Mark Rogers:]

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

[Philip Mezey:]

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

[Mark Rogers:]

Okay. And then currency seems to have been a bit of an annoying since this past quarter. What are your plans for hedging currency, if any?

[Steve Helmbrecht:]

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

[Mark Rogers:]

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

[LeRoy Nosbaum:]

This is LeRoy. I will start with that and if Marcel wants to make a comment that is clearly appropriate. First of all, the strength of the Actaris brand was one not so much of the name itself but the quality of the product and the quality of the people and the breadth of presence around the world. By the way it’s just heartening back to the way we talked about that I can certainly see why the strength of the name would have been something that it seemed we were talking about. We were far more focused on presence on product and on their great people experience. Interesting thing, I made quite a deal when we bought them of differing from the norm for some companies and saying we are not going to change this name. But the reason we weren't going to change it in my view at least was I didn't want people fussing over that, I didn't want them spending a moment on that issue. I wanted them working with customers, selling product, making money, just like they always have. Over the course of the period of time since we have bought them, we have moved from a period of sort of we are Actaris, we are proud of Actaris. Quite frankly, many Actaris people saying to me and to Malcolm as we would travel around the world to meet these people, when are you going to change the name to Itron. And so we let this thing go to a point in time when quite frankly my judgment, maybe more mine than anybody's was that the Actaris people were ready for the name change, the Actaris people were wanting to identify with Itron because Itron was moving beyond just being in the meter business, to being in the systems business, to being in the solutions business. Clearly, Itron's manicure if you would, rather than being a meter company. In my mind that certainly was the essence why we chose to change now. Marcel wants to make a comment. Marcel Yes, Marcel, first of all, I would probably here say thank you very much to all of you for this transition to Itron by any means not been forced. It's been total consensus between the Itron management and the Actaris management. And yes, Actaris was a very well respected brand. Why? Because of the quality of the product, the systems, and the people. And we are in the business, the business industry. And the value of the brand is the result of the value of the offer. So would that make any sense to keep two brands while we were on the power more and more combining our offers and our synergies? The answer is obviously no. Then we could spend time on discussing what's the best time. We talked about that together and we said, well, 2009 is a good timing. So here we go.

[Marcel Regnier:]

We are all excited about it.

[LeRoy Nosbaum:]

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

[Mark Rogers:]

Okay. And then –

[Deloris Duquette:]

Go ahead.

[Mark Rogers:]

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

[LeRoy Nosbaum:]

No, we were not modeling a flip in housing at all. But I will say two fundamental things. I have been in this business 40 years. In the 40 years I have been in this business in the meter business. This is the first time that a decline in housing starts which clearly started long before this month has had any material effect on the purchase of electric water and gas meters. It’s just has not historically. This time, however, as evidenced by what was today the announcement of the lowest annualized housing starts in the 50 years they have been keeping records, this time it has. We didn't think it would. We didn't think the decline would be as precipitous and protracted as it has been, but if anybody was flying the flag of this should not make a material difference to us, it was me. Because in my 40 years of history, it never has. You can go back and look at the stats on that and you can't find it. But I will tell you what this time is different. As we all know we are in a period of time here that we have not seen in my entire lifetime. And it’s just different and we are in a real different world right now.

[Mark Rogers:]

Thank you.

[Lady:]

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

[Operator:]

We have five questions in the queue.

[Deloris Duquette:]

Okay. And that should be the end and we’ll take all five that are in the queue.

[Operator:]

Okay. We’ll move on to our next question from Michael Borowitz [ph] from Hamper Group [ph].

[Michael Borowitz:]

Okay, thanks for taking my call. I’ll just be brief because there’s been a lot of detail, so thank you for that. Just to be clear on the San Diego situation and your plans, you’re supportive of them pushing out like this because you plan for this new security relief. Are there any other situations where you may have planned adjustments on your offering with editors or with some of the other utilities or how should we look at that? I know somebody asked a question earlier about if it’s pushing to some other people’s plans but maybe not on the security front, anything else that we should look at with your offering that people are looking for where they might land it.

[Steven Helmbrecht:]

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

[Michael Borowitz:]

Okay great. Thank you.

[Deloris Duquette:]

Sure.

[Operator:]

Next we have from Richard Harding from Cleverdon & Co.

[Richard Harding:]

Good evening. Thank you for taking my call. This is a real quick question. Steve, I figured that the debt-to-EBITDA ratio is just over four times. Is there a target of maybe three and a half times or three times it is so, how long do you think will take to get there?

[Steven Helmbrecht:]

As answered in one of the prior questions on a pro forma basis with the pay down, we earned about 2.7 times and we expect that trend, as you said, over the course of 2009, keeping in mind that our covenants continue to decline in future years so we’ve set those up particularly to focus on continue to repay debts, but that said, as I mentioned before, our main focus is on cash flow but we have been optimistic in paying down debt or exchanging as well where we think that’s appropriate.

[Richard Harding:]

Alright. Thank you. That was helpful. And just a broad question here. What are you guys seeing in the water side of the business, do you see a lot of opportunities? Is it going down? Can you just generally speak about that?

[Steven Helmbrecht:]

Let me just talk globally about what it is, first of all. Remember we’ve got global operations and a tariff where we cover the rest of the world and we’ve got U.S., a little metering business in the US, but mostly the AMI, AMR business in the U.S. We haven’t seen a slowdown really in our water metering business and our water AMR business. I’m really going to hand this over to each particular to Phillip and also to Marcel, just for a couple of brief comments on the water side, we’ve not seen a huge slow down in that area.

[Philip Mezey:]

When I made the comment, I said we haven’t identified the trend by commodity but that I meant electric, gas or water, but we had a nice year in water in 2008 and we are actually projecting another nice year of above average growth. So water has been a strong spot for us.

[Marcel Regnier:]

Marcel speaking. On top of my mind, you know what’s specific to the water industry is that there is today something like 30% of connection which has no meter which is just about 300 million points across the world so just for – one of them being U.K. and U.K. definitely moving more and more into water metering. So for those reasons, we are still very positive on the water business side of the company.

[Richard Harding:]

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

[LeRoy Nosbaum:]

Thank you.

[Malcolm Unsworth:]

Thank you.

[Operator:]

Next we’ll go to Alex Kurtz from Merriman Curhan Ford.

[Alex Kurtz:]

Yes, thanks for taking the question. Just if you could reiterate the tax rate, the effective tax rate for 2009 and then looking at OpEx, what are the leverages again? I think, you are talking about G&A and sales and marketing, little over more specific around where you can make those improvements and serve what the levels will look like from Q4 to Q1? Thank you.

[Steven Helmbrecht:]

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

[Malcolm Unsworth:]

And regarding our OpEx, remember we had some significant expenses in 2008 regarding Sarbanes-Oxley, we’ve taken it down to 2009 – not completely but we’ve taken them down and we see a basically flat or reduced spending in OpEx.

[Deloris Duquette:]

Yes, Alex, we obviously don’t give guidance quarter to quarter operating expenses that you can improve from our guidance. We’re expecting a lower Q1 operating expenses as a percent of revenue would probably be a bit higher in the first quarter but what we are talking about before is the year average.

[Alex Kurtz:]

Okay. Thank you very much.

[Operator:]

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

[Sanjay Shrestha:]

Okay, thank you. First of all, LeRoy, Malcolm, congratulations and –

[LeRoy Nosbaum:]

Thank you.

[Malcolm Unsworth:]

Thank you.

[Sanjay Shrestha:]

I wanted to make a point. I think it is actually pretty transparent about the OpEx transition here. Quick question; when you talk about the low end of the number for 2009, LeRoy, given your experience in this industry, are we baking in that Euro goes against us and things are going to get worse because you guys, when you give your preliminary guidance before you said its going to be probably flat year-over-year; and am I hearing you right that we maybe being a bit more conservative given the uncertain world we are in right now?

[LeRoy Nosbaum:]

You are hearing me absolutely correctly. We are being more conservative.

[Sanjay Shrestha:]

Okay, great.

[LeRoy Nosbaum:]

Without question.

[Sanjay Shrestha:]

Okay, so, now in terms of us being at that low end versus the high end, do we need to see both, let’s say the stimulus package hitting as well as some of the large AMI moving forward, could we get there even with this one and in terms of coming in at the higher end of that range?

[LeRoy Nosbaum:]

Well, certainly for North America, I would say, yes, you can do it with just one.

[Sanjay Shrestha:]

Okay, okay.

[Marcel Regnier:]

Sanjay, obviously a change in currency rate, one way or another could put you at either into that guidance level.

[Sanjay Shrestha:]

Okay, the kind of what I was trying to get at. So it both happens and the currency goes against you guys, there is still a profit that you can end up coming in the higher end of the range.

[LeRoy Nosbaum:]

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

[Sanjay Shrestha:]

Well, one last question, guys. In terms of ongoing de-leveraging and anticipated phenomenal tax generation next year, so is there a chance that we will probably just going to continue to focus on this de-leveraging or given the environment, are you starting to see some attractive opportunity that might make sense to as a tuck-in acquisition and things along those line?

[LeRoy Nosbaum:]

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

[Sanjay Shrestha:]

Got it. That’s great. Thanks a lot, guys.

[Operator:]

There are no further questions at this time.

[LeRoy Nosbaum:]

Operator, this is LeRoy. I am going to make a couple of closing remarks and then turn it to Delores. First of all, let me say – I could say it’s always been fun. It hasn’t always been fun, guys. There have been moments of challenge but always respectful and I appreciate that. It has been an interesting tour of duty. I appreciate your following of Itron, your interest in it and your support of what we’re trying to do here. This is a great company with seriously great employees. Moving out of the picture, there’s nothing more than create space for Malcolm to step into and take the same (inaudible) in a higher level. There is a huge opportunity ahead of us. We happened to be in a goofy year. None of us wants to be here. None of you, not any of us either, but we are where we are. Our great strength is that we will get through this in good style. We will come up the other side with even better performance and better opportunities. With that, thanks for a good time since the year 2000. Delores?

[Deloris Duquette:]

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