Itron, Inc.
Q1 2011 Earnings Call Transcript

Published: 28 Apr 2011

[Operator:]

Good day, everyone, and welcome to the Itron Q1 2011 Earnings Conference Call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Ranny Dwiggins. Please go ahead, sir.

[Ranny Dwiggins:]

Thank you, and good afternoon, everyone. Thank you for joining us today. On the call, we have Malcolm Unsworth, our President and CEO; and Steve Helmbrecht, our Chief Financial Officer. We issued a press release earlier announcing our results. The press release includes replay information about today's call. We have slides to accompany our remarks today. These slides are available through the webcast and through our corporate website under the Investor Relations tab. Please turn to Slide 2 while I review today's agenda. After I complete the introduction, Malcolm will provide a business update. And next, we will review the financial results for the quarter, and then Malcolm will close our prepared remarks. After that, we'll take your questions. Our earnings release and financial presentation include non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation. Now please turn to Slide 3 regarding our Safe Harbor statement. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectation because of factors discussed in today's earnings release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I will turn the call over to Malcolm Unsworth, Itron's President and CEO.

[Malcolm Unsworth:]

Thank you, Ranny, and good afternoon, everyone. Itron's first quarter results provide continuing validation of the strategic direction we're setting for the company. Those of you who follow us on a regular basis, know that we are managing Itron to capitalize on the extraordinary energy on what the management opportunities' unfolding before us. As you move forward in the global marketplace, there are 3 watchwords at the forefront of our minds

[Steven Helmbrecht:]

Thank you, Malcolm, and good afternoon, everyone. This is Steve. I've asked Ranny to step in today to take you to the financial materials in order to save my voice for the Q&A. We'll be starting with Slide 8. And with that, I'll turn it over to Ranny.

[Ranny Dwiggins:]

Okay. Thank you, Steve. And as Steve said, please turn to Slide 8. Overall, we are very happy with our results for the first quarter, with both Itron North America and Itron International operations contributing to overall revenue growth. Revenue grew 13.3% over Q1 2010 to $564 million, with FX contributing about 1% of that growth. And bookings were $681 million, inclusive of our $268 million booking for OpenWay at BC Hydro for a book-to-bill ratio of 1.2

[Malcolm Unsworth:]

Thank you, Ranny. In summary, with our global footprint, balanced portfolio of Electric, Gas and Water end-to-end solutions, continuing emphasis on organization-wide execution and proven track record of innovation, Itron is very well positioned to compete for the growth opportunities ahead of us. Operator, we're ready for questions.

[Operator:]

[Operator Instructions] We will take our first question from Steve Milunovich with Bank of America Merrill Lynch.

[Steven Milunovich:]

Malcolm, with the BC Hydro win, there are a lot of questions about your relationship with Cisco on that and specifically, what kind of payments you have to make with them and how you assure the economics. Could you elaborate at all on that?

[Malcolm Unsworth:]

Certainly. We have a solid relationship now with Cisco, and one thing that we obviously can't say an awful lot for competitive reasons we've said in MDA, and talking publicly is quite difficult. But one thing we're going to do, as I said in my prepared remarks, we will be paying them a license fee for the use of their IPv6 technology. And the margins on this contract are very comparable to the other OpenWay contracts that we've had.

[Steven Milunovich:]

Okay. And then on one hand, it seems like the adoption of smart meters in the long run is inevitable, but in the short term, it seems somewhat murky in terms of the economic argument and you've seen public utility commissions, some of them pulling back, some of them moving forward. It's a real mixture out there. What's your sense right now of demand uptake? And what we can expect for the next 12 or 18 months for the industry?

[Malcolm Unsworth:]

Okay. So this maybe a little long, but there are about 175 million electricity meters in North America. About 51 million have been awarded to Itron and some of our competitors. That means about 124 million that are left. Out of the 124 million, there's 24 million of those that are highly active, and they should sign anywhere between now and the next 1 or 2 years, at least 100 million. Those 100 million, about 25 million of those are what I call fairly active. They don't necessarily have RFQ split out, but we visit them regularly. So if you take the 100 million less the 25 million it's about 75 million that are not active. Out of those 75 million, about 30 million that have Itron's AMR solutions in there. So that's about another 45 million that are left to go. So overall, we see between now and the next 2 years about 24 million that will be awarded potentially. And about 25 more million that are active. So that gives you a pretty good picture that in North America about what's going on with the business. And obviously, over in International, we've seen a significant number of RFQs coming in. Nearly all of the RFQs in tender activity is associated with AMR and AMI activity.

[Operator:]

We will take our next question from Steve Sanders with Stephens.

[Stephen Sanders:]

Good quarter. A follow up on BC Hydro. Will they be taking the Gen 3 product? And then do we effectively have to wait until the government review is finished in June to begin shipping in any kind of volumes there?

[Malcolm Unsworth:]

Our Generation 3 is our next, obviously, our next version of our OpenWay solution, and that is included in the contract. We've definitely got that. And when it comes to when will rollouts are going to start, it's basically been approved obviously by BC Hydro. It's been approved by the government, and we're moving forward and probably start deployment sometime in the second half of the year. To be completed obviously with the mandate in BC, it should be completed by the end of 2012, Steve.

[Stephen Sanders:]

Okay. And then the follow up, I appreciate the color that Ranny provided on the various segments internationally. He did mention that there are some headwinds on the electric side. Is that, in your mind, essentially some of the bigger utilities slowing down their replacements in front of the smart grid route? Is it a significant headwind? Did you see it over the next year? How would you characterize that?

[Malcolm Unsworth:]

We can only look at headwinds based on current activity that we have with these utilities. We're actively involved in many of the utilities. As I said, about 22 million points of activity involved with bits. I'm not certain what the definition bit you'd call that is. I think that's fairly active. And then the rest of them, as I said, is about another 24 million that we have where we're involved. Headwinds, what can I say? We're now back to business cases. Good business case, which is what we do, which we've done many times. And good business cases makes good business sense for the utility. And so -- okay, Steve?

[Ranny Dwiggins:]

Steve, this Ranny. I would also add that in Europe, yes, we've seen some headwinds, I would say with the planned rollout of projects there. On the other hand, as we mentioned in our prepared remarks, business has held up pretty well in Europe. We were pleased to see that. So in spite of the fact that these big rollouts are planned, business has been holding up pretty well.

[Operator:]

We will take our next question from Michael Horwitz with Baird.

[Michael Horwitz:]

Great. Thank you for taking my question, and nice progress on the margin. Just 2 quick questions. When I think about your relationship with Cisco, should we think about each deal that you're able to win and then implementing Cisco IPv6 as separate when we think about your payments, your licensing payments so BC Hydro will be separate from whatever other project you win. I'm just trying to understand the math, and so when you book $270 million into backlog from BC Hydro, but then we're going to X out a license fee, how do we think about that for subsequent contracts?

[Malcolm Unsworth:]

Michael, every single contract that we have is different. We will have -- we have a license fee that we'll be paying for this one. We have the contracts. We have the contract with BC Hydro. And then everyone will be different after that. So there's not one answer that I can say because it will change over time. But this is the first one that we've had where we'll be paying this license fee.

[Michael Horwitz:]

Okay, fair enough. And then there are quickly -- clearly, your balance sheet is in a much better condition, quite a bit of talk out in the marketplace about consolidation, and given some of your comments about the competitive marketplace, are you starting to look at acquisitions again? And clearly, there are some very big competitors that seemed to be in play even some news this afternoon regarding Landis. How are you going to maybe counteract some of those forces or at least get in the game?

[Malcolm Unsworth:]

Let me answer the regarding Landis, first of all. Obviously, the announcement that came out, so it's about the possibility of Landis, I think, and GE. If you start looking at the competitive landscape, I figured it's all -- that's fine. We've been competing with GE, and we've been competing with Landis for a long time. So I don't think that's going to be any issues. At the same time, if you start looking at our acquisition possibilities, obviously, we've always talked about tuck-in acquisitions we've been doing there. But obviously, with the balance sheet, it's a lot more prone to or a lot more opportunistic. We're always looking at that. But I don't publicly comment on what we're working on. So we're always looking at it go[ph].

[Steven Helmbrecht:]

And this is Steve. As Ranny mentioned, we do feel the balance sheet, as you've said, in a much stronger position today than it has been in the last 4 years. And gives us an opportunity to take a fresh look and tie that into our strategic work that we're doing. And then we'll -- that we'll be talking about more next month at Investor Day.

[Operator:]

We will take our next question from Benj Schuman with Pacific Crest Securities.

[Benjamin Schuman:]

Just quickly on the North America AMI bookings outside of BC Hydro, would you say that's there's a healthy pipeline of those doubles and triples coming up next couple of quarters that can turn those bookings around? Or is that a more persistent weakness?

[Malcolm Unsworth:]

Ben, one of the advantages that we have is we have a balanced business. We have Water, Gas, Electric, as I've said many, many times and a lot of these doubles and triples don't necessarily come from our AMI solution. As we said in our Q4 prepared remarks, we've had a lot of Gas opportunities that were considered to be doubles and triples. We've had a lot of Water opportunities in North America. So we're not just dependent on our AMI electric solutions in North America. And of course, overseas, there's lots of opportunity, as they said, with parts of India, parts of Asia. And Europe is actually looking quite good. So we don't just depend on the AMI situation in North America.

[Ranny Dwiggins:]

This is Ranny. We don't see it as a downturn in business opportunities. Yes, the pipeline is good, and there are a number of doubles and triples out there that we're pursuing.

[Benjamin Schuman:]

Okay, great. And does this OpenWay SCM meter have a price premium to the, I guess, ERT AMR meter and are you shipping those to Con Ed as an upgrade or is that more replacement meter?

[Malcolm Unsworth:]

We have been developing sometime -- we have a very, very large installed base of AMR. And what this product does -- it has a highest selling price, absolutely because it includes a lot of the features that we have with our AMI solution, with our OpenWay solution, but at the same time, it's got backward compatibility, which allow us to read a lot more, not just at Con Ed, I'm going to talk about in a second. But out of the whole 37 million that we've got installed, it allows them to do this upgrade and look at going towards AMI, but still using the AMR functionality. And with regards to Con Ed, we've already got a significant number of AMR electric meters and the gas meters as well using our SCM solution. So it blends in perfectly for Con Ed.

[Operator:]

We will take our next question from Paul Coster with JPMorgan.

[Paul Coster:]

You sound pretty pleased with the start of the year. Would you say that the quarter exceeded your expectations at the time of issuing guidance anyway and in answering that question, looking out to the remainder of the year, do you expect the typical kind of seasonal pattern of an ups sort of 2Q, flattish 3Q, then a strong fourth quarter?

[Steven Helmbrecht:]

Paul, this is Steve. I'm going to voice-wise attempt to answer this. As I said, as Ranny said in prepared remarks, we are happy with the quarter, overall. And you mentioned seasonality. We certainly have seen some of that in the past. We didn't see a lot of seasonality in the first quarter.

[Malcolm Unsworth:]

Yes, and we'll be talking -- we'll be updating our guidance at the end of the second quarter for rest of the year, Paul.

[Paul Coster:]

Okay. And then regarding the reorganization that you just -- what is the status of this reorg? Is it completed? On completion are there anticipated benefits falling out of it? Are there restructuring costs associated with it? Are there any risks? If you can you provide some color, please.

[Malcolm Unsworth:]

Paul, it's a bit too early to tell what we said initially. We called -- obviously transformed 2015, which we'll be covering a lot more detail at our Investor Day. But we started off by pulling the reorg together with Philip and Marcel. And obviously, the idea of this is to expand on all of our opportunities that we've got in North America because of the number of -- which need a little bit more maturity that we have and the experience we've had. And we see this as going forward with some -- obviously, there'll be a lot more reorganization that's going to take place rather than just 2 top guys. When it comes to restructuring, we're not there yet. We've not really looked at all the details. That's part of what we're doing now. We should have a little bit more to talk about in the Investor Day, but I don't think we'll have too much more. But the idea, obviously, is to do some consolidation, trying to improve time-to-market, trying to standardize and simplify and look at the systems that we have. So we call it a 4S solution

[Ranny Dwiggins:]

And Paul, it's a big project. I mean, we are well underway this. We're spending a lot of time on it. We will be giving more updates later, but we expect significant changes.

[Operator:]

We will take our next question from Patrick Jobin with Crédit Suisse.

[Patrick Jobin:]

My first question, just looking at Europe and Latin America, Malcolm, you mentioned that it looks quite good foreseeing some awards later this year. Was that a correct interpretation of when you expect some awards for the smart meter deployments internationally?

[Malcolm Unsworth:]

Okay. So let me just give you a broad picture of what's going on in different parts of Europe because is Europe is 27 countries and also Latin America. If you take a look at different countries with different customers, what we're seeing is that we believe that by about 2012, we're starting to see some RFQs coming out now. RFQs in pilots. We're involved with many of those pilots. We should start seeing some rollouts that are starting in about -- that probably in 2012

[Patrick Jobin:]

Great. That's very helpful. Just as a quick follow up, you had one comment as it relates to the strength you're seeing in the International business for the advanced metering aspect and still seeing some sluggishness in the Base Meter business as utilities are considering the smart meter adoption. Was there anything particular about the timing for the advanced meter deployments for the quarter or could that trend continue?

[Malcolm Unsworth:]

Remember, we do have this balanced business, okay? So we're not dependent completely on these AMI smart, large projects. If you take a look at the RFQs and the tender activity that we have, we've got substantial tender activity going on in various parts of the world. But the AMI and AMR activity is high. But we still have this metering base that is still going on. And I think the number's running that we have in there for our quarterly standard metering projects and standard metering solutions was 20-odd million for the quarter.

[Ranny Dwiggins:]

Yes, the basic meter has declined slightly. And the strength we're seeing is in Water and Gas. And that's really not regulatory-driven. That's really coming from business drivers in many parts of the world, particularly outside of Europe, although we've seen some good business in Europe too on advanced metering. So Water and Gas is very strong, and that's the comment we made during the...

[Malcolm Unsworth:]

And there's significant progress going on in Indonesia as well that I talked about. So it's not just with prepayment. And we're finding prepayment being significant, starting to be a lot more attractive to many of these developing countries.

[Operator:]

We will take our next question from John Quealy with Canaccord Genuity.

[John Quealy:]

I'm sorry to do this to you, Steve or maybe Ranny can take some of these balance sheet questions. But seasonally, we usually have the buildup in inventory, but it looks like you had payables come off pretty hard. So when we talk about cash flow expectations moving forward, and I also see you've got a new deferred on there, can you talk about the ins and the outs in the free cash flow in the next 3 quarters? And then I have a follow-up.

[Steven Helmbrecht:]

Sure, John. Q1 cash flow was impacted quite a bit by the compensation payments. And that is seasonal in the sense of Q1. The working capital built up a bit in terms of inventory in advance of the shipments later in the year. And so we would expect a more normalized pattern going forward. Ranny, can you add to that as well? And I'd like to talk about CapEx.

[Ranny Dwiggins:]

Yes, I think I'll just reiterate what Steve said. It was an unusual situation in Q1 because of the incentive comp and to some degree, the inventory. We expect that inventory to normalize out over the year and no other significant changes in sort of the cash flow.

[Steven Helmbrecht:]

And we've tended to see stronger cash flow in the second half of the year. Generally speaking, over the last couple of years, our CapEx we would expect to be somewhere in the 3% to 3.5% of revenue range.

[John Quealy:]

Okay. And then, Malcolm, as a follow-up, I want to make sure I understood what you folks are saying about focusing on and improvement in gross margins. Was that worldwide or just International? And was that in reference to what we should expect in New York next month? And if that's the case of raising gross margins, I know this is a kind of a tweener technology and manufacturing business model. So as you focus more on gross margins, should we expect more to fall out of operating expense? Or do you need some facility investment to absorb some of that?

[Malcolm Unsworth:]

John, we will be looking at all aspects of both North America, International when it comes to gross margin opportunities. At the same time, I will reiterate constantly our investment in R&D is important. So we're looking at the kinds of things in G&A, what can we do there, how do we alternate some of the processes that we have, how do we improve globally what we do, how do we look at facilities whether we've got excess facilities. But we will be looking completely at the whole area of operating expenses. So hopefully, some of that will drop out in gross margin improvements.

[Ranny Dwiggins:]

So it is a worldwide story there, John.

[Malcolm Unsworth:]

Yes.

[Operator:]

We will take our next question from Colin Rusch with ThinkEquity.

[Colin Rusch:]

Can you talk about some of your R&D efforts on the communications side if you're working on any enhancements to communications feed and to enable specifically distribution automation?

[Malcolm Unsworth:]

Yes. We are always -- we spend $140 million in R&D a year. And if you take a look at how that's broken up into some of the various parts, I'd say I don't know whether it's 50%, but it's close to the number of engineers that are working on firmware and communication technology. So one thing that I didn't make very clear on the BC Hydro project is that when it comes to DA and optimization of both of our -- and a few of the solutions that are outside of just metering, our OpenWay NIC card is obviously going to be used there. So that's an area that we see as a growing opportunity for distribution automation as well.

[Operator:]

We will take our next question from Craig Irwin with Wedbush Securities.

[Craig Irwin:]

So Malcolm, I was hoping you might be able to comment a little bit about what you've learned from the implementation of the 6 million AMI units out in the field already. And whether or not we should expect maybe some quantitative studies from these utilities over the course of the next several quarters that would really help the business case of the tens of millions of units out there that will have to go in front of the commissions.

[Malcolm Unsworth:]

Craig, yes. What have we learned from our OpenWay installations? We have learned a lot. What does that really mean? I've got to put something around that. One of the things that's important with, and this may be too much detail for you, but what's important is to make sure that there's two things that you have to do or a number of things. But one of them is to make sure your billing accuracy is good. A frequent read, a read that's based on the contract that you're deploying, which means that you've got to have a high level of meter reading, as well as communication technology performance. What we've learned is how to deploy networks, how to put the right number of -- concentrated in the right locations, whether you do that first or you do that second, understanding how your whole system and your network is behaving because this is dynamic. It goes on constantly. It is not something that you're just looking at once a month. It's happening realtime, all the time. And information going through to an in-home device is so critical. As [indiscernible] Energy has now done, you have to provide this information on a frequent basis every 15 minutes. So we've learned a substantial amount from that 6 million installed in those in those three. And that was reflected obviously with the awards that these guys had. And all that ties into a meter data management system, which we also have with regards to software. So we've learned a substantial amount that we better pass on to other areas and the rest of the world. So hopefully, that will help you as far as the information that you needed.

[Craig Irwin:]

Great. Then my next question is about the margins in Itron North America. Obviously, with the general recovery and sort of the base utility spending benefiting the core Itron America revenue trends there, I mean, historically had very high margins in that business, high 30s, low 40s. Is it fair to expect the recovery there to continue to be a modest gross margin headwind? Or the margin improvements we're seeing in that business more driven by efficiencies on the manufacturing side of the AMI business and some of the other product mix benefits that you see?

[Malcolm Unsworth:]

One thing that's important to understand is that you can't stop technology. Technology is continuing to grow. Functionality continues to grow all the time. So what happens is that you don't stand still. We have new designs that come out that improve the functionality. We develop new ASIC technology. But at the same time, we have to learn how to make high volumes of these. And what we've learned over the past period of time in North America in particular is automation is everything. If you don't automate, you don't get the right quality levels, you don't get the right reliability levels. You have to do that, so that you get in. It's not something that you can outsource. We don't believe that you outsource everything. We believe that you have control of what you do. That all boils down to laboring improvements, material changes, when it comes to design changes. So we're always looking at how do you redesign your product, improve performance, reduce cost and it's something that we've used to -- we've been doing it for the past 25 years.

[Operator:]

We will take our next question from Andrew Weisel with Macquarie.

[Andrew Weisel:]

I just have one that I want to touch on. The BC Hydro is obviously a very short lead time, given that you announced the contract and are planning to ship them pretty much as soon as possible it seems. Should we take that as a unique circumstance given their mandate? Or is that a trend that you're seeing a shorter lead time versus the same 9 to 12 months that we've historically gone with as a rule of thumb?

[Malcolm Unsworth:]

One thing that's important to understand is that they have a deadline to meet for the year 2012. So the sooner they start, the better. We're very well prepared with our OpenWay solutions. We can accommodate that. So compressed lead times -- what I found over the last few years in this business is that once utilities start to put and see the benefits of these, they will accelerate. So the very beginning public service commissions and the utilities, they like to put a decent length of time to do these deployments. But as they find the benefits are improving and they get them, they usually accelerate. And we're, in Itron, both internationally, where we've installed a significant number of automation projects to accelerate the markets for Europe, we've invested, as Steve said earlier, in CapEx to increase and reduce the lead time in all of our opportunities, so we can capitalize and maximize on everything we do because we see that this is something that the utilities will want to do. Once they start to deploy, they'll start to accelerate. And Itron is there to be able to do all of that for them.

[Andrew Weisel:]

So to just be a little bit more specific in Europe, how long of a lead time would you expect, in general, from when a deal is announced to when the meters start shipping?

[Malcolm Unsworth:]

Of course, it depends on whether it's electricity or gas or water, okay? And it depends on the design. And it depends on the forecast that you get and how long you get. But from start to finish, you can very easily start to deploy in a matter of 2 to 3 months.

[Operator:]

We will take our next question from Sanjay Shrestha with Lazard Capital Markets.

[Sanjay Shrestha:]

Two quick questions, first off, Malcolm, with the BC Hydro being the first project you and Cisco is going to be working together and 14 NDAs that you guys have out there, what can you tell us, at this point in time, as to how quickly they can start to pick up and all this concern about slowing down of these 4 big electric project and potential slowdown for '12? Does it become an inconsequential type of a scenario for you guys?

[Malcolm Unsworth:]

Well, Sanjay, as I mentioned earlier, we know that there are, as I said, 22 million more to deploy. Do I think that those are going to move very quickly? Well, they're in negotiations, not negotiations, but they're in discussions today. I'm looking at all of these deployments. We talked to 14 of our customers with regards to what we do with Cisco as a distributor and they're very happy with what they're looking at for the relationship between us and Cisco. So it's moving forward. And we have Laura Ipsen who's going to be talking at Investor Day, where you can get a pretty good understanding in New York from her about what they're looking at with their smart grid solutions, and it would be a good opportunity to listen to right from the horse's mouth.

[Sanjay Shrestha:]

Great. So what will you guys be able to share with us as to better functionality, therefore, better ASP and here as potential impact to margin and maybe gross profit dollars or probably net neutral, even though there's some sort of a licensing and arrangement between you guys and Cisco. Will we get sort of a granularity like that on the Analyst Day?

[Malcolm Unsworth:]

Maybe not to the extent because of competitive reasons. Obviously, we can't share all of this information. But obviously, there's value associated with the two of us getting together. There's definite value. As I said, we spent $140 million in R&D. We put that back into the product. We get some margin on that and also get some business, reduce costs. But it's something that we -- we're used to doing this. But you may get something out of the Investor Day, but we won't be specific for competitive reasons. Obviously not.

[Ranny Dwiggins:]

Yes. And Sanjay, I would just add that we definitely think that Cisco's bringing values to the tables, not diminishing in all the value we bring, and with the combination of the two customers, we'll be willing to pay more.

[Operator:]

We will take our next question from Elaine Kwei with Jefferies.

[Elaine Kwei:]

On the International gross margin, I was wondering how much of the recovery was purely from backing out some of the one-time things that were dragged in previous quarters? And going forward, could we potentially see this trend higher than the historical highs with the continued mix shift to some of the more advanced products?

[Ranny Dwiggins:]

Elaine, this is Ranny. If you're comparing Q1 to Q1 International gross margins and if you sort of ignore these unusual items, the special warranty, the recoveries and that sort of thing, margins are pretty flat quarter-to-quarter. But if you look at -- so what we were trying to comment on with some of the long-term trends where Water margins are very, very good. Gas margins really good. We've had struggles with Electricity and we're in a transition phase. So the point we were trying to make is as we move forward to smart metering in Europe, we think we can address some of those Electric issues.

[Steven Helmbrecht:]

And this is Steve. As we move next year to reporting Energy and Water, part of that process as well will be more discussion about margins on that basis rather than International versus INA.

[Ranny Dwiggins:]

And then I guess, the last comment on that, Elaine, is that one of the comments in the prepared remarks is we are very focused in this transformation that Malcolm has been talking about on our whole manufacturing strategy and how to improve our gross margins. So this is a big part of the work that's going on now.

[Elaine Kwei:]

Great. And just one more. Do you have any updates on the large AMI pilots that you do have currently underway in Europe and France and Spain and perhaps elsewhere? Just curious if we've passed any milestones there and if there's any more clarity on timeline for deployment.

[Malcolm Unsworth:]

Yes. I mean, I answered some of those questions earlier. So you can probably get that from the transcript. But just to repeat ERDF, which is the big one, we've completed the pilot. That is done. It was completed in December 2010 and they're going to be looking at that over the next year or so. The rest of them, they're ongoing. We've got pilots for Iberdrola, we've got pilots, not pilots, but Italgas, we're actually deploying that and then GrDF is also working on deploying the pilot a little later. We're already starting it a little later this year.

[Operator:]

We will take our next question from Steven Charest with Divine Capital Markets.

[Steven Charest:]

My question has been somewhat answered, but to bring up the question in terms of how it was phrased maybe last year, there's a lot of talk about enhancing margins via an improved chipset in the meter, and now we've got Cisco's product baked in. The gains that we've seen in this last quarter here, could you characterize maybe, without giving away the secret recipe, what the fraction is between how much of the gain came from an enhanced manufacturing processes, which was alluded to before versus simply a cheaper components or a lower number of components in the meter. How much between the meter and how much between the processes? Could you give us some flavor on that?

[Malcolm Unsworth:]

Yes. I mean, most of the margins today have been improvements on the process, and that's important. We put a lot of automation into our electricity factory in the U.S., and so we've gained a lot of efficiency and process improvement for that. But what we'll find later is the latest new ASIC that we have that we'll be doing later this year in 2011.

[Ranny Dwiggins:]

And I would just add to that, Malcolm, that in our manufacturing plant in Oconee, our electricity -- we're very automated there and we improved our automation there, and we have a higher level of automation now, and so that's driving some of the lower overhead cost as a result of a per unit basis.

[Malcolm Unsworth:]

Absolutely.

[Steven Charest:]

I got it. That's useful.

[Operator:]

At this time, there are no further questions. Mr. Unsworth, I will turn the conference back over to you for any closing comments.

[Malcolm Unsworth:]

Well, thank you. Thanks a lot, everybody, for listening to our prepared remarks and our earnings. And I look forward to -- and Ranny any of the comments? I mean, I look forward to you being on the call the next time for our Q2 earnings call. And thanks very much for showing your interest in Itron.

[Ranny Dwiggins:]

Yes. And if you have any other questions, this is Ranny, feel free to give me a call. I'd be happy to talk to you. Thanks again.

[Operator:]

Ladies and gentlemen, there will be a audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1 [phone] or 1 [phone] with the passcode 5550136 or go to the company's website, www.itron.com. This concludes today's conference call. We thank you for your participation.