Itron, Inc.
Q1 2010 Earnings Call Transcript

Published: 29 Apr 2010

[Operator:]

Good day, everyone, and welcome to the Itron Inc. First Quarter 2010 Earnings Conference Call. For opening remarks, I would like to the call over to Ranny Dwiggins. Please go ahead, sir.

[Ranny Dwiggins:]

Okay, thank you. Good afternoon, everyone, and thank you for joining us. On the call today, we have Malcolm Unsworth, our President and CEO; and Steve Helmbrecht, our Chief Financial Officer. Steve will begin by giving us a financial review of the quarter, and then Malcolm will provide a business update. After that, we'll take your questions. Our earnings release includes non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. We also a supplemental slide deck that is intended to augment our prepared remarks as well as provide a reconciliation of differences between our non-GAAP and GAAP financial measures that we will talk about today. You can find the supplemental information at our corporate website under the Investor Relations tab. We will be making statements during this call that are forward-looking statements. These statements are based on current expectations options that are subject risks and uncertainties. Actual results to differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call any the risk factors section of our 10-K, our 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 statement. With that, I would like to turn the call over to Steve.

[Steven Helmbrecht:]

Thank you, Ranny, and good afternoon. I will give an overview of our results for the first quarter, and we'll talk about cash flow and repayment of debt. First, I would like to make a comment on the tax benefit for the quarter. The benefit resulted in part from the receipt of a Clean Energy manufacturing tax credit, awarded as part of the American Recovery and Reinvestment Act. In addition, we had a benefit related to the reduction of tax reserves for certain foreign subsidiaries. In total, these tax-related items positively impacted non-GAAP EPS by about $0.26. With that, I will move to our operating results. We had a good quarter with strong earnings and cash flow from operations, as well as a sizable increase in our 12-month backlog. Revenue in the quarter was $499 million, which was $111 million or 29% higher than the first quarter of 2009 and about $22 million higher than the fourth quarter of 2009. Our revenue growth was driven primarily by record revenue of $243 million in Itron North America. We had significant growth with OpenWay shipments in the first quarter equal to our total OpenWay shipments for all of 2009. Our increased level of research and development spending over the past few years is beginning to produce strong returns, with OpenWay revenue contributing approximately 45% of total Itron North America revenue for the quarter. Although international revenues increased by about 3% compared to the first quarter of 2009, they declined about 6% in constant U.S. dollar, due to continued soft demand and economic conditions in certain markets. The euro to U.S. dollar increased to an average of $1.38 in Q1 versus $1.31 in Q1 2009. And the dollar depreciated against other major currencies we do business in as well. Stronger foreign currencies resulted in approximately $22 million in additional international revenue compared to Q1 '09. Gross margin for the quarter was 31.8% compared with 33.4% in the first quarter of 2009. Itron North America gross margins were 4.6 percentage points lower this quarter than last year. The decline in margin in North America was primarily due to a change in product mix, with increased shipments of first-generation OpenWay meters at lower gross margin. In addition, we have increased low-margin service revenue as well as increased competition expense. In Itron International, gross margin for the quarter was 31%, comparable with the prior year. Total operating expenses, excluding amortization of intangible assets, were about $108 million, an increase of about $10 million, due mostly to increased competition expense resulting from the reinstatement of bonus and profit-sharing, 401(k) match and regular compensation reviews. As a percentage of revenue, operating expenses decreased to 21.6% in 2010 compared to 25% in 2009. Amortization expense declined from $23.5 million last year to $17.8 million this year. Non-GAAP operating margin was 10.3% for the quarter, up from 8.3% in the first quarter of 2009, due primarily to the much higher revenue and lower growth in operating expenses. We had a non-GAAP tax benefit of 4% in the quarter compared with an expensive 32% in the first quarter of 2009 due to the tax items I mentioned. Non-GAAP diluted EPS was $1.01 for the quarter, compared with $0.33 in the first quarter of 2009. Our non-GAAP fully diluted share count for the quarter was 40.9 million shares compared with 36.5 million shares in 2009, primarily as a result of a convertible debt exchange and an equity offering in 2009. Our diluted share count included approximately 130,000 shares related to our $224 million in convertible notes, as our average stock price during the quarter was approximately $67 per share. At a stock price above $65, the convertible notes will continue to be a factor in dilution going forward. Cash flow from operations for the quarter was a record $66 million. Capital expenditures were $16 million for the quarter. And we had record free cash flow of $50 million for the quarter. We have adjusted EBITDA first quarter of $66 million compared with $43 million in the first quarter of 2009, an increase of 54%. Adjusted EBITDA margin was 13.2% compared with 11% in the first quarter of 2009. Cash interest expense was $12.6 million in the quarter compared with $15.5 million in Q1 2009. At March 31, we had about $726 million in total debt at a blended interest rate of about 5.3%. During the quarter, we made $53 million in debt payments, about equal to our free cash flow. Our debt-to-total-capitalization ratio at March 31 was 35%. Since the acquisition in April 2007, we have repaid over $900 million in debt, inclusive of the convertible debt exchange. Our debt to EBITDA ratio was 3.2x at March 31, well below our maximum covenant of 4.25x. Bookings for the quarter were $481 million, for a book-to-bill ratio of about 1

[Malcolm Unsworth:]

Thank you, Steve, and good afternoon, everyone. I'm delighted that the positive momentum that began in the fourth quarter of 2009 is continuing into the first quarter of 2010. Revenue for the quarter, $499 million, was $111 million greater than the first quarter of last year, a 29% growth. Bookings are very good at $481 million, given that we did not have any large OpenWay bookings in the quarter. And as Steve already pointed out, we had excellent cash flow and non-GAAP earnings per share. And I'm thrilled the operating margins are moving in the right direction. 2010 is off to a great start. I want to cover several things with you today. I will give you an update on our major American OpenWay projects; talk about other developments in North American gas and water markets; cover what's happening internationally; and lastly, provide an update on the rest of the year. With regards to our OpenWay contracts, installations continue to successfully ramp. Our Q1 OpenWay shipments of 1 million units equal the total for all of last year. Our execution and deployment of these contracts is going well and continues to be a top priority. To date, three of our customers, Glendale, CenterPoint and DTE, have announced they have finalized their agreements regarding stimulus grants with the DOE. As we previously noted, CenterPoint announced their intent to use the money to accelerate their deployments from five years to three years. This had a positive effect on our 12-month backlog. And DTE just made in dismay their announcement this week. And we are very encouraged by that have notified us of their intent to move forward with their first phase deployment. As a reminder, total backlog at the end of Q1 does not include DTE. Interest in AMI [advanced metering infrastructure] systems remain tight. We expect that several AMI projects will be announced in the next few months, as a number of utilities finalize their AMI and Smart Grid plans. I will go obviously as to us much of this business as we can't and I feel we are very a position. Also during the quarter, we installed OpenWay production equipment in our factory in Minnesota, alleviating a potential bottleneck in manufacturing process at our facility and ensuring continuity of supply for our customers. Beyond electric AMI, we saw a strong performance in our gas and water businesses in North America. During the quarter, we signed an agreement with Oklahoma Natural Gas for an expansion of their mobile gas system in Oklahoma City. We also signed a number of AMI worker contracts in the quarter that were related to stimulus funds from the EPA. Sand Springs and Stillwater are two examples. Last month, the distributor trade show in Tampa, we announced our new gas AMI system which is part of our Choice Connect solution. We have also released our new water and AMI solutions to Choice Connect. There is very high level of interest and transfer these two offerings which include the ability to migrate from mobile AMI it's a fully functional to weigh in my solution with many of these benefits to gas and water utilities. This proves once again that our Choice Connect system, which focuses on operational benefits, continues to be a compelling story with technical advancements that enable the benefit of AMI by layering on network infrastructure. We believe there will be a convergence of AMR and AMI technologies, and that our Choice Connect system will be an integral part of that solution. And as a final comment on North America, we reached three major milestones this quarter. Since inception, we have now shipped more than 30 million gas modules, more than 30 million central meters and now more than 2 million OpenWay units. And now, let's turn to International. The economy in Europe is recovering more slowly than the U.S. However, we are seeing some bright spots, especially with our smart payment and AMI offerings, which gives us confidence for the remainder of the year. We recently announced an important win for gas prepayment contracts with Gas in the Azerbaijan Republic. In fact this contract represents the second phase of a project that began last year. This is important for two reasons. One, it demonstrates the opportunities to help utilities in developing countries to address enhanced customer service. And two, this is a great example of leveraging the synergies we are realizing with one of Itron's highly successful technologies in one part of the world. In this case, the technology developed in South Africa, so all of the parts of the world with similar requirements. We significant progress in the U.K. and France on their AMI direction. The U.K. is entirely deregulated, even to the meter level. So a centralized interruptible communications solution is expected. So we feel we are very well-positioned as we provide meters, systems and managed services to most of the major energy supply companies. In France, our portion of the first phase of the ERDF AMI Project for 300,000 PLC meters and network concentrators is on schedule and is planned to be completed this year. And using similar technologies, we are being selected for AMI projects involving a number of French municipal electric utilities. Also, SEI, one of the EDF companies, selected Itron provide a key component of the Smart Grid solution that enables secure and safe integration of renewable energy sources and electricity network. Global interest in advanced meter applications for gas and water utilities continues to be high. During the quarter, we announced two major water a you Mark contracts. The Yorkshire Water the U.K. and the municipality of Mumbai in India. These activities demonstrate the key Itron competitive steps. Our global to print and our leading market positions. You will recall that my focus this year is in three areas. First, execution of our current North American OpenWay contracts. Our networks, smart meters and gas mobile deployments are clearly on track and we continue to focus on this objective. With two million OpenWay points deployed, the message is clear

[Operator:]

[Operator Instructions] We'll take our first question from John Quealy with Canaccord Adams.

[John Quealy:]

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

[Steven Helmbrecht:]

This is Steve. I think this is reasonable.

[John Quealy:]

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

[Steven Helmbrecht:]

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

[John Quealy:]

What did you say?

[Malcolm Unsworth:]

45% OpenWay, roughly, in total.

[John Quealy:]

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

[Malcolm Unsworth:]

You know that we have added some more capital equipment into our operations. We did that this quarter, which gives us additional capacity for as you know, for our print and circuit boards. As far as the capacity, yes, I think we are running -- I think we're running three chips but I could be wrong. But we do have overtime capability. So we have expansion in that area.

[John Quealy:]

In terms of the margin expansion, assuming that gas and water and non- AMI stayed constant in North America, asset mix goes up of OpenWay versus not OpenWay, are we looking for linear change and margins? What are the sensitivities we should be thinking about wave margin expansion given what we all would assume is increasing penetration of OpenWay given the public deployments that these three or four the customers?

[Steven Helmbrecht:]

This is Steve. Clearly, as we see volume increases, we are going to see some in terms of absorption overall. One, we also have a healthy mix of not OpenWay business that will continue over time. And that certainly reflected in the bookings we talked overall this quarter without any substantial OpenWay bookings. So while we see a good mix at the 45, 55, we see and often talked about strength in the water and gasoline businesses. But overall in terms of impact on EBITDA, we will see some absorption and some improvement. At the same time we are taking on these projects. We've talked about service revenues as well that will have some impact on the downside as we flow that through, as we take on our prime responsibilities for some of these projects.

[John Quealy:]

On International, down a little bit more than I thought with local currency. It looks like electric meter volumes were down. Is that a cannibalization AMR, AMI? Is it market share? Is it just lumpiness in Europe? Can you talk about that a little bit?

[Malcolm Unsworth:]

Yes. We've seen some declines in the basic electric meters that were affected by the economic conditions. And really, a bit of a slow start to this year, but no real issues going forward, John.

[John Quealy:]

Back to North America AMI and OpenWay, so Malcolm, right now the 606,000 meters that DTE has announced that they want to do a pilot of their initial employment under stimulus, that is not in 12-month or full-year backlog. And then what about Centerpoint Gas, is that in there as well? And then my last follow-on to that is, you folks have come on late and hard at the SoCal Gas opportunity, regardless of whomever wins that. Have you noticed the change in characterization of utility customers to receive you, in the receptiveness of the Itron given you've got 2 million deployed now?

[Malcolm Unsworth:]

First of all, BT is not in the backlog and neither is Centerpoint. That's not in the backlog. So that would be additional. As far as SoCal Gas, we are just competing with the other competitors as well. We never comment on that until decisions are made, John.

[Steven Helmbrecht:]

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

[Malcolm Unsworth:]

Yes, we had very good acceptance of the AMI gas introduction to the distributor.

[Operator:]

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

[Stephen Sanders:]

One just back to the guidance and the revenue line, last quarter you give us a breakout than what you expected North America versus what you expected international. Can you revisit that? It seems like North America is trending quite a bit higher and maybe International is a bit of a disappointment relative to your expectations. But can you just give us the domestic versus international revenue breakdown?

[Malcolm Unsworth:]

We sort of decided that we'll just give you the total numbers, Steve, because sometimes, there's volatility. As I said, we have some exchange rates. So we've basically given low teens to mid-20s as the total, without breaking it down to INA or into INL.

[Stephen Sanders:]

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

[Malcolm Unsworth:]

I do believe that is correct.

[Stephen Sanders:]

A question on the EEN sales that was announced recently. What's included in that? What was the rational? Is there a P&L impact that we would notice? And is the say anything about kind of the potential over the long run for you to capture some incremental revenue opportunities around the data and energy management is coming out of the Smart Grid?

[Malcolm Unsworth:]

The EEN, Steve, we brought that when we acquired the silica and energy acquisition. Very small piece of the business. Very limited number of customers and it won't impact the business at all. So we just wanted to focus on the rest of it rather than have been included in our offering. So no, just address the different customer base Steve.

[John Quealy:]

Finally, the acceleration is not the 12-month backlog. There is nothing significant and therefore DTE. So absent of a significant win during the quarter in quarter, should we think about a 12-month backlog starting to flatten out or decline? How should we think about that? Understanding that there always be deals out there that can change the answer to quickly?

[Malcolm Unsworth:]

As we move forward and we start making shipments, the backlog calculation of as you know borders and revenue. But obviously, we are not going to comment than anything going forward. But they're still quite a few large deals that has to be decided upon in the next few months. So, we'll see what happens.

[Operator:]

Next, we'll hear from Carter Shoop with Deutsche Bank.

[Carter Shoop:]

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

[Malcolm Unsworth:]

One of the things that we have talked about is that we have certainly not abandoned our AMR products. In fact, what we've done is convert them over from AMR, as I said in my script, it was AMR to AMI. So the projects that were actually looking at, AMR projects that have been now converted into AMI. So we are seeing these convergence of going from a standard on our gas side, for example, to standard product now that's two-way communication. So not only are we seeing our legacy products shifting from AMR to AMI. The product itself now is a dual product. As we said. There's a converges between the two. There's a lot of activity that's going on the gas side and a lot of activity as we've seen on the water side. And we are just launching a new Choice Connect 100W product. So yes, we are seeing activity.

[Carter Shoop:]

On the water side, it looks like the meters are up about 21% sequentially. Was that primarily international, given your footprint to their relative to North America? Can you talk about a couple of the big drivers there? Start shipping in Mumbai and also in Yorkshire this quarter?

[Malcolm Unsworth:]

No. they're not included in our shipments in the U.K. nor in Mumbai. Not in this quarter, no. But we are seeing some activity there as you said. In the first quarter, remember is also a good quarter for heat meters as well. Basically, mandated out of Germany. So a lot of it comes from there.

[Carter Shoop:]

Can you quantify the compensation expenses quarter-over-quarter? You mentioned that they started to increase here in the first quarter of 2010? Any way you can comment on what that sequential increase was?

[Steven Helmbrecht:]

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

[Carter Shoop:]

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

[Steven Helmbrecht:]

It's a good run rate.

[Operator:]

We'll next from here from Benjamin Schuman with Pacific Crest Securities.

[Benjamin Schuman:]

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

[Malcolm Unsworth:]

Not particularly. I don't have that on my fingertips, no. I'll get back afterwards on that.

[Benjamin Schuman:]

With International revenue down, currency neutral due to the economic conditions. But given kind of the solid bookings number, do you think we'll see maybe some over-pronounced seasonality in the International revenues here?

[Malcolm Unsworth:]

I'm not really certain, Ben, to be honest with you. We've had a couple of quarters where we've seen some declines, but some good bookings this quarter. I'm not certain. Usually Q1 is pretty heavy on the water side in certain parts of Europe because of regulation, and that's the heat side. But now, I'm not really seeing that. Not really.

[Steven Helmbrecht:]

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

[Malcolm Unsworth:]

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

[Benjamin Schuman:]

With the U.K. mock him, looking at making some kind of determination of AMI central comms model and the next few months, is there a particular technology or communications model that Itron is advocating for that market?

[Malcolm Unsworth:]

Remember, this is approximately 47 million points in the U.K. It's very, very deregulated. So yes, central communications are needed. As far as what certain communications technology, it hasn't been determined. And it's not yet law. It is just a recommendation to go with central comms. We have some very, very good relationship with all the energy providers. So I'm feeling quite good about that. And we've got our system, we've got the smart payment system. So there'll be a melding of those two, I think going forward. But no, there's not been a decision yet than any of the central comms.

[Benjamin Schuman:]

But from an Itron standpoint, you wouldn't favor one form of comms over the other?

[Malcolm Unsworth:]

No. We'll just integrate whatever is the central comms into our smart metering solution.

[Benjamin Schuman:]

A follow up on Steve's question. Can you give us what the enterprise energy management revenue was in 2009, just for modeling purposes?

[Steven Helmbrecht:]

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

[Benjamin Schuman:]

So maybe a couple of million?

[Malcolm Unsworth:]

Yes, it's not material at all.

[Operator:]

We'll take our next question from Andrew Wiesel with Macquarie Capital.

[Andrew Weisel:]

First question, just want to follow-up on Steve's question about the revenue guidance. I understand you're not breaking up the geographies at this time. But sort of you think the weighted average growth from the previous guidance, that would be sort of a low teens. Now you're talking about high teens To low-20%. I'm just wondering, how much of that came from better than expected in the first quarter versus improved outlook in the rest of the year?

[Steven Helmbrecht:]

We think it came from both. I didn't split out the difference, but certainly seeing Q1 results. And also it came from the backlog, which is the $981 million. Clearly, 12-month, that number which will extend into '11, it gives us indication as orders are firming up. And again, that's something that Malcolm mentioned, there is a lot of fluidity in their right now is plans are being made, deployment schedules are rolling out. The 12-month backlog, we feel, is a very good reflection of that. We certainly see that increase.

[Andrew Weisel:]

With regards to Manufacturing capacity. My understanding, and sort of address the percentage of AMI coming from South Carolina earlier. My understanding was that in the capacity, there would have been able to handle a whole lot more. So I'm a little curious as to why you're expanding it in the other facility rather than getting more scale in the South Carolina facility?

[Steven Helmbrecht:]

There's a couple of reasons for that. One is to be prepared to scale if necessary. The second strongest is business continuity planning. And these are large projects for our customers and they want to see the ability to have continuous supply in certain scenarios. And by having a backup capability online now in our Minnesota plant, that enables that. So that's something that we committed to a number of customers as well in bringing out online helps us achieve that as well. So that is beyond increasing capacity and addressing any potential bottlenecks. It's also helping us in terms of ensuring reliable supply going forward.

[Malcolm Unsworth:]

So, Andrew, we do not have a capacity problem.

[Andrew Weisel:]

You put out a whole handful of press release the past few months about contract wins, generally internationally. My question is at what point do you decide whether or not to issue the press release? Obviously, you have a ton of smaller contracts. Presumably, it's only the big ones that get announced publicly in realtime. Is it a matter of the number of meters, the dollar amount, the strategic implications? How do you decide whether or not to issue a press release for the wins?

[Malcolm Unsworth:]

The customer also has a big say in this as well. Sometimes they do like to present the fact that they are advancing the technology with the customer. So it's a joint decision between the customer and us.

[Operator:]

We'll take our next question from Charles Fishman with Pritchard Capital.

[Charles Fishman:]

What percentage of the stimulus awards now have, at least the ones that are relevant for you guys, have been signed at this point between the company and DOE?

[Malcolm Unsworth:]

There are approximately, I believe, about 40 to probably -- It's public information. It's about 40 of the 100 have been signed. But many of those have not made their vendor choices yet.

[Charles Fishman:]

There was about 100 in total, but yes, a lot of those weren't really relevant to your business.

[Malcolm Unsworth:]

There were 400 applications. Of the 400 applications, there was 100 accepted. And there were approximately 18 million endpoints that were in question or to be determined. And about half of those have been spoken for. So probably about 9 million altogether that were up for the decisions. And they not all been made yet. We're participating in them.

[Operator:]

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

[Stuart Bush:]

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

[Malcolm Unsworth:]

Remember, what we've -- I mean, I've talked about this many times with you guys. As far as the ASIC development, it's completely on schedule. We've talked about that potentially being accepted in the second half of the year. However, obviously, we want to make sure that, that get accepted by the customer. The 40 million points we have in the contract will set the prices. So no, that won't affect anything that we've got going forward. We're not going to give it away. We'll keep most of it. So pretty much on plan. And then as you said, we'll try to keep the margin, not give it all away. But we can determine that later.

[Stuart Bush:]

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

[Malcolm Unsworth:]

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

[Stuart Bush:]

And so there's nothing in your current contracts that prevents you from potentially tapping into that later on?

[Malcolm Unsworth:]

Sounds like a good opportunity, if we could.

[Stuart Bush:]

About PG&E, there has been some concerns about customer billing accuracy. And the public utility commission there instituted a third-party consultant to review this project. I was wondering if you expect other commissions to do something similar? And if you've noticed any heightened public relation concerns by utilities for the Smart Grid project?

[Malcolm Unsworth:]

Well, first of all, I just definitely don't comment on all the vendor's solutions. I will not comment on that. But has there been other activity? Most of the big installations right now are going on in California. So you've got, for California utilities, that could potentially do something. And then you've also got Texas as well. And really it's up to the utility with the commission. And if the commission decide to do some investigation, they will certainly use a third-party test. We've seen this in California. What we see in Texas, I'm not exactly certain. But we welcome it. We absolutely welcome the situation with them, Stuart.

[Stuart Bush:]

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

[Steven Helmbrecht:]

We do expect to continue to deploy our free cash flow or use that for debt repayments over time. And there is some seasonality. We've seen that in the past in that flow of free cash flow over the course of the year. So certainly, I'm not saying they will be the same amount each quarter. But in terms of our strategy right now is to continue to repay debt. And longer term, I'm comfortable in the 2x or less debt to EBITDA. And the way to get there is to both reduce debt and improve EBITDA over time. So clearly, we're very pleased with the progress that's been made, particularly in Q1 with a fairly significant improvement in that ratio and all the other ratios that go with that as well. So our needs for cash in terms of CapEx are fairly modest. That hasn't changed, about 3% of revenue. And you can see some of the other working capital metrics just been, the Operating group is doing a very, very good job of ramping this business in a cash-efficient way.

[Operator:]

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

[Colin Rusch:]

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

[Malcolm Unsworth:]

Well, I have to say, I'm not really commenting on other choices that customers have used. They take their time on making decisions. Utilities, they will try something. If it works, great. If it doesn't work, they'll refresh the technology. And if other utilities selections don't work, we'll be in there. We always are on it for the long haul. We're there to support the customer. And we're always presenting our solutions to both existing customers, new customers and competitors' customers. I mean, yes, we're always showing what we've got. Having 2 million now in the field is very, very helpful, as far as having shipped 2 million. And so we're always looking at opportunities, Colin.

[Colin Rusch:]

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

[Malcolm Unsworth:]

There is a significant amount of activity that's going on right now in the water industry. Last month or the month before, there was an article appeared in National Geographic on the scarcity of water. And if you start looking at the contracts that we've got when we booked in Yorkshire and also in the U.K., there is a significant number of customers that do not have metered solutions. We talked about Mumbai. There's 185 million gallons of lost water per day out of just Mumbai. There's an immense opportunity worldwide as far as I'm concerned. There are 300 million customers in the world that are not metered. That gives us the opportunity to sell both meters and also AMR and leak-detection solutions. So I'm thrilled about the fact that there's lots of opportunity on the water space.

[Operator:]

[Operator Instructions] And next, we'll hear from Vishal Shah with Barclays Capital.

[Jake Greenblatt:]

This is Jake Greenblatt for Vishal Shah. I just wanted to ask a quick question about the OpenWay deployment. I know you guys said that you shipped about 1 million units this quarter, which I believe was the same amount that you shipped all of last year. How can we think about that going forward for the rest of the year?

[Malcolm Unsworth:]

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

[Jake Greenblatt:]

And so the DTE contract you said was not yet in the backlog, do you have any expectation as to when that will be firm enough to put into the backlog?

[Malcolm Unsworth:]

This quarter.

[Jake Greenblatt:]

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

[Malcolm Unsworth:]

The convergence between AMR and AMI is significant. What we're finding is that we have a significant market share on gas, gas AMR. The product that we ship today is an AMI solution. It is not an AMR solution. You can use it for AMR, which is one-way communication if you wish. But it actually has a two-way communicating device. So what we're finding is that the AMR business is turning into AMI business. So we're saying, is the traditional business going to decline? No. As far as I'm concerned, it's a change going to AMI from AMR. So technology is completely changing to everything that we're shipping, everything that we produced and have designed is now AMI.

[Operator:]

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

[Sanjay Shrestha:]

One thing on the revenue guidance here, previously, you guys said that if the stimulus money start to flow, that will be an upside. And that's not in your guidance. Now there's a clearance from a tax standpoint. So is it now that the sort of the revenue numbers you guys are talking about for this year, is reflective of your belief that you are now more confident that stimulus-related is going to contribute to '10 growth? Is that how we should think about it?

[Malcolm Unsworth:]

Okay. So Sanjay, if you just think about and I'm just going to reiterate what we said earlier, that the CenterPoint stimulus money of $200 million is now reflected in our 12-month backlog. So what they've done is the money that they have received have gone from five years to two years. So yes, we're starting to see some of that. Obviously, the Detroit Edison booking has a significant number of -- or has money in for stimulus money. So that will make a difference.

[Sanjay Shrestha:]

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

[Malcolm Unsworth:]

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

[Operator:]

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

[Sean Hannan:]

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

[Malcolm Unsworth:]

Energy Service Directive is what's been the term in Europe. I said, the Energy Service Directive is what's driving the requirements in Europe. And obviously, they have to -- they've been [ph] member states. And all the various utilities have to have their deployments done by 2020. Some countries are ahead of others. But is it going to happen or I think it's going to accelerate with that in the next 18 months? I would probably say, no. I think it's going to be a bit later. I think a lot of pilots will come in, in the next 18 months. As we've demonstrated with ERDF, we've got 100,000 points there that are being deployed this year. And then obviously, you've got Spain, you've got the U.K. There will activity over the next 18 months. But is there going to be mass deployments like the U.S.? My answer is, I doubt it.

[Operator:]

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

[Scott Graham:]

I wanted to ask you how you were seeing your bookings, contemplate raw materials inflation. Maybe if you would differentiate between 12-month backlog and the total backlog, if there is a differentiation?

[Malcolm Unsworth:]

Can you repeat that one more time?

[Scott Graham:]

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

[Ranny Dwiggins:]

Scott, this is Ranny Dwiggins. As far as raw material increases and that sort of thing, we are seeing some increases in prices. And nothing really significant at this point. It hasn't had a big impact on our operations. We monitor that very, very carefully. It's extremely important and we have purchasing folks all the time focused on that and making sure they're making smart buys and coordinated purchases. As far as how we segment that between the backlog and new bookings and that sort of thing, those costs impact us as we manufacture the units. And we book those estimated costs into our forward-looking numbers that we've talked about today in terms of gross margins and that sort of thing.

[Steven Helmbrecht:]

Well, this is Steve. Just to add to Randy's answer, in terms of the backlog itself, it's a revenue backlog. So cost not withstanding it's indication. The point I was going to add to that is as we get more visibility in the form of firm orders and backlog, that actually is helping us in costing in the sense that's giving our purchasing managers and others more visibility into the future that they certainly factor into their supply decisions. And overall, we feel we do a very good job in managing costs in that regard and our inventory management, which requires a very tight interaction between the purchasing agents and the selling groups in terms of understanding forward demand.

[Operator:]

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

[Benjamin Kallo:]

As you look at the market and the endpoints that have been awarded and speaking of electricity AMI here in the U.S., what would you calculate your market share as today? And then how do you see that changing going forward?

[Malcolm Unsworth:]

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

[Benjamin Kallo:]

But is that announced contracts, that number you gave? Sub-contracts that have been announced that you've won or they're contracts that you have won that haven't been announced that you included in the number?

[Malcolm Unsworth:]

Yes. The ones that have been announced.

[Steven Helmbrecht:]

That's right.

[Benjamin Kallo:]

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

[Malcolm Unsworth:]

We've competed on this business forever to be honest with you. We've been in the business a long time. We know how to negotiate contracts. We know how to continually focus on reducing costs, improving functionality. So it's just something that we used to -- do you give it to your customers? It depends. Do you take and give it to your shareholders? It depends. Obviously, it's something we're always looking at. So I don't think there's any one answer there, Robert.

[Benjamin Kallo:]

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

[Malcolm Unsworth:]

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

[Benjamin Kallo:]

Yes, exactly.

[Malcolm Unsworth:]

Well, there are huge -- the difference between gas companies in Europe and gas companies in the U.S., we'll just talk a little bit about that. You've got -- I'll give you an example, Gaz de France. Gaz de France has got about 11 million points. In the U.K., there are 20 million gas endpoints, but it's not one large utility. You've got ETAL [ph] gas, that's got about 11 million points. So you got very large utilities in Europe that are going to be going forward with some of the changes. And it's a little bit different than it is in the U.S. They're bigger and they make some significant decisions when it comes to changing our technology. So the opportunities are very, very large in Europe for gas. And the opportunities in the U.S. are very large as well, as we have a very large market share there. So overall, our gas AMI solution is starting to take hold in the U.S. and at the same time, there's a lot of interest in what we're doing in the U.S., overseas as well.

[Operator:]

And we'll take our next question from Michael Coleman with Sterne Agee.

[Michael Coleman:]

The Minnesota facility, could you kind of -- one, is the configuration similar to South Carolina? The second is, are you producing meters -- manufacturing meters there now? Third, what was the CapEx associated with that facility? And did you incur any startup costs, non-capitalized startup costs in the quarter, or will you in the second quarter associated with the Minnesota facility?

[Malcolm Unsworth:]

Well, first of all, I just want to explain that the Minnesota facility is not a new facility. We've had this facility really for years and years and years with Itron. It does not make electricity meters. It specializes in battery technology for gas and water modules. And it also has significant made-in-America solutions for the gas and water utility. And so what we've done, as Steve said earlier, for business continuity, we moved -- we developed and installed some equipment that would duplicate what we were doing in South Carolina. So Steve, you want to comment a bit more on this?

[Steven Helmbrecht:]

Yes. Michael, so the strategy was to increase capacity and again, provide that continuity in the circuit board assembly area, particularly for OpenWay meters. And so the CapEx was around $4 million or $5 million in total. Very little operating startup charges. It's an established factory, well-run. And as Malcolm mentioned, running our high-volume manufacturing today for both water and gas and historically, for electricity when we were in that business in the past. So a lot of experience there. And again, that product is in ship and -- that comes out of that is then incorporated into the final assembly in South Carolina. And that's how we were able to increase capacity overall. So really, expenditure and deployment of capital is actually fairly modest.

[Michael Coleman:]

Talking about that the AMR is turning into AMI. And I think, Malcolm, you said to an earlier question that everything you produced and shipped is now AMI. Do I understand that correctly?

[Malcolm Unsworth:]

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

[Operator:]

[Operator Instructions] And we'll take our next question from Mark Rogers from Gagnon Securities.

[Mark Rogers:]

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

[Malcolm Unsworth:]

Yes.

[Mark Rogers:]

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

[Steven Helmbrecht:]

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

[Mark Rogers:]

You said that you have roughly 35% of the endpoints of the awarded contracts. Of the remaining 65%, where are you the incumbent meter provider, whether that be legacy or AMR?

[Malcolm Unsworth:]

Mark, we have been providing CENTRON meters. We said, we shipped 30 million CENTRON meters. We almost shipped in nearly all of these many, many, many utilities and customers in the U.S. So I don't really know what to say to you. We've been in the business a long time. We've been shipping and producing our CENTRON products since 1998. So we're at significant numbers of these locations, whether it be metering or many of the AMR customers as well.

[Operator:]

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

[Jeff Osborne:]

Strategically, Malcolm, do you see just over the next few years, getting into distribution automation in a broader scope? And then also, I just want to verify, I think originally, the DTE contract was for roughly $350 million. Although I think subsequent to that, you've kind of broaden your scope or enter a relationship with SmartSynch, the communication partner. And so, I was just trying to get a sense if that contract value would be the same if that's hopefully added to the backlog in the near term?

[Malcolm Unsworth:]

With regards to distribution automation, one of the things that's important to understand and I did say this in the prepared remarks, we have now working with some customers outside of North America that actually have put in Smart Grid solutions with EDS, using that as a further analysis of the grid. As far as the U.S., we know that we have utilized partners. We've got 75 partners now that we're working with. So obviously, we can't provide a complete solution for everything. So we partner with a number of people. And so, that's the plan that we have today. Will it change going forward? I'm always looking at alternatives. But today, we've got, as I say, 75 partners, yes. Now maybe, you could repeat your question about the DTE?

[Jeff Osborne:]

And just as a follow up to the prior question around DA, it just seemed kind of logical to me that as you increase the throughput of your network and you moved to an IP-based platform with your new ASIC, that perhaps you would start offering your own products there and capture the revenue and margin yourself, as opposed to giving it to your partner. But maybe we can talk about that in the future. But with BTE, I believe the original contract was for $350 million. Now I'm just trying to get a sense of your extended partnership with SmartSynch. Is that still a fair number to use in terms of the contract value for that offering? And also, if you could break out what the logical electric versus gas component would be and if you think both will be added to the backlog at the same time?

[Malcolm Unsworth:]

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

[Operator:]

That is all the questions we have at this time. I'd like to turn the conference back to you for any additional and closing remarks.

[Malcolm Unsworth:]

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

[Steven Helmbrecht:]

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

[Operator:]

Thank you. And that concludes today's conference. There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1 [phone] or 1 [phone], with a passcode of 4641152, or go to the company's website, www.itron.com. Once again, today's conference has concluded. We thank you for your participation. You may now disconnect.