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Itron, Inc. (ITRI)

Q1 2009 Earnings Call Transcript

April 29, 2009 5:00 pm ET

Executives

Deloris Duquette – VP, IR and Corporate Communications

Steve Helmbrecht – SVP and CFO

Malcolm Unsworth – President and CEO

Philip Mezey – SVP and COO, North America

Marcel Regnier – SVP and COO, Actaris

Analysts

Steve Sanders – Stephens Inc.

John Quealy – Canaccord Adams

Stuart Bush – RBC Capital Markets

Paul Coster – J.P. Morgan Chase, Inc.

Carter Shoop – Deutsche Bank

Mark Rogers – Gagnon Securities

Jeff Bronchick – RBC Investment Management

Elaine Kwei – Piper Jaffray

Sanjay Shrestha – Lazard Capital Markets

Vijay Singh – Janco Partners

Alex Kurtz – Merriman Curhan Ford

Darin Conti – Wachovia Securities

Operator

Good day, everyone and welcome to the Itron, Inc. first quarter 2009 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 Malcolm Unsworth, our President and CEO, Steve Helmbrecht, our Chief Financial Officer, Marcel Regnier, Chief Operating Officer for our International Operations, and Philip Mezey, Chief Operating Officer for North America.

We may talk about issues on today's call that could be forward-looking in nature. The forward looking information we are discussing 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 disclosures in our press release which alerts you to a number of factors that can cause a difference between our expectations and our actual results.

You should also refer to our 2008 Form 10-K and other related SEC filings for more complete disclosures of 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. Schedules reconciling GAAP to non-GAAP financial information are included with our press release and are also available on Itron's external website. Supplemental information is posted on our website under the investors tab that you may find helpful in today’s discussion.

Steve is going to start our prepared remarks today with an overview of our financial and operational results and then, Malcolm will give his thoughts on the quarter and the rest of 2009. Philip and Marcel will participate in the Q&A session of the call.

And with that, I would like to turn the call over to Steve Helmbrecht, Itron's CFO.

Steve Helmbrecht

Thank you, Deloris. I will spend some time reviewing our first quarter results and then I will discuss our capital structure in light of the recent amendment to our credit agreement. After that, Malcolm will give his perspective about the quarter and the rest of the year.

Before we begin, I wanted to make everyone aware of some of the changes our current earnings release includes which have changed our prior period results. First of all, we realigned our operating segments at the beginning of the year to reflect the way that we are now running the business. We have two businesses located in the US, gas and water that were reporting into the Actaris segment. We have now moved those operations into Itron North America.

2008 has been restated to reflect that realignment for comparison purposes. Also we recently completed an internal rebranding project under the Itron name. Going forward, we will be reporting Actaris as Itron International. During the quarter, we applied FASB Staff Position APB 14-1. This new provision applies to convertible debt instruments such as ours that settle in cash or in a combination of cash and securities.

FSP 14-1 calls for the convertible debt to be shown at a discounted value with the discount accreted over time in the form of additional non-cash interest expense. It requires retroactive restatements of all prior periods, so you will notice that our GAAP operating results and balance sheet for 2008 have been restated accordingly. So let me turn now to our operating results for the first quarter.

We went into the quarter knowing that Q1 of 2008 would be a tough comp and we would face headwinds in the form of a stronger dollar, the economic slowdown, and uncertainty with utility capital spending. Total revenues were 389 million at the low end of our guidance range and 90 million or 19% lower than the first quarter of last year. Of the $90 million decrease, nearly 60% of it over 50 million was due to the stronger dollar against the currencies in which we do business.

To give you a couple of examples of the severe FX moments we had experienced, the euro which makes up about 40% of total Itron revenue has decreased nearly 13% from the first quarter of 2008 to 2009, and the British pound and Brazilian real, which accounted for over 12% of total Itron revenue in the quarter have decreased 27% and 25% respectively.

North America had lower revenue as well which was due primarily to the completion of a couple of AMR contracts in 2008 and the fact that our business in North America is being affected by the recession and a slowdown in spending. Gross margin for the quarter of 33.4% was 60 basis points lower than last year due to lower margins in our International business. International had a mix shift and shipped a lower percentage of AMR and prepayment meters during the current quarter and had a higher percentage of service revenue with lower margins.

Operating expenses for the quarter were over 14 million lower than last year, almost half of the decrease due to lower expenses related to our amortization of intangibles and the remainder of the decrease is primarily due to the stronger dollar. Our non-GAAP operating margin was 8.3%, which is substantially lower than the 12.2% last year primarily due to the lower revenue. We're focused on improving operating margins through cost reduction initiatives, which Malcolm will discuss.

Net interest expense is lower for the quarter by nearly 11 million due to the substantial repayment of debt over the last year and lower interest rates. Interest expense for both the current quarter and last year includes the effect of the adoption of FSP 14-1, which calls for allocating our convertible subordinated notes between debt and equity and booking non-cash interest expense at a rate higher than the 2.5% coupon rate. We add this non-cash interest expense back for non-GAAP results.

We also had a $10 million non-cash net loss in the extinguishment of debt related to the convertible debt exchange we gave in January. The exchange resulted in a net loss because the number of shares we issued was greater than the specified number of shares under the terms of the convertible notes. We excluded this non-cash debt extinguishment loss from our non-GAAP results.

Our non-GAAP tax rate was 32% for the quarter driven primarily by the tax effect of certain foreign subsidiary interest expense. Non-GAAP diluted EPS was $0.33 for the quarter compared with $0.82 in the first quarter of 2008, again the lower revenue significantly affected our earnings. Now I would like to turn to our capital structure and a couple of things we did over the past months to improve our financial position and provide operational flexibility.

During the quarter, we made 68 million in debt repayments on our term debt. In addition, we previously reported exchanging 121 million in convertible debt for common stock. So in total, we reduced outstanding debt by nearly 119 million during the quarter. We have previously discussed that our credit agreement had a steep step down in our debt to EBITDA covenant from December 31 to March 31, 5.5 times debt to EBITDA to four times. Our debt to EBITDA ratio was 3.7 times at March 31 in compliance with our debt covenant.

Earlier this week, we announced that we completed an amendment to our senior debt agreement. Given we were in compliance with our covenants, why did we decide to seek an amendment to the agreement. With the current economic environment and volatile foreign exchange rates, we considered it prudent to have more cushion in the covenants as well as future step down and step up schedules that are more gradual. Also, we wanted to support growth in AMI by increasing financial flexibility, particularly the ability to increase our revolver by up to 75 million in the future to support the issuance of bit and performance sponge.

The new agreement provides for more flexibility in our covenants and an opportunity to increase our revolver should we need to, but it will cost us more in interest. Our rate has increased from 1.75% over LIBOR to 3.5% over LIBOR as of April 24. We expect the increased interest expense to be about $0.20 dilutive to non-GAAP earnings during 2009.

With the convertible exchange in the debt repayments, we now have 979 million of total debt outstanding. The increased rate on our amendment raises our blended interest rate from 4.7% to 5.9%. We are satisfied with the amendment terms in pricing and will continue to focus on using free cash flow to repay debt. Cash flow from operations was 43 million for the quarter, which is about 13 million lower than the first quarter of 2008.

Our capital expenditures for the quarter were about 13 million, resulting in free cash flow of 29 million. This is lower than the 43 million in free cash flow we generated in the first quarter 2008 due primarily to the lower income, but much higher than the 15 million we generated in the fourth quarter of last year. We ended the quarter with $102 million in cash, keep in mind this is after our 68 million in debt payments.

We had good AR collections in the quarter and customer credit quality continues to be strong. We had adjusted EBITDA for the quarter of 43 million significantly below the 72 million we generated in the first quarter of last year due to the lower revenue. In summary, we had a tough quarter in terms of both revenue and earnings. However, we had another strong quarter in terms of bookings. New order bookings for the quarter were 625 million compared with 484 million in 2008.

Our book to bill ratio was 1.6 to 1. The most significant booking in the quarter related to our AMI contract for San Diego gas and electric. The first phase of the project has been accepted by SDG&E and we are proceeding to the next phase. Including Q1 bookings, our total backlog at March 31 was 1.5 billion, a new record and more than doubled our 683 million backlog a year ago. We believe we are well positioned to weather this challenging environment and take advantage of the opportunities this market is presenting in the long term.

With that, I will turn the call over to Malcolm.

Malcolm Unsworth

Thank you, Steve and good afternoon everyone. I'm going to make a few comments about the first quarter and then spend most of my time talking about my areas of focus for the year. The first quarter was certainly challenging, volatile currencies and the stronger dollar had a very negative impact on the results of our international segment with some variations country to country, the slowing economy has caused many utilities to squeeze their expenditures by replacing meters more slowly than they have in the past in reducing their inventory, with this quieter departure from past utility practice.

For example, utility budgets used to be set in the fall and could generally be relied upon as a good guideline. Today, we find budget to being changed quite frequently. In the US, while the conversion to AMI is gaining traction, it’s slower than we would have liked and we are being negatively impacted by the cannibalization of AMR. Lastly, housing starts continue to be at historic lows. On the other hand, our US AMI project deployment schedules are encouraging.

Both CenterPoint and San Diego has started deploying. Southern California Edison is on schedule to begin deployment later this quarter. Our OpenWay system is performing very well. In March alone, we shipped more than 23,000 OpenWay meters and gas modules, so we are well in our way. I have three areas that I am focused on in the short term: first, AMI strategy, deployments in execution; second, international growth and positioning; and third, cost reduction measures to right size the company.

Starting with AMI, I held meetings with each of our four large AMI customers to discuss the end of (inaudible) smart metering projects, including system performance against expectations, current and future plans, and feedback on how we are doing. I was reassured that all four of our customers are testing their systems and solidifying their deployment schedules and plans. I'm pleased to report that the results of those tests in which they are also testing cyber security are very positive and the customers are confident in our OpenWay solution.

So to remind everyone, our OpenWay system has CENTRON [ph] and Industrial Defender technology which comply today with the standard that Merck is requiring. OpenWay is critical for our growth in North America. Therefore, execution of our current contracts is first and foremost for 2009, as well we’re focused on gaining momentum with other electric gas and water customers in order to transition them to our OpenWay and our other AMI solutions.

My second area of focus is international. I believe that international is a growth market for this company because it’s where most of the opportunity for automation and revenue lies. I've been visiting our business operations around the world performing comprehensive business reviews and getting feedback from some of our international customers. For example, I recently met with Beijing Power to get a sense of China's view of this small grid and to tell them how Itron with its international platform could be an integral player in helping them accomplish their objectives.

We also completed a comprehensive business review of our strategies and product offerings in South America. We are confident in each of business lines as an effective strategy which will enable us to grow each of our businesses in this region. We have solutions to help electric – to help electric utilities better manage by high non-technical losses, provide fixed network solutions for work to customers, and deliver prepayment solutions to some of our gas customers.

In Europe, there continues to be encouraging signs regarding AMI plans. Last week, the European Parliament approved an agreement to liberalize the European Union energy market which requires EU member states to implement intelligent metering systems, the electricity directed cost of full deployment of smart metering by 2022 with 80% of consumers equipped with smart metering systems by 2020.

As a reminder, there are approximately 220 million electric meters and a 110 million gas meters in Europe, most of which will be impacted by the legislation. At this point, there are no deadlines in the gas directive but we see the legislation as another encouraging sign that utilities in Europe are moving towards smart meters, which proves that even in these economic times, we're beginning to see smart meter projects come alive in some areas of the world.

My third area of focus is on cost reductions and rightsizing the company in order to invest in the areas that will drive the future growth of the company. We know that 2009 is going to be a challenging year, so we have already taken a number of steps to mitigate the bottom-line effect of the slowdown. In the US, we have suspended compensation increases in 2009, suspended bonus and profit sharing, and suspended option grants, and companywide we have made selective headcount reductions and are continuing to scrutinize any new positions.

We've had a comprehensive review of spending policies and will continue to monitor spending at all levels to ensure that we are being cost-effective and efficient. We have identified and implemented millions of dollars in cost reductions in these areas to allow continued spending and programs that will drive future growth, including a launch of meter factory in China, AMI automation in South Carolina, and smart metering automation in the UK and France.

So let's review the rest of 2009. There are obviously a number of factors that will have significant impacts on us for the balance of 2009, the US and world economies, the unprecedented drop in housing starts, the exchange rate volatility, the impact of the stimulus bill, concerns about standards and security for smart grid, and most importantly the decisions by our uncommitted customers to either move forward with AMR or AMI Systems or just sit on the fence.

We came into the year with expectations that our North American business would grow between 5% and 10%, and that our international business would grow at single digit – at mid-single digits in local currency. We now believe that North America will rightly be flat to down by single digits and that our international business will also likely be flat in local currencies. Given the status of the world economy, the volatility of foreign exchange rates and the move to new technology, we are finding that our ability to confidently forecast revenue is limited.

Even though we are continuously talking with our customers about the states of their business, their plans are changing because they simply don't know. Accordingly, we are temporarily suspending guidance. Two main concerns have driven this decision. First, increased volatility in foreign exchange; second, our customers have changed their practices and they are not as predictable as they once where. We believe that this is a short term exception in reaction to today's economic environment, but time will tell.

While we are very confident at the outlook for AMI in North America, we are less confident with the rest of North America and international. We will revisit guidance as soon as confidence in our forecasting ability returns. We will spend our efforts in 2009 on the three areas that I discussed; AMI deployments and strategy, international growth and cost reductions. I wanted to be able to focus our attention on these critical areas rather than EPS targets throughout the year. We are executing against this long-term strategy and will get through this current challenging environment.

As I said before, we have the right strategy, the right technology, and the right people. With the work we've done to improve our balance sheet by the convertible debt exchange, the debt repayment and the amendment, we now have the ability to concentrate on the long-term. Itron has a great future and has all the pieces in place to take advantage of the market opportunities in front of us. We believe 2009 is a short-term challenge and we are keeping our focus on the long-term perspective. We will come out of this year stronger than ever. With a record $1.5 billion backlog, we are well positioned for the future.

And with that, I would like to open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And your first question comes from Steve Sanders with Stephens Inc.

Steve Sanders – Stephens Inc.

Good afternoon, everyone.

Deloris Duquette

Hi, Steve.

Malcolm Unsworth

Hi, Steve.

Steve Sanders – Stephens Inc.

I guess first on the guidance, it looks like Actaris in constant currency – I'm sorry, Itron International in constant currency was down 2% to 3% in the quarter, I realize you're not providing any detailed guidance but do the near term trend appear to be similar to that, in other words is FDLI, what we will see in the second quarter.

Deloris Duquette

Well, I think Malcolm talked about in his prepared remarks that at this point in time, we feel like Itron International could be flat to slightly down. So however you want to end up in that range.

Steve Sanders – Stephens Inc.

Okay and I assume that that anticipate a little better second half than first half.

Deloris Duquette

Yes, consistent with last year's patterns, that is correct.

Steve Sanders – Stephens Inc.

Okay. And then on your core AMI projects, does it still look like the schedules are comparable to what they were a few months ago, CenterPoint started, San Diego started, she made the comment that (inaudible) looks to be on schedule, has anything swept on those four projects relative to a few months ago?

Philip Mezey

Steve, it's Philip. No, that schedules had stayed intact.

Steve Sanders – Stephens Inc.

Okay, okay. And then just directionally in terms of revenue for the second quarter versus the first quarter, typically you see some seasonal pickup, is that something that we should be expecting this year?

Deloris Duquette

I guess that's one of the things that we don't know and one of the reasons that we are not commenting, I would say that what we continue to believe is that the year will be more back end loaded as we stated before.

Steve Sanders – Stephens Inc.

Okay, okay. And then Philip maybe this is a question for you, maybe for Malcolm, but it looks like the early proposal from the DOE is for small awards on large number of projects. I guess there is a comment period last for a few months here, can you talk a little bit about your view on how this plays out, kind of summarize the arguments for allocating more of the funds to larger project, as it seems like the – its really the population centers that have the most acute issues. Can you talk about that a little bit?

Malcolm Unsworth

Sure, Steve. First of all, your statement is correct but the original guidelines have come out and there have authorized up to 50% matching that is not guarantee 50% up to 50% matching for projects up to $20 million. So – and that was I think surprised the industry somewhat. We are now in a common period in which a substantial number of comments have been filed, many requesting that that limit be raised and our take on that is, if the objective of the stimulus funding is to create jobs that we feel that the matching cap should maybe significantly higher favoring large projects that are so-called shovel ready that will allow companies to go out and create new jobs as opposed to smaller projects which would tend to suggest a little bit more R&D and sort of proof of concept work which may advance smart grid technology, but are not quite as job intensive. So if we optimize for jobs as many of the comments we're pushing for, we hope to see higher caps which you could definitely draw a line would be tied to the types of projects that we are typically involved in.

Steve Sanders – Stephens Inc.

Okay. And then a final question before I guess for Malcolm, as you look at the International business, can you just talk a little bit about some of the key markets in Europe and things you're seeing in Europe generally versus what you're seeing in some of the markets that could potentially continue to grow through the struggle, specifically Central and South America, the Middle East, Asia, just differentiate a little bit about the trends you're seeing in the various international markets.

Philip Mezey

I will let [ph] Marcel on to that Steve.

Steve Sanders – Stephens Inc.

Okay. Thanks.

Marcel Regnier

Steve, Marcel speaking. I think you partially un-served yourself to the equation. We still see Europe prudently flat, we see (inaudible) by big drop of the currencies, where we see more of Asia, Latin America, and also Africa and Middle East, still having a nice project that we are walking on.

Steve Sanders – Stephens Inc.

Okay. Thanks very much.

Deloris Duquette

Thank you, Steve.

Philip Mezey

Thank you, Steve.

Operator

Next question comes from John Quealy with Canaccord Adams.

John Quealy – Canaccord Adams

Hi, good afternoon folks.

Deloris Duquette

Hi, Quealy [ph].

Malcolm Unsworth

Hi, John.

John Quealy – Canaccord Adams

With regard to the guidance, you just renegotiated the term loans with obviously pretty detailed schedules on total leverage etc, and obviously I would assume that you had these results in hand when you finalized the paper. Can we just look at – I mean what’s the difference between public not giving its guidance and then giving a term loan that has basically covenants in it that will walk us through at least the EBITDA line. What was the two pieces that need to be reconciled there?

Steve Helmbrecht

This is Steve. Hi, John, a couple of things again as I mentioned is that, as you look at the original structuring of the agreement there were pretty steep step downs year on year which effectively became a quarterly step down, so we believe that a loan warranted and amendment process. In addition, we have about 50 million of – of our 150 million in revolver outstanding for our performance sponge. And we believe we are going to see more of that as international stars to adapt AMI and we wanted more financial flexibility. So that was – those are key drivers for the amendment process.

To your point about the specific levels, we certainly went through a process to arrive at that and part of that was also making sure or being comfortable with the level of cushion that we have in place that would help us deal with more uncertainty going forward particularly as I mention the 20%, 30%, 40% year-on-year decline in FX and not knowing in the future where the euro dollar rate, where the currency dollar rates are going to go. And so that's something completely out of our control and we felt that the amendment process would help us – able to deal with that going forward. At the same time, that uncertainty also drives lesser confidence in the ability to forecast and provide that kind of guidance going forward.

John Quealy – Canaccord Adams

And Steve, maybe I should have just asked the question this way, in Q4 I think it was 3.7 times on a forward covenant, (inaudible) you are comfortable with that quarter turn headroom or how would you like to manage the business with a half a turn or quarter turn, what’s generally in a normalized environment, how much cushion you would like to have against that headroom?

Steve Helmbrecht

You live more comfortable with the half a turn or more, but we like the half a turn at a minimum going forward.

John Quealy – Canaccord Adams

Okay. And then in nominal dollars, R&D spending was up 7% year on year, is that an area to focus on for cost-cutting or can you give us a little bit more quantification of – it doesn't really look like you cut a lot of cost in the Q1 period, what sort of benefit should we be looking forward in calendar ‘09 for that type of activity?

Malcolm Unsworth

This is Malcolm. I am not going to tell you the kind of numbers that we got in that obviously. But we are reviewing every single program that we have in all of our R&D – in all of our R&D areas. Obviously the most important thing in North America is to make sure we do not sacrifice anything with regards to AMI, that's absolutely critical and number one importance.

We review at all the other various products that we have to beside, is that important because move that to right a little bit and so we are making sure that we do look very carefully at every R&D plan. And as far as international is concerned, we are doing exactly the same. We are looking at – can they get by with what they have, can they reduce some of their contracts they have, but one of the things we find important is to make sure that we try not to lose the skill sets that we have in all the various areas. So contractors are easy to do something about, but we are really scrutinizing what we do with regards to spending to make sure that our future does not get affected.

John Quealy – Canaccord Adams

Just two last questions. Excluding CenterPoint and San Diego, the last two quarters in North America, it looks like Itron North America bookings were up in Q1 about 30% from the December period, again excluding those two major contracts. How does that reconcile with your view that things are slowing down in North America where it looks like it held steady and even improved a bit in Q1, is it just mix?

Malcolm Unsworth

Yes, I mean John, it is just mix. I mean there is bookings are over different periods of time, so I mean some of those announcements one of them you commented on is a multi-year contract and so we really are – you're talking about bookings as a short-term measure of quarterly performance and so – when we – so when we are talking again about a mix of time periods in those bookings, the fact that it is less than one to one in that core business area is indicative to us that we are experiencing slowing.

John Quealy – Canaccord Adams

And then lastly, I think San Diego publicly stated today that they would like to lift the meters installed in calendar year ‘10 to about 7,000 per day from the previous plan of 5,000. How does that work with your capacity and your budgeting plans? I realize we have to live to lay a lot of months to get to that, but I'm just wondering on how that reconciles with your recent conversations with these big AMI customers.

Steve Helmbrecht

Bring it on. No, we had this (inaudible) capacity of fully automated line that we are commissioning, so fits within our plan.

John Quealy – Canaccord Adams

Thank you.

Malcolm Unsworth

John, I mentioned a little bit about our investments in automation which we are continuing. I was actually there last week with Philip and we looked at the OpenWay line, it is up and running starting next week, actually in the factory.

John Quealy – Canaccord Adams

Great. Thank you.

Operator

And next question will come from Stuart Bush with RBC Capital Markets.

Stuart Bush – RBC Capital Markets

Yes, hi guys. Back to the question on the deployment schedules at the existing AMI customers, have you seen any delays at all in addition from what we saw before on the hardware installation – any questionable – any additional questions that have been raised about the security, I think maybe you can just go into that little bit more on where we stand today?

Philip Mezey

Yes, Stuart, it’s Philip. I believe the question was asked had the schedules changed in the past several months and the answer was, no, they have not.

Deloris Duquette

And if your question is about security, certainly on the year-end call, there were a lot of concerns about security. We haven’t to our knowledge encountered any more from those core customers on the security issue.

Philip Mezey

Correct.

Stuart Bush – RBC Capital Markets

Okay. And then one for Steve, we had 32% tax in the quarter. Has your outlook changed on what tax rate do you think will incur for the entire year, I guess to that point you know will we see a benefit in the back half?

Steve Helmbrecht

Yes, we would – we would expect for the year to be lower than the first quarter, bit higher than last year by a couple of points, but I do a qualifier to that would be any new legislation that comes out this year for example elimination of deferral and multinationals in foreign earnings, which would be another (inaudible) for us, and another major source of uncertainty going forward but assuming no legislative change of that magnitude, we're comfortable with the rate a couple of points higher than last year.

Stuart Bush – RBC Capital Markets

Okay. And then the last question is on the legacy North American business, I'm just trying to get an understanding of the two pieces that encompass that the actual meters sold and then the AMR, both are under pressure. Directionally is one [ph] in the pressure more that you are seeing at this point.

Deloris Duquette

You are talking about meters with and without AMR?

Stuart Bush – RBC Capital Markets

Yes.

Deloris Duquette

I would [ph] say both are under pressure at this point in time in Actaris.

Stuart Bush – RBC Capital Markets

Okay. Thanks.

Operator

We move on to Paul Coster with J.P. Morgan.

Paul Coster – J.P. Morgan Chase, Inc.

Thanks. Steve, to give my – what a better (inaudible) and why did they justify this higher interest rate on the debt.

Steve Helmbrecht

When we – what we see increasingly with large contracts for where we come in either as a prime or participating, a part of that and part of our financial strength is the ability to back our commitment to technology with our financial strength in the form of better performance upon and that requires some backing of letters of credit which requires credit capacity. So simply that we are not out of (inaudible) and as we execute on our plans and meet those commitments, we don't make payments on those bonds or simply there is insurance to the customer.

We would expect as we grow internationally we will see more of those requirements as well and the additional revolver will give us the ability to back those or these revolver to back additional issuance. So that's really the finance groups effort to support the Ops group has they continue to grow and give us their views about what they are going to need going forward. And I did not mean to imply that that in an ever self wanted the additional pricing, so I don't want to minimize the type covenants, that's been something we've certainly worked out and that's been talked about, and I would view that as the primary objective of the amendment was the change in the covenant level and this future schedules.

Paul Coster – J.P. Morgan Chase, Inc.

Thank you, Steve. That helps. As you go through this downturn Malcolm and no matter Steve, are you using an operating margin or EBITDA margin as a sort of target level for the trough here or is it more of a sort of (inaudible) when you say tight expense level.

Steve Helmbrecht

We do have internal targets, but we can't really say whether it's of course.

Paul Coster – J.P. Morgan Chase, Inc.

Okay. And the backlog you have, beyond the 12 months, can you just give us some color as to the composition of global international versus domestic AMR versus – AMR versus other anything that you can share there that might give us a little bit of color.

Malcolm Unsworth

Yes, it’s Malcolm. We've got – on the international business, we traditionally have had book to bill business there in the past, it's still pretty much the same. We have about $200,000 of international backlog, $200 million I should say at and we also have 1.3 billion of North American backlog.

Paul Coster – J.P. Morgan Chase, Inc.

Okay and is that primarily AMI projects, Malcolm?

Malcolm Unsworth

I would say, yes.

Paul Coster – J.P. Morgan Chase, Inc.

Okay. And then my last question is, I had this question a lot from investors and that is, during this period of the downtown are you seeing your competitors behaving rationally? Is pricing pretty easy to predict? Are margins is going to come under pressure?

Malcolm Unsworth

I guess it depends on what particular part of the world you are in. We are in a business where it's always competitive, there is no question we – it's always been competitive. And if volume goes down, then obviously prices go down to get the volume. So overall, we are seeing probably a bit more pricing pressure but again it depends on which products we're talking about. If we're talking about our AMI offerings, no, I think that's holding its own. If you looking at meter prices in various parts of the world, absolutely it’s competitive. Is this competitive now? It has been. So yes, we just live with that everyday and one of the things that we try to do is to make sure that we have cost reduction plans in place for product, cost reductions and also other cost reductions that we have for operating expenses. So we are always looking at that.

Paul Coster – J.P. Morgan Chase, Inc.

Right. Okay, thank you very much.

Malcolm Unsworth

Thank you.

Deloris Duquette

Thanks, Paul.

Operator

Next question comes from Carter Shoop with Deutsche Bank.

Carter Shoop – Deutsche Bank

Good afternoon. On previous calls, I think during the last call you mentioned that Actaris was bidding on projects worth about a billion dollars and about a 100 projects, I think it was called bid activity, I'm not sure if either country is bidding on it or not, could you give us an update on that?

Marcel Regnier

Thanks, Carter. And Marcel speaking. Yes, and actually the bid activity is nut down, its favor with (inaudible) 100 projects of which a significant portion is AMI, but not only that and of course accounts for this to make a comment on the ERDF1, which is still ongoing and absolutely not postponed. You know ERDF is a making a public promotion about it and moving forward that's fast as they count.

Carter Shoop – Deutsche Bank

Adding back, are those hundred projects $1 billion pipeline, how much of that could be realized in 2009?

Marcel Regnier

2009 little. Most of the – as we have consistently said most of the major all out of AMI would be 2011, 2012, and the next – and the following ten years to come.

Carter Shoop – Deutsche Bank

In regards to Actaris or Itron International foreign exchange rates go on constant at today's levels, how much of a decline would you expect to see in international sales in 2009?

Steve Helmbrecht

As Malcolm mentioned in his prepared remarks talking about local currency rates again it varies by market, but as Malcolm mentioned flat slightly down in local currency rates overall.

Deloris Duquette

And I guess Carter if you are thinking in terms of US dollars, were you thinking in terms of US dollars?

Carter Shoop – Deutsche Bank

That is correct. That is all I'm looking for thank you.

Deloris Duquette

That one is hard to really quantify, I mean when we talked about the effects for the quarter was in excess of $15 million, we had about a 1.5 euro to dollar ratio last first-quarter, we have about a 1.3 this quarter. Now obviously that came down throughout the year, but that's what makes it really hard to even give any color on an annual basis because it did change every quarter last year.

Malcolm Unsworth

The just add some extra color, we have been looking at exchange rates on particular institutions and they are really all over the map as far as what the predictions are for a 2009. It goes from, Steve 1.1?

Steve Helmbrecht

You know as low as $1.10 as highly as $1. 05 and there is a range obviously that makes markets as there is a wide concern, wide view of diversion feel let’s say about where the dollar goes going forward and so that it makes it difficult, we don't profess to be able to forecast the future rate of the dollar, but simply trying to manage the business accordingly and so that is part of again the uncertainty we are in right now, or volatility has increased significantly in the last six months.

Carter Shoop – Deutsche Bank

Two more questions if I may. Can you discuss what the impact to gross margins were for the Itron International part of the business for foreign exchange on a year-over-year basis?

Deloris Duquette

It really didn't really affect gross margins per se.

Malcolm Unsworth

Yes we do see a little bit of, let me start with this that one of the strengths we have in terms of currency hedging is that we have a multi-local approach so that we manufacture for example a lot of our product in the – for the European market in Europe. So, the costs and revenues are both in Euros, but there are certainly situations where in-bound costs and in one currency and we sell in the other and certainly see some hit negative to margins on a net basis, but the primary impact to our aggregate financials is around the overall revenue-translation of our euro and other currency results back into the dollar.

Carter Shoop – Deutsche Bank

Last question on the performance bonds, it sounds like this is a relatively new phenomena in this industry and we obviously have it in some of the contracting markets for transition and distribution, is this something that happened over the past quarter or two or is it something we have seen for several over the years now?

Malcolm Unsworth

Like as I said, we've had outstanding performance bonds for a long time and if you look at, you know part of gain, are focusing the finance group is where the business is going in the future and as you see from some of these contracts where we have 1.5 billion in backlog and we talked about food deals, these are getting very large and so our focus financially is to have the ability to not only back the technology with a good track record but to have the financial strength to say to back the types of commitments our customers are looking for. So, we aren't seeing a sudden change, but we simply are looking forward in future growth particularly in international markets where we would expect that to be more of a requirement than domestically.

Carter Shoop – Deutsche Bank

And I think you mentioned there is $50 million in performance bonds as of today, do you know what that was last quarter?

Malcolm Unsworth

Figure is about flat.

Carter Shoop – Deutsche Bank

Great thank you.

Malcolm Unsworth

Thanks Carter.

Operator

Moving on to Mark Rogers with Gagnon Securities.

Mark Rogers – Gagnon Securities

Thank you for taking the question. First one is on incremental bookings in the quarter, ex-SDG&E looks like it was down year-over-year, I was wondering if you could talk about that and then the catalyst to push this up going forward?

Deloris Duquette

It certainly was down year-over-year and that is one of the things that we've been talking about, that core business if you will you are seeing a slowdown and so we obviously are booking less business yes.

Mark Rogers – Gagnon Securities

Okay and then the, I believe earlier there was a comment on 200 million of the backlog is from International, 1.3 is from North America, and last quarter the backlog balance was 1.3 billion, so it's North America essentially frozen right now with respect to backlog?

Deloris Duquette

It is the one that is gone up in all fairness because we booked that San Diego contract.

Mark Rogers – Gagnon Securities

Now they work significantly. Okay, so North America’s backlog is actually up so international backlog has come down.

Deloris Duquette

It is similar yes.

Mark Rogers – Gagnon Securities

Okay and then lastly, this is more of a philosophical question, previously smart grid when smart meters so utilities seem to go to you guys first in determining how to roll out their smart grid projects and now with standards and communication protocols coming into question, I see more utilities contracting system integrators first and then meter vendors second, do you feel that this is the case and that is a reason for a lot of these utilities staying on the fence as you said? And then if you could, are there system integrators out there that you feel most comfortable working with?

Malcolm Unsworth

So to the premise that they are contacting systems integrators first there has been variability in the market in terms of the role of system integrators and deals, I don't see a dramatic change there actually the norm for us is that an RFP has put out that is a multi-part FRP requesting meters communications and software project management and system integration services as the most popular format that we have seen. There certainly have been cases in which the indicators have been engaged initially and are advised on how the project is to proceed and even some bids that are bid to an integrator who in turn puts together a consortium in order to make the final bid. I agree that as we move towards smart grid, a broader implementation that involves integrating many systems that the role of systems integrators is potentially increasing there and for the past several years we have put a great deal of effort into our partner program and keeping systems integrators educated, we have done quite a lot of work and we are working with Cap Gemini down in San Diego Gas and Electric, with IBM at CenterPoint and have developed a number of other relationships and bid with a number of other integrators at both in North America and internationally as well.

Mark Rogers – Gagnon Securities

Okay great thank you very much.

Mark Rogers – Gagnon Securities

Thank you Mark.

Operator

And we have a question from Jeff Bronchick with RBC Investment Management.

Jeff Bronchick – RBC Investment Management

Good afternoon everybody. I want to beat the dead horse of the backlog again, and I have got a couple of related questions, could you just specifically go over SCE, CenterPoint, Detroit, and San Diego specifically of where exactly you are in the actual installation process? Secondly, I'm just wondering out loud how do you have comfort in the backlog, in the backlog implementation schedule currently when your initial comments for Malcolm where your customers are utterly in flux and you are pulling guidance and really “don't know when it is going to happen”. And then lastly, what drives quitting for example, what decision is required to quit San Diego actually into the backlog from “conceptual project”?

Malcolm Unsworth

I am going to let Philip answer the question on our AMI projects, this is Malcolm. One of the things that we have talked is that – we have a solid AMI backlog, what we talked about in the call was the other business that we have which is moving back and forward, which moved and it is uncertain. And so that is the area of uncertainty that we have just to clarify that. So Philip maybe you want to talk about the projects that we've got with the AMI projects.

Philip Mezey

Sure. So the two projects that began, they are formal for rollouts in the first quarter where San Diego Gas and Electric and CenterPoint, both projects had gone through extensive field proof exercises, regulatory approval, internal testing cycles, and so forth. The decision to actually book the San Diego Gas and Electric contract in the first quarter was related to how the contract was constructed; we hit a major milestone and therefore booked the project. Southern California Edison is going to begin a sizable deployment coming up here in a couple of months and we will proceed directly from that rollout and actually ramp-up consistently from there. And Detroit Edison is currently in a 10,000 proof moving to a 30,000 proof that will then, if everything remains on schedule, moves to rolling out full deployment beginning next year.

Deloris Duquette

And I can just walk you really quickly through why we put something in backlog; our general purpose is that it has to have passed whatever milestone is attached to that contract. So for example with the Southern California Edison contract their milestone was that it had to have been approved by California public utility commission, once that was approved we put it into background with CenterPoint Energy it is to be approved by the Texas Utility Commission so that back pointing time upon approval, we put edit to backlog. San Diego actually had a two-part process, they had to have the contract approved by the California Public Utilities Commission, but as well they had to have acceptance of the first phase of their testing and both of those things have passed and that is why we put it into backlog.

Jeff Bronchick – RBC Investment Management

And just another question someone else asked, in regarding competitive issues and you know what's driving the metering world or the sort of the systems integration world, did you bid on the Miami Project, GE is very happy to PR all over the place and has for example the CenterPoint contract change where actually GE, the consequence divided in GE ended up getting meters?

Philip Mezey

So two comments. There was to our understanding no separate bid for the Miami Project. We did bid on the Florida Power & Light Project many years ago and there has been no new activity there that was an interesting media announcement, but not a new externally big project. At CenterPoint, the GE is not supplying meters, the GE announcement was simply that they are providing the so-called backhaul on the project there using a WiMAX radio system to bring data back from our meters and our OpenWay system across the GE system.

Jeff Bronchick – RBC Investment Management

And if your relationship with IBM strictly a project by project or do you have a more formal, you know they pitch you sort of a range where the services are of organization?

Steve Helmbrecht

We certainly do endeavor for the latter.

Jeff Bronchick – RBC Investment Management

Right thank you very much.

Steve Helmbrecht

Thank you.

Operator

Next was sent comes from Elaine Kwei with Piper Jaffray.

Elaine Kwei – Piper Jaffray

Hi thanks for taking my question. First, can you give us an update of how utilities are currently viewing the position between investing in AMR versus AMI just sort of specifically what type of consideration go into that cost-benefit analysis and whether the stimulus funding will effect that calculation?

Malcolm Unsworth

Philip you?

Philip Mezey

It varies by country obviously, but it is just in North America. For the money used to scan there, that seems to be just North America. So, of course the fundamental differences in AMR is the technology primary targeted at operational savings associated with removing meter readers improving meter accuracy and reading accuracy in timeliness, so it is a cost savings-based business case. An AMI business case contains all of the components of an AMR business case, but typically also additional components about improved reliability demand response possibly energy efficiency just a wide range of other value propositions. As the media and the marketplace focused more on AMI and on smart grid there is a prudence question against AMR of how long that technology will remain viable into the future. So, we see more of the marketplace tilting toward AMI. However AMI is significantly more expensive to implement and I would comment that terrific utilities like mid-American PacifiCorp last year completed a large mobile AMR deployment based upon the very sound economics of a mobile system. On the gas and the water side, we continue to see a large amount, continue to see a large amount of AMR based activity although there are some significant large fixed network projects that are also considered to be AMI in nature.

Elaine Kwei – Piper Jaffray

Okay great. And my next question is, what you think utility is needed to see in order to get comfortable with the fiber security issue and how was Itron able to provide that comfort, is it through third-party fabrication or vendors such as sort of what type of capabilities would you have internally to implement and demonstrate security?

Philip Mezey

Great question. And it is the sum of all of this thing. So first of all, we are using security technology that has been in use in the financial defense and aerospace industry, so we are not inventing new things and therefore we talk about relationships with sort of common industrial defender because these are proven technologies used in other industries, we are currently engaged with third parties as our customers have commissioned third-party intrusion analysis work to be done. So there is confidence building there as well and we have referenceable field deployments off our security architecture being placed out in the field and functioning very well.

Elaine Kwei – Piper Jaffray

Okay terrific. And just lastly, I understand that you certainly have some natural hedging there where you have manufacturing located in the local market, would you be able to give any color on the percentage of exposure you have that is the revenues that are not naturally hedged and what type of hedging activities would you be taking to address the volatility and foreign exchange?

Steve Helmbrecht

Well first of all, we do engage in some hedging activities as it relates to intercompany balances in some areas, but the area I was most focused on is revenue itself. And again, we believe it having a multi-local strategy, the way in which we are distributed around the world is hedging in some sense economically because there are different cycles worldwide. Regarding hedging specifically revenue that is not something we focus on doing today, in fact we believe that that is more speculative to try to bet on the future direction and engage in hedging contracts on that basis and so we are exposed clearly as you can see from the results to – on a net basis to, the significant change in the dollar rate to other currencies we do business in, but we want to emphasize as well as that from a currency perspective that the largest are the euro, the pound, and the reais and while we do business in another dozen or more currencies that starts to go down quite significantly. However, a lot of, we believe future growth will come from emerging markets and we will certainly look at other operational strategies and other ways to hedge that going forward and it is certainly what we are doing internally in the future.

Elaine Kwei – Piper Jaffray

Okay great thank you.

Malcolm Unsworth

Thank you Lane.

Operator

Next question comes from Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

Hi guys thank you. Couple of quick question guys, just one follow-up on the sort of performance bond and changing the enough credit agreement in increasing sort of the unsecured abilities, is that because you guys are anticipating given a larger projects to materialize, you know down the road during ’09 and ‘10 or is it because that now the requirements for the performance bonds have actually gone up given sort of the difficult credit environment we are in?

Steve Helmbrecht

The former. As in the future, the agreement, the amendment itself provides for the potential to increase our revolver in the future. So, we are not paying anything for that today, for the 75 million, we have no additional fees other than those incurred to amend the agreement overall, but that was driven primarily by the other aspects of the amendment. So, it simply allows us in the future, should we decide or need to increase the revolver in the future and have that in place without the need to go out and seek additional agreements or amendments from our vendor base. So, we are very pleased with that and it is exactly the former, it is if it is needed in the future, I hope we have that situation where we are providing our financial strengths to back our commitment to new technology growth in international markets where they require the company to back that, in fact we think that will give us a competitive advantage.

Sanjay Shrestha – Lazard Capital Markets

Got it. So kind of a follow-up on that guys, so you guys talk about sort of the flat performance for the international business on a constant currency and kind of down single-digit for Itron, North America and so that is clearly not a reflection of slowdown in AMI right, it is really more of your core meter business, one I think and two that does not take into consideration anything incremental at all happening from the stimulus side, correct?

Deloris Duquette

Correct.

Malcolm Unsworth

That is correct, yes.

Sanjay Shrestha – Lazard Capital Markets

Okay. Tying that with you sort of the backlog trend that you guys have, is it then fair to say that '09 is what it is, but you're looking at probably a pretty significant growth in 2010?

Malcolm Unsworth

Now if we take a look at the historical backlog that we have that we provided on the charts on the web, we are not – we are sitting at $1.5 billion as we see.

Sanjay Shrestha – Lazard Capital Markets

Yes.

Malcolm Unsworth

That is over a period of time, but we do see significant kind of growth numbers in 2010 and 2011 and we're pushing continuously to try and get new contracts of course. So we are not just sitting back on that $1.5 billion and that is one of the things you talked about with this performance bond. We are going and looking at all of these AMI contracts with the quantities that Marcel talked about earlier, we are positioning ourselves for the future and so definitely I see our 2010 and 2011 numbers increasing.

Sanjay Shrestha – Lazard Capital Markets

One last question guys, so when you talk about sort of utility budget change infrequently, I imagine that's really for the, you know smaller size project and not really the larger AMI because that's, I got to imagine that's a long-term capital decision-making process?

Malcolm Unsworth

Sanjay that's exactly right, yes it is the smaller deals yes.

Sanjay Shrestha – Lazard Capital Markets

Okay great thanks guys.

Malcolm Unsworth

Thank you Sanjay.

Operator

Next question comes from Vijay Singh with Janco Partners.

Vijay Singh – Janco Partners

Well thank you my question has been asked.

Operator

Moving on to Steve Sanders with Stephens, Inc.

Steve Sanders – Stephens, Inc.

Hello. Just a couple of follow-ups, maybe first Philip, if the stimulus funding does turn out to be significantly skewed towards smaller projects for smaller awards, how do you capitalize on that as it seems your historical strength is more focused on the large IOUs?

Philip Mezey

Steve I would say that that's largely a matter of where we tend to focus our comments. One of the strengths of our businesses is that it is broad and deep and we do participate in the co-op and the immune market across Electric Gas and Water and therefore have the opportunity and do see by the way stimulus opportunity on the water side where there is a whole separate stimulus process administered by the EPA that's in place that has the potential to drive business for us there. So, we do have a number of technologies in the broad-based market to benefit from that spending.

Steve Sanders – Stephens, Inc.

Okay and on the parallel line carrier specific side, I know you have done some partnerships, but where are you on having a product in North America that's really an Itron product rather than a hybrid of partnership product?

Malcolm Unsworth

This is Malcolm, we have a power line carrier technology that we are using today at EOD, we've been developing it for some time and that's one of the reasons that we’ve been picked as the supplier for those 35 million points. We're taking that technology and we are developing it in North America and we have a power line carrier solution that if it talks and it will talk C12.22 so it is will talk common language, common standards in North America and we are working on that solution to be an adjunct to our OpenWay product. So we will have the ability to OpenWay next technology and then in the outlying areas or what over our customers choose we will have a PLC, Power Line Carrier and I'm not giving you the exact date because that's one of the reason's why we are maintaining and being very careful of what we do with our R&D plans.

Steve Sanders – Stephens, Inc.

Okay but you would, is it fair to say you would have that product ready in time to capitalize on some of the stimulus funding for the smaller utility projects, if in fact they decided they wanted to go Power Line Carrier? You can be competitive in those deals over the next year, is that fair?

Malcolm Unsworth

I'm not certain it would be a year. Philip, I think you may want to just answer that a little bit more crisply.

Philip Mezey

Yeah Steve, I would say that in those co-op and many [ph] deals at that level we would not likely bid a false advance, I mean a false mark metering implementation using that very new technology.

Steve Helmbrecht

But it is available in the not-too-distant future raised on –

Steve Sanders – Stephens, Inc.

Okay and then one for Philip and then another one for Malcolm, if I can? Philip on the North American side can you talk a little bit about the gas and water markets specifically, I mean obviously we understand all the reasons for the pressure on the electrical side, but when you look at the market growth clearly it is still fairly strong on the gas and water side, what are you seeing specifically in your businesses there?

Philip Mezey

So on the gas bid there is a discussion as of the beginning of the year is now expanded to both meters and I would say meters and regulators in the business that we picked up in Owenton Kentucky, as well as the AMR business at that gas meter and regulator business has been directly affected by housing starts with – so you know I think the economy is definitely a work there at the AMR business is, the gas AMR business is holding in there relatively flat and on the water side you will see a bright spot of where we would see some nice improvement and you know continued strength. So, very pleased about that.

Steve Sanders – Stephens, Inc.

Okay and then Malcolm I think you talked in the past about moving toward being more of a turnkey provider internationally similar to what Itron has done in North America for a while, can you just give us an update on the thoughts there and talk a little bit about the kind of incremental investments you might need to make to be more of a turnkey provider internationally?

Malcolm Unsworth

Marcel do you tell anything, I can take it but do you want just speak?

Marcel Regnier

Marcel speaking. I think the answer is yes, we definitely, ever since we are ready to manage and implement turnkey solution and to some extent we already did that to take an example in prepayment. We did turnkey solutions and we are managing directly just another data. As far as investment is concerned I think we would do the necessary investments in order to implement those projects and of course we are learning from the strong experience of North America.

Steve Sanders – Stephens, Inc.

Okay thank you very much.

Malcolm Unsworth

Thanks Steve.

Operator

(Operator instructions) Your next question comes from Alex Kurtz with Merriman Curhan Ford.

Alex Kurtz – Merriman Curhan Ford

Yes thanks for taking the question, as far as you are – the programs and the cost-cutting, how many quarters do you think you guys can implement that, is that something we can start seeing improvements in the June quarter or implementing OpEx controls will take a couple of quarters to start to see that in the bottom line?

Malcolm Unsworth

You know it is Malcolm, I'm going to say that we have continually done in cost reductions, we are always looking at changing designs, we always looking joining together our purchasing strategies and we have bought cost containments in place and cost reductions in place and targets for our OpEx group and our non, sort of direct materials and direct labor kind of projects. So, will we see much in Q2? We will see a little bit, yes we will. Will we see a lot more in Q3 and Q4? Yes we will.

Alex Kurtz – Merriman Curhan Ford

And just on that cannibalization that you are seeing between AMR and AMI in North America or sort of the deferment that some of the utilities are dealing right now. I mean is that something that could lead over into the international markets as they start to adopt AMI and they look at their AMR programs, they well, let's put those on hold like is this still over in 2010 as sort of AMI gets implemented in a more broader way across the road.

Malcolm Unsworth

So let me just explain a little bit about what's happening in the rest of the world outside of North America. AMR actually has really been a stronghold throughout the rest of the world in North America that's where most of the automation has come from with AMR and the rest of the world very, very little AMR is actually taking place, what we're actually seeing is that they are skipping the AMR technology, so they're going directly from manual meter reading, which could be once every two months in some countries, once a year and many and going directly to AMI. So we are not saying any transition from AMR into AMI, outside of North America, we are seeing strong result from manual meter reading to AMI and not – and skipping the AMR piece.

Alex Kurtz – Merriman Curhan Ford

And just on a question earlier, there was about what would it take in North America to give you guys a little more confidence about providing guidance in the next couple of quarters, can you just repeat that in sort of give a little more color around, you know is it improvement in stability in foreign exchange on improvements in utilities into their outlook, what are the kind of items that you are looking for?

Malcolm Unsworth

When do we see stabilization?

Alex Kurtz – Merriman Curhan Ford

Yes.

Malcolm Unsworth

A lot more color around what utilities are really doing?

Alex Kurtz – Merriman Curhan Ford

So right now there is just no visibility with some of your major customers?

Deloris Duquette

It is not that there is no visibility Alex that is probably too strong a word, what has been interesting is that their behavior patterns which have been quite predictable in the past don't seem to be any more. So, I would think that you know if we return to that time when they are more predictable we've obviously will feel more comfortable, as well as if our foreign exchange rate stabilized somewhat worse we obviously would feel somewhat more comfortable.

Alex Kurtz – Merriman Curhan Ford

Yes I understand thanks Deloris. And just last question, you know what should we think about as far as the interest expense moving forward on a quarterly basis, was the March quarter, I know you guys changed the cap structure around a little bit, should we expect something similar to that as far as interest expense and net interest expense?

Deloris Duquette

Yes well we gave you the components of this repeat (inaudible) these prepared script, but our blended rate is now 5.9%. So that'll be the real interest expense, if you look at that APB 14-1 effect it is going to run about 3 million a quarter and about 10 a year ballpark figure. My 2.5 million a quarter.

Steve Helmbrecht

That is a non-cash component.

Alex Kurtz – Merriman Curhan Ford

That's a non-cash, right?

Deloris Duquette

Yes so take that 5.9% and then you'd have to add that APB 14 effect if you choose to although we stripped it out for non-GAAP.

Steve Helmbrecht

And that expense of non-cash expense will continue through about mid-2011.

Alex Kurtz – Merriman Curhan Ford

Okay thank you very much.

Steve Helmbrecht

Thank you.

Deloris Duquette

Operator is there any further questions?

Operator

Yes there is.

Deloris Duquette

How many do we have in the queue?

Operator

Two.

Deloris Duquette

Okay we'll just take those and then I think we will be done.

Operator

Okay. There next question comes from John Quealy with Canaccord Adams.

John Quealy – Canaccord Adams

Hi just two quick follow-ups, first probably more from Marcel, in terms of direct material costs obviously it seems aluminum copper and resent through bronze is coming down, can you comment on, or have you started to see any benefits in the direct materials line for the international business?

Marcel Regnier

Good question John thank you. When we talked about the raw material cost, we need to keep in mind that we would be comparing Q1 of last year versus Q1 of this year and then situation is quite different. Remember that in last year, we were still at that time of the year looking at increasing raw materials and certainly you know went down at the end of ‘08 versus those big increases. So, actually we are more altogether fact for example in aluminum just as last year, no up, no down. In copper, clearly we are gaining some savings from an average cost of order to copper alloy between this year and last year. So, in the – what they arrive they enter again.

John Quealy – Canaccord Adams

Okay thank you. And then my last one, we have started to see some rumblings out of Japan in terms of moving forward to smart creator automated metering etc. I know Itron in the past has had had a good handheld market share there, can you comment on what you think about time frames and possibility for Itron technology to be deployed there in the coming years.

Malcolm Unsworth

You know we have a very strong presence as you said John with handheld devices, we used those all over Japan and so we have got quite good connections there. We developed the water meter of water AMR device there using the frequencies that they have in Japan and it has been under test for some time. On the electric side, yes the only way we would really get anywhere on the electric side as if we did some kind of joint partnering with a large utility or a large meter manufacture, but we do have presence, we do have presence in Japan. If it is rumbling to take off we are certainly are very interested in the talking to those guys and we do have presence there. So we are interested, it is not something that we do with smart meters today, but it is something we certainly would look to for the future.

John Quealy – Canaccord Adams

Thanks.

Operator

Our next question comes from Darin Conti with Wachovia.

Darin Conti – Wachovia Securities

Hi can you hear me?

Steve Helmbrecht

Yes, Darin, we can hear you.

Darin Conti – Wachovia Securities

Just wanted to touch basically on the INA forecast for our flat to down single-digit revenue guidance, what does that imply I guess for the non-AMI business or what kind of cannibalization does that imply?

Deloris Duquette

We're not going to quantify that because we are not giving guidance.

Darin Conti – Wachovia Securities

Okay. Well I guess if you're just trying to get a run rate for that business and I know you have a pressure on housing starts and the meter replacement, but if we kind of look and a little bit better more I guess normalized economy how should we think about that run rate, I mean what's, I guess first up, what is the break down between meter replacement in your new housing starts or just new AMR projects?

Deloris Duquette

Well I guess what you could think of is that power revenue in North America in 2008 by in March did not include any AMI therefore all of that would be what we are discussing in terms of being effected by the recession, customer behavior etcetera.

Darin Conti – Wachovia Securities

Okay, so that is $650 million number for '08?

Deloris Duquette

$628 million it was last year that is right.

Darin Conti – Wachovia Securities

Okay, I mean have we seen those two big AMR projects, I mean will they continue to kind of effect next couple of quarters or are they largely –?

Deloris Duquette

I'm not sure at AMR –

Malcolm Unsworth

I think we have commented on the fact that there were several large AMR projects in 2008 that concluded in 2008 that are impacting our current results and yes they will continue to impact our results in the core business. What we fully expect is that at these AMI projects start to ramp as they actually began in the first quarter and will continue on through the second quarter and the remainder of the year that that revenue will replace the revenue that essentially was consumed on those AMR projects in 2008.

Darin Conti – Wachovia Securities

Okay so you basically have a gradual ramp down of that core non-AMI revenue as the AMI projects ramp up?

Malcolm Unsworth

Right.

Darin Conti – Wachovia Securities

Is that –

Deloris Duquette

In all fairness Darin that is one of the things that we don't have a gradual ramp down and a ramp up, we are being effected by saying customer behavior, order placement, etcetera and that is one of the reasons that we are not sort of talking about some growth rates there or specific numbers going forward.

Darin Conti – Wachovia Securities

Okay let me just ask – if I am kind of looking at the core number is it how much of the revenue number there non-AMI is new AMR or is it –.

Deloris Duquette

We don't give that information.

Darin Conti – Wachovia Securities

Meter replacement new housing starts, because I mean are you always going to have a little bit of a growth rate there, do you do new housing starts and meter replacement or is the bulk of that you have to have a new AMR orders?

Deloris Duquette

We don't break our revenue down like that in all fairness, so that – it is a very hard question to comment on.

Darin Conti – Wachovia Securities

Okay.

Operator

And that does conclude the question and answer session.

Deloris Duquette

Great. If you have any follow on questions, as always, feel free to call and thank you for joining us today.

Operator

Thank you. There will be an audio replay of today's conference available this afternoon, you can access the audio replay by dialing 1-888-203-1112 again that is 1-888-203-1112 or 1-719-457-0820 with the pass code of 6466939, again the pass code is 6466939 or go to the company's website at www.itron.com. That does conclude today's conference, thank you for your participation today.

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Source: Itron, Inc. Q1 2009 Earnings Call Transcript
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