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Itron Incorporated (NASDAQ:ITRI)

Q1 2014 Results Earnings Conference Call

April 24, 2014, 5:00 PM ET

Executives

Barbara Doyle - Vice President, Investor Relations

Philip Mezey - President and Chief Executive Officer

Steven M. Helmbrecht - Executive Vice President and Chief Financial Officer

John Holleran - Executive Vice President and Chief Operating Officer

Analysts

Ben Kallo - Robert W. Baird

Sean Hannan - Needham & Company

Craig Irwin - Wedbush Equity Research

Susie Min - Deutsche Bank Securities

Operator

Good day, everyone, and welcome to the Itron Incorporated Q1 2014 Earnings Conference Call. Today's call is being recorded. For opening remarks, I like to turn the call over to Ms Barbara Doyle. Please go ahead, ma’am.

Barbara Doyle

Thank you very much Blake, and good afternoon to everyone. We issued a press release earlier today announcing our results. The press release includes replay information for today's call. We have also prepared presentation slides to accompany our remarks from this call. The presentation is available through the webcast and through our corporate website under the Investor Relations tab.

On the call today, we have Philip Mezey, Itron President and Chief Executive Officer; Steve Helmbrecht, Itron Executive Vice President and Chief Financial Officer; John Holleran, Itron Executive Vice President and Chief Operating Officer and Shannon Votava, Itron Vice President, General Counsel and Corporate Secretary.

Philip will lead off the call with a summary of our operating results and the business environment. Steve Helmbrecht will cover our Q1 financials. Philip will then close the call with come prepared remarks and will hold a Q&A session with the process that the operator will provide.

Before I turn the call over to Philip, please let me remind you of our non-GAAP financial presentation and our Safe Harbor statement. Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation.

We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today’s earnings release and the comments made during this conference call and in the Risk Factor section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Now please turn to Page 4 in the presentation, and I will turn the call over to our CEO, Philip Mezey.

Philip Mezey

Thank you, Barbara, and good afternoon to everyone. Before we get into the quarterly results, I’d like to take a minute to recognize Steve Helmbrecht. Steve -- Itron announced now today that Steve will be departing the company at the end of the year. He will remain in his role through December 31, 2014 to ensure an orderly transition. Steve has been instrumental in building Itron’s strong financial foundation as we grew from a $200 million company to a $2 billion company. His competency in capital market transactions provided the financial flexibility for more than $2 billion of acquisitions.

He built the strong financial organization with the skills, processes, and systems to ensure a sound, control posture, and he has instilled a sense of integrity and transparency into the organization.

What’s important for you to know is that Steve and I made this decision together. We both acknowledge that bringing in a seasoned, external CFO with a different set of skills and experiences would be a beneficial move to accelerate Itron’s growth. The Board and I thank Steve for his deep commitment to our company’s success.

With Steve remaining in his role through his departure date, he will certainly continue to represent Itron with the financial community, so nothing changes for any analysts or investors on the call.

Steve, would you like to make any comments?

Steven M. Helmbrecht

Yes, I would, Philip, thank you. I want to say what an honor it has been for me to lead Itron’s financial organization, especially given the tremendous growth and change that has occurred at Itron over the last 10 years.

We have a great team and I thank them. It also has been a privilege to represent Itron and work with our analysts and investors, and I look forward to working with you through the remainder of the year.

I am proud of what Itron has accomplished to this point, and I am excited about Itron’s future. In this decision, Philip and I have the company's best interest in mind. I remain committed to continuing the important work we are doing as part of Philip's team over the course of the year. We have much to do.

Philip, I will turn the call back to you.

Philip Mezey

Thanks, Steve. Okay, now let’s move on to our quarterly results. I'll begin the call with highlights from our first quarter performance, including revenue bookings and backlog; Steve will then review the financials in more detail. I will conclude with an update on our profitability improvement plans, and then we'll open the call up to take some questions.

Looking at Q1 performance, we had substantial improvement in operating results compared to last year. Our Gas and Water financials continue to be strong with growth in revenues and profitability in both of these segments year-over-year.

In Electricity, we had meaningful growth in revenues, bookings, and backlog, as well as reduced employee-related expenses, although these benefits were offset by $5 million of legal and warranty costs in the quarter. Overall, I am encouraged by our first-quarter results and improvements in the underlying profitability in the business.

Now, let me turn to revenue performance on slide four of the presentation. Revenues, bookings, and backlog were definitely highlights for Itron in the quarter. Revenues increased in each of our three business segments compared to last year.

Total revenues grew 7% excluding currency impacts. Bookings and backlog are shown on slide five and six. Strong bookings of $745 million with a 1.6 to 1 book-to-bill ratio increased our backlog substantially. Total backlog of 1.3 billion increased 30% year-over-year. 12-month backlog increased by more than 8%.

Our Q1 bookings included 2 million endpoint OpenWay contract with FirstEnergy for their grid modernization project in Pennsylvania. This is a truly transformative project for FirstEnergy's Electric grid.

Itron's IPv6 smart grid platform, that we jointly developed with Cisco supports an extensive set of capabilities including voltage monitoring and outage management, time of use pricing, demand response, theft detection, and net metering.

Our flexible multi-service platform also supports distribution automation and other applications, which are critical elements of FirstEnergy's grid project in consumer empowerment programs.

In addition, we have announced several key contract wins that are not yet reflected in the backlog. In February, we announced a significant contract with Gaz De France. GrDF plans to replace 11 million gas meters in France with smart meters between 2016 and 2022.

Itron was awarded 3.7 million meters for the project. We are proud of our development efforts on the Gazpar meters for GrDF and to be named a primary supplier for this large, smart meter project in France.

In water, we signed new business with Saudi Arabia’s National Water Company to supply 141,000 residential and commercial water meters with wireless communications for the city of Jeddah. This is a critical project to conserve scarce freshwater resources in the city.

We also announced an agreement today with Mitsubishi Electric Company or MELCO to provide our software and services to Chubu Electric Power in Japan. Japan is an attractive opportunity with replacement of 85 million Electric meters being driven by National Energy Policy. Chubu, who will be using Itron’s OpenWay meter data collection software is the third largest electric utility in Japan.

Our agreement with MELCO was a significant milestone for several reasons. It represents how we are entering attractive new markets through partnerships and new business models. It also validates the potential for our OpenWay platform and global markets, providing additional opportunities for economic return on our R&D investments in software and systems.

And other important news, we just this week signed a significant agreement with Duke Energy in support of their electric grid modernization project. The agreement is a great win for Itron that considerably expands our current OpenWay deployment with up to 4 million additional endpoints over an eight-year period, including Itron’s 4G LTE cellular solutions.

Duke will use our flexible multi-service IPv6 platform to support grid applications such as distribution automation, Volt/VAR optimization, and distributed energy resource management.

In addition, Duke and Itron will collaborate to introduce new grid applications using Cisco’s IOx operating system for the utilities meter-as-a-sensor project. We are advancing grid applications enabled by our OpenWay platform, which extend the value proposition of smart grid systems. This value goes beyond the operational savings from smart metering by bringing intelligence and computing capabilities to the edge of the network.

We have been making significant investments to develop advanced network platforms, including OpenWay for this exact purpose to open up global markets and new business opportunities for Itron as utilities increasingly deploy smart systems and modernized grids around the world.

Our Q1 bookings in new business awards provide visibility to increased revenues in 2015 and beyond. These projects are a proof point that the advantages of smart systems are being realized and are taking hold around the world, and that Itron is well-positioned to benefit from these investments.

Now, I'll turn the call over to Steve to cover our financial performance.

Steven M. Helmbrecht

Thank you, Philip. I will begin with slide seven which summarizes the consolidated financial results for the quarter compared with the first quarter of 2013. Total revenues of $474.8 million grew 6% compared to last year and 7% at constant currency.

Higher revenues and a favorable mix of smart versus standard volumes, especially in Gas and Water drove improvement in margins. Gross margin of 32 5% improved by 120 basis points, and we had operating margin expansion of 150 basis points over last year. Adjusted EBITDA also increased year-over-year. Adjusted EBITDA was 34.5 million this quarter with a margin of 7.3%, an increase of 130 basis points from a year ago.

Now I'll turn to earnings per share which were negatively impacted by interest, currency volatility and a higher tax rate compared to the prior year. On a GAAP basis, we had a net loss of a $0.01 compared with net income of $0.06 per share in 2013.

Non-GAAP diluted earnings per share which exclude the impact of the goodwill impairment, restructuring charges, acquisition related expenses and amortization of intangible assets and debt fees were $0.31 for the quarter which is consistent with last year's earnings.

Slide eight provides more detail behind our EPS performance. Revenue growth and consolidated gross margin improvement drove $0.37 of improved non-GAAP earnings per share. Our core sales and marketing, product development and G&A expenses were down year-over-year driven by headcount reductions and cost controls which added another penny of improvement.

While G&A headcount was down year-over-year, the expense was negatively impacted by higher legal reserves, increased professional fees and costs associated with our global ERP project to streamline business services. These expenses negatively impacted non-GAAP EPS by $0.18.

Increased other expenses which include interest and foreign exchange losses related to volatile currencies in certain markets including South Africa, Argentina and the Ukraine negatively impacted earnings by $0.06, a higher effective tax rate impacted earnings by $0.14 compared with last year.

In Q1, 2013 our earnings benefited about $0.10 per share from the reinstatement of the R&D tax credit related to 2012. If the R&D credit for 2014 gets approved by Congress later this year we would see about $4 million benefit in our tax provision.

So although non-GAAP EPS was flat year-over-year, we are seeing earnings benefits from our efforts across water, gas and electricity including revenue growth and favorable expense trends. Those benefits are better reflected in the cash flow in the quarter given several non-cash charges that impacted earnings.

Free cash flow in the quarter was 58 million compared with the negative 14 million in 2013. The cash flow reflects our improved operating performance, working capital management and reduced capital expenditures. The free cash flow for the quarter was a little high due to timing as many of the payables will be settled in the second quarter. Regardless, it is a good start to the year.

As a reminder, we will update our earnings and free cash flow guidance for the year on our next earnings call. We finish the quarter with 146 million in cash. During the quarter we used free cash flow for both debt repayments and share repurchases. We repaid about 31 million in debt, bringing our debt balance down to 348 million, and we repurchased about 75,000 shares of stock for 3 million.

I will also provide an update on the restructuring. Last year we announced plans to reduce our work force by approximately 750 people and restructure operations to increase efficiency and lower costs.

During the quarter we added 70 more positions to the restructuring plan and recorded an additional accrual of 5.5 million. To-date, we have completed over 65% of the total workforce reductions. In addition to the facility activities we discussed last quarter, we continue in our efforts to consolidate operations. We will be closing an electric meter facility in Saudi Arabia and consolidating production into one facility in Hungary.

In the gas segment, we closed a production facility in the Ukraine. We are making good progress on our restructuring and expect most of the activities to be completed by early next year. We anticipate the restructuring will drive 30 million to 35 million of annualized cost and expense savings once completed.

Now let’s move to segment performance beginning with the water segment on slide nine. Overall the water team delivered strong results in the quarter. Water revenues grew by 10% compared with the first quarter in 2013 driven by smart water projects in Ireland, growth in heat meters and heat cost allocators in Germany and strong performance in Latin America.

Gross margin increased 300 basis points to 36% due to increased volumes and operating efficiencies. Non-GAAP operating margin also increased more than 390 basis points to 15.8% driven by the higher gross profit compared to last year.

The improved performance of Water did drive a slight increase in sales commissions and resulted in a higher proportion of corporate allocations compared with last year. Water is a profitable growing business for Itron and we are pleased with the direction we are heading.

Now turning to the Gas segment on slide 10. Gas also had a strong quarter and performed very well. Gas revenues of 146 million grew 6.7% compared with last year. The increase in revenue was driven by strong performance in North America where we had higher module shipments, an increase meter shipments to Southern California Gas.

Gross margin was up 300 basis points mainly due to the mix of increased modules which generally have higher margins than meters, as well as increased volumes and lower warranty costs.

Non-GAAP operating margin was 19.2% in the quarter, up 330 basis points compared with last year. The higher gross profit offset increased product development investments for new products. Overall we were pleased with the Gas segments performance in the quarter which was driven by an uptick in North America. Revenues in EMEA are still a bit low but we remain optimistic long-term as our pipeline is healthy along with our great win at GrDF.

Now, I will move to Electricity segment on slide 11. Profitability is clearly at acceptable levels. On the positive side, electric revenues of 180 million grew over 5% in constant currency. Growth in smart metering in North America offset declines in other regions. The growth was driven by key projects in North America including Detroit Edison, Duke Energy, Consumers Energy, FirstEnergy, Texas and Mexico Power and others.

Gross margin decreased 190 basis points year-over-year driven by the impact of product mix, lower volumes and slightly higher special warranty charges. Non-GAAP operating margin was down 80 basis points year-over-year due to the decreased to gross profit. Operating expenses were flat in total year-over-year with increased legal and other reserves offset by lower headcount and employee related expenses. Q1 was a good start to the year and reflects the progress we're making on our initiatives. We continue to focus on growth and improved profitability.

And now, I will turn the call back to Philip to cover more specifics on a profit improvement plans. Philip?

Philip Mezey

Thanks, Steve. On our last call in February I reiterated our financial goal of mid 30s gross margin and mid-teens EBITDA margin on a consolidated basis. I highlighted two of our businesses gas and water that were already performing at the level required to achieve mid-teens EBITDA, strong Q1 financial performance in gas and water moves us closer to our goal.

To achieve mid-teens EBITDA margin on a consolidated basis, the Electric segment EBITDA must be in the high single-digits. On our last call I said that we will improve performance in the electric business and we are making progress.

Profit improvement in the electricity business will be driven by three elements. Backlog growth, long-term sustainable cost reductions and efficiencies, and rebalancing our existing electric business.

As is evident in our first quarter results, we are generating backlog growth with projects where we sell differentiated high value solutions. Projects including FirstEnergy and Duke Energy along with schedule deliveries to Duquesne FortisBC, Detroit Consumers Energy and others give us our firm visibility to increase smart volume in revenue in 2015 and beyond.

We expect additional smart metering backlog growth in Asia from accounts like China Light & Power and in Japan. This list of projects provide $1 billion of smart grid project revenue visibility between booked contracts or committed future business.

The new business we have won will drive more than $80 million of incremental revenue growth by the end of 2016 with the growth beginning to materialize in 2015. This added revenue will drive 300 to 400 basis points of EBITDA, which is nearly half of the improvement that we are targeting in electricity.

Secondly, we are continuing our focus on cost reductions and efficiency improvements with a number of projects. As Steve discussed we continue to progress with our announced restructuring projects. The majority of the savings benefit the electricity segment. These savings are already included in our financial guidance.

In terms of additional efficiencies, we are engaged in discussions with third-parties to increase our levels of outsourced printed circuit board assembly, which provides the opportunity to reduce our cost by another $10 million annually.

It also increases our variable manufacturing capacity, allowing us to better align costs with revenue. We expect to implement these changes over the course of 2014 and we will continue to evaluate make versus buy opportunities across the business.

Long-term sustainable cost reductions and efficiencies remain an urgent priority for John Holleran and his team. We have a number of additional items under review which we will share as decisions are finalized.

We are also rebalancing our Electric business with an increased shift to smart systems from basic and standard metering. Our new business and smart grids and systems, managed services, smart payments and software delivers good profit and these types of projects are driving our growth. Profit is lagging on some product lines or geographies and we have operational plans in place to improve them.

And there is a certain portion of our Electric business that does not meet our financial objectives today and based on our outlook will not sufficiently improve in the future. Approximately 20% of the Electric business falls in this category. A detailed review is underway to assess product lines or geographies in this category. We are prioritizing projects with higher probability and declining projects are exiting business that will not meet our financial objectives. We will implement actions to either deliver products in a more cost-effective way or exit markets.

For example, last quarter we announced the phase out of our Residential Electromechanical business in Brazil. Actions we take may offset some of our projected revenue growth in the short term. However, exiting low contribution products in markets will improve EBITDA margin and add future operating leverage by allowing us to reduce support, sales, marketing and administration required to serve these markets.

With the growth in our booked and committed smart grid revenues, our cost reduction activities and efforts to rebalance our electric portfolio I am confident that we are taking the necessary steps to achieve our goal of high single-digit EBITDA margin for the electricity business. I am also confident that we will demonstrate visible progress towards this objective in 2014.

With the first quarter in the books I am pleased with our sales execution, improving business results and our increasingly strong competitive position. We will continue to focus on R&D to open up new business opportunities.

I also expect that my team will continue to drive operational improvements with urgency allowing us to achieve the full earnings potential of our strong global business. My commitment and CEO is to continuously evaluate all aspects of our business and make the changes necessary to accelerate our evolution as a world leading technology and services provider. As a company, we will continue to take bold steps forward that best position Itron for growth and profitability.

Thank you. Operator, now let’s take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take our first question from Ben Kallo. Please go ahead.

Ben Kallo - Robert W. Baird

Hi. Thanks for taking my question, and Steve sorry to loose you and congratulations on whatever you're moving on to do. Could you guys talk a bit about this Japanese opportunity? I know the software is a good start, but when we could expect more details there?

And then my follow-up question is a great win at -- in France in the gas side. It seems like there is more activity in the gas and water side of the business. Where should investors be focused elsewhere outside of the wins that you already have won? Thank you.

Philip Mezey

Thanks, Ben. Yeah, I mean we’re very excited as I say about this first Japan win. As everyone knows, we focused quite a lot of effort on trying to get a foothold in the Japanese market, and we see an opportunity to expand.

We will be announcing more details on this arrangement with MELCO as we get further along, and then we’d mentioned several times that there are other opportunities at the electric power companies as bids go out in that market. So, this one starts with software and services, but we see the opportunity for metering in communications in the Japanese market as well. I'll handoff to John to provide color on the gas and water markets.

John Holleran

Sure. Thanks Philip. Yeah, on the – a year ago, we separated our businesses operationally into gas and electricity, and I think we’re beginning to see the benefits of a much stronger focus on the gas side. I think when they were together in the energy segment, they tended – electricity tended to overshadow gas, now that we've got our organization in place and we've made a few changes there, we've really gotten a a much stronger focus, and I think we're starting to see those dividends.

Likewise on the water side, I just think the nature of that market and the increasing focus on water scarcity is causing more and more utilities on the water side to think very critically about how they measure and manage their water supplies, and again I think if we can position our business in front of that wave, we'll catch it pretty well.

Operator

And our next question comes from Sean Hannan

Sean Hannan - Needham & Company

Yes, thanks. Good evening. Can you hear me?

Barbara Doyle

Yes, Sean.

Sean Hannan - Needham & Company

Okay. Great. Just wanted to see if I could follow up on some of the comments that were provided a little bit earlier on electric. Thanks for some of the detail in terms of how we can look to improve this from a margin perspective over time.

I want to get an understanding of where we stand today for being able to stem that decline and really how some of that could start to materialize or perhaps improve a little bit as we progress at least through the 2014 year during the transition period and then into 2015? Thanks.

Philip Mezey

Sean, so as I commented, we do expect to see visible improvement in 2014. The three elements that I covered again, growth, cost reduction, and rebalancing. The cost reduction comments that I made in particular, we have -- as the restructuring proceeds, we will continue to receive benefits from efficiency in 2014, so those benefits will be felt first.

And then on growth, I commented on increasing visibility, most of that backlog growth is over a longer period of time, but we do have better visibility in the second half of the year. So, the combination of cost reduction and growth are where we see that improvement occurring in 2014.

Operator

And our next question comes from Craig Irwin.

Craig Irwin - Wedbush Equity Research

Good evening and congratulations on the significant bookings in the quarter at FirstEnergy.

Philip Mezey

Thank you.

Craig Irwin - Wedbush Equity Research

So, it appears that the revenue trajectory is starting off with a little bit of strength at the beginning of the year, maybe market conditions might not be as challenged as we might have thought a few months ago.

We also saw an interesting data point today from an important component supplier indicating that there could be some strengths coming in the European market. Can you maybe give us some color as far as how things are tracking versus your expectations coming into this year, and whether or not the significant bookings that you have accumulated over the last couple of months might actually help drive a more constructive picture as the year takes shape?

Philip Mezey

So Craig, yes, I hear two questions there, one really short-term one and one sort of mid-to-longer term. We're very pleased with our results here in the first quarter, but are cautious that one quarter does not a trend make, and so we will be updating our outlook here on the next call, so we need to get a little further into the year to really understand whether or not our outlook about the economy or some of these other markets has substantially changed.

That being said, however, as you point out, the strengthening of the backlog, increase in bookings, and not only the FirstEnergy announcement, but now this very important agreement with Duke and others are providing better visibility into 2015 and 2016 for us.

So, we are very constructive and optimistic in the mid-to long-term and do see continued opportunity for improvement in 2014. It is just that we really want to get another quarter under our belt before we comment on that.

Craig Irwin - Wedbush Equity Research

Okay. Excellent. And my second question is really a clarification, so in your prepared comments, you mentioned $5 million in legal and warranty costs incurred in the quarter, and when you discussed the different components on slide eight, I don’t think you broke that out specifically. So, was the $5 million in incremental legal and warranty costs included in any one of the three negative step downs in that bridge, and maybe could you give us a little bit more color there?

Steven M. Helmbrecht

Yes, Craig, hi this is Steve. And that – on that slide, we talked about the increased discrete G&A items that is inclusive of that litigation, and the professional fees, as well as some of those project cost, which are being incurred in the near term as we continue to rollout the technology and the new processes.

Craig Irwin - Wedbush Equity Research

Great. Congratulations on the impressive bookings.

Steven M. Helmbrecht

Thanks very much, Craig.

Operator

(Operator Instructions) We’ll take our next question from Susie.

Susie Min - Deutsche Bank Securities

Hi. Thanks for taking my question. I have one more specifically on the guide, previously you said we should see incremental improvement, obviously, you're referring off of a strong quarter, and I know you're not updating your guide until next quarter, but if you could maybe give us some color on what you're seeing, how should we think about Q2, and is the 20% of the electricity business that you are evaluating, is that part of your guide?

Philip Mezey

So Susie, to the first part, we are not going to provide outlook for the second quarter. It’s not our standard policy, and again, we’re one quarter into a year, in which there's been quite a lot of economic up and down in the past couple of years, and so it’s really prudent for us to get another quarter under our belt before we provide updated information to you on the outlook for the remainder of the year.

To your second part of the question about is this rebalancing of the portfolio that is this reference to 20% of the Electric business that does not meet our profitability objectives. We are in the process as you heard of reviewing what it is that we are going to do there.

I would not expect significant impact from that in 2014 and we expect growth that we've seen in backlog and is better visibility going forward to be a mechanism to offset any of the impacts to revenues that we see from that rebalancing. So we have not provided you any guidance that includes or excludes that -- those numbers because it is further in the future.

Susie Min - Deutsche Bank Securities

Okay. And if I could just squeeze in one more question on your Water business. Obviously you saw a strong quarter. I know that’s more of a book and ship business. But is there anything else you are seeing. I know you mentioned projects from Ireland, Germany and strong performance within Latin Am.

But is this sort of a good run rate to think about in that business. Obviously the highest revenue you guys have recorded for the quarter and you know longtime. So, any color there?

John Holleran

This is John. I think that what we're seeing is a real driver in that business is our Heat and Allocation business and that’s a relatively new business for us. It’s really taking off particularly in Germany. And we're optimistic that we'll have opportunities to grow that business and other regions of the world and that’s where we're working on.

Barbara Doyle

In addition to some of the large AMI contracts that we signed last year, including Baltimore, Cleveland which was sometime last year but its still in progress and Los Angeles. So we’ve got good AMI projects Susie and then as John said really good business, new business in heat and allocation business.

Susie Min - Deutsche Bank Securities

Okay. Thanks, Barbara. Thanks, guys.

Philip Mezey

Thanks Susie.

Operator

And we have a follow-up question on the line from Craig Irwin.

Craig Irwin - Wedbush Equity Research

Thank you. So 4 million units for Duke, wow, that is a big contract and much bigger than what I thought it was likely to be in the near term. Can you maybe comment as far as the geographies that you plan to or that your customer plans to address and how this contract is likely to take shape for you? Are we really looking at Indiana which I think was first up on the list, still being first or is there something you could share with us that might help us model this and understand how this is really going to be rolled out over the next several years?

Philip Mezey

So Craig, we are very excited about the contract with Duke and to your point about it being larger than you had anticipated, it is that the – what we were all focused on where opportunities in specific geographies and you mentioned Indiana as one of those.

The agreement with Duke is basically standardizing on Itron Technology across all of Duke’s geographies and it is a longer-term agreement that is not a specific authorized implementation. It is basically a blanket order over an extended period of time in which Duke will be purchasing their smart metering technology from Itron.

So as they continue to saturate the geographies in which they are currently working and continue to work with the regulator in Indiana for approval of that project, their intent is to use Itron technology, not only in those geographies, but in all the geographies as they work towards regulatory approval and expansion.

Craig Irwin - Wedbush Equity Research

Great. And then my second question here is, I was hoping you might be able to give us a little bit more color on the dozen utilities in the US they are at some stage in going to commission or potentially moving forward with projects. We understand that there are several working with some of the project developers and some of the third-party implementation firms evaluating these projects, but can you maybe give us a little bit of color as far as how things might have changed over the last couple of months, and if you see maybe a change in sentiment, or a change in appetite that might be impacting these projects?

Philip Mezey

Craig, without getting to specific projects , I mean what we’re seeing with FirstEnergy, of course, is the act in Pennsylvania moving – having the potential to move forward the number projects in Pennsylvania. We've seen regulatory progress in Massachusetts. We are looking for support in New York and New Jersey, so there is a healthy pipeline of business out there, and we see not only that regulatory support in those regions, but where we have demonstrated business benefit, it is now possible to go back in some of these other territories to more strongly build business case to expand pilots like the one that we have at National Grid. So, I mean that’s just the flavor I can give you on where we see the industry going in North America.

Craig Irwin - Wedbush Equity Research

That’s helpful. Thank you. And I’ll squeeze another one in, one of the criticisms by some of the more bearish investors has been that the margin profile of the company has been impaired given the competitive environment that’s quite challenging. Your results this quarter 100 basis points or 130 basis points had a consensus seemed to indicate that maybe things aren’t quite as bad as what the most skeptical investors are looking at.

How would you respond to the margin structure of your business and the fears that there might have been competitive pressures that impaired it or that the structure of our customers are asking for today might not be the products with the same margin structure we had a couple of years ago. I mean, how would you respond to that these days?

Philip Mezey

Okay. So the first part we'd point out, this is a very healthy financial metrics of our Gas and Water business. So this comment is mainly typically directed at the Electric business. And it’s based upon the theory that there is increasing commoditization and low-cost competition that is going to engulf the whole of the Electric market.

And what we are seeing is a strong move to smart technologies that we said or higher margin, defensible integrated systems in North America where it’s possible for us to maintain pricing through continued investment and innovation in R&D.

And then where we are facing the pressure of the barricades we have acknowledge in this 20% of the business in which there are highly commoditized metering products and maybe market dynamics where we have to rethink our presence in those markets.

The barricades is predicated that that 20% is really a substantially larger portion of the global geography and we feel that by investing in technology and competing in markets with defensible margins that we will be able to strongly maintain and improve our position in the Electric market.

Craig Irwin - Wedbush Equity Research

Fantastic. Thanks again for taking my questions.

Barbara Doyle

Thanks, Craig.

Philip Mezey

Certainly.

Operator

And we'll turn the conference back over to Barbara Doyle.

Barbara Doyle

All right. Thank you. I think we have covered everything that we have plan to cover Steve or Philip, is there anything else you would like to add?

Philip Mezey

No, thank you. While we have more work to do, it is a good start to the year, and as a number of you have commented we are very pleased about the bookings and backlog performance during the quarter. So thanks very much for your questions and support. Look forward to talking to you soon.

Barbara Doyle

Thanks very much, Operator. We will conclude now.

Operator

Thank you, and there will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1888-203-1112 or 1719-457-0820 that is 1719-457-0820 with the passcode 5900636 or go to the company’s website, www.itron.com. Call is concluded. You may now disconnect.

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Source: Itron's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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