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Itron (NASDAQ:ITRI)

Q4 2011 Earnings Call

February 15, 2012 5:00 pm ET

Executives

Barbara J. Doyle - Former Vice President of Investor Relations

LeRoy D. Nosbaum - Chief Executive Officer, President and Director

Steven M. Helmbrecht - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Stephen Sanders - Stephens Inc., Research Division

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

Craig E. Irwin - Wedbush Securities Inc., Research Division

John Quealy - Canaccord Genuity, Research Division

Steven Milunovich - BofA Merrill Lynch, Research Division

Operator

Thanks very much for standing by, everyone, and welcome to the Itron, Inc. Q4 and Year-End 2011 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn things over to Ms. Barbara Doyle, Vice President, Investor Relations.

Barbara J. Doyle

Thank you, Abe. And good afternoon to everyone on the call. Today we have LeRoy Nosbaum, our President and Chief Executive Officer; and Steve Helmbrecht, our Senior Vice President and Chief Financial Officer on the call. Also joining us are Marcel Regnier, President and Chief Operating Officer of Itron's Water business; and John Holleran, Senior Vice President and Corporate Secretary.

We issued a press release earlier announcing our results. The press release includes replay information about today's call. We also have prepared slides to accompany our remarks on this call, and the slides are available through the webcast and through our corporate website under the Investor Relations tab.

Before I turn the call over to LeRoy, please let me cover our Safe Harbor Statement. Please note that our earnings release and financial presentation include non-GAAP financial information which we believe enhances the overall understanding of our current and future performance. We have included all the reconciliations of differences between GAAP and non-GAAP in our financial measures and in our earnings release and financial presentation.

Regarding our Safe Harbor, please know that we will be making statements during the call that are forward-looking. These statements are based on our current expectations and assumptions and they 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 Factors section on our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any update -- any duty to update our forward-looking statements.

Now please let me introduce LeRoy Nosbaum, Itron's President and Chief Executive Officer.

LeRoy D. Nosbaum

Thank you, Barbara. Good afternoon, everyone. Thanks for joining the call. We've got a lot to talk about today, most importantly, the acquisition of SmartSynch which I think really strengthens our solutions portfolio and go-to-market strategy. But before I go there, let me begin with some highlights of our business results, including an update on our restructuring project. Steve will cover the quarter's results in more detail and provide our financial guidance for 2012. I will close the call with my observations about '12 and what I've learned in my first 6 months back at Itron. Then we'll open up for questions.

So let's begin. Overall, Q4 was a solid end to fiscal Q11 -- or 2011 and I'm pleased with our results. It was a good end to a tough year in our industry, and let's be honest, a rather tumultuous year for Itron. We ended the year with $2.4 billion of revenue, the top end of our guidance, and non-GAAP EPS of $4.29, above our guidance range of $4 to $4.20. On a full-year basis, our global revenues grew by 8%. You can see on Slide 4 that we had 13% revenue growth in Water, 8% revenue growth in Gas and 13% growth in non-OpenWay electric business. As we forecast, our North American OpenWay sales declined slightly by 2%. But as the graph nicely shows, the 2% loss was more than offset by growth in what we would call our base business represented by the different shades of glue -- blue on the graph. The graph is key to understanding Itron. While we have exciting opportunities beyond our traditional business, OpenWay being one, our strong, steady and profitable base business is significant, and I believe, too often overlooked and undervalued. I'd also point out that our FY '11 revenue and non-GAAP EPS represented record high results for Itron.

Equally important, we are nicely moving forward with our operational plans including the pace of our restructuring project. As we announced in October, several of our manufacturing facilities will be closed or scaled back. The goal is simple, more volume and fewer manufacturing facilities, which in turn, eliminates redundancies, streamlines and allows automation of remaining operations and reduces costs. We are on track with all our plans. Action taken to date include: successful negotiations with work counsels at affected locations which will allow reductions in workforce; we are negotiating the sale of several smaller businesses which we hope to close in Q2; we have closed 2 facilities, one in Canada, one in Portugal with the reduction in headcount of 140 people; as well, our downsizing plans are being finalized in several other locations.

Given our solid Q4 results and progress on our operational initiatives, I feel confident that our focus is appropriate and that we are moving forward aggressively in the right direction.

Let's turn now to some customer contract wins we have announced that are clear examples of how Itron is capturing market potential around the world. In December, we announced an important win in Ecuador, where Itron provided 4,300 commercial and industrial OpenWay electric meters, 2-way wireless communication and meter data management for the utility. We're executing well and are in a strong position for the next opportunity of 1 million electric meters planned for award in 2012.

In November, we announced a rollout of our advanced water metering solution with the Water Corporation of Western Australia who is installing 13,500 Itron meters, our network infrastructure and software. Itron's solution is part of its project to manage the city's resources more effectively and provide greater control over water delivery.

In October, we had a significant win for 400,000 residential water meters that we will supply to Hong Kong Water Supplies Department. We also announced a significant follow-on contract for 400,000 gas smart prepayment meters for the Zury[ph] gas in Azerbaijan. This is the second phase of the project in the Republic following our initial project for 250,000 meters. All of these wins highlight the strength of Itron's presence around the world. We also underscore what I said last quarter. Yes, North America business has slowed somewhat, but the rest of the world is growing. Our global customer base and strong manufacturing are indeed sales and services presence around the world bode well for Itron. Itron's strength is bringing our global expertise on a local basis.

And forgive me if I brag just a little. In the most current Water Meter Industry Report published by IMS research, IMS estimates that Itron has the top unit share for total worldwide water meter shipments, total worldwide water communication modules and total worldwide residential water meters. So all in all, I believe it is appropriate to say Itron is the world leader in water metering.

And at DistribuTECH in San Antonio in January, Itron was recognized with the prestigious Frost and Sullivan Product Quality Leadership Award for our smart grid platform. We were selected due to the performance of Itron solution benchmarked against our competitors. Using multiple criteria including product performance, product reliability, product design, product usability and perceived value.

As I come back to Itron, it is clear that there is a lot going on in the industry. We are leading on many fronts and there is a lot of potential for Itron. One of the things that is crystal clear is that the landscape in this market is not homogeneous. Our customers and potential customers are demanding a number of technology options for smart grid and smart meters. One of the opportunities on my radar screen has been the need to tailor complete solutions and align with customer considerations in using existing cellular networks for residential smart metering and other smart grid applications.

Accordingly, we are very pleased to have announced today that we have reached an agreement to acquire SmartSynch. Here, you might go to Slide 5. SmartSynch is the leading company deploying smart grid networks utilizing cellular technology. The rationale for this acquisition is simple: providing an integrated cellular option makes sense. This acquisition gives Itron the flexibility to offer a variety of choices that meet specific customer needs. With SmartSynch, we can support multiple customer scenarios, anything from hybrid situations for RF mesh plus cellular offer the most of cost effective solution to opt-in rate-based scenarios in places like Pennsylvania. Itron has been partnering with SmartSynch for over a decade on just such opportunities. There have been many significant advances in the cellular communication including data transmission capability, coverage and improved backward compatibility.

The cellular pricing model has also become far more attractive. With these advances in cellular communications and the expertise in technology developed by SmartSynch, we believe the opportunities are expanding for cellular network utility solutions in smart grid applications such as electric, gas and water metering and distribution automation applications as well. Utilities like Consumers' Energy and Texas - New Mexico Power have made significant commitments to SmartSynch's cellular smart grid.

Other utilities are utilizing combination networks of OpenWay and SmartSynch including West Bend Power, San Diego Gas and Electric and Southern California Edison. In 2012, we look for sales of SmartSynch post-close to be in the range of $50 million. This is just the beginning of the opportunity as we see both revenue and margin synergies and the combination of our 2 companies. With Itron's financial and marketing strengths, sales will grow in North American, and potentially, around the world. We will not quantify sales beyond 2012, today.

We also plan to combine our sales in manufacturing and embedding devices in meters, along with the ability to sell Itron meters under SmartSynch networks to produce overall better margins and additional meter sales going forward.

Technology does not stand still in this industry. We have been watching the opportunity for cellular technology in Smart Metering, Smart Grid arena for some time. There will be utilities set for geographic, regulatory or other reasons find cellular technology very attractive. Before you ask, this is not a change in Itron's position regarding mesh networks or OpenWay. It is an acknowledgment that cellular technology has significant promise and the acquisition of SmartSynch puts Itron at the forefront of this very exciting opportunity while positioning Itron with one of the most complete portfolios of smart grid communication solutions in the industry.

We welcome Stephen Johnston and the Smart Grid team to Itron. Stephen will continue to lead SmartSynch and will report to Russ Vanos who leads Itron's Smart Metering and Smart Grid efforts. SmartSynch will continue to be headquartered in Jackson, Mississippi, and will adopt the name Itron upon close. We would expect the transaction to close in the second quarter of this year.

Now, let me turn the call over to our CFO, Steve Helmbrecht.

Steven M. Helmbrecht

Thank you, LeRoy, and good afternoon. Let's start with Slide 6. We had a very good quarter, with record revenue of $642 million, up 3% from Q4 of '10, driven by strong core operating results in both segments, North America and International. Gross margin was 29.8%, consistent with the year ago. Margin improvement from a more favorable product mix was offset by higher material costs and warranty expense in North America.

Adjusted EBITDA for the quarter was $79 million, up 7% from a year ago. We had a GAAP-diluted loss of $1.35 per-share for the quarter compared with GAAP net income of $0.65 a year ago. The main drivers for the GAAP loss were restructuring charges and a goodwill impairment charge, restructuring charges of $65 million related to our reorganization and cost reduction efforts. This amount was higher than our original projection due to higher than expected severance costs at our U.K. locations and additional non-cash charges for asset impairments in 2 of our factories. With these adjustments, we now expect total restructuring charges to be about $85 million compared to our original estimate of $65 million to $75 million.

We had a non-cash goodwill impairment charge of $44 million in the quarter related to the finalization of our goodwill assessment testing. Our non-GAAP earnings per share, which exclude the impact of the restructuring and goodwill charges, as well as amortization of intangible assets and debt fees, were $1.19 per share compared with $0.95 a year ago, an increase of 25%.

On Slide 7, you can see that unit volumes were up about 1% over the prior year, driven by advanced meter sales. By geography, units sold increased 3% in our International segment and decreased by 1% in North America. In terms of technology trends, we continue to see a shift from basic meters towards advanced and smart meters.

You see on Slide 8 that Q4 revenues increased by 3% in total with increases in both North American and International segments. Q4 International revenues grew 6% in constant currency, driven by growth in our electric and gas solutions. North America revenues increased 3% driven primarily by OpenWay projects.

I want to move now to bookings and backlog using the next 3 slides. Our 12-month backlog as of December 31 of '10 was $913 million, and we ended 2011 with $766 million in 12-month backlog, down about $150 million. We had full-year revenues of $2.4 billion in 2011 which gives a sense of our ability to drive, book and ship revenue.

You can see on Slide 10 that the OpenWay backlog is being worked off, as we ship and successfully implement the meters for very -- several very large North American contracts signed over the last 3 years. You can also see that the base backlog is relatively stable.

Now let's look at our trended quarterly bookings on Slide 11. First, you see that our overall bookings pattern is lumpy, particularly in North America, driven by some of the large OpenWay projects. You can also see the steady growth in our International bookings. In fact, on a full-year basis, they grew 11% over 2010.

To summarize, our OpenWay deployments have progressed very well and the backlog associated with these projects is being worked off as anticipated. You can see that our core business, which includes book and ship revenue, continues to be stable and sound.

Now let's review our operating results, moving to Slide 12. We had a GAAP operating loss of $60 million in Q4 driven by $65 million of restructuring charges and a finalized goodwill impairment charge of $44 million which particularly impacted our International segment.

Slide 13 shows an improvement in all of our key non-GAAP metrics. Non-GAAP operating income increased 6%. Non-GAAP net income increased 25%. Adjusted EBITDA increased 7% and free cash flow increased 20% driven by the strong revenue and improvements in our trade working capital.

Now I'll review Q4 results by region, starting with Slide 14. Revenues in North America increased 4%. Gross margin improved 60 basis points and non-GAAP operating expenses decreased slightly in total and as a percent of revenue.

Our Q4 International segment results are shown on Slide 15. Revenues increased 6% in constant currency, gross margin decreased by 70 basis points, driven primarily by higher material costs, and non-GAAP operating expenses increased, driven by additional spending on international R&D.

The next few slides cover full-year results. Several highlights are that 2011 revenues grew 8% or 5% in constant currency. We had revenue growth in both segments but particularly strong revenue performance in International as you can see on Slide 17. Gross margin declined by 40 basis points, driven primarily by the special warranty charges in 2011. Non-GAAP operating margin was flat at 11% and adjusted EBITDA was up 2%. Non-GAAP EPS of $4.29 increased 10% year-over-year due to revenue growth, reduced interest expense and a lower effective tax rate, as you can see on Slide 18.

Now turning to Slide 19. We have significantly strengthened our balance sheet, leverage and financial flexibility in 2011. We paid down our debt by $178 million in 2011, ending the year with $453 million of total debt at much more favorable interest rates of under 2% due to our debt refinancing. And so far this year, we have repaid an additional $10 million in debt. We will finance the SmartSynch acquisition with a combination of cash on hand and available capacity on our revolver.

We also commenced our share repurchase program in Q4. As of today, we have repurchased 1.1 million shares at an average price of $36.20, for a total of $40 million. That represents a repurchase of 2.7% of our outstanding shares and leaves available buyback authorization of $60 million. Our balance sheet provides substantial flexibility to fund growth in our business as well as to repurchase shares when it makes sense.

Now let's talk about guidance which includes the impact of the SmartSynch acquisition. We expect revenue to be between $2.1 billion to $2.3 billion with non-GAAP diluted earnings per share between $3.80 and $4.20. We expect to close the SmartSynch acquisition in early Q2. Excluding amortization of acquired intangibles, purchase accounting adjustments and acquisition-related charges, we expect the acquisition will add approximately $50 million in revenues and be under $0.10 dilutive to non-GAAP earnings per share in 2012. We expect the acquisition will be accretive beginning in 2013.

Our guidance assumes a 32% gross margin, euro-to-U.S. dollar exchange rate of $1.37, average diluted shares outstanding of $40 million and a non-GAAP effective tax rate of 27%.

With that, I will turn it back to LeRoy.

LeRoy D. Nosbaum

Thank you, Steve. Let me add just a little color of my own to our guidance comments. Given where we sit today, I think it's the right guidance. Would I like to see revenue higher? Of course. I think the opportunity is there. But in this economic environment, timing of projects can be affected by a variety of forces. So let's get SmartSynch under our belt, see how the U.S. and Europe macro issues are shaking out and we'll give you a mid-year update on our Q2 call this summer.

Let me now turn to some final comments. We had a great year in 2011 and a very nice Q4. And as you can see on Slide 4, that growth was built on -- not built on OpenWay, but rather on Electric, Gas and Water business and a lot of it outside the U.S. In fact, worldwide water grew 13% with growth in Europe of 15%. Smart water meters and modules grew 22% around the world with over 2.8 million points shipped.

Let me add a few words about gross margins. I'm not thrilled with gross margins of the overall business. But if you back out special warranty charges, we look more like 32% margin versus the 30% shown in our numbers. Looking back 12 quarters, our percent of direct labor has been going down. Our percent of overhead has also been going down. Materials, however, have been going up and special warranty charges have been going up. While nice price increases would fix gross margins, that's not going to happen in this economic climate, we are seeing price pressure. So we're working hard on reducing material costs through global purchasing initiatives. We're working hard on insuring better quality and control over our suppliers who have largely been the cause of special warranty. We can do better, and we will do better.

One of the things we're doing is to use EBITDA margin as one of our annual bonus measures which will ensure attention on both gross margin and OpEx. 2012 and beyond is increasingly coming into focus for me. I have had deep conversations with Itron people. I spent most of January in Europe, and last week, I spent 2 days in Washington, D.C. at a DOE Energy conference with commissioners, utility executives and energy policy experts. I draw up 2 conclusions. First, growth in the U.S. would be slow for a number of years. Until we can see the economy materially moving forward, housing rebounding to something over 1 million starts and the consumer in better shape. Many utilities are reluctant to put large smart meter deals in front of commissioners for approval where consumers are already overburdened. Will there be smart meter sales? Yes. Will Itron be successful at many? Yes. Will the level of business rebound to the high level we saw in '10 and in '11? Not for a while. But it's not going to fall off the cliff either. In fact, as I look at smart meter, smart grid opportunities that will come to market this year, albeit some will be pilots, and like Itron's positioning on 2 to 4 of them.

Speaking of positioning, many of you will have seen the Itron National Grid announcement that was released a short time ago. We are of course delighted to participate with National Grid in this most comprehensive project to build and evaluate smart grid in Massachusetts. This project will utilize Itron's OpenWay meters, the Cisco Itron IPv6 smart grid architecture, Almeria network capability and distribution automation, all over a common network infrastructure. The importance of this project is not its size, but rather, what will be learned by both National Grid and Itron about optimizing the grid and giving customers choice and control over their energy usage. Itron is delighted to have been chosen for this very important project with National Grid. So again, while the U.S. has slowed a bit, there are important projects and opportunities that are available.

The second conclusion I draw up is the action that's moving to Europe and it is real. During January, I was in the U.K., France, Germany, the Netherlands and Spain. I visited executives at British Gas and National Grid in the U.K., ERDF in the Energy Ministry in France, as well as Veolia, Alliander in the Netherlands, Iberdrola and GNF, Gas Natural Fenosa in Spain. Projects are moving forward everywhere.

Money is available. Yes, there is dither on the exact schedules, but they move forward. In the U.K., British Gas is buying smart electric meters now and smart gas metering will start next year. In France, the regulator is pushing to start the tender process for the next 7 million electric meters immediately. The Energy ministry is on board. ERDF is anxious to move forward. I believe they will be rolling out in 2013. In the Netherlands at Alliander, Itron is supplying meter data management and meter data collection. Electric meter tenders at Alliander and the distribution companies are coming later this year. Installations will begin later in 2013. Yes, Itron has to win the business. The projects are moving forward.

In Spain, both Iberdrola and GNF are moving forward. While I was there, Iberdrola issued a tender for 1 million smart electric meters. This is the beginning. We have the meter data collection award. Itron now has to win the meter business. These are obviously my views from meeting with the utility executives. Many of you will not believe in the forward progress until the tenders are on The Street and awarded. Fine. But I will tell you that while I'm still focused on the U.S. market, I am spending an increasing amount of my time and focus in Europe for remainder of this year, insuring we are appropriately positioned, making sure our factories are ready and supporting the fine efforts of our Itron people.

Let me leave you with a couple of final points. While most of my comments today have been about the U.S. and Europe, there are many exciting things going on in the rest of the world. One of them that is getting a lot of press in the last week was the pending opportunity in Japan: 17 million meters by 2019 with 3 million to be awarded in October of this year for delivery toward the end of 2013 and on into 2014.

There are a lot of opinions as to how this business is going down. Let me give you my view. First, the testing that has gone out at TEPCO so far has largely been lab testing over the last couple of years with a minor amount of field trial. That testing has included both RF and powerline communication testing under meters provided by the 4 traditional Japanese meter manufacturers. As a side, we provide both RF and powerline carrier technology in many places around the world. While the tender is for 3 million meters to be deployed at TEPCO, external organizations like METI, the Ministry of Economics Trade and Industry and others are encouraging TEPCO to use an open-bid process, inviting new-comers and international companies for the Japanese smart grid market. The Ministry of Internal Affairs and Communication, MIC, has announced that they are in the process of reallocating bands in the 900 megahertz frequency area for Smart Metering applications.

If it is not clear, it should be. But the game has changed in Japan since the earthquake. The traditional 4 Japanese meter manufacturers will see international competition for the TEPCO business. Itron has been doing business with TEPCO for over 20 years. Nearly every residential meter in TEPCO has been read by an Itron solution for the past 20 years. We have literally spent the last 1.5 years positioning Itron for this TEPCO opportunity and the nationwide smart grid opportunities in Japan.

Just like everyone else, we're waiting the release of the tender specifications and the bidding process for both local and international smart grid companies' participation. No one has won anything. When we have real results to report, we will.

Turning now to business that has actually been placed. In 2011, Itron sold over $100 million of metering out of our factory in Indonesia. Most of it was smart prepay meter and a lot of that went to Indonesia. There is a very large opportunity in Asia Pacific. There is also much to be encouraged about in Latin America. We will talk more about these areas next time.

And finally, customers around the globe will increasingly be drawn to a vendor with financial staying power that is leading with technology. Itron's technology portfolio, strong balance sheet, scale and history with customers, is more of an advantage today than ever before. It is our responsibility to capitalize on this opportunity by staying at the forefront in our own technology solutions and running our company in the most effective and efficient way possible, that is what we are doing.

Now we'll open up the call for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] I'll take your first question from Chris Kovacs with Robert Baird.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

This is actually Ben Kallo. Can we just go a little more into your guidance, how much of the guidance is weighted to the International side of the business? And then LeRoy, if you can just give us some idea about your visibility into the international business, that gives you confidence in that guidance. And then on the gross margin front, how do you expect to expand gross margin as your business mix moves more towards the International side where I think we carry lower gross margin?

LeRoy D. Nosbaum

Well, let me start with the gross margin question and I'll let Steve take the question about how much is International and how much is not. I mean one of the things that we look as we think about gross margins, and I referred to it in my prepared remarks, is you have to back out special warranty. And while I'm not guaranteeing that the special warranty stuff won't crop up again in 2012, I would say that we lost a couple of points on gross margin to special warranty. And we are doing some things to try and get that back under control. Another point I'd make big-time about special or not special warranty but about but about gross margin, is that as we look at Europe, part of our restructuring efforts were a real attempt to put our factories in better shape as we look at 2013 and beyond. So we're closing some facilities. We're moving some production out of some facilities into both facilities with lower cost operations and as well, just bulking up the amount of product that we put through any one facility. That allows us to put more automation in that facility, and accordingly, drive gross margins higher by driving our costs down. So we've got a couple of things going on in there. And lastly, I would say that we really have a pretty substantial effort going on worldwide to combine our purchasing power across the globe and really hit some areas where we can take some costs out by negotiating better prices with our competitors. All of that is on the plus side of gross margins. Now I'd be the first guy to say that in these economic times, everybody's chasing orders, there is a lot of price pressure out there, and as we look particularly at some of the tenders that are going to come forward for smart grid stuff in 2012 late, and on into 2013. I mean, we're going to have to go after some business because other people are going to do the same thing. So I think we've got a nice balance there as we head into '12.

Steve, some thoughts about how '12 plays out?

Steven M. Helmbrecht

Yes. Ben, just to build on LeRoy's answer, he's covered the margin side of it. Let me talk about the geographic splits. We think about North America, in the last couple of years, it's been hovering at or slightly above 50%. As we look out at the year, we see it more trending in the 40%, 45%, probably higher-end there. EMEA, growing on a relative scale. Again, probably about even with that toward the lower-end of that range. And International, probably about 15% plus or minus. And that is up a couple of hundred basis points as we continue to see growth in both South America and Asia-Pac but particularly in Asia. And then a final comment I'll make is that as we report in 2012, we will be recasting our segments into Global Energy made up of electricity and gas and water. We will also be providing revenue splits by geography starting this year, Q1, North American, EMEA, Latin American, Asia-Pac. We're providing that level of detail as well going forward, but not today.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Okay. If I may ask one more question, I hear BC Hydro is going very well as far as end points go. Could talk about the actual network deployment, the scheduling there, if there's any deadlines that you got to meet? I saw that the Cisco executive of the smart grid program left today. Does that impact anything with your relationship? And I'll leave it at that.

LeRoy D. Nosbaum

Yes, we've known for a little while that the Cisco executive was leaving to join another company. We were warned of that and have had deep conversations about how that will be back-filled. So we're comfortable with that, virtually no effect from Itron's perspective at all, a real dedication to smart grid and utility industry on the part of Cisco. I would say that deployment at BCH is going good, both in respects to meters and the network. I would also say that I think it's fair as we move through '12, we'll give you some other updates on that, but at this point, everything going well and precisely as we had expected it to.

Operator

Moving on, we'll go to Paul Coster with JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

LeRoy, can you just give us a little help on how to shape the revenues for the year? It's not clear anymore what normal seasonality is. So perhaps you can just, sort of, give us a sense of what might happen.

LeRoy D. Nosbaum

Paul, a couple of things for sure. I mean we're shipping in the front half, a lot of OpenWay to BCH, that goes without saying. In the back half of the year, I think will be again Q4 that's probably tilted up a little bit. I mean, if I had to give you a sense of it across the year, I think it's rather flattish quarter-to-quarter-to-quarter.

Paul Coster - JP Morgan Chase & Co, Research Division

Yes, and maybe just a quick follow up on the SmartSynch acquisition. Can you just confirm with us that from a technology perspective, it syncs in with Cisco platform and is there any backlog originating from that acquisition?

LeRoy D. Nosbaum

Well, I'll let Steve answer the backlog question specifically. But let me give you a couple of thoughts on the technology. First of all, ever since I got back -- so you mean, all the way back at the very front end of September last year. I'm looking at cellular and I'm saying that quite frankly, this is a technology that is coming to its forefront. Pricing of cellular has gotten cheaper. The capabilities of cellular, including the ability to move data in large volumes, clearly, backward compatibility, clearly, security and its general prevalence almost everywhere these days just drives cellular to be a good option to take a look at as a utility. Now cellular is running IP, as is Cisco, and we look at a network and say, "What a great combination to be able to provide where it makes sense, mesh network, where it makes sense, cellular." And together, that's a very powerful product and technology portfolio for Itron. So we don't see any incompatibility there. And in fact, as Itron, we think we're uniquely able to bring our technologies from a communications standpoint as well as meter data collection and meter data management together to form a very powerful offering.

Steven M. Helmbrecht

And probably in the second half, this is Steve, we will be seeing some acquired backlog, but what we really see and look very forward to, is the visibility we're getting here because of the signed large contracts that LeRoy talked about at Consumers' and elsewhere go in the future deployment schedule over time, not all of which is contained in -- from backlog as we have defined -- as we define as well. So we're quite pleased with that visibility going forward.

Operator

Moving on, we'll now take a question from Sean Hannan with Needham & Company.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

So if I could just follow up on some of the SmartSynch thoughts there. Just from a very high-level perspective, can you talk perhaps, LeRoy, what SmartSynch brings to the table strategically when you look at geographies particularly outside of the U.S., given the cellular approach, how quickly are you -- and then also how quickly are you in position to effectively leverage that solution into some other markets?

LeRoy D. Nosbaum

Let me say that our primary focus was the U.S. as we looked at the acquisition of SmartSynch. But the secondary focus is to what we can do outside of the U.S. So we valued the acquisition wholly, if you will, on its capably and what it brought to us in North America. Now having said that, in many respects, cellular capability outside the U.S., particularly in Europe, is frankly advanced compared to what you see in the United States. For many places in Europe where we believe, as does Stephen Johnston, that the ability to sell SmartSynch technology in Europe is really there and we look forward to exploring those opportunities as we move through 2012. Right now, our primary focus with SmartSynch is going to be bringing them under the Itron umbrella and making sure we do a good job with integration. We'll then make sure that our customers and SmartSynch's customers in the U.S. are getting appropriate attention and they're not lost in the acquisition shuffle, and then we'll turn our eye to opportunities beyond the U.S. And I would imagine that, that would begin in Europe.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

That's helpful. And then a quick follow up around the guidance. You've a little bit, both you and Steve about the international versus domestic breakdown. Can you elaborate perhaps on the products' [indiscernible] discussed, as look to 2012 growth in Gas, Electric and Water.

LeRoy D. Nosbaum

Well, let me say that I think that in general as you look in Electric, and Gas and Water. Our Gas and Water are going to continue to grow, and Electric is the one that is going to be a tougher growth comp from '11 to '12. Part of that is OpenWay in the United States without question. And in fact will be mostly OpenWay in the United States. Having said that, things are continuing to grow around the globe. We are growing in Asia Pacific as we have been for the last several years, and that will continue. We're seeing good, albeit modest growth in Europe in Gas, in Water and tiny bit in Electric, and so I like that. But as our guidance for '12 relative to '11 says, I mean it's essentially flat year-on-year with a little down in '12. The real growth picture for me begins late in '12 and on into '13 and that story is largely a European story, potentially some stuff in South America. And of course, we believe Asia-Pac will continue to do what it's been doing.

Barbara J. Doyle

And we've got a really long queue of questions and not as much time. So we'd really appreciate it if we could hold to one question.

Operator

Well moving on we do have Stephen Sanders with Stephens Inc.

Stephen Sanders - Stephens Inc., Research Division

Maybe first, LeRoy, just a follow up on your Europe commentary. France and Spain clearly have some pretty significant macro issues. So what did you hear from the utilities there in terms of the business case drivers that gave you the incremental confidence? And then part B of my question is just the restructuring charges went up to 85. Is the savings still 30 annualized at the end of '13 or do we have something incremental there?

LeRoy D. Nosbaum

Steve, that one's easy. It's still 13 on an annual run rate and then it'll become full in -- at the end of '13. So full for '14. I met with the head of EDRF, Madame Bayonne, and I asked her straight up, "Is this moving forward or it isn't? And give me the issues." And her response to me is real straight-forward. It's moving forward. Yes, this is France, LeRoy. We always have issues, and we've got a French election coming and that's not going to help just because it takes peoples’ minds away. This is going to move forward, it's going to provide 10,000 jobs when it starts rolling out. There's no way this is not going forward. Iberdrola, same situation, same head of Iberdrola, similar question. Are you moving forward or not? I'm sitting there with them on the day they had released the tender for 1 million points of smart electric meters. It's moving forward. And we just simply have to be prepared. We have to win our share of the orders and I got no different perspective when I was in the U.K. at British Gas or with National Grid in the U.K., nor did I get a different view when I was with Alliander in the Netherlands. I mean one of the thing -- reasons I went over to Europe was to sit down with as many utility heads as I could sit down with and ask that very question. Because as you guys have been skeptical, I have been skeptical and I think that's a reason -- reasonable amount of skepticism. I just didn't find it in reality. Those utilities are well-financed. They have a lot of money, they are willing to spend it. And so I think you have to simply believe them at their word. And by and large, for instance in France, the cost of smart grids are not being charged to their consumer. EDRF also said, "We'll take it. It's our deal. We'll spend it. We are going to get cost savings." That's not universally the case in Europe, but it certainly is at EDRF. So I got to tell you my concern is not whether or not the orders are coming, my concern is participating, my concern, frankly, and I've been leaning all over my factory guys, considering in about 2015, I think we have not enough factory to produce what we're going to need to produce.

Operator

And moving on, we'll go to Sanjay Shrestha with Lazard.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

That was kind of my question, LeRoy. '12 is what it is, right? It looks like '13 and beyond is really shaping up to be a very big growth year. So how are you guys and the industry if Japan, Brazil, Europe, international markets and even some of these 2 to 4 large opportunities in the U.S. all hit at the same time? How are you planning in terms of sort of capacity for you and for the industry?

LeRoy D. Nosbaum

Well, Sanjay, that's a question I've been asking my guys a lot and spent a lot of time on it just couple of weeks ago. Because I'm very comfortable in the U.S. We have plenty of capacity, we have too much capacity. And now I'm asking questions about whether or not we can offload some of the stuff that we have to do elsewhere around the world, South America, maybe Europe, although it's harder moving stuff back and forward across the pond, but I think there's probably some things we can do. We have taken some good steps in Europe as we went through the consolidation to both expand capacity in a couple of places and put more automation in some others. So we're expanding capacity in a low-cost country, Hungary. We're increasing capacity with automation appropriately so in France. When we turn to Japan, I think that quite frankly, while I think we have great promise to participate in that business, and we might, in the early days, produce something in -- probably in the United States, we will work in cooperation with a partner in Japan to bring that volume up to speed as that marketplace rolls out. We have the potential of looking at some of the stuff we're doing elsewhere, in Asia-Pac, whether that is Indonesia or elsewhere. So I think we have to be careful to plan for it but I think it's well within our capability. I think the only thing that we have to be mindful of is our global supply chain, including our part suppliers and other vendors have to be ready. And so we're talking with them as to how to make those transitions. But your question is well-found. You guys in subsequent quarters are going to continue to ask me, "Are you sure you can make enough?" That's a nice problem to have.

Operator

Now moving on, we'll go to Patrick Jobin with Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

Just want to do some housekeeping items, actually 3 items. First, the specialty warranty seems to keep popping up here. I guess, what are you doing to address it and how do you see that evolving throughout the quarter -- next few quarters? Secondly is just the FX exchange rate assumption? What are some of the moving pieces there as far as the cost equation, for how it impacts? And then lastly, the $567 million in smart meter backlog. How do you see that hitting the statements in '12 versus '13?

LeRoy D. Nosbaum

I'll give you the book ends, and let Steve take the FX. Let's start with the $576 million in smart meter backlog. I think about half of that going in '12 and the rest of it trailing out in '13 and the better part of the half will be BCH. As to special warranty, well, I wish I could give you a hard answer, when the hell that's going to quit. And then unfortunately, that's one of those deals where that -- you made the problem but you don't know about it for some days, weeks or months, in some cases, even years, ahead. We'll tell you that we've brought on some quality people and I like the way they're attacking the problem. We're beginning to work a little better with our suppliers in terms of making sure that we understand what they are changing when they make changes. And we're looking across multiple Itron locations to make sure when one location qualifies a supplier, if another location knows something about that supplier, either good or bad, that we are en masse gathering our information and doing a good job there. The unfortunate part about that special warranty is the fact that too much of it was caused by our vendors. Sometimes, we knew that they had made a change, other times, we did not. So we are for sure tightening down on our vendor quality control and we are instituting some new processes and procedures. The tough part about it, frankly, is that we may have done something 6 months ago that will show up 3 months from now. And quite honestly, we don't know. And we think we do a pretty good job on a day-to-day basis. Every once in a while, something comes out. We need to do better. Steve, FX?

Steven M. Helmbrecht

Yes, Patrick, we used a $1.37 rate. That clearly, that's a bit high today in terms of the euro dollar rate. So that shapes our thinking on the low end of the range in terms of revenue. In terms of how that flows through EPS, we have a lot of our cost structure in euros, so the change in the euro rates, primarily have impact on revenue, can move that $50 million plus/minus, let's say a little less on EPS. It's the other currencies, if the dollar stays fairly strong, and the other currencies that can have some impact flowing through down to P&L, plus or minus $0.01, let's say. So again we try and take that into consideration in our ranges.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Great. So the low-end of the guidance so is on the revenue side is partially attributable to an FX movement back to spot?

Steven M. Helmbrecht

That's correct.

Operator

We're now moving on with Craig Irwin with Wedbush Securities.

Craig E. Irwin - Wedbush Securities Inc., Research Division

I know multiple people have asked questions about your restructuring and your guidance. But I just wanted to weave the 2 of those together. Can you maybe shed some light on how much of a benefit from restructuring is included in your gross margin and EPS guidance for the back end of '12? And whether or not the timing of these actions and the benefits of these actions weights EPS to the back of the year? Or if there's potentially a more positive contribution that would push performance towards the higher end of the range if these actions are very, very successful.

LeRoy D. Nosbaum

Craig, we're going to get to $15 million that we talked about, give or take. So we're comfortable with that. And I think in some respects, it's pretty flat across the year. We were already able to take 140 people out. We dropped that pretty quickly. We've got some great work going on to get rid of some businesses, and we think that, that's not too far down the pike. So I'd say if you look quarter-to-quarter over the 4, I think it's reasonably flat. So I don't think that the effect on EPS is particularly weighted one direction or another. I think it is fair to say that as we consider the $15 million savings, we spent some of it. If you haven't noticed, you'll note that our R&D expenses from '11 to '12 go up. We're going up about $20 million, give or take, in R&D '12 over '11. And the wonderful thing about what we said so far today is that we've got lots of opportunities in Europe, in Japan, in Latin America. The bad thing about all those opportunities, in some form or another, they all take more engineering. And so we're allowing our engineering numbers to go up a bit in various places around the world. We've got a little bit more sales and marketing expense, about -- a little bit in Latin America, some in Europe, as we're making sure we're positioned for opportunities in those places, a little bit in Asia Pacific as well. So while we're getting to $15 million, where some giving it back in a variety of areas. But I think all good investments as we look toward the latter stages of '12 and on into '13 and beyond.

Operator

And then moving on we'll take a question from John Quealy from the line of Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

The SmartSynch acquisition with CMS, can we sketch out revenue opportunities, is the CENTRON or OpenWay going to be part of CMS, do you think? Just -- We've all been primed to this $100 ASP price in the past. How should we think about this moving forward in timing? And then secondarily, on free cash, excluding the purchase, what should we be thinking about? You had over 1:1 conversion? Should we think a little bit more use of cash to your points earlier, LeRoy?

LeRoy D. Nosbaum

I'll let Steve take the cash question. OpenWay/CENTRON at Consumers', John, we come into that deal having acquired SmartSynch but with some commitments already made by SmartSynch both to consumers and to other meter manufacturer. We'll see what leverage we can have there. I guarantee nothing. I am hopeful that we can probably participate to some extent in that as to the exact amount of participation I can't tell you today because we have not, as yet, been able to work that aggressively as we will after the acquisition closes. But some help there, I think more promise beyond consumers to be fair about it. And in that realm, we have great synergies as we put SmartSynch communication inside Itron meters and looking very favorably there.

Steven M. Helmbrecht

And John, yes, this is Steve. We had a very good free cash flow year, in fact our free cash flow for Q4 was the best ever. If we think about 2012 and we think about it overall, I think relatively a similar cash flow profile and that would be slightly north of the earnings as well in terms of our outlook. So we've talked about, as you mentioned, 1:1, we've had fairly healthy -- very healthy free cash flow the last couple of years reflected as a non-GAAP -- as a reflection of our non-GAAP EPS as well so we see that continuing. And just one other comment that CapEx continues to be fairly modest. We don't see acquisition changing our profile in a major way in terms of capital expenditures.

Barbara J. Doyle

Operator due to the time let's take one more question. All right?

Operator

All right. And that question will come from Steve Milunovich's line with Bank of America Merrill Lynch.

Steven Milunovich - BofA Merrill Lynch, Research Division

The backlog obviously, has been coming down and the long-term backlog is down quite a bit year-over-year. And you mentioned the Book and Bill business which is going to be very important. Does the backlog concern you much in looking at future revenues or do you have some visibility on this book and bill business that gives you confidence?

LeRoy D. Nosbaum

As I mentioned in the prepared remarks, we do have confidence in the book and bill business in, for example, in international, where we have not seen a large project-based bookings, we've averaged over 1:1 pretty much over the course of the year. And so that's a reflection, I think, of the stability and the outlook we have going forward.

Steven M. Helmbrecht

I would echo that. I am not in the least concerned about the backlog coming down. I mean, we've seen this before, historically, when we get several large orders and, well, they happened to be OpenWay and they happened to be huge. And we're in a bit of a trough here relative to those large kind of smart grid orders. And we'll begin again toward the end of this year on into '13 in a number of locations. So our book and ship capability and our knowledge about that is really, really good. We build up from the ground up every quarter with all of our sales guys and all of our management teams. So I'm very confident with that.

Steven M. Helmbrecht

Just one other comment is that our guidance does reflect that our 12-month backlog declined sequentially about $150 million, as I mentioned in my opening remarks. And so we've certainly took that into account as we're looking at 2012.

LeRoy D. Nosbaum

Okay. Operator, I'm going to make some closing remarks and we'll turn it back to Barbara for a final comment. Everybody on the call, thanks for joining us. Delighted to have you with us today. Sorry to have to cut the questions off, which were great questions. Thank you, appreciate those. We had a great, great 2011, and a strong finish in the quarter. We're pleased with where we are in many respects, positioning both in the U.S., I think you'll begin to see some things happen, both the SmartSynch acquisition and the National Grid announcement today, that make us very happy about our prospects going forward in the U.S. As I said, I'm going to spend more time in Europe. I just think the opportunity there is just fantastic as we look to 13, '14, '15 and beyond. So I'm sitting here today reflecting upon my first bit of time here back at Itron. I like what I see and I like the feel.

So I would say to you thanks for joining us, and give you a heads-up that tomorrow, you will see another exciting announcement out of the Water side of our business in the U.S. but I'm not at liberty to share with you yet today. Barbara?

Barbara J. Doyle

Folks, I got nothing else to add to that one. Thanks for joining us, and we will speak with you during the quarter.

Operator

Well, thank you very much. Well, I guess, ladies and gentlemen, that does conclude today's conference for today.

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