Itron's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Itron (ITRI)

Q1 2012 Earnings Call

April 25, 2012 5:00 pm ET


Barbara J. Doyle - Former Vice President of Investor Relations

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

Philip C. Mezey - President of Energy and Chief Operating Officer of Energy

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


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

John Quealy - Canaccord Genuity, Research Division

Zach Larkin - Stephens Inc., Research Division

Jesse Pichel - Jefferies & Company, Inc., Research Division

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

Patrick Jobin - Crédit Suisse AG, Research Division

Amir Rozwadowski - Barclays Capital, Research Division



Good day, everyone, and welcome to the Itron Inc. Q1 2012 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Barbara Doyle. Please go ahead.

Barbara J. Doyle

Thank you, Robert, and welcome, everyone, to our earnings conference call. On the call today, we have here LeRoy Nosbaum, Itron President and Chief Executive Officer; Philip Mezey, Itron President and Chief Operating Officer for our Energy segment; and Steve Helmbrecht, Senior Vice President and Chief Financial Officer.

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

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 the differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation.

I'd also like to cover our Safe Harbor statement. We will be making statements during this call that are forward-looking. These statements are based on our 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 Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update forward-looking statements.

You will notice in our press release and investor presentation our new segment reporting. Our reporting segments have changed from North America and International to Global Energy and Water segments. This reflects how we are running the business after completing our corporate reorganization. We also believe the new reporting will provide investors with more insight into our business as we are now providing revenue, gross profit and operating income measurements for our Energy and Water businesses.

To provide some context for this change, you can reference the profile of our Energy and Water segments for 2011 on Slide 4 on the investor presentation. This slide depicts our full year 2011 results in the new segment view, including revenue for Electricity, Gas and Water and gross and operating margins for Energy and Water segments.

We have also provided on our investor website a preliminary unaudited schedule recast -- that recap 2011 by quarter into the new segment disclosure that we hope will further assist you.

Now let me please introduce LeRoy Nosbaum, Itron's President and CEO.

LeRoy D. Nosbaum

Good afternoon, everyone. Thanks for joining today's call. I'll begin with some thoughts regarding Q1 results. Philip will add some comments on smart grid opportunities around the world. Steve will cover financial results in more detail, and then I'll return with some closing comments before we open up the questions.

So let's begin with some thoughts about the first quarter. Some explanation of results and what we are working to achieve at Itron. Revenue for the quarter was $572 million. On a constant currency basis, revenues were up about 4% from Q1 of last year, including up about 5% in Water, 5% in electricity and 1% in gas. Given the economy around the world, I am pleased with the revenue in Q1.

Gross margin for Energy is a bit complicated, but if you adjust for onetime warranty insurance claim recovery we received in Q1 of '11, Energy gross margin was up by 90 basis points. In Water, gross margin was up 30 basis points. Total gross margin was 32%. While I'm pleased with 32% for now, we still have a lot of work to do in reducing the cost of parts and materials and increasing the efficiency of our factories.

We are working on better parts and material purchasing and expect continued improvement throughout the year. We are continuing with our factory rationalization effort, which will help as the year progresses. We are working the necessary adjustments, driven by slowing of OpenWay activity in North America, including cost reductions which are planned and budgeted for later this year.

Our Q1 -- For Q1, our warranty expenses were at a more reasonable level than they have been in past quarters. We have some potential to see gross margin improve further, but we're also working to mitigate potential downward pressure in the second half of the year. With one quarter in the books, we are on track so far.

Now let me turn to operating expenses, R&D, sales and marketing and G&A. All of them are too high if we were to allow them to remain at these levels indefinitely. So let me give you some color on what we're doing and why.

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