Q2 2020 Itron Inc Earnings Call

August 3, 2020

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Paul.

This conference.

For opening remarks, there with the fall.

Yes.

Go ahead.

Thank you operator, good afternoon, and welcome to our second quarter 2020 earnings Barbara.

We issued a press release earlier today and our result.

That's really lose replay information about baseball.

The presentation to accompany our remarks on this call is also available through the web town and on our corporate website under the Investor Relations path.

On the call today, we have Combimatrix microns, President and Chief Executive Officer, and Jones, <unk>, Senior Vice President and Chief Financial Officer.

Following our prepared remarks, well open the call to take questions usually in the process. The operator described.

Before I turn the call over to Tom. Please let me remind you of our non-GAAP financial presentation in 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 reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release in on our Investor Relations website.

We'll be making statements during this call that are forward looking.

Statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could differ materially from these expectations because the factors that were presented in today's earnings release in the comments made during this conference call in in your risk factor section of our form 10-K in other reports and filings with the security next.

James Commission.

In addition, due to the fluid nature of the covert 19 pandemic company estimates regarding impact of Tobin 19 on current are forward looking statements are made in a good faith attempt provide appropriate insight to our current and future operating and financial environment.

Materials discuss today August Threerd 2020 may materially change and we do not undertake any duty to update any of our forward looking statements.

Now please turn to page four in the presentation and I'll turn the call over to our CEO Tom interest.

Thank you Ken good afternoon, and thank you for joining us.

Imbalance, we were pleased with our teams focused on execution this quarter against the backdrop of the coded 19 global pandemic.

Our continued commitment to our customers and aggressive actions to safely ensure business continuity yielded better results than we initially expected.

You will hear details from Joan in a moment, but to summarize our second quarter performance revenue was $510 million adjusted EBITDA was $31 million non-GAAP earnings per share was three cents and free cash flow was negative $10 million. We expect these results to be the low point.

For the fiscal year and would like to provide a brief update on the customer and operating environments as we see them today.

Beginning with our customers in the second quarter, we continue to see a healthy opportunity pipeline several new tenders and awards across our segment with a significant acceleration in interest around our Riva distributed intelligence platform.

As anticipated we saw lower bookings in the second quarter of approximately $390 million, bringing our total backlog to approximately $2.9 billion. Additionally, our 12 month backlog remained steady at approximately $1.3 billion, while our bookings were below a one to one ratio.

After we continue to target a full year book to bill ratio over one to one.

Next I would like to share some customer trends, we saw in the second quarter that we expect to continue into the second half of 2020.

Importantly, we have not seen any order cancellations to date, nor a slowing of collections due to cope with 19.

Regionally, we saw Asia Pacific normalizing and the larger western European countries, taking cautious steps forward.

Our customers in the United States continue to work through very fluid conditions. This includes ongoing coded 19 related impacts and rollbacks and operating procedures for some states.

Our customers have been providing reliable services, but several have temporarily slowed ongoing projects, which impacts our business in the near term.

We have seen regulatory delays in some of the hardest hardest hit regions. Additionally, a few selected customers have delayed capital expenditures on selected new projects to combat Temple Cobot 19 related business impacts.

As discussed in our prior earnings call, we tend to see larger customers coping a bit better with the impacts of coded 19 versus smaller customers, who face more significant operational and economic challenges.

We expect these trends to continue through at least the balance of the year.

While our customers' ability to resumed normal operations will impact the speed at which we recover we see a clear acceleration of customer interest in automation solutions grid, resiliency technology, and the thirst for more forecasting and data analytics.

These are positive secular trends for our business that are well aligned to our strategy and the focus of our ongoing research and development investments.

Turning to our operations, we were extremely pleased with the performance in the agility that our teams have shown in supporting our customers I am grateful for the dedication of the worldwide Itron team.

The conditions exiting the second quarter has significantly improved from when we entered the quarter. We currently have all factories up and running with continued aggressive measures to ensure employee safety in manufacturing and field operations further our supply chain and logistics network have stabilized and while intermittent hot spots.

The main present these issues are not sustained.

Finally, we are not slowing research and development investment necessary for our long term performance and we'll continue to position ourselves to capture the growing technology and service needs of utilities in cities that tomorrow.

We are confident in our ability to work through the current environment, an optimistic about the future opportunity.

I'll now hand off to Jones to discuss the second quarter results and the second half of 2020.

Thank you Tom.

Since the start of the pandemic, we have worked hard to managing this dynamic environment with disciplined cost controls and cash conservation measures, while always prioritizing the health and safety of our employees customers and suppliers. We were pleased that our efforts resulted in better than anticipated performance in the second quarter.

Please turn to slide seven for a summary of consolidated GAAP results.

Second quarter revenue of 510 million decreased 20% versus last year in 18% in constant currency the year over year decline was due to reduced demand and the operating constraints related to coded 19.

This performance was better than expected when we provided insight into Q2 on our last earnings call.

Gross margin for the quarter was 27.2% 290 basis points lower than last year.

I merely due to manufacturing inefficiencies caused by corroded 19.

The GAAP net loss of 63 million or negative. The dollar 56 per share compares with net income of $19 million were 49 cents per diluted share in the prior year.

As previously announced we sold our Latin America business in Q2, and booked at 57 million noncash loss on sale, which contributed to $1.42 reduction in earnings per share.

Regarding non-GAAP metrics on slide eight non-GAAP operating income was 20 million.

Adjusted EBITDA was 31 million or 6% of revenue.

Non-GAAP net income for the quarter was 1.3 million or three cents per diluted share.

Looking at the revenue by business segment on slide nine we saw a decline in all three segments that was primarily driven by coated 19 related impacts.

Advice solutions revenue was 129 million, an 80 million for 37% year on year decline on a constant currency basis.

Network solutions revenue was 324 million, a 31 million or 9% decrease year over year.

Revenue in the outcomes segment was 56 million, a 5 million or 8% decrease in constant currency from 2019.

Outcomes decline was primarily due to lower software license revenue versus last year.

And lastly, foreign currency changes resulted in 11 million lower revenue versus the prior year.

Moving to the non-GAAP year over year EPS bridge on slide 10.

Our Q2, non-GAAP EPS was three cents per diluted share compared with 87 cents in the prior year.

Due to better than expected operational performance and strong cost controls our non-GAAP EPS was significantly better than we anticipated for the quarter.

On the year over year basis, net operating performance had a negative 73 cents per share impact versus Q2 2019.

Lower interest expense resulted in a three cents benefit.

Higher non-GAAP tax rate decreased EPS by 12 cents versus last year.

The higher non-GAAP effective tax rate was due to unexpected shifting the mix of income by jurisdiction caused by coded 19.

In addition, our Q2 results included a true up provision for the prior quarter, which resulted in a very high effective tax rate in Q2.

And lastly changes in foreign currency and share count resulted in a two cents per share decreased year over year.

Turning to slide 11, I'll cover liquidity in debt.

Free cash flow was negative $10 million in Q2. This result was significantly better than we anticipated due to a quickly stabilized operating in supply chain environment and strong collections.

Cash and equivalents at the end of the second quarter were 545 million.

Total debt was 1.35 billion net debt was 805 million.

Net leverage was 3.8 times at the end of Q2.

We believe we had sufficient liquidity to fund our operations through this pandemic and our current capital priority continues to be cash conservation.

Turning to slide 12, I'll provide some insight into the second half of 2020.

Tom just mentioned, we still anticipate the second quarter to be the low point core revenue earnings and cash flow performance in 2020.

While our operations in supply chain capabilities have begun to normalize our customers recoveries at varying rates across the globe.

As we work with our customers. Their current focus is on supplying essential services, which has delayed some projects and therefore, the pace at which our business will recover.

Taking into account we have the following via the second half of 2020.

First it's important to note that our view is consistent with comments made on our last earnings call.

While we expect operating improvements in the second half of the year, we anticipate revenue and non-GAAP earnings per share to be on par with the first half of 2020 with neither quarter being larger than our Q1 performance.

It's also considers a higher non-GAAP full year effective tax rates of approximately 36% driven by the shift in mix of income by jurisdiction.

Since the start of coated 19, we have focused on mitigating the financial impact to the levers we control we have tightened all discretionary spending through hiring freezes reductions and outside services delaying some capital projects and we continue to evaluate all temporary cash conservation measures.

We are managing cash receipts and disbursements very closely.

With this continued focus we anticipate the full year 2020 free cash flow will be positive although at approximately half of our prior years performance.

In closing we are aggressively managing our response to these unprecedented times our services are essential to our customers today and the need for our solutions will increase could you may begin to get back to normal operation.

Well the negative impact is close to 19 on 2020 persists. We believe these disruptions in our business are temporary and they do not change for long term earnings and cash generation potential provide trends.

We are confident that the needs of our customers will drive growth for us in the future.

We will remain fortunate to be part of an industry that provides critical infrastructure to society.

As the only us based industrial Aiotv pure play in our industry, we are well positioned to support our customers over the long term.

Well there will be challenges ahead, we are confident in our ability to successfully navigate the near term and to get back on track to reach our target operating model of improved operating leverage expanded earnings power and the growth of free cash flow now I'll turn the call back to Tom.

Thank you John to summarize the key points. The Joan covered we are prudently navigating through the current uncertainties with actions in place for what we can control and prepared with a nimble response for the unknown.

While we expect that our supply chain and operational performance will continue to improve in the second half of 2020, we recognize that many of our customers are still grappling with this fluid environment.

The executed in the current environment, we are working daily with their customers to ensure alignment on their shipments deployment schedules and ongoing operational activities.

We anticipate as regional conditions improve our customers focused on enhanced solutions and deployment timing will also accelerate.

This includes increasing capital focused on future proofing their business through digitalization deploying solutions aimed at improving their operational performance and delivering increased grid resiliency and reliability.

Internally, we continue to keep tight controls on operating and capital expenditures and drive actions focused on improving margins as we continue our path towards our targeted asset life operating model.

We remain confident in our ability to work through the near term challenges execute our strategy and capture additional future value.

Thank you for joining today operator, please open the line for some question.

Thanks, very much we'd like to ask a question on today's call. Please press star one.

If you listen to these speakerphone, please pick up your handset.

Good day.

Yes.

Ask this question.

Your first question from Deutsche Bank.

Okay.

Good afternoon, everyone in pulp your wells.

I guess first well done on the cash management this quarter.

And I think the free cash flow profile for the year is well above was constrained by expecting.

They did want to ask I recall, you've been anticipating a working capital drag this quarter in part because we're planning a large inventory build.

Did you build less inventory relative to what you had expected if so what drove that.

Or was it just better cash collection offsetting.

Well inventory contributed as well so we we were able to build a little less than we anticipated certainly we're still looking at opportunities for strategic by where we are concerned with supply chain, but we did we bought a little bit less than anticipated, but I would say the collections was probably the bigger piece we had.

Hessam Conservative assumptions, we were worried customers may slow down and in fact, they did not.

Good I mean just to be clear.

You build a little bit less inventory because the supply chain within this tight.

Or because there was less demand apart.

As I think it's two things one is the supply chain situation was normalizing a little bit faster than we initially expected so getting components in the door.

It was set was less challenging than we expected as I commented earlier.

Theres a couple of hot spots remaining but by and large that portion of the business has stabilized.

The second piece of it is the revenue was substantially higher than we have what we had originally provided any outlook. So the stuff that went out the door in the form of revenue was within our inventory.

Yes, yes, it's got better absorption of that Okay and then.

Trying to work during this year, but the year over year.

Tax rate it.

You know if I take your implied guidance.

Going to 36% from Goliat 20, low Twentys last year. It can you kind of just try to parse that out first a little better dimension it out where were going up by growing like 30 cents here.

And Michael.

Yes, about probably 25 cents for the year relative peculiar using something like 25%. It's really just math on where we expect the income to go down so it's going down in the us ending in Europe, but in particular some of the countries in Europe, where we have eventually.

In allowances or we have.

Places, we can't take advantage of the tax rates coming down so it's strictly to massively jurisdictional income.

Okay. Thanks, and apologies for other question boss were more before I turn it over just as you can comment on on drivers of conviction in getting the book to Bill above one to one this year.

Yes, I think that Theres, a number of places that we've we've seen awards already starting to were to happen.

As you know, we don't put something into the the bookings until we have the regulatory approvals completed we think.

There are several hundred millions of dollars of stuff that has been awarded and there is just working through the final process to be able to do what we see strong demand out there.

And as the places that we are growing is exactly where we are targeting our business to grow. So it is in things like distributed intelligence on the Riva platform, which has really enables the utility to to add capability on an ongoing basis moving forward. So it really is based on customer discussions and.

Awards that are not yet showing up in in the bookings is what gives us that conviction.

Perfect. Thanks, so much.

Thank you.

We'll go ahead.

Yes Hello.

Okay.

Hey, guys.

So I have fruit question from the first.

Okay.

Now, let's say and you're already I think you talked growth through cash flow to our very bright for 21.

Joe you said that through your cash flow target or store quarter by four make sure that were sold order both the year.

Yes, no. So the comments I made on the call today will really about the back half of the year in the expectation that the full year 2020 will be positive, albeit at about half of last year's performance. So last year's performance was a little over 100 million 110 or so.

So I didn't really give any comment on 21 I would say at this time that I think the model. We we shared at Investor day is still intact, albeit it's definitely pushed to the right given everything that's been going on with Covance sized I still think that is the right aspartic acid operational model, but it is going to shift a little bit to the right.

Great.

Very helpful. Bob.

I guess.

Bob do you all four total lovers.

On the on.

Side.

It was the throughout the balance of review Roderick or.

Yes.

Maybe could you describe why that is.

Where are the or are these going.

Our because what we're trying to figure out because I look at the outcome business.

And.

And how it's performing.

We we all figure you're.

During the R&D.

So just help us figure out where the commodity going forward.

How we do that.

Yes outcome.

The long lead progress so housekeeping dropped the ball.

I have one more.

Very good.

So with respect to R&D you are correct. The majority of where we are investing is core networks and outcomes based solutions that that's where we intend to grow the business customer interest in.

Improving their network performance with the endgame notion of future proofing their business.

The things like distributed intelligence, improving resiliency and reliability getting better monitoring of what's going on better safety.

In a gas context, or really understanding where you might have losses in your system through faster or other places like that is where we would.

I expect the business to to grow.

The timing on these things to the network business tends to be very big project based activity. So as we are growing our networking business. It is those big projects that flow through backlog. So understanding what the backlog position is like is a good leading indicator of where the networks business will go outcomes will.

Likely drag behind.

The network.

The growth activity for us to really get a network installed and then start deploying those value added services and outcomes on top of it. So as next worked grows that creates the greenfield for us to grow the outcomes business.

And that's where it will will flow through.

What we see right now with coded 19 is is certainly a slowing in the near term of the those opportunities as a lot of our customers are just focused on keeping the lights on in the water flowing.

But as a conversations that we have with them are rich interest around the types of things that we're talking about resiliency for liability.

Better insight into what's going on any given all the way out to the consumer side, where we've been pulled into some pretty interesting discussions with consumer oriented companies about how we might be able to partner to give the utility a better activity in that portion of the market as well, so thats, where the R&D goes and how you should expect it to flow through the CNL.

During the quarters ahead.

Thank you Bob.

I guess the volume.

So if I look at the year over year, Bob you're basically breakeven operating margin.

Yeah.

Absolutely.

South America during the quarter.

Before I guess I'm wondering if there is is there more of that tight.

And you mentioned the goodwill.

Where are you in your restructuring.

The move for those types of deals with away from.

Yes.

Christine meter manufactured on every partner.

And how should we think about that impact the.

With forget about this year, but next year.

In the year.

20.2, how do we think about that impacting your target.

What are gross.

Operating margin.

Target.

So for the state look you're not making any money on this.

The by pollution deserve better way to do that while you all that money into the other two segments.

A number of parks to your question there, let me try to to unpack. It and then maybe I talked to Joan to talk a little more on that on the ongoing restructuring activities, but start with that with what is is just behind us and the rear view mirror of Q2. Please recall that that was a very low point, where we had.

Our European factories closed for a good portion almost half of the quarter itself. So that's an unusually low point.

Gross margin as well as our revenue point of view for for that that business. Those factories that opened up during the quarter and opened up a little faster events and we had anticipated.

And that's part of the growth that we expect to see sequentially into Q3. The next part of the discussion really is about operating Maureen and an asset light kind of model.

DSL deal that we did in Latin America really was based on that notion of finding a way to automate remain president and active in that marketplace with.

The networks and outcomes portions of our portfolio, but operating in a way that was more asset light as demand might go up and down because of.

Various fluctuations in the marketplace. That's a deal structure that we do like and we will continue to look for ways to do that.

Our ongoing notion about how to put our supply chain together very much is targeting an asset light model across the board and Thats why you see the portion of our manufacturing cost increase pretty steadily for rep outsource manufacturing were touch under half of our total manufacturing being outsourced today and I would say.

Suspect that number probably creep south with normal product rotations into that the newer categories, which tend to be outsourced.

So we'll look to continue to to improve on that model and pursue it.

Logically forward as it's the right thing to do for our business now we do have an ongoing restructuring plan that we started back in 2018, which.

We will finish up the balance of that by the end of the year. There is one factory.

In Western Europe that said, it's being consolidated out of the footprint.

Over the next couple of quarters. So there's some.

Residual money left in the CNL around that.

Yeah, it relative to the 2018 plan, our our expectations is incrementally year over year from 19 to 20, there into total was about $10 million in incremental benefit probably split half between the margin line in the Opex line and those are still on track, albeit again factory in France is a little bit late.

Yes.

Great. Thank you guys I'll turn it over I appreciate it.

Thanks Ben.

And we'll go ahead I think our next question Joe Osha with JMP Securities. Please go ahead.

Hi, This is I'd say hey on channel.

I just kind of wanted to ask a clarifying question on the comments Jim made about the 2021 model that you guys could kind of put out for that at the analyst day in and just to clarify I.

Does that do you range that you had kind of given there is that something that he can be so the.

Super Bowl next year, where are you more kind of speaking today the margin profile payment.

I'm really both so again, if you look at the.

From that from a originally Ben's question around the targets I think the targets that we showed at Investor day in terms of gives us the gross margin profile in the growth in the free cash flow generation are still the right targets, but given the coding situation does turn in achieving a started to definitely pushed to the right and how far into the right. It's really a function of.

On the regulatory environment.

18 becomes a little bit more clear when the capital projects, we turn our best guess right. Now at 21 is we will probably see revenue growth in the low single digit range.

Okay, Great and then understanding that kind of the near term focuses on seven cats I was just kind of wondering if you think conceptually you take kind of outlined when we might do you start to bring.

Again, thank you.

Yeah, we're definitely going to be continuing to monitor this situation in the second half of the year in so.

Right now we have done very well from a free cash flow generation standpoint relative to our initial expectations were monitoring out in the back half of the year end of things look like they're going to continue to improve we'll probably look at starting to pay down to pay back some of the resolved by the entity.

Okay. Thank you that's it I mean.

Okay.

And we'll go ahead and take our next question, Jeff Osborne with Cowen and company. Please.

Hey, good afternoon.

The good questions have been asked but maybe just following up on now is about the confidence in the book to Bill above one.

It's implied that you needed regular regulator approval.

With Coca coming back around the country or not.

I guess what gives you the confidence.

That does some other programs that you referenced one.

We've been awarded but don't have approval and aren't in Backout backlog at what gives you the confidence with the regulators you'll understand but.

Well again, we were judicious about where we were.

Looking to forecast in the wins based on that the regulatory process and how things work, we're coming together there is some parts of the country, which.

Hasn't moved along quite nicely in adapted a more virtual model for the.

Regulatory process, there is even been and a positive regulatory outcome in the upper Midwest recently that that's published.

And public as well that things do move forward. There are other places in some of the hard hit regions in the northeast where things really have have slowed down and decisions have been pushed but those are exactly things that we kind of factored out as we were looking forward to it. So the net in some of all of that is why do we feel that thats the right place for us to par.

Mark It is.

Customers discussion points and interaction with the regulatory process as those filings have been prepared we think that though bill flow through.

That's great to hear and is the Tom is there any update on regulators and improving of of rate basing fast applications. Another handful did.

Allow that now, but just given coated and remote monitoring and.

Automation is that something that also is moving forward or not necessarily.

Well I would say that it continues to move forward even in terms of discussions so all in almost all 50 states at this point I can't.

I think of any one state off the top of my head that clicks Dover in into this category since the last time time, we talk so by my count it's in the upper Thirtys call. It 36, or 37 states allow performance base rates up a couple a really allow you to capitalize SaaS.

And more discussions underway, so I think still positive momentum and tailwind there but.

No Big news I would say during the last quarter or so.

Got it my last question is just being talked about what visibility or similar to the regulator question.

Your.

Municipal exposure personal as a company.

On the breakup segments with water gas and electric could you just remind us what the water exposure is and what you're seeing with the municipal channel in particular.

Sure so.

Our presence in the in that smaller market opportunity, whether it is in the water space or whether it's in the near any co op space for for gas or electric is a smaller portion of our business. So call. It a 20% or so is about where where we run there.

So what we see certainly is those.

Customers have struggled quite a bit more to switch over to a virtual world even for some of the basic things they need to do for per customer care, we jump in and try to help and certainly discuss with them. The types of technology, we provide and how that might help them that run their business a little bit more effectively interest in that area, but we all.

I recognize that there their tax base, which is set.

Based on local sales tax and things of that sort has dropped.

Quite a bit as well so I still think it takes a little bit longer for those markets to return to a more normal environment that the big.

Investor owned utilities and larger rep grid. The solution. So I think that will be a couple of quarters or if not a year longer in terms of the shape of the recovery based on what we see today.

Are you counting smart in a way DWP and those types of people in that number or no.

Large and beyond.

Well at those those are big enough that I kind of put them into when the Midmarket area I'm really talking more rural and small water communities.

With my commentary there so that's a big rate bigger regional guys and the two that you mentioned I would put into that sort of mid market kind of area and.

Certainly they've got challenges as all customers due in the current environment, but maybe less so than the and the smaller group.

Okay, perfect Thats, all I think.

Thank you.

That does the reminder, that is star wonder if he'd like to ask a question on these calls.

A question fab.

Sharply.

Please go ahead.

Thanks for taking the question.

One more on me Latin America transaction I realize Youre night.

Exiting the region, but you are it seems like de emphasizing it and given the pandemic is there a sense that maybe you're kind of getting out at the bottom of the market so to speak and maybe it would have.

Would've been better to wait for some stabilization there before doing the deal.

HM interesting thoughts.

I would say that tying that that the timing of our announcement together with killed it is that thats coincidence, rather than any sort of strategy that deal had been underway.

To be honest well before covance hit so.

The financials associated with it and as those the structure behind the deal.

Wasn't really based on on the market as you see it today. It's it's a predated 0.1 0.2 is I don't know that I would want to call. It to a de emphasis on the market I would very much. Once you think about it it's a better way to attack the market from a model from our standpoint, so taking out some of your exposure to the fixed costs.

Last portion of of operating environment. When you got at a pretty dramatically fluctuating and demand depending on local economies. It's just a better way to attack and when we operate on variable costs, we still have access to it we ship in and from a distributor model. We just don't have that the fixed cost so when we announce.

Once the deal and said things like no material impact on the outlook for the year. It. It really is based on its is a better way to attack the market from our financial point of view, because we're operating on variable cost rather than disappearing from the market.

Okay.

A question about 21 I realize it's early but you made a statement few minutes ago that.

Your baseline expectation is revenue growth than in the low single digits.

Right what gives you the kind of visibility that that far ahead.

To make the forecast because I think normally you wait until February to do that.

Yeah, I mean part of it into pipeline that in the backlog to Tom was talking about so we've got about 1.3 billion 12 month backlog being so as we look.

At the bookings, we expect to assign between now and in the ended the year as well as the 12 month backlog that we have.

That's what we currently see and again that could change depending on regulatory environment in capital projects et cetera, but at this point in time.

No single digit growth into what we see.

All right appreciate it.

Thank you.

This concludes today's question and answer session I would like to turn the call back over the top chicken judicial or closing your line.

Thank you very much everyone for joining the call I turn is well positioned in the industry, we serve theres growing need for our leading technologies, we're confident in our ability to navigate near term challenges and truly excited about the future. So with that we will sign off the well everyone.

Okay.

And that does conclude today's conference.

There will be an audio replay of todays conference available this afternoon.

You can access the audio replay by dialing one.

She is your 31112 or 17194 570 820 with the tax code of 1.9 to nine five or such the company's website at Www <unk>.

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I T R.

Thank you very much and having a wonderful.

And.

[music] mm.

[music].

Good day.

Right.

Todays call.

Yes.

For opening remarks.

Uh huh.

Yes.

Thank you operator.

For me and welcome to our second quarter 2000, <unk> earnings Conference call.

Issued a press release earlier today, and our result grocery we lose replay information about today's call.

Presentation to accompany our remarks on this call is also available the what south and on our corporate website under the Investor Relations.

On the call today, we have Pultegroup hydrants, Burkert, and Chief Executive Officer, and Joe <unk>, Senior Vice President and Chief Financial Officer.

Following our prepared remarks, well open the call to take questions usually in the process. The operator described.

Worked on the call over to Tom. Please let me remind you of our non-GAAP financial presentation in our Safe Harbor statement.

We'll be making statements during this call that are forward looking.

Statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could differ materially from these expectations because the factors that were presented in today's earnings release in the comments made during this conference call in in the risk factor section of our core right.

In other reports and filings with the Securities Exchange Commission.

In addition, you do that we wouldn't nature of the appropriate Nike endemic company estimates regarding impact over 19 on current are forward looking statements are made in a good faith provide appropriate insight for current and future operating and financial environment.

Material discuss today August Threerd 2020 may materially change and we do not undertake any duty to update any of our forward looking statement.

Now please turn to page 40 degrees and patient and I'll turn the call over to our CEO Tom.

Thank you Ken good afternoon, and thank you for joining us.

Imbalance, we were pleased with our team is focused on execution this quarter against the backdrop public cobot 19 global pandemic.

Our continued commitment to our customers and aggressive actions to safely ensure business continuity yielded better results than we initially expected.

You will your detailed from Joan in a moment, but just summarized our second quarter performance revenue was $510 million adjusted EBITDA was $31 million non-GAAP earnings per share was three cents.

Free cash flow was negative $10 million.

We expect these results to be the low point for the fiscal year and would like to provide a brief update on the customer and operating environments as we see them today.

Beginning with our customers in the second quarter, we continued to see a healthy opportunity pipeline several new tenders and awards across our segment with a significant acceleration interest around our Reba distributed intelligence platform.

Anticipated, we saw lower bookings in the second quarter of approximately $390 million, bringing our total backlog to approximately $2.9 billion. Additionally, our 12 month backlog remains steady at approximately $1.3 billion, while our bookings were below a one to one ratio this quarter.

We continue to target a full year book to bill ratio over one to one.

Next I would like to share some customer trends, we saw in the second quarter that we expect to continue into the second half of 2020.

Importantly, we have not seen any order cancellations to date, nor a slowing of collections due to cope with 19.

Regionally, we saw Asia Pacific normalizing and the larger western European countries chicken cautious steps forward.

Our customers in the United States continue to work through very fluid conditions.

This includes ongoing cold at 19 related impacts and rollbacks and operating procedures for some states.

Our customers have been providing reliable services, but several have temporarily slowed ongoing projects, which impacts our business in the near term.

We've seen regulatory delays and some of the hardest hardest hit regions. Additionally, a few selected customers have delayed capital expenditures on selected new projects to combat Temple Cobot 19 related business impacts.

As discussed in our prior earnings call, we tend to see larger customers coping a bit better with the impacts of cobot 19 versus smaller customers, who pays more significant operational and economic challenges.

We expect these trends to continue through at least the balance of the year.

Well, our customers' ability to resumed normal operations will impact the speed at which we recover we see a clear acceleration of customer interest in automation solutions grid, resiliency technology, and the thirst for more forecasting and data analytics.

These are positive secular trends for our business that are well aligned to our strategy and the focus of our ongoing research and development investments.

Turning to our operations, we were extremely pleased with the performance in the agility that our teams have shown in supporting our customers I'm grateful for the dedication of the worldwide Itron team.

Conditions exiting the second quarter has significantly improved from when we entered the quarter. We currently have all factories up and running with continued aggressive measures to ensure employee safety in manufacturing and field operations further our supply chain and logistics network have stabilized and while intermittent hot spots from.

Okay and present these issues are not sustain.

We are confident in our ability to work through the current environment and optimistic about the future opportunity.

I'll now hand off to Jones to discuss the second quarter results and the second half of 2020.

Thank you Tom.

Please turn to slide seven for a summary of consolidated GAAP result.

Second quarter revenue of 510 million decreased 20% versus last year and 18% in constant currency.

The year over year decline was due to reduced demand and the operating constraints related to cobot 19.

This performance was better than expected when we provided insight into Q2 on our last earnings call.

Gross margin for the quarter with 27.2% 290 basis points lower than last year, primarily due to manufacturing inefficiencies caused by cobot 19.

The GAAP net loss of 63 million or negative the dollar 56 per share compared with net income of $19 million worth 49 cents per diluted share in the prior year.

As previously announced we sold our Latin America business in Q2, and booked at 57 million noncash loss on sale, which contributed to $1.42 reduction in earnings per share.

Regarding non-GAAP metrics on slide eight non-GAAP operating income was 20 million.

Adjusted EBITDA was 31 million or 6% of revenue.

Non-GAAP net income for the quarter was 1.3 million or three cents per diluted share.

Looking at the revenue by business segment on slide nine we saw a decline in all three segments that was primarily driven by covert 19 related impacts.

Device solutions revenue was 129 million 80 million or 37% year on year decline on a constant currency basis.

Network solutions revenue was 324 million 31 million or 9% decrease year over year.

Revenue in the outcome segment was 56 million, a 5 million or 8% decrease in constant currency from 2019.

The outcomes decline was primarily due to lower software license revenue versus last year.

And lastly, foreign currency changes resulted in 11 million lower revenue versus the prior year.

Moving to the non-GAAP year over year EPS bridge on slide 10.

Q2, non-GAAP EPS was three cents per diluted share compared with 87 cents in the prior year.

Due to better than expected operational performance and strong cost controls our non-GAAP EPS was significantly better than we anticipated for the quarter.

On year over year basis, net operating performance had a negative 73 cents per share impact versus Q2 2019.

Lower interest expense resulted in a three cents benefit.

Higher non-GAAP tax rate decreased EPS by 12 cents versus last year.

The higher non-GAAP effective tax rate was due to unexpected shifting the mix of income by jurisdiction caused by cobot 19.

Addition, our Q2 results included a true up provision for the prior quarter, which resulted in a very high effective tax rate in Q2.

And lastly changes in foreign currency and Shareco resulted in a two cents per share decreased year over year.

Turning to slide 11, I'll cover liquidity in debt.

Free cash flow was negative $10 million in Q2. This result was significantly better than we anticipated due to a quickly stabilized operating in supply chain environment and strong collections.

Cash and equivalents at the end of the second quarter were 545 million.

Total debt was 1.35 billion net debt was 805 million.

Leverage was 3.8 times at the end of Q2.

We believe we had sufficient liquidity to fund our operations through this pandemic and our current capital priority continues to be cash conservation.

Turning to slide 12, I'll provide some insight into the second half of 2020.

As Tom just mentioned, we still anticipate the second quarter to be the low point core revenue earnings and cash flow performance in 2020.

While our operations in supply chain capabilities have begun to normalize our customers recovery you didnt varying rates across the globe.

As we work with our customers their current focus does not supplying essential services, which has delayed some projects and therefore, the pace at which our business will recover.

Taking into account we have the following view the second half of Tony Tony.

First it's important to note that our view is consistent with comments made on our last earnings call.

While we expect operating improvements in the second half of the year, we anticipate revenue and non-GAAP earnings per share to be on car with the first half of 2020 with neither quarter being larger than our Q1 performance.

Yes, I also considers a higher non-GAAP for your effective tax rate of approximately 36% driven by the shift in mix of income by jurisdiction.

Since the start of coated 19, we have focused on mitigating the financial impact to the levers we control we have tightened all discretionary spending to hiring freezes reductions and outside services delaying some capital projects and we continue to evaluate all temporary cash conservation measures.

We are managing cash receipts and disbursements very closely.

With this continued focus we anticipate the full year 2020 free cash flow will be positive, although what approximately half of our prior years performance.

We are confident that the needs of our customers worldwide growth for us in the future.

We remain fortunate to be part of an industry that provides critical infrastructure to decide.

As we only us based industrial Aiotv pure play in our industry, we are well positioned to support our customers over the long term.

The executed in the current environment, we are working daily with their customers to ensure alignment on their shipments deployment schedules and ongoing operational activities.

We anticipate as regional conditions improve our customers focused on enhanced solutions and deployment timing will also accelerate.

We remain confident in our ability to work through the near term challenges execute our strategy and capture additional future value.

Thank you for joining today operator, please open the line for some question.

Thanks, very much we'd like to ask a question. Please call. Please press star one.

If you're looking for using speakerphone, please pick up your handset.

Yes.

Once again.

Ask this question.

Your first question.

Okay.

Good afternoon, everyone in pulp you're well.

I guess first well done on the cash management this quarter.

Okay.

Free cash flow profile for the year is well above what constraint the expecting.

They didn't want to ask I recall, you've been anticipating a working capital drag this quarter in part because we're planning large inventory build.

Did you build less inventory relative to what you would expect that if so what drove that or was it just better cash collection offsetting.

Well inventory contributed as well so we were able to build a little less than we anticipated certainly we're still looking at opportunities for strategic by where we are concerned with supply chain, but we did we bought a little bit less than anticipated, but I would tell you. The collections was probably the bigger piece we had.

Had some conservative assumptions, we were worried customers may slow down and maintain invested enough.

Good I mean, just to be clear you built a little bit less inventory because the supply chain within the height.

Or because there was.

Demand apart.

I think it's two things one is the supply chain situation was normalizing a little bit faster than we initially expected so getting components in the door.

Was that was less challenging than we expected as I commented earlier.

As a couple of hot spots remaining but by and large that portion of the business. This statewide.

The second piece of it is the revenue was substantially higher than we had what we had originally provided any outlook. So the stuff that went out the door in the form of revenue was within our inventory.

Yes, yes, it's got better absorption of that Okay and then.

Trying to work through our numbers here, but the year over year.

Right.

If I take your implied guidance.

Going to 30% from what we've got 20 low Twentys last year can you kind of just try to parse that out first a little better you mentioned it out we're looking at like for like 30 cents there.

Well.

Yes about probably 2.5 cents for the year relative to if you are using something like 25%. It's really just math on where we expect the income to go down so it's going down in the us standing in Europe, but in particular some of the countries in Europe, where we have a valuation.

Allowances or we have.

Places, we can't take advantage of the tax rates coming down so it's strictly to map of the jurisdictional income.

Okay. Thanks, and apologist, rather question costs were more before I turn it over just if you can comment on on drivers of conviction in getting the book to Bill above one to one this year.

Yes, I think theres.

A number of places that we have seen awards already starting to were to happen as you know, we don't put something into the the bookings until we have the regulatory approvals completed we think.

There are several hundred millions of dollars.

Stuff that has been awarded and there is just working through the final process to be able to do what we see strong demand out there.

And as these places that we are growing is exactly where we are targeting our business to grow. So it is in things like distributed intelligence on the Riva platform, which has really enables the utility to to add capability on an ongoing basis moving forward. So it really is based on customer discussions and.

Awards that are not yet showing up in the bookings is what gives us that conviction.

Perfect. Thanks, so much.

Thank you.

We'll go ahead.

Yes. Thanks.

Okay.

Hey, guys.

So I have three questions from the first.

Okay.

Let's say and your job.

I think you talked growth through cash flow to our very hard for 21 and.

And you said that food your cash flow target or sold order I for make sure we're still order both in Europe.

Yes, no. So the comments I made on the call today will really about the back half of the year and the expectation that the full year twentytwenty will be positive, albeit at about half of last year's performance. So last year's performance was a little over 100 million 110 or so.

So I didn't really give any comments on 21 I would say at this time that I think the model we.

He shared at Investor day is still intact, albeit it's definitely pushed to the right given everything that's been going on with Covance, sorry, I still think that is the right escrow aspirationally model, but it's it's going to shift a little bit to the right.

Great.

Thats very helpful.

I guess.

Bob.

You all four.

Total lovers.

All right.

David.

Okay.

Well.

So the doctor or.

Okay.

Maybe could you describe why that is.

Where are the or going.

I think that what we're trying to figure out.

I looked at the outcome.

Yes.

And how it's performing.

Right.

We all figure you're.

During the R&D.

So we felt that figure out where the commodity going forward.

How do that.

Yes outcome.

The long lead cargo so housekeeping dropped the ball.

Well I have one more.

Very good.

So with respect to R&D you are correct. The majority of where we are investing is core networks and outcomes based solutions that that's where we intend to grow the business customer interest in.

Improving their network performance in with the endgame notion of future proofing their business.

The things like distributed intelligence, improving resiliency and reliability getting better monitoring of what's going on better safety.

In a gas context, or really understanding where you might have losses in your system through sascar or other places like that is where we would.

I expect that business to grow.

Likely drag behind.

That said that work.

The growth activity for us to really get a network installed and then start deploying those value added services and outcomes on top of it. So as not what's worked grows that creates the greenfield for us to grow the outcomes business.

And that's where it will flow through.

What we see right now with cope with 19 is certainly a slowing in the near term of the those opportunities as a lot of our customers are just focused on keeping the lights on in the water flowing.

But the conversations that we have with them are rich interest around the types of things that we're talking about resiliency for liability.

In the quarters ahead.

Thank you Bob.

I guess the volume.

So if I look at the year over year Bob your.

Right.

Operating margin.

Yes.

Aggressively.

In South America during the quarter.

Before I guess I'm wondering.

Is there more of that.

You mentioned live.

Where are you.

Your restructuring.

Move for those prices deals with away from.

Please note.

Interesting leader manufactured on every partner.

And how should we think about that impact.

All right, let's forget about this year, but next year.

In the year.

20.2, how do we think about that impact.

Your target.

What our growth.

Operating margin target.

So just saying you're not making any money on the audience device solution.

A better way to do that while you all that money and others.

A number of parts to your question there, let me try to unpack it and then maybe I talked to Gionta talk a little more on the on the ongoing restructuring activities, but start with that with what is just behind us in the rear view mirror of Q2. Please recall that that was a very low point, where we had.

Our European factories closed for a good portion almost half of the quarter itself. So that's an unusually low point.

From a gross margin as well as our revenue point of view for for that that business. Those factories that opened up during the quarter and opened up a little faster than we had anticipated.

And that's part of the growth that we expect to see sequentially into Q3. The next part of the discussion really is about operating more in and an asset light kind of model.

Sell deal that we did in Latin America really was based on that notion of finding a way to automate remain president and active in that marketplace with.

The networks and outcomes portions of our portfolio, but operating in a way that was more asset light as demand might go up and down because of.

He is fluctuations in the marketplace. That's a deal structure that we do like and we will continue to look for ways to do that.

I suspect that number probably creeps up with normal product rotations into the newer categories, which tend to be outsourced.

So we'll look to continue to to improve off on that model and pursue it.

Logically forward as it's the right thing to do for our business now we do have an ongoing restructuring plan that we started back in 2018, which.

We will finish up the balance of that by the end of the year. If there is one factory.

In Western Europe that.

Thats being consolidated out of the footprint over the next couple of quarters. So there's some.

Residual money left in the CNL around that.

Yes relative to the 2018 plan, our our expectations is incrementally year over year from 19 to 20. There is a total of about $10 million, one incremental benefit probably split half between the margin line in the Opex line and those are still on track, albeit again the factory in France is a little bit late.

Great. Thank you guys I'll turn it over I appreciate it.

Thanks Ben.

And we'll go ahead I think our next question from Joe Osha with JMP Securities. Please go ahead.

Hi, this is actually hurry on that Joe.

I just kind of wanted to ask a clarifying question on the comments John made about the 2021 model that you guys could kind of about that at the analyst day in and just to clarify.

The revenue range that you had kind of given there is that something that we could see as it Super Bowl next year, where are you more kind of speaking today the margin profile.

I'm really both so again, if you look at the.

From a from a regionally Ben's question around the targets I think the targets that we showed at Investor day in terms of the.

Gross margin profile in the growth in the free cash flow generation are still the right targets, but given the cobiz situation those charges keeping that started with a definitely pushed to the right how far into the right. It's really a function of one the regulatory environment.

It becomes a little bit more clear when the capital projects, we turn our best guess right. Now at 21 is we will probably see revenue growth in the low single digit range.

Okay, Great and then understanding that kind of the near term focuses on conserving capital I was just kind of wondering if you think conceptually you could kind of outlined when we might do you start to bring down again. Thanks.

Yeah, we're definitely going to be continuing the monitoring the situation in the second half of the year and so.

Right now we have done very well from a free cash flow generation standpoint relative to our initial expectations will monitoring out in the back half of the year end of things look like they're going to continue to improve we'll probably look at starting to pay down payback some of the revolver by the end of the.

Thank you that's it for me.

Okay.

And we'll go ahead and take our next question, Jeff Osborne with Cowen. Please.

Good afternoon.

The good questions have been asked but maybe just following up I know as about the confidence in the book to Bill above one.

It's implied that you needed.

Regulator approval, just with Coca coming back.

In the country or not.

I guess what gives you the confidence.

At some other programs that you referenced one.

We've been awarded but don't have approval and aren't Backout backhaul guess, what gives you the confidence with the regulators will rubber stamp.

Well again, we were judicious about where we were.

Looking to forecast in that the wins based on that the regulatory process and how things work, we're coming together there is some parts of the country, which.

Hasn't moved along quite nicely in adapted a more virtual model for the up.

Regulatory process, there is even been and.

Positive regulatory outcome in the upper Midwest recently that Thats published.

And public as well that things do move forward. There are other places even some of the hard hit regions in the northeast where things really have have slowed down and decisions have been pushed but those are exactly things that we kind of factored out as well as we were looking forward to it so that in some of all of that is why do we feel that thats the right place for us to pay.

Market is.

Customers discussion points and interaction with the regulatory process as those filings have been prepared we think that though they'll pull through.

That's great to hear and is the Tom is there any update on regulators and improving of rate basing SaaS applications. Another handful.

Allow that now, but just given coded and remote monitoring and automation is that something that also is moving forward or not necessarily.

Well I would say that it continues to move forward in terms of discussions.

All in almost all 50 states at this point I can't think.

Think of any one state off the top of my head that clicks to over in into this category.

Since the last time time, we talk so by my count it's in the upper Thirtys call. It 36, or 37 states allow performance base rates a couple really allow you to capitalize SaaS.

And more discussions underway, so I think still positive momentum and tailwind there but.

No Big news I would say during the last quarter or so.

Got it my last question is just being talked about what visibility or similar to the regulator question.

Your.

Municipal exposure personal as a company.

On a break up the segment with water gas and electric could you just remind us what the water exposure is and what you're seeing with the municipal channel in particular.

Sure so.

Our presence in the in that smaller market to opportunity whether it is in the water space or whether it's in that nearly co op space for for gas or electric is a smaller portion of our business. So call it 20% or so is about where where we run there.

So what we see certainly is those.

I recognize that there are tax base, which is set.

Based on local sales tax and things of that sort has has dropped.

Quite a bit as well so I still think it takes a little bit longer for those markets to return to a more normal environment that the big.

Mr owned utilities and larger rep grid. The solution. So I think that will be a couple of quarters or if not a year longer in terms of the shape of the recovery based on what we see today.

Are you counting flooding.

And those types of people in that number or no.

The margin.

Well at those those are big enough that I kind of put them into the mid market area, I'm really talking more rural and small water annuities.

With my commentary there so that's a big rate bigger regional guys and the two that you mentioned I would put into that sort of mid market kind of area and.

Certainly they've got challenges as all customers due in the current environment, but maybe less so than the than the smaller group.

Okay, perfect Thats, all I think.

Thank you.

I must remind you that star wonder if he'd like to ask a question on these calls.

The question.

Gotcha.

Please go ahead.

Thanks for taking the question one more on me Latin America transaction I realize youre NIE.

Exiting the region, but you are it seems like de emphasizing and given the pandemic is there a sense that maybe you're kind of getting out at the bottom of the market so to speak and maybe it would have.

Would've been better to wait for some stabilization there before doing the deal.

Interesting thoughts.

I would say that tying that the timing of our announcement together with kilobit is that thats coincidence, rather than any sort of strategy that deal had been underway.

To be honest well before covance hit so.

The financials associated with it and that the structure behind the deal.

Wasn't really based on on the market as you see it today. Its predated 0.1 0.2 is I don't know that I would want to call. It to a de emphasis on the market I would very much wants to think about it it's a better way to attack that the market from a model from our standpoint, so taking out some of your exposure to that the fixed.

Cost portion of.

Operating in that environment, when you got to a pretty dramatically fluctuating and demand depending on local economies. It's just a better way to attack. It when we operate on variable cost we still have access to it we ship in and from a distributor model. We just don't have that the fixed costs. So when we announced deal and said things like no mature.

I will impact on the outlook for the year. It. It really is based on its a better way to attack the market from our financial point of view, because we're operating on variable cost rather than disappearing from the market.

Okay.

A question about 21 I realize it's early but you made a statement out few minutes ago that.

Your baseline expectation as revenue growth in the low single digits.

Right. What gives you the kind of visibility that that far ahead to make the forecast because I think normally you wait until February to do that.

Yeah, I mean part of it is the pipeline, but in the backlog to Tom was talking about so we've got about 1.3 billion 12 month backlog and so as we look at.

The bookings, we expect to assign between now and in the ended the year as well as the 12 month backlog that we have thats, what we currently see and again that could change depending on regulatory environment in capital projects et cetera, but at this point in time.

No single digit growth.

Okay.

All right appreciate it.

Thank you.

This concludes today's question and answer session I would like to turn the call back over.

Additionally for closing remarks.

Thank you very much everyone for joining the call I turn is well positioned in the industry. We serve their it's growing need for our leading technologies, we're confident in our ability to navigate near term challenges and truly excited about the future. So with that we will sign off the well everyone.

Okay and that does conclude today's conference.

There will be an audio replay of todays conference available this afternoon.

You can access the audio replay by dialing one.

She is eurthree one was one Q.

One seven Onenine four five 708.

With the passcode one.

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Thank you very much and having a wonderful.

Q2 2020 Itron Inc Earnings Call

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