Q3 2020 Itron Inc Earnings Call
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Good.
Welcome to the I try to incorporate two three Twentytwenty earnings conference call today's call is being recorded.
[music] Max Oh, let's turn the call over to Ken Hello, Pete.
Thank you operator, good afternoon, and welcome to I Trust third quarter 2020 earnings Conference call. We issued a press release earlier today announcing our results. The press release includes replay information.
Today's call a presentation to accompany our remarks on this call is also available through the webcast and on our corporate web site under the Investor Relations tab.
On the call today, we have Tom teacher, I Trust, President and Chief Executive Officer, and Joseph <unk>, Senior Vice President and Chief Financial Officer.
Following our prepared remarks, we will open the call to take questions using the process the operator distraught.
Before I turn the call over to Tom. Please let me remind you of our non-GAAP financial presentation, and our Safe Harbor statement.
Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance.
Conciliation of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website.
We will be making statements. During this call that are forward. Looking these statements are based on current expectations assumptions that are subject to risks and uncertainties actual results could differ materially from these expectations because the factories that we presented in todays earnings release and the comments made during this conference call and in the risk factor section.
One of our form 10-K, and other reports and filings with the Securities and Exchange Commission in.
In addition to the fluid nature COVID-19 pandemic company estimates regarding the impact of feel good 19 on current or forward looking statements are made in good faith attempt to provide appropriate insight to our current and future operating and financial environment.
Materials discussed today November 2nd 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 degrees inpatient and I'll turn the call over to our CEO Tom Dietrich.
Thank you Ken good afternoon, and thank you for joining us.
During the third quarter, our team continued to focus on the success of our customers and safely delivered results aligned to our expectations considering the current environment you will hear details from Jones, shortly but just summarize our third quarter performance revenue was $540 million adjusted EBITDA was 40 million.
Dollars non-GAAP earnings per share was 61 cents and free cash flow was positive $38 million, while improving sequentially from the second quarter of 2020. These results still reflect the ongoing pandemic.
Now let me provide a brief update on the customer an operating environment as we see it today beginning with our customers consistent with last quarter, we have not seen contract cancellations and collections have continued as expected we continue to see robust acceleration of interest in our Riva distributed intelligence platform automation.
Solutions grid, resiliency technology, and the demand for more forecasting in data analytics that our customers deploy to increase efficiency and insight for their operations.
These are positive secular trends for our business and it is directly contributing to robust customer discussions and a healthy pipeline of new opportunities.
As we noted in prior calls the pandemic has slowed near term bookings due in part to delays and regulatory decisions bookings in the third quarter were approximately $432 million, bringing our total backlog to approximately $2.8 billion and our 12 month backlog at approximately $1.1 billion.
Yeah.
We continue to target and have visibility to achieve a full year book to bill ratio of approximately one to one recall that our threshold for including an award into our backlog requires a signed contract and any required approvals from the appropriate regulatory agencies.
During the third quarter, there were several notable customer bookings and milestones that demonstrate the power and innovation present in our strategy and leading technology offerings in partnership with Cps energy and the San Antonio water system known as saws, we announced a long term software and services agreement that allows Cts and.
Saul is to leverage a common network to deploy water Department services. This is on top of a previously announced smart City project with Cps and the city of San Antonio to deploy and industrial Internet of things automated Street like Kennedy.
This is an outstanding at scale demonstration of the deployment of a multipurpose network that can be efficiently, we used across multiple organizations and applications for the benefit of the community, while providing long term SaaS and service business for Itron.
It is important to note that this business model continues to gain momentum in fact, we recently signed an agreement with HP in Washington County in Virginia to utilize ATP network to the benefit of both utilities as well as Itron for recurring SaaS and service revenue. This is a win win win model for oil and gas.
All right.
We also announced an agreement with Centerpoint for the deployment of the entellus gas metering platform with integrated safety features that enable remote shut off so that when paired with other services such as nothing detection and alarms create new levels of performance and safety.
Also during the third quarter, we surpassed the 1.5 million Mark for deployed endpoints that enable downloadable applications via our distributed intelligence platform. These meters continue to be deployed across many of our customers networks.
Our customers have proven in head to head tests against competitive solutions. The performance advantages of downloadable applications for real world situations, such as Steph grid efficiency and safety.
Turning to our operations to conditions exiting the third quarter remained steady with no significant production constraints, our supply chain and logistics network are stable. We currently have all factory is up and running with continuing aggressive measures to ensure employees safety and manufacturing and field operations, we are vigilant and prepare.
Cared for regional and local spikes from the pandemic that could potentially disrupt our operations.
We continue to execute our strategy and move towards an asset light operating model in September we announced a 2020 cost savings project designed to better utilize our talent capital and infrastructure to provide support for our customers more efficiently and effectively the 2020 cost savings project is expected.
To yield $20 million to $25 million in savings with approximately 80% benefiting gross margin when completed by the end of 2022.
With this project, we further align our operations with our strategy to increase the focus on higher value solutions and optimize our supply chain. These actions will make itron stronger and more resilient in the quarters to come.
I will now hand, the call off to Joan to discuss our third quarter results.
Thank you Tom while our results improved sequentially from the second quarter low point Theres still more recovery needed before we are back to normal operating and financial performance. Please.
Please turn to slide six for a summary of consolidated GAAP results.
Third quarter revenue of 540 million decreased 13% from last year, but was up 6% sequentially from Q2.
The year over year decline was due to lower customer demand and operating constraints, resulting from COVID-19.
Gross margin for the quarter was 26.5% 500 basis points lower than last year, primarily due to manufacturing inefficiencies caused by COVID-19 unfavorable product mix and an increase in inventory reserves.
The GAAP net loss of 25 million or negative 63 cents per share compared with net income of $17 million or 42 cents per diluted share in the prior year. This.
This loss was driven by a $44 million restructuring charge booked in the quarter related to the 2020 cost savings project that we announced in late September.
Regarding the non-GAAP metrics on slide seven non-GAAP operating income was 30 million adjusted EBITDA was $40 million or 7% of revenue.
Non-GAAP net income for the quarter was $25 million or 61 cents per diluted share.
Looking at revenue by business segment on slide eight device solutions revenue was $176 million, a 42 million or 20% year over year decline on a constant currency basis device.
Device solutions revenue was up 36% from the second quarter, increasing its share of total company revenue in Q3.
Network solutions revenue was 307 million, a 50 million or 14% decrease year over year.
Revenue in the outcomes segment was 57 million 18 million or 4% increase in constant currency from 2019.
Lastly, foreign currency changes resulted in 6 million higher revenue versus the prior year.
Moving to the non-GAAP year over year EPS bridge on slide nine our Q3, non-GAAP EPS was 61 cents per diluted share compared with a dollar four in the prior year.
On a year over year basis, net operating performance had a negative 71 cents per share impact versus Q3 2019.
This decline was driven by lower revenue and margin caused by COVID-19, as well as unfavorable product mix, partially offset by lower operating expenses.
Lower interest expense resulted in a four cents benefit year over year.
A lower non-GAAP tax rate increased EPS by 26 cents versus Q3 2019.
The lower year over year tax rate was primarily due to favorable discrete items booked this quarter.
And lastly changes in foreign currency and share count resulted in a two cents per share decrease year over year.
Turning to slides 10 through 12, I will discuss the Q3 results by business segment compared with the prior year.
Device solutions revenue was $176 million with gross margin of 12% and operating margin of 6%.
Gross margin decreased 750 basis points to the COVID-19 related inefficiencies as well as product mix.
Operating margin decreased 680 basis points due to the fall through of lower gross margin, partially offset by reduced operating expenses.
Network solutions revenue was $307 million with gross margin of 33%.
Gross margin was down 460 basis points from the prior year due to unfavorable product mix and COVID-19 related inefficiencies.
Operating margin was 23% below last year due to the fall through of lower gross margin and reduced operating leverage.
Outcomes revenues $57 million with gross margin of 36%.
Gross margin decreased 90 basis points from the prior year, primarily due to product mix.
Operating margin was 21% 130 basis points higher than last year due to lower operating expenses.
Turning to slide 13, I'll cover liquidity and debt.
Free cash flow was $38 million in the third quarter, which was slightly better than we expected due to strong collections.
Cash and equivalents at the end of the third quarter were $586 million.
Total debt was 1.35 billion and net debt was $764 million.
Net leverage was 4.3 times at the end of Q3.
Please note this leverage ratio is calculated differently than the bank net leverage that governs our credit agreements our bank net leverage was 3.4 times at the end of Q3, well below our covenant threshold.
Our balance sheet remains flexible with sufficient liquidity to fund our operations.
Cash conservation has been our priorities since the start of the pandemic.
As conditions continue to stabilize and improve we have begun to repay the drop from the revolving credit facility.
In October we repaid $100 million of the 400 million revolver draw.
While we continue to target our long term financial model, we recognize the COVID-19 has slowed our progress throughout.
Throughout the pandemic, we have been focused on mitigating the financial impact to near term levers that we can control, including tightened discretionary spending hiring freezes reductions in outside services and the delay of some capital projects.
For the full year Twentytwenty there are no significant updates to the comments I made on last quarter's call with the exception of the expected tax rate.
We currently expect the full year non-GAAP tax rate to be approximately 20% versus the 36% discussed on last quarter's call. This reduction is primarily driven by favorable discrete items.
We will continue to diligently manage our business through these unprecedented times delivering value to our customers and support to the communities that we serve.
As Tom mentioned, we are confident we will emerge from this pandemic well positioned to take advantage of increasing customer demand for our technology solutions and we remain confident in our ability to reach our target financial model now I will turn the call back to Tom.
Thank you Joan on a final note prior to turning over to Q and eight I would like to highlight our recent itron utility week.
First I would like to thank Cps Energy's, President and CEO, Paul Gold Williams for being our keynote speaker and co host of this year's event. During the event Cps energy was awarded with the Excellence and Resourcefulness Award by Frost and Sullivan I am Grateful for Paul as partnership and continued leadership.
Held annually for the last 38 years Itron has hosted customers partners and suppliers at our leading utility week conference.
We switched this year's event to a three day virtual gathering with 1500 worldwide participants a new record level for us while we truly wish we could evolve in face to face. It was important that we still gather as industry experts customers colleagues and thought leaders to share perspectives and learn from one another.
And work together to address our industry's challenges.
The theme of this year's event was empowering innovation. It is a timely topic as our industry must reliably continued to provide critical infrastructure and deliver services during both normal and abnormal times.
As we continue to move forward, we must remain mindful of Threed macro trends that are creating both challenges and opportunities for our industry today infrastructure resiliency environmental considerations and societal expectations. These macro trends will reshape how we work what we focus on and the legacies we leave behind.
Mind, but each can and will be addressed through our commitment to innovation.
Through innovation in our industry can completely redefine the utility in city landscape and our relationship with how we manage energy and water engage consumers respond to disasters reimagine business models and so much more.
In our modern world is so dependent on critical infrastructure to deliver safe secure and cost effective supplies at both energy and water innovation is not just a future state it must be our constant companion.
Thank you for joining us today operator, please open the line for some questions.
Thank you.
We would like to ask a question. Please press star one on the telephone queue.
If you are using a speaker phone just make sure that your mute function turned off to allow your singh from three to prevent it.
That style one we'll pause for just a brief moment to slow everyone an opportunity to signal for questions.
Once again that is star one well take our first question.
No K from open Highway. Please go ahead your line is open.
Thanks, Good morning, everyone I appreciate your taking the question.
Can I start with a few quick ones for for Joan around the tax rate assumption change.
Any color on what's driving that discrete tax benefits.
It looks unless I've got my math wrong looks like this might be worth around 40 cents or so a share to full year EPS feel free to correct me. If that's mistaken, but then importantly does that have any impact on how you're thinking about cash flow performance for the year. Thanks.
Okay.
Sure. So let me start with the EPS impact, it's about a little over 30 cents a share impact versus the 36% that we gave last quarter.
Most of this decrease were booked this quarter.
The largest one had to do with our ability to take advantage of some tax attributes that we essentially acquired when we bought silver spring it required us to go back and re file some silver spring historical tax returns to take advantage of the foreign tax credit and we were able to do that in Q3, and so that by far is the largest tax disc.
Great in terms of the cash taxes for the year and the cash taxes have been very low and.
And so this eventually effects cash taxes, but you don't think about it as an immediate pay payment for the year essentially we were able to really some valuation allowances that we had on deferred tax assets.
The other question that I think would be permanent would be is this what is this indicative of the go forward rate and I would say no. Its very large discretes that we booked this quarter. If you look at that non-GAAP tax rate. This quarter was actually negative. So our best estimate going forward is still a little over 30% is the best estimate right now.
No Thats Super helpful. Thanks.
Turning to demand.
Bookings, Tom I think I heard you you mentioned that there's still a shot here to get to one to one book to bill for the year.
Again, just doing some quick math, there would have to be a.
Well, maybe historically strong bookings number for the fourth quarter and.
And we know that the timing of approvals can be pretty lumpy from a regulatory perspective. So is that a low probability would say a high probability.
To put up that kind of number in the fourth quarter or is there a good chance it could maybe slip into one Q2 Q 21.
Very good thanks Noah.
I think that the way to think about it is we have the visibility to go do it it will depend on some regulatory decisions and us finishing up a few contracts, but it is our target for the year to come in at approximately one to one so still feel good about that possibility and that's absolutely what we drive toward.
Words.
Relative to your comment at being a record I don't know we'd have to go back and look, but having a large fourth quarter.
Bookings numbers is not unheard of we've done it a couple of years in the past at least during my short time with the company. So it is based on customer discussions is based on awards and a real hunger for our our products and technology.
Okay, very good and maybe one quick one.
We've seen that municipal water meter sales during the pandemic have been relatively resilient than it seems a good time to check in on your North American Intel is water meter product introduction, how are you seeing.
Awards and sales tracking for that.
The beginning to contribute at all materially could that be a growth opportunity in the future.
It certainly can be a growth opportunity for the future at this point, it's still relatively small.
An immaterial part of the overall business, but it is an area that we have a lot of excitement around you.
Even in some of my prepared comments I talked a little bit about a different ways customers are pursuing the business overall, so the notion of having our multipurpose network out there and being able to load things underneath that whether would be gas and electricity or in a couple of the examples that I cited with Cps and saws incentives.
Oneo wind.
As in Washington County, where people are using the same multipurpose network to read electricity.
Electricity and water. It helps the community. It certainly is a cost effective solution and something that we're pretty excited about we think that model has a lot of room to grow and into the future.
Okay. Thank you very much.
And now take our next question from Paul Welcome News from Raymond James. Please go ahead. Your line is open.
Thanks for taking my question.
For the last six months, you've talked about utilities that are slowing.
Hey, sell physical labor due to social distancing precaution.
Are there any key steady do you can you point to of where.
Colgate metrics have improved and as a result utility.
Work patterns have essentially normalized to pre pandemic levels.
So I can take that one good morning Pablo.
I think that Theres plenty of cases.
Our things that we can point to about a restrictions having helped in terms of a virus spread overall nothing utility related but.
More along the lines of.
Utilities start into the into continue to risk.
Restore installations, we can see that in France. We have seen is in parts of the northeast. So there is a desire when when capital is allocated and projects are ongoing for for our customers to carry on.
With that work what we do see as it is in cases, where the work is done outside in home and types of.
Of installations continue to be on hold I don't know that I would ever be able to point to something that talks about at returning back to full pre pandemic levels up to this point.
But we do see the intent of our customers to move in that direction as safely as they possibly can.
Okay, and a follow up on that you know obviously the.
Severity of the second wave in Europe, just in the last 30 days has.
Probably taken a lot of people by surprise.
Have you noticed any shifts specifically among.
The European revenue mix in terms of the last kind of four to six weeks of activity.
Have any impact from either the lockdowns or just because the worsening of covance.
The the factories remain open in Europe, we had that the closure way back in Q2, but you saw a nice sequential improvement in our European business between Twoq and Threeq you relative to the last month or two as as you had cited we don't notice.
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A tremendous difference.
In terms of the customer's behavior, but we are mindful and we continue to watch and make sure that we are adapting to the situation as well as we can and we feel good about power.
Protocols and the way we are operating within our factories and will contain contingency as diligent as we can about keeping employees safe and making sure we support our customers.
Thank you very much.
We'll now take our next question from Ben Kallo from.
Barack good blend is open.
Hey, guys. Thank.
Thank you so joint venture.
Mentions the target model.
So could you remind us what that is.
Yes, it's hard for me to pour so so everything you guys have we will have to deal with.
Because of the cold and go through the year.
If I just looked at margins will decline, let's say, probably you guys were integrating.
Yes.
Well.
Reducing cost.
Several factors.
So I'm trying to square away.
All that with with the margins.
The decline there.
The longer term.
The.
Long term targets.
And then what does that longer term target when do we think about the next year or two.
Please.
Oh, Yeah, let me start so the target model is is the model that we showed at the Investor day last year and it represents I'm getting to the mid teens EBITDA level. So what we showed was a range of 13% to 15% of EBITDA with gross margins associated with that in the 33 a 35.
5% timeframe and had free cash flow as a percentage of revenue in the range of 6% to 8%. So obviously as I mentioned in the prepared remarks, COVID-19 has certainly slowed that progress and pushed out our ability to achieve that to the right. It's not 21 based on the discussion of what we expect for topline and 21 is a 22.
Potentially too soon to tell in terms of how strong a recovery will be but we still think it's the right model. If you go to that Investor day deck. It actually showed the target ratios were shooting at buyer segments. Those are still the targets that are our segments are being asked to achieve but again the timing of when we'll be able to achieve that has has pushed to the right.
Hi.
Okay, I guess as a follow up to <unk>.
Just.
Are you seeing pricing pressure on.
That works well.
Oh Hello.
Good so we're though.
Yes, I can take that one good morning Ben.
Certainly it is a competitive market.
We feel very good about our technology, we tend to to see when customers are interested in.
Buying something that has plenty of capability for the future being able to use a multipurpose network add additional.
Capability to enable smart city applications, automate, but but do more with the data with downloadable applications, what we tend to do very well in the marketplace.
So I I don't think that the environment has changed relative to pricing pressure on the networking front and we feel great about our technology.
Thanks, Chris.
Thank you.
Well now take our next question from Jeff Osborne from Cowen and company. Please go ahead.
Hey, good morning couple of questions on my end.
One.
I was wondering if you could just characterize the level of quoting activities coming back to the book to Bill being above one I assume the regulatory approvals are things that you were verbally awarded sometime in the past but.
Maybe we'll come through by year end, but I was curious just on newer programs that.
That might be being booked.
The level of activities.
I can take that one relative to quoting Asia Pacific were back at pre pandemic levels Europe is a little slower North America is is a little bit behind that the pre a level. That's in terms of new quotes that.
Said the number of discussions around advanced technology. The the pipeline of new activities has definitely grown during this time period, a plenty of appetite towards forecasting and doing a better job of understanding how changes in demand would be incorporated into their network a lot more discussions around.
R&D. These a lot more discussions around renewables being integrated into to the network overall on the gas side does safety is a very high priority for our customers and again that generates a lot of new opportunities for us.
That's good to hear.
Maybe for John can you touch on the inventory reserves was that an element of obsolescence or FX or what drove that.
Yes, it was mostly in our devices segment and related to I would say the most of it is the shutdown of some factories from some prior restructuring reserves at the time, we would not have predicted coded and therefore some of the demand for for the products went down and as we ultimately shut that factory down we ended up with some.
Excess inventory.
Got it.
And then.
And the the recent Lockdowns in Europe over the past week or two have you heard from your customers is there you know what the impact for that would be just given that the last month.
How should we think about things like Frank it's still okay. In other markets as you have exposure to.
Sure, it's still pretty fresh and pretty fluid so difficult to get a full bead on it we've been in touch with all of our customers. They are still counting on us to make deliveries as I commented earlier factories are open and running but it is it is brand new and something that we'll have to watch.
For us as we exit through the rest of the quarter.
Got it and then if I could sneak one quick one in for Joan I was surprised to hear it's great to see but I'm surprised to hear that you're paying back 100 million already have and in October.
It looks like you had 186 million.
Of cash.
Without the $400 million revolver.
So this would take you down to sub 100 is there a minimum level of cash.
But you feel anxiety about how would you feel comfortable taking that down to 50.
Yeah, Let me clarify so we ended the quarter with 586, which included the 400 of the revolver. We paid 100. So we're at 46. So you are correct that if you paid the entire revolver back at the end of Q3, we would have had 186. So the revolver payment doesn't change that that amount typically we would we would.
Look to operate around $100 million of kind of operating cash to have on hand.
Okay. Thank you very much.
We'll now take our next.
Question from Tom Rima moving the corporate please go ahead.
Good morning, and thanks for taking my questions.
Hello. Good morning can you hear me, how many were not able to.
Now we can yes more.
Good morning, Thank you for taking my questions.
Good morning go ahead Tommy.
So acknowledging the Crystal ball is is hazy here.
I wanted to ask if you could help calibrate us.
As best you can.
With with what we know today on topline.
So as we look to 2021 is low single still the right kind of compare to think about versus this year.
When you get than when you get beyond 21.
Should we think about that maybe inflecting to a higher growth rate out in 22.
Or maybe more broadly if you're comfortable answering if we can accelerate the covert noise. How should we think about a run rate type CAGR for total company revenue.
Yeah, let me take that so last quarter, we did indicate our expectations for 21 were low single digit growth rate. We don't really have any update to that normally we will provide guidance in our February call 21.
In terms of what what should a normal run rate look like a revenue. Once we are completely recovered I would point you to that target operating model that was in the Investor day deck last year with revenue and that kind of 3% to 5% CAGR, but that would be completely recovered I'm not good enough to tell you when the recovery is going to be complete so I don't know if that's 22.
23, but but for now I'm really no further comments on 21 versus what we gave on the last call. Okay.
Okay fair enough and thanks, and then on the restructuring.
You indicated in the press release earlier this year that the the bulk of it would hit above the gross margin line any insight you can give us on which segments should see the biggest benefits from the program.
Devices should see them the largest impact.
Okay and should we expect any more charges.
Trickling through in Q4 or next year or is most of that in the rearview now.
Well, we provided the detail of the of the total amount of charge, which was I think between 55 and 65 million. We booked about 45 in Q3. So the remainder will come in between now and for the most part by the end of 21.
Okay. Thank you I'll turn it back.
[laughter].
Once again as a reminder to ask a question. Please press star one star one to ask a question.
We'll take our next one show O'shea from Securities. Please go ahead.
Hello, everybody good morning.
Good morning, Joe.
All right.
Two questions for you first Tom you talked in the past about how the procurement process looks a little different for your rate base spending versus our.
Up something that would end up in the operating budget for you or municipality I'm. Just wondering it goes through the different tracks are manifesting different we can to covert here, we're doing everything just kind of look okay.
I would say that the difference that we see is.
How customers think about that the overall situation larger customers, meaning state grids internationally are the large investor owned utilities in the us.
Tend to be a little bit more resilient and continue to operate I will say a bit more normally in terms of their procedures and processes. Despite working from home.
We've seen smaller customers think small municipalities water departments things of that sort of struggled a little bit more in terms of of trying to understand how to do to seamlessly convert to work from home even in a.
A.
A customer care kind of environment, so that tends to slow down there, they're pretty pure amount process, a little bit in terms of of new tenders. That's what that's what we've seen for our portion of the business, but you push that aside I think it's a timing question rather than something that fundamentally alters that the process the.
Interest in new technology the interest in.
Automating business processes is very strong and something we feel very good about.
Okay. Thank you and as a follow on to that obviously, we know that state and local budgets have gotten your wells, where whereas I would assume that the.
Your rate base.
Or regulated utility probably less though so are you beginning to see any sort of rumblings of of what those fiscal constraints on on state States and municipal governments might do to some of their decision.
I would say too early to call right now as to anything being materially different everyone is is being cautious in terms of of new a new project starts. They don't want to have to start and stop a project, we've seen regulatory commissions being pretty reticent to to approve cases, where.
For a rate payers, where the consumers would see an increase given some of the the economic issues that are out there broadly, but I don't know that I would say there is anything that is.
Different that it's hard to pull out of the noise as a long term trend.
Okay. Thank you very much.
Thanks, Joe time over there appears to be no.
Further questions I'd like to turn the conference back to Mr. Vittorio.
Additional or closing remarks.
Very good. Thank you, Brian I'll finish off with thanking everyone for joining today Itron is well positioned as a technology and thought leader, we feel great about the longer term trends and are well positioned to to navigate the near term cross wins until we have a chance to speak again. Thank you all.
Uh huh.
That concludes today's call. Thank you for your participation.
You may now disconnect.
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