Good day, everyone, and welcome to the Itron, Inc. Q3 2011 Earnings Conference Call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Barbara Doyle. Please go ahead, ma'am.

Thank you, Jenny, and good morning to everyone. Thank you for joining us so early. We have several announcements to coordinate today, including with employees around the world. So we're doing our call early today. We really do appreciate you joining us. And on the call today, we have LeRoy Nosbaum, our President and Chief Executive Officer; and Steve Helmbrecht, our Senior Vice President and Chief Financial Officer. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. We have prepared slides to accompany our remarks in this call, and we also have a copy of our prepared remarks on our web page as well. So the slides and the prepared remarks are available to the webcast link and to our corporate website under the Investor Relations tab. If you turn to Slide 2, you'll see today's agenda. Before I turn the call over to LeRoy, please let me provide our Safe Harbor statement. Please note that our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and our financial presentation. Now if you turn to Slide 3, you'll see our Safe Harbor statement. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update our forward-looking statements. Now let me please introduce LeRoy Nosbaum, Itron's President and Chief Executive Officer.

Thank you, Barbara. Good morning, everyone. Good to be back with all of you. Kind of interesting for me this morning. Thank you for dialing in to the Itron call. From talking with customers and employees, I'm beginning to understand what is happening in the business and in the field. From talking with many of you in the last several weeks, I think I have a fair idea of the things that are top of mind for investors. I'm listening carefully to our shareholders and the analysts that follow Itron. And I've fully realized that our communication with the investor community has been less than ideal. I'm committed to restoring Itron's credibility with investors and communicating a very clear vision of where Itron is heading. For the most part, I'm going to let Steve talk about the quarter's results. I will say that while I am not pleased with all of the onetime items, particularly warranty expense, we did have a good operating quarter. I'd like to focus on the following areas in today's call. First, I'd like to share a few of my observations from my first 60 days. Second, bookings trends. I'll also comment on our smart electricity metering business in North America, which has been a significant driver of our bookings. Third, my views on 2012. Fourth, some comments on the restructuring project we announced today. And last, our share repurchase plan. I'll then hand the call over to Steve to cover third quarter results and guidance, and then I'll come back and wrap up with some remarks about long-range market opportunities and my vision for Itron. And then, of course, we'll take questions. So let's begin starting with my first 60 days. The challenges we are facing as a company, as well as an industry, are…

Thank you, LeRoy, and good morning. In addition to our financial results, I will also discuss our recent debt refinancing and our financial outlook. Let's start with Q3. In a number of ways, we had some good things happen this quarter. We had the second highest revenue quarter in Itron's history, strong earnings per share generated from core operations, significant reductions in debt and interest expense and strong free cash flow. However, there were substantial charges that negatively impacted margins and earnings in the quarter which I will also address in my remarks. The items included warranty charges of $0.33 per share, net of reductions in bonus compensation resulting from the increased expense, onetime charges related to our change in capital structure and hedging of $0.05 per share and a $540 million goodwill impairment charge that impacted GAAP earnings per share by $13.27. I would like to take a few minutes upfront to cover the warranty charges and the charge related to our hedging since they resulted in a large financial impact in the quarter. In the past 6 quarters, we incurred $4 million to $5 million in warranty costs on average. We incurred total warranty charges of $25 million in Q3 for several issues involving suppliers-provided components, as well as Itron's own equipment. We will not detail each item, but the single biggest item representing half of the total charges in North America concerns a batch of diodes used in certain water applications. Our decision in several cases was to proactively do a full replacement of equipment in the field where these situations were found. That results in larger costs, but we feel strongly it is the right thing for customers and in the best long-term interest of our company. In addition to the warranty, we incurred charges in…

Steve, thanks a lot. Let me leave you with a few words on our long-range market opportunity. On that subject, I'll begin with some thoughts on Itron's vision. Our vision has been and continues to be Itron will be the leading technology supplier of electric, gas and water measurement and automation solutions in the global market. We come to this vision as we believe that in many areas of the world the installed base of meters will continue to grow for electric and even more so for gas and water meters. Many of those meters will be automated to provide efficiency in meter reading, as well as smart meter and smart grid information and capability. The potential market in these areas, metering and controls, automation for meters and the distribution grid and software solutions, is substantial around the world. We all know about the opportunity for electric smart metering and smart grid in North America. New orders are not likely to occur with the magnitude or pace they have in the last 4 years. There are many independent reports telling us so. That said, the orders and opportunity have not stopped. There are many utilities that will be facing upgrades, replacements and enhancements to their systems, and there will be more wins for Itron in North America. The market for gas metering and water metering, along with automation, still continues to grow in North America. We are very pleased with our progress and opportunities in gas as our offerings have continued to gain favor in the market. For example, large gas contracts with Atlanta Gas Light, ATCO Gas, CenterPoint and NiSource have accelerated our gas business by 20% from the original 2011 plan. We have also launched our C&I gas meter, the Dattus. We continue to ship large volumes of…

[Operator Instructions] And we will hear first from Paul Coster with JPMorgan. Paul Coster - JP Morgan Chase & Co, Research Division: LeRoy, looking out to 2012, in the context of the guidance you've already outlined, do you have a sense of whether the international business will be growing faster or slower than -- or the decline will be greater or less than the domestic business? And then in respect to that international business, building up from kind of break fix preventative maintenance projects and these frame-type deals, can you give us some sense of the visibility in aggregate that you have so far and how that might evolve?

Paul, happy to answer that. First of all, in our best estimate at this point, international is going to grow faster than domestic. There's just many more opportunities. There's far more going on in Latin America and Asia Pacific. Europe is going to maintain a steady pace. So I think as we look to '12, we are certainly looking for growth internationally as opposed to growth in what I'll call the U.S. or North America, although BC Hydro is going to be a nice growth prospect for us in North America. As I think about the international visibility, one of the things that has traditionally been nice about international prospects is we know them. We know them well. We're not quite so affected by the great magnitude order. But rather, we have lots of orders from a lot of really well-known customers. So I think the visibility internationally is really quite good. I'll give you an add. As we move into '13, I mean, we're going to begin to see some of the big smart metering projects come into play. And while we will know them well, they will certainly cause the international revenue to begin to look a little bit more lumpy than it has in the past. So just a heads-up on that one.

And we will go next to Sanjay Shrestha with Lazard Capital Markets.

Two quick questions. First, LeRoy, when you talk about that comfort surrounding flat to down revenue with a 12-month backlog, less than $1 billion right now, so there's inherently about $1.2 billion to $1.5 billion kind of for book and a burn [ph] business. Can you sort of help get into that a bit more as to where does that come from, what is the trend like on that, what is that related to? Give us some more visibility on that so that we can get comfortable with either the low or high end of that range from a book and a burn [ph] business for you guys. And I have a quick follow-up.

Yes. Well, let me direct most of this answer to North America, which I think is the real question. I mean, we're going to fall off in North America, round numbers, as I've said, $300 million in OpenWay bookings. We'll fill some of that back with BC Hydro. We'll fill some of it back with some smaller OpenWay stuff that we're shipping as well. And so that begins to fill up a reasonable size of that hole. Our gas business is growing in North America, and that's going to fill up some of that. And we know that business well. It's automation projects and just raw selling of gas meters, to be honest about it. The team is doing a great job with that. And as well, we're doing very good on water projects, automation projects around the United States. So Sanjay, I would say that we are not filling that back up with unknown prospects at this point. So we're not looking at holes in 2012 that we have yet to fill to be able to be flat to down a tiny bit next year in North America. For Paul, I answered the North American piece of it, essentially.

Sure. So one quick follow-up then. That warranty charge in the quarter, which obviously impacted EPS by north of $0.20, I mean, are we basically done with that? Or is there more to come? That was a pretty big number. What are those?

Yes. I mean, Sanjay, I'd love to say we're done with it. Unfortunately, in this particular quarter, we got stuck with the diode problem that caused over half of that issue. And should we have caught it before we put that diode in a bunch of products, maybe. I have actually, on the warranty side, gotten my nose into this stuff pretty severely. I do that for 2 reasons: one, as you suggest, the numbers are big; two, it kills me to send bad product out to our customers. And I think we may need to make a better effort culturally to get the DNA of Itron wrapped around quality more than it is today. I don't expect going forward in the next quarter or quarters next year that we're going to have that kind of warranty. Now that's an expectation. It's not a promise. The fact of the matter is, if you buy millions of little parts and pieces and the manufacturer makes a change to the formulation, whether they tell you about it or not, that's pretty hard to know sometimes until you have got that component out in the field in nasty conditions like humidity or sitting in water and water pits or being baked on the side of a building, if you're an electric meter, pretty tough to know whether that compound change is going to do anything to you or not. And while we do an extraordinary amount of testing, and we do an awful lot of looking at our suppliers. At the end of the day, you're going to get stuck once in a while. Have we had too much of it? We've had way too much of it. Unfortunately, I can't tell you that everything out there is in perfect shape. What I can tell you is we've got an awful lot of focus on making sure that going forward, everything is in a whole lot better shape than it has been.

And we will go next to Benjamin Kallo with Baird Investment Bank. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: LeRoy, how did you get to the number of facilities that are impacted in the restructuring? Is that the right number as we look forward? Or will we have to look at this again in a couple of months and see if that is the correct number of facilities to shutter? And then also as we look out into the European opportunity, can you tell us where your technology is referred in North America? There were some technology hiccups, do you feel comfortable with your technology going forward for that European opportunity?

Yes. Good questions both. First of all, the facilities around the world, I mean, one of the things all of you have noted is that we have not come back to you as quickly as maybe we had hoped with complete plans around the restructuring. Part of that has been I'm in a real grounds up effort to look at every facility around the world and take just a real sort of fine lens to whether or not these facilities were necessary, whether or not we could combine facilities and do a better job of it. So I'm pretty comfortable with the 13 facilities that we're impacting with this. I don't believe, Ben, going forward for the next bit of time, several years at least, that we look at any more facilities. So I'm real comfortable with the legwork that was done around that and the economics that were looked at and the considerations that were taken. That having said, this is a tough project, and the real work, frankly, starts now. We're going to be heads down on this as we go through 2012 and 2013, being very careful of people impacts. The bulk of the closures are in Europe, a little less so in the United States, and so that process has already begun. Technology in Europe, to some extent -- and some of the reorganization we have done over the last several months helps us to bridge technology from the United States that we developed for OpenWay and other projects to some of what we are doing in Europe. We have a fairly healthy product development group in Europe and other places in the world that are also working on the technology for opportunities in Europe. We have been deeply involved in the Linky project at ERDF and deeply involved in the GrDF project as well. So that technology is quite well along as we sit here today. So I'm comfortable with that technology progress. I'm comfortable we'll have the technology to serve those markets. I will, before you ask me, say that we were a bit behind at British Gas that we did not get to look at a piece of that business that has been awarded this year to Landis, if I remember right. We will catch up in that technology area, and we will be participating in that business as time moves on.

And moving on, we have a question from Steve Sanders with Stephens Inc.

First, just as it relates to Europe, what do you think the impact of pending AMI rollouts will be on the traditional replacement business in Europe? Clearly, we saw some issues in '09 in North America that were amplified by the stimulus, but I just wanted to see what your thought process was on that. And then I have a follow-up.

Sure, Steve. I mean, we're going to affect normal meter purchase at any place we have a big change-out between plain meters and AMI stuff. So whether it's ERDF or GrDF or British Gas or potential smart meter programs in other places, that business gets affected. And so as we forecast, not so much this year, but certainly as we look to '13 and beyond, we're going to have to take that into consideration. And in fact, in many ways, as we think about our planning relative to the restructuring, we were thinking about these things going forward so that we could be more efficient and better utilize our manufacturing capacity.

Okay. And then a follow-up is a couple of parts. On the restructuring, you're obviously taking out facilities, but you mentioned increasing capacity. Is there a philosophical change in your outsourcing strategy here? Or is this more about consolidation and automation? And then could you just give us an update on BC Hydro? Do we think about this as 1/3 this year, 2/3 the next year, just generally?

Okay. On the restructuring -- let me say that as we looked at restructuring, we thought about manufacturing from the prospect of how can we do it within our own grasp more efficiently than we are and how can we better utilize factories. We looked at factories for cost structure within those factories, and we looked at factories relative to the levels of automation that might allow us to increase our capacity. I can say reasonably that we did not look at further outsourcing to subcontractors or to contract manufacturing people. We still believe, and I believe personally fairly strongly, that we have it within our grasp generally to manufacture at a far more competitive rate under our own roof than under somebody else's roof. And I know that flies in the face of a lot of thought around being in the manufacturing business, but it pains me to share margin with a contract manufacturer when I know I can make it for the same price he can. I mean, we are manufacturers of millions of things around the world. We're going to be better at it at the end of 2012 and even better than that at the end of 2013. That having been said, BC Hydro this year, about 1/3 of it gets shipped. Next year, about 2/3 of it gets shipped, probably a little spill over into '13, but not much.

And we will hear next from Patrick Jobin with Credit Suisse. Patrick Jobin - Crédit Suisse AG, Research Division: So I guess a few months ago, Itron laid out a pretty aggressive inorganic growth strategy. Is that still on the table? Or is it focusing more on operations?

I'm going to give you 2 answers to do that, Patrick. First of all, I like the goals. I certainly think that $5 billion by '15 is a great goal. I certainly think that 18% EBITDA margin is something we have to work at every bloody day of our existence. Having said that, as I've come back, I have far more focused my own attention, and accordingly everybody else's, on 2012, on making sure that we are competitive on the smart meter and smart grid projects that we've got in front of us. But the grand goal laid out in transform, we are absolutely aggressive in our efforts in water. We are absolutely aggressive in our efforts in Asia Pacific, which I just look to be a very exciting area for us. We have been adding people in Asia Pacific at the senior-most level that will bring to us both experienced and wherewithal that we've not heretofore had. So none of the transform objectives are off the table. But I have reasonably, I will admit, focused far more on 2012 and making sure that we were very buttoned-up in order to have a great platform for growth.

And we will -- yes, we will go next to Craig Irwin with Wedbush Securities.

So one of the things that we've noted over the last couple of quarters, this quarter included, is that the core Itron, your legacy AMR products and some of the software and other things that you're selling into North America, appear to be selling very, very well. I think last quarter was your best quarter ever. This quarter is again right up with the top of your execution there over the last many years. Can you talk to us a little bit about the core markets in North America outside of the very large implementations and update us on what you see as technology solutions for the general customer base there? And then if you could also update us, a couple of quarters ago Malcolm shared with us the number 24 million as the number of units that are just generally being bid or out for proposal in North America. If you could maybe give us an update there as far as the potential units on the horizon for the next couple of years.

Sure. Let me start with sort of what we would call our core business in North America or maybe even more precisely to say are non-OpenWay business in North America because certainly, OpenWay has looked pretty core to everybody in the last couple of years. Craig, we have a -- we got a great team in the gas business. We were sort of waltzing [ph] along selling gas meters for a long time. We have energized that with the right people in the right place. I couldn't be more pleased with the gas team. They are not going to cover off the ball in many respects. We are selling gas meters to people we've never sold them to before. We've done some work in the product area. We're doing some more work in the product area that's going to bring us home some more business. So I'm real, real pleased at the growth and the prospects for our gas meter group. On the water side, our water business is interesting because we don't have a water meter franchise. And so what we look at is a whole lot of what I'll call project business. And that project business often is not -- is funded through some kind of municipal funding like municipal bond or other not normal revenue for the municipal. So while in some areas you're seeing the water business hurt because the municipals are just not taking in a lot of revenue these days, some of these big projects are not only key to reducing costs, but they're funded in a different way that's not affected by gross tax receipts in any given annum. And so you get a little different picture for our water business than you might for a meter company that's in the water business.…

And we will take our next question from Steve Milunovich with Bank of America Merrill Lynch.

A lot of my questions have been asked. But LeRoy, could you comment on as you've come back to the company, obviously, the restructuring thing was under progress, and I'm sure you've supported that effort. But specifically, what are you looking to change in taking a different direction from what you've seen so far? And maybe incorporated into that, you could talk a bit about the culture of the company.

A couple of things. Steve, I clearly support the restructuring, as you said, unquestionably. I've spent a little bit of time there making sure that we follow up on that through '12 and make sure that we pay attention to the people that are involved in that. As we look at a couple other areas I've focused on, we have had not only a restructuring effort, but an effort to recast how we are going to present the company to you guys. And so you will look at an energy and water presentation. And inside energy, we'll have electric and gas. I've spent a lot of time on that organizational structure, making sure that we are firmly focused on the customer and we have good line of sight to the customer because everything we do starts with the customer and I wanted to make sure that the organization was not getting in the way of good line of sight for the customers. So I've tinkered with that a bit, but the plan in general was very good going forward. I have looked at people throughout the organization and comforted myself that we have the right people in the right place, and generally, we do. I won't say everywhere we do, but we're working on those kinds of things. I certainly have gotten involved in early days, as I mentioned earlier, in quality. We are having far too much warranty issue than we have had before, and that needs fix. And then I alluded to in the very front of my prepared remarks, I don't think we've communicated to The Street worth a damn, to be blunt. I think we have been too evasive. I think we have not been specific enough, and I think the result of that is we've caused a lot of confusion both for you folks, and for our investors, and in some cases, even for our own employees. And so I think we need to be far more crystal clear about how we move forward what the prospects are, what the prospects aren't. And then I'll close by saying we've lost too many orders on big deals, and we will take sufficient corrective action to fix that.

And we do have several questions in the queue at this time.

We've got time for about 2 more questions, please.

We'll go next to John Quealy with Canaccord Genuity.

So again, staying with the higher-level stuff. LeRoy, you talked about the message being muddied for Wall Street. Can you talk about how you're going to rectify that for customers, especially as we look near term in the U.S. in sort of a maintenance mode, but clearly, in Europe, sort of mid-decade or whatever we think it is on -- there's a very big utilities with a disproportionate share? So can you talk about, one, your impressions of what you've heard from them? And then technically, I have a quick follow-up.

Well, so far, John, to be frank, I have not visited any customers in Europe. I am going to spend the entire month of January in Europe. And high on my list, although not the only thing on my list, will be spending time with customers. I have spent a lot of time with our team in Europe to assure myself as to where we were on projects and to the extent I shared in my prepared remarks where we were with big megadeals that are going forward. The interesting thing about some of the megadeals in Europe is that, whether we like it or not, they're not going to be solely awarded to one contractor. And so we'll get a piece of most of those deals. The question is how big a piece will we get. And to some extent, I'm going to personally intervene in some of that to make sure that we can get as big a piece as we can. My intervention is not only meeting with customers, but it's making sure that we have the right stuff available and making sure it's at the right price range. One of the issues always in Europe is price, and I'm very much encouraged by our rationalization around factories to make sure that we can make things at the appropriate cost level so that we can enjoy winning deals and making money. I think that answered your question, John. I'm not sure actually.

No, that was fine. And then my follow-up. So for many years, many of us have considered Itron more of a technology company clearly from the early days up until the AMI cycle, if you will. Can you talk about your vision of heritage and/or change to the technology DNA to Itron. We're talking a lot about standard manufacturing consolidation on this call, but can you share your thoughts about what you think Itron is and where you want it to go?

Oh, my, there's about half a dozen questions in there. Let me see if I can answer that. First of all, we have moved both through time and opportunity to a place where we are selling systems that are not just Itron systems. We're selling systems that connect to all kinds of things that other people make. And in that sort of stage, on that stage, we have to work with partners of a wide variety. I know people have questions. For instance, our partnership with Cisco. But there's a perfect example of where Itron says we belong in this piece of this market and we can better lever our talents if we have a partner that can do other pieces of this talent -- of this market. So if you look at Cisco and Itron, we're still making meters. We are absolutely still in the radio business, in the communication business. We are absolutely still in the software business. But by joining with Cisco, we get a partner that is clearly a superior network management company, a superior company relative to broad deployment of networks where security, quality of service, the kind of features that are common in an IP network are important. That is not a place where we have to have an expertise. We have to have knowledge, and we have to have good partners. And there will be other places like that as well. So I think key going forward technologically is to pick our points. We will command the metering business. We will command the communication of metering information into networks that are not always ours. We'll do some of that, however, and we'll take a look at technologies beyond radio because in some places, that's what the customer is demanding. So our technology focus around meters and communications modifies itself a little bit where we can use partners to a better advantage. On the software side, we're in the meter data collection business. We will always be in the meter data collection business, and we will command the highest ground in that business. If we can add analytics around meter data collection to provide more knowledge to our customers than just pure data, we are very much, I think, moving in the right direction. Overall, I think we have to have a culture here and a mindset around innovation. And innovation is not just doing new things. Innovation is looking down the road 3 or 4 years and saying, "What are the new things that are needed?" And so I don't have a penchant for following somebody else. I kind of like to be out front leading.

Operator, I think that will be it for today.

So with that, I'll turn the call back over to you for any additional or closing remarks then.

Yes. let me say a couple of things about this call today as we close. First of all, I appreciate some of you getting up early. We'll go back to our normal format. We just thought we had a lot to lay on the table. We wanted to get it out to you. And as well, we were coordinating to a great degree with some of the stuff we had to do around restructuring, particularly in Europe. As well, I've handled almost all of the questions today. Maybe I did handle all of the questions. Thank you. You want to try me out and see if I could remember what I've learned in 60 days. I'm going back to the format we had before. I will have other people sitting at this table who will comment, Philip, Marcel from time to time, even others, and we will do more of that. I know at our most recent Analyst Conference that we laid out a pretty aggressive strategy. We'll try to talk to that strategy in further conference calls as we go along, and we'll maybe pick off bits and pieces. I'm looking forward to traveling with a bunch of you and seeing you and reacquainting. It's kind of good to be back actually. Thanks. You weren't too tough on me this morning. We'll see you all soon.

Thanks very much, everyone.

And ladies and gentlemen, there will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1 (888) 203-1112 or 1 (719) 457-0820 with the passcode 6304863 or go to the company's website, www.itron.com. We do thank you for your participation, and have a pleasant day.