Good day, everyone, and welcome to Itron Incorporated quarter two 2020 earnings conference call. Today's conference is being recorded. For opening remarks, I would like to turn the call over to Ken Gianella. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Itron's second quarter 2020 earnings conference call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. A presentation to accompany our remarks on this call is also available through the webcast and on our corporate website under the Investor Relations tab. On the call today, we have Tom Deitrich, Itron's President and Chief Executive Officer; and Joan Hooper, Senior Vice President and Chief Financial Officer. Following our prepared remarks, we will open the call to take questions using the process the operator described. 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. Reconciliations 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 and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors that were presented in today's earnings release and the comments made during this conference call, and in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. In addition, due to the fluid nature of the COVID-19 pandemic, company estimates regarding the impact of COVID-19 on current or forward-looking statements are made in a good faith attempt to provide appropriate insight into our current and future operating and financial environment. Materials discussed today, August 3, 2020, may materially change, and we do not undertake any duty to update any of our forward-looking statements. Now please turn to Page 4 in the presentation, and I'll turn the call over to our CEO, Tom Deitrich.

Thank you, Ken. Good afternoon, and thank you for joining us. In balance, we were pleased with our team's focus and execution this quarter against the backdrop of the COVID-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 $0.03, 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 continued 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 1:1 ratio this quarter, we continue to target a full year book-to-bill ratio over 1:1. 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 COVID-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 COVID-19-related impacts and rollbacks in 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 in some of the hardest hit regions. Additionally, a few selected customers have delayed capital expenditures on selected new projects to combat significant COVID-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 COVID-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 resume normal operations will impact the speed at which we recover, we see a clear acceleration of customer interest in automation solutions, grid resiliency technologies and a thirst for more forecasting in 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 are extremely pleased with the performance and the agility that our teams have shown in supporting our customers. I'm grateful for the dedication of the worldwide Itron team. The conditions exiting the second quarter have significantly improved from when we entered the quarter. We currently have all factories up and running with continued aggressive measures to ensure employee safety and manufacturing and field operations. Further, our supply chain and logistics network have stabilized. And while intermittent hotspots remain present, these issues are not sustained. Finally, we are not slowing research and development investments necessary for our long-term performance and will continue to position ourselves to capture the growing technology and service needs of utilities in cities of tomorrow. We are confident in our ability to work through the current environment and optimistic about the future opportunity. I will now hand off to Joan 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 manage 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 7 for a summary of consolidated GAAP results. 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 COVID-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, primarily due to manufacturing inefficiencies caused by COVID-19. The GAAP net loss of $63 million or negative $1.56 per share compared with net income of $19 million or $0.49 per diluted share in the prior year. As previously announced, we sold our Latin America business in 2Q and booked a $57 million non-cash loss on sale, which contributed to a $1.42 reduction in earnings per share. Regarding non-GAAP metrics on Slide 8, 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 $0.03 per diluted share. Looking at the revenue by business segment on Slide 9, we saw a decline in all three segments that was primarily driven by COVID-19-related impacts. Device Solutions revenue was $129 million, an $80 million or 37% year-on-year decline on a constant-currency basis. Networked 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. The Outcomes decline was primarily due to lower software license revenue versus last year. 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 $0.03 per diluted share, compared with $0.87 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 a year-over-year basis, net operating performance had a negative $0.73 per share impact versus Q2 2019. Lower interest expense resulted in a $0.03 benefit. A higher non-GAAP tax rate decreased EPS by $0.12 versus last year. The higher non-GAAP effective tax rate was due to an expected shift in the mix of income by jurisdiction caused by COVID-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. Lastly, changes in foreign currency and share count resulted in a $0.02 per share decrease year-over-year. Turning to Slide 11, I'll cover liquidity and debt. Free cash flow was negative $10 million in Q2. This result was significantly better than we anticipated due to a quickly stabilized operating and 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 and net debt was $805 million. Net leverage was 3.8 times at the end of Q2. We believe we have 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 for revenue, earnings, and cash flow performance in 2020. While our operations and supply chain capabilities have begun to normalize, our customers' recovery is 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 this into account, we have the following view of 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. This also considers a higher non-GAAP full-year effective tax rate of approximately 36%, driven by the shift in the mix of income by jurisdiction. Since the start of COVID-19, we have focused on mitigating the financial impact through the levers we control. We have tightened all discretionary spending through hiring freezes, reductions in 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 year's 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 as they begin to get back to normal operations. While the negative impact of COVID-19 on 2020 persists, we believe these disruptions in our business are temporary, and they do not change the long-term earnings and cash generation potential of Itron. We are confident that the needs of our customers will drive growth for us in the future. We remain fortunate to be part of an industry that provides critical infrastructure to society. As the only U.S.-based industrial IoT pure play in our industry, we are well positioned to support our customers over the long term. While 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, Joan. To summarize the key points that Joan covered. We are prudently navigating through the current uncertainties with actions in place for what we can control and are 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. To execute in the current environment, we are working daily with our customers to ensure alignment on their shipments, deployment schedules, and ongoing operational activities. We anticipate, as regional conditions improve, our customers' focus 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 toward our targeted asset-light 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 questions.

Thanks very much. And we'll take our first question from Noah Kaye with Oppenheimer. Please go ahead.

Good afternoon, everyone, and hope you're well. I guess, first, well done in the cash management this quarter. And I think the free cash flow profile for the year is well above what the industry had been expecting. But I do want to ask here, I recall, you've been anticipating a working capital drag this quarter, in part because you were 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?

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 buys where we are concerned with the supply chain. But we did buy a little bit less than anticipated. I would say the collections were probably the bigger piece. We had some conservative assumptions. We were worried customers may slow down, and in fact, they did not.

Good. I mean, just to be clear, you built a little bit less inventory because the supply chain was in this pipe or because there was less demand required?

Well, 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 less challenging than we expected. As I commented earlier, there are a couple of hotspots remaining, but by and large that portion of the business has stabilized. The second piece of it is the revenue was substantially higher than what we had originally provided in the outlook. So the stuff that went out the door in the form of revenue was reflected in our inventory.

Yeah. Yeah. Just got better absorption of that. Okay. And then trying to work through our numbers here. But the year-over-year tax rate hit, if I take your implied guidance going to 36% from, I think what we've got, low-20s last year, can you kind of just try to parse that out for us a little bit or dimension it out? We're looking at like something like $0.30 here.

Yeah. It's about probably $0.25 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 U.S. and in Europe. But, in particular, some of the countries in Europe where we have valuation allowances or we have places we can take advantage of the tax rates coming down, so it's strictly the math of a jurisdictional income.

Okay, thanks. And I apologize for a lot of questions, I'll ask one more before I turn it over. Just can you comment on drivers of conviction in getting the book-to-bill above 1:1 next year?

Yeah. I think that there are a number of places that we've seen awards already starting to happen. As you know, we don't put something into the bookings until we have the regulatory approvals completed. We think there are several hundred millions of dollars of awards that have been given and are just working through the final process to be able to execute. We see strong demand out there, and the places that we are growing are exactly where we are targeting our business to grow. So, it is in things like distributed intelligence on the Riva platform, which really enables the utility 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, which gives us that conviction.

And we'll go ahead and take our next question from Ben Kallo with Baird. Please go ahead.

Hey, guys. So, I have three questions. So, the first, just compared to the Analyst Day, and you're – I think you talked about free cash flow of $200 million by 2021. And I think, Joan, you said that your cash flow targets are still in order. I just want to make sure that we're still in order by the same year.

Yeah. No. So the comments I made on the call today were really about the back half of the year and 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 million or so. I don't really give any comments on '21. I would say at this time that I think the model we shared at Investor Day is still intact, albeit it's definitely pushed to the right, given everything that's going on with COVID. So I still think that is the right aspirational model, but it's going to shift a little bit to the right.

That's very helpful. I understand your outlook on savings and your commitment to maintaining R&D spending. Could you elaborate on the reasoning behind that and where the R&D efforts are focused? I'm trying to grasp how the R&D funding is being allocated, especially in relation to the performance of the Outcomes business. Can you provide insight into the direction of that funding? Additionally, considering the long lead times for contracts, how should we anticipate the return on that investment? I have one more question as well.

Very good. So with respect to R&D, you are correct. The majority of where we are investing is for networks and outcomes-based solutions; that's where we intend to grow the business. Customer interest in improving their network performance with the end-game notion of future-proofing their business with things like distributed intelligence, improving resiliency and reliability, and 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 theft or other places like that is where we would expect the business to grow. The timing on these things, the Networked 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 Networked business will go. Outcomes will likely drag behind the Networked 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 Networked 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 COVID-19 is certainly a slowing in the near term of those opportunities as a lot of our customers are just focused on keeping the lights on and the water flowing. But the conversations that we have with them are rich in interest around the types of things that we're discussing: resiliency, reliability, better insight into what's going on, and even 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 that's where the R&D goes and how you should expect it to flow through the P&L in the quarters ahead.

Thank you. Regarding the Device segment, when I examine the year-over-year data, it seems you're at a breakeven operating margin. Congratulations on your recent deal in South America and the progress achieved thus far. I'm curious if there are more opportunities like that, as you've mentioned. What is your current status in restructuring to pursue these types of deals instead of solely focusing on manufacturing meters across every continent? How should we consider the impact of this restructuring on your targets, such as gross margin or operating margin, not just for this year but also for next year and 2022? It appears that the Device Solutions are not generating profit. Is there a more effective approach to manage this while continuing to invest in the other two segments?

A number of parts to your question there. Let me try to unpack it and then maybe I toss to Joan to talk a little more on the ongoing restructuring activities. But start with what is just behind us in the rearview 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 a revenue point of view for 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 an asset-light kind of model. The sale deal that we did in Latin America really was based on that notion of finding a way to remain present 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 that's why you can see the portion of our manufacturing costs increase pretty steadily for outsourced manufacturing. We're a touch under half of our total manufacturing being outsourced today, and I would 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 improve on that model and pursue it logically moving 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's being consolidated out of the footprint over the next couple of quarters. So there's some residual money left in the P&L around that.

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

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

Hi, this is Hillary filling in for Joe. I wanted to ask a clarifying question regarding Joan's comments about the 2021 model you presented at the Analyst Day. Can you confirm if the revenue range mentioned is still considered achievable for next year, or were you primarily referring to the margin profile outlined?

If you consider the targets we presented at Investor Day regarding the gross margin profile and the growth in free cash flow, I still believe they are the right targets. However, the COVID situation has definitely delayed our ability to meet those targets. The extent of that delay depends on when the regulatory environment stabilizes and when capital projects can resume. Currently, our best estimate for 2021 is that we will likely experience revenue growth in the low-single-digit range.

Okay, great. And then understanding that kind of the near-term focus is on conserving capital. I was just kind of wondering if, even conceptually, you could outline when we might see you start to bring leverage down again? Thank you.

Yeah. We're definitely going to be continuing to monitor 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. We'll monitor that in the back half of the year. And if things look like they're going to continue to improve, we'll probably look at starting to pay back some of the revolver by the end of the year.

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

Most of the good questions have been asked, but maybe just following up on Noah's about the confidence in the book-to-bill above one. You implied that you needed regulatory approval just with COVID coming back around the country in certain hotspots. I guess what gives you the confidence that some of the programs that you referenced, that you won or been awarded, but don't have approval, will get it? What gives you the confidence that the regulators will stamp that?

Well, again, we were judicious about where we were forecasting the wins based on the regulatory process and how things were coming together. There are some parts of the country that have moved along quite nicely and adapted to a more virtual model for the regulatory process. There has even been a positive regulatory outcome in the upper Midwest recently that's been published and is public, as well that things do move forward. There are other places in some of the hardest hit regions, in the Northeast, where things have really slowed down and decisions have been pushed. But those are exactly the factors we considered as we were looking forward to it. So the net and total of all of that is why we feel that that's the right place for us to park. It is customers' discussion points and interaction with the regulatory process as those filings have been prepared. We think they'll flow through.

That's great to hear. Is there any update on regulators' approval of rate basing for SaaS applications? I know that a handful of states allow that now, but given COVID, remote monitoring, and automation, is that something that is moving forward or not necessarily?

Well, I would say that it continues to move forward in terms of discussions in almost all 50 states at this point. I can't think of any one state off the top of my head that clicked over into this category since the last time we talked. So, by my count, it's in the upper 30s, call it 36 or 37 states allowing performance-based rates. A couple really allow you to capitalize SaaS and more discussions are underway. So, I think there's 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 can you talk about visibility or similar to the regulator question. Your municipal exposure, first of all, as a company, you no longer break out the segments of water, gas, and electric. But can you just remind us what the water exposure is? And then what you're seeing with the municipal channel in particular?

Sure. Our presence in that smaller market opportunity, whether it is in the water space or whether it's in the municipal co-ops space for gas or electric, is a smaller portion of our business. So call it 20% or so is about 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 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 run their businesses a little bit more effectively. Interest in that area, but we recognize that their tax base, which is 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 than the big investor-owned utilities and larger grid solutions. 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 SMUD and LADWP and those types of companies in that number or no? The larger…

Well, those are big enough that I kind of put them into the mid-market area. I'm really talking more about rurals and small water utility companies with my commentary there. So that's the bigger regional guys, and the two that you mentioned, I would classify into the sort of mid-market area. And certainly, they've got challenges, as all customers do in the current environment, but perhaps less so than the smaller group.

We will now take another question from Pavel Molchanov at Raymond James. Please proceed.

Thanks for taking the question. One more on the Latin America transaction. I realized you're not exiting the region, but you seem to be 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 been better to wait for some stabilization there before doing the deal?

Interesting thoughts. I would say that the timing of our announcement together with COVID is coincidence rather than any sort of strategy. That deal had been underway, to be honest, well before COVID hit. So the financials associated with it and the structure behind the deal weren't really based on the market as you see it today. It predates it, point one. Point two is, I don't know that I would want to call it a de-emphasis on the market; I would very much want to think about it as a better way to attack the market from a model standpoint. So, taking out some of your exposure to the fixed cost portion of operating in the environment, when you have a dramatically fluctuating demand depending on local economies, it's just a better way to approach 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 the fixed cost. So, when we announced the deal and said there would be no material impact on the outlook for the year, it really is based on that it’s a better way to tackle the market from our financial point of view because we're operating on variable cost rather than disappearing from the market.

Okay. Question about '21. I realize it's early, but you made a statement a few minutes ago that your baseline expectation is revenue growth in the low-single digits. What gives you the kind of visibility 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 that Tom talked about. So, we have about $1.3 billion in 12-month backlog. And so, as we look at the bookings we expect to sign between now and the end of 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 and capital projects, etc. But at this point in time, low-single-digit growth is what we see.

This concludes today's question-and-answer session. I would like to turn the call back to CEO, Tom Deitrich, for any additional or closing remarks.

Thank you very much, everyone, for joining the call. Itron is well positioned in the industry we serve. There is a 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. Be well, everyone.

Once again, that does conclude today's conference. 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 of 1649295, or go to the Company's website at www.itron.com. Thank you very much, and have a wonderful day.