Good day. Thank you for standing by. Welcome to Itron's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Paul Vincent, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Itron's second quarter 2024 earnings conference call. Tom Deitrich, Itron's President and Chief Executive Officer, and Joan Hooper, Senior Vice President and Chief Financial Officer, will review Itron's second-quarter results and provide a general business update and outlook. Earlier today, the company issued a press release announcing its results. This release also includes details related to the conference call and webcast replay information. Accompanying today's call is a presentation that is available through the webcast and on our corporate website under the Investor Relations tab. Following prepared remarks, the call will open for questions using the process the operator described. Before Tom begins, a reminder 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. 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 comments made during this conference call, as well as those presented in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. All company comments, estimates, or forward-looking statements are made in a good faith attempt to provide appropriate insight to our current and future operating and financial environment. Materials discussed today, August 1st, 2024, may materially change and we do not undertake any duty to update any of our forward-looking statements. Now please turn to page four of our presentation as our CEO, Tom Deitrich, begins his remarks.

Thank you, Paul. Good morning to everyone and thank you for joining our call. Itron's second quarter results reflect strong execution and operational discipline by the team. Revenue growth of 13% over the second quarter of last year marks the seventh consecutive quarter of growth, with record quarterly revenue in our Network Solutions and Outcomes segments, operating leverage supported by continued improvements in profitability and free cash flow against a backdrop of stable market demand. Financial highlights for the second quarter are shown on Slide 5 and include revenue of $609 million, adjusted EBITDA of $77 million, non-GAAP earnings per share of $1.21, free cash flow of $45 million. Turning to Slide 6, our backlog at the end of the second quarter was $4.1 billion. Bookings for the second quarter were $447 million. Although the second quarter book-to-bill is below our full-year target of one-to-one, we currently have more than $1 billion of customer awards that are working through the appropriate processes to support our bookings discipline. These processes are progressing at a measured pace resulting in larger pending bookings than typical. The timing of these bookings will likely be skewed to later in the second half of the year, with our expectation for an annual book-to-bill ratio of one-to-one or better, assuming progress on the regulatory and governmental funding processes. The pipeline of new opportunities continues to be strong, driven by our infrastructure, environmental, and consumer macro trends. Our global customers face challenges and increasing complexity in power generation and distribution, which is driving an all-of-the-above approach to technology deployment use cases. Itron's great edge intelligence platform provides a forward-thinking, agile solution that addresses these critical needs. Examples of customer adoption of high-value technology are highlighted by notable additions to our backlog during the second quarter. Rochester Public Utilities in Minnesota is committed to upgrade from an existing drive-by system to our latest grid edge intelligence solution that will address numerous key challenges in their territory, including grid management for the increased adoption of renewable energy resources and electric vehicles, enhanced consumer service through real-time data access and personalized energy management tools, optimized grid operations and grid planning through edge compute for decision-making and asset management, enhanced safety with automated remote disconnects and anomaly alerts, and deployment of a scalable communication network to support future needs. In Ohio, we will be working with FirstEnergy to support their expansion of advanced metering infrastructure and continued moves towards FirstEnergy's grid edge strategy for the deployment of more advanced use cases. Also, during the quarter, Spire Energy committed to adding 100,000 intelligence endpoints to their active deployment of Itron ultrasonic technology. This adds to the more than 700,000 installed endpoints and continues the ongoing conversion to Itron technology. Now Joan will provide details of our second quarter and an update on our full-year guidance.

Thank you, Tom. Please turn to Slide 7 for a summary of consolidated GAAP results. Second quarter revenue of $609 million increased 13% year-over-year and reflects solid operational execution and the conversion of the remaining $40 million of previously supply-constrained revenue. Gross margin of 34.6% was 250 basis points higher than last year due to favorable product mix and operational efficiencies. GAAP net income of $51 million, or $1.10 per diluted share, compares to $24 million, or $0.53 per diluted share in the prior year. The improvement was driven by higher levels of operating and interest income, which were partially offset by higher tax expense. Regarding non-GAAP metrics on Slide 8, non-GAAP operating income of $69 million increased 67% year-over-year. Adjusted EBITDA of $77 million increased 56%. Non-GAAP net income for the quarter was $56 million, or $1.21 per diluted share versus $0.56 a year ago. Free cash flow was $45 million in Q2 versus $36 million a year ago. The improvement reflects year-over-year earnings growth. Year-over-year revenue growth by business segment is on Slide 9. Device Solutions revenue increased 6% on a constant currency basis, driven primarily by growth in EMEA smart water sales. Networked Solutions revenue grew 14% year over year, driven by the catch-up of previously constrained revenue and increased project deployments. Outcomes revenue increased 16% year over year, primarily due to higher recurring and services revenue. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q2 non-GAAP EPS increased by $0.56 year-over-year to $1.21 per diluted share. Pre-tax operating performance contributed $0.70 per share year-over-year improvement driven by the fall-through of higher revenue and gross profit, partially offset by higher operating expenses. Higher tax expense had a negative year-over-year impact of $0.11 per share, and foreign currency and share count had a negative impact of $0.03 per share. Turning to Slides 11 through 13, I will review Q2 segment results compared with the prior year. Device Solutions revenue was $119 million, gross margin was 26.3%, and operating margin was 20%. Gross margin was up 450 basis points year-over-year and operating margin was up 760 basis points, reflecting a higher value product mix and operating leverage. Networked Solutions revenue was $413 million with gross margin of 36.9% and operating margin of 28.5%. This quarter was a record revenue level for the Networked segment. Gross margin increased 310 basis points year-over-year and operating margin was up 400 basis points due to favorable product mix and operational efficiencies. Outcomes revenue was $78 million, a quarterly record for the segment with gross margin of 34.8% and operating margin of 13.7%. Gross margin decreased 600 basis points year-over-year and operating margin was down 520 basis points due to a lower margin revenue mix and increased services costs. Turning to Slide 14, I'll review liquidity and debt at the end of the second quarter. Total debt was $1.265 billion, and net debt was $344 million. This includes our existing $460 million coupon convertible notes maturing in 2026 and the recently issued $805 million coupon convertible notes maturing in 2030. This recent financing was a well-executed transaction that significantly improved our liquidity and strategic flexibility, particularly as it relates to M&A. As of June 30th, net leverage was 1.2 times, and cash and equivalents were $921 million. Now please turn to Slide 15 for our third-quarter outlook. We anticipate third-quarter revenue to be between $590 million to $600 million. The midpoint of this range represents growth of $34 million or 6% year-over-year. For non-GAAP EPS, we expect a range of diluted share at the midpoint. This implies an increase of $0.17 versus Q3 of last year. Now please turn to Slide 16 for an update to our annual 2024 outlook. We now anticipate 2024 full-year revenue to be within a range of $2.385 billion to $2.415 billion versus the $2.275 billion to $2.375 billion range we provided in February. At the midpoint, this represents an increase of 10% versus 2023 and 3% from our prior 2024 annual guidance. Continued customer demand and strong operational execution are driving the higher revenue expectations. Earnings will also be positively impacted by the fall-through of higher revenue. Our non-GAAP EPS full-year outlook range is $4.45 to $4.65 per diluted share versus the February guidance of $3.04 to $3.80 per share. At the midpoint, the updated non-GAAP EPS estimate is up 35% versus 2023 and 26% versus prior guidance. The revised full-year guidance assumes a 23% effective tax rate. The actual tax rate could fluctuate based on jurisdictional mix and the timing of tax settlements. The recent financing transaction we completed in mid-June will be accretive to our 2024 EPS, given both the net interest income and the share buyback. We estimate the Q3 impact is approximately $0.11 per share and the full-year impact is approximately $0.22 per share. This benefit is reflected in the updated guidance. Our financial performance has accelerated meaningfully over the past year as supply availability recovered and our operations and utilization levels improved. Having realized significant operating leverage over this timeframe, we're now entering a more normal operating environment versus the catch-up environment of the past six quarters. Lastly, as Tom noted, 2024 bookings are expected to skew more to the latter part of this year, which will likely impact 2025 revenue as the projects will now start later than previously anticipated. Now I'll turn the call back to Tom.

Thank you, Joan. The need for great hardening and modernization is clear to us, our customers, and increasingly the public. Extreme weather and climate disruptions continue to challenge our customers, most recently in Houston, Texas, where Hurricane Beryl left millions without power. Beryl was an uncommonly early and strong start to the hurricane season. Unfortunately, these types of events are expected to increase in frequency, duration, and intensity. Itron's technology provides our customers with visibility into what is happening across their distribution assets in an accurate and timely fashion, while providing capabilities ranging from support of day-to-day operations to identifying the magnitude and location of customer outages, while also helping to reduce the impacts should these events occur. Digitization of the grid and software-driven approaches to problem-solving and asset management, like Itron's Grid Edge Intelligence platform, can provide critical support for utilities working to maintain access to energy and water during high-impact events. Visibility and control at the edge of the grid continue to be at the forefront of the most effective solutions to cope with the increasing challenges of our customers. At Itron, our commitment to supporting energy and water resource management extends to all stakeholders, and we recently published our 2023 Corporate Sustainability Report, which details our efforts to be responsible stewards. The report covers Itron's commitment to create a more resourceful world by helping utilities and cities achieve their sustainability goals, improve their environmental footprint, and shares the company's progress on advancing its own sustainability initiatives. Key areas of progress include our technology enabling Itron's customers to avoid at least 6.8 million metric tons of greenhouse gas emissions while enhancing consumer engagement through dynamic energy-saving programs such as demand response and time-of-use rates. During 2023, we achieved our initial greenhouse gas emissions goal of a 50% reduction in owned emissions by 2028, a full five years ahead of our target timeline. We enabled our customers to avoid 400 times more emissions than our own during 2023 alone. Last but certainly not least, our focus on maintaining a safe working environment for our team resulted in the lowest recordable and time-lost rates in Itron's history. On behalf of Itron's management, I am grateful to our team for the demanding work that produced these results. In closing, our second-quarter results were encouraging. We have much more to contribute and unfinished work to achieve our goals. We are excited for the future and eager to engage. Thank you again for joining our call today. Operator, please open the line for some questions.

Thank you. Our first question is from Noah Kaye with Oppenheimer. Your line is open.

Well, good morning. Thanks for taking the questions. So we'll start with Outcomes, and I believe this is the first time the segment actually led growth percentage-wise amongst all the segments since the first quarter of 2022. So good to see the inflection there. Two parts to this. One, is there, I think, a pathway or setup for Outcomes to sustainably lead top line growth over the coming quarters as was sort of the vision from Investor Day? And then on the margins in the segment, I know we talked about this a bit last quarter on your earnings call, but still seeing lower margin impacts, both on gross margin and operating income. When does that inflect more positively? And when do you start to see margins trending back towards the targets that you outlined?

Very good. Thank you, Noah. Tom here. I can take that one. So we were very pleased with the revenue growth in Outcomes. It's a new record for us on the Outcomes revenue line. And really, what you're starting to see showing through there is the Outcomes portion of various projects accruing to the revenue line. We knew Networks was growing for the last couple of quarters given the catch-up on components and the strength of the portfolio there. And now it starts to roll into the Outcomes segment. That's what is underlying the growth and what is still ahead of us. What you saw on the margin line though was much more tilted towards the services side of things rather than the SaaS or software portion of the Outcomes portfolio. And in particular, it was more one-time services with the integration of all of the back-office systems that are really starting to show through, and that's what led to a little bit lower gross margin during the quarter. That said, there's nothing structural here that leads us to move off of the 2027 targets that we laid out in Investor Day. So that low-40s kind of gross margin is still the right ZIP code for the Outcomes segment overall. So this isn't structural. It really is much more about the mix of the types of things that we had. What does it take to sustainably get into that margin and growth pattern? It really is a bit more scale to the business itself. It's what we've been working towards. It's finally starting to happen. I would expect it to continue to be lumpy, a little bit longer for several more quarters. That said, the general trajectory is moving in the right direction, and we're pleased with the progress.

Okay. Thanks for that color, Tom. And since during the prepared remarks, there was a discussion of Hurricane Beryl, I want to follow up on that. I think, and by the way, we're aware that you have some great customers down there, and ERCOT has always had some challenges. But I think it's pretty public that the response to the storm was broadly criticized. And I think people were without power for several weeks. So when you look at that event, what does it tell you about Itron's capabilities, Itron's evolution of those capabilities, and ability to help with improved response to natural disasters? Where do you need to grow your capabilities? And where do your customers potentially benefit from using more of the services that you offer? In other words, to what extent is this an opportunity and to what extent is this a challenge for the company?

Yeah. I definitely put it in the category of opportunity for us. We continue to invest in the Grid Edge Intelligence Platform, and you can put that capability to use on grid resiliency as well as outage management. You can figure out where you have an outage and get to the scene of the issue and be able to correct it faster. When an outage should occur, you can put that capability to use for things like vegetation management in a proactive sense. Here's where we've got some trees revving up against some critical infrastructure, and you could roll the truck to take care of that vegetation more fully. So we definitely like the direction of our portfolio, and we think that investment in resilience and reliability of utility infrastructure is absolutely essential in the new world that we're moving into. Those floods and fires and storms are sadly happening more often than not, but it is definitely in the category of opportunity for us overall and something we're eager to engage with our customers to go get deployed. That relates back to the question a moment ago it's that type of revenue accrues in the Outcomes segment and part of the things that we're working with our customers to get deployed now.

Right. I guess that's what I'm getting at here, that more customers should be utilizing the Outage Management services, the Distributed Intelligence capabilities that are embedded in the portfolio. Have you seen that kind of uptick in interest broadly across the customer base over the last, call it, coming quarters and potentially even in response to what happened with Beryl?

Absolutely. So we've seen a much broader interest in things like Wildfire Management and Vegetation Management for sure, in areas where that type of situation is very prevalent, meaning the West Coast in the U.S., clearly is an opportunity there. So again, the level of conversations with customers clearly has increased. Their interest is high. There's also government funding activities that are in this area as well to invest in resilience and reliability. And again, what gives us a lot of optimism about that portion of our portfolio for the years ahead.

Okay. Thank you, Tom. I'll turn it over.

Thank you. And our next question coming from the line of Jeff Osborne with TD Cowen. Your line is open.

Yeah. Thank you. I just wanted to maybe follow up on the prior question around the Houston utility. Tom, aren't the bulk of those meters that have been installed back in like 2007 to 2010 not even IP-compliant? Would they even work with the existing software set or would the meters themselves need to be upgraded? Or have some kind of migration path?

Yeah. There's a migration path is probably the right terminology to use there. So clearly, if you want to deploy something like Distributed Intelligence, it would be a new set of hardware, but you could deploy that on a selective basis or an ongoing basis. It wouldn't necessarily need to be a full rip-and-replace kind of setup with a lot of our customers across the territories.

Got it. And then maybe just in conversations with broader customers, I think prior a year or two ago and in the past, the narrative from you folks was much more around EV and renewable integration, but I'm just curious, with the utilities reporting so far, the past two earnings call cycles, it's been much more around load growth. And so I'm just curious, what in particular can DI do to help manage load growth and squeeze sort of efficiencies and non-wires alternatives out of the grid in areas that maybe aren't as impacted by renewables and EVs, which seem to be the prior positioning of Itron at least to investors previously?

Certainly, the utilities are facing several challenges. We previously discussed two key issues: resilience and reliability during storms, as well as changes in overall load growth, including increased onshoring of manufacturing and the rise of data centers. Additionally, there are evolving load patterns with more electric vehicles and batteries installed behind the meter. These factors underscore the importance of our investments in the Grid Edge Intelligence Platform. This platform functions like a versatile tool, allowing us to address current challenges effectively. Its capabilities include connectivity to edge grid assets, visibility into their status, control over these assets, and optimization to ensure they work cohesively. This can be utilized in non-wires alternatives, coordinating assets to draw from battery power and developing virtual power plant capabilities with customer-controlled assets for enhanced resiliency and reliability. All these functionalities enable utilities to manage a range of complex issues they face today, which is why we believe we have a superior solution compared to others in the industry.

Perfect. If I could squeeze one last question in. Joan has mentioned that the bookings will be weighted towards the back end of the year. I just wanted to ask a two-part question about that. What are some of the regulatory hurdles or scrutiny that the awards you already have are going through? Is there any risk in your opinion? The second part of the question is, could you remind us what the typical lag is from regulatory approval to the start of installation? Is that a six, nine, or 12-month process? It seems like Joan was implying that there might be a softer first half of 2025, and I'm just following up on the point she was trying to make.

Right, right. So our bookings discipline is the award to sign contract and regulatory approval. The reason we do that, although it is probably somewhat conservative, is it makes the bookings really, really sticky. Once it's booked, it really doesn't go away. It perhaps could shift in time. But it's very, very sticky. The $1 billion of pending bookings that I talked about, that number is a lot larger than is normal overall. And I think there's two reasons that are underneath that. The first one is regulatory approvals tend to be a bit more complex these days given the challenges that utilities face, as well as commissions. Generation, transmission, and distribution are all in need of upgrade and expansion. Interest rates are a little higher, and inflation is higher, consumers are struggling to pay bills. So as the regulatory commission, how do you think through all of that? As a utility, how do you prioritize all of that? So it makes the rate case a bit more complicated at times. That's part of the answer. The bigger part in the case of some of those larger pending bookings for us has to do with the government funding side of things, example being IIJA funding. That's an extra step in the process where a portion of the total cost is covered by the federal government, and then the rest of it goes into the rate case. So you got to get one before you could do the other, so you can do the math across the board. And that extra step is taking a bit more time in the rate cases, which means that pending bookings category is a little bit larger than usual. I do think that given the pace that things are moving just now, we should see those bookings more towards the second half of the year, as Joan mentioned, and then the typical lag time from a bookings booking until the project really starts to begin tends to be, I would say, usually in the six, nine, sometimes 12-month kind of range, but nine being sort of the center portion of that and then the project ramps from that point. So it does give you that profile or at least thoughts about what 2025 ought to look like. We're not trying to guide 2025 today. We just want to be transparent about timing and what that may look like.

Perfect. That's all I had. Thank you.

Thank you. And our next question coming from the line of Ben Kallo with Baird. Your line is open.

Hi. Thank you for taking my question. Good morning. I want to revisit the outcomes from the record quarter. Tom, you mentioned there were some services included. Could you provide insight into what's in your backlog regarding outcomes? Also, when can we expect to see the margin shift towards the higher-margin segment of the outcomes business? Will that happen next quarter or will it extend into 2025? I have a follow-up question as well.

Sure. While we don't provide a breakdown of the backlog by business unit or segment, it's important to note that over 90% is from Networks and Outcomes. Typically, we begin by installing the network, followed by executing the first use case, which often involves a simple AMI application. As we add more capabilities, we need to integrate all the back-office systems to leverage the data effectively, which usually increases service revenue. Eventually, we deploy the actual capabilities, which relate more to the SaaS software aspect of our portfolio. This pattern generally holds true, although it can vary from project to project. This was evident in the Outcomes revenue and margin for the second quarter. I believe that, considering the size of this business, we are still below our targeted scale, and while there may be fluctuations from quarter to quarter, I am confident that margins will move towards the 43% to 45% range in the coming years, as we outlined during the recent Investor Day.

And then just talking about the complexity of the utilities that you serve, load growth, has that changed your emphasis on M&A? Or has it kind of reduced the ability for you guys to do M&A because of valuations out there? Could you just maybe give us a little update on the environment on the M&A front? Thank you.

Okay. So no change in our aspirations to expand our portfolio organically or inorganically. We wanted to build a flexible platform that allows our customers to put it to use to solve the problems we know they are up against, so no change there. Clearly, we want to grow that Outcomes portion of the portfolio faster than what we can do organically, which leads to the inorganic options on the M&A front, which are generally in the Outcomes space. I tend to think that valuations, if anything, probably have come down a bit from where they were, but valuations in the software area clearly are higher than for hardware just in a generalized sense. So no change in our aspiration. What we're looking for is something tilted towards Outcomes, something that's truly scalable and really allows us to expand the reach and breadth of that portfolio.

Thank you. And our next question coming from the line of Joseph Osha with Guggenheim Partners. Your line is open.

Thank you. Good morning. I just have one question, folks. Looking at the midpoint of where you've ended up this year with your guide, looking at some of the comments that you've made about these bookings showing up for next year. To the midpoint of your 2027 guide at this point, by my math, you're only looking at a 4% CAGR, which seems conservative to me. So I'm wondering, I suspect the answer is no, but I'm wondering if you might be willing to make a comment about implications that the numbers we're hearing today have for that 2027 range that you put out at the Analyst Meeting? Thank you.

Yeah. I would say no change to the 2027 numbers and the ranges that we put out there a couple of months ago. We never expected it to be a straight line from 2023, 2024 all the way to 2027. So we stand behind the targets that we provided for 2027. The commentary that we made, as Tom just described on bookings is just to be transparent, if they end up at the end of 2024, the rollout of revenue is different than they would have been if they were in the beginning of 2024. So if you look at the current 2025 consensus numbers out there, you got to really make sure you normalize for the $125 million of catch-up that we had in 2024. And just doing that, the current consensus for 2025 is already 9% growth. So you're right that if you kind of take the midpoint of the updated 2024 guidance to 2027, it's more like 4% CAGR. But again, you got to be careful because of that catch-up effect in 2024.

Well, okay, but I'm going to drill down on that a bit because even if you run through that math, looking at 2026 and 2027 then, the midpoint of your guide implies that you fall off assuming your comments about 2025 are correct to low single-digit growth, which doesn't seem to make sense to me. I mean, doesn't this business organically grow at 4% or 5% even off of that 2025 comp?

Well again, if you look at the market numbers based on kind of 2024, I think at the time of Investor Day, we were looking off 2023 at 5% to 7% kind of growth for the overall company. So again, if you anchor it off 2024, it's probably a bit lower than that. But certainly, that's organic. That's no M&A. And as we described the 2027 targets, we also did not put any stimulus. So hopefully, it's higher than that, but the numbers that we described back in March still stand.

Thank you. And our next question coming from the line of Martin Malloy with Johnson Rice and Company. Martin Malloy, your line is open. Please check your mute button.

No. Thank you. Sorry about that. Just one question for me this morning. I was wondering if you could maybe give us an update on the partnerships you've announced with GE, Vernova, and Schneider and how those are going?

Happy to. So those partnerships are alive and well and something that we're excited about. The underlying thesis behind it is absolutely playing out as we would hope. Our customers really struggle with keeping up in many cases with the speed of technology. So new ideas come at them faster than infrastructure changes. How can we help them cope with that by doing a lot more, I'll call it, pre-integration and making sure that our things work better together out of the box, and it saves the customer time later on. So a number of very fruitful discussions going on with those partners today. In some cases, targeting or in concert with very specific customers, pilot projects, and technology demonstrations, which again, we hope will lead to revenue acceleration in the years ahead. So I would say alive and well and that bench of technology partners that we want to use that playbook with is growing by the quarter.

Thank you. And our next question coming from the line of Pavel Molchanov with Raymond James. Your line is open.

Yes. Thanks for taking the question. Can you drill down on this kind of sneak preview of 2025 that you gave in the prepared remarks saying that revenue might shift kind of beyond 2025 based on certain utility contracting activity. Can you just explain what you meant by that?

Sure. So again, I'd say, first of all, it's too early for us to be giving 2025 guidance. But given that the profile of the 2024 bookings is more skewed to the latter part of the year, we thought it was prudent just to remind you that there is a natural timeline between something being booked and when it converts into revenue and Tom just described that kind of six to 12-month timeline. The only other comment, again, that I just made in response to an earlier question is be careful when you look at growth, 2024 to 2025, don't forget to normalize for $125 million of catch-up revenue that existed in 2024. And so, that's kind of the commentary that we had on 2025.

Okay. Yeah, that's useful. And then also kind of looking ahead to 2025 from a margin perspective, what's the latest on the post-COVID pricing kind of flow through? I remember you, obviously, had some kind of legacy contracts that are rolling off. How close are we to that roll-off finally?

Sure. Starting with your question about pricing, the shift to a more indexed pricing model is proving effective and is being implemented well on new projects entering bookings. So far in 2024, the price-cost balance has generally been positive, and I expect it to remain that way based on current observations. Regarding the backlog, we are still around a 70%-30% split, with 30% still pending in some of the pre-priced backlog. While there are changes happening with new bookings and outgoing revenue, a 70%-30% position is still acceptable. By 2025, we will benefit from the closure of those factories in the latter half of this year, which is an advantage. Overall, pricing is working in our favor, and I am pleased with the direction the business is heading and the strong execution by the team.

All right, thanks very much.

Thanks, Pavel.

Thank you. And our next question coming from the line of Kashy Harrison with Piper Sandler. Your line is open.

Good morning and thank you for taking my questions. So apologies if I missed this earlier, but I was wondering if you could just speak to the drivers of the increased revenue expectations this year. How much of that is just a pull forward or faster conversion of backlog versus increased demand?

Yes, I can start, and then Tom may want to add in. Regarding the Devices segment, it has significantly exceeded our initial expectations. We have seen unexpected growth, particularly in Europe with water sales. There are numerous upgrades to new technology occurring in Europe for our water customers, contributing to substantial growth this year that we had not anticipated. Additionally, some of the network deployments are progressing faster than we expected now that we've caught up, while Outcomes is roughly in line with our expectations.

I think it's a good and accurate summary overall.

Got it. I appreciate the added color. And then just my second one, I know this is a little bit fresh given that it just happened a couple of days ago, but PJM recently had a record auction for power just given the plant retirements and surge in demand. I was wondering if events like this factor into your discussions with customers and theoretically, how you think about the implications to demand within that area for your products, just if we continue to see events like this?

I think all of our customers are definitely thinking about this, especially when focusing on the U.S. Load growth over the next 10 to 20 years is markedly different from the past couple of decades when it was more or less flat. Now, we are witnessing growth, and while everyone can guess the rate of that growth, the shift from essentially zero growth to an increasing trend is significant. This is evident in the surge of private power purchases from major tech companies who are taking large amounts of power off the grid. This scenario places immense pressure on the overall system, requiring us to maximize efficiency within our current setups while also striving to enhance generation and transmission. We are involved in distribution upgrades to boost efficiency and ensure that when new bulk generation comes online, it can be effectively distributed. Our investments in this area over the years have us looking forward to the returns in the future. These challenges are not limited to any particular region; they present a considerable opportunity for us to assist our customers across the board.

Appreciate it. Thank you.

Thank you. Our next question coming from the line of Chip Moore with ROTH. Your line is open.

Thanks for taking the question. Hey, everybody. I wanted to go back to the trajectory on 2027. I think you framed out dynamics for next year very well. And Tom, I think you mentioned government funding starting to play a role here in some of the approvals. Just maybe, how should we think about that potential benefit of stimulus if that's not embedded in the longer-term view yet?

It's quite challenging for me to predict exactly what that will look like. We didn't include it in our 2027 targets due to uncertainty around timing and specifics. Clearly, awards are beginning to be issued. If I look at a small portion of IIJA funding through the GRIP Program, the first round of awards was announced in the fourth quarter of last year, and an agreement was signed between the grid deployment office, which manages those funds, and a customer, and this became public just last month. From the announcement of the bill in 2021 to the initial awards in late 2023 and then the actual agreement being finalized in mid-2024, you can see the delay in the funds being utilized. I'm optimistic that the pace will pick up, but it's still tough to predict exactly how it will unfold. A significant amount of money will be spent, which should benefit our customers and eventually us, but the timing remains uncertain, which is why we left it out of our 2027 projections. When it does come through, it will be an advantage for us.

Perfect. No, that's helpful. Appreciate it, Tom. And maybe just last one. Just in terms of your conversations, I guess, with sort of leaders and laggards in this space in terms of Edge Intelligence adoption. Just how are you seeing those conversations evolve? And how do you think, I guess, about that tail opportunity developing over time?

The conversations only continue to accelerate. I can't think of nearly any customer in the electricity space that isn't thinking about how they could use this capability and why they need it. We see the same thing on the competitive side where our competitors are starting to create or at least talk about the things that they would do in this area. So I think we were absolutely ahead in the market and continue to be there today. Today, there are about 10 customers or thereabouts that are in active deployment or are already booked. And we have over 8,000 customers on a global scale. So you can see the runway that's still ahead in terms of being able to deploy this much beyond the early movers that are in the game today.

Great. Appreciate it. Thank you.

Thank you. And our next question coming from the line of Austin Moeller with Canaccord. Your line is open.

Hi. Good morning. Nice quarter. Just my first question here. Are there any specific projects either with a specific utility or in terms of contract size that we should be thinking about driving more momentum in the backlog over the next year?

There are a number of them. It wouldn't be appropriate for me to name them, but regarding the $1 billion of pending bookings I mentioned, there are about 10 or so that I counted in that category. So it's a pretty broad range and not heavily reliant on a single customer.

Okay. That's helpful. And just another question, where are we at in terms of the old backlog that was not inflation indexed? Is that flowing out pretty evenly as of Q2? Or should we expect to be more back-end loaded, Q3 and Q4?

I would say it's flowing out overall. Some portions of it clearly are pushing ahead based on the deployment time frame. So it's still roughly in that 70%-30% kind of range where we are today. The majority of that 30%, if you will, that's still out there flows through in the 2024, 2025 range. So not wildly different than what we've spoken about before, maybe a few things have slid a quarter or two, but overall tracking to our expectations.

Great. Thanks for all the details.

Thank you. Our next question is from Scott Graham with Seaport Research Partners. Your line is open.

Yes. Hi. Good morning, and nice quarter. I wanted to just maybe speak, Joan, just a second on the incremental margin, which seems to be creeping up each quarter even as your sales are just a little bit slower, obviously, because of the stack comparisons and all of that. And I'm just wondering, is it just the case here where you have that past due now behind you, and it's just sort of people are normalized in their seats or on your production lines? Is that what we're seeing here in the incremental margin rise?

I would analyze this by our segments. In Devices, there has been a notable improvement over the past couple of years, especially compared to the mid-teens performance a few years back, with results now in the 20s last year and this year. This progress is largely driven by refining our portfolio. Several years ago, our Devices segment was much larger, but we have actively exited unprofitable product lines and shifted our focus from just top-line growth to enhancing margins. They've done an excellent job with this strategy. Regarding Networks, there has been strong margin performance in the last few quarters, which I attribute to a favorable product mix—certain products deliver better margins than others. Additionally, as we've addressed past revenue constraints, we're seeing increased factory volume, which contributes to margin benefits through improved absorption. Both product mix and operational efficiencies tied to these volumes play a role here. Lastly, Outcomes has seen a slight decline, primarily due to the mix of solutions within that segment.

Thank you for that. I appreciate it. Tom, that is a significant number in the award pipeline, and congratulations on that achievement. I was hoping you could break it down for us a bit more. Are you all focusing on providing more solutions now than ever before? Perhaps you can share some of the key components of that $1 billion?

The biggest portion of it is the Grid Edge Intelligence Platform. It's this notion of putting out a networking capability that gives you connectivity to assets at the edge of the network and being able to get visibility and control of those assets out at the edge. Being able to grab much richer data to be able to make intelligent decisions around outage management or vegetation management or wildfires or being able to control edge assets would optimize usage at the edge. So that, by far, is the largest portion of that backlog or pending projects is that Grid Edge Intelligence Platform that you've heard us speak about quite often.

Yes. So the endpoints there are probably going to jump up in 2025 then?

Yes.

Absolutely. Yes, you'll see steady growth overall and every quarter. That's clearly what's in backlog today. And as we book new projects, it will still be growing that portion of it. So I do think the number of DI-enabled endpoints that we talk about, a little over 11 million, I think, today, that will continue to grow quarter after quarter.

Thanks a lot.

Thank you.

Thank you. And I see no further questions in the queue at this time. I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.

Thank you all for joining the call today. We look forward to updating you again next quarter.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation and you may now disconnect.