Barbara Doyle - IR Philip Mezey - CEO Mark Schmitz - EVP, CFO Tom Deitrich - EVP, COO.

Noah Kaye - Oppenheimer & Company Ben Kallo - Baird Sean Hannan - Needham & Company John Quealy - Canaccord Jeff Osborne - Cowen & Company Jose Garza - Gabelli & Company.

Good day, everyone, and welcome to the Itron Incorporated Q2 2016 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..

Thank you, operator. Good afternoon and welcome everyone to Itron's second quarter 2016 earnings conference call. We issued a press release earlier today announcing our results. The press release includes replay information for today's call.

We have also prepared a presentation to accompany our remarks on this call and the presentation is available through the webcast and through our corporate Web site under the Investor Relations tab.

On the call today, we have Philip Mezey, Itron's President and Chief Executive Officer; Mark Schmitz, Itron's Executive Vice President and Chief Financial Officer; and Tom Deitrich, Itron's Executive Vice President and Chief Operating Officer.

Following our prepared remarks, we will open up the call to take questions using the process that the operator will describe. First, 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 Web site.

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 call and the comments made in our Q&A session and then the Risk Factors section in our Form 10-K and other reports and filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward-looking statements. Now, let me turn the call over to our CEO, Philip Mezey..

Thank you, Barbara, and welcome to everyone on the call. It's good to speak with you all today. Over the last six months, we’ve remain focused on running our business and executing on our strategic initiatives, which is evident in our strong financial results in the first half of 2016.

There is a lot we're going to discuss today, so to summarize there are three key points that we want to communicate. First, we delivered strong performance in the first half with healthy sales growth and good operational execution.

Second, we're raising our full year 2016 guidance which reflects our solid first half and our outlook for continued improvement in the second half. And third, we see opportunities for additional synergies and efficacies in our business. This includes the new restructuring projects we announced today as well as broader initiatives across our business.

Tom Deitrich will discuss this more later on today's call. Looking at our Q2 results, we realized solid revenues of $513 million, gross margin of 33. Adjusted EBITDA of 10% of revenues and non-GAAP EPS of $0.65.

The strong results reflect our growing smart business as we continue to target opportunities where our technologies can best serve customers profitably. We're also realizing benefits from our cost savings initiatives and our focus on driving more efficient operations around the world.

Lastly, I'll comment on our backlog and then I'll turn the call over to Tom. Our backlog at the end Q2 remain healthy at $1.3 billion with 395 million of bookings in the quarter. I’d note that these figures exclude more than $300 million worth of business that has been awarded or which we've been selected and has not yet been booked.

This includes several projects we've announced this year. Avista selected Itron's OpenWay Riva platform to modernize its electric and gas network in Washington State and lay the foundation for smart city applications. We’re delighted to be working with Avista on this large scale redeployment in North America.

Additionally, National Grid has recommended deploying Itron OpenWay across Massachusetts, following the successful pilot of our technology in Worcester. Itron will provide the advanced meter and communications network to modernize its grid for 1.3 million customers.

In August, we announced the contract with Peoples Natural Gas in Pennsylvania to install 460,000 OpenWay Riva communications modules over the next five years.

With Riva solution, Peoples will improve operational efficiency and customer support by automating meter reading with the ability to expand the system to include a multipurpose network to support smart city applications and a diverse ecosystem of meters, network devices and distributed assets.

We have also signed key contracts with Anidus [ph], formally ERDF in France for the Linky Project and Smart Water Projects in Rogers, Arkansas and Lancaster, Pennsylvania. We’re confident and upbeat about our healthy backlog and a solid pipeline of business, especially in North America.

Importantly, our investment in our multi-purpose open standards IoT network OpenWay Riva unifies our solutions and accelerates our competitive position.

As a common IoT platform across electric, gas and water, Riva provide the foundation for utilities to share networks and run smart city applications such as smart street lightening or electric vehicle charging.

Itron’s OpenWay Riva solution is unique in that it's the only utilities IoT solution available that delivers both adapted communications technology and distributed intelligence to meters, grid devices and sensors at the edge of the network.

Riva’s adaptive communications technology combined radio frequency, power line carrier and Wi-Fi on the same chipset to deliver high communications performance with connectively. ACT dynamically selects the most reliable and fastest communication path based on location, network operating conditions and the type of grid application or data.

Our Riva technology enables utilities to run multiple applications in edge devices and make near real time decisions in the field. Our edge intelligence differentiates Riva from competitors’ solutions and their traditional software role solely collecting data for billing and back office analysis.

We’re very pleased that in June Itron’s OpenWay Riva IoT solution was recognized by Greentech Media with a Grid Edge 2016 Award. Riva was recognized for its demonstrated potential to shape the distributed energy system of tomorrow. Now, I’d like to introduce Tom Deitrich.

Tom joined Itron in October 2015 as Executive Vice President and Chief Operating Officer. Tom has substantial global experience in operations at leading technology firms where he drove strategies that transformed and significantly improved business results.

He hit the ground running in October, and will now share some comments about his approach to accelerate our transformation at Itron. Tom, let me hand the call to you..

Thank you, Philip. Good afternoon. I am pleased to speak with everyone today. Nearly 11 months ago, I came to Itron filled with determination and energy to improve the performance of the Company. Today, I am even more excited about what we could accomplish.

Itron has many strengths including deep customer relationships, innovative solutions and expertise around the world. My focus is to leverage these capabilities to improve the predictability of our business, increase our earnings and drive profitable growth.

Key to achieving these goals is a unified approach to our culture, common platforms that leverage our R&D and manufacturing resources in rigorous disciplined processes and measurements. As you may recall the first quarter of business was to perform an evaluation of our R&D supply chain and manufacturing operation.

Mark Schmitz and I undertook this comprehensive review. With the support of global consulting firm, A.T. Kearney we benchmark Itron's performance against best-in-class standards across various sectors ranging from technology to industrials.

Based on this evaluation, we immediately began to systematically refine our processes, tools and organization to drive stronger profitability and more consistent results. I am pleased to say that we're beginning to realize the benefits of these efforts, combined with a number of other initiatives many of which predate my joining the Company.

This work which includes the restructuring activities announced in 2014 has already begun to change the way we operate, putting us on the path to increase the profitability and growth. Over the past few quarters, we've implemented a number of new processes and approach throughout our organization that propel towards benchmark performance levels.

While these changes are too numerous to discuss here. I would like to give you a list of some of the key initiatives. We implemented a companywide operational cadence that focuses on quantifiable leading indicators that improved our visibility.

This cadence which includes standardized metrics allows us to measure our operations around the globe and drive focused improvements. We’ve unified our insensitive plans to ensure clear alignment to company objectives.

We created and filled a Senior Vice President of Supply Chain roll to drive synergy and scale in our manufacturing footprint in global supply chain. We've elevated the focus on quality with the appointment of a Senior Vice President of Quality to standardize a holistic quality system for the Company.

We've developed a consolidated platform for sales pipeline management and sales operations planning. We've established a disclaimed portfolio management approach to ensure that new product development efforts are targeted to expand margin and returns.

This approach also gives us clear eyes on projects that are potentially going off track so that we can rapidly address and redirect as necessary. We've adjusted the product development process and teams to drive efficiency and effectiveness in our R&D investments.

We fostered a clear attention to detailed culture, expanded our center of excellence in India and opened Itron ideal labs to drive solution innovation. We’ve accelerated our software activities with cloud-based targeted solutions that complement our distributed computing Riva platform to improve the operational efficiency of our customers.

We have refined our go-to-market strategy to ensure value pricing for our products and services and target the unique needs of our customers. And finally, we expanded our evaluation of the global sales profile.

This process started in the electricity segment a few years ago to ensure that we're focusing our efforts on the right geographies and segments to optimize value and return. As a result, we have exited certain businesses that were non-strategic. We are now rigorously continuing this approach across the entire company.

With these initiatives, we've taken solid steps towards transforming our company but there is still much to do. Today, we announced some new restricting projects as another step in our ongoing operational transformation. As part of the plan, Itron will reduce its workforce and close or consolidate several facilities.

These projects are part of the continued effort to optimize the global operations, increase our competitiveness and provide strong support for our customers. Some of these reductions will begin immediately, and we target these projects to be substantially complete by the end of 2018.

We forecast annualized savings of approximately $40 million upon completion. Through this process, we will incur pretax restructuring charges in the range of $55 million to $65 million. Many of our employees are represented by unions and works councils.

In these cases, employment actions may be subject to prior consultation with work councils and authorities. This may affect the timing of the charges in the planned savings in certain areas. Over the past few quarters, I hope that you’ve started to notice a change in Itron’s performance.

These are the results of the combined efforts of Itron employees, management and the strong support of our customers. However, my approach to business transformation isn’t about one or two, or even a handful of projects.

This is about an ongoing evaluation, measurement and disciplined improvement in our operations to drive real synergies from our global presence and scale. While we are beginning to see the benefits from our operational focus, there is much more that we can deliver. Ultimately the outcome we seek is really quite simple.

We want to improve the predictability of our business. We want to increase our earnings and drive profitable growth. I am confident that we’re taking the right steps to achieve these goals. With that, Mark, I’d like to turn the call over to you..

Thank you, Tom, and good afternoon. It has been some time since we presented our results. So before discussing quarter two, I’d like to comment on the delayed 2015 10-K filing, and the software VSOE revenue recognition review.

As you know the reason for the extended 10-K filing had to do with a more rigorous approach to VSOE analysis of software and related revenue and costs applied to 2015 and prior years. And we have applied the same more rigorous standard to our 2016 reported results.

The 2015 10-K filed on June 30th displayed non-GAAP EPS of $0.73 for the year, which was $0.28 lower than we had announced in February. The variance in final EPS results for 2015 had very little to do with software revenue recognition.

The $0.28 per share adjustment was principally due to subsequent events recorded to 2015, and among these the largest item is a one-time legal settlement concerning the TransData license matter, which we announced in an 8-K on July 15th.

All told, the effects of our revised approach to software revenue recognition on 2015 and prior year results as well as on our 2016 results are immaterial.

We’re pleased to be filing our quarter two 10-Q which will very likely take place tomorrow or at latest Tuesday, and we expect to be timely with the filing of our quarter three 10-Q and subsequent quarterly and annual reports.

Work is also proceeding according to plan for remediation of the material weakness we announced in our 2015 10-K involving software revenue recognition. We’re also pleased that the accounting review did not interfere with operating performance in the first-half of the year. As we reported on August 11th, quarter one results were strong.

We recorded constant currency sales growth of more than 15% year-over-year in quarter one with strong growth in both North America and EMEA, all three of our operating segments registered double digits rates of growth in quarter one.

Gross margin expanded by 180 basis points on favorable mix and Gas and electricity while Water suffered none of the special warranty expenses they incurred last year. Gas and Water both achieved gross margin of our 35% while Electricity’s gross margin approached 30%. Non-GAAP EBITDA expanded by 150 basis points to 8.1%.

Electricity’s non-GAAP operating margin expanded year-over-year by 390 basis points to 6.6% showing some of the improvements promised at the launch of our restructuring program two years ago. Free cash flow was healthy at $25 million and we ended the quarter with $220 million in net debt and the net debt to EBITDA ratio of 1.8 times.

Note that these results were achieved despite an $11 million year-over-year increase in operating expenses, $8 million of which was due to non-recurring audit costs associated with extended 10-K Filing as well as legal and settlement costs and other non-recurring professional services.

The positive momentum from quarter one carried over to quarter two with many of the same positive things repeated. In terms of sales growth in North America and EMEA, gross margin expansion due to favorable mix and efficiencies partly offset by continued excess cost for the delayed 10-K Filing and higher legal expenses.

As shown on Slide 7, we recorded quarter two revenue of $513 million, constant currency growth year-over-year of 10%. The Electricity segment led the way with revenue growth of 16% while Gas recorded 9% growth.

Gross margin improved by 790 basis points to 33.1%, about 500 basis points of this improvement is due to the special warranty charge of $23 million last year in the Water segment. The rest is due to favorable volume and mix in the Electricity and Gas segments as well as operational efficiencies.

Non-GAAP EBITDA improved by 9.3 percentage points to 10.1% with five percentage points of improvement due to the special warranty expense last year. EBITDA would have been better, had it not been for audit, legal and other non-recurring professional services costs. These non-recurring costs amounted to more than $9 million for quarter two.

Non-GAAP EPS was $0.65 per share compared to a loss of $0.31 [ph] in the year ago quarter. Our effective tax rate was 34.2% in quarter two. Slide 10 through 12 display operating results result by segments.

Noteworthy is Electricity's year-over-year gross margin expansion of 460 basis points to 30.4% which together with revenue growth of 16% pushed their non-GAAP operating margin to 9.9%. The gas segment achieved at 18% non-GAAP operating margin on 9% revenue growth and a 35.6% gross margin.

Water achieved a respectable 12.1% non-GAAP operating margin on 34.9% gross margin and modest revenue growth.

Free cash flow was $6 million for the quarter, a little over than last year’s $10 million due to a number of special one-time payments in the quarter or taxes and prepayments on software programs as well as the increased working capital requirements associated at high levels of revenue growth.

A one-time payment for settlement of the TransData litigation will be reflected in our third quarter free cash flow. We ended quarter two with $132 million in cash and $216 million in net debt for a net debt to EBITDA ratio of 1.4 times. Now let me turn to our outlook and guidance for the remainder of the year on Slide 14.

We are expecting revenue to be in the range of $1.95 billion to $2 billion, and non-GAAP EPS of $2.20 to $2.45 per share. Our guidance for effective tax rate remains unchanged at 37%. We are basing our guidance on continuation of existing currency rates. There are lot of positive things happening at Itron.

Our operational execution and financial results in the first-half of the year have been strong and our guidance reflects our expectation for continued strong performance in the second half. We’re far from finished and a long hard work lies ahead in implementing the actions and operational efficiencies that Tom just spoke about.

All of us in the management team are aligned on the priorities of predictability, profitability and revenue growth. And while improvements won’t be straight lined, we have here in quarters one and two a good beginning. So, I’d like to turn the call back over to Philip..

Thanks Mark. Overall, our team is executing on our goals and performing very well. Today, you heard Tom and Mark discuss the clear alignment across our Company on three key areas of predictability, profitability and growth. This alignment is evident in our results.

In the first-half of the year, we delivered significantly improved financial performance compared with last year. In 2014, we committed to strengthening performance in the electricity segment. We’re delivering on that commitment, with 17% growth at constant currency, 8% non-GAAP operating margin and 9% EBITDA in the first-half of the year.

Additionally, our Gas and Water segment margins have shown substantial improvement from 2015, returning to solid operating margins and EBITDA performance. And our OpenWay Riva platform unifies our Company and strengthens our competitive position for utilities in smart cities.

Our current performance puts us clearly on our way to our mid-teens EBITDA targets. I firmly believe in our potential to generate greater value for all of our stakeholders and position Itron for a bright future. Operator, now let’s open up the call to take some questions..

Thank you [Operator Instructions]. We’ll take our first question from Noah Kaye with Oppenheimer & Company..

Thank you. And first of all, I would start with congratulations Philip to you and the team for completing the restatement, getting the filings out and the performance. It’s good to be speaking with you again.

Maybe we can just start, since you've talked publically in a recent while, with the view that you have at current on the landscape, the metering landscape, the RFP activity.

Certainly you've seen in the significant awards here in North America, can you just comment on the level of RFP activity at present and how you're feeling about the taste of potential wins?.

So overall I would say that, we think, there is a strong opportunity and a good outlook.

What I've said in prior quarter remains true that with expanded regulatory support Pennsylvania and Massachusetts, we have pending cases in Indian and New Mexico, areas of the Northwest and the East, that there is a broad range of smart grid activity out there, and you've heard about some of these competitive wins.

But we really do continue to see a strong opportunity in North America. Rest of world, we've talked about activity in France which we see is ongoing and are very pleased with our position there, and have some further opportunities in Western Europe that we're pleased about. So I've characterized the overall outlook as positive..

And then maybe we can turn to the restructuring, just be helpful to understand how you guys are thinking about the cadence of both the cost and particularly the realization of benefits from that, and perhaps it’s well if that’s more likely the benefits to accrue the market line or the OpEx line?.

I'll turn it over to Mark second. I want to place the restricting in the context of Tom's broader comments though that said that, that this is an element of a much broader initiative of really strengthening the operational controls within the Company of driving down cost, organizational simplification and they were broad range of initiatives.

And this formal restructuring plan is a part really of a broader program that we think are going to continue to drive strong benefits. So with that, I'll turn to Mark to the question specifically about restructuring..

And I know you saw our 8-K that was filed earlier on this, so some of this may sound little repetitive. But we indicated cost of between $55 million to $66 million, severance in a range of 39 to 46. So call it 40 million to use a round number. Other costs are facilities, moving expenses, legal, et cetera.

We set it in a range of 60 million to 90 million. We said we'd expect $40 million in saving by the time the projects are completed and we think they will be substantially complete by the end of 2018. Just in terms of cadence there, it's really too early to comment on the timing.

Much of this is subject to European and country work council approvals -- except I should say on the cost side, not all of it will be recognized upfront in quarter three. So you will see the costs over at least a couple or three quarters.

And there is -- a lot of this is of the nature of continuous improvement, so obviously we're going to look to get as much as we can early on. But there is a lot of continuous improvement going on of Itron and this still just one piece of the puzzle, albeit a very important piece..

Thank you very much. And then maybe just one last question from me and it's really around cash flow. As we look at continuing to improve, potentially giving you some more wiggle room.

How -- Philip and team, how are you guys thinking about use of free cash flow these days? Are you considering expanding the share repurchase, are you feeling like there are more opportunities to be acquisitive.

How should we think about that?.

It's always a deep question, and I’d say that our policy with regard to, call it, capital allocation is, first of all, investment in the business. We’ve got great opportunities to invest in the business at attractive returns and the restructuring program is one example of that.

Secondly, we would consider tactical or strategic opportunities that enhance our competitive position, or that offer new opportunities, new avenues for growth of the business. And then third, yes, we do actively consider returning funds to shareholders as we have done in the past.

We do not have an active program in place for our share repurchases at this time..

Our next question comes from Ben Kallo with Baird..

I was hoping that you could provide a little bit of commentary on the pipeline coming up, perhaps especially internationally.

Are you seeing a lot of headwind there?.

So, international pipeline, what I would say, our characterization really on a regional basis is that we would consider EMEA as somewhat muted, as -- I wouldn’t want to call it directly related to Brexit. But we view with some level of caution economic expansion in Europe and its potential effect upon business over there.

So, while we are seeing steady growth, our water business is very well diversified and grows at a steady market rate that on the large procurement side that we are, I think, very balanced about the activity that we see there.

Latin America remain cautious, Brazil being one of our largest markets there, and as I think you can imagine, we’re quite cautious about the outlook in that market. And then in Asia, it's somewhat a story of China, but we do have some attractive opportunities that we continue to pursue.

So, really the strongest area for us really does continue to be North America. And as I said in my earlier comments, we’re very pleased with the outlook there..

And just one more question, I just want to make sure I heard you correctly.

Did you say there was $9 million on one-time unallocated corporate overheads in the second quarter?.

Yes, what I said is it’s a combination of special audit costs and legal and settlement costs and other non-recurring special services costs in quarter two, amounted to $9 million. And in quarter one that number was $8 million..

[Operator Instructions] We’ll move next from Sean Hannan with Needham & Company..

Good evening folks, and also to echo some of the earlier comments, there has been a lot underway I think for you all, the management team and in terms of getting back to current filing as well as operations that you have been accomplishing and of course in terms of we have the top line, there is that [ph].

There is certainly a lot of positives to take away here, so nice work on that front. My question also is focused around Europe, but perhaps in a slightly different -- from a slightly different angel.

You have a number of projects that has either been underway or just started underway in very early volumes and whether it be GRDS, ERDS, Italgas, et cetera, can you give us a little bit more color around the cadence of the volumes that are going to those customers and how you expect that to continue moving forward? And I guess there is an aspect that that's elaborating on some of your last questions, but a little bit more color would be helpful.

Thanks..

So as you've pointed out, we have overtime discussed a number of projects that are in the initial stages of ramp up. We did ship a nice volume of the Linky G1 and do have our initial award on the Linky G3, which -- so we'll continue to see volume through ’17, ’18 and we hope beyond there. GRDF does ramp up more significantly in ’17.

And we continue to compete for business in Italgas. So we feel that we have some nice visibility for investments that we've made over the last several years there.

What you've heard from us through is also some profit discipline both in efforts that we've made in order to cost down those products which we're bringing those cost optimize products to market as well as really maintaining bidding discipline to ensure that the awards that we do receive are at our target margins and we're pleased with the progress that we've made on those fronts as well.

So I think, there has been very good profit discipline as well as a nice continued growth opportunity for us..

That’s great. Now there has been over the course of the last two years a lot of puts and takes on whether whichever geography we may look at on the Gas side of the equation, so can you elaborate a little bit more on the current environment for Gas, U.S.

versus EMEA and other geographies within the world bank?.

We are, as you can see from our results, very-very pleased with the performance of Gas business and it’s returning to historical level of very attractive profitability and that is largely driven by a very healthy market in North America at near record levels. So that is the star contributor and that’s both communications and metering there.

In Europe, improvement in our overall margins is a result of the introduction of these costs optimized products and the ramp up that we’ve just discussed. And then we have of course the opportunity to continue to build on our commercial and industrial offerings which tend to be at higher margin levels.

We do expect the UK to come online here in the ’17, ’18 sort of timeframe so there is a nice opportunity for us there as well. So the gas business we see is continuing really to make that strong contribution to support the mid-teens EBITDA target for us..

And it seems like not only have we had the momentum, but you’re very optimistic that it has some good medium to longer term legs at this point?.

Yes, I mean, these awards are not -- either they’re multi-year in nature, and so this is, we feel a durable business..

Our next question comes from John Quealy with Canaccord..

So, Philip -- and those of us in Boston appreciate the Worcester pronunciation as well. So, first question for you, the M&A landscape has been hot, Xylem [ph] sensed this, Honeywell Elster, Sun Capital, GE, the Badger head stake, so two questions on this. Those -- they seem to be landing in a little bit more stable strategic owners.

How are you thinking about that? Honeywell doesn’t usually do utilities in this way. So talk about your thoughts about longer term changing dynamics, not going to talk about multiples, we can all do that on our own.

But has that caused you to think about things differently and go to market differently? And then on the other side of that, I want to talk about, does it change your approach in terms of Riva and OpenWay? Would you ever consider splitting metrology versus network as smart grid really seems to be taking off? But à la carte is still the way a lot of customers, i.e.

utilities want to talk. So, sorry for the [indiscernible] those first question..

No problem, John. So, we have not, although we have seen absolutely as you pointed out M&A related activity. It has not in our view particularly changed the competitive landscape. So sensing Xylem that we haven’t really seen Xylem in our Water marketplace and together we don’t see necessarily a new vector of competitive threat there for us.

And the same is true by the way for Honeywell Elster in terms of some combined offering that would be more competitive or would really change the dynamic for us in our market.

I think the second part of your question is hinting at the fact that these larger companies do see benefit in the communications capability that their utility acquisitions have potentially for other markets, because that’s certainly a synergy that they’ve discussed publicly.

And we definitely with our significant investment that we’ve made in OpenWay Riva, see the opportunity that we’ve mentioned, smart city several times, that building these types of networks and having communication devices does open the door to opportunities outside of the kinds of metering and sensing that we see in the distribution and deliver of Electricity, Gas and Water.

So, overall, again competitive landscape not particularly changed by those moves. And to your second question about do we see the separation of the communications and what we would think of as metering.

Looking forward to having opportunity with all of you to talk about what we see really is an opportunity of the integration of sensing communications and computing at the end point of some very exciting opportunities that are available for us there.

So, there we see the ability to sell networking and to work with third parties and we’re developing with Riva as well as the opportunity to really extend the value proposition beyond the revenue cycle, beyond the traditional billing types of solutions that we’ve looked at historically to deliver significantly more value for our utility customers..

And then maybe my follow-up maybe to Tom, if you could give us your thoughts on -- the composition of the business -- sorry about that -- in terms of warranty charges so we're coming off a period of several years of discrete warranty charges for a lot of different reasons internal or external factors, talk about your assessments of that almost a year in, are we always going to have a certain lumpiness in the warranty pictures here or what’s your valuation of that pictures, should it be more reliable for us moving forward specially as we look to gross margins go up? Thanks guys..

Thanks John, I'll just start out, in one sense in terms of Tom which was that, when Tom got here and we discussed this priority of that you heard predictability, profitability and growth.

That predictability, we rated number one because of this these extraordinary and lumpy charges and surprises that Itron had seen over the past years and how upsetting those have been, so I made it very clear to Tom and the team that looking at this problem and really getting down to root causes and driving a higher degree of predictability was amongst three incredibly important objectives, the one that we rated first.

So with that Tom, I'll turn it to you..

Absolutely, I pick up really well Philip left off. If we think about predictability as one of our chief tenants of how we want to move forward, I view that very much as a very a holistic thought process.

So how we design products, how specify products, how we work with customers in terms of the robustness of the solution, how we manufacture them, how we test them and delivery them.

All of that lead to the predictabilities so quality is something that absolutely is a very holistic part of how we think about the business, an area that we worked that on.

In my prepared comments certainly you've heard a number of these themes come up over and over again in terms of changes of our design processes as well as some structural changes that we made to put a focus on these types of things.

So I think we can very much do a very good job of building on the theme of predictability across the business where it would be financial, engineering, deliveries as well as quality. So I very much think we're on the right track, there is always more work to do as we work continuously to improve that and avoid any one-off types of charges..

We'll take our next question from Jeff Osborne with Cowen & Company..

Most of my questions have been answered, but maybe just picking up on the predictability, profitability and revenue growth themes. I believe Tom mentioned in his prepared remarks that the management incentive competition scheme is now all aligned.

I assume it's around those three tenants, given you've mentioned them 10 odd times on the call, but will it be shared in the 10-Q or perhaps that was in the 2015 10-K? What in particular the revenue growth and profitability metrics are as it relates to the management competitive plan?.

Jeff those will appear in the 2016 proxy when it comes out because they were part of an aligned program put in place for this fiscal year.

And to your point, yes, those elements are reflected historically; profitability and growth have been in the compensation plan very clearly in terms of revenue and EBITDA targets that have driven the short term incentive plan.

But to the predictability, there are measures in there that in the overall goals portion of our compensation plan that are now shared across not just the whole management team business the whole short term incentive population to make very clear alignment around those themes..

If I could squeeze in two here, one is on the Europe, you kind of addressed it on the demand side as well as the cost side and being disciplined. I did have just a quick question.

I was wondering if Riva as a concept is resonating with European utilities at this point given the challenging Dutch auction [ph] environment there, most of the examples you’ve highlighted are domestic.

But I was just curious on the European?.

Jeff, it's a great question, because there really is a bifurcation in that market as you know of what we would call specification driven markets that are not as amenable to the extended value proposition that Riva potentially offers to them. So, we have to be very targeted.

And historically we’ve seen regions like the Nordics that have driven for a somewhat higher level of functionality.

And so we’re being very selective and looking for markets that are looking for something more than really an automated meter reading with some extended -- some level of capability to really going beyond to some level of grid sensing or extended value proposition. So we need to be selective there. We are competing in that specified market.

As you’ve heard though, however, in France in particularly we discussed, but across certainly very competitively across our Gas and Water businesses as well..

And then last question I had is just obviously a litany of restructuring charges that you talked about playing out through ’18.

I assume it's a safe assumption that the actions announced today and assuming that the mix that you’ve seen here in the first-half of the year, does that remain constant exiting ’18 that that gets you to your target of mid-teens EBITDA, or is there something else that’s kind of Hail Mary that needs to happen to execute on that goal?.

I’ll offer the first response in that Jeff. And I think Phil wants to add something too. But if you look at, just look at it subjectively, we’re standing at a 10% non-GAAP EBITDA number at quarter two and we’ve got close enough to $10 million of excess OpEx in that number.

So, if you put that $10 million back in and look at us getting to -- we’re at 33% gross margin too, so you pick that gross margin up to the mid 30s or 35, and you’re pretty close to that mid-teens EBITDA. But we don’t see there is a Hail Mary at all, honestly..

I didn’t think so, I just want to double check that I wasn’t missing anything. The last thing on the [indiscernible] analysis or any of the work that Tom did.

Was there any discussion or output as it related to return on investment of the R&D dollars that are being spent?.

Yes, that certainly was -- Tom, why don’t you -- I mean once you cover Austin [ph] because it absolutely is the kind of benchmarking measures that were looked at there..

Great question. We did look at our R&D spend as well as many of the other supply chain metrics and identified a number of areas that I think we can do a bit better and that's exactly what we're looking at today.

It really comes down to making sure that we target our R&D spend into areas of the market where we can get some descent returns, so it's a spend targeting kind of question.

It’s a thought process around where we would want to play from a geographic standpoint, it's a thought process around the quality that's associated with the products, so when you sell them they stay in the field, it's the thought process around the overall solution as Philip mentioned, there is different types of markets that are out there.

At some places you can sell a piece of solution, other places you can create some additional innovation and value for customers by selling an entire solution and an outcome and also as we shift some R&D dollars into those areas we can get some good returns.

So those are perhaps some of the clues that were derived from that without giving you all of the nuts and bolts of the study. But those are deeply embedded into the comments that I made earlier and the changes that we're making in the organization, so pretty good stuff has come out of that study that will help us going forward..

We hear again from Ben Kallo with Baird..

Very quickly John, clearly what a great question he asked there and then following onto Jeff's question there, how do we think about the next step of cost reductions and how long does that take us to receive that? And then what do we have to worry about, Philip, when we looked across the business through kind of the churns business, I think you kind of answered this, but I guess as we think about Gas ERDF, GRDF outside backlog, how much of that business, do you have visibility on and how does that move the needle? Thank you..

So Ben I want to make sure that I’ve picked up all the piece of that, that in terms of cost reduction, I mean, the restructuring plan again is only a part of the steps that are being taken in order to drive our profitability and performance.

We'll continue to invest R&D dollars in higher margin products, greater selectivity in the targets that we're pursuing and improving our selling techniques, value-based selling techniques.

All kinds of things that go into managing that overall profitability number in addition to just getting our costs out and Tom enumerated the number of things that were going on there in terms of better supply chain discipline coordinated planning that even within our existing footprint give us an ability to manage that other cost to goods sold and other things that detract from our overall profitability.

So there are a wide range of actions been taken alongside of restructuring and we're seeing those benefits and some of those benefits already in 2016.

As to the churn business, I mean we continue to optimize our cost performance within those contracts, are pleased with the award levels that we're seeing there, again within our profit discipline and have good reason -- visibility, I mean to if I think I got your question on visibility too, as an example this European base contract that they're largely coming off on the schedules that they’ve projected in terms of their bid schedules, and so we feel that we have again this good visibility through ’17 and ’18 on progress against those large contracts..

Let's take one more question operator please..

Okay. Our final question comes from Jose Garza with Gabelli & Company..

Good afternoon guys, congrats on the filings.

I just wanted to see if you could maybe bucket the savings on the restructuring just in terms of segment, if you could?.

Actually we’re not prepared to break it up by segment, Jose, sorry. But I can tell you that we look at -- the majority of these cost reductions are going to occur in cost of sales. There is some impact in the OpEx categories, but mainly it's cost of sales. And we’re going to be reluctant to break it up by segment also..

And if you could, just thinking about the run rate on the corporate line, presumably, there will be some cost in here in the quarter.

How do we think about that going forward?.

There is a small amount of carry over excess cost related to the extended 10-K filing in quarter three, but it's not a material amount. And I think you should look for a pretty significant reduction at OpEx in H2 versus H1. It's going to be something north of $15 million reduction..

That concludes today’s question-and-answer session. At this time, I’ll turn the conference back to your speakers for any additional or closing remarks..

Thanks everyone. I am -- of course as we’ve said, we’re very pleased to be back with you and very proud of the finance team for getting us through this filing period and getting us caught up. We’re having a great time together. Things are -- we’re making a lot of progress. You’ve heard that we’re very well aligned.

We’ve got some really favorable market conditions and still lots of opportunity for improvement. So, we’re looking forward to telling you more about our progress here on the upcoming calls. Thanks very much, talk to you all soon..

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