Good day, ladies and gentlemen, and welcome to the Itron, Incorporated. Q1 2020 Earnings Conference Call. Today’s conference is being recorded. For opening remarks, I’d like to turn the conference over to Ken Gianella. Please go ahead..

Thank you, operator. Good afternoon, and welcome to Itron’s first 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’ll 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 the 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 to our current and future operating and financial environment.

Materials discussed today, May 4, 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..

the health and safety and support of our employees, and the people and the communities we serve. Our concern for our employees goes beyond the virus. In April, severe storms impacted the southeastern portion of the United States moving near our operations in Oconee County, South Carolina.

While we are grateful that each of our employees are safe and our facilities were not impacted, some of our neighbors in South Carolina were less fortunate, and our thoughts and prayers go out to them. Turning back to the COVID-19 impact.

Our current operating situation remains dynamic, and we are continuously refining our outlook as information is changing daily. Allow me to give you an update as to where we stand today. To start, let us frame the conversation around our employees, our customers and our supply chain.

We established our pandemic crisis management and business continuity team in late January. This team has been making decisions with the understanding that healthy, safe and productive employees enables the success of our customers, and this, in turn, drives our business results. It is this prioritization that guides our decisions.

First, our employees. We are committed to continuing operations while balancing employee safety, meeting customer demand and adhering to local and country-level mandates. Business travel and gatherings has been gated since January.

We are also instituting and have instituted a work-from-home policy for all employees that can productively do so and would expect to continue this approach so long as conditions require.

For the safety of our employees at our facilities and factories, we have instituted specific training, additional cleaning per shift, and have made sanitizer readily available within our facilities and provided appropriate PPE.

We are utilizing social distancing in all locations, including at our factories and within production lines wherever possible. We are actively encouraging any employee who is not well to stay home, and have extended sick leave to avoid unwarranted employee pressures.

As an added measure, during these times, these rules also apply if a person they are living with is not well. Our employees are our greatest asset, and we want to give them a peace of mind that they can take care of themselves and their families during this difficult time. Turning to our customers.

In most regions around the globe, the work that Itron does is considered an essential service since we provide critical infrastructure solutions.

The continued operation of Itron’s facilities, supply chain and contract manufacturers are important pieces to enabling our utility customers to reliably deliver energy and water during and after this pandemic.

We are in contact and work daily with our customers to ensure alignment on shipments, deployment schedules and ongoing operational activities. Our outcomes team continues to monitor, support and perform services with our customers on over 64 million managed end points.

Our service teams are fully staffed, and Itron’s operating systems are built to be operated remotely for prolonged periods of time or in disaster events such as this. While the reactions of our customers do vary as they grapple with the impacts of the virus in their communities, we do see some trends emerging.

Larger customers, such as investor-owned utilities and state-owned grids, have generally tended to continue to accept product deliveries within practical constraints, such as warehousing space. These customers have employed various strategies regarding deployment, but most have adjusted and slowed installation plans and suspended in-home work.

It is important to note these temporal deferrals will predominantly impact near-term growth projects in our Networked Solutions and Outcomes segments, and potentially with the start of new developments – new deployments, some of which may need regulatory approvals, particularly in regions hardest hit by the virus.

Turning to smaller customers, such as municipalities and water departments. The reaction to the virus has more often resulted in suspending both incoming deliveries and deployment. Our business with this type of customer is generally book-and-ship business, and is most correlated with our Device Solutions segment.

Looking ahead, we do expect these general trends to continue into the second quarter of 2020. With the information at the hand, it is impossible to predict the recovery rates with precision, but we think it is likely that larger customers should be able to return to more normalized operations more quickly than smaller customers.

Most of the recovery ramp for our larger customers with ongoing projects seems possible within a quarter or so after shelter-in-place orders are lifted and local businesses are reopened. It is too early to assess how the current environment might alter regulatory approvals or customer access to capital for new projects.

For some of the smaller customers and municipalities, we anticipate the recovery ramp is more likely to require multiple quarters, as it seems likely to expect pressure on city budgets, which could slow all but the most urgent matters.

Importantly, while we have seen these varying customer reactions, we have not experienced any contract or order cancellations due to COVID-19. Discussions around the pipeline of new opportunities do continue, and it is too early to see a trend in customer processes for the longer-term regulatory cadence.

Finally, permit me to discuss the current view of our supply chain environment. The picture is also very fluid and changes day by day. The information we are providing today does make assumptions around our operations, and these assumptions contained elevated virus-related risks and uncertainties.

We closely monitor the situation and adapt to the conditions on the ground. The status of our manufacturing operations differs from country to country. We fully comply with all appropriate government guidance and work closely with Itron team members and associated groups to drive a safe and productive working environment.

With respect to our United States-based factories, we have been designated as an essential supplier, and have remained open to date. These locations – in these locations, non-essential personnel and those who can perform their jobs remotely have been directed to do so.

We have been pleased with the strong support that we have had from local, state and federal government agencies in these matters, as they readily recognize the essential role of utilities at Itron in society. We did place production holds on some of our factories in Western Europe in mid-March.

These actions primarily impact our Device Solutions segment. The production holds in these facilities have recently been lifted, and we are now in the process of ramping these facilities. The ramp procedures vary facility to facility, but generally require approximately four weeks.

Our production sites in other locations in Europe, Brazil as well as our key contract manufacturing partner locations have continued to operate, albeit with some constraints.

With respect to our supply base, our dedicated crisis management material team has also been in place since January, and continues to actively work to assess and mitigate the temporal disruptions and risks in our global supply chain created by the COVID-19 pandemic. We are in close contact and actively monitor our suppliers and logistics providers.

Supplier impacts do vary by country. We do expect the current constrained and choppy component landscape to continue with the timing of recovery occurring at different points in time and at different rates.

For example, we are already seeing some meaningful recovery underway from the supply base in China, as they were among the earliest to experience and begin recovery from the virus. Subsequently, we expect regions impacted later to begin recovery later.

We are also navigating disruptions in the global logistics network, where air capacity is constrained by limited passenger flights, medical supplies shipments being prioritized and international ports and border crossings that are operational are often constrained.

As supply chain disruptions are identified or can be predicted, we are managing our factories and communicating with our customers to minimize any interruption. These factors have impacted our first quarter of 2020 and remain present in the second quarter of 2020.

I will now hand the call off to Joan to discuss the first quarter of 2020 results and our current view on the second quarter of 2020..

Thank you, Tom. Let me begin by echoing Tom’s comments on the gratitude we have for the essential workers, our customers, employees and the Itron employees around the globe that are working every day to serve our communities as we fight this virus. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

The scope and magnitude of this event was obviously not anticipated in our full year 2020 guidance provided on February 24. As you will hear in a moment when I discuss Q1’s performance, the pandemic has already started to have an adverse effect on our financial results.

Given the continued uncertainty around the duration and impact of the virus on our operations, we feel it is prudent to suspend our prior full year guidance for fiscal 2020. We hope to be in a position to update our annual guidance on a future call when conditions allow.

It is important to note that prior to COVID-19, our expected performance for full year 2020 was within the guidance range we provided in late February. Now let me discuss Q1 results. I will talk predominantly about total company performance for the quarter and the estimated impact that COVID-19 had on our financials.

The segment details that we would normally walk through on this call are in the materials posted on our website.

While most of the calendar quarter had passed before our operations were impacted by COVID-19, Itron typically complete shipments, installation sign-offs and other key operational and sales activity in the last few weeks of the quarter, and therefore, we did experience a moderate impact from COVID-19 in the first quarter, which I will highlight in my comments.

Turning to Slide 5, I’ll begin with our bookings and backlog performance. Bookings in the quarter were $418 million. Q1 bookings are traditionally the lowest quarter of the year, and we did not see a material impact from COVID-19.

With the lower bookings in Q1, our backlog on March 31 was $3.02 billion, similar to a year ago, and our 12-month backlog is now $1.3 billion.

Our pipeline remains strong, and we are in discussions with many customers about new business, but we think it is possible that the timing of some of these new opportunities could be delayed due to COVID-19-related disruptions. Moving on to the Q1 financial results.

A summary of consolidated GAAP results are shown on Slide 6, and non-GAAP results are shown on Slide 7. First quarter revenue of $598 million decreased 3% versus last year, and 1% in constant currency.

The year-over-year decline was primarily driven by missed shipments or logistic delays due to COVID-19 in both the Device Solutions and Networked Solutions segments. Gross margin for the quarter was 28.7%, 180 basis points lower than last year, primarily due to unfavorable product mix and temporary manufacturing inefficiencies.

Moving to earnings per share. GAAP net income was $9 million or $0.21 per diluted share, compared with a net loss of $2 million or negative $0.05 per share in the prior year. Regarding non-GAAP metrics, non-GAAP operating income was $39 million.

Adjusted EBITDA was $52 million or 8.7% of revenue, non-GAAP net income for the quarter was $23 million or $0.57 per diluted share. Before moving on, I’d like to discuss how COVID-19 affected us in the first quarter. Turning to Slide 8, we have a year-over-year bridge, including the estimated impacts from COVID-19 on our Q1 performance.

We have identified approximately $29 million in lost revenue and $10 million in gross profit that we could not fulfill due to customer delays, factory closures, transportation delays or supply disruptions, all related to COVID-19. Looking at revenue by business segment.

Device Solutions revenue was $202 million, a $12 million or 6% year-over-year decline on a constant currency basis. The decline was primarily due to COVID-19. Networked Solutions revenue was $341 million, a $5 million or 1% increase year-over-year, as continued strength in North America AMI deployments was mostly offset by delays related to COVID-19.

Revenue in the Outcomes segment was $55 million, a slight decrease from 2019, primarily due to the timing of customer deployments. And lastly, foreign currency changes resulted in $8 million lower revenue versus the prior year. Moving to the non-GAAP year-over-year EPS bridge on Slide 9.

Our Q1 non-GAAP EPS was $0.57 per diluted share compared with $0.70 in the prior year. Net operating performance had a negative $0.03 per share impact versus Q1 2019. COVID-19 caused an estimated $0.19 reduction in earnings per share due to shipment delays, manufacturing closures and inefficiencies as well as some incremental expenses.

Excluding the COVID impact, Q1 non-GAAP EPS was approximately $0.76 per diluted share. Continuing with the year-over-year EPS bridge, lower interest expense had a $0.04 benefit, a lower non-GAAP tax rate increased EPS by $0.07, and lastly, changes in foreign currency and share count resulted in a $0.02 per share decrease year-over-year.

Turning to Slide 10, I’ll cover liquidity and debt. As described in our 8-K on March 26, we drew down $400 million from our revolver in order to maintain financial flexibility during these uncertain times. It is important to note that we do not have any required debt repayments in 2020. Regarding metrics for Q1, free cash flow was $6 million.

Cash and equivalents at the end of the first quarter were $555 million. Our new debt structure with the revolver draw is total gross debt of $1.35 billion, and net debt of $795 million. Drawing on our revolver had no effect on our net leverage ratio, which is 3.1 times at the end of Q1. Our current capital priority is cash conservation.

Once the market returns to pre-COVID conditions, we anticipate beginning to repay the revolving credit facility. We believe we have sufficient liquidity to fund our operations. Turning to Slide 11.

As Tom mentioned, we are monitoring the environment and doing scenario planning based on the situation in each country, including local government mandates, our manufacturing capabilities, the overall supply chain and the timing of our customers’ demand and deployments.

As our visibility improves, we expect to update the full year outlook on a future call. In the meantime, given this unique situation, we will provide some insight on expected Q2 performance based on the best information and scenarios as we see them today.

For Q2 2020, we anticipate revenue to be in a range of $475 million to $500 million, down considerably from Q1 and the prior year due to the COVID-19 pandemic. The associated non-GAAP EPS would be a loss of between $0.10 and $0.30 per share.

We anticipate most of the impact from COVID-19-related revenue reductions versus the Q1 levels in the Device Solutions segment, as this business is more concentrated in Europe where many factories were shut down in mid-March. While all of those factories have started the process of reopening, we do not expect them to be fully ramped until June.

There is also a sizable impact to the Networked Solutions segment, given local mandates and/or customers deferring some deployments. There remains significant risk of global factory disruptions as we work through this pandemic, and we are managing the situation on a day-by-day, case-by-case basis.

Since the outset of the pandemic, we have focused on mitigating the financial impact through the levers that we control. We have tightened all discretionary spending through hiring freezes, reductions in outside services, delayed some capital projects, and we continue to evaluate all temporary cash conservation measures.

We are also managing cash receipts and disbursements very closely. But given the revenue and earnings reduction we are projecting for Q2, coupled with more uncertainty around working capital needs, we are projecting a negative free cash flow in the second quarter in a range of $70 million to $85 million.

At this point in time, we expect Q2 to be the low point for the year in terms of revenue, non-GAAP EPS and free cash flow. Although we are aggressively managing our response to COVID-19, it’s impact on our full year 2020 results and beyond remains uncertain.

We will continue to monitor the impact of COVID-19 on the economy, our customers, our operations and the global supply chain. While our services are essential, we expect there will continue to be disruptions beyond Q2 as our customers and suppliers navigate local conditions and economic impacts. We are not planning for a snapback recovery.

And while we do expect Q3 and Q4 revenue to be higher than Q2, it may not recover to Q1 levels. However, we believe the disruptions in our business created by COVID-19 are temporary, and do not change the long-term earnings and cash generation potential of Itron.

As Tom said, we’re fortunate to be part of an industry that provides critical infrastructure to society. And while there will be challenges ahead, we are confident in our ability to successfully navigate through this crisis. Now I’ll turn the call back to Tom..

today we announced, in partnership with KeyBank, a financing program backed by key equipment finance and KeyBank subsidiary, Key Government Finance, that removes funding as a barrier for Itron technology to be deployed in smart utility, smart city and smart community programs in the United States.

KeyBank, as a leader in equipment and municipal funding, provides another tool to help utilities and municipalities modernize critical infrastructure and smart city solutions that create safer neighborhoods and move our industry forward in sustainability. Strategically, Itron is favored by the essential utilities we serve.

We need to increase the resiliency and reliability of critical infrastructure for cities and for water, gas and electric utilities, more and more as we move into the future. Itron Technologies continue to demonstrate increasing improvements in operational insights and cost efficiency for our customers.

With this COVID-19 event, data analytics and grid forecasting, along with finding solutions to reduce the risk to utility and city field personnel is in high demand and should be expected as the new normal. Itron has never been in a stronger position to support our customers through this crisis.

Over the coming weeks and months, we will continue to monitor and adapt to navigate this dynamic environment. Our priorities are to ensure the workforce is healthy, motivated and focused on serving our customers. We will continually work closely with our global customer base to support the ramp-up of ongoing projects as quickly as conditions allow.

We will closely monitor the pipeline of new opportunities, the regulatory landscape and customer access to capital. We will continue to prudently control operating expenses. We will continue building on the efforts underway to streamline operations, resulting in improved operating results and free cash flow as this crisis abates.

Our long-term strategy is unchanged, and financial potential, while possibly delayed, remains fully intact. Now more than ever, Itron is supporting our customers to solidify the base of a functioning society that requires the robust and resilient grid for the secure delivery of energy and water.

Itron is dedicated to creating a more resourceful world and partnering with our key stakeholders to improve the quality of life, enhance safety and promote the well-being of people around the globe. Thank you for joining our call. Operator, please open the line for some questions..

Thank you. [Operator Instructions] We’ll take our first question from Noah Kaye with Oppenheimer Funds. Please go ahead..

This is Noah Kaye from Oppenheimer & Co. Good afternoon, everyone. It’s good to hear all your voices, and I wish you all and all of your families and your employees good health. And I’m glad we can all be on the call.

I guess, understanding this is a very fluid situation, it would be helpful to know how you’re thinking a little bit about the cadence of revenues in the second quarter. You mentioned you’re doing a reramp process now in Europe.

What kind of revenue run rate, if you can share with us where you at in April? And where are you hoping to kind of get to on an exit rate basis by quarter end?.

Yes. I don’t think I’m able to give you a monthly view of the revenue estimates that we provided. But I did mention on the call a couple of points. One is that the Device Solutions business, which is significantly based in Europe, has – essentially had the factories down for two of the three months in the quarter.

So you would expect that to be somewhat back-end loaded. But I also mentioned expected impacts in the Networked Solutions segment, and that’s really a function of customer deployments and delays, which could be throughout the quarter..

Okay. That is helpful. Thanks, Joan.

Maybe can you help us understand where you’re thinking about the drag on free cash flow in the quarter to come from? I guess, like a $0.20 per share loss is about $8 million of net loss, right? So how do we get the $70 million to $85 million of a free cash flow drain?.

Yes. I mentioned on the call, it’s a combination of the earnings guidance we gave in kind of uncertainty around working capital. So let me expand on the last point. As Tom mentioned, the supply chain is actually quite tight and it’s choppy. And so we are expecting to have to invest in some inventory to ensure that we’ve got that to meet customer demand.

So it’s really, I would say, the biggest working capital impact is inventory. Obviously, we’re monitoring receivables very, very closely. And to date, we haven’t seen an issue. But there’s a scenario where that slows down a little. But I would say inventory is the biggest working capital investment.

So it would essentially be timing issues for Q2 that would reverse itself in the future quarters..

Okay.

And due to the inventory investment that you’re making, how do you think about that impacting – is that really, from a margin perspective, going to be contained you would expect to 2Q? Or is that a 3Q issue for us to think about as well?.

Well, again, we didn’t really provide any – the only insight I provided you is, for Q3 and Q4 is we definitely expect the revenue to be higher than Q2, but it may not recover to Q1 levels. At this point, it’s – as Tom says, it’s very fluid every day.

If we’re in a position to provide updated guidance in August, we’ll be able to talk about what the supply chain looks like at this point. But when we gave the Q3 free cash flow guidance, the assumption is we are investing in inventory to ensure continuity of supply..

Okay. I appreciate that. Last one from me. And I think, Tom, you were mentioning this in your remarks at the end. It seems like the current crisis is definitely underscoring the value of having a connected, intelligent, resilient grid, you can manage it remotely, you can limit operational risks, especially to people.

I’m wondering, have you seen that influence the types of conversations you’re having with customers? And if so, can you comment?.

Sure. Thank you, Noah. I hope you and your family are well also. The trends that I see in customer conversations, obviously, the first one that dominates most of that conversation today tends to be the tactical one, about making sure that we and they are doing their job in this critical time.

But if I look past that, I definitely see a strong trend towards more and more automation of some of the basics of their operation. Intense interest in that. I see a lot of interest and increasing levels of interest around forecasting.

As demand is changing, they see new trends in their business and their interest in being able to forecast that better and better insight into great operations, even into the distribution side, understanding and gaining insight there.

So resiliency, reliability, forecasting and automation are definitely areas that I – well, I think we will see an increased level of demand as we get on the other side of the current situation..

Okay. Thank you very much for the color. I’ll hop back..

Thanks, Noah..

[Operator Instructions] We’ll go next to Pavel Molchanov with Raymond James. Please go ahead..

Thanks for taking the question. You guys have 12 manufacturing plants, and I think you’ve mentioned that the ones in France and Italy have been shut down.

Can you give an update on their current status? And have any of your other facilities also been shut down due to lockdowns?.

So you’re indeed correct. Our Western European facilities and by count, most of those are in France, there’s a couple in other countries, Italy and Spain, that we did put on production hold as the virus sort of swept through those communities.

All of those facilities that were on production hold have been lift – the production holds have been lifted, and we’re doing it in a phased and thoughtful manner. So we bring people back with proper training, with proper distancing, and we bring it back in one shift and then two shifts, and then eventually, we’d go back to normal operations.

That ramp time period happens over roughly a four-week time period, depending on the individual facility. The production holds in those larger locations have just been removed in the last couple of weeks, so we’re into the meat of that ramp right now. In terms of other locations, we have not seen any significant disruptions that were long-lasting.

Maybe you have a component shortage or a logistical challenge here and there, but no other large-scale production holds outside of Western Europe..

We’ll take our next question from Jeff Osborne with Cowen & Company. Please go ahead..

Yes. Good afternoon. I had a couple of questions on my end, Tom.

Is there any particular component or components that are problematic for an extended duration? Or is it more kind of whack-a-mole game, where there’s week-to-week, it’s rolling based on your suppliers’ production schedules?.

So I would say that the predominant trend is indeed the carnival game that you mentioned, it is the game of whack-a-mole, where things tend to move around a little bit.

We are closely monitoring exactly how suppliers in Western Europe in those locations where there were government-mandated shutdowns, what they will look like as they ramp their facilities. But by and large, it is that carnival game of whack-a-mole, which we work hard to try to mitigate.

We learned a lot of lessons during some of the component shortages back in 2018, and have taken those lessons and have applied them since that time. So it puts us in a reasonably good starting position from a playbook as well as from an inventory point of view that we will get through this..

It’s good to hear. A couple of other just clarifications or quick questions. So your very helpful detailed at the start of your script on the IOU and sort of regional government response versus the smaller customers.

Can you just give us a general sense of maybe over the past year or two, what that mix is between your revenue profile between those segments? Can you characterize them?.

Yes. I would say that the larger customers in general, correlate to our Networked Solutions and Outcomes business. That’s not a 100% correct, but predominantly, that is how it tends to play out.

So if you look at the historical revenue performance, and you also look at how much is in our 12-month backlog, that gives you a pretty good indication of the larger versus the smaller and more turns-based business..

Got it. And then speaking of the 12-month backlog, is that just – I mean I want to understand the methodology better there.

So have you scrubbed that number based on your conversations? Or if you have a PO with a price and a shipment date as of now, even if the customer maybe last month delayed things, I wasn’t sure if you’re handicapping that at all? Or is it just if it’s in the Salesforce.com or whatever you use with a date and the price, that gets spit out into that number?.

Good question. We’re in touch with all of the customers and try to understand what their deployment schedules tend to look like.

So I – while we have not heard from 100% of the customers, we have to try – we have tried to do our diligence there to understand their deployment schedules, their inventory on hand and how they were looking at it from an ongoing revenue as well as from a backlog point of view to make sure we have the best view on that.

So it is a vetted view that we have in terms of that backlog..

Got it.

The last one I had is just on the broader – putting aside corona and what may happen afterwards or during it, the broader regulatory environment that we’re in around metering, do you have any perspectives that you can share on either some of the rejections and/or approvals? Certainly, it’s been a mixed bag around the country in terms of the ability to get to yes, which obviously is important for your longer term growth..

Sure. I think that when business cases are well-articulated and are pretty clean, the regulatory approval pre-COVID was easier to demonstrate. If customers had taken a case where they put a lot of things together, it was harder to get regulatory bodies to fully understand that case.

So in general, we think the environment pre-COVID was looking quite okay for well-articulated business cases, whether it was on the AMI side of things or whether it was for distribution, automation and other services. With respect to COVID, I think it’s very difficult to see any trends at this moment as to how the regulatory environment may change.

We haven’t seen any long-term trends yet, but I do believe that will be a critical parameter to understanding what the shape and the speed of the recovery will look like..

Got it. Thank you. That’s all I had..

[Operator Instructions] We’ll take our next question from Robert McCarthy with Stephens. Please go ahead..

Hello, everyone.

How are you today?.

We’re well.

How are you Rob?.

Good, good, be safe everybody. I guess the first question, maybe you could just amplify some of your comments around your financial liquidity position and kind of – you said, I think, you draw on your revolver, you have ample liquidity needs and/or ample liquidity for your needs.

But could you talk a little bit about the out years, how we think about the milestones there and how we should think about when you got to start generating some cash flow? Because obviously, given what we see now, this is a concern, particularly in the context of the virus sets the rules, and we could be seeing a lot of volatility for 18 to 24 months here..

Yes. So just to reiterate some of the comments that were made in the prepared remarks, so we drew down the $400 million on our revolver, really just to ensure that we have the cash in our accounts and to give us financial flexibility. So at the end of Q1, we had $555 million of cash and equivalent in the bank.

I mentioned a range of free cash flow burn in Q2 of $70 million to $85 million. So obviously, that comes down a little bit. But we expect Q2 to be the low point for free cash flow and then to improve from there.

So as I look at an expectation of Q3 and Q4’s earnings being better than Q2 as well as if we’re doing strategic investments in inventory, we wouldn’t do that every quarter. I fully expect the free cash flow to improve from Q2 levels as well. So I’m obviously not in a position to predict what does it look like a year from now.

But at this point in time, we believe we have sufficient liquidity to fund our operations..

Okay. And then I guess just in terms of thinking about what this rolling uncertainty could look like.

Have you gotten any comfort from decision-makers across the board in your respective industries, whether it be IOUs or otherwise? How they’re going to make decisions and move forward with investment, which could be a very difficult environment, not only from conception of essential projects, but also from the practical problem of deployment? I mean, obviously, we picked up from some of your competitors that this metering issue was very difficult.

But how do you get around it? And will there be any kind of solutions or fixes to see if you could continue the deployment of meters in close quarters or in residential spaces?.

So I would start by saying that customers that have ongoing projects, which is sort of the biggest piece of our business, are anxious to get things started and keep things moving. Customers have responded in different ways. Sometimes they’ve had to slow or suspend in-home deliveries, as you point out.

But in general, they’re trying to work around that by doing installations and activities in other areas. Customers see strong demand for forecasting for insights into the grid operations themselves. Those are areas that largely – are trends we see acceleration in the business.

Relative to places that in-home installations have been suspended, that’s a temporal point. It will recover in time. It’s exactly – it’s hard to know when that will happen. It will vary location to location and property to property as the virus sort of sweeps through individual communities. So again, I think it’s temporary, not permanent.

But difficult to exactly say when it clears..

I’ll leave it there for now. Thank you..

Thanks, Rob..

We’ll take our next question from Ben Kallo with Baird. Please go ahead..

supply chain, customer pushouts, your plant closures, and then the inability for IOUs to allow you to deploy meters, how would you rate those four things on uncertainty and visibility? And then can you rank them on how they impact your margin most?.

Yes. Maybe – tell me the four again, so that I get it right, supply chain….

So push out your customers we can’t deploy meters because we’re under quarantine. And then supply chain impacts, and then your own plant closures, and then I don’t know my fourth one is – I’ll remember..

Was it regulatory, Ben?.

Yes, regulatory..

Yes. Thank you for clarifying. Plant closures is the shortest duration of any of these, assuming no major disruptions or other areas. We think that one kind of clears in the next few weeks, assuming that there’s new outbreaks or waves of the virus. The customer pushouts, I think, will follow with the time span that we talked about for larger customers.

It’s maybe a quarter or so for them to ramp back up fully. For the smaller customers, it may take a couple of quarters for them to put it back into place. Supply chain I think will be bumpy throughout this time period, where we’ll see some choppy component supply during the period.

Regulatory, in my mind, is the one that has the longest tail of all of these. It will be harder to understand what that looks like and how it will play out over a longer period of time. So plant closures, shortest customer pushout varies a little bit by customer type.

And then the supply chain will be fits and starts with regulatory being the longest time to recovery..

And then from a margin perspective, Joan, which are the biggest impacts?.

Well, again, it depends on the part of the world, so I don’t know that I can give you an impact by that piece part..

But I think the most important piece of this is to ensure that our factories continue to run. That obviously is the one that generates the most near-term margin associated with the business. So ensuring that our factories continue to run is a very important job.

Making sure that we do that in a safe and efficient manner, of course, is important, but that’s the one that has the biggest margin lever..

And you outlined the mix between investor-owned and smaller utilities. Could you talk about that over just maybe North America and Europe? And as you look forward and gave us some good information on Q2, how you budgeted what would be a bigger impact to the negative side? Is it Europe because of they’re slowing down deployments? Or in the U.S.

because you can’t actually deploy.

And so as we think about that going into the next couple of quarters?.

Yes. So I gave some of the comments in the remarks. But from a revenue standpoint, if you use Q1 as a baseline, the bigger impact would be in our Device Solutions, and that’s because of Europe. So although the factories have started to ramp, as Tom said, they take, let’s call it, four weeks or so.

So we have not assumed that we will have fully functioning ramped factories until June in these numbers. And then – but there’s a sizable impact in Networked Solutions, which is primarily going to be the U.S., and that’s from this customer issue of just pushing out, taking acceptance of product because of their own unique situations or deployment.

So that’s the relative size. For the Q2, I think Devices is the bigger impact..

Thank you. And just my last one, and thank you. My questions are kind of tedious.

But just as I think about how we all think about numbers shifting out, can we frame it as this is we think of 2020 is what 2021 is going to be? Or is that not possible yet based on the visibility?.

Yes. I think it is early to say exactly what the back half of 2020 looks like and into 2021. We try to give the best color that we have today, but we very much look forward to updating everyone.

When we get a little bit better clarity on this, we would anticipate to continue to view what 2020 – back half of 2020 and 2021 look like as a bit murky at this time..

Great. Thank you guys..

Thank you..

Ladies and gentlemen, this concludes today’s question-and-answer session. At this time, I’d like to turn the conference back to Tom Deitrich for any additional or closing remarks..

Thank you, everyone, for joining the call today. I hope you continue to be safe and well. I want to finish up by saying that Itron serves an essential utility, and we’re well positioned.

So long-standing customer relationship, strong backlog, sufficient liquidity and a solid management team in place, we will navigate through these uncertainties and be sure to control what is in our control. We look forward to updating you again on our progress on the next call. Thank you all for joining..

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We appreciate your participation. You may now disconnect..