Itron - Earnings Call - Q2 2019

Transcript

Speaker 0

day, everyone, and welcome to the Itron Incorporated Q2 twenty nineteen Earnings Conference Call. Today's call is being recorded. If you are on a speakerphone, please make sure that your mute function is turned off to allow the signal to reach our equipment. Once again, that's star one for questions today. Now for opening remarks, I would like to turn the call over to Ken Gianella.

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Itron's second quarter twenty nineteen 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 is 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 Philip Mezzi, Itron's president and chief executive officer Joan Hooper, Senior Vice President and Chief Financial Officer and Tom Dietrich, Executive Vice President and Chief Operating 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 Philip, let me please 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 on 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 discussed in today's earnings release and the comments made during this conference call and the risk factor section of 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 please turn to Page four in the presentation, and I'll turn the call over to our CEO, Philip Measy.

Thank you, Ken. Good afternoon, everyone,

Speaker 2

and thanks for joining us. We are pleased to announce an exceptionally strong second quarter with higher than anticipated customer demand in our Networked Solutions segment, combined with improved operating performance, we are well positioned as we exit the first half of twenty nineteen. You'll hear the details from Joan in a moment, but to highlight our Q2 twenty nineteen performance, revenue was $635,000,000 adjusted EBITDA was $73,000,000 non GAAP EPS of $0.87 and free cash flow of $38,000,000 These results capped off strong first half performance. As a result, we are raising both our revenue and non GAAP EPS guidance for 2019. Turning to Slide five, I'd like to give some color on our sales performance in the second quarter.

Our total backlog at the end of the quarter increased sequentially to $3,100,000,000 and our twelve month backlog was $1,400,000,000 Our bookings in Q2 were $7.00 $2,000,000 and we continue to see robust customer demand with a very strong pipeline. An example of this quarter's bookings is the recently announced signing of Liberty Utilities. This will be a multiyear project that will deploy over 800,000 endpoints of our Open Way Riva solution, spanning across their 40 utilities in 13 states. While bookings levels vary quarter to quarter, we are on track to achieve a book to bill ratio of approximately one to one for 2019. As discussed at our recent Investor Day, we've been making strong progress on our operational initiatives.

Our supply chain optimization strategy is well underway. And our execution is improving as demonstrated by this quarter's results. While our component costs and inventory remain at elevated levels, we continue to see an easing in the supply chain constraints, as the number of components with lead times over six months has decreased over 60% since its peak in 2018. We are making progress on several initiatives to reduce component costs. And the transformation of our manufacturing footprint is well underway.

Our supply chain transformation, combined with improving external conditions, leave us well positioned to achieve our long term gross margin targets and improve our ability to meet our customer commitments. The result of these efforts, combined with strong customer demand, contributed to the better than expected first half results. I'll now hand the call off to Joan to discuss full Q2 results and our revised 2019 guidance.

Speaker 3

Thank you, Philip. We are very pleased with our second quarter and 2019 performance. A summary of consolidated GAAP results is shown on Slide six and non GAAP results are shown on Slide seven. Revenue of $635,000,000 increased 8% versus last year, driven by strength in our Networked Solutions and Outcomes segments in the North American market. Q2 gross margin was 30.1%, flat versus last year due to product mix, increased variable compensation, higher supply chain costs and other onetime charges.

As a reminder, the second quarter of last year was when the global supply chain constraints began to negatively impact our financial results. In addition, we booked a onetime benefit from a decrease in variable compensation last year, both of which impacted year over year comparisons. Moving to earnings per share. GAAP net income was $19,000,000 or $0.49 per share compared with net income of $3,000,000 or $07 per share in the prior year. Regarding our non GAAP metrics, Non GAAP operating income was $63,000,000 up 43% from the prior year due to the higher revenue fall through and lower operating expenses.

Operating expenses were down year over year primarily due to the benefits from restructuring and delayed spending associated with the CEO leadership transition. Adjusted EBITDA was $73,000,000 or 11.5% of revenue. Non GAAP net income for the quarter was $35,000,000 or $0.87 per diluted share compared with $21,000,000 or $0.51 per share in 2018. Now turning to the second quarter year over year revenue bridge on Slide eight. Total company revenue grew 8% or 11% on a constant currency basis.

Our improved performance was driven by both the Network Solutions and Outcomes businesses performing ahead of our expectations in part due to accelerated customer deployments. Their growth offset the expected decline in our Device Solutions segment, which was driven by lower smart spec project demand in Europe as well as FX changes. To give more color on the revenue for each of our segments, Device Solutions revenue decreased 8% as reported, but only 3% in constant currency. While we anticipated the lower smart spec demand in Europe, we were pleased with our ability to meet the in period book and ship demand and improve responsiveness to our customers' request. This quarter's better than anticipated revenue performance highlights the progress we have made in strengthening our supply chain's ability to deliver on in quarter customer demand.

We continue to expand our footprint as Network Solutions revenue increased 21% in constant currency with the ramping of new customer deployments and higher than anticipated demand from North America. The majority of the higher demand came from customer acceleration of ongoing projects initially expected in the back half of twenty nineteen. Next, Outcomes revenue increased 16% in constant currency driven by the deployment of onetime software licenses earlier than anticipated. Moving on to the non GAAP year over year EPS bridge on Slide nine. Our Q2 non GAAP EPS was $0.87 per diluted share compared with $0.51 in the prior year.

Net operating improvement contributed $0.29 versus the prior year. This was primarily due to increased revenue in our higher margin Network Solutions and Outcomes businesses, benefits realized from our restructuring and integration projects and the underspending of OpEx in the period. These gains were partially offset by an increase in variable compensation versus the prior year. The lower effective tax rate and lower interest expense contributed a $06 and $02 increase, respectively, while FX changes lowered EPS by $0 The Q2 non GAAP effective tax rate was 28.5%, lower than our full year expectation due to positive discrete adjustments booked in the quarter. Turning to Slides 10 through 12, I'll now discuss the Q2 results by business segment compared with the prior year.

Device Solutions revenue was $218,000,000 with gross margin of 19% and operating margin of 13%. While the supply chain environment continued to improve, there was still a negative year over year impact due to higher costs that began to materialize late in the second quarter of last year. This, coupled with product mix, is contributing to both lower gross and operating margins. Network Solutions revenue was $356,000,000 with gross margin of 36%. Gross margin decreased two forty basis points due to product and customer mix as well as some onetime costs.

Operating margin was 28%, flat with the prior year as an underspend in product development offset the lower gross margin. Outcomes revenue was $61,000,000 with gross margin of 38%. Gross margin increased nine points year over year, primarily due to accelerated deployment of onetime software licenses and operational benefits from restructuring and integration efforts. The operating margin was 23%, up 16 points on the higher gross margin and the delay in product development spend. Now turning to Slide 13.

Free cash flow was $38,000,000 in the second quarter, 29% higher than last year, primarily due to improved profitability and lower restructuring and acquisition payments. Cash and equivalents at the end of the second quarter was $136,000,000 Total debt was $1,020,000,000 and our net leverage declined to 3.2 times. In March, we announced our Board approved a twelve month $50,000,000 share repurchase program. We repurchased $17,000,000 in common stock during the second quarter, completing the total $25,000,000 planned for 2019. Our balance sheet continues to strengthen as we generate more free cash flow and pay down our debt, and we have ample liquidity with access to an undrawn $500,000,000 revolving credit facility.

Now turning to our updated full year 2019 guidance on Slide 14. With our strong first half performance, we are well positioned going into the back half of the year and are raising our full year guidance ranges. Our revenue guidance for 2019 is now 2,450,000,000.00 to $2,500,000,000 versus the 2,350,000,000.00 to $2,450,000,000 we provided earlier this year. At the midpoint, this is $75,000,000 higher than the previous guidance. We are also raising non GAAP EPS guidance to a range of 2.8 to $3 per share from the previous guidance of $2.35 to $2.75 per share.

At the midpoint, this is primary driver of the improved EPS outlook is the fall through of the higher revenue. This guidance includes a reduced share count fell in the repurchase of approximately 500,000 shares in the first half. We now expect an average of 40,200,000.0 shares outstanding for the full year 2019. We're assuming a euro to U. S.

Dollar foreign exchange rate of 1.12 in the second half of the year, and we continue to assume a full year effective tax rate of approximately 31% and interest payments for the full year of approximately $50,000,000 At the midpoint of our revenue guidance, the second half revenue is down slightly from our first half performance. As I mentioned earlier on this call as well as on our Q1 call, we had some customer projects accelerate into the first half of this year that we had originally planned for the second half. Most of this shift was from Q4, so we expect Q3 revenue to be higher than Q4. From an EPS perspective, the midpoint of our guidance implies $0.24 or 15% lower EPS in the second half versus the first half of twenty nineteen. This sequential decline is driven by the revenue shift I just mentioned and increased second half OpEx spending over unusually low first half levels.

We continue to benefit from our previously announced restructuring projects and remain on track to achieve our committed savings by the end of twenty twenty. We also continue to expect gross margins increase from Q2 levels and exit the year at approximately 32%. In summary, we are pleased with our first half performance, which exceeded our expectations, and we are well positioned as we head into the back half of the year. Now I'll turn the call back to Philip.

Speaker 2

Thank you, Joan. As Joan mentioned, we're working hard to continue the momentum into the back half of the year. We're mindful of our near term operational commitments and we'll continue to consistently challenge ourselves to improve and accelerate value creation for all of our stakeholders. As we announced, I will be retiring from Itron as President and CEO effective tomorrow, August 6. There are no words to describe how extremely grateful I have been for my time with Itron and the support I have received from our customers, our employees, and our shareholders over the years.

It's been my privilege to work with so many talented people. My decision to move on is in no way a reflection of the immense opportunity that Itron has before it, as I truly believe that Itron's brightest and most innovative days are ahead. Itron's not about any one person. It's a company with a vision and a team dedicated to creating a more resourceful world. I'll look back with pride at the accomplishments we've achieved together, and I am excited about the future.

Now it is my pleasure to congratulate and introduce Tom Dietrich on being named my successor as President and Chief Executive Officer.

Speaker 4

Thank you, Philip. It has been a great journey, and I've enjoyed working for you for these past four years. This is indeed Philip's last earnings call at Itron as CEO, and I would like to take a moment to thank him for all that he has done for almost twenty years for our industry and for our company, and most importantly, for our time together as my mentor. Philip has worked hard to build relationships with our employees, customers, analysts, and investors with the utmost sincerity and integrity. I can only hope to build upon what you've started, Philip.

It is my pleasure on behalf of over 8,000 employees and partners around the globe and our board of directors to thank Philip and wish him all the best in his future endeavors. Thank you, Philip. Before we move on to Q and A, I would like to share the progress on our journey, remind you of our priorities and highlight my initial focus areas as CEO. To start, I am honored to be leading our team of talented and hardworking employees here at Itron. During the past four years, we have been working to architect the company's innovation and product strategy, reoriented our company's go to market and manufacturing footprint and realigned our structure to better serve our customers through our solutions oriented business units of outcomes, network devices, and device solutions.

As we have discussed at our recent investor day, our company priorities are clear, and these priorities are unchanged with my appointment. We are working diligently with our customers to grow our business in three unique ways. First, to expand our footprint of connected devices. Second, to expand our value by empowering our customers with solutions and software that allow them to achieve their desired outcome. And third, to expand our reach by enabling as many sensors and devices on our platform as we go deeper into the smart utilities and smart cities vertical.

As we execute these priorities, we create value for our shareholders as technology leadership, improve our operational leverage and continue to increase our free cash flow. My initial focus as CEO will be first to increase our customer success. We are committed to continuing to provide high quality products and services and consistently fulfill our commitments to customers by helping them achieve their desired outcomes. Second, to strive to be the trusted adviser and thought leader in the markets that we serve. Through the creation of innovative solutions that combine our award winning technology and an ecosystem of partners, we will leverage our global experiences to help our customers.

Our expertise in the utility and smart city space is an asset that enables us to partner with our customers for decades to come. And finally, to create value by aligning our team to focus on our stakeholders' priorities, empowering the team to create an operational leverage and execute to our objectives will be essential to our success. We will continue to foster a culture that strives to be excellent, engaged, empowered and unified in that execution. As a company, we are on the right path. We had a strong start to the year and my focus will be to build upon this momentum as we move into the back half of twenty nineteen and beyond.

As we execute our focus on our objectives, we will create value for our customers and our shareholders. I look forward to working with each of you as we create the next chapter of Itron. With that, thank you all. Operator, please open up the call so that we can take some questions.

Speaker 0

Thank you. And our first question will come from Chip Moore with Canaccord Genuity.

Speaker 5

Thanks. Hey, guys. And Philip, wanted to say thanks for all the help over the years to start.

Speaker 2

Hey, thank you, Chip. Thanks.

Speaker 5

I guess, first, just your comment on customer demand in the pipeline. It sounded like you're seeing a bit of a pickup. Maybe you can expand on what you're seeing out there.

Speaker 4

Sure, Chip. Tom here. I can take that one. What we see is a continuation of strong demand, robust flow of deal opportunities in North America. The types of deals that we see out there tend to be solution oriented.

They tend to value higher value applications from our point of view. So it's more than just an AMI application, but really starting to think about what more you might be able to do with a network and a solution that's out there. So North America clearly would be a big region for us and strong deal flow. APAC is a bit smaller region for us, but we also see good and robust demand for network solutions as well as device oriented types of things. In Europe, it tends to be a bit of a mixed bag from country to country.

It's a big region, but there's still good opportunities primarily in the device solution space for us in Europe. So that being a quick march around the globe is really what we see on the part of customers.

Speaker 5

Got it. That's helpful. And maybe for you, Joan, when you talk about some of the acceleration in deployments, how should we think about, I guess, the magnitude of that sequential decline in Q4 from Q3? And then any more color you can give us on the segments.

Speaker 3

Yes. I would say that the estimated range of and I would talk second half accelerating into first half is about 25,000,000 to $30,000,000 of revenue. So it's fairly sizable. The segments are primarily Network Solutions and maybe a little bit of Outcomes, so decent margin as well. And so that really helps explain the EPS first half to second half trend as well.

Speaker 5

Great, that's helpful. And maybe one last one. I think you mentioned that book and ship problems in Europe seem to have abated. Do you think those issues are behind you now?

Speaker 4

Do, Chip. Tom here again. I think that we've seen a pretty consistent improvement in the supply chain environment over the last couple of quarters. That's reflected in the results that you've seen. We also you can also see it in our inventory numbers as we built up a bit of inventory to make sure we're well positioned as things can ebb and flow and naturally will as we go forward in time.

But we're feeling much better about it from the peak of the lead time issues that we had last year where we were leaving some revenue on the table. It's improved substantially from that point. We're down probably 60% or more in terms of the components that have that really long lead time as the metric that we use to communicate the improvement. But we see a good supply chain environment for the back half of this year as well.

Speaker 3

And certainly, that's part of when we're able to raise the revenue guidance, 75,000,000 at the midpoint is because of our increased execution on book and ship business.

Speaker 5

Our

Speaker 0

Our next question will come from Noah Kaye with Oppenheimer.

Speaker 6

Thanks very much. Good afternoon, Philip. We wish you well on the next phase of your journey. It's been a pleasure. And of course, Tom, congratulations on becoming CEO.

Speaker 2

Thanks, Noah.

Speaker 6

I would like to ask a couple of questions to start with around margins. Joan, I think you called out, lower incentive comp, year over year as a headwind. You also mentioned, obviously, the components cost, but, you know, you you had some favorable trends in terms of of, you know, higher networks and outcomes growth. Then you also called out the the mix impact from maybe a little bit better devices. So maybe it would just be helpful for us if we could kind of understand the main components and any bridging you can do on the gross margin line to basically understand how we get kind of flattish gross margin.

Speaker 3

Yes. So let me clarify a little bit. So the variable comp comments I made actually increased variable comp year over year, not declining variable comp. That serves to put a little bit of pressure on the margins. Device margins year over year are actually down.

And so that is part of the issue. But I would say product mix, tariffs are in the equation this year. So this time last year, it wouldn't have any tariffs. Tariffs run anywhere from 2,000,000 to $3,000,000 a quarter. So that's certainly one of the items as well.

And again, there's going to be some natural ebbs and flows of the margins. The important point, I think, is that we remain confident that we'll hit the 32% exit rate in Q4.

Speaker 6

Okay. And how much roughly was that variable comp as a headwind?

Speaker 3

Yes, we haven't really given that number out, Noah. If you recall last year, we talked about benefits of having a reverse in variable comp. So the year over year impact was somewhat exacerbated because we had actually negative last year and a positive this year, but it was all around our overall performance last year versus where we expect to be this year relative to variable comp.

Speaker 6

Okay. And so looking forward here, this the second quarter in a row, you pointed to 32%, margin as an exit rate. You said exit rate for for April. I I mean, as you look at the mix of what you're booking, the improving component situation, you know, and obviously, some of the cost initiatives that you're putting in place, you know, is that sustainable, or can you improve on it, in in '20? Just at high level how to think about that because obviously you've laid out some longer term targets here.

We're just trying to understand is this 32% kind of the right level to start building off of for 2020?

Speaker 3

Yes, I think so. I mean, as you said, we've reiterated the 32% now. This is probably the third call, and we still feel confident based on our backlog and what's coming into the quarters. And certainly, we expect to improve from there. So while we didn't give 2020 guidance at the Investor Day, we gave 2021 guidance, and we expect the margins to continue to improve from 2019 to 2020 to 2021.

Speaker 6

Okay. And just obviously, it's you called out tariffs. Is there any incremental tariff impact from what was announced via tweet this past Friday?

Speaker 4

Yeah. It's very difficult to fully assess it. Policy by by that level of detail is is difficult. What we see thus far without having full clarity into it is is the things that seem to be coming in the September time frame are much more consumer goods, household goods, not related to our segment at all. So we we don't expect it to be material in terms of our guidance for for the rest of the year.

Please remember that our our tax surface, if you will, is is relatively small here. The the amount of business we do in China, and any manufacturing we do in China tends to be, for that region. We do buy, components from from China, which is where we we have seen impacts, which was that 2 to $3,000,000 per quarter that Joan previously mentioned. So I don't expect that it gets much worse, but difficult to to know based on the level of information available today. And as as you're keenly aware, it's a very active negotiating environment between The US and and China.

So it's something that we'll have to continue to watch and and mitigate as we go forward.

Speaker 6

Okay. Alright. Thank you very much.

Speaker 0

Next, we'll take a question from Joseph Osha from JMP Securities.

Speaker 7

Hey. This is actually Hillary on for Joe Osha. Thanks for taking our questions and join the train and say I wish you a very happy retirement, Philip.

Speaker 2

Thank you.

Speaker 7

Thanks. So just first, you kind of touched on it earlier about the supply chain optimization. I was just wondering if you could provide a little more detail for where we stand on some of the very initiatives that are driving that improvement.

Speaker 4

I'll start and then pass it to Joan perhaps for another comment or two. When we started some of the activities back in 2016 we focused initially on reforming our supply chain in North America. That is essentially behind us now and we're into some minor optimization around that. We still are in the midst of some of the initiatives that we announced in the 2018 plan which affect more on our European side of the operation where we have. Some factories that are in transition over that period so overall in terms of optimizing our supply chain, would say we're in the middle innings of that type of ballgame with more to go specifically on the European side, we started with our 2018 plan.

Speaker 3

Yes, was going say if you look at the chart we described as opportunity beyond 2021 at Investor Day, gave you a little feel for kind of what inning we're in for the various initiatives. And as Tom said, kind of middle innings for rationalization of manufacturing service, overall supply chain, probably even earlier innings. So there's a lot of opportunity even beyond the 2021 estimates that we provided at Investor Day by continuing on these initiatives.

Speaker 7

Okay. Great. And then when you're looking at the opportunity with the water meters, I was wondering if there was any progress you could share, conversations you're having, and when we might see that become a more meaningful opportunity. Thank you.

Speaker 4

Sure. The water meter that was referenced there in your question, I think, was a static water meter, which we have had in our European portfolio for several years now and we'll continue to proliferate that into the marketplace with different sizes and in different market opportunities. We are in customer pilots and testing on the North American version of that meter. And depending on how that goes, I would expect that to really be a part of our stronger offering as we look into the 2020 kind of time frame. So testing consistent with what we've said before and ramping into a a meaningful product in the 2020 kinda time frame.

Speaker 7

Great. Thank you.

Speaker 0

Next, we'll go to Robert McCarthy with Stephens Incorporated.

Speaker 4

Hello?

Speaker 2

Yes, we can hear you.

Speaker 8

Yes, sorry about that. Well, congratulations, Philip, on a great career. First question is, maybe you could just talk a little bit I think you did not want to give us the kind of GAAP reconciliation here, but what items within the GAAP reconciliation can you give? And where is the biggest variable? Is it around restructuring?

Where are the biggest you know, kind of puts and takes?

Speaker 3

So our press release should be out on the wire. And the very last page of the press release is a reconciliation of GAAP to non GAAP. But as you say, it's amortization, it's any restructuring type payments. Those are probably the big ones. And we didn't really have any new restructuring charges of any sort this quarter, so it's primarily the amortization.

Speaker 8

Okay. And then in terms of your backlog, I mean, is there anything you'd comment in terms of your existing backlog in terms of better mix, worse mix, how we should be thinking about that going forward? Clearly, obviously, you must be somewhat confident given the exit rate for gross margin in the back half, but I just wanted to get any kind of color around that.

Speaker 4

Sure. Our total backlog runs $3,100,000,000 or so, so above $3,000,000,000 The amount that is in the next twelve months is roughly 1,400,000,000. The makeup of that is roughly two thirds to one third, two thirds being the network and the outcomes segment of the business. Because of the way customers buy and the way our backlog system works, that's majority North American types of business. So as you know, our outcomes and networks business tends to have slightly higher gross margins or materially higher gross margins than the Device business, and that gives us visibility into the revenue as well as the margin mix that's coming ahead of us.

Speaker 8

And then finally, just for general edification, given the blackout we saw in New York and obviously in the headlines in the July, is there any learnings or market opportunity or awareness for you that you withdraw from that incident?

Speaker 3

I'm counted blackouts.

Speaker 4

Oh, okay. There was some echo on the line. I had some trouble hearing you. Anything we learned from that, I would say that it only increases the market need for the types of solutions that we provide. The more evidence we see of other external factors out there, the importance of resiliency and reliability of the grid is higher, is a lot of what we are focused on with our distribution automation and and other offerings is is a way that we can help our customers solve some of those problems and be more robust in in the face of of those types of things.

That doesn't mean that that specific New York case was anything really target point on to our products or services, but more just a general market need and we see acceleration in that segment of our business and we're pleased to be able to help our customers with it.

Speaker 8

Thanks for your time.

Speaker 4

Thank you.

Speaker 0

Our next question will come from David Katter with Baird.

Speaker 9

Hi guys, thank you for taking the question. Bottom line have been answered, but maybe one more on tariffs. I think you guys at the beginning of the year previously estimated about a $0.15 headwind year over year EPS from tariffs. I was just wondering how that has changed and what's embedded in kind of your revised guidance you guys just provided?

Speaker 3

Yes, I'll take that, David. Just so you're actually cutting up a little bit. So I think the question was how does our current view of tariffs in the current guidance compare to what we expected from the beginning of And I'd say it's basically the same.

Speaker 9

Got it. That's perfect. And then one more on kind of the sequential progression in gross margin. Are you expecting improvement every quarter from here out, or is there going to be kind of a step increase to get there at the end of the year in Q4 based on your backlog?

Speaker 3

Well, again, we gave the expectation Q4 exit rate of 32. I would say that it's not the type of business that's going to be sequentially every quarter a little bit better. As you saw this quarter, you can have customer projects move based on customer needs. And so if a lot of projects in the or outcome segment move, it tends to bring higher margins with it or if they push out the opposite effect. So we expect to continue to grow and improve gross margin every year.

But quarter to quarter, there could be some variability.

Speaker 9

Got it. Thanks guys. And also congratulations, Philip.

Speaker 2

Thank you, David.

Speaker 0

Our next question will come from Jeff Osborne with Cowen and Company.

Speaker 10

Yes. Good afternoon, guys. And best of luck, Philip. A couple of quick questions here, Joan, starting with you. Can you just give us an update of where you are in the restructuring process and how much is left?

I think last time it was 70,000,000 or $75,000,000 to go in an equal split between COGS and OpEx, but I might have my figures wrong.

Speaker 3

Yes. At Investor Day, there's actually a slide in the deck that we gave more precise color, but you're right around the overall savings of about $140,000,000 roughly half had been achieved entering this year, and the remainder will be primarily in 2019 and 2020. So basically, no different. I would say if anything's changed in the last quarter, it might be that the Silver Spring stuff is accelerating even more so. So we hope to be done with most of Silver Spring by the end of this year.

Speaker 10

Remind me, the bulk of the Silver Spring side on the G and A or in COGS?

Speaker 3

It's both. It's actually not just G and A. It could be in the R and D side as well. It's across OpEx and COGS. I'd say most of Silver Spring was OpEx.

And again, half of it was achieved in the 2018 P and L. So initially, we expected some of it to trickle into 2020, and there might still be a little bit. Most will be complete by the end of twenty nineteen.

Speaker 10

Got it. That's helpful. And you gave a lot of detail about the leverage targets for 2021 at the Analyst Day, but just given the down second half in 2019 versus the first half, is there any comments or perspective you can offer in terms of the cash flow outlook for the second half? Any onetime items we should consider? Or what just general thoughts would be helpful.

Speaker 3

No. And again, I'll try to give a little color around sequential first half and second half because it's really related to the timing of customer projects that got accelerated. So no issues at all on cash flow. As our EPS guidance went up a little bit, I'd expect our cash flow to actually be a little higher than this year than what we originally talked about.

Speaker 10

Got it. And then for anyone there, can you just remind us what the typical book and ship business is for you folks? You mentioned that part of the upside was book and ship, I assume, for for networking, but maybe it was for devices. Just put that in perspective would be helpful.

Speaker 3

Well well, again go ahead, Tom. Go ahead. We we have book

Speaker 4

and ship business that shows up in both the the device business as well as on the the network solution side of things. Book and ship is probably something on the order of about 40% of of our total business, and that's across both of those PBUs. So in general, we did well on the book and ship side of things. No particular concerns with fulfilling the revenue based on the supply chain situation.

Speaker 10

That's good to hear. Two other quick ones, if you don't mind. You mentioned networking margins were down year over year because of mix. Can you just give us an example of what some of the mix challenges are?

Speaker 3

Yes, it's more of a customer mix issue just in terms of what deployments we may have had last year versus this year. That's primarily the issue.

Speaker 10

Got it. And then how should we think about your exposure to Brexit and The UK in particular? I think a quarter or two ago, you talked about a SMETS2 meter being qualified. My assumption is it's a pretty small piece of total revenue and you probably scrubbed that pretty hard for the updated guidance. But just wanted to put it in perspective as you talked about, I think if I heard you right, Europe was a little bit softer this quarter and North America was a strength.

What's the outlook for The UK in particular?

Speaker 4

Indeed, The UK is a relatively small part of our business and we've tried to contemplate what would happen with Brexit around The UK, and that's contained within our guidance. Know that it's not a particularly material difference, for us one way or or the other. We we tend to, have a fair amount of, recurring revenue types of business there that's contained within the The UK. There are some, products and meters that are shipped in which, again, you could get caught up in a little bit of slowdown around the border depending on how that would work. But again, contained within our guidance and relatively small for us in the grand scheme of things.

Speaker 10

Makes sense, Tom. And then was the softness in Europe this quarter more France related or any perspective as to geography given the strength in North America? I'm just trying to get a better sense of the exposure to Europe and and what's what the underlying fundamentals are for you folks.

Speaker 4

Sure. So if I put some color behind the EMEA region in general, the the the biggest portion of that is indeed the big economies in in Western Europe. We have some pretty big exposure to France and Germany. We expected things to start to slow down there just because of where the deployments are in terms of their life cycle, and indeed that is indeed what we saw happening. The broader base things that we do in more like the traditional water area of the market was actually quite strong and quite okay for us compared to expectations.

I think of it as more smart spec meters in the large scale Western European economies, France and Germany related.

Speaker 3

And again, those were not unexpected. If you go back to our Q4 call when we talked about 2019 guidance, we specifically talked about the ending of some customer projects, particularly in France.

Speaker 10

Makes sense. I appreciate the clarification, John. Thank you.

Speaker 0

Next, we'll take a question from Pavel Molchanov with Raymond James.

Speaker 11

Thanks for taking the question. In the cash debt and liquidity slide, specifically called out $500,000,000 revolving credit facility, but of course, you're in the process of paying down debt rather than taking on more. So I'm curious if should we read that as a sign that you're open to additional M and A opportunities or anything along those lines?

Speaker 3

No. Our capital allocation strategy is no different than what we talked about at Investor Day. It's to pay down the debt and delever. We just wanted to point out that obviously having a treasure chest there, if you had to go opportunity for cash is leaves us in a good position.

Speaker 11

Okay. Okay, clear. And then it's kind of a minor housekeeping item, suppose, tax rate always bounces up and down, obviously quarter to quarter. I know you've historically talked about something in the low 30s as the blended average for the company kind of steady state. Is that still the case for the second half of the year?

Speaker 3

Yes. It will be a little bit higher in the second half since we're projecting the 31% for the full year. And so the first half was particularly the second quarter was a little bit lower than that. But for the full year, it's the same the 31% is the same one that we originally guided to back in February.

Speaker 11

Okay. Well, Q1 tax rate was over 100% on a GAAP basis.

Speaker 3

On a GAAP basis. Yes. I apologize, Pawel. The 31% is the non GAAP rate. Okay.

The 28.15% that I quoted is the non GAAP.

Speaker 11

Okay. Okay. Got it. Thanks very much.

Speaker 0

That does conclude our question and answer session at this time. I'll turn the conference back over to Tom Dietrich for closing remarks.

Speaker 4

Great, thank you Melissa. Thank you everyone for joining the call today. We feel good about our start to the year and what I think you should expect going forward is our strategy remains unchanged. Our focus on our customers and improving our business remains unchanged as we step forward. We look forward to updating you in next quarter's call.

Thank you very much.

Speaker 0

There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 80012 or +1 (719) 457-0820 with the passcode of seven nine two two thousand one hundred fifty seven or go to the company's website, www.itron.com. That does conclude our conference for today. Thank you for your participation.