Aug 7, 2008
Executives
Pat Moore - Director of IR Vic Richey - Chairman and CEO Gary Muenster - EVP and CFO
Analysts
Steve Sander - Stephens Incorporated Kevin Maczka - BB&T Capital Markets Carter Shoop - Deutsche Bank Patrick Forkin - Tejas Securities Group, Inc. Ian Fleischer - FBR Capital Markets John Quealy - Canaccord Adams Richard Eastman - Robert W.
Baird & Co., Inc.
Operator
Good day and welcome to the ESCO Third Quarter Conference Call. Today's call is being recorded.
With us today are Vic Richey, Chairman and CEO and Gary Muenster, Executive Vice President and CFO and now to present the forward-looking statements and for introductions, I would like to turn the conference over to Ms. Pat Moore, Director of Investor Relations.
Please go ahead.
Pat Moore
Good afternoon everyone. Statements made during this call regarding the timing and amounts of fiscal 2008, 2009 expected results, cash flow and net debt, the timing and success of PG&E contract negotiations, future contract awards, the timing and amounts of expected Aclara RF gas products, the success of AMI pilots, the success in international markets and other statements, which are not strictly historical, are forward-looking statements within the meaning of the Safe Harbor provisions of the Federal Securities Laws.
These statements are based on current expectations and assumptions and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but not limited to the risk factors referenced in the company's press release issued today, which is an exhibit to the company's Form 8-K, filed today. We undertake no duty to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the third quarter results press release, issued earlier today and found on the company's website at escotechnologies.com under the links Investor Relations, Financial Reports and SEC filings.
I'll now turn the call over to Vic.
Victor Richey
Thanks, Pat. Given where we are in the fiscal year and considering the recent volatility in our stock price, I thought it would be helpful to take a slightly different approach with my commentary on this quarter's call.
I'll provide a few comments related to PG&E and on the balance of the business followed by Gary who will discuss the financial highlights for the quarter and the year, and then we'll open up for question and answers. First of all, I'd like to address the recent churn regarding PG&E and the status of their AMI deployment as there has been a lot of discussion recently about what decisions have been made and what impact these decisions have or will have on ESCO.
My current perspective remains consistent with the message that I've communicated previously and is based on the following information. I've had several recent conversations with senior management responsible for the AMI project.
This information has been substantiated by internal formal communications within the customer organization. And this perspective has been validated by the customer's ongoing testimony to the California Public Utility Commission.
The bottom line is this: PG&E has made no quantity commitments to our competitor beyond an estimated 150,000 units. The quantity's order is similar to the 188,000 Aclara RF electric units ordered by PG&E earlier this year.
Currently, we're well into our contract negotiations with PG&E regarding Aclara's RF electric solution. We're confident this new contract will be finalized very soon.
Additionally we continue to negotiate a resolution of the power line systems contract, we hope to have this resolved over the next few months. Regarding PG&E electric I want to reiterate that we do not have any PG&E electric product assumed for the remainder of '08, beyond what has been ordered and we have none in our outlook for fiscal 2009.
And we will not assume any additional electric revenues from PG&E until we receive a formal quantity commitment by a purchase order. As I have said for months any PG&E electric business is pure upside to our outlook.
Additionally we'll continue developing enhancements to our RF electric product to provide the most robust solution available to PG&E as well as other large utility customers. It's important to know that Aclara is not standing still in the new product development area and we are confident that the additional functional that we have in our pipeline along with our proven networking capabilities will allow us to continue to win our fair share of new contract awards.
Switching to the gas side of this project, as you saw in the release we continue to book orders and deliver significant quantities to PG&E for their gas deployment. To-date we have received orders for over 1.6 million gas units, which represents about 40% of the total 4 million unit deployment.
Based on my recent conversation with senior management validated during the PUC testimony, PG&E does not have any plans to change vendors on their gas deployment. They continue to be very pleased with our system performance and advance functionality.
It's my belief that the calendar year '09 will see a major ramp up in the gas units deployed at PG&E. To ramp up on PG&E I'd summarize by saying that all the Aclara products ordered and delivered to PG&E have performed as committed and the benefits the customers has realized have been positive and they continue to utilize the system.
Moving on to the rest of the business I would like to highlight some of our recent strategic accomplishments, but I firmly believe that it's a result of these actions ESCO has positioned itself for success today and well into the future. Strategically we have dramatically improved our over all growth prospects and profitability over the past 12 months.
This began by divesting Filtertek, which was a low growth low margin business with exposure to several challenging end markets. And we will replace that revenue with Doble, which is a high growth, high margin business, which participates in the fast growing utility services sector.
Those end markets are very large and the growth opportunities resulting from the aging infrastructure as well as the somewhat untapped international electric utility marketplace is very exciting. We will continue to pursue international opportunities, both organically and through accretive acquisitions such as LDIC which we announced earlier this week.
LDIC gives us an opportunity and distribution platform to broaden almost reach overseas, as well as giving us a chance to bring LDIC's state-of-the art products in the domestic market through Doble's extensive customer base. The result of these M&A actions is that we have significantly enhanced our utility solutions margins and our filtration margins, while expanding our international footprint.
On the AMI front, we continue to invest in new products and advanced technologies, which has allowed us to demonstrate significant progress in broadening our offering of AMI solutions to ensure future growth in this large market. Throughout 2008, we significantly expanded our AMI Group's international market efforts by focusing on Central and South America, which we strongly believe is going to be a very large market for us for a long time.
Utilities we're actively engaged, have expressed a strong willingness to move forward with some level of an AMR/AMI deployment over the next 6 to 12 months. In a number of total metering endpoints in these areas is very large.
We have also recently won our first AMI power in Europe, and we are active in discussions with several large utilities in Asia and other parts of the Far East. While Asia maybe a bit slow to develop, compared to South America, the number of metering endpoints we're involved is also very large.
Finally, I'd like to highlight a few recent wins across the company, which will benefit our future growth. In PTI our first Airbus contract worth up to $150 million over the next 10 years.
At Waco our continued success in the Crew Exploration Vehicle and Test our recent win in India with NATRIP. With Aclara our success at Idaho with our power-line solution, the $68 million New York City water project which represents the largest AMI water job in North America, our recent selection by the city of Toronto for their AMI water solution, our selection at Baltimore for an RF electric and gas pilot, our ongoing success ongoing success in gaining several additional international powers, and finally the fact that we've added nearly 50 new AMI customers to our Aclara business so far this year is quite impressive.
Despite of a challenging economic environment, I'm very encouraged by our current position in all of our end markets and I'm convinced we're better positioned for meaningful growth across all three business segments. I remain focused on our goal, which is to deliver on our commitments to increase shareholder value.
Now I'll turn it over to Gary so he will cover the financial results and the balance of our outlook forward '08. In addition, he's going to share how we see '09 shaping up and where our growth is expected to come from in each segment as we finalize our plan for next year.
Gary Muenster
Thanks, Vic. As noted in the release, adjusted EPS from continuing operations was $0.60 a share, excluding the $0.10 of non-cash amortization related to TWACS NG software and purchase accounting related assets.
GAAP EPS was $0.50 a share, which represents a 67% increase over the prior year third quarter, in spite of a more challenging economic environment. When looking at the third quarter from an operational perspective, I'm very pleased with our year-over-year results, which I detailed in the release.
A few highlights include: total sales increased 37% with the Utility Solutions Group growing nearly 74% and filtration up over 15%. EBIT and EBITDA increased over 70% with Utility Solutions Group EBIT more than doubling during the quarter.
We entered nearly $160 million in new orders and have increased our backlog again during the quarter. This order amount included another $31 million of PG&E business followed by an additional $7 million of business in July.
This brings the total cumulative PG&E order book to 2.2 million units with an aggregate value of $140 million. For the comparable nine month period of operations you will note that every operating metric for the year-to-date period was up substantially over the prior year in spite of higher interest expense, additional amortization and a higher effective tax rate in fiscal 2008.
My only additional comment here is to highlight the utility solutions group performance compared to the prior year where sales increased 86% and EBIT was up nearly 250%. On the balance sheet I remained very comfortable with our current capital structure and I am pleased that we continue to reduce our net debt outstanding, which was about $208 million at June 30th, resulting in a 2.3 times leverage ratio.
Regarding cash flow net cash provided by operating activities on a continuing ops basis, was over $51 million and we expect to generate over $20 million in cash from operations during the fourth quarter. Entered orders continued to be a bright spot with their book-to-bill being over a 100% again bringing our total backlog to $283 million at June 30.
I had mentioned the PG&E orders a few moments ago, but additionally I want to point out that these order numbers do not include the recent announcements of nearly $150 million in new business opportunities including as Vic mentioned the Idaho power, New York City Water job, City of Toronto and the recent win in tested NATRIP. All of these wins certainly validate our enthusiasm towards our growth prospects going forward.
Moving on to our guidance for the balance of '08, we are holding our outlook for sales and we narrowed the range of EPS as we're getting near the end of the year. Our EPS range represents a 40% increase over the $28 GAAP amount reported in 2007.
We expect EPS adjusted for certain intangible assets and purchase accounting items to be in the range of $2.22 to $2.27 a share. Next I would like to share some preliminary thinking about how we see fiscal '09 and its plan beginning to shape up which we have finalized for the next call.
Vic just addressed a few of the specifics on our strategy and now I'll provide a little more color around our growth opportunities as we currently see them. Our filtration business has continued to show very solid growth prospects heading into '09 led by our commercial aerospace business.
The number of new aircraft being placed in service continues to grow year-over-year at a rate of approximately 5% and we don't see this changing as we enter '09. While some may view higher fuel cost as a potential detriment to our growth in this area, we are seeing somewhat of an opposing situation.
As the airlines continue to seek out more fuel efficient planes to replace their aging fleet, we will benefit from this on both the OEM side and the aftermarket side, as we have more content on the newer planes compared to the planes that are being taken out of service. For example at several airlines MD-80s are being retired and replaced with 737s where we have a significantly higher content amount per plane.
Additionally our space business at VACCO continues to win more than its fair share of new awards as Vic mentioned the Crew Exploration Vehicle, which relates to the shuttle replacement, has already been approved by NASA and we are beginning production and design next year. These situations and filtrations bode well for us in growing that business.
Moving to the Test business. While facing some economic challenges domestically, we continue to see significant growth opportunities in Asia and other international markets.
Based on our current bid and proposal activities, which remain very high, Asian customers such as NATRIP and others do not seem to be slowing down their planned spending, a new product design and development which will benefit us in the near-term and the long-term. Within Utility Solutions, we'll continue to benefit meaningfully from Doble, where next year we will realize a full 12 months of high margin results versus the 10 months that we own them in 2008.
Besides the favorable calendar impact, we continue to see reasonable organic growth at Doble supplemented by the recent LDIC acquisition. On the AMI side, we fully expect to see a meaningful ramp up of gas products in '09 to our West Coast customer.
Along with the startup of both Idaho Power and the New York City projects which both will be incremental to our fiscal '08 performance. Our COOP and Muni outlook continues to be solid with sales levels expected to be consistent with or slightly above the current year.
In addition, we fully expect that certain of our international AMR/AMI market opportunities will begin some level of deployment in 2009, which again will be additive when compared to this year. Wrapping up the AMR/AMI discussion, I want to highlight the fact that our Aclara fix network water solution seems to be really taking a dominant market position in the US, evidenced by the recent large wins in New York and Toronto and based on current opportunities where we seem to be taking the leadership position.
Keep in mind that the water market is very large and is also in the early stages of its migration towards a fixed network solution. We fully expect to continue to capitalize on this situation with our RF water product.
Finally as Vic mentioned, while we do not believe this will be the case, we have not included any PG&E electric product sales and profits in our outlook and again this will be purely upside. So in summary we are very pleased with our financial performance in fiscal '08 and we see our financial outlook as we enter '09 looking very solid.
As we have numerous opportunities across all three business segments which will help us realize meaningful growth. I'll be happy to address any specific financial questions to this in Q&A and now I'll turn it back over to Vic.
Victor Richey
Okay those are our prepared remarks no longer than normal but I will make sure everybody had a clear perspective of what was going on and how we saw the future position of the business. We'll be glad to answer any questions.
Operator
[Operator Instructions.] We will take your first question from Steve Sander with Stephens Incorporated.
Steve Sander - Stephens Incorporated
Good afternoon.
Vic Richey
Hi, Steve.
Steve Sander - Stephens Incorporated
A couple of questions, first on PG&E. Just roughly what were the sales in the quarter and have you started shipping the Aclara RF for the electric?
Vic Richey
On the sales side we shipped about 350,000 units worth about $23 million.
Gary Muenster
And to answer the second piece that we are just starting to ship that product to PG&E.
Vic Richey
In the fourth quarter?
Gary Muenster
Right.
Steve Sander - Stephens Incorporated
Okay and then Vic I think you indicated that you expect to see a pretty significant increase on the gas side there in 2009 just as a starting point, what are you expecting for 2008 in terms of gas shipments, just rough dollars?
Vic Richey
You have that Gary? I think Gary has got it.
You are talking about the dollar amount on the gas side?
Steve Sander - Stephens Incorporated
Yes. Just by yearend, what's our starting point to think about…
Gary Muenster
Yes, what we've shipped
Steve Sander - Stephens Incorporated
In '09.
Gary Muenster
What we've shipped so far Steve through the quarter end was about 700,000 units and another 100,000 in July, and so looking at July and let's just assume that's the trend, and call it a 100,000 to 125,000 a month.
Gary Muenster
Okay.
Gary Muenster
And so that equates to about 6 million or 7 million a month, so we should do somewhat consistent with what we did in Q3, which is like I said the $22 million to $23 million.
Steve Sander - Stephens Incorporated
Okay. And then Gary, on the numbers it looks like you guys had a pretty sizeable Q-to-Q sales increase.
The gross margin was down 100 bips, maybe a little bit more than that. Is that mix, or is there something else going on there?
Gary Muenster
No, it's mostly mix. I would say looking at across the business segments within filtration WACO had an outstanding quarter, and the shipments of their defense spares Q3 of last year versus this, and in some cases there is 10 or 15 points of margin.
And then as you look at the mix in the Test business, we ended up selling more large chambers and less components and there is probably a 15% to 20% margin differential there. So there is nothing unusual that warranted our concern other than the volatility of the mix that we see on a quarter-to-quarter basis.
Steve Sander - Stephens Incorporated
Okay. And then a couple of others.
On the other expense line $0.50 million bucks, anything unusual there?
Gary Muenster
No, nothing out of the ordinary.
Steve Sander - Stephens Incorporated
Okay. And then it looks like based on your revised tax rate guidance that you picked up maybe $0.10 or so which would imply that something slipped relative to what you were expecting a quarter ago?
Vic Richey
Yes. Let me address that.
Some of the, goes back to the Test business a bit. Some of the chambers that we had thought were going to be able recognize revenue on/or they were going to shift in the third quarter, shifted out of the quarter.
I'd say that was the majority of it. And most of that comes back in the fourth quarter.
Steve Sander - Stephens Incorporated
Okay, all right. And then just two final questions, then I'll get out of the way.
Vic you referenced your '09 outlook. I guess are you talking about the $3 cash number that you guys put out there several years ago, which would tie to something in the $2.50 or $2.60 range now, since you haven't really issued anything formal.
Is that what you're referencing when you mentioned nothing in PG&E electric as it relates to your '09 outlook?
Vic Richey
Well, the point I was trying to make with the PG&E is I think there has been a lot more activity and a lot more concern about whatever's going to happen at PG&E and I told you what I know today and I don't know what's going to happen tomorrow or next week or next year. So I have to make that clear, but I want to make sure everybody understood what we knew first of all.
And second of all, I want to make sure that people knew that we had already made that assumption, that while certainly our thought is that we're going to get more of that product, we want to make sure everybody understands there's not an assumption of that in our forecast all through the remainder of the year beyond what we already have or going forward. As far as '09, as you know the $3 that we have out there was the target and I think as we've talked about to a lot of folks over the past six months or so, that's more of a cash EPS now and we don't know that we are going to get exactly that number is the target we are shooting for.
So we are not prepared to today to give guidance for '09 other than to say for currently based on everything we see and as Gary shared with you that we do anticipate certainly our earnings being better next year than they are at this year.
Steve Sander - Stephens Incorporated
Okay and on the international side did you add a couple of pilots since the last call? Can you just essentially repeat your comments there what's new what's incremental to what you talked about in the past?
Vic Richey
We started another pilot in South America and as I mentioned we did win a first pilot in Europe.
Steve Sander - Stephens Incorporated
Okay alright thanks a lot.
Vic Richey
Okay.
Operator
We will take your next question from Kevin Maczka with BB&T Capital Markets.
Kevin Maczka - BB&T Capital Markets
Hi Vic, Gary.
Vic Richey
Hi Maczka.
Kevin Maczka - BB&T Capital Markets
Gary, just a question about, going back to some of your commentary from the call last quarter. I think you used the term “confidence factor” a number of times and I am just wondering as you sit here today three months forward you are maintaining your revenue guidance for the year, you are trimming the high end of your EPS guidance by a nickel and in your outlook you are still very positive for next year.
But I guess as it relates to Q4 end of next year, just give some more color around that confidence factor that you've have got now.
Gary Muenster
Yeah I would say Vic touched on it. Looking at utility solutions and filtration, we understand the delivery schedules there and the majority of its in our control, its manufacture and deliver.
But within Test there are so many projects currently in the works and they are spread all over the world, and there is a quite a few situations that honestly just get outside of your control. For instance if you are putting a Test lab at Sony over in the Far East and if the parent building isn't fully constructed in time for the application of our product to be installed then that can slip at a month or two And so I would say everything we need to hit our numbers is in backlog today.
We are not sitting here today hoping that something gets booked and shipped. I would say the only thing that waivers the confidence from a 100% is the fact that within the Test segment there are certain aspects of those large chambers that are outside of our control.
And so if there is any risk in Q4, it's going to be something that doesn't happen in September, but ships to October and again it's very important to understand that the things we need to do are in backlog. Okay.
So, sitting here today I remain very confident, but the caveat is let's say if two or three of these chambers move to the right, you are talking a couple penny, you are not talking $0.20 and $0.30, and again whatever moves to the right doesn't impact cash flow because of the way we get deposits, down payments and milestone payments along the way it's purely a revenue recognition issue that could possibly move to the first quarter. And that's why we narrowed the top end of our range.
Kevin Maczka - BB&T Capital Markets
Okay, got it. And then shifting gears over to margins, as I look at the three major business units you report and some of the prior guidance that you've given for full year margins, it would kind of suggest that you we're not really on pace to still make those milestones, particularly on the utility side and the Test side, and I guess the Test is more understandable with some projects being delayed.
Can you just give us some more color around your margin expectations for Q4 and as it relates to '09?
Vic Richey
Let me just make a general comment and Gary would follow up. Again you have to remember that the fourth quarter is going to be our biggest quarter by far.
So inherently that's going to result in higher margins really across the board. Of course our plan is to have a very solid, up fourth quarter.
Gary Muenster
Yes. And taking that forward and again I'll just lightly touch on the three segments, but within filtration where we've added about 17% EBIT and roughly $31 million in sales.
Again relative to the individual components we have there. Looking at what we have in backlog and yet to be shipped, we can see just sequentially more than a 10% increase in sales in Q4 in filtration.
And so in round numbers that's $3 million or $4 million additional sales that we expect in the fourth quarter, and with that we tend to run $0.50 to $0.55 or percent incremental margins on that. So as you get up to the volume levels we're talking about for Q4 you have a substantial amount of the margin that falls right through the bottom line.
So the expectations in filtration for Q4 are north of 20%. Okay.
So when you blend that all together, we're very confident on what our original expectations were there. Again on Test, the sales increase from Q4 versus Q3 is about 40% higher, because again the majority of these chambers are well into the construction phase, they're all in backlog, and it really is just a matter of between the customer, situations onsite and other things, can we deliver somewhere in the mid to upper 40s in revenue.
And we were just down there a week or two weeks ago with the Test folks in our July ops review, and again there is some risk and things moving a little bit, but the risk is not substantial. So when you put incremental revenues through that Test business and somewhere in the neighborhood of $45 million to $48 million relative to $33 million, you're covering your fixed costs so substantially that you're going to have an unusually high margin pull through in that situation, where it would not be unrealistic to think of this as 14% to 15% EBIT coming through Q4 on that high margin.
Looking at utility solutions, again we expect not just as I mentioned earlier what's going to be going on with PG&E gas, there is also some positive momentum at Doble. There is positive momentum through the other aspects of this and so we expect sales there to be potentially $15 million to $20 million more over the $93 million that we have booked there.
So again when you pull that type of volume through and again it's all in backlog. It's being manufactured as we speak and as long as we get it out which we don't feel a lot of risk, you are going to pull through a pretty substantial margin on that incremental sales there.
So, and it's a longer answer than you might have been looking for, but you have to look at the three pieces and you look at the volume and the incremental margins that pull through at these volume levels. We are not sitting here with our fingers crossed hoping that every star line is up to hit these numbers.
Kevin Maczka - BB&T Capital Markets
All right. No, that's fine Gary long is good, I appreciate the color.
But just one final one if I could. If you can just describe a little bit to us in more detail of the utility orders that you received nearly $100 million in the quarter and I guess $31 million of that was PG&E related.
But I thought Vic I heard you say that you had signed up some 50 odd AMI customers year-to-date, just describe the size of may be some of the orders that might be coming from them or the Doble portion of that order book?
Vic Richey
Yeah, the thing I was talking about with the 50 new AMI customers those are strictly in Aclara group. So, as I remember it, I think there were about 22 of those were on the electric side.
The majority of them being COOPs but also Idaho, then we had the Aclara RFPs, where we had a number of smaller water jobs, we also had New York, we also had Toronto we also had the pilot of PG&E, and then I think there were about seven new software customers year-to-date. I think maybe the other number you were talking about is really kind of subsequent to the end of the quarter, we've entered about $150 million total of orders and that's, New York, Toronto, Idaho, and then this large automotive chamber in India that we entered.
And then the Doble business I think has been very consistent at something over $20 million a quarter as far as orders there. And most of that shifts, I won't say we're always within the quarter, because they have these long-term contracts.
But that's pretty consistent business thus far.
Kevin Maczka - BB&T Capital Markets
Okay, and how big was the Toronto business again Vic?
Vic Richey
That's going to be somewhere around $30 million maybe a bit larger.
Kevin Maczka - BB&T Capital Markets
30 million, okay. Okay, guys thank you.
Vic Richey
Thank you.
Operator
We'll hear next from Carter Shoop with Deutsche Bank.
Carter Shoop - Deutsche Bank
Good afternoon. Few quick questions here, for PG&E when we talked about that business accelerating in '09 versus '08, will we see an acceleration versus the current run rates or are we just going to see the year-over-year increase as a result of staying at existing shipping rates?
Gary Muenster
I think it's a little of both. And keep in mind that the ramp up on the gas side really didn't begin in earnest until about halfway through the second quarter, and just to kind of put some numbers around it.
In the first quarter we did in round terms about $10 million, in the second quarter we did about $10 million and we ramped up to as I said the 22 or so and we are on track for that. So if you just assume it's flat with Q3 and Q4 at 20 to 22, you are looking an 80, four quarters at 20 versus something in the neighborhood of 60 this year.
So that's assuming a normalization of today's run rate, which is consistent Q3, Q4. So if there is some additional acceleration, which is what our belief is, you should be able to see something incrementally better than that.
So you're comparing 12 months or four quarters at a 20 versus two at 10 and two at 20, so you get that benefit working in your favor plus the opportunity to accelerate on top of the 20 if that's in fact what PG&E's intent is.
Vic Richey
The thing we don't know today, and I don't disagree with anything Gary said, but the thing we don't know today is how quickly we're going to be able to deploy those. So, they're in a ramp up phase just like we're in a ramp up phase in deploying those products and so they need to be able to prove to themselves that they're going to be able to deploy at the same level they're being delivered.
Carter Shoop - Deutsche Bank
That leads to my next question. Do you have visibility in regards to how many gas and electric meters they shipped of yours versus how many you've shipped them?
Vic Richey
I think assuming as far as installed, I think the number of installations that they have is something over 750,000. And that's gas and electric.
Carter Shoop - Deutsche Bank
Do you have a breakout by any chance between the gas and electric?
Vic Richey
I think they've deployed around 200,000 electric and the rest will be gas.
Carter Shoop - Deutsche Bank
In regards to Doble, it appears that businesses maybe tracking a little bit behind original expectations. Is that the case or do you usually see a pretty large seasonal uptick in the September quarter in that business?
Vic Richey
I would say it's tracking really right on what we thought. It's the only issue I think we had to explain, as here we had markup something's, but they're really right on or maybe even just a tad ahead of where they were anticipated to be at this time, and typically they're big month is in December.
So we don't see any big tick in the fourth quarter but they're right on track with what we've projected.
Gary Muenster
Yeah. Carter, in Q2 which obviously was the first full quarter, they did a little over 21, in this quarter they did right at 21.
So I wouldn't think of that as missing expectations by any strategy.
Vic Richey
I think what we had said when we made the acquisition they were going to be doing about $80 million in sales on an annualized lost basis.
Carter Shoop - Deutsche Bank
Okay may be my notes are incorrect. I had $80 million to $90 million for 10 months.
I'll go over and double check that.
Vic Richey
That would be it.
Carter Shoop - Deutsche Bank
That's all I have. Thank you.
Vic Richey
Okay.
Operator
We'll here next from Patrick Forkin with Tejas Securities.
Patrick Forkin - Tejas Securities Group, Inc.
Good afternoon guys.
Vic Richey
Hi, Pat.
Patrick Forkin - Tejas Securities Group, Inc.
Was wondering if we could drill into these water projects a little bit first on New York City win, what does the ramp up look like there, when are you guys going to start shipping in meaningful quantities and what's the project period there?
Gary Muenster
Yes, our understanding is that we will be shipping some product in the first quarter of '09, maybe a little bit in the fourth quarter of '08, but what we will be doing there really fairly small amount, some of the data collection units to start getting the infrastructure in place. What they say now is that and I think what they have said probably is they plan a three year deployment.
Patrick Forkin - Tejas Securities Group, Inc.
Okay you are talking about your fiscal quarters.
Gary Muenster
Yes.
Patrick Forkin - Tejas Securities Group, Inc.
Okay and then on Toronto.
Gary Muenster
I think that was probably going to be, more probably our second quarter of '09 and their deployment schedule currently is a five year deployment.
Patrick Forkin - Tejas Securities Group, Inc.
Okay and then on Idaho. Is that a shorter deployment period there?
Gary Muenster
I think its going to be three years as well.
Patrick Forkin - Tejas Securities Group, Inc.
Okay.
Gary Muenster
We are starting to ship some sub-station equipment out there in the fourth quarter as well.
Patrick Forkin - Tejas Securities Group, Inc.
Okay and then in some of the proceedings or the press on New York, there was some discussion about exploring using the Hexagram or Aclara network to look at metering, picking up the electric meters. Have you guys been involved in those discussions, or do you have any input there?
Gary Muenster
I don't think there is anything we're really in position to talk about right now, obviously once we get the infrastructure around any meters that are resident underneath that would be in Canada, so for us to pick up.
Patrick Forkin - Tejas Securities Group, Inc.
Okay. And then Vic, in your prepared comments did you mention that there were maybe some other significant water engagements that you were involved in?
Vic Richey
There is a couple of others, yes, that we're looking at.
Patrick Forkin - Tejas Securities Group, Inc.
Okay. Would they be on the same scale as New York and…
Vic Richey
Probably not as big as New York, but they would be more in the Toronto type size.
Patrick Forkin - Tejas Securities Group, Inc.
Okay, very good, thank you.
Vic Richey
You bet.
Operator
We'll hear next from Ian Fleischer with FBR Capital Markets.
Ian Fleischer - FBR Capital Markets
Hi, good afternoon.
Vic Richey
Good afternoon.
Ian Fleischer - FBR Capital Markets
Could you touch on the recent acquisition announcement and how that kind of folds into Doble and kind of the benefits with respect to that offering?
Vic Richey
Sure. There is a couple of things in this.
Quite nicely this was an acquisition in candidate that Doble had identified really and talked to us about during the acquisition process with Doble. But LDIC is a company that does very much what the same types of products that Doble does.
They do really primarily partial discharge though and that's a test process, that's much more common in Europe, although we have started to see it more in US as well. So, what it does for us is it really expands the product offering we have, it gives us some Euro centric product if you will as well.
It also gives us a base in Europe and obviously what we want to do is accelerate our international growth that's where we see the best growth. So having a well established company, this is a company that has been around for quite some time in Germany and in Switzerland.
That it has a good distribution network throughout Germany I think is going to help us. Also they have an excellent product development group there as well and access to good engineers and so we'll do a lot of the European product development in that facility with that group.
So what it does it really expands our products, expands the opportunity in Europe and allows us I think to accelerate that opportunity. This company is pretty well known in Doble, they've been working with them for a number of years.
Ian Fleischer - FBR Capital Markets
Okay, great. And so when you think about your Utility Solutions segment, overall right now.
Do you think there is other opportunities, acquisition opportunities, to continue to build out that segment or do you feel that you're pretty much at where you think you'll be?
Vic Richey
I think we'll continue to look for things. I would say that particularly on the Doble side or that side of the business they continue to look for opportunities and it's really how we're going to expand internationally in some ways we already have as I've mentioned before a number of international occasions if we get a little more critical mass there, in some of these fast developing countries that we would really take a hard look at that.
We're doing it a little bit the old-fashioned way with a smaller group and growing around, but if other opportunities like LDIC present themselves we'd certainly take a hard look.
Ian Fleischer - FBR Capital Markets
Okay. Just finally, if you could maybe just rank kind of your near-term opportunities on the AMR/AMI side internationally with respect to Central, South America, Europe and Asia?
Vic Richey
Yes. I'd say certainly that the best near-term opportunities are Central and South America without a doubt.
It’s a small foray into Europe, but I would say probably the next one would probably be in Asia, because I think we've got some good opportunities there, having some good discussions with customers there but certainly Central and South America remains at the top of the list.
Ian Fleischer - FBR Capital Markets
Great thank you very much.
Operator
(Operator Instructions) We will hear next from Chip Moore with Canaccord Adams.
John Quealy - Canaccord Adams
Hi it's actually John Quealy, just a quick follow up on PG&E and the outlook in the next couple of quarters in terms of the booked orders. Does the revenue mix or recognition change given what I think PG&E had in their deployment plan about having the network infrastructure fully deployed in '09 and the meters continuing on past that time.
Does that impact the price per end point for you folks in the next couple of quarters as you help to fulfill that goal?
Gary Muenster
Hey John this Gary. I don't think you are going to see any really differential if the mix between the data collection units and the end points tilts one way or the other obviously the relationship of the unit price is obviously a big difference between a meter and a collector unit, but there is a lot less collector unit.
So you can still continue to think of this in the neighborhood of $55 to $60 of a blended end point process. So I don't see anything as the quantity differentials come through that's going to impact anything there.
John Quealy - Canaccord Adams
Okay great and then lastly on Doble. Can you comment a little bit, about any cost optimization efforts where you folks are in that way and also as you look to '09, fiscal that is.
What's your outlook for Doble organically ex-acquisition, do you think it's an up year or product cycle is coming or what's your thoughts there?
Vic Richey
Let me answer the second part of it first. We didn't think that we'll have an up year at Doble next year over this year, ex the acquisition or obviously that's going to help, but we anticipate some growth there organically as well.
As far as the cost optimization, we have made a decision to stay in a facility that we are in, we are doing some relay out of that. They had already started some outsourcing of some of the product and we are going to continue to do what they had set out to do, but we are going to relay out the plant that we have in place to make sure that we are optimizing that as much as possible.
It is running as a standalone business, we don't intend to change that, so you are not going to see a consolidation that you would if we were, consolidating plants or something of that nature.
John Quealy - Canaccord Adams
Great, and just one other. Again, I don't know if anyone asked this, but in terms of the momentum it seems like there is a lot of chatter about STAR networks and AMI versus MESH.
Can you comment about what you are seeing in terms of RFPs in characterizations of MESH versus point?
Gary Muenster
I think that everybody, we are responding to a large numbers of RFPs. I think the MESH folks are doing the same thing and I think it's just going to be a matter of say on each how each of these systems really work at the end of the day, I think there is some inherent advantages to having a point-to-point system.
I think there is some misconception that, you know, at some point-to-point, you've only got one opportunity to make that connection. The reality is the way our systems are setup that we typically will pick up a signal from a meter about two or three, sometimes even more data collection units.
So it is a very robust system and that you're not counting on just one line of contact between the meter and the DCU. The other thing I know people probably get tired of hearing me say this but I'll continue to say it, this point-to-point system has proven its scale and it's proving to be able to handle the data loads that are required, and it's proving to be able to scale up, so I would say that's again the biggest advantage that we have today.
John Quealy - Canaccord Adams
Great. Thanks, guys.
Operator
We'll hear the next question from Ric Eastman with Robert Baird.
Richard Eastman - Robert W. Baird & Co., Inc.
Hi. Vic, is the pilot that you are deploying in Europe is that on the electric side?
Vic Richey
Yes.
Richard Eastman - Robert W. Baird & Co., Inc.
And is that, presumably that's RF?
Vic Richey
That is not.
Richard Eastman - Robert W. Baird & Co., Inc.
So it's power line?
Vic Richey
Yes.
Richard Eastman - Robert W. Baird & Co., Inc.
Okay. I thought there were some issues with the technology being deployed in Europe just from the number of transformers and some physical issues?
Vic Richey
It varies from place-to-place. I thought were you going to ask about the 50 hertz and we have been working with a partner on that.
But this is an opportunity where the technology should work very well. So that's yet to be seen, but there were several other companies who were not selected, but we were selected to do a pilot there.
Richard Eastman - Robert W. Baird & Co., Inc.
Okay. And then any update on [Oncor] in terms of that remaining territory?
I know they choose another vendor to take a quick look, but is there any additional business there that either came in through a booking or do you expect soon?
Vic Richey
We've not got any additional bookings there. We remain in discussions with Oncor and I am not really sure how that's going to play out.
As you probably know, people will follow the Texas situation. I would say the PUCs got very active there and there has been a lot of discussions about what the final requirements are going to be.
And I think until some of that gets shaken out we are not going to have a clear vision on what are full opportunity is there, but we are engaged with them and I would say we have had folks down there probably three times in the past two months.
Richard Eastman - Robert W. Baird & Co., Inc.
I see, okay. And then just one last question on the New York City water project, is that $68 million.
How does that come through the P&L and what profit margin, does that include any install, are you the project manager on that, or does that come in with a typical kind of hardware/software margin?
Vic Richey
It's a straight hardware sale and obviously the software that's engaged in that project is not one like we had historically with the new developments at TNG. So it's a units of delivery system, we deliver the product, can't recall who the installation company is offhand, but that's not our situation.
It's going to be a straight standard commercial delivery product. I am not allowed to comment specifically on the margins other than to say that they are consistent with the run rate that we have there so some of the noise that might have been tossed around that.
We bought into that system I would say is absolutely untrue.
Richard Eastman - Robert W. Baird & Co., Inc.
Okay. And can you just give us how many end points is that?
Vic Richey
About 875.
Gary Muenster
Yeah, I think that 875 is what New York called it.
Richard Eastman - Robert W. Baird & Co., Inc.
Okay, great thank you.
Vic Richey
Thanks Ric.
Operator
We will hear a follow up from Patrick Forkin with Tejas Securities.
Patrick Forkin - Tejas Securities Group, Inc.
Hi, just a follow up to Rick's question on the European pilot. Victor did you say you are working with a partner on that project?
Vic Richey
Yes.
Patrick Forkin - Tejas Securities Group, Inc.
Can you give us any…
Vic Richey
I am not sure we have ever disclosed that and I am not sure as to the benefit of doing that. I would just tell you it's a meter manufacture outside of the US that we have been doing some other deployments with and they kind of took the lead on that.
But it's a company we have been working with for several years, and have been a great product with probably two years ago.
Patrick Forkin - Tejas Securities Group, Inc.
I wasn't going to ask the name, because I knew you won't give, I mean you wouldn't give it, but I was just kind of curious as to the size and timing on that, the number of end points in the pilot?
Vic Richey
It’s a pretty small pilot, I would say it's like 3,000 end points or something like that. It's not going to be deployed probably in the next four months or so.
They really haven't given a strong indication on whether they'll go for it, but I think a decision would be made sometime in '09.
Patrick Forkin - Tejas Securities Group, Inc.
Okay. Very good, appreciate it.
Vic Richey
You bet.
Operator
That concludes today's questions. Now I would like to turn the call back over to Mr.
Mike Richey.
Vic Richey
All right, well this is Vic Richey. I appreciate everybody's attention and interest today.
I think we have a lot of good things going on, I think we made a lot of progress over the past 12 months and I look forward to finishing up this year and having a strong '09. So, thank you very much.
Operator
That concludes today's conference and thank you for attending.