Landis+Gyr Group AG (LAND) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Analyst and Investor Call First Half 2020 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Ms. Eva Borowski, Head of Communication and Investor Relations. Please go ahead, madam.

Thank you, Sandra, and good morning, everyone. As you know earlier today, Landis+Gyr issued our first half financial year 2020 results press release and accompanying presentation. You can find these documents on our website. Before we get started, we want to emphasize that some of the information discussed today contains forward-looking statements, and for more information, we refer to Page 2 of the presentation and our press release issued today. Today's conference call will follow the presentation. So we suggest that you have it on your screen or otherwise available to follow along with our comments during the first part of the presentation. With that short introduction, I'd like to turn over the call to our Chief Executive Officer, Werner Lieberherr.

Thank you. Eva. Good morning, everyone, and welcome to our half year 2020 financial results. I'm here with Jonathan Elmer, our CFO, and we are very pleased you have all been able to join this morning, especially given the short notice. As you might have seen this morning's press release, we have a significantly lower result report, and we wanted to get this information out as soon as it was available. Thank you for making the time. Look, before we start with the presentation, I would like to give you a brief overview of the key messages of today's call: first, the situation and current environment are difficult. However, we are getting the house in order; second, despite almost 30% revenue decline, we were able to produce a solid free cash flow of $45.9 million and traded profitably with an 8% adjusted EBITDA margin; third, I am convinced that we have the right strategic focus to drive leading-edge technology and transform the company. So let's talk about what's been happening over the last 6 months and move on to Slide 3. The COVID-19 pandemic has affected all aspects of our lives in unprecedented ways. This has also had a significant impact on our customers and our company and is reflected in our financial results and forecast. We are glad to say, thanks to the proactive measures we have taken, our teams around the globe have managed the crisis well and shown an incredible amount of resilience and dedication. That said, the safety, health and well-being of our employees, customers and partners remains our top priority. Following local rules and regulations, we continue to utilize home office policies and enforce strict adherence to safety measures. Our efforts have paid off with very few cases amongst our employees, and these have not impacted the business negatively. Also, we have not experienced any supply chain issues and remain dedicated to meeting the commitments we have made to our customers. Even though we have not experienced any major project cancellations, we have seen the impact on revenues in markets where installations have slowed down or been temporarily suspended. Let's have a look at some of our key metrics. Starting with the order intake, our book-to-bill ratio was 0.73, which is unsatisfactory. It is largely a result of delayed project approvals in the U.S. due to COVID-19 and the fact that customers and regulators are widely working from home. This is slowing down approval processes even further, so getting the ratio back up remains my top priority. Our committed backlog fell by 17% to roughly $2.1 billion. Americas and EMEA both contributed to the decrease, while Asia Pacific held up pretty well. Net revenues came in at $623 million, a decrease of 27% in constant currency. While both Americas and EMEA were seriously impacted by the crisis and associated lockdowns, our business in Asia Pacific largely managed to maintain its revenues. Adjusted EBITDA for the first 6 months came in at $50.1 million with an EBITDA margin of 8%. We see a significantly lower top line and reduced operating leverage despite adjusted OpEx being lower by $32.2 million. Free cash flow, excluding M&A, remained positive with $45.3 million, up from H1 of last year and demonstrating again the cash-generating power of our company. One of our great strengths has always been our balance sheet. This remains very solid, and in the first half of the financial year with a net cash position of $12.1 million. Additional revolving credit facilities of CHF 200 million were established during H1, and these facilities remain undrawn. In May, we postponed the decision on last year's dividend as a precautionary measure given the global economic uncertainty. I'm very pleased to tell you that our Board of Directors has decided to propose a distribution on capital reserves of CHF 2 per share based on a prudent approach given the current environment. This distribution is free of Swiss withholding tax and will go to vote at the Extraordinary General Meeting on November 24, next month. Let's talk about what we have achieved in the last half year on Slide 4. During the full year results presentation, I shared a list of my key priorities. I'm happy to tell you that to a large degree, we have delivered on these commitments in my first 6 months at Landis+Gyr. First of all, I promised that we would manage for cash. We have delivered the free cash flow of $45.3 million, excluding M&A, while still maintaining a high level of R&D investments. This is higher cash flow than the first half of last year despite the COVID impact on our top line. Second, converting opportunities into top line growth. We did win some customer projects, but delays in the U.S. due to regulatory project approvals continue, and this has been worsened by COVID-19. Of course, there's still a lot of work to do, but we are laser-focused, and this remains my top priority. Third, R&D. We redesigned our R&D organization by empowering our local teams and centrally driving technologies, strategies and global platforms. We've already seen good results with respect to customer intimacy and speed to market. In addition, we have enhanced technology road maps with emphasis on digital transformation to ensure we develop and deliver leading-edge innovation for our customers. Fourth, driving efficiencies. To implement all of these changes, I put together a strong leadership team, and we are fully aligned to drive our strategic key initiatives. This is the first step in getting the house in order, and our restructuring initiative Project Hermes is progressing swiftly and according to plan. Hermes is also aimed at driving efficiencies and we have made good progress on optimizing product costs and simplifying process across the organization. I will tell you more about this later. Fifth, ensuring customer satisfaction and readiness for the future. The key to this is to push grid edge intelligence and smart infrastructure. We are actively pursuing strategic partnerships such as Vodafone and looking into valuable and meaningful M&A options to drive growth and profitability. Additional information in the strategic direction as well as possible update on midterm guidance and dividend policy will be given at the Capital Markets Day on January 27. Turning to Slide 5. Since I arrived in April of this year, I've made several changes to our management team. We now have a highly motivated leadership team, and I'm convinced that we are well positioned to elevate the company to the next level. The regional head Susanne, PV and Steve remain unchanged and do a very solid job. New appointments include Eva in Investor Relation and Corporate Communication, who is with us here today; Jeff in the technology office; Sean in Supply Chain Operations; and starting on November 1, Holger as General Counsel. Bodo was internally promoted to Lead Strategy function and soon, we'll also be able to announce a new Head of HR. Already in January of this year, we've announced Jonathan's retirement and Elodie's arrival as the new CFO. I'm pleased that she will join the team in the next few weeks. On behalf of all of us at Landis+Gyr, I would like to thank Jonathan for his unwavering support, expertise and dedication over the years. I'm also glad to say that he has agreed to support us until next March to ensure a smooth transition working with Elodie and me. Let's move on to Slide 6, and I'd like to talk more about Project Hermes. On August 5, we announced Project Hermes, a global savings initiative aimed at further optimizing our cost structure and simplifying the organization. This will reduce our workforce by around 12% globally. In the past weeks, we made significant progress in executing this initiative. Let me add a little color on that. When I took over as CEO in April, I conducted a thorough analysis of the business and identified several areas with room for opportunity. And by previous restructuring initiatives, this program targets the entire organization on a global level, including group overheads. Our teams are working hard on implementing the measures, but you will appreciate that every country has different time lines and implementation, given local laws and regulation. In North America, for example, we were able to implement measures swiftly, while in other jurisdictions, we are still in discussion with work councils and unions. We aim to have the program completed by the end of our financial year '20, so by the end of March '21. We should see the full benefits of the program in fiscal year '21. Once completed, we expect this initiative to result in annual run rate cost savings of approximately $30 million. Of this, about $14 million relate to manufacturing and supply chain personnel. This will help to offset the lower revenue and support our gross profit margins. The remaining $16 million relates to operating expenses, both R&D and SG&A. I would add one comment on how fully we will see these savings in our results next year. We see the need to increase investments in some key areas of our portfolio, plus this half has benefited from some one-off effects in our costs, mainly due to COVID as we have benefited from government schemes and low travel expenses. In terms of restructuring costs, we already booked $14 million in H1. We expect around another $5 million bringing the total restructuring cost to approximately $19 million. Before we move on to the regions, let's talk for a minute about the impact our technology has had on social and environmental factors. Over the past few months, we have seen the importance of smart meters for utilities in managing greater loads, but also for end customers, helping them to manage energy consumption in a more informed and sustainable way. Looking at the U.S. This spring, we have seen a temporary drop in overall energy demand for many utility systems. This was largely driven by commercial industrial facilities shutting down during shelter-in-place orders. While this got reasonable attention, there's another trend in the data we find even more interesting, and that suggests a longer-term change. Overall, usage was offset by a notable rise in residential energy usage as people shifted from traditional office spaces to work from home. By June, that number went up to 42% in the U.S., and that's really a disruptive change for utilities and consumers. We actually overnight, energy had to be redirected to suburbs and residences in a completely different usage pattern than ever before. Weekdays start to look like weekends, with ACs and internet running all day. In many cases, this resulted in home energy spikes of about 20% more demand than usual. The shift of energy during this pandemic is just one example of the dynamic condition. Utilities must be prepared to manage while maintaining uninterrupted service to their customers. It requires technology and expertise provided by [indiscernible] to strategically manage energy so it can flow to the right place at the right time. And grid intelligence will continue to be a critical tool for utility's as they serve customers transitioning to this new normal. Additionally, this technology will grow in importance to consumers as well, providing them with greater awareness and control to make flexible and sustainable energy choices. Working actively towards a greener future, sustainability is embedded in our DNA as we help manage energy better. On October 28, we will publish our sustainability report 2019/'20, and I encourage you to take a look. In addition for 2020, we have introduced a sustainability component in our short-term incentive for all eligible employees with a rate of 10%. We've also signed up the UN Global Compact and Global Reporting Initiative. We are very proud of the progress we've made, but also acknowledge there's still room for improvement. Our portfolio of products and services offer unique opportunities regarding environmental and social benefits, and we strive to advance our efforts to support the positive impact for a more sustainable world and more empowered energy consumers. Let's turn to Slide 7, and we have a look at the developments in each region. I'll start with the Americas led by PV. Even with the challenges COVID-19, there's an active sales pipeline, and we recently had some good wins. For example, Indianapolis Power & Light, Sacramento Municipal Utility District and Piedmont EMC. And over the last few weeks, we have seen increased movement in the regulatory decision-making process. And I would also like to highlight that our products and services are considered to be part of critical infrastructure. Nevertheless, regarding our top line, we've had a tough first 6 months. Looking at North America, I'd like to point out a few things. First, COVID-19 slowed down installation of various projects. Secondly, the pandemic has extended decision-making time lines for regulatory approvals even further. I'm personally in close contact with our customers, and we support them wherever possible to speed up the process. I'd expect news flow towards the end of this year or in Q1 calendar year '21. Please keep in mind from the time we sign a contract until it translates into meaningful revenues, it takes approximately another 18 months. This means we are talking financial years '22, '23. And thirdly, recent project roll-offs are not replaced for new business, and we see slower tendering activities. This creates pressure on our top line due to conversion cycle of all those mentioned earlier. We remain committed to continued investments in our R&D programs such as Revelo grid edge intelligence sensors and Gridstream Connect IoT platform. Customers have shared consistent and positive feedback on our technology road map. That's an important reinforcement of our vision and reputation we hold for innovation. Also recently, we have announced our partnership with Vodafone. This provides flexible communication options as part of the Gridstream Connect offering and expands our customers' access to a global base of several metrics. Finally, we have taken a disciplined approach to our operating expenses, with a priority on driving process efficiency and rightsizing our resource to ensure costs are streamlined. In South America, the situation remains challenging, driven by intense international competition and marked by uncertainty related to funding, policy and economic stability. We have put in place sustained cost savings as a critical part of managing through this type of climate. We have also shifted our strategic focus to areas, they are well aligned to our core competency, namely high-value metering and our IoT connectivity platform. These are designed to address the critical energy management challenges this region faces around revenue protection and grid operations. In Japan, our technology is now enabled in excess of 26 million grid sensors of the 29 million contracted for deployment. This project continues to be a global showcase of the largest utility IoT platform in the world. And it's not just the size that is impressive, but the performance of the system, which is exceeding very stringent SLA requirements. Our end-to-end scaling capability is the best in the industry with over 1.3 billion reads per day with 99.99% accuracy. Also you may recall, by law, meters will be replaced every 10 years and the next nationwide replacement cycle is due to start around '24. We also anticipate an acceleration of gas smart metering and adopt portion of smart metering for [ auto ]. Our track record of providing future-proof technologies will enable us to maintain our leadership position. Let's move to Slide 8 and take a closer look at EMEA led by Susanne. Under normal circumstances, U.K. is our largest and most important market, having contributed approximately 40% to EMEA revenues in financial year '19. Due to the pandemic nonessential smart metering installation stopped in the U.K. in March and resumed on late July, so at a slow pace. Currently, we are back at around 60% pre-COVID installation levels. As I have mentioned before, there has been no cancellation so far, but the revenue stream will now be extended over a period of 2 to 3 years. On a positive note, we have signed a contract extension with Calvin Capital for an additional 2 million electricity and gas meters, mainly focusing on independent energy suppliers. We have already delivered our secured contracts of approximately 23 million smart meters of the entire rollout of approximately 50 million electricity and gas meters, about 40% has already been completed. The implementation target set by the U.K. government have now been extended to June 25. At this time, we see installation peaking around '22, with an additional potential of approximately 15 million meters to be awarded. In France, Linky installations were also suspended, but rebounded to pre-crisis level earlier than the U.K. The French market has shaped up favorable for us, but we are now 1 of 3 remaining suppliers. We are well positioned as a strategic partner to Enedis and currently in conversations regarding full approaches for around 8 million additional meters as part of the Linky rollouts. Other important markets like the Netherlands, the Nordic countries of Switzerland, a negative impact by COVID-19, but installations came back fairly quickly. Over 1 million meters were contracted in Sweden and Denmark. We have an excellent momentum in the Nordics, winning the N1 and Vores Elnet in Denmark and C4 in Sweden. Our E360 has become the most popular next-generation energy meter in the Nordics, backed up with our narrow-band IoT communication solution. We also have strengthened our position in managed services by extending several customer contracts in Finland. In the Nordics, the second wave rollout is still expected to provide additional opportunities of around 10 million meters. COVID-19 led to a slowdown of business, we implemented cost-saving measures, partially mitigating the negative impact. Government through EMEA remain committed to their smart meter rollouts. In addition, we believe the large install base of our technology is a solid foundation to leverage service opportunities. Let's take a look at APAC led by Steve on Slide 9. Asia Pacific is a bright spot in our results. Adjusted EBITDA margin were the highest since our IPO despite a very challenging environment. Asia Pacific is to reach least impacted by COVID-19. In Australia, the energy sector is considered critical infrastructure and installations largely continued. Also, our intelliHUB joint venture is performing as expected. In Hong Kong, we have 2 major rollouts with CLP Group and Hong Kong Electric for our Gridstream Solution as the key technology provider. The programs are continuing and scheduled and contributed to revenue growth in the half year. The market in India was impacted the most due to prolonged lockdowns. Overall, it is mission-critical that we win projects and execute in a challenging environment. Let me now hand over the call to Jonathan to give you a more detailed review of the financials. Afterwards, I will walk you through some thoughts about financial year '20 before opening up the call for questions. Jonathan, please.

Thanks, Werner. So let's turn to Slide 10 to get an overview of our consolidated results for the first half of financial year 2020. As we said when we released the full year 2019 results in May, we've been seriously impacted by COVID, and our revenues are well down. Notably, our profitability is taken a hit. That said, we've seen a significant reduction in our cost base already, with more to come from Project Hermes. Also, we've increased our cash generation compared to H1 last year, and both of these positives position us well to recover from the COVID crisis. Just walking through the key numbers on the slide. Order intake was $456.9 million, down 43.7% in constant currency, and all regions are down year-over-year as customers and regulators delayed making decisions due for COVID. Net revenue was down 27.1% in constant currency, mainly due to COVID impacts, and I'll unpack the details later. Reported EBITDA fell to $31.8 million and adjusted EBITDA was down by 59.9% to $50.1 million as COVID hit sales and margins. This meant that, overall, we felt a net loss of $2 million. Free cash flow, excluding M&A, was a bright spot at $45.3 million for the half, an increase of $12.2 million compared to the first half of last year as we managed cash tightly. So let's turn to Slide 11, and I'll briefly walk you through the constant currency revenue bridge. The Americas revenue was down by $137.2 million, 29.2% decline in constant currency. EMEA was down $93.2 million or 30.4% in constant currency. And Asia Pacific was down by $1.7 million, 2.2% in constant currency compared to last year. So a very significant fall in revenue for the group, driven mainly by COVID, and I'll give more details when we get to the regional slides. Moving to Slide 12, the adjusted EBITDA bridge. If you look at the first 2 red blocks, you can see that adjusted gross profit declined for 2 reasons. First, because of the significant fall in revenue, which in constant currency terms, accounted for $81.6 million of the decline in adjusted gross profit. And secondly, because of lower adjusted gross profit margins, which in constant currency terms, accounted for $24.5 million of the decline. And this was largely due to reduced operating leverage as we do not adjust the fixed cost base in our manufacturing, supply chain and services business, quickly enough to offset the fall in revenues. Then we come to a reduction in our adjusted operating expenses of $33 million in constant currency. This represents a 19% reduction between H1 last year and H1 this year. Much of the reduction comes from cost control measures introduced prior to Project Hermes but some of the reduction is attributable to lower cost for variable compensation and some is also due to lower costs associated with COVID, such as much lower travel expenses and the benefit of government support schemes. And as Werner mentioned, COVID-related expense reductions will be a headroom for us as the unwind over the next period. As a result, adjusted EBITDA was down over last year, coming in at $50.1 million and margin of 8%. Moving to Slide 13, you see our adjustments to EBITDA. I'll focus on 3 items in the table, restructuring charges for the first half were $15.4 million and of this amount, $14 million related to Project Hermes. On the warranty normalization line, the negative amount of $6.7 million represents the amount of provisions made in the half, relative to the average 6-month warranty utilization over the last 3 years. We've not had any major changes to our warranty provisions this half. Specifically, we've not resized the provision in respect to the legacy component issue in the Americas, where failure rates continue to track in line with our expectations. Finally, timing differences on FX derivatives. Our biggest FX exposure is due to revenue, which we generate in the U.K., our single most important European market. And with sales in British pounds and supply chain costs, largely in other currencies, we've hedged part of our exposure to [indiscernible] rupture approximately 24 months ahead. So this adjustment excludes the unrealized losses of $9.7 million in respect of mark-to-market differences on our FX hedges to the extent that the underlying hedge transaction have not taken place by the end of the half. Turning to Slide 14 on cash flow. In H1, we generated free cash flow, excluding M&A of $45.3 million, an increase of $12.2 million compared to the first half of last year, notwithstanding the much lower profitability. Looking at some of the details. Working capital was a net generator of cash in the first half, contributing $32.1 million. And even though overall working capital declines, inventory actually increased slightly by $1.5 million compared to the start of the year as we couldn't turn off the tap on our supply chain quickly enough. So there's an opportunity to reduce inventory in H2, so that it's more in line with our revenues. Warranty and warranty settlement cash outs were $7.2 million, down from last year by $16.2 million. This was due to lower cash outs both in EMEA and the Americas with respect to the legacy issues in both regions. Finally, on tax plans. Payments fell from $16.7 million to $8.9 million in the first half, which is partly due to lower profitability and partly due to various government COVID-related tax payment deferral scheme. So there will be some headwinds on tax payments as these schemes go well. Turning to Slide 15 to look at our net cash position. We had net cash at the end of September of $12.1 million, an improvement of $111 million compared to our net debt at the end of September 2019, and an improvement of $45 million compared to the end of March 2020. This reflects our ability to generate cash even in the downturn. We didn't pay a dividend in H1 but assuming the EGM approves the Board's proposal to pay CHF 2 per share in November, this will result in a cash out in H2 of approximately $63 million. And we will have a couple of headwinds on cash flow in H2. Firstly, as discussed, we'll have about $18 million of cash outs in respect to Hermes restructuring. And secondly, as we disclosed in our 2019 results, we have reviewed the sales tax assessment in Washington state in the U.S. for approximately $22 million. We strongly disagree with assessment and believe it will be overturned on appeal. However, in order to file an appeal to the state ports in Washington, we must first pay the assessment. So it's likely that we'll file an appeal to the court in H2, and therefore, make payment of the assessment in the second half. Now turning to Slide 16 for the Americas. The Americas backlog declined by 18.5% to $1.33 billion as order entry was weak given continued regulatory delays and COVID impacts. Revenue fell sharply with the biggest effect being in North America due to COVID and weak order intake, but also we had a tough comp in H1 of last year. We also saw falls across the region, including in Japan and the TEPCO project near its [ stands ]. Adjusted gross profit margin fell by 490 basis points, largely due to reduced operating leverage and could not adjust our cost base book enough with our level of sales. Expenses are well controlled, declined by $17.3 million. This decline is attributable to expense reduction measures, which we took at the end of last year at the core product Hermes but there's also a benefit from lower variable compensation costs appropriately focused in the couple of one-offs. Given the reduced operating leverage, adjusted EBITDA fell to 12.2% but outside the 18% to 21% range that we targeted. Turning to Slide 17 for EMEA. In EMEA, committed backlog fell to $663.2 million as we continue to execute against the backlog, which we have built up in the U.K., Netherlands and France. On the order intake side, we've had some nice wins in the Nordics, as Werner mentioned, there's new opportunities emerging in that part of the EMEA. Revenues fell by 30.4% in constant currency terms. This fall was mostly due to declines in the U.K. as meter installations slowed dramatically during the COVID lockdown. Adjusted gross profit margin fell by 350 basis points. And as with the Americas, this is largely due to reduced operational leverage on lower sales and some mix effects. Adjusted operating expenses were also lower by $9.2 million, again, mainly due to lower variable compensation, some COVID-related effects and generally higher cost control. So based on lower sales and lower margins, EMEA held to a negative adjusted EBITDA of minus $4.3 million, margin of minus 2.0%. Turning to Slide 18 for Asia Pacific. Asia Pacific is holding up reasonably well during the pandemic. Net revenue declined by 2.2% in constant currency terms as growth in Hong Kong offset declines in Australia and India, where both markets are quite affected by COVID. Gross margins ticked up by 160 basis points and adjusted operating expenses remained broadly flat. Based on this top line performance and reachable margin development, adjusted EBITDA was $5.7 million or 7.4% of sales, the highest margin we have seen in Asia Pacific since the IPO. So I'll stop there and turn the call back over to Werner for some closing comments and a discussion of our outlook.

Thank you, Jonathan. Turning to Slide 19, let's talk about the dividend and second half of our financial year '20. After announcing the deferral decision on the financial year '19 dividend during last year's results presentation in May, the Board of Directors will propose a distribution of CHF 2 per share to the Extraordinary General Meeting on the 24th next month. This is equivalent to approximately 50% payout of financial year '19 free cash flow, excluding M&A. The distribution will be paid out of capital contribution reserves in this extent from Swiss withholding tax. The share buyback program remains suspended. Turning to our future trading. We still see a great deal of uncertainty due to COVID-19 as a general business environment. The resurgence of the virus in Europe and the continued high levels in the U.S. make it very difficult to be confident about our top line on the second half. That said, we have seen a bit more stability in schedules from our customers recently. So we are providing an indication of where we think we will land for the full year. Specifically, we expect that full year '20 revenues will be between $1.3 billion and $1.4 billion. If we achieve this revenue level, that implies some recovery in the top line from H1, and we should see some benefits in our EBITDA margin, given the improved operational leverage. Now we will open the call up for questions.

The first question comes from Andreas Willi from JPMorgan.

I have 2 questions for now, one on the U.S. and one on the U.K. In the U.S., in terms of your recovery potentially when if orders materialize, what kind of revenue level would we need to see in the U.S. to go back into the margin range, the 18% plus, assuming also the cost savings that you will now get from this program? And the second question on Europe and the U.K., what have you assumed within your H2 outlook for revenues in terms of what could happen in the U.K. now with potential new lockdowns and what's the access likely going to be like to properties? What have you assumed there? Maybe a third one, if I can. On the $33 million cost savings in H1, what part of that is purely short term that goes away again? And what part of that is something that stays in terms of the base for next year?

Yes. Thanks, Andreas. Answering the question first on U.S., in the U.S. actually to have a margin corridor of about 18% to 21%, which is a historical level, we will need about $900 million. And as I said, at the moment, what we see, it's really predicated by that. And the issues we are having at the moment is definitely COVID. As you can imagine, short term, but then also we see these regulatory approvals, which actually give additional pressure on the top line. In terms second question, the U.K. in terms of going forward, we assume 60% will come back, obviously, to higher levels in H2. And then you can assume roughly about same percentage for EMEA actually going forward. And the last question, $33 million, as you rightly said, there's $14 million, which we really actually see in terms of lowering revenues, which will not flow to the margin. And then $16 million, which flow to the margin. However, as I mentioned during my talk, we have about -- we have initiatives which we want to do portfolio. And I think that's where we want to make further investment. So that's something we are still working out, what do we see actually will be sustainable in going forward and what's not. And that's something we want to give then further insights about the $60 million at the Capital Markets Day.

Yes. And just to add a bit more color on the $32 million savings we saw in H1. I think around about half of that, we would expect to sort of to say and as I commented when I was speaking, we also got benefit from COVID-related cost avoidance and also just some effects around lower variable compensation. So the COVID aspect is probably around about $10 million and at some point, that will probably go away because that's lower T&E and some of the government [ projects since ].

Yes, exactly.

The next question comes from Patrick Rafaisz from UBS.

The first would be on your working capital assumption for the second half of the year. Jonathan, you talked about inventories that could still be reduced, but then I assume other components would likely rise given increased activity levels. So how should we think about that working capital in the second half of the year? The second question would be around the order intake and the run rate you've seen here, especially in August and September, if you can add some color on that? And then -- and the last question would be around the buyback. How should we think about the likelihood of this being resumed? And how should we think about potential timing around this?

Yes. Thank you, Patrick. Jonathan, why don't you answer the first question about working capital. Yes. Very good.

So on the working capital, as you rightly pointed out that the inventory sort of basically stayed flat over the half. I think we would expect it to tick down in H2 to reflect the lower revenues, and we've got pretty granular plans to make sure that we deliver that. On the other hand, as you rightly point out, we're sort of indicating for higher sales in the second half. And therefore, there'll be some offsets to that from -- on the receivables and payables, the net balance between those 2. So I think we certainly do recognize that our inventory is much higher than it should be and we should see some quite significant reductions in H2. But as you correctly point out, they were pretty -- they won't fully flow through because it will be a partial offset in material [ onset ].

Yes. Maybe just to add to that. As Jonathan said, we are not able to turn off the tap fast enough on the inventories, but we do feel pretty confident that we will see a pretty different number. Actually, given the low revenues, this has to follow. In terms of the second question, order intake, Patrick, we do see some increased activities. We see that in Europe, which is positive. Having said this, don't get me wrong. The book-to-bills are disappointing, and we need to work very, very hard on that. There's no question in my mind. Same goes for the U.S., we do see in terms of -- especially this regulatory approval, we see increased level, which are really read as a positive sign that regulators are looking at this stuff again. But having said this, the proof of the pudding will be, and we see actually when the commissioners meeting, actually, there will be these projects on the agenda. And so far, we have not seen that, but they will meet every month, and we watch that very carefully. But that's what I think is important. We see increased activity, which also led to some good wins. But overall, the book-to-bill is unsatisfactory and the regulatory approval still outstanding. I think that's really important. The last point, book-to-bill -- sorry, the last point, share buyback, I apologize, that's something we put on hold, and that's a broad decision. I would be surprised if that would change in the near term, but that's definitely the Board, which will take a decision on that.

The next question comes from Patrick Laager from Crédit Suisse.

Two questions from my side. First, on Americas, specifically the U.S., it looks like that Landis+Gyr lost significant market shares in the U.S. to Itron, your biggest competitor. I estimate this loss to be, I don't know, around 600 to 800 points down to 30%, 32% over the last 3 years. Is this significant loss due to, I don't know, pricing, weaker innovation power or maybe a moving customer base? Or what are the key reasons for this development?

Yes. Pat, thank you for the question. I share your view, when we look in the U.S. over the last few years, we did have a loss in market share. I think that's a fair assessment, where we had a few projects which we couldn't win 2, 3 years ago. Having said this, Revelo was our response to that from a technology perspective. And I think Revelo has a very good, I would say, reception in the market when I look now these projects under regulatory approval. So I think we are definitely on an equal foot [indiscernible], we believe we have the technology leadership. But having said this, Patrick, you're absolutely right and that's why we will see in the U.S. this top line compression, which is really driven by these roll-offs of projects which we cannot replace what you just said with new projects and then obviously, this regulatory approvals on top of it. So that's a very fair assessment from your side.

Okay. Good. So it's definitely not driven by pricing. I mean it looks like that it's more on weaker innovation power here.

Yes. I think it's a fair assessment. Now there's always a mix, as you can imagine. But I definitely think that with Revelo, we were able to close the gap or even achieve technology leadership.

Okay. Good. And the second question is around EMEA. Here, obviously, the big concern about EMEA is the lack of revenues once the U.K. rollout has been completed. This means that finding new sources of revenues will be key for you. However statements you have made so far remained very, very vague here. So we heard about Landis strengthening its footprint in the Nordics, in Eastern Europe, potentially also in Africa and Middle East, we -- that's more for the organic side. And inorganically, you mentioned that potentially acquisitions in water metering, in EV, in heat metering, gas metering and more recently in cybersecurity could be interesting. So all this remains very interesting here. However, obviously very vague. Can you provide more insights about your focus here? I know that there is a Capital Market Day in a couple of weeks or months to take place. However, it would be nice to have a first indication what could be the most interesting investments or, let's say, focus in the next couple of weeks or months? Probably months or years, not weeks, months or years.

Yes. Absolutely. In terms of EMEA orders intake, one thing I would like to say before I go into different countries is in EMEA, actually, on a very positive side, the U.K. market is peaking in '22. So I think that, for us, very important. It gives us a little bit time in terms of shifting more into new markets. So that's the positive thing. And then as I mentioned in the past, we see interesting opportunities in the Nordics. That's something where we are already had wins. And as you heard through my first part, I think E360 is well accepted. We clearly heavily focused on the Nordics. We see opportunities in Ireland. We see opportunities in Eastern Europe. In Eastern Europe, there, we have some really strong positions, for example, in countries like Poland, but other countries where actually we have room for opportunity. And Middle East, Africa, definitely, we want to have an increased presence. I think that's important. When you look from a legacy perspective, our legacy markets were really: U.K., France, Netherlands and as these rollouts are coming to an end, it's super important that we are able actually to gain increased traction in this market. I think we made good steps. But obviously, you're right, Patrick, you're absolutely right. Show me the results, and that's something which need to follow. In terms of acquisitions, I think a strong focus on it. We have the balance sheet and I -- trust me, I'm someone -- I make quite a few acquisitions in the past. I'm very hungry to do that. We look at software, in particular, we look at grid edge in particular. There were some interesting opportunities. Having said this, it always needs to fit a little bit the profile. What do I mean with that? On one hand, when you look at, for example, in a more software environment, you pay for a company 10x revenue, where you pay for a hardware company 1x revenue. So you need to fit actually the firing power which we have at the moment, which I think is important. And then when I look into grid edge, there are not that many opportunities around. There was one great opportunity, which we wanted to get, but obviously became very pricey. But I do hope that at the Capital Markets Day that we can give a little bit more color because we need to be in the target zone that we actually could talk about something.

Next question from Ben Uglow from Morgan Stanley.

The first was just a bit of a clarification. I think at the beginning, you were talking about the EMEA revenue, and you mentioned this sort of 60% installation rate. Is that what you're basing your kind of future revenue assumption on? Are you basically thinking that you can carry on in EMEA at that type -- or you mentioned the U.K., but in EMEA at that type of rate? So that was a clarification. Secondly, on EMEA, if we carry on at the current rate and we get the benefits of the Project Hermes savings next year, is your assumption that, that market will be profitable, i.e., can it be EBITDA positive if we continue at the same rate with future cost savings coming in. So that -- I'll ask that one and then come back, if I may.

Yes. No Ben, very good question, thank you. As the 60%, my view is or our view is we think it should go up higher than 60% in the U.K., and we think that's doable. Now I need to predicate that, obviously, with the latest COVID development, which we not just see in the U.K., we see it in Switzerland and all over the place. So I think that's something we need to watch very carefully. But my view is also that all of us learned to deal with it better. So the U.K., we expected actually, that should go in the second half further up above the 60%, closer to 100%. In terms of EMEA, yes, we do see that on current level in terms of the Hermes savings coming in that we need to get back through profitability. And we'll get back to profitability. Jonathan, maybe some color from your side also?

Yes. I think the big impacts for EMEA certainly has been the hit in the U.K. So everything we say is very heavily predicated around how the U.K. performs. I think given the -- some recovery in the U.K., hopefully, over the next 6 months or maybe into next fiscal year, but yes, we should get back to a profitable track. And I think we talked before about a 10% adjusted EBITDA target. I didn't [indiscernible] feasible target for the region, but obviously it requires a recovery in the top line and that requires a recovery in the U.K.

Yes, that would be pre-COVID revenue level.

Yes, exactly, yes.

Understood. And can I ask a sort of -- look, a bigger picture question, just stepping back. None of us know obviously when these lockdowns and whatnot are going to end. But if I think about your revenue guidance, basically, you've done 620-odd in the first half, and what you're thinking at the moment is that there's 730 at the midpoint, so nearly a 20% increase in the second half versus the first half. Philosophically, is that increase basically being driven simply by your assumption on installation rate, i.e., is your revenue forecast completely contingent on your view of just being on site? Or is there anything else in that number? So -- and I guess the follow-on to that is if sooner or later, the orders and the revenues do need to connect somehow, so if we don't get to that run rate in the second half, how do I think about the revenues as we move into '22?

Yes. So Ben, I think to a large degree, that this revenue really are predicated on the installation levels. As I mentioned before, some of France backed 100%, Netherlands backed 100%, U.K. 60% but should actually come up, but I think that's a fair assumption.

Okay. Understood. And final question and apologies for being on too long. Jonathan, in that $30 million working capital number, were there any line items in working capital that you considered sort of extraordinary in terms of receivables or payables? Or was this a sort of natural kind of inflow?

Yes. And I think on the receivables and payables side, I mean, and it pretty much followed the revenue track. So obviously, significant reductions in both but not very much in line with the revenue. So there was nothing unusual in that.

The next question comes from Daniel Koenig from Mirabaud.

Yes. I have also one big picture question, and then I have 2 XL question. First, my big picture question is there is an election on November 3. And what is your view, what will -- what is the impact of a new President and other President on your revenue line in the U.S.? And then the 2 XL questions are, the interest income has gone down from $5 billion to $251 million. Is there in '19 one-off in there? I'm just wondering what to forecast in the second half. And then the other one would be the tax expense, you had a positive tax benefit of $13.8 million. What shall I assume for H2?

Yes. Thank you, Daniel. I'll take the first one, and Jonathan, I suggest that you talk about 2 and 3. Election, I think I have a pretty clear view who will become President. But either ways, I think that either way, it will be positive because if it's Trump, I think he's pushing business. I think that will be a positive in terms of I'm thinking now, in particular, about our regulatory approval projects. And then if Biden were to come, I think Biden has actually a green plan, which I think is very good, and he wants to push that element quite a bit. And then last but not least, we should also not forget, it's not so that this is actually driven by the central government, this decision is about this smart metering second wave really driven by the states. So for example, New York makes a different decision than Texas and so on. So I think from that perspective, I feel that -- either way, I think we should get to the right answer, but it's frustrating that it takes much longer than we expected.

Let me take up the other 2 points. On the interest, there was a big one-off last year on the interest income line because you may recall, we had the settlement of the court case in Brazil on VAT, which went back many years. So the large interest component in last year's income savings for interest, which hasn't repeated this year, and what we don't identify that will repeat in future. And on the tax expense line, yes, we had some one-off credits in the first half, which obviously go as a big income tax benefit. I think for the year as a whole, obviously, we'd expect some in a more normal level of tax charge, assuming we become profitable in the second half.

The next question comes from Jeff Osborne from Cowen and Company.

Most of the questions have been answered, but I just had 2. One, I was wondering if you could just update us on the scope of the awarded business that you have with the new Revelo product but hasn't been regulatory blessed?

Yes. Jeff, that's right. And so the -- as when I say regulatory plans, I don't think necessarily it's technology issue. The way to think, Jeff, is that obviously these are very sizable investments. So for example, when you look at our 4 projects, there are some projects where there will be a combined amount with other suppliers, there will be some projects, which we are the sole supplier. But in summary, these projects are valued over $1 billion. And so when you think about this project, it's a very sizable thing and that combined with actually the rate increase for the end customer, that's where you see a little bit the sensitivity by the regulators, like we saw understandably, let me say, it makes a lot of sense for the utilities. But that has the way how to see capacity.

And do you anticipate all 4 to have clarity by Q1 of next year or just a few?

I would say not all 4, but definitely 1 to 2. I definitely see 1 to 2 and then the others will be more timing, but that's how I see this whole thing unfolding.

Got it. And the last one I had was for Jonathan. I might have missed it, but the $20 million for the state of Washington, did you already take the charge? And if you're taking that in the next period, where will that flow through in the model?

Jeff, no, we haven't taken a charge for that. And in fact, we won't take a charge for it even if we make the payment because we are very confident that we'll finally win this in our case. And therefore, we will hold it as a prepayment in our balance sheet.

The next question comes from Peter Testa from One Investment.

Maybe just following on from that first question. When you look at the larger projects and your comments around expecting definitely 1 or 2 clarity in Q1 '21, can you give some sort of sense as to what's leading you to that view? Have you seen any change in conversations or tone? Or you said it wasn't on the meeting schedules, but could you just give some view on that, please?

Yes. Definitely, Peter. The -- so this regulator utility and then customer who actually are having these discussions. So we are so-called by standard. It's not that we, unfortunately, can directly participate in these discussions. However, we are actually supporting the utility as much as we can. And what we do see is also my conversations directly with these customers that we have an increased level where they come back and say this question or that question, which we view as positive. So I think that leads us to the view that we think by end of March '21, there should be some clarity. And my view is also, Peter, I mean, if by mid next year, these projects are not coming through, we should stop talking about it. Because there's always a time window. So I do think in this time frame, we are in right now, I think we should see some movement.

Okay. And you see that more on 1 or 2 of them than the other 2. So that's kind of why you say that and gave that answer. Or do you see it across?

I actually see -- yes, I see it actually -- I mean I talked to all 4 and -- but I see on -- when they have been filed and so on, so there's a certain trajectory. And you see 1 to 2 projects a little bit ahead of the other projects that's why I think it will pan out this way.

Right. And then just on the point you made on Nordic opportunity. You highlighted about 10 million meters opportunity. Do you have any sense of the time frame of those awards? Are we talking 1 to 3 years, 1 year? Just some view on how that opportunity spells through.

Yes. I think that probably should. I mean the whole 10 million, I cannot give you a view on that, but I think there are sizable opportunities in the next 12 to 24 months coming up. I mean we are just, as we sit here, quoted for 1 and more to come. But for the 10 million, that's something we could provide you later, which time frame do we think about that. That's probably more than in the, I would say, 3 to 4 years for all of them.

Okay. And last question is just when you look at the point you made about your roll-offs and so on in North America, are you looking at this as being larger projects coming to an end over the next 12 months? Or is it just a series of smaller ones and kind of a natural evolution of the backlog?

So I made the comment to Patrick Laager's question when he said, "Hey, did you lose market share?" We did have -- we did lose 2, 3 projects 2, 3 years ago, and therefore, we were not able to actually then replenish the top line because all projects actually rolled off and then we were not able actually to bring in the new projects as a company. And that's compounded now, obviously, with this situation we are having with this regulatory approval delays.

Sure. But I was just wondering, going forward, you made a comment about roll-off continuing, and I was trying to understand whether this was just a series of projects over time or whether there are any particular large projects in that?

No, there's -- no, I think it's pretty gradual in terms of -- also what we see in terms of backlog and so on. That's why it's so important that we can win new projects, but it's not that we would have a cliff or something like that.

The last question comes from Willi, Andreas from JPMorgan.

Just had a follow-up question on Brexit, deal versus no deal, what that could mean for you in terms of impact next year? And given that a lot of the costs are outside the U.K. for you for the deployment?

Yes. No, thank you. We have here a real English man with us. Jonathan, why don't you speak?

Thank you. Yes, I think there's -- I mean, obviously, there's always sort of a supply chain disruption risk, I mean just in terms of [indiscernible] getting products into the U.K., we think that's probably worth a short-term impact. But the direct impact would be import duties if the U.K. trades on WTO terms, and those are between 1% and 2% for meters, depending on the type of meter, the maximum 2%. So that would be a cost that we would have to bear at least in the short term. And then we're obviously also conscious around the FX exposure that we have, which is obviously -- is the level of the pound is quite geared to the Brexit and that's obviously why we've got some quite significant hedges in place to mitigate any impact there. So I guess sort of the most immediate direction plan is the WTO duties, if that's what was to happen.

Yes. Thank you, Andreas. Then I would like to make some closing comments. And before I do that, thank you very much for your questions, I think great questions. And just want to have some key takeaway before today's call. First, I do think the situation of the current environment are challenging. However, I really keep it with Vincent Churchill, never waste a good crisis. And we are making good progress, and we are getting the house in order. Second point I want to make is despite almost 30% revenue decline, we were able to produce a solid free cash flow of the $5.9 million and traded profitably with an 8% adjusted EBITDA margin. And then last but not least, I also would like to say that we are convinced that we have the right strategic focus in order to drive leading-edge technology and transform the business. With that, thank you for joining us today. Stay safe and healthy. Look forward to speaking with you very soon. Thanks a lot, and have a good day.