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

Ladies and gentlemen, welcome to the Analyst and Investor Call FY 2020 Conference Call and live Webcast. I am Pablo, the Chorus Call operator. conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Eva Borowski, SVP, IR and Corporate Communications. Please go ahead, madam.

Thank you, and good morning, everyone. As you know earlier today, Landis+Gyr issued our full year 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, please see Page 2 of the presentation and our press release issued today. Today's conference call will follow the presentation. So please, 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 full year 2020 financial results. I'm here with Elodie Cingari, our CFO, and we are very pleased you have all been able to join us this morning. Look, before we start to its presentation, I would like to give you a brief overview of the key messages of today's call. First, this has been a challenging year. However, our transformation to expand grid edge intelligence and smart infrastructure is well underway. Second, despite 20.8% revenue decline, we were able to achieve a 10.3% adjusted EBITDA margin and produced a solid free cash flow of $97.6 million. Third, I'm convinced that we have the right strategic focus to drive leading-edge technology and transform the business. So let's talk about what's been happening over the last year and move on to Slide 3. The COVID-19 pandemic has affected all aspects of our lives in unprecedented ways. This also had an impact on our customers and our company and is reflected in our financial results and forecasts. Just this past week, we have taken the decision to temporarily close our [indiscernible] facility to protect our employees from the rising case numbers in India, whenever possible, employees continue to work from home. And also, we have not experienced any major project cancellations. We have seen the impact on revenues in markets where installations have slowed down or being temporarily suspended. That said, installation rates have picked up a great deal over the course of H2, which is a positive sign for recovery. Let's have a look at some of our key metrics. Starting with the order intake. Our book-to-bill ratio was 0.96, which is an improvement from 0.81 in FY '19. Improving the ratio going forward remains my top priority. Our committed backlog fell by 2.6% to roughly $2.2 billion. Americas and EMEA both contributed to the decrease, while Asia Pacific was able to increase its backlog by 8.4%. Net revenues came in at $1,357.4 million, a decrease of 20.8% in constant currency, while both Americas and EMEA were seriously impacted by the crisis and associated lockdowns our business in Asia Pacific managed to improve its revenue by 0.4% in constant currency. And we saw a little recovery in H2, which was up nearly 18% versus H1. Adjusted EBITDA came in at $139.6 million with an EBITDA margin of 10.3%, a decline of 370 basis points only despite 20.8% lower net revenue. Free cash flow, excluding M&A remained positive with $97.6 million, down 18.9% year-over-year, yet demonstrating again the cash-generating power of our business. One of our great strengths has always been our balance sheet. This remains very solid with the net debt to adjusted EBITDA of 0.05x. Undrawn credit facilities at the end of FY'20 were CHF 270 million and USD 130 million or USD 416.6 million in total, while we repaid a total of USD 204.3 million. I'm pleased to say that our Board of Directors will propose a distribution from capital reserves of CHF 2.10 per share. This distribution is free of Swiss withholding tax and will go to vote at the Extraordinary General Meeting on June 24. Let's talk about what we have achieved when it comes to sustainable impact on Slide 4. We are proud to say that we are reporting according to GRI core and have signed up to the UN Global Compact. We see our efforts recognized by the recent global Ecovadis Gold Medal, raising us in the top 5% of sustainable companies. In addition, we continue to maintain high ratings with ISS, MSCI and Inrate. These accomplishments drive us to elevate our sustainable impact to the next level, and I'm very pleased to announce that we have set ourselves the target to be carbon neutral by 2030 the latest with focus on Scope 1 and 2. Our portfolio of products and services enables us in a unique way to have a direct sustainable impact on social and environmental aspects. Working actively towards a greener future, sustainability is embedded in our DNA as we help manage energy better. Turning to Slide 5. In addition, for 2020, we have introduced a sustainability component in our short-term incentive for all eligible employees with a rate of 10%. In 2021, we will increase this number to 20%. We have developed a comprehensive set of goals to empower our employees to have a direct impact on environmental and social topics. Hereby the overarching categories of climate, resource, trust and equality are guiding our way forward to further improve our sustainable impact. Let's move on to Slide 6 and take a look at the recent awards we have won. We are proud of the strong partnerships we have with our customers around the globe. To name just a few. In the U.S., we have been awarded contracts by Puget Sound in Washington, Polk-Burnett in Wisconsin and Evergy in Kansas. In the U.K., we have signed agreements with Smart Choice Metering and EDF, for example. We are excited about this project and others, of course, and continue to be committed to delivering leading-edge technology to our customers and value to our shareholders. Let's turn to Slide 7 and review the past year briefly. When I look at this timeline, I'm proud that we have picked up the pace quite a bit over the course of the year. Since list is quite comprehensive, let me pick a few highlights. Next to some additional wins listed here, I'm personally very excited about our 7-year strategic partnership with Google, and I will provide an update on our strategic initiative here in a moment. To further accelerate the transformation of our company, we have acquired Rhebo and EV company's Etrel and True Energy. This opens up new markets and revenue streams for us. So you see, we are investing heavily in w technologies, M&A and partnerships to strengthen our core of smart metering and expand our reach in grid edge intelligence and smart infrastructure. But in 2020, we also focus on driving efficiencies. I'm pleased to announce that our global streamlining and restructuring initiative Hermes has concluded as of March 31. Let's turn to Slide 8 and have a look at the developments in each region. I'll start with the Americas led by PV. Even with the challenges of COVID-19, there's an active sales pipeline and the clean energy focused administration and regulatory approvals in New York and New Jersey signal momentum. I'm partly in close contact with our customers, and we are active in negotiations after regulatory project approvals have been granted late last year. I'd expect news flow towards Q2 of FY'21. Please keep in mind, from the time we sign a contract until it translates into meaningful revenues, it takes approximately another 18 to 24 months. This means we are dropping financial year '22, '23. I would also like to highlight that our products and services are considered to be part of critical infrastructure in the U.S. In addition, we are leveraging our partnership with Google Cloud, our edge-to-enterprise vision, enabling the digital transformation for utilities and R&D investments also remain a high priority. South America continues to be growing market for us, demonstrated by multiple wins. In Japan, the project with TEPCO is rapidly advancing to the next stage, including foundational elements for the next-generation of technology deployments planned for commencement in net '25. Overall, we see solid tailwinds for continuous recovery, especially with the planned U.S. energy infrastructure investments in excess of USD 100 billion. Let's move to Slide 9 and get a closer look at EMEA led by Susan. Deployment programs in several European countries are put on hold due to the pandemic, especially in the first half of the year. However, we saw some recovery in the second half of FY'20. Due to the COVID, the smart metering program in the U.K. has been extended until June 25. We start to work with government and industry bodies in the U.K. to scope the potential of the smart infrastructure to support the U.K.'s 2050 carbon-zero target. The Nordics remain a key region for us with more than 1 million smart meters contracted in Sweden and Denmark. Second wave rollouts in the region are expected to provide an additional opportunity of approximately 8 million meters. Let's take a look at France where the rollout is in full swing, with more than 31 million Linky smart meters already installed and a further 11 million to be deployed untill 2026, overseas territories and medium utilities. In the Netherlands, we confirmed our leading position and extended our relationship and contract with major great operator Stedin and Alliander. In Qatar, we have been selected as a supplier to deliver smart meters as well. As a result of the increasing installation rates in H2 of approximately 80% of pre-COVID levels in the U.K. and roughly 100% in France, we see positive momentum in EMEA. Let's take a look at APAC led by Steve on Slide 10. Asia Pacific is a bright spot in our results. It's the region last impact by COVID and managed to grow its revenue and adjusted EBITDA year-over-year. Growth in the region was largely due to continued execution of AMI project in Hong Kong, which delivered higher revenues in FY '20, together with the resilience of the business across Australia and New Zealand. In Australia, the energy sector is considered critical infrastructure and installations largely continued. We have extended our supply contract with our partner intelliHUB until '26, ensuring smart meter supply continues across Australia and New Zealand. Our smart meter programs with CLP and Hong Kong Electric in Hong Kong continue and we're proud to say that CLP will soon install its 1 million Landis+Gyr smart meter. Business in India was particularly impacted by the pandemic in the first half of FY'20. In the second half of the year, India recovered to pre-COVID levels. Overall, we are very pleased with the resilient performance of our Asia Pacific segment, which was able to increase revenues despite the challenging COVID-19 environment. Moving on to Slide 11 to provide an update on our strategic transformation. While our core smart metering remains important, we are increasing investing in grid Intelligence, smart infrastructure to drive our strategic transformation. In FY'20, we have taken decision to invest in development of smart water and smart gas to propel organic growth in smart metering, as you can see on the left, for example. In addition, we are proud to have strong partnerships, Vodafone is enabling meter and sensor communication through cellular technology and as such, elevating our smart metering and grid edge intelligence portfolio. The 7-year strategic partnership with Google is a big part of our transformational journey, as it allows us to co innovate new offerings in smart infrastructure. And on the M&A front, we were able to share some exciting news most recently. After the acquisition of Rhebo in January, which expands our cybersecurity offering, we are proud to welcome True Energy and soon also Etrel to Landis+Gyr. These two additions will allow us to strengthen our position in the EV infrastructure technology market. Let me dive a little deeper into this on the next few slides. Starting with our organic strategic initiatives, we are making good progress with the development of our ultrasonic global smart water meter. Interest continues to grow in smart water metering solutions, with Australia, New Zealand, Singapore and Hong Kong, leading the way. And we expect the market introduction with deliveries into selected markets in EMEA starting in '23. Good developments also for our ultrasonic global smart gas meter. We see strong customer engagement on product requirements and anticipate full market introduction in '23 with volume ramping up swiftly afterwards. These target investments in new products and services will drive future organic growth, and we are on the right path to drive these initiatives forward. Let's move on to Slide 13, so I can provide a brief update about our partnership with Google. The partnership with Google opens up new markets and it enables us to offer our customers more insights into the vast amount of data, our smart meters and grid edge intelligence centers called collect on their behalf. We continue to work closely together with dedicated teams on both sides and push forward numerous applications that we will start offering via multiple channels, including Google marketplace and our own Google independent software vendor program within the year. In addition, we are in process of expanding our relationship with Google GOV, Google Energy and several other auto-based companies. Also, we are partnering with the government solutions provider supporting federal and state local government agencies on TSA and other schedules as the GCP provider. As a result, we will be able to offer new software applications and expect to see around $3 million in revenues this year. Our Head End system modernization is well underway as we prepare for North American and APAC delivery and sales tenants this year, a global rollout is following in '22. In turn, we are migrating all IT and older systems to the Google Cloud platform according to plan. In addition, of course, all our recent and future M&A activities will be Google Cloud platform native going forward. In summary, our Google partnership drives customer benefits, additional revenue opportunities, cost optimization efficiencies, and we expect realization to start this fiscal year through FY'23 and beyond. With that, we are moving on to Slide 14 to provide an update on the acquisition of Rhebo, which we announced on our Capital Markets Day in January of this year. Rhebo is perfectly positioned to cater to the increasing demand for cybersecurity at the grid edge. It allows us to participate in double-digit growth for cybersecurity monitoring into achieve scalability with Google technology and our existing customer base. Let's jump to Slide 15 and talk about our just recently added acquisitions in the EV charging smart infrastructure technology business. After the recent announcement of the acquisition to True Energy, the addition of Etrel further strengthen Landis+Gyr's position in the EV market. EV challenges in residential homes and public places will require management of additional large unplanned load on the grid, which is our expertise. Therefore, with our two most recent acquisitions, we are well positioned to participate in double-digit growth for residential EV charging, which are driven by strong market incentives. Let's talk about Etrel and True Energy and what they bring to the table a little bit more on Slide 16. Etrel is a recognized player in the EV infrastructure market with expected profitable double-digit million sale in FY'21, offering a complete range of smart charging stations for home and public. In addition, portfolio includes a comprehensive suite of software for charging management and smart charging. Etrel's charging stations cater to any home or business, providing intelligent user interaction, advanced power management and flexibility, while offering users a seamless transition between charging locations with a single app, keeping track of all deployed charging equipment. Operating and managing charging stations opens new possibilities for services to monetize EV charging infrastructure and connected applications. True energy's technology enables sustainable electricity on-the-go, automated EV energy use for times of the day when electricity is most cost-efficient and most climate friendly. Currently, we already involved in pilots in the U.K., such as the SmartSTEP project, which brings smart EV charging to residential urban streets and proof-of-concept activities in France to support our customers in the development of future-proof technology. Therefore, both Etrel and True Energy are a perfect match with our general mindset and will enable us to drive our initiatives related to EV charging infrastructure technology. Now let's turn to Slide 17 and take a look at our consolidated results. First, let me point out that despite 20.8% revenue decline, we were well able to achieve a 10.3% adjusted EBITDA margin and solid free cash flow of $97.6 million was a bright spot. Order intake of USD 1,298.7 million, down 6.2% in constant currency with an order intake and revenue conversion, mostly impacted by U.S. regulatory project approval delays and COVID-19-related installations, suspensions and slowdowns. As announced during the Capital Markets Day, we recognized a Legacy Toshiba Goodwil impairment of $396 million. We were also able to maintain a low net debt adjusted EBITDA of 0.05 despite a challenging environment. Overall, despite lower trading results, mainly impacted by COVID-19, we were able to maintain a strong cash generation, with even margin and solid balance sheet. Let me now hand over the call to Elodie to give you a more detailed review of our financials. Afterwards, I will walk you through the guidance for fiscal year '21 before we open up the call for questions. Elodie, please?

Thank you, Werner. Good morning, everyone. I would now like to walk you through the financial details for fiscal year 2020. Our net revenue results for the fiscal year 2020 was $1.357 trillion. This is a decline of 20.8% in constant current quarter versus prior fiscal year. As mentioned in our H1 earnings call, this is primarily due to COVID-19 impacting our markets by delaying planned deployments and new volumes. In particular, the decline was attributed to the Americas region, where we saw a slowdown of project installation and regulatory delays. In EMEA, the lockdown in certain countries, particularly in the U.K., resulted in delayed deployments. The APAC region was resilient overall during the year, with the ongoing rollout acceleration offsetting some of the impact of India's lockdown. All in all, we are seeing an upward trend from H1 to H2, while H1 revenue was 27% down versus prior year, H2 was down 12% versus H2 '19. I will now move on to the EBITDA bridge, Page 19. Our adjusted EBITDA for the fiscal year 2020 declined from $237 million to $139.6 million year-over-year. This translated into an adjusted EBITDA margin, down from 14% to 10.3% year-over-year. In particular, our gross profit declined for two reasons: Our volume decline impacted the gross profit by $123 million, driven by Americas and EMEA. Our margin decline accounted for $19 million impact due to reduced operating leverage as we could not adjust our costs related to supply chain and manufacturing fast enough to offset the fall in revenues. Lastly, our adjusted operating expenses significantly reduced year-over-year. Much of this was driven by proactive cost control measures and the initial impact of Project Hermes that was launched in 2020. We also benefited from COVID related savings such as lower travel expenses and government support key. And now moving on to the reported EBITDA to adjusted EBITDA bridge on Page 20. Here, there are three items as shown on the page: First, restructuring charges. These relate mainly to Project Hermes, the global streamlining and rightsizing initiatives that has been completed in FY 2020. Second, the warranty normalization. It represents the amount of provision made in 2020 relative to the average actual warranty utilization for the last 3 years. The average utilization is trending downwards, and you can see that the actual amount of provision is down $13.2 million compared to the full year average utilization. And thirdly, timing differences on FX derivatives. Our biggest FX exposure is in the U.K., where we contract revenues in pounds and our core supply chain cost largely in other currencies. In 2019, 2020, we hedged the British pound up to 24 months ahead, given the uncertainty around Brexit. The adjustments exclude unrealized gain losses of $23.8 million related to mark-to-market differences. Now moving on to Page 21 and looking at our dynamics in the second half of 2020 compared to the first half. As mentioned, we are seeing a positive trend on the topline in H2, reducing the gap to prior year from minus 27.7% in H1 to minus 12.2% in H2. We took early action to preserve cash and tightened cost controls across all levels of the organization. Due to a combination of structural changes like Project Hermes, short-term cost actions and COVID related cost benefits, we were able to deliver significant OpEx savings in 2020. In the second half, we saw some of the short-term effects related to COVID that were temporary in nature move $21 million in the second half compared to the first half. We expect to see this trend continuing in 2021 as our OpEx level will come back to a more normalized level without the short-term impact of COVID related measures. At the same time, our structural changes linked to Project Hermes savings are fully implemented, and the program is delivering the savings as planned. As a result of the combination of operating leverage from the increased volume and lower OpEx costs, our adjusted EBITDA margin increased to 12.2% in the second half, 4.2 points above the first half. If I now look at net income and free cash flow, moving on to Page 22. Looking at net income first. As indicated in our Capital Markets Day, early January, we performed and concluded on an assessment of the fair value of our intangible assets and have reviewed all associated parameters. As a result, we booked a noncash impairment charge of $396 million related to the Legacy Toshiba Goodwill attributable to the Americas business. In 2020, we recorded a net loss of $392.2 million or a negative 13.6% EPS, including the goodwill charge. Excluding this one-off goodwill charge, our EPS would have been 0.13. Looking at cash flow, and as noted in the financial report 2019 the company has received the sales tax assessment from the state of Washington Department of Revenue, WADOR, we strongly disagree with the assessment and believe that it will be overturned on appeal. In order to file an appeal to the court, one must first make payments of the tax assessment. We have, therefore, paid $20 million in Q3 2020 and a high benefit in November 2020. We do not expect this case to be resolved before fiscal year 2022. Throughout 2020, we delivered a strong cash flow performance, showcasing the resiliency of our operating model, our focus on cost and continuous commitment to optimize our operations. If I turn to the details on the cash flow page, Page 23. You see that in 2020, we generated free cash flow, excluding M&A of $97.6 million. This was approximately $22.8 million lower than last year, notwithstanding the lower volume and the one-off water charge of $20 million mentioned earlier. Working capital continued to be a net generator of cash with $51.7 million through strong inventory controls, in particular, in the second half in our Americas and APAC operation. Warranty and warranty settlement cash outs were at $17.3 million, down from $45.2 million in the prior year as payments for America's legacy components issues were lower, and we completed the M&A based litigation settlement in fiscal year 2019. Our CapEx remains low at $26.6 million as we continue to benefit from the shift to the asset-light business model. Tax payments were $26.1 million, due to lower profitability and partly due to various government's COVID-19-related tax payments default schemes that we benefited from. Finally, we recorded a cash out of $11.7 million, predominantly related to our Rhebo acquisition announced in January '21. If I move to Page 24, looking at net debt, as of 31st of March 2020, we had a net debt position of $6.9 million. This represents a net debt reduction of $25.7 million compared to end of March in the prior year. Our strong free cash flow generation supported this reduction and as well allowed us for $63.3 million dividend payment in November 2020. The $11.7 million M&A cash out relates primarily to our cybersecurity acquisition of Rhebo, as mentioned. The share buyback remains suspended. And during the fiscal year, we have repaid over $200 million of debt. And at the end of the fiscal year, we have undrawn facilities of over $400 million available in addition to our cash position of $140 million. As a result, the net debt position translates into a net debt to adjusted EBITDA ratio of 0.05x. If I now turn to the regions and look at the respective performance starting with Americas on Page 25. In the Americas, regulatory delays and COVID-19 impacted order intake and revenue recognition. Order intake grew 2% year-over-year, whilst revenue fell 21.9% in constant currencies. This is due to slower deployment of ongoing contracts, contract phase out not being replaced fast enough due to the current market environment and weak order intake of convertibles within the year. Adjusted EBITDA was at 15.1% compared to 18% in previous year. This is largely due to reduced operating leverage associated with lower volume, partially offset by improved mix and restructuring cost savings. Expenses were well controlled, predominantly driven by the impact of restructuring initiatives and other cost control measures. Moving to our EMEA region. In the EMEA region, COVID-19 impacted order intake negatively as we saw more delays. Revenue fell 24.6% in constant currency, predominantly in our largest EMEA market in the U.K. due to slower planned installations during COVID lockdowns. Adjusted gross profit margin decreased by 150 basis points. Similar to the Americas, this was largely driven by operating leverage, partially offset by favorable mix and cost out on installed bearings. Adjusted OpEx were lower versus prior year, driven by COVID-19 measures, restructuring and one-off items. We are seeing early recovery in the U.K. in the second half and expect continuation throughout 2021. Moving to our APAC region on Page 27. APAC saw resiliency during the pandemic. Order intake was up due to India, while revenue was increased by 0.5% in constant currency. Growth in Hong Kong offset COVID-19 related weakness in India and Australia and New Zealand. Gross margin expanded by 290 basis points, driven by favorable mix throughout the Southeast Asia volume. As a consequence, we continue to see EBITDA margin improvement that was up to 7% in fiscal year 2020. And with that, I am handing the call back over to Werner.

Thank you, Elodie. Turning to Slide 28. Let's talk about the guidance for our financial year '21. We still see some level of uncertainty due to COVID-19 and the general business environment. In addition, a global shortage of electronic components and plastic resins as well as increased freight rates could pose challenges for cost and on-time delivery performance. However, mitigation actions are in place. With increased vaccination efforts, we see increased levels of installation and anticipate recovery of previous project delays. We expect that full year '21 revenue will grow organically between 7% and 11% CAGR, while inorganic revenues will come on top of that. So we see a good level of recovery, mostly driven through the EMEA region. To ensure we are well positioned for the future, we are incurring additional expenses of approximately 2% of net revenues. This will support our strategic initiatives and company transformation that we talked about just a moment ago. This directly impacts our adjusted EBITDA margins, which we see then between 9% to 10.5% of net revenue. Free cash flow, excluding M&A is expected to come in around USD 80 million to USD 100 million. On June 24, the Board of Directors proposed a distribution of CHF 2.1 per share to the extraordinary General meeting, the distribution will be paid out of capital contribution reserves and is exempt from Swiss withholding tax. And lastly, let me also mention that the share buyback program remains suspended. Now we will open up the call for questions.

[Operator Instructions] The first question comes from Patrick Laager from Crédit Suisse.

A couple of questions here. Regarding the potential successful outcome of the ongoing negotiations with the U.S. utilities, which have now received approval from the public regulator. You said you're expecting new flow in Q2. Do you mean Q2 of FY'21 or calendar Q2?

Yes. No, what I mean is actually our Q2 that would be in actually June, late July, we will hear more. We have two customers as part of this regulatory approval, which we are really in very advanced negotiations and really should be able to conclude in June, latest July.

Okay. So there is a small delay here. Because initially, as you said, I think March to -- between March or April to June? I'm not sure.

That's right. It's more to the end, but we feel very good about it, how the discussions are going, and these are sizable also. So we are pretty excited about that.

Okay. I'm exciting -- excited too. Good. So the second question is, you said you're planning to introduce smart water meters in EMEA in Q1 2023. So why does it take so long, given that this is basically based on existing technology you are using for gas metering? And what about the U.S.? I thought you would launch this type of water meters also in the U.S., right?

That's right. Now when we look at water -- water is very close to our Nürnberg facilities in terms of what we have the heat technology. And when we look at the moment in the markets, we just see very promising prospects in Australia, New Zealand, which is very interesting for us, Asia in general. And then absolutely right. I mean, we will also push in EMEA, but there's always some specifications, which are changing. That's why we really would like to push at Asia Pacific first. And then the U.S., it's also something we see. We shouldn't forget in the U.S., we have actually 3 companies with better, with [indiscernible] were very strong in water. And we feel with our technology, we will be able to compete on equal footage, but we think that it will take a little bit longer to really entrench in that market.

Okay. Good. And my last question is regarding APAC. This region remains a relatively small revenue contributor. As your business is, let's say, very much focused on Australia, Hong Kong and India. You said you're now starting the rollout of meters in Malaysia. Can you provide some numbers here? Around this introduction? And how about expanding into other markets like Indonesia, I don't know, Vietnam, et cetera?

Yes. As you said rightly, we look into APAC, it's really our bright star. Yes, they are smaller. But when you look at the segment, they didn't have any impact. They were even able to slightly grow during COVID, I think 0.4% and also actually in '21. We have a healthy growth rate, and we shouldn't forget Asia Pacific it's a pretty competitive region. So they really do a good job in terms of cost conservation and also compete in a more commoditized environment. Patrick, as you know, I lived in Asia for a few years, and I feel particularly hard about Southeast Asia because I think these are good markets for us. You mentioned really, Philippines, Indonesia, Thailand, Malaysia. These are good markets where I feel that we are underrepresented. And we were able to win there in Malaysia actually a contract with TMB. And I would like to see actually now more actually in that region. And I think we feel that we should be able to actually do more in that part of the world.

The next question comes from the line of Andreas Willi from JPMorgan.

My first one is on the kind of raw material cost inflation component situation. How do your contracts generally work in that sense if you have supply contracts for a year or 2 out, and then you have a meaningful change in your input costs? What's -- what can be done in terms of price escalation clauses or adjustments in these contracts? And kind of what you need to do yourself in order to basically offset the potential higher cost for components or freight?

Yes. Andreas. No, you're absolutely right. When we look into -- sorry, I apologize.

No, we had some echo.

Sorry, I thought Andreas you were still talking, but it's an echo sound, which now went away. So when we look into these global shortages, we are not the only one. As you know, I've worked in automotive before and automotive alone, we'll see around EUR 60 billion impact in '21, so very significant. We, obviously, are much smaller, don't have less muscle so far. We are able to manage it pretty well, but these are daily meetings. These are actually where we do some redesign on components, actually, that we can actually switch supplier and so on. I expect this remains a challenging environment for the rest of calendar year '21. And the main challenges are, Andreas, are really that, first of all, material availability because if we don't have the material, we are not producing in the manufacturing plants. And then secondly, it's a cost increase of materials and also freight costs increase, which are not negligible. I mean, just to give you an example, we have freight increases from Asia to Europe times 3 and from Europe to the U.S. times 2, so significant. What we are doing is obviously we manage that with our supply base as good as we can, which I think it's very important that we don't see cost creep. We also look into contracts in terms of discussions with customers. Depending on the situation, it's something we clearly watch very carefully. I would say it's the one area when I look into our guidance, I feel we have the right mitigations in place, but something which deserves very special attention to make sure that we are able to deliver these results.

And my second question on the acquisitions in the EV charging space. Maybe if you could talk a little bit about the channel to market of these companies and what you can do to help them scale up in terms of customer access or you sell generally to utilities? Do you expect utilities themselves to be a customer group for some of these applications? Or do they sell more directly to users? So I would like to understand basically a bit better the sales synergies and what you can do as a large company for these smaller acquisitions?

Yes, yes. Exactly what you said. So when we, for example, look now in the U.K. and in the -- in the U.K. in particular, where we have very large market shares. We have 50% actually of meters in the U.K. and with our SMETS technology, and that's a very strong market share. And now discussions are actually taking place, how can actually this technology be leveraged into EV charging? These discussions are going on between the companies and the government authorities. And I think we can be very substantial in the U.K. to help Etrel in terms of market access, customers and so on. The utilities, clearly, they would actually expand their reach in terms also EV charging. And that's why we think EV charging not only as a segment in itself, but also in what we are actually doing as a company, I think it's a really good fit. The same we see in France also where we have proof-of-concept discussions, so I think that's very positive. And then, of course, already what Etrel is doing in their own market. I think that remains very interesting. So we feel really good. And Etrel while is not the biggest company, but they did a really good job also in terms of managing costs. I mean they are, for us, EBITDA neutral, which is pretty remarkable. When you see some of the other companies, what kind of cost structure they produce. So I think that's really positive. So in summary, our customers clearly look for solutions to manage services around EV and security, and I think we can really do that together very, very effectively.

And my last question on working capital. You have had a strong improvement in the last financial year. Looking at your cash flow guidance also implies that you keep probably a lower level of working capital to sales than you had before the crisis, given you expect a revenue increase, but maybe not such a strong increase in working capital. Maybe you could talk a little bit about what you expect from working capital in the new financial year? And what aspects of it were you able to structurally improve?

Yes, Elodie, please?

Yes, sure. Yes, as you rightly said, there was a significant reduction of working capital in FY 2020. And naturally, as we go into FY 2021, and we expect a growth in revenue, this will put some pressure on the working capital. We don't expect to grow the working capital back to levels where it was in the past. We expect that what we were able to achieve in 2020 will be carried forward structurally into 2021. In particular, the working capital in 2020 was decreased both on receivables section as well as on the inventory section, and we expect structurally to be able to continue to operate in this way. We have a very strong focus on cash and cash generation throughout the organization, and we'll continue to drive this.

Yes. And I think in the U.K., a very good summary. I would say we will see some increase. Keep in mind that, actually, we are growing revenues about 10%. So far that, we seen some inventories going up. And then secondly, I think we need to stay very strict in terms of the global supply chain shortages. While we don't like to increase inventories, I think there's no other way around to really make sure actually that we can keep the production going in our production sites. So that's a little bit, of course, it's competitive, so to speak, but exactly to Elodie's point,

The next question comes from the line of Lucie Carrier from Morgan Stanley.

I guess the first question I had was around kind of the future path from an R&D and innovation standpoint. You were mentioning, obviously, that you are stepping up kind of the investment into innovation this year. But I was just curious to understand which type of investment you are precisely working on, but also going forward, is it kind of what I would call a one-off? Or are you actually looking for a sustained higher R&D to sales in the future?

Yes, Lucie. The -- when we actually look into R&D, we clearly want to be seen as the technology leader. And so when we think about that, we think in 3 categories, Lucie: We have smart metering, we have grid edge, we have smart infrastructure. And when we think about smart metering, clearly, we talked about smart case. These are not small investments. It costs money, takes time, it costs resources, but the right thing to do. But then we also think, Lucie, about grid edge and smart infrastructure. And when I say this, then clearly Google partnership, which we are doing where we develop new products and services that cost money, but also in the grid edge, where, for example, Rhebo is a very interesting acquisition and what we are doing. And I think we can also leverage that more and more in the energy sector. So these are the type of things. In terms of timing, I clearly see that we need to make this investment in '21, also '22. And then don't take it a wrong way, but we will -- actually, we made a commitment to you in January about our '23 midterm guidance, that's really [indiscernible]. And so we watch very carefully that we are actually able to achieve that. So I would -- I'm not saying this extra everything will go away with this 2%. But I do think midterm at 9% R&D investment, it's a good number. There's no question about that. But at the moment, we need this push to actually position us for mid and long-term success.

Understood. That's very helpful. My second question was around the revenue dynamic because you are providing the organic growth guidance, 7% to 11%, but you're obviously talking about the M&A coming on top, and this is true that you are having kind of 3 acquisitions coming in, in the pipeline. So I was -- and also possibly the Google partnership, which I understand is going to be a couple of million of revenue already this year. So can you maybe help us understand how much contribution you expect from M&A because if I see some of your disclosure, one, asset is you're talking about double-digit million sales in 2021 at Rhebo, but double-digit could be 10 to 90, I guess, and you're not giving really information on the other assets from a sales standpoint.

Yes. No, I think that's a fair point. When we think about the M&A, you can imagine True Energy is very small, but I think very promising. But for '21, pretty -- we don't see anything which will be material to talk here. In terms of Etrel, there, we see -- we hope around [ $17 million ], which I think is exciting. It's a 1% company growth. So to think in that in that terms. And then Rhebo, that's also smaller, it start-up also.

And then kind of maybe lastly, just I wanted to clarify two things on the cost dynamic for 2021. First, how much savings you're expecting? Because I appreciate this year, there was also some government help and one-off cost savings from COVID. So what do you see as the run rate in 2021? And just maybe to follow-on the question from Andreas. Currently, do you expect your mitigation to fully offset the supply chain constraint? Or do you have in your guidance some headwinds from this constraint included?

Yes. Maybe first question, Elodie?

Yes. So on the OpEx side, Lucie, as we -- as I mentioned during the presentation, we saw in H2 part of the temporary COVID-related short-term measures reverse for part. And we basically saw an uplift of $21 million H2 to H1 over our OpEx. I expect this will carry on into 2021. As basically, we start to see now these temporary measures fade out. On the other side, as I said, we have implemented our Project Hermes. This has been done fully in H2. We have started to see some of the benefit in H2, and we will see further benefits of that in the full year 2021. This is completely in line with what was previously announced in terms of savings. And lastly, I will say, when you look at our OpEx, obviously, you have the impact on the investments that we are making that we just discussed with Werner. So you have to take these three elements in combination when you look at our OpEx for 2021.

Yes. And very good. And then the second question, Lucie, in terms of guidance and global supply chain shortages and so on. Our view is that we should be able to manage these parameters. Now as you can imagine, if there will be really sky fall, and that's a different thing. But I think given where we are right now, these are, obviously, daily optimization reviews and mitigation actions, but I feel comfortable that we should be able to do that.

Your next question comes from the line of Patrick Rafaisz from UBS.

Three questions. I'll start with a follow-up on just the previous 1 on the supply constraints and freight costs. You mentioned a tripling of Asia freight to Europe doubling to the U.S. I mean this looks quite significant. I'm still trying to better understand in your guidance range, both on the topline organic and on the margins, is that's already fully reflected? Or is that just a caveat you add in addition to your guidance? So if the supply constraints continue, freight costs remain high, then we are at the lower end? If things get easier, we have the higher end? Or is this range independent of the supply constraints?

Yes. Patrick. When we think about the current situations, and I can tell you, supply chain, and we are not the only company. We see the competitors, as I spoke before, automotive, pretty much everybody. Battle stays on a daily basis, but you have these components only, then maybe crystals not available and so on. So this is what we are at the moment, doing very detailed reviews on a daily basis. I expect it stays within the -- in a similar range. And as long as it stays in a similar range, Patrick, we really see ourselves in this guidance. But for me, at the moment, I couldn't give you much more color because it's really hard to say. My personal opinion is, Patrick, is that so we should have more visibility towards the mid of this calendar year '21. So by the end of June. I think we should have all of us, including automotive and so on have better visibility, but that's how we think. And that's why I think assuming that it stays with that type of range, we think we will be able to manage within our guidance.

Okay. And that brings me then to the second question also related to your organic growth guidance. Thinking about the range here, what are, in your view, the main building blocks for the upper end and the lower end? What are the variables here?

I would say upper end, clearly, we now need to see this revenue coming through, in particular, in Europe because, obviously, as you can imagine, U.K. lockdown. France, we don't expect it anymore. At the moment, in the U.K., we are not back to 100%. We are about 80%, but I think that situation will further improve. Our view is vaccination plus higher temperature will actually help overall -- the overall COVID situation in a positive way. So I think that's -- but I think that's important. On the lower end, clearly, global supply chain challenges. That's really how we think about it at this point in time.

Okay. Helpful. And my last question on the EV charging infrastructure opportunities that you've seen. Can you shed a bit of color on your mid to longer-term planning or business case here for this business? What are your revenue -- what kind of revenue potential do you see for the group over, I don't know, 3 to 5 years or more?

So we -- actually, the I may need to be a little bit careful because we just actually signed the contracts, but we'll not disclose. You know what I mean? And with that, I'm a little bit hesitant to say too much. But what I would say EV charging when you look from a market segment perspective, Patrick, and I hope you will be 1 of them, who will also call us over time that you need a charging station. We are here. But when I look into that, then you clearly see actually that the rest is double-digit growth, and we do think that we will be able actually to grow with the market. So that's how we think at the moment. But as soon as we close and I think during H1 results, we should be able to give further color to that.

Our next question comes from the line of Urs Emminger from Research Partners.

I have several add-on questions. First, you said you spent roughly 2% in addition of sales. Is that all in R&D or in other areas, too?

Urs, that's really a mix. It's -- when we think about this additional investment, it's really the Google partnership in which we invest and then Rhebo a little bit and then gas and water. But this is actually where we make investment and some goes directly into R&D engineering, some goes in other cost items, but that's the way we think.

Okay. Then I saw the reduction in sales and marketing. Was it mainly traveling? And I was a little bit surprised that general and administration didn't go, the cost didn't come down faster. Perhaps my mistake, but perhaps you can say a word or 2 about those 2 items.

Sure, yes, Elodie?

Yes. I think part of that is linked to the short-term COVID-related coverage measures where we saw in fact, in terms of variable compensation an impact linked to the topline. And this is one element. And obviously, the other element is the global restructuring that we've done with our Project Hermes. So these are the two -- we have more short-term and more structural items in those cases.

Exactly, yes. Good. Urs then you said, I think you had two, three other follow-ups?

Just the details of the financial report is not out. Nevertheless, I have a question or two about those. Did the provisions in summary, increase or decrease? And what can be expected from normalized tax percentage or the near future?

Yes. Elodie?

Okay. In terms of provision, yes, we will focus on warranty because that's always the big topic. As I said, we are seeing basically warranty expenses going down versus the 2-year average. This is what we saw in 2020. And in terms of the provisioning on warranty, you will not see any surprising effect, I would say, there was the normal provisioning effect as we are shipping new products and some small readjustments. But nothing that will surprise in the financial report. In terms of tax rates, we are running with what I explained, $26 million tax, and we expect about 25%.

Yes. And Urs, you will see the full report -- annual report on the 20th of May, that's when we actually published it.

Yes. I know, but I have to comment anyway.

Very good question. Yes, yes, it's fine. Perfect.

The next question comes from the line of Jeff Osborne from Cowen & Company.

Two quick ones here. One is, can you characterize the level of quoting activity in the U.S.? Was question one. And then question two, as you referenced in the prepared remarks, President Biden's infrastructure plan. I was just curious how you thought that would impact your business?

Sorry, Jeff, the first question, I kind of missed it. Can you repeat it again?

Yes. I was curious on the level of quoting activity for new projects. You referenced the ones that have already received regulatory approval. I was curious if you could characterize the pace of business that has not yet received regulatory approval.

Yes. Sorry. No, I think quoting definitely improved. I think we have a good level in the U.S., also Europe improves, APAC improved. So that's positive. For us, you have in my prepared remarks, Jeff, our priority #1 is clearly book-to-bill. There's no question, and that's also my priority, which needs to improve. We will improve that, but I think from a quoting perspective, clearly improved, which is positive, positive momentum. Joe Biden gives a $100 billion. At the moment, we cannot earmark and say well, actually, so and so much will go to grid or so much will go to even smart metering which will be nice. But I'm a member of that Great Infrastructure's Advisory Council in the U.S., which is really good, to be closer to discussions. And my view is, Jeff, it definitely has a favorable impact. And not everything, which just comes through in '22 and '23, but I'm absolutely convinced this has a very favorable impact also for us as a company.

Ladies and gentlemen, that was the last question.

Good. Then from my side, I just would like to say -- just look for my paper here. So first of all, thank you for your questions. I'm going to close the call in a moment. But before that, I would like to leave you with this slide as a reminder of the key take aways of today's call. First, this has been a challenging year for our transformation to expand grid edge and smart infrastructure as well underway. Second, despite 20.8% revenue decline, we were able to achieve a 10.3% adjusted EBITDA margin and produced a solid free cash flow of $97.6 million. And third and I think most important is, I'm deeply convinced that we have the right strategic focus to drive leading edge technology and transform the business. With that said, thank you for joining us today. Thank you for your great questions. Saty safe and healthy. We hope that we can actually see you soon face-to-face again. That will be really cool. And in the meantime, I wish you all the best and a very good day. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.