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

Ladies and gentlemen, welcome to the analyst and investors full year 2022 conference call and live webcast. I am Alice, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Eva Borowski, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead, madam.

Thank you, Alice, and good afternoon, Good morning, everyone. As you know, earlier today Landis+Gyr issued its financial year '22 results, a press release and the company's 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 we want to explicitly emphasize that there are numerous risks, uncertainties and other factors, many of which are beyond Landis+Gyr's control that could cause Landis+Gyr's actual actions or performance to differ materially from the forward-looking information and statements made on this conference call or in this presentation. Consequently, Landis+Gyr can give no assurance that those expectations will be achieved. For more information, please see Page 2 of the presentation and our press release issued today. This conference call will follow the presentation, so we suggest that you have it on your screen, otherwise available to follow along with our remarks during the first part of this call. Afterwards, you will have the opportunity to ask questions, and Alice will provide further instructions as we start the Q&A. With that short introduction, I'd like to turn over the call to our Chief Executive Officer, Werner Lieberherr.

Thank you, Eva. Good afternoon, Good morning, everyone, and welcome to our financial year 2022 results. I'm here with Elodie Cingari, our CFO, and we are very pleased you have all been able to join us today. This year, we are doing the call a little later than usual so our U.S. participants don't have to get up in the middle of the night. During our Capital Markets Day, 3 months ago, we discussed our strategy in detail, and I'm convinced that we have the right strategic focus to drive leading-edge innovation, continue to transform the company and deliver sustainable shareholder value. So let's dive right in and start with an overview of the key messages of today's call. We are pleased to announce an order intake of almost USD 2 billion driven by Americas and EMEA, resulting in a book-to-bill of 1.15 and a new record backlog of almost USD 3.8 billion. And we were able to deliver strong net revenue growth of over 20% year-over-year in constant currency, driven by strong backlog execution and supported by improved component availability, making the second half of the year our best half year ever. Adjusted EBITDA margin came in above the guided range with 8.3% and was impacted by supply chain-related costs as guided. In order to convert our record backlog, we have made strategic investments in inventory largely of temporary nature, resulting in a negative free cash flow of minus USD 22 million. Net income of USD 207.9 million was boosted by a gain from the divestment of our minority stake in Intellihub early in the financial year. In addition, we are proud of our strong balance sheet with low net debt to adjusted EBITDA ratio of 0.47x. And on June 22, a progressive dividend of CHF 2.2 per share will be proposed to the AGM. In addition, we are proud that Landis+Gyr is positioned in the sweet spot of the energy transition with a strong focus on decarbonizing the grid. Moving on to Slide 4. Our portfolio of software services, grid edge sensors and EV solutions enables us in a unique way to have a direct sustainable impact. In FY '22, we were able to avoid over 9.5 million tons of CO2 emissions through our installed smart meter base. By signing up to the science-based target initiative, we continued to improve our performance on our journey to reduce carbon emissions. In addition, 20% of our short-term incentive for all eligible employees is based on ESG targets. On May 26, we will publish our sustainability report as part of our annual report and invite you to take a look on our website once these documents are published. In summary, we are working actively towards a greener future as we continue to manage energy better. Let's turn to Slide 5 and have a look at the developments in each region. I'll start with the Americas led by Sean. We have seen a lot of good news from the Americas region over the last few months, with some major wins, promising federal investment plans to modernize the grid and upcoming refresh cycles. We were able to book a stellar order intake of USD 1.2 billion, a book-to-bill ratio of 1.31, resulting in a backlog of over USD 2.8 billion. With 129 agreements signed in FY '22, we see good momentum for future growth, while the pipeline remains strong. Recently, we were able to announce a few fantastic wins like EPCOR water, providing AMI technology and related services for water meters in the city of Edmonton and WEC Energy Group, based in Wisconsin, to expand the AMI coverage for over 200,000 G480 ultrasonic gas meters, 750,000 AMI gas modules, and more than 100,000 electric meters, and to extend the existing managed services agreement through 2038. And of course, we are proud that after regulatory approval, National Grid will deploy 1.4 million of our Revelo grid sensors across its Massachusetts service areas. On top of that, our Gridstream Connect platform will provide a wide sensor certified network, providing edge intelligence, enhanced access to energy usage information and grid analytics. Furthermore, our large AMI rollouts are scaling up nicely with several new deployments kicked off. And on the technology side, we continue to focus on edge computing platforms, software solutions and market-leading sensors. In summary, we are proud to be a provider of critical infrastructure, supporting resiliency and modernization of the great cybersecurity efforts, and initiatives to decarbonize the grid. Let's move on to Slide 6 and take a closer look at EMEA led by Bodo. While EMEA was hit hardest by supply chain and FX headwinds, we continue to drive innovation. And over the last year, we have seen some fantastic wins in the region, positioning EMEA well to capture significant growth in the coming years. In Israel, we have been awarded a tender by Israel Electric Corporation to supply over 0.5 million residential smart electricity meters, and this amount may increase substantially in the future. In addition, we are also providing the head-end system and the set of services for the maintenance of the existing meter data management system and related applications. In Finland, we have won the majority of the KV alliance tender with 0.5 million metering points. And in France, we were selected as one of Enedis major partners to develop a new family of industrial meters. Next to the selection of major wins for large AMI rollouts, we continue to expand our reach in heat and smart ultrasonic water and in the EV infrastructure market. Just last week, we announced a framework agreement with Velago, leveraging our EV solutions to support decarbonization efforts. And we are also deploying our Chargepoint management software in Iceland for ON Power. Now let's take a look at Asia Pacific, led by Steve, on Slide 7. Our Asia Pacific region was able to increase revenues by more than 20% year-over-year, mainly driven by growing business in Australia and the execution of smart metering projects in Hong Kong. Generally, we see good momentum and growth opportunities in Australia and New Zealand with strong orders from key customers for the latest generation E360 series smart meters delivering true grid edge intelligence. In addition, the further expansion of our smart water offering across ANZ resulted in a growing customer base, and some of you may recall, are also from Southeast Water speaking at our Capital Markets Day in January to share our successful journey to combat water losses together. In Southeast Asia, we see good traction, and we have repositioned our business focus in India. As we continue to deploy AMI technology and expand our reach in ultrasonic smart water, we are also excited to commence business development activities for our EV solutions and expect to see results starting next year. Overall, we see a continued positive trajectory driven by recent portfolio releases that allow us to drive new business. Now let's move on to Slide 8 and talk about the supply chain impact in FY '22. We continue to see an impact on our supply chain, and EBITDA results include around $56 million in supply chain costs, impacting all regions, but more significantly EMEA. In EMEA alone, we saw a $32 million increase in cost and an additional $6.4 million in FX. To date, we have had no cancellation and continue to work in partnership with our key customers and suppliers. In H2, we saw improved availability of components that supported our strong growth, and we expect the situation to improve throughout '23. Now let's turn to Slide 9 and take a closer look at our consolidated results. We saw strong revenue growth led by Americas and APAC despite FX headwinds in EMEA and continue to see positive momentum based on our record backlog, demonstrating the trust our customers have in us and our solutions. Adjusted EBITDA decline was driven by continued supply chain cost pressure and ramp up investments to support the conversion of our record backlog and future growth, partially mitigated by strong volumes. As mentioned before, free cash flow was negatively impacted by the increased operating working capital requirements due to largely temporary inventory buildup. With the divestment of our minority stake in Intellihub, we received proceeds of around USD 235 million, on which we paid USD 53 million in taxes. Overall, despite the current challenges, we were able to deliver a solid result. And now Elodie will give you a more detailed review of the financials. Afterwards, I will come back to our guidance, before we open up the call for questions. Elodie, please.

Thanks, Werner. Good afternoon, Good morning, everyone. I'd like to walk you through the financials for the financial year 2022 in more details. As mentioned by Werner, order intake was at approximately USD 1.9 billion. This results in a book-to-bill ratio of 1.15 for the company, driven in particular by the Americas with [ skewing] like National Grid, AEP and APS. At the end of the financial year, we achieved a new record backlog of USD 3.8 billion, which represents an increase of approximately 10.6% versus the prior year. If we look at our revenue on the next page, our net revenue results for 2022 was USD 1.681 billion. This represents a 14.8% growth year-over-year, equivalent to 20.8% growth in constant currency versus the prior year. Landis+Gyr is reporting in U.S. dollar and therefore, exposed to FX fluctuations. In FY 2022, the strong U.S. dollar versus the euro and the British pound had a significant adverse effect on the year-over-year growth rate and impacted our revenue negatively by $72 million. Improved component availability across parts of the portfolio rose and supported our ability to better serve customer demand in the second half of the year. Americas revenue performance was particularly strong with growth in all clusters led by North America, Japan and Brazil. EMEA revenue growth was driven by entities acquired in the prior year that contributed $53 million revenue year-over-year, and supported also by robust performance in Switzerland and Central and Eastern Europe. APAC continued to grow strongly, predominantly in Australia and New Zealand. Now looking at our EBITDA. Overall, our adjusted EBITDA declined from $147 million to $139.9 million year-over-year. This translated into an adjusted EBITDA margin reduction from 10% to 8.3%. 2022 was a challenging year due to constrained availability in H1, a back-end loaded H2, supply chain cost impacts and FX pressure. At the same time, we continue to invest in our strategic initiatives to transform the company and ramp up our activities to enable future backlog conversion. While our top line was impacted significantly by adverse currency movement, the FX impact on our adjusted EBITDA remained limited due to our natural hedging position and our hedging strategy. With a strong revenue growth, the margin benefited from a volume impact, and this positive effect was across all regions, particularly in the Americas. Separately, gross profit margin was impacted negatively by $56 million, primarily driven by higher material and transportation cost. As Werner mentioned, this impacted all regions, but more significantly EMEA. Finally, our adjusted operating expenses increased by $43 million year-over-year. Reasons for this development were ramp-up costs related to preparation of current and future backlog conversion, particularly in North America; investments associated with businesses acquired prior year in EMEA; and as well continued investment in strategic initiatives. If we look at the bridge between reported EBITDA and adjusted EBITDA, it contains 3 items. First, restructuring. In FY '22, the restructuring charges are primarily related to our India business operation as a result of the decision to discontinue manufacturing activities. Second, warranty normalization adjustments. This adjusts the warranty provision amounts made in the fiscal year relative to the 3-year average of actual warranty cost incurred. Due to lower warranty cases in recent period, the downward trend here continues from prior years. And third, timing differences on FX derivatives. This year, this impact was neutral. Moving on to cash flow. In '22, our free cash flow excluding M&A was at negative $22 million. Main driver for this development is the change in working capital, and particular, inventory. At the end of the fiscal year, we are carrying higher inventory position, an increase of $139 million year-over-year to satisfy a strong backlog and to anticipate revenue growth and supporting customer commitments. With the volatile supply chain, some component shortages and longer lead time, we are holding more inventory than in an ordinary climate. The higher inventory levels are expected to reduce towards FY '23 and beyond as we anticipate further easing of the supply chain situation and are committed to deliver on our growth plan. However, our current assumption is that this positive development will only start to materialize in the second half of the financial year '23. Looking at our capital expenditure, it remained low at $28 million and in line with previous year as we continue to stay disciplined in our investments. Finally, free cash flow was at $150 million considering the IntelliHUB divestment as announced during our last call in October, which totaled for a net impact of $182 million. Now moving on to net debt. As of 31st of March '23, our net debt position was at $65.6 million. In the year, net debt was impacted by the following items: first, the dividend payment of $64.7 million that was made in June '22. Second, the minority stake in IntelliHUB divestment with net cash proceeds of $182 million. And lastly, the free cash flow generation ex-M&A that was a negative $22 million, FX and other impact being $17 million. All in all, we are further deleveraged in FY 2022 and we continue to maintain a strong balance sheet with net debt to adjusted EBITDA ratio of 0.47x. This position, together with our undrawn facility of about $400 million that is available, provides a solid foundation and a great platform for further growth opportunities. Now moving on to our regional performance and starting with the Americas. Here in Americas, order intake was approximately $1.2 billion, resulting in a book-to-bill ratio of 1.31x. Revenue increased by 25.7% to $888 million. And the expansion was really driven by 3 markets in the region, North America, Japan and Brazil. Adjusted EBITDA margin declined by 210 basis points to 13.4%. The effect from stronger volume was offset by increased supply chain costs, further ramp up investment to support future backlog conversion and investment in strategic initiatives. Now looking at our EMEA region. In the EMEA, we recorded a solid book-to-bill ratio of 1.03x and this was supported by order intake in the Nordics, in the acquired businesses, and in Germany. Revenue increased by 13.8% in constant currency to $602 million. Throughout the reporting period, EMEA was adversely impacted by FX movements, combination of strong USD and a weak euro and GBP caused an adverse impact of $61 million. Operationally, revenue growth was driven by prior year acquisitions, which contributed $53 million year-over-year and strong demand in Switzerland and Central Eastern Europe. Adjusted EBITDA declined to negative $14.1 million, resulting in a margin of negative 2.3%. The reasons for this development was significantly higher supply chain costs, which impacted EMEA very strongly, investment in acquisitions from FY '21 and strategic transformation initiatives. Now moving on to our APAC region. APAC order intake was approximately $140 million, resulting in a book-to-bill of 0.73x. The top line impact of our decision to cease manufacturing activity in India and drive margin improvement is reflected in the year-over-year decline of order intake, as it contributed historically about 15% of revenue annually. APAC revenue increased by 20.8% in constant currency to $191 million. Growth was predominantly driven by strong demand across the region, and particularly in Australia and New Zealand. Adjusted EBITDA margin expanded to 6.9% due to operating leverage, operational cost out, which was partially offset by higher supply chain cost. With this, I will now hand it over back to Werner for the guidance.

Thank you, Elodie. Turning to Slide 19, let's talk about the guidance for FY '23. We expect low double-digit organic net revenue growth and an adjusted EBITDA margin between 9% and 11%. Assuming the supply chain situation further normalizes as we move further into the year. We project free cash flow excluding M&A to come in between $60 million and $90 million, and a progressive dividend of CHF 2.2 will be proposed to the AGM on June '22. As outlined during our Capital Markets Day, we will continue to drive our strategic transformation forward while managing costs diligently to mitigate supply chain exposure. With that, we open up the call now and look forward to your questions.

[Operator Instructions] Our first question comes from the line of Michael Roost with Baader-Helvea.

Yes. Can you hear me?

Yes, very well, Mike.

So my first question is a little bit more on the supply chain. I know you mentioned that a little bit during your presentation. However, could you maybe give us a little bit more granularity in terms of what you're seeing, what you're hearing from your suppliers as we're starting to hear a little bit more that things are starting to cool down a little bit, so that might be positive? Then my second question is on the order intake for the full year. Now obviously, we expected normalization, so order intake did drop compared to the record last year. However, it was a lot better than what I expected. Are you expecting a further normalization? And what are you generally seeing in the market?

Supply chain, I would agree with your sentiment. When we look at the suppliers, we definitely see increased availability, which I think is very important. Last year, we sometimes even couldn't operate a plant for a certain period of time. And we also see further normalization of costs. Just to put things in perspective, we had an increase of $30 million in '21 and now another $56 million in '22. And going forward, we expect a relaxation of about $25 million, $30 million. So I think that's very positive, so about 1%, 1.5%. And that will actually continue and also going into 2024. But that's how we view the supply chain. In terms of order intake, I would say, obviously, as you mentioned, Mike, last year was a phenomenal year in terms of book-to-bill, 1.8 and so on. I think we have very good momentum in the market. I think when I start looking into the U.S., customers like our technology, like Revelo, but we also won a large order with Wisconsin Electric Corporation for G480 gas meters. So that's really cool actually that we are able to achieve that. And so good momentum in the Americas. Also Europe, I expect 1:1 or maybe even a little bit better. In Europe, it just takes a little bit longer when you look into Germany. And then I think in Asia Pacific, there it's important, obviously, with the India manufacturing closed that we are able to capture new orders in our key markets, Australia, New Zealand, Hong Kong, but then also actually in Southeast Asia, plus EV, plus water. So overall, I would say, Mike, definitely see for this year also a little bit above 1:1 book-to-bill for '23.

Okay. And maybe one last thing if I can just add on, if you don't mind. On the M&A side, obviously, we've talked about supply chain starting to ease. So the general economy may be a little bit starting weaken a bit. Is this translating on the M&A side to potential targets becoming a little bit more attractive or available?

I do think so. I mean, when you look at our balance sheet, it's -- as you know, it's pretty unlevered. I think it's really perfect actually to pursue M&A. And it's not that we are not doing it. We just stay very disciplined because, obviously, we want to do, as we said in the past, the large acquisition preferably in the U.S., which would also be earnings accretive. We are very selective. But to your point, Mike, I do see M&A opening up more, and I think that's positive for us. But I would say we will find the right target. We just need to really very disciplined actually pursue our M&A strategy.

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

I think he -- Urs, can you hear us?

Mr. Emminger, maybe Your line is muted.

Can you hear me?

Yes.

Okay. Sorry. Great results. Well done. Nevertheless, I have some smaller questions. Let's start with personnel costs, how did those develop over the year due to the inflationary pressure also on the salary side? Then you just mentioned that you're optimistic about APAC regarding new bookings, new order intake. Perhaps you could elaborate a little bit on that? Because otherwise, in about 7, 8 months, you're running out of orders. Then also a detailed question perhaps. What was your financial expense last year, just for comparison reasons? And perhaps you could give us an update on Japan. There are a few big orders looming around the corner. And perhaps you can give us a little bit color around that.

Yes. Very good. I give you an answer on 3, on the personnel cost, APAC, Japan. And then Elodie, I will ask you later then talk about the expenses. What we can say in terms of personnel costs we had last year, we had around $10 million of personnel cost, which is not little, but it's very important. We still are in an environment where resources are scarce. And I think this year we probably -- I would say in terms of the upcoming salary increase it's probably $8 million. So these are not small numbers. But we need to keep in mind that actually -- my view is that most external important assets are the customers and the most internal are our employees. And so while these are numbers which I would like to see, frankly speaking as a CEO, a little bit lower. But important is, I think, we will end up with about this number, Urs, because it's really just still a labor market. You can look in the U.S., but also Europe or Asia for that matter. It is just pretty much low unemployment. APAC, you're right. When we look into the order situation, obviously, I think it's important that we are winning key orders in our markets like Australia, New Zealand, Hong Kong, but also in Southeast Asia. I think we have good prospects in Southeast Asia. I think that's something which is very important. But then what I also believe is for us critical is water. The water meter, W370, which we are pushing as a launch into Australia with Southeast Water, I think that also will be very good for us in terms of order intake. And then the other thing, Urs, which I also would like to say is EV. The electrification takes place around the globe. Australia, in particular, is extremely advanced. And I think we will also be able to capture good opportunities in Australia. So that's from an order intake. You're absolutely right, important. It's on top of the list. We just had this morning, as I do every month, the energized meeting. Since we already published the numbers at 7:00 in the morning, I wanted to address our Asian employees already at 8:00. And that was actually really the top item on my agenda for Asia Pacific. Japan, I think, very well positioned. I was slightly nervous with the phase out of Toshiba when I actually joined the company, but we made a phenomenal hire with Eizo, who is the General Manager in Japan. And he does a fantastic job with the team. So I think -- as you know, also we won the head-end system, which was a huge win for us. And I also feel that we are very well positioned with the communication module. So Japan well underway, customers are happy. We are executing well. So I'm really pleased. Now I would like to hand over to Elodie terms of talking a little bit about the expenses. Yes.

Right. Urs, I understood your question was around financial expense. And if you look at our cash flow statement, you should see that in FY 2022, we had about $6.7 million in net interest payments. This compares to the prior year at $3.1 million. So it's a bit more than double. And this is really driven by our credit facility and the increase of the interest rates that we saw in the market. Some of the interest rates obviously are variable rates. And so we had to bear the impact of this increase in interest rates. So about $6.7 million in the cash flow statement this year.