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

Ladies and gentlemen, welcome to the Analyst and Investor Call Half Year 2023 Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [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, Andre, and good morning, good afternoon, everyone. As you know, earlier today, Landis+Gyr issued the half year financial year '23 results ad hoc 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 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 or otherwise available to follow along with our comments during the first part of this call. Afterwards, you will have the opportunity to ask questions, and Andre will provide further instructions as we start the Q&A portion. With that short introduction, I'd like to turn over the call to our Chief Executive Officer, Werner.

Thank you, Eva. Good morning, good afternoon, everyone, and welcome to our half year results. I'm here with Elodie, our CFO; and Eva, our Senior Vice President, Investor Relations and Corporate Communications, and we are very pleased to have all been able to join us today. In the first half of financial year '23, we were able to demonstrate our ability to deliver continued strong growth and margin expansion. The steadily improving component availability and a strong focus on backlog execution drove growth and supported our ability to serve customer demand even better in the first half of the year. Continued strong order intake shows the trust our customers have in our solutions and underlines the recession-resilient nature of our company. As a result, we expect to deliver around the upper end of our margin guidance for the full year, assuming broadly unchanged global economic conditions. Additionally, energy efficiency and grid resiliency are on top of mind as we are heading into winter. These factors, paired with our strategic transformation, provides a solid foundation for sustained profitable growth. The increased need for intelligence at the grid edge positions us in the sweet spot of the energy transition as we offer end-to-end solutions for our customers to manage energy better and drive the decarbonization of the grid. Now let's talk about what's been happening over the last 6 months and move on to Slide 3. As you can see, we are well positioned with our energy efficiency solutions, especially as we are heading into winter with possible blackouts and brownouts. Let's have a look at some of our key metrics. Our order intake increased by 22.5% in constant currency, resulting in a book-to-bill ratio of 1, leading to a continued strong backlog of over $3.7 billion. Net revenue came in at $970.5 million, an increase of 32.1% year-over-year in constant currency. Adjusted EBITDA came in at $108.1 million with an EBITDA margin of 11.1%. In order to convert our continued high backlog, we have made strategic investments in inventory resulting in free cash flow excluding M&A of $5.1 million. Our balance sheet has always been one of our greatest strengths, and it remains very solid with a net debt to adjusted EBITDA of 0.67x. In the first half of the year, we shipped 10 million devices, an increase of 38% year-over-year, which also further strengthens our installed base for future software revenues. Lastly, we were able to deliver solid results despite continued headwinds and expected supply chain impact to slowly improve going forward. Let's talk about what we have achieved when it comes to sustainable impact on Slide 4. As an update to our full year of 2022 results, we are proud to share that our ambitious decarbonization targets have been approved by the Science-Based Target Initiative as we continue to manage energy better and support global efforts to decarbonize the grid. Our portfolio of energy efficiency solutions enables us in a unique way to have a direct sustainable impact, and our short-term incentive for all eligible employees includes an ESG component of 20%. Let's turn to Slide 7 and have a look at the developments in each region. I'll start with the Americas, led by Sean. Looking at smart metering, we continue to deliver on our large order backlog, including PSE&G in New Jersey and Ameren in Missouri. In addition, the certification of our G480 ultrasonic gas meter has unlocked opportunities with customers like WEC Energy Group. In grid edge Intelligence, we've begun a large-scale deployment at National Grid New York. Moreover, we are excited about the regulatory nod for AMI with PPL Rhode Island. As we continue to evolve, our focus remains on a SaaS-first approach across all products, thereby increasing the breadth of our services and penetration. This becomes evident in successful migration of an increasing number of customers to our Google Cloud-based head-end system, allowing us to further expand on growing software opportunities. In smart infrastructure, venturing into new horizons, we have secured a deal with Enerpro Systems for our INCH PRO chargers, an important milestone for our EV expansion in the North American market. And we also see an increasing focus on cybersecurity, allowing us to protect even more aspects of critical infrastructure with our solutions. Furthermore, our consistency and dedication have resulted in some notable wins like Salt River Project meter extension with 400,000 endpoints, CLECO's AMI refresh and Tucson Electric Power transitioning to our Revelo solution. From a technology perspective, we continue to innovate and bring new solutions to the market, including the launch of our Revelo application developer kit, opening doors for unparalleled software solutions. Overall, we see strong momentum in the Americas driven by continued high-grade infrastructure investments. Let's move to Slide 8 and take a closer look at the EMEA, led by Bodo. Continued strong order delivery growth and profitability in EMEA driven especially by Germany, South Africa and Luna. In addition, we see activities picking up with smart water, a welcome high-margin development. In grid edge intelligence, we were able to win market share in the ICG segment, further supporting future profitable growth in the region. In Israel, despite the current situation, the rollout is expected to run until '28 and the contract [indiscernible]. IEC expressed the importance of the smart metering project as a cornerstone for the establishment of Israel's smart grid. In smart infrastructure, we see solid wins in our EV charging business, including [indiscernible] Allego and OnPower. Especially in the U.K., we see a strong pipeline for EV charging contracts with major CPOs, e-mobility specialists and energy suppliers. Speaking of wins, let me highlight wins in Switzerland with Oiken and St. Gallen selecting our E360 and HES and also some major sales at Fluvius at E.ON Sweden. In addition, we continue to expand our portfolio with our analytics platform, launching our new power quality cloud solution and the residential EV charger, capturing a broader share of the market. In summary, EMEA is well positioned to capture opportunities driven by the accelerated energy transition in the region. Let's take a look at APAC led by David McLean, who took over from Steve last month on Slide 9. Each month, metering continue to deploy for CLP in Hong Kong while we are leading sustainable residential smart water management in Australia and New Zealand. In grid edge intelligence, next to continued strong rollouts, we are proud of the deployment of our first Gridstream SaaS in Australia with a contract period of over 10 years. And also in smart infrastructure, we are gearing mass rollouts of our smart water SaaS, expanding our software revenues. Some of the major wins include Hong Kong with 3 years maintenance, support contracts of Gridstream HES and support and upgrade contract for our Gridstream HES in the Philippines, which was a critical step from Meralco's EMI expansion. Further in Queensland, Australia, we have won the contract of Grid Edge devices, enabling DER and flexibility management services. In China, we continue to hold a leadership position in the high-end grid segment and won our first order of narrowband IoT smart residential heat meters. I will dive into the acquisition of Thundergrid, a leading EV infrastructure consulting and services company, in New Zealand a little bit deeper on the next slide. In summary, we see increased profitability through product diversification through software, services and EV infrastructure offerings, which positions the region well for the future. After the acquisition of Etrel and True Energy, we have now further expanded our portfolio by acquiring New Zealand-based Thundergrid. Next to hardware, software app and load management assets, we are now also able to offer turnkey capabilities to our customers in ANZ and will continue to expand these offerings globally as we integrate the company into our EV solutions business. Now let's take a look at some of our key contract wins in the first half of FY '23. Over the last few months, we were able to win a number of important contracts in all regions in all 3 of our strategic smart metering, grid edge intelligence and smart infrastructure. The list you see here is by no means complete but provides a comprehensive overview of growth opportunities to demonstrate a solid order pipeline across the board. Let me just point out a few here. EPCOR in with Edmonton with RF mesh service 5 water modules for water meters, software upgrades and implementations of advanced network security. A component of the Gridstream Connect platform, the water modules will operate on the utility's existing RF mesh network, which currently supports over 435,000 advanced electric meters. The project is expected to be complete by the end of 2025. For Israel Electric Corporation, we will deliver over 560,000 residential smart electricity meters, a quantity that can be expanded by IEC via multiple options to 4.2 million units. We will also provide the head-end system and a set of services for the maintenance of the existing meter data management system and related applications. Boosting our EV business, Atlante has chosen our INCH 2 charging solution to support the expansion of e-mobility services in Southern Europe, significantly growing the number of charging sites across Italy, France, Spain and Portugal. Now let's turn to Slide 10 and take a look at our consolidated results. We have talked about the key metrics already. So let me just hit a few points here. Order intake continues to be solid, as we mentioned and was driven by all regions, up 22.5% in constant currency year-over-year. We have seen strong revenue growth led by Americas and EMEA, whilst Asia Pacific is down slightly due to the discontinuation of manufacturing activities in India. Further, adjusted EBITDA margin was up 140 basis points, primarily driven by operating leverage, operational efficiencies and also slow recovery of supply chain costs. As mentioned before, the free cash flow was $5.1 million, impacted by operating working capital requirements primarily due to the strategic inventory investments to support 10 million meter deliveries in H1. Overall, despite ongoing challenges, we were able to deliver a solid financial performance. Let me now hand over the call to Elodie to give you a more detailed review of the financials. Afterwards, I will come back to our guidance for the full year before we open up the call for questions. Elodie, over to you.

Thank you, Werner. Hello, everyone. I'd like to walk you through the financial details of the first half 2023 and ended September 30. As mentioned by Werner, order intake was at $958 million. This results in a book-to-bill ratio of 1 for the company, driven by the Americas with few wins like PPL, SRP and CLECO, and also supported by good order intake in EMEA. H1 revenue grew strongly year-over-year and orders [indiscernible]. This is a positive development and translates into a robust backlog growth of more than 7% year-over-year. Our backlog continues to be at very high levels at more than $3.7 billion. Let's now turn to net revenue on the next page. Our net revenue result for the first half was $970 million. This represents a 32% growth in constant currency versus prior year. Overall improved component availability across large parts of the portfolio and a strong focus on backlog execution, both significant growth and supported our ability to better serve customer demand in the first half of the year. Americas revenue performance was particularly strong, driven by our North American market. EMEA growth was driven by Switzerland, France and Luna, our FY '21 acquisition in Turkey. While we saw softening in the U.K. market. APAC experienced a slight decline in revenue, predominantly driven by India as a result of our decision to seize manufacturing activities in the country in the last fiscal year. Overall, a strong performance on the revenue in the half year with a positive impact on EBITDA. Let's look at this in more detail in the next page. Our adjusted EBITDA increased from $49 million to $108 million year-over-year. This translated into an adjusted EBITDA margin expansion year-over-year from 6.7% to 11.1%. Due to the strong revenue growth, the margins benefited from a significant volume impact, particularly in the Americas and supported by EMEA. Additionally, gross profit margin was impacted positively by improved operational performance and some recovery of supply chain costs of approximately $9 million year-over-year. Finally, our adjusted operating expenses increased by $16 million year-over-year. Reasons for this development were ramp-up costs related to backlog execution and preparation of current and future backlog conversion, particularly in North America; investment in EV technology and ramp-up of our acquisition Luna in Turkey as a broader manufacturing platform in EMEA; and as well as continued investments in strategic initiatives in gas and water ultrasonic technology as well as its software. As you know, we adjust EBITDA for 3 elements to better reflect the operational performance of the business. Moving on to the next page with the bridge from reported to adjusted EBITDA. The bridge between reported and adjusted EBITDA contains 3 items. First, restructuring. In H1 of this fiscal year, the restructuring charges are primarily related to a global restructuring initiatives launched in August 2023 called Project Horizon, which aims at streamlining the organization and delivering operational efficiencies by reducing the workforce by about 200 positions. Second, warranty normalization adjustments. This adjusts the warranty provision amounts made in this fiscal year relative to the 3-year average of actual warranty costs incurred. Due to lower warranty cases in recent periods, the downward trend from prior years continue. And third, timing difference on FX derivatives. Our biggest FX exposure is in the U.K. and Australia, where we contract revenues in GDP and AUD, respectively, and offer our chain costs largely in other currencies. The adjustments exclude unrealized losses of $1.9 million related to mark-to-market differences on our FX hedges. Let's now turn to free cash flow performance on Slide 15. In the first half of 2023, our free cash flow, excluding M&A, was at approximately $5 million. Cash flow generation from operation was unfavorably impacted by the change in working capital and, in particular, inventories. We are committed to deliver on our growth plan and fulfill our customer commitments. This is evidenced by our strong revenue performance. To satisfy our strong backlog and keep our growth trajectory, we continue to carry a higher inventory position as lead times and some [indiscernible] supply chain constraints have not yet fully normalized. As indicated in the earnings call in May 2023, inventory levels are expected to start reducing throughout the second half of fiscal 2023 and beyond as we anticipate further easing of the supply chain situation. Further, our capital expenditure increased to $19 million, focused on new product introduction and upgrade of manufacturing facilities to support future growth and backlog execution. Finally, other free cash flow was impacted by the timing of revenue recognition in Americas. Now moving on to the next page and looking at our net debt position. As of September 30, 2023, the net debt position was $134.2 million. In the period, net debt was impacted by the following items: first, the dividend payment of $70.8 million that was made in June 2023; second, the free cash flow generation ex M&A of approximately $5 million; and lastly, FX and other impacts, which were negative to $2.9 million. All in all, we continue to maintain a strong balance sheet with a net debt to adjusted EBITDA ratio of 0.67x. This position, together with our undrawn credit facility of about $233 million available, provides a solid foundation and a great platform for future growth opportunities. With this, let's now move to the regional performance, starting with the Americas on Page 17. In the Americas, order intake was over $600 million, resulting in a book-to-bill ratio of 1.1. Revenue increased by 44% to roughly $565 million. Improved component availability, in combination with a strong focus on backlog execution and catching up on pent-up demand, drove expansion, particularly in our North America market. Adjusted EBITDA margin increased by 370 basis points to 15.9%. The expansion was primarily driven by a higher operating leverage. Operating expenses were impacted by further ramp-up investments to support factor of execution and future conversion as well as investments in strategic initiatives. Moving on to the EMEA region. In the EMEA region, we recorded a solid book-to-bill ratio of 0.9, supported by order intake in Switzerland, Israel and the Nordics. Revenue increased by 24.9% in constant currency to roughly $322 million. The revenue growth was driven by strong demand in Switzerland, France and Luna in Turkey, partially offset by softening of the U.K. market. Adjusted EBITDA improved to $6.7 million, resulting in a margin of 2.1%. The increase was predominantly driven by operational leverage on the back of higher volume, some recovery of supply chain cost, which were partially offset by investment in EV and water meter technology as well as the expansion of the Luna business. Moving on to the APAC region on Slide 19. In the APAC region, we recorded a book-to-bill ratio of 0.7. The top line impact of our decision to seize manufacturing activities in India to 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 decreased by 1.7% in constant currency to $84 million, driven by India and partially offset by strong demand in Hong Kong. Adjusted EBITDA margin expanded to 10.3% due to operational efficiency and steady supply chain cost recovery. With this, I will now hand it over to Werner for the guidance.

Thank you, Elodie. Turning to Slide 20. Let's talk about the guidance for our full year. Despite the slow recovery of supply chain costs, we are confirming our guidance for FY '23 that we communicated last May during our full year 2022 results. Let me add, when looking at the margins, we expect to come in at the upper end of the guidance range. Looking at Slide 21, we are also confirming our FY '25 mid-term guidance. And now we will open up the call up for questions.

[Operator Instructions] The first question comes from the line of Patrick Rafaisz from UBS.

2 or maybe 3 questions from me. First, on the Americas business. You are currently in full deployment phase, as you said. And I was just wondering, are we at peak levels now as a run rate for revenues? I'm asking here in the context of the book-to-bill that was again very strong and above 1x. And would you expect that to continue, the order momentum in H2 with another $600 million or so? That's the first question.

Yes. Patrick, thank you for the first question. Yes, Americas, look, I mean, it's really punching on the right level. We like what we see. We achieved a solid 1.08 booking for the first half, and we expect actually the second half same range. So overall, I would say, for full year, around 1:1.

Okay. Great. And then for the second question, Project Horizon is -- when should we expect the cash outs for those $15 million or so of one-offs? And would there be more charges in the second half? And how much of cost savings are you anticipating? And can you allocate that to the reporting segments?

Yes. I talked a little bit about when do we see the savings, and Elodie will lean in to the costs. What we can say is with the $15 million costs we have, we see around $25 million of savings. But obviously, that's us in '24. In terms of the costs, Elodie?

Patrick, in terms of the cash out, we expect the majority of the cash out to happen in the second half of this year, and we do not expect the provision that you see here in our accounts for restructuring are expected to cover the majority of this program. We do not expect other provisions for this program in the second half.