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

Ladies and gentlemen, welcome to the analyst and investor half year 2024 conference call and live webcast. [Operator Instructions] And the 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, Senior Vice President, IR and Corporate Communications. Please go ahead.

Thank you, Sasha, and good afternoon, good morning, everyone. As you know, earlier today, Landis+Gyr issued its results ad hoc release and accompanying presentation for the first half of financial year 2024. 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 or 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 Sasha 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 half year '24 results. I'm here with Theresa Andorfer, our Head of Group FP&A; and Eva Borowski, our Senior Vice President, Investor Relation and Corporate Communications, and we are very pleased you all have been able to join us today. Elodie Carr, Group CFO since November '20, is unavailable today, and will embark on new endeavors upon the expiration of her contract. A search process for her successor as Group CFO has been initiated on behalf of all of us at Landis+Gyr. I would like to thank Elodie for her valuable contributions, and wish her all the best for the future. Assuming you have seen our second announcement this morning, we are excited to announce the decision to pursue a strategic review of the group to drive sustainable shareholder value creation. The review includes the following elements. First, creating value by focusing increasingly on our highly attractive Americas business, which is most aligned with our strategy of providing integrated edge-to-enterprise energy management solutions. Second, launching a strategic review for the best value creation from our EMEA business to position the region for long-term success. Third, evaluating the merits of a potential listing in the U.S. over the medium-term to create value for our customers, employees, and Landis+Gyr shareholders. With that said, let's review the first half of financial year '24 before we come back to the strategic update prior to the Q&A. We are pleased to announce a solid order intake driven by the Americas, resulting in a book-to-bill of 0.9 and a continued high backlog of almost USD 3.7 billion. Net revenue was stable on the back of an extraordinarily high FY '23 base, and we expect a back-end loaded year picking up in H2. Adjusted EBITDA margin came in at 11.7%, driven by the Americas and APAC. Free cash flow of minus $13.5 million was driven by elevated inventory levels to support backlog conversion, and we expect a normalization for the full year. A personal highlight is our steadily increasing software revenues, which now make up 24% of total revenues, demonstrating the value of our strategic transformation investments. The rise in software and services is driven by the rapid push for electrification and the resulting increased demand for energy efficiency and grid resiliency solutions. These factors, paired with our strategic transformation, provide a solid foundation for sustained profitable growth and further expansion of our software and services offering and recurring revenue generation. In addition, the increased need for intelligent at the grid edge positions us in the sweet spot of the energy transition as we continue to expand our edge-to-enterprise solutions to enable our customers to manage energy better and drive the decarbonization of the grid. Let's turn to Slide 4 and have a look at the developments in each region. I'll start with the Americas, successfully led by Sean. Our continued strong Americas performance was fueled by market-leading innovation and our customer success-driven teams. We are very pleased to report on the growing adoption of Revelo with long-term partners, Unitil and Portland General Electric, to name just two examples. In addition, we continue to drive growth in software and services, including the successful migration of over 30 customers to our modernized cloud-based Emerge head end system next to a growing services penetration. Proud to be a leading innovator for edge-to-enterprise solutions, we continue to expand our cloud-based analytic platform, which provides actionable insights to drive efficiencies as well as cost and carbon emission savings. In addition, we are excited to share that we all have joined forces with OATI to deliver an integrated edge-to-enterprise DER management solution to help utilities leverage demand side assets and grid operations to enhance grid resiliency and capture decarbonization goals. With our leading innovative solutions, we are excited to play a vital role in future-proofing critical infrastructure in the Americas for continued profitable growth. Let's move on to Slide 5 and take a closer look at EMEA. This morning, we announced that Bodo Zeug, who has led the EMEA region since September '21, has decided to continue his professional path outside of Landis+Gyr. We thank Bodo for his valuable contributions, and wish him every success for the future. Effective immediately, I'm very pleased to announce the appointment of Rob Evans as our new Head of EMEA. Rob has successfully shaped the company in various leadership roles. His leadership and experience position him well to play an integral part in the announced strategic review for the best value creation from our EMEA business. Turning to the region's performance. We have seen a steady performance in smart metering across EMEA with strong sales in Switzerland, Germany, and the U.K., and new opportunities developing in Denmark, Spain, and Poland for H2. We also have seen a strong performance in our industrial, commercial, and grid business with wins across the entire region, and we were able to demonstrate strong growth in heat and water solutions, reinforcing our diversified portfolio. In smart infrastructure, we continue to build momentum in the European e-mobility sector with strategic partnerships and key contracts across diverse markets, setting the stage for future deliveries across EMEA. While EMEA continues to recover from supply chain headwinds, we remain focused on driving innovation, positioning EMEA well to capture profitable growth in the coming years. Now, let's take a look at Asia Pacific on Slide 6, led by Dave. Dave, who took over the leadership role in APAC in April and his team continue to expand into Southeast Asia, and we are excited about the APAC region going forward. In smart metering, we continue to expand our partnerships with China Light and Power and Hong Kong Electric. In grid edge intelligence, we are progressing to grow our software and services offerings in Australia and India, especially with Intellihub and also with Esyasoft, a joint venture for which Landis+Gyr provides software solutions for the Indian market after ceasing manufacturing activities in the country last year. In smart infrastructure, we continue to expand our EV Solutions footprint, and have steadily grown our water meter deployments. Overall, we see a continued positive trajectory that allows us to drive future success in APAC. Now let's turn to Slide 7 and take a closer look at our consolidated results. We see a continued solid backlog primarily supported by order intake in the Americas. Revenue decline was driven by project timing in EMEA as we expect a back-end loaded financial year. Adjusted EBITDA expansion in Americas and APAC was supported by operational efficiencies, the continued recovery of supply chain cost, and gains from a real estate transaction in India and partially offset by lower operating leverage in EMEA. And now, Theresa 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. Theresa, please.

Thank you, Werner. Good morning, and good afternoon, everyone. I would now like to walk you through the financials for the first half 2024 ending September 30th. Order intake was at $812 million, resulting in a book-to-bill ratio of 0.9 for the company. Landis+Gyr recorded a solid backlog of $3.7 billion, down 2.3% year-over-year. This decline was mainly driven by EMEA, where timing of large tenders and softening in key markets affected orders. However, the Americas partially offset this with an increase in backlog of 1.8%. Let's now turn to net revenue. The net revenue result for the first half was $925.6 million, a decrease of 4.3% in constant currency year-over-year. Overall, the decline in revenue was mainly driven by EMEA, while the Americas revenue performance continues to be strong, enabled by focused backlog execution. The decline in revenue in EMEA is driven by timing of large project rollouts, market softness in the U.K. and Turkey, as well as dampened demand for EV Solutions. APAC experienced a slight decline in revenue, predominantly driven by project timing. Despite the decrease in revenue, Landis+Gyr achieved an overall EBITDA margin expansion in the first half of 2024. Let's have a look at the details on the next page. Adjusted EBITDA for the first half of 2024 was $108.2 million, translating into an adjusted EBITDA margin of 11.7%, an expansion of 60 basis points versus the same period in the prior year. Gross margin was impacted negatively by a shortfall of revenue and unfavorable product mix in EMEA. This was more than offset by two factors: first, improved operational performance, a steady recovery in supply chain costs and the gain from a real estate transaction in India; second, the decrease in adjusted operating expenses of $6.4 million year-over-year, benefiting from last year's OpEx restructuring initiative and a disciplined approach to spending. We continue our commitment to innovation and investments in strategic areas throughout the year. Turning to the next page, we will discuss the bridge from reported to adjusted EBITDA in more detail. The bridge between reported and adjusted EBITDA contains 3 items: First, restructuring. In the first half of 2024, restructuring charges are mainly related to the completion of a global initiative launched in FY '23. Second, warranty normalization adjustments. This adjusts the warranty provision amounts made in the financial year relative to the 3-year average of actual warranty costs incurred. The downward trend from prior years continues due to lower warranty cases in recent periods. Finally, timing differences on FX derivatives. Our FX exposure is in the U.K. and Australia, where we contract revenues in GBP and AUD, respectively, and, [ of course ], supply chain costs largely in other currencies. The adjustments exclude unrealized gains of $0.4 million related to mark-to-market differences on certain FX hedges. Now let's turn to the cash flow performance. In the first half of 2024, our free cash flow, excluding M&A, was at negative $13.5 million. Cash flow from operations was unfavorably impacted by the change in working capital due to increased accounts receivable and unbilled receivable balances, both driven by collection timing. Capital expenditures decreased to $11.7 million as prior year initiatives focused on new product introduction and automation upgrades in manufacturing facilities have been completed. Other assets and liabilities was driven by timing in deferred revenues, offset by lower incentive accruals. Lastly, the net interest payments increase is driven by the higher debt utilization to fund net working capital requirements. Moving on to net debt. As of September 30, 2024, the net debt position was at $226.3 million. Net debt was impacted by the following items: the dividend payment of $72.5 million made in July 2024. Free cash flow was at negative $13.5 million. And finally, FX and other impacts were negative $9 million. Those were related to the acquisition of the remaining 25% equity interest in Etrel as well as the purchase of treasury shares. Overall, we continue to maintain a solid balance sheet with a net debt-to-adjusted EBITDA ratio of 1.01. This provides a solid foundation for future growth opportunities. With that, let's move on to the regional performance, starting with the Americas. In the Americas, order intake was at $565 million, resulting in a book-to-bill ratio of over 1. Revenue performance remained strong at $558.7 million, a decrease of 0.2% in constant currency, maintaining revenue levels in line with prior year. Adjusted EBITDA margin increased by 130 basis points to 17.2%. The expansion was primarily driven by operational cost-out and continued recovery of supply chain costs, partially offset by further ramp-up investments to support backlog execution and investments in strategic initiatives. Moving on to EMEA. The EMEA region, we recorded a book-to-bill ratio of 0.6. Order intake was impacted by timing of large tenders in the U.K., Poland, and UAE. Revenue decreased by $11.4 million in constant currency to $286.1 million, mainly due to unfavorable timing of large projects and softening in the U.K., Turkey, and the EV market. Adjusted EBITDA decreased to negative$5.6 million, resulting in a margin of negative $1.9%. The decrease was driven by lower operational leverage and product mix. Continued investments in EV and the ultrasonic water heater technology were more than offset by OpEx restructuring benefits. Moving on to the APAC region. The APAC region recorded a book-to-bill ratio of 0.9, supported by wins in Hong Kong and Esyasoft, a JV established in India. APAC revenue decreased by 4.1% in constant currency to $80.7 million, driven by project timing in Australia and Southeast Asia. Adjusted EBITDA margin expanded to 25.2% due to gains from the disposition of real estate in India, and favorable mix in Hong Kong and ANZ. With this, I will now hand it over to Werner for the guidance.

Thank you, Theresa. Very well done. Turning to Slide 17. Let's talk about our reconfirmed guidance for FY '24. Following an extraordinary year of growth, we expect low single-digit revenues growth of '24 compared to FY '23, while we continue to focus on expanding our profitability. As a result, for FY '24, we expect an adjusted EBITDA margin between 11% and 13% of net revenue. In addition, we will continue to drive our strategic transformation forward by managing our costs diligently. On Slide 18, you can see our guidance for FY '25, which is hereby also reconfirmed. Let's move to Slide 19 and talk about this morning's announcement. We are sharpening our strategic focus to drive value creation for you as our shareholders, our customers, and also our employees, by making sure that we position each part of the business for the greatest possible success. The review consists of 3 parts, as you can see above. First, we are focusing on the Americas business, which offers the greatest opportunity with higher-value software and services solutions as part of our differentiated edge-to-enterprise offering. In addition, already today, the Americas is our largest and most profitable segment and offers the highest return on capital. Second, we are launching a strategic review for the best value creation from our EMEA segment to position the region for future success, building on our leading position and successful optimization initiatives we have implemented over the last few years. And third, we are evaluating the merits of a potential U.S. listing, gaining access to a larger pool of capital, and facilitating easier comparison with key peers. On Slide 20, we will take a more detailed look at the Americas region as it stands today. In the Americas region and in the U.S. in particular, we are leading with integrated edge-to-enterprise solutions and are proud of the record backlog, which will continue to allow us to drive profitable growth going forward. Our technology leadership and the increased levels of recurring software and services revenues, paired with the high quality of the Americas backlog, position the region well to benefit from future market developments and capture wins by serving today's and tomorrow's needs of our critical infrastructure customers. Already today, we are generating 60% Group revenues and over 80% of adjusted EBITDA in the Americas region, and are poised to continue to win in the market with strong customer relationships and a laser focus on technology leadership. Now let's turn to EMEA on Page 21. Operating in a different market environment, our EMEA region has demonstrated a great amount of resilience and worked hard at driving efficiencies while strengthening our technology leadership position in the region. We have made significant progress in further optimizing our EMEA operations, and are well positioned in all key markets of the region. We see a clear path to uplift profitability by driving supply chain improvements, operating leverage, enhanced efficiencies, manufacturing optimization, and cost-saving initiatives. That said, in order to fully capitalize on EMEA's unique market dynamics, we believe that the region requires a different long-term strategic focus than our operations in the Americas. As such, the Board and management have determined that now is the right time to explore value maximizing strategies for the best value creation from our EMEA region. We will provide updates on the process and developments as they become available. And now we would like to open the call for questions.

[Operator Instructions] The first question is from Michael Roost with Baader-Helvea.

So I've got two questions, if possible. The first one is regarding the strategic review. Now obviously, I don't expect you to tell me exactly what the timeline is, but just to give a bit of an idea in terms of your priorities over the next period of time, i.e., are we talking about that we should -- we would expect a little bit more information maybe at the CMD at the beginning of next year? Or how would you expect that to sort of start to flow through in terms of information? The second question from my side is on North America in terms of order intake. I was actually surprised that it was not more negative than what it was at minus 6%. Is that -- did that also include a little bit of weakness due to the U.S. -- the upcoming U.S. elections, i.e., that you would expect things to improve in the second half a little bit?

Yes. Very good. Thank you, Michael. First one, yes, the strategic reviews, as you can imagine, all that takes time. When we think about EMEA, obviously, where we said, we look -- on one hand, we look at optimizing the current segment, meaning, for example, taking out low-margin projects or maybe closing a low-margin business. Or a second option is maybe sell part of EMEA. Third option, sell full EMEA. We engaged in investment bank. We are looking into this in detail. But frankly speaking, that's a process of 12 to 18 months, just that we speak about the magnitude. When we think about, for example, a potential U.S. listing, also that, first of all, the Board would need to come to the conclusion that we want to do it. And if we were to make the decision that we would do it, then this is not something which comes tomorrow. So we are really talking here about, I would say, '26 at the earliest, just that we put some timeline into these things. These are considerations which need to be done very, very carefully. So that all takes time and we definitely see a CMD coming up in '25, where we want to give more feedback. Then the second question was, Michael, in terms of the U.S....

The U.S. order intake. Yes.

U.S. order intake, yes. So that's really a little bit the timing at the moment. On a half-year basis, we see sometimes -- for example, we have a large project, which hopefully we can capture in H2. So that's really just the timing as this [ stuff ] comes available. I would say, generally speaking, the market environment is extremely positive, remains very positive. There are large grid fundings available, which actually, for the utilities are there to grab. We are working with utility actually on these use cases. So it's a very conducive environment. I also believe the decision which we will hear next Tuesday, whether it will be Harris or Trump, will make little to no impact, actually, to the current environment because we need to keep in mind, these decisions are actually made on state level. And maybe if I can just remind everybody, I mean, National Grid, which was a huge order for us, $300 million order, then followed by two other orders from National Grid totaling $800 million. But National Grid New York was made in October 2020, and that was really when actually COVID was at the highest point in time with 400,000 new cases a day, high unemployment rate. But the regulator of New York said, "Hey, we need this technology." So that's how we see a little bit this whole environment, Michael.

Okay. Okay. So then you would expect second half to, maybe, be a little bit more of an improvement half-over-half. Is that about right?

Yes. I think we can say that. Yes.

The next question is from Jeff Osborne with TD Cowen.

Just a couple of questions from my side, Werner. On the -- You just mentioned the environment in the U.S. I'm just curious, with the Department of Energy releasing the grid -- the GRIP funding recently. Is that something that any of your customers have won, and you would expect as they go to the state commissioners to seek approval that, that would benefit you in the second half?

I would say, Jeff, maybe second half or not -- I mean, there's always a little bit timing involved. But generally speaking, Jeff, I mean, the whole GRIP funding, and you know that I sit on the GRIP's Infrastructure Advisory Council for that. It's extremely positive. You know what I mean? And so, is it second half? Some of it maybe goes out a little bit further, but just very positive, yes.

Great to hear. And then I think you mentioned, if I heard you right, 24% of revenue was software and services. Could you just -- I haven't heard you mention that percentage in the past. Can you just give us a percent -- perspective on what that was maybe 1 year ago or how the backlog complexion is, as it relates to sort of the tech portion of the business?

Jeff, I wanted to surprise you a little bit today. No, it is a high number. And look, about maybe 1 year ago, it was around 20%, I think when we talked last time. And it does fluctuate a little bit. I also want to be clear about that, Jeff. But you remember when you and I talked -- our view is clear that -- my view is, I mean, we want to move the whole company from a 20% plus, in the direction of 30%, and I think we should be able to achieve that.

And then, just what level of comfort do you have that some of the softness in Europe? This is my last question. I think you said the U.K., Turkey, and some of the EV markets. Do you anticipate any of those 3 to resume growth in the coming months and quarters?

Yes, yes. I mean, when we look into the EMEA business, then it's really -- it's a timing issue, which I think is very, very important to see. We -- actually, I would say we should be around -- in H2, we should be around $90 million higher than in H1. And when I look at the opportunities which we are having, I think they will come in. We are talking here about -- from a book-to-bill, from 0.6, I think we should be able to move up the needle to around 0.85, 0.9, in that neighborhood, but I feel confident that we actually should be able to achieve that. And with that then, of course, Jeff, also the margin is coming along.

The next question is from Patrick Rafaisz with UBS.

Can I follow up on this last point about EMEA?

Yes.

Book-to-bill 0.8 to 0.9, was that in reference to H2 or for the full year, which will mean above 1 for H2?

That would be full year then. So we see a little bit in EMEA. I think to get to 1%, I see this to less -- sorry, to [ 1.01 ], I see to a lesser degree for the full year, but I'm talking 0.85 to 0.9 for the full year for EMEA.

And would that be the sequential improvement you're anticipating for the second half also in EMEA, I assume? Would that be enough to bring EBITDA back into positive territory?

Yes, definitely. I mean, look, when we look at EMEA, I think it's a little bit at this time -- this point in time, maybe I would call it undervalued. So when I think about this minus 1.9%, at the moment, the consensus which is out there is around 4.6%. I think we will achieve that. What I think is important is, when I think about EMEA, as I told you before, about $90 million, $90 million that will give us then a volume effect of around -- an EBITDA level of around $35 million. Then we have some mix improvement of about $9 million. We see supply chain around $10 million, and then plus/minus. So, the clear objective is that, in H2, considerably better in the direction of around 9%, 10%, which will give us then around 5% -- 4.5%, 5% margin for the year -- EBITDA margin for the year.