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

Ladies and gentlemen, welcome to the Landis+Gyr Business Update Conference Call. I am Valentina, the Chorus Call operator. [Operator Instructions] 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 Peter Mainz, CEO. Please go ahead.

Thank you, Valentina. Good morning, and thank you for joining us on this call on such short notice. We have some prepared comments at the beginning. We have no presentation material. And as Valentina mentioned, we'll open for Q&A at the end of this call. Today is day 84 in my new role as CEO. And I'm as excited about our talent, our customers and our prospects as I have been on day 1. Back in October, we announced our strategic initiatives. And for the EMEA business, it became clear we needed to take accelerated action regarding the EV business, a business that was built on companies we acquired just 4 years ago. When we entered this business, we believe that utilities would play a significant role in the adoption of EV charging solutions. This has not materialized. And changes in the regulatory environment, combined with competitive pressure, including substantial pressure from Chinese players, made it unlikely that we will achieve target growth rates and a return to profitability in the foreseeable future. In fact, we incurred losses of $10 million in '23 in our prior fiscal year, and those losses are forecasted to increase in '24. Taking all this into consideration, we made the swift but difficult decision. It impacts a lot of people to wind down this business, and this will incur cash effective restructuring charges of $10 million to $15 million. We expect to essentially complete the wind-down by the end of March, which will move this business into discontinued operation in the depiction of our financials. A noncash goodwill impairment of approximately $100 million will also be recorded at year-end as a result of this decision. Through my and the team's deep daily involvement in the business, we discovered that our assumptions and expectations for '24 were overly optimistic and not fully aligned with current market conditions. Based on the review of the business outlook for the second half of the financial year '24, we have concluded to lower our financial guidance for fiscal year '24. We now expect net revenues in fiscal year '24 to decline by approximately 8% when compared to '23, and that decline is driven by the Americas and also by EMEA. Net revenue in the Americas region is forecasted to decline in '24 with the previous year catch-up pent-up demand being the major driver for the development. In fiscal year '23, Americas benefited from a post-COVID demand rebound of approximately $120 million, as we previously disclosed, which is not expected to recur in fiscal year '24. When we exclude this effect, the Americas business will grow at low single-digit rate in '24 compared to the previous year. Specifically, I want to mention here this revision to our North American outlook was not triggered by any loss of business or tenders. Our robust pipeline remains strong and very much intact. Net revenue in the EMEA region is expected to grow in the second half of fiscal year '24 when compared to the first half of this year. However, the rebound is less pronounced than initially expected. Adverse timing of large projects and softening in the U.K. and in Turkey markets are expected to result in an overall revenue decline for fiscal year for '24. The lower net revenue level will result in reduced operating leverage for the group. And in addition, the streamlining of the Americas product portfolio, which was driven by the fast adoption of our next-generation grid edge offering by customers, triggered inventory obsolescence of around $20 million, decreasing our adjusted EBITDA by the respective amount. For the EMEA region, management expects the business to return to a positive adjusted EBITDA margin full year of '24, and this is driven by an impressive mid-single-digit EBITDA margins in the second half of this financial year. But all of the above results in a reduced adjusted EBITDA margin for the group of around 10% for fiscal year '24. Adding back to this 10% EBITDA margin, the positive and the negative one-offs that we experienced throughout '24, we had a land off -- a land sale benefit in the second half and the negative inventory write-down in the second half, both items in '24, this brings us back to an 11% EBITDA margin. Furthermore, the aforementioned acceptance of our grid edge offering for the experts here on the call, that's really our Revelo, this allowed us to swiftly move down the cost curve for this offering much faster than we anticipated. And when paired with the returning operating leverage, this is setting us for '25 and beyond and further manifesting our industry-leading margins. So I want to summarize one more time. We have taken a very decisive action regarding our EV business. And again, this is just one step while we continue to advance our options and our review for EMEA. Our strong focus remains on North America. We remain absolutely convinced the market offers the highest potential for value creation. And this strategic direction that we have announced, also reminding everyone, includes exploring the possibilities of a U.S. listing that we are plotting along with our actions every day. But most important at the end, our outlook for North America remains highly positive, and this is really evidenced by exceptionally strong pipeline, which is driven by market acceptance of our leading technology solutions. With those prepared remarks, I want to give back to -- hand back to Valentina and open the call for Q&A. Valentina?

[Operator Instructions] The first question comes from Gupta, Akash from JPMorgan.

It's Akash from JPMorgan. I have a couple of questions on the U.S. business and maybe starting with order intake there. You said in your prepared remarks that you have not seen any loss of tenders or business. But maybe if you can talk about what do you see in the U.S. pipeline? Are you seeing any pushout because of uncertainty that may be caused by the new administration? And also the second question on the U.S. was that if you can provide a bit more details on this inventory write-down. I mean we are still in an inflationary environment. And just like maybe if you can provide some more color on what led to this decision of inventory write-down.

Yes, I'll start with the easy one. That's a write-down, we articulated around $20 million. And that was, in essence, really driven by the much faster acceptance of the new-generation Revelo, as I mentioned before, of that product. Even surprised us, the market acceptance that we have seen in every customer segment and the focus on that product and the resulting cost-downs that we can achieve maturing this product, moving down the cost curve, making this the exclusive differentiated and leading offering for us triggered that write-down. So that was on the inventory. It's really driven by the accelerated acceptance by our customers of our next-generation offering. We haven't seen anything in the marketplace that is related to slowdowns or anything in the discussions with, as you mentioned, on the administration. And when I mentioned the pipeline and our focus on the pipeline and, in essence, focus on a book-to-bill ratio that will substantiate that at the end of the year, this is still very much the focus between now and the end of the year. And we are very much convinced that we have a very positive book-to-bill to record at the end of the year. We really spent the 80 days with the new team in EMEA and, in particular, in North America, really assessing where we stand on the business, what is really happening on the assumptions. And the moment it became clear, those assumptions are not really matched by a reality in the market. That's what really triggered this announcement today.

This book-to-bill comment, more than 1x, is that only for Americas or that is for the whole group?

Well, the exclusive focus is -- and when we talk about the focus going forward, I do want to highlight that we focus on the book-to-bill for North America. That's where we have the large business tenders that we need for this business, and those are the ones that excite us to go forward. But obviously, that will also drive the whole group above and beyond a 1:1.

[Operator Instructions] The next question comes from [indiscernible] from Antarius.

I have a question regarding the revenue revision of the guidance because after the first half, you guys confirmed the guidance, which would be low single-digit growth. So I was wondering how we can get such a big revision of the guidance because you have a quite clear visibility of your revenue because of the order backlog. So what happens when the guidance becomes so much down?

Again, I can really only say that we used the 84 days that I had with the new management team, really dive into every detail of our forecast and into the reality of the business. And the market reality basically really triggered this forecast revision. I had to start with the announcement on the guidance that was made at the time the strategic announcement were made, but I focused my 84 days on really revisiting and reviewing the business with the new management team, and this was the resulting outcome.

And the EV charging business, was that only in Europe?

Yes, it's more or less exclusively in Europe. The parameter is more or less exclusively in Europe. It's a hardware-centric business that we moved into 4 years ago. And as I mentioned, we were already incurring substantial losses in '23. And this not being our core business, we don't have the resources and talent available to wait this one out.

[Operator Instructions] The next question comes from Leah Süss from AWP.

I was wondering if you could say something about the headcount in the e-mobility sector or how that will affect Europe or EMEA?

Yes. Just give me one question to give you an accurate number. So we're talking close to 200 people we have in that business today. So again, as I mentioned, it's a difficult decision for all of us.

And so when -- and another question maybe was there was no option to sell the segment?

We haven't seen any -- obviously, at the beginning, it was part of the EMEA parameter, but it became very clear that we needed to take decisive action and exclude this one. We haven't seen any transaction in that place for an extended period of time, except bankruptcy and asset sales out of bankruptcies. We have not seen in the past 18 months any transaction that's triggered. So we didn't really see that as a path as anything that would lead to a successful outcome, delays, and we needed to be in the driving seat from the get-go. That really triggered our decision that we want to choose that path.

Maybe one last question about this. So does that heighten your chance to sell the remaining EMEA segment or business?

Look, we review every option on the EMEA business, but taking it out of the parameter is certainly was one of the drivers why we needed to take accelerated action and find a solution for that business to make the business we have, the attractive business that we have in EMEA even more attractive for that option that you are describing.

The next question comes from Rolf Renders from AMG.

Can you also elaborate a bit on the net working capital levels, inventories and the possibilities you see there?

For the end of the year? Or...

Yes. Just if you have to inventorize in the first 84 days, just where the levels are now and where potential could be. I guess that's -- I don't expect you to know where they will be end of the year, but more the opportunity with that.

Yes, I would -- the one item I would say is we continue to focus on our net working capital and aligning our supply chain with the realistic demand pattern that will result in substantial net working capital improvements over the next quarters, and we focus aggressively also to show results at the end of the year. And we expect the net working capital to be in the range of 20% at the end of the year.

We have a follow-up question from Akash Gupta from JPMorgan.

I wanted to ask you about the update of strategic review of EMEA business. Given this profit warning today, how do you see that this -- I mean, should we see it as a clearing event and that can expedite your review of business? Or should we see this as a headwind because now you're lowering your profit expectation and this may require some more work from whoever is engaging in dialogue with you on the business? So any thoughts on how shall we see this update of EMEA business in context of the strategic review that you have been doing?

You might -- you may call it a clearing or cleaning event and -- but at the end of the day, it hasn't changed any one of our strategic assumptions on both work streams. We continue to review EMEA, and I would look -- what I would like to say what we are now initiating on EV is really a first step in the shortest period of time possible. So absolutely nothing has changed here, and the focus on North America and our belief that value creation by focus on this market with capital and talent allocation is the right way forward. Nothing has changed here, and nothing has caused us to push a pause button here and review any of those strategic initiatives. And in a way, are they less right or more right than before, they're still absolutely the right steps, and we continue to push ahead full steam on both of those initiatives.

And then maybe a question on the time line that you can potentially help us with, like what sort of time line shall we think about for EMEA strategic review? I think previously, management said you are open for divestment or wind-down. Maybe any thought on the time line that could it still be doable in 2024 or is it going -- 2025, or is it going to be more 2026?

No, no. Look, I think with every announcement and with every initiatives that we have set, we're looking at '24 to be very clear -- '25, I'm sorry. I'm sorry. We're not that fast. We can't do it retroactively. '25, I'm sorry. I'm sorry. No, no, we're looking -- it's definitely a '25 event that we are pushing for.

We have a follow-up question from Leah Süss from AWP.

I was wondering, could you say something about the other regions, about Asia Pacific and maybe also in the region Americas, how the different regions compared?

Can you repeat the question on the Americas? I'm sorry. Or the different...

Or maybe we can do one by one. So maybe we can start with Asia Pacific, how the developments have been there?

So unchanged. So Asia Pacific continues to be this market. The only negative about Asia Pacific is that it's our smallest business, but it's plotting along nicely at the margin profile that we had predicted and continues to grow. And so no revenue change in our expectations for this business that we have seen. It's slightly below $200 million business. No change there. As I mentioned, it is also utilizing a lot of North American software in their offering, triggering the proximity to that market. So continues to be a nice presence that we have created in those markets for us.

Okay. Perfect. And what about the U.S.? You were saying that, of course, North America remains the focus. But maybe can you say something about software versus other areas, how that developed?

I think we previously always mentioned that in -- if we just focus on the North American business, a business north of $1 billion at 30% plus, I think we were specific at 32% is today our software and service percentage. And we continue to see that as a substantial part of our offering and different from many other players. This has been part of our genetic setup in North America for decades. So we continue to focus on that, and we expect that to grow and be part of our offering. No change there, how we view it and how we drive it.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Peter Mainz, CEO, for any closing remarks.

Thank you again, everyone, for the interest in Landis+Gyr. And to summarize again, we've taken exceptionally swift action on the EV business, and nothing has changed on the North American expectations for value creation, and this is really evidenced by the pipeline we see and the traction that we have with our customers today. And we look forward to the dialogue and talk to you at the year-end results on May 8. Thank you, everyone.

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.