Landis+Gyr Group AG (LAND) Earnings Call Transcript

Welcome to the Landis+Gyr Half Year 2026 Results Presentation. Please note that the call will be recorded. [Operator Instructions] I would now like to turn the call over to Christian Waelti, Head of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, good evening, everyone. I'm Christian Waelti, Head of Investor Relations. I'm joined today by Peter Mainz, our CEO; and by Davinder Athwal, our CFO. Today, we will review Landis+Gyr's results for the second quarter and first half of fiscal year 2026. We will follow the structure of the presentation and conclude with Q&A. Before I hand it over, please take a moment to review the disclaimer on Slide 2. Peter, over to you.

Thank you, Christian. Good afternoon, and good evening, everyone. I'm here with Davinder, our Chief Financial Officer, and we are pleased to provide you with an update on our first half performance. With that said, let's now start with a review of the strategic developments over the past months. Move to Slide 3. We made important strategic progress during the first half. We closed the EMEA divestiture in April and hosted our Capital Markets Day in New York in June introducing our new segment structure around connected platforms and grid intelligence and our midterm targets through fiscal 2028. We also strengthened the leadership team with seasoned executives. Rocky Martin for Connected Platform segment and Eugene Masso for Grid Intelligence. And our teams continued the preparations toward a potential U.S. listing while retaining the Swiss listing as we aim to better align our capital markets presence with the majority of up our operational business activity. In the first half, we also returned $162 million to shareholders through buyback and dividends. Just this week, we concluded the share buyback ahead of schedule repurchasing 10% of our share capital over the last 12 months as promised with the announcement of the EMEA divestment in October 2025. Move on to Slide 4. Let's start with the highlight of the week. On Monday, we announced a $509 million contract with a major U.S. investor-owned utility. The timing of large project awards like this is inherently difficult to predict. And while we would, of course, have welcomed the order in the first half. What matters most is that we are winning significant business demonstrating customers' confidence in Landis+Gyr and in particular, in our leading grid edge technology. Our order backlog stood at $3.7 billion on September 30, and as of now, surpassed $4.2 billion, reaching another record level. This validates the record pipeline we previously discussed and shows its continued conversion through order intake into backlog. Turning to our first half performance. Net revenue of $501.4 million was in line with our expectations and driven by project transitioning timing as guided earlier in the year in May. Adjusted gross profit was $189.2 million and adjusted gross margin reached a record 37.7%, driven by operating efficiencies. Adjusted EBITDA also grew and was $73.9 million, representing a margin of 14.7%, a significant improvement over previous year. Operating cash flow was $74 million, up 220% year-over-year, while diluted EPS from continued operations was $1.84, up 263%. With our first half performance, progressing exactly in line with the anticipated revenue profile, we're confirming our midterm revenue guidance for the year while also narrowing fiscal year 2026 guidance range. In light of our first half performance and the strength of our order backlog, we are also raising our adjusted EBITDA margin guidance. With that, I'll hand it over to Davinder for the financial details. Let's move to Slide 5.

Thanks, Peter. Hello, everyone, and thanks for joining us today. In my remarks today, I'll be covering order entry and backlog. The results of operations for the second quarter and first half of fiscal year 2026 as well as liquidity and leverage. Starting with order intake and backlog on Slide 5. First half order intake was $337 million, including $221 million in connected platforms and $116 million of in Grid Intelligence. Following the September close, we secured a $509 million contract award in October. Including that award, order intake for the year-to-date period was $846 million or 42% above the first half and fiscal 2026 comparison shown in the presentation. Backlog at September were $3.7 billion comprising $2.1 billion in connected platforms and $1.6 billion of Grid Intelligence, including the October award, backlog would have been approximately $4.2 billion or 6% above September 30, 2025. As Peter mentioned, we continue to see strong pipeline activity, which have reached record levels. Turning to our second quarter results on Slide 6. Order intake was $170.3 million, and the trailing 12-month book-to-bill ratio was 0.8x. Revenue was $269.2 million, down 6% year-over-year as expected due to deployment timing. Importantly, profitability continued to improve. Adjusted gross margin reached 38%, up 460 basis points from the prior year quarter, driving adjusted growth profit 6.8% higher despite the decline in revenue. The improvement reflects continued operational efficiencies and a favorable product mix within connected platforms. Looking now at our first half results on Slide 7. For the first half, revenue was $501.4 million, down 6.3% from $535.3 million in the prior year period. Despite the lower revenue, adjusted gross margin increased 370 basis points to 37.7%, driving adjusted gross profit up 4%. That improvement also carried through to EBITDA. Adjusted EBITDA margin increased 140 basis points to 14.7%, with adjusted EBITDA increasing 3.5% to $73.9 million. So while revenue was lower in the first half, the underlying profitability of the business improved meaningfully. Looking now at segment performance and starting with connected platforms on Slide 8. Order intake was $220.9 million, with trading 12-month book-to-bill ratio of 0.6x. Revenue was $363.7 million, down 9.3%, primarily reflecting the timing of project deployments. At the same time, adjusted gross margin improved significantly, increasing 810 basis points to 36.9%, driven by operational efficiencies and a favorable customer mix. Moving on Slide 9 in Grid Intelligence, order intake was $116.4 million, with trailing 12-month book-to-bill ratio of 0.8x. Revenue increased 2.6% to $137.7 million driven primarily by the growing installed base of Revelo annual recurring revenue reached $223 million, representing 8% annualized growth. Adjusted gross margin was 40%, down 600 basis points, primarily reflecting onetime revenue mix effects in the second quarter. Finally, let's take a look at cash flow, net debt and leverage on Slide 10. We started the fiscal year with net debt of $198.9 million, a leverage of 0.9x the trading call month adjusted EBITDA. During the first half, we generated $74 million of operating cash flow and invested $13.7 million in capital expenditures. We also returned $162.7 million to shareholders comprising $41.5 million of dividends and $121.2 million of share repurchases. Net proceeds from the EMEA divestment were $97.5 million, while other net changes were $54.3 million. As a result, net debt at September 30 was $258.1 million with leverage of 1.5x. As a reminder, the leverage calculation continues to include adjusted EBITDA from divested EMEA business. That concludes my prepared remarks. Thank you again for joining us today and for your continued interest in Landis+Gyr. I'll now hand it back to Peter to take you through our fiscal 2026 guidance and midterm targets.

Thank you, Davinder. And let's move on to Slide 11. Based on our solid first half performance, we are narrowing fiscal 2026 net revenue guidance to $1.085 billion to $1.115 billion from the previous range of $1.075 billion to $1.125 billion. The midpoint of the range remains unchanged at $1.1 billion, supported by the ramp-up of large contracts we see a significant acceleration in revenue in second half. Based on the continued progress in operating efficiency, we are raising our fiscal 2026 adjusted EBITDA margin guidance to 15% to 16% and from previously 14.5% to 15.5%. Moving to Slide 12. As a reminder, our midterm target through fiscal 2028 remain unchanged, and as presented at the Capital Markets Day back in June. From fiscal 2025 through fiscal 2028, we target a mid-single-digit revenue CAGR and a group gross margin of approximately 35% or higher. We target adjusted EBITDA CAGR at 2x revenue CAGR and adjusted EPS CAGR at more than 5x revenue CAGR. This concludes my prepared remarks, and we are now very happy to answer your questions.

[Operator Instructions] Our first question comes from Akash Gupta with JPMorgan.

I got a few and I'll ask one at a time. My first one is on pipeline for orders and large ones, especially after this booking this exceptionally large orders early in the week. I mean we have still 5 more months to go in current fiscal year. And again, I appreciate these large orders are quite lumpy, maybe if you have to assign a likelihood of probability, I mean, curious to hear your thoughts on how does the pipeline look like? And could we see something more in the remaining course of the year? Or do you expect more in the next fiscal year?

Akash, thank you. Obviously, as we try to explain some of those large -- especially larger orders are very difficult to predict at what time they come, but we still -- no matter what, we really like them. But when you look at the order intake of the $509 million and what we had achieved in the first half you can assume that we're clearly on the path to have a book-to-bill ratio for the year that is substantially in excess of one and consistently, what I say in -- after the first quarter at the end of July, we continue to look at the record pipeline and what I really liked about this win, it's not just talking about a record pipeline. It's about orders coming out of the record pipeline going into our backlog. So I really look at that as a validation and a record pipeline that we are looking at is still in place, and there is still a tremendous amount of activity that really validates, I think, the tailwinds that we're finally seeing in our industry.

And maybe just a follow-up on this order. Are you going to book it entirely in connected platforms or it will be split between the 2 segments just for housekeeping purposes to put that into our numbers?

Like every order, it will be split in both segments. This specific one as probably not the percentage ratio of grid intelligence as some of the other orders, but it will -- it will go in the backlog for both segments.

And my second one is on input cost dynamics. I think it is a bit increasing your raising guidance at a time when we hear some concerns in the market on input cost and also some potential supply chain bottlenecks given the big AI investments creating bottleneck for other industries. So maybe if you can talk about what do you see on raw materials, supply chain and input cost. And when we look at this margin upgrade today, where is it coming from compared to your prior expectations?

So obviously, a big driver for us when we give guidance for 6 months, all of that is in our backlog. So we have very good visibility on the profitability over the next 6 months. So that is really the driver for increasing our guidance to be very clear here. Obviously, when you look at our Grid Intelligence product, it is really a product that contains a memory and contains processing power and those components have gone up over the last couple of months substantially and some of those costs in the second half starts to hit. And like every other industry, we've been working diligently from the month of April, the beginning of our fiscal year when we understood that this was coming, that we need to continue to work with customers and increase our prices to get compensated for the value increase that is coming from memory chips and coming from processing costs as well. The availability -- sorry, just on the -- you also had a point, sorry for interrupting you. You had a point on the availability of parts and comment. I can clearly say that but the people in supply chain, they had to work more diligently and providing the supply in the first 6 months. So it didn't impact us with any issues in the first half. I expect them to continue to work diligently in the second half but we have really good visibility on what we're executing in the second half to have that available.

And the last one is just more on the phasing of revenues in second half. So again, if you look at implied second half revenues, you're guiding for $600 million in second half, which is down 5% year-on-year. And maybe any commentary between Q3 and Q4, the phasing of this revenue, like should we expect Q4 to be more like flattish and Q3 down given the phasing effect? Or do you expect similar growth in Q3, Q4?

So I think the pattern -- that pattern described is actually the pattern we laid out at the very beginning of the year. We said we were transitioning to a contract in Canada, transitioning is starting in this quarter, Q3. And in the fourth quarter, it will ramp up to a full deployment scale. So what you have laid out is very consistent how we depicted the revenue profile throughout the year. And obviously, also Q3 is always the shortest quarter in any given year. But that profile matches with what we've laid out and with our expectations. .

So you mean similar 5% decline in Q3, Q4 revenues?

Sorry, you depicted the 2 different profile, I'm not referring to the first one.

Our next question comes from Patrick Rafaisz at UBS.

Two or three questions from me as well. The first one would be sort of follow-up specifically to the connected platforms and the strong margin performance there. You talked about operating efficiency and mix as you mix means more in the revenue. But can you maybe elaborate a bit and also give more color on these individual components, how much they contributed.

So a couple of things. On the price increases hitting the first half results, price increases being on the components in the first half that included very little of that. As I said, it's really starting to hit our canal and hit our cost base in actually this quarter, beginning this quarter, middle of this quarter and then in the fourth quarter. So that is what we see on the material cost side. On the mix side, I would probably more say as we articulated on the Rebel, as you alluded, we are clearly going down the learning curve as this product that was early on in the cost curve, we continue to go down this cost curve dramatically and perhaps a bit faster than we had anticipated. It is an electronic product. Volume is the name of the game. And as it continues to raise, it replace other products that continues to show also consistent in how we have anticipated it so that it continues to be a big driver for us. a new product early on in the cost down curve and we'll continue to execute on that curve and perhaps a bit faster than we anticipated at the beginning of the year.