Ladies and gentlemen, welcome to the Landis+Gyr Half Year Results 2022 conference call and live webcast. I am Sandra, the call's call operator. I would like to remind you that all participants will be in listen only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Eva Borowski, SVP, IR and Corporate Communications. Please go ahead, madam.
Thank you, Sandra, and good morning, everyone. As you know, earlier today, Landis+Gyr issued its half-year financial year 2022 results, ad hoc release, and accompanying 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 two of the presentation in 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 Sandra 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 Lieberherr.
Thank you, Eva. Good morning, everyone, and welcome to our half-year results. I'm here with Elodie Cingari, our CFO, and Eva Borowski, our Senior Vice President, Investor Relations and Corporate Communications, and we are very pleased you have all been able to join us this morning. Before we start with presentation, I would like to give you a brief overview of the key messages of today's call. First, we are pleased to announce a record backlog of almost $3.5 billion. Second, we were able to achieve a 6.7% adjusted EBITDA margin despite the global and cross-industry supply chain challenges, which we expect to improve in the second half.
Third, we are confirming our guidance for FY 2022, but expect to come in at the lower end for cash, and I'm convinced that we have the right strategic focus to drive leading-edge technology and transform the business. Let's talk about what's been happening over the last 6 months and move on to slide three. We are well-positioned with our energy efficiency solutions, especially amid the current energy crisis with looming blackouts and brownouts. Let's have a look at some of our key metrics. Our book-to-bill ratio was 1.06, with continued solid order intake in all three regions. Net revenue came in at CHF 728.7 million, an increase of 10.3% year-over-year in constant currency. Adjusted EBITDA came in at CHF 48.7 million, with an EBITDA margin of 6.7%.
In order to convert our record backlog, we had to temporarily build up inventory significantly, resulting in a negative free cash flow, excluding M&A of -$38.9 million. Net income of $186.5 million was boosted by gain from the divestment of our minority stake in Intellihub, resulting in a high diluted EPS of $6.57. One of our greatest strengths has always been our balance sheet. This remains very solid with a net debt to adjusted EBITDA of 0.63x. Our strategic transformation and the integration of our recent acquisitions are on track. Lastly, we were able to deliver solid results despite significant headwinds and expect the supply chain impact to improve in H2 compared to H1. Let's talk about what we have achieved when it comes to sustainable impact on slide four.
Looking at the page, we are proud that our efforts are being recognized with awards and continued high ESG ratings. Our portfolio of products and services enables us in a unique way to have a direct sustainable impact. For example, we were able to avoid over nine million tons in CO2 emissions through our installed smart metering base. In addition, our short-term incentive for all eligible employees includes an ESG component of 20%. Especially as we head towards the winter and there are discussions about possible blackouts and brownouts, our products enable utilities and end consumers to reduce energy consumption and provide solutions that support the operation of stable, safe and secure grids also in challenging times. Working actively towards a greener future, we have signed up to the Science Based Targets initiative as we continue to manage energy better and support global efforts to decarbonize the grid.
Now let's move on to slide five and take a look at our strategic transformation progress over the last six months. Our commitment is to remain a leading provider of energy efficiency and flexibility solutions, and so we continue to temporarily invest an initial 2% of revenues to drive our strategic transformation and future growth forward, bringing our adjusted R&D expenses in H1 to 11.4%. Our products, services and solutions put us right in the sweet spot of the energy transition, and we see that further amplified by the current energy crisis. There's an increase and acute need for smarter grids and more data analytics, especially as we face possible energy shortages and grid instability heading into winter.
Analyzing information in the cloud is a critical part of our strategic transformation, as it allows utility customers and end consumers to gain data insights in real time to reduce consumption. We continue to expand our reach in all three strategic pillars. On January thirty-first, we are pleased to announce that we will hold a capital markets day to provide you with an in-depth update on our strategic transformation. Until then, we will continue to focus on executing on our strategy. Let's turn to slide six and take a more in-depth look at the current supply chain situation. Over the last few months, we have seen a continued impact on our supply chain, as have many companies around the world amidst this global crisis.
Around $80 million in top line was deferred due to the current supply chain constraints, and EBITDA results include incremental $29 million in supply chain costs. We have mitigation actions in place and work closely with our customers and suppliers. As a result of our efforts and the changing macroeconomic climate, we expect the situation to start easing from H2 onwards. The impact we see is mainly related to three topics: material non-availability, material price increases, and heightened freight costs. Let's turn to slide seven and have a look at the developments in each region. I'll start with the Americas, led by Sean. Our Americas region continues to go strong with a record backlog of around $2.6 billion, and we also see sustained and diverse growth in software and services.
This is also reflected in the large contracts we have signed that have up to 30% software revenues. We see positive developments regarding federal funding for resilient and smart grids, energy efficiency, renewables, and EV infrastructure. With the first wave of smart meter installations well underway, the technology refresh cycles are picking up with the need for higher computing power and intelligence at the grid edge. Here, our grid edge intelligence sensor, Revelo, is a product of choice, and we have successfully deployed the first sensors with National Grid. In addition, large AMI rollouts with PSE&G, New Jersey, LG&E in Kentucky, and AES Ohio kicked off during H1. In Japan, we see revenue growth with our head-end system refresh for TEPCO. In South America, we have good momentum with wins like Equatorial, Enel, and EDP.
On the technology side, we continue to focus on market-leading devices, grid edge sensors, the smart infrastructure platforms, and software solutions. In summary, we see a good pipeline in all markets and are proud to be a provider of critical infrastructure, supporting resiliency and modernization of the grid infrastructure, cybersecurity efforts, and initiatives to decarbonize the grid. Let's move to slide eight and take a closer look at EMEA, led by Bodo. Over the last few months, we have seen good developments in the region. Even so, EMEA is hit hardest by supply chain and FX impacts. In the U.K., Switzerland, France, and the Nordics, we see continued high order intake, solidifying our market-leading position and securing quality backlog for future growth. In Belgium, we have successfully completed the first major milestones of the Fluvius project.
In addition, we have successfully delivered our Gridstream head-end system to E.ON and booked significant awards to the C&I segment. A major focus is to strengthen our position in the EV infrastructure technology market, and we see promising opportunities and traction for charging hardware and flexibility management software in the U.K. and Switzerland, for example. On the innovation side, we continue to drive energy efficiency technology, which is needed now more than ever in light of the current energy prices and risks to grid stability and power supply, especially in Europe. In summary, we are well positioned to capture significant growth and market share in H2 for 2023 and beyond. Let's take a look at APAC, led by Steve, on slide nine.
With a backlog of around $173 million, we continue to see solid growth in our Asia-Pacific region, driven mainly by strong order intake in Hong Kong, Australia, New Zealand, and Southeast Asia. In Australia, we successfully deployed our next-generation smart meters and SaaS offering to Yurika, an Energy Queensland subsidiary, and see continued momentum for smart meter deployments in general. In New Zealand, we won a contract with Watercare to deliver ultrasonic smart water meters with embedded narrowband IoT communications for the country's largest water utility, combating water losses with leak detection technology. In Southeast Asia, we see opportunities in Indonesia, Thailand, Malaysia, and the Philippines as they transition from non-AMI to smart meters. In Hong Kong, we are pleased to say that we were able to bring home the fourth contract extension for AMI deployments with Hong Kong Electric.
Overall, we are well positioned to capture growth and expand our reach in the region. 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 on a few points here. Order intake continues to be solid and was driven by all regions, while down year-over-year, given the extraordinarily strong order intake of almost $1.8 billion in H1 FY 2021. We have seen strong revenue growth led by Americas and Asia-Pacific, while EMEA was impacted by component constraints and FX. Further, adjusted EBITDA margin declines primarily due to higher supply chain costs and investments. As mentioned before, free cash flow was adversely impacted by temporarily higher inventories to support backlog conversion. Overall, despite the current 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, and good morning, everyone. I would like to walk you through the financial details of the first half 2022 that ended on thirtieth of September 2022. As mentioned by Werner, order intake was at approximately $0.8 billion, resulting in a book-to-bill ratio for the company of 1.06. All regions contribute to this development with a ratio above one. In the same period last year, order intake was significantly higher, driven by major wins in the Americas region. At the end of the first half 2022, we had again a rather large backlog of $3.5 billion, which represents an increase of approximately 7.5% versus prior year, and even surpassed our previous record end of 2021 by 2.7%. Moving on to the next revenue bridge.
Our net revenue results for the first half were $729 million. This represents a 10.3% growth in constant currency versus prior year, equivalent to 4% growth year-over-year, considering the adverse impacts from currency movements. Landis+Gyr as a multinational company is exposed to FX fluctuations, given the reporting currency is in US dollars. The strong US dollar had a significant impact on the growth rate year-over-year, impacting our revenue by about $40 million negatively. America's performance was particularly strong with growth in all three clusters, North America, Japan and Brazil, despite the continued challenging component availability situation. EMEA experienced a decline, in particular in U.K. and France, predominantly driven by restricted critical component availability. Entities acquired in prior year contributed to approximately $23 million in revenue incrementally year-over-year.
APAC continued to show strength predominantly driven by Australia despite disruption of operations due to COVID-19 in China. In all regions, the global component shortages put pressure on the delivery plan as we deferred revenue of approximately $80 million to future periods. Moving to the EBITDA bridge. The financial year 2022 is a challenging year due to component availability, inflationary costs and FX pressure. While our top line was impacted significantly by FX as per our previous page, due to the natural hedge and hedging policy, the FX impact on our adjusted EBITDA was limited. That being said, we experienced margin compression due to material and transportation cost increase. We made good headway in mitigating these adverse effects through pricing actions and product cost outs, even though not all effects will materialize in this financial year.
Overall, our adjusted EBITDA for the first half declined from CHF 70.8 million to CHF 48.7 million year-over-year. This translated into an adjusted EBITDA margin reduction by 340 basis points from 10.1% to 6.7%. In more detail, our gross profit was impacted as follows. Gross profit volume benefit was CHF 23.7 million, driven by higher revenue in Americas and APAC, partially offset by lower EMEA volume. Gross profit margin impact was -CHF 27.6 million due to higher material and transportation costs. Our adjusted operating expenses increased by CHF 15.1 million year-over-year. The reasons for this development were ramp-up costs related to preparation of current and future backlog conversions, particularly in North America, operating expenditures associated with the acquired businesses prior year, and our continued investments in strategic initiatives.
We now move on to bridging EBITDA to adjusted EBITDA. The bridge here contains three items as shown on the page. In the first half of financial year 2022, the restructuring charges are primarily related to our India business operation as a result of the decision to discontinue manufacturing activities in India. Second, warranty normalization, representing the warranty provision amounts made in H1 relative to the three-year average of actual warranty costs incurred. Due to the lower warranty cases, the downward trend from prior year continues. Third, timing difference on FX derivatives. Our biggest FX exposure is in the U.K., where we contract revenues in British pound and incur supply chain cost largely in other currencies. The adjustments exclude unrealized losses of $6.3 million related to mark-to-market differences on our FX hedge.
If we now look at our cash flow, in the first half of financial year 2022, our free cash flow, excluding M&A, was at -$38.9 million. Cash flow generation from operations was adversely impacted by the EBITDA decline flow through and significant buildup of inventory across all regions. The inventory increased by $76 million year-over-year, driven by two effects. Critical components were not available to fulfill production and deliveries as planned, primarily impacting our EMEA region. Second, an overall ramp up of inventory to support the strong revenue that we plan in the second half. The higher inventory levels will reduce throughout the second half as we expect some easing in the supply chain situation, and we are targeting to deliver on our growth trajectory. Our capital expenditure remained low at $8.9 million and in line with previous year.
Finally, free cash flow was $143.1 million, considering the Intellihub divestment as announced during our last earnings call, which totaled $234.8 million proceeds and related tax payment of $54 million. Moving on to our net debt position. As of 30th of September, the net debt position was $79.3 million and impacted by the following items. First, the dividend payment of $64.7 million that was made in June. Second, the minority stake Intellihub disposition with net cash proceeds of $182 million. Last, the free cash flow generation excluding M&A, which was at $38.9 million. FX transaction impact was $14.1 million.
At the end of the first half of financial year 2022, in addition to our cash position of $82.3 million, we had undrawn facilities of about $395 million available. All in all, we maintain a strong balance sheet with a net debt to adjusted EBITDA ratio of 0.63x. Now moving on to our regional performance, starting with Americas. In Americas, order intake was approximately $410 million, resulting in a book-to-bill ratio of 1.04. Revenue increased by 20.4% to $391.7 million. The expansion was driven by our main three markets in the region, North America, Japan and Brazil, despite changing component availability situation. Adjusted EBITDA margin declined by 320 basis points to 12.2% despite stronger volumes.
The decline was driven by increased supply chain costs, further ramp-up investments to support future backlog conversion and investment in strategic initiatives. If we now look at our EMEA region. In the EMEA region, we recorded a good book-to-bill ratio of 1.07, supported by major wins in the U.K.. Revenue decreased by 6% in constant currency to $248 million. Throughout the reporting period, EMEA was adversely impacted by FX movements, a combination of strong USD and weak euro and British pound caused volumes to decline by -17.4%. Operationally, the revenue decrease was predominantly associated to component shortages impacting our delivery schedule in the U.K. and France. Adjusted EBITDA declined to $9.4 million, resulting in an adjusted EBITDA margin of -3.8%.
Reason was primarily lower operating leverage, higher supply chain costs and investments in acquisitions and strategic transformation. If we now look at our APAC region. APAC order intake increased by 15.6% year-over-year, resulting in a book-to-bill of 1.12. APAC revenue increased by 23.8% in constant currency to $89 million. Growth was predominantly driven by strong demand in Australia, partially offset by Hong Kong timing. Adjusted EBITDA margin expanded to 7.6% due to operating leverage, which was partially offset by higher supply chain costs. 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 ongoing challenges of the global and cross-industry supply chain situation, we are confirming our guidance for FY 2022 that we communicated last May during our full year 2021 results. Let me add, when looking at cash, we expect to come in at the lower end of the guidance range due to higher inventory needed for backlog conversion. Now we will open up the call for your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to only announce till asking a question and eventually turn off the volume of the webcast. Anyone with a question may press star and one at this time. The first question comes from Patrick Rafaisz from UBS. Please go ahead.
Thank you and good morning, everyone. A few questions.
Good morning.
Good morning. A few questions, please. The first one on the deferred sales and the incremental EBITDA impact from the supply chains. With the situation easing into the second half, how much of that do you think you can recapture in the second half? Do you think the supply chains overall will still be an incremental headwind in the second half compared to prior year? Or will it start to become a benefit?
Yeah. As in terms of deferred sales, you know, we have around $80 million, as we said. There we have around Europe, around $35 million deferred, U.S. around $40 million, and then we have APAC about $5 million. That revenue will come back, you know, in the next, not everything, obviously in the second half, will come back in the next twelve to, let me say, twenty-four months. You know, in terms of EBITDA, what we can say, as we said before, you know, we see a relaxation of the delivery situation. I think that's good because they will help us, Patrick, actually in terms of volume, which also then consequently will help us in terms of EBITDA margin in the second half versus H1.
Supply chain, our view is. I think you and I spoke before that. You know, we are very close to this large chip suppliers, which I think is very good, but we are obviously competing in the same pool like automotive and the consumer. We do expect delivery situation improving starting H2, which is good. You know, they are due to the de-globalization of these large chip suppliers. They also add capacity in the U.S., in Europe. I think that's all good. Pricing, we expect some relaxation starting mid-calendar year 2023, but that's something we still need to see at this point in time.
Okay, great. That means probably that in terms of gross margin, we should see a sequential improvement here, that's quite tangible in the second half already, even if not returning to pre-supply chain issue levels yet, right?
Yeah. I think that's a fair assumption. Yeah. I mean, we do. You know, when you look at the gross margin in the first half, it was really actually we did have obviously volume and some mix and so on. Going into the second half, I would expect that, yeah.
Okay. You talked about FX, the transaction risk, especially from the pound, which was mitigated with hedging. Will that still be the case in the second half? Or will these hedges roll over at more unfavorable rates? Can you add some color on that? What-
Yeah.
What should we assume as the underlying margin, if the hedges weren't in place?
Definitely. Elodie, if you could answer the question.
Yeah, I'd be happy to. Hi, Patrick. From a hedging perspective, our hedge policy is that we hedge on a 12-month rolling basis. That's the coverage that we have. Obviously we have also some of our natural hedge that we have for some of the things that we do within Europe, you know, within the euro or the pound currency.
Mm-hmm. Maybe just to add some color. Look, I mean, we are not going crazy in terms of hedging because our view is that, you know, euro currency will stay low. The same goes with the U.K.. We make that assumption, we deal with that. Exactly as Elodie said. Maybe the one additional point also, we watch the operational hedges very carefully. That means, for example, for EMEA, we will actually also move more of the supplies in, into the Eurozone because our expectation is that the euro stays relatively soft for the next few years.
Okay. Okay, great. The last question, piecing all of that together, I recall right from the last call, the indication was that seasonally we'll have a softer H1 in terms of profitability followed by a stronger H2. Now you actually came in pretty close to the midpoint of the guidance range already in H1, which was better than expected. Does that mean that the sequential improvement on profitability will be less in the second half? Or should we really think more about the upper half of the guidance range as the realistic outlook for the full year?
I would say directionally, you know, as the supply chain improves, we have a higher top line. Of course, we still have supply chain pressure. Supply chain pressure, you know, $29 million for the first half, for the full year, $60 million. We should see an improved, you know, EBITDA in H2.
Okay. Thank you. That's all for me.
Yeah. Thank you very much. Thank you.
The next question comes from Urs Emminger from Research Partners. Please go ahead.
Good morning. I have two questions. The first one is what happened in India? I'm sort of a little bit surprised, and I would like to know if all costs are included now or if there's something additional looming. The second question is, if I look at the taxes, excluding the Intellihub impact, the taxes are $20 million, roughly. It seems a lot, given EBIT of $10 million. Perhaps you can explain. Thanks.
Yeah. No, very good. Thank you, Urs, and good morning. Urs, the first question, India, you know, I mean, as you know, I worked in power generation, I worked in aerospace, automotive, and now back in energy, and I can tell you India is the most competitive place. We came to the conclusion that actually we want to cease our manufacturing because the margins are just too low. That's the reason why we actually do that. We have done that in the last few months. An impact of about restructuring costs of about $66 and a half million, but that's pretty much done, actually. Now we have projects which are running out up to end of March. Having said all this, India remains a very large market.
We are not excluding at all that actually in the foreseeable future maybe we come in with some software offerings or something like that. But for us it was important in terms of, you know, manufacturing, that we drive this closure. In terms of tax, Elodie?
In terms of tax, we had some very significant movements in our tax in the first half, primarily driven by the capital gains tax that we had on our Intellihub divestment. If you restate our taxes and if you exclude the capital gains tax on Intellihub, we were actually running at 11% tax rate in the first half, which is rather low. We expect to be in the range of 22% for the full year, and you know our guidance is normally to be at 25%, which is our run rate in terms of taxes. I think you just have to keep in mind that we had the big Intellihub movement in the first half, that was a big one-off.
Exactly. Very good. Good.
The next question comes from Daniel Koenig from Mirabaud Securities. Please go ahead.
Yes. Good morning. I have also a couple of smaller questions. I was wondering, how do you see the development on personnel costs in H2 and more importantly in the next fiscal year? How do you see that developing? I was wondering, could you break down the revenue growth in the U.S. in terms of prices and volume? I was wondering how much you could increase prices? And then finally, I was wondering what's the latest and greatest on your Turkey acquisition. Thanks.
Yeah. Very good. Okay. Personnel cost, you know, when you look at our company, we have around $260 million of personnel costs, so it's not a small number. We actually on average had a 4% salary increase, so that's about 0.75% in terms of EBITDA. That's quite a thing. My view is, going forward to your question, how will that develop? You know, I would say we are going into recession, U.S., Europe, technically, we probably already are. That will also cool down actually and obviously the labor market, and I think that's a good thing overall. We need some relaxation, I think all of us together, in terms of these types of costs. That's how we look into that, you know.
In terms of U.S. revenue growth, price, volume, you know, we look at it in three buckets. The way we look at it is bucket number one is where we have large contracts where we actually have indexes, indices already built in, which is good. We also have some contracts where we don't. You need to keep in mind with some of the utilities, if you actually would insist in terms of procurement indexes and all that, you will be automatically actually then not participating, you would actually be kicked out. We have a third basket, which is really the short flow order. Something comes in, we can price it correctly, and then actually win the contract. That's about 30% of the whole volume.
As I said, it's a mixed bag. We are not consumer industry or something like this, but I think that's the way to look into that. The other thing I also want to say, Daniel, when you look into these large contracts, you know, we started in 2021, first rollout start in 2023, but then they go for three to five years. In terms of supply chain and all that, there's quite some time, and we work very hard on some cost reductions. Maybe the last point I want to mention is, in these large contracts, you also have up to 30% software, which is a really good thing because no chips required, which makes us happy. In terms of your last question, Daniel, Turkey operations, I would say really positive.
I can tell you. Same goes also for Etrel. These are two large acquisitions, you know, Turkey around $60 million revenue, accretive to EMEA revenues, Etrel $20 million, but really strong growth curve, double-digit growth curve. Happy about these acquisitions. Turkey at the moment have been impacted by chip supply. They're about four months. There was little production due to the chip supply, but now actually they can go full production again. Turkey's for us critical in terms of technology transfer that we can push these new technologies into markets like Turkey who go smart. I spoke before a little bit about the de-globalization of the supply chain, which technically will lead obviously to higher costs, higher inflation.
However, in our case, Turkey is very cost competitive, and we want to do more in Turkey, as a EMEA low cost production platform, and we are pretty excited about that. Really happy actually how things are going with our Turkey operations.
Okay.
Yeah.
Did I understand this correctly? Personnel costs were on average up 3%.
On average up 4%. You know.
Four?
But you have to keep-
Four.
Yeah, yeah. It sounds high, but you need to keep in mind we have a large contingent in the U.S. The U.S. is a pretty opportunistic market, and my view is we did the right thing as a company. Our most important internal value are our employees, our most external are the customers. With that, I think we did the right thing, but I also think with this cooling down, we don't need to repeat it.
Okay. Thanks a lot.
Thank you a lot.
The next question comes from Jeffrey Osborne from TD Cowen. Please go ahead.
Yeah, good morning. A couple questions on my end, Werner. I was wondering if you could just elaborate more on the 30% contracts that include software. I hadn't heard you discuss that in the past. If you could give us maybe a case study on that, who you would highlight that maybe has that type of content. How do we think about that software revenue flowing through? Do you need to build the Gridstream network overlay first and then deploy the AMI meters and then software comes last? Or is it ratably rolled out as the meters are installed?
Yeah. Okay, good. Jeff, first want to thank you for being up so early. It's 4:45 A.M., and I will tell you that the next time we do the call at 2:00 P.M., which is 8:00 A.M. your time, just want to mention that first. Thank you again for that. In terms of software, you know, the 30%, that's really software and services, which we have, it very much depends on the contract. In terms of rollout, when are the software solutions coming in? I'm thinking here about the large American-based contracts, as you know some of them, Jeff, pretty well.
We also have, for example, Fluvius, about 20%-30% software content, you know. Because obviously of the individual contracts, we cannot comment in particular. What I would say, to a large degree, actually, they happen together with the rollout of these contracts. You know, as we roll out meters, actually, these software solutions come into play and actually go with the rollout.
As a reminder, if you wish to register for a question, please press star and one. The next question comes from Peter Testa.
I think Jeffrey just lost
Yes.
Sandra, Jeff just lost the connection, I think.
Yes, exactly.
Sure. Yeah.
We will take Peter Testa from One Investments, and in case we will take Mr. Jeffrey Osborne after. Thank you.
Yeah. It's very good. Yeah. Perfect.
Good morning. I mean, if there's something you missed answering from Jeff, please feel free to just go ahead. If otherwise, if I just had a couple questions, please. If you look at the FX points you made about the rolling twelve months, and we look forward, just checking that when you think about the, say, European margin, where it would be affected the most, the extent to which you think that's a factor we should be aware of next year. Obviously it's not a big issue for North America. Then second is on going forward on this 2% in transformation expenses. I mean, do you expect that to be a sort of continued spend as you win more business?
You had a big Arizona contract the other day, for example. Or is it something you think will come down in the following financial year? The third thing is just as you look at the mix, kind of extending from Jeff's question, do you think mix is becoming positive in the following financial year?
Yeah. Very good. In terms of FX, Peter, our view is that euro, pound, given the political environment and, you know, how the central bank interacts or doesn't, I think it stays relatively stable on a lower level. We actually have that in our considerations, you know. I think what is really important, Peter, as I said, we are pushing natural hedges a lot, which is important. You know, when we look into just the in EMEA then the supply chain was a significant impact, but with increasing volume, I spoke before about, you know, the supply chain delivery capabilities will improve. I think with that we also will see better margins for EMEA. Can I ask you again the second question?
Peter, can you repeat it again? That was actually the R&D related.
Yeah, it was just on the expenses for preparing for these larger contracts, this 2%. You're continuing to win large contracts, so I was wondering whether we should just assume that carries on as an expense where you get the volume benefit.
Yeah.
going forward or whether it actually does in absolute terms come down next year.
Yeah. So the R&D, the 2% were related to Smart Water, Smart Gas, Rialto and Google. Some of it will go forward nevertheless. We have clearly pushed it down, as we said, going into 2023. You know, we go from 11%+, to 9%+. I think that's very important. We did have on the large contracts some higher costs, Peter, because we missed a little bit the labor arbitrage between, you know, we wanted to do more engineering in India, but then actually that was very difficult to do with the labor situation and the fluctuation in our workforce. We do have some increased costs and also some ramp-up costs as you know, you talked about it.
That's in a nutshell how we look into that. Having said this, Peter, we clearly have a path forward from the 11%+ into the 9%+. I think that's important. Then we also need to keep in mind, you know, with the higher volume, we also have higher operating leverage obviously, which also plays into the percentages. In terms of mix, I would say largely, you know, the mix, we had some mix issues in H1 which maybe look a little bit better in H2, but not significant. I would say from a mix perspective, that pretty much remains unchanged, you know.
Great. Okay. Thank you for the answers.
Yeah. No, thank you very much. Maybe Sandra, if you could go back to Jeff again, I think he's back, and you just will need to press star one, Jeff. I don't know exactly what you heard or what you didn't hear from my answer, Jeff. I apologize.
We will open up the line for Mr. Osborne. Please go ahead, sir.
Yeah, appreciate that, Werner. I didn't catch your answer, but I can go back and read the transcript. Just briefly, is the software ratable or is it upfront or more deferred after the AMI network's built out?
On these large contracts, Jeff, what I said is that we have 20%-30%. This is really a software and services. However, we cannot disclose it because of confidentiality clauses in the contract. But this software actually rolls out as we roll out the meter. It's not something which comes subsequently. It really goes actually with the metering rollouts.
Got it. That's helpful. I was a bit surprised that it's almost equal in terms of the impact to PLC meters versus the Gridstream mesh network. I think you said $40 million and $35 million respectively. Is it, c an you detail, is it more analog chips than that are used in both or microcontrollers? I would have thought it was more impactful to your RF mesh chip needs, but it doesn't sound like that's the case.
Yeah, no, that's actually for us. I mean, I would say a more typical distribution. Obviously as we roll out the Revelo going into 2023, that will then obviously tilt to the other side.
Got it. I know you don't give guidance, this is my last question. If you had to guess over the next 12-18 months, would you anticipate the book-to-bill in the Americas to be about one, or did you front-end load backlog with all of the deferred awards that were, you know, delayed during COVID? I'm just trying to get a sense of the quoting.
Yeah.
activity that you're seeing over the next 12-18 months.
I mean, Jeff, I would say directionally. Look, we are positive about the Americas. I think we achieved 1.04 this time. We feel positive over the next 12, 18 months, we will have book-to-bill of 1 to 1 or higher.
Excellent. Great to hear. Thank you.
Yeah. Thank you, Jeffrey. Thanks a lot.
Once again, to ask a question, please press star and one. The next question comes from Daniel Koenig from Mirabaud Securities. Please go ahead.
Yes. Good morning once again. I have a very simple question. I saw the gross margin in Asia deteriorated just below 100 basis points, which is much lower than in EMEA and the Americas. What is the simple answer? Is it that freight costs are much less relevant than in the other two regions, or is it the operational leverage? What is the explanation for the difference in less declining gross margin in Asia?
Yeah. I would say first of all, I think our APAC team is doing a really good job, Mark, I can tell you that. Secondly, it has much less been impacted by supply chain. You know, out of the $29 million, which we had, actually 17 was EMEA, $10 million was US, and then only around $2 million was really impacted by supply chain. So really a relatively little impact. Again, they really do a really good job as a team when you look at book-to-bill, when you look at how they win the contracts and expand margin. You know, I can tell you, Mark, I feel really good. Oh, sorry. Actually, Daniel, I think. Sorry, Daniel. It shows up wrongly on the chart here.
I misread it. Asia, you know, my view is mid-term will go to 10%. I feel really good about that.
Okay, thanks a lot.
Yeah, thank you.
The next question comes from Mark Diethelm from Vontobel. Please go ahead.
Thanks. Good morning. I just one question regarding Germany. Last week, we have heard the German Minister of Economics talking about the significant simplification of the smart meter rollouts, kind of with the binding roadmap, as a result to kind of increase transparency in the energy sector, kind of with monitoring of electricity consumption, something which the EU seems to be pushing now increasingly as well. Do you have any more insights or early thoughts if that could speed up the advanced smart meters adoption in Germany? Thank you.
First of all, I think what Habeck said there, I think was a positive statement, really good, that they want to accelerate actually the rollout. I think it makes a lot of sense when you think about, you know, the potential brownouts, blackouts, EV, which in Germany goes well much more alternative energy. I think in Germany it's over 50% now. I think that's something which should be favorable for us, you know. Smart Meter Gateway, ways, obviously, which they want to install together with our meters. I think, Mark, from our perspective, it's a positive development, which we expected for quite some time, but not yet saw. You know, Germany has around 50 million endpoints.
According to the current rule, over 6,000 kWh, you need a smart meter, so that's around 5 million only of the 50 million. I think there's a lot of runway, and over time, we hope we can participate in that. That really now is the specialists and then the government body look into that and then hopefully make these changes that this rollout can be accelerated.
Okay, thanks.
Good. Thank you, Mark.
Ladies and gentlemen, that was the last question.
Yeah. Good. Some closing comments. First of all, thank you for your questions. You know, I'm going to close the call in a moment, but before that, I would like to leave you with the key takeaways of today's call. First, Landis+Gyr is recession resilient due to the continuation of rollouts and expected cost relaxation during an economic downturn. Second, we are positioned right in the sweet spot of the energy transition, which is further amplified by the current energy crisis as we need smarter energy grids to drive efficiency and ensure critical infrastructure stability. Third, we have delivered a solid performance despite ongoing supply chain challenges and confirm our guidance for FY 2022 under the assumption of a more normalized supply chain.
With that said, I'm convinced that we have the right strategic focus to drive future profitable growth, and I would like to thank all of our employees for their continued dedication, passion and hard work, and our customers and shareholders for their continued trust and support. Thank you for joining us. Stay safe and healthy, and I look forward to meeting all of you soon, virtually or in person. Goodbye and have a very good day. Thank you.
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.