Ladies and gentlemen, welcome to the Landis+Gyr half year results 2021 conference call and live webcast. I am Sandra, the Chorus 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 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 2021 results, ad hoc release, and the company 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 and 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 and our press release issued today.
This conference call will follow the presentation, so we suggest that you have it on your screen or otherwise available to follow along with our comments during the first part of this call. Afterwards, you will have the opportunity to ask questions, and 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 fiscal year 2021 results. I'm here with Elodie Cingari, our CFO, and we are very pleased you have all been able to join us this morning. Look, before we start with the presentation, I would like to give you a brief overview of the key messages of today's call. First, we are pleased to announce an order intake of almost $1.8 billion, resulting in a record backlog of over $3.2 billion. Second, we were able to achieve a 10.1% Adjusted EBITDA margin and produced a solid free cash flow, excluding M&A, of $41.6 million despite the global and cross-industry supply chain challenges.
Third, we are confirming our guidance for FY 2021 but expect to come in at the lower end, 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 six months and move on to slide three. In late 2020, our customers received long-awaited regulatory approvals, and as a result, we were able to win major contracts over the last few months. As the global supply chain situation continues to pose challenges, we were able to deliver a solid first half of the current financial year. Let's have a look at some of our key metrics. Our book-to-bill ratio was 2.55, which is improvement from 0.73 in H1 of FY 2020.
Improving this ratio was one of my top priorities, and I'm excited to say that we have delivered on that. Our committed backlog is up 55.5% year-over-year, a record $3.2 billion, mainly driven by the major contract wins in the Americas and EMEA. Net revenue came in at $700.9 million, an increase of 9.1% in constant currency. Our EMEA region was up 31.4%, Americas slightly down by 2.4%, and our business in Asia Pacific was down by 6.7% in constant currency. Adjusted EBITDA came in at $70.8 million, with an EBITDA margin of 10.1%, an increase of 210 basis points driven by operating leverage and favorable mix.
Free cash flow, excluding M&A, remained positive with $41.6 million, down 8.2% year-over-year, yet demonstrating again the cash-generating power of our business. One of our greatest strengths has always been our balance sheet. This remains very solid with a net debt to Adjusted EBITDA of 0.5x. In regard to the global supply chain challenges, we expect the impact to be elevated in H2 compared to H1, but we are diligent to manage the risks. Talking about M&A, we have acquired Etrel and True Energy in the EV infrastructure technology market and have agreed to a strategic investment in charge point operator Allego to solidify our position further.
The acquisition of Telia further expands our managed services business in EMEA, and in addition, we have signed a binding agreement to acquire Luna in Turkey, offering cost-competitive solutions in smart metering. 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. In addition, 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 8.5 million in CO2 emissions through our installed smart metering base.
In addition, for this year, we have raised the sustainability component in our short-term incentive for all eligible employees from 10% in 2020 to 20% this year. Working actively towards a greener future, sustainable impact is one of our shared values as we continue to manage energy better and support global efforts to decarbonize the grid. Today, we have also published our sustainability report and invite you to take a look on our website. Now, let's move on to slide five and take a look at our activities over the last six months. When I look at this timeline, I'm proud that we continue to keep things moving and drive positive business development with important wins and strategic acquisitions. Since the list is quite comprehensive, and we will talk about some of the larger wins later in more detail, let me pick a few highlights.
Winning contracts with Enedis in France and Horizon in the U.K. shows our continued leading position in these markets. In Australia, we are proud of a win with South East Water just recently. On the acquisition front, we have made good progress. More about that later. Let me say that we continue to invest heavily in new technologies, M&A, and partnership to strengthen our core of smart metering and expand our reach into grid edge intelligence and smart infrastructure. Let's move on to slide six and take a look at the recent awards we have won. We are proud of the strong partnerships we have with our customers around the globe. To name just a few, in Japan, we have won a contract that will allow us to continue to provide our Command Center headend system for the upcoming replacement cycle.
In the U.S., we have all waited for the regulatory approvals a long time here, we have been awarded contracts by National Grid, PSE&G, and LG&E. In EMEA, we were able to win a large contract with Fluvius in Belgium. We are very excited about these projects, and others, of course, and continue to be committed to delivering leading-edge technology to our customers and value to our shareholders. Let's turn to slide seven and review the progress of our strategic transformation briefly. Our commitment is to remain a leading provider of resource management solutions. We are temporarily investing an additional 2% of revenue to drive our strategic transformation and future growth forward, bringing our adjusted R&D expenses in H1 to 11.1%. As you can see on the left, smart ultrasonic water and gas technology development propels our organic growth in smart metering.
The acquisition of Luna, once closed, and Telia's metering reading business expand our reach in smart metering and grid edge intelligence. In addition, we are proud to have strong partnerships. Vodafone is enabling meter and sensor communications through cellular technology. The seven-year strategic partnership with Google is a big part of our transformational journey as it allows us to co-innovate new offerings in smart infrastructure. Let me dive a little deeper into our newest additions and technology developments on the next slide. Turkey-based Luna offers a cost-competitive metering platform with well-established production facilities in Izmir, Turkey, and opens new markets for us. The acquisition is expected to close towards the end of the current calendar year. Telia's metering reading business, which you can see on the right, expands our managed services position in EMEA significantly and builds out our position for the second wave of smart meter rollouts.
After the acquisitions of Etrel and True Energy earlier this year, the agreement with strategic investment charge point operator Allego allows us to further strengthen our position in the EV market. Let's take a look at the progress of some of our strategic initiatives. The digital transformation partnership with Google allows us to develop future-proof solutions, transforming our business towards a more software and services-driven company. Our head-end system organization is well underway as we prepare for North American and APAC delivery and sales tenders in Q1 of FY 2022. The partnership enables us to offer our customers more insights into the vast amounts of data our smart meters and grid edge intelligence sensors collect on their behalf. As part of that, we will offer applications like power quality and pattern detection to empower our customers to manage energy better.
In summary, our partnership with Google drives customer benefits, additional revenue opportunities, cost optimization, and efficiencies. We expect benefits realization to start this fiscal year through FY 2023 and beyond. Moving on to the right. Rhebo is perfectly positioned to cater to the increasing demand for cybersecurity at the grid edge. We expect around $9 million in revenues by 2023 with an offering of integrated OT and AMI security. Also, interest continues to grow in smart water metering solutions as the market is switching to smart ultrasonic technology that will replace the current mechanical devices. That said, we expect around 1% of revenue to come from ultrasonic smart water technology by 2023. Good development also for our Ultrasonic Smart Gas Meter.
We see increasing interest in the North American market with strong customer engagement on product requirements and anticipate full market introduction in 2023, with volume ramping up swiftly afterwards. As a result, we expect 2% of revenue to come from Ultrasonic Smart Gas technology by 2023. These targeted investments in new products and services drive future growth, and we are on the right path to drive these initiatives forward. Let's turn to slide 10 and take a more in-depth look at the current supply chain situation. Over the last few months, we have seen an impact on our supply chain, as have many businesses around the world amidst this global crisis. Around $40 million in top line was deferred due to the current supply chain constraints, and EBITDA results included incremental $10.5 million in supply chain costs.
We have mitigation actions in place and work closely with our customers and suppliers, but we expect the situation to become increasingly challenging in H2. The impact we see is mainly related to three topics, material non-availability, material price increases, and heightened freight costs. That said, we are confident that we will be able to stay within our guided ranges for FY 2021. Also, we expect to come in at the lower end of the guidance. Let's turn to slide 11 and have a look at the developments in each region. I'll start with Americas, led by PV. Our Americas region has delivered good news on a monthly basis in the past half year, and we are very excited about some major wins in the region.
We were able to book a record order intake of $1.2 billion, resulting in a $2.3 billion backlog, which brings us to a record 3.7 book-to-bill ratio for the first half of the financial year. We have already talked about the major wins, so let me add that here that we are also continuing to expand our distribution business with cooperative and municipal utilities, including strong portfolio in distributed energy management, advanced grid analytics, demand response, and smart city IoT. On the technology side, we continue to focus on market-leading devices, grid edge platforms, smart infrastructure sensors, and software solutions. In summary, we 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 12 and take a closer look at EMEA, led by Bodo.
In September, Bodo took over the EMEA segment and we are excited that he will lead our EMEA region into a successful future. Over the last few months, we have seen some fantastic wins in the region. Next to the Fluvius contract in Belgium, we have won a key contract with Enedis in France and remain one of the three suppliers for the Enedis rollout. We are also proud of the contract extension, new wins with Horizon Energy Infrastructure in the U.K. and significant wins in Switzerland. Last but not least, we are excited about the Eskom tender win in South Africa. On the acquisition front, we were also able to announce some exciting news, and we have talked about this at length during the call already.
Let me just mention here that the integration of Etrel and True Energy is well underway, and we are excited to be an active part of the booming EV infrastructure technology market. Let's take a look at APAC, led by Steve, on slide 13. In Australia and New Zealand, we continue to see good momentum for smart electricity meter rollouts and also a growing interest in smart water metering technology to combat distribution losses. In Hong Kong and Malaysia, deployments for AMI projects continue. Even so, the pandemic has delayed a number of project schedules across Southeast Asia. In China, we saw sales improve year-over-year. In India, amid the countrywide lockdown in Q1, resulting in contraction of sales by 6.7%, but we were able to commence first deliveries for two new AMI projects.
Overall, we saw increased order intake year-over-year by $22 million, with a significant portion of smart water reflected in that. Now let's turn to slide 14 and take a look at our consolidated results. Order intake was almost $1.8 billion, up 277.4% in constant currency, driven by major wins in the U.S. and the EMEA. Revenue recovery was driven by easing installation rollout restrictions in EMEA while supply chain constraints impacted revenue growth. Further, we saw strong Adjusted EBITDA margin expansion due to product mix and operating leverage, partially offset by transformation one-off COVID-19 reversals, and supply chain costs. Overall, despite the current challenges, we were able to deliver a solid free cash flow generation, resilient margins, and solid balance sheet. 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 FY 2021 before we open up the call for questions. Elodie, please.
Thanks, Werner. Good morning, everyone. I'd like to walk you through the financial details of our first half 2021. As mentioned by Werner, order intake was at approximately $1.8 billion, driven by major contract wins in Americas and in EMEA. This is a very positive development that was dependent in part on regulatory approvals and easing COVID-19 restrictions. Based on our H1 2021 revenue, book-to-bill ratio for our company was at 2.55x , driven by Americas with 3.7x . We expect this ratio to come down in second half of this year. At the end of H1 2021, we had a record backlog of $3.2 billion, which represents an increase of approximately $1.2 billion or 56% versus H1 in prior year and 49% versus FY 2020 year-end.
We expect a significant backlog growth from these orders for the full year 2021. The recent orders are planned to convert into revenue starting in 2023, where we will have upfront costs related to R&D and operations ramp up starting in the second half of this year. Now, if we move on to page 16 and look at our net revenue, our net revenue result for H1 2021 was at CHF 709.9 million. This represents a 9.1% growth in constant currency versus half year prior year. Key driver for this revenue increase was the volume carryover from EMEA deployments, in particular the U.K., and rollouts in Sweden and in Austria, and a strong overall contribution from software and services. In Americas, we are experiencing higher demand than our ability to serve. On one side, this underlines the demand for our technology and product offering.
On the other side, the global component shortages puts pressure on the delivery plan for the financial year. In H1 2021, we were able to offset this partially to a higher volume in Brazil and Japan and overall software and services. The APAC region remains resilient. Strong growth in China and Singapore, but overall impacted by the India lockdown in Q1. The overall impact on revenue from the acquisition of Etrel and True Energy was immaterial due to the recent timing. If we now look at EBITDA on page 17, our Adjusted EBITDA for H1 2021 increased from $50.1 million last year to $70.8 million year-over-year. This translated into an Adjusted EBITDA margin expansion by 210 basis points from 8% to 10.1% in H1 2021. In particular, our gross profit increased for two reasons.
Gross profit volume benefit was $18 million, driven by higher revenue in EMEA, and gross profit margin benefit was overall $25 million. The three underlying drivers were a favorable product mix in Americas and EMEA, benefits from structural changes implemented last year that were partially offset by higher supply chain costs that impacted H1 2021 by $10.5 million. Our adjusted operating expenses increased by $23 million year- over- year at constant currency. As already highlighted during our FY 2020 results, the one-time benefits related to COVID support teams started to fade out in the later part of last year. Our OpEx came back to a more normalized level in H1 2021. In addition, we are investing significantly in our strategic initiatives, including our recent acquisitions.
If we now dive and look at the details of reported EBITDA to Adjusted EBITDA on page 18, there are three items as shown on the page. First, restructuring. In H1 2021, there were limited restructuring charges. This compares to prior year impacts that were mainly related to Project Hermes, the global streamlining and rightsizing initiative that has been completed by the end of last year. Second, warranty normalization adjustments representing the three-year average of actual warranty costs incurred in excess of the provision billed for new cases in H1 2021. Thanks to lower warranty cases, the downward trend from prior year continues, and the warranty provision for H1 is down CHF 7.2 million compared to the three-year average utilization. Third, timing differences on FX derivative. Our biggest FX exposure is in the U.K., where we contract revenues in pounds and incur supply chain costs largely in other currencies.
The adjustment excludes unrealized gain or losses of $8.5 million related to mark-to-market differences on our FX hedges, whereas the hedge or underlying transaction has not occurred yet. Looking into our cash flow performance on page 19, we can see that in H1 2021, we continued to generate strong free cash flows. Excluding M&A, our free cash flow was at $41.6 million. This continues to highlight the resiliency of our operating model. Working capital continued to be a net generator of cash despite higher volumes due to our strong collection efforts and tight cash management.
Warranty and warranty settlement cash outs were $7.5 million, in line with prior year. Other cash flow represents changes in other assets and liabilities, and had an impact of $30.6 million due to the unfavorability from derivative financial instruments used to hedge our currency exposures and also timing of restructuring efforts. Tax payments was $12.5 million, higher than H1 last year due to higher profitability and expiration of government tax payment deferral schemes benefiting last year. Our capital expenditure remained low at $8.9 million, benefiting from our asset light model. Finally, we recorded cash out of $41.4 million, predominantly related to our acquisitions of Etrel and True Energy in the EV space. If I look at net debt on page 20, as of 30th of September 2021, we had a net debt position of $79.4 million.
In H1 2021, uses of cash were the dividend payments that were made in June of $65.9 million, the acquisition of Etrel in April and True Energy in July. A significant part was financed by our strong cash flow generation from operations in the first half of $41.6 million. At the end of H1 2021, in addition to our solid cash position of $86 million, we have undrawn facilities of over $411 million available. All in all, we maintain a strong balance sheet with a net debt to Adjusted EBITDA ratio of 0.5x. If I now dive into our regional performance and starting with Americas on page 21. In the Americas, order intake was approximately $1.2 billion, resulting in a record book-to-bill of 3.7x.
Revenue fell by 2.4% in constant currency to $325 million, impacted by the global component shortages. We are monitoring the situation very closely and are in real-time communication with our suppliers. The North America volume shortfall was partially offset by Brazil and Japan, higher sales of meters, network equipment, and software and services. Adjusted EBITDA margin expanded by 320 basis points to 15.4%. This was largely due to a favorable AMI residential and C&I/G product and customer mix, further supported by positive effects of the Hermes restructuring from last year. In part, these favorable effects were offset by increased supply chain costs and one-off COVID benefit reversal and strategic investments. Moving on to our EMEA region.
In EMEA, we recorded also a strong book-to-bill ratio of 1.6x , driven by a significant increase in orders, in particular in Belgium. Revenue increased by 31.4% in constant currency to CHF 300 million. This increase reflects the recovery of our U.K. business compared to prior year, as well as easing of installations in the rest of the region, and in particular in the Nordics and in Austria. Adjusted EBITDA margin expanded by 640 basis points to 4.4%. This was largely driven by operating leverage and supported by positive effects from the Hermes restructuring. Like in the Americas region, the higher gross margin flow-through was in part offset by transformation costs, higher supply chain costs, as well as expiring federal schemes.
Note that inorganic P&L effects coming through the two energy acquisitions were relatively small in the first half of this year due to the timing of acquisition closures. Moving to our APAC region. In APAC, order intake increased year-over-year, resulted in a positive book-to-bill of 1.1x . Similar to last year, APAC revenue showed resiliency. Growth in China and Singapore was offset by decline in India that experienced significant COVID-19 related lockdowns in the period, as well as deployment timing in Hong Kong, which was anticipated last year. Adjusted EBITDA margin declined to 4.4%. This was driven by expanding gross margin due to favorable product mix and cost out initiatives that were in part offset by our higher R&D and transformation costs. With this, I will now hand back over to Werner to conclude on the guidance.
Thank you, Elodie. Turning to slide 24, let's talk about the guidance for our financial year 2021. Despite the ongoing and increasing challenges of the global and cross-industry supply chain situation, we are confirming our guidance for FY 2021 that we communicated last May during our full year 2020 results presentation. Let me add that we expect to come in at the lower end of the guided ranges since we still see some level of uncertainty. This is mainly driven by the global shortage of electronic components and plastic resins, as well as increased freight rates that continue to pose challenges for cost and on-time delivery performance. That said, we are working closely with our customers and partners and mitigations actions are in place. Having said this, we will open up the call now for 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 use only handsets 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 Andreas Willi from JPMorgan. Please go ahead.
Good morning. Thanks for the time. I have two questions, please. The first one on the mechanics, how it works in terms of pricing on larger contracts. When you make the proposal, then you have customer discussions, you get preferred supplier status, regulatory approval, and eventually a firm order. At what point in time do you fix the price? How much flexibility is there afterwards, if any? And how can you normally hedge this in terms of your input cost effects and so on to get a better sense of obviously larger orders that have been signed recently and the embedded pricing relative to current component costs? The second question in terms of Europe. I assume the run rate has now pretty much normalized post-COVID. Maybe you could talk a bit about the U.K. and the French rollouts.
Where are we then now on these, and when would we start to see some moderation as these rollouts mature? Thank you very much.
Yeah, very good. Thank you, Andreas, for your questions. First one, large contracts. As you said, you know, we actually put the bid together, and when we think about the U.K. in particular, then, we had these regulatory approvals. Why that? It's really driven by this, you know, not only second but third wave, so to speak, of new technology where the regulators obviously want to weigh in, which means, you know, is it the right value proposition for the end consumer, but also for the utility. Prices, when we go in, there's a negotiation and, then for example, in our case, we wait for regulatory approvals and firm up the contract. The price negotiations really take place actually, prior to the, you know, handing in the regulatory approvals, which is fine with us.
If you think now, what does it mean in this particular supply chain situation? As we said before, rollout starts in 2023. Delivery times actually from the supplier expanded significantly, you know, from two to three months up to a year. That means we really then in summer 2022 we need to lock that in. Maybe last point for you, Andreas, I would say when I think about these contracts margin-wise, they're pretty much in line with the historical margins we have seen on contracts in the U.S. The second point in terms of EMEA, you know, the way to think U.K. is for us a very significant market around 40%. It remains about 40%± .
As I, you know, the way we look at it with some of the supply chain challenges, it could be maybe the peak is moving a little bit into 2023 or maybe stays at 2022. We will see then, but that's how we think about it. That's why it was so important to win this Fluvius contract because, you know, after 2022, 2023, revenues will come down in the U.K. France peaked in 2020. It is coming down now, but still at a reasonable level. Same with the Netherlands. You know, we have in the Netherlands also, we have actually the market share around the same. It's about 4%-5% now.
Thank you very much.
Thank you.
The next question comes from Patrick Laager from Credit Suisse. Please go ahead.
Yes. Good morning. Just two questions.
Morning.
Regarding Americas, you mentioned the important tender wins across the U.S. such as National Grid, for example. Now, going into H2 and more important beyond H2, shall we expect additional wins here? This is my first question. Second question is coming back to EMEA. Here again, you mentioned some important tender wins across EMEA but also South Africa. You have provided some indications here regarding the U.K., the Netherlands and France. Can you provide, you know, more details around project deployment and what sales we should expect roughly for Fluvius, Enedis, what's the other one? Horizon Energy, and also by the way, the Swiss tender. Thank you.
Yeah. Thank you, Patrick. In the Americas, you know, obviously, I mean, it was a landslide, which we are super happy about it. You know, these huge wins. I think that's obviously not going to continue like that. It will come down to more normalized level, but I think our job is to really make sure that we stay at the healthy book-to-bill. We expect in H2 one or the other win, but definitely the way we think about it, you know, from this 2.55 for the year, we come down probably to around 1.6, something like this book-to-bill, which is still a very healthy rate.
In other words, you know, we would like to see, you know, more wins to come, but not the same magnitude. In terms of EMEA, as you said, Patrick, I think we had good wins across the region and I think we're well-positioned. You know, the countries you mentioned in terms of Belgium, South Africa, you know, Switzerland and so on. One thing I also would like to say, which excites me in particular is obviously also that with Luna, you know, we have a very cost competitive platform, which also should allow us to enter new markets, not only home market in Turkey, but also, you know, where you have more basic mechanical metering like in Africa, like in some of the Eastern European countries, which really should help us, you know.
I would also say, Patrick, in terms of where is growth coming from, you know, when you think about the organic growth, 1% in water and 2% in gas. That's from my perspective good numbers. These are around $45 million. We have Luna, which is around $50+ . We have Etrel, this year around $17 million. So when you think about these numbers together, you know, we are already here $100 million+ in 2023, and I think that's critical for our company.
Okay. Thank you very much, Werner. No timelines you can provide for each. I mean probably you can provide for each contract here and also in terms of sales, because this is obviously very difficult for us on the sales side to model into our forecast now, how things will develop for each project here. No indication here?
Yeah. No, sure. I would say, Patrick, you know, the way we think is pretty much once we won a large order, then it takes around 18-24 months before we actually are able to recognize revenue. That's driven by engineering, certification and so on. That's the way to think, you know. If it's a repeat order, different or maybe one point out you can say, do is if it's book and ship, that means we book something and ship it in the year, which is a good thing for us, because it's short flow revenue, which is about 30% of our company is book and ship.
You know, where we also have more, much more actually leverage in terms of commanding pricing because obviously, especially in this current time, these are then the short flow orders in addition to that.
Mm-hmm. Mm-hmm. Okay. Thank you.
Yeah. Thank you, Patrick.
The next question comes from Lucie Carrier from Morgan Stanley. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my question. I have a few of them, and I will go one at a time. The first one was a follow-up on Andreas' question on the backlog. I just wanted to confirm, Werner, when you were saying that the margin of the contract you have been awarded in the U.S. a couple of months ago, that this margin was in line with the U.S. historical margin. Is it considering current raw material prices and freight costs or is it considering, you know, the cost that you were seeing at the time of the bidding, please?
Hi, Lucie. About these contracts, I mean, the price, the material costs obviously have been priced in when we bid it. However, we do have some index clauses without going now into too much detail and confidentiality. There is some index clauses in terms of which can be applied, but the pricing has been fixed when we actually made the bid.
Thank you very much. My second question is around the freight cost, and I was hoping maybe you could give us some indication around how much of your cost base is related to logistics. More particularly, when we think about your procurement, whether this is components or finished product. How much of these components or finished product are coming from Asia into the U.S. and from Asia into Europe, please? Whether your freight is contracted or spot-based or contract-based.
Lucie, the way to think about when you think about in the first half, out of the $10.5 million, $5 million was freight costs, you know. When you look at our results for the company, what we see is pretty much the $40 million, which you missed, is more U.S. driven and has to do with some special suppliers. When you look on the freight costs, it's more on the European side where actually the impact happened because obviously much longer distances and so on. I do think that, you know, when we talked during the presentation here, you know, there are three effects. There is material non-availability, where we need to go to the gray market, there is material price increases and there's freight costs, you know.
The freight costs are a very significant piece. You know, if you think about, I think it was just on the news, Reuters news, most recently, $24 billion, you know, of freight actually in front of Long Beach and Los Angeles, you know, and 73 ships. Normally it's one ship. That all adds to freight costs, you know, because there's not enough container capacity, much longer unloading, you know, it's just, it's an incredible situation. The way we think about it, Lucie, is that, you know, this situation will go well into 2022. I expect, you know, probably second, third quarter 2022 before we see an easing. I mean, there are some analysts and specialists who say even into 2023.
I'm a little bit more positive on that, but it takes quite some time to unwind that. Especially when you think about, you know, just automotive came out most recently. Instead of $110 billion impact, they have now $210 billion impact. That means, they also talk to the same supply chain and make, obviously, you know, crystals and semiconductors purchases and so on. I think the situation will be stressed for quite some time.
Thank you. Any chance that you can maybe help us understanding what's the weight of freight in your cost base and the nature of your contract around that?
You know, technically, when you think about our contract, obviously these are fixed and firm contracts. But at the same time I also would like to say, I mean, this is a very unusual situation. You know, we started quite some time ago to speak to a customer because obviously it's an issue which not just we own. It's a global, cross-industry situation which we have to manage. You know, while you know, these contracts are often public tenders, which is much more difficult, but freight costs, it's something I think a discussion or not I think I know we have these discussions, they are taking place. I would say freight, as I said, 50% for the first half.
I think it's a very significant piece in the second half. You know, it will be probably something around 30%-50% again. Just shows you the magnitude of the whole challenge.
Thank you. Just maybe my last question, you were mentioning, I think in the call, a positive impact from share of software and services on the mix. Are you able to maybe confirm the share of that business now as percentage of sales and maybe the growth rate you have seen in the first half for that business versus the 9% organic you reported for the whole group?
Yeah. Elodie, why don't you take this question?
Yeah. Hi, Lucie. Basically on software and services, we did see a positive impact in the first half, indeed, as I mentioned. We don't specifically disclose the percent of software and services as part of our business, but what I can tell you is compared to prior year, at the same time, we saw the share growing by about 2%.
Yeah.
Which is very positive for us.
Exactly, Elodie. I think what we could add to that is when you think about these large contract wins in the U.S., you know, we have up to 30% software and managed services. That's a really positive thing. You remember, Lucie, we talked a year ago, we want to move up from this 18% software and services and we are moving in the right direction, you know? Now, when you think about cybersecurity that we like software. When you think about Etrel is not just a hardware company, Etrel is also a software company, which will add to these are all elements which actually will help us, you know, to increase the software share, including Google also. You know, we are excited about that.
For us, smart metering is the base load engine for many years to come, but as we told you last year already, we would like to move more into grid edge and smart infrastructure, and I think we are moving in that.
Thank you both. I'll go back in the queue.
Thank you very much, Lucie.
The next question comes from Jeff Osborne from Cowen. Please go ahead.
Hey, good morning. I just had two questions, if you don't mind. One is, can you characterize the level of quoting activity? Things that you're bidding today that might be awards in 2022.
Hi, Jeff. Sorry, I had an acoustic problem. What did you say?
I was wondering if you could characterize the level of quoting activity, big bids that you're responding to that might be awards in 2022?
Jeff, I couldn't give you a number, but what I can say in the U.S., my view is that we really have positive. We have a very active pipeline. As Jeff, you and I talked before, I sit on the Grid Infrastructure Advisory Council in the U.S. You know, I'm excited what's happening in the U.S. You know, I mean, $100 billion going into energy infrastructure. We really see good long-term, good short-term activity, which excites us not just with the IOUs. That means it's a large, you know, customers, 170 customers, but really also on municipal level. I think that's really positive. We see also in Europe an increased level.
You remember a year ago, we said, well, you know, a pretty low pipeline. We clearly see that increase, which is positive. Because if we think about, you know, the grid needs to become more dynamic, you know. For that we need metering because we have EV charging, we have photovoltaics and all that, and we see that actually reflected in the markets. I would say also good pipeline in Europe and the same goes also for Middle East, Africa.
Got it. That's very helpful. My second question was, you know, sort of responding to some of the questions around the price and margin outlook. Could you characterize what you're doing to qualify additional semiconductor suppliers? So what the backup plan is in the event that the semiconductor market is tight in 2022 and through the early 2023 period? Instead of going to the gray market as you characterized it, to buy more expensive components, are you qualifying additional suppliers so that you can lock that cost in?
Yes. To your question, Jeff, we are doing that, for example, where we redesign certain things, you know, that we are able actually to create a larger supply chain. Obviously, that doesn't go overnight. For that, we need then up to three to six months. What I'm also doing is, you know, I talk every week to key suppliers, and I think they respond pretty well. Obviously, as you well know, Jeff, you're sitting here in a huge pot with many others, including consumer industry and automotive, as I said before. I find really that, you know, that these suppliers, they are responding relatively well given the challenges all of us are in. These are the things we are doing.
We have daily calls internal, where we see actually, okay, in terms of, you know, production build, what are we doing? Because sometimes we think on a Wednesday, things look good, in terms of building the meter, and then on Thursday, there's a shortage coming up and so on. It's really daily, you know, tackling and, what we are doing. But these are the issues, Jeff, which, I think it's, our top priority for the next, eight months, probably.
Great. Thank you for the details.
Thank you very much, Jeff. Thank you.
The next question comes from Patrick Rafaisz from UBS. Please go ahead.
Thank you, good morning, everyone. I have three questions, please. The first one is a clarification. Werner, I think you mentioned the deferred revenues are $40 million. That was, you know, if we allocate that across the region, that was mostly driven by the U.S., right? And where would you expect this number to end up at the end of your fiscal year, given that you know anticipate a bigger impact here in the second half? That's the first question.
Good day. Good morning, Patrick. That was mostly coming from the U.S. and that really depends then a little bit in terms of supply chain. You know, I think the revenue which moved out, a larger part, we'll be able to actually then realize in Q3, Q4 of fiscal year 2021. However, there's obviously also other stuff moving out. It's a pretty fluid situation which we manage. The good thing is, Patrick, what we are not seeing is that these revenues are evaporating, meaning that, for example, the competitors could deliver and we can't. We don't see that. Do you know what I mean?
We really, I think, what we are doing is in line with our competition.
Okay. Understood. Then the second one, coming back to the product mix. You described already earlier, you know, the benefits from a higher share of software and services. To what extent would you say that this was, you know, more of a temporary impact now in the first half, just given the sales mix? You know, in Europe, would you assume that you will manage to gain, you know, or increase the share of software and services in the next two to three years as well? Or is it really just driven by the better order intake in QS?
I do think that in Europe we see a gradual, you know, improvement. I would say the U.S. it's a little bit different. You know, when you look at the gross margin in the U.S., it's really incredibly high, and that's something which really has to do with a very, very favorable mix which maybe over time we see a little bit, you know, then balancing out again. That's the way to think, you know?
Okay. Okay.
Yeah.
The last question is on the Luna acquisition. Can you talk maybe about, you know, you mentioned that this is opening up new markets and new business opportunities. Do you see cross-selling synergy potential here as well? Or are you just upbeat on the growth outlook for the Luna assets per se without any cross-selling synergies?
We see two things. First of all, you know, we are excited about Luna as a low cost platform, what we are doing in terms of Turkish market, in terms of other, you know, mechanical metering markets like Africa, Nigeria and so on. I think that's exciting for us. Equally exciting, Patrick, is also the fact that we will be able actually to use Luna as a low cost platform, you know? Just when you think about the more recent transportation costs, when you think about transportation costs from China to Europe, I mean, we are talking here historical cost times four, times five, you know? I mean, incredible. To have this low cost platform actually closer, I think that's great.
You know, Turkey is, in terms of cost, very comparable to China. We are excited about that we definitely want to do more in Luna as a low cost platform also for other markets outside of the Luna portfolio.
Okay, super. Thank you very much for these answers. Thanks.
Thank you, Patrick. Thank you.
The next question comes from Urs Emminger from Research Partners. Please go ahead.
Good morning, and thanks for taking my question. Actually, it's two things that surprised me somewhat. It's the cost of revenue that was way below my expectations. The question here is, will it remain at that percentage of sales more or less? The other one is general and administrative costs, which went up a little bit more than I thought. Will that also stay at that level, or were there extraordinary things in it that we can cancel down for the next few years?
Yeah. Elodie,
I'm sorry, can you repeat your first question? Because I understood the cost of revenue, right? That was your question, the first part.
Yeah. The cost of revenues remained almost flat compared to last year, and sales went up quite substantially. The margin percentage of cost of revenue compared to sales was improved a lot.
Ah.
Which is a good thing. Will it stay there? What can we do?
Yeah. Urs, I think we understand it, and good morning, by the way. You know, what he means is that actually the gross margin went up quite a bit.
The gross margin improvement.
If you can talk about that exactly and so maybe also the admin costs. Yeah.
Okay.
Sorry, Urs.
I'll start with the gross margin. In gross margin, we saw a number of impacts in the first half. One is that we had stronger operational leverage simply because we had a higher volume compared to the previous year. That plays into our margin. The second impact, as I explained, was the fact that on the mix, we had a favorable mix that we saw in the U.S. and also in EMEIA. You have these two impacts.
Counterbalancing that, in a way, was the supply chain costs that we experienced in the first half and as well the fact that we are investing into our transformation, 2% of revenue as we previously discussed. These are the big movements, I would say, in terms of margin percentages that we see. We also finally saw the I would say, the positive impact from the restructuring activities that were completed last year.
Yep. Exactly.
Does that answer your first half of the question?
No. Sorry. I understood everything of that. My question is, will it remain in the future, or will any of those impacts disappear one way or the other?
Yeah. I think what we can say, you know, when I mean, from a gross profit level, I think the U.S. was very high, given the mix which we just enjoyed. When you look at the revenue, the revenue relatively low with the $325, but then there was a very favorable mix. Urs, to your question to that's not exactly sustainable.
Okay. Thank you.
Thank you.
Okay. I will take on the other question also, which was, I think related to our level of SG&A in the first half, and what are the movements there. I think, here, what we see now is a reversal of last year's one-time effects that were there on the COVID benefits. This is now faded out. We did not have this positive impact anymore in the first half. That's a part. For the other part, as I mentioned, I mean, we are supporting our investments in our transformation, and that's a part of this effect, right?
Yeah. Very good.
Thank you.
Thank you, Urs. Yeah.
The last question for today's call is from Daniel Koenig for Mirabaud Securities. Please go ahead.
Yes. Good morning. This is Daniel from Mirabaud Securities. I had a couple of smaller questions. I discovered the marketing and sales expense is virtually flat. Is that sustainable looking into the future? The other question would be, did I understand this correctly, that you expect freight costs to go up 30%-50% in H2? The final question is, how much was the inorganic revenue contribution in H1? Because your guidance says 7%-11% organically this year.
Yeah, yeah.
I was wondering how much was the inorganic contribution in H1?
Yeah.
The final question.
Yeah.
Carbon neutrality, is that Scope 1, 2 or 3, your goal?
Yeah.
That's it. Thanks.
No, very, very good, Daniel. Good morning. Actually, today we expect that pretty much to stay on the same level because, you know, when we did Hermes, we are sensitive about the cost, so percentage-wise, we expect that pretty much stays where we are. Freight costs. You know what I did say there, maybe just to clarify, I said around out of the $10.5 million, $5 million was about freight costs. What I think in second half, when you look at the number, which we will see, I think, you know, again, out of that number for supply chain costs, I think 30%-50% again, will be freight costs. In other words, Daniel.
Okay.
Freight cost plays a very, critical piece in the whole equation. Right?
Okay, now I understand it. Thank you.
Yeah, yeah. No, it's good that you asked, it's perfect. In terms of inorganic revenue, it's negligible. You know, Elodie will talk in H2. She will actually give them a much more refined picture because then we have actually Luna in, we have Etrel, well, much more. I think that's very important, you know, but at the moment, it's pretty much nothing. Carbon neutrality, Daniel, when we think about carbon neutrality 2030, that's scope one and two. That's the way we think. Scope one and two carbon neutrality by 2030. With that, I'm sensitive of your time, so I just want to thank you all for your questions.
I'm going to close the call here in a moment, but before that, I just would like to leave you with this slide as a reminder of the key takeaways of today's call. First, our record book-to-bill and backlog in excess of $3.2 billion, you know, are a testament to our leading technology and motivates us to keep developing and delivering leading edge innovation to our customers, and I can tell you our employees feel that every day. Secondly, we are proud that we were able to achieve, you know, 10.1% Adjusted EBITDA in this current environment and also create a solid free cash flow, $41.6 million. Then thirdly, as I mentioned, you know, reconfirmation of the guidance, but clearly at the lower end.
With that, I do think, you know, we are convinced that we have the right strategic focus to drive future profitable growth, and I would like to thank all of you here on the call, our stakeholders and employees, you know, for the continued dedication, passion and hard work which goes in every day. I want to thank you for joining us today. Stay safe and healthy, and I look forward, you know, to meeting you all in the very near future, one way or the other, virtual or in person. Goodbye and have a good day. Thank you very much.
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