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Edited Transcript of LANDI.S earnings conference call or presentation 29-Oct-19 9:00am GMT

Half Year 2020 Landis+Gyr Group AG Earnings Call

ZUG Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Landis+Gyr Group AG earnings conference call or presentation Tuesday, October 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Elmer

Landis+Gyr Group AG - CFO & Executive VP

* Richard Mora

Landis+Gyr Group AG - CEO

* Stan March

Landis+Gyr Group AG - SVP of Corporate Communications

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Conference Call Participants

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* Benedict Ernest Uglow

Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research

* Daniel Koenig

Mirabaud Securities Limited, Research Division - Analyst

* Fabian Haecki

UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research

* Patrick Laager

Crédit Suisse AG, Research Division - Research Analyst

* Peter Testa

One Investments S.A.G.L. - Analyst

* Urs Emminger

Research Partners AG - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the release half year results 2019 conference call and live webcast. I'm Andre, the chorus call operator. (Operator Instructions) At this time, it's my pleasure to hand over to Mr. Stan March, Senior VP and Corporate Communications, Investor Relations. Please go ahead, sir.

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Stan March, Landis+Gyr Group AG - SVP of Corporate Communications [2]

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Thank you, Andre, and good morning, everyone. As you know, earlier today, Landis+ Gyr issued our first half fiscal year 2019 results press release and accompanying analyst presentation as well as 2 other important documents, the half year report and our sustainability report. You can find all these documents on our website. Today's conference call will follow the analyst presentation. So we suggest that you have it on your screen or somehow otherwise in hand to follow along with our comments during the first part of the presentation.

With that short introduction, I'd like to turn the call over to our CEO, Richard Mora.

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Richard Mora, Landis+Gyr Group AG - CEO [3]

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Stan, thank you for that, and good morning, and welcome to Landis+ Gyr's first half financial year 2019 results announcement. I very much want to thank you for joining us. I'm pleased to say that Landis+ Gyr continued to make further meaningful progress on our efforts to deliver the strategic, operational and financial ingredients during H1 fiscal year 2019 to be a stronger, nimbler and increasingly profitable industry leader. Now let's go ahead and dig into the results.

You'll see on Slide 3, you can see some of the key numbers. For H1 fiscal year 2019, Landis+ Gyr made further progress on our performance improvement efforts. Looking at our sales funnel, order intake was driven by all 3 regions and reached more than $800 million, giving us a book-to-bill ratio of 0.95.

Committed backlog rose 7.1% year-over-year to approximately $2.5 billion. All regions contributed to the increase, which reflected solid progress driven in large part by our strong finish to fiscal year 2018. On the top line, we had net revenues of $863 million, a year-on-year increase of 3.4% in constant currency. We posted an adjusted EBITDA of $124.9 million for a margin of 14.5%. This amount contains a one-off gain of $5.6 million from a favorable ruling regarding a Brazilian VAT court case. Excluding this gain, our adjusted EBITDA margin was 13.8%. EMEA and Asia Pacific continued their path towards improved profitability, with margin progression of 780 and 1,180 basis point improvement in adjusted EBITDA margin, respectively. The Americas region experienced temporary lower sales as expected due to project timing. Nevertheless, the Americas adjusted EBITDA margin stayed in the targeted 18% to 20% -- 18% to 21% range, and we are intent on keeping it there. Free cash flow, excluding M&A was $33.1 million. And finally, our balance sheet remained quite strong, with a net debt to adjusted EBITDA ratio of 0.4x.

Let's go ahead and move on to Slide 4. And here, I want to discuss and focus on some key highlights. In North America, we've continued to be a preferred supplier to the public power market. Of note, Colorado Springs Utilities signed a contract to deploy our Gridstream Connect platform to more than 0.5 million endpoints, including electricity, gas and water meters. In addition, they extended their managed service contract for a 20-year period. In Sweden, we signed a contract with E.ON for delivery of our Gridstream Connect platform to 1 million endpoints as the utility moves to a second wave of technology to enhance multiple use cases. In the U.K., where Landis+ Gyr is the market leader, the SMETS2 transition has continued to move along, largely as expected, with approximately 2.5 million SMETS2 meters now on the DCC network. And just to remind you, we have approximately 21 million smart meters deployed or under contract in the country.

These latest contracts clearly build on our strong performance in 2018 and demonstrate that as the industry leader, we are very well positioned to continue capturing the growth that will be coming as the utility sector continues to seek products, solutions and services necessary to modernize their infrastructure. And finally, Landis+ Gyr was selected by Frost & Sullivan as their global AMI company of the year for the fifth consecutive time.

Moving on to Slide 5. I want to talk in more detail about some key developments in each region. Let's start with the Americas. Looking at North America, I already touched on Colorado Springs Utilities, but would like to add the combination of multiple meter endpoint types, what we all call a combination customer, selecting our IoT platform for grid applications, coupled with a 20-year managed service extension make us quite proud to have won this important contract with a long-term customer. We've spoken at quite some length in the past about the importance of grid edge intelligence. I won't repeat too much here now for the sake of time, but we are really focused on serving utilities globally in this space. Therefore, it's certainly worth highlighting that we made further progress on expanding our partnership ecosystem by announcing our agreement with Utilidata.

Similar to our earlier investment in Sense, with us being a leading supplier of these grid edge capabilities as vitally important for us, and we will continue to both partner as well as drive our own R&D investments, each of which is essential to maintaining our leading position in the market. On the Americas top line, we did see the anticipated roll-off of 2 large projects that reduced sales in H1. Nevertheless, we continued to see solid activity in the AMI market for both the investor-owned utility segment as well as public power. The primary drivers remain technologies, customer needs, grid resiliency and distributed energy resource requirements.

Now moving to the right-hand side of the slide, in South America. We see a steady pace of pilot projects continuing. However, the overall economic climate is currently limiting opportunities for large deployments. In Japan, the technical leadership that our network has enabled continues now with about 23 million endpoints installed, demonstrating that our system scaling capability is not just impressive, it's unparalleled in our industry. We continue to work with TEPCO to find applications which they can implement to leverage their network. And as we have commented before, by law, the electricity meters in Japan must be replaced every 10 years.

Moving on to Slide 6. A few comments on EMEA. First, I want to again highlight the success the EMEA team has continued to deliver in the first half of fiscal year 2019. Jonathan will get into the numbers a bit later, but the continued expansion in profitability from essentially a breakeven a year ago to the results we showed today have been extremely important and certainly hard thought.

Looking to the key markets, we see continued progress. In the U.K., SMETS2 meter volume shipments continued, and the British government published the revised smart meter project deadline to 2024, which is completely aligned with our internal expectations. We remain well positioned with meters under contract at approximately 21 million meters delivered or contracted. And just to remind you, 15.5 million SMETS2 meters are yet to be awarded. And I like our chances to pick up contracts for some of these.

In France, we continue to ship Linky meters and we're actually awarded additional volumes in fiscal year 2019 first half. And finally, I'd like to say that the second wave of deployments we have spoken about coming in the Nordic countries has begun, and our E.ON contract is a vivid example.

Operationally, our EMEA focused restructuring programs are fully on track. The product cost as we've spoken about in the past are all now in the market, driving gross margin expansion. Project Lightfoot ahead of plan is expected to deliver $20 million in annual savings by the end of fiscal year 2019 and a further $5 million in fiscal year 2020. You'll also recall that our Project Phoenix was completed in H1 fiscal year 2018, having achieved more than what was targeted with $21.7 million in annualized savings realized.

In conclusion, EMEA, we had a very strong net revenue growth, and our backlog was up 3.9%. Operational improvements were delivered, driving further meaningful margin expansion. In short, we have made significant progress on our performance improvement road map towards a 10% adjusted EBITDA margin target for fiscal year 2020.

Let's now go ahead and move to Slide 7, talk a little bit about Asia Pacific. I'd also like to highlight the important improvements that the Asia Pacific team has delivered in the first half. The results are likewise impressive with 32% net revenue growth and more than 1,100 basis points of adjusted EBITDA margin expansion. The results speak for themselves as the successful hard work on sales opportunities and tight cost control bear fruit. In Australia, we saw the sales growth due to the Power of Choice transition. And while in Southeast Asia, CLP Power, continued their deployment of our Gridstream solution in Hong Kong. In India, we've continued to deploy our Tata Power solution.

With that overview, let me go ahead and hand over to Jonathan to provide a bit more detailed view of the financial results. I will come back at the end and offer some summary comments and talk about our fiscal year 2019 guidance before opening the call to questions. Jonathan?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [4]

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Thanks, Richard. So let's turn to Slide 8 to get an overview of our consolidated results for the first half of fiscal year 2019. As you might recall, we had expected that our first half results would be significantly weaker than those of the second half. However, I think we've delivered some solid results in H1, with improved net revenues, adjusted EBITDA and free cash flow performance. So just walking through the key numbers on the slide. Order intake was $818.9 million, that's down 7.1% in constant currency terms, and we have a book-to-bill ratio of 0.95. All regions were down year-over-year.

Committed backlog grew in all regions and was USD 2.51 billion, up by 7.1% for the group overall. That said, many of the large contracts booked late in fiscal year 2018 benefited year-over-year comparison.

Net revenue was up 3.4% in constant currency. And I'll unpack the details when we walk through the original numbers. Reported EBITDA increased from $114.9 million to $128.2 million. And adjusted EBITDA was up on a percentage basis more than sales and reached $124.9 million. As mentioned by Richard, this did include a positive one-off of $5.6 million from a favorable court ruling in Brazil on a VAT case.

Operating income was up 25.6%, which shows some nice growth and free cash flow, excluding M&A, was $33.1 million for the year, an increase of $19 million year-over-year, and I'll unpack some more details on the cash flow when we get to Slides 12 and 13.

Let me walk you through the constant currency revenue bridge on Slide 9. As we expected, America's net revenues were down year-over-year, in this case by $20.3 million, 4.1% in constant currency. This is primarily due to the roll-off of 2 major projects in North America. Revenue in EMEA was up by $29.2 million, 7.5% in constant currency, primarily driven by the U.K. SMETS2 rollout gaining further momentum. Revenue in Asia Pacific was up $19.5 million, 32.0% in constant currency compared to last year as sales in Australia, Southeast Asia and India all drove the improvement. And I'll go through the revenue by region in more detail on the regional slides.

Moving to the adjusted EBITDA bridge on Slide 10. If you look at the 3 blue blocks, you can see that we generated higher adjusted gross profit for 2 reasons: first, because an underlying gross profit improvement of $5.5 million flowing through from higher revenues. The second block of $8.8 million in lower costs associated with eased supply chain constraints, with $3.3 million in H1 FY 2019 compared to $12.1 million, 1 year ago. As you can see, the supply chain situation did improve in H1, but has not left us completely. These 2 gross profit related items combined to give a $14.3 million improvement year-over-year. You can also see the positive $5.6 million impact from the Brazilian VAT case shown explicitly here as well.

And if you look at the red block, you can see that we incurred minor cost increases on the OpEx lines of $1.8 million due to a couple of internal initiatives. I'd also like to mention that while our R&D spend ticked down a bit in absolute terms, we have experienced productivity gains as we now have over 50% of our engineering staff in lower cost countries. The result has been a reduction of R&D spend as a percentage of sales, while keeping our leading-edge portfolio current. As a result, adjusted EBITDA was up over last year, coming in at $124.9 million, a margin of 14.5%, and excluding the impact of the Brazilian VAT case, margin increased 130 basis points to 13.8%.

On Slide 11, you see our adjustments to EBITDA. To limit the details, I'll focus on 3 items in the table, restructuring expenses for the first half were an $0.6 million for the expenses incurred across the group. On the normalized warranty expenses line, the amount of $4.8 million represents the amount of provisions made relative to the average annual warranty utilization for the last 3 years. In first half fiscal year 2019, reported EBITDA does include an increase to the legacy component provision in the Americas of $11.3 million. This is the same issues you've talked about before, and we're taking this additional provision as we have seen an uptick in projected failures.

Finally, timing differences on FX derivatives. I think it is well-known that economic uncertainty in the U.K., our single most important European market caused by the protracted negotiations around Brexit, has led to an increased risk of exchange rate volatility, with sales in pounds and supply chain costs largely in other currencies. We have placed hedges in respect to the part of our exposure to the pound for up to approximately 24 months ahead. Therefore, this adjustment excludes the unrealized gains of $8.6 million in respect of mark-to-market differences on these FX hedges to the extent that they were unrealized at the end of the first half. And there's no corresponding adjustment in the first half of last year as this adjustment cash flow was only introduced in the second half of fiscal year 2018.

Turning to the cash flow on Slide 12. Overall, the cash flow performance in H1 reflects improved operational performance. We generated free cash flow, excluding M&A, of $33.1 million. In looking at some of the details. Working capital was a net consumer of cash in the first half. Essentially, we had declines of the same magnitude in our payables and receivables, meaning the net increase in working capital comes from inventory, primarily in EMEA and Americas. And we'll work hard to reduce the inventory over the balance of the year.

On CapEx compared to last year's $16.9 million spend, we saw a decrease to $12.7 million, so it's driven partly by timing in the Americas region, but also reductions consistent with our asset-light business models. I'd also like to comment a bit on warranty and warranty settlement cash outs. Warranty and warrant settlement cash outs were $10.8 million lower than last year as the cash out came down in EMEA and the Americas, both with respect to the legacy issues and more generally. As I said -- and as I've commented previously, in FY 2020 and thereafter, we expect our warranty cash outs to decline significantly as our legacy component cash outs roll off.

Turning to cash flow seasonality on Slide 13. I just want to touch for a moment on the seasonality we've historically experienced in our cash flows. In the first half of FY 2017 and FY 2018, we experienced legacy warranty settlement cash outflows as part of our litigation settlements. Additionally, employee incentive payments are made in the first half of each year. Looking to FY 2019, we expect warranty litigation settlement payments in both half year periods, not least because in fiscal year 2019, we have one final payment to make in the second half related to the warranty settlement -- litigation settlements in EMEA. Nevertheless, we still expect stronger cash flow in H2, as shown nominally in the chart on the right.

Turning to net debt on Slide 14. Net debt ended the half at $99.4 million, down $11 million compared to September 2018 and up by $82.2 million compared to the end of March 2019. In H1, we made payments of $94 million for the dividend in July 2019 and $20.5 million for the shares repurchased, both inside and outside the buyback program. This then was partially funded by the free cash flow of $33.1 million, with the balance resulting in the increase in net debt at the end of September. Overall, our leverage ratio is down 0.5x -- was down to 0.4x. I'm sorry. Overall, our leverage ratio is down to 0.4x adjusted EBITDA compared to 0.5x at the same time last year.

Now turning to the regional performance on Slide 15. In the Americas, backlog picked up 7.4% year-over-year on the back of the large contract wins, which we announced in the second half of FY 2018. We experienced the anticipated revenue decline that we mentioned in our last results release as the impact of the 2 major deployments in North America coming to an end were not fully offset by other project starts. In constant currency terms, our Americas revenue declined by 4.1% over the first half of FY 2018. Likewise, we saw a slight further decline in our revenues in Japan.

Adjusted gross profit performance is quite stable in light of the sales decline remaining just under 40% and aided by the reduction in supply chain constraint costs. Expenses are well controlled, and we did increase R&D efforts in the region. And overall, we saw our adjusted EBITDA margin of 19.3% or 18.2%, excluding the one-off Brazilian VAT impact. So adjusted EBITDA remains in the 18% to 21% range we've talked about before, and this was after absorbing incremental group charges of $2.2 million.

Turning to Slide 16 for EMEA. For the EMEA region, we saw continued significant strides on our pathway towards reaching our targeted adjusted EBITDA margin of 10%. Starting at the top line. Net revenue grew by 10.5% in constant currency terms. This strong result was primarily driven by the U.K. as SMETS2 meter shipments continue to be healthy. I would also note that the destocking we thought might occur after the expiry of the first Brexit deadline at the end of FY 2018 did not take place.

Adjusted gross profit margin increased by 420 basis points. The biggest contributors to this margin improvement were the introduction of cost reduced products, coupled with reduced supply chain constraint costs and in addition, Project Lightfoot is running ahead of plan. We expect to deliver $25 million of savings in FY 2020, with approximately $20 million of annual savings to be realized in the current fiscal year. Adjusted operating expenses were also low by $4.1 million. So based on sales growth and operational improvements, EMEA delivered adjusted EBITDA of $23.4 million, a margin of 7.6%.

Moving to Asia Pacific on Slide 17. We also made significant strides in Asia Pacific. Net revenue increased 32.0% in constant currency terms, a $16.6 million increase year-over-year. Stronger sales in Australia following the Power of Choice regulatory change, together with Southeast Asia, mainly from the contract in Hong Kong and higher sales in India drove the top line improvement. Adjusted operating expenses came down $2.9 million. Mainly reflecting the further year-over-year benefits from restructuring efforts. Based on this strong top line performance and further cost control, adjusted EBITDA was turned around by $8.5 million or 1,180 basis points and resulted in a positive outcome of $4.9 million. So some fairly good results coming through from Asia Pacific.

I'll stop there and turn the call back over to Richard for some closing comments and a discussion of our outlook.

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Richard Mora, Landis+Gyr Group AG - CEO [5]

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Very good. Thanks, Jonathan, for that. And before moving to guidance, let me touch on a topic that I spoke to during our Annual General Meeting of Shareholders, and I'm talking specifically about sustainability. Landis+ Gyr has a rich and past history of leadership in the environmental arena, from internal improvement efforts that reduce emissions and discharges to developing leading edge efficiency, products and solutions for the electric utility industry. We are now taking another step forward on our sustainability journey to further improve performance, having recently completed a comprehensive materiality analysis that considered current and future corporate social responsibility priorities. This was based on a survey of internal and external stakeholders. The company has identified 9 key categories, including 4 topics of particular strategic importance going forward. For each of these 9 topics, a team of specialists with a dedicated workstream leader developed a package of measures with corresponding key performance indicators. Together, these measures were in the road map for the execution of a comprehensive renewal of Landis+ Gyr's CSR management system by 2021. Once implemented, Landis+ Gyr will have, what we believe, to be an industry-leading program, offering an enhanced structure, guided primarily by the UN Global Compact and Global Reporting initiative guidelines. We will continue to report on these important efforts.

Now moving to Slide '19. Let me wrap up by saying we remain positive on the balance of fiscal year 2019. The regulatory delays could slow some project starts in the U.S. and as a result, we are being a bit more cautious on our top line forecast. Our guidance for fiscal year 2019 adjusted EBITDA and free cash flow, excluding M&A remain unchanged. Therefore, Landis+ Gyr, we expect fiscal year 2019 net revenue growth of approximately 1% to 4% in constant currency versus an earlier range of 2% to 5%.

Group adjusted EBITDA to be in the range between USD 240 million and USD 255 million. Free cash flow, again, excluding M&A to be between USD 120 million and USD 135 million, and we plan a dividend payout of at least 75% of free cash flow, again excluding M&A.

Now let's go ahead and stop here and open up the call to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Fabian Haecki from UBS.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [2]

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I got one (inaudible). So the first one on the U.S. business. What exactly caused this regulatory delay. And are we talking here of a few weeks, months? Or is there also a risk that it could further extend longer? This will be my first question.

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Richard Mora, Landis+Gyr Group AG - CEO [3]

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Yes. Fabian, thanks for that. This is Richard. Yes. As I said, we have experienced some regulatory delays, that they can be from a number of reasons, from a perhaps a longer public comment period and perhaps they need to improve their benefit sharing, et cetera. So there are a myriad of reasons. In terms of the expectation, this is a common regulatory cycle that we see. It's unclear at this point as to exactly when their approvals will come through, but we are confident that in the future, we'll certainly see the contracts begin to unwind.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [4]

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Okay. Then the next questions are on EMEA. On the Project Lightfoot, can you specify the measures what you've taken so far? What is planned, particularly to reach $20 million savings. So Lightfoot is, as the name says, I guess, it's mostly footprint adjustments. Did you close down some smaller plants and what is exactly planned?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [5]

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Let me take that one. Fabian, this is Jonathan. Yes, I mean, we're continuing the program, which we have, which is to move to a more outsourced model, and this particularly affects some of the volumes that we ship into the U.K. So yes, we have seen some footprint adjustments. And as you correctly say, the name is indicative of that of us continuing with that process. So yes, during this period, we've just continued the process of outsourcing more of our production, and particularly that relates to our supplies into the U.K.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [6]

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Okay. And this trend to more outsourcing, does this affect in any way your own capacity utilization in your main plants or they just result in some smaller plant closures?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [7]

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It's really the latter. So we're trying to concentrate our own production in a small number of larger plants so that we don't have a sort of a utilization issue, as you say. So it's really the smaller sites that are tending to close.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [8]

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And do you see more outsourcing potential besides now the U.K. smart meter -- SMETS2 meters for other regions. Would this also be applicable?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [9]

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I think in the general direction of travel, it's the way the business is going, but I don't think we'd call out any other particular products at this stage that would go down that route as far as we have for the U.K.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [10]

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Okay. Then on the U.K. rollout, when you look at the government statistics, the rollout has significantly slowed or decline actually over the last 6 consecutive quarters. How was it possible that you've outperformed that market by so much because you have also been affected by that delay in the whole regulatories and in infrastructure bottlenecks to install those meters. Do you believe that the U.K. rollout in total has now seen the trough that you could also benefit from increasing volumes? Or will you see kind of growth trajectory being more or less what we have seen in H1?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [11]

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Yes. I think, I mean -- I think we are very confident with the overall trajectory of the U.K. rollout. Obviously, we're aware that, overall, there's been some tick down. Obviously, from our customers' point of view, they're very committed to meeting the revised deadline, and we see that in our order book and also in the call offs that we get. We clearly still have some impacts going on from the whole uncertainty around Brexit. I mean we had a tailwind at the end of last year, which we were concerned might unwind in the first half of this year as customers stopped [talking] ahead of the Brexit deadline. Clearly, with that continued uncertainty that has not materialized in this half and the outlook still looks quite reasonable for us in the U.K.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [12]

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Okay. And then the last one, on APAC. So your margin has been extremely volatile and unstable in the past, but that has now seen quite a strong improvement since you formed the joint venture. So is this kind of mid-single-digit EBITDA margin plus. Is this a sustainable number? And is it fair to assume that the volatility now with the joint venture formation will be lower on your earnings side, or is this -- will it still be kind of volatile, vulnerable and dependent on projects and volumes?

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Richard Mora, Landis+Gyr Group AG - CEO [13]

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Yes. Fabian, thanks for the question. I think we definitely turned the corner there with the intelliHUB [invested] in place now. We can see sort of the solid revenues running through that. We've done quite well in the other regions. We talked about Hong Kong electric rollouts there, stabilizing, et cetera. So I would expect to see less volatility in the margin.

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Operator [14]

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Your next question comes from the line of Ben Uglow from Morgan Stanley.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [15]

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My first -- I had a couple of questions about the top line. On the order backlog, when I look at it, it is up 7% year-on-year, but that's on a relatively undemanding comp, and if I look quarter-on-quarter, it's slightly down. Is there any typical seasonality or any factors in backlog, which normally means that the first half is below the closing period for the last year. And if I think about 2019, '20 overall should we assume that your backlog is going to be $2.6 billion plus, i.e., on a year-on-year basis, is it reasonable for us to think that the backlog will still be higher at the end of the year.

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Richard Mora, Landis+Gyr Group AG - CEO [16]

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Yes. Ben, thanks again for the question. This is Richard. We've always talked about backlog as being a bit lumpy. I think that's generally what you're seeing. We're not overly concerned about some of the things we're seeing. In terms of the expectation for fiscal year 2020, we do see a solid pipeline of projects, et cetera, so that we're quite confident that we'll continue to grow the backlog, yes.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [17]

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Okay. And there's no kind of weired seasonality that happens every year or anything like that?

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Richard Mora, Landis+Gyr Group AG - CEO [18]

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No, nothing, no. I wouldn't say that. No.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [19]

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Okay, understood. Then my next question was just on the orders, and I note that we don't talk that much about orders. But when I look at them, they are down about 10% year-over-year. It all seems to be EMEA. But what I'm trying to understand is, is there anything underlying there in the EMEA trend? Or is this -- a lot of it must be to do with currency. So could you just sort of outline what's going on with the orders?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [20]

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Yes, there's a bit of currency inflation there, but actually, the main impact was that we had a pretty strong H1 order intake in EMEA last year. So we booked for $467 million, and we had big orders coming in from the U.K., that was the biggest driver of that, but we also booked the Linky order, which is EUR 87 million, as I recall. It also goes into that number last year. So the order intake comp was actually quite tough for EMEA last year. And I think the good news for us is that in the first half in EMEA, we had an order -- a book-to-bill, which is well above 1%. So I think it's $378 million for H1 in EMEA order intake, we were quite comfortable with that.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [21]

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Okay. And it's reasonable to assume that book-to-bill, as we look at the year as a whole, should be gravitating back to 1% or slightly better. Is that fair?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [22]

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Yes, I think, I mean, we're always vulnerable to the lumpiness of order intake because -- but yes, I think directionally, that's a reasonable comment.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [23]

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Understood. And then final question, just on the revenue guidance, how would I put it? It was nice to see it sort of fine-tune so carefully, but my question would be, if -- and I understand it's coming from the Americas. Given that EMEA and APAC have been so strong on growth in the first half, why not just let the revenue guidance stand? Why did you feel that you needed to cut it down a point?

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Richard Mora, Landis+Gyr Group AG - CEO [24]

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Yes, and again, I think we're being definitely cautious here. We did say, as we mentioned, some regulatory delays. And they're always -- those are always unpredictable in terms of when those will come to fruition. So as a [word] of caution, we did lower it by the point.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [25]

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Understood. But there's no other factor beyond that. We expect to see ongoing strength in EMEA and APAC, basically, yes?

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Richard Mora, Landis+Gyr Group AG - CEO [26]

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Yes, exactly.

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Operator [27]

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The next question comes from the line of Urs Emminger from Research Partners.

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Urs Emminger, Research Partners AG - Senior Analyst [28]

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Congratulations to the very strong results. I have 2 questions. One is, the bush fires in California have a long-term impact on your business? And the second one, could you give us a little bit more detail on the planned share buyback for the next 2 years?

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Richard Mora, Landis+Gyr Group AG - CEO [29]

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Yes, I'll go ahead and take the first one. I think you're talking about the bush fires out in California? No, there's really no material impact to our business. Certainly, we'll reach out to California, Edison there, PG&E in the past when there have been issues like this, but no, nothing material that affects our business.

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [30]

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Yes. And on the share buyback, I mean, we're still in the market continuing the share buyback. We've completed about 30% so far. Obviously, we keep it under review the whole time. And clearly, I'm sure you'll have noticed that as the share price has gone up, we bought back a little bit less, but we'll obviously just keep that under review and make decisions as we go forward.

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Operator [31]

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The next question comes from the line of Patrick Laager from Crédit Suisse.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [32]

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First question, how shall we actually model the cash outflow related to the legacy component provisions for this year and later? You just actually said that the outflows will decrease significantly, but any details here?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [33]

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Yes. Thanks, Patrick. I mean, we certainly -- I mean, looking to the second half, we sort of signaled that obviously we have got this final litigation settlement payments in EMEA. So plus/minus, we would expect cash outs to be broadly in the same range in H2 as H1. I think thereafter, obviously, we do see a significant reduction coming, notwithstanding the additional provision we've taken today. Obviously, as it was mentioned, we do have the final litigation settlement cash outs in the second half, so there's a -- if you like a $20 million tailwinds going into FY '20 because of that. So notwithstanding the increase in the provision that we've talked about today, we're absolutely confident we'll see a significant reduction from FY '20 onwards on the warranty cash outs.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [34]

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Okay. But this was basically just EMEA related, the number you gave. Is that correct?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [35]

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That's correct. The $20 million relates to the EMEA litigation settlement, which has its final payment going out in the second half.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [36]

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Okay. And still related to this topic, can you provide more insights about the warranty claims in the U.S. I mean, initially, the population of meters showing a failure was 2.2 million, if I remember well, of a total population of 5 million. Can you, I don't know, update these numbers, this would be extremely helpful.

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [37]

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I mean, the failure rate, obviously, that we've seen is somewhat less. So we have a few hundred thousand meters now in addition to those, which we had talked about previously. And also the size of the affected population is also somewhat higher than we discussed previously.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [38]

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Okay. But the total population would be still less than 6 million, let's say.

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [39]

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I don't want to get too much into the detail, obviously, there's some commercial sensitivity around that. So I think I'd just sort of leave it at saying that it's -- the population is somewhat higher than that which we discussed previously.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [40]

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And regarding your guidance, I mean, your adjusted EBITDA guidance of 20 -- $240 million to $255 million, is still including actually this one-off gain from the Brazilian VAT court case. Why are you actually including this one-off gain. I mean, adjusted would be a kind of clean line, I would expect. So is there any special reason for that?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [41]

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Well, I think on adjustments, generally, we've obviously tried very hard since the IPO to reduce the number of adjustments because that was discussed very widely at the time of the IPO. And as a management, we've taken a very strong commitment out to the investor community that we would reduce the number of adjustments. We now have the sort of 4 tightly defined categories, which is restructuring to related to warranty and the FX transaction timing differences. And clearly, the Brazil topic doesn't fit into one of those. And therefore, we didn't want to open up the discussion again around categories of adjustments, and therefore, it remains in the adjusted EBITDA. You're correct, obviously, to point out, therefore, that some -- it remains within our guidance. And we felt within the context of a $15 million range for full year adjusted EBITDA guidance, it didn't make sense to make any change based on the Brazilian VAT $5.6 million impact.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [42]

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Okay. Still on this topic, are you seeing any one-off items emerging in H2? And maybe can you share the -- I know this is difficult, but the respective year-end adjustments we should take into consideration when trying to calculate the bridge between reported and adjusted EBITDA.

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [43]

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I mean, I don't think we've got anything on the horizon, and obviously, we will have our restructuring cash outs and P&L impacts are fairly modest. Clearly, the warranty normalization topic will continue and as -- according to the model, which we've adopted since the IPO. And then obviously, the other significant one is the FX timing differences, and that's obviously very completely dependent or largely dependent on how the pound moves against the dollar. So that's obviously a very difficult one for us to predict.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [44]

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Okay, good. Last question, coming back to order entries which were down 10%. How has the mix between the different type of products shifted?

Was it more favorable or less or any special shift here within the product mix?

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Richard Mora, Landis+Gyr Group AG - CEO [45]

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Yes. Patrick, thanks for that. No, I think broadly speaking, we see the same mix in terms of software services compared to what we call connected intelligent devices versus nonconnected intelligent devices. So generally, no broad changes in terms of that mix.

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Operator [46]

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(Operator Instructions) The next question comes from the line of Peter Testa from One Investments.

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Peter Testa, One Investments S.A.G.L. - Analyst [47]

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I have 3, please. The first is just to understand a bit better on the regulatory delays in the U.S. Is this -- does this have anything to do with smart meter approval or at the customer level they have cut their own customer-facing costs that need to be approved? Or is it somewhere further down the line in terms of the regulatory approval point?

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Richard Mora, Landis+Gyr Group AG - CEO [48]

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Yes. No, listen, there's always a number of reasons. But specifically, remember, these are cases that utilities take to the regulatory bodies. And it's quite natural. This is not something that we haven't seen before. So quite common for the delays to affect some of the rollouts. There's nothing here that is of great concern. Yes, there have been some delays, but we certainly expect those to eventually roll through the process.

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Peter Testa, One Investments S.A.G.L. - Analyst [49]

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Okay. And then when you look at the U.S. next-generation contract flow and pipeline. Can you give any comments on that, please? And maybe how some of these regulatory delays may be impacting timing of awards?

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Richard Mora, Landis+Gyr Group AG - CEO [50]

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Yes, it's a -- we do see a strong sales pipeline. It's important to say that while we have seen some delays according to our initial plans, that we haven't lost any business. And we also -- we also should say that we actually have been awarded business that is subject to regulatory delays. There's just one mix of [presence], we have awarded business waiting for the regulatory approval process. And then there's another mix of customers utilities that are waiting for the regulatory approvals before awarding. So it's really 2 mixes there. I would not want to speculate on the regulatory process in terms of when these -- when we would see this coming to market. We're just confident. We've seen this before. And yes, eventually, they will unwind.

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Peter Testa, One Investments S.A.G.L. - Analyst [51]

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Okay. Are there any common factors about them, just...

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Richard Mora, Landis+Gyr Group AG - CEO [52]

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Not really. You take a look at each one on an individual basis, which we do. And it could be a prolonged just comment period. It could be where the regulator asks for a little more clarity on their benefit case, et cetera. So there isn't any one common theme here.

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Peter Testa, One Investments S.A.G.L. - Analyst [53]

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Okay. And in terms of market share of wins that have been awarded, any comments on the trend between yourself and your major competitor?

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Richard Mora, Landis+Gyr Group AG - CEO [54]

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No, as I said, it's very competitive landscape. I've always said that. And we see a very, as I said, strong sales pipeline going forward, and we hope to have some announcements in the coming months around that.

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Peter Testa, One Investments S.A.G.L. - Analyst [55]

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Okay. And then just another question was on guidance. And just how you've handled the U.K. within your guidance? Obviously, last year in the H2, you had quite a strong finish because of the order timing, and then you have this inventory question. Have you drawn down the inventory in your guidance for FY '19? Or if you have kept it high and how do you -- just that -- centering around the U.K., please?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [56]

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Yes, I think in H1, we had a pretty strong half in the U.K., and we didn't see the brexit destock, but we were concerned might arise in H1. And as we look forward to H2, obviously, we're aware that, that issue is maybe out there because, obviously, customers have not destocked, given the continued uncertainty. So clearly, when we're thinking about H2 and our full year guidance, we're obviously conscious of that possible downside in the U.K.

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Peter Testa, One Investments S.A.G.L. - Analyst [57]

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Okay. So essentially a large part of your range is therefore around whether the U.K. draws down or not. I mean is that the way to understand your answer?

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [58]

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Yes. I mean, the change to the range isn't driven by the U.K., that's driven by the issues we talked about in the U.S., but obviously, I mean, our 3% range isn't huge, but obviously, there is, as always, some volatility and the U.K. is our second largest market globally. And obviously, when we're thinking about our overall group guidance, but we're very conscious about what's happening in the U.K. market.

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Operator [59]

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The next question comes from the line of Daniel Koenig from Mirabaud.

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Daniel Koenig, Mirabaud Securities Limited, Research Division - Analyst [60]

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I have 2 little questions. Can you explain the development of the depreciation line, why it has gone down in the Americas? And then can you please spend some thoughts on the development of the gross profit margin, especially in EMEA and the Asia Pacific.

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Jonathan Elmer, Landis+Gyr Group AG - CFO & Executive VP [61]

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Sure. I think let me take the second one first at the gross profit line in EMEA and Asia Pacific. I think, yes, they're obviously the growth we see in EMEA is driven through the product cost down. So these are the lower-cost product [families] that we've introduced. And also, obviously, Project Lightfoot, which is the restructuring program, which we've talked about some previously. So that obviously is the driver in EMEA. If you look at Asia Pacific. Again, we've had some restructuring efforts ongoing. And that's obviously helped to improve the position and also had a slightly favorable mix in terms of the markets that we've been selling into. In terms of the sort of slight tick down in the Americas depreciation, obviously, now we have some managed service assets in there, which are components of the Americas depreciation and they, I think, are the main reason why that ticked down a little bit this year. But I wouldn't read too much into that line.

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Operator [62]

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That was the last question.

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Richard Mora, Landis+Gyr Group AG - CEO [63]

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Well, very good. I appreciate that. And let me just end with a couple of closing comments. As we sign off, we want to leave you with some key messages about our H1 fiscal year 2019 results. Significant progress made towards midterm targets in EMEA and Asia Pacific and the Americas remain resilient despite expected net revenue decline. All key performance metrics, net revenue, adjusted EBITDA and free cash flow, excluding M&A grew year-over-year. Supply chain constraints eased during the H1 fiscal year 2019, and net debt remains low at 0.4x adjusted EBITDA. We remain positive on the balance of fiscal year 2019, the regulatory delays could slow some project starts in the U.S., and as a result, we are being a bit more cautious on our top line forecast. Our guidance for fiscal year 2019 adjusted EBITDA and free cash flow excluding M&A remain unchanged. In short, we are working to continue delivering our commitments.

I very much want to thank you for joining the call. I look forward to seeing you on the road show at a conference in the near future. Have a nice day, and goodbye.

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Operator [64]

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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.