Landis+Gyr, the global leader in smart metering solutions, is riding high on a wave of success. Their latest earnings call [1] painted a picture of record-breaking performance, boasting a $3.8 billion backlog and a 15.6% year-over-year revenue growth. It's a triumphant tale of thriving in the heart of the energy transition, but lurking beneath this glossy surface is a hidden vulnerability: the looming threat of a European supply chain crisis.

While the Americas bask in the glow of a normalized supply chain, EMEA remains trapped in a logistical nightmare, a stark contrast that seems to have slipped under the radar of most analysts. During the earnings call, CEO Werner Lieberherr revealed a startling fact: while the US supply chain has largely recovered to 2021 levels, EMEA is a full year behind, with a predicted return to normalcy not expected until the end of fiscal year 2025.

This discrepancy has enormous implications for Landis+Gyr's profitability. The company's ambitious target of a 10% EBITDA margin for EMEA by 2025 now seems precariously balanced on the volatile fulcrum of the European supply chain. Lieberherr himself acknowledged the ambitious nature of this target, attributing the slower-than-expected margin improvement to the lingering supply chain woes.

To quantify this hidden burden, consider this: between 2020 and 2022, EMEA experienced a staggering $45 million surge in supply chain costs. While they managed a $10 million saving in 2023, a hefty $35 million burden remains, a ticking time bomb that threatens to derail their profitability goals.

This is not just a temporary setback. The protracted supply chain recovery in EMEA has deeper roots, stemming from a strategic decision to source components from a range of European suppliers to create a natural hedge against currency fluctuations. This strategy, initially intended to mitigate risk, has backfired, leaving Landis+Gyr exposed to a web of interconnected vulnerabilities as component shortages cascade across the continent.

Here's the potential scenario: with the EMEA supply chain still reeling, Landis+Gyr is forced to navigate inflated component costs, potentially leading to margin compression. This could trigger a domino effect, forcing the company to renegotiate existing contracts, delaying project deployments, or even absorbing some of the inflated costs to maintain customer relationships. Any of these scenarios would have a significant negative impact on their profitability.

The crucial question is: can Landis+Gyr defuse this time bomb before it explodes? Their strategy hinges on a multifaceted approach: leveraging their end-to-end solutions and differentiated technologies to command premium pricing, strategically shifting manufacturing to contract manufacturers outside Europe where necessary, and continuing their focus on footprint rationalization and operational efficiencies.

While the company remains confident in achieving their ambitious 10% EMEA margin target, the reality is that it's a high-stakes gamble. The success of this gamble rests not only on their own internal efforts but on the unpredictable whims of the European supply chain. If the recovery stumbles, Landis+Gyr's rosy future could quickly turn bleak.

Hypotheses:

If the EMEA supply chain recovery remains sluggish, Landis+Gyr's EMEA EBITDA margin for FY 2024 is likely to fall short of their internal target range of in-between 2.6% and 10%.

Assuming a continued $35 million supply chain cost burden and flat revenue growth for EMEA in FY 2024, the EBITDA margin would remain at approximately 2.6%, significantly below their aspirational target.

EMEA Supply Chain Cost Burden (2020-2023)

"Fun Fact: Did you know that Landis+Gyr installed the first electric meter in Switzerland back in 1896? Over a century later, they're still shaping the future of energy management. But will their legacy of innovation be enough to overcome the challenges of a volatile global landscape? Only time will tell."