Earnings Call: Q1 2021

May 12, 2021

Hello and welcome to the Elsan Q1 2021 Trading Update. My name is Rosie, and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration your lines will be on listen only. However, you will have the opportunity to ask questions at the end. To register your question at any time. I will now hand you over to Marco Rolivas, CEO, to begin today's conference. Thank you. Thank you, Rosie. Good morning, everybody, and welcome to this webcast regarding the 2021 Q1 trading update of Alfen. We appreciate the fact you have taken the effort to participate. This webcast and the questions that may come forward are handled by Jeroen Varossen, CFO and myself, Marco Lundgaard, CEO. We're happy how the Q1 has resolved. A solid quarter with further revenue growth in combination with a positive development of our profitability and a strong outlook for future growth. In this webcast, we will start with an update of COVID in relation to Alfven. Then we will continue with the highlights of the Q1 followed by a short review of the business line. Next, we will go in more detail regarding our financials and outlook. Assuming you've noted the use of disclaimer, you can now go to sheet 3 with an update of the COVID situation in relation to Alfven. We are in the midst of the COVID crisis and therefore our number one priority remains the health and safety of our employees and partners. Up to this point, we have managed to keep our business going. To continue safe and responsible operation, we We continue to enforce strict safety measures. And we expect COVID to stay to still have some impact on revenues in the short term, where we continue to anticipate long term positive market development for all our business lines. We will continue with Slide 4 with the highlights of the Q1 of 2021. In this Q1, we realized a revenue of €53,800,000 This represents a growth of 22% compared to the same period last year. This growth was driven by strong growth at energy storage and EV Charging Equipment. The gross margin was 36.5%. This is in line with average gross margin of last year, but almost 2% point higher than in the same period last year. As a percentage of revenue, adjusted EBITDA improved from 10.4% in the Q1 of 2020 to 13.3% in the same period this year. We are positive about all the drivers for future growth. COVID has had an impact on our markets, but most European governments have expressed their commitment to further facilitate the energy transition. And we reconfirm our 2021 full year revenue outlook of €225,000,000 to €250,000,000 Later on in the presentation, Jerome will go in more details on the financials. In the commentary sheet, we'll go in more detail on our each of our business lines. We started sheet 5 with Smart Bit solution where the revenue was slightly higher than the same period last year. The modern growth is driven by a combination of COVID impact and the production ramp up of a new innovative substation range for Anaxys, which now has been successfully completed. At the same time, the momentum in smart risk is increasing and the backlog at the end of the Q1 was 27% higher compared with same period last year. We produced less substations in Q1 2021 compared to the same quarter last year. However, the product mix shifted to larger and more complex substations and we executed relatively more project work. We now continue on sheet 6 regarding EV charging equipment, where we have realized a revenue growth of 46%. We benefit from a growing market for electrical vehicles and as a consequence more demand for home, semi public and all 3 public chargers. Further internalization is also a strong growth driver. Our revenue outside of the Netherlands more than doubled and is now approximately 60% of our revenues. Although COVID has an impact on the delivery of EVs, We are convinced of the long term trends towards e mobility. Therefore, we keep expanding our sales teams in the various European countries. To support the strong growth of our EV charging business line, we continue to further optimize our production facility. And from a supply chain perspective, a high demand for electro components is putting pressure on the supply chain throughout the world. We are also experiencing some supply chain challenges. However, up to this point, we have been able to mitigate them. We now continue Slide 7 regarding Energy Storage Systems, while we have realized a strong revenue growth compared to the same period last year. We benefited from new contract wins and progress of completion of earlier secured contracts. Decision making and some projects is still being delayed as a result of COVID, although the momentum continues to grow in this market. The growing number of renewables, so solar and wind energy are increasingly driving the need for energy storage to offset the mismatch of electricity supply and demand. Rune, may I ask you to continue? Yes. Thank you, Marco. Let's have a deeper look at the Q1 financials on Slide number 8, starting with the graph on the top left hand of the slide, where you can see that our revenues increased from CHF 44,100,000 in the Q1 of 2020 to EUR 53,800,000 in the Q1 of 2021. This growth of 22% was predominantly driven by energy storage and EV Charging Equipment. Our gross margin was 36.5% compared with 34.8% in the same quarter of last year. Our adjusted EBITDA was €7,200,000 being 13.3 percent of revenues compared with $4,600,000 being 10.4 percent of revenues in Q1 2020. This increase of our adjusted EBITDA is the result of combination of gross margin increase and operational leverage. So from the highlights of the financials, we now go to the outlook on the next slide. We expect COVID to continue to have some impact on our markets until the vaccination schemes successfully get the virus under control and restrictions can be fully lifted. At the same time, as Marco also mentioned, the transition to a clean carbon free energy system is building more and more momentum across Europe. Therefore, we continue to anticipate long term positive market developments for all of our business lines and thus continue to invest in our organization, production facilities and Innovations for the Future. For 2021, taking everything into account, we reconfirm our full year revenue guidance in the range of €225,000,000 to €250,000,000 We are now at the end of the presentation, where I will hand over to the moderator for any questions. Moderator, could you please take over? Yes, of course. Thank You will be advised when to go ahead. And our first question comes from the line of Peter Olofsen from Kepler Cheuvreux. Please go ahead. Yes, good morning, Jeroen and Margot. I have two questions. The first is on raw materials. What are you seeing in terms of raw material cost inflation? And to what extent is that affecting your gross margin? Or are you able to compensate for that? And I will be particularly interested in the EV charging business. And then my second question is on Energy Storage, Where on the one hand, you mentioned that Q1 sales benefited from some new projects. On the other hand, you also state that you're still seeing some delayed decision making. So could you shed some light on the overall momentum that you are seeing in Energy Storage and in the market and what your current sales funnel and pipeline look like? Yes, Peter, thanks for the questions. I'll start with the question on raw materials and supply chain. You know there's pressure on the supply chain throughout the world, mainly related to electrical components, which is referring to your phrase about EV charging as well. Well, we have been able to mitigate those and keep our supply chain intact. You know we have a multiple sourcing philosophy, and we're in a constant contact with our suppliers. We have a diversified supplier portfolio. We also are in direct contact with manufacturers of those components. Fair to say that sometimes you have to take a decision, for example, to get the components through air instead of through boat, which is then slightly But all in all, you also know that we have our purchasing programs in place, which are gaining power every day and ahead in time. So all in all, we can say that at the moment, we are still able to compensate for these price increases. And also, for example, with copper, we also take positions in there. So that's how we monitor That supply chain and those pricing on a more or less daily basis, I would say. So we're really on top of that. And I think the second question is related to energy storage. Well, yes, we say We said at year end, we said that you saw that we felt that the momentum was coming back into the energy storage market. Fair to say that we cannot always communicate about a project because that's also depending on whether a customer and have progress on the backlog that we have and on the orders that we have. And at the same time, we do We said at the annual accounts, we feel that the momentum is coming back into the energy storage market And that is unchanged. We definitely see that our project pipeline is evaluating and is growing. So we feel that the energy storage market is making a next step in maturity. Okay. I know that in terms of guidance, you're usually not too precise on the individual segments. But Would it be fair to say that despite some softer order intake last year, that with the renewed momentum, Energy Storage would see revenue growth this year? It's a good question, but for us a complicated aspect to answer on is that we In terms of we don't disclose numbers per business line. And you have to also take into account that we always stated that we The first, let's say, of January in a year, and even not on the 1st May of the year, we have the full order backlog for the whole year already in portfolio so that we can more or less predict what the revenue will be depending on the site progress of project. So we need quite a lot of orders to finalize the year in revenue. So we are more or less convinced of the change in momentum. But on the hand, we have all seen in the years past that sometimes even if the momentum is there, the final decision making is always an aspect is We cannot enforce clients to finalize it on a date where it's convenient for us. So therefore, we have taken approach that When we look at our overall revenue for the end of this year, for us, the best way to guide What it is going for is to reconfirm the range in what we are. And that range reflects more or less the positive aspects in market trends and also in getting more momentum, but also has to take into account some negative aspects like what happens if corona It stays there longer and decision making is delayed of other market aspects that we cannot influence. And at this moment, I'd say the best valuation of our of the market situation for us is to reconfirm our revenue statement of €225,000,000 to €250,000,000 Although we also say that say the outlook, the market trend is positive For us, when we see it not only for this year, but also the years after. But of course, Peter, you know, and I understand the question. We always said that the fastest growing market segments are energy storage and EV charging. So yes, of course, we are aiming for a growth compared to 2020. And then the final question on energy storage. Back in February, you talked also about you being capable to do larger projects than you did In the past, are you already seeing larger projects in the pipeline in the sales funnel than before? Yes. Okay. Thanks for that. The next question comes from the line of Theis Boker Berkelter from ABN AMRO ODDO BHF. Please go ahead. Yes. Good morning, gentlemen. Congratulations. Good results. I got some questions from Lotte. So a question on smart grids. Your revenues in Q1 were up 1%, but you stated backlog is up 27%. This backlog of 27% in euro terms for a number of terms. And This backlog, I presume, is for the remainder of the year. Is that correct? Yes or no? Then maybe can you give an update On the ramp up in the number of FTEs right now and maybe what you're targeting there to end up with at the end of the year and similar maybe on sales costs. And finally, coming back on energy storage. As I recall, let's say, the prime battery packages you were using were BMW packages. Do you already have Plenty BMW packages and then let's say in your inventory to let's Say at least do the energy storage projects you envision for a coming year or maybe 2 years. How should I look at that? Well, let's start with the question on the backlog. That's indeed in euros. So it's 27% higher in euro value. It is the backlog situation at the end of Q1. So that is reflecting the period in time compared with the same situation last year. Of course, we continue to have new ordering and new production. So we emphasize this increase in backlog to give the momentum in the smart grids market, whereby you see that we had a moderate growth of Just 1% in the Q1, which we explained in the Q3 trading update with the issuance of the annual accounts where we said, okay, We have some impact of COVID there and we also see that we are in the still in the ramp up of Hello, the operator here. I just want to check the There's no difficulty with audio. I'm not hearing anything right now. Okay. I do apologize. If you could please stand by. The host line has disconnected. So we will just be reconnecting it for you very shortly. Okay, so apologies, Thijs, if you could just bear with us for a moment. Yes. Okay. Thank you very much for reconnecting us. So type of you would like to continue. I don't know precisely where what you heard. So ramp up FTE. Ramp up FTE, was that so you heard everything about Smart Grid, is that correct? I heard reflecting Momentumismartbridgemarketinq4 and Q1, some COVID related problems and then I was disconnected. Okay. Because I was saying that we also show by this increase in the backlog that we see that the momentum is getting back into that market area as well. So that is reflecting the outlook that we have on the Smart Grids business. The question related to full time equivalents and sales costs, well, we always said that we continue to invest in the organization. But that's the pace in which we will grow that will be slower than the growth of the top line. Well, that is still the aim and that's still where we are striving for. Of course, you can imagine that from a period to a period, a quarter to quarter that can be slightly different. But we don't give the precise numbers, but we increased our FTEs and we keep on continuing investing in the organization to anticipate all the future growth and the further growth that we see. So that's what I can say about that. And then I will take the aspect of storage. Like we already have stated that we are for our battery storage system battery agnostic. We do not depend Only on one brand or one make of battery manufacturer. And what's of course, what you can assume is that When we see that the market is growing, we see also that, say, the demand for batteries is quite high. And we've secured, say, with heating suppliers the production capacity For batteries in the remaining part of this year, we're able to translate it to orders that we are Having in portfolio now and that we foresee that we will get in the coming period. And we're quite confident that there is a balance between say our outlook for orders in combination with the amount of batteries we have secured And that we try to balance that as best so that we not have too much in stock on the other hand that they have enough batteries in the pipeline to be able to cope with new contracts. Yes. Okay. Just a short follow-up on the smart grids backlog. What is more or less the lead time of the smart grid backlog? Well, it's of course a combination of project and products backlog. In the products, that's around 6 weeks delivery time. So you should Think about that. And in the projects, it's a bit depending per project where you have projects which have same lead times, but we also have projects which And to have longer lead times depending on the execution of those projects. So it's a mixture, But it's definitely not that this is the backlog which is the only backlog for the rest of the year. Okay. Yes, clear. Thanks. Our next question comes from the line of Jan Richard from Berenberg. Please go ahead. Yes. Good morning, gentlemen. Thank you for taking my questions. I have 3 of them please. Firstly, I'm coming back on Peter's comment on raw material costs. Jeroen, you did said at the end of your comment That you take position on copper. Could you please elaborate a bit more on this? Because I think this is a key raw material for you guys. So Just wanted to hear a bit more what that mean exactly, please. Yes. What we do with copper, so we use copper, of course, in our products. And copper is manufactured by one of our suppliers. But we for critical components, we tend to monitor and keep control of the supply chain ourselves. So the situation here is that we directly by and fix the pricing on copper both on the quantity as well as on a pricing perspective. And then that copper as a component is supplied to the manufacturer who is then putting it into the raw materials that we use in production process. So that is how we look at that. So we are not depending on a supplier to safeguard the copper. We safeguard the copper Our sales. Okay. And how successful are you in passing on increases in raw material costs to your customers? I guess it depends if the increase is sudden or not, but just generally speaking. Yes, generally Speaking, what you see is that if there are increasing raw material prices that also gives rise to, of course, discussions with your customers. You know that in the contracts with the drink operators, we have indexation clauses, but they are not directly 1 on 1 related with raw material pricing. There are a couple of factors that you take into account, and then you Discuss that at the end of the year and define the indexation for the year to come, which you can imagine, especially in the more projects part in selling transformer substations to other parties than the grid operators. There Of course, if raw material prices are increasing, you also discussed that with your customers. Okay. That's clear. And then two questions on storage. The first one is, could you please give us a bit more color on The proportion of Q1 revenues attributable to contracts won in the second half of last year As opposed to contracts which you won't end of 2019, early 2020. Yes, I appreciate the question, Jan. We don't give that precise split. The only thing what we can say is that it's partly related to contract 1 in 2020, but also partly related to new ordering in 2021. So it's a mixture of elements there. That's how it's built up. Okay. And can you please tell us how much of revenues in storage in the last, let's say, 6 months come from framework agreements as opposed to more one off projects just to see sort of momentum you can see in this business. Well, We cannot give that precise split, but what we can say is that we emphasize the fact that there are framework agreements we concluded last year to also show that we feel that there is a next step in the majority of the end of storage market. And we also see that Q1 is coming from those framework agreements. So that's what we definitely see. So we do have a mixture of customers who are looking at 1 or 2 projects. We have customers who have framework agreements and are already planning ahead in time. So it's a real mixture of all elements. But I think the most important thing is that where you saw that COVID definitely had an impact on the energy storage market. And it seems like that the step up in the storage market was back again. We already emphasized that the issuance of the annual report that we felt The momentum is coming back in that market and we definitely see that today that that momentum seems to be getting back in the market. So There's a lot of requests and there's also a good development of our sales pipeline in that area. Very clear. And lastly, still on storage, I mean, talking about software, it plays a critical role in, delivering value to your customers. And we've seen some interesting trends over the last few months as energy companies boosting their digital capabilities through M and A. So my question here is, do you feel you are in a position to continue Develop your software on your own and keep up with your peers? Or you're potentially looking at potential targets in the software space. Yes, just a bit more information on that would be very helpful. Hello, Jan Marco here. If I try to answer I will try to answer this question. If we look at the position we take in the value chain, Maybe starting with EV charging. We're not in the area of making back office system. There's all software related to back office systems and in billing through back office systems and all kind of protocols that are in that area is not the area we are talking about when we talk about software development. We are more or less within the charging station, try to envision what are the requirements in relation from say Those back office systems relate to our product and we try to come up with all kind of smart software features whether it is low balancing etcetera, etcetera that's within our product. We don't interfere with the business cases and software capability of our customers and So that we are not also that we don't see risk there that we are developing the wrong set of software. If you take the same approach to battery storage, we don't develop, say, SCADA systems that Our balance for say our end customers that have to value say how much energy from a wind farm is being translated to Say the trading aspects of when to store, when to stop transferring energy to the grid. We are fully controlling our own set of hardware with all kind of software features to optimize interconnection to the SCADA systems as a customer, But we don't interfere into the scatter systems of our customers. So we are more or less quite well secure of Quell, Yes, I was happy with this approach because it's more or less one that we don't expect customers to interface directly with our hardware because that is Very complicated for them to envision how to control the whole product Performing in itself, so that we are more or less limited ourselves to the interface, leave it to the customers to do all trading Thank you. Our next question comes from the line of Martin Verbierks from the Idea Driven Equities Analysis Company. Please go ahead. Good morning. It's Maarten. A couple of questions from my end. First of all, within the smart grid, We have seen quite a jump in much larger and much more complex substation. Is this a trend to continue? And is this also favorably For your profitability. If we look at, say, the FPS markets, the grid market, Yes, we see that the group operators, relationships with the tenders that did already years before in different types of switchgear, where we have to accommodate our substations to be ready for those bigger installations. That makes it as a monetary consequence that the substation are to be bigger also. And we have seen that in the tenderly denetics where this was combined We say quite a past requirement for example with fire safety. It meant that it's bigger and more complex And that's the reflection on say the overall price, not directly in maybe in relationship to the margin, but directly to the overall price of a substation. We've seen the shift in Aliamo that they shifted to different type of Swiss care, and we had to more or less Accommodate that with a bigger substation to cope with that. It is purely in first step related to the price of the substrate relating to SAIS. And of course, on as an aspect on margin, we, of course, always trying to look at, say, savings in our printing process, savings in our materials to be able to increase our margin, but those are 2 independent processes. Okay. Thank you. With respect to EVA charging, you have now disclosed the breakdown Between the Netherlands and outside the Netherlands. To get a feel for the different growth rates, could you also provide that ratio for the Q1 of 2020? And could you also rank your top 3 countries outside of the Netherlands in the Q1 of 2021? Yes, we don't give the precise numbers there. We have an internationalization strategy. So what we show here is that we We see that our internationalization strategy is working. We sell our charge points in more than 25 European countries, and we spread out our salespeople over all these countries. It is fair to say that you see that the Netherlands is one of the most developed EV charging countries and still there. There's a lot of new charge points which are needed for especially if we want to reach the 2,030 climate goals. So also in the Dutch market, there's still a huge growth potential, but we definitely see that the countries surrounding the Netherlands Are now starting off, especially Germany and the UK are fast growing markets at the moment. And lastly, could you say something about your development of your net debt situation? So we don't give the numbers on net debt. We are strict on monitoring our working So you can expect us to keep strict on monitoring that working capital in time. Okay. Thank you. We now have a follow-up question from the line of Teitur Kaldur from ABN AMRO of ABHS. Please go ahead. Yes. Thanks again. Maybe short question on your entity in Finland Andover Sweden, can you shortly describe what the progress has been there? And the second question is on the charging equipment. Just to understand it, revenue growth has been 40 6% year on year, but production of charging points plus 58%. But the revenues Are probably linked to the numbers of charging points sold, not the ones produced. Is the number sold also more like 46% or more like 58%? In relation to the Finland, We have a very situation that say Finland is Making use of, say, the effect that in the market there is a transition from, say, open lines to underground lines where we see a more stable development of the market, where the market in Sweden, we are trying to develop its growth slowly. It's more or less to be expected that you cannot in one day say, okay, let's make it easy, go to Sweden and then the next day you only have success. So we Starting with the slide slowly, but we are progressing. But you also may trying to leverage The cross selling aspect of our company and also the relationship we have, of course, with the substations to grid operators and parts in the market that are also busy with renewables that we try to emphasize now the efforts in relationship to the energy storage possibilities in those markets. I think the second question It was related to EV charging and the growth numbers. Well, to some extent that is indeed due to producing and selling. But the major impact on that element is the product mix. You know that product mix can shift from a quarter to a quarter. And the major impact on that revenue growth being slightly lower than the production rate is related to that product mix, which was slightly different in the Q1. So should I understand that, that's probably is primarily the German systems coming into the mix? No, it's an overall mix what we see there. So we see a bit more on the single points Instead of the double and the public charges. Okay. Thanks. We have no further questions coming through. So I will now hand back to Marco for any closing remarks. Okay. This is Marco Roeligelt. I would like to thank everybody for joining in this trading update And appreciate all the questions to maybe enhance some aspects of our trading update and speak to you again say in a few months' time. Thank you for joining today's conference. You may now disconnect your lines. Thank you.