Good day, welcome to Alfen H1 2023 Results Conference Call. Today's conference is being recorded. For the duration of the call, your lines will be in listen-only mode. However, you will have the opportunity to ask questions, and this can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over to Marco Roeleveld, CEO. Please go ahead.
Thank you, Marianne. Good morning, welcome to this webcast regarding the H1 2023 Trading Update of Alfen. We appreciate the fact you have taken the effort to participate. This webcast, the questions that may come forward are handled by the Management Board of Alfen, being Jeroen van Rossen, CFO, Michelle Lesh, CCO, and myself, Marco Roeleveld, CEO. In the H1 2023, we have increased our H2 revenue with 9% compared to last year, we also conclude that 2023 will be for Alfen, the breakthrough year for Energy Storage Systems. In this webcast, we will start with the highlights of the H1 , followed by a short review of the business line, next, we will go in more detail regarding our financials and outlook.
Continuing now with Slide 3 , with the highlights of the H1 2023. In the H1 , we realized € 223.9 million in revenue. This represents a growth of 9% compared to the same period last year. This growth was driven by a growth of 20% of smart distribution, and especially by energy storage systems, with 6.0x the revenue compared to the H1 of last year. The European EV charging market is still hampered by destocking in the distribution channels, leading to a temporary slowdown of our EV charging stations revenue. We experienced a decline in revenue of 36% compared to the same period of last year.
The overall gross margin was 30.5% compared to 35.3% in the same part, same half year of last year. This gross margin decrease is purely driven by shift in business line revenue mix towards energy storage systems. As a percentage of revenue, the adjusted EBITDA declined from 18.4% to 9.4% in this year. We've updated our 2023 full year revenue outlook from € 540 million to € 600 million, and then transferred it to € 490 million to € 520 million, driven by a lower EV charging revenue outlook due to the stocking and challenging market conditions. This adjustment was also communicated to the market last week. Lastly, we want to reconfirm our medium-term objective on revenue and EBITDA.
As proof of our asset-light business model, we have the objective to keep our CapEx below 5% of revenue. Jeroen will go in more detail on the financials later on in this presentation. In the coming sheets, we'll go in a little more detail on each of our business line, starting on Slide 4- Smart Grid Solutions. In the Smart Grid Solutions business line, the revenue grew with 20% to € 85.5 million. Both the grid operators and private network segments contributed to this revenue growth. Grid operators continue to expand and reinforce the distribution grid to support the energy transition, and we continue to benefit from these plans with existing framework agreements with these grid operators. We also continue to prepare for a step change in growth in the coming years as the grid operators scale up their investment plans.
The introduction of the new substation for Liander under the new framework contract will, will lead to a low number of substations produced in the H1 2023. We produced 1,570 substations and small decline of 3% compared to the same period last year. The growth margin for Smart Grid Solutions amounted to 29%, which is at the low end of the bandwidth of 25% to 40% range, as provided at the capital market stage for this business line, but this shift is related purely to product mix differences compared to different quarters. We expect a strong revenue growth in this business line in the coming years. The construction of our additional production facility in Almere is advancing nicely and is on track to be operational in Q1 2024, as can be seen on the photo, Slide 5 .
The Dutch grid operators announced in their 2020- 2022 annual reports, ambition to install much more substations in the coming decade. Already in 2024, we plan for a strong growth and are well prepared for this growth with the new building. We decided two years ago to invest upfront in additional smart grid production capacity to ensure that our growth is not hampered by limited production capacity. This new Alfen location is also a good showcase for all of the products of Alfen and all of our capabilities. We installed two Pacta substations for the grid connections. We will install three Diabolo substations for the electrical distribution around the building. We will install more than 100 AC charging stations.
We'll install several DC charging stations. Of course, we will also install battery energy storage containers that are necessary to be able to level out the energy coming from the solar panels in the relatively high power consumption for the charging stations. We now go to Slide 6 regarding the segmental review of energy storage systems. where in the H1 of this year, the revenue increased from € 9.4 million to € 68.8 million, compared to the same period last year. The momentum in energy storage market is powerful, mostly driven by continuous renewable growth and the need to balance the demand and supply of electricity and the congestion in various grid aspects. This revenue increase was driven by both our stationary systems and our mobile systems. The pipeline of qualified leads and orderings, they continuously develop in a healthy manner.
Currently, our backlog is over one hundred, € 160 million with more than half expected to be executed in the remainder of 2023. The growth margin for energy storage systems amounted to 19%, which is at the lower end of the 15% to 30% margin range we had provided at our Capital Markets Day for this business line. This is due to a relatively high portion of large-scale projects running in the H1 of this year. Now I will hand you over to Michelle Lesh, our CCO, and she will continue on sheet seven with the segmental review of EV charging equipment.
Thanks, Marco. Now let's talk to our EV charging business. For the H1 2023, we saw revenue of € 79.6 million, compared to € 125 million in H1 of 2022. The primary drivers for the drop are two-fold. First, as previously communicated, we saw destocking in the H1 2023, primarily in the home segment. Additionally, we started to see market demand challenges in key geographies such as Germany and the UK. In both of these markets, we saw the ending of subsidies, which are a few of the many drivers of market demand. We still saw 60% of our revenue generated from outside the Netherlands, and our gross margin was 40% for both Q1 and Q2, which is at the midpoint of our previously communicated guidance at our Capital Markets Day.
Fortunately, we are seeing the destocking situation improve for EV charging, we expect second half revenue to be in line with H1 revenue. As we move to the next few slides, we wanted to share more detail on the operating cadence we have with our customers, and therefore the market, and more context on our performance relative to others in the EV charging market. First, on Slide 8 , just like we did with supply chain, we have board engagement on our commercial operating rhythm. We have country and customer-specific action plans in place to know where to focus our efforts. We have a regular internal and external communication cadence to ensure we track progress against those actions and to follow up with our customers.
We partner with our customers on project and pipeline reviews to help them find additional sales opportunities and have expanded our joint channel marketing activities. We've also looked at ways to make their inventory more valuable to their customers by leveraging recent innovations. Next, on Slide 9, we've also taken a historical view on the overall market for Alfen compared to some of our peers. We often get the question about when will destocking be over and our market share position. First, let's look at the destocking challenge. We had rapid growth in 2022. While some peers in the market have communicated destocking is over for them, you can see on this graph that our revenue in 2022 was more than double our peers, which creates a larger inventory position with our channels. The destocking challenge has been larger for us than our peers.
For example, we recently worked with a key channel to execute a large parking project. We supported the installation of their units. However, these units were shipped and delivered in summer of 2022, just now being installed in summer of 2023. This just shows the lag between the Alfen revenue to the final installation for our customers. However, we have moved through the stock in some of our markets and have channels that have begun to order again. This is in line with our previously communicated indication that we would see some pickup in late Q3 and Q4. Even with this large challenge, we are still the largest amongst our peers. This is what provides some insight into our share position, which right now we feel is stable. Long term, the market growth is still there.
We are fortunate to be in so many European markets and be able to serve the public, the business, and the home segments within our portfolio. Now let's take a look at some of our key wins in the H1 on Slide 10, starting with EV charging. With Virta, we secured a three-year contract to enable them to supply SNCF the French national railway operator for both public and private parking facilities. We have a four-year framework agreement with E.ON Drive, which is a part of E.ON, focused on deploying public infrastructure across multiple European countries. We have also been selected as a partner by Aral Pulse, a division of BP p.l.c., to support their business and public infrastructure rollout. In smart grids, a key win for us was our previously communicated multi-year contract with the grid operator, Stedin.
They are the third largest grid operator. With this win, we now have contracts with all three of the grid operators in the Netherlands. We also saw continued demand in two of our key segments, grid-connecting fast charging stations and greenhouses, with contracts with IONITY and Harvest House. In energy storage, we're excited to be building Centrica's first EU energy storage facility in Belgium. We're also proud of the progress we are making on the largest energy storage project in the Netherlands with SemperPower, continuing to see wins in the Nordics with Ilmatar, Klimat Partner. Now on to slide 11. Let's look at some of the key innovations that we've communicated in H1. First, in March of this year, we launched our Ultra substation.
The station will be used in both the Netherlands and Belgium. We are already seeing orders, including one with Electra in Belgium, to grid connect their fast charging stations. Second, as shared at Capital Markets Day, we've developed a 30 kW DC charger. We are on track with our large customers, and we'll begin to work with more customers later this year. We have also launched our Mobile X energy storage solution, which provides a higher power density in the same 10-foot container, 720 kWh versus 422 kWh. This container not only houses the batteries, but also the transformer and switchgear, making the battery mobile truly plug-and-play ready for our customers. Now I'd like to hand it to Jeroen to walk through our financials.
Thank you, Michelle. Let's first have a look at our income statement on Slide 12. If we look at our revenue and other income, that increased from € 205.5 million in the H1 of 2022 to € 223.9 million in the H1 2023. Earlier in the presentation, Marco and Michelle already gave some more details on the individual business lines, so I will now directly go to the growth margin. Net growth margin decreased from 35.3% last year to 30.5% this year, which is driven by a revenue mix shift from EV charging equipment to energy storage systems.
If we look at our personnel costs, that increased from € 25.8 million last year to € 34.9 million this year, an increase of 36%. We grew the number of FTEs from 893 at the end of 2022 to 956 FTEs at June 30, 2023, that is part of the causing of the increase in the personnel cost. The main drivers for that are a 10%, roughly, salary increase as per January 1, 2023, based on the concluded collective labor agreement that's there in the sector. Of course, the rollover effect of last year hires who were not there yet for the full- year 2022, but are fully on the payroll, of course, as from January 1, 2023.
Those two elements have the biggest impact on the rise of the personal cost. We will add some new people in the second half of the year, but definitely not at the pace we saw previously. Other operating costs increased from €10 million last year to € 12.5 million this year. If we exclude one-off costs and special items, we arrive at our adjusted EBITDA, and as you can see, that decreased from € 37.3 million last year to € 21.1 million this year. There are two main drivers for that. The first one is the already mentioned revenue mix shift from EV charging equipment to energy storage systems, and the second driver is that the fixed cost base within EV charging is causing some deleverage.
Finally, our adjusted net profit decreased from € 25.3 million last year to € 10.1 million this year. From the income statement, we now go to the balance sheet on Slide 13. I'll start with the long-term assets. They increased from € 58.7 million at the end of last year to € 85.8 million at June 30, 2023. The capital expenditures amounted to € 20.1 million, compared to € 10.1 million in the same period of 2022. CapEx in the H1 year is high, but that's based on the acquisition, and that was announced earlier, of the new building at the Damsluisweg 70 for our energy storage business line, and the purchase price of that was € 10 million.
Included in the € 20.1 million are also € 4.9 million of capitalized development costs, which demonstrates our continued efforts to invest in innovations for the future. At our Capital Markets Day in May, we set a qualitative objective to maintain our asset-light model. We noticed, however, that that is sometimes perceived in the market as we are going to significantly raise our CapEx. That's not the case. Therefore, we quantify now our medium-term objective on this asset-light business model, and that is to keep our CapEx below 5% of revenue. Now, we'll go to our working capital.
That increased from € 87.6 million at year end 2022, to € 135.1 million at June 30, 2023, which is primarily related to increased stock levels and strategic stock down payments, which we will explain a bit more in detail on the next slide. Let me start with the table on this slide on the left, top hand of this, of this slide. You see two e- elements there, inventory on hand, that is inventory which is in stock, there, but also some down payments that we have on purchase orders for batteries, for example. They are recorded in accordance with accounting regulations under receivables, but it's fair to make this statement, so you can see what actually more or less, holistically speaking, is a, is a real inventory level.
As you see, that inventory level grew quite significantly. We talked before in earlier presentations about the high inventory level for EV charging. With inventory level, don't misunderstand, we do not talk about finished products. They are components, like housing, like relays, like chips, and so on. In EV charging, our inventory level is beyond normalized levels, and in combination with what Michelle Lesh told earlier about the destocking, we do expect this inventory level to come down in the coming quarters and thus will be transferred to cash. The second element and the main driver for the growth of the inventory level, it's a deliberate choice, is to make sure that we have the full supply chain ready for a huge execution on energy storage in Q3 and Q4.
We have shown the high backlog that we have, and we stated also there that more than half of that backlog will be executed in Q3 and Q4. Although the working capital is high, and it's at a high point, and that's also a timing effect, we have the supply chain safeguarded to execute on the Q3 and Q4 revenue stream for energy storage. Of course, as a result of the increase in inventory levels, also our cash position is then impacted. That means that as of the 13th of June, our cash position amounts to a negative € 35.2 million. As our current account overdraft facility is over €100 million, our total cash availability amounts to over €66 million.
Therefore, we maintain significant headroom in our bank overdraft facility, and to avoid any misunderstanding, we are not planning a capital raise. Now let's go to the slide number 15 with our outlook. We expect that the energy storage systems and Smart Grid Solutions markets will continue to grow throughout 2023, as Europe's transition to a carbon-free energy system that is not dependent on fossil fuels continues to gain momentum. As said earlier, for EV charging, this year is considered a bridge year after extraordinary demand in 2022.
Based on our H1 year performance and the current revenue visibility, we update our 2023 full year revenue outlook, which was a range of € 540 million to € 600 million, to a new range of € 490 million to € 520 million, driven by a lower EV charging revenue outlook due to the destocking and challenging market conditions. However, long term, we continue to anticipate positive market developments for all of our business lines as new legislation is pushing the energy transition further and faster. As such, we will also continue to invest in our organization, in product innovation and the production facilities, but we will definitely do it in a very balanced way, thus aligned with the expected growth in the various business lines.
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?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question from the queue, it's star two to remove yourself. Again, please press star one on your telephone keypad. The first question comes from Ruben Devos from Kepler Cheuvreux. Please go ahead.
Yeah. Yes, good morning. Thanks for taking my questions. I just had the first one on basically the operational costs. So I think if my math is a bit right, it looks like below the gross profit line and above EBITDA, you're having OPEX of about € 23 million to € 24 million quarterly run rate. That has been the case in Q1 and now also in Q2. You know, obviously, you've been ramping strongly ahead of, you know, the execution of energy storage. You've also signaled that basically in EV charging, you've decided not to scale down in line with lower volumes. My question is really, looking at H2 and beyond, what is sort of... Is this sort of the run rate that we can continue to expect, € 20 million to €24 million, or could that be somewhat higher?
Could you give any type of guidance on that? That would be very helpful. Thank you.
Of course, there are also, always there a, a bit of timing effects related, because sometimes you have a bit more exhibits, for example, than you have in a, in another quarter. I think from a, from a staffing perspective, as said, we, we are, growing a bit in, in, in the number of FTE, so that will, that will contribute. The major contributor of that, that rise was, and that's, that's shown in Q1 and in Q2, is the rollover effect of the hires of last year and that, and that salary increase. As said, we will, we will continue to invest there, because if you, if you grow fast in a certain area, then you will also, make sure that, that you capture that growth.
Perhaps, a sidestep from EV charging, because the other two are sometimes a bit underestimated, but we have prepared ourselves for, for a huge growth in energy storage. We will, we will continue to expand a bit there, but that will be very qualitative expansion. At the same time, also in Smart Grid Solutions, as said before, with building and constructing a new building, and also making sure the organization is ready for a real step change in growth that we expect there in the next years. I think that's a bit hampering the results for now.
Given the fact that we look very positively towards the future, we, we are not interfering now in the short term to optimize the result. Nevertheless, we will also not continue to grow the organization in the pace we did in the past, because that would not make any sense. We, we try to get a very balanced approach, and I think it's relatively fair to say that this OPEX level is also something we, we are working towards for Q3 and Q4.
Basically, if you look at EV charging, last year in Q2 was quite exceptional. Obviously, you, you were producing 85,000 chargers. The comparable was for very tough in this quarter. Like, like I mentioned, you've decided not to lower your fixed costs and EV charging in line with lower volumes. Is it therefore reasonable to assume that you sort of expect in the foreseeable future to get back to that 85,000, simply because your operations are still able to produce that level?
Yeah, I will leave the outlook of EV charging to Michelle. I think she can give a bit of flavor on how we look at destocking and going forward. It's. I think maybe from a financial perspective, you saw a huge operational leverage in 2022, so the organization of Alfen is able to capture more revenue than they do today. Also you see a deleverage going on when, when debt is decreasing. But the positive side of it is, is that we feel that the organization is, is capable of handling far more. If we are at the end of destocking and ordering take picks up again and revenue streams go up, then also operational leverage directly kicks in. That means that, that the gross margin that you generate nearly fully is then translated to the bottom line, and then we're looking at totally different numbers again.
Yeah, then from a market perspective, I think what you'll see Q3 in line with Q2, second half in line with H1, then, you know, we still see EV registrations increasing, which usually drives demand for charging. Fortunately, we are able to ramp down and ramp up with our flexible labor force. We'll be able to support the future growth when it comes back.
Okay. A final question just on maybe pricing also in EV charging. Yeah, quite some developments in terms of regulation, changing standards and product protocols, smart charging functionality, you know, some, some pricing pressure in home chargers, I believe. Could you maybe, yeah, provide a few comments on the pricing environment today? Thank you.
Yeah. I think fortunately, we're in three segments. We're in the home, we're in business, we're in public. Yes, there, there is some pricing pressure, and what I'd say is the low to mid-range of the home segment, depending on the capabilities that are needed. As you get into the smart home segment, where you need to be able to communicate with a smart meter, as you get into the business segment, where you need to be able to do load balancing, what we're seeing is our pricing is fairly stable. What you have seen is some of our customers have changed pricing to their end customers, but a lot of that was to try to drive inventory to installations to get rid of the stock.
From our perspective, our pricing is fairly stable, and as you mentioned, there are so many protocols and standards and things that are being developed, that if anything, the charging equipment is moving up the value chain and not necessarily moving down and being more commoditized, especially in the high-end home, business, and public segments.
All right. Thank you very much.
The next question comes from Nikita Lal from Deutsche Bank. Please go ahead.
Hi, good morning. This is Nikita from Deutsche Bank. Thank you for taking my question. I have actually three. The first question on cash generation. We saw that free cash flow was highly negative in H1 due to higher CapEx as well as working capital. How should we think about this in H2?
Well, I'll give the direct. I, I thought you were going to ask the three questions. No, on the cash generation, yeah, that- that's high, but that's, that's, purely, related to, the inventory level, which is on the high end. That's the only trigger, for that. Besides, of course, that we have now, a bit of an extraordinary year where we bought a building. That is a €10 million extra CapEx, because I think if you look at the CapEx in total, if you would deduct the €10 million of that incidental buy of a, of a building, which we do for, for the future, growth of, of energy storage, then we would be at the same level of, last year.
It's purely related to the inventory levels, and I, I just explained why they are on the high end. On the flip side, the good news is, is that, that we will reduce the, the inventory levels in EV charging, because they are beyond normalized levels. That's also related to the fact that we have a huge ramp up and these huge supply chain challenges in previous years with long, lead time items of over a year. Yeah, the forecasting has already been done, let's say nearly two years ago. And then when, of course, the revenue is decreasing, yeah, that has an impact on the, on the stock levels. We're very confident that we will drive them down.
It will take some time, nevertheless, that will be generated to cash. For energy storage, I think, looking at it from a momentum in time, then it is very high. Looking at it from the positive side, if you want to execute on, let's say, more than € 85 million of backlog, that's huge. That's, that's a revenue stream, which is far higher than we have in the H1 year already for energy storage, with a already six-fold revenue in the H1 year. That's an extreme step up, and we make sure that the full supply chain is there. The inverters, the batteries, the containers, it's there, we can execute.
Okay, thank you for this. My second question is around the full year guidance. I think Michelle said, and I'm not sure if I understood correctly, but she said H2 revenue should be in line with H1. Is this correct?
For EV charging.
Okay, understood. If we think about then the full year revenue for your group, and think about Q3 being at the same level as Q2, how should be Q4 so exceptionally strong to meet the guidance at midpoint? Could you maybe elaborate more on the drivers there?
Yeah. just to be clear, Q3 equals Q2 EV charging, H2, H1, EV charging, and I'll let Jeroen comment more on the overall guidance?
I think if you look at the overall guidance, I already gave some explanation there. If, the revenue in the H1 year for energy storage is slightly below € 60 million, and we, and we make a statement that we have a € 170 million backlog, and more than half of it will be executed in the, in the H2 , then, then it's, it's not difficult to calculate that the revenue will also be much higher in the H2 for energy storage. The trend of Smart Grid Solutions will continue. Energy storage has a huge backlog on which we will execute, and then, as said, we expect the, the H1 year of EV charging in total, be roughly the same in the second half year.
Yeah, then, then you come up to this kind of range, and then it depends a bit on, is the, is the destocking going slightly faster than, than we expect at the moment, or slightly slower, or can we execute a little bit more on energy storage project before year end or not? That, those are timing elements. We're quite, quite confident about the bandwidth that we gave now. That's also why we limited the bandwidth to a much smaller bandwidth than earlier in the year.
Perfect. Thank you for this. Lastly, on your midterm guidance, I mean, you had a adjusted EBITDA margin of 15% to 20%. What do you expect, what you, you will see in the coming years, so that will support your EBIT level, EBITDA level?
Well, I, I think what you will see is, is that. We always said that, that we, we are wanting to maintain our growth margins. Please note that the drop in growth margin, percentage wise, at the moment, is purely based on a business line, different business line mix. We talked earlier about the operational leverage, and I think it's fair to say that we, we are building an organization for, for energy storage, which should be able to capture future growth. We feel that we are at the start of the operational leverage journey for energy storage. We are continuing and seeing a, a real step change in growth in the Smart Grid Solutions. Also there, we, we should have the possibilities to further, create operational leverage.
If EV charging is, is back on track and is growing again, yeah, we, we've, we've shown in the past that the contribution of that, both from a, a growth margin perspective, but also from an operational leverage perspective, is big. That's, that's the way to look at it going forward. We do expect, and we are, of course, aiming to further grow our, our EBITDA in, in over time. That's also why we said, if we look at our own, let's say, models and our own projections, then of course, this is a, a setback with EV charging. Nevertheless, long term, we're, we're, we're still on track to meet those medium-term objectives, and that's why we also said we, we restate them.
Okay, thank you very much.
The next question comes from Thijs Berkelder from ABN AMRO - ODDO BHF. Please go ahead.
Yeah, good morning. First question on the inventories. Can you maybe give us a split of the inventory level you're showing at Slide 14, the € 195 million? What is the part of EV charging versus energy storage? When looking at the strong growth in energy storage, why would inventory and energy storage at year-end be lower than at the mid-year stage? Because I think that market is growing fast, is expected to grow fast, so you will need to order much more batteries than you've done a year ago. That's my first question. Then second question is on growth margins. Can you maybe explain why Smart Grid Solutions growth margins are at the low end of the guidance range, and what you expect to happen there in next year?
Related to that, in Smart Grid Solutions, already revenue growth is something like 20% in H1, and you are now guiding for a step change in 2024. Is that +50% or +100%? What do you mean with a step change?
We can start at the end. From a step change perspective, what we do expect is a Capital Markets Day. We've communicated a CAGR of 10% to 15% for Smart Grid Solutions, we expect from 2024 on, that that will be significantly higher than 10% to 15%. We're not going to see 50%. This market doesn't grow that fast, you know, 20% is reasonable.
We progressing timeline. Of course, we are also now building a business. At this moment, we have certain limitations within the existing environment to grow, say, the number of substation we can produce. We have to balance out, say, our growth also with our capabilities. We are lucky that two years ago we made the decision to make, to start planning on the building, because if we had to plan, start planning now, we would more or less be having a problem because the grid operators, their planning processes are now such that they want us to grow quite quickly in numbers in next year.
The pace in which we can grow is also something that will be debated and say, whether it is next quarter or in the year results when we plan in 2024, more give the outlook of next year, then it will be more clear what the percentages are. But say, because of the fact we are both grid operators and projects, then we have expected fundamentally high growth with the grid operators, and while the projects will keep its normal pace.... Thijs, coming back to the inventory question, I, I'm willing to be, if, to give roughly that split. So for energy storage, that is approaching the €90 million in total. With the EV charging, it's roughly € 85 million, and the remainder is on the smart grids.
Looking at the EV charging, and we said it before, if you look at, let's say, normalized burn rates again, yeah, then, then, it's fair to say that with a € 30 million to € 40 million inventory level, you have enough. So we have roughly double, and in the next periods, we will reduce that inventory time over time. Every week I see that declining, but sometimes you get a delivery in, and then it's slightly up, and then it's downwards again. That is what we will see. Yes, fair to say that energy storage will remain on a bit on a higher level. But that is also fully influenced by, let's say, by timing of projects.
Sometimes, and that is in the accounting treatments, with Incoterms or whatsoever, yeah, then it's really a matter of shipping. There are also timing moments, because if you execute on a project, let's say in, in, in, in February, and you get the batteries in January 10, then you don't see anything at year-end, and the, and the level is low. If you get them in before Christmas, then all of a sudden, the inventory level is high. Fair to say that we will have a higher inventory level for Energy Storage System, not higher compared to now. Also good to notice that we also negotiated different delivery terms.
We are now capable of spreading the deliveries a bit more in time. Probably later on in the year, we can give a bit more flavor on it, but we are in a possibility that we, that we can spread it a bit more and, and therefore, also point a bit more towards, let's say, execution of the project. That's not the case yet for now, for the half year. That's why we, we decided to make sure that we have them, and that we can execute, because, yeah, otherwise you, you jeopardize the execution on your, on your backlog. I think that's the way to look at it also going forward. I hope that gives some clarity.
Yeah, the gross margin outlook?
For, for Smart Grid Solutions, you mean?
Well, preferably for all segments, but
Oh, yeah, Well, what you saw in the, in the product, that's purely related to the, to the product mix. There are two elements there. I explained it, somewhat earlier in earlier presentations, that we, we sell a certain type of a transformer substation, and, and we call it, for example, a 10 A, and it has a pricing and a margin, and then another customer also orders a 10 A, but has slightly different switch gear and, and a slightly, more cables in, and then, and then the... That margin is slightly higher. If you have a more, well, let's say, standardized, product, then it's, then it's slightly lower. It's purely related to product mix, and on top of, of it, the relative part of, the projects in Smart Grid Solutions was, was a bit lower in Q2.
That, those two elements gave rise to a, to a small drop in the, in the growth margin, there. We do expect that to, to pick up again.
Okay. Thank you.
The next question comes from Jeremy Kincaid, from Van Lanschot Kempen. Please go ahead.
Good morning, all. I just wanna say thank you for the very clear guidance around the EV charging business. I just wanted to run a couple of numbers past you to get your thoughts. Obviously, you're saying that the Q3 should be the same as the second quarter, which would imply revenues of €33 million. In the H1, the same as... Sorry, the H2 , same as the H1, which would imply fourth quarter revenues of €47 million. What I think is quite interesting about that fourth quarter, is that it's the Q1 in a couple of years or so, where there's been no inventory stocking or de-stocking impacting that number. On theory, represents underlying demand , if I understand you right.
Then you're saying, on slide nine, that you're expecting the EV charger point market to grow from 15% to 20% per annum. If I understand the Alfen house view correctly, should we sort of be applying a 15% to 20% growth rate to, say, €47 million or €40 million or €50 million in the Q4 , for sort of a run rate going forward, that's not impacted by stocking or de-stocking issues?
The, the difficulty in this situation, of course, is that this we can give indications, but things are not mathematically always say, can have a direct translation. Several aspects into play, but we more or less saw not only the de-stocking element, but we see, especially, for example, in the Netherlands and Germany, that there is some, say, and I call it disturbance in the market in relationship to the tax advantages or grants that is being incorporated by governments. There is always a fluctuation in the market from whether it's from one year to the other, or from a quarter to the other, and say, the average number of growth of that 15% to 20% is an average number. That we cannot say that every quarter there'll be a mathematical translation of those elements.
On the other hand, to be fair, we think at this moment, that in second half year, we have, more or less, been to the floor, in the de-stocking elements. If the market keeps ticking up, if the cars come to the market.
We, by definition, think also that the translation to revenue for us will also pick up, because at this moment, we have no indication that there is a fundamental change in market position of Alfen or our share of wallet with our customers. We have more, therefore, an expectation that our revenue will pick up more or less in line with the growth, overall growth in the market. How that grows quarter by quarter, really, a value will continue, that's a little bit hard to predict. In general terms, you might be right, but say, if we are really there in the first quarter of next year, there might be practical circumstances, it will be a little bit less or a little bit more. It is...
In general terms, we are confident about our market position. We are also confident, say, about the future market growth. How that will evolve quarter- by- quarter, that's a little bit more difficult to predict, although, let's say, trend-wise, you're correct.
Okay, understood. Then Slide 10 was also very useful, I thought, with your recent commercial successes. Could you just talk about the EV charging commercial successes and maybe quantify the size of those and whether or not you think it might impact your overall market share?
Yeah, so, you know, these are multi-year framework agreements. What you see is most of them are international, primarily supporting kind of the business and public market, where we're very strong. We can't really put numbers on those because we don't communicate that specifically by customer, by market, but all of them are impactful for the business, and is part, part of what gives us confidence that things are, they're moving in the right direction. As you know, Virta has been a customer, but their contract with SNCF is a new one, so that's incremental growth for Virta. E.ON Drive, new customer for us. Aral Pulse, new customer for us.
All of this is adding to, you know, our confidence that our market position is, is at least stable, because we are able to add new customers as well as continuing to grow our existing customer base.
Great. Thank you. And then just one question, one more question from me on, on debt and the bank headroom. It's a little bit lower than what you've had in the past. It's €66 million of, of headroom. I think the working capital piece, is well understood now based on the prior questions, could you just talk a little bit more about, the CapEx for the H2 with the, building that's required? And that move-- that's, I think, the final moving point that, investors might have questions on.
Yeah, I think what we said before is that we will have, incidentally, a somewhat higher CapEx due to the buildings, and we, so we have to do some refurbishment, therefore, for that building. That is to be expected, and that's also a thing for ourselves. More structurally long run, we always said that we will slightly increase the material part of it, so the capitalized development costs.
At the same time, we also from a PP&E perspective, will continue to invest in some molds that we need, because, for example, in smart grids, if you have a step change in growth that you expect, and the step change is not the previous growth of 10% to 11% or 12%, now it's 20%, and then feeling that will be increased going forward. Then also some investments in molds is necessary to safeguard that, because that means much more transformer substations than we do today. So that is to be expected, but all in all, the PP&E part is relatively stable and limited. I think that's the way to look at it going forward.
With the buildings now going on, there are some incidental extra investments involved, that's why we also wanted to give a new qualitative objective for it, because we noticed that the market picked up. We thought, honestly, that we would say, "Well, everyone understands as-is means, no major CapEx coming from us." There was some misunderstanding by, by us stating it as a qualitative objective and not quantifying it anymore, that as to... It's sometimes per- being perceived in the market as, "Oh, they are going to really step up in CapEx, and that will, that will grow." That is structurally not the case.
Sure. Okay, thank you very much.
The next question comes from David Kerstens from Jefferies.
Good morning. Thank you for taking my questions. I've got three, please. First, can you explain the link between the registrations up 45%, driving demand for EV charging equipment in the second half of the year? Is it currently not an exceptional situation in EV registrations related to huge order backlogs from 2022? The second question is on the pricing. Your ASP in EV charging was down 7% quarter-on-quarter. Is that due to a mix shift, or do you also see the first impact of lower prices? Maybe when you look at the home segment, your entry-level model at around € 650, I think Tesla recently lowered their prices to € 500. Is there a risk that ASPs need to come down further, or is the price difference sustainable?
Maybe a final question on the balance sheet. Net debt increased much faster than expected, but you're saying you're not planning a capital increase. Can you run us through those assumptions behind the leverage ratio you anticipate going forward, and what are the governance in your loan documents with regards to Net Debt to EBITDA? Thank you very much.
David, to start with registrations, you're right, right? The car registrations are seeing a little bit of an uptick, but tied to car orders from 2021- 2022. From an EV registration perspective, we're not directly tying that, that to our pickup in second half. What we see with EV registrations is it's more of an overall market indicator that people are still buying and taking delivery of cars. Obviously, we need to stay on top of EV registrations going forward. Will we see them continue to rise? What will happen? That's for us, more of a macro market indicator. For us, the second half is more tied to what we're actually seeing from an ordering intake and operating rhythm perspective with our customers. What they've told us they're intending to do, new contracts that we've won.
Our H2 is really more tied to what we see and feel tangibly, whereas EV registrations are more of a macro trend that is driving the entire industry. From a pricing perspective, yes, primarily mix shift. If we sell more of our singles than versus our doubles or our twins, then you definitely see an impact on the ASP because the pricing levels are different. For our lowest end product, I think, yes, there are products out there that are fairly, I don't want to say generic, but they don't always meet the country needs in terms of smart meter connectivity, and other feature functions that, you know, we tend to focus on more in that smart home segment. I know Tesla's charging infrastructure in the United States.
I know they have an entry-level model that they can serve with their vehicles, but what we've seen and heard from customers is they come in thinking they want that, but when they realize those chargers can't connect to the smart meter, can't do more, they'll often leave with a different model charger, sometimes an inaudible. It's definitely something that we're paying attention to in terms of pricing developments, we're not seeing it as a primary threat because, again, we play in that smart home segment, and there we're seeing things a little bit more stable.
I think, going to the balance sheet, David, I think there are two elements to distinct there. That's the normal regular borrowings in which we have bank loans and lease liabilities. I think that is, that is in accordance with what we expect. We are constructing that building at a bank loan, so that will increase to some extent. Of course, we have the purchase of the new building, which is also financed through a bank loan of €10 million. That means structurally, more or less, debt position from borrowings and lease payments and et cetera, is roughly around €50 million.
Our Net Debt to EBITDA ratio is three in the covenant. That means that with the €50 million, you have more or less, based on, on, let's say the rolling forecast of the EBITDAs, we have the whole RCF available, and that's, that's the way to look at it. Then, noticing that I mentioned that the inventory levels in EV charging should come down and should generate cash. Also, of course, we always said it's, it's about profitable growth.
If we grow further and are able to reduce the inventory levels a bit, and we are strict on monitoring our working capital, as you know, then also you generate free cash flow, and that's the way we look at our balance sheet. Because we got some questions on, yeah, the working capital is increasing and is there a capital raise? We wanted to make clear that for now we have sufficient headroom in the facility that is readily available. We are focusing on driving the inventory levels down, we're not planning a capital raise.
Just to clarify, you're saying a sustainable underlying net debt level would be around €50 million, whereas in, in the H1, yeah, you were well above that, but if inventory levels in EV charging will reverse in the second half, you get back to that €50 million level.
Yeah, I say, I say the net debt, then that I only referred, that's not a net debt, including the cash. I referred about the borrowings side of it. That is structurally roughly a € 50 billion to €55 billion level area. Then, of course, your bank's position at a certain moment is contributing to a net debt or a net cash, because if it's positive, it's a deduction. That's the way to look at it. That cash position is more directly related. That's timing also sometimes in the relationship to working capital. The more borrowing part of it is a more structural element, because those are lease obligations in combination with bank loans.
Understood. Thank, thank you very much.
You're welcome.
The next question comes from Maarten Verbeek from The IDEA!. Please go ahead.
Good morning, it's Maarten Verbeek of The IDEA!. Two questions from my side. Firstly, when I look at your cash flow statement, I do see that there is an issued loan of -€ 11.5. Could you provide some more color on that one? Secondly, apparently, you say that you have suffered much more from the inventory correction or destocking than your peers. Now, more or less, that is stabilized. Do you think that from this moment onwards, you will be outperforming your peers?
Yeah. On the first question, now, now I'm getting really technical, but I, I explained it a couple of, earlier in a somewhat earlier presentation, that, that is related to the construction of our building. At the time when we, when we were entering into that building situation, there, there, we had a project developer, and, then normally the project developer finances-... the construction, and then at the end, when the building is delivered, you get the building in, in a lease contract, which we also sign. And then, the lease installments are there.
When we were having the discussions and negotiations with the project developer, we noticed that their financing and the interest rate that they needed to pay on the construction was much higher than what we needed to pay. We came to a kind of situation there, and we said, "Well, we are not willing to have these high interest costs and then get them back in these installments because we can finance it cheaper ourselves." There, that's why we said we are going to finance the construction of the building. That's, that's renting out, let's say, that's, that's a, that's a loan that we provide to the project developer for the construction of the building.
The opposite side of it is that we have a loan to the banks. The moment, and that's why you see a negative amount or an element there of the € 11.5 million issued loans. That is related to that, because we have an other receivable in the non-current assets that you see happening there, and the opposite is a bank loan that we have. What will happen at the end when the building is ready, and I'm giving, let's say, not a precise number, but assume we have €20 million, for example, then we have at the moment the building is transferred to us, we have a €20 million receivable on the project developer and a €20 million bank loan.
At that moment, we are entering into a lease agreement, so then the building is transferred to a lease. Our receivable will be redeemed. We redeem the loan to the bank, so that's 0. From an accounting perspective, an IFRS 16 lease contract kicks in, meaning that we have a right of use asset and an opposite lease liability, which then roughly, probably will be the same type of numbers, but it's just a reallocation of that element. That is what it is. Yeah, it is a bit atypical, but we save quite a lot of money with it. We thought it was worthwhile entering into this construction. I hope it gives some clarity because it's quite a technical accounting issue.
Then from a market position, I think, you know, our, our ambition is always to outperform the market. You know, we feel that we're strongly positioned with our current product portfolio. You know, new innovations are on the way, and I think it also helps that as Alfen, we're in multiple European countries. We're in all three business segments: business, home, public. I think that gives us more possibilities to outperform than maybe some of our, our peers, but we'll have to see how things play out.
Okay, thank you.
As there are no further questions, that will conclude today's question and answer session. I would like to hand the call back over to Mr. Roeleveld for closing remarks.
Okay, I would like to thank everybody for their attention, and also for the questions, that are raised in order to be, for us to be clarifying a little bit more about the practice situation. Thanks for all the questions, and therefore, I wish, let's say, we will, meet again in the present, and also after the Q4 , and are able also to see the development there, and also to... for us to be able to show the recovery of the EV charging, but also to recapture the growth we are planning for, and that we can sustain or, make clear that we are well on track to, live, to our promises on the, medium objectives. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.