Alfen N.V. (ALFEN) Earnings Call Transcript & Summary

Hello, and welcome to the Alfen 2019 Full Year Results Call. My name is Rosie, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to Marco Roeleveld to begin today's conference. Thank you.

Good morning. Welcome to this webcast about the full year 2019 results of Alfen. We appreciate the fact that you have taken effort to participate. And this webcast will be presented by the management board of Alfen, Jeroen Rossen, CFO; Richard Jongsma, CCO; and myself, Marco Roeleveld, CEO. With due pride, we can look at the results of 2019 that show that we can deliver on our profitable growth strategy. In new Smart grid solutions market, we've improved our market position, successfully upgraded our production controls and expanded our production. With our EV chargers in a favorable European market, we significantly outpaced the market growth. And in Energy storage, we made good progress in securing new orders and product innovations to be ready for future growth. Also in other areas, we made progress in 2019. Alfen has a long proven record on CSR. However, we renewed our CSR strategy and aligned it with United Nations Sustainable Development Goals. And we further expanded our in-house academy with now more than 50 participants. And we held our first Capital Markets Day in November. Assuming you have noted the usual disclaimer, we can now go to Sheet 3 with a table of content of this webcast. In this webcast, we will first come onto the highlights of 2019 and the outlook for 2020, and then we will continue with an evaluation of the progress with regard to the realization of our profitable growth strategy. And next, we will go in more detail on our financials. Now we can go to Sheet 4 with the highlights. The full revenue growth was 41%, and we realized in 2019 EUR 143 million in revenue compared to EUR 102 million in 2018. This growth was mainly driven by a 113% growth in EV charging equipment and a 40% growth of Smart grid solutions. Our profitability grew even stronger. As a percentage of revenue, the adjusted EBITDA improved from 3.6% in 2018 to 10.1% in 2019. The net debt was decreased and operating cash flow was positive. Jeroen will go in more detail on the financials later on in his presentation. Our market position also improved in 2019, and later on in the presentation, we'll go in more detail on some important new clients and contract wins. On Sheet 5, we have stated the outlook for 2020, where we can say that supported by an anticipated growth in all our business lines, we confirm our strategy and medium-term objectives. Being first, a revenue CAGR of 40%; second, growing revenue outside the Netherlands to above 50%; third, improving the adjusted EBITDA margin percentage to a mid- to high teens; and fourth, maintaining a sustainable capital expenditure level below 3%. And our revenue outlook for 2020 will be -- is between EUR 180 million and EUR 220 million. We will now continue on Sheet 6 with the revenue split in 2019. If we compare the 2 years, '19 and '18, you can see that on the graph on the left-hand side, and I will go in some detail on all the 3 of our business lines. First, regarding Energy storage solutions. As also said in the first half year results, we are convinced of the market potential for Energy storage. In the first half, the number of -- in the first half of 2019, the number of projects were relatively limited. Challenging business [ grades ] across the [ late-stage ] of the market and complex [ lending ] processes resulted in delayed decision-making across the industry. However, in the second half of 2019, the situation changed. We've seen orders picking up with new clients like Fortum, but also orders with existing customers like Greener and Vattenfall. Our proven track record across multiple storage applications is playing to our advantage, and we keep investing in developments as we can show with the new, next-generation mobile storage solutions for festivals and events and the high-density storage concepts. I will go in more detail on EV charging revenue growth. Our growth is driven by growing EV markets, increased revenues and the framework agreements that have been set up over the past years, new client wins and further internationalizations. We strengthened our international sales force in Norway, Germany and the United Kingdom. And to accommodate the growing revenue, we realized additional product lines that enable higher output, more flexibility and increased efficiency. And we realized various new product introduction and innovations preparing for further growth. In our Smart grid solutions business line, the growth is driven by continued grid investments, a strong market environment for projects in the solar PV sector, new opportunities related to EV charging hubs and increasing revenues from service. And we have been able to further diversify our customer base. Also here, we have installed an additional production line that enables higher output, more flexibility and increased efficiency. And our CFO, Jeroen Rossen will now continue on Sheet 7 with a more in-depth explanation about our financial results.

Thank you, Marco. We're now on Slide 7, where we'll take a look at our adjusted EBITDA. If you look at the graph on the top left hand of the slide, you see that we grew our adjusted EBITDA by over 300% from EUR 3.6 million in 2018 to EUR 14.5 million in 2019. The EUR 14.5 million is including an amount of EUR 1.9 million with respect to the changed lease accounting guidelines under IFRS 16. Percentage-wise, our adjusted EBITDA increased from 3.6% of revenues in 2018 to 10.1% of revenues in 2019. And the increase in our adjusted EBITDA is driven by a couple of elements: first of all, our strong revenue growth; second, the increased gross margins, which grew from 29.7% in 2018 to 35.1% in 2019. And as also explained at our half year figures and at our Capital Markets Day, this is the result of a couple of all positive effects like our strong market position, our leverage from increased scale, a shift towards increasingly complex solutions and a favorable product mix. The third element driving the increase of the adjusted EBITDA is the leverage of our fixed cost base, while we are realizing strong revenue growth. Going forward, we anticipate a continuation of our strong revenue growth and a further leverage of our fixed cost base. The medium-term objective is, therefore, still to improve the adjusted EBITDA margin to mid- to high teens. On the next slide, Slide 8, we will take a look at our net debt position. What you see on the slide on the left hand is that the net debt position at the end of 2018 was EUR 16.6 million. If we include the effect of the changed lease accounting under IFRS 16, we arrive in the opening balance at a net debt position of EUR 24.5 million, which gives a like-for-like comparison with the closing balance of 2019. And as you can see, the net debt at the end of the year is EUR 19.3 million, which is a decrease of 21% in our net debt position. If we look at the net debt-to-adjusted EBITDA ratio, that was 4.6 in 2018 and significantly decreased to 1.3 in 2019. The elements which are supporting the reduction of our net debt are our working capital, which decreased from EUR 5 million in the opening balance to EUR 3.1 million in the closing balance, despite the further growth of our business. Furthermore, our operating cash flow in 2019 was EUR 14.1 million positive compared to EUR 1.5 million negative in 2018. So now I will hand over to Marco again to address our commercial successes in 2019.

Thank you, Jeroen. I will now go in more detail regarding some commercial successes in 2019. First for Smart grid solutions. The successful tender with Enexis was an important achievement for Alfen. Enexis is one of the biggest grid operators in the Netherlands and awarded a 4-plus-4-year supply contract exclusively to Alfen. The very stringent technical requirements and a proven record on sustainability ask for maximum creativity and high technical capabilities. The Jamtkraft contract marks our first entry in the Swedish market for Smart grid solutions. Jamtkraft is a local power company in the north of Sweden, and they've selected Alfen as a preferred supplier of secondary substations for a group of 19 Swedish grid operators for 3 to 5 years. For EV charging agreement, 2 other examples. In United Kingdom, we entered in a new contract with Drax. Drax is a utility that has ambition to supply 0-carbon, low-cost energy, and they selected Alfen because of the proven reliability of the products and the extensive smart charging capabilities. Together with our distributors in France and the U.K., we will supply charging stations to the headquarters of Volkswagen in these countries. Here again, the proven reliability of the products and extensive smart charging capabilities made Alfen the chosen partner. For Energy storage, I would like to go in a little bit more detail on 2 won contracts. First, the contract with Uniper for a 10-megawatt system near Rotterdam. Uniper made the decision to award Alfen the contract because of 3 aspects. First, the very small footprint of the system due to the new high-density configuration, where we were able to upgrade the maximum power rating in a container, 40-foot container, from 2 to 3 megawatts. Secondly, the integrating capabilities in the physical electrical network of the existing plant of Uniper. And thirdly, but also the integrated capabilities of -- integrating capabilities of Alfen in relation to the control network of the overall plant of Uniper. The second Energy storage contract to highlight is a new contract for 30 pieces of mobile energy storage systems for Greener. After 2 successful rental seasons, Greener wants to expand their services across Europe. Alfen was and is the ideal partner for this because we have translated all experience since over the last 2 years in an updated product in which we enhance the reliability and easy integration on all sorts of applications. Obviously, then you can find an overview of our progress to come up with an updated CSR strategy. Alfen has a long-standing CSR tradition. And environmental-friendly focus in product development and carbon dioxide reduction program for many years and our in-house academy for -- since 2008 are good examples of this. The process to update our CSR strategy was executed in 4 steps. The first of these step in this process was started in the second quarter of 2019 with a stakeholder survey in which we interacted with all relevant stakeholders of Alfen. In the next step, we mapped the different options of the stakeholders in a materiality and an analysis diagram, and we used the most important topics out of this mapping to bring focus in our CSR strategy. This was also presented at the Capital Markets Day in November. In December, we matched these most important topics with the relevant United Nations Sustainable Development Goals, and we came up with 4 of these goals and have set up a reporting structure to be able to start reporting in the coming years on the progress in realizing our targets. An overview of progress at our medium-term objectives can be seen on Sheet 11. For the 4 objectives, the program from 2016-2019 has been put into a graph. Our challenges are to monitor the tide balance between revenue growth and cost for this growth. As clearly can be seen in the EBITDA graph, in 2018, we absorbed extra cost to facilitate the hampering supply chain at Smart grid solutions and limited orders in the Energy storage business line. In 2019, we have come back on track on our strategy to grow the EBITDA margin. Regarding the international revenue, one might raise the question whether have made progress in 2019, since the percentage of international revenue did not grow. We are confident that the percentage of international revenue will keep growing in the coming years. The growth of EV charging revenue and Energy storage will be for a large part outside of the Netherlands, and therefore, drive our international revenue. Richard, can you now continue with the progress against the strategy?

Sure. Thank you, Marco. I will now take you through the progress against our strategy, and I will continue with Slide 13. Our 4 levers of growth should be well-known by now. All markets we work in are fast-growing markets. We have an intensive internationalization action plan, and on top of our growing installed base, we supply service and maintenance. And the true unique opportunity for Alfen is to cross-sell our products over different business lines. For Alfen, a customer in one business unit is a prospect for all other business units. Let me first address the market growth on Slide 14. The markets where we operate in continue to grow. As for the Smart grids market, investments in the grid by grid companies continue to grow, and the number and size of solar PV parks are growing as well, a market for which Alfen has developed a unique and tailored solution. Installed PV capacity in the Netherlands is expected to show a growth of 37% on an annual basis between 2018 and 2023. For EV charging, new EV car registrations throughout Europe is growing rapidly, and the expected growth in new charging stations in Europe between 2019 and 2023 is 17%. The OLEV brand in the U.K. for smart charging solution, we forecast that 1.8 million EV charger in the Netherlands by 2030, and chargers being Eichrecht-compliant for the German market are playing in our favor. In the Energy storage market, we see the market growing more rapidly and the prices of battery slowly decreasing. The market fundamentals for Energy storage are very good, and market and growth expectations are increasing. More and more companies are expressing their Energy storage ambitions and turn their interest around into actual decisions. For instance, like Uniper, with 10-megawatt energy storage system, Vattenfall, with a 12-megawatt system and like Greener with 30 mobile energy storage systems for the rental market. Slide 15. What we have said before, internationalization is very important for Alfen. Therefore, we are happy to share with you that our revenues outside the Netherlands have grown in 2019 with 38% from EUR 29 million in 2018 to EUR 40 million in 2019. In our smart grid business, we were able to maintain our market position in the Netherlands, Belgium and Finland, and we focus on further growth in, for instance, Sweden and on follow-our-customer approach. Also the strong growth in our EV charging business in our home market has contributed, where we grow market share with the presence of our own sales force and with further internationalization of our client base. For instance, with E.ON, Vattenfall and Fortum. For our Energy storage business, we were able to scale up with existing international clients, like Vattenfall, and new clients across Europe, like Fortum, with who we have a signed framework agreement for the coming years. I continue with Slide 16 about service. We continue to focus on our ambition to grow our service offering, both in Holland and beyond. In all our business units, we are benefiting from a growing installed base, especially for smart grids at PV parks and for charging hubs, which we see as another high-potential market segment. We continue with our standardized service packets with remote service and control, called Alfen Connect, that goes with our storage projects. And further, international rollouts of our EV service partners, also in Scandinavia, Germany, Belgium, the United Kingdom, France, Italy, Spain and also in Portugal. Moving on to Slide 17. We continue to benefit from our unique and true possibility to integrate and cross-sell our product solutions. As we explained before, a customer in one business unit is ultimately a prospect for another business unit. Shell, for instance. We are now supplying grid connections to facilitate our ultrafast Shell Recharges at around 50 Shell locations, and recently, Shell has decided to add an Alfen energy storage system to provide peak-shaving at a Shell Recharge location. Another example is Greenchoice. Alfen combines its expertise in smart grids, energy storage and EV charging by developing and delivering a charging hub for mobile storage systems, where these mobile storage systems can be recharged with renewable energy and provide grid stabilization whenever these systems are not deployed at events or festivals. Now Jeroen will continue with the financials and outlook.

Thank you, Richard. Let us start with the income statement on Slide 19. As you can see, we grew our revenue and other income from EUR 101.9 million in 2018 to EUR 143.2 million in 2019. And this revenue growth is driven by a strong market growth and is further bolstered by internationalization, cross-selling and service. We grew our gross margins from 29.7% in '18 to 35.1% in 2019, which is the result of a couple of all positive effects, like our strong market position, our leverage from increased scale, a shift towards increasingly complex solutions and favorable product mix effects. Our personnel cost increased from EUR 19.1 million in '18 to EUR 27.2 million in 2019. We grew the number of full-time equivalents from 410 at the end of '18 to 497 at the end of 2019. We do, however, see the first steps towards leverage, as the growth in the average number of direct FTEs was 37% in 2019 and the growth in the average number of indirect FTEs was 26%. Our other operating costs increased from EUR 8.8 million in '18 to EUR 9.2 million in 2019. Fair to say that in 2019, the lease expenses for an amount of EUR 1.9 million are no longer recorded under the other operating costs as a result of the changed lease accounting guidelines under IFRS 16. If you look at our EBITDA, debt increased from EUR 2.4 million in '18 to nearly EUR 13.9 million in 2019. Excluding the one-offs and special items, we arrive at our adjusted EBITDA, which increased from EUR 3.6 million in '18 to over EUR 14.5 million in 2019. Excluding the positive IFRS 16 effect on the adjusted EBITDA in 2019, we arrive at the adjusted EBITDA which gives a like-for-like comparison with 2018. And also there, you see an increase from EUR 3.7 million in '18 to over EUR 12.6 million in 2019, a growth of 249% compared to 2018, which is driven by our strong revenue growth, our gross margin improvement and the leveraging of our fixed cost base. So finally, our adjusted net profit increased from slightly over EUR 800,000 in 2018 to more than EUR 6.2 million in 2019. So from the income statement, we now go to the balance sheet on Slide 20. What you can see is that we included the opening balance as per the 1st of January 2019 as comparative figures. That's due to the fact that in these figures, the impact of IFRS 16 and the changed lease accounting guidelines are included and therefore, gives a like-for-like comparison with the closing balance. If we first of all, look at our noncurrent assets, we see an increase from EUR 24.3 million in the opening balance to EUR 27.7 million in the closing balance. Our capital expenditures in 2019 amounted to EUR 6.7 million, being 4% of -- 4.7% of our revenues compared to EUR 6.1 million in 2018, being 5.9% of revenues. Our capital expenditures in 2019 includes the investments in the expansion of warehousing and production lines for both the Smart grids and the EV charging business lines as well as EUR 4.2 million of capitalized development costs, which demonstrate our continued commitment to invest in innovations. Our working capital reduced from EUR 5 million in the opening balance to EUR 3.1 million in the closing balance, despite the further growth of our business. Our bank overdraft position decreased from EUR 7.9 million in the opening balance to EUR 3.3 million in the closing balance. Worthwhile mentioning is that in December 2019, we expanded our working capital credit facility with the bank from EUR 20 million to EUR 30 million, and we increased our separate facility for bank guarantees from EUR 5 million to EUR 10 million. On the next slide, we will show that we are well prepared for further growth in 2020. First of all, we have a positive market outlook for all of our business lines. If we look at Smart grids, we're benefiting from grid investments, we see a strong growth in the solar PV sector and we are expanding our smart grid services for EV charging hubs. If we look at EV charging, we're benefiting from various new EV models that come to the market, the incentive schemes in various countries, the introduction of our dedicated charges for Germany and France and the ramp-up in volumes from several important contracts. In the Energy storage business line, we're benefiting from a market that is regaining its momentum. And we're building on our track record with multiple customers across all major storage applications. The introduction of several new, innovative storage features in 2019, like our mobile energy storage solution and our high-density concepts like Marco explained earlier on in the presentation, on top of a strong project pipeline. Furthermore, we invested in the production in 2019, supporting a production scale-up and driving further efficiencies. With respect to Smart grids, we produced over 2,900 substations in 2019, which is a growth of 63% compared to 2018 with approximately 1,800 substations. During the second half of 2019, an additional production line was gradually taken into operation to facilitate this growth and prepare ourselves for further growth. Looking at EV charging, we produced nearly 26,000 charge points in 2019, a growth of 111% compared to 2018 with slightly over 12,000 charge points. To be prepared for further uptick in volumes, we invested in additional production lines, and we're currently in the process of an expansion of our production facility. So overall, from an outlook perspective, we expect our 2020 revenues to be in the range between EUR 180 million and EUR 200 million, which is driven by a high market growth, reaping the benefits of our international expansion strategy, our increasing cross-selling opportunities between our business lines and the further expansion of our service offering. On the next slide, we will quickly address our financial calendar before we go to the Q&A. On Slide 22, you can see our financial calendar, where we will have our Annual General Meeting on the 8th of April. We will start, as from 2020, with a trading update on Q1, in which we will give some highlights and key figures. That will be presented on the 6th of May. Our half year results will be presented on the 26th of August. So we're now at the end of the presentation, where I will hand over to the moderator for any questions. Moderator, could you please take over?

[Operator Instructions] And our first question comes from the line of Peter Olofsen from Kepler Cheuvreux.

A couple of questions. Maybe first on the revenue outlook for 2020. Could you maybe shed some light on your expectations for the 3 segments? Do you all 3 -- do you expect all 3 to contribute to the growth? And which segment could potentially grow fastest in 2020?

Peter, this is Marco. Thank you for these question. We expect that all the 3 business lines will grow in 2020. We don't specify the outlook in -- for each individual business line. But -- and of course, it is always complicated to have a 100% prediction of what business line will go to what percentage. Therefore, we've given general outlook. It can be assumed that the business lines with charging stations will well be -- also in 2020, be one of the major growth areas. But also the other business lines, Energy storage and Smart grid solutions will keep growing in 2020.

Okay. And then maybe a follow-up on Energy storage. So the first 6 to 9 months were quite soft and then there was a pickup in Q4. Just to confirm that this is a rather broader pickup in the market that you're seeing, so it's not just Alfen-specific. Is that correct?

We don't know about orders with any other companies, but we have seen that the overall activity in the market with request for quotations, also say, a process to decision-making is getting more and more to the point. And also we have seen now in the start of 2020 that for some small orders have already come in, like the order with Shell for the combination with an ultrafast station -- fast-charging station that we see some order there, and we are now in the process that we can expect also in the first half year, there will be new orders for us to grow our revenue also in 2020.

Okay. So but that means that compared to a year ago, your backlog is basically higher?

That's correct.

Okay. Then maybe a question on EV charging. Which countries, in particular, contributed to the growth in 2019?

Peter, it's Richard here. Yes, we don't specify different growth in different countries. But as you know that we -- that internationalization is one of our key drivers for the growth. We have our own sales teams in different kind of countries, in the countries surrounding us and also in the large-potential countries. We also benefit from Dutch companies going international. And of course, we have customers with an international footprint that takes us along to all kind of countries around Europe. For that -- and you know that we, in very early stage, we plant seeds in the countries where we expect some good growth, and we do that from the Netherlands with our expert sales managers. And what we do is we invest in relationships, technology and information in that country to make sure that we are well prepared for that. So overall, we expect the European market to offer us enough growth to realize our ambitions.

Okay. And maybe to continue on this internationalization. So the revenues from outside the Netherlands has grown from EUR 29 million to EUR 40 million. But there is also the M&A effect from Elkamo. So it seems that organically, the growth in revenues outside the Netherlands was more like high single-digit growth. Is that something you're satisfied with? Or -- because I would have expected, frankly, a little bit more than high single digit.

It's always a combination of factors. What you have seen is that in Smart grid solutions, which is a mainly Dutch-oriented markets, there we have shown a strong revenue growth, that, of course then only in the Netherlands. For Energy storage, we had some orders, but they -- although that are with companies that have an international footprint, the orders that we secured were based in the Netherlands. But we are confident that for the coming year, we got that, more or less your question, not only from say last year, that the revenue growth outside the Netherlands, especially with Energy storage and charging stations, will be strong in the coming years.

Okay. And just to clarify, when you sell chargers to a Dutch client, but when these chargers go into a foreign market, it's then booked outside the Netherlands or in the Netherlands because it's a Dutch client?

This is -- black-and-white discussion is that the company who is ordering the chargers, that's where -- the one where we allocate revenue on. So Dutch client ordering is Dutch revenue. A German client ordering is foreign revenue. And what we have seen also is that we have not individual consumers which are ordering, but bigger clients like, for example, E.ON. And E.ON orders their chargers in Germany, but it could well be that they end up in the Netherlands because they distribute their chargers along -- throughout Europe.

The next question comes from the line of Lotte Timmermans from ABN AMRO.

First, a question on Smart grid solutions. You indicated you have a broader customer base. Can you give some guidance on what the split is between these revenues and more private revenues?

Yes, Lotte, this is Richard here. Well, we don't specify different division in revenues, as you know. But from the start on, we have seen that our Smart grid business is actually split between DSOs and projects, as we call them. DSO they have to publicize their capital expenditure on a yearly basis. And the forecast, we see that growing with 12% per year. That is what they announce. Further on the growth on the project side, as we call them, especially when it comes to connecting DC chargers, DC fast chargers to the grid, and also with PV parks, we see that market growing rapidly, not only in the Netherlands but also in the countries surrounding us. So we foresee this growth to continue.

Okay. And I saw that the average cost per substation declined. Is that mainly due to these project-based revenues?

I think you're correct, yes. For this division -- this unit also generates revenues not only for the project but also for projects and also for service. So it's very hard to see to actually -- to analyze or make an analysis based on the information that you see here is -- can vary very drastically from project to project.

Yes. So if I state that in the first half '19, there were more services in Smart grid solutions and therefore, the average costs were higher -- average revenue were higher per substation, is that correct?

Yes, kind of correct, yes.

Okay. This also improved the gross margins then. On Energy storage, you announced a couple significant contracts year-end 2019. Are these mainly scheduled for this year or are these already in the reported revenues '19?

Well, Lotte, it's Jeroen. Actually, we do percentage of completion on the contract. So part of the contracts are included in the 2019 revenue, but also part of the contracts will generate revenue in 2020.

The next question comes from the line of Tanuj Agrawal from Barclays.

I have a few questions. One on the margins, actually. But before we go to margin, actually, we see the margin impacted in the past by the investments. So just want to get a sense around how do you see investments now going forward, both in the workforce and PPE, the guidance you gave for 3%, but just the color on the workforce and CapEx, please?

Well, Tanuj, as you know, what we explained at our half year figures and at the Capital Markets Day is that the increase in our gross margins is due to a couple of all positive effects, some of a more structural nature and some related to a favorable product mix, as we also explained. So that's what you see. Furthermore, we are leveraging our fixed cost base on a total level, which is both personnel costs as well as other operating expenses. So that's what you see there. And you can definitely see in Q3 and Q4 that the first signs of the leverage are kicking in. So that's how we look at our profitable growth model. We always said it's about profitable growth. And that's due to the fact that we want to gradually increase our gross margins, leverage our fixed cost base, while we are generating revenue growth. So we will add new staff, new employees to our company, but it won't be in the same pace as our revenue growth.

And just to understand, I mean stretch it, the point further on direct and indirect actually because we saw 37% growth in direct and some 25%, 27% in indirect. So within indirect, do we expect the growth in indirect to slow down? Or do you think it would continue at similar pace, actually, that's like more a sustainable level for you now?

Well, in the whole model, normally, you would see that the increase on direct FTEs is -- it has a more direct relationship to the increase in revenues. And in the indirect FTEs, that's a different relationship.