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

Hello, and welcome to the Alfen 2020 Full Year Results Call. [Operator Instructions] I will now hand you over to your host, Marco Roeleveld, to begin today's conference. Thank you.

Thank you, moderator, and good morning, everybody. Welcome to the Alfen 2020 webcast. Let me firstly introduce the participants on our side. In this webcast, any questions that may come forward will be handled by the management board of Alfen: Jeroen van Rossen, CFO; Richard Jongsma, CCO; and myself, Marco Roeleveld, CEO. Despite the impact of COVID on the whole society, the wider economy and everybody's well-being, we are proudly presenting the results of Alfen for the full year 2020. Although the near future is unpredictable, we are confident that in the course of 2021, we will start with overcoming the impact of COVID, and as a company, we'll be able to leverage on the increased European focus on the energy transition. In this webcast, we will start an update of COVID in relation to Alfen, and then we will continue with the highlights of 2020, followed by the progress on our strategy. In this last section of this webcast, we will go in more detail on the financials and the outlook for '21. Assuming you have noted the user disclaimer, we can now go to Sheet 3 with an update of the COVID situation in relation to Alfen. As also stated at the quarterly webcast meetings in 2020, we can say that our #1 priority remains everybody's health and safety. For safe and responsible operations, we continue to enforce 6 safety measures. And at this place and time, I would like to express my sincere gratitude to all our employees, our customers, our suppliers, our partners for their continued efforts to cope with all restrictions, but also to keep business going. Due to these combined efforts, we've been able to keep our supply chain intake and the production up and running. Although our end markets experienced some impacts as a result of COVID, which might be impacting our order intake in short term, we are also -- we also have concluded that the long-term energy transition drivers remains strong. I now will continue with the highlights of the full year 2020 results on Slide 4. The revenue in 2020 has risen to EUR 189 million. This represents a growth of 32% compared to 2019. As a percentage of revenue, the adjusted EBITDA in 2020 is 12.9%. This represents a growth of 68% compared to 2019. Later on in this presentation, we'll go in more detail on the financials. In 2020, we won important new projects and signed several new framework agreements with new clients, and some examples will be addressed later on in this presentation. With regard to the revenue outlook for 2021, our projected range is EUR 225 million to EUR 250 million. This is based on the ongoing energy transition on the one hand and the macro economical impact of COVID on the other hand. Jeroen will now continue with a short summary of the revenue and results of 2020, both financially as commercially.

Thank you, Marco. Let's get into some more details on the year 2020, starting with our revenue on Slide #6. If you look at the graph, you see that the revenue and other income increased from EUR 143.2 million in 2019 to EUR 189 million in 2020, a growth of 32% which is supported by growth in all of our business lines. Now let me address some highlights per business line, starting with Energy storage. Although storage is an essential component of the future sustainable energy system, COVID-19 did slow down the growth of the energy storage market, thus delaying investments and projects. Yet, energy storage solution costs are coming down and the market appears to be recovering. So on the back of this, we have been able to secure new contracts and framework agreements towards the end of 2020 based on our strong market position. If we go to EV charging, we see that the EV market has been growing rapidly, also supported by additional governmental support and incentives for electric driving despite the challenging year for the automotive industry due to COVID-19. We benefited strongly from increasing volumes under our framework agreements that have been set up over the past years as well as from new client wins and further internationalization. We further strengthened our international organization, and we further expanded internationally. Furthermore, we successfully relocated our production facility to a new and 5x larger building, and by that, also significantly expanded our production capacity. Going to Smart grids. We see growth driven by continued grid investments to accommodate the growing number of decentralized wind and solar PV installations as well as the ongoing electrification. We benefited through our existing framework agreements with grid operators and through new contract and client wins in our microgrid business. Although the number of the renewable developments are growing considerably, some projects have been delayed as a result of COVID-19, which affected order intake, and thus, revenue. So from revenue, we now go to our profitability on the next slide. Our adjusted EBITDA increased from EUR 14.5 million in 2019 to EUR 24.4 million in 2020, a growth of 68%. This growth of the adjusted EBITDA is a combination of strong revenue growth together with gross margin improvement and increased operational leverage. This is enabled through our strong market position, the further leverage from increased scale and a shift towards increasingly complex solutions. To further improve profitability, we continue to drive forward our strategy of leveraging our fixed cost base. So from the numbers, we now go to some examples of commercial successes in 2020 on Slide #8, and I'll start with Smart grids. We are very proud to have won the framework agreement with Enexis, one of the 2 largest DSOs in the Netherlands, for the exclusive supply of substations with an initial term of 4 years which can be extended with 4 additional years. An example in the projects part of our Smart grids business is the new 3-year framework agreement which we concluded with PerPetum Energy, a Belgian developer of smart energy solutions, for the supply of transformer substations for their renewable energy projects in the Netherlands. If we go to EV charging, we want to highlight Engie with which we secured a 3-year framework agreement to supply EV charge points to their customers throughout Europe through their European subsidiaries. Furthermore, we concluded a framework agreement with Bee, one of Sweden's leading charge point operators to supply them with charge points. Marco will address the British Gas example later on in the presentation. The third business line, energy storage, there we see that next to already existing framework agreements like the one with Fortum, we concluded another 3 major multiple year framework agreements with EnBW, Centrica and SemperPower to provide them with the full portfolio of our energy storage solutions. All in all, 2020 was commercially a successful year for Alfen. These selected examples clearly show that we further expanded internationally with these internationally well-known clients. Furthermore, we concluded various multiple year framework agreements, and thus, securing the growing business for the future. Now we would like to go into some more detail on innovations and for the highlights on these innovations, I will hand over to Marco.

Thank you, Jeroen. Investments in innovations are key to the future growth of Alfen, and we'll give some examples of larger innovations. First, introduction of recycled cement in our products to achieve further CO2 footprint reduction. During cement production, considerable amounts of CO2 are released, and we have started testing the users of recycled cement for the concrete housing of our substations to further reduce our impact on the environment. The second example is the implementation of the latest communication protocol for charging stations. This Open Charge Point Protocol is an open communication standard between smart chargers and the back office for charge point management. As one of the first in Europe, we've implemented this latest version, the 2.40 (sic) [ 2.0 ] version provides additional features such as more support for smart charging features by back office settings and information on price transparency. The third example is our next-generation mobile energy storage solution. After its first introduction in 2018, we launched our second-generation mobile energy storage solution in 2020 with new and improved features such as improved grid interaction and battery remote control capabilities. This further solidifies our market-leading position in this segment. On Sheet 10, we go in more detail on our CSR strategy. Corporate social responsibility is a key focus point for Alfen. In 2019, we formulated our new CSR strategy. Based on a stakeholder survey, we have focused our CSR strategy on 4 elements that were aligned with the relevant United Nations Sustainable Development Goals. In the picture on Sheet 10, we showed a summary of the 2020 progress in relation to these 4 elements of our CSR strategy. One element is linked to the #7 United Nations Sustainable Development Goals, being affordable and clean energy. Looking at this, at our progress on this element, we can conclude that we have helped to avoid the emission of about 1.4 million tonnes of CO2 with our installed charging stations for electrical vehicles. And we have helped to avoid harmful emissions with our smart grid projects, while we have been able to make solar energy available for about 142,000 households. To go in further detail of all aspects of the progress on our CSR strategy, I would like you to take a look at the relevant section in our annual report of 2020 that is available on our website. I now will continue with the progress on our strategy. On Sheet 12, you can see the 4 levers of growth that are supporting our growth strategy. On each of them, I will go in more detail. The first driver for our growth is the market growth. On Sheet 13, we show updated independent relevant market data, and for the coming years, this market outlook is strong for all of our business lines. The grid operators are expected to further increase grid investments and the decarbonization of the energy system continues to drive up the demand for electricity. And also, the grid has to be accommodated for the decentralized input of renewable energy. Annual installed EV charge points in Europe are expected to grow year-on-year from 2019 to 2025, also driven by the European Union's targets to have at least 30 million electrical cars on the road by 2030. And the annual industrial scale battery energy storage systems across Europe are expected to grow strongly from 2020 to 2025. The second driver for our growth, building international organization, is shown on Sheet 14. We continue to pursue our internationalization strategy and have been able to grow the revenues outside the Netherlands, which is at 57% to EUR 61.4 million in 2020. [ International ] growth has predominantly been driven by our EV charging business line. Our international organization covers 13 countries, having entered Italy, Spain and Poland in 2020. And additionally, we further strengthened our organization in the countries where we're already operating like Germany and France. Besides our own organizational presence, we are also benefiting from clients with an international footprint, and we have installed our products in more than 25 European countries. The service offering for our products is the third growth driver and is shown on Sheet 15. In 2020, we have further expanded and optimized our service offering across our business lines. For example, we have widened our service offering for Smart grids. And for our EV charging business, we have further optimized our third proposition to fulfill customer needs even better. For EV charging, Alfen offers remote and on-site service throughout Europe, while we have international service partners lined up, and we are increasingly benefiting from our growing installed base, both through existing and new customers. Unique cross-selling capability of Alfen is the fourth growth driver that is shown on Sheet 16. The ability to offer integrated solutions across our 3 business lines sets Alfen apart in the industry. Therefore, Alfen not only benefit from positive market dynamics in each of our business lines but also from cross-selling and integrated solutions between our business lines. An example of cross-selling is Centrica, who which in 2020 we have concluded a framework agreement for the supply of EV charge points with Centrica's daughter company, British Gas. This is UK's largest energy supplier. The process to come to the framework agreement made it easier to become a preferred partner for Centrica for the supply of battery energy storage solutions across Europe. An example of an integrated solution is PZEM, an energy supplier in the Netherlands. We supplied an energy storage system in combination with grid integration and a charging plaza at our Alfen office in the Middelburg municipality. This charging plant is equipped with smart Alfen Eve Double charge points that are combined with our dynamic load balancing solution software to optimize charging speeds for the electrical vehicles. And the battery storage container is used to make optimal use of the connection to the local grid. As the energy transition involves more and more complex challenges arise from which a holistic integrated approach is required. Jeroen will now continue on Sheet 18 with a more in-depth explanation of the group financials and the outlook for 2021.

Thank you, Marco. Let's take a look at the financials where we indeed will start with the income statement on Slide #18. So overall, the numbers clearly show that we generated profitable growth in 2020. And I will now go into some more detail on the line items, starting by the revenue and other income. If we look at revenue and other income, we see that we increased the revenue and other income from EUR 143.2 million in '19 to EUR 189 million in 2020. And this revenue growth is driven by growth across all our business lines. The gross margin percentage increased from 35.1% in '19 to 36.7% in 2020, which is the result of our strong market position, our leverage from increased scale, a shift towards increasingly complex solutions and favorable product mix effects within each business line. Personnel costs increased from EUR 27.2 million in '19 to EUR 34.4 million in 2020, an increase of 27% compared with the 32% growth in revenue, thus resulting in further operational leverage. The average full-time equivalents increased from 464 in '19 to 571 in 2020. The other operating costs increased from EUR 9.2 million in '19 to EUR 11.1 million in 2020, also showing further operational leverage. As a result, our EBITDA increased from EUR 13.9 million in '19 to EUR 23.8 million in 2020. If we exclude one-off costs and special items, we arrive at our adjusted EBITDA, which increased from EUR 14.5 million in 2019 to EUR 24.4 million in 2020, a growth of 68% compared to 2019. And this improvement of the adjusted EBITDA is the combination of higher gross margins with operational leverage. Finally, our adjusted net profit more than doubled in 2020. So from the income statement, we now go to the balance sheet on the next slide. Now let me start with the noncurrent assets. They increased from EUR 27.7 million at the end of '19 to EUR 37.8 million at the end of 2020. The capital expenditures amounted to EUR 9.6 million being 5.1% of revenues compared to EUR 6.7 million being 4.7% of revenues in 2019. And as we also addressed at the presentation on the semiannual accounts as well as with the Q3 trading updates, these capital expenditures in 2020 includes the investments in the new molds for Smart grids as well as investments in a new and significantly larger EV charging production facility. Additionally, we capitalized EUR 5 million of development costs, which demonstrates our continued efforts to invest in innovations for the future. Going to the working capital, we see that working capital reduced to EUR 2.5 million at the end of '20 compared with EUR 3.1 million at the end of 2019, despite the further growth of our business. Inventory increased due to some strategic stock for additional resilience related to COVID-19 as well as increased stock levels reflecting the further growth of our business. However, this was offset mainly by an increase of the trade and other payables. Finally, our equity increased from EUR 13 million at the end of '19 to EUR 74.2 million at the end of 2020, a combination of our capital raise in June 2020 as well as by the addition of the net profit over 2020 to our other reserves. So finally, we go to the outlook on Slide #20. We expect that in 2021, COVID will continue to impact the wider economy and our end markets, which may impact order intake, and thus, revenue growth. To what extent depends on the duration of the pandemic and how quickly vaccines can successfully be rolled out and get the virus under control as well as any measures adopted by governments. At the same time, we expect the energy transition to keep building further momentum as European governments increasingly take action to further support the European Union's Green Deal to become climate neutral by 2050. As such, we continue to anticipate long-term positive market developments in all of our business lines. And in 2021, we plan to further invest in our organization in new innovations for the future and in the further optimization of our production facilities. Finally, we expect our revenues for 2021 to be in the range of EUR 225 million to EUR 250 million based on the ongoing energy transition while taking into account the impact of COVID-19. 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?

[Operator Instructions] Our first question is coming from the line of Peter Olofsen from Kepler Cheuvreux.

I have a couple of questions. Maybe first, two questions on Energy storage. Is it fair to say that because of the delayed decision-making by some of your customers last year that your backlog going into 2021 is lower than what it was at the beginning of 2020? And then on the new framework agreements that you have, I understand that in case of Centrica, it's for sub 10-megawatt systems. Is that the segment where you think you are particularly well placed, or do you see scope for Alfen to also participate in larger projects? And then I have some follow-ups on Smart grids.

Maybe to start with the last one, Peter, is that I think that what we already always have stated that we will be as Alfen in storage will be, say, be active in different areas of the market. One is the mobile energy storage solutions where we are, I'll say, the leading provider of systems [ of this moment ]. On the other hand, with the redevelopment of the high-density concept last year, we also think that we are -- not only think, we are convinced that we can play a role in also the bigger project and where the small and big is more or less changing parameters. That's, of course, something to -- in discussion, but we are convinced that we can also be a relevant partner for projects which go to high-power ratings, whether it's 50, 80, or 100 megawatts. We think that we'll be competitive in a wider range of applications for energy storage in the coming years. And lastly, the question of backlog. What we see, of course, we have concluded framework agreements. And we have, at this moment, say, projects running, but where in history, maybe we announced individual project, we have to must be clear that also that we can also communicate on individual orders when we have, say, final agreements also from customers that are willing to disclose the information that there is a project running. And at this moment, we have to limit ourselves to the -- not only limit, but I think this is quite a positive approach to the framework agreements, which we have to say, quite large player in the whole European area, and we are convinced that we can grow our business in the coming years.

Then two questions on Smart grids. First, on Slide 13, where you show the investments by the top Dutch DSOs, it actually shows that for '21, '22, the investments could be broadly stable versus 2020. Is that consistent with what you're seeing based on your discussions with some of those DSOs? Or do you think it could be a bit more positive and continue to grow? And then a question on the Elkamo business, where you've previously talked about some projects or business that you had won in Sweden. Is that already starting to show a more meaningful contribution? And what are you seeing at the switchgear business of Elkamo? Is that still somewhat under pressure? Or is that starting to recover?

Hi, Peter, it's Richard here. And to start with your first question, where we see other investments from Dutch DSOs in the future. Of course, we see the objective information as well. However, be aware that on a European level, you see that all the European grid companies invest more than EUR 40 billion on a yearly basis. They prepare themselves for the energy transition. The energy transition goes on in the Netherlands as well. So there is no reason why it would not be growing. Also, the local Dutch authorities, they see and reviewed the plans, and we have indicated that the plans are too conservative. So we look at that as well. And don't forget that for us, Smart grids is not only the DSOs, it's also the projects and the projects for renewables. And that one is growing quite fast as well. So we believe, at the end of the day, that the growth for the Smart grids will be there.

For -- if we look at the Elkamo situation, we've seen, let's say, the -- when you look at Scandinavia in a more wider sense, that's Finland and Sweden where we're now active in. We see that there is a delay of investments in Sweden where we expect them to be picking up in the coming years. And we see a stronger strive for, say, coping with, say, the energy transition in Finland. So therefore, there's going to be growth steadily in Finland, and we're preparing ourselves to have a good entrance into Sweden, while we have won, of course, our first contracts. But the numbers are, say, relatively low. On the other hand, it gives us the opportunity to tune the products which we are planning to supply to Sweden to tune and optimally to the requirements which are a little bit different than what we see in Finland. The aspect of the load for the switchgear, we see that there is a continued more or less lack of investments or delay in investments mainly related to one of the bigger customers being Wartsila. Wartsila has difficulty in continuing their revenues in the area of, say, power plants across the world. And as a consequence, on local switchgear, we see that overall revenues is there is not growing. But on the other hand, we see that within Finland, there will be -- we expect investments in especially the paper industry. And we are, say, confident that with the right attention, we'll be able to benefit from those renewed investments in Finland.

And then my final question is related to EV charging, where the sales about doubled last year. Could you shed some light on the growth that you saw in your home market in the Netherlands and the growth that you saw outside the Netherlands? What are the big difference between these two?

Well, Peter, we don't report on the different markets. But what we see is that the very strong position that we have in the Dutch market, we maintain and we grow it. So you see that on a European level, we outpaced the growth of the market. We do that in the different segments. So you have the public, the semi-publics or the business and home. And all the 3 aspects, you see the growth of our business accelerating. What you also see is that we, of course, entered into new countries. As you know, we preinvest in new countries by putting people in place in the different countries to make sure that we prepare ourselves for that country. And you see that the markets surrounding us, where we also invest in expanding our teams there and expanding our product offering, that the growth is very satisfied.

The next question is coming from the line of Lotte Timmermans from ABN AMRO-ODDO BHF.

First, a question on the Enexis contract. Didn't hear any comment in the call, but you said something one-on-one that, that might have partly delayed some DSO revenues. Could you give some more color on that regarding the new substations you're supposed to deliver? And is this going to positively influence rollouts in Q1? That's my first question. I'll do one by one.

Well, I think if you look at the Enexis part, Lotte, indeed, what we see is that we are very proud, of course, to have won that contract, long-lasting multiple year contract. But we engineered a new product range of transformer substations for Enexis under this new contract. So we were in Q4 as well as also in Q1 in the situation where we phase out the old range of the product portfolio and phase in the new range of the product portfolio. And as, of course, there are 2 organizations involved in that, we as well as Enexis, we try to balance that as good as possible, but we are currently also still in the phasing in of that contract.

So there will be more into Q2 as well?

Not, say, directly organized that way, I say what is in quarter. But the basic situation that's in 2020 in the fourth quarter, we were ramping down, say, the auto modules so that we had a hard transfer to the new designs in 2021 and then slower ramp up our production so that we not only are the ones to ramping up the production also, but Enexis can cope with the different substations that have to be incorporated in a different way within that grid. So we're stepping up our production in the first quarter, and we're hoping that we'll have a stable situation in, say, starting around the second quarter, whether it is starting the half of March or half of April, that's not fully clear yet at this moment.

Okay. Then on the earnings outlook, I know you don't guide on 2021 earnings and don't say any specific ones, but looking at your performance this year, especially year-end, can you give some more color on your views on margin improvement in 2021? Do you expect gross margin to still improve as services becomes a larger part of the mix, for example? And what would it be translated to in terms of EBITDA margin?

Of course, good question. I can't give the precise guidance there, you know it. But what you see is that, again, in 2020, we saw an increase in our gross margins, supported by, as we mentioned before, our strong market position, the increased leverage -- the leverage from increased scale that we see as well as more complex solutions that are needed as the energy transition is going on, also some favorable product mix effects. And we explained before that there are some elements which are of a more structural nature, but there are also some elements which are more of an incidental nature, which might be up or a bit down. So the policy and the strategy is still to generate profitable growth. And a profitable growth, as we said also at IPO, is gradually increasing the gross margins and at the same time, create the operational leverage. And I think we're very proud to see that we have been able to increase the gross margins. But also, you see the signs of the operational leverage kicking in. So that's definitely the strategy that we want to continue with, and we'll keep on -- and we'll focus on going forward.

And looking at your medium-term targets, I think you're well on track for the EBITDA margin. Would you say that you're ahead of schedule on that one?

Well, what I can say is that we are very pleased with the outcome of 2020 that the adjusted EBITDA mid- to high teens objective is still there and that we will do our utmost to reach that. So that's how we look at it. But looking at 2020, we are very happy with the results.