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

Hello, and welcome to the Alfen Half Year 2022 results. My name is Ben, and I will be your coordinator for today's event. [Operator Instructions] I'll now hand over to your host, Mr. Marco Roeleveld, CEO, to begin today's conference. Thank you.

Thank you, Ben. Good morning, and welcome to this webcast regarding the 2022 half year results of Alfen. We appreciate the fact that you have taken the effort to participate. This webcast and the questions that may come forward are handled by the Alfen Management Board consisting of Jeroen van Rossen, CFO; Michelle Lesh, CCO; and myself, Marco Roeleveld, CEO. We are very satisfied how the first half year of 2020 (sic) [ 2022 ] has evolved. A very strong revenue growth, mainly driven by EV charging equipment and a good EBITDA development. In this webcast, I will start with the highlights of the first half year of 2022, followed by a short review by business line and some comments on the adjusted EBITDA development. Then Michelle will continue with revenue growth aspects, and Jeroen will go in more detail regarding supply chain, financials and outlook. I now continue on Slide 3 with the highlights of the first half year of 2022. We realized EUR 205.5 million in revenue. This represents a growth of 78% compared to the same period of last year. As a percentage of revenue, the adjusted EBITDA improved from 14.7% in the first half year of last year to 18.1% in the same period this year. And we have been able to manage the supply chain challenges. And to safeguard future revenue at the smooth production, we increased stock levels and made strategical down payments to secure the future supply of components. We are positive about all drivers for future growth. And in combination with the order intake and revenue development in the first 6 months of this year, we decided to increase our full year revenue outlook to the range of EUR 410 million to EUR 470 million. On Sheet 4, you can see the revenue split between our 3 production lines. The EV charging equipment revenue more than tripled compared to the same period last year. This revenue growth is driven by increased volumes on our existing framework agreements, new client wins and further internationalization. We continue our internationalization strategy by continuously strengthening our international organization. And in the first half year of 2022, more than 69% of our revenue was generated outside of the Netherlands. It's our ambition to outperform the market growth. Yet, year-on-year revenue growth figures in the first half of 2022 were exceptionally high due to a peak in demand after COVID measures were released and some of our customers have been building inventory before the summer season. And in the second part of this year, we expect a year-on-year growth rate that's more in line with the year-on-year growth rate in the previous years for this production line. In the Smart grid solutions business line, the revenue was 14% higher than in the same period last year. Grid operators continued to expand and reinforce the distribution grid for electrical energy, resulting in further growth in the number of substations needed. And we continued to benefit from existing framework agreements with the grid operators. The private network business did not show much growth in the first half to 2022 because project execution takes longer on the current supply chain conditions. In the Energy storage market, the momentum continues to develop favorably, mostly driven by the growth of renewables and the need to balance electricity demand and supply. The pipeline of qualified leads and order intake continues to develop in a healthy manner, but project execution can be delayed for certain projects due to, for instance, the permitting processes or obtaining a grid connection. And as communicated in the Q1 trading update, Energy storage revenue will be backloaded towards the second half of 2022 and is supported by our strong order book. On Sheet 5, we continue with the adjusted EBITDA growth. The adjusted EBITDA margin improved -- improvement is a result of strong revenue growth in combination with the operational leverage strategy. And going forward, we will continue to pursue this strategy on profitable growth. And now our CCO, Michelle Lesh, will continue this webcast on Sheet 6 with the international revenue growth.

Thanks, Marco. Now I'd like to talk through how we're executing our profitable growth strategy for 2022 and beyond. First, on Slide 6. We continue to delivered strong international revenue growth, achieving 50% international revenue at the group level for the first time. The growth is primarily driven by our EV charging business line, and there are 2 key factors: first, we continued to invest and strengthen our sales and service organization across Europe to support our international growth. Second, we continued to see our customers internationalize using our solutions to support their own international growth ambitions. As we move to Slide 7, I'd like to share some examples of our commercial wins across the business. In EV charging, we have 3 examples of customers that are helping us internationalize. With E.ON, we have new projects in Central and Eastern Europe. We have also secured a supplier contract with Total to be one of their suppliers across all of Europe through 2025. In addition, we have signed a framework agreement with Stromnetz Hamburg to support the City of Hamburg in Germany. In Smart grids, we continued to see strong growth in solar. We secured 23 substations with our longer-term customer, PFALZSOLAR; 10 substations with a newer customer, bejulo, where we are supporting their first solar park in the Netherlands; and a micro grid project supporting a solar installation in Almere with another long-term customer, HVC. In Energy storage, we continued to secure wins across Europe, including a 12-megawatt project with EPV, the third largest battery facility in Finland; a contract with Nybro in Sweden for a 5-megawatt system; and a contract with nimble energy in the Czech Republic for two 5-megawatt systems. We're proud of our continued commercial wins across Europe in our EV and battery storage product lines and our continued growth in key markets for Smart grid. And now I'd like to hand it to Jeroen to walk through an update on supply chain and financials.

Thank you, Michelle. This supply chain overview is the same as presented in the Q1 webcast. We still face supply chain challenges, but up until today, we have been able to manage those challenges. As we expect the supply chain pressure to remain in 2022 and 2023, we continue to deploy our measures of which an extract is shown on this slide. So we will continue to stay on top of this. From the supply chain, we now go to Slide 9 for the financials. We will start with the profit and loss account. And as Marco also mentioned before, we are proud of the strong results in the first half year of 2022. The revenue and other income increased from EUR 115.3 million last year to EUR 205.5 million in the first half year of 2022, a growth of 78%. Gross margin decreased from 36.4% last year to 35.3% this year. We have been able to leverage our growing scale and strong market position to dampen the effect of challenges in the global supply chains. Our personnel costs increased from EUR 19.6 million last year to EUR 25.8 million this year, an increase of 31%, showing further operational leverage. From a people perspective, we grew the number of FTEs from 683 at year-end '21 to 770 FTEs at 30 June 2022. The other operating costs increased from EUR 5.8 million last year to nearly EUR 10 million this year. And if we exclude one-off costs and special items, we arrive at our adjusted EBITDA, which more than doubled from EUR 16.9 million, which was 14.7% last year, to EUR 37.3 million, which was 18.1% of revenues this year. The adjusted EBITDA margin improvement is a result of our operational leverage strategy. Finally, our adjusted net profit nearly tripled from EUR 9.3 million last year to EUR 25.3 million this year. And from the profit and loss account, we now go to the balance sheet on Slide #10. Let's start with the noncurrent assets. They increased from EUR 43.1 million at year-end '21 to EUR 50.5 million at 30 June 2022. And our capital expenditures amounted to EUR 10.1 million, which was slightly below 5% of revenue, in the first half year of '22 compared to EUR 5.4 million, which was 4.7% of revenues in the same period last year. The investments included investments in new malls for our EV charging and Smart grids business lines, followed by product line automation for EV charging, ongoing investments in our IT infrastructure and data security as well as investments in additional solar panels for our buildings. Furthermore, we capitalized EUR 4.8 million of development costs, which demonstrates our continued efforts to invest in innovations for the future. From a working capital perspective, the working capital increased from EUR 23.8 million last year to EUR 54.8 million at 30 June 2022. Given the supply chain challenges, we maintain higher safety stock levels, further supported by strategic stock down payments for batteries, inverters, containers and electrical components in order to safeguard and enhance the resilience in our global supply chain. From the financials, we now go to the outlook on the next slide. We expect that our markets will continue to grow throughout 2022 as the transition to a carbon-free energy system that is not dependent on fossil fuels is building ever more momentum across Europe. As said earlier, we continue to experience supply chain challenges and expect those challenges to continue well into 2023. Therefore, we remain committed to being on top of the situation through deploying our rigid operational processes. Long term, we continue to anticipate positive market developments for all of our business lines. And as such, we will also continue to further invest in our organization, innovations and production facilities. Finally, based on the first half year performance and the current revenue visibility, we raise our full year 2022 revenue outlook from EUR 350 million to EUR 420 million to a new range of EUR 410 million to EUR 470 million. 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] The first question comes from the line of David Kerstens calling from Jefferies.

Congratulations on the strong results. I've got 3, please. First of all, maybe on the inventory in the EV charging supply chain. Can you please quantify that effect? And are you now back at a normal situation from previously a shortage situation that explains the expected normalizing growth in the second half of the year? Then secondly, in terms of capacity for EV charging equipment, what measures are you taking to absorb the much stronger than expected growth in the first half in your assembly capacity in Almere? And maybe finally on the working capital. You talked about the strategic down payments to secure further growth impacting the operating cash flow. How do you expect that to develop in the second half of the year? Was this a one-off step up? And do you expect a normalization in the second half?

Okay. Jeroen, can you take, say, elements 1 and 3, then I will try to handle the production capacity?

I could. I could. Well, if you look at the stock levels for EV charging, we build up safety stock there. And we will continue doing so because we said before, we favor a continuous delivery to our customers. That's the most important element to support them in running their business models. And we are in the financial position to do so. And that's why we increased safety stock levels as well as do prepayments on certain components to safeguard that. So it's very difficult to precisely predict when the supply chain will normalize again. So that's also why we said, for example, in the Energy storage market area, there we see also a different supply chain development. Before you could buy lower amounts of batteries and you could spread them more over the year, now you buy higher amounts of batteries at once and you cannot spread them fully over the year. So that's why we also warned, after the Q1, that we would need to put more working capital into the Energy storage segment. But that's what we also foresee working capital is there to put us all at work. And that's why we also put a higher working capital in that area, it is directly related to inventory. And we will stay on top of it and we will monitor it, but we don't expect that, that pressure in the supply chain will be released and will also continue in 2023. I think that's the first element. It's more or less also, to some extent, related to the working capital question, I think I also addressed that one. So yes, we do put prepayments in certain areas and certain components to make sure that we safeguard our supply chain. And as you can imagine, we're not planning a supply chain for the next month. We are already planning way into 2023. So from a working capital perspective, we said that we felt that the working capital would increase. You see that signal, and we don't expect a large decrease in the supply chain pressure in 2022 yet.

Okay. Then, thank you Jeroen, I will take then the question on production capacity. Stated already several times before is that for -- especially this production of the charging stations, it is an asset-light approach where we can increase our production capacity quite fast. On the other hand, we also, of course, try to anticipate on, say, the growth levels and try to be, on one hand, not expand the production CapEx too much and do -- and [indiscernible] spare room too much. On the other hand, we try to time it also in such a way that it more or less fits with the growth in the production. And if you look to the coming years, more or less to say, we are convinced that the market outlook there are positive and that we then still have to increase our production capacity, but it also gives us the opportunity that we're now coming in a situation where the numbers are such that we also start, say, -- to do, say, automating elements within our production area. For example, the second half of this year, we'll introduce an automated packaging machine, also to accommodate the growth and also to be able to leverage on our fixed cost base by not only increasing personnel or in a direct relationship to our revenue growth, but also optimize our production. It's also the reason why we already announced last year that we would be building in Almere, a new facility to cope with the revenue growth, not only within [indiscernible], but also in the 2 other business units. And we will use all the existing buildings to reallocate more or else to the right production line in order to have an optimal production approach for the coming years, and we can facilitate the growth also in the coming years.

The next question comes from Emmanuel Carlier calling from Kempen.

I will do it one by one. The first is on EV charging as well. So you guide that the second half of the year will be more in line with the previous growth rate, which is around 100%. But if you look at the volumes of the market and so the market growth is rather 30%, so you continue to gain market share. How do you look into 2023? Is that something that you believe you will continue? Or do you believe that from 2023 onwards, your growth rate might move maybe a little bit more in line just with the market growth rates? That's the first one.

Okay. Thank you, Emmanuel. Related to this question, I say, in general terms, we are agreeing on the fact that, say, our pace of revenue growth is indeed bigger than the growth of electrical cars coming to the market. We can maybe say that yes, we might translate into that we grow our market share. Other hand, it is not always quite clear whether the number of cars is directly related to the number of charging stations required at the moment because we not only supply, more or less to say, to the end markets for private persons, but we especially also have revenue for our projects in, say, the public area or the semipublic area, and those are not always directly related to the number of cars coming to the market. That's also what we saw in the first half of this year. They say when many companies realized, okay, or are assuming that COVID would be mainly overcome, that they released projects that they already had in the planning to increase the number of charging stations at offices, in grocery stores, at -- to be able to cope it and growing number of cars which were in the market. On the other hand, we are also convinced that due to our strategy with, say, pan-European customers, like Michelle mentioned, several of them, that we will be able to grow our revenue on our own accounts in different countries by finding new customers, but also to leverage on the success of our customers not only in one given country, but also bear with their progress to expand within the European space. And we are convinced that this will contribute also in the coming years to a very strong revenue growth for Alfen. And that will be different country by country, like we see now as well as at the moment, the most developed countries, Norway and Netherlands. But the [ nonevent ] we see now also that countries like Germany, U.K., France are stepping up quickly. And also in a pace that is not to be expected to ramp down in the coming years because they are way behind, say, the amount of charging stations needed to accommodate the introduction of electrical cars. And this is complicated, for how many years? We can expect to have those type of growth percentages. But saying from a market perspective, we're not way close to the moment where the market will slow down.

So if I understand correct, you don't really see the reason right now to believe why the 2023 growth rate should be very different from the one you expect in the second half? Is that correct?

From market, but it's always complicated to really predict our own growth rates and do -- there are many elements contributing to that. But if we look, say, at the general market situation, the only markets where we say where there is a consolidation of the number of charging stations that might be Norway because there the number of electrical cars in newly sales of cars is already extremely high. In all other countries of Europe, if you, more or less, amount them together, we will see that many countries are only at the beginning of the introduction of electrical cars. So it can be different -- therefore, different country by country. And also there, as a consequences have a different impact on our growth capabilities but fundamentally, within the overall scheme of Europe, there is still an enormous growth potential. Countries as U.K., Germany and France are stepping up, but many other countries are way behind there in the process of introducing electrical cars and, as a consequence, the introduction of charging stations within the overall marketplace.

Okay. And then second question is on profitability for the group. Yes. I think we see that with sequential sales going higher, the EBITDA margin is also going higher. Could you maybe elaborate a little bit about how you think about the second half '22 EBITDA margin? I would assume that the midpoint of the sales guidance assumes a slightly higher sales versus Q2. So does that mean that you also expect profitability in the second half to be slightly above the one of the second quarter?

Well, I hope you appreciate that we don't give any profitability outlook. So we will also not do it now. But what I can say is that at the time of the IPO, we said that our objective was to go to a mid- to high teens adjusted EBITDA margin. Last year, we were slightly below the bottom point of that range and the first half year shows that we are in that range. So our objective is definitely to be in that range that we defined up from. But at that time, we also said it's a 5- to 7-year period. And I hope you appreciate that we are now in year 5. So that's how we look at it. And we tend also to look at it more from a year-to-year basis instead of a quarter to a quarter because a quarter might be slightly different. Operational leverage is not a linear line from quarter-to-quarter because sometimes we invest upfront in extra people or whatsoever and then it can give a bit of pressure on operational leverage in a certain quarter and then, again, extra operational leverage in the quarter after. So that's how we look at it, but you can expect us to strive for profitable growth. That's our mission, and that remains the mission. So that's how we look at our results going forward.

But is there any reason to believe that profitability will deviate quite substantially from the H1 levels? May be driven by, I don't know, mix effects because it looks like EV charging in absolute numbers might be a bit lower, Energy store is probably a bit higher. So could that have a big impact on the profitability in the second half?

There can always be impact on profitability going from product mix because, as you know, even a transformer substation with the same type for a different customer doesn't have the same margin. So there is a product mix effect. There is a supply chain challenge. There are transportation costs. There is pricing towards customers. So yes, all of the above will be taken into account and can have an impact on results. As said, we will continue to strive for profitable growth. That's what I can tell you at this point in time.

Okay. And then my final question is on Energy storage. Based on what I read in press and from peers, it looks like the demand is much stronger than previously expected. Could you give us an update on your order intake and your order book for this segment?

Yes. So we definitely continue to see our pipeline and our order book grow. The 3 examples I shared during the webcast are examples of order intake that we've seen that will convert to revenue in the future. Our pipeline continues to grow across Europe, project sizes continue to grow. So we're definitely starting to see the momentum in multiple markets.

Is there any number you could share on order intake? just to get an idea on the size.

Like indicated at the start of the year that starting of 2022, our order backlog was already higher than the revenue we have realized last year. But we're not able to, more or less, present all the exact numbers on the order intake and also it's complicated to give a precise prediction on the revenue because also we have seen in the first half year that especially with Energy storage, the elements of when is the connection available? When do the materials come on site? When are all permits available? And permits can be building permits, but also can be, say, permits to feedback into the grid? For what rating that have an impact on, say, the ability for us to present revenue in relationship to the progress of the project. We are fully convinced of, say, that the revenue this year will be backloaded as what we said. So the most of the revenue will be in the second half of the year. And also, we are very positive about, say, future developments of us because of the fact we see our qualified pipeline grow strongly, not only in number of projects, but also in size. So therefore, we're also convinced of the positive outlook, not only for this year, but also for the coming years.

And would it be fair to say that you have become more positive on the segments today versus 6 months ago?

That's a correct conclusion. And we try to find also the proper words to make that -- to substantiate that. So on one hand, our order book is quite strong at the moment. And we also see our qualified pipeline go strongly. Therefore, the qualified pipeline will have a limited effect on the revenue this year, but of course, especially in next year or the year after because also here, we see that due to the size of the project, also the time spend in which project realization is being -- can be executed is also prolonging. So therefore, we already have line of sight for what will happen in 2023. And we are confident due to, say, the discussion with customers that also the market capabilities are positive.

The next question comes from the line of Bhawin Thakker calling from Barclays.

So my first question relates to, again, your second half operating margins. If you can provide any visibility in addition to what you've already said. So I was just thinking in terms of the mix elements for the second half. So your Energy storage revenues are implied to kind of step up in second half. And your automation-related project is also expected to kind of start showing effect in second half. So how should we think about overall margins, especially in terms of mix? And what kind of impact this automation-related project might have on your margins? Does it start incurring costs from second half? Or you have already booked some costs with regards to that in the first half itself?

Well, I appreciate the question, and -- but we never give a, let's say, a profitability per business line, so we will also not do it now. What we can say is that we strive for operational leverage, and we said before that the fastest-growing business lines have the most opportunity for operational leverage. So that's where we are focusing on, and that's how we look at it. And we feel we have not reached the end of operational leverage yet. Having said so, product mix has effects, but also global supply chains have effect on the overall margins and profitability of the business as such. But I think I said before, we will continue to strive for profitable growth.

Okay. Okay. That's helpful. And with regards to the operating leverage, like as you mentioned that the year-on-year growth in your EV charging business, which has been exceptionally high, more than 200% year-on-year. So as it kind of slows down slightly, despite remaining at quite high levels more than 100%, of course, as you said, you have seen over the last few years. So does that have any impact on the operating leverage for the second half?

Well, we also have a flexible workforce. So we are able to increase and decrease compared to production levels that we see. So that's how we balance our operational leverage also.

Okay. Okay. And lastly, I just wanted to know if you could provide some more details about the impairment charge that you have booked of about EUR 0.5 million in the first half? What does it relate to?

That's the expected credit loss that you referred to. That's the accounting treatment of what you initially called a provision for doubtful debts, which is now based on an overall calculation model and even outstanding amounts, which have not yet been overdue. You need to take into account a certain percentage of risk. So that's fully based on IFRS, and that's why you see that on that line. So it's -- yes, it is called an impairment loss in accounting terminology, but it's more or less a kind of step-up in provision.

Okay, Okay. So it's not with regards to any repayments that you were already due?

No.

The next question comes from Paul de Froment calling from Bryan Garnier & Co.

Two questions for me on EV charging. The first is, do you plan to release new products update this year in EV charging? And my second question is, could you give us more color on the contract with TotalEnergies for Europe until 2025?