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

Hello, and welcome to the Alfen 2023 Q1 Trading Update Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Marco Roeleveld, the CEO, to begin today's conference. Thank you.

Thank you, Laura. Good morning to this webcast regarding the 2023 first quarter trading update of Alfen. We appreciate the fact that you have taken the effort to participate. The webcast and the questions that may come forward are handled by the management Board of Alfen. Jeroen van Rossen, CFO; Michelle Lesh, CCO; and myself, Marco Roeleveld, CEO. In this first quarter, we have increased our Q1 revenue with 90%, and 2023 will be for Alfen the breakthrough year for Energy storage systems with a revenue growth of 280% -- 285% in Q1. In this webcast, we will start with the highlights of the first quarter of this year, followed by a short review of the business line Next, we will go in more detail regarding our financials and outlook. We now continue with Slide 3 with the highlights of the first quarter of 2023. In this quarter, we realized EUR 113.2 million in revenue. This represents a growth of 19% compared to the same period of last year. This growth was driven by a growth of 22% of Smart grid solutions and especially by Energy storage systems with 4x the revenue compared to the same quarter 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 revenue. The overall gross margin was 32.1% compared to 35.7% in the last quarter or the same quarter of last year. This is purely driven by a shift in business line revenue mix towards Energy storage systems. As a percentage of revenue, the EBITDA declined from 17.9% in the first quarter of last year with 12.7% in the same quarter this year. For the Smart grid solutions revenue, it is notable that we will be awarded a long-term contract with Stedin being the Netherlands' third largest grid operator. And we will confirm our 2023 full-year revenue outlook of EUR 540 million to EUR 600 million supported by a strong backlog in Energy storage systems, exceeding EUR 165 million, of which a major part is executed -- expected to be executed in 2023. Lastly, I want to mention that we have set new medium-term financial objectives during our Capital Markets Day in last week, Wednesday. Jeroen will go in more detail on the financials later on in the presentation. In the coming 3 sheets, we go into a little bit more detail on each of our business lines. We start on Sheet 4 with EV charging equipment, where in Q1, the revenue was EUR 47 million being 14% less than in the same period last year. I would like to note that Q1 2022 was an extraordinary quarter with extremely high demand for EV charging stations as COVID-19 mobility measures were coming to an end. The market still faces excess inventory in the distribution channels, particularly in the home segment. The destocking takes longer than we expected. However, we do expect the market to improve after summer due to positive signals we hear from our customers and the increase in battery-equipped vehicles that are registered. In the market of the battery-equipped vehicles, we saw a 33% growth in Europe in Q1 compared to the same quarter of last year. In the first quarter, approximately 65% of our revenue was generated outside of the Netherlands. And in production-wise, we produced 43,800 charge points, a decline of 32% compared to the same period last year where we produced 64,600 charge points. The gross margin for EV charging equipment amounted to 41%. We now continue Sheet 5 with Market Solutions, where the revenue was 20% higher than in the same period last year and amounted up to EUR 41.7 million. Both the grid operators and private network businesses contributed to the revenue growth. And we continue to see a long-term growth trend in Smart grid solutions, underpinned by electrification of society's electrical energy needs. The grid operators announced a sustainable, higher ambitions in their 2022 annual reports to roll-out substations until 2030. The production in Q1 was 777 substations, an 8% decrease compared to last year in the same period. And the start-up operation for the new substation for Liander -- the Liander contract caused a lower number of substations produced in Q1 2023. And we also see a trend towards higher value substations. The gross margin for Smart grid solution amounted up to 31%. We go now to Sheet 6 regarding Energy storage systems, where in the first quarter, the revenue was EUR 24.5 million, an increase of 285% compared to EUR 6.4 million in Q1 last year. This increase in revenue was driven by both stationary applications and our mobile applications. The momentum in the Energy storage market continues to grow, and our backlog has grown significantly due to new contract wins and is now exceeding EUR 165 million. The gross margin for the Energy storage amounts to 18%. This is at the lower end of the 15% to 30% provided at the Capital Markets Day. But due to the relative high portion of large-scale projects in Q1, this is more as expected, and we expect also in the remaining part of the year that we will balance out. Our CCO, Michelle Lesh, will now continue with the most relevant market developments.

Thanks, Marco. Now we'd like to quickly share some of the market insights across our business units. We shared some of these last week at our Capital Markets Day. But today, we wanted to use them as some additional context for Q1. First, in EV charging. What we do is regularly look at our customer base and want to be sure that we're both keeping our loyal customers as well as adding new customers. And what we saw is that when we looked at our top 50 customers from the last few years, we see that 98% of them are continuing to place orders in the last 6 months. So while the order volumes may be of a different magnitude, we still see customer retention. Second, we continue to see growth in our Smart grids business, and we'll be awarded a long-term agreement with Stedin. This agreement is in the final stages of signing. It will be a 4-year framework contract similar to our other grid operators, with the option for 2 additional, 2-year extensions for a total of potentially 8 years, and we'll see 50% of that contract. Third, we continue to see the momentum build in Energy storage. As Marco mentioned and is evidenced by our strong backlog, where we've got line of sight to more than EUR 165 million that will mostly convert this year and into 2024. Fundamentally, we see really strong market developments in each of our business lines and expect that long-term trends will support our continued growth. Now I'd like to hand it to Jeroen to talk through our financials.

Thank you, Michelle. Let's first have a quick look at the Q1 financials. Our revenues increased from EUR 95.5 million in the first quarter last year to EUR 113.2 million in the first quarter this year, an increase of 19%, and this growth was driven primarily by Energy storage systems with a growth of 285%, and our Smart grid solutions business with a growth of 22%. As Marco addressed earlier on in the presentation, the EV charging revenue decreased and is still hampered by destocking in the distribution channels. The gross margin decreased from a 35.7% in the first quarter last year to 32.1% in the first quarter this year, which is purely driven by a shift in the business line mix. The adjusted EBITDA decreased from EUR 17.1 million, which was 17.9% of revenues last year to EUR 12.7 million, which was 11.2% of revenues this year. And this is caused by a lower blended gross margin percentage and a decreasing EV charging revenue, which creates deleverage in this quarter. We achieved 3 out of the 4 financial objectives set at the time of the IPO in 2018. Therefore, we felt it was time to set new medium-term financial objectives which have been announced last week at our Capital Markets Day, and we rephrased them here. Let me first start by defining the medium term, that is 3 to 5 years, meaning in the time span of 2025 up to and including 2027. From a revenue perspective, we want to achieve a revenue of at least EUR 1 billion. Next to that, we want to keep the adjusted EBITDA in the range of mid- to high teens, meaning between 15% and 20%. And next to these qualitative objectives, we have a couple of more qualitative objectives. We feel we are well positioned to continue to outperform the market growth in all of our business lines. We want to not only support sustainability through our product portfolio, but also through reducing our own CO2 footprint by adopting science-based targeting initiative-based targets. Furthermore, we continue to be asset-light, but we will continue to invest in new developments to stay at the technology forefront. And of course, this cannot be done without an excellent workforce and thus, we will continue to grow and educate our people. From the new medium-term objectives, we now go to the outlook for 2023 on the next slide. What we see is that the transition to a carbon-free energy system that is not dependent on fossil fuels is building ever more momentum across Europe. In addition to that, the Energy transition is a priority for the European Union, reflected in stimulative policy towards 2030. Therefore, we continue to anticipate long-term positive market developments for all of our business lines, and continue to invest in our organization, production facilities and in innovations for the future. From a revenue perspective, we reconfirm our 2023 full year revenue outlook in the range of EUR 540 million to EUR 600 million. Currently, we do expect it will be more likely to end up in the lower half of the bandwidth than in the upper half. 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] And we'll now take our first question from Ruben Devos at Kepler Cheuvreux.

Yes. I've got a question on EV charging. I think in the press release, you mentioned that European EV charging market is still hampered by destocking in the distribution channels. And obviously, you flagged that in February and now we see the impact, which -- of course, if you compare it to what consensus was forecasting is quite a more pronounced impact than what was forecasted. How do you see maybe your performance relative to where the market is? And I believe you also talked about your ability to continue gaining market share this year. Is that still what you expect?

Yes. I think when we'll compare to market, we've done some internal analysis on country-by-country, segment-by-segment. And we don't feel that we're losing share. I think what we really see is the stock levels with our resellers, primarily for the whole segment. In the public segment, that's driven by tenders. We still see tender volume. We're still winning tenders in the business segments, that's project driven. So units are ordered to support a project but the project volumes tend to be smaller than the home volume. So we really do feel that it's a -- it's just a time lag and inventory destocking challenge. And then I think over time, we will see that start to pick back up. And we see in Q1, for example, 33% increase over Q1 of last year. So as we get into the second half of the year, we do see a time lag in registrations versus infrastructure that it will start to come back in the second half.

Okay. But basically, the idea is that EV sales, and it was said that in February that will grow 20%, right? And then if you look at EV charging infrastructure and private charging basically, the idea could be that you're still growing 15% to 20% as well this year. If you're now down 40% in Q1 and you only expect a recovery as of September. Is it then -- it's been quite hard to believe that you still would gain share this year. Is that a fair assumption?

I think -- yes, that's a fair assumption. And I think what you saw in 2022 is there was such an outperformance that in some of our markets as we've done the analysis, we actually outperformed for more than a 1-year time frame. So from a 2022, including into 2023. So yes, I think that's a fair assessment.

Okay. And then just on the 30-kilowatt DC charger, which you expect to launch in H2, could you maybe share the progress on how far you're advanced in this? If you think about maybe R&D but also regulatory compliance and certification, maybe your production readiness in sort of sales and marketing strategies you've put in place. So any update on sort of getting this new product life that would be very helpful.

We're now in the safe state to do all certification testing, where we are, say, at 90% done for, say, the product to have a technical compliance to all the different regulations. And we now more or less have run our first, let's say, what we call the 0 production number to validate that we have all part numbers in the material that we can do the test at certifying bodies. And after summer, we will start up, say, the first production, and we also in that level, are in discussion with, say, what we call them maybe not [ launching ] customers, but customers where we can start more or less validating that all elements in the product are really meeting demands of the product. So that we can step-by-step ramp-up production, but also June, I would say, commercial activities in the second half of this year.

And the demand was driven by our existing customer base. So from a go-to-market perspective, we'll maintain our current channel structure, and this will really help build out their portfolio. So if you think about a parking infrastructure project, for example, you can deploy both AC and the smaller DC to support a project like that.

Okay. And then maybe a final question. Just thinking about the cost base for this year. I think in the press release, you mentioned that you do not -- intentionally did not decrease the fixed cost base with the same speed as you may see some softness in EV charging. How is that for the rest of the year? Is that -- I mean, -- are you looking at maybe recruitment of temporary personnel, maybe a bit of a -- maybe a bit of a lesser spend in R&D and SG&A? How do you think about the cost base for the rest of this year?

We always try to balance the cost base as much as possible. But I think we explained earlier on in a couple of webcasts how operational leverage works within our company. And the highest operational leverage is in the indirect staffing and in the older OpEx. The same is also valid. If you have an organization, for example, in EV charging, which is capable of handling far more revenue than we are currently handling today, then also delever, which is quite strong. And I think that's what we are currently seeing. So we more or less built on an organization which is capable of handling further growth. And yes, if you've done in the quarter are hampered by, let's say, a growth which is not as you would have hoped for and as expected, then it also creates deleverage, which can then also have a significant impact on the bottom line. We saw the opposite effect in 2022 when we saw a huge leverage kicking in also contributing to the bottom line. And maybe to explain if you have an EV-charging organization, which is capable of handling, let's say, on a yearly basis EUR 80 million more revenue. And then the majority of the gross margin that you generate with that revenue trickles down to the bottom line. And then operational leverage really kicks in very fast. So that's the way to look at it. And what we decided for now is that we say, well, fundamentally, long term, all the drivers are still intact and we do you still see positive market signals in all our business lines, also in EV charging. So we are not optimizing the short-term profitability and then jeopardizing the long-term growth. So that's the balancing act that we constantly play.

W., will now move on to our next question from David Kerstens at Jefferies.

I've got three. First, maybe following up on the destocking. Do you have visibility on the channel on how much excess inventory is left and how much there's more to go? And also when you look at the [ ASP ] and EV charging, it was pretty much in line with Q4, whereas the mix shift was probably much more pronounced, does that imply that you see a negative impact on pricing in the home segment? That's my first question.

Yes. So from a visibility perspective, we are in constant communication with our channels. And for the most part, they will share with us and we do have visibility, and we understand their current run rate. We don't have 100% visibility, but we certainly see a majority of it. So that is informing what's happening in the market, and they obviously want us to partner with them to help drive demand in the end market. So we work well together to help maximize the destocking and move it as quickly as possible. And then, yes, it still is a mix issue. We're not seeing any negative pricing trends. We've -- there's always a price lever you can pull. But for us, when we look at the markets we serve and how we want to stay positioned in those markets, making a price decision was not something that we wanted to do. So you don't see any pricing impact there. It's purely mix.

But even the ASP is in line with Q4 and you have a more pronounced impact of destocking in Q1. How can that ASP not be lower than? Why is it in line with Q4?

Maybe we have to look into that one because I [ cannot ] reproduce your figures. Let's say we know that we have not loaded our prices in any of our product ranges. So we have been able to maintain our price levels and therefore, our gross margin. But due to, say, individual mix effects, then the average sales price that can depreciate quarter-to-quarter, but it is not so. We also watch more or less our price level in our gross margin. And then there is no fundamental change in our pricing and our gross margin.

Okay. Understood. And then the second question, with the outlook for the current quarter -- second quarter. The mix shift that could be similar or maybe even more pronounced than in the first quarter due to the tougher comps as Q2 last year was your best quarter of the year. Does that imply that you have more operational deleverage and likely an EBITDA margin below the 15% to 20% range? And my question is what needs to happen in the second half of the year to make 15% to 20% EBITDA margin objective achievable?

I think there are 2 parts to that answer. The first one is that we will never give a profit outlook for the year. We've never done that, and we are not doing that. So I cannot answer the 15% to 20%. What I can say is that, of course, when there is a decrease in the EV charging revenue, and as I explained before, we built an organization which is capable of handling far more than they handled then the deleverage is also ongoing. On the other hand, it's also a fact that you need to build your organization upfront. So if you anticipate on a growth of Smart grids and if you anticipate on the growth of Energy storage, then you cannot balance that directly in the quarter. So if you think that in the second quarter, the revenue of battery goes up, then it's very convenient if you have your organization already in place before that. So that is also an effect. So what we will see is some operational leverage in other areas. But at the moment, the deleverage in EV charging is on both...

Another answer is also to make clear, if we would see the effect of whether it's due to pricing or market share loss that we would assume that will be, say, impact on, say, our long-term strategy than we would have indicated. So at this moment, we have no reason to doubt on our midterm objectives. But it is in a quarter of 2 quarters an impact due to, say, practical circumstances. On the other hand, we are also sure of the fact that we can maintain our midterm objectives. And it's also the reason why we try to balance it out there that we all say, on the one hand, I, say always a short-term impacts. On the other hand, we have also to put that in perspective, of the medium-term capabilities as an organization seem -- want-to-have and also will have.

Yes. That's clear. And then maybe a final question, if I may. I was wondering if you could please comment on developments in operating cash flow and free cash flow in the quarter. And also the -- as this year looks likely to be a relatively asset's CapEx intensive year with the new production capacity and the acquisition of production capacity and also the development in working capital, please?

Yes, I think David, what you've noticed is that we have a facility in place with the banks, which is separate from the RCF for both the financing of the new building and the acquisition of the new building. And so that's more or less neutral from that perspective going through the both RCF financing. So we never -- we don't give balance sheet numbers in the Q1, but that really depends also on the deleveraging, which is going on and what we will see also in the destocking, which will go on. If the destocking is gone after summer, and we are able to drive down our inventory levels within EV charging, then still, we should also be able to further optimize. But that if -- it is difficult to give you a precise element of that now because that also depends on -- to a large extent on timing and on those kind of elements. But it's not per definition that, that then you are only in a negative free cash flow this year, and that's not per definition case. That really depends on the replenishment of the inventory levels as well.

But you normally not give qualitative statements on operating cash flow or free cash flow in your trading update. So is it only at the half year, full year stage?

Only at the half-year and full-year stage.

Thank you. We'll now move on to our next question from Thijs at ABN AMRO ODDO BHF.