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

Good day, and welcome to Alfen Half Year 2023 Results Conference Call. Today's conference is being recorded. For the duration of the call, your lines will be listen-only. [Operator Instructions]. I will now hand over to Marco Roeleveld, CEO. Please go ahead.

Thank you, Maria. Good morning, and welcome to this webcast regarding the 2023 first half year trading update of Alfen. We appreciate the fact that you have taken effort to participate. This 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 the first half of 2023, we have increased our half year revenue with 9% compared to last year and we also then conclude that 2023 will be for Alfen the breakthrough year for energy storage systems. In this webcast, we will start with the highlights of the first half year, followed by a short review of the business line, and later we will go in more detail regarding our financials and outlook. Continuing now with Slide 3 with the highlights of the first half year of 2023. In the first half year, we realized EUR 223.9 million in revenue. This represents a growth of 9% compared to the same period last year. This growth was driven by a growth of 20% of Smart Grid Solutions and especially Energy Storage Systems with 6 times the revenue compared to the first half year of last year. The European EV charging market is still hampered by destocking in the distribution channels, leading to a temporary slowdown of our EV Charging stations revenue and we experienced a decline in revenue of 36% compared to the same period of last year. The overall gross margin were 30.5% compared to 35.3% in same half year of last year. This decrease is purely driven by a shift in business line revenue mix towards Energy Storage Systems. As a percentage of revenue, the adjusted EBITDA declined from 18.4% to 9.4% in this year. We've updated our 2023 full year revenue outlook from EUR 540 million to EUR 600 million to EUR 490 million to EUR 520 million, driven by a lower EV charging revenue outlook due to destocking and challenging market relations. This adjustment was also communicated to the market last week. Lastly, we want to reconfirm our medium-term objective on revenue and EBITDA. And as proof of our asset-light business model, we have the objective to keep our CapEx below 5% of revenue. Jeroen will go in more detail on the financials later on in this presentation. In upcoming sheets, we will go in a little more detail on each of our business lines, starting on sheet 4 with Smart Grid solutions. In the Smart Grid solutions business line, the revenue grew 20% to EUR 85.5 million. Both the grid operators and private network segments contributed to this revenue growth. Grid operators continue to expand and reinforce the distribution grid to support the energy transition and we continue to benefit from these plans with existing framework agreements with these grid operators. We also continue to prepare for a step change in growth in the coming years as the grid operators scale up their investment plans. And the introduction of the new sub-station for Liander under the new framework contract led to a low number of substations produced in the first half of '23. We produced 1,573 substations and small decline of 3% compared to the same period last year. The gross margin for Smart Grid solutions amounted to 29%, which is at the lower end of 25% to 40% range as provided at the Capital Markets Day for this business line, but this shift is related purely to product mix differences compared to different quarters. We expect a strong revenue growth in this business line in the coming years. The construction of our additional production facility in Almere is advancing nicely and is on track to be operational in Q1 2024, as can be seen on the photo of sheet 5. The grid operators announced in their 2022 annual report ambition to install much more substations in the coming decade. And already in 2024, we plan for a strong growth and are well prepared for this growth within the new building. We decided 2 years ago to invest upfront in additional smart grid production capacity to ensure that our growth is not hampered by limited production capacity. This new Alfen location is also a good showcase for all of the products of Alfen and all of our capabilities. We installed [indiscernible] substations for the grid connections. We will install 3 e-boiler substations for the electricity distribution around the building. We will install more than 100 AC charging stations, we will then install several DC charging station. And of course, we will also install better energy storage containers that are necessary to be able to level out the energy coming from the solar panels in a relatively high power consumption for the charging stations. We now go to Sheet 6, regarding the segmental review of Energy Storage Solutions Systems, where in the first half of this year, the revenue increased from EUR 9.4 million to EUR 58.8 million compared to the same period last year. The momentum in Energy Storage market is powerful, mostly driven by continued renewable growth and the need to demonstrate demand and supply of electricity and the congestion in various grid expense. This revenue increase was driven by both our stationary systems and our mobile systems. The pipeline of qualified leads and order intake continues to develop in a healthy manner. Currently, our backlog is over EUR 150 million with more than half expected to be executed in the remainder of 2023. The gross margin for Energy Storage systems amounted to 19%, which is at the lower end of the 15% to 30% margin range we provided at our Capital Markets Day for this business line. This is due to a relatively high portion of large-scale projects running in first half of this year. Now I will hand you over to Michelle Lesh, our CCO. She will continue on Sheet 7 with the segmental review of EV Charging Equipment.

Thanks, Marco. Now let's talk to our EV Charging business. For the first half of 2023, we saw revenue of EUR 79.6 million compared to EUR 125 million in the first half of 2022. The primary drivers for the drop are twofold. First, as previously communicated, we saw a destocking in the first half of 2023, primarily in the home segment. And additionally, we started to see market demand challenges in key geographies such as Germany and the UK. In both of these markets, we saw the ending of subsidies, which are a few of the many drivers of market demand. However, we still saw 60% of our revenue generated from outside the Netherlands, and our gross margin was 40% for both Q1 and Q2, which is at the midpoint of our previously communicated guidance at our Capital Markets Day. Fortunately, we are seeing the destocking situation improve for EV charging, and we expect second half revenue to be in line with first half revenue. And as we move to the next few slides, we wanted to share more detail on the operating cadence we have with our customers and therefore, the market and more context on our performance relative to others in the EV charging market. First, on Slide 8. Just like we did with supply chain, we have board engagement on our commercial operating rhythm. We have country and customer specific action plans in place to know where to focus our efforts. We have a regular internal and external communication cadence to ensure we track progress against those actions and to follow-up with our customers. We partner with our customers on projects and pipeline reviews to help them find additional sales opportunities and have expanded our joint channel marketing activities. We've also looked at ways to make their inventory more valuable to their customers by leveraging recent innovations. Next, on Slide 9. We've also taken a historical view on the overall market for Alfen compared to some of our peers. We often get the question about when we'll destocking be over and our market share position. First, let's look at the destocking challenge. We had rapid growth in 2022. While some peers in the market have communicated the stocking is over for them, you can see on this graph that our revenue in 2022 was more than double our peers, which creates a larger inventory position with our channels. So the destocking challenge has been larger for us than our peers. For example, we recently worked with a key channel to execute a large parking project. We supported the installation of their units. However, these units were shipped and delivered in summer of 2022, just now being installed in summer of 2023. This just shows the lag between the Alfen revenue to the final installation for our customers. However, we have moved through the stock at some of our markets and have channels that have begun to order again. This is in line with our previously communicated indication that we would see some pickup in late Q3 and Q4. And even with this large challenge, we are still the largest amongst our peers. This is what provides some insight into our share position, which right now we feel is stable. And long-term, the market growth is still there. We are fortunate to be in so many European markets and be able to serve the public, the business and the home segments within our portfolio. Now let's take a look at some of our key wins in the first half on Slide 10, starting with EV charging. With Virta, we secured a 3-year contract to enable them to supply SNCF to the French railway operator for their public and private parking facilities. Additionally, we have a 4-year framework agreement with E.ON Drive, which is a part of E.ON, focused on deploying public infrastructure across multiple European countries. And we have also been selected as a partner by Aral Pulse, a division of British Petroleum to support their business and public infrastructure rollout. In Smart Grids, a key win for us was our previously communicated multiyear contract with the grid operator, Stedin. They are the third largest grid operator. And with this win, we now have contracts with all 3 of the grid operators in the Netherlands. We also saw continued demand in 2 of our key segments; grid connecting fast charging stations and greenhouses with contracts with Ionity and Harvest House. And in Energy Storage, we're excited to be building Centrica's first EU energy storage facility in Belgium. We're also proud of the progress we are making in the largest energy storage project in the Netherlands with SemperPower and are continuing to see wins in the Nordics with Ilmatar Glennmont Partners. Now on to Slide 11. Let's look at some of the key innovations that we've communicated in the first half. First, in March of this year, we launched our Altro substation. The station will be used in both the Netherlands and Belgium, and we are already seeing orders, including one with ELECTRA in Belgium to grid connect their fast charging stations. Second, as shared at Capital Markets Day, we've developed a 30 kW DC charger. We are on track with our large customers, and we'll begin to work with more customers later this year. We have also launched our Mobile X storage solution, which provides a higher power density in the same 10-foot container, 720 kilowatt hours versus 422. This container not only houses the batteries, but also the transformer and switchgear, making the battery mobile truly plug-and-play ready for our customers. And now I'd like to hand it to Jeroen to walk through our financials.

Thank you, Michelle. Let's first have a look at our income statement on Slide #12. If we look at our revenue and other income, that increased from EUR 205.5 million in the first half of 2022 to EUR 223.9 million in the first half of 2023. And earlier in the presentation, Marco and Michelle already gave some more details on the individual business lines, so I will now directly go to the gross margin. Net gross margin decreased from 35.3% last year to 30.5% this year, which is driven by a revenue mix shift from EV charging equipments to energy storage systems. If you look at our personnel costs, that increased from EUR 25.8 million last year to EUR 34.9 million this year, an increase of 36%. We grew the number of FTEs from 893 at the end of 2022 to 956 FTEs at 30 June 2023, and that is part of the causing of the increase in the personnel cost. But the main drivers for that are a 10% roughly salary increase as per the January 1, 2023, based on the concluded collective labor agreement that's there in the sector and of course, the rollover effect of last year hires who were not there yet for the full year 2022, but are fully on the payroll, of course, as from the January 1, 2023. Those 2 elements have the biggest impact on the rise of the personnel cost. We will add some new people in the second half of the year, but definitely not at the pace we saw previously. Other operating costs increased from EUR 10 million last year to EUR 12.5 million this year. And if we exclude one-off costs and special items, we arrive at our adjusted EBITDA. And as you can see, that decreased from EUR 37.3 million last year to EUR 21.1 million this year. There are 2 main drivers for that. The first one is the already mentioned revenue mix shift from EV charging equipment to energy storage systems and the second driver is that the fixed cost base within EV charging is causing some deleverage. Finally, our adjusted net profit decreased from EUR 25.3 million last year to EUR 10.1 million this year. So from the income statement, we now go to the balance sheet on Slide #13. And I'll start with the non-current assets. They increased from EUR 58.7 million at the end of last year to EUR 85.8 million at 30 June 2023. The capital expenditures amounted to EUR 20.1 million compared to EUR 10.1 million in the same period of 2022. CapEx in the first half year is high, but that's based on the acquisition that was announced earlier of the new building, at Damsluisweg 70 for our energy storage business line, and the purchase price of that was EUR 10 million. Included in the EUR 20.1 million are also EUR 4.9 million of capitalized development costs, which demonstrates our continued efforts to invest in innovations for the future. At our Capital Markets Day in May, we set the qualitative objective to maintain our asset-light model. We noticed, however, that, that is sometimes perceived in the market as we are going to significantly raise our paybacks. That's not the case. And therefore, we quantify now our medium-term objective of this asset-light business model, and that is to keep our CapEx below 5% of revenue. Now I will go to our working capital. That increased from EUR 87.6 million at year-end 2022 to EUR 135.1 million at 30 June 2023, which is primarily related to increased stock levels and strategic stock-down payments, which we will explain a bit more in detail on the next slide. And let me start with the table on the left top hand of this slide. You see 2 elements there. Inventory on hand, that is inventory, which is in stock there, but also some down-payments that we have on purchase orders for batteries, for example and they are recorded in accordance with accounting regulations under receivables, but it's fair to make this statement, so you can see what actually more or less holistically speaking is a real inventory level. And as you see, that inventory level grew quite significantly. We talked before in earlier presentations about the high inventory level for EV charging. And with inventory level, don't misunderstand, we do not talk about finished products, they are components like housing, like relays, like ships and so on. In EV charging, our inventory level is beyond normalized levels. And in combination with what Michelle told earlier about the destocking, we do expect this inventory level to come down in the coming quarters and thus will be transferred to cash. The second element and the main driver for the growth of the inventory level is a deliberate choice to make sure that we have the full supply chain ready for a huge execution on energy storage in Q3 and Q4. We have shown the high backlog that we have, and we stated also there that more than half of that backlog will be executed in Q3 and Q4. And although the working capital is high and it's at a high point, and that's also a timing effect, we have the supply chain safeguarded to execute on the Q3 and Q4 revenue stream for energy storage. Of course, as a result of the increase in inventory levels, also our cash position is then impacted. And that means that as of June 30, our cash position amounts to a negative amount of EUR 35.2 million. As our current account overdraft facility is over EUR 100 million, our total cash availability amounts to over EUR 66 million. Therefore, we maintain significant headroom in our bank overdraft facility and to avoid any misunderstanding, we are not planning a capital raise. So now let's go to Slide #15 with our outlook. We expect that the Energy Storage Systems and Smart Grid Solutions markets will continue to grow throughout 2023, as we have transitioned to a carbon-free energy system that is not dependent on fossil fuels continues to gain momentum. As said earlier, for EV charging, this year is considered a bridge year after extraordinary demand in 2022. So based on our first half year performance and the current revenue visibility, we will take our 2023 full year revenue outlook, which was a range of EUR 540 million to EUR 600 million to a new range of EUR 490 million to EUR 520 billion, driven by a lower EV charging revenue outlook due to the destocking and challenging market conditions. However, long-term, we continue to anticipate positive market developments for all of our business lines as new legislation is pushing the energy transition further and fast. As such, we will also continue to invest in our organization in product innovation and the production facilities, but we will definitely do it in a very balanced way, thus aligned with the expected growth in the various business lines. We are now at the end of the presentation, where I will hand over to the moderator for any questions. Operator, could you please take over?

Thank you. [Operator Instructions] The first question comes from Ruben Devos from Kepler Cheuvreux.

I just had the first one on basically the operational costs. So I think if my math is a bit right, it looks like below the gross profit line and above EBITDA, you're having OpEx of about EUR 23 million to EUR 24 million quarterly run rate. That has been the case in Q1 and now also in Q2. Obviously, you've been ramping strongly ahead of the execution of Energy Storage. You've also signaled that basically in EV charging, you've decided not to scale-down in line with lower volumes. So my question is really looking at H2 and beyond, is this sort of the run rate that we can continue to expect EUR 20 million to EUR 24 million or could that be somewhat higher? Could you give any type of guidance on that? That would be very helpful.

Of course, there are also always there a bit of timing effects related because sometimes you have a bit more exhibits, for example, than you have in another quarter. But I think from a staffing perspective, as said, we are growing a bit in the number of FTEs. So that will contribute to the major contributor of that [indiscernible] and that's shown in Q1 and in Q2 is the rollover effect of the hires of last year and salary increase. So as said, we will continue to invest there because if you grow fast in certain areas, then you will also make sure that you capture that growth and perhaps a side step from EV charging because the other 2 are sometimes a bit underestimated, but we have prepared ourselves for a huge growth in Energy Storage. So we will continue to expand there, but that will be a very qualitative expansion. And at the same time, also in Smart Grids as with building and constructing a new building and also making sure the organization is ready for a real step change in growth that we expect there in the next years. So I think that's a bit hampering the results for now. But given the fact that we look very positively towards the future, we are not interfering now in the short-term to optimize the results. Nevertheless, we will also not continue to grow the organization in the pace we did in the past because that would not make any sense. So we try to get a very balanced approach. And I think it's relatively fair to say that this OpEx level is also something we are working towards for Q3 and Q4.

And then basically, if you look at EV Charging, last year in Q2 was quite exceptional. Obviously, you were producing 85,000 chargers. So the comparable was very tough in this quarter. But like I mentioned, you've decided not to lower your fixed costs and EV charging in line with lower volumes. Is it therefore reasonable to assume that you sort of expect in the foreseeable future to get back to that 85,000 simply because your operations are still able to produce that level?

I will leave the EV charging to Michelle. I think she can give a bit of flavor on how we look at destocking and going forward. But I think maybe from a financial perspective, you saw a huge operational leverage in 2022. So the organization is able to capture more revenue than they do today. So you see a deleverage going on when that is decreasing. But the positive side of it is that we feel that the organization is capable of handling far more. So if we are at the end of destocking and order intake picks up again and revenue streams go up, then also operational leverage directly kicks in. And that means that the gross margin that you generate in nearly 2 years then translate into the bottom line. And then we're looking at totally different numbers again.

Yeah. And then from a market perspective, I think what you'll see in Q3 in line with Q2 to second half in line with first half. And then we still see EV registrations increasing, which usually drives demand for charging. And fortunately, we are able to ramp down and ramp up with our flexible labor force, so we'll be able to support the future growth when it comes back.

Okay. And then final question just on maybe pricing also in EV charging. So quite some developments in terms of regulation, changing standard protocols, smart charging functionality, some pricing pressure in home chargers, I believe. Could you maybe provide a few comments on the pricing environment today?

Yeah. So I think, fortunately, we're in 3 segments. We're in the home, we're in business, we're in public. And so yes, there is some pricing pressure in what I'd say is the low to mid-range of the home segment, depending on the capabilities that are needed. But as you get into the smart home segment, where you need to be able to communicate with a smart meter, you get into the business segment where you need to be able to do load balancing, what we're seeing at our pricing is fairly stable. What you have seen is some of our customers have changed pricing to their end customers, but a lot of that was to try to drive inventory to installations to get rid of the stock. So from our perspective, our pricing is fairly stable. And as you mentioned, there are so many protocols and standards and things that are being developed that if anything, the charging equipment is moving up the value chain and not necessarily moving down and being more commoditized, especially in the high-end home business and public segments.

The next question comes from Nikita Lal from Deutsche Bank.

I have actually 3. The first question on cash generation. So we saw that free cash flow was highly negative in H1 due to higher CapEx as well as working capital. How should we think about this in H2?

On the cash generation, yeah, that's high, but that's purely related to the inventory level, which is on the high-end. So that's the only trigger for that. Besides, of course, that we have now a bit of an extraordinary year where we bought the building. So that is a EUR 10 million extra CapEx because I think if you look at the CapEx in total, if you would deduct the EUR 10 million of that incidental buy of a building, which we do for the future growth of Energy Storage, then it would be at the same level of last year. So it's purely related to the inventory levels. And I just explained why they are on the high-end. On the flip side, the good news is that we will reduce the inventory levels in EV charging because they are beyond normalized level, but that's also related to the fact that we have a huge ramp-up and the huge supply chain challenges in previous years with long lead time items of over 3 years. So the forecasting has already been done, let's say, nearly 2 years ago. And then when, of course, the revenue is decreasing, yeah, that has an impact on the stock level. But we're very confident that we will drive them down. It will take some time. But nevertheless, it will be generated to cash. And then for energy storage, I think looking at it from a momentum in time, yes, then it is very high. But looking at it from the positive side, if you want to execute on, let's say, more than half of EUR 117 million of backlog, so that's huge. That's a revenue stream, which is far higher than we have been in the first half year already for Energy Storage with an already 6-fold revenue in the first half year. Yeah, that's an extreme step-up, and we make sure that the full supply chain is there. So the inverters, the batteries, the container is there. So we can execute.

My second question is around the full year guidance. I think Michelle has said, and I'm not sure if I understood correctly, but she said H2 revenue should be in line with H1. Is this correct?

For EV Charging.

Okay. Understood. So if we think about then the full year revenue for your group and think about Q3 being at the same level as Q2, how should be Q4 so exceptionally strong to meet the guidance at midpoint. Could you maybe elaborate more on the drivers there?

Yeah. So just to be clear, Q3 or Q2 EV charging, second half, first half EV charging and I'll let Jeroen comment more on the overall guidance.

I think if you look at the overall guidance, I already gave some explanation there. If the revenue in the first half year for Energy Storage is slightly below EUR 60 million and we make a statement that we have EUR 170 million backlog and more than half of it will be executed in the second half. Yeah, then it's not difficult to calculate that the revenue will also be much higher in the second half for Energy Storage. The trend of Smart Grids will continue. Energy Storage has a huge backlog on which we will execute. And then as said, we expect the first half year of EV Charging in total will be roughly the same in the second half year, then you come up to this kind of range. And then it depends a bit on -- is the destocking going slightly faster than we expect at the moment or slightly slower or can we execute a little bit more on Energy Storage project for year-end or not, but those are timing elements. So we're quite confident about the bandwidth that we gave now. That's also why we limited the [Technical Difficulty] with a much smaller bandwidth than earlier in the year.

And lastly, on your midterm guidance, I mean, you had an adjusted EBITDA margin of 15% to 20%. What do you expect? What you will see in the coming years so that will support your EBITDA level.

Well, I think what you will see is that -- and we always said that we are wanting to maintain our gross margins. And please note that the drop in gross margin percentage-wise at the moment is purely based on the business line, different business line mix. But we talked earlier about operational leverage. And I think it's fair to say that we are building an organization for Energy Storage, which should be able to capture future growth. So we feel that we are at the start of the operational leverage journey for Energy Storage. We are continuing and seeing a real step change in growth in Smart Grids. So also there, we should have the possibilities to further create operational leverage. And then if EV Charging is back on track and is growing again, yeah, we've shown in the past that the contribution of that, both from a gross margin perspective, but also from an operational leverage perspective is big. So that's the way to look at it going forward. So we do expect and we are, of course, aiming to further grow our EBITDA over-time. And that's also why we said if we look at our own, let's say, models and our own projections, then of course, this is a setback with EV Charging. But nevertheless, long-term, we're still on track to meet those medium-term objectives, and that's why we've also said we restate it.

The next question comes from Thijs Berkelder from ABN AMRO - ODDO BHF.

First question on inventories. Can you maybe give us a split of the inventory level you're showing at Slide 14, the EUR 195 million. What is the part of EV Charging versus Energy Storage. And when looking at the strong growth in Energy Storage, why would inventory in Energy Storage at your end to be lower than at the major stage because I think that market is growing fast, is expected to grow fast, so you will need to order much more batteries than you've done a year ago. That's my first question. Then second question is on gross margins. Can you maybe explain why Smart Grid gross margins are at the low end of the guidance range and what you expect to happen there next year? And related to that in Smart Grids, already revenue growth is something like 20% in H1, and you're now guiding for a step change in 2024. Is that plus 50% or plus 100%. What do you mean with the step change?

We can start at the end. So from a step change perspective, what we do expect is the Capital Markets Day, we've communicated a CAGR of 10% to 15% for Smart Grids. And we expect from 2024 onward, that will be significantly higher than 10% to 15%. We're not going to see 50%. This market doesn't grow that fast, but 20% is reasonable.

Present time, of course, we are also now building a business. So at this moment, we have certain limitations within the existing environment to grow, say, the number of subjects we can produce. So we have to balance out, say, our growth also with our capabilities. And we are lucky that 2 years ago, we made the decision to start planning on the building because if we had to start planning now, we would more or less be having a problem because the grid operators, their planning processes are now such that they want us to grow quite quickly numbers in next year. The pace in which we can grow is also something that will be debated and say whether there's next quarter or in the year results when we plan in 2024, more outlook next year, then it will be more clear what the percentages are. But say, because of the fact we have are grid operators and projects, we have expected fundamental growth with the grid operators and where the projects will keep its normal pace.

And then Thijs coming back to the inventory question, I'm willing to give roughly that split. So for Energy Storage that is approaching the EUR 90 million in total. For EV Charging, it's roughly EUR 85 million and the remainder is on the smart grids. And looking at the EV charging, and we said it before, if you look at, let's say, normalized run rates again, yeah, then it's fair to say that with a EUR 30 million to EUR 40 million inventory level, you have enough. So we have roughly doubled. And in the next period, we will reduce that inventory over-time. Every week, I see that declining. But sometimes you get a delivery in and then it's slightly up, and then it's downwards again. So that is what we will see. And yes, fair to say that Energy Storage will remain on a higher level. But that is also fully influenced by, let's say, by timing of projects because sometimes, and that is in the accounting treatment with income terms or whatsoever, then it is really a matter of shipping. So there are also timing at the moment because if you execute on a project, let's say, in February, then you get the batteries in January 10, then you don't see anything at year-end and the level is low. But if you get them in before Christmas, then all of a sudden, the inventory level is high. So fair to say that we will have a higher inventory level for Energy Storage, not higher compared to now. And also good to note is that we also negotiated different delivery terms. So we are now capable of spreading the deliveries a bit more in time. And probably later on in the year, we can give a bit more flavor on it. But we are in a possibility that we can spread it a bit more and therefore also point a bit more towards, let's say, execution of the project. But that's not the case yet for now for the half year. So that's why we decided to make sure that we have them and then we can execute because otherwise, you jeopardize the execution on your backlog. So I think that's the way to look at it also going forward. I hope that gives some clarity.

Yeah. And the gross margin outlook.

That's purely related to the product mix. There are 2 elements there. I explained it somewhat earlier presentation, we sell a certain type of a transformer substation, and we call it the for example [Technical Difficulty] and it has a pricing and the margin. And then another customer also orders it, but with slightly different switch here and slightly more cables in and then the debt margin is slightly higher. But if you have a more, well, let's say, standardized product, then slightly lower. So it's purely related to product mix. And on top of it, the relative part of the projects in Smart Grids was a bit lower in Q2. And those 2 elements gave rise to a small drop in the gross margin there. So we do expect that to pick-up again.

The next question comes from Jeremy Kincaid from Van Lanschot Kempen.

I just wanted to run a couple of numbers past you to get your thoughts. So obviously, you're saying that the third quarter should be the same as the second quarter, which would imply revenues of EUR 33 million and in the first half, same as -- sorry, the second half, same as the first half, which would imply fourth quarter revenues of EUR 47 million. But what I think is quite interesting about that fourth quarter is that it's the first quarter in a couple of years or so where there's been no inventory stocking or destocking impacting that number. So in theory, represents underlying demand, if I understand you are right. And then you're saying on Slide 9 that you're expecting the EV charger point market to grow from 15% to 20% per annum. So if I understand the Alfen house view correctly, should we sort of be applying a 15% to 20% growth rate to, say, EUR 47 million or EUR 50 million in the fourth quarter for sort of a run rate going forward that's not impacted by stocking or destocking issues.

The difficulty in this situation, of course, is that we can give indications, but things are not mathematically always, say, can have a direct translation, several aspects into play. But we more or less saw not only need destocking element, but we see, especially, for example, in the Netherlands, Germany, that there is some, say, and I call it a disturbance in the market in relationship to the tax advantages or grants that has been graded by governments. So there is always a fluctuation in the market from whether it's from one year to the other or from a quarter to the other and say the average number of growth of that 15% to 20% is an average number. But we cannot say that every quarter, there will be a mathematical translation of those elements. On the other hand, to be fair, we think at this moment that in second half year, we have more or less been to the floor in the destocking elements. And if the market keeps picking up, if the cars come to the market, then the definition thing also that the translation to revenue for us but also because at this moment, we have no indication that there is a fundamental change in market position of Alfen or our share of wallet with our customers. So we have more or less, therefore, an expectation that our revenue will pick up more or less in line with the overall growth in the market. How this grows quarter-by-quarter, really a value will continue. That's a little bit hard to predict. So in general terms, you might be right. But say, if we are really there in the first quarter of next year, there might be practical circumstances, it will be a little bit less or a little bit more. So in general terms, we are confident about our market position. We also are confident in, say, about future market growth. How that will evolve quarter-by-quarter. That's a little bit more difficult to predict, although trend-wise, you are correct.

Understood. And then Slide 10 was also very useful I thought with your recent commercial successes. Could you just talk about the EV charging commercial successes and maybe quantify the size of those and whether or not you think it might impact your overall market share?

Yeah. So these are multiyear framework agreements. What you see is most of them are international, primarily supporting kind of the business and public market where we're very strong. We can't really put numbers on those because we don't communicate that specifically by customer by market, but all of them are impactful for the business and is part of what gives us confidence that things are moving in the right direction. Virta has been a customer, but their contract with SNCF is a new one. So that's incremental growth for Virta. E.ON Drive is new customer for us, Aral Pulse, new customer for us. So all of this is adding to our confidence that our market position is least stable because we are able to add new customers as well as continuing to grow our existing customer base.

And then just one more question from me on debt and the bank headroom. It's a little bit lower than what you've had in the past at EUR 66 million of headroom. I think the working capital piece is well understood now based on the prior questions, but could you just talk a little bit more about the CapEx for the second half with the building that's required? And that's, I think, the final moving point that vests my questions on.

Yeah. I think what we said before is that we will have incidentally a somewhat higher CapEx due to the buildings. And so we have to do some refurbishment there for that building. So that is to be expected, and that's also pending for ourselves, more structurally low run. We always said that we will slightly increase the immaterial part of it, so the capitalized development costs. And at the same time, we also from a PPE perspective, we'll continue to invest in some molds that we need because, for example, in Smart Grid, if you have a step change in growth that you expect and the step change is not previous growth of 10% going to 11% or 12%, now it's 20% and then feeling that, that will be increased going forward. And then also some investments in months is necessary to safeguard that because that means much more transformer substations than we do today. So that is to be expected. But all-in-all, the PPE part is relatively stable and limited. So I think that's the way to look at it going forward. So with the buildings now going on, there are some incidental extra investments involved. But that's why we also wanted to give a new positive objective for it because we know that the market picked up, we thought, honestly, that we would say, well, everyone understands asset light means no major CapEx coming from us, but there was some misunderstanding by us stating it as a qualitative objective and not quantifying it anymore that as sometimes being received in the market as they are going to really step up in CapEx, and that will grow. And that is structurally not the case.

The next question comes from David Kerstens from Jefferies.

I've got 3, please. First, can you explain the link between the registrations up 45% driving demand for EV Charging equipment in the second half of the year? Is it currently not an exceptional situation in EV registrations related to huge order backlogs from 2022. The second question is on the pricing. Your ASP in EV Charging was down 7% quarter-on-quarter. Is that due to a mix shift or do you also see the first impact of lower prices? And maybe when you look at the home segment, your entry-level model at around EUR 650, I think Tesla recently lowered their prices to EUR 500. Is there a risk that ASPs need to come down further or is that price difference sustainable? And then maybe a final question on the balance sheet. Net debt increased much faster than expected, but you're saying you're not planning a capital increase. Can you run us through those assumptions behind the leverage ratio you anticipate going forward? And what are the covenants in your loan documents with regards to net debt to EBITDA?

So David, to start with registrations, you're right, right? The car registrations are seeing a little bit of an uptick but tied to car orders from '21, '22. So from an EV registration perspective, we're not directly tying that to our pickup in second half. What we see with EV registrations is it's more of an overall market indicator that people are still buying and taking delivery of cars. Obviously, we need to stay on top of EV registrations going forward, will we see them continue to rise, what will happen. So that's for us more of a macro market indicator. For us, the second half is more tied to what we're actually seeing from an order intake and operating rhythm perspective with our customers. And what they've told us they're intending to do new contracts that we've won. So our second half is really more tied to what we see and feel tangible, whereas EV registrations are more of a macro trend that is driving the entire industry. From a pricing perspective, yes, primarily mix shift. So if we sell more of our singles than versus our doubles or our twins, then you definitely see an impact on the ASP because the pricing levels are different. And then for our lowest-end product, I think, yes, there are products out there that are fairly -- I don't want to say generic, but they don't always meet the country needs in terms of smart meter connectivity and other feature functions that we tend to focus on more in that smart home segment. So I know Tesla is charging infrastructure in the United States. I know they have an entry-level model that they can serve with their vehicles. But what we've seen and heard from customers is they come in thinking they want that. But when they realize those chargers can't connect to the smart meter can't do more, they'll often leave with a different model charger sometimes in Alfen. So it's definitely something that we're paying attention to in terms of pricing developments, but we're not seeing it as a primary threat because, again, we play in that smart home segment. And there we're seeing things a little bit more stable.

I think going to the balance sheet, David, I think there are 2 elements to distinct there, that's the normal regular borrowings in which we have [Technical Difficulty] and lease liabilities. I think that is in accordance with what we expect. We are constructing building loans, so that will increase to some extent. And of course, we have the purchase of the new building, which is also financed through a bank loan of EUR 10 million. So that means structurally more or less, that debt position from borrowings and lease payments and et cetera is roughly around EUR 50 million. Our net-debt-to-EBITDA ratio is 3 in the covenant. So that means that with the EUR 50 million you have more or less based on, let's say the forecast of the EBITDA. We have the whole RCF available, and that's the way to look at it. And then noticing that I mentioned that the inventory levels in EV Charging should come down and should generate cash. Also, of course, we always said it's about profitable growth. So if we grow further and are able to reduce the inventory levels a bit and we are strict on monitoring our working capital, as you know. Then also you generate free cash flow. And that's the way we look at our balance sheet. But because we got some questions on AI, working capital is increasing and is there a capital raise, we wanted to make clear that for now, we have sufficient headroom in the facility that is readily available. We are focusing on driving the inventory levels down. So we're not planning a capital raise.

Understood. So just to clarify, you're saying a sustainable underlying net debt level would be around EUR 50 million in the first half, you are well above that, but if inventory levels in EV Charging will reverse in the second half, you get back to that EUR 50 million level.

Yeah. I'd say the net debt that I referred to that's not a net debt, including the cash. I referred to about the borrowings side of it. That is structurally roughly a EUR 50 million, EUR 55 million level area. And then, of course, your bank's position at a certain moment is contributing to a net debt or a net cash because if it's positive, it's a deduction. So that's the way to look at it. But that cash position is more directly related. That's a timing also sometimes in the relationship to working capital. The more borrowing part of it is a more structural element because those are lease obligations in combination with bank loans.

The next question comes from Maarten Verbeek from Idea.

2 questions from my side. Firstly, when I look at your cash flow statement, I do see that there is an issued loan of minus EUR 11.5 million. Could you provide some more color on that one? And secondly, apparently, you say that you have suffered much more from the inventory correction or destocking than your peers. Now more or less, that has stabilized, do you think that from this moment onwards, you will be outperforming your peers?

Yeah. On the first question, now I am getting really technical, but I explained it a couple of earlier -- in somewhat earlier presentation, that is related to the construction of our building. At the time when we were entering into that building situation, we had a project developer and then normally the project developer finances the construction. And then at the end, when the building is delivered, you get the building in a lease contract, which we also signed and then the lease installments are there. When we were having the discussions and negotiations with the project developer, we noticed that their financing and the interest rate that they needed to pay on the construction was much higher than what we needed to pay. So we think your kind of situation there is, well, we are not willing to have these high interest costs and then get them back in lease installments because we can finance it cheaper ourselves. So that's why we said we are going to finance the construction of the building. So that's renting out, let's say that's a loan that we provide to the project developer for the construction of the building. The opposite side of it is that we have a loan to the banks. And that's why you see a negative amount or an element there of the EUR 11.5 million issued loans. That is related to that because we have another receivable in the non-current assets that you see happening there. And the opposite is a bank loan that we have. What will happen at the end when the building is ready, and I'm giving, let's say, not a precise number, but assume we have EUR 20 million, for example, then we have -- at the moment, the building is transferred to us. We have a EUR 20 million receivable on the project developer and a EUR 20 million bank loan. At that moment, we are entering into a lease agreement. So then the building is transferred to lease. So then our receivable will be redeemed. We redeemed the loan to the bank. So that's 0. And then from an accounting perspective, IFRS 16 lease contract kicks in, meaning that we have a right-of-use asset and opposite lease liability, which then roughly probably will be the same type of numbers, but it's just a reallocation of that element. That is what it is. But yeah, it is a bit atypical, but we save quite a lot of money with it. So we thought it was worthwhile entering into this construction. I hope it gives some clarity because it's quite a technical accounting issue.

And then from a market position, I think our ambition is always to outperform the market. We feel that we're strongly positioned with our current product portfolio, new innovations around the way. And I think it also helps at Alfen. We're in multiple European countries. We're in all 3 business segments, business, home, public. So I think that gives us more possibilities to outperform than maybe some of our peers, but we'll have to see how things play out.

As there are no further questions, that will conclude today's question-and-answer session. I would like to hand the call back over to Mr. Roeleveld for closing remarks.

Okay. I would like to thank everybody for their attention and also for the questions that are raised in order for us to be clarifying a little bit more about the [Technical Difficulty]. And I thank for all the questions and therefore, I wish that we will leave again and also after the [Technical Difficulty] quarter and are able also to see the development for us to be able to show the recovery of EV Charging, but also to recapture the growth we are planning forward and that we can sustain or make clear that we are well on track to our promises on the midterm objectives. Thank you.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.