Envipco Holding N.V. (ENVI) Earnings Call Transcript & Summary

Well, good morning, everyone. It gives me great pleasure to welcome you to the 4Q 2024 presentation by Envipco. I'm Simon Bolton, CEO of Envipco, and I'm joined by my colleague, Mikael Clement, Chief Strategy and IR Officer, and we'll go through an update of the business, and then, opportunity as normal to address any questions you have with the Q&A at the end. Okay. Next slide, please. So solid end to 2024. Group revenues, as we announced earlier this morning, EUR 36.4 million, which is 3% higher than a year ago on a very high Q4 '23 comparable. Overall then, group revenues, 2024, came in at EUR 17.8 million (sic) [ EUR 117.8 million ], which is 35% growth year-on-year and definitely underlines the strong progress we're making as a business, as we develop and execute on our growth strategy. Gross margin was very pleasing. A lot of work that we've done, as you know, those who follow the business, as we target improvement in gross margin, and in the quarter, it was 38.4%, giving gross profit of EUR 14 million. Overall then, EBITDA was EUR 5.4 million for the quarter, which is just under 50% margin, and cash balance was just over EUR 30 million. So positive work on working capital, which Mikael will tell you about later. Overall, operational highlights, as I mentioned, we continue to grow and execute in our existing markets. Solid operational execution shown by good gross margins, good working capital management. And as we've talked about over several quarters, and we'll summarize again in this presentation, really a fantastic, unprecedented opportunity ahead of us, and we need to continue to invest to be able to capture that. Highlights really for this quarter, excellent performance in Romania, actually our single largest market in the quarter. And continued great work in Hungary, as we complete the delivery of the first phase of that particular project and also strong contribution from Greece and Ireland. As we have highlighted before, our focus is really on greenfield new markets, but there are opportunities for Envipco's technology to help in brownfield markets. We've been in Sweden a long time, for example, and we see some other opportunities. Most recently, the Netherlands, which has issues with particularly the introduction of cans into the deposit return scheme, that's now starting to use our Quantum product to increase their recovery rate. And that's an exciting opportunity, an example of what we're doing in brownfield. Yes, as mentioned, we've made careful and focused investments in the team, in markets, in product development, and we'll continue to do that as we look to be able to execute on the terrific, exciting growth ahead. And as announced just before Christmas, we uplisted from the growth market in Oslo, which we joined in 2021 to the main market in Oslo. And we believe that's the right thing to continue to develop and solidify our profile in the international financial markets. Maybe for those who are joining for the first time, a quick recap. So we are a recycling technology business. We've been around just over 40 years. And our focus is the delivery of products and services that support the recovery of beverage containers normally in markets, countries that have implemented a deposit return scheme, so-called DRS. And this is to improve the recovery of those materials and obviously the uses of that material in new containers. Driven by legislation, we see ahead of us unprecedented growth in this market, as we go to 2030 and beyond. We'll talk a bit more about that later. Over the last few years, we've proven that we can capture a leading position in European markets, fantastic efforts in Romania, Hungary, Malta and so on. And based on our broad product portfolio, we'll continue to invest in this platform, which includes for us both the product and also the services. We've invested in the team. We have a very nice mix of industry veterans and also newer people who are coming into the team. And we feel those 4 things will deliver revenue growth and increasing profitability. So with that, a pleasure to hand over to Mikael, which will go through the financial review. Mikael, over to you.

Thank you, Simon. So let's start out with the profit and loss statement. Q4 revenues, as Simon mentioned, EUR 36.4 million, up 3% from EUR 35.5 million in the corresponding quarter last year. Remember, Q4 '23 was a record quarter for the company at that time. Gross margins continue to widen in Q4 last year, 38.4%, up nearly 400 basis points year-over-year, driving gross earnings of EUR 14 million. In Q4 '24, operating expenses were EUR 11.3 million, up from EUR 8.9 million in Q4 '23. I'll come back to that bridge. EBITDA this quarter, EUR 5.4 million, includes EUR 0.5 million in nonrecurring items, such that the adjusted EBITDA in Q4 '24 was EUR 6 million for a margin of 16.4%. Operating earnings in Q4 '24 were EUR 2.8 million, down from EUR 3.8 million in Q4 '23, with net earnings after tax of EUR 0.3 million. For the year, revenues were EUR 117.8 million, a growth of 35% from 2023, driven by growth in existing and new European markets. Gross margin for the year ended at 36.6%, up nearly 200 basis points from 34.5% in 2023. With EBITDA for the year at EUR 12.8 million and an adjusted EBITDA of EUR 14.4 million. So with that, let's take a closer look at the underlying revenues. First of all, Europe. Revenues in Europe in Q4 '24 were EUR 27.3 million, down 2% year-over-year. RVM revenues were EUR 24.8 million, with Romania being the strongest growth driver in the quarter. Romania actually being our largest European market in the fourth quarter of 2024. However, Hungary showed good sequential progress and a very important revenue mix in the quarter, also the same with Greece. Program services still make up a very small portion of our European revenues, but growing very nicely. In Q4 '24, program services in Europe were EUR 2.5 million, up nearly fourfold from EUR 0.6 million in the corresponding quarter last year. For the year, European revenues were EUR 82.8 million, up nearly 50%, driven by a 43% increase in RVM sales and nearly threefold increase in program service revenues. Our North American business is a much more mature business, a business where -- in which we've been since the early 1980s. In Q4 '24, revenues in North America were EUR 9 million, an increase of 22% from EUR 7.4 million in Q4 '23. One driver is our increased program services revenues, up 12% year-over-year, driven by the doubling of deposit in Connecticut, driving higher collection volumes. RVM sales in the fourth quarter were EUR 1.2 million, an increase of 183%, partly on an increase in spare parts sales. For the year, North American revenues were EUR 35 million, an increase of 9%. Envipco is positioning in European growth markets, and we need to position ahead of DRS go-live. We continue to do that in selected markets in Europe, and that is partly driving our increase in operating costs. This quarter, operating costs were EUR 11.3 million, up 26% year-over-year. The drivers are new hires, increasing OpEx and the introduction of Sensibin amortization of intangibles and also accruals on our long-term incentive plan. Nonrecurring items this quarter from the uplisting on the Oslo Stock Exchange and the Sensibin acquisition-related costs were EUR 0.5 million. Adjusted for this, operating costs this quarter were EUR 10.7 million. For the year, our operating costs were EUR 38.8 million, up 36% year-over-year. Bridging our OpEx from the previous quarters. In Q3, we reported EUR 10 million in operating costs, including EUR 1.1 million in nonrecurring items from the Sensibin acquisition and the uplisting on Oslo Stock Exchange. Underlying OpEx in Q3 was thus EUR 8.9 million. This quarter, we have increased amortization on the Sensibin acquisition of EUR 600,000. We have long-term incentive plan accruals of EUR 700,000 and then new hires and underlying OpEx increases of roughly EUR 600,000 for an underlying OpEx level of EUR 10.7 million, adding the EUR 0.5 million in nonrecurring items, EUR 11.3 million. So let's move over to our balance sheet. Our balance sheet's total increased by around EUR 4 million to EUR 129.4 million this quarter. Our noncurrent assets were close to EUR 40 million, up around EUR 3 million, largely made up of property, plant and equipment roughly half that, EUR 20 million, and intangible assets of EUR 15 million, largely from activated development expenses and also some intangibles from the Sensibin acquisition. Current assets were at EUR 89.5 million. Inventories, EUR 28.6 million, down around EUR 4 million, with accounts receivables EUR 30.1 million, up around EUR 3.5 million. Our cash increased by EUR 2 million to EUR 30.7 million. Equity ratio, this quarter, flat with the previous quarter at 52%. Our noncurrent liabilities, EUR 16.4 million, fairly flat with the previous quarter, of which borrowings were close to EUR 6 million. Our current liabilities were at EUR 45.4 million, up from EUR 44.1 million in the previous quarter. Trade creditors were at close to EUR 17 million, flat sequentially. Finally, let's have a look at our cash flow. First, for the fourth quarter. We started out with EUR 28.7 million in cash at the end of Q3 and ended up with EUR 30.7 million in cash at the end of Q4. Our cash from operating activities gave a positive cash flow of EUR 5.7 million, driven largely by our EBITDA generation. Our cash flow from investing activities this quarter was EUR 1.7 million negative, driven by CapEx of 1.1, largely from piloting equipment, from leasing equipment and IT investments and also some capitalized R&D of EUR 0.6 million. Our cash flow from financing was a negative EUR 2 million in Q4, driven both in the reduction of borrowings and lease liabilities. Then, over to the cash flow for the year. Increasing our cash balance from EUR 12.5 million at the end of 2023 to EUR 30.7 million at the end of 2024. Cash flow from operating activities last year were a positive EUR 1.2 million. Our CapEx was EUR 6.5 million, driven by underlying CapEx of EUR 5 million and capitalized R&D of EUR 1.5 million. So our total CapEx in 2024 was at 6% of revenues compared to 8% of revenues in the previous year. In addition, we had a payment of EUR 1.5 million for the Sensibin acquisition in Q3. Cash flow from financing activities in Q4 -- in 2024 were EUR 25 million, driven in large by the private placement in March last year of EUR 24.8 million, ending the year at EUR 30.7 million in cash. So with that, Simon, I think I'll leave the word over to you again for a look into the future prospects.

Very good, Mikael. Thank you very much. So yes, just we'll go through an outlook. Look, I think the key thing to say, and those who follow the business for several quarters would have seen this, is I think we've got now some really good proof points that we're delivering on our European growth strategy. Just here is development of revenue of the business from 2018 to 2024. The bottom gray is North America, then you have Europe on top. As Mikael said, solid growth in '24 from North America as a mature business. But really, as these -- that growth is being driven by these new markets as they come on. And that will continue over the next several years as effectively people need to address and countries need to address the legislation that is now in EU law. And that legislation, which we have talked about before, that's now fully approved. So the last year, the council approved the law, and that's now into EU law in December. As a reminder, that sets clear targets for the recovery of beverage containers, 90% to be recovered by the 1st of January 2029. And importantly, it says minimum recycling targets for the beverage industry. So not only must the government set up a system to recover this material, these containers, but also the beverage industry, there's a demand there for the recycled content. So that's a fantastic link, and that drives the system. And the best way of doing that, and it's clear in the legislation, is that to put in a deposit return scheme as you have in a number of countries in Europe at the moment, but will be prevalent in all EU countries. Outside the EU, U.K., for us, a very important market. That U.K. legislation also passed over the last few months, and that mandates a scheme to be in place by the third quarter 2027, and certainly, there's excellent activity by the U.K. government to continue to maintain that timeline with probably the next milestone being the DMO. So the operator of the system being appointed in spring of this year. So maybe taking a slightly further look, a longer-term horizon, you see here on the left-hand side, really a snapshot of our revenue growth over the last few years. So really, the European growth strategy being executed, and that actually coming into tangible results for the business. The next few years are going to be very busy, as those countries that are looking, legislating for, actually implement a deposit return scheme and obviously needs the goods and services, the machines that we, as Envipco, can provide to them to help make the deposit return scheme a reality. We've looked at the market in a few different ways. I think you've seen industry estimates before of roughly 100,000 units, tripling over the next few years. A different way of looking at it is actually the population that served through these new deposit return scheme markets. So last few years, Hungary, Romania and so on, has probably covered about EUR 42 million in terms of population. Over the next 3 years, about 278 million people will be in countries that will implement a deposit return scheme. And over the next 5 years, that adds about another 148 million people. And roughly the population is proportional to the number of reverse vending machines, the number of recycling points that, that country needs to be able to cope with that return volume. So that's very exciting, and a rule of thumb is probably about 500 RVMs per 1 million population. So next 5 years, that's 200,000 to 250,000 units, which correlates well with industry estimates from before. So very exciting times ahead. Maybe a little bit more specific. We've updated this slide a little bit. Effectively, all of the key countries, all of our target markets continue to work diligently to implement a deposit return scheme. So the key markets coming up are Poland and Portugal. So certainly, Poland, there's been several announcements, but the President signed off that the scheme will go live, but it won't be earlier than the 1st of October, but we still see a lot of activity in the country, and that's an interesting market. Portugal, again, continues to work at pace, and we expect that scheme to go live beginning of '26. Czech Republic, slightly later in '27. And then later on in '27, as I mentioned, the U.K. And then we have a number of other markets who have announced go-live dates or are working diligently on systems. Some of these like Spain and France are very significant large countries, and we're exciting about those growth prospects. As I mentioned earlier, we -- our focus is on those new greenfield markets, but we keep an eye on brownfield. And obviously, we offer our technology support and help where we can support a system to improve their recovery rates. So a couple of quick examples here using Quantum. So Netherlands, we installed our first machine in March last year. And in the first year, it's already done 3.5 million containers, which is a fantastic result. And local team give the customer a cake every 1 million containers. So they've received quite a few cakes, and hopefully, a few more to come. And we continue to follow up on opportunities with different customers in the Netherlands, and that's quite exciting step by step as we go through the years ahead. U.S.A., as Mikael said, there's a number of refresh going on in different deposit markets, and that offers opportunities for entrepreneurs, different customers to put in larger kind of bulk machines, like the Quantum. So we've delivered our first units in the U.S.A., and we expect that again to be a market that's interesting for us in the years ahead. So just before we finish, really a summary of where we got to over this -- the first few years of our growth strategy. So the key thing is we've delivered significant growth. So we've gone from EUR 38 million to now EUR 117.8 million. Increased margins, that is something that we're focused on. And we have an opportunity with this very significant market opportunity ahead to capture 30% plus market share, which is one of our ambitions, and we've got proof points that we can do that. And in terms of gross margin development, that's something that we're really focused on. We see continued opportunities as we scale the business to do so. And we also expect with growth, there will be continued operational leverage opportunities within the business. Overall then, these will continue to drive the top line and also continue to drive development of us as a stable and sustainable profitable business. And I think that's it for the presentation. So I think, Mikael, if there's any questions, we can certainly take those now.

Sure. I'll have a look to see what's come in here. And yes, there are a few questions coming in already. I'll just start from the top. You mentioned that your targets will be refreshed in 2025. Do you still expect to reach the target in 2025? Then I guess the question refers to the ambitions released in 2021, Simon.

Yes, exactly. So we -- when we listed on Oslo growth, we had 3 ambitions. One of them was to, I guess, prove we could pivot to Europe and capture 30%-plus market share. Yes. And I think with the efforts we've done in Hungary, in Romania, in Greece, and I think we've done that. I think it's a very good basis. The other target was to really work on gross margin, making sure we're getting the right price for our technology and also doing the right work as we scale the business on the costs and the efficiency of delivering our products and services. And you can see, we've had a nice development quarter-on-quarter, Q4, 38.4% a quarter, and that ambition was, as we exited 2025 should be 40%. And the other ambition really was on topline growth, so -- and the combination of the markets we thought we understood them coming, we predicted coming, and also that market share, that would give the top line growth. Look, we're still -- that's still our ambition. Obviously, we are subject to the timeline of some legislative processes. And at the moment, this year particularly, Poland and Portugal. So it's really -- we are ready. We have the people, we have the production capacity, we have the technology, we have great discussions with customers, but really, it depends on certainly the timing of when those particular orders will be received and delivered. And depends exactly the revenue within the quarter. And there will be some fluctuations up and down with that. Obviously, what we're looking at now, and hence, the comment in the report that we will be announcing longer-term targets to 2030, is we're getting much more visibility now, and we have a stronger legislative backdrop to the other countries that are coming up. So we expect continued very exciting growth over the next few years. Yes, in '25, but also going to 2030.

Good. Can you comment on the expected business model mix in Poland, throughput versus sale and service, maybe also leasing, I guess? How -- and how will this affect your capital mining and competitive strengths?

Yes. Yes. Yes, it's a good question. Look, I think a few things. First of all, we've always been -- always had the position that we want to do what's best for the customer to kind of solve their problem. And most of our customers, as you know, are retailers. And suddenly, they're involved in the scheme. They're involved in this legislation, and they find working with Envipco very helpful as a partner to understand what is the best solution. And part of that is what is the best business model, is it to buy the equipment with a service contract, is it rental, is it throughput models? And we do all of those. We do, for instance, throughput models. We have examples in Europe, and we do a lot of that in the U.S. And we're pretty agnostic what type of model the customer wants and whatever fits best with them. We find that most large European customers buy the product. But again, we will support any type of model. And, of course, where that's at scale, then we have a number of partners that can help us with those throughput or lease type portfolios that we could use as necessary. So we don't see certainly our capital structure or size of our balance sheet being certainly a hindrance to offer any of those models at scale. And certainly, we've got active RFIs and RFPs with customers like in Poland on several different formats of what they want to buy.

Good. Can you elaborate on the revenue phasing through 2025? How do you expect your revenues to grow through the year? I can address that, Simon. We expect 2025 to be another year of back-end loaded sales as we saw last year, likely maybe even with the stronger effect than we saw last year, largely due to the phasing in of new markets such as Poland and Portugal anticipated in the second half of the year. So a slower start in Q1 coming off a -- back of a very strong Q4 and a growing trend through the year. Let's see here. Assuming revenues in Poland and Portugal in the first half, when would you typically see firm orders? Simon, would you like to address that?

Yes. Certainly. So the -- it depends a bit on the retailer. So the customer, how far ahead they plan. Obviously, we like it as far as possible. We think that's the best way for good implementation of a system. But we see several customers where there's a longer implementation of technology. And we think probably a country like Poland, even though the start is after October, so end of this year, beginning of next, we think there's going to be a longer implementation period. So sometimes this is captured in some sort of frame agreement, which may be deliveries 6, 12 months after that initial order or frame agreement. So we think there's going to be some of that in certainly Poland, and Portugal, maybe a slightly harder start at the beginning of '26. So those -- that order cycle may be more like 6 months versus 12.

Okay. Let's see here. With 38% gross margin this quarter at still muted volumes relative to forecasts, do you see upside to your 40% target? I guess I can take that, Simon. I mean, I think the 40% gross margin target is very reasonable. Some of the underlying drivers, to address a few of the other questions here as well, this quarter and as we also saw in Q3 scale clearly, volumes helping us. So we will see quarterly variations, so with lower activity levels into the beginning parts of this year, you should also expect slightly lower gross margins, but on an overall positive trend towards the 40% targets. Longer term, I think we will have to revisit this. But I mean, in the medium term, our 40% target seems very reasonable to continue to expect. Which markets in the U.S. have you received the Quantum orders?

Yes. Yes. So that is -- so far, the interest for Quantum has been in the strong Northeast markets, particularly Connecticut. So I think, as Mikael said, the U.S. deposit legislation or so-called bottle bills have been around since the '80s, and USD 0.05 in 1980 was worth something. In 2025, it is not really. So doubling the deposit from USD 0.05 to USD 0.10 is a significant impact in volume of 30% or 40% recovery, which is fantastic, which is why countries do it. And you'll note that Sweden has also increased their deposit recently also to drive recovery. And so where there's a higher volume than a quick way to -- in a very efficient way to handle that additional volume is with our Quantum Bulk Feed technology. So initially Northeast, but clearly, where other states are looking to develop or improve their infrastructure like maybe California, and I think Quantum is a really, really good solution for those customers. So, so far in Northeast, but once established, hopefully, that will be a technology platform that will go to other states.

I see here. For clarity, is it fair to say that you are more confident around your current margin and market share targets versus revenue targets? Would you like to address that, Simon?

Yes, sure. I think we're confident about all our ambitions, to be honest. I think we're confident about our ability to take 30% market share. We are confident about our ability to drive to 40% gross margin. And ultimately, that will -- with the markets coming up, that will generate topline revenue growth. And certainly, we -- our ambition remains 4 to 6x versus 2021 and just is when the timing will be. And that's something that we can't control. We're at the behest of legislative processes. As we've said all along, it's now a matter of not if it will be implemented, it's a matter of when it will be implemented. And the timing of that may move some of the revenue from one quarter to the other or move it from 1 year to another. But certainly, our revenue growth we maintain great confidence in because of all of the deposit schemes that are coming up, which we kind of went through in some detail in the presentation.

Yes. Good. And then we have -- we're closing in here. Greece, Greece has announced plans to introduce DRS late this year. How do you view this event in light of your current installed base and operation in Greece and your market position?

Yes. Look, we have had a -- we work through a partner in Greece, and we have developed a very interesting pre-DRS infrastructure using Quantum and also our Ultra glass machine, and that's been very successful, and if you like, has accelerated the recovery of beverage containers within the country. And certainly, we're -- it's very interesting to hear that certainly, there's plans to introduce a deposit return scheme. And certainly, obviously, through our partner, we'll be following that closely. Whether that's in '25, whether that's in '26, obviously, that -- the detailed timeline is to be kind of published. But certainly, we're in the market. We -- as I think everyone knows, we do final assembly of the products in Greece. We think that's very helpful. And certainly, we would expect to continue to develop and grow our business in Greece in the years ahead.

And then we have a final question, last one. Can you elaborate on the decline in inventory? I can take that, I guess. I mean working capital management has been a clear focus, both through 2023, coming off of the delay in Scotland. We already were very active and built up inventory in anticipation of that. Working our way through that inventory, continuing through 2024, where we also positioned towards increased activity levels in markets such as Hungary, Romania and also the upcoming markets, Portugal and Poland. At the same time, we're working with our supply chains. We're working with our own operations to make our operations more efficient. I think that's partly what we'll see a result of in Q3 working into Q4. Specifically, the reduction from Q3 to Q4 was driven by somewhat lower raw materials, spare parts inventory with fairly stable finished and work-in-process levels. So -- okay, here are a couple more. But I think I'll come back to that later. I think, Simon, we'll have maybe some concluding remarks from you and...

Yes, definitely, Mikael. So first of all, everyone, thank you very much again for tuning in and your time and interest in the business. Again, it's been another really good year for Envipco, 2024, a very strong end. A pleasure to present those results with Mikael this morning. And certainly, as you see, there's a really fantastic growth opportunity for us as a business going forward. Over the last few years, we've developed the right products. We've developed the right team. We have the right experience, and certainly, when these markets do go live and when those processes are complete, then certainly, we are ready to deliver the products and really make these deposit schemes work well for the countries that implement them, so exciting times. We look forward to keeping you updated. Our next presentation is in May for Q1. So with that, from Mikael and I, thank you very much indeed. Have a great day, and we'll keep in contact with you. Thank you again.