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

[Audio Gap] sits predominantly in service teams and in assembly capacity. Where we now see under-absorption and that puts pressure on our margin and our bottom line. We need to improve that. Throughout the presentation, though, you will see that investment in growth and delivery on growth is a balancing act that affects the quarter. It doesn't impact the long-term outlook. We are growing in many European markets, and we have built a solid backlog in the U.K. with confirmed orders, and we need capacity to produce that. So investing for growth remains very important. Over the past quarter, we have been converting cash into inventory, and we expect in the next quarters that, that will be turned around again. Some operational highlights. I have started at the company. We have continued to deliver wins in the markets that started rolling out DRS recently like Poland and Portugal, we've announced a number of major wins in the U.K., going well over 5,000 machines now. We have a record quantum development deployment in the Netherlands. And at the end of this quarter, we ended our growth with just shy of 650 employees. That's the short growth story of Envipco. Mikael will now go into more details.

Thank you, José. I will start off with some comments on the financial review for the quarter. As José mentioned, Envipco returned to growth in the second quarter of 2026, with revenues up 13% year-over-year to EUR 26.1 million. For the first half of the year, revenues were up 4% to EUR 45.8 million. despite the positive growth, the company is not at scale yet as Jose mentioned. That is impacting the company's profitability. Gross margins in the quarter were 32.2%, with 33% for the first half of the year. In the second quarter, Bipco posted EBITDA of negative EUR 1.7 million with negative EUR 3.8 million for the first half. with operating profit at minus EUR 3.8 million in the second quarter, net loss came in at EUR 4.1 million. Looking into the drivers, Envipco has 2 key geographies: Europe and North America. Europe revenues were up 18% year-over-year to EUR 17.1 million and a solid sequential growth from EUR 12 million in the first quarter. The new markets, Poland and Portugal were key sales growth drivers on a year-over-year basis. The company has also continued to experience a very solid traction in its operations in the Netherlands, supplying a record number of quantums for that market in the second quarter. existing markets. Hungary, Romania and Sweden, are much more mature and are on the tail of deliveries. However, Romania continues to be a very strong sales driver for the company also in the second quarter of 2026. Program Services from Europe in the second quarter were up 32% year-over-year to EUR 2.3 million. North America represents Envipco's single largest market with revenues in the quarter of EUR 9 million, up 5% year-over-year. Adjusted for FX, the underlying growth is 8% on a year-on-year basis. Program Services, slightly down on flat activities, down 3% year-over-year to EUR 7.3 million. while RVM sales grew 56% year-over-year on delivery on the announced convenience store orders in the Connecticut market. As mentioned, gross margins in the quarter were 32.2%. These have been affected still on lower capacity utilization in our assembly operations and the continued build of our service organization. On a general note, Envipco needs to invest ahead of activity starting this quarter as well, positioning towards specific market opportunities in Europe led to a staffing in our assembly operations. However, the opportunity has shifted in time. Operating costs this quarter, EUR 12.1 million, up 17% year-over-year. Sequentially, OpEx is up by EUR 900,000. And more than half this increase is explained by higher professional fees, largely on it and a large transfer pricing projects. About 1/3 of the sequential increase is explained by marketing costs where Vetco cohosted a big DRS summit in Romania this spring. Operating leverage comes with revenue. This quarter, OpEx in relation to revenue was down 10 percentage points from 57% in Q1 to 47% in Q2. Financial position and balance sheet. Balance sheet total this quarter EUR 155 million, up slightly from EUR 151.1 million in the first quarter. There are 3 key movements in the balance sheet this quarter. The first being working capital. As mentioned, there's been an increase in inventory and investment in inventory of EUR 14.8 million, in addition to a EUR 6 million increase in receivables on late quarter sales. This has brought down the cash balance at the end of Q2 to EUR 18.7 million. There has also, as expected, been a reversal of the borrowings class that we had in Q1 and Q4 as communicated in the first quarter '26 earnings presentation. Total borrowings this quarter were down by EUR 1.2 million to EUR 17.5 million on scheduled repayments. In addition, there has been a EUR 5.8 million addition to noncurrent assets through investments in RVMs for throughput services. Taking a closer look at the working capital build. Let's add some further backline on this. Envipco is facing exciting market opportunities and an anticipated ramp-up in activity. The company has announced orders for around 7,000 RVMs for the period 2026 and 2027. That is a multiple of 2 to 3x recent activity levels. These orders and the company is preparing for that, preparing inventory for announced wins, building some readiness to deliver on short notice in new key markets as these markets move into the second and third waves. We are preparing for a sizable market opportunity in the Greek market. And further, the company is securing some long lead items in inventory, specifically for some new opportunities, an example of the U.K. This is the nature of the business, investing ahead of the curve. These are investments and not cash leakage. It converts and as José mentioned, these are expected to convert in the next quarter or 2. Finally, cash flow in Q2. Cash from operating activities was negative EUR 17 million, largely driven by the said working capital build. Cash flow from investing activities was a negative EUR 6 million in Q2 largely driven by CapEx investments in PPE of EUR 5.5 million, which largely once again is explained by RVM investments for contract -- RVMs on throughput services. Capitalized R&D this quarter was EUR 0.4 million. Cash flow from financing activities was negative EUR 0.5 million with debt repayments being offset by settlement of a shareholder loan. Net sales in cash in the second quarter, negative EUR 23.5 million with cash ending at EUR 18.7 million. Then let's have a look into some of the market developments. Envipco is facing exciting market opportunities ahead, driven forth by regulation, mandating the introduction of DRS across Europe. In the E.U, in the U.K. and now also initiatives in Turkey. The U.K. has been preparing for the launch of DRS next year for some time, and that is progressing on schedule. Greece has announced plans to introduce a DRS expected to come sometime in 2026, but not yet officially announced. Turkey is planning a staged rollout of DRS through 2026 and onwards. And following on that, we see several countries having initiatives to introduce DRS in line with the PPWR regulation by the end of this decade. Most recently, we've seen initiatives in Italy. We've heard also news from France, and we know that Spain also is preparing its DRS legislation for a launch in a few years. Some of our markets, let's discuss, North America is a stable market for Envipco and Envipco continues to have a steady execution in this market. This is Envipco original market, has more than 40 years' history in the North America market. and a strong market position with around 45% market share. This quarter, the company has delivered on the announced orders to Connecticut-based convenience stores over than 200 RVMs. That delivery will continue into the second half of this year. In the second quarter, the company also installed its first quantum in -- with a redemption center in Connecticut following on the very successful installations of -- and implementations of the quantum in a few redemption centers in New York. This quarter, now over the summer, the company is installing its first quantum in California with an operator. The outlook for 2026 sales, continued stable operations with some growth in RVM sales on delivery of the Connecticut order. Envipco is off to a strong start in the U.K. market. So far, the company has been appointed by 4 leading U.K. retailers to deliver RVMs in the size of 5,400 units through 2027. We -- the company has signed a contract for delivery of compact RVMs with Iceland Foods. The company has further announced 3 unnamed appointments by 3 leading retail groups in the U.K. totaling then these 4 5,400 RVs. Participants in the market are actively preparing to be ready for the October 2027 launch. The DMO or the operator in the U.K. Exchange for Change has established a deposit level a handling fee structure and also a grant program in the U.K. market to secure a broad national network of collections. Looking at the structure of the market with a very large part of the U.K. market being -- retail market being driven by convenience stores, this gives very strong support to the U.K. becoming a very large market for RVM technology in the years ahead. So Envipco is very happy about the position established in the U.K. so far and maintains high activity to continue to cater to retailers wanting to prepare for this opportunity. Envipco is still somewhat behind the curve in Polish markets. The company lost out on a couple of big wins initially following the launch of DRS in Q4 2025, and pickup in the broader market has been somewhat slower than anticipated. Retailers have still been somewhat reluctant and been slow in the adoption of RVM technology. However, we are seeing also some changes. Firstly, the volumes, the returned beverage volumes in the market are increasing quite significantly. That is giving some pain points to retailers not yet having returned -- excuse me, automated their return of beverage containers. And we're also seeing some evidence of retailers having under machined some of their outlets. Envipco has recently or is in the process of now refreshing its operating model. in Poland. The company has a renewed team in place is taking some of the learnings from markets in which Envipco has been very successful, such as the U.K. and also other markets such as Romania, with a much more granular and proactive market approach and more -- even more tailored value proposition for the Polish market. This gives expectations of the company continuing to build on its position in Poland. Envipco is strengthening and continuing to build on wins in the Portuguese market. Portugal DRS went live in April this year. And there is a very positive sentiment around the DS implementation in the Portuguese market, among consumers, retailers and with a very strong operator as well. So far, Envipco is establishing a #2 position in that market with solid increase in Q2 revenues on delivery on secured orders, a few of which are mentioned on this slide. In Portugal, Envipco is delivering every product across the product line from the compact through the freestanding RVMs to the modular and quantum. So it's a broad network of products in the Portuguese market. The pipeline is growing as we see new retailers and a new wave of retailers wanting to automate their collections of beverage containers. The Netherlands has been a fantastic brownfield opportunity from which this capitalized in the last couple of years. The Netherlands had introduced cans to its DRS a couple of years back. Collection rates dropped sharply, Envipco introduced the Quantum technology to the Dutch market and has proven very, very efficient. Late last year, Envipco entered into a frame agreement with the operator in the Dutch market and has been delivering on that since. Record deployments in the second quarter with an order book that continues to grow also yields optimism for the Dutch market ahead as the operator continues to strive towards the 90% collection targets in the Dutch markets. Finally, on the market slide is Greece. Greece is progressing towards national DRS. With a base of around 500 Quantums deployed to the Greek market over the last years, together with local assembly operations and a long-standing relationship with our distributor in the Greek market. Envipco is very well positioned and ready to deliver on the opportunities offered by Greek DRS. We are peparing -- prepared. We have the products available for the market, and we believe we have a value proposition that well matches the opportunities in Greece. And we're very much excited about the opportunities we are facing from the Greek DRS. With that, I'd like to give the word back to Jose for a few words on outlook.

Thank you, Mikael. So the market opportunity remains highly attractive. And Envipco is well positioned to capture that market opportunity. We have proven that we can capture our targeted share with our teams, our portfolio and our service offering. Nothing has changed on our long-term opportunity. Our focus for the next quarters will be on delivering consistent operational progress, strengthening the organizational maturity and communicating our development there with clarity and transparency. As I said, it's not a change of strategy, it is executing our strategy with discipline and conviction. Let me reiterate also our strategy. It is based on the 4 pillars, the one being our existing business. For example, our market in the U.S., which is a mature market, where the majority of our revenue comes from service. Some of our European markets are coming into this arena as well, where Romania and Hungary have gone through the curve of big installations. -- and the revenue coming from debt. And as they now go through the warranty period, revenue from surface is coming in. That's an important pillar for us. Then we have the new DRS markets. as Poland and Portugal are coming up to speed, and we're selling machines in there those are developing. We also have, of course, the great opportunity of the U.K. now coming on board and then Greece being very imminent. But on top of that, also the Southern European countries, we've been having conversations in Spain about the legislation. Recently, we've been in -- we've been involved in talks with the Italian government about their rollout of DRS and their way of setting it up. So we have exciting greenfield opportunities ahead of us. Besides the greenfield opportunities, the third pillar is based on brownfield, where some of our technology is specifically very well equipped to bring in additional collection to bring down the cost of collection or to serve underpopulated areas. The example here, of course, is the Netherlands. Our fourth pillar is that we continuously monitor opportunities for M&A that could help us grow into geographies where we are not yet present or that maybe add technologies that we don't have in our portfolio yet. That strategy, we will continue to execute on. We have the tailwind of the DRS legislation being rolled out across Europe, which will triple our addressable market over the coming years. We currently have a very balanced portfolio across the U.S. and Europe with existing business, brownfield operations and new rollouts in Poland and Portugal. And then we have exciting markets coming on board, like the U.K., Greece and the South of Europe. What is important now is that we execute that strategy with our discipline, that we apply the learnings from earlier rollouts and success that we've had in markets to the new markets that as we grow, we professionalize, we standardize our processes, and we simplify our organization to benefit from our scale, that we execute with rigor and discipline, and then we will deliver profitable growth. Thank you very much for listening to us. I think the floor will now be open for questions.

What is the first question that we are receiving, Mikael?

Let me see. Quite a few questions coming in. So let's just start on top, please add some color to the developments in the Polish market and how Envipco is performing.

As Mikael already just explained, the Polish market launched DRS at the end of last year. That was a very gradual launch or a slow launch even, also complicated with a large number of operators. We have been able, as Envipco to secure a number of deals, but we will be honest that we would like to have had more. We've been reviewing the situation in Poland. And we've seen also that there's a lot of new stores coming on board, where in the beginning, they were hesitant and maybe didn't mandatorily have to implement automated DRS, they go now from manual to automation or even from no DRS to automate DRS. That has really opened up a large number of additional outlets. So our addressable market is growing. And we feel that we have good opportunity to win a targeted share in that market. Looking at our success in the U.K., we've made changes to the Polish team. We've renewed the team, and we have now a team in place that is closer to the market that understands the market as well better. We've also seen in the U.K. that we've had a much more granular look at the market opportunities and the customer needs, what type of customers we have, and we are reapplying that to Poland. With that granular look, we are also much more able to tailor our value proposition to the needs of our customers. and bringing all of that together, we feel confident that we have a good outlook on solid growth also in Poland.

Good. There's a good question. That's for you. José, what's been your biggest surprises in the first 90 days.

Oh, the biggest surprise. Well, maybe not a surprise, maybe not a surprise, but I've been very impressed with the entereneurial spirit that I found in many of our operations. And you can also imagine because we've been rolling out over the past years across Europe, and we've been setting up new businesses. And so some of the people in our teams they are so good at capturing the opportunities with virtually no team around them and just getting things done. And that's really, really impressive. At the back of that, as we are growing, we now need to learn to use the scale of the business together and to standardize processes and not see everything as a new opportunity. So as we grow, we need to standardize our processes, learn from each other, adopt what we've seen in new markets and bring it of what we've seen in successful markets and bring it to new markets. and learn to collaborate as one team through standardized processes, not reinventing the wheel.

Good. There's a question, I'm trying to collect here. But there's a question on Greece. What's the status in Greece? What do you know about the award of the contract of 4,000 RVMs. And I guess this is a question that relates to some of the news articles that have been out there. I mean as we try to explain, Greece is preparing for rollout of DRS. The DMO or system operator, DRS Hellas, was appointed to operate the system late last year. And there were public tenders issued this winter and spring, we don't know anything about the volumes through those tenders, but we know about -- a little bit about what the Greek system is looking for in terms of technology. And these tenders are for which naturally Envipco has positioned through our distributor in the Greek market is we see that they are asking for bulk feed technology, both very much similar to what we already have established in the Greek market. mobile bulk feed units in addition to regular RVM technology, indoor and outdoor. So we believe we have at Envipco a strong value proposition for what the Greek market is asking for. We don't know anything specific about any awards yet, and we will notify the market when and if we do get that type of information. There are a couple here on gross margins, quantifying the gross margin effect from underutilization and service hiring. First, yes. So as we try to explain through the presentation, Envipco is investing. We've invested in a delivery platform and assembly operations. We have 4 of those in Romania, Greece, Germany and the U.S. in order to deliver on the upcoming market opportunity. The company has previous occasions, stated, we have an annual supply ability of around 30,000 RVMs per year. Naturally, we staff that up. and we staff it up with people in the assembly operations, but we also need to staff up our service personnel to do installations in new markets. In the first half year of that, looking at the underutilization part of this, is we explain roughly 3, 3.5 percentage points on the gross margin. as gauge on what some of these investments are. Yes. And then there is also a question and follow-up on the gross margin target, 40%. Does that still stand? And when do we expect to reach it? Yes, that's a target the company set at its Capital Markets Day in Q3 last year. That remains the target for the company. That is reliant upon -- reaching that is reliant upon revenue growth. So of course, the pace of which the company grows in the quarters and years ahead will be a determinant on when that target also potentially reached. Let's see here further, inventory questions, a couple of them here. You've built inventory of EUR 49 million. Why this size, what's the risk of this not being converted? Yes. Envipco has invested in inventory, really 4 specific items. Delivery on announced contracts, building some preparedness for short deliveries, on frame agreements in new markets, getting ready and having preparedness to deliver on the Greek opportunity and also securing some long-lead items specifically thinking ahead for the U.K. opportunity. The largest part of the inventory currently are raw materials. There are some finished goods and the smallest share is working process. The risk to that inventory is seen as low and the company expects to reduce its inventory levels from Q3 versus Q2. So you're off to a great start U.K., 4 announced wins today. How much of the market has been selected, how much is remaining? And how do you see this developing? You want to?

Yes, of course, of course, we are, of course, very delighted with the situation in the U.K. We've announced now 4 major wins, but we believe that the largest part of the market is still ahead of us. As Mikael has explained, the scheme that has been introduced by the U.K. operator is highly advantageous for smaller stores as well to go into automated our deposits straight away from the beginning of the launch of the scheme, and we also see that traction. So there's a lot of business development still ongoing. There's a lot of markets that still need to decide, and we feel confident that we can grow even further in the U.K.