Kempower Oyj (KEMPOWR) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the webcast where we present Kempower's financial results for the First Half of the Year 2023. My name is Paula Savonen, I am the VP of Communications at Kempower, and also your host today. Today, we have 2 presenters. We have our CEO, Tomi Ristimaki; and our CFO, Jukka Kainulainen. But before I let Tomi and Jukka to the stage, I would like to remind you to ask questions during the presentations, you can type in your questions any time during the presentations in the chat box on your screen. And you can ask questions in Finnish or in English, and we take all the questions in the end of the presentations. And now we go to today's agenda. We start with Tomi Ristimaki, who presents you the key highlights for the year.

Thank you, Paula, and welcome from my side as well to this actually a very, very great day. It's really a pleasure to be here today. We're looking at from the highlights, a summary. The demand of the market is exceeding expectations. If you look at analyst or we look at our own expectations of market studies, increased production capacity is something that is a key for the -- also the results of the last quarter. A record high quarter in many ways. And let's go to the topic. So, record high revenue and record high order intake, showing also the growth of the business to the following quarters as well. So we have never exceeded these numbers before, EUR 72.5 million revenue and especially huge increase in the order intake is telling where the company is going. And it's still growing in triple digits, which is also -- it's really nice to see. And then doing it profitably. So operative EBIT for the second quarter was 19.2%. So the strong demand of Kempower electric vehicle charging solutions is continuing, and the improved production capacity is making us able to answer this -- this demand. How we see the market today and where we are? Like we stated in our Capital Markets Day, it's our goal is to be the top 5 player in Europe and North America by 2030. And how we are already doing it in Nordics, we are in the top position, and our market share is increasing in the rest of Europe. And Jukka will tell you later about how much, but that's -- that's really, really happening. North America, that's a rapidly growing market, starting from smaller than Europe for the EV base today, moving with a higher percentage. And Kempower's entry to that market is really happening this year when we open our factory by the end of the year, producing products for the U.S. market in the U.S. Rest of the world, we are looking at that more from the business development stage. We are screening the markets what are the interesting areas. We have some interesting products today in the Southeast Asia. We are active in the Australian market. We are in New Zealand. Different countries in the area, but it's from us still today more sales through our distribution partners. And looking at the outcome and let's say, the market potential. One could -- I want you to look at the headlines. So 1 million new battery electric vehicles registered in Europe in the first half of '23 is 45% increase through the previous year. So we are seeing this is the biggest driver how it is when we are doing charging infrastructure. And then I'm saying really the infrastructure to abling people movement between places and being the core on supporting the EV business. So the number of EV is a big thing there. This is growing. How we see the market size for DC charging market, which is the main market of Kempower. By 2030, it is EUR 14 billion and dividing more or less equally to Europe and North America. And looking at Europe is today bigger, we expect a lot more growth in North America. But it's been driving -- it's been driven through a number of vehicles on the road by the users. Customer highlights of the quarters 1 and 2. We received the second order and also the first order on the first half from one of the largest retailers in the U.K. and building high-power charging system network for U.K. wide. Then important part also to seeing how the car sales companies as Arnold Clark, one of the Europe's largest car retailers is now equipping their sites with Kempower chargers, providing their own network for their customers. As a highlight, also National Car Charging, one of the most significant reseller and installer of charging systems in U.S. was -- we made a cooperation agreement on the second quarter. Then looking at the scale-up of production. This is key because we are a manufacturing company. Main part of our revenue comes from delivering products. So we were able to answer the surging demand through continuous improvement. This is also how we communicated in the first quarter that it's not only building new factories, Kempower's production method and the whole company is actually based on continuous improvement. We are all the time developing how we do things, how we could use our existing resources more efficiently. And now we produced more than 9,000 charging points and delivered 475 megawatts of charger power to our customers in the first half, which is a significant improvement to the previous years. So how it was done? We improved the production capacity in Lahti factory, efficiency improvements, layout changes, all the time trying to scale and basically speed up the process, have the throughput of the factory faster, being able to produce more units. And now we also communicated that during '24, we will open the third production facility in Lahti, and opening it gradually that we are moving part of the production there to make room in the existing facilities and then also being able to finally double our production capacity in Europe through that investment. And North America, production is to start by the end of the year in '23. And looking at North American entry advancing as planned. Production preparations are really going on. And part of that is also the supply chain development in there. So looking at that we are able to produce, and we are able to answer the, let's say, the orders from the customers in the future. And then the customer pipeline development is progressing well as we see. So we had a quite a good increase in order intake in the U.S. for the second quarter. And I'm also very happy to welcome Tim Joyce to join us in the management team and running our U.S. operations in the future. He will join us in the August. And with the title operation in North America and team's responsibility is to run our U.S. operations and get an efficient start and actually scale it up pretty fast. He's quite experienced person to do that. So really happy that, that he joins -- decided to join our company. And again, saying that the production will start by the end of '23. Important milestones in R&D or RDI, so research development and innovation. So we decided and announced also that we will have joint research center with LUT University in Lahti, to also focus really on the future research. If we're looking at power [ electronics ], if we are looking at energy efficiency, we are looking at data, we are looking at the charging network planning, all the topics what you have in the e-mobility and doing it together with the academic research. A new R&D site we opened in Vaasa, and that now we are also telling that it's the main focus of the Vaasa site is to focus also in the future Megawatt Charging Systems and focus on the high-power charging what is higher than the current high-power charging, so really looking at more than 500 kilowatts up to several megawatts. And we expanded the Tampere site as well in Finland. And this is really also to have the possibility when we are looking at the resources in Research and Development. The engineering resources, you have to bring the company near to the knowledge pools of people in certain areas. So we see Tampere [ Hervanta ] site in Finland, good sites for energy technology and power electronics. From new introductions, we introduced the Plug and Charge solution. So this is basically enabling in the future use of car as a payment and notification, let's say, car as a payment tool for the charging. So this is not the same system as people see with Tesla. That's a closed network. This is more open for every car manufacturer, every charger and actually following the GDPR rules, so making it a safe payment to use your car as a identification when you do the charging. NACS, so -- or like some people call it NACS, charging standard, this is a charging standard developed by Tesla. And we are going to include that in our offering in North America. And this is quite now more significant than Tesla alone because many car manufacturers are joining the standard and having those connectors that only Tesla used before in their cars in North America. Sustainability. Of course, in our industry, when we are looking at -- this is really a competitive edge, people are choosing the suppliers also based on their values and their sustainability goals and achievements. And in the first half, we look at -- we were awarded by Carnegie Sustainability Award. And then we achieved also when we look at the social side, the employee Net Promoter Score is extremely high, still 71. This is when the company grows, it is a measure we want to see that our employees are liking what they do. And we can create an atmosphere and culture where the, let's say, the people thrive. Our new planned production facility as our all previous facilities as well we are wanting to hand them in existing buildings, existing facilities, not to build new things. So it's also about biodiversity and circular economy. Using the sites what are already there and not to, let's say, burden the nature by every time building new buildings. And we have a clear road map on how we will achieve carbon neutrality in our own operations by 2035. But now, I will give it to Jukka to tell you more about the figures from the Q2 and the first half.

Thank you, Tomi. And I'm Jukka Kainulainen, Kempower's CFO, and really nice to be here -- here now in July 2023. So let's start with key figures, what Tomi already partly mentioned. We had a really strong quarter, we could say even outstanding quarter. When looking at our order intake, our revenue, operative EBIT, really record high level, all of those. And then, of course, how did we do it? Like Tomi mentioned, we were really successful in increasing our production capacity, but also, of course, the strong demand driven, especially in the regions of Rest of Europe and Nordics as well contributed on the strong result for the quarter. Also, it's good to also address, we already had the balance sheet, almost [ EUR 213 million ] at the end of the quarter. And when looking the first half of the year, we actually improved our net debt situation by EUR 10 million. So really strong results in the quarter 2 and of course, whole H1. Then a little bit details about our revenues. Our revenues continued to accelerate. Our revenue share in the Rest of Europe continue to increase. It was already EUR 38.1 million in the quarter 2, comparing to Nordics, which was EUR 29.7 million, also quite a significant, even though Rest of Europe becoming even the bigger regions already now. And then when looking how our revenue has been grown, our Rest of Europe revenue was already 53% of the overall revenue, which is quite a significant milestone as well. And it's good also to recognize that we haven't been growing only year-on-year, but we have actually grown also sequentially now 6 quarters in a row, which is quite a great achievement as well. Then a little bit about our sales performance, really doing strong in that area as well. Like I mentioned, order intake, EUR 86.3 million, record number there. It was driven especially in the orders from the Rest of Europe region, also a really strong order backlog, EUR 138.5 million. So really strong outcome in the sales side as well. Then a little bit about our profitability and our cash flow. Our operative EBIT, like I mentioned, already reached 19% -- 19.2% in the quarter 2, reaching EUR 13.9 million on the quarter. And that was driven, of course, like I mentioned, our strong revenue and demand, but of course, the increased production capacity as well. And we also had quite a healthy and profitable deliveries during the quarter. But when looking at the cash flow, it was really positive and strong cash flow as well, EUR 20.5 million operating cash flow for the quarter, of course, driven also by our profitability, higher volumes, but also positive working capital management, what we did during the quarter. Then about our new outlook, we gave a profit warning 1 week back, which was a positive. And our new guidance for revenue is between EUR 280 million, up to EUR 310 million, which means that we basically tripled our revenue compared with the last year. We also positively updated our profitability guidance. Our new operative EBIT margin guidance for this year is to reach over 10% operative EBIT margin for the year. And it's good also to address that we, of course, continue growing profitable way. But in H2, we expect significantly higher fixed costs than in H1. So we really want to accelerate our growth initiatives, which relates on our R&D programs. We continue scaling our capacity in Europe and in North America. And we continue, of course, doing the further recruitments, which enables our future growth as well. Then, at the end, our financial targets, as a reminder, which we made public in April this year. So our revenue target is to make EUR 750 million in the medium term, so between years 2026 to 2028. And in the same time frame to make operative EBIT margin between 10% to 15%. And then in the long term, at least 15% operative EBIT margin. And our dividend policy in the short term is not to share dividends. Thank you.

Thank you, Jukka. Thank you, Tomi. And now we go to the questions and answers, and we take all the questions that you have presented us from online, and thank you already now for the interesting questions that you have typed in. The first question is about customer expectations. Do you see any recent changes in customers' expectations in terms of what kind of product characteristics they are looking for?

I think more or less, it depends a little bit on the market, but in the long term, we see at least the increase of charging power, what people are requesting and we are wanting to have a higher and higher power. And of course, it stops at a certain point of view. But today, at least that's one. And I think, in general, we see bigger and bigger charging sites when the electrical vehicles are getting more popular in different countries, trying to avoid the charging queues and the delays in waiting for the charging points.

Thank you, Tomi. Then this goes to Jukka. It's about gross margin. The gross margin has improved significantly compared to year ago levels. What are the key factors behind this trend? And do you see the current level sustainable?

Yes. So what has been positive this year has been our product and whole customer mix what we have had in our deliveries. We have been also maintained quite well our unit cost level even we reduced that. So we have done really good work whole company regarding the gross margin. And of course, that is visible in our operative EBIT as well, more than 16% in the H1 and more than 19% in the quarter 2. So we don't guide the gross margin. So like I said, our financial targets in the long term is to make the -- more than 15% and then in the midterm, between 10% and 15%. So that is what where we focus also.

Thank you, Jukka. Then the next question is about the lead times. We mentioned in the report that we have a very competitive lead times at the moment. What is the average lead time on -- for the new deliveries?

Of what, [ we're doing ] single chargers, [ movable ] chargers, big systems, small systems...

Average.

I think average lead time, we are looking at 3 to 4 months maybe in the larger systems, but in a very simple level way movable chargers, it's a few weeks. So it varies. And of course, it could be also really fast if we are forecasting customers. So it is something that average lead time in a company producing very many different kind of charging systems. It's not very clear question as well.

Although it's competitive for us.

It is today competitive and being able to produce. And this is also why we make the new production assembly lines in the new facilities to be able to better answer to the customer requests.

Thank you, Tomi. Then the next question is about the production volumes. How do you see the room to increase production volumes? Do you still see room to increase production volumes from the current manufacturing facility is in Lahti. So now, the question is only about the current production facility.

Simple answer is yes. But it's also simple as is that there is not a single production facility, which couldn't be improved. But it's a matter of what is reasonable. And I think we have still reasonable efforts we can do and still make it more efficient.

Thanks, Tomi. You got the next question is about CapEx. What is the CapEx need for the new Lahti facility?

That we haven't disclosed. But like you see, our investments in the first H1, first 6 months was around EUR 4 million. And -- but of course, you can ask me what happens when you continue investing on the new facilities and all this growth initial [ things ] like we mentioned in connection with our guide. So we don't disclose that, but you can draw some own conclusions, of course, from our previous comments.

Thanks, Jukka. Then there is a question about the production volumes for the third quarter this year. Do we expect holiday season, especially maybe in Europe to affect Kempower's production volumes on the third quarter?

We haven't seen it in either or any of the years before. I think it's also that the Nordics is getting back to the work when the Central Europe gets to holiday. So it's also a little bit stepped. I think that's not difficult to be seen that vacation periods are affecting that.

Oh, yes. So the Nordic countries, they take vacations.

Normally the July and then the rest of the year, August and...

August, so it's...

And it's normally been of good quarters in quarter 3 because it's also -- there is no, let's say, frozen ground in the Nordics and this kind of good installation time. So this is -- I haven't seen any significant difference in quarter 3 on the vacation period.

Thanks, Tomi. And the next question is about the product mix and especially we reporting now the number of charging points. So the question is, this is from Paul de Froment from Bryan, Garnier & Co. Could you give us more information on the product mix, please? You indicated having produced 9,170 charging points over the first half of the year. So what does this mean in terms of plugs?

This is difficult, does it mean, it's mainly CCS, if it's the type of the plug today, maybe NACS in the future as well, but CHAdeMO is diminishing. If it's meaning what does it mean? We calculate that charging points plugs, which can charge cars at the same time. So we have products where you can use either CHAdeMO CCS, that's for us one charging points. But if you deliver a system, which has 4 charging [ was in ] charge for cars, that's a 4 charging points. If that clears the things. It's -- we are calculating how many vehicles you can charge at the same time and control it separately. So that's what it means. I don't know if it helped anything, but mainly CCS, if it's about the type of the plug, but then... Yes.

Then about the sales development in Europe, could you give us some more color in Europe where you see the most growth in regards to sales?

I think it's anyway the countries where the EV numbers are growing fast. And this is more or less related to that, that's how we have seen. And I think the fast-growing countries, I would say, U.K., France and Sweden would be something that are really, I think, high-growth areas. And even Finland is now, I think it's a high number of new cars is EVs. So maybe those countries could be good, but it is typically that the high-growth phase, what we have seen happens after the, let's say, the proportion of the new cars goes over 10% and steps from that, and that would be expected then to grow fast at that.