Otovo ASA (OTOVO) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining this presentation of the first half results of 2020 for Otovo. We are here at Arctic Securities office in Oslo. I'm going to be joined by CFO, Cecilie Weltz; and our GM for Spain, Inigo Amoribieta. And myself, Andreas Thorsheim, will do the first part of the presentation. With regards to questions, the -- you may input them in the chat, and we'll answer at the end of the call. But we'll do the entire presentation without questions on the slides. We will do that at the end. But we're welcoming your questions and looking forward to [Audio Gap] Yes. So the presenters are myself, Cecilie and Inigo. We will today talk about Otovo. And for those who are not entirely familiar with us, we are a marketplace for energy installations, and our aim is to build a European #1 in residential solar energy. Today, we will give you a business update, financial results for the first half of the year, an update on the leasing launch in Spain, and then we'll summarize at the end and open for questions. As every business in the world, I guess, we've been impacted by the COVID pandemic, which has resulted in a short-term drop in business. But in the long term, we see a very positive outlook for solar energy, photovoltaics and batteries. I'll give you a bit of zoom-in on how COVID pandemic has impacted us. So in the first quarter, we saw the first signs of disruption with China being hit by the virus, local lockdowns in China that echo to the value chains internationally and created a shortage of panels in Europe. At the same time, currencies depreciated in Scandinavia. And those things conflated to bring about an increase in the price of panels. That situation has since returned to normal, and the slack is being worked on. And prices are back down on the downward trend of about 10% decrease in hardware cost per year. That has been the trend the last 30, 40 years. In Q2, European economies entered lockdown, and it resulted in a drop in sales as consumers reduce their CapEx and discretionary spending on financially heavy items. And that has also returned to normal. We're seeing sales numbers in all countries returning to pre-COVID levels or above. The situation where people are maybe a bit more concerned about job security and their financial position, we think also strengthens the leasing product that takes down the entry-level barriers for solar, and we'll get back to the details on that when Inigo presents the launch in Spain. Now into Q3, installations will slow down. Installations typically take 3 months from interest to installation. And that means that in Q3, we will be installing sales done in Q2. And so we're expecting also Q3 to be on the weak side as the drop in sales in Q2 translate to a drop in installations in Q3. But that also means that once we're at the end of Q3, we will have worked through the lockdown impact and will be back to normal in Q4. If we're looking into 2021, which I think is the most interesting part, we're seeing green stimulus in Europe, several countries in Europe stepping on accelerator in order to stimulate the economy. And a lot of that stimulus has a green tint to it. EU overall responding to the crisis with the Green Deal. And we're also seeing increased capital inflows to ESGs and energy efficiency and improved regulatory and subsidy environment. So we're thinking this will translate into continuous improvement on prices, on batteries and solar PV. And we're thinking that the 2020s overall are looking very promising for price competitiveness on distributed energy compared to traditional sources of energy in all countries in Europe. Overall, on the business side, the first half, we're booking revenue, which is down 10% compared to 2019. And the number of units sold is down 6%. And -- so Norway taking the biggest hit. I think it's a mix of both coronavirus and extremely low energy prices that have been getting a lot of attention and consumers haven't escaped the fact that we're having the lowest electricity prices in the Nordics in 20 years. Sweden, flattish. We have seen a bit of a weakening on sales on our end. I think it's mostly due to us taking down activity in the face of COVID. I'll get a bit back to that. France will, in this first half compared to only a quarter in 2019 as we merged with In Sun We Trust in April in 2019. They are only reporting their commissions and not the entire sale value because they are on a different business model and the different technology stack from the rest of the Otovo family. That will change in the second half of 2020, and we'll see numbers come up in France, both in terms of revenue and the extractable margins on each product. Spain launched at the end of 2019 and has booked its first EUR 100,000 in revenue. That is going to grow fast throughout the end of the year. Overall, group revenue is NOK 77 million, down from NOK 86 million last year, a drop of about 10%. On the right-hand side of the slide, you can see sales numbers in the amount of units so far this year. And you clearly see the flattening of the curve as the coronavirus lockdowns hit Europe in March and in April. But as we launch leasing and the economies return to a more normal situation, the curve is ticking back up, and I think we'll have a good chance of beating 2019 numbers as the year progresses and coming out of 2020 with really high speed and everything is set for high-growth 2021. With regards to market share, we're down in Norway. In Norway, it's mainly Q1 that was poor on market share. We're coming out of Q2 with more than 50%, which is our normal level. I think we're just attributed to a bit of a fluctuation in when the different companies booked their sales during winter and a bit lower volumes than the year before. So it's a bit more volatile. I think our levels of about 50% market share are sustainable in Norway this year. Sweden down from double-digit market share to 6%. We stood on the breaks in March and April as we faced the coronavirus. That was clearly not the case for our competitors. So we focus on doing only profitable sales and being conservative on the marketing front in Q2, and that probably lost us some sales, but Sweden is also back now. And we think we can defend and increase our market share towards the end of the year. France, it's a lot more positive story. At this point, the French authorities have only reported Q1 numbers, but we're up from 1.3% last year to 2.3%, and we see that growing throughout the year. And when the France team gets on the Otovo technology at the end of this year, we can see that accelerate even further. In Spain, they don't report national numbers of installations, but we have anecdotal evidence of what the biggest players like Iberdrola and HolaLuz are doing, and we're quite confident that we're in the top spots in Spain and as we're grabbing market share aggressively. With regards to installers, we've recruited 61 installer companies net during this quarter, this half year. That means we've added quite a lot more because we've also onboarded -- offboarded some installers that aren't up to standards who aren't performing. And we're seeing the year ending at above 300 installer companies on the platform as we enter 2021. And this installer recruitment and working on those installers is super important. And this is a slide that I'm extremely proud of because this is not easy to replicate for other companies and is in the way, the secret juice of the Otovo recipe. And what you're seeing here is that the 3 countries that are on the Otovo bidding platform are able to decrease their cost levels extremely aggressively. And saying it a bit jokingly, we're better at reducing costs on the installer side in Europe than the Chinese manufacturers are, I think, decreasing the cost of panels in their factories. Norway, which is an older market, is down 15% in the last 12 months. Sweden, down 18% on the average system sold. And Spain, which is added only for 6 months is down 38% year-to-date, and we are very confident in our ability to reduce cost. We will not be giving out the cost levels in euros for competitive reasons. But I can say that we compare extremely favorably with the large players in the U.S., for instance. And we're seeing this as a competitive advantage where we can go into markets and get the cost advantage really fast. In Spain, for instance, we're seeing that we're a clear cost leader, and we're bumping up margins in order to not incentivize our competitors to do loss-making sales and the road -- the basis for business going forward. Okay. I'll leave it to Cecilie to do the second part here and the financial update for the first half.

So revenue came in at NOK 77.4 million for the first half of 2020, which is a reduction compared to same period 2019 of about 10%. And this is a result of both demand and supply chain impact from the ongoing COVID-19 pandemic. The number of projects sold in the period was reduced by approximately 6%, but revenue impact is higher. And this is due to lower average basket size. Now as the share of projects outside Scandinavia is increasing. NOK 12.7 million in gross profit, which is a margin of 16.4%, and that's up 3 percentage points from the same period last year. Otovo continues to expand project margins on the back of installer platform dynamics, reducing cost of goods sold despite unfavorable currency development for a large part of the period. Otovo has implemented cost-reduction measures to mitigate the impact -- margin impact from COVID-19. Total operating costs still increased with 6%, which is driven by market entry in Spain and the full 6 months operation in France. And note that only 3 months were included in the first half of 2019 for France. The increase in depreciation is driven by goodwill depreciation. It's related to In Sun We Trust, which is being depreciated under Norwegian general accounting principles. And increase in finance costs relates to changes in the earn-out liability for In Sun We Trust, as a result of weakening of the NOK versus the euro, and this is a noncash effect for the period. And the overall earn-out is settled with 90% Otovo shares and 10% cash. Overall, we still see substantial uncertainty in revenue outcome for the year. We expect to see gross margin continue to improve in year-end EBITDA in line with 2019. Otovo exits the first 6 months with a solid cash position of NOK 153 million. Intangible assets that consist of goodwill of NOK 91 million, depreciated over 10 years and Otovo developed technology. Trade receivables and trade payables are reduced from lower activity in June 2020 compared to year-end 2019. And also the VAT treatment in Sweden has been changed, which affected other receivables and payables as of year-end 2019. There is an increase in the earn-out liability due to the weakening of NOK versus euro. So that's on the noninterest-bearing debt. And we used the average last 12 months' currency to settle. So the impact on the first earn-out payment was smaller than the actual currency swing. Target cash position for year-end 2020, roughly NOK 65 million to NOK 75 million. And this also then includes equity funding of the leasing projects, which I'll comment more on later on in the presentation. The earn-out and sellers loan related to In Sun We Trust, the acquisition will be settled in July 2020 by issuing roughly 240,000 shares. That settles the EUR 2 million liability at a share price of NOK 101 per share and a cash payment of EUR 226,000. The second earn-out payment is expected to amount to EUR 3.1 million. That's settled in 90% shares and 10% equity during the second quarter of 2021 and the first quarter of 2020. Okay. Now I'll hand over to Inigo to take us through the leasing launch in Spain.

Thank you, Cecilie. Sorry that I'm remote. I hope everybody can hear me okay. So as Andreas mentioned, we launched leasing in Spain barely about 6 weeks ago, and it's been extremely successful. What we think what we're able to do with this new product is it address a whole market segment that before was not considering solar. Just to give you a sense of numbers in Spain, up until today, pretty much we have 10,000 homes with a solar system on their roof, yet the market has a potential of 4 million homes. When we looked at Spain back when we started looking at the country to start operations here, we saw that 3 out of those 4 million homes really didn't have access to solar because of financing issues. So people that didn't really have the money or the ability to address this opportunity. And what leasing has proven is that we're now addressing these people, as we call in this year -- in this slide, sorry, the normal personal economy folks, right? So the people that would love to do it, but they didn't have. In Spain, the average installation could be somewhere between EUR 5,000 and EUR 6,000. They didn't have that money easily accessible. Yet with leasing, it's -- they're able to consider it. And also an important thing in Spain is that these systems, the way we are selling it, they're cash flow positive to the client from day 1. This means that the cost of the lease of that monthly quote is lower than what they're saving on their invoice. Thus, they're not having to invest any money upfront, and they derive savings from the first day. On top of that, the way subsidies are structured in Spain, the subsidies go to the homeowner, not necessarily to the solar system owner. Thus, our customers, even though they're leasing, they're still able to get money for improving their homes even though that hardware is not there. So great opportunity even though COVID hit hard here and the country was shut down for quite a few weeks and months, we were able to develop this product, launch it in early June. And we're already seeing that it's deriving a very relevant share of our business. So -- and that's what we thought it would be and this is being confirmed by the first few weeks of operations. On the next slide, if we look at the -- sorry, one second. If we look at what we did on the PR launch, it got great press. First of all, because it's a first-of-a-kind product in Spain, there are some alternatives that large utility players are putting on the market, but they require very large roofs that, for example, 98% of our customers, they don't have a roof big enough for what these utilities would claim or would help them put a, let's say, an investment-free product on their roof. And secondly, the way these other alternatives are structured, they require you to sell the energy to whoever puts this system on your roof. In our case, the energy is 100% the customers', and they can do whatever they choose. They can self-consume it, or they can revert it back to the grid. So it makes it a very unique proposition. And as I said, it's cash flow positive for the customer from day 1. So we got great reception all across the board. We got into the major newspapers. We got into the specialized press, and one of the major headlines was, get solar for free, right? And no money down on your roof, which is essentially, if you look at it from a cash flow perspective, that's what it looks like. There's a couple of other things that have been validated over these first few months by Otovo here in Spain. Number one is that operating under a Norwegian/Nordic flag in Southern Spain is very positive. People view this as a very -- as a professional and sustainable brand, serious folks, and it's an advantage when competing with the utilities. And we think that this will help in other -- as Otovo looks at that pan-European expansion, this is a very strong brand to build on. Despite the growth in Spain, which has been very fast and we hope that in future quarters and halves, we can show you some more detailed numbers. The reception has been extremely warm. We've just put here a number of quotes of customers that you can freely look on Google, Trustpilot or Habitissimo, which is a local handyman's portal and how happy customers are. We take care of all the administrative processes in Spain, which are sometimes cumbersome for the customer. And customers, we typically receive ratings between 4 and 5 stars. Very happy. It's working and it's scaling as we're going with sales. So we think that this is very sustainable. All this in an environment, as I talked before, that the country was shut down. Even through the confinement, we were still able to sell. Every single week, sales were coming in. And for 3, except for [Audio Gap] So as you can see here, customer reception was -- has been very good, and it seems to be scaling. And despite the confinement measures in Spain, like I said, we were able to sell. And for the only 3 or 4 weeks -- 2 or 3 weeks that actual installations were prohibited, we were still able, with new security and improved quality controls and health measures, to continue installing. So even in autumn or a fall that might look at more confinements, we think we're able to operate. The other thing is Otovo was the only company in the market that was able to work remotely from day 1. So all our leads were able to get their quotes. We were able to have sales conversations. And of course, that adaptation that is -- our competitors are now having to go through, we were able to do it from day 1. So overall, and just to finish on the leasing, we think that we have a very successful product in our hands. It's contributed and it's contributing a significant share of our sales, and it has other benefits. We think that it's pushing us into the virtuous cycle of giving us a much bigger market by which more people will see panels on the roofs and the more people will start asking about this. And granted, we're only 5 weeks since the launch. But we're already seeing friends and families together that are purchasing or renting the -- leasing the systems from us. The other thing that we're also seeing is a much cheaper marketing and ability to convert these sales because we're addressing a much wider market. We're in less competition with other players or we're targeting a much bigger set of possible customers. So these are all benefits that over the coming months, we think we'll make leasing a significant share of our business here in Spain. So that's a bit what I had. So Cecilie, I think, back to you on the setup of the company.

Thank you, Inigo. So continuing on the leasing side, we are very excited. We've worked hard for a long time to get this project up and running. And we're excited to announce that now we have established the asset company to own the solar systems, namely European distributed energy assets or EDA. So EDA will purchase the solar systems from Otovo and receive fixed monthly payments from the leasing customers. Otovo will handle customer interaction, including marketing, sales support and replacement of spare parts and receive payments for the servers from EDA. We estimate that we will be able to deploy north of NOK 1 billion within the next 3 years. And we've secured an attractive debt facility and will give existing Otovo shareholders the opportunity to participate in that NOK 30 million round in EDA during August, September this year. There are 4 key elements that makes this an attractive investment case from our point of view. This is an opportunity for capital deployment on a large scale. And as Inigo just pointed out, we're seeing high demand for this product. And as we build a larger portfolio, we believe EDA will appeal to several investor categories, including those looking to deploy sizable equity tickets. And as we've also been able to secure an improved term sheet with a large Nordic bank, with 50-50 debt equity. We foresee equity returns here to be fairly good, given the risk-return profile of the projects. EDA receives a stable CPI-adjusted cash flows on 20-year contracts. There is no volume or price risk for the investor as the monthly leasing payment is fixed. And the portfolio will be highly diversified, consisting of thousands of contracts towards homeowners in Western Europe. And this mitigates the counterparty risk. And the fourth point is also that once EDA has a sizable portfolio with a demonstrated track record, there is a potential for yield compression through an exit to the investor with lower return requirements, for example, an infrastructure fund. As I already mentioned, we will be giving existing shareholders an opportunity to participate in the private placement in the fall and in terms that best regard will be disclosed in August.

Thank you, Inigo and Cecilie, that leaves me with the opportunity to round off. To us, this half year has been a real positive with regards to our biggest project, which was the launch of the leasing concept in Norway and Spain and really sets us up for a nice follow-up with a leasing launch in France and Sweden this autumn. So to sum up the first half of 2020, it's a period that's been impacted by COVID. We're expecting a pretty much no growth year, but the entry speed into 2021 will be high and it really encourages us. We are continuously expanding the profitability per project, and we're seeing more of our growth happening outside Scandinavia. The leasing offer has started. And as you heard from Inigo, it's been a successful launch and has a really promising early numbers. The PR and public reception was positive, and it's improving our metrics, both on the customer acquisition costs, the margin per project and our ability to close sales with attractive conversion rates. So we feel that this is transforming our company and really sets us up for high growth and success in 2021. We will spin out EDA now, and we're executing on creating this company, an asset-owning company which will hold the leasing assets on its balance sheet. Otovo and Otovo shareholders will hold the first -- we'll take the first leg. And then a Nordic bank that debt facility has been secured, which allows us to go at full speed this autumn. And it also sets us up to be able to deploy pretty large sums of money in the medium term, aiming for NOK 1 billion in the 2020 to 2023 time frame. So I think that pretty much concludes the prepared slides and material from our side. Well, in that case, thank you for attending. And the presentation will be put on notc.no, for further reference. Thank you to Cecilie and Inigo for presenting and looking forward to talking to you all in the fall. Thank you very much.