Otovo ASA (OTOVO) Earnings Call Transcript & Summary

Good morning, and welcome to Otovo's fourth quarter presentation. Today's presenters are Andreas Thorsheim, Founder and CEO; Petter Ulset, CFO. My name is Sondre, and I work with Investor Relations. Now over to Andreas with the business update.

Good morning. Today, we have a lot of news for you. So I thought I'd start by setting the scene. Today, we will look at our Q4 numbers released this morning. We will give the details on our new debt facility that I know a lot of you have been waiting anxiously for, and then we'll give the details on the private placement that will be conducted later today. Okay. Let's zoom in on Q4. This has, once again, been a record quarter in terms of installations. We did more than 2,200 solar panel installations across Europe. And that drove, of course, record numbers. We're coming in at NOK 282 million in revenues and handsomely above what we guided for the quarter, and both subscription revenue and direct sales revenue are up during the quarter. 2022 was an exceptional year in which demand far outstripped supply. We utilized this. And we came into Q4 with an enormous pipeline consisting of more than 5,000 consumers waiting in line and wait times that were close to eight months. Focus for us this quarter has been to increase throughput speed to stabilize the pipeline and to get the waiting times towards 6 months, so we don't take a risk that people be fed up waiting in line. In Q4, we also saw that search volumes on the major search engines was down, and the cost of activations from social media and other performance advertising was up. In Otovo, we constantly optimize the way that we get our consumers, and this was not the quarter to be adding more people to the pipeline. Our aim now is to stabilize waiting times at 6 months and to keep this up by having a sustained pace of installations in Q1 and Q2 and thereafter. Now the environment that we see going into 2023 is one where demand, once again, is harder to come by. This is a good terrain for us. Last year, everyone and their brother could find a solar consumer. And so a lot of handyman had sold out pipelines. The environment that we're now facing is conductive to the type of company that we are and the type of people that our GMs are. We've been planning for this for a while, and a major focus for us has been to get more partnerships. Partnerships are a great way to have proprietary modes of distribution, adding to what you can do in PR, in search, in blogs where the marginal traffic is free, adding to what you can do in performance media, where you're competing for search words, need to be smart at how you convert that. Partnerships represent a third type of channel in which you have reliable sources of trusted brands that rub off on you and can generate solar customers on a regular basis. During 2022 and increasingly towards the end of the year, we signed major partnerships like with Castorama, one of Europe's largest do-it-yourself stores, or large energy or mobile operators across the continent or even great new power companies like Tibber. Put together, the partnerships represented more than 10% of the sales we did in 2022, and this is a number we expect to keep growing throughout 2023. It's a major focus area for us in the beginning of the year. Now let's look at the subscription portfolio. Another strong quarter in terms of the subscription ratio showing that the numbers we had in Q3 were not a blip. We expect to see these numbers sustain going into the beginning of the year. And our ambition is to move towards a 50% subscription ratio in our sales and installations during the year ahead. Now when you have a high subscription sales number on increasing numbers of sales, then you add more and more to your portfolio. This quarter is one where we added NOK 80 million in accumulated contracted subscription revenue, and we crossed the NOK 300 million mark to reach NOK 305 million. And once again, we show that the subscription portfolio is now sizable and scalable, and our ability to grow this is very strong as we also say when we talk about the outlook for next year. With regards to the business health metrics that matter the most to us, battery attachment rate, ticket size, battery attachment rate and gross margins. In general, they're all moving up and to the right, if you look at individual countries. So we're once again proud of this quarter. Now there will increasingly in the beginning of this year, be mix effects as new countries are coming in, and some are contributing towards the north and some are contributing towards the south, so to speak. And so we'll see some mix on these things before things once again stabilize towards the end of 2023. We've been in launch mode in 2022. And I'm proud to say that we've gathered a fantastic group of general managers and managing directors to bring this country forward -- this company forward in 2023. This lineup is probably one of the strongest that you'll find in any platform company and is a big explanation for why we are consistently able to deliver high numbers and why we're so bullish on our own growth throughout this year. In particular, I'd like to sell out to our new markets GMs in the U.K., in Portugal, in Switzerland and Austria and in Belgium and the Netherlands, some really fine general managers here that come and fill out the full team that we have in Otovo. And if we look at the countries that are leading these are countries that will be, in general, contributing positively to the subscription percentage. They will be contributing in general, positively to the battery attachment rate, and then there will be some mix effects due to consumers in these different countries having different purchasing power and different preferences in terms of system size that will affect our numbers. As I said, 2022 launch mode. Now increasingly performance mode on these different countries. At the end of Q4, we could announce in a separate message that we had sold systems in 13 countries in Europe. And we are the first pan-European player. We've established a strong parameter from which to grow. And during this year, we will be putting more green into this table. The installation column, we will fill in Q1. The unit positive column we will also fill in Q1. Now what remains is profitability on these countries. By the end of the first half, we will have 6 positive countries, and our ambition is to have 9 to 10 by the end of the year. So where does this leave us as we start 2023? Otovo is really three different business lines with different maturities. The first one is the marketplace, in which we originate assets, we sell them directly to consumers or we hand them off to the asset portfolio company, and we take a margin when we do so. The name of the game there is geographical coverage and utilize our strong ability to be asset-light and digitally backed which is an advantage to us when fighting for market share in multiple countries in Europe. The focus for management there now is to grow volumes and to do that in a way that brings us to increasing profitability, both in existing markets and increasingly in new markets as well. The second line of business is the asset portfolio. Here, we make money from consumers signing up for 20 years of inflation protected subscriptions on solar assets. We build and they pay monthly for the assets. Now the key to succeed here is to get to volumes. You need a reliable source of volumes and Otovo's marketplace really is that, and we're proving that once again this quarter. The focus for us now is to develop this balance sheet. Today's news on the debt side is a big contribution to that. But then the next question will be, well, how will you monetize that? And that's the next horizon for us in 2023. The third element is what all these assets enables you to do. When you have tens of thousands of homes with solar panels on them, when you have thousands of batteries that are connected to the grid, and they're on your balance sheet. They are digitally connected to your systems. We have contractors that have carved out a way for you to control those assets. It represents a tremendous value that can be used as a fleet to stabilize the grid, to arbitrage beyond what a single consumer can do. And that is a next growth horizon for us and horizon that we can explore like our peers in the U.S. with very limited resource use. More about that at a later stage. Now I'll hand off to Petter for a detailed look on our financials for the quarter.

Thank you, Andreas. Now looking over to our reported financials. In the fourth quarter of 2022, we had total operating revenue of NOK 205 million. That's more than double from the fourth quarter in 2021. However, if you look further down in the P&L, our OpEx increased only 60%, meaning that we have an improvement in EBITDA, which ended the quarter at minus NOK 75 million, which is an improvement of 16 percentage points from the fourth quarter in 2021. Turning over to the balance sheet. We had noncurrent assets at NOK 477 million in the quarter. The increase here is mainly driven by CapEx in our subscription segment. Inventory is at NOK 11 million, which is up from NOK 0 at the fourth quarter last year, but a decrease of NOK 6 million from the third quarter. I will get back to the movement in our cash position and other current assets at a later slide. Now turning over to our alternative performance measures, which we believe is a better representation of value creation in the business as it includes the contribution from our subscription business. Revenues generated increased from NOK 109 million in the fourth quarter of '21 to NOK 282 million in the fourth quarter of 2022. That's an increase of 2.5x. And if you look at our subscription segments, revenues generated increased from NOK 26 million in the fourth quarter last year to NOK 81 million, which is almost an increase of 3x year-over-year. Looking at gross profit generated. We had NOK 22 million in the fourth quarter last year, increased to NOK 56 million in the fourth quarter of 2022. That is a decrease in margin from the third quarter. This decrease is driven by a higher share of batteries in our subscription business, which has the same yield, but the lower duration as well as country mix effects where certain countries had a larger weight in the fourth quarter. Zooming in on the subscription segment, we saw continued growth in the fourth quarter. Total subscribers increased 160% to 2,737. Those consumers have an accumulated value of around NOK 305 million, and we realized NOK 18 million in annual recurring revenues from those customers. If you zoom in on profitability, we saw that EBITDA generated came in at NOK 57 million. That is down NOK 6 million from the third quarter, which is driven by investments in primarily new markets. Of the NOK 57 million of EBITDA generated, we have significant nonrecurring items as well as noncash cost components. Now turning over to movements in our cash position. We started the quarter with NOK 291 million of cash. And then we saw that cash flow from operating activities was a negative NOK 78 million. Within this, cash EBITDA was negative NOK 68 million. We had improvement in operating working capital, releasing NOK 90 million over the period. And then we saw that nonoperating working capital increased by NOK 26 million. This is mainly driven by Italian tax credits. However, we now see that our credits originated, sold and converted is now in balance intra-quarter and that the volumes that we originated in December were sold and are expected to convert to cash in the month of January. Looking at investing activities, we had a negative NOK 67 million where we paid in NOK 4 million into Holu, our Brazilian JV. However, as reported, we have signed an agreement to sell Holu for NOK 24 million with cash effect in Q1 of '23. Then we had capitalized R&D of NOK 8 million, and we invested NOK 54 million in our subscription assets. We have NOK 50 million of net cash flow from financing activities, which is in large due to the drawn debt from Nordea. Now turning over to our new financing facility. We today announced that we have secured 100 million in financing from DNB and SR-Bank. This has been the result of a structured process that we have run the third and the fourth quarter of this year, where we had a field of both Norwegian, Nordic and international banks. The facility that we ended up with is RCF of 50 million with a 50 million accordion option that last accordion option is, of course, subject to a new credit approval, but will be based on the same documentation. The leverage that we achieved is 75% for Norway, Sweden and Germany and 60% for all other countries. Looking at the volumes that we expect for 2023. This will result in an average of 64%. And to be precise, this 67% is measured towards the ticket size, which is the direct purchase equivalent, i.e. what would Otovo sell a system for to a consumer, which is the same as Otovo sells a system for to EDEA our subscription SPV. The facility is priced on Euribor plus 350 basis points. This is 100 basis points higher than our existing facility. And we see this to be just the increase in spreads that we have seen in credit markets over the last year. The facility has a duration of two years within one year extension option, and it's an RCF-related payment, so there is no amortization over the lifetime of the facility. And to zoom in on leverage. This has been something that we have received a lot of questions about. So I wanted to take some time to try to clear away this confusion. When we sell a project to a subscription customer, we, for this example, see that to have a value as measured by contracted subscription revenue of 130. If we look at the leverage ratio measured towards those 130, they are quite modest. We see this to be based on a ticket size of 100 and of those 100, the Otovo margin is 20% and 80% is what we pay to the installer. The leverage that we have then received in this financing is 67% measured towards those 100, i.e., what our subscription SPV pays to Otovo. The old facility for reference purposes was 50% as measured towards those 100. Now if you think about how does this then translate towards what we pay the installer? In this example, we paid installer 80. The new facility would give us 84% of the 80 in debt meaning that the cash that we had to then take from the balance sheet or the equity would be 13%, which is way lower than what it was with the old facility. Now turning over to how we have built the balance sheet of our subscription SPV over time. We started out with on equity that allowed us to build a portfolio until we reached a balance sheet of EUR 15 million. Then we started to draw on the debt from Nordea, and we continue to draw on the debt until we reach a balance sheet of a total of EUR 13 million. Now that gives us a leverage ratio of 50%. Now with the new leverage ratio, we can continue that journey and build the portfolio only using debt until we reach a leverage of 67% or a balance sheet of roughly EUR 45 million. With the new equity financing that was announced today and flexibility that we have in the portfolio, we will continue to build the balance sheet to utilize the full capacity of the new debt facility. That will allow us to build a total portfolio of -- with a value of more than 200 million with the total balance sheet size of 150 million. A larger portfolio also gives us more flexibility. The underlying assets have high quality. They have attractive IRRs. They have low default rates. They are certified green by CICERO, which makes them highly attractive for investors. Higher volumes, of course, means that we have more flexibility on the debt side, and it also makes them attractive for a larger set of counterparties. This provides us with flexibility on monetization, through either bilateral sales, securitization or other leveraged finance structures, and we expect to launch a process in 2023, where we explore the options for monetization. As mentioned, the new debt facility increases capital efficiency. That also improves our equity IRRs. In the old facility, we -- for a project with contracted subscription revenue of 130 with a ticket size of 20, meaning that we have an originator market of 20 and COGS of 80. We would have to invest 50 and with a cash need of 30 that we've given equity IRR of 20%. In the new debt facility with the same example, customer the debt that we will be able to draw on would be higher, 67, that would reduce the cash need, as mentioned earlier, to 13, and this would lift the equity IRR to 40%. Now turning back to the update on the private placement, and I leave the word to you, Andreas.

And now let's move to the private placement. Today, we wanted to have all the answers out at once. We wanted to take the uncertainty about funding out all at once. And so we are proud to announce that the private placement we will be conducting this afternoon is fully guaranteed by our largest shareholder, Axel Johnson through Axel AB at a price of NOK 19.88 per share. In addition to them indicating pro-rate share subscription at least in this offering. We also have support from Nysnø, Norwegian Green Climate Investment Fund. OBOS and Agder Energi. And beyond that, we see strong support for the deal from our cap table and beyond. So where does this leave us at the end of the fourth quarter as we enter 2023? We are confident management, and we continue on our path and our ambition to double this business every year, and that starts with '23 and keep going at this pace that we've been holding up in '21 and '22, all the way to 2025 to become the European equivalent of the type of player we see in the residential sector in the U.S. In 2022, we launched 6 new markets. Those launches have happened on time and on budget. And fresh markets will increasingly throughout this year add to sales and installations. In fact the other guarantors of continued growth in this company as we approach the end of the year. The market conditions we've been facing throughout 2022, changed markedly in Q3 from being supply constrained, those constraints lifted. We have a very positive outlook on the supply side, both of labor and of equipment. And maybe a bit further down the road, we will see cost decreases on both, and that is something that benefits us and benefits European consumers. There's been a change in the weather towards focus on demand. That, too, is something that we like. Our DNA is one of creating demand, much more so than creating installations or running a supply chain. We are marketplace people. I am and so are the GMs that we have in the local markets. This is what we excel at. So when we look at the implications of all this for the year ahead, we have good visibility on installation volumes for the first half of 2023, and we expect to double compared to the first half of 2022. And we can confidently also reiterate our guidance on at least doubling the revenues in the same period. Now that we've come so far on the land grab and the country expansion, our attention turns to profitability, both at the country level and at the group level. We expect all new markets launched in 2022 to be unit economics positive in Q1. That means that their gross margins cover all variable costs, and they will be contributors to covering the fixed cost of the company. We also aim for 6 countries to be EBITDA positive by the end of Q2 and to keep adding to this list of profitable countries throughout the autumn and into the winter of next year. We like profitability, and we'll be watching costs and watching the unit profitability of each country. With regards to the portfolio that we are announcing funding news about today, we are confident in our ability to keep growing that at ever higher paces and our accumulated contracted subscription revenue will pass NOK 500 million by the end of the second quarter. So to sum up, today, we announced a financing for our portfolio and an ability to build that to EUR 150 million. The marketplace is growing rapidly. We've passed the NOK 1 billion in revenue generated as a run rate. We did a record number of installations, 2,200. We have a sales quarter that helps reduce our pipeline. We have a pipeline of 4,600 in some projects as we enter the new year, providing us flexibility on timing in addition to flexibility on geography to reduce customer acquisition costs and keep adding sales throughout the year. Our revenue generated comes in at NOK 282 million, total revenues under IFRS NOK 205 million, up 2.6% and 2.1% multiples, respectively. Gross profit generated up 2.6x. New markets on track and on budget, increasingly adding to sales and installations. Financing secured through a large debt package from DNB and SR-Bank, giving good visibility for the portfolio. NOK 200 million in a fully guaranteed private placement with backing from Axel Johnson and other large shareholders and an outlook that is confident and strong, reiterating our guidance of at least doubling revenues in the first half of 2023 and expecting 6 countries to be profitable by the end of the first half. So with that, we will be only having one task remaining, and that is the uplift to the main list of Oslo Børs. That process will follow immediately on the heels of the private placement EGM notice and all those events and expects to conclude in February. So see you all on the main list shortly. With that, we turn to the Q&A, and I have seen that we have a couple of questions coming through here. So let me just have a moment to have a look at this.

So question number one. So basically, you waited out Q4 in marketing and sales. How do you see Q1 developing?

That's a question for you.

I guess it is. Yes -- so yes, you can say that we waited out Q4, living off a rich pipeline of more than 5,000 customers at a time where the spot price for marketing was exceptionally high, highest we've seen in probably 7 or 8 quarters, if I remember correctly. That was not a good time to be adding to the pipeline. In Q1, Q2 and Q3, we added to an already full pipeline because marketing cost was so low. In Q4, the marketing cost was high, and it didn't make sense to buy customer spot to add them to the back of the queue that had almost 8 months of waiting time. That's a risky move. In 2023 and going forward, we will optimize our customer acquisition costs along 2 axis. One is timing. When your pipeline is full and costs are high, you can market less and wait for your sales to be done the month after or the week after. When you find yourself in the opposite direction, you go for speed on marketing. The other axis is geography. As we start this year, we have 13 markets. We will put our marketing budgets into the countries that have the best ROI on marketing and the fastest conversion from marketing to gross profit cash back. And so during this year, we will steer our marketing to keep OpEx as low as possible, both on geography and on time. That being said, management finds no reason to take down our sales and installations ambitions for next year. We remain confident on hitting the targets for the year ahead. Then to second question. At Euribor 350 basis points, you are close to the 5% assumed discount rate in your alternative performance metrics? So I guess the question there goes to you, Petter.

Thank you, Andreas. Yes. So it's -- in our ATMs, we do assume a 5% discount rate and a 2% inflation, keeping in mind that these are inflation-protected cash flows. And inflation is considerably above the 2% that we assume. The 2% and 5% have been chosen in collaboration with our auditor, more to reflect what we have seen in transactions in this market over the cycle. So we think this is a fair assumption to use over the cycle, and we are not adjusting these quarter-to-quarter. However, we provide in the quarterly presentation and report enough information that investors can make their own judgment. If they choose to have a higher discount rate, keeping in mind that you should then also adjust the inflation in those calculations.

All right. Third question, how do you assess the likelihood of monetizing the portfolio? Maybe we can go both. At that one, I'll go first. So over the period that we've had this subscription portfolio, we've seen recurring incoming interest for taking it over. And we've used that interest as a source of learning, educating us on how we need to structure the portfolio for maximizing the exit value of it. And we believe that entering a more structured process during 2023 will add to the interest for this type of portfolio. Petter, maybe you have more to add to that.