Otovo ASA (OTOVO) Earnings Call Transcript & Summary

Ladies and gentlemen, investors and employees, thank you for attending this first quarter presentation of the results for Otovo ASA. Today's agenda is a business update that I will present before my colleague, CFO, Petter Ulset, will give us the financial results. We will both return for the summary and outlook and a Q&A session towards the end. We solicit your questions and welcome them in the chat feed. We'll do our best to answer at the end of the session. Now today, I present against the backdrop of a challenging solar market in Europe. In the aftermath of the energy crisis, the residential solar sector has been challenged by a tough macro environment for consumers in which they struggle with mortgage rates, high inflation and lower purchasing power and electricity rates that are less than favorable for solar, although they are higher than against previous year's averages. And that means we're meeting more cyclicality than ever seen in this business. We ended the fourth quarter with about 1,600 sales, and it's only natural that we would install that number going into the first quarter. In the first quarter of 2024, we did 1,624 installations. That's down 17% sequentially and more than 40% year-over-year. The revenues generated followed suit, 16% down sequentially and 44% year-over-year. Now on a more positive note, the gross profit generated is a record high 28%. That comes as the result of hard work and the mechanics of the marketplace improving in our favor. It shows that we're able to extract more value from each contract even in a challenging market. And that is true both for the subscription assets that we generate and direct purchases. If you look at the gray bars on the chart showing the gross profit generated per project, you can see that expanding from a low point of NOK 9,000 per project in the first quarter of 2021 to NOK 39,000 three years later, a quadrupling of the revenue -- gross profit generated per project and a point of pride for Otovo in this environment. Looking at the other quality metrics besides gross profit generated. The battery attachment rate on installed project is also a record high at 37%. The ticket size remains stable and that, I think, is impressive in a market in which hardware and labor has plummeted in costs throughout 2023. Keep in mind that these last 12 to 18 months are probably the steepest declines we've seen in the cost of renewable equipment for households ever, and we're able to have the same amount of revenue against each customer, thanks to both the margin expansion and the fact that we're adding more hardware to each customer. The subscription share is hovering quite stably at about 1/3 of customers, slightly up from the third -- fourth quarter to 34% now on installed projects in the first quarter. And as I said, gross profit generated, coming in at a record high 28%. Now I'd like to direct your attention towards one of the big strategic items for Otovo going forward. We're increasingly becoming a multi-hardware platform that allows households to get all the equipment that they need to electrify their homes. They can save electricity through a heat pump. They can transfer electricity to their car with an EV charger. They can make electricity with solar panels and they can store that electricity with batteries. Starting in 2016 and the following 6 years, we offered solar panels in 13 European countries. In the summer of 2022, Italy pioneered battery patched systems for Otovo and over the last 2 years, we've been expanding that offering to all of Europe. New on the menu in the first quarter of 2024 is EV chargers. And as of March, 7 of our countries offer EV chargers when you buy solar and batteries with Otovo. And then Italy, once again, is pioneering heat pumps. And coming out of March, they had a double-digit attachment rate on heat pumps to solar, and we believe we can expand that and obviously move to selling heat pumps in more markets going forward. And not only are we offering more equipment, but we're also offering different modes of ownership. People can buy directly if that's how they want to finance and own and operate the equipment in their homes or they can have all of this as subscriptions, allowing them to forgo the upfront cost and transform this new electrical equipment into a monthly payment that compares favorably against the electricity bills they would pay otherwise. Now is this working? The answer is yes. Let's look at how the battery attachment rate has been developing over the last 12 months. Now in orange, you see the Europe average for Otovo growing from about 20% of solar installations containing a battery 12 months ago to more than 40% now, a record high number. This is not driven by a single country or the fact that we're selling more in battery-rich countries, it's really uniform movement from the left to the right on the scale that goes all the way to 90%, I remind you. So it's really a big transformation of how people configure solar panels. This is good for them because it allows the consumer to use their solar electricity into the evening and night hours. It allows them to trade in electricity markets and power markets, frequency markets. Make more value from the equipment that they have. It's good for society as this takes off pressure from the grid. It allows higher solar and wind penetration rates. And it's great for Otovo because we're selling more to each customer, earning more in euro and kroner terms from each customer. And it also shows that Otovo is able to add more hardware types, and this is an essential strategic aim for us in 2024 and going forward. And then in terms of our ability to attract more customers, this first quarter breaks a downward trend that we've seen in the 2 preceding quarters. I'm happy that we're selling more. And I think we can sustain that movement into Q2, sell more in Q2 than we did in Q1. But it is a cautious and moderate growth that we're seeing in the beginning of 2024. The residential macro environment remains challenging in Northern Europe. As long as Northern European consumers struggle with their mortgages and tough purchasing power development, as long as electricity rates remain subdued there, the triggers aren't really in place for a strong Scandinavian market. The same goes partially for Spain, whereas markets like France, Italy, Austria see more positive where the macro picture is better, and the policy support picture is better. And those will be champions of our growth going forward. And then we have some positive tickets available in the German and Polish markets. Where does this put us all together? Well, we believe that 2024 will have a higher exit speed and be more positive in going out of 2023. And we're doing all we can to be well positioned for the growth that we expect coming out of 2024. Now over to Petter for the financial results.

Thank you, Andreas. Then turning over to our financial results in the first quarter. Revenues came in at NOK 167 million. That's down NOK 119 million from first quarter of last year. As Andreas noted, the reduction is largely driven by lower volumes in the first quarter. Margin expanded slightly, which ended up with an EBITDA of negative NOK 92 million in the first quarter. Turning over to the balance sheet. We saw that fixed assets increased NOK 100 million year-over-year to NOK 680 million. corresponding we saw that other current assets is down significantly, and that is due to the fact that we have sold off the majority of our Italian tax credits. The cash position at the end of the quarter came in at NOK 434 million. Then zooming in on the cash, we started the first quarter at NOK 583 million. And during the quarter, we had a negative movement of NOK 102 million of operational cash flow. That is inclusive of a working capital buildup of NOK 40 million, which is higher than average. It was driven by timing of installation activity and also payouts that we have towards the restructuring program. Investments in the SPV less net financing came in on negative NOK 14 million. Going forward, we would expect to draw more relative to investments in the coming quarters, roughly balancing new debt and investments. Other items came in at negative NOK 32 million, that is inclusive of capitalized R&D and some movements in currency. Otovo's financial framework to maximize shareholder value has 4 components: it's about improving cash performance, maintaining capital discipline, continuing to optimize the balance sheet and to do portfolio sales, where we reinvest the proceeds back into the business. Turning into cash performance. We saw that OpEx came down significantly from Q4 of last year. A large part of that is explained by one-off effects that we had in Q4 related to the restructuring and also the cancellation of the old share program. But in addition to that, we saw significant reductions in payroll and more disciplined SG&A spend. As we continue to move into 2024, this will strengthen both as a result of measures that we took in Q1, but also as a result of additional measures that we will take throughout the year. At the end of the third quarter, we had 449 FTEs. At the end of the first quarter, we had 387 and we aim to move that down towards 360 at the end of the third quarter. In addition, the headcount that we have taken out is to a large extent in cities in Northern Europe, which are more expensive, meaning that the weighted average payroll comes down and is weighted more towards the payroll that we see in the southern part of Europe. This means that the cost program that we announced in Q1 is on track, meaning that we are comfortable in taking out NOK 80 million to NOK 100 million from the third quarter of last year. And we'll continue to chase efficiencies wherever we can in the business going forward. Another important part of our financial framework is our ability to realize value from our subscription assets. In Q4 last year, we announced the sale of our NOK/SEK assets to Swiss Life Asset Manager. That transaction closed in Q4. The partnership is now operationalized and we're selling assets continuously to Swiss Life. Now the focus is turning over to the Continental portfolio. The Continental portfolio is bigger, it has better yields, and it is in currencies that are less risky than the NOK/SEK assets. That makes me quite confident and we have also seen in Q4 and Q1 of this year, that there has been done several transactions that are similar to the one we did, which for me indicates that investor appetite is there. We have initiated the process for selling off the Continental portfolio. The transaction structure is expected to be similar to the last time, meaning it would comprise both existing assets that we have built and volumes that we will build going forward. Based on our previous process, I would expect that this time line would be 1 to 2 quarters. Then I turn it over to Andreas for the summary and outlook section.

It's time to summarize and look forward. As I said initially, our backdrop is one with challenging consumer macro and consumer electricity prices that have come down from their highs in 2022, although higher than where they were in 2021 than previous years. An uptick in either one of these elements would be positive for the residential solar sector. For Otovo, this is a quarter in which we recorded our highest ever gross margin generated at 28% and an IFRS gross margin of 21%. We're proud of having expanded this through hard work and the mechanics of the platform over the last few quarters. We're earning more than ever per customer. In terms of the outlook for sales, France, Austria and Italy are expected to be our strongest markets. We believe in continued but moderate growth going into Q2 and that 2024 will end on a higher note than 2023 did. In terms of installation speeds, we believe them to be flat to improving, meaning that a quarter will roughly install the sales done in the previous preceding quarter. And then importantly, after the successful sale of our Scandinavian portfolio that closed in the fourth quarter, we're now moving on to the euro portfolio. We're confident on process and believe that on the back of comparable transactions being done in the European market in the last 6 months and our own success, we will be able to do this in a thorough way with many interested counterparts and come away with a beneficial result for Otovo and its shareholders. With that, thank you for listening, and we'll open up for the interactive parts with questions and answers. And welcome back on stage, Petter.

Now let's have a look at the questions. So question number one. For the portfolio sale, you say 1 to 2 quarters from start to finish. What does that mean in terms of when this is happening? And who do you see as buyers? I'll leave that to you, Petter.

Yes. So as we said in the presentation, we see several similar transactions to the one that we will execute happening in the European market. So we are quite confident in the time line we have presented. We have initiated the process and 1 to 2 quarters is the time that we expect to then signing. Then on the most likely buyer, I would say that this is an investor that invests in infrastructure and with the appetite for green assets.

Great. Next one. You said you were down from 449 to 387 FTEs, which is 14%. Yet payroll is up in the same period. What is -- how is that possible if payroll per FTE is down 10%? Well, I think here, we need to distinguish between headcount and FTEs. Headcount is indeed down 449 to 387 at the end of the quarter. That is a leading indicator, whereas the payroll is a lagging indicator of what we consume in terms of payroll. And as such, I think that adds up. So what you'll see during this year is that the number of people in our employment will decline. The bulk of that is done, but we're seeing that we will overshoot the plan and come in with stronger FTE reductions than anticipated due to natural change. And that we also have a shift towards the lower cost locations away from higher costs cities in the north of Europe. So overall, [indiscernible] down compared to the baseline we used for the cost program and high confidence that we will come in, in the NOK 80 million to NOK 100 million cost reduction interval. How long can you last on current cash with and without the portfolio sale? So for Otovo, the cash equation has three components. One is volumes. The other one is the cash reserves and the third is the cost levels. So turning to each one of those. The volumes we have now lead to an operational burn with the cost base. We have now over roughly NOK 100 million. Obviously, we need those numbers to go up. The path to profitability for Otovo goes through volume growth. So we're happy to record a slight increase, and we think that will keep going up. And the question is when will we see a strong uplift in our sales. That is, of course, the hardest part of this equation to predict, but I can tell you we're working hard to make that happen as soon as possible. Then on the cash reserves. You've seen the cash we have on hand. That represents some just level sales set up about 4 quarters of burn. In addition, there should be roughly 3 quarters of operational expense baked into the latent cash in the portfolio. And then on the cost reduction side, we aim to take the cost down NOK 80 million to NOK 100 million with the yearly effect that is accumulating and is at full speed by the beginning of Q3. So I think those are the components. It means that we are in a situation where we're not stressed out. We can have a thorough and good process on the portfolio sale, and we can do the right things in terms of tightening our operations, having the right organization for a bounce back that we think is going to happen and ending 2024 on a higher note than the trends coming out of 2023. Next, what do you need to see in order for unit sales to accelerate again? I think the cyclicality in this business is twofold. One is consumer cycle. The more headroom people have mentally and economically in terms of purchasing power and mortgage pressure, the better it is and of course, the better the savings. There's probably people who are better macroeconomists than me on the call and out there among our shareholders, so I won't predict that too much, but we see that Southern European consumers seem to have a bit more headroom. That's a positive. And the more countries can get into a position where the mortgage rate bites less, would be good news. On the electricity side, the electricity prices are down from the highs of 2022, but they're up from where they were ahead of that crisis. And we also see that some of the levies and taxes that were removed during the crisis are added back, which structurally is positive for us. So I think we're gradually meeting easier conditions as we get into the third and the fourth quarter of this year. So I think that's -- those would be tailwinds for us that we, of course, intend to tap into and lean into and with now a setup that has a Madrid core, but the ability to follow sales where they are easiest to come by, we hopefully can be ahead of market growth in Europe. Next question, what type of headcount are you cutting? Are you doing new cost cut rounds? Or are you seeing more than anticipated effects of what you already did? So on the layoffs that we did in December and January, that is staff and middle management to a large extent. We also moved to a more regional setup in Benelux and the DACH regions, more shared resources, and we moved operations staff to Madrid. So those are the three effects. Less central staff and middle management, more regional setup and the operations in Madrid. Are we seeing a new cost cut rounds? No, we would -- we are -- we're doing -- we did the layoffs and announced those in December and January. And then we have -- we're running a tight ship on hires and monitoring departures in order to come in with the right organization with the right cost going forward. What more can you cut? Well, I think we try to have the right cost base for our level of activity and are adjusting that as we go. We have high confidence in reaching the target for the cost program that we announced. Where do you see battery attachment rate at the end of the year? It's hard to anticipate. In the graph shown in the presentation, you saw certain countries moving more than 20 percentage points within the year. It's phenomenal. What's happening in batteries is just phenomenal. And it's really changing the nature of the product. It's making solar and battery as a combination much more attractive to consumers. And it's clear that the consumers are picking this up. I think this is more market driven and it is our benefit, to be honest, where -- or our merit, to be honest. I think there's no reason why they shouldn't keep progressing. It's quite uniform across countries. We can probably see fluctuations from month-to-month and quarter-to-quarter in terms of which countries are pulling and that could change the average composition a little bit. But overall, I think the battery patent trend is strong. And rather than say where it will be at the end of the year, I would say, where I think it will be in 5 years, and I think it will be very close to 100% because this is a natural component of a solar system, the way things are looking now. What's going on with your marketing spend, spend is up and sales are down? Yes, indeed, the marketing return on advertising spend is the lowest we've had in the first quarter. That is a mix of several factors, not least that I think we're seeing some desperation in the markets from competitors and higher cost per activation than previous. And of course, we have -- we don't have uniform results on marketing spend. We think we can do better than we did in the first quarter. We'll certainly do whatever we can on the performance marketing side. And then in addition, as we've said in previous quarters, we work very hard on making a better structure on the way we acquire customers. That means building the brand, it means building organic traffic. It means search engine optimization, PR and news out there. And of course, partnerships where we think we have a lot of goodies in store and hopefully can keep flattening the cost curve of marketing going forward. And that would be beneficial for us. And I think we have a certain degree of optimism in that. Your gross margin is up. Will it come back down if markets return? Petter, do you want to go for that one?