SFC Energy AG (F3C) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the publication of the preliminary figures 2019 of SFC Energy AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Dr. Peter Podesser, CEO, who will lead you through this conference. Please go ahead, sir.

Thank you very much, Aurelia, for the introduction. Good morning, ladies and gentlemen. Thanks for joining us today, and welcome to the presentation of the preliminary and therefore, also unaudited numbers here for 2019, as well as a first look into, I'd say, our expectations of, for the year of 2020 with the guidance for the running year. Together with Gerhard Inninger, we will lead you through some of the key elements here of the historical numbers of last year, but also give you more details on the planning and the expectations for 2020. As always, after completing our presentation, we are looking forward, and we will be happy to answer your questions. So let me start off. Well, a key message here is, yes, we hit the revised guidance for 2019, just to -- as a recall for all of us, we unfortunately had to revise our guidance back in November based on 2 main facts, a weaker development of our oil and gas business throughout the entire year of 2019 combined with the fact that an award of our German defense customer didn't happen in late 2019, forced us to revise our guidance down back in mid of November. If we look now into the preliminary consolidated sales revenue with EUR 58.5 million, we are within the range, published the range being EUR 58 million to EUR 62 million of revenue for 2019. Also, on EBITDA level and EBIT level, we are hitting here the indicated revised numbers. Preliminary underlying EBITDA being at EUR 3.6 million and the respective underlying EBIT number being at EUR 0.3 million. The second part today will be an outlook for 2020. We see overall growth here driven by our civilian fuel cell business with a dynamic environment here for our direct methanol product, but also for the newly introduced hydrogen fuel cells. We see good momentum on the international defense business as well as a significant improvement of environment in oil and gas. The overall range of growth we foresee right now is between 10% and slightly above 20%, so resulting into a revenue number of EUR 64 million to EUR 71 million of revenue for SFC Energy as a group. Now let me lead you through the segmental performance here on the revenue side in 2019. To start off with the challenging situation in oil and gas, we saw the revenue down 15.6% compared to 2018, which is primarily driven or which was primarily driven here by a structural issue in our Western Canadian core market here, a lack of pipeline capacity, a lack of transportation capacity for the crude led to also a depressing factor on the pricing. Western Canadian producers do not get the WTI pricing, means the West Texas Intermediate price, but get a differential on to their price. And the fact that transportation capacity was limited had a depressing effect here on the crude price. So as a result, investment activity was really down, almost at the crisis levels of 2016 and big, big reluctance on the CapEx side led to this decline. One data point I would like to mention here too, is that despite the fact that the overall business went down by more than 15%, still our product category -- our fuel cell product category, the EFOY business we were able to grow it by more than 6% in such an environment, which I think is an important statement and also confirming the overall strategy. Looking now into the recent developments here. I think the environment is really showing significant signs of improvement. We see real positive signals here. First, decisions for increasing pipeline capacity led to higher activity, even still in December of last year, and we concluded the year with a significantly higher backlog here on oil and gas compared to the year before. More than doubled the backlog here by end of December 2019. And also, the first couple of weeks, 2020, dynamic start into the year. So we expect an improvement of the situation in Canada here. The strategic focus here for 2020 is clearly to expand our business into the U.S. We started this program back in -- last year. We already formed alliances here with regional partners in the different areas -- geographic areas of the U.S. Just recently, we also had one of our most experienced EFOY sales executives here out of Europe joining the Canadian team and taking over the responsibility for the U.S. endeavor. What is the strategic plan here? It is, make us less dependent on the Canadian oil and gas industry, but also expand the business in the U.S., not only in oil and gas, but also within our clean energy and mobility business. I will get back to this later here. Next segment, Defense & Security. Also, here, I mentioned this before as one of the reasons for the revised guidance, a delay in an award for a program here for the German armed forces overall. This led to a decline in the segment of more than 24% year-on-year 2018 to '19. So there's no doubt that this naturally was a major setback for us in our, I'd say, especially German business development. But we also must not neglect the, I would say, apparently successful internationalization of the defense business. We increased the business here. We grew the business by more than 80% year-on-year on the international level. Main customers being, I'd say, Indian users. So India strongest development, Israel continues to be a good customer. Very positive first-ime significant sales here into the U.K. And also shortly before the year-end, we landed our first significant program also in the Netherlands, so in Holland. We reduced our dependency here on the national business consciously. But we also have to say the original target to have a 50-50 split between international and national business did not work out, not because of the international not being growing, but after the German part of the business being below expectations. Overall, the target remains the same. We want to have a proper balance between national and international business. Going to the Industrial segment, our power electronics part of the business. The solid growth here of 5.7% is slightly below our initial expectations of about 8%. In Q3 and Q4, we saw a softer environment, especially in the semiconductor part of the business there. Fortunately, with our new modular product platform being successful in the laser industry, we overcompensated here the softness here of the semiconductor subsegment. Looking into, I'd say, this year, and we will get back to this. We are actually watching here with a certain concern the impact on the supply chain here, especially by the corona situation in China. We'll get back to this in a second. Definitely, the star here of the segment last year is our civilian fuel cell business, EFOY, but also initial sales here of our, I'd say, hydrogen product, strongest growth in this segment, overall, more than 25% year-on-year, consisting of 2 elements. I think we could show a solid turnaround in our end consumer in our business here with RV and sailing customers. And growth -- I'd say strongest segment -- subsegment growth of 36% in the industrial business here with our EFOY Pro product line. The drivers here is significant demand here in the wind industry as well as the civilian surveillance, security technology market, off-grid power supplies here for CCTV cameras, for wind measurement systems. And this not only in our core markets in Europe, strongest growth here in Scandinavia, U.K., Benelux, but also in Germany. But also in Asia, the expansion of the business to Asia really shows very positive results and bear fruit. Japan, Singapore, but also after 2 years of business development. First significant sales into China, mostly into the wind industry. This business also shows a strong improvement in the gross margin and contributes here to profitability, and Gerhard will go into this. As an add-on here, we signed contracts with our long-term partner in Germany, a company by the name of udomi. We are acquiring, I'd say, the customer base of our German integrator, and we are acquiring also a portal for remote monitoring and let's say, a subscription-based business model here from our long-term partner. Expectation here is the acceleration of growth in Germany in this segment. But at the same time, making sure that we take this remote access web-based portal here, a nucleus for a new business model, and we started this in Germany. I mentioned before, going forward, in 2020, in the Clean Energy & Mobility segment, also the regional rollout now into North America with the U.S. being the first target market is one of the key projects here for 2020. With this, I would like to hand over to Gerhard to lead you through the financials here of 2019.

Thank you, Peter. Good morning, ladies and gentlemen. Please, let me give you an overview on revenue per company, as a follow-up, what Peter already told you on the segments. And of course, on our margin and earnings situation as well as on balance sheet and most important cash based on the preliminary figures, which have not been audited. But of course, you can imagine the audit is in progress, but it's finished once it's signed off end of March. Most important message, we mentioned before is revised guidance is fulfilled. The revenue number was EUR 58.5 million. It's between or within the range of EUR 58 million to EUR 62 million. The EBIT adjusted before IFRS 16, and we had our guidance, we recently revised guidance before the impact from IFRS 16. I think you all know what it's for, was at EUR 131,000 and this is between minus EUR 0.5 million and plus EUR 1.5 million. And the EBITDA adjusted before IFRS 16 was round about EUR 1.3 million is within the range of EUR 0.5 million to EUR 2.5 million. On the revenue, quick follow-up. What happens per company. Yes, we had on Simark, EUR 26 million in 2018 and we achieved EUR 22 million in 2019. So more important is that we already -- that we now see again light at the end of the tunnel with this much stronger backlog and good start into the first quarter. PBF increased from EUR 16.3 million to EUR 17.2 million in revenue, and this is the same number as we had in the segment industry and also very important for us that the revenue for the companies -- SFC was very stable from EUR 19.4 million to EUR 19.3 million. There were only a few thousand euros difference. So the EFOY business is stable and the EFOY revenue number. And with the increased revenue number for -- from Simark Controls, we have a plus here in total on the group. On the gross profit, usually, what happens when revenue is lower, even the gross margin goes down. Fortunately, we didn't have this development. We increased the margin, the gross profit from 2018 that we achieved 34.2% to 34.4%. Very good development in the segment, Clean Energy and Mobility. Here, we could improve, also based on the higher revenue, but also on the customer base. We have there from 39% to 43%. This is a plus of 4%, and this is really hard to achieve. So very happy about this development. Industry PBF business was almost stable from 30.7% to 30.4%. Oil and gas was a little bit behind the whole year, but had a very good final quarter, so at least we could manage to bring it from 28.2% to 29.2%. And of course, a strong EFOY business in Canada in quarter 4 helped a lot here. Not so good was on defense, but this was expected as the international -- the national revenue was missing, and this, of course, is the revenue with the highest margin. So we had a decrease from 50.9% to 44.7%. But at least as said before, we improved from 34.2% to 34.4%. Let me give you an overview on the earnings situation now. And of course, the most important thing here was this new IFRS 16. This accounting standard for recognition and measurement of leases. Application of IFRS 16 had the following effects on profit and loss, and this is already included in the figures as presented, except for the guidance here, I had to do a separate calculation what I mentioned before. On EBITDA, we had an impact of round about plus EUR 2.3 million. And this is not the depreciation, these are the lease costs we have in the group. And on EBIT, we had an impact of EUR 153,000. This is the lease minus depreciation. There's obviously a little bit of a tricky calculation, but the good news is starting from this year 2020, there will only be figures including the IFRS 16. The underlying position in 2019 was in total round about EUR 1.6 million, thereof, EUR 1.4 million to EUR 1.5 million, resulting from a stock option appreciation rights. This is based, as you know, on the share price and round about EUR 120,000 from costs for acquisitions or corporations means costs which are related to this. The group EBITDA, and let me come to the 4 earnings figures. The group EBITDA decreased on a year-to-year basis from EUR 2.5 million to round about EUR 2 million. This was almost stable, even if we had a loss, the loss more or less was compensated by the impact from IFRS 16. The EBITDA adjusted for the nonrecurring effects, this EUR 1.6 million I mentioned before, was stable with EUR 3.7 million, and it moved to EUR 3.6 million. At least this was again, what I said before, the negative impact from the earnings was compensated by IFRS 16. The group EBIT decreased from EUR 1.3 million to minus EUR 1.3 million. This is a minus of EUR 2.6 million. And here you can see that we have now here the impact from the earnings or let's call the costs, which we had to spend for the future growth. And the underlying EBIT moved from EUR 2.5 million to round about EUR 300,000 here. The same picture, minus EUR 2.2 million, as said is all the costs which are gross related in 2019. The balance sheet, due to the capital increase, we will have an equity ratio, which will be over 50%, exactly 55%. This is a very good percentage, much higher than the year before, even if the higher balance sheet resulting from IFRS 16 impacted this and brought -- diluted this a little bit, but the capital increase, of course, helped you a lot. The cash position at the end of 2019 was round about EUR 21 million. In addition, we managed to have credit lines here now at SFC Energy AG, in the single-digit million euro range with 2 German banks. So this will bring us into a position to reduce the usage, not the credit lines, but the usage of credit lines at our subsidiaries in Canada and Holland and Romania, which are on a higher interest rate level. So I have to work on the interest rate we are having here in the group. This is one of the next challenges. On a net, the group is positive on a cash basis. That's the message. On employees, we had -- end of 2018, we had 279 employees. End of 2019, we had 282, so almost the same figures, a few heads more. And -- this wasn't what I had on my plate -- and with this on my head -- I may hand back to Peter Podesser, who will give you an overview on the outlook 2020. Thank you.

Thanks, Gerhard. So yes, 2019, I think this is no secret. Naturally, we are unhappy with the disappointing development here in oil and gas and also in the German defense business. We have in the meantime, I think a changed situation here. On the oil and gas side, first of all, we see a better environment, higher momentum in the market and stronger demand. And we have taken proper measures also to strengthen the management team and to drive our business beyond Canada into the U.S. as well as beyond the oil and gas business into our Clean Energy and Mobility business also in the same geography. Well, same for the German defense business. We saw -- we implemented the change here also on the management level. The Supervisory Board was not extending Marcus Binder's contract here as they're responsible for this part of the business. We have formed a task force here consisting of internal, but also high profile external, one would call them maybe heavy hitters here out of the sector. Under my responsibility, and we have been working now since November time frame, simply on the path forward here to make sure, I'd say, we do not expect -- we do not experience the same disappointment again in 2020 and the years forward. But with all this, we should not neglect and not oversee the dynamic that we see in the broad base of our business. I'd say, all our civilian application gained continuously momentum. We have mentioned the industrial fuel cell business part. We've mentioned also the turnaround on the consumer business. And we experienced the same momentum still here in the first couple of weeks of this year in those segments. And this is also where we base our confidence of guidance on. Hydrogen, [indiscernible] I was mentioning here. The product was finalized before the original deadline, so faster implementation than expected. First orders in the German program here of digital towers here for government telecommunication network is in its rollout. The first federal states have awarded the tenders already. Even a first batch is already recognized in Q4 figures here, although still, I'd say, naturally a small fraction of it. But here, we can see that replacement of conventional off-grid generators -- diesel generators is happening as we speak, and we see continuous demand here. And therefore, the guidance here with a range of 10% to 20% growth here from EUR 64 million to EUR 71 million and a respective development here of the profitability of underlying EBITDA between EUR 3.6 and EUR 6.6 and underlying EBIT between EUR 0.1 million or between a breakeven and roughly EUR 3 million, EUR 3.1 million is what we, I'd say, see as the doable range of business. It is important to note that the lower end of the range does not contain new orders from our national defense customers here. So no orders, no new orders here accounted for in the lower end of the range here from the German defense sector. But if we split it up and look into the segments, well, then if you look at the higher end, we are expecting Clean Energy and Mobility to grow by about 30%. So same growth rate continued as we have experienced it. On the industrial side, about 10% and oil and gas back on growth, about 15% of which the EFOY part is growing at double the pace here with about 30% comparable to the Clean Energy and Mobility. Defense and security definitely is the one that makes the range that big. On the higher end, including German business, we expect this to grow by about 50%. And on the lower end, this is, call it, just the international anticipated growth of about 15%. So all of this leads us to, I'd say, the 10% to 20% growth rate here. If we look into the medium-term outlook, we do not see, I'd say, any reason for changing this overall environment is continuously improving also for this clean and efficient technology here, be it hydrogen or direct methanol fuel cells. We think we are -- despite the obvious setback here in November last year or the setback in 2019, we are fully on track here for our 3- to 4-year plan to reach at least EUR 100 million of revenue with a solid improvement here of EBITDA margins on an underlying level, clearly above 10%. With this, we would like to conclude our presentation and looking forward to your questions. Thank you very much. Handing back to Aurelia.

[Operator Instructions] And we've received the first question from Karsten Von Blumenthal, First Berlin Equity Research.

My first question is regarding your deal with Ballard Power. You receive stacks for your hydrogen fuel cell. My question is, do you see Ballard also as a competitor? And why did you choose Ballard and not another supplier?

Karsten, this is Peter. I will start with the second part of your question. This was just a really very pragmatic approach here. The JUPITER fuel cell platform developed originally here by the colleagues that we took the IP from was already using Ballard stacks from the beginning, and those stacks and those products are also the pilot products that were used by the government customers that are now ordering those systems. So this is a well working, well accepted core element of the JUPITER product. So why changing, I'd say, a well-working system. What we did is establish -- based on our long-term relationships also with our colleagues in Vancouver, we established a new and long-term partnership here for the purchase and the supply of this core component. Other part of the question, well, as we see the focus here from Ballard has not been on the stationary part of the business, telecom backup for quite some time. And so far, I do not see that we are entering into a competitive situation. I think that's a complementary situation. Their focus is really mass transportation mostly here geographically in China and North America. So for the time being, I would say, pretty complementary situation.

All right. Understood. You had a very good start regarding your hydrogen fuel cell business with the first tender you won and with over 400 radio tower sites to equip with the hydrogen fuel cell. For me, it is not entirely clear what part of the business goes to adKor? What goes to SFC? You mentioned that you are a subcontractor for adKor. So could you elaborate on that topic?

Yes, absolutely. We are not intending to go into, let's say, a general contract to roll here for this digital telecom business here for the federal space in Germany. This includes, let's say, as services like also the civilian groundworks. And I'd say, final commissioning of such a system, which definitely is not our core business. But adKor has been out there as an integrator for this business for quite some years and did all the pilot systems. The other party that does those works is the construction division of the German railway. So in some of those programs, we are going to be a supplier to adKor. And either adKor is the subsupplier to the German railways or SFC will be the subsupplier of the German railway. So this is still some flexibility in this program. The core elements, we are delivering are the JUPITER fuel cell products.

Okay. That is decisive. And I'm glad that you do not play the general contractor role. That is always a tedious and difficult business. I have another question to Gerhard. Could you again give me the EBIT figure, not the underlying EBIT, but the EBIT figure, because I wasn't quick enough to comprehend that.

Yes. Hello, Karsten. The EBIT figure and there are different EBIT figures, as you realize. The real EBIT figure was minus EUR 1.287 million.

Minus EUR 1.287 million. All right.

And let me say this includes IFRS 16 and also includes the underlying figures means this is before this -- sorry, this is including this SARs expense and stuff like that.

Excellent. And did you have any SAR costs in Q4?

Yes, of course, the SARs -- impact from SARs in Q4, but this went into the other direction because the share price was lower than end of quarter 3.

Okay. Perfect. Understood. You mentioned -- yes?

We have to -- we always calculate this with the valuation and the difference from last quarter -- end of the quarter from last quarter and as of last quarter this is always booked. So it's an ongoing process. And at the end of the year, we always compare what was last year, and this must be the right number, which we have. And this can be expenses, once the share price goes up or it can be income or negative expenses once the share price goes down.

And one last question from my side. You had a very dynamic Clean Energy and Mobility business with high margins. And could you again give me the growth figure you expect for this business in 2020?

Around 30%.

Around 30%, excellent.

And the next question is from Ms. Timmermans, ABN AMRO.

Lotte Timmermans, ABN AMRO. First, you already mentioned China and the coronavirus. I was wondering if you already have calculated this in your guidance? And what kind of impact it will be as you have suppliers from China?