SFC Energy AG (F3C) Earnings Call Transcript & Summary

Welcome, and thank you for joining SFC Energy's Half Year 2020 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand over the word to the Executive Board with us today: the CEO, Dr. Peter Podesser; and CFO, Daniel Saxena. Please go ahead.

Well, thank you very much, Henrik, for the introduction. Good morning, ladies and gentlemen. From our side, thanks for taking the time to join us today to our teleconference on the first half year results as well as the second quarter results. Today, it is also a particular pleasure for me to welcome for the first time our new CFO, Daniel Saxena. Daniel, together with me, will present here the development of the business in the first half year. We will give you a detailed overview on the development in the individual market segments and naturally, a detailed analysis of the financial results. As usual, after our presentations, we will be very happy to have you joining us in the Q&A session, and we'll be happy to answer your questions. So let me start with, I'd say, some of the highlights and the overview. We saw naturally, I think, as all of us, a challenging environment here, characterized by the impact of containment measures implemented on a worldwide level to fight against the COVID-19 impact here on an international level. In our case, we saw this naturally impacting our daily operations but also different market segments. But at the same time, and this is somehow, I think, specific here, we also have parts of the business that are totally unaffected and show a robust and continuously dynamic demand here despite this COVID situation. Just recently, some political decisions, I think, gave our technology, our theme of efficient and clean energy generation a new impetus, namely the publication of the National Hydrogen Strategy here in Germany. But also, on EU level, the program presented as -- under the theme of the Green Deal here also promoting hydrogen and related technologies as one of the future pillars of an environmentally conscious energy generation concept here in Europe. But now coming back to, I'd say, the development in the business, I think the 2 key factors that are having the biggest effect here on the results of SFC Energy in the first half year and in the second quarter is that we see in some of our submarkets, in some of our end markets, namely the industrial business, the Oil & Gas business and to a certain extent, also in Defense & Security, that measures against COVID have impacted the business activity, have slowed down the business activity in many instances. Customer visits have not been possible and are not possible yet. Some of it's still under, let's say, a strict hygiene regime now starting to resume again. But with all of this, we saw some impact on decision-making. Oil is being postponed but also, I'd say, some of it, especially in the Oil & Gas business, even canceled. On the other hand, I mentioned this before, we experienced an unprecedented demand dynamics here in our civilian fuel cell business. And this is not, I'd say, a German phenomenon, and this is not restricted to our hydrogen products. We see this across the board of our civilian product range here and on a very broad regional basis, in Europe, in Asia, but to a certain extent also in North America. And seeing this, I think this also helped us to counterbalance some of the COVID impact here in the business. Looking at, I'd say, the overall handling of the COVID situation at SFC. I think we can report that yes, as I think every responsible organization, we have implemented measures in early March here to protect here the health of our teams, the health of our business partners, everybody related here in the value and the supply chain. And until today with, let's say, a strict separation of teams with -- and immediate use of remote working opportunities, home office, mobile office, we are happy to report until today that we had no single day of shutdown related to COVID and no single person directly, personally affected here. We hope we can continue this way. At the same time, well, we have been tackling the situation here actively. We decided to take our fate into our own hands. And I think we have made good use of the time so far. We have formulated a program that we call Fit for the Future to make use of this environment right now to, let's say, improve wherever possible. We've started to restructure our sales and marketing approach here to tailored online webinar-based activities. A tremendous response here from customers especially in the first 2 to 3 months. We also can notice a certain, I think, tiring here in our customer base. Some of them even told us we are, to a certain extent, what they call Zoomed out, means we now scale back this activity in summertime and will resume again in autumn time. One of the major initiatives that we started was simply an acceleration, a further focus here on our R&D activities, accelerating the development here of new products, namely the next generation of our EFOY products, intended to be launched still in autumn time this year, the kickoff for the next generation of hydrogen fuel cells but also simply take the time and evaluate complementary technologies to our own technologies such as electrolysis, producing own hydrogen off-grid here and [ have full turnkey ]. So this has naturally cost money, conscious investment to be simply ready to go here after this overall crisis situation here on a worldwide level. At the same time, we have decided very early in March time already to simply increase our purchasing activity, stockpile essential parts here to make sure we don't see any interruption here in the supply chain. And I think until today, we can say this has paid off in a sense that we did not see any disruption in the supply chain so far, and we have been able to produce every single day. Producing and manufacturing every single day is naturally based on a strong demand here and a good capacity loading based on our civilian products. And this was also naturally together with this Fit for the Future program implemented, the basis why we did not make use of any of the government support measures such as short-term work in Germany. Going back to, I'd say, the macro picture here. I think we have now appreciated a tremendous attention -- we have been appreciating a tremendous attention for hydrogen and related technologies over the last couple of months, culminating in the publication of this National Hydrogen Strategy in Germany and what I also mentioned here in terms of programs on EU levels. But what impact does this have for a company like SFC Energy? The overall target here to establish a climate-neutral and CO2-neutral energy generation in a country like Germany, I think, is just a consequent step here in this energy transition process started years back with alternative energies taking over a big part of the energy generation from fossil-based technologies. But just increasing the capacity of alternative energy generation, wind power in the north of the country, solar in the south of the country simply is not enough. You need to store, transport and at the same time then, at the point of use, again, bring the electrical energy to the user, be it an industrial user, an end consumer or government agencies. And here, hydrogen has been selected on the German and EU level as the media of choice for transportation and storage. And when you convert the hydrogen back into electrical energy, the fuel cell is the efficient and clean conversion technology. So overall, the environment here is favorably changing here for companies like us who have been in this business now for about 20 years. So what is the immediate expectation here to the national program? Absolutely, we are expecting to get now more support here, especially for our R&D endeavors. There have not been many programs out there in recent years. We have this -- in the initial years of building up of the company to get R&D funding. We will file our programs here and expect an impact as early as 2021. And naturally also, all those programs to ramp up hydrogen and related technologies here in the country, we expect to get some positive impact here from market opening initiatives. I think we can also name the first one of it, which is published in June, the first shipment, again -- or the further shipment here of hydrogen fuel cells for a government digital radio program, which is already subsidized to a certain extent. From this macro picture, that is twofold. As we see, it has, well, 2 phases. I think we now have a look into the individual development here in our segments. In terms of sales revenues, yes, due to the corona impact here in some of our subsegments, we had to acknowledge a decline in sales revenue of about 10.8% to EUR 27.7 million here in the first half year of 2020. Looking into the order backlog, I think we have still a mixed picture here. We have an increased order backlog here year-on-year compared to the midpoint of last year, but we also have to see that the book-to-bill ratio in the first half year of this year was negative. So in comparison to 1st of January this year, we see a decline in backlog. Going into the individual segments, let me start with Oil & Gas. COVID has impacted the demand for oil and gas. If, let's say, a couple of billion people don't travel, if factories don't run, there is less demand for oil and gas, and therefore, naturally, we saw a massive decline. And this decline in price of the commodity was even accelerated by a dispute of producing countries under the OPEC+. Saying this, well, we see a decline in revenues here of 13.1% to EUR 10.3 million, which is a significant decline. But at the same time, we still have to look a little further into the business, and we still can see on a product level that the innovative part of the business, the fuel cell-based business in this area has still increased and is still increasing as we speak. The -- if we see this decline of 13.1%, we have to say this is on the upper end of our expectations in terms of business but also on the lower end in terms of impact. If some of you recall our statements here with the Q1 results, we were expecting a minus 20% to minus 25% impact, and we are now at a 13% impact. This does not -- I don't try to tell you that this is, let's say, positive per se but it's relatively better than the expectations. If we now look into the measures. Naturally, we have already in March and April time frame calibrated our cost base here, adjusted our cost base. And at the same time, I think it is realistic to assume that the third and fourth quarter, we are facing a continuously difficult and challenging environment in Oil & Gas. So we do not expect a rebound here for 2020. Going into the industrial/electronics part of the business. We saw the most immediate and strongest impact here in the business. Large industrial customers simply reduced their call-off quantities. Some of the programs were delayed. So we are seeing a difficult Q2. We are also expecting a difficult Q3. But at the same time, we could record, amongst others, significant contracts here, one of it a EUR 3 million contract for one of our long-term customers in this field here for power electronics that starts shipment already in Q4. So what is the expectation? The expectation is Q2 and Q3 challenging and recovery starting in Q4. And recoveries expectation is not based on hope. It's based on backlog and hard orders. Defense & Security. We have a significant deviation to last year's numbers here but not so much because of the corona and COVID impact, just because of the fact that we shipped significant quantities of products to countries like India and Israel in the first half year of last year, which did not happen this year. And therefore, we look at the revenue of EUR 1.4 million for the first half year compared to EUR 4.6 million in the previous year. The significant order I was referring to in 2019 amounted to about EUR 2.7 million. Still, corona containment measures in different countries have an impact on the activity here in the first half year, especially in the second quarter of the year. And if we look at the hard lockdown measures that countries like India and Israel have imposed, this naturally ceased -- or results in a delay of decisions and some slowing down of the sales activity. What we now experienced since June is, again, active project work in different countries, including Germany. We expect -- and I think that's the helping part here, the defense business traditionally being a year-end business. So there is still time to prepare here for an expected year-end business. Additionally, in Germany, the stimulus package that has been published by the government and launched by the government to counterbalance COVID impact here also to small- and medium-sized enterprises is another potential support factor here, where we naturally trade to be part of it and get -- or participate from it. When we look on to the international level, I think the activity we are now seeing in countries, again, like the U.K., some of our Middle East customers, but also, again, starting activities in the U.S., we, I think, have a good basis here and a solid basis to expect some year-end business and some year-end activity. The other picture we see in our Clean Energy & Mobility segment. We see a sales growth that is even stronger than in the first quarter. Overall, we are seeing about 70% of growth. As I said before, this is a broad regional business that is coming here from countries like Japan, like Singapore, both with, let's say, minimum doublings -- in Singapore, a 500% growth here to the business; in Japan, a doubling of the business; but also good development in Scandinavia and Germany and across our product range, so the EFOY product line with our methanol products as well as the initial program here for our hydrogen business here with EFOY Jupiter systems. End markets, our traditional markets like wind, surveillance, security, but also now starting activities especially on the telecommunication and critical infrastructure part, and the good news here is we are not seeing a weakening of this trend as we speak. So we expect this momentum to really continue throughout the year. And besides years of business development, I think the overall macro environment mentioned before is one of the drivers. I think it's also worthwhile to mention that especially the industrial part of the business here realized almost a doubling of revenues, so a 95% growth. But this naturally also implies that we have some negative deviation on the consumer end here for our recreational vehicle and sailboat business. Although there's a lot of demand now in this business and the caravaning industry is booming, especially in the second quarter, we saw a diverse picture. Whereas the German market was really continuously booming and we were selling through the shutdown measures, especially Italy and France simply impeded some of our sales here. But for the year-end, we are pretty excited also for this part of the business, especially now given the fact that we are launching a new product in September time frame. So overall, very stable basis here, counterbalancing a big part of the COVID impact on sales revenue and expectation is to continue this way. With this, I conclude the market section and hand over to Daniel here to give you an insight and overview on the financials.

Good morning. Thank you, Peter. Good morning, everybody. Thanks for joining our call. Let us dig into our financial performance in the first half year by starting to look at the gross profit and the gross margin. And as Peter mentioned before, it's a bit of mixed picture or heterogeneous development across the segments. Our entire gross profit in euros were EUR 8.8 million versus EUR 10.4 million for the previous year's. That will translate into a gross margin of 31.7% versus 33.5% compared to previous years, 1.8% lower -- percentage points lower compared to the previous years, which naturally is -- we'd like to have it better. But given the whole entire circumstance all in the market, it's not entirely dissatisfactory for us. The reason, Peter mentioned that before, first of all, missing Defense & Security sales in the first half year, which tend to have very healthy gross margins. So the gross margin in that segment plummeted to 24%, 25% because they're mostly service sales and no product sales. So that's really missing. Another effect is the product mix in the Oil & Gas segment, which resulted in an entirely lower segment margin, not dramatically lower but even that's off. And we were able, and Peter mentioned it, to compensate that, to offset the lower margins with the significantly higher Clean Energy & Mobility revenues, which has very attractive margins for us. So obviously, we're able to compensate the missing gross profit from the previous 2 segments with Clean Energy & Mobility. I will have a quick look and just run you through the gross profit, gross margin of the segments. As I mentioned before, Oil & Gas came in at 25.1% gross margin, which is 2.8 percentage points lower than the previous year's. I already mentioned it's mostly product mix. Good news is that -- and Peter also mentioned that the fuel cell revenue content in that segment is increasing continuously. If we look at industry, 29% versus 29.3% in the previous year's. We'll see the margins tend to be a bit more defensive in that sector even though revenue has declined. That has to do with certain framework contracts. If you look at Clean Energy & Mobility, 41.8% versus 43.4%, it's good. The margins in this segment also benefit from the product mix on the projects, but it's 1.6 percentage points lower. And last but not least, and that's what I mentioned at the very beginning, Defense & Security. We're looking at 24.5% compared to almost 44% for the last year, and that is obviously the biggest hit that we have incurred for the reasons that Peter mentioned with low revenues and little product revenues. Looking into the EBITDA. We -- the missing gross profit could not be compensated by reducing or optimizing operating costs in the first year. So our gross -- our EBITDA and EBITDA margin declined. In any event, we all know that costs are only, to some extent, variable in the short term; of course, variable in the long term. Every cost is variable in the long term. But we did what we did to really compensate for the challenging environment. Our group reported EBITDA is negative EUR 2.1 million, that's obviously a negative margin, compared to EUR 0.3 million in the last -- in the first half year 2019. But we like to look at what we call the adjusted EBITDA or the recurring EBITDA just for ourselves to compare apples to apples and get a more objective indicator also for our performance -- financial performance. So the adjustments, as always, that have been done are mostly the last program -- the stock option program and valuation methodology and to some smaller extent, acquisition-related expenses. The total adjustments are EUR 3.3 million, and they're really truly nonrecurring or, as I mentioned, resulting solely from valuation regulations. When we look at that, about 91% percent or EUR 3.1 million of those adjustments are related to the valuation of the stock option program for management. And a mere, let's call it, 8.4% or EUR 28,000 are acquisition or transaction process-related expenses. So the adjusted or recurring EBITDA will be EUR 1.2 million, which translates into an EBITDA margin of 4.5%. Comparing that to the first half year 2019, that was EUR 2.2 million and a higher margin, of course, of 7.1%. So yes, even though we reduced our operating expenses, we're able to reduce them by roughly EUR 650,000, we could not compensate, as I said earlier, the missing gross profit due to lower sales and yes, the lower gross margin in certain segments. Of course, we'll continue to look at cost optimization. Peter mentioned it earlier. We started to implement certain measures in the second quarter -- first and second quarter of this year. The effects will not immediately show. Some of them will show later. But we're looking at putting such things as hiring freeze. But still, we'll invest in our product portfolio going forward. I mean if we look at depreciation and amortization, total depreciation and amortization amounted to EUR 1.8 million -- EUR 1.9 million. They are of -- about EUR 1.1 million are IFRS 16 related, so pretty much a bit over half. And roughly EUR 0.5 million is really depreciation from R&D -- from activated R&D, and the rest is other. So our depreciation is a bit different than what you would expect in a company that has a lot of assets. And that eventually goes into an EBIT of -- negative EBIT adjusted or recurring of EUR 0.65 million versus EUR 0.58 million in the last year. Have a quick look at the operating expenses and running through the items. Sales and marketing expenses, at a first glance when we look at it, they seem to be only 3% lower than the previous year, comparing EUR 7.1 million for the first half year this year to EUR 7.3 million in the last year. But once again, marketing expenses include a decent portion of SAR expenses. So if we take those SARs valuation, those SARs expenses out of the marketing expenses and try to compare apples with apples, our total marketing expenses were something like 11% lower than the comparable expenses in the first half year 2019, which is, obviously, as Peter mentioned, traveling did not take place, [ certain events ] did not take place. Also here and there, we cut costs there. We also received certain subsidies to personnel expenses in Canada as well as The Netherlands, which also brings down those expenses. If you look at R&D expenses, the R&D cost expense in our P&L amounted to EUR 1.57 million versus EUR 1.69 million in the previous year's. On the first glance, it looks like that we have 7% less expenses compared to last year. However, if you look at the R&D-related expenses that we really had in the group, that would include capitalized expenses, expenses compensated by JDAs. So the real R&D cost was EUR 3.8 million -- EUR 3.9 million versus EUR 3.3 million in the previous year. That is an increase of 18%. We already touched on that. We are developing new products. We are looking at bringing a new product family to the markets. So we always look at what do we really spend in R&D. Most of these, as I mentioned, are project driven. It's a bit on the higher side in terms of percentage of revenues, what we would target. But then, of course, it has to do with the lower revenues in the first half year as well as higher expenses of bringing out of new products. If you look at the G&A expenses in the group, EUR 4.5 million in the P&L versus EUR 3.5 million in the last year. Once again, if we adjust them SARs, we are looking at adjusted G&A expense of EUR 2.7 million versus EUR 2.6 million. So it's not a big increase. Adjustment of SARs is EUR 1.1 million; acquisition-related expenses, EUR 280,000. It's really personnel expense mostly and a mix of different cost positions, no huge or major movements. Once again, we're also looking here at G&A costs and how to optimize them, but most effects will show a little bit later. Looking at the balance sheet, and I'll try to be short here. If you look at our fixed assets and intangible assets, we consider ourselves as an asset-light company. We mentioned that before in previous calls. So CapEx -- real CapEx intentions other than capitalized R&D expenses is not a big issue with us. Our intangible assets and gross PP&E were EUR 24.1 million compared to EUR 23.8 million at the end of the previous year's. That's an increase of 1.3%. Mostly, this is R&D, capitalized R&D expenses. Total CapEx were EUR 2.6 million. And the biggest portion, as mentioned before, R&D expenses of EUR 1.9 million or 74% of entire CapEx. If you look at cash and net debt, our cash position was EUR 14.85 million, financial debt was EUR 4.1 million, short term is EUR 3.6 million. This is mostly working capital lines with our Canadian and Dutch affiliate company. Long term is EUR 0.5 million, sitting with our Canadian affiliate. So that all adds up to a net cash position of EUR 10.7 million versus EUR 14.4 million in 2019. Equity ratio was 40 -- 54%. We had a bond option that was outstanding and was exercised in the first half year, which gave us EUR 750,000 in equity. And last but not least, looking at the cash flow. Our operating cash flow was positive again. Operating cash flow was EUR 1.1 million versus EUR 2.5 million in the previous year. Our net working capital increased by EUR 1.9 million. One of the reasons is, and also Peter mentioned it earlier, our inventory went up by EUR 760,000. We are stocking. We want to make sure that we have enough material components for manufacturing. Procurement processes have changed in times of COVID. So we see our inventory in terms of raw material going up and probably staying at this level for some time. We were able to reduce accounts receivable by EUR 1.3 million and also paid quite a bit of our accounts payable. So these are the major 3 impacts why net working capital increased. Our cash flow from investment activities were EUR 2.4 million. I mentioned before CapEx, mostly R&D. Cash flow from financing activities, EUR 2.8 million, repaying some debt in Canada. And so the total change in cash was EUR 6.1 million. Thank you.

Well, thank you very much, Daniel. So summarizing all of this and looking at, let's say, the remaining part of the year still. As mentioned before, we see a big impact of COVID-related measures here, especially in, I'd say, the Oil & Gas and the Industrial part of the business, continuing for the year with some easing here in Q4. But still, the visibility is limited. And at the same time, we have a level of uncertainty in terms of timing of decision-making so that we see a broad amplitude here of revenue-impacting and therefore, also profitability-impacting factors. And this together puts us in a position that we are not able to give an accurate forecast here for the year-end, which is basically confirming what we also published here or announced with the Q1 figures. We naturally understand that this is not a satisfactory situation, but I think it's just a realistic assessment of the overall situation. At the same time, and I think this is obvious out of, let's say, the changing overall environment here for fuel cells and hydrogen as well as, I think, the success in our civilian business continuing here with a really unprecedented momentum, we fully stick to our midterm targets. And at the same time, I truly believe that our growth potential here for this midterm target has significantly improved also just recently. And as we speak, we are working on a new 5-year plan to be implemented here in early autumn time, which is, I think, an important reaction here to this market environment. Overall, yes, we will take a step back here in our development in some of our submarkets in 2020 due to COVID. Fortunately, we can compensate this partially here with a superior development in our core business. But as a whole, it is a lower impact than we anticipated it 3 months ago. Containment measures are in place. And at the same time, again, we are taking a very active approach here. It is not sitting back and waiting until COVID goes away. It is really addressing areas of needed improvement, of acceleration from R&D to sales marketing, to, I'd say, supply chain improvement, as mentioned here by Daniel and myself and with all of this. And naturally, now there's, I'd call it, macro and political tailwind. Mentioning, again, those political statements just issued in June and July on German and EU level. We definitely feel that we have a very good chance to, I'd say, have an overproportional effect out of this, being one of the long-term players in this industry with a proven market access, with a proven product offering and I think, with an innovation capacity that helped us to survive now the last 20 years. And with this, I would like to conclude here. Thank you very much for the attention, and we would now like to open the floor for your questions and comments. Thank you.

[Operator Instructions]

I've got a question about electrolysis. Because, certainly, if you look at the EU hydrogen road map that came out earlier this summer, they were very, very focused on encouraging the development and implementation, deployment of large numbers of electrolysis across Europe. What are your plans for entering that segment of the market? Because if you look at existing incumbents, ITM is already putting the finishing touches on Gigafactory in Sheffield, and Plug entered the market earlier this year by purchasing Giner. So how would you approach that market?

Thank you very much for these questions. As mentioned before, it is a logical step for us to assess complementary technologies along the value chain here, including electrolysis. If you look at our product range, we are doing -- most of it is off-grid and backup power. In many instances, a situation where fuel supply is a key issue here or final efficiency and total cost attractiveness to our customer are therefore a logical step here. And as we did before, when entering the hydrogen fuel cell technology at a very classical stage, we look at, yes, existing and incumbent technology/product. Some of it might not be at a fully developed stage. Being in this industry now for almost 2 -- or now 2 decades, I think we have a good overview here of also companies that have maybe not survived the last couple of years of tight environment. So looking at existing technology, looking at -- and R&D effort. We have been demonstrating our capabilities to develop own technology pretty quickly, so second part, second avenue. And the third one is, well, collaboration. There are not so many fuel cell companies out there with 50,000 systems in the field and an established way to market. Not many electrolyzer companies have already market access, so this could be also a complementary collaborative and cooperation model. So not decided yet whether it's an M&A route, whether it's an R&D route or it's a cooperation route, all the 3 of them.

We will continue with another question from the chat. There's a question regarding your R&D expenses. And the question is if you can elaborate a little bit more why they are going down.

Yes. So first of all, if we look at our total R&D expenses, they are not going down. They're actually increasing. And our R&D spending -- total R&D spending in the first half year was EUR 3.9 million versus EUR 3.3 million in the previous year's. Shown on the P&L is only EUR 1.5 million or EUR 1.57 million versus EUR 1.6 million in the previous year's. And one of the reasons is that we are capitalizing R&D expenses, so the portion of R&D expenses that is not shown on the P&L is capitalized, in line with IFRS. And then in addition, we have certain JDAs, joint development agreements where we also do R&D. And our R&D cost is then, in this case, showed in the cost of goods sold, the COGS. So R&D -- total R&D spending is not going down. It has increased a bit, 18.3%, a bit more, yes. But what's shown in the P&L looks lower than what we are actually spending.

And in terms of impairment related question, for the time being, we do not see any need for impairment, not for our Oil & Gas operation or others.

We will go ahead with another question from the telephone. [Operator Instructions] It seems to be, at the moment, no further questions from the call. So I would like to thank you all for participating in the call. And of course, I want to hand over again for some final remarks to the Executive Board.

Well, yes, thanks, everybody. As always, with innovation, there are also challenges to innovation. I think we have here also a challenge on the technical level. So therefore, as usual, the -- we offer the bilateral communication here. So Daniel and myself are available for questions whenever you have a need for it. Everybody who could not get through here through the new system in place, don't hesitate to send us message. And I'm seeing some of the messages already coming in on my mobile phone here. So we will definitely address all your questions whenever you have some and get back to you. Asking for your understanding that apparently, we all need to get used again to this new mobile world of working. But continuous improvement, always appreciated. With this, I thank you all for your time. I thank you all for your interest and your trust in us. I think we are aware of the challenges of the situation, but I also think we are on a good path, and we'll head on with, I'd say, full conscious of -- consciousness of risks and opportunities. Thank you very much and looking forward to bilateral discussions afterwards. Thank you.