SFC Energy AG (F3C) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the Publication of the Annual Report 2020 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.

Thank you very much, [ Lisa ] for the introduction. Good morning, ladies and gentlemen. Welcome to the presentation of our audited consolidated figures for 2020 and to the publication of our annual report today. Together with my colleague, Daniel Saxena, we will present you here the numbers for 2020, give you a perspective into the year and also, I'd say, an actual assessment of the overall situation. We will start with our presentation as usual, and then we're very happy to answer your questions after opening the floor. Before we go into the numbers, I think, first and foremost, a couple of words on the impact of the pandemic situation as of today and our countermeasures in place. As you can imagine, I'd say health and safety here of our employees, of our customers, of our suppliers and their families, have been the utmost priority since the starting of this situation, starting off the impact of the COVID-19 pandemic here about a year ago. We have seen some cases so far. I think for God sake, they all have -- all related individuals have recovered properly. Happy about this. And we have, let's say, stringent hygienic measures in place. And distancing is overall practice, home office, mobile working is standard practice. But naturally, we have a big part of our teams who have to be present physically because you cannot build systems, you cannot build products, you cannot run laboratories without being present here for this entire year. And therefore, yes, we are adapting our measures here. Maybe not to some of the hectic or nervous moves we see now on the political state, but we are adapting here, I think, with the proper and necessary foresight. Overall, we have rapid testing in place now also for about 12 months. We do this voluntarily. We do this proactive and the -- we hope to be able to continue to operate as we do right now. Until today, knock on wood, there was not a single day where we had to shut down one of our operations. Seeing the recent 2, 3 months, yes, we have excellent loading in all our factories. We are running over time. We even had to go into some of the Saturdays here in the last couple of weeks to make sure we get product out the door. And we will make sure we do whatever is within, I'd say, our means to continue to protect the health and safety of all individuals and all parties related. That's a day-to-day practice, and we are checking the situation here within the management teams, national and internationally, on a daily basis. It is modus operandi so far and part of our day-to-day work. And now getting back ready to the numbers, but I -- we really feel it's important that you know how we address this. Well, yes, the first statement here, I think, yes, it's correct but still important that the audited consolidated financial statements confirm what we published as preliminary figures mid of February a couple of weeks ago. If we look into the overall business of last year metric, we were also impacted by the COVID-19 situation by countermeasures through the pandemic here from travel restrictions that did not only impede our sales activities, but also simple fact is that installations could not take place in different countries because of hard lockdown measures. We also saw the demand for our products impacted in some of the end markets, not all of them fortunately, but some of them. We also saw an unprecedented demand here for our civilian fuel cell products, methanol and hydrogen fuel cells. We see this overall driver of the business here continuing into the current year into the first month of 2021. I think we made good use of the time. We launched new product lines. Our fifth generation of our EFOY platform in [indiscernible] and some of the variations now until Q1 of 2021. We also launched our hybrid power package here, EFOY fuel cell plus EFOY lithium battery. We even got a nice award here, an Innovation Award in [indiscernible] for this package, yes. And we implemented the strategy that we also announced not too long ago, during 2020 by expanding our partner network here for regional expansion of the business. And I think a lot of groundwork, a lot of foundation solidified and laid out for a sustainable and good growth here in 2021 and also on the medium term. In terms of measures, I think also in connection with COVID, it is important to mention that, yes, we laid a strong emphasis on solidifying the supply chain on -- also pulling back some of the supply chain parts here to the vicinity naturally, with some investment on the working capital side, higher levels of stocking. This is a measure that is implemented also for 2021, where we have already released purchasing orders here for material until Q3 of this year, which we feel is important to make sure we have no disruption in the supply chain. Overall, yes, we see 2020 as a solid performance overall, but naturally, with different impacts of business performance, especially on revenue and on segment level. And let me go into this. EUR 53.2 million of revenue. Yes. Undoubtedly, this is a decline to the year 2019, 9.1% decline from EUR 58.5 million the year before. The biggest impact we saw in 2 segments. The one is the defense part of the business where I think we have to accept that the hard shutdown measures in some of our international markets like Israel and India simply led to significant delays in the procurement. We also naturally saw on the decision-making, including also our home market here in Germany, obviously delays because people were: A, not used to mobile working. Some parts of the public procurement agencies in different countries were not equipped for a mobile working situation. And therefore, delays that were up to 9-month delays in decision-making. The deviation significant in this segment, 60% down in terms of revenue here from almost EUR 8 million to roughly EUR 3 million, EUR 2.99 million -- disappointing from almost EUR 7.5 million, sorry, to EUR 3 million. Disappointing, no doubt, one positive out of this, we have not lost projects here and programs here. In most of those programs, we are still single source, and we see -- and Q4 numbers have shown this. We see a rebound here and activity here on national and international levels since Q4. Oil and gas also a challenging environment, especially in Q2 and until mid of Q3 where simply demand was down, the oil price being impacted by an oversupply situation, a correction there of OPEC+ measures and a rebound here also in demand in Q4 led really to a solid development since August time frame, better than we anticipated this in our scenario planning here for the end of last year. We are still down 19.6% in this segment, which is significant here to EUR 17.65 million of revenue. But seeing the continuous momentum, especially since August, September last year and also into this year now with an oil price solidly holding above $60 in the Western Canadian Select, which is important for us on a high level, even beyond $50 leads to better-than-anticipated demand here in this segment and a positive outlook, especially here for 2021. Industrial electronics, power electronics business, we -- yes, new -- very early in the process that there was a reaction by big customers here. Our biggest customer, Thermo Fisher, they simply reacted also quickly, some of the call-offs of Q2 and Q3 were reduced and postponed, but a strong rebound. Despite this, still, the segment was down roughly 21% year-on-year to EUR 13.58 million. But seeing the rebound since Q4 and also the momentum here in the early part of 2021 and the outlook, I think we are seeing not only, I'd say, growth here. I think what we detect is that our customers have accustomed and have adapted to the situation as we, ourselves, have done, too. So we live with the COVID impact, and we live with the measures in place, and we have adapted our business models to this. So also here, I think a strong outlook after a good rebound in Q4. And then, well, coming to, I'd say, the story of the segments, the Clean Energy and Mobility segment here very robust and resilient and resistant here to the COVID situation over the last, not only the 12 months of 2020, but also the first months here of 2021. We see a broad -- a regionally broad demand here, but also in terms of products, methanol and hydrogen fuel cells, we generated growth here of more than 60% last year. If we only take out the industrial customer base, where we see a growth that is beyond 71%, almost 72% year-on-year. And if we take out our hydrogen products, I think it's important to note this. This was the first year of having the product commercially out. So driving the business here from initial sales in 2019 to more than EUR 2 million in 2020 is a factor of 10x. So very dynamic that is, I'd say, something that we see still ongoing in 2021, and we see a continuation here of the rebound in Q4 overall. And Clean Energy and Mobility being simply as dynamic as we have seen it throughout the entire year of 2020. We did implement actually some learnings out of 2020. At the end of this year, we talked about already the strengthening of the supply chain, but we also did some changes in our business segmentation, whereas we have been reporting until now the end of the year 2020 in 4 segments based on end market segments, we have prepared for a change here. And as of the year 2021, we are shifting this to a technology and product-based segmentation where we expect higher transparency by segmenting the business into the fuel cell and strict fuel cell related business and on the one hand and the power conversion, the power electronics business on the other hand. We reduced the number of segments here from 4 segments to 2 segments, naming as Clean Energy and Clean Power management, whereas all fuel cell-related business goes into the clean Energy segment. All power electronics and related systems business goes into Clean Power management. We also expect, I would say, an increase of efficiency besides, let's say, transparency, but we also think we can avoid some of the, I would say, granularity that made it sometimes a little difficult to make a proper assessment on the overall performance of the individual businesses. With this, I would like to hand over to Daniel to lead you through the earnings development of 2020.

Thank you, Peter. So let me guide you through our earnings and the cost positions that we had in 2020 after Peter already gave you detailed information on the revenue development. Maybe let me quickly touch one more time on the regional contribution or distribution of our revenues. It hasn't changed significantly. Europe and Germany. Europe, excluding Germany and North America pretty much on the same level, contributing each 36%. So these remain our 2 largest retail markets. Notable is Asia. Asia has been increasing to contribute now 12% to our revenue. That's a development that we've seen over the year, and that's a really positive development as we see it. If we look at our gross margin the paradigm that we mentioned all the time remains where we say we want to take advantage of the ample opportunities that the market offers us. But at the same time, we really want to safeguard our margin level or even margin expansion opportunities. And then if you look at the entire group, we were able to keep our gross margins nearly stable. We're looking at 33.7% in 2020 versus 34.4% in 2019. In spite of the difficult market environment that we had and in spite of the shift in revenue contribution from the segments. We had, as Peter already mentioned, much lower revenue contribution in the segment, Defense & Security, which tends to have very strong gross margins that revenues accounted only for 5.6% in 2020 versus 30% in 2019. But on the other side, as Peter already mentioned, we were able to push our Clean Energy, Mobility segment sales up, which also have a very healthy margin. So Clean Energy and Mobility revenues were really able to compensate for the lower Defense and Security revenues, which then ended up in the nearly stable margin. If I quickly want to touch base on the margin in each segment, Clean Energy, Mobility, we remained stable with the margins, 42.8% versus 43.2% in the last year. In the Oil and Gas segment, we had slightly lower margin that results of slightly lower margin across all product families, but also, as we mentioned in our previous quarterly calls, this year, for the first time, we have allocated the non-oil and gas fuel cell revenue in North America in SFC Canada to the segment, Clean Energy and Mobility. And that tends also to be higher margin revenue. So that's another explanation why the margin in Oil and Gas has decreased a bit. If we look in our Industry segment, Peter already mentioned that also. Overall, we have pretty defensive gross margins in that segment, mainly because we do have frameworks, maybe we do have long-term design in with our customers. So there's a margin even improved a bit. The gross margin looking at 32% in 2020 versus 30.4% in 2019. And then last but not least, it Defense and Security. Much lower margin, unfortunately, 33.4% versus 44.7%. And that's really because of the product mix that we had and also the lower activity and sales activity that we were able to develop given the pandemic. Looking at our EBITDA and EBITDA adjusted, which really are the key financial performance indicator for us in addition to revenue growth. Our reported EBITDA was negative with EUR 1 million compared to EUR 2 million positive in the last year. But as we always mentioned on our quarterly calls, what we're looking is the adjusted EBITDA. Our adjusted EBITDA gives us the possibility to really compare apples with apples. We remain with 3 adjustments. The first adjustment that we do to our EBITDA is a stock option under the expense for the stock option program for the management, which is noncash for the time being. The second position is really acquisition-related expenses. And the third one in this year are restructuring related expenses. To quickly dig into that, the [ DAR ] expense that we had stock option expense that we had in this year was EUR 3.5 million versus EUR 1.4 million in the previous year. The higher expense, good for all stakeholders, is also due to the much increased share price. Of course, the expense or the stock option expense is linked to share price development. Acquisition-related expenses, about EUR 300,000, so a smaller position. And then we have other smaller position about EUR 200,000 as restructuring expense in context with the production relocation from the Netherlands to Romania. So that's just a small portion. So if we adjust our group EBITDA and then for those 3 effects then we have an adjusted EBITDA of EUR 2.9 million compared to EUR 3.6 million in the previous year. That translates into an adjusted EBITDA margin of 5.5% compared to 6.2% in the previous year, a bit lower. But I think still, given the overall circumstances and market environment, we did very well by really keeping our operating costs in line. Depreciation and amortization totaled 3.5%. Please note that out of this 3.5%, 2.1% is really IFRS 16 related and roughly EUR 700,000 is on advertising our capitalized R&D. So that is in line with our asset-light overall balance sheet. Operating expenses, I already mentioned, we were able to really keep them in line and also adjust to the environment and the challenges we had. A little surprising, our total marketing expenses are lower than last year. We're looking at EUR 12.1 million versus EUR 12.4 million in the previous years. In the sales and marketing expenses, we also have [ SARs ] stock option expenses in the personal expenses in that line item. So if we'll take those [ SAR ] expenses, noncash expenses out and just look at adjusted marketing expenses were even 12.6% lower than in the previous year. It has to do, of course, with lower travel activity, trade for expenses, but were still very active in sales and marketing. R&D expenses, total cost of R&D in the last year were about EUR 6.7 million. That splits up in basic 3 positions. It's EUR 2.8 million, which we expensed in the P&L. So the position, the R&D expense that you find in our P&L is EUR 2.8 million. EUR 3.1 million is R&D expense, which we capitalized on our balance sheet. And then it's about EUR 800,000 cost that we had with JDA, joint development agreements, which; however, we get our real expense through customers. So total cost is EUR 6.7 million, that's pretty much on the same level as in the previous year. R&D in relation to revenues for 2020 is 13%, a bit higher than in the previous years. It has to do, as Peter mentioned, we are rolling out new product generations. We are developing our hydrogen -- further developing our hydrogen platform. And also, we are developing our power platforms. In the long term, nothing has changed. We're looking at R&D as percentage of revenue, around 6%, 7% in the long-term. In the near term, it's probably going to be a bit higher. G&A expenses really not a big change. It looks unadjusted for our [ SAR ] expenses that also flow in the G&A expenses a 20% higher. However, once again, if we take the stock option expenses out of G&A then we are 2% higher than in the last year. G&A expense are not as variable, obviously, as other expense items. Quickly, just giving you a brief overview and run you through our balance sheet. Fixed assets, looking at intangible, EUR 60 million, out of which about EUR 7.8 million is really goodwill and EUR 7.8 million is capitalized R&D. Our PP&E is EUR 10 million. If you look at it, you'll see it's the right of use, IFRS 16 is EUR 7.7 million. We are still asset light. We don't have and we don't need a lot of equipment and machinery, even though we keep investing in those items. Total CapEx, if you look at this, was EUR 7.3 million, and the biggest portion is capitalized R&D, as I mentioned before, with EUR 3.1 million. Cash and net debt, our cash position has increased. We have a healthy cash position, basically due to the capital increase we did last year. We are looking at cash freely available of about EUR 31.5 million. Our financial debt, on the other hand, has reduced from EUR 6.5 million to EUR 4.5 million. Our financial debt is primarily working capital lines that we have for SFC Canada as well as SFC Netherlands. And then there's a small portion of a term loan, EUR 210,000 remaining that is being reduced over the year. So that all resulted in a cash position of about EUR 27 million. Our equity ratio has increased also due to the capital increases that we made in the last year. So we're looking at 64% versus 55% in 2019. Quickly guiding you to the cash flow. Operating cash flow before change in net working capital amounted to EUR 3.5 million, a bit lower than in 2019, where we looked at EUR 3.9 million. Our net working capital has increased by EUR 3.9 million. We also mentioned that in the previous quarter calls, we are keeping a health level of inventory in the current pandemic situation. We want to make sure that we don't have any supply chain interruptions. As Peter mentioned, we are working and producing full steam. So our inventory level, raw materials tend to be higher than in the previous year. And we'll probably keep it at the level as long as the pandemic is around. On a positive note, our accounts receivable have decreased by roughly EUR 700,000, but also our account payables have decreased by EUR 3.1 million. So with taxes and this results in a negative cash flow from operating activities of EUR 600,000. Cash flow from investing activities, EUR 4.3 million, as I mentioned, EUR 3.1 million is capitalized R&D and financing activities of EUR 15.4 million, so the total change in cash is EUR 10.5 million. Thank you. With that having said, I would turn it back to Peter.

Well, thanks very much, Daniel. So where do we stand in terms of 2021 expectations? And what is the midterm expectation? Summary here, really optimistic for 2021. We had a dynamic start, and we are experiencing here a dynamic demand in the first 3 months talking about this on the 25th of March. And midterm, well, we are determined to deliver, I think, it was this week, already a major step forward here announcing the first and major cornerstone that is set already for our expansion in Asia, which is expected to contribute to a massive part to the midterm growth here to the scenario that we published a couple of weeks ago. But let me start with the expectations now for 2021 optimism, justified by a dynamic environment. And we are assuming that the environment stays as we have been experiencing right now until last week of March. What we are not assuming here is a massive deterioration here of the COVID environment and, let's say, the resetting of measures like we experienced in parts of our markets last year with hard lockdowns and shutdowns. By seeing this, I think we have adapted to the situation. We are expecting 15% to 30% growth. The bandwidth, as you all know, it's mostly driven simply by the lumpiness of some of our defense business. Where do we expect the growth to come from, particularly driven here by our Clean Energy segment? The Clean Energy segment is primarily formed by the Clean Energy and Mobility segment, as we reported it until now the defense segment and price of the oil and gas segment. But at the same time, we are also expecting maybe not that aggressive growth, but significant growth here from our Clean Power management, the power electronics business. Growth contribution across products. Well, the new EFOY is being accepted exceptionally well, I would say, first couple of weeks, especially of our end consumer business is unprecedented outstanding. And well, the hydrogen business, what we see here is that the demand here for these kinds of products is rapidly growing. We see RFIs, RFQs coming in, especially here for the telecom and telecom backup applications. We are talking here about multimillion RFQs here originally, not only limited to Germany. We are not only talking about, let's say, the continuation of the well working German government program. We are in a supply situation right now. We are talking here also about telecom operators and tower companies showing up as potential customers. So -- and regionally, not only in Europe but also in North America. So EUR 61 million to EUR 70 million is the expectation, we are confirming here again for 2021. Naturally, with a positive impact on profitability, the range of EBITDA underlying between EUR 3.5 million and EUR 3.6 million also unchanged in terms of expectations as well as the underlying EBIT, where the range is between minus EUR 900,000 and EUR 1.6 million here for 2021. Going beyond this year, it is clear for us that we can reaffirm our midterm plan. We published this a couple of weeks ago, showing the different elements, mostly organic elements to this in terms of regional rollout of the business, talking about collaborations here in Asia as a first step. The level of business that we are targeting here in 2025 in the framework of those 5 years is ranging up to EUR 350 million to EUR 400 million with an associated increase of the EBITDA to at least on an underlying basis, 15% of EBITDA. The demand for our hydrogen and methanol products is driven by a macro environment supported naturally by government programs now coming really into place and starting to be executed in an unprecedented format here for this transition to a hydrogen-based energy supply. If we look at the segment that is important for SFC, we are talking here about the stationary energy market. We are talking here about the replacement of an incumbent technology. We are replacing, as we speak, diesel genset, the theme we are operating under, we call it goodbye diesel and not for cars, but for the stationary power market, which is a multibillion market today out there on a worldwide level. Why do we expect benefit from this? And why do we expect benefit from it over-proportionally and early because we are one of the first ones having industrial-grade and mature products out in the market. We have an established installed base of 50,000-plus products in the field and 100 million operating hours recorded. We have an advantage in timing, and we are determined to make use of this advantage. And I think the partnership here with Toyota Tsusho expanded now into big parts of Asia, Southeast Asia with Vietnam, Thailand and Philippines now is the first step, but also the biggest market for sustainable, clean energy, China is a significant step for us. And we are -- as you can see right now, I'm excited. I'm happy. We implemented this in a pretty short period of time with our Japanese partners. We have learned and learned to work together in the last 5 years in the home market in Japan. We are now capitalizing and start to capitalize on a sales and service network, a logistics network throughout the entire continent there and SFC's part of it is contribute the right product, contribute the right next level technology. So with this, yes, both parties see the level of EUR 100 million revenue as the target level here and the target hurdle for 2025. And therefore, naturally, this is a big part to our midterm plan. So to speak, it's the first pillar erected here for this plan here for the next 5 years. Next, to come. And this one now is in implementation. We have already projects in Vietnam. We have initial project work already in the other countries. And we are working on a segmentation in China with our existing partner there that we do not discontinue to support. Therefore, in China, we now have 2 sales arms into the country. Overall, summarizing, yes, 2021, 25th of March, fully on track and under full utilization of our capacity. Biggest concern right now is that we experienced shutdowns of manufacturing. We still have a couple of days in this quarter, and we really want to use every single day, including this week's set today to make sure we can produce what is ordered and needs to be shipped. And for the midterm, yes, the first step is taken. We now have to go and implement the first one here with our partners in Toyota. And naturally, we have to take the next steps. All this leads to the conclusion here that we are, yes, on a good path here to contribute significantly here on the society's journey here to net zero. We don't call it a race to net zero, but it is a defined path. With this, I'm handing back to Lisa and looking forward to get your questions. Thank you.

[Operator Instructions] Our first question comes from Karsten Von Blumenthal from First Berlin Equity Research. I think we lost this participant. The next question is from Anne Margret Crow from Edison Group.

I've got 2. The first is on gross margins, and you mentioned being taking care to keep the gross margins up. I'm wondering if you were seeing any margin pressure on fuel cells? And then the second question was regarding expansion in China. And whether there was any expectation that you would start doing some part of your production within China in order to be eligible for some of the larger contracts because there seems to be an expectation from the Chinese government that if you are going to get large contracts, you do have to have some production capability in the region?

Let me answer the gross margin question. We don't see any gross margin pressure beyond the -- let me put it this way, normal pressure you get from customers in all industries, in all segments, in all products. So we -- what we see is that we can maintain our gross margins. We are working on expanding our gross margin because our product, once again, we're not selling necessarily simply based on pricing but really on the value or on the unique as use piece of our products. So short answer to your questions, no, we don't see any significant gross margin. But of course, we do have to negotiate with our customers.

And then, it's Peter. Talking about, I'd say, production and local content, I think we see those expectations in various parts of the world right now and part of our joint venture planning and discussion here with Toyota naturally is comprising the entire value chain where it is not only China, but it is also, I'd say, potentially southeast Asia that will see some, I'd say, local contribution here in terms of value chain assembly first and then, I would say, full stage production. And well, the most imminent one and the one where we see most stringent requirements, maybe also because our business is already more mature in this market is India where Mr. Modi phrases this in a very friendly way as an invitation, Make in India. But at the end of the day, the requirement is very clear. We do already significant government programs there, but also civilian programs. We just published one of the Smart City Project here, replacing again, diesel genset here for smart traffic solutions for emission control. Yes, we will have to cope with this and planning is ongoing and expect to implement, I'd say, first step definitely in 2021.

The next question comes from Karsten Von Blumenthal, First Berlin Equity Research.

Can you now hear me?

Absolutely.

Perfect. Happy to hear you. I don't know why it didn't work first time. So my feeling is the outlook for this year is pretty good despite the pandemic. You mentioned that Q1 '21 has a high momentum. Have you got a feeling, if you compare it to Q1 2020, which was well, more or less unaffected, but also -- perhaps also already affected by the pandemic. Do you think you could beat this quarter on a year-on-year basis or is there still some upside you have to reach?

Well, this is Peter, Karsten. Well, 2020, we have to say is, for us, not affected at all. So this was really pre-corona levels. Without releasing too much at this point in time, I think we feel well on track to get to pre-corona levels here in Q1 2021.

You mentioned the new generation, the fifth generation of the EFOY product. Perhaps this is a good opportunity to explain us the main technical advances in your products so that we can get a feeling what's now better than in the generation before?

Yes. Certainly, at the end, the overall target, as it has been for the previous generations are, let's say, performance, higher power, more compact form factor. And at the same time, longer run times, which leads into, let's say, higher efficiency and cost reduction in terms of operating costs for our customers. So we have increased the run time here by 1/3, which is really significant, and we keep it in terms of overall pricing, which leads into a real efficiency gain here for our customers. So this is the real tangible performance factors. And the other one is really connectivity, remote accessibility. We have just issued also the EFOY cloud solution, here at the end, giving access to or -- for our customers to their products to run a fleet of systems here to optimize the operation. And from our side here, we are preparing, as we speak, also in addition to our business model by, I'd say, selling actually part of this cloud solution to our customers on a monthly or yearly basis. So we did this acquisition some time ago of our German partner, Udomi here including his remote accessibility platform. And now we have brought this on to, let's say, the latest state of the art. And it is also simply turning it into or part of the business model into a continuous cash flow-based model.

Excellent. That is very helpful. Another question regarding competition, my feeling is that you are very well positioned as probably the most advanced industrial producer of fuel cells. On the other hand, we see a very strong growth at the moment, meaning that a lot of other players may try to get into the business or other players keeping -- further developing their products, especially the question is in Asia, in China, do you see stronger competition? Do you see that your IP is protected enough, especially in the Asian markets now in your cooperation with Toyota. So how do you see the development in coming years there?

Yes. I think it's an obvious development, and you're hitting all those points there. There is significant resources now and investment flowing into the sector, which has not been the case as we or as all of those here on the line who have been with us for a couple of years have experienced with us. I feel and we feel, as a company, this is a good sign because our approach to competition has not changed. Being the only one supplying a technology or offering a technology, on the practical level, gives you the initial hurdle with your customer, where the customer asks you why -- are you the only one? What is the issue here? What is the problem? So you need at least a year to convince them that although you're the first one or still the only one this is working. This will change over time, fortunately, but therefore, also the adoption is simply driven by this and entry or acceptance hurdles are eliminated. So we expect here -- I always use the same picture. If you are the only small ice breaker here, you can create a small canal. If a fleet of vessels and ice breakers comes in, you're creating a bigger wave and a broader way. This, I think, is what we expect. Well, our task now is to stay at the forefront of this next-generation products exactly targeting at this coming out, let's say, with new features being more efficient, also being cost effective for our customers. Well, in IP, yes, we see naturally competitive product concepts coming up. We still -- and Daniel has also said this and quantified this last year, we've spend significant money here in terms of R&D for those next-generation products that some of them released. But for example, next-generation of hydrogen product is in the works, Jupiter 2.0 is in the works, where the power electronics is developed here in the Netherlands, where the fuel cell, we do it here. Expanding our IP portfolio, as we speak, what helps is definitely also the licensing agreement in place with [indiscernible] but it's an area of constant alertness and will be constant investment also from our side. But we feel competitive situations also drive market growth. And therefore, this is definitely better than we experienced, let's say, a couple of years back. It's now in our hands to stay competitive, and we have to prove this.

Maybe adding to what Peter just said in terms of supply chain and also gross margin cost of material, of course, as the energy grows, the supply chain is developing, the materials are developing faster, if you got more players in the market. And as we all know, it tends to be cheaper to buy a drug store than buying in a pharmacy. So there could be also some positive effects, and we expect those positive effects in terms of bill of material and supply chain and material availability.

Excellent. One last question. We probably see now the worst part of the pandemic in coming weeks and months until the vaccination campaign will help. My feeling is that regarding supply, you are safe. Regarding production, you do everything you can do. So the remaining part is, do you fear any backlash from demand or is, as we have seen it last year, the sector in a way beyond the pandemic because everyone looks into the future, knowing how urgent it is to buy these products to establish it? So what is your feeling regarding the current situation of the pandemic for Q2?

Well, as mentioned in terms of assessment and assumptions for our market expectation guidance for 2021. If this remains as it is, and we see maybe some more severe measures in place, I think we are well covered. If we see actually full shutdowns in different countries coming up, well, this is not part of our assumption set here for the guidance. But overall, I think if we take especially the civilian part of the business, we -- our customers and we, ourselves, I think we have adapted to the situation. A worst-case scenario cannot be, let's say, now avoided in terms of -- well, if you have cases here in some of the production facilities, you need to shut down, you need to adapt. As said before, we really do whatever we can. We have constant adoption of our measures, voluntary rapid testing in a broad sense and not only since a couple of weeks, but since 12 months here. So I think we do what we can. And if the environment is, as we experience it right now until the end of March this year, we are well prepared and, yes, growth is expected in the range that we published.

Our next question comes from Lotte Timmermans, ODDO BHF.

Two questions. Actually, few subjects, multiple questions for one subject. Looking at your gross margin outlook for 2021, you say you assume a slight recovery, does that mean you don't see any recovery in the oil and gas and defense gross margin for 2021? Let's take that one first. And there seems to be some kind of echo on the line or is that me?

Maybe it's you, Lotte. But I think technically, we need to simply accept this at this point in time. But let's try -- if you can -- can you understand us properly?

Yes, I can understand you. But if I am, myself talking as well?

Okay. No, we have a clear line here. So we can understand you very well. And maybe on the gross margin, Daniel, do you want to take the lead here?

Yes. Yes. We don't say that we don't see a recovery in gross margin. Frankly speaking, I think 2 trends that we will see and -- or 2 things that we work towards is first of all, as I mentioned, we're always looking at gross margin expansion as a first thing. And there may be, as I also mentioned, certain effects coming from the market that will help us on that. Second thing is we're looking also in the oil and gas segment at more long-term or average gross margins. What, of course, this year is not with the whole pandemic environment also in the oil and gas terminals in that segment and that this is the margin that we will see for this year and the next year. So once again, answering your questions, we don't see the margins at the level as they are in 2020. We'll see them going or increasing, going up. And also, it's probably good to look more at the average margins that we had in the last 2 years. And then as I mentioned, we -- our target is to increase our gross margin clearly, and that's what we're working on.

So -- sorry, go ahead.

On Defense & Security, this is very, very natural we expect product business to recover, which we didn't have in 2020, and therefore, you will see an impact on the gross margin automatically.

Yes. But then I would expect that the gross margin would increase more than slightly. So that's why I was asking the question. I would expect that the defense product margin will be higher, as you know, in Germany, et cetera. And therefore, the German, definitely defense margin to increase in 2021, and therefore, more than slight improvement in gross margin in 2021?

Maybe we remain cautious here on the outlook, but let us deliver Q1 and then reassess it.

Then a question on your agreements. I think that's a very good one, of course. I had some more questions on the details of the contract, if you can share anything? Are there any volumes or prices agreed in this or price increases? Does this have a special term? How many years? And looking at the press release, you specifically mentioned that you have an exclusive agreement for the South Asian areas, but not for China. Is that correct? What's the difference in the contract?

Well, without being able to release all the details as we are on the strict confidentiality here for either side, but it is, let's say, what we published is what reflects the approach here. In those markets where we have not been active with an established sales channel so far, Southeast Asia, we are happy to grant this exclusivity. We have learned here in Japan that Toyota is simply high-performing and reliable partner for a market where you start business development and you have to invest. In China, we have been building a proper and well-performing partnership here over the last 3 years with our partner, Beijing Green Century, especially in the wind market, big inroads into the market for fuel cells. And we think there is enough space in this huge market to do a proper segmentation. And therefore, this is not exclusive in China. In terms of agreement commercially, we have basically copied what we have in place for Japan for the last 5 years, which, at the end, helps us to sell our product on comparable gross margins here to Japan compared to all the other parts of the world. So it's not, let's say, a massive price reduction that we need to swallow here.

That helps a lot. Then one question on your medium-term target. I saw you mentioned the Roland Berger consultancy report in your guidance statements. Looking at the medium term, especially I was curious what kind of assumptions you take on growth? And what kind of -- and this is the main question, which value chain parts are you looking at -- it's a hydrogen part, if you assume growth for hydrogen one? Is it purity of stationary or do you also take other value chain parts into account?

Well, at the end, yes, the Roland Berger's study quoted is one of the data points out there. As we speak, we see more data coming up, which naturally helps. It also supporting actually some of those government programs, not only in Germany, but also on EU level now. We also saw now the change in overall direction in the U.S., which is not even, let's say, factored in from our side too much. But at the end, the core part has not changed. What we are saying is that, yes, in order to reach net zero and climate targets, we need renewable energy. We see that hydrogen is being selected as the element of choice for transportation and storage, but then the fuel cell converts the hydrogen back -- converts the gas back into a flow of electrons at the point of use with the individual customer group being an individual, being an industrial, being infrastructure and critical systems. And our core market is the stationary power market. We are not planning to now be and jump on the bandwagon here for mobility, trains, cars, trucks, no. Stationary is big enough. This is a multibillion market still growing for diesel engines at this point in time. And we are best positioned to capture market there, and this is where we anticipate the growth. And this is also full alignment here for our Asian strategy, for example, here with our partners in Asia.

This concludes our Q&A session. I will hand back to speakers.

Well, with this, we thank you very much. We've taken it a little longer than the hour anticipated. Thanks for your time you take to listen to us. Thanks for the questions. Well, stay with us. If you have additional topics you want to address, do not hesitate to reach out to [ Susan ], to Daniel or myself. As a complementary information, the new investor presentation is online as of today for those of you who want to have a look at it. Thank you. Looking forward to a very dynamic 2021 and stay healthy. Thank you.

Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.