SFC Energy AG (F3C) Earnings Call Transcript & Summary

Good morning and good afternoon, ladies and gentlemen. Thank you very much for joining us for the first time this year and for the first time as an ASX-listed company. Together with Daniel, we are presenting the preliminary numbers, unaudited numbers for the previous year, but naturally also give you an outlook for the year, we are already in there. And naturally, we will be happy to answer your questions. So this naturally a good fact, and we are happy to look back at a record year in terms of growth and also increasing earnings. In some areas, I think we also feel proud about some of the things that finally we were able to achieve with our teams here on a worldwide level. But at the same time, I think we have to be very realistic. And I think we all know, nothing is as old as last year's numbers, and we are in the seventh week of the year and as of January 2, we have been out on the road here in North America, in India, in Asia, driving again our projects seeing our customers and driving the business here for continued growth in 2023. And that's why today's presentation also is covering actually the outlook for this year, which, again, I think is of prime interest on your side. Getting back to the first part. Yes, preliminary group sales, we are, I'd say, exceeding the upper end of the last forecast as well as also the consensus here from the analyst side with 32.5% growth compared to last year's numbers, reaching EUR 85.2 million of revenue. This also results in an improved absolute EBITDA, where we see the EBITDA margin naturally also showing phases of all the investment and spending we have to do for our growth and for the R&D. Daniel will go into this in more details, but also we show an improved EBIT performance. Looking ahead, I think the order book is 1 of the key elements that is, I'd say, the base of a very justified optimism also for this year, EUR 74 million order book at the end of the year compared to 30.5 million. So that's almost a ratio of 2.5x simply showing the demand. Now going into, I'd say, the market into the overall mechanics and macro and micro development here on our customers' front. I think we have to see 2 elements, growth in clean energy part of the business as well as the key power part of the business, more specifically continued demand and strong traction on fuel sales, the methanol part in a full scaling, the hydrogen pipe still in the business development era, but also a recovery on the power electronics side in some of our, let's say, end customers' businesses after COVID-impacted delays of business and severe supply chain challenges still being a factor to be recognized in this part of the business. So the overall environment, especially for the fuel cell part of the business, the clean energy part of the business, yes, even saw a further acceleration by the undoubtedly said geopolitical developments. We experienced an immediate demand here from end customers, from industrial customers, but also from government bodies for replacement of fossil-based conventional power generation. And at the same time, the underlying long-term macro trend here using our products to improve customer CO2 footprint by the good handprint, our product being reducing emissions is ongoing. So therefore, we have a good combination of factors here short term and long term. Looking into the regional development. Yes, we have played a lot of emphasis in expansion -- in regional expansion in recent years and especially North America with the U.S. being the leading economy in the world and then Asia as the part of the world where most of the people on earth are living and India being now the country with the largest population in the world have been areas of key focus for business development. And I think we are seeing in '22, some of the fruits of the business development and market introductory work here over the last 5, 6, 7 years. North America, sharp increase of business here by 56.9%, so almost 57%. Naturally, the commodity price here also in our oil and gas market helps, but also diversification is fully on its way, seeing, I'd say, the -- especially the fuel cell business growing outside this vertical in a significant way. In Asia, we have the relative increase, even higher 66%. So -- but we also have to see, naturally, we are coming from a lower absolute level here, still the right trend, the right development. And just coming back from, again, a trip in Canada and the U.S., I think our collaboration with the largest U.S. customer rate now like new technology, fast ramping customer in the civilian security business is an example for this. We have, let's say, within a year, we have installed 1,000 systems in the field on their surveillance trailers. Their customer base is mostly retail from names like Walmart, Safeway, Lowe's are our prime customers there. And we entered into another contract end of last year for more than 2,300 units as we are in a consistent scaling phase. Why are they buying the product at the end? Yes, we are ensuring a dependable and reliable energy source here 24/7 throughout the year off grid. At the same time, we are extending run times by our product improvement and technological development. So we are getting uptime up for their end customers, and so profitability on their end is going up. Well, the last point is their customers expect ESG conformity, they expect products that are replacing generators. As a last thought here, yes, if you look at their -- fully into their business rollout, at the moment, we have about 30%, 33% installation rate on their products for EFOYs. Looking at the demand, I think getting up to 50% is a pretty realistic number here. So although fast growing, still potential to grow. And naturally, there are also competitors out there in this field, and we have started naturally to serve the market in a broader way. Looking into the segments before I hand over to Daniel, I mentioned this at the beginning. Yes, prime driver of the growth with a 35.8% increase in revenues clean energy is the fuel cell-based part of the business. And there, again, it's the industrial applications that are driving the scaling here from technology like this grade here with LiveView in the surveillance and the civilian security business, data transfer, data transmission, telecom, as well as neo digitization. Again, a consistent replacement of conventional generation here is -- a significant element means replacement of generators, but at the same time also just hybridization with battery and solar combinations to make them a reliable power storage. On the end consumer market side here in this segment, we saw a horizontal development with a slight decrease in revenues, especially in the second half of the year. We could also see some consumer hesitation with minus 2% in revenues. We are slightly behind. Not particularly happy with it, but I think explainable here seeing the economic environment changing our end consumer spending. And we also saw a deviation here, a negative deviation in our government public security business with, let's say, the project character of the business leading to a decrease here year-on-year of about 35% in this segment. Still here, we are naturally serving multiple markets here. We see still a delayed execution on projects in the home market but we expect a significant pickup throughout Europe and also especially also in India this year. So overall, the impact -- the growth impact is driven here by, let's say, the more than 80% of the business being in the industrial applications according to also the strategy. Looking into clean power management to sum this up, there are 26% growth up to EUR 27.6 million of revenue, a pickup in demand with existing but also some nice, I'd say, new project wins we had in the semiconductor-related part of the business and naturally also the development in oil and gas contributed in a positive way. Still there we could have achieved more but still delays in the supply chain left us with a push out in projects of about 10% here overall revenue. Looking into the upcoming or into the current year and looking ahead, we expect consistent and significant growth also in the power electronics part of the business simply by having an order backlog that is I'd say, higher than ever before and almost, I'd say, approximately half of what we have in the total backlog here as the group. Supply chain still a challenge here. We are consistently and almost on a daily basis still working on improvements here with our suppliers. We are still having elevated stock levels and expect an improvement of the overall situation in the second half of the year. So it's not a matter of orders, it's a matter of shipments here in terms of performance in this segment. And with this, I would like to hand over to Daniel to talk about the sales and earning side of the business.

Good morning, ladies and gentlemen. Thank you for joining our call. As Peter already mentioned, the last year was overall a successful year where we executed the strategy that we laid in the previous years and really were able to achieve high value growth. Our matures in the revenues without being only to be too repetitive of EUR 5.3 million which is the 33% increase year-on-year, following the 21% we had in the previous years. We see the growth trend continuing. We also saw -- and that's not much of a surprise that the fourth quarter was a little bit weaker than the previous quarters, simply a function the first quarter comes a little bit shorter with December coming. But then also, and Peter already mentioned it, and we also indicated that in our third quarter call, supply chain issues, even though they have decreased their solid systems and 1 or 2 components missing means that eventually, you'll be not able to ship a certain more specific last quarter. But overall, a very good year with a very good growth. If you look at our profit margins and once again, EBITDA adjusted, don't more repeat the adjustments, but the adjustment that we're making is mostly on transaction-based expenses as well as the provision for our stock option program. So if you're looking at the adjusted EBITDA, we have EUR 8.2 million versus EUR 6.2 million in the previous year, which shows that EBITDA adjusted increased analog with the sales. And that as a matter of fact, as part of a challenging environment. We implemented swiftly, counter method, as you know, already in the first quarter and then subsequently in the second quarter, that seems to really have worked well for us. Also, we profited from a favorable product mix. Peter already mentioned also that the revenues in the higher-margin segment, clean energy, increased. So all these different effects combined really led to margin stability on level of EBITDA adjusted, looking at 9.6% versus 9.7% in the previous years. Same accounts for the EBITDA adjustment, EBITDA adjusted amounted to EUR 3.2 million versus EUR 1.9 million in the previous years. That also shows a marginal improvement, looking at 3.7% versus 3%. During the math, you'll see that depreciation and amortization increased a little bit in the last year, but that's the effect from the investment in growth that we made mostly tangible asset, but also to some extent, the depreciation of our R&D. And you will see those details once we publish the full numbers. Order backlog, very favorable order situation. The order backlog from the beginning of the year increased by 2.5x. So very, very solid. You saw the announcement that we made with various customers. Peter mentioned some of them earlier. So we're really getting the orders in. We see the trend of growth being still fully intact, which eventually makes us also decently optimistic for the future. And at this very brief summary of the numbers, I will throw it back to Peter.

Well, thanks very much. And yes, what do we expect now for 2023? What is our outlook, our forecast? I think as said at the beginning, we look at 2023, with, I think, a justified in fact-based optimism. We have a solid order book. We have a dynamic demand out there, as I think in execution, there are 2 challenges that we really have to work on and this on a daily basis is, yes, finding additional people. We have hired more than 100 people during the last fiscal year. We are still in, let's say, continuous hiring mode here for another 60 to 70 headcount minimum for this year. And the other part is naturally handing the supply chain situation, but also expecting a slight improvement here in the detensioning of the situation. And with this, yes, we expect 2023 again to show strong growth. The range we are seeing again organically between 20% and 30%. So a revenue spend between EUR 103 million and EUR 111 million seems, I think, a realistic range still with, let's say, the size of some projects, we feel that the bandwidth needs to be that broad. Looking on to the earnings side, and that should be naturally more than Daniel's part of giving you the more cautious part of the outlook. But I think we are looking at the year with the needed cautiousness, and we know that we have to further invest into the growth here, expansion of production capacity in Germany is still ongoing. We finalized the first 5 doubling capacity here. We are finalizing our first production line in Cluj in Romania by end of Q1 and within the next couple of weeks, we should be able to get going and go live also with our own presence in India for the -- in the partnership with our local Indian partners. In the second half of the year latest, we need to be present also in the U.S., most probably in a greenfield set up, especially for sales and service. And with this, I think looking at the EBITDA adjusted, we are looking at the range of between EUR 8.9 million and EUR 14.1 million, also admittedly still a broad range, but Q2 also the revenue spend that are logical and almost mechanic outcome here of the numbers. And the same for with EUR 3.4 million to EUR 8.6 million. This is a good view of where we are. We should not forget that we are also consistently investing here into, I'd say, core technology competence. We are looking at a broadening of our technology based on the fuel-cell product in terms of components, and we continue to invest in the new generations of hydrogen products, higher power, independence of the license product platform that we are currently using, but also integration of electrolyzer capabilities in our own offering. So all in all, very upbeat here looking into the year, and it's a motivating an exciting environment being able to grow the business in the format we have been doing it last year and continuing to do so this year. With this, we would like to hand back to Mina and we'll be happy to answer your questions.

[Operator Instructions] The first question comes from the line of Thijs Berkelder with ABN AMRO ODDO BHF.

Yes. Congratulations. First question is on the order backlog reported. Can you explain what part of the order backlog is for '23? And what part is for '24 and later?

Absolutely. I think here again in a very simple split, you can take roughly EUR 20 million out going into '24 and the remainder for '23.

Okay. Very good. Then the order backlog is roughly 2.5x as high as a year earlier. Why is then the revenue guidance just of 20% to 30%?

As said at the beginning, I think that's we see at justified base here, we still naturally cannot neglect some of the uncertainties in some of the government business in terms of timing. We have also naturally an impacting factor here, the commodity price in oil and gas. And therefore, well, they are with us a couple of weeks and months into the year, and then we can assess this further on.

Okay. Then logically also the question and you stipulate yourself already that the guidance ratio EBITDA for '23 is quite wide. What would make you land at the bottom end of that guidance range that would make you force lower margins than, let's say, the earning '22?

There's basically 3 effect, Thijs. The first 1 is supply chain issue, even though they have decreased significantly, and the environment has become better but they're still existent. And as mentioned also in previous calls, it doesn't matter if you're missing 1, 2, 3 or 4 or 5 or 6 parts, if 1 is missing, and that mainly also still in the increased prices and to get it on board, there is a certain risk in the material expenses. That's the first one. And why I said, they have decreased, but they have not been eliminated over the last year. And also that's the way we see it for the coming year. Second thing, as I mentioned, we are investing in our growth. We are investing, and Peter mentioned it, also in expanding our assembly and manufacturing capabilities, but also business development and capabilities, the retail expansion, which we mentioned in the last year, notably India and U.S.A. And depending on how quickly and how fast we will wrap it up, and you know we are ambitious based on the market development, there's also additional costs coming through that. And this cost may, depending on the ramp-up starting off across the higher or lower, and that really has to do not only the operational cost, but really the cost of setting up those entities and operations. And then last but not least, we're also speeding up development for our product platforms and then also a certain variable in there was again depending on how much resources we can apply, how much resources we will get on board. And going forward, it could speed up certain things. And then again, will have an impact on the R&D expenses. So all these 3 factors in summary, result in a certain variance of the earnings.

And coming back there on the, let's say, the additional cost, the gross costs this year, should that this year be a more normal year in the sense that Q4 then should be, again, the strongest quarter of the year and the year starting relatively slow? Or has the pattern more or less changed?

Well, I think overall, as we also have seen last year, with, I would say, non-regular [indiscernible] in Q3 and also in prior to it also in Q2, we have, let's say, also momentum here in scaling, especially on the fuel cell side where, let's say, yes, we have this year, we are looking at a very good start of the year and we expect Q2 being at the same level. So we are not particularly depending then on simply the year-end business, which I think makes it also more healthy and gives us the better visibility already by midyear.

Okay. That's clear. Final question maybe on EBITDA reported over 22. Can you give a split between clean power management and Clean Energy Solutions?

We will have those numbers yet again, will happen towards the end of the year -- sorry, when we publish our final numbers, but the tendency, of course, is that the EBITDA adjusted in the segment Clean Energy is higher than in Clean Power Management. Well, please understand that we'll publish those numbers with the audited file numbers.

The next question is from the line of Karsten Von Blumenthal with First Berlin Equity Research.

Congratulations to the good results. My first question would be, could you give us a rough split between your direct methanol and hydrogen fuel cell sales?

Yes. Still methanol, I said is the scaling price where we are beyond 90% and hydrogen is still, I'd say, in the business development stage in terms of a product line. Although the project log increased consistently over the year, we also see, I'd say, that implementation sometimes is not even depending on customers or ourselves. The approvals and the rights to operate from, I'd say, government side, the regulatory environment for some of these projects is simply a relevant factor in terms of implementation. Looking at the current activities, we are now in the process of getting also the North American certification finalized here at CSA and also the UL. The teams are there again end of the month. So we expect, let's say, a further, let's say, uptick here and acceleration here. But still, we have to simply see the different maturity here in terms of market penetration and acceptance.

All right. Yes, fully understood. If I look into your Q4 figures, my first impression is growth is different from the quarters before. This time, the smaller segment showed much stronger growth than the fuel cell segment. Could you comment on that?

Yes. Absolutely. I think what we see is a slight easening here on the supply chain here for the power side and for the power electronics side. And what we also see is, I'd say, some shipments here out of the fuel cell part moved into -- this year into the first quarter. We do not see this as a call it, irregularity, but at the end, it is more a timing factor. Part of it even, let's say, linked to, I'd say, our capacity constraints here at the year-end.

And remember last year was the year where in a revenue shifted between quarters, depending on availability of components, depending on the revenues. So it's been in terms of the distribution of the order revenues and also within the segment, really a function of when it was not available, when it could we ship it. Some things earlier, some things later. So that's a bit of an irregularity.

Understood. Could you roughly tell me how much was postponed into Q1 of the fuel cell business of clean energy?

If you look at it let's say, specifically, we have, let's say, monthly shipments to a particular customer in North America. There, we had a postponement in India. Talking about, let's say, overall here, 100 to 150 units here, which is not that significant, but that's about it.

All right. Okay. Understood. If I look into your Q4 EBITDA -- to your adjusted EBITDA, that looks relatively weak compared to the quarters before. So did you have any extra cost in Q4 because you had a relatively good sales in Q4, but EBITDA was relatively low. So what is the reason for this?

Well, there's basically 2 reasons for it. Obviously, 1 reason when we mentioned the under expenses were a little bit higher. And you please understand that we will not dig too deeply into the gross margin discussion, but when you asked about the cost of a higher cost base in the fourth quarter, as you can easily imagine, Peter mentioned based on the salt operations in India, very soon, and also looking at the U.S. So the expenses with establishing and whether it's legal, whether it's tax, whether it's whatever cost to set up the structures did not all appear in the first quarter of 2023 because we've been really working on that in the third and but then also in the fourth quarter. So that's most certainly one of the impacts that we have and then also the impact that we had in the first quarter is you don't see it that we did hire a number of people who came on board within the third quarter, but also in the fourth quarter. So you also have a bit of a higher personnel expenses in that. And it's more a mix of various cost positions that really increased the cost base in the fourth quarter in combination also with the development. But we'll discuss that at certain times in gross margin. Yes.

To complement her Karsten, just a year where we did increase our pricing naturally over the year. And there is an improvement in there, but still, let's say, on the cost side, we also saw a soaring cost base in some areas. I think if we want to talk about, let's say, what is the impact in Q4, I think it's EUR 0.5 million to EUR 1 million overall, those factors together and leveling this out to let's say then especially the setup costs, the preparation cost here for the entities in the region. I think we are getting to a digestible impact here. And we will also see this in Q1 that this is again leveled out.

All right. So basically, it's growth investments and overall growth especially more staff. You reported that it's very difficult to find new staff. That means you might have to pay higher wages. So what is the wage cost inflation you calculate for 2023?

Well, I think that we have 2 elements. First of all, I think hiring, I would not say it is, let's say, particularly difficult for us. I think we are seeing the opposite on the labor market. We are in an interesting area of the economy. So I think we are an employer of interest here for young people wanting to make an impact, and we are really seeing this also in all our recruitment efforts. Again, we hired more than 100 people. So I'd say every third, every fourth person on the payroll is new compared to a 12-month period before. So it is an area of key focus, it is a challenge, but it is not particularly difficult or more difficult for us than others. I would rather see the opposite. Cost competitiveness on payment structure, but they naturally also expectations here on the inflationary side, yes, we have overall increase of labor cost, I'd say, in there in -- for example, in Holland, there is a collective labor contract signed here also for people who are employed with us. We don't have this in Germany. We don't have it in Canada, nor do we have it in Romania, but I think overall, we are looking at a range of a 5% to 7% combining competitiveness as well as inflation compensation.

The next question is from the line of Anne Margaret Crow with Edison Group. Mrs. Crow, you have the floor. We will now move on to the next question. The next question is from the line of Malte Schaumann with Warburg Research.

First question is on the current demand trends given the environment. Do you see a change in demand patterns? Do you see an unexpected somewhere? How would you assess the overall situation?

I'm sorry, I had it difficulties acoustically here. The line was not particularly clear. Can you help me again, Malte, with the question?