SFC Energy AG (F3C) Earnings Call Transcript & Summary

Thank you very much, France, for the introduction. Good morning to all of you, and thanks for sharing the time with us here. Daniel and myself, we are pleased to present our half year as well as our Q2 financials to you and also give you, I think, a good insight and a good update on where we are on an operational level here in order to, I'd say, fulfill our targets here also for 2024. Looking into some of the highlights here. As a first point, then really going into the details here of the business side of the financials, and then finally, as you shall open up the questions here -- open up the floor for questions and comments from your side. So I think to make a brief on the highlight side, well, we see improved and increased KPIs on all our financial ratios here for the first half year, sales EBITDA. I think a next step on implementing our growth strategy here. We are, so to speak, really pleased also with the our cash flow performance in the first 6 months. And I think content wise, we have taken the next steps here in international expansion as well as build up of our capacity numbers ramping up MEA production in the U.K. We will get to this in a minute, but also opening up our presence in the U.S. as well as all the capacity implementation in Germany, Romania as well as India. Looking at all of this, I think we do not neglect, and we do not oversee the fact that we have a slower growth in Q2. We have to say, as expected, but also as communicated, still with, let's say, the limitation we were facing here in Q2 by having capacity limitation based on the ramp-up of our membrane production, we feel this has been the right step in sourcing our MAA capabilities for us is not just a question of getting the numbers up, but also a question of having a competitive advantage over time with higher level of technology and, I'd say, a stronger supply chain. Where are we in this respect? I've been out there in Swindon a couple of times in the last couple of weeks. And, we can say, as of today, we are running a 2-shift production here, it's August 20th and we feel ourselves well on track to catch up on capacity as well as output now within Q3 and Q4, which means the project is on schedule and capacity-wise on target. So this limitation is being eliminated. Now, going back to, I'd say, where the business is, I think the real good news is we see a continuously growing demand here for our Clean Energy, but also for our Clean Power projects. We are seeing this with consistent repeat orders coming in mentioning, I'd say, Singapore, the U.K., large customers out of Europe as well as Asia continued to stick to our products and on the Clean Power side, yes, we noted, let's say, the largest contract here, we ever signed as a company with our long-term customer out of the analytical segment here also in the first half of the year. At the same time, we also see new customers to mention one project here. We secured significant hydrogen project here with ConnectCom from Luxembourg as well as others. So overall, what we see is, we see a dynamic demand for, I think, sustainable and reliable energy and power management solutions. And therefore, looking at the backlog we see this as a reflection also in numbers. We see the order intake increasing to EUR 79 million in the first half year from EUR 68.8 million up, which means we stand at the end of the half year here with EUR 89 million compared to EUR 81 million by year-end 2023. So we have a more than 10% increase also in backlog here. I think some of the projects in the pipeline right now, we could have pulled in even before end of the last quarter -- for end of the half year, looking at our capacity situation as well as expected rebates for exercises like this, we opted not to do this, and we see our pipeline properly stable and filled. If we now look into the regional part of the development, we see Asia up significantly driven here by the performance in India as well as in Singapore. We also see the U.S. in the first 6 months below last year's numbers and also, I'd say, quarter-on-quarter, we see a decrease here in terms of relative performance. In absolute numbers, we are almost at last year's figures. I think there are 2 elements to it. First of all, again, we faced the limitation in terms of shipments here of units. But at the same time, our biggest customer there, well, is think in a growth phase like we are. They were shifting to a new production facility, and with this, also a slowdown of output here was noted. At the same time, we are diversifying our customer base there and see, let's say, the pipeline properly filled and expect some significant projects also to be closed in autumn time. If we now look at the segment performance, looking at Clean Energy, industrial applications, which are about 2/3 of the segment amount also for the greatest contribution here to sales, we see a double-digit growth here again year-on-year on the industrial side. Defense and public security application biggest jump up also a significant impact, therefore, on the mix with about -- well, more than doubled, 137% growth here, significant contribution here by the business in India on the front end of the year. So overall, the sales in Clean Energy is increasing by 31.8% to about EUR 50.8 million and reflecting 71% of the overall revenue. Clean Power, still growing here by 8.3% and as said, with a strong backlog, not just by, let's say, one significant order signed here earlier in the year, but a broad range of customers. And well, with 8.3% within, let's say, this 10% to 12% corridor, slightly lower in the first quarter to be, let's say, or expect it to be within the expectation also going into the year. If we look again into, I'd say, the mix, I mentioned this already. We have 2 elements driving the mix and therefore, also driving, let's say, the gross margin development, a strong increase on defense and public security as well as the industrial fuel cell business. With this, I would like to hand over to Daniel to lead you through the earnings and the overall financials.

Thank you, Peter. Good morning, everybody, and thank you for joining the half year financial call. Let me go into the earnings figures and the key KPIs. I think start mentioning that in spite of some of the challenges that Peter just addressed, the growth momentum in the first half year of 2024 not only remain strong with regards to the revenues, but also our earnings and margin reflect the strong operating performance as well as the group-wide cost discipline that we showed. That's really then reflected in what we consider to be strong H1 KPIs across the board. Peter already mentioned the increase of the revenues by 24.2%. We also expanded our EBITDA adjusted margin to 17.7%, which is a 4.8 percentage point expansion compared to H1 2024. And at the same time also, we expanded our EBIT adjusted margin to 13.5%, which is a 5.9 percentage point expansion. Order backlog being really strong with EUR 89 million. Looking at the gross profit from first half year 2024 and what has been driving the gross profit, I think we had, and you saw that also in the first quarter, an extraordinary good start into the year, and we have a very favorable volume development and product mix, which made a positive contribution to the gross margin development in the first half year. Consequently, we have made continuous progress on our gross margin expansion and at the same time, continued to follow our growth path. Gross profit reached EUR 29.5 million and exceeded last year's first half year profit significantly or by EUR 7.7 million, respectively, 35%. With the gross profit growth outpacing our revenue growth, this obviously also then translates into a gross margin of 41.7%, and that's significantly above the level of the previous half year's gross margin, which amounted to 38.3% and still notably above what we've seen for the entire last year, while the annual gross margin was 39.6%. I think we've been able to really, in the last quarters, keep an excellent balance between price stability and volume growth, and the increase of the gross margin is a little bit repeating what we also already said in the first quarter. It's in really higher revenues, which lead to relatively lower production overhead per unit. Also the consequent pricing strategy in both segments that we are pursuing in the last quarters, the very favorable product mix that we had in both segments and to some extent, also the normalized costs of raw materials and no impairment on inventory. Obviously, we had a bit higher cost for the membrane in the first half year giving the manual production [indiscernible] manual production that we had it here in Brunnthal. If you look at the segments in both segments, we see that the gross margin has improved with obviously a much higher expansion in the segment, Clean Energy. For the first quarter, the gross margin in the segment, Clean Energy, improved by 3.3 percentage points, basically really driven by the growth of the segment. And also, Peter mentioned that earlier, we had a very favorable product mix in terms of project business that was attractive, but also industrial applications that were attractive and contributed to that margin expansion. Clean Power Management, we have a slight or marginal gross margin expansion. Mostly that was driven by product mix that we saw there and lower unit costs from the overhead. Our mid long-term gross margin targets we mentioned before, Clean Energy, well above 44%. We are there. So I think we'll still be working on further expanding that margin. When it comes to Clean Power Management, we're looking north of 32%, so we still have some headroom and improvement that we will work on the margin in that segment. Looking at the EBIT and the EBITDA. The group reported EBITDA, as always, includes some nonrecurring expenses and income. These are consistent with the previous quarters, provisions for the LTI equity-based programs on the one hand side and transaction-related expenses on the other side. We adjust these or we adjust the EBITDA for these costs. The reported EBITDA in the first half year was negatively impacted by those nonrecurring expenses in total of EUR 1.3 million. So much, much higher from what we've seen in the first half year 2023. It was also impacted positively by income of the reversal of the provision of the stock programs. The income was EUR 638 million. And then also, it was negatively impacted by transaction-related expenses, which amounted to EUR 240,000. So adding up those numbers will get to the total of EUR 1.3 million negative impact. That leads us to the adjusted EBITDA. The adjusted EBITDA amounted to EUR 12.5 million, which is EUR 5.2 million or 71%, well above the level of H1 '23. We are particularly happy with our adjusted EBITDA margin in the first half year and the expansion that we've seen, the March EBITDA adjusted margin came up to 17.7%, which is an increase of 4.8 percentage points, I mentioned that before in comparison to the first half year of 2023, which is really within our EBITDA margin target range. The excellent overall figure is attributable to the significant gross margin gains in combination with a good operating leverage, which we've shown in the first half year. So what are the key drivers behind the absolute EBITDA increase, I'm going to repeat myself. It's obviously the gross margin and the gross margin expansion, which is a combination of the fixed cost. I mentioned that and production overhead cost degression in combination with product mix and stable input prices. So the gross margin expenses of a solid -- sorry, the gross margin expansion of a solid 3.3 percentage points has a relative contribution to the adjusted EBITDA increase of EUR 2.4 million. Looking at the operational leverage, and you know that we are really committed to delivering profitable growth and staying disciplined on our cost, so even though all functional costs increased absolutely with personal expenses being the key drivers for all of them, the functional costs have grown under proportionately with respect to sales, general results and capital markets call operational leverage. The adjusted sales and marketing expenses accounting for almost 40% of functional costs, and therefore, still the largest expense position increased distinctively slower than sales. It came to 11.6% of revenues compared to 13.8% of revenues in the first half year of 2023. So that's a notable 1.8 percentage points, relatively less compared to the first half of last year. And if we compare the H1 2024 EBIT -- adjusted EBITDA with the H1 2023 adjusted EBITDA and the relative contribution of the sales and marketing expenses and the operational, then the relative contribution of relatively lower sales and marketing and expenses was EUR 1.2 million. Adjusted R&D expenses partly surprising given sort of the short-term and midterm fixed cost character of R&D expenses, increased marginally slower than sales, resulting in 4.7% of revenues versus 4.9% of revenues in the first half year 2023, i.e., 0.2 percentage points lower, and that would then lead -- or that leads to a relative contributor to the increased EBITDA of EUR 183,000. Last but not least, in relation to revenues also adjusted G&A expenses grew slightly slower resulting in a G&A expense to sales ratio of 11.7% compared to 12.3% in the first half year of 2023 and then also a relative contribution to the increased adjusted EBITDA of EUR 434,000. Depreciation and amortization pretty much on the level of the first half year in 2023. Almost 40% of the depreciation is IFRS 16 related i.e. EUR 1.2 million and notably higher than what we've seen in the first half year of 2023, which has to do that we have additional sites and buildings that were leased in Swindon, U.K. as well as Romania. Then, the second largest position in the depreciation and amortization is the depreciation of capitalized R&D, which accounted for EUR 1 million. A little bit lower than last year, but remember, last year, we had an extraordinary depreciation in the capitalized R&D depreciation. That brings us then to the group adjusted EBIT, which was EUR 9.5 million compared to EUR 4.3 million in the previous year. The facts basically are the same as described in the adjusted EBITDA. Quickly looking at sales and marketing expenses and the development. I already mentioned the operational leverage and the relatively slower growth of sales and marketing expense, let me give you some insights on the development. As we outlined in various conferrence and calls, our priority is to expand our international presence and our business develop with a strong emphasis on Asia and the U.S.A. So what you see in the first half year 2023 is that the head count in sales and marketing has increased compared to the previous year by 10 persons. That is a key driver in that cost. The second largest position in these costs is really exhibition and travel expenses, which increased year-on-year by 7%. R&D expenses, I give you a quick color on the concept of R&D spend as we do it always in the quarter. So we're looking at the entire amount that we invested in R&D. This is made up of the R&D expenses that we have in the P&L. It is the R&D expense that we capitalized and is the subsidies received and put into R&D. So the total adjusted R&D spend came up to EUR 5.2 million in the first half year 2024 comparing to EUR 4.5 million in the first half year 2023. The key driver also there is really personal expenses, but also our material expenses in R&D, some of the materials being used are rather expensive. G&A expenses, I mentioned that also, it increased by 18%, and that's significant. It is mostly personal, highly qualified people and experienced specialists we get on board. We really built up our CSRD, ESG, and risk management practice. We build up IT and HR capabilities. We built up finance capabilities in the last 6 months, that also leads to increased cost. Second position in there is really travel expenses. We are internationalizing, Peter already mentioned our activities in Swindon, our activities in the U.S. as -- which also led to some higher travel expenses, still in relation to sales, G&A expenses, adjusted G&A expenses grew slower and are in the range of our midterm targets. CapEx. Total gross CapEx was EUR 4.8 million, excluding the right-of-use IFRS 16 accounting. The CapEx split, you may have seen that as a bit unusual for us is towards PP&E. So a higher portion of tangible assets normal. You see that our CapEx is intangible asset, which is mainly driven by capitalized R&D. It's higher than tangible asset that is a different thing in the first half of the quarter, mainly driven by the investments in the sites and the buildup of the sites and the equipment in Swindon for MEA production as well as in the production capacity expansion in Romania. So that is really driving that CapEx number. You will not see that repeatedly in the next couple of quarters. Investment in total CapEx was mainly capitalized R&D that has not changed. Looking at our cash position, very nice. We increased our freely available cash to almost EUR 70 million coming from EUR 60 million at the beginning of the year. We are still investing, and you will see that we will be investing cash in the second half of the year on growth. If you look at the equity, equity increased by EUR 7.8 million. The equity ratio remains on years and level, mainly driven by the net profit of EUR 6.4 million from the first half year. And now last but not least, the wonderful cash flow. The operating cash flow was 70% up and over what we have seen in the first half year of 2023. So it amounted to EUR 12.6 million, really driven by the strong operating performance. On working capital, we are pleased to report a significant improvement in the first half year. Our net working capital decreased by EUR 4.5 million. Remember in the first half year of 2023, we saw a significant increase of EUR 8 million that brings us to a working capital ratio to last 12 months net sales of 20% that compares to a net working capital ratio to sales of 32% for the first half year of 2023 and 25% for the full year 2023. So we are fully on track to get an effective level of working capital. However, what you also see and I forget it, is really the impact on our inventory and to some extent, the shortage of certain components, and we ship basically everything that we could ship. So that then also explained to some extent, the decrease in our inventory cash impacting by EUR 1.6 million. Remember, in 2023, we saw an increase for EUR 2.2 million. We will expect that the inventory will increase in the second half of this year again as we start building up buffers on products as well as raw material. 12-month trailing days of inventory 110 days versus 128 days at the end of the year. The accounts receivables more or less on year-end level and the 12 months trailing days of sales outstanding are 80s compared to 88 days at the year-end. So you see a little improvement there. Other short-term receivables change increased and cash impacting by EUR 834,000. And what you also see in that's notable is that the accounts payable increased cash impacting by EUR 3.6 million. So that already gives you an indication of our order patterns for raw material. Still relatively the decreased days payables outstanding came up to -- increased to 78 days versus 66 days at the end of this year. After tax payment, this result in a positive cash flow from operating activity of EUR 60 million. The cash flow from investment activity CapEx was negative EUR 5.1 million already explained and laid out where we invested the money. And then we have the cash flow from financing activity, which was negative EUR 1.4 million. This is mostly repayment of leasing liabilities. So with that, I give it back to Peter.

Well, thank you very much, Daniel. One element also important, especially now for the growth performance is also if you look at the number of people we had by end of Q2, we are looking at 421 permanent employees, up from 400 by end of the year. If we look at the hiring, yes, approximately, I'd say, 40 new hires, we are looking still at about 50 open positions here, attracting new talent as well as naturally retention remains a core focus here, particularly positive here. If we look at our U.K. facility, 90% of the team members are long-term experts who joined us here from their previous employer, our long-term partner, Johnson Matthey. So a significant buildup also of know-how and expertise here in this technology related part of the business. To put it in short, yes, hiring and retention still is a core task here for all of us throughout the full value chain and is also decisive for the implementation here of the further growth. Now remains to look at the summary and the outlook. First, yes, we expect and we will continue on our path of profitable growth here, which we feel is also looking at previous publications here out of the industry, a major differentiation in the peer group and in the industry. Yes, we are facing challenges as everybody else here, some macroeconomic. We see also the geopolitical situation with impact here on demand, but also partially on supply chain topics. And we also see the hydrogen adoption and the hydrogen business developing slower here than expected, which is, I'd say, a theme that is not just limited here or specific for SFC. Despite all of this, I think we are overcompensating these factors. If we look at the quarters, yes, we consider Q2, our weakest quarter this year, but we also have to put this a little bit into perspective with EUR 30.8 million revenue, we almost are even to EUR 31.1 million of last year's Q3, which was our strongest quarter last year. So what do we expect? We expect Q3 and Q4 to show a significant increase of shipments. Well, Q3, not at Q1 levels, but let's say, a significant improvement. And then Q4, finally, this will depend on the order timing here for the remaining part of the year as well as our capacity situation. And this leads us then to the guidance. We confirm our existing guidance on the revenue side, sales revenue between EUR 141.7 million to EUR 153.5 million. As said, where do we end within this corridor, depending on those 2 elements, just mentioned before. And with this, also coming to, again, a confirmation on the range of EBITDA between EUR 17.5 million to EUR 22.4 million as well as EBIT between 9.8 to 14.1. We assume here that we see growth as we have shown it also in Q1 in both segments that our MEA production is not only up and running as we have it right now in a 2-shift production, but also yields the right quality of product. And we keep also our operating cost here within the planned corridor. So overall, you see us confident here for the remaining part of the year. And with this, we are now looking forward to your questions and comments. Thank you so far.

[Operator Instructions] Our first question today comes from Karsten Von Blumenthal.

Daniel, This is Karsten. So my first question is regarding your ramp-up MEA production. You said you have already achieved a 2-shift production, and you see a catch up in Q3 and Q4. So could you tell us when do you want to achieve 100% production when in Q4? Early Q4? Late Q4? And will Q3 be better than Q2 in terms of shipments and production of MEA?

Good morning, Karsten, this is Peter. Yes, this has been the single factor here for us being or seeing Q2 that as the weakest quarter this year, and with this said, yes, Q3 as well as Q4 is expected to be, I'd say, significantly higher, not only in shipments, but also with this than in revenue. And if we look at the ramp up, as I said, we are already in a 2-shift production and with August, we have now reached, let's say, a capacity that is up to almost 100%. So end of August, we expect to be up at 100%. And so with September, October and November time frame, we have significant capacity to catch up, means, we are at this point in time, at a double capacity than what we got from our previous supplier here on a yearly basis last year. So it is a 100% add up in capacity that we have now already within our Q3 compared to what we got last year as an input. So we are on track timing-wise as well as capacity wise. Is there a residual risk? I think everybody who ramps up a factory knows there are different factors that can impact this for the time being, what I think gives me and also our technical team here around our CTO, a lot of comfort is as mentioned before, we have, I think, eliminated or almost eliminated one major risk factor means new team members, new people operating there. We have more than 90% of the team doing this for call it, really decades. So they basically moved their workspace from one factory, a couple of hundred meters to the next one. We are almost next door neighbor here to Johnson Matthey. So that gives us really a lot of confidence.

That sounds pretty good. You mentioned in the call and also in the news that quality could be an issue, but given that you obviously have succeeded so far according to plan, why do you see quality problems could arise in coming months? Or is that just a precautionary wording?

No, I think it's more precautionary, but still, if you transfer such a process from one factory to another one, there are ambient factors from temperature to humidity, individual timing of process steps. Basically, we have copied what we purchased and so to speak, inherited. And still, you are -- still you need to calibrate it than to the actual ambient situation in the new factory. I think this has taken place. We are measuring this on a daily basis to make sure we are where we want to be. And so far, I think we are fully within the boundary parameters here.

All right. That sounds pretty good. If I see your result for H1, the EBITDA result and look at the upper end of your guidance for the full year, you have already reached 56% of that guidance. So you have confirmed it, but you seem to be a bit cautious to raise it. So perhaps you could elaborate on that.

Karsten, this is Daniel. I'm happy to elaborate on that. So it's not necessarily being cautious. It's really looking at our second half year. Please remember, that's pretty much what I said in the first quarter applies and head count is adding in the course of the year. So that's really happening. You will not have this entirely up and running in the first half of the year. . Secondly, business development activities, including capacity expansion also further ramps up in the second half of the year, and then there may be certain projects that we're working on, especially member IT, ERP that almost -- there are links to tend to become more intensive in the second half of the year. So basically, if you look at our cost basis in the relative cost basis, and you also see that in the last year's [indiscernible] business, it tends to get a little bit higher than what we see in the first half year. Let's see. Obviously, we still have the variables product mix. We still have the variable in the regional mix that all could have an impact on the margin. So I will not say that we're necessarily cautious. At the end of the day, it's really in line with our planning and the expectation, especially on the operating cost, which, as I mentioned, are mostly driven by headcount.

All right. Thanks for making this clear Daniel. One last question to Romania. Have you reached already your capacity there? Is it up and running well? What is the output there? Perhaps, Peter, you could elaborate on your Romanian site?

Happy to do so. I think looking back to the last couple of weeks, I did -- we did a tour here through also the new sites, particularly also impressed here by Cluj. We just moved last month here, mid of July to this new building more than doubling, I'd say, the space there. The Clean Power management part of the operation was already up and running by end of the month, again, and Clean Energy, the fuel cell production is ramping up as we speak. Official opening, we planned for mid of September, and then we have a step-by-step plan here starting, let's say, from 3,000 units here for the remaining part of the year up to 17,500 units capacity next year and then comparing this with, let's say, the current 12,000 units capacity here in Brunnthal, you can see the significance of this operation. Midterm, 30,000 units includes as well as 17,500 units here in Brunnthal is the planning and then also adding India. So the production for fuel cells is not yet fully operational includes, but was also not planned as said, we just moved in July the power and -- the Clean Power management production is already up and running, but again, on track and on schedule.

Could I just repeat the figures. It is 30,000 units in Romania next year and 17,500 in Brunnthal. Did I get that right?

Now, we are looking at a step-by-step ramp up. So the first step here in Cluj is now for the remaining part of the year, approximately 3,000 units. And then next year, up to 17,500 with, let's say, a final capacity in the current setup here, what we have of 30,000 for Cluj, but that's more a 2026 target line. And then Brunnthal this year now about 12,000 units output. And now with the shift of some of the systems assembly with, let's say, the energy solutions business also to Cluj. We will increase the capacity here in Brunnthal also for 2025 to 17,500 units. And then, if you look then at 2026 and onwards, we are looking at a maximum available capacity of up to 50,000 units. So a step-by-step path is here. So next year, if you wish the capacity available above 30,000 units in total, excluding India.

The next question comes from Usama Tariq.

I hope I'm audible. Thank you for the opportunity and congrats on the outstanding performance. Two set of questions. Since U.S. has been pretty weak, have there been any layers taken in U.S., especially with the launch of new facility going forward? And my second small question would be the scaling up in India. How much would that translate in terms of CapEx required going forward, if any?

Yes, good morning. This is Peter. We can hear you very well. So the U.S., well, relatively lower than, I'd say, compared to, let's say, previous half year is clear. And as mentioned, I think we see 2 factors. The one is really our own capacity limitation in Q2 as well as our largest customer moving to a new production facility and with this also a couple of weeks of low production there, and that had an impact here on the numbers looking at I'd say the 2 key elements that also drove our decision to be present now in the U.S. with our new facility in Orem going up live a couple of weeks ago is supporting existing customers. I think there, we can tick the box setting up also the service and refurb capabilities on site or in the country. And then the second element is really diversification of customer base. If we look into this and into the pipeline, I think we are, I'd say, on a stable track here. So from a quarter-to-quarter and now, let's say, half year perspective, we are absolutely looking at, let's say, a decrease of numbers right now, but now the decrease in activity. So I think we will see this leveling out over the quarters coming.

And with regards to India and for the build-out, so India is built out. We are up and running with our production in India. We do not expect any significant investment within the next 6 to 12 months. Unless we may come to the conclusion that we shift certain production from A to B. But, for the time being, there is no significant further investment required for India. If we ramp up capacity, that is more a factor of head count rather than PP&E or any equipment.

[Operator Instructions] It seems to be no further questions at the moment. And I would like to hand back to Dr. Podesser for any closing comments.

Thank you very much. It seems we are also here publishing our numbers in the midst of at least for part of the audience of still the case of the usual audience vacation season. So any other questions coming up as usual, Daniel, myself as well as Susan, we are available for bilateral discussions, happy to do so. We will be on an investor conference tomorrow, also in Hamburg. This will be also broadcasted as we understand, and the link is also in our publication of today. So whoever missed part of this here today, come join us tomorrow and do not hesitate to reach out to us. With this, thank you for your time. And well, thank you for your trust and support and looking forward to catching up soon. Thank you very much.

Thank you.