SFC Energy AG (F3C) Earnings Call Transcript & Summary

Thank you very much, Alessia for the introduction. Good morning to all of you, ladies and gentlemen, and thanks again for joining us here today to the presentation of our half year results. As usual, my colleague, Daniel Saxena and myself will first again, assess some of the key reasons for the recent adjustments of our guidance end of July. I think we can give you a profound insight into the half year numbers as well as some measures implemented following the adjustment. And then also, we will focus on the outlook. And naturally your questions in the Q&A session. If we look at the first half year of 2025, yes, although I think we achieved some visible and important milestones like the ramp-up of our MEA production into, let's say, a seamless to shift production in Swinden, U.K., we also integrated the hydrogen business that we acquired from Ballard end of last year here in, I would say, smooth way, and this business is going to contribute here on the revenue level as expected, but also at least be, let's say, breakeven as plan. And still, some developments, and we published this a couple of weeks ago, end of July, some development in the macro environment as well as our business made us adjusting our full year forecast at the end of the year. Such a decision never is an easy nor a pleasant one, but we think nevertheless, it was necessary in order to set the right basis for realistic expectations and also the right course on the basis of a clear analysis. Let me just summarize the key reasons for the adjustment here and staying, let's say, at let's say, the level of just going through it one by one, not taking all the details here at the beginning of the presentation, as Daniel and myself, we will look into the numbers later on. Yes. We are seeing a macro environment that is still characterized by uncertainty and has been so with an impact on -- and the negative impact from a euro perspective in terms of exchange rate, which had an impact for us in core markets like Canada, U.S. and India, uncertainty overall led to some hesitation in terms of decision-making here for new projects and investments. We mentioned last time, our new business development in the U.S., although growing by still double digit, about 16%. It is not at the original expectations here of, let's say, 30% overall. In addition, we had to accept that our customer in India here, the defense part of the business in India with the Indian Army saw some delays as funds already allocated to energy programs were reallocated here to drone programs, which at the end of the day is a revenue element that in the short run, we were not able -- or we are not able to replace and compensate for in 2025. Looking at the financial results here, just on a short note, and Daniel is elaborating on this later. Yes, some spiking in the spending on, we think long term, the right investments into structures, into systems, into cybersecurity infrastructure had a temporary and extraordinary burden here on our earnings from, let's say, IT and SAP spending here. Overall, I think the analysis is done and measures in place, let's say, looking at the overall spending and, let's say, curbing down some of the spends in the mentioned areas. I think we're looking at EUR 1 million to EUR 2 million less of spending maybe in the second half of the year out of this Hiring. Yes, we are not talking about, let's say, reduction of workforce. We have been growing significantly over the last years also with the expansion of the organization internationally. We are around 500 people on the payroll right now. Yes, we do not expect now to add another 50 as we had it in our plans, and we were already looking at. We are let's say, not freezing all hirings. We still do selective hirings, but we are looking at it closely, watching every single one. And I think this also will have the expected impact also on the cost structure. So overall, I think a big impact we expect here from further steps in our local-for-local strategy, especially now in the U.S. as we have done this before. In India, we are preparing for the ramp-up of our production in Salt Lake City in the U.S. in Q4 as planned. With this, the original intent naturally is or the generic intent is customer proximity, but at the same time, naturally, we are reducing our exposure to existing and potential further import tariffs. We are reducing our currency risk and I think in our own interest, but also in the interest of our customers, we're bringing down supply chain risks locally. And at the same time, naturally against the background of bringing down our guidance, we should not and we must not forget that we have core business growing solidly. If we look at our industrial applications in Europe as well as in North America, the industrial fuel cell business here with a core segment in the civil security and civil protection area is growing consistently above 20% in some areas, existing business like in the U.S., about 30% also in the first half year and seeing the active dynamics here also on the order intake side, we expect this to continue throughout the year. If we look into our power business, the power business has been growing with approximately 9% here year-over-year with, let's say, significant impact, especially also regionally in the Netherlands, key customers, Thermo Fisher Scientific and ASML growing consistently. Also, this is the expectation for the remaining part of the year. If we look into the defense part of the business, yes, we have an impact here on the overall defense business with the delays in India that were planned for being the biggest part of our revenue contributors this year. This also brings down the expectations here in Asia, and that's why we are not seeing growth in defense and public security and also not in Asia for the year 2025, apart from the other regions in the industrial and the power business. So if we calibrate the expectations, I think we are looking at a weaker or a weak Q3, but we're also looking at the robust and good Q4, looking at, let's say, the guidance revision we have out there. Why is the expectation here for the end of the year are positive. Again, we see the defense and security pipeline filling up. We are looking at programs in Germany on the OEM side, in the Netherlands. Core projects are still out there also in the U.K. as well as in Austria, materializing in terms of revenue impact, we are looking here at 2026. And besides all of this, naturally, we are continuing to open up new markets and just mentioning one key example here. We look at major infrastructure projects in Germany, where we see also quite some government efforts going in with the funding program over the years. We have recently completed successfully our first large-scale project on a motorway construction site where we have 60 EFOY systems, integrated systems operating for a couple of months together with a strong partner, Ramudden Global, one of the leaders in traffic security services. And that's one construction site out of, let's say, many. If we look at the published numbers out of the 28 motorway -- 28,000 motorway bridges, in Germany, 8,000 of them are qualified as to be refurbished and around 4,000 of them are officially qualified, and one can read this also on the website of the relevant ministry to be out for urgent need to renovation. So we are expecting here a new market to unfold. And at the end, our EFOY fuel cells simply reduce the total cost of ownership here for energy supply by longer run times compared to mere battery solutions. And again, this is not something out of the blue. We have been working on this for a couple of years, and I think it's now maturing. So adjustment of the forecast is done, but the strategic direction remains unchanged with, I would say, again, a renewed and reshaped focus also on the spending side. If you look at the recent momentum in the business, I think I'm very happy also to report that we had -- despite being in summertime, we had a quite active order intake here around EUR 14 million in the first couple of weeks of the quarter here from the U.S., Canada and Europe. I would say we are expecting EUR 10 million to EUR 15 million in the upcoming weeks. And if we add this all up, I think we are addressing the weak order backlog here by mid of the year in the right way. Looking into the segment part, I think we are looking at a horizontal or, let's say, just a growth of 1.8% in the Clean Energy segment. We have discussed the relevant impact there, and we are looking at a 9.2% growth in the Clean Power Management segment. As mentioned before, we see regionally, therefore, a significant jump here in sales in the Netherlands of more than 75%. Yes, we will see a flattening out over the year, but it's, let's say, confirming the positive development of the power business here with Thermo Fisher and ASML, but also the continuous growth with our long-term partner, BauWatch] in the clean energy side. Regionally, also in the U.S., despite not reaching our expectations of new business growth also being 30%. We are seeing an overall growth of 30% and Germany, above 21%. With this, I would like to hand over to Daniel for the analysis of the half year's numbers on the earnings and the profitability side as well as the balance sheet.

Good morning, everybody. Thank you for dialing in. Let me dig into, first of all, the gross margin of the group as well as the gross margin of the 2 segments. Overall, we've been able to maintain what we consider to be sustainable and healthy gross margin level on the group in spite of the macroeconomic environment and challenges that we had and the negative impact from the exchange rates. With the exchange rates having a severe impact on a certain cost position and on certain valuation position. I'll dig into this a little bit later also. But giving you an overview, if we compare the average exchange rate at the end of '24 and the end of the first half year '25. We've seen that the U.S. dollar depreciated by 4.1%. We saw that the Canadian dollar depreciated by 3.1% and that the Indian rupee depreciated by 5%. These are 3 important exchange rates for us because in North America, we sell in U.S. dollars and in Canada dollars. And in India, a substantial part of our business is being done in Indian rupee. If we then look at the exchange, not the average exchange rate, but the exchange rate at the cutoff date, 30 June 2024 and compare it to at the end of last year, the effect of the depreciation of the exchange rates are even bigger. The U.S. dollar plummeted by 11%, the Canada dollar by 7% and the INR by 12%. This is an impact on our other operating expenses if you have seen, but it also has an impact I believe on our gross margin. Nevertheless, we were able to increase our gross margin by 4.8% and the gross margin reached 42.5%, which is moderately above what we've seen in the first half year of 2024 in spite of the less favorable exchange rates. It is also slightly above the gross margin on group level that you've seen in 2024 for the full year, which was at 41%. In spite of the fact that we consider the gross margin in both segments to be on a decent level given the overall macroeconomic environment, we have set ourselves higher targets in the beginning of the year for our gross margins. If we look at the impact of the segments on the gross margin, we see that the segment Clean Energy was suffering much more from the less favorable exchange rates than the segment Clean Power Management. We see that with a stable North American revenue share of 37%. The gross margin, and there is also an impact of the exchange rate declined from 47.9% to 47%, not a huge decline, but again, not the targets we set ourselves at the beginning of the year that we were really aiming for an expansion of the gross margin. We had a positive impact on the gross margin from the segment Clean Power Management, which set off to some extent, the decline in the Clean Energy segment. The gross margin in Clean Power Management increased to 31.8% from 25.9% in the last year, which is consequently of a stronger pricing with our Power Management solution as well as the drive motor controls business in Canada. If we look one more time deeper into the gross margin development and what are the impacts of the gross margin in Clean Energy. I think one of the impacts that we compare with the first half year 2024 was that the revenue mix has shifted. We had a decline in the defense business, if you compare half year on half year by over 50%. The defense business tend to be the business with the highest gross margin. So that has an impact naturally from our product mix in spite of the fact that also the industrial business is very highly priced, but missing that attractive revenue from the defense business has an impact. The second impact was a specific topic with one customer in Canada, where we provide solutions with that specific customer. We had somewhat of a weaker gross margin and weaker pricing than anticipated. That is not a trend. This is not across the business, but it was one big customer and had an impact, and you see it on the gross margin of Green Energy, even not huge, but any little percentage point will impact it. And then last, but not least, and I mentioned it, the third impact was really the much stronger euro against the U.S. dollar and the Canadian dollar, where we see if we translate it in euros, lower revenues. At the same time, and we mentioned already in our call when we lowered our guidance, and of course, some of the materials that we are purchasing, especially from EMEA are purchased in U.S. dollars. So the material cost will also be more favorable, but there's is a time lag before you see it, frankly speaking, because we do not buy the material on the spot market, some of the stuff and most of the stuff has been bought already in the fourth quarter of 2024 or at the very beginning of the year, or you still have slightly higher U.S. dollar prices. So this is something you will not see immediately. I mentioned the strong expansion of the Clean Power Management gross margin to 31.8% from 20.9%. We see that the margin in that segment is getting higher, is increasing really based on a more sophisticated product strategy as well as new platforms that we have rolled out with a stronger pricing. The first half year was impacted by some unexpected and some higher than planned expenses. When I come to the unexpected expenses, it was, as I mentioned before, really the exchange rate losses. The income from exchange rate and the gains that we had in the first half year were EUR 1.3 million, but that was more than offset by the exchange of losses, which we had, which amounted to EUR 4 million. So that we had a net expense of EUR 2.7 million or if you look at it and put it in relation to revenues, 3.6% of the first half year revenues. It is important to understand that out of the EUR 4 million exchange rate losses, EUR 3.3 million were unrealized losses -- sorry, out of the EUR 3.3 million exchange -- sorry, out of the EUR 3.3 million exchange rate losses, they were unrealized. And out of those EUR 3.3 million, EUR 2.5 million are intercompany positions. So these are not third parties. This is really intercompany receivables. It is related to intercompany shareholder loans that are how we finance our subsidiaries in the U.S., in Canada, but also in India. So the largest portion of it is really a long-term financing for our subsidiaries. And that is, like I said, unrealized losses, which also have no cash impact. What was a little bit higher than we planned for in the expense -- on the expense side, were the G&A expenses. And specifically, within the G&A expenses, the cost through the digitization, higher cybersecurity and especially also the ERP and SAP implementation in the group, which we intend to complete early next year. The costs relating to the SAP implementation in the first half year amounted to approximately EUR 1.4 million. These are consulting expenses, these are license expenses that we are having for the software, even though we have not fully implemented it. These are advisory expenses for various fields and processes. So that's a huge cost that we have. And then in addition, the cost for improving our IT system, which is cybersecurity, making them more robust, making more stable and more efficient accounted to EUR 1.3 million. So in total, the cost for IT that we have in the first half year were EUR 2.7 million. So we know and we already said that in the last year and announced at the beginning of the year, we want to invest heavily in our IT infrastructure, because this is required for operating efficiently and effectively also in view of the growth that we have ahead of us, which we still strongly believe will happen. But some of the costs that we anticipated to happen in the second half year of 2025, really incurred in the first half year. Now you could argue that we are trying to speed up the whole process to make sure we got it implemented. You could argue that also those projects tend to be a bit more expensive than anticipated. In any event, the costs were higher, and that really has an impact again of something like 3.7% of revenues. So if you combine those 2 impacts, and that is really if you look at our operating costs, those 2 impacts are huge and one of the reasons why really also our EBITDA margin went down. Getting to EBIT, EBITDA. The adjusted EBITDA amounted to EUR 8.5 million, which is down 32% of the EUR 12.5 million we saw in 2024. Adjustments in the EBITDA, the same thing as every quarter. It is related to provisions from LTI programs, IFRS 2 accounting and it is related to transaction-related expenses for potential M&A transactions. So these adjustments amounted to EUR 3.9 million in the first half year 2025 compared to EUR 1.9 million in the first half year of 2024. Adjusted EBITDA, like I said, 32% below the level of H1 2024. Adjusted EBITDA margin declined to 11.6% from the very high 70.7%, which we had in the first half year 2024, but it's still below the full year EBITDA margin 50.2% in 2024. What are the reasons for the contractions of that margin? I already mentioned those 2 positions in G&A and in other operating expenses, i.e., net exchange rate losses. But also, what you have seen is that we had a contraction to relatively higher R&D expenses expense in the P&L in addition to the relatively higher G&A expenses. Some of these increases are of one-off nature, I would say, for the current financial year, and we would not expect them to see then next year. So let us quickly look at the drivers behind the absolute EBITDA decrease and bring forward some of the functional cost discussion. We've discussed the gross margin. If you look at the adjusted sales and marketing expenses, we'll see that we are pretty much in line with the growth. So adjusted sales and marketing expenses in relation to revenues amounted to 11.6%, which is marginally higher above the last full year's revenue relation, which was 11.1%. As Peter mentioned, we're looking at optimizing the cost also there to bring that ratio down again towards the end of the year. The main cost increase, however, in sales and marketing is really the additional headcount. We had an average 8 people more, but there was also higher marketing and travel expenses, which, of course, is in connection with our product development. If we then look at the adjusted R&D expenses, you would see that the cost to revenue ratio increased significantly to 6.4% from 4.7%. But the main driver behind that was really a lower capitalization ratio of R&D expenses due to the R&D activities in the first half year 2025 being focused more on serial development, which cannot be capitalized, but also, to some extent, with increased personnel expenses. If you look at the R&D spend and the R&D spend is the adjusted R&D expenses in the P&L, the EUR 4.7 million that you see plus the R&D capitalized, it was roughly EUR 1 million plus the subsidies we received with the EUR 3 million. So this adds up to an R&D spend of EUR 5.8 million, which compares to EUR 5.2 million R&D spend in the first half year 2024. So still 12.4% higher. However, the capitalization was much lower for reason, as I just mentioned, which increases the P&L expenses in -- obviously, in the P&L, which also has an impact on the EBITDA in spite of the fact that you haven't really spent that much more money on R&D. And then the adjusted G&A expenses. I already mentioned it. The key driver behind the increase of those costs, which were 50% of the revenue, which compared to 30.2% of revenues for the full year 2024 was really IT expenses. But in addition also, we had a slight increase in personnel expenses with an increase in average headcount by 4. So this is basically if you isolate the drivers behind the EBITDA margin dilution. It's not the gross margin. It's really a R&D expenses, a higher portion being expensed. The large portion of IT costs. And then last but not least, the very large portion of exchange rate losses, out of which, as I mentioned, a large portion is not realized and not cash impacting. Nevertheless, it's expense and really depends on how the exchange rates will develop, whether this will turn into income into the near future. If we then quickly look at the depreciation and amortization, total depreciation slightly up, EUR 3.9 million versus EUR 3 million in 2024 in the first half year. The depreciation, 40% of it is IFRS 16 related, so EUR 1.5 million. The depreciation without IFRS 16 impact is came up to EUR 2.4 million. Large portion of the increase is the depreciation of capital R&D, which is EUR 1.3 million out of that EUR 2.4 million total depreciation without IFRS 16. That brings us then to the EBIT adjusted, which went down to EUR 4.6 million from EUR 9.6 million and translates in an EBIT-adjusted margin of 6.3% compared to 13.4%. Having a look at the balance sheet, key position there, first of all, fixed assets and intangible assets. You saw that the CapEx without IFRS impacts, IFRS 2 impacts came down to EUR 1.7 million from the EUR 5.8 million you saw in the first half year 2024. The total CapEx, like I said, being excluding -- that was excluding the IFRS 16 accounting impact. If you split that EUR 1.7 million between intangible assets and PPE, you will see that intangible assets are about 55% of that CapEx with PPE equipment being 45%, much lower than what we've seen in the last year, given the fact that last year's CapEx was driven by the buildup of the [indiscernible] manufacturing site in the U.K. as well as the assembly site in Romania, too and some more investments in India. So we basically see a normalized CapEx pattern again, where our run rate of PPE is something between EUR 1 million and EUR 1.8 million for the full year. You would also see that the investments in intangible assets are lower because a large portion of that is the capitalized R&D, which was EUR 1.9 million this year compared to EUR 1.5 million in the previous year, as I mentioned before, when we were discussing the R&D expenses. Looking at the cash and cash equivalents. Cash really available went down by EUR 10 million from EUR 60.5 million at the end of 2024 to EUR 50.6 million at the end of June. Key driver were really the investment in the networking capital. I will explain and give some more information on that subsequently. Financial debt increased slightly to EUR 4.4 million coming from EUR 4.1 million at the end of the year. So you will not see a huge increase in that and still with a very, very low leverage. We see that the equity increased by EUR 321,000 to EUR 1.4 million, pretty much on the level at year-end. Cash flow, operating cash flow before change in net working capital were about EUR 9 million. That is significantly lower than what we've seen in the first half year 2024, where we had EUR 12.6 million. Still, we believe this is solid given the investments and the higher operating expenses that we really had in the first half year. Now what we see is that the networking capital, however, increased by almost EUR 40 million. And that already an indication why the net cash position has decreased, whereas in the first half year 2024, we had a decrease in the working capital. What -- the working capital ratio to last 12 months net sales has increased to 32% from 25%. So we see that our net working capital has gone up significantly and cash was consumed there. The largest impact from the net working capital change has the increase of the accounts receivable, which went up notably from year-end, resulting in a negative cash impact of EUR 7.1 million. So if you look at the days of sales outstanding, 12 months trailing at the 30th of June, they came to 103 days and were up from the 90 days that we saw at the end of last year. Various reasons for that. We do not have any big creditor who's failing or is not paying the bills. We see here and there and especially in North America, but also Asia customers had to pay a little bit later. But again, there's not a significant change that we are seeing. There is not a significant change that we see in the credit risk that we're having and in the rating of our customers. It is just a development that we have a close look and want to make sure that we bring that number down significantly by year end. The other position in net working capital that increased significantly with a cash impact of minus EUR 6.3 million is really stocking and that is stocking in SFC Germany in the AG, mostly of fuel cell components that accounts for the increase of the inventory of approximately 80%, 85%. So if you do that, the very simple math on days of inventory at the end of June, we are looking at 155 days last 12 months trailing comparing to 131 days at the end of 2024, which is a significant increase. Also there, we will look to bring this down towards the end of the year to manage our inventory more effectively, efficiently. But still, we want to make sure that we have sufficient components on stock. By far offsetting these increases in inventories and accounts and receivables is an increase in accounts payable, cash impacting EUR 2.4 million. So does increase up a little bit. That leads to days of payables outstanding last 12 months trailing again coming up to 74 days from 66 days at the end of 2024. After tax payments of EUR 1 million, that results then in a negative cash flow from operating activities of EUR 6.3 million. We had cash flows from investment activities, EUR 1.5 million, much less than the EUR 5.2 million that we saw in 2024. Then we have cash flow from financing activities, which is mostly related to lease payments of EUR 1.7 million, which then in some had a change in cash of EUR 9.5 million. And then we had an exchange rate impact on cash also, which is about EUR 800,000. This was an overview about the balance sheet and the operating performance. I think in summary, yes, there's light and shadow. We don't see a structural topic in our operating expenses, but rather some impacts, as mentioned, that hit us and some what we would consider one-off expenses this year. We still see that our balance sheet and our cash position is rock solid, and we are still prepared for the growth going forward. With these words, I'll turn it back to Peter.

Thank you very much, Daniel. Complementing it with, let's say, number of employees here. We are now at -- we were at 30th of June at 409 permanent employees. And as mentioned before, we intend to keep this stable for the foreseeable time, depending also naturally on top line development. And then for the forecast, yes, we have announced a revised guidance, I'd say, top line now being between EUR 146.5 million to EUR 161 million. We see the adjusted EBITDA to reach a corridor between EUR 13 million and EUR 19 million and adjusted EBIT between EUR 5 million and EUR 11 million. All together, I think we now look at, let's say, 2 pillars to make sure we do continue our risk mitigation, which as a first point is, again, the local for local implementation in the U.S. And as Daniel said, yes, it's cost sensitivity and also, let's say, dedicated and focused cash flow management here throughout the remaining part of the year. And still, we are not planning to stop some of those initiatives, including, let's say, cybersecurity as well as ERP. We might have been too ambitious at the beginning of the year to implement this as fast as we can. We still need this, and we'll still do it. And we make sure we manage this better. And with this, I think we are looking now, as mentioned before, at Q3 being down, let's say, in the low EUR 30s million of revenue and the Q4, again, looking at the guidance, we are looking at EUR 40-plus million in Q4 with, let's say, again, a strong result. And this entails a buildup of pipeline in, let's say, the defense and public security part, a continuation of the industrial and power business performing as we see it right now and looking at the order activity, as mentioned in those weeks of summer right now, well, I think we are confident to deliver on this one and building up the right pipeline long term also for the year to come. I think we see ourselves in an even improved technological position looking at, let's say, the market environment and peer group out there. And we also, I think, have an extremely solid financial position. Last but not least, we are not just looking at M&A opportunities. We are actively working on it, and we have been doing so, I'd say, over the year. First focus is market access, better market access in Asia. In the U.S., we are looking at our existing verticals, be it oil and gas, defense or, I'd say, our civil security and protection business. And with this, we conclude our presentation here. We thank you very much, and we are looking forward to your questions. Handing over back to Alessia. Thank you very much.

[Operator Instructions] First question is from Karsten Von Blumenthal, First Berlin Equity Research. We've lost connection with the gentlemen. Next question is from Michael Kuhn, Deutsche Bank.

One on current market dynamics. I mean, obviously, you elaborated on quite a lot of topics still. I mean, versus the call 4 weeks ago, have you seen, let's say, any change in customer behavior? You referred to, let's say, some hesitation in some areas? Is that slowly dissolving? Or is that still the same? And in that context, you mentioned orders collected so far in the quarter and what you see in the next few weeks. Maybe you could quickly repeat it. I understood EUR 14 million collected so far and other number in the teens over the next few weeks. So just to confirm that number. And the second question would be on the M&A topic that you touched on at the very end of the call. It sounded like it could be in a kind of progressed state already. Is there a chance that you see any additional deal over the remainder of the year?

Michael, thank you very much. Yes, on market dynamics, I think we have 2 elements. We are seeing really the continuous activity and growth in our existing industrial fuel cell business as well as the power side. And if we look at the recent orders, yes, last couple of weeks, about EUR 14 million in, which again is exactly out of this, these 2 parts of the business. The overall hesitation, I think if we look into the U.S., again, I think our final implementation of setting up -- or ramping up the production going local for local, I think, will help us there, too. And again, it is not that we do not see new business. As said, we were around the 16% growth rate or we are at the 16% growth rate even in new business there. But our expectations and our ambitions were higher than this. And orders, we see in, let's say, the immediate pipeline, I think a good EUR 10 million to EUR 15 million for the upcoming weeks is what we see right now. And if we look at this, adding this all up to where we were at mid of the year, we also see ourselves well positioned also for the remaining part of the year. M&A., yes, we continue to really put our focus on it. And I think we have a good probability to at least land one of those projects and to, let's say, close it or at least sign it within the remainder of the year. And again, it's about, let's say, market access. But there, you might want to give us a few more weeks here until end of September to see where we are, but heavily working on it. And again, looking at the pipeline once again, on the defense part of the business, the buildup of the pipeline is, I'd say, already now for 2026 revenue realization given just the time line of such projects, including the supply chain. And that's, I think, the summary on this end.

Next question is from Malte Schaumann, Warburg Research.

First one is on the inventories. You potentially just touched upon briefly. So the buildup -- just to confirm that the buildup we are seeing should not go away in the second half of the way and then the preparation for the growth you expect next year, right?

We should -- we expect to decrease the inventory towards the second -- in the second half year. So yes, it should go to a lower level again.

Okay. Okay. Good. Then on the Indian project in India, I mean that you received the announcement from your customer on pretty short notice, which triggered the announcement at the end of July, early August. So potentially, you have been attached with your customer. So -- and meanwhile, so did you get further indications, further confirmations about the project and what will happen in 2026? Or is that yet to come?

Well, I think, Malte, this is Peter. Yes, we naturally have been in intense conversations and exchange here over the last couple of weeks. For the time being, I think it's very realistic to assume that we are going into a realization of those programs now in 2026. We have this, I'd say, in our planning now maybe with a slightly, let's say, lower dollar or euro value, not just because of the currency, which is one impact where we are still, let's say, now more cautious also in planning as well where we do the same thing with the Canadian and the U.S. dollar going forward for, let's say, at least the remainder of the year and the beginning of next year. But overall, we have no reason to believe that those projects are not going to be continued because the basic decision-making is taken. There was a short notice reallocation of already purpose funds, which, yes, was simply not expected. And let's say, both of us sitting here, we will be in India within the next couple of weeks separately and I think get more details here. But we have taken out those programs out of 2025. That's besides the, I'd say, currency impact, the biggest impact on the top line by far for 2025.

Yes, sure. Okay. And then maybe comment on the pipeline of projects of new customers, which have not done business with you in the past, how that developed over the past couple of quarters? Do you see a change in getting leads, et cetera? So maybe some color here would be good as well.

I think here, again, looking at just the different segments, if we look into, let's say, the civilian surveillance and protection business, we are expanding from core initial partners like BauWatch in Germany and the Netherlands or Europe or LiveView in the U.S. to, let's say, the whole landscape of players there for the mobile security market. a certain hesitation in the U.S. due to the mentioned factors puts us, let's say, at a lower growth speed here than originally anticipated, which I think is now factored in. But overall, yes, we are seeing a market penetration of our fuel cells as simply a superior technology to batteries and solar combinations only and still naturally also total cost of ownership then superior to diesel. And looking at new business, I think what we look now at in the infrastructure part of the business, going out there here on construction sites and providing combined solutions here batteries and fuel cells, our EFOY packages here, 2 key players in the industry that are consolidating this business, we see as a significant upside here. If you look at it, the first project being realized here, is just an initial pilot that confirms the viability here of our technology, just bringing down the cost. If you look at such a construction site here in Germany, going out there changing batteries at one of those sites is an expense between EUR 2,000 and EUR 4,000 because you need 4 trucks going there, 2 for safety, 2 for, let's say, the team as well as the equipment. And if you can take out a few of those visits per year, it makes a pretty attractive calculation and teaming up with one of the key leaders in this industry in Europe as well as North America, I think, is a good starting point in the market. For us, same pattern as we do it for the surveillance part of the business.

Okay. Then on defense, maybe more related to the NATO -- potential NATO customers, major customers. What are you seeing there about momentum picking up going into 2026 or some projects taking a bit longer hence rather be we realized maybe late next year, early '27. So what's your take on the environment as you see there?

Well, I think what we see is, Malte, some almost contradictory picture. Although the funding constraints are eliminated at least from a political decision-making, until this again trickles down into a household, it again takes some time. And then you have the other limiting factor, which is the capacity of the industry. If we talk about vehicles with the OEM customers, some of them are really, let's say, at the limit of their existing capacity and are thinking of turning some automotive facilities into defense vehicle facilities. So household, yes, in Germany, the parliament is coming back in 2 weeks from the summer break, and then we see, hopefully, to see a household in place end of September. And then it's more a couple of weeks than a couple of months that the household is open. So that's why I think we will see this contradiction in 2026, but this is really complaining at pretty high level because the overall funding limitations are removed, and that's the fundamental change to the years before. And therefore, our focus is really on the OEM side to make sure we get those programs in place. We published this collaboration with the vehicle manufacturer, Polaris, just a couple of months ago. We are at the big defense show in the U.K. in 2 weeks. That means building up pipeline for the U.K., for the Netherlands, for Germany, some projects being in there also for smaller countries here for portable systems like Austria. Not everything is going to materialize as you mentioned, in '26. But with the rebound in India and 1 or 2 of those programs, we are looking again and expecting, again, returning to growth in Defense and Security in '26 and '27 onwards.

Next question is from Usama Tariq.

I just had a set of questions. Number one, being -- could you just elaborate this, the motorway construction where 60 E4 systems were used and you do identify a large opportunity there. So just a little bit of color there would be really nice. Is it bettering based? How long is the cycle? So there and secondly, FX, do you foresee going forward some hedging activities if FX has been that negative, do you see doing some FX hedging next years?

Well, thank you very much, Usama. This is Peter. Well, the motorway construction part of the business, yes, we started collaborating with dedicated security and traffic safety companies a couple of years back, just for the testing of the EFOYs. At the end, what we do is all those signs at such a construction site out there, be it, let's say, just light LED lighting, be it, let's say, speed control devices just overall, let's say, signs, they need off-grid power. The conventional solution today now to a large extent is expand its battery and solar combinations with certain limitations on run time. And by adding an EFOY, it's our standard approach, hybridizing, we are prolonging the run times. And therefore, we are bringing down the maintenance cost. And it is, let's say, the business -- and the way to market, going to the customer is through those dedicated service providers there. And for the time being, looking at just now the German opportunity here. I mentioned this before, we are looking at, let's say, 4,000 bridges that are, let's say, defined as urgent need for renovation or replacement and also seeing, let's say, the plans of the government here in terms of investment I think we see ourselves well positioned. I think we will also realistically now need some time in the next couple of months to really assess the opportunity. But the partner we are working with is not focused on Germany only. It's one of the market leaders here in Europe as well as in North America. So I think having completed this first major project with success and also commercial success here for our partner. It's now up to us in the next couple of weeks and months also within our budgeting process to assess it. But just, again, 60, let's say, EFOY units on one of those bridges, and we are looking at the plan of the government here to do 400 bridges a year. We might not get to 100% of market share, but even 10% of the market share would be a tremendous success in adding to our industrial business.

It's Daniel. So with regards to doing hedge or how to derisk the exchange rate risk going forward. I think it's a bit of a more comprehensive answer, but let me try to summarize it a little bit. If we differentiate between 2 different exchange rates. The first one is what I told you, the average exchange rate for a certain period which is not fluctuating or has not fluctuating that much so far. So I said, if you compare it fiscal year '24 to the first half year '25, we see that U.S. dollar came down 4.1% average exchange rate, we should apply to the revenue number. The Canada dollar came down 3.1% and the largest decrease has happened with the INR which is 5.4%. So we -- obviously, we do have an exchange rate colors, which we use or look at it, which clearly the movement has been higher than what we anticipated in this year on that average level. So that is something we'll have to look in and maybe potentially going to be more conservative with that going forward. But then the other one is the exchange rate at the cutoff date when you value your balance sheet items, right, your assets. And that is done end of December and then now again, end of March and end of June. And if you look at that exchange rate, right? So that's the spot rate at that day. You'll see that the U.S. dollar went down by 11% compared to year end, the Canada dollar 7% and the INR 12%. And that is really where a large portion of that exchange rate loss comes from because you value your receivables and your assets on that specific day. And you see that the depreciation is much, much higher than on an average. And when it comes to that position, right, yes, we will be looking into some of those currencies and talking specifically now about Asia, we may look into hedging certain positions being aware that payment cycles in those countries are much longer from what we see than in North America. And I think this is something we are looking at. And we're looking at any position, asset position, and that would be accounts receivable mostly, where we have an exposure, which is significantly above 60 days. How we could either reduce that exposure by collecting earlier or what we can add/or negotiating exchange rate adjustment clauses with the specific counterparty and/or going into a hedging instrument there, which, of course, is also not for free. And as I mentioned in the quarter before and, comes with the cost. So we will apply a sophisticated strategy, which will not reduce the eliminate the exchange rate risk, but we want to avoid having those fluctuations on a quarter, right? As I said, larges portion is unrealized on that. There's no need for us to realize it. Nevertheless, we are fully aware that it is not looking good on our P&L and then we need to act on that.

[Operator Instructions] Next question is from Karsten Von Blumenthal First Sterling Equity Research.

I was disconnected when I tried to ask my question first. So I hope you can hear me now.

Yes. Very well.

Perfect. So in your corporate news, you said that Defense & Security in H1 was roughly 48% of H1 sales. Could you roughly split this in public security and defense for us?

I think specifically, it is defense and public security, which is, let's say, the government part of the business being about 9% and the remaining part is the civilian part of our security business, which we have in the industrial part of the business. It was just to make sure one can see now how big, let's say, Civilian Security and civil protection business has grown, which is, I'd say, the fastest-growing segment, as mentioned before, and still under our industrial business. So it is the government part and the civilian part together, so not -- to make sure we are specific here.

Perfect. That helps to understand it. One further question regarding Salt Lake City. You mentioned ramp up in Q4. Does that mean that from Q1 on, you will have full capacity there?

Well, at the end, again, as we've done this before. In India, we've done it in Klush in Romania, we have to look at, let's say, the setup there. We are talking about an assembly line and the main equipment in there is naturally all the quality assurance and test benches. So yes, it will be there, and we will do this.

Okay. Do I understand this right that it just takes time to get such a production online, and it is an ongoing process. So we will also, in Q1, probably see further ramp-up activity. Do you have a target when you want to reach your full capacity there?

Well, I think at the end of the day, what is now happening is the setup there, we have, let's say, the hiring there ongoing. Training is a key element. Part of the training will take place here. Well, the moment everybody has a passport, they can also travel here to Germany. And the part of the training will be here, part of the training will be there. And then it's really something that can be adjusted to, Let's say, the business volume there. So we are, I would say, not too excited or too. We are not at all afraid of doing this, and we are excited of implementing it. And we have done it and shown it here in Europe as well as in India.

All right. We're ramping up and having the production is one part. The other part is probably to say, localized cost. So how much of the total product cost can be sourced in the U.S. next year?

Well, I think we have been also clear here from the beginning. We are not anticipating to, let's say, move some of the core parts here to the U.S. as, let's say, the supply chain is highly depending on our own membrane facility here. We have not taken the decision whether it makes sense in the initial part to move, let's say, things like a stack assembly to the U.S. But as Daniel mentioned before, if we look at the MEAs, core part of the materials that come to Swinden are coming also from a U.S. supply chain. So therefore, I think we have -- if we look at the stack, we have about, let's say, of the 2/3 of the cost being in U.S. dollar out of, let's say, U.S. based or U.S. originating supply chain. And actually, this gives us some flexibility. We might not move, let's say, all the assembly right at the beginning. But that's, I think, that the potential apart from, let's say, the logical things from cabling to other, I'd say, standard parts. But that's, I think something that protects us already in an effective way, but we take this along the lines here. Again, the move and the decision to do this in the U.S. originates from the request here from and the expectations from our customers to move the assembly there. It is seen as an objective or maybe from our perspective, maybe more a perceived risk, but they want us to be there. And now mitigation on tariffs and exchange rates, I think, are the additional effects that we are now, I'd say, having here in our risk mitigation plan also seeing the environment developing as it's developing.

Perfect. One last question from my side, Peter, you mentioned Polaris. And I think in the last call, you said there are some tenders out. Is there any recent positive development from Polaris regarding orders for you?

As mentioned before, we are working on the pipeline for 2026, and this unfortunately implies the fact that decision-making is not there yet. And this, again, has to do with the overall situation of political decisions being taken, but allocation of funds here in the various households is usually decoupled and delayed. But still, the overall environment, we must not complain here. And we have to confirm here that we did not do anything when you were disconnected.

Ladies and gentlemen, that was the last question. I would now like to hand over the conference back to the management for any closing remarks.

Well, again, thank you very much for taking the time. As usual, we are here at your disposal for the individual discussions that might arise now from our call today, Daniel, Susan and myself. And in addition, we will be at the Hit Hamburger investor store target as of tomorrow presenting results and outlook and hopefully seeing some of you there. Thank you very much.