SFC Energy AG (F3C) Earnings Call Transcript & Summary

Good morning ladies and gentlemen, and thank you for joining us in this call presenting our Q3 and 9-month figures as well as an overview of the business right now. Together with Daniel, we will lead you through all the key figures, but also key facts relevant to the 9-month period right now, but also naturally onto the outlook. And thereafter, we will be happy to answer all your questions. No question. We are looking back to a soft quarter. We're looking back also to a challenging period here in the business. We have to say, as also anticipated as this was one of the key reasons where we saw ourselves obliged to bring down the guidance back in Q3 at the end of July. But naturally, starting with this point, I think we want to give you, let's say, a solid and concrete analysis on this. If we look at the development here. In the first 9 months, we see a slower growth than originally planned. in all parts of the business. I think if we look into the main reasons of deviations, I think we have to start off with the biggest impact on the defense business. In India, we saw a postponement of the follow-on programs here for our M&A and JENNY deployment, M&A and JENNY fuel cell deployments to the Indian one, based on a decision that was basically a repurposing of funds during this current fiscal year. We have spent quite some time in various meetings on site in India. And I think within the last 3 months, we see I think we see solid signs and we see, let's say, basis also for a rebound within, let's say, the next fiscal year here for the business in India. Maybe not back to immediately the levels of the 2024 on our business third, definitely higher levels than we see it in '25. Two additional elements here. We have signed service and repair contracts comprehensive maintenance contracts now for all the deployments with the Indian Army, which going forward as of Q4, and we have signed them last Friday. So going forward, this is basically also covering more or less lower cost and also yield proper capacity loading here for our operation. In India, and we have also started last week and local methanol filling here as we do it in other parts of the world, North America and Asia as well. So we are also able now to provide local methanol address also cost concerns from customers there and also see this as the basis also for the rebrand. So India, the first element here of deviation this year. Definitely, I'd say, volume-wise, the biggest impact. If we look at our organic growth, we also see growing -- we still see a growing business in the U.S. Overall, in the first 9 months, we see about 28% growth, but we have to say, especially with new customers, we were expecting also based on historical growth rates, a significantly higher growth. The overall economic uncertainties have an impact on decision-making of our customers there. And therefore, we have missed that on the original plan to see growth above 40% as said, 28% organic in the first 9 months and a corridor that we also expect until the end of the year is, per se, a solid growth number, but definitely not what we have planned for and what we expected. The third element, and Daniel will go into this. Yes, we have seen 3 functional currencies, I'd say, devaluating significantly against the euro U.S. dollar, Canadian dollar as well as the Indian rupee with an impact on sales and earnings getting into this in a bit. If we look now into, I'd say, the reaction on these developments, I think we are seeing first fruits out of, let's say, cost alignment and cost measures that we have implemented was immediately in third quarter, we are seeing, I'd say, a normalization, especially on IT and our key spending and I think also functional cost, you will hear from Daniel is, I think, an alignment on what we implemented. As also mentioned before, we are not talking about here now significant head count reduction at all. I think we are in a selective hiring mode here in those areas where we see growth, and we are reallocating also resources to those areas where we see growth. And we are taking capacity out in those areas where we don't growth. If we now look into the third quarter, we have to -- we are seeing a significant increase especially on the order intake side, which also is the basis for us expecting a strong fourth quarter. We are over seeing an increase to a book-to-bill ratio of compared to about 0.76 in the first half of the year and combined with, I'd say, a product mix also impacted and positively impacted by a higher defense sales ratio in the fourth quarter, we see a positive impact also in the fourth quarter. If we now look also into, I'd say, the next steps of implementing our strategy I think the acquisition of a 15% sit in Oneberry Technologies in Singapore is a key element on the one hand, for the regional expansion of the business, we are seeing Singapore as the regional hub for the expansion in Southeast Asia. The closing process is in a final phase that besides the regional expansion, I think we have is a unique opportunity here to learn and to step into a business model that is highly attractive and profit turbo where Oneberry is operating under a security as a service business model for their AI-based unmanned security solutions from Voda protection to grow defense locations and predict infrastructure protection. Overall, we have an option also to take majority ownership, and we are working actively on this as also a platform for further growth in Asia as of 2026. Furthermore, important to inform you about the U.S. operation. We are on track for the ability to do the local production to ramp up the local production in our facility in Salt Lake City, strengthening our local-for-local program here at the end, it helps us to reduce exposure to import tariffs. But over time naturally also makes us less vulnerable and depending on exchange rate and currency risk by establishing a local supply chain. Our team from the U.S. right now is here in Europe, for training. And therefore, we will be ready to have a first pilot series produced still this quarter. and ready for production early 2026. So overall, looking at the sales performance, we see a decline of 2.4%, as said, not happy with this performance, the reasons for the deviation, the reasons for the decline, the main reasons mentioned here. If we look into, let's say, the order intake, I mentioned this seeing EUR 34.6 million in the third quarter, we see a significant increase to the previous quarters. So the book-to-bill ratio now is up at 1.2% in this quarter, and this also naturally gives us a solid basis now for the final -- for the final weeks of the yes. If we look at the overall backlog big around EUR 79 million that is definitely significantly lower than at the beginning of the year with EUR 104 million, reflecting the weak order intake we had, especially in the first 6 months of the year. Yes, I would like to also draw your attention to the fact that we naturally have a part of the business being highly transactional, which means it's kind of a rolling order book that is turned around within the quarter, and we are looking here at a ratio between, let's say, slightly below 40%, up to 50% of the revenue also turned around within the quarter that we are looking at, let's say, this year, affording to EUR 15 million turnaround in the quarter. So having this in mind also, you put in perspective that order backlog. If we look at the segments, the big impact here on the revenue and the significant impact was mainly on the Clean Energy segment, the biggest segment, clean energy still is accounting for about 69.7%, so almost stable to the year before. But still here, we see a drop in revenue of about, I'd say, 2.5%. I mentioned this, the U.S. and the Indian defense business being the biggest impacting factors. Looking at the end markets there, we still have to see that Industrial part of the fuel cell business is growing above 10%, 10.8% and the security part in this, that is basically CCTV application, civil security business is running about 15% growth. So there is an impact growth curve, I think, visible. Looking at the clean power management, around 30% of the business a decline of 2% strictly leading back to a single project missed in the Canadian and gas business of, I'd say, a EUR 2.8 million business year for Power Products, VF with one customer in Canada that was basically in our forecast a loss to competition. Looking at the clean energy business in Canada, we see also this part on a solid growth curve. With this, I will hand over to Daniel, leading you through the financial results here of Q3 as well as the first 9 months.

Good morning, everybody. Thank you for dialing in. Let me go into the margins a little bit as well as the cost basis I think as a summary, what we would say is that those negative impacts that we have seen in the first half year have continued. To some extent, they have lowered, but they will still negative impact. I believe from the cost basis, you've seen we are running rather stable in the underlying us or rather optimized. But let me go into that we quit and highlight certain enrollment. So when it comes to the overall gross margin, in the first 9 months, we've seen the negative impacts that we also have seen in the first half year, especially with regards to the segment free energy, which is the less favorable product mix with the lower share of the case revenue. We mentioned that before. That really played an essential role in the unprovable gross margin since the beginning of the year. What we also have seen now is that the constant duty that happened introduced slowly negatively impact MRI gross margin. Like I said, we will be unlikely that we'll be -- that we'll be able to avoid the entire customer impact. So it is not that we will see a huge impact, obviously, a slight impact from those custom duties. And then what we also see in the segment Clean Energy is the less favorable exchange rates with regards to U.S. dollar and the hand dollar. So if you compare the average exchange rates of this major currency. The U.S. dollar in average depreciated by 1%, the $10 in average accretion by 4%, which has an impact on the gross margin. So the overall group's gross margin weak 40% in the first 9 months, which is slightly below what we've seen the 9 months of 2024, while we had a gross margin of 41.7%. And it's also moderately below the level of the previous full year margin, which was 41%. Nevertheless, we have considered the group's gross margin to be on a level with which we're not entirely satisfied for good reason. At the beginning of the year, we have higher goals and higher targets. We may not anticipate entirely economic turmoil ahead of us the beginning of the year, we may not have seen entirely the development of the exchange fleet, but also the development in India, all of it has an impact on the gross margin, especially with regards to the segment. We have everything to heterogenous development that gross more we've seen that. We have a gross margin expansion in this segment in power management, where we see the gross margin going up to 29.7% from 26.9%. That's something that we are happy in content with that meaning of that, the decrease is basically in both main product line in that segment. So the commerce resolution we were able to implement a higher pricing also because we had in the first half year report call already also due to our product -- products that we've been operating, but we've also been able to implement higher prices in the drive motor control products. So again, looking at the EBITDA margin and the key impacts on those operating expenses, R&D and G&A, I think there's -- again, there's 3 major topics that we've seen in the first half year, which is the extraordinary cost for exchange rate losses. That is the IT spending for the implementation of SAP as well as making our IT so overall and at more robust. We've seen those costs or those expenses having come down in the first quarter, but there was still an extraordinary expense in there. And what we also see in the third quarter is a lower rate of capitalization of R&D, which is something we've had in the first 6 months. And this is also something that will likely change because that is pure accounting, and that has also impacted EBITDA negatively compared to the first 9 months in the last year. So if you add up those 3 impacts and look -- look at the last year make a like-for-like comparison, those 3 effects together have impacted EBITDA negatively but approximately EUR 5.5 million. [indiscernible] shows that our cost basis is solid. The earning power is still there. We believe we take those 3 as a way. We know that they're there, but you'll see that we didn't do has. Let me make it is the exchange rate losses. First of all, so you've seen or we had an income from exit-rate gains of EUR 1.8 million in the first 9 months, which were entirely offset by the exchange rate losses of EUR 0.1 billion in the first 9 months. So that comes to a net impact of EUR 3.3 million, which negatively impacted the EBITDA or 3.2% of revenues. So out of these exchange we losses that we've seen by EUR 4.4 million or 85% is unutilized losses and out of which approximately EUR 4 million are related to the company positions, i.e., shareholder loans and intercompany receivables. I mentioned that already in the first half year. So that's why you would not see that in the cash flow statement. Yes, we'll forget but this unrealized losses for the exchange rate. [indiscernible] thus impact and EBITDA negatively with 3.3% [indiscernible]. The next position is the ancillary cost for IT in the G&A expenses. These are costs relating to the SAP implementation. So in the first 9 months, the total cost has been EUR 1.9 million. They come down notably in the spending has set down notably in the third quarter, but it still along the first 9 month trust takes into 1.8% negative impact of the revenues on the EBITDA. We also had costs for improving our IT system that amounted to approximately EUR 1.4 million in the first 9 months, which again would then make a 1.4% negative impact on the EBITDA. Together, if you see that amount that we will spend on IT, and yes, it's necessary, we need to make our system more robust, we need to make a step over in higher efficiency and automation in our system. So this is not something that we're just doing for doing it. It really means making the major staff in getting our systems safer, more secure, more robust increased efficiency, also increase the effectiveness of our operations. What is a huge investment that we've seen, and we'll see further investment in the fourth quarter. We also will see some of those investments still in the next year until that system is how we implement that. And then the third impact is the lower rate of capitalized R&D expenses. So the total R&D spending amounted to EUR 8.7 million in the first 9 months of 2025 compared to EUR 7.5 million in the previous year's timeline. So you see a decent hike in our R&D spending. But what you will also see is that in the previous years, approximately 23% of these costs were capitalized. In the current year, we are just capitalizing 30% of the cost. So on a like-for-like basis, which will also request into a negative impact on the EBITDA on [ EUR 600,000 ] to go into this really briefly. So capitalizing R&D expenses is not a choice amount of option which we do -- it is, as I mentioned at the beginning of the call, as an accounting principle, so [indiscernible] projects can be capitalized, [indiscernible] projects cannot be capitalized and that's a little bit dependent on your R&D focus, but also what you have in the pipeline. Remember, any capitalization going forward needs also depreciation and additional cost. So it's not that you're optimizing the cost. You're just pushing those expenses into the future. In any event, it is what it is, but you'll see that our R&D spending as we go has increased, it has not a huge jump that you see in the mail and the early power out, that's why I said at the beginning is still at a decent level. So what does it mean for the adjusted EBITDA and the adjusted EBITDA. It means that we reached EUR 10.81 million which, of course, is significantly with 56% below what we've seen in the previous year's 9 months. It is, of course, a factor of revenue growth of gross margin and those negative effects in the other operating cost side, just mentioned. We appreciate amortization, you don't see a big change in there, depreciation of EUR 5.8 million versus EUR 4.5 million, 40% of the negotiation IFRS 16 related. So you will not see a new change in that position going forward either. That brings us to the adjusted EBIT, which is -- came up to EUR 5 million. That represents an adjusted EBIT margin of 4.9%. That's significantly lower from what we've seen in the first 9 years in 2024. Again, we're not entirely happy with that, as you mentioned. Let me finalize with a cash flow and our cash position, cash fully available at the -- so at the end of the first 9 months were EUR 40.8 million compared to EUR 60.5 million which we have at the end of 2024. So it's EUR 20 million lower from what we have seen. The financial debt, on the other side, also decreased by approximately EUR 1 million to EUR 3.1 million, which gives us a net debt -- sorry, net cash position of EUR 37.6 million pretty much EUR 20 million below what we've seen at last year end. Our equity decreased by EUR 1.5 million. This is due to the negative earnings but remain in the negative earnings also there's nonrecurring effects with regards to the IFRS 2 and the stock option programs are reflected. Cash flow. The operating cash flow before the change in net working capital was EUR 10.5 million, that compares to EUR 18 million in the first 9 months of the previous years. So what we see is -- is significantly lower, but it's still at a good level with EUR 10.5 million. So it is 20% -- sorry and what we see there is the net working capital development. The net working capital increased by EUR 21.5 million. That compares to EUR 2.5 million in the last 9 months. So the working capital ratio road of last 12 months net sales went up to 40% as of September compared to 25%, what we see at the year-end. So we really find hard to manage that working capital. It is really the inventory that we need to look at, it's really looking at the accounts receivable. The largest impact of that is really the increase in the inventory, which has gone up by EUR 10.3 million. That has changed the days of inventory to 237 compared to 131 at the end of the year. That is an extreme high value. We are fully aware of that. That is something that we need to manage more actively and bring it out. We are fully aware of that. We have a lot of material sitting in the mostly fuel cell components and materials, which we intend to bring down in the next 6 months. So it's nothing that is going to go pad will become obsolete. It is really good hidden happening it has to be bought in the program. You also see a large impact on the increase of the accounts receivables. They increased by EUR 8.1 million compared to year-end, that translates to a 12-month trailing base of sales outstanding of 114 compared to 90, which we had at the end of the last year. So we see increase in the sales outstanding. We don't see any VAT receivables out there, but this is something also that we are managing actively and intention that number doing in towards the 90 days. Then we also see is that the accounts payables have come down. They're going down EUR 2.8 million. That rate the payables outstanding down to 52 days from 66 days. So then with the tax payment of EUR 1.4 million, you'll see that the operating cash flow after the net working capital and tax is becoming very negative with [indiscernible] least minus EUR 12.4 million, all driven by the net working capital development. Cash flow from investment activity is much, much lower from what we've seen in the last year. We are looking at EUR 2.6 million compared to EUR 6.4 million. I mean the last year, so all those large investments that we have made last year are done and completed. So EUR 2.6 million is at a decent level. It includes, of course, the analyzed R&D. Then we see the cash flow from financing activities of EUR 2.8 million. A loss portion of that is related to leases. And if you add those numbers up, you'll see a change in the cash position of EUR 70.9 million, and then we'll still have to have the exchange rate impact on our cash point currency. So overall, cash as we view, like I said, in summary, mostly capital. We've seen the March decline. Still, I think we are at a good level, but not a level which we are happy or satisfied with and we were we need to be on working on [indiscernible] measures structures to optimize, especially our cash flow assumption. With that, I'll we turn to Peter.

Thank you very much, Daniel. So summarizing where we are. I think on the basis of the performance to date. Also, we talked about the order backlog and also I'd say still some -- I'd say, challenging macro conditions here. We've done, I think, a concise assessment here on the year-end forward costs that we are expecting the revenue at the lower end of the target corridor that we had out there that we have out there as a revised guidance. we see EBITDA adjusted as well as EBIT adjusted in the lower half of the corridor that is out there for EBITDA, the corridor is EUR 13 million to EUR 19 million. And for the EBIT, respectively, it is the corridor of EUR 5 million to EUR 11 million. As said, we are expecting to end up in the lower half for both ratios. So looking at this, I think after years of continued and a continuous and significant growth and increasing profitability, you see ourselves here clearly. And honestly, disappointed with those results here after 9 months. We also have to be self-critical here in terms of some maybe 2 aggressive and optimistic plannings in some areas, especially of the top line against the macroeconomic environment that we are operating under. But at the same time, I think we have done a thorough analysis of the situation. We also see the recent tensions and we have implemented clear and targeted measures. We've talked about the cost part. I think on the inventory price, yes, the defense part of the business has downside with, let's say, longer procurement because but the good thing is those products are not turning anywhere that, as Daniel mentioned. So this is naturally the basis here for the improvement also on the cash flow side to get let's say, this out of the north as fast as possible. And that's why you've seen ourselves here, and I'd say this clearly, I'd say, I'm a realistic mode, but with all the dedication to get this back to growth curve. And again, I think for all of us here, we have a and organic growth in the business, be it, let's say, our civilian security business, be it the industrial business. We are talking here about double-digit growth here between 11% and 15%. And also our U.S. business, significantly above 20%. So the expectation there is to continue on this growth path to return to a growth path. In India, as I said, service contracts in place, local methanol filling all basis also for further, let's say, satisfying the customers' needs there. And we've been intensively working on OEM programs on the defense part of the business in Germany as well as in those states. And naturally, we are expecting an impact of this in the year to come. We are doing, again, our regional expansion with the investment in Singapore, we expect growth impact out of this. And we are seeing our products performing properly, well also for new applications like done charging. And I also mentioned the drone defense activity here in Singapore. So all over, yes, the situation, especially in the last 2 quarters, a very, let's say, disappointing we've taken the measures now, and we are looking at a strong year-end and again, a return to growth and improved profitability here based on all the measures that we mentioned together. With this, we close our presentation and would like to open the floor for questions. Thank you very much.

[Operator Instructions] The first question comes from Karsten Blumenthal from First Berlin Equity Research.

My first question is regarding Oneberry. You have now a 15% stake. And perhaps you could shed some light on your future activities. You have a 50% option. When and how will you try to get this option?

So we have that option to be exercised in the shorter term. short term in within this year potentially beginning of next year. That option apparently, as we said, is to increase are holding in Oneberry majority for fixed valuation. So this is something that we intend to do and when we put this option there in order to exercise it, of course, we'll have to redo certain things with the business. We'll have to complete a bit more on the due diligence side, everything that is set at a subject process, and then we will likely exercise likely exercise that option.

If I can add here, Karsten, just to take shed a little more light on, let's say, the business model at the end they are engaged in long-term multiyear contracts with the Singapore government, the pipeline they have and the backlog they have is more than 90% government business there. And this is something naturally we want to continue to grave, but then also replicate this model to other parts of the region and if possible in other parts of the world, a rental business so security unmanned security automated based on, let's say, significant also, I'd say, AI content to, let's say, recognition parameters here. At the end, with a higher profitability than we see it in our own business, and well, having been partners for quite some years, I think we also have a good trust base there to roll this out to other areas in the region as well as in other parts of the world.

So there's a high likelihood that you will be able to consolidate Oneberry next year when you exercise the option. Could you shed some light on sales and EBIT, Oneberry reached, for example, last year in 2024 that we can have an idea what will be the impact on your P&L next year?

I think we would, at this point, also after negotiations there, I think it's good to have a our figure here in terms of revenue, we're looking at about EUR 20 million of revenue. And as said, profitability, I'd say, above our own EBIT and EBITDA levels.

Consolidation, well, let's assume that we exercise that option last us to will get the control as defined for cost evasion. Then currently, let's assume that we were close to that transaction, then yes, we would consolidate Oneberry from next year on. Remember the numbers we are saying are not in IFRS to be also to make that sure rights talking about Singapore gap [indiscernible] a year.

All right. That was very helpful. Next question, you mentioned a postponement in India. And you said that you expect a rebound in 2026, but not as high as in 2024. Could you roughly tell us how high revenue was in India in 2024?

Well, the defense revenue in India was around EUR 12 million and being, let's say, now, I'd say, 60% below last year's revenue as said, is one of the major impact in fact that this year. The fiscal year there ends at 31st of March, and that's why we are, as we speak now in the assessment of, I think, the right level of or the right budgeting level together with our partner on site and will naturally be based on the experience a cautious assessment for next year, but still we expect a rebound and growth based on what we have learned over the last 3 months out there.

All right. One follow-up question regarding the U.S. You mentioned that you are on track for local production in your facility in Salt Lake City. Could you shed some light on the next milestones you want to reach. So when will production start how quick do you want to scale it up?

Highlights we have our team of the U.S. right now in Europe for training for, let's say, still the next weeks here, and then we do the first pilot trial still in December, so that everything is geared up for 2026 Series production. The plan here is to have, especially, let's say, our high runners, the 2,800 all produced locally next year. And that's why we are looking, let's say, at a shift here from production from Germany as well as Romania to the U.S., whereas the core elements as the specs still will be mounted here in onto -- so it's a pretty -- the same exercise we did here with India, and we did with Romania in the last, I'd say, 12, respectively, 24 months. So we are not reinventing the wheel here. So it's basically topping the process.

Yes, that was certainly facilitated. Could you roughly give us an idea about the value of the shift in terms of revenue for 2026?

You mean end customer revenue or simply the transacted systems?