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Alfen NV
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Hello, and welcome to the Alfen 2021 Q3 Trading Update. Please note, this conference is being recorded. [Operator Instructions] I will now hand over to your host, Marco Roeleveld, CEO of Alfen, to begin today's conference.
Thank you, moderator. Good morning, and welcome to the orphan webcast about the Q3 2022 results in which we continue to deliver on our profitable growth ambition. This webcast and the questions that may come forward are handled by the Management Board of Alfen. Jeroen van Rossen, CFO; Michelle Lesh, CCO; and myself, Marco Roeleveld, CEO. In this webcast, we will start with highlights, followed by a short review of the business line of the most important topics and next we will go in a little more detail regarding our financials and outlook. Assuming you have noted the usual disclaimer, we can now go to Sheet 3 with the highlights of the third quarter. We realized EUR 60.6 million in revenue compared to EUR 49.9 million in the same period of last year. This represents a growth of 21%. The gross margin this quarter was 36.9% and was in line with our expectations. As a percentage of revenue, the adjusted EBITDA improved from 15.1% in the third quarter of 2020 to 16% in the same period of this year. Later on in this presentation, Jeroen van Rossen will go in more detail on the financials. With regard to the full year revenue outlook, we confirmed the bandwidth of EUR 225 million to EUR 250 million. In the coming 3 sheets, we will go in more detail on each of our business lines. We start on Sheet 4 with Smart Grid Solutions, where we have realized a revenue of EUR 33.2 million, which is slightly more than in the same period of last year. The supply of transformer substations continued into our key markets from grid operators to more project-oriented markets. Revenue growth was partly offset by some project delays in the industry segment, which has been the result of customer schedule delays as well as grid operator planning challenges to establish grid connections. We now continue on Sheet 5 regarding EV charging equipment, where we have realized a strong revenue growth of 123%. We benefited from our strong international market position as the penetration of electrical vehicles in new car sales keeps growing across Europe. More and more car OEM's have committed to electrification of their portfolios and are rapidly increasing and diversifying EV supplies in the market. This, together with ongoing incentives for EVs across Europe is driving the growing demand for EV charge points at home, at businesses and in public locations. From a supply chain perspective, a high demand for component, especially electrical ones, continue to put pressure on the supply chain throughout the world. We continue to closely manage our supplies lane. And up to this point, we've been able to mitigate the component delivery challenges. We now continue on Sheet 6 regarding energy storage systems, where we have realized EUR 2.2 million in revenue, which is 62% lower than last year. The decrease in revenues is a result of COVID-19 headwinds in 2020, combined with ongoing decision-making delays across the sector, resulting in longer lead times to secure new orders and to generate revenue. Nevertheless, at the end of the third quarter, our pipeline of qualified lease has more than tripled compared to the same period last year. And we remain convinced of the long-term market opportunity for energy storage as energy storage is an essential element in the set of solutions in the energy transition. This year, we have celebrated the 10th year anniversary of this business units within Alfen and have dedicated the latest Alfen Magazine to this with a broad set of background stories. Now our CFO, Jeroen van Rossen, will continue on Sheet 7 with a more in-depth explanation of our group financials and outlook.
Thank you, Marco. Let's take a look at the financials, starting with the graph on the top left hand of the slide, reflecting our revenue growth. If we look at the third quarter 2021, our revenues increased with 21% to EUR 60.6 million compared with EUR 49.9 million in the same quarter last year. The gross margin was 36.9%. Although this was slightly lower than the 37.2% gross margin in the same period last year, it increased 50 basis points compared to the realized 36.4% in the first half year of 2021. The differences in the gross margin are related to product mix effects. As a result, our adjusted EBITDA was $9.7 million, being 16% of revenues compared with EUR 7.5 million being 15.1% of revenues in last year. So despite a slightly lower gross margin, the adjusted EBITDA increased because of operational leverage. From the financials, we now go to the outlook on Sheet #8. And let's start with the supply chain. We don't see a reduction of pressure on the worldwide supply chain yet, and we still expect supply chain pressure to continue well into 2022. Therefore, we will stay on top of this and continue all the mitigating actions that we already took. However, this may result in some adverse impact as we favor the continuous delivery to our customers. From a business perspective, we anticipate strong market development for all of our business lines. And as such, we will continue to invest in our organization, in our facilities as well as in innovations for the future. From a revenue outlook perspective, we reconfirm our 2021 full year revenue guidance in the range of EUR 225 million to EUR 250 million. We are now at the end of the presentation, where I will hand over to the moderator for any questions. Moderator, could you please take over?
[Operator Instructions] The next question comes from the line of Emmanuel Carlier from Kempen.
A couple of questions. Maybe first on Smart Grids. I was just wondering if you could explain a little bit why the sales growth is lacking the growth in substations?
What we see in the market of substations that we have, say, 2 market events where we are operating in. One is for the grid operators. And the second one is, say, the elements, what we call a small project orientated for greenhouses, [ green field parks ] and the industry. And what we've seen is there that -- especially in the area of grid operators that the planning they do to improve the grid to enhance the capacity to connect all kinds of requirements of the customers to be connected, that they have difficulty in coping with all those different elements together in combination with the planning aspects that are influenced by what you call them the nitrogen elements that in permissions to -- to make modifications in the infrastructure. We see there on the huge pressure to make the realization of those projects happen. And if we are more or less hit with this in 2 elements. One is more or less the direct business for the grid operators. And the second element is, which is a bigger impact is the one which are related to the project realization where the grid connections are delayed. And in some elements also, we see delays due to planning permissions. And as consequence of that, we see that although we have maintained our revenue for some elements, we see that the elements of, say, what we call the percentage of completion for projects, they are delayed somewhat due to the elements we just mentioned.
Yes. That's very clear. Then the second question is on energy storage. So there you mentioned that the size -- now that the project pipeline is very good and that it tripled, but we don't have an absolute level. Could you maybe give a bit more color on the size of that project pipeline and how we should look at that into Q4 and probably H1 next year?
So what we're seeing is that the project pipeline does continue to grow at a rapid base. The demand is certainly there in the battery energy storage market. But what we are seeing is the timing of those projects and the decision-making continues to take longer than expected, except for that it is a nascent market, it is still in its early stages. So that's why the demand gives us confidence that the market will be there in the future, and we'll continue to work each and every one of those projects to close throughout 2022 and beyond.
Yes. Okay. And then on the final question for now -- from my end is on long-term profitability. So you guide for 15% to 20% EBITDA margins. If you look at the last 3 years, you have made an impressive jump on that metric. So how do you look today at the future? Yes, did you have more confidence that you will achieve that? Or do you even believe that maybe this target is on the conservative side? So yes, any color on that would be helpful.
Well, let me start by saying we look very positive towards the future. I think in 2018, we already expressed that our model is based on profitable growth, and that profitable growth should come from a combination of gradually increasing gross margins as well as having operational leverage in. Of course, at that time and looking into what you might expect, we did not have COVID-19 on our radar screen, to be honest, in 2018. So there are always situations where you have to cope with. And I think that's what we are trying to do. So we have a very clear strategy on growth and internationalization and cross-selling. That is what we are pursuing. And then looking at the trend, we see that the trend is there, so that the parameters supporting that profitable growth, they are there. Is there still room to -- for further improvement? Yes, there is. If you look from a quarter-to-quarter basis, I expressed it also before. I also would like it to be a linear line, both on the top line as well as on the bottom line because that would make the explanation very, very easy. But in reality, in nearly all instances, it's not a linear line. So from a quarter to a quarter, you can see an acceleration or a bit of a slowdown. But I think the fundamental parameters underlying our business models, they are still fully there. So we are preparing ourselves for further growth. And we keep on investing in the organization. So from a quarter to a quarter, that might have shown a little difference on the gross margin or on the operational leverage, but we will strive for further growth and also further profitable growth.
Yes. And if I may follow up on that. If I look at the last 5 years and I try to look forward, to me, I think, on sales growth. I think most people probably agree that the sales flow trends will probably be quite similar. But is there a reason to believe that the operational leverage effect will start to fade in the coming years from current levels? Because otherwise, you would expect stronger profitability growth.
Well, of course, to some extent, the operational leverage is, of course, mostly related to indirect staffing because the direct staffing, of course, has a more direct relationship with growth in revenue as well. So you cannot create endlessly operational leverage. So there will, of course, be a certain point in time where already operational leverage might still be there, but it will not grow as fast as it did before. So that is always what you're happy to look at, but we also do not precisely know what gross margins will do then at that time. So, again, I think, for us, and that's why it's a profitable growth story. In our opinion, it doesn't make any sense to grow and not make any money. So we favor the growth on the top line equally as we favor the growth on the bottom line, and that has different parameters. So that's what we are focusing on in the execution of our strategy, and we will continue doing so.
The next question comes from the line of Peter Olofsen from Kepler Cheuvreux.
Yes. I have a couple of questions. The first one is on the gross margin. Yes, it's pretty consistent, I would say, with what we have seen in recent quarters despite the fact there has been a lot of supply chain pressure, raw material cost inflation, et cetera. So could you confirm that you have been able to compensate for raw material cost inflation by pricing and other measures and that the mix this quarter, yes, was within the normal range? Or was there anything exceptional to the mix this quarter?
I would not say exceptional to the mix, but the mix did help to contribute to the gross margin. I think it's also fair to say that we are not buying components and having them in a weak basis, so you do buy upfront. So there's always a bit of a time lag when price increases are also reflecting in cost pricing. So in Q3, to some extent, we saw the first effects of cost price increases. So that's why we also say that we -- there might be some adverse impact in Q4, especially on the electrical component area because we take the approach that we favor the continuous delivery to our customers. That's what we are doing. So if we have to take the decision that we accept higher freight costs based on the fact that we then safeguard the supply chain and keep on producing and delivering, then we will definitely do it. So that is what you might expect. That's what we mean by that we see a continuous pressure on the supply chain. And it's not only about a price increase of raw material, it's also about the logistical chain because we do not see transportation costs of containers going down at the moment. It's stabilizing, slightly declining, but it's not near the levels that we were used to normally. So that is what we are looking at, and that's why we stay on top of this item. So safeguarding the supply chain and make sure that you cope and reduce the price increases as much as possible, that's very high on our agenda.
But in light of the general cost inflation, has there been a positive contribution from pricing to the revenue growth?
Well, we don't have automatic indexations in [ there ]. We have constant pricing strategy meetings in which we look at our whole portfolio and the positioning of ourselves in the market areas. We have indexation clauses, for example, in the contracts with the grid operators. They start normally at the 1st of Jan. So those discussions are going on currently. So that's what you will see. But it's not an automatic transfer of raw material cost increases in sales prices. Unlike some other sectors, for example, in the chemical sector, there it is a more or less a direct connection. That's not the case in our segments.
Okay. Then on some of the project delays that you have seen in smart grid solutions on the project side. Could you maybe shed some light on what has caused some of your clients to delay those projects because that was not very clear from the press release.
There are several elements in those delays. We're also in, say, the previous quarters, we have shown examples that in finalizing the [ preprinting ] sequences in the Netherlands in relationship to, say, the extra environmental elements that have to be included like the -- what we call it, the carbonization elements in making projects happen. We've seen some that we -- that the projects were delayed somewhat due to the fact that the had to be -- we got that extra additional report to be filed in order to get approval. In combination with the fact that we see at this moment that the grid operators are quite stretched in making grid connections or planning grid connections for, say, the relevant projects we are working on due to different reasons, those projects are more or less many elements are combined. Of course, there is also grid improvement projects by the grid operator themselves and they coincide with more or less the extra connections that are being requested by -- to accommodate the projects we are working on. And that makes that in some instance, we have experienced delays to get site work physically finished. And therefore, that also has a consequence in our revenue recognition because we do revenue recognition based on the completion of the project. And if there are delays, then we have to also delay our revenue recognition and that's both valid for the grid of the projects in [ SCS ], but also we see the same elements with energy storage, where we have seen delays in decisions and projects for different kind of reasons, but also in execution of projects. In the second quarter, we indicated the project where we were awarded the contract in for Vital Energi in the U.K. But we have seen that in getting permission to start work on the feasible location that was to be expected in the third quarter. We saw a delay due to the fact that the local permitting agency had extra questions for our customer. And therefore, we could not start on site and therefore, not recognize revenue on this project in the third quarter.
Okay. And coming back on the project delays in smart grid solutions, is it then fair to say that some of the business that was delayed from Q3 might then come in Q4. But at the same time, there is a risk that some of the business that was supposed to come in Q4 might slip into next year?
It's a good assumption Peter. And there's always hard model to have an exact view on whether the delay will offset -- is offset by other elements, but we see now that it is not an element that is -- that has one driver, so that will be also a straightforward solution there in a certain time. It's a combination of elements that makes it for us quite complicated to predict which project on which moment will be -- where we will be able, on the one hand, start to work on site or finish the work on site and get then a proper project planning handling in relationship to the customer requirements.
Okay. And then my final question relates to the EV charging equipment business. Obviously, very strong growth there. Could you shed some light on the growth domestically and internationally? And could you update us on the revenue share of the international sales in that segment?
Yes. So in Q3, we're really proud that we had more than 60% of our EV charging revenue outside of the Netherlands. So we're continuing to see growth in both spaces, but it is fair to say that outside of the Netherlands grew faster.
The next question comes from the line of Lotte Timmermans from AMRO ODDO.
First, a question on the annexation clauses in smart grids. Could you say on what benchmark this one is based and what kind of percentage points would you think of?
Good question and no answer. The indexation is not based on indexes as such. It's a discussion that we have with the grid operators in which a couple of parameters are included in and the rivals are included in that discussion.
And what kind of parameters should we think of? Is it based on raw material price increases or...
Labor pricing. It's collective labor agreements. It's a variety of elements.
Okay. Great. And then a question on prepayments and stocking. In last quarter, you said that you made prepayments of I think of, on top of my head, EUR 5.5 million among other batteries. Did you do the same this quarter? And could you shift gears on some of the electrical components already?
Yes, we are -- we continue that path. It's one of the actions that we take to safeguard the supply chain. So we continue doing that. And if you look at the electrical components, we are not planning just for 2 weeks or 4 weeks ahead in time, we are already planning way into 2022.
Okay. Great. And then another one on lead times. So I know that the lead time is normally in EV charging is about 1 to 2 weeks. Did you see any differences due to supply chain issues? Or could you just manage to keep up with the lead times?
Yes. So what we're really trying to focus on is continuing to deliver for our customers. So the lead times have extended, but we're still in a very competitive position relative to the market. And what we've done is modify our strategy to make sure that we're partnering with our customers to continue to deliver and ensure that we can support their business throughout Q4 and into next year.
Yes. As you know, we're never supplying directly to customers. We have a business-to-business approach, and we have taken the opportunity to strengthen our relationship with our business partner in this segment. And in that way, also try to maintain the, say, the good delivery performance we have, say, always had in the past and keep doing that in this time frame.
Do you know if your lead times are significantly better than your competitors or roughly similar?
We're able to deliver for our customers, and we've gotten positive feedback that they're able to keep their businesses running just like we are.
[Operator Instructions] The next question comes from the line of Jan Richard from Berenberg.
I have a few of them. The first one on smart grids, where we're seeing long-term trends putting pressure short term on the level of activity, and we've seen these bottlenecks for some quarters now. So my question is assuming that these bottlenecks on the grid are here to stay because we don't really see these easing. Now could it put your [ longer term ] revenue guidance at risk, meaning that instead of having low teens annual organic expansion in smart grids, we could have mid- to high single digits for the next 2 years?
It's a good question but complicated answer is that on the one hand, we see the -- not only the ambitions, but also the plans of the grid operators to step up in investments into the grid. We have seen announcements from grid operators say from this year to next year that they show that they want to more than double the investment into the grid in the coming 10 years. So we are fully confident in that, the grid investment and therefore, for us, the business opportunities, they are quite positive. On the other hand, we see constraints in relationship here and there in supply chain or constraints in planning elements. And we -- it's very hard for us to predict at what moment, say, the needed extra investments will also be -- can be translated to more revenue or that there will be, say, limitations, whether it's this quarter or next year, when those balances will be more in favor of letting our business grow. That's quite complicated model for us to judge where or when those extra investments can be translated to real business. But on the other hand to say, on the short term, there might be some impact. But in the long term, we are fully convinced that the investments and gains can be or will be translated to business opportunities for Alfen.
Okay. But do you believe it is a realistic scenario to assume that these bottlenecks and challenges will remain for the next 2, 3 years? Or do you think we can -- you see a path, at least to ease as the industry just copes with a significantly higher level of activity going forward?
We are convinced that all partners which are busy in this segment have the ambition to make the realization and the step up in the energy transition. And you have seen, say, from 2018 onwards that everybody is more then stepping up. Sometimes, there will always be limitations, several like at this moment also, say, the most -- the economic aspects of growth in combination with, say, the supply chain problems also hamper all elements also in this sector. So the growth will be there. It's only hard to predict when the actual growth can be shown in revenue.
Okay. That's very clear. And the second and final one is on energy storage. We've heard some listed U.S. storage companies talking about their supply chain, especially until one -- they have secured their own supply chain. So could you tell us until when on your side, have you secured your supply of lithium ion batteries? Is it Q3 next year? Is it Q4 next year? Is it Q1 2023. Any color on this would be very, very helpful.
Yes. I understand, Jan, I think we will not give the exact time frame because that's very sensitive and competitive information. But you can be assured that we stay on top of the supply chain, as I said before, it's not only on the electrical components, but it's on the whole supply chain for every business unit. So also for this unit, we are planning already way into 2022.
The next question comes from Emmanuel Carlier of Kempen.
Yes. A few questions left for me. First of all, on EV charging. So the focus today is on the AC. I was just wondering if you consider to expand into DC and maybe also if you believe it makes sense to add more services and move into software like some of your peers have done? And if not, yes, why don't you do that? Do you believe it does not make sense to offer -- yes, to have a broader proposition. That's the first question.
I will start with answering the latest part of your question is that in relationship to how do we enter into the market with which type of products and services. As often, we have taken a strategy that we are not in the business to consumer business, on one hand. The second element is that we try to be a supply partner for a broad market segment and also that we've taken a decision not to compete within our own customer group. So if you refer to the -- especially, say, the services in relation to consumers, we know there are some players in the market who both supply various projects in general and also do services. And we've taken the approach into the market not to compete with our customer base. And therefore, we see also that we can have a very straightforward business relation with those -- with our customers, and we can be transparent in our ambitions. Also, they can be transparent in their ambitions and we can work together to optimize the whole value chain. And we see that it affords as -- we see that we don't anticipate to make changes in that approach. If you see that the overall market segment, we have always said that we see the main market to be focused on AC charging at offices, at home, in public environment. And what we call the more, say, also convenient charging when you drive an electrical car, you want to drive when you're not driving your car. It can be in the office. It can be at home. It can be at a leisure center. And the most convenient way to do so is that with AC charging. That doesn't say that DC charging is, of course, part of the overall ecosystem with DC charging that will be on a high location, if you have a long travel, that is a very convenient way to fill up your car to have a further driving step. But we are also of opinion that the opportunities for us as a company. They are, at this moment, more fit with the AC charging equipment. Of course, we will continuously monitoring the market approach, and we also then will consider to include or not include as a decision to add further projects in our product portfolio, but we will do so when we think that the market is more or less fit for an approach for a company like Alfen.
Okay. And how do you look at expanding into more type of recurring revenues, like software revenues? Is that something that you could consider? I know that you do that already for some part, but it's more integrated within the current products that you have.
Our approach is that we -- together with our customers, we have more or less a decision on what should be included in our hard and software portfolio. What we see is that we have more set of a scheme where, say, relevant software features can be added if necessary, to our product. And it's more or less for our customers that they can decide whether they want to upgrade the features or not. But we see that as part of our overall business proposal. We've got sometimes customers at the moment of buying the charging stations are not fully aware of all the options or even the requirements of local grid operators to be load balancing activities viable in our product or not. Those can be added later on. But at this moment, a limited part of our business, but we make our product more or less viable to entering those market elements in the future.
Okay. And then the final question for me is on the feed box. So it looks like they have quite some issues. I was just wondering if this year, you may be in one way or the other benefiting from that.
What we can refer to as often is that we can be clear on our strategy and our approach into the market. And there are, of course, several marketplaces with all kind of elements where they have more or less success into the market. And for us, it is not possible to have any relationship to what happens with some players into the market.
So we tend to never comment on our competitors and only look at ourselves, executing our profitable growth strategy and especially within the EV charging segment, internationalization is very important, and we continue on that path, and we see that we can deliver on that. So that's what we are aiming for.
[Operator Instructions] The next question comes from the line of Maarten Verbeek from The Idea.
It's Maarten Verbeek from The Idea. Alfen signed a lease contract for new production and location office building recently. Could you inform us about the status? Are you already -- is that already operational? Did it also have an impact on your cost structure, maybe again, because it's under utilization. And could you also inform us about the total right of use assets and also the impact on your depreciation level?
Yes. Well, hopefully, you appreciate this is a trading update and not a full financial. Coming back to the first question on the lease contract. We signed that lease contract, and we are currently in the discussion with the landlord on -- and the architect on how the design should look like, et cetera. So we expect that we will start the building of that office next year. And probably, it will be finalized after, let's say, a year later. So probably in the beginning of 2023, we will then have it operational. So that's what we are looking at. And then, of course, with the IFRS legislation in place, it will give rise to an ROU as well as a lease commitment and liability. That's definitely there. So we will have some lease payments there, but it's not there in the numbers yet.
We've have no more questions on the line. [Operator Instructions] There are no more questions on the line, I now hand over to your host.
Okay. Thank you for all the questions. Management Board have been happy to answer all the questions that have come forward and appreciate the attention for our quarter results. And I would like to thank everybody again and speak to you next time, next quarter for the year results 2021 in February. Thank you.
Thank you for joining today's call. You may now disconnect.