CTEK AB (publ)

STO:CTEK

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the CTEK conference call Q1 2023. [Operator Instructions]Now I will hand the conference over to the Interim CEO, Ola Carlsson; and CFO, Thom Mathisen. Please go ahead.

[Ola Carlsson, executive]

Good morning, everyone, and welcome to this call. We'll start this call by presenting a little bit what we do at CTEK and how we are organized. I will do that very briefly. I know many of you have seen this before.We look at our business in 2 technologies: EVSE, which is aiming towards electrical car charging of electrical cars; and what we call low voltage. And within low voltage, we sell through retail and our OE partners to consumers. We sell to workshops professional products. We have portable products and we also sell products that are installed in commercial vehicles.In EVSE, we are present in 2 segments: home charging and destination charging; and you see a couple of examples of products. Up to the left, you see the General Motor chargers. In the middle, you see our Chargestorm Connect. And to the right, you see our portable EV charger NJORD GO. We are organized in 3 business divisions: Energy & Facilities, Aftermarket and Original Equipment.If we start with Energy & Facilities, that's the channel where we only sell EVSE products. And you see typical customers there. It's a B2B business. We also sell not only hardware, we sell software. In the Aftermarket today, it's mainly related or has sales in low voltage, and we sell through physical and online retails. And we sell mainly then our low-voltage chargers, but we can also sell our portable chargers and other EVSE products. Our last business division is OE, Original Equipment. This is where we sell to car manufacturers or other manufacturers or vehicles. And here, we sell both low voltage products and EVSE products.We showed this chart last time, and I just want to highlight what has changed in the quarter. So we have a substantially larger share of EVSE products in the quarter than in the previous quarter. You can also see that our Original Equipment business unit has a bigger share of the total group. And in the quarter, actually Americas was the biggest region for us.With that said, I hand over to our CFO, Thom Mathisen, to take you through the Q1 interim report.

[Thom Mathisen, executive]

Yes. Hello, everyone. I will talk you through the slides with the quarter one numbers. And starting with the overall performance in -- now it's not working for me in this. So sorry, back. Some technical problems.The overall financials, you can see that the net sales for the company is more or less flat versus quarter one last year. But as Ola also mentioned before here, we have another product mix with a higher share of EVSE products through our OE division, taking down the overall gross margin with around 4%. Overhead cost rather stable versus last year, but clearly lower than quarter 4 last year, around SEK 50 million lower than quarter 4 last year. We come back to that a little bit later.Some one-off cost in this period related to the cost-out activities we have done and the change of CEO, but on a lower level than we guided in the quarter 4 report, around EUR 9 million versus the SEK 50 million we said in quarter 4.Then coming to our different divisions. I go to the Aftermarket first. As you know, not only for CTEK, but generally in the market, it's a slowdown in the consumer spending and that hits our Aftermarket business; it works, on a very large extent, towards the consumer market. So we have around 20% lower revenues in quarter one versus last year. But in the same time, we have managed to bring up the underlying margins in the business. So we are more not fully compensated, but to a large extent, compensated with improved gross margins in that business. That is a positive thing for the first quarter. That is coming both from less of airfreight and spot buy that we had in the beginning of last year, but also from the remaining price increases we did compared to quarter one last year.OE division, there we see, as we said before, a large increase versus quarter one last year coming from the EVSE sales. So you can now see that 2/3 of the sales in quarter one is coming from EVSE, 1/3 from low voltage. This have an impact, as we have communicated before, on the overall margins in that division because we have less margins in the EVSE part, which we are working on. We will come back to that later on to come to better levels going forward. But we -- as communicated before, now we see the higher volumes coming through EVSE.E&F, last division, not the least. Also here, we are -- with our focus on working with destination chargers, we can clearly see that we are hitten by the lower activities in the construction sector. So we have a net sales drop of 50% compared to last quarter. However, we are working with -- as we have communicated before, looking for more profitable growth than just focusing on top line. And that shows also in the graph you see below that we now have turned the negative trend on margin toward a positive trend with better EBITDA margins than we had before.Finally, some words around cash flow and CapEx where we actually see clearly improvements versus the last quarters, I would say. And if you compare to the quarter one last year, we are around SEK 40 million improvement both after operating activities and after investment activities. That comes primarily from all activities done to reduce inventories and reduce trade receivables, which we have done according to the plans we have had.We also see that our net debt that was finalized right at the end of quarter one now bring us back to our financial target of 3x as a result of that right issue.So with that, back to Ola.

[Ola Carlsson, executive]

Thank you, Thom. I'll talk you through a little bit about the current trading and the outlook for the rest of the year. If we start with the current trading, all the activities that we communicated in the last quarterly report are either done or in progress. As you know, we have completed the SEK 350 million rights issue with strong support from [ LV ] and small owners. So we're very grateful for that. All the previously initiated activities are progressing according to plan. And as Thom were alluding to, returned quite negative cash flow in Q4 into a positive cash flow in the first quarter.We lowered our operational expenses with SEK 50 million in between Q4 and Q1. So the cost saving program is progressing well. We have done the majority of the organizational changes and anticipate to have full effect of those in the end of this year.What has happened in the quarter as well is that we have seen a lower market activity. We, as many other companies, are affected by lower consumer spend, and that has an impact mainly on our Aftermarket division. But we also see a lower activity in the construction sector, which impacts our Energies & Facilities. So compared to what we saw before, we see lower market activity.Another thing that has happened in the quarter is that our big customer, General Motors, has heavily or substantially reduced their forecast for 2023. For those of you who are interested in their forecast on how they will develop with the electrical car, I recommend to go into General Motors' first quarterly report. They have quite a lot of details there about how they see the development of electrical cars in General Motors.We are continuing to take actions to improve or lower our costs and improve our cash flows, and that will continue throughout the year. And we don't exclude that we have to take additional actions as a consequence of the softer market.We look at the updated guidance for 2023. We now foresee a bigger decline in the Aftermarket, driven by the lower consumer spend. As a consequence of the revised General Motors forecast, we don't see as strong growth as we communicated earlier. However, I want to highlight that the rest of the OE business is actually progressing quite well. So we don't see the same slowdown there. It's good sales. For Energy & Facility, we were looking at growth, but now we see a flat development versus 2022. That also will bring down the EVSE part of the total turnover for 2023.Our margins in the base business, excluding General Motors, are strong. We will also have a lower share of General Motors in the product mix which means that we would have a better gross margin on the group compared to what we previously communicated. So it will be slightly lower than last year and better than previously communicated.When we look at the adjusted EBITDA, we unfortunately see lower volumes in Q2 compared to Q1. And so we would have a further decrease in Q2. And then we foresee a gradual improvement from Q3 onwards, driven by the -- more of the actions that we have taken comes into place in the result.CapEx, we keep at the same level in nominal terms. But as the net sales becomes lower in percentage, it's going to be a bit higher than normal. We remain with our forecast to stay -- have a positive cash flow on the full year of 2023, driven by the activities that we have initiated. And when we talk about the net debt, we see that we will be above our financial target due to lower earnings.Before we end this presentation, I also want to inform you where we are on the actions that we initiated in the first quarter. We have reduced our workforce. We were above 300 at the end of last year, and we're currently at 270, including consultants. And we aim to get down to 230 by the end of the year. We have lowered the OpEx in one quarter with, as Thom said, SEK 50 million, and we want to lower that additional SEK 8 million towards the end of this year.On the development cost, we currently have a run rate around SEK 100 million compared to SEK 150 million last year, and we bring that down to SEK 80 million at the end of the year. On the cash flow, we already talked to that. We have made good progress in the first quarter, and we aim for a positive cash flow for the full year.In the graphs, the first one I will not comment since Thom talked to that. But you see also graphically there that we are bringing down our CapEx. We have also reduced our inventories and as we said, we turned a very negative cash flow in the Q4 into a positive cash flow in the first quarter.In addition to this, we work very hard now to reduce the cost of the GM chargers. So that's a project that is ongoing. And if there is any benefits of lower GM volume is that we now have a little bit more time for those activities. They all require approval from GM, but we have good cooperations with GM, and we are confident that we can lower the cost of these products. And as volumes pick up in 2024, we will see better profitability on those products.That was the things I wanted to present today, and I think we then open up for questions.

[Operator]

[Operator Instructions] The next question comes from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

This is Johan at Kepler Cheuvreux. I will start off a little bit with the EVSE part. Here in Sweden, we have obviously seen a competitor dropping out now admittedly in the sort of low-end consumer chargers rather than the destination chargers you are in. But I think I've noticed that the CTEK brand is mentioned more often in reviews after this. Have you seen any positive impact from Easee's demise in the Swedish market?

[Ola Carlsson, executive]

I would say, as they are mainly a home charger competitor and we are not present in that segment, it has a limited effect on us.

[Johan Eliason, analyst]

Okay. Good. Then on the GM chargers, you talk about lowering the cost, but I understand there's also a base version and a more advanced version coming. Which one is the most -- which activity cost cutting or the more sales of the premium version of the GM charger is most important for your earnings development on that contract?

[Ola Carlsson, executive]

It's hard to reveal those details, but I can say that the cost-cutting activities will affect both models. And it's no secret to have a little bit better margins on our premium versions. We are right now produced the first batch of the premium version, and we are just waiting for GM's approval to ship them.So that's also important to understand when we talk about development costs. We are not -- we have very little left of the GM project now in terms of development. So that's, of course, good. And that gives us the opportunity to bring down our development costs.

[Johan Eliason, analyst]

Unless you have any other major contract in the pipeline, how is that looking?

[Ola Carlsson, executive]

I cannot comment that, but as we have a very strong reputation in the industry and we have long-term cooperations with the world's major car manufacturers, whenever they want a product like that, we will be invited to those tenders. But I cannot comment any specific tenders. But we are getting invite to those tenders.

[Johan Eliason, analyst]

Okay. And then a little bit on the low-voltage business in the Aftermarket channel. You talked about you obviously releasing inventories. But have you any ideas on how your retail partners' inventories look like? Are they down to a level they want to be? Or are there further inventory reductions expected? Or where are we now in that cycle?

[Ola Carlsson, executive]

Yes. That's a very good question. It's a little bit difficult to answer since we are present in 70 countries. But when we talk with the big -- our big customers, it's a little bit a mixed picture. Some of them actually stated they don't have any other inventory while some of them actually have too much inventory. So it's a bit of a mixed picture. But I would say, on average, they have a bit too much inventory because they are also seeing the slowdown in the market. So that's why we also anticipate lower sales.

[Johan Eliason, analyst]

Okay. And then finally, Energy & Facilities. You had some geographic market expansions and now you're cutting costs a little bit. Which are the markets you are now focusing on apart from Sweden, obviously?

[Ola Carlsson, executive]

You can see it like this. We focus on our home market, which is Sweden. We are in U.K. and we've taken a little bit longer time, but we are starting to get some traction now in U.K. as well with some of our bigger customers. But we are also taking part in tenders. What is changing a bit that is the tenders becomes bigger and they cover more countries.So a big priority to us now is to get our Chargestorm Connected compliant in as many countries as possible because there is not that many players that can compete in these tenders. They are big tenders, big parking operators with European footprint. So our strategy is also to try to gain those businesses and then grow with those customers into new markets. But we also already have some sales in other countries in Europe outside U.K. and Sweden as a consequence of focusing more on big customers rather than small.

[Johan Eliason, analyst]

And if you get the tender, win the tender for U.K. and maybe France, Benelux, can you sell with profits in sort of those countries? Or will you have to give away to the integrator if you're not present yourself in those markets?

[Ola Carlsson, executive]

It is our belief that it's better to gain those kind of businesses. The gross margin might be lower because it's -- they have a strong purchasing power. But once you get the business, it's much more cost efficient to maintain the business than if you go after smaller business. But of course, you need a certain size. I mean we are still making a loss in this business division, and we would need a bigger net sales to be turned profitable. But we think this is a faster path to it rather than going country by country and building up a sales organization and starting in that end.

[Johan Eliason, analyst]

Excellent. And then finally, just gross margins. Are you back on your low voltage products where you were before the cost inflation started? And where are you on the gross margins on the EVSE part?

[Thom Mathisen, executive]

I would say if you take our base business, you call in fact that LV business, I would say we are back on track and even better than -- you had to go back some quite many quarters to come back to those gross margins. So there we have seen a clear improvement.In the EVSE side, I would say that we -- as I said about the E&F division, we are more cost efficient even if we not have the volumes, as we have said, that we would like to have, but we have a lower overhead cost for that division. And as we also mentioned for the big GM contract, there are several actions ongoing to take out the cost of the product. So it's heading in the right direction. But of course, from lower levels on that side.

[Ola Carlsson, executive]

But strong gross margins, excluding GM, in all the businesses.

[Thom Mathisen, executive]

Yes.

[Johan Eliason, analyst]

Okay, good. And just to get a feeling for your sort of midterm 20% margin target, what sort of gross margin assumptions would you bake in there?

[Thom Mathisen, executive]

Yes. I think that will come from various things. It has been mentioned the cost-out activities, but it's also, I would say, advantages of scale; scaling up businesses, of course, mainly in EVSE products, both through OE division and E&F division. But you also can see that we still have -- compared to the levels we have today, we will definitely grow in Aftermarket as well. And also the LV business, the low voltage business is room for growing continuously. So by that, and not we -- I think we can be quite cost efficient on the OpEx side and the overhead side. We will have a scale advantage over time. So if we hit the turnover target we have to come to SEK 2 billion, we see that the 20% EBITDA margin is fully reachable.

[Ola Carlsson, executive]

Yes. And then you can see the impact that GM had had just in one quarter. So it's -- I mean, if you have a few of these customers, and then, of course, you need to get the profitability right from the beginning. And then you know the GM story, was down in the turbulence of component shortage and corona and so on. We know much more about how these products are -- should be designed and how you do it cost efficient today than we did during the development of these products. So we are more confident that we can earn money in these segments going forward.And then -- but as Thom is alluding to, it's important to get the scale here because when you scale both in OE EVSE, you don't need a huge sales force to maintain these customers. You need some support, but it's quite cost efficient once you have the business, and it's the same with bigger E&F customers. You need a certain support, but it's quite efficient once you have the contracts.

[Operator]

The next question comes from Kenneth Toll Johansson from Carnegie.

[Kenneth Johansson, analyst]

A question on the Aftermarket side. If we compare sales in Q1 to Q1 2021, so 2 years back, and at that time, 2 years back, it was in the middle of the pandemic. So you probably benefited from the pandemic effect in your sales to Aftermarket at that side. But over 2 years, sales revenues for Aftermarket is down 32%. There should be some price increases in that. So, I mean maybe sales and volumes are down like 40%, 50% over 2 years. There are probably some destocking at retailers and so on. But still the former CEO estimated that the pandemic gave a boost of some 10%. So volume is down 40%, 50%. It's quite a lot. So are you facing more competition? Or are you losing market shares in your market as well?

[Ola Carlsson, executive]

I think we don't have any market statistics by where we get information from our customers. We don't lose market share. That's our opinion. It's more that the market is down.

[Thom Mathisen, executive]

And if we can say in general, we have -- as you are also saying, we have had the pandemic effect, a positive pandemic effect. If you go back to 2019, 2020, we are back on those levels and now a little bit this year, more slowdown in the general consumer market that hits us right as we speak. So we see more that it's the consumer spending impacting now than anything else.

[Ola Carlsson, executive]

We haven't lost any distribution. So we are in the same distribution of the same customers, so.

[Kenneth Johansson, analyst]

Okay. Great. Then I wonder you also guide now that your net debt to EBITDA will be above your financial targets this year. Do you see a risk that you will start getting close to covenants? Or were you able to change covenants when you did the new share issue?

[Thom Mathisen, executive]

I cannot go into that details. You saw now that we are on -- exactly on the cost of free after quarter one. The problem for us now since you see that we have a rather good cash flow expectations, it's not on the net debt side, it's more that the profitability slowdown. So of course, that impacts the net debt ratio and so forth. Obviously, we have some audience about our financial target in the bank covenant. So of course, it's a focus area for us to keep us within the limit.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Ola Carlsson, executive]

Okay. I just want to say thank you for participating and look forward to talk to you soon again. Thank you very much.