CTEK AB (publ)

STO:CTEK

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to CTEK Q2 Report 2023. [Operator Instructions] Now I will hand the conference over to the speakers, acting CEO, Ola Carlsson; and CFO, Thom Mathisen. Please go ahead.

[Ola Carlsson, executive]

Thank you. Good morning, everyone, and thank you for joining this call. We will take you through the Q2 results of CTEK. I'll start with a short introduction of CTEK and the split of our net sales and so on, and then Thom Mathisen will take you through the Q2 results, and I will round off with the conclusions and the current trading.

So let's get started. Some of you have seen this slide before, but I think it's worthwhile repeating. We look at our business in -- divide it in 2 technologies: one is low voltage and one is EVSE, which relates to electrical vehicles. Low voltage, we sell to consumers who charge their lead acid batteries or lithium batteries. We sell to workshops, professional chargers. We have also portable chargers where you can recharge your battery if you have a flat battery somewhere out on the road. And we also have integrated solutions for vehicles that have more than batteries for other purposes in the car than starting the engine. And then in the EVSE, Electric Vehicle Supply Equipment, we are active in home chargers. You see the one we are selling to General Motors in U.S. We are also active in destination charging, which is in the middle. And we also have a portable charger for electrical vehicles. So that's a little bit where we are active.

If we then look how we are organized, we have 3 business divisions, Energy & Facilities, Aftermarket and Original Equipment. We start with Energy & Facilities. In that division, we sell only EVSE products, and the main product is the one you see there, Chargestorm Connected, which is our destination charger. We also sell software related to these products. Our typical customers are you see there in the middle, would be a property owner, parking owner or electrical wholesalers. So it's basically a B2B business.

If we move on then to Aftermarket. There, you see that, that is for now mainly a low-voltage business. And this is where we sell through retail, both online and physical retail, but we also, in some instances, use distributors and we sell to workshops. And we basically sell most of CTEK's products in this division, with the exception of the destination chargers. So you see both EVSE products and low-voltage products.

In Original Equipment, the split year-to-date is actually we have sold more EVSE products than we sold low voltage. Our customers are well-known car manufacturers or manufacturer of other kind of vehicles, and we sell under our clients' brands. And you see an example from Ferrari and General Motors there.

We are active in more than 70 countries around the world in sales. If you look at our year-to-date sales, divided first by technology, you can see that basically 1/3 of our business is now EVSE and the rest is our low voltage business. If we look at the business divisions, Aftermarket is still the biggest division, Original Equipment is about 30% and is the one who has grown most this year. And to the right, you can see our geographical split, where now actually, Americas is our biggest region so far this year. So that was just a short introduction to who we are and how we operate and where we are present.

I'll now hand over to Thom Mathisen, who will take you through our interim report for Q2.

[Thom Mathisen, executive]

Thanks, Ola. So I will take you through both the overall group numbers and some short words around the business divisions and the performance in those. So first, all in all, we can conclude on this slide that, as we also guided in quarter 1, we saw a little bit of a downturn in the beginning of quarter 2, especially in April, with a recovery in the 2 remaining months in the quarter. But we are SEK 35 million approximately below last year's quarter 2. Obviously, when we lose volumes also in our high-margin division like AM and also in E&F, we also lose profit. And that is visible on the adjusted EBITA, that is now around SEK 20 million lower than last year. So that's where we are. The good thing is that we can say that we overall keep our gross margins at stable levels, actually better than the quarter 2 last year.

If we then comment on the various divisions. On the Aftermarket, as said before, we see that due to the lower consumer spending coming from higher inflation and interest rates, et cetera, we see that it's generally lower demand than last year. A very weak start of the quarter, but then a recovery during May and June, and we see that it's rather good in the beginning of quarter 3 as well. We are still holding up good margins, so we keep the EBITA margin on a stable level. That is due to price increases from our side. It's also due to that we have less old spot buy of components and less of air freights than same period last year.

We can then switch to Original Equipment. As Ola said, the division that has grown most this year, almost double sales compared to last year, and the majority of this coming from the newly started deliveries of EVSE to the North American market. So we also see also on the low voltage side, it's stable. Good activity among our customers and stable and good margins on the LV side. And this overall gives, in absolute numbers, the same EBITA as last year, but with the mix change, we obviously have a lower EBITA margin.

Coming then finally to Energy & Facilities. Here, as we also saw in the last quarter and actually was in the end of last year, we can see that now being very active in the Swedish market, which is our main market, we see -- you all know that the construction sector has a lower activity than before. That means also that the project that we are involved, especially then in destination charging, they are delayed. And we see them coming from that lower volumes. That means also that we lose [ popping up ] those numbers, EBITA. And having done a lot of cost savings in this area means that it looks better than it should have been if we haven't done those activities. What we have to prioritize in this, we have said that profitability and coming to profitability is more important than to grow the top line. So that means that we now prioritize to update the product portfolio that we can bring with our customers in pan-European tenders out to other countries in a more effective way than we have done before.

Then some short words about cash flow and CapEx, which obviously is important for us in the business. And we can see that we now are not only for operating cash flow but also for cash flow after investments. For the second quarter in a row, we have positive cash flow. For the period, we have SEK 39 million positive in operating cash flow and SEK 14 million for after investments. That means that after half year, we are on plus SEK 25 million after investments compared to minus SEK 65 million last year. So it's a significant improvement in cash flow versus the first half of the last year. You can also see on the down left side that CapEx, as we have said before, we had a peak given the large development projects we had during '21, '22, especially '22. And now we are gradually going back to more -- it's still high, it should be in this kind of sector, but lower and more normal levels in comparison to the revenues. So we are on the 10% development CapEx during this quarter.

The net debt a little bit increased compared to quarter 1, and that is obviously due to the lower result. The net debt in itself is stable and a little bit improved compared to quarter 1.

So by that, I think I hand over to you again, Ola.

[Ola Carlsson, executive]

Thank you, Thom. Talk a little bit about current trading. As Thom was talking about, we saw a weak consumer spend affecting our Aftermarket division, especially during April. But we also saw a recovery in May and an even stronger in June. And we also got quite a lot of orders into Q3, which means that we're starting this quarter in a better position than we did in the second quarter.

We continue to see lower -- less activity in the construction sector, which affects our Energy & Facilities division. And as Thom said, what's really important is that we now get our product compliant and ready to sell in many more European countries because we get -- we are getting invited to more pan-European tenders, and that is in line with our strategy. And you also saw from our report that we have signed an agreement with a leading parking operator in Europe to deliver destination chargers over a period of 4 years. So a step in the right direction in that area. Our previously announced activities are progressing according to plan, I'll come back to that on the next slide. And if we look forward, we -- it is our assessment that the group's adjusted EBITA margin will improve in the second half of this year.

As we also communicated already in the Q1 report, we have significantly lower EVSE volumes within the OE division than we originally anticipated. We have also reached a mutual agreement to reduce the number of EV chargers for North American market. You might remember that we had a base version and a premium version, we call it Base Plus. We will continue to deliver this Base Plus premium charger, but we will discontinue the base one as probably somewhere in the beginning of next year.

We have also decided to move our production of EV chargers for the North American market to Mexico. And the main purpose of that is to avoid trade tariffs, that we have to pay shipping from China. So that is one of the things we do to reduce the cost of those chargers. We also are running another project to redesign some parts of the charger to get the cost down. This will also open up at a later stage for us to relocate also low-voltage products that we sell in U.S. to Mexico because they are also burdened by the tariffs today. And that would be putting us in a more competitive position on the North American market also for low voltage.

Despite the fact that we have been reducing our development cost, we continue to launch new products. And in the coming quarter, we will launch a product called Nanogrid Air, which is the device that you can use together with NJORD GO, and you can then get wireless load balancing. And what that means in simple words is that you avoid to blow your fuses because the unit will -- before the fuses -- if you run your washing machine and you charge a car at the same time, you might have a problem with the fuses. And this device avoids that diffuse, will cut by reducing the current actually when you charge your car. The second part is a product for our big North American customer called V2L, I talked to it during some presentations. It's a device where you connect to your electric vehicle. And you use it as a power bank, so not to drive the car, but you can actually use it to -- for instance, if you have tools, electrical tools or even a refrigerator, you can use the power in the car to run those without being -- if you're off-grid.

We -- even though we see a recovery, especially in the Aftermarket, we are very cautious to watch the demand and how it will be affected by further increases in interest rates and so on. So we are continuously evaluating actions to mitigate, if needed.

This slide, we showed you already in the Q4 report, and this is the program we initiated to improve profitability and to strengthen our balance sheet. And I'm happy to report that we are on track with these activities. We had a workforce that was higher than 300 in the end of last year, and we're now down to 250. So we have -- the end target is to come down to 230. This is both our own employees and consultants we have in our organization. Our OpEx, we actually had SEK 105 million, if you look in the report of Q4. And we have managed to get that down to SEK 85 million now, and we're aiming to get it further down to SEK 80 million run rate in the end of the year. Our development costs were around SEK 150 million in 2022, and we are now at the run rate of around SEK 100 million. And we plan to get that down to SEK 80 million. The cash flow, Thom already talked about it. We had a quite negative cash flow last year, and we have made good improvements. And the outlook for the year is still to deliver positive cash flow for the full year of '23.

That was all we wanted to share with you today. This will also be my last report. Next time, you will meet Henrik Fagrenius, our new CEO, which starts the first of September. And I will continue as Board member of CTEK.

With that said, we 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. A few questions. On the -- you mentioned significantly lower EVSE volumes within the OE division than anticipated. Could you give some reasons for that? Is the rollout of the EVs slower? Or has a competitor taken some volumes out from you in that contract? Or what's the main reason behind this slower-than-expected volume development?

[Ola Carlsson, executive]

The main reason for the lower volumes that we ship is delayed launches of electrical vehicles on the customer side. If you read the financial statements of GM, you can actually -- they publicly stay put numbers of electrical car they sell. And you would find that the vast priority of their sales year-to-date is the Chevrolet Volt, which is a low-end electric vehicle they have. And so the big launch of the premium electrical vehicles is anticipated towards, I think, the beginning of next year. But I urge you to read more on the GM home page.

[Johan Eliason, analyst]

Yes. Good. And then you decided to go for one version in this contract, the Base Plus, if I understand it correctly. Previously, you sort of indicated that the base version has a lower margin and the Base Plus should have better margins when you start to deliver those. Now is this still the case that the Base Plus that you will deliver now going forward still has the same margin uplift as you expected before? Or has there been any changes to your contract on those terms?

[Ola Carlsson, executive]

No, you're correct in saying that the Base Plus has a better gross margin already from the beginning when we signed the deal with General Motors. And of course, the margins on both products are too low today, and it's not until we are up and running in Mexico that we will see a decent margin on the Base Plus. But that project is well on track. That's my assessment.

[Johan Eliason, analyst]

And when do you expect those volumes to start?

[Ola Carlsson, executive]

We think we can be up and running in Mexico probably around the end of the year.

[Johan Eliason, analyst]

Okay. Good. And then I think in the previous quarter, you had a lot of guidance items. This time around, I sort of see positive cash flow for the full year and hopefully an improving EBITA margin in the second half of the year. Is that basically the recreation of the guidance? Or were there any other metrics that have been changed?

[Thom Mathisen, executive]

No, I would say we are holding what we have said before. And we can see, as you see in the report also, that we have started quite well in quarter 3. And we are still cautious about this. You don't have a full grip on the macroeconomic events that can happen during the fall. But otherwise, as we see it from the business side, we are on the road as we -- as presented before, should be improvements during second half of the year.

[Johan Eliason, analyst]

Yes. And then finally, if I look at your EVSE volumes in the Aftermarket, like, I suppose, that relates to NJORD GO, for example, it doesn't look very impressive. Is it fair to say that you haven't seen any benefit from the Norwegian competitor sort of being forced out of the Swedish market because you're not really in the price points where they were? Or can you say anything of any potential impact for you on that situation?

[Ola Carlsson, executive]

No. We think this Nanogrid Air has been an important -- will be an important enabler for us to lift the sales of NJORD GO. And NJORD GO, we sell both in the Aftermarket division and in Energy & Facilities. And I think that has been a feature that's been lacking on that product, which is important for the customer. But you're right in that we haven't seen a big uptake in our sales because of our competitors' problems. That's correct.

[Thom Mathisen, executive]

And that's depending on the fact that we are more focused on the destination chargers than home chargers. So that's why we didn't have exactly the right products for that.

[Ola Carlsson, executive]

But we still see a big potential in the new to-go concept, which is quite unique on the market. You can bring your charger with you. And if you have several homes, you just need to fix a 3-phase outlet, which is not a very expensive thing to do. And then you can bring a charger with you.

[Johan Eliason, analyst]

But then you also need to buy the load balancing product as well, I suppose?

[Ola Carlsson, executive]

Yes, yes. That's correct.

[Operator]

The next question comes from Kenneth Toll Johansson from Carnegie.

[Kenneth Johansson, analyst]

So a little bit more about Mexican thing. You said that you are maybe up and running already at year-end. So is it the same subcontractors that you use in China or is it a new subcontractor? And would you consider a similar setup for Europe?

[Ola Carlsson, executive]

To answer the first question, the answer is yes. It's the same contractor we use in China that already has a factory in Mexico, that -- and they are now preparing production for us in Mexico in that existing factory. And now we're running this project, and this has been running since beginning of this year, this project. So we are quite advanced in it. And we are confident that we can get this working. When it comes to Europe, we haven't made any decisions to do the same for Europe, but we don't exclude any changes in our footprint given how the world develops. But we see this move to Mexico as it's not just, I think, to fix the profitability of the EVSE chargers. It's a strategic move to broaden our supply base to be more competitive even in the North American markets regardless what products we sell there. So we think this is a good opportunity for CTEK going forward.

[Kenneth Johansson, analyst]

But are there as high import duties in Europe as from China as there is to the U.S.?

[Ola Carlsson, executive]

No, they are much lower, much lower there.

[Kenneth Johansson, analyst]

Okay. Great. Also, you said that you plan to discontinue the first GM charger toward in the beginning of next year? Or could it happen earlier, you think?

[Ola Carlsson, executive]

No. I think in the discussions -- of course, everything can change. But as we have been discussing with our customers, that's where we agreed that, that would be a good timing for both parties. So approximately 6 more months of deliveries of that product.

[Kenneth Johansson, analyst]

Okay. And do you think that -- how large do you think the second GM product that you will continue to deliver? How large do you think it will be compared to this one in terms of sales?

[Ola Carlsson, executive]

It's hard to say, actually. What we normally see in the low voltage when we do this kind of OE business is that the more premium a product is, the higher the take rate is. So the customer that uses to buy a more exclusive car normally buy the accessories to a higher extent. But on the other hand, of course, the number of cars sold are much less. So we don't have as strong -- I mean, we get updated forecasts from our customers all the time, but I don't have a number to share with you.

[Kenneth Johansson, analyst]

Okay. Good. And also, I remember further back you were saying that, I mean, once you have sort of sorted out the GM products and the relationship is working and ongoing, there could be possibilities to try similar deals with other OEMs. So do you think that, that could be an option going forward? Or...

[Ola Carlsson, executive]

Yes, absolutely. We can -- I mean, we are -- without mentioning anything specific, but we have ongoing discussions with many clients both for low voltage and for EV all the time. And sometimes it happens and it becomes a reality and sometimes it doesn't happen. But there's always discussions going on. So that's -- and that -- since we now have the platform, that is, of course, a good opportunity for CTEK.

[Kenneth Johansson, analyst]

But there isn't anything that is going to be launched in the next half year or in the very near term, at least?

[Ola Carlsson, executive]

It's -- we'll be back when we have a deal that we can communicate.

[Operator]

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

[Ola Carlsson, executive]

Now just to round this off, I think we are happy that the actions we have done is shown in the results, even though the result is not where we want it to be. We continue to make the adjustments that we need, and we are carefully monitoring the demand on the market. Thank you for listening. And next time, you will, as I say, listen to Thom and Henrik, who will take you through the next quarterly report. Thank you very much for listening.

[Thom Mathisen, executive]

Thank you.