CTEK AB (publ)

STO:CTEK

Earnings Call Analysis

CTEK Q2 2024: Organic Growth and Improved Profitability

CTEK reported SEK 212 million in Q2 revenue with a 53% gross margin and SEK 15 million adjusted EBITDA. Organic growth was 6%, and the EBITDA margin rose to 7.1%. The Consumer division saw a 26% increase in sales, driven by focused actions and the successful launch of the CS1 in Australia. The company’s net debt ratio improved to 2x. With ongoing efforts to enhance the sales organization and focus on new product development in Low Voltage, CTEK aims for continued growth, particularly with its new EVSE charger CC3.

Signs of Recovery

CTEK is demonstrating a significant rebound after a challenging period, evidenced by a 6% organic revenue growth this quarter—the first growth in 1.5 years. This resurgence is primarily attributed to a substantial performance in their Consumer division, which surged by 26%. Notably, the introduction of their CS1 product in Australia has made a positive impact on sales.

Financial Highlights

In Q2, CTEK reported revenues of SEK 212 million with a gross margin nearing 53%. Adjusted EBITDA rose dramatically from SEK 3 million in the same quarter last year to SEK 50 million this quarter. This increase in profitability is due to a favorable sales mix favoring high-margin products, particularly in their Low Voltage segment.

Divisional Performance

CTEK operates primarily through two divisions: Consumer and Professional. The Consumer division, accounting for about 65% of total volumes, saw a significant improvement, driven by strong sales and effective sales strategies. Meanwhile, the Professional division, representing 40% of volumes, witnessed mixed results, particularly in the EVSE sector, indicating a reliance on larger B2B relationships.

Debt Management and Cash Flow

As part of their financial prudence, CTEK has reduced its net debt ratio from 3.4x to 2, showcasing effective debt management strategies. The company is also improving its cash flow, reporting SEK 22 million in operating cash flow, which indicates solid operational efficiency moving forward.

Future Guidance and Strategies

Looking ahead, CTEK is keen on continuing its organic growth while enhancing product focus, especially within the Low Voltage segment. CEO Henrik Fagrenius mentioned that they are entering Phase 2 of their growth strategy, emphasizing product development and sales organization strengthening. However, they remain cautious about providing specific revenue guidance due to unpredictable market conditions.

Market Dynamics

CTEK also reported slight positive trends in the North American EVSE market, albeit from a low base. This hints at potential growth opportunities, but the company remains vigilant about market volatility and competitive pressures. Overall, while the Consumer division showed robust gains, the Professional sector's dependence on major accounts indicates a need to bolster sales volume for future profitability.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to CTEK Q2 Report 2024. [Operator Instructions]

Now I will hand the conference over to the speakers CEO, Henrik Fagrenius; and CFO, Thom Mathisen. Please go ahead.

[Henrik Fagrenius, executive]

Thank you very much, and welcome, everybody, to today's call. Today's presenter is me, Henrik Fagrenius, and I also have Thom Mathisen, CFO at CTEK. Just a brief description of CTEK for the new participants. We are -- we were founded by Inventor Bengt Wahlqvist 25 years ago in Vikmanshyttan in Dalarna. We are developing, designing and testing all our products in Sweden, and we have research centers in Vikmanshyttan, Sweden; Norrköping, Sweden and Shenzhen, China. We have mainly 2 technologies, which one is EVSE, that is chargers for electrical cars and hybrids and low voltage, which is mainly 12 volts up to 48 volts chargers to some different segments.

Last year, we did a slight reorganization and we have now 2 divisions. One is called Professional, where we serve our big B2B customers, both client brand for Low Voltage and EVSE for big parking operators and others. And then we have our Consumer segment where we sell to consumers and to retailers. So let's talk about Q2 results. The revenue ended up in SEK 212 million. The gross margin of almost 53% coming to an adjusted EBITDA of SEK 15 million. We had an operating cash flow of SEK 22 million, and the EVSE share of the net sales was 21% and our net debt is 2x.

I'm very happy to see that we are growing the company for the first time in 1.5 years. We had an organic growth of 6%. We increased the EBITDA margin with 5.7 percentage points to 7.1%. And we see a very strong increase in the Consumer division, and we grow with 26%. And thus is due to focused sales activities, and we also have launched the CS1 in Australia with a very positive result. When we come to the EVSE, we see some slight positive trends for the EVSE in North America, though from very low levels. And we delivered our first CC3 to customers in U.K. in July with a very positive outcome.

If we talk a little bit more about the very important segment of Low Voltage, this is the fourth quarter -- sequential quarter, but we have growth. And as I mentioned before, we are strengthening the sales organization in the Consumer division. We will continue to do so. We see a stable sales in the client brand. And as I mentioned, we are launching new products. And with that, we are also shifting a bit of our focus now when we have finished the CC3 EVSE charger. So we will focus more on Low Voltage development going forward.

With that, I'll leave over to you, Thom.

[Thom Mathisen, executive]

Thank you, Henrik. So some number crunching for the quarter 2. We had overall key financials for quarter 2. I just highlight here the -- as Henrik already mentioned, the net sales growth of 6% adjusted for currency. We have an increase in gross margin, mainly coming from another mix with higher share of the high-margin Low Voltage segment. And those 2 together means also an increased EBITDA from SEK 3 million comparable quarter last year to SEK 50 million this quarter driven by volumes and mix but also lower OpEx than same quarter last year.

I continue then to some words from the divisions, the Consumer division, that is our largest division, having around 65% of our volumes where we did high increase compared to last -- same quarter last year, a 26% decrease. And with that follows, of course, higher EBITDA number wise, but also slightly higher margin-wise, 38.4% versus 26.1% last year. So in the growth on the lower side of the slide, you can see that we have stable and good EBITDA levels and also quarter-on-quarter, an increase over the last 1.5 years.

Going over the Professional division. Here, the standing for around 40% of the volumes. We can see also that the share of EVSE is somewhat higher than last quarter, it's 56% and 44% from Low Voltage. The lower volumes comes from the EVSE part and mainly actually from the big North American customer where we had higher volumes comparable quarter last year. On the lower-hand side, you can see that we have now stabilized the volumes. In this division, we have a slight decrease in the margin, but going -- we know now that the cost base is under control. We now need the volumes to grow the margins and turn them to the positive numbers.

Cash flow and CapEx. I would say cash flow is, of course, the main topic for us to continue to work with. We continue now to create both positive operating cash flow, but also operate positive net cash flow after investments. That is really important. We have the higher continuous EBITDA levels and the reduced net debt, leading us to an improved net debt ratio, now down to 2 compared to 3.4x same quarter last year. As you see on the graph below, we are still on the same level of CapEx compared to net sales, 9% as we had full year last year. We are working both with more efficient CapEx, and we have also finalized some large CapEx projects.

So we'll continue to work on that, reduce consultants and going down somewhat in order to create more cash flow. And at the same time, also, of course, working with net working capital as we have done before to create even more positive cash.

So with that, I think I leave back to you, Henrik.

[Henrik Fagrenius, executive]

Thank you, Thom. And just as a summary then. I'm very happy to see that we are having organic growth in the quarter and with increased profitability. Also very important is that we are continuing to lower our net debt ratio, now reaching 2. And of course, the strong increase in the Consumer division with increased focus on sales and also launching products in Australia. And then we see some slight positive EVSE trends. We see a very good welcome of our now new CC3 products now when we are installing at that customer and see a big interest on that.

We are continuing to follow our strategy, as I mentioned last call, we have left Phase 1 and are now coming into Phase 2, where we will focus on organic growth. And we are continuing to strengthen our sales organization, especially in the Consumer side, and we are increasing the focus on development of new products in Low Voltage and we look positive on the outroll of the new EVSE charger CC3.

So with that, I hand it back to the operator.

[Operator]

[Operator Instructions] The next question comes from Sofia Sörling from Carnegie Investment Bank. Please go ahead.

[Sofia Sörling, analyst]

Sofia here from Carnegie. A couple of questions from my side. So first, just to touch upon this with the spend on R&D. And what implication on new product closures will this entail? And also how do you see the -- is it necessary for you to actually launch new products within Low Voltage and EVSE ahead or into 2025? That's my first question.

[Henrik Fagrenius, executive]

Yes. I can take that one. We have now finalized some of the developments of CC3, where we have had external consultants involved. So the reduce is mainly that we do not need those external consumptions any longer. And it is very important for us to still have efforts in the R&D, of course, we are an innovative company and we live on the premium products. So we need to be ahead both in EVSE and in Low Voltage. But we have had a very high concentration now to get to the CC3 out. And now we free up some resources internally to refocus a little bit more on the Low Voltage side as well. Then we will focus then on building up the sales organization.

[Sofia Sörling, analyst]

All right. And maybe you can also -- you mentioned the increased focus on sales organization within the Consumer division. Should we interpret it if you will focus on the sales organization for Low Voltage? Or is it both Low Voltage and EVSE care for maybe EVSE?

[Henrik Fagrenius, executive]

The Consumer division is selling actually both Low Voltage and EVSE products, but mainly Low Voltage. And we will concentrate to build up the Consumer division sales organization because we have a lot of countries where we haven't got the penetration, but we wish that we have. When it comes to the pure EVSE for parking operators, et cetera, I think we have the right-sized organization to be able to grow there as well because it's more of a B2B business with large key accounts. So we don't need that amount of feet on the street to growth.

[Sofia Sörling, analyst]

Okay. And just a question on the strong sales in Low Voltage. As you mentioned, the CS1 in Australia, is this trend -- if you can give some more details on the demand trend during the quarter? And is this something that you expect will continue into Q3? And in addition to that, if you see other positive trends within Low Voltage and also in other type of countries or anything that distinguish from this base in Australia?

[Henrik Fagrenius, executive]

Yes. We have, of course, quite a soft comparing quarter when entering into Q2. But we see that the strong -- this is the fourth consecutive quarter that we have growth in Consumer, be a positive trend. We will not guide because it is a very turbulent world, but of course, we are working to continue that trend. And there are a lot of white spots for us in Europe, but also in the rest of the world. So with extra focus and extra seats on the street, I perceive that we can grow the Low Voltage program.

[Sofia Sörling, analyst]

Okay. But what would you say is the main drivers between this quite significant sales in Low Voltage then?

[Henrik Fagrenius, executive]

The underlying market is not growing as such so much. So it's more that we are capturing market shares and with a full effort in launching new products and also entering into new [ numbers ] that I would say, is -- and more -- it's hard work.

[Sofia Sörling, analyst]

All right. Okay. So let's go over to the EVSE sales instead. You mentioned actually that compared to previous same period last year and deliveries within North America was reduced, but you still also mentioned that you recognized some positive trends also in North America, and you see positive trends in the Nordic. Could you give some more details on what you actually see and what drives this?

[Henrik Fagrenius, executive]

When it comes to North America, the comparing quarter last year was actually quite strong. But then after that, we have had a very weak quarter. So the positive trend I'm referring to is if you look from quarter 4, quarter 1, the 3 last quarters, we see a slightly uptick in North America but it is, of course, very low levels. When we come to the Nordics and Europe, it is a lot of activities. Still, there is uncertainties due to the interest level, et cetera, for new building projects, et cetera. But we see that there are more activity in the market than it was previously.

And also with -- now when we have delivered our first CC3 units to customers in the U.K., we get a very positive feedback on that, both on the product and also from the support levels that we can give to our customers.

[Operator]

The next question comes from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

And just a curious question about the sales growth, again, following up on that. You say focused sales activities. I mean it sounds like the sales are not focused otherwise. But is it just that you have hired more and more sales guys? Or have you initiated some sort of discounting program? Or what's the focused sales activities actually?

[Henrik Fagrenius, executive]

Yes. It is hard work, but it's also a more efficient way of working. We have a new Head of Consumer Division since beginning of this year, Fredrik Uhrbom coming from the retail industry with the vast experience in how to work. So we see a more focused work. We are working closer together with the marketing and department, connecting those 2 departments, and we have also increased the sales force in especially Germany and we will continue to do that in strategic countries.

[Johan Eliason, analyst]

Okay. So that sounds like some potential for us to continue. You have previously talked about your retailers restocking after the cold winter, starting in December, if I remember correctly, sort of. How do you see the developments of the retail inventories during this quarter? And beginning versus the end, for example?

[Henrik Fagrenius, executive]

It is hard to have hard facts and figures on that one. But we see our online customers and we see that the -- it is increasing. We are actually gaining market share at companies like Amazon, et cetera.

[Johan Eliason, analyst]

Okay. Good. And then on the cost items, good gross profit, et cetera, but at least versus my expectations, your overhead costs were a little bit higher. And I noticed your staff costs have increased sequentially and is basically flat year-over-year. Is this what you are now planning for to -- I mean, you mentioned the higher sales in Germany, for example? Are you expecting these costs to be flat up going forward and that the volumes will help you to improve the EBITDA margin further? Or how should we understand these components going forward?

[Thom Mathisen, executive]

Good questions, Johan. I'll take it first. So first of all, I think we have very well followed our program that we launched end of 2022 with the reduction, as we said, in OpEx. And we are following that trend. And actually, now on a group level, we have lower OpEx in quarter 2 versus quarter 2 last year, where we had done the majority of the cost-out activities. So what we can say there is that we don't expect any large further cost reductions, but we work continuously, we're optimizing. So what Henrik mentioned before, we need to have some more feet on the ground in consumer to grow that area.

And then we take out cost in primarily consultants in R&D, et cetera, to make sure that OpEx CapEx levels stay on a stable level and not coming to a cost problem. Again, so to say. And then, of course, what you are saying is also true. We think we have done, as I said, most of the cost reduction activities, but we now need also to grow top line, and that will, of course, help us to have the right OpEx level compared to net sales. That goes and we can see that already now. And we can also see that we -- in EVSE, if we have the right-sized organization we think, but we have higher volumes, we will also let's say, increase the EBITDA level by that.

[Henrik Fagrenius, executive]

Having a scaling effect.

[Thom Mathisen, executive]

Yes, scaling effect, yes, yes.

[Johan Eliason, analyst]

Good. And just to be clear on this R&D, you mentioned you have developed now the CC3. That means your R&D costs should go down. Is that primarily on the CapEx side or OpEx side or both?

[Thom Mathisen, executive]

It's a little bit of both, I would say. Of course, quite -- I will not give the exact percentage, but it's a lot of CapEx now that we can end having the CC3 and most of the things developed for that new product. But for us, we look not only on OpEx, CapEx, but the most important is to create positive cash flow. So having out reducing the net cash out is our primary goal.

[Operator]

The next question comes from [indiscernible] from Red Eye.

[Unknown Analyst]

I think most of my questions have been answered already, but I'm curious to hear just with regards to the very strong Low Voltage sales here. Is there any customer in your account or anything like that, that stands out in the quarter with regards to this high level of sales or maybe any month in the quarter that stands out? Or has it been in line with your own expectations, you think?

[Henrik Fagrenius, executive]

It is -- it has been in line with our own expectation. It always varies a little bit between months and I would say we have a very diversified customer base in Low Voltage. So it is growth overall. What I mentioned is that we see an uptick in Australia due to the launch of CS1 there. I would say that is probably the one thing about is sticking out. Otherwise, it's growth all over.

[Thom Mathisen, executive]

Yes. Maybe we can say [ dark hawks ] where we have increased sales force.

[Henrik Fagrenius, executive]

Yes, in Germany, especially where we have increased the sales force, we see a positive effect of that.

[Unknown Analyst]

Okay. That sounds fair. Do you think there is any risk that this strong sales in Australia, for instance, could have, I don't know, maybe not a backlash effect, but that it could come on the behalf of the Q3 sales, is it still fair to think that consecutive quarter with growth is fair?

[Henrik Fagrenius, executive]

Yes. We are not guiding and we are working hard to, of course, make the trend to continue. It's always hard to say in specific countries, but we are working hard on having also the fifth quarter as growth.

[Unknown Analyst]

Okay. That's good. You also mentioned in the report that you're seeing positive signals in the North American market and possibly also the big North American customer. Could you just elaborate a bit on these signals or [ tenancies ]?

[Henrik Fagrenius, executive]

It is from very low levels, but we see that the model that we are still having but we're still supplying to them, they start to have some demand for that. It is on low levels, but we see that it's at least moving in the right direction.

[Unknown Analyst]

Understood. And also final for me. Regarding the timing of the launch of the CC3 in the U.K. market, you mentioned second half of this year. Is it more -- is it fair to think that Q4 is more reasonable than Q3?

[Henrik Fagrenius, executive]

Yes to see volumes, we have, as I mentioned, installed the first units as customers now in July and we will continue, but the ramp-up will be in Q3, Q4.

[Operator]

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

[Henrik Fagrenius, executive]

Thank you all for attending this call and looking forward to hear you again in a quarter. Thank you very much, and have a nice day.

[Thom Mathisen, executive]

Thank you.