CTEK AB (publ)

STO:CTEK

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to CTEK Q4 Report 2022. [Operator Instructions]. Now I will hand the conference over to the speakers, CEO, Ola Carlsson; and CFO, Thom Mathisen. Please go ahead.

[Ola Carlsson, executive]

Good morning, and welcome to this year-end report presentation for CTEK. I'm Ola Carlsson, the acting CEO of the company. And with me I have Thom Mathisen, our CFO. We will take you through a little bit introduction to CTEK. Some of you know us better than others, but we'll have a little bit of an update on CTEK, then we will go through the financial results for Q4 and the full year. And then -- and that will be done by Thom, and then I will come back at the end and talk a little bit by my reflections about the results and some guidance around 2023.

So let's get started. First an interaction, where are we active in CTEK, -- we divided in 2 technologies. One would be EVSE or electrical car and other electrical vehicles. And then we have our heritage, the low voltage technical segment. If we look at it, and you see some examples of products we have in the different segments of the market. So we talk about home charger for private use at home. That's the new GM chargers that we developed together with GM. You see on the pictures in the middle, you see destination chargers, which we typically find in public destinations, such as shopping malls or hotels or workplaces and so on. And to the right, you see a portable version of a home charger.

So if you have a power outlet with 3 phases, you can use this charger and it is as powerful as a normal home charger. And if you have a second home somewhere, you can bring it with you.

If we move over to the low voltage, we have a little bit more segments. We have a consumer segment, where we sell under our own brand in retail, both physical retail and online retail, and we sell to many of the leading car manufacturers under their brand. We also sell professional charger to workshops, service centers and so on. They are still low voltage, but they have very high current, up to 120 amps. We -- in this segment or on the low voltage segment, we have also launched a portable low-voltage charger, where you actually can use it to charge your laptop or your mobile phone if you're off-grid, but you can also charge a flat battery if you have one because there's actually battery inside the charger. So if you're stuck somewhere with the flat battery, you can use that to recharge your battery and get started and drive on.

We have also another segment of the market where we're active. We sell solutions for vehicles that has a lot of equipment, you can say, that need charging. Typical example would be an ambulance or a service van or something like that. So that's a little bit where we are active.

So if we move on, and this is now a little bit new how we will report these technical segments going forward. So we -- before, we just did it on a group level, but to increase transparency and understand both how our business are performing, but also where the potential in the business are, we now will divide the different business units into EVSE and Low Voltage separately as well.

If we start with Energy & Facilities, where we sell mainly destination chargers, but you can also sell home chargers in this, to some of the clients or customers that we have in this. But the typical client could be Vattenfall, electrical wholesalers, property owners and so on. But some of these like Vattenfall, they sell home chargers as well. So it's not only destination chargers.

If we move over to aftermarket or you could call to retail if you would like to, we sell to physical retail or land retail to distributors. And here, you can also actually sell both type of products, you can sell low-voltage products and you can sell EVSE or car chargers in this distribution as well. You see that we do it to some extent today, but of course, we want to grow this share going forward.

And the last business unit we have is Original Equipment, but we already now are on 23% EVSE in 2022. And here, a typical customer is all the leading car manufacturers, but also motorcycle companies, power sports, snowmobiles. And also here, you can sell those low voltage chargers and home chargers.

So the takeaway from this picture is, I mean, we have divided in 3 business units, which is divided by customer type. And then we have products, and some of the products can be sold in more than one business unit. You know this, but we are present around the world in more than 70 countries, which, I would say, is a unique position to CTEK. Our relationship with the car manufacturers and the fact that we have global distribution is really one of the key benefits of CTEK.

If we look a little bit about 2022. As an introduction to the result, we can look at the sales also for the group then. For the full year of 2022, 2/4 of the revenue comes from Low Voltage and 1/4 of the revenue comes from EVSE. You can see the split of the sales by the region. So still Aftermarket is by far the biggest business unit we have, and Original Equipment and Energy & Facilities are equally big.

You can see our split geographically to the right. That will change, I can say, rather a lot into next year, but we'll come back to that in the end of the presentation.

With that said, I hand over to our CFO, Thom, to take us through the year-end report.

[Thom Mathisen, executive]

Yes. Good morning. So to start with a reflection back to quarter 3 report, where we guided you to the quarter 4, and we can say that we are above our guiding when it comes to top line net sales, and we are on par with what we guided in quarter 3 when it comes to EBITDA, a little bit lower. So with that said, a full summary of the company and the financial highlights for quarter 4.

Here, you can see that the net sales are on par with quarter 1, SEK 24 million. On full year, we are SEK 30 million up from the SEK 920 million on 2021. We have managed to keep the gross margin on an increased level compared to last quarter last year, you know about higher cost for components during end of '21 and the first half of '22. And now we have managed to raise prices in the markets and compensated for that and back to the levels we wish in our base business.

As Ola mentioned, the EVSE portion of total sales has continued to grow. So now in quarter 3, it's up to 30%. And you can also see on this slide that we have SEK 10 million as an adjustment affecting the comparability of the result, and that is related to the first cost for the -- cost reduction program that we announced in quarter 3.

Now something by division as well. So start with Aftermarket, the largest division. We can see this is a division that is most affected by the current global situation with higher interest and higher inflation, does meaning that end consumers have less cash to spend on our products. So we have a, net sales fell on 17% quarter-by-quarter. Positive is as also on group level that in this division, we have managed to push the prices and compensated for the component cost increases. So we keep the gross margins on a good level.

If I then continue to Original Equipment, here is probably the division that you will see the biggest changes. In the side of -- the right-hand side a picture there, you can see that already now in quarter 4, almost 50% of the net sales are coming from EVSE products, and that is of course, related to the GM business now picking up. But we also had a very good quarter 4 when it comes to the low-voltage products into this division. So all in all, an increased EBITDA in this division.

Coming then to Energy & Facilities. We are quite eager on par with quarter 1 -- with quarter 4 '21 to '22. We have, as also said back in the quarter 3 report, now more of a focus on profitable growth before top line growth. And we also are a little bit hampered by the lower activity in the construction sector that -- meaning that we are not growing sales according to our plans actually. We know that this division have a high -- quite high share of fixed costs. So we are still on a negative EBITDA on this division, but we will continue the efforts to improve that by both growing sales and have better cost control going forward. And in this division, as Ola said before, here we only sell EVSE products.

Now coming to the slide that also explained a little bit of the other press releases we have submitted this morning around the right issue, Ola will come back on that. But you have all seen that we gradually have had higher net debt ratio in recent quarters. And the cash flow after investment activities for this year was about SEK 160 million. It was close to SEK 100 million last year. So obviously, we have had -- it has -- the projects we have run, the component shortage and the higher inventories has -- meaning that we have decreased the cash quite significantly in the business, and that is one thing we need to restore.

If you look at the graph on the bottom hand, on the left-hand side, you can see the portion of capital expenditure in our product development during the recent years. And then you can see that we -- 2022 speaks out as an exceptional year, with 12% of spending compared to net sales. Thus in normal years are in the range of 7%, 8%. Of course, that has also had a negative impact on the cash situation.

So with that, I hand over back to you, Ola.

[Ola Carlsson, executive]

Thank you, Thom. As you probably have read also in the interviews and so on, this is not the result that we are particularly happy about, even if there are some highlights that Thom alluded to, such as stable gross margins. But we in management and together with the Board have decided to take actions to restore our profitability and to strengthen our balance sheet.

And here, you see some examples of the things we will implement, and some we have actually started to implement already. If we start with the workforce, which is our own employees, including our consultants, we were at year-end around 300 people, and we are now going to reduce that down to 230 gradually through the year. So that's a 25% reduction. Some of that reduction is already done and some is -- we still will do.

We also need to bring down our OpEx, our overheads. We have around SEK 100 million of OpEx in the fourth quarter last year. We will bring that down to SEK 80 million in the last quarter of this year. So that's a SEK 80 million annual effect or 20% down. Thom talked about development costs. You saw that it was quite high in 2022, mainly related to GM project. Here, we will go back to more normal levels. So we are looking at SEK 80 million for 2023. So that's more what we've been operating previous years with. And we will turn a quite big negative cash flow of SEK 160 million into a positive cash flow for the full year of 2023.

I think that's what we need to say about that. You see some of the backgrounds where we have deteriorating EBITDA margins over the quarters. We have increased inventories and intangible CapEx. We have -- our leverage has been getting higher and higher, and we have had in most of the quarters, a negative cash flow over the last 2 years.

I want to talk a little bit about General Motors as well. And the reason being that this project has been a challenge for CTEK, but it's also going to be a big part of our business going forward. But let me start by giving you some background first. We have a long relationship with GM as we have in many of the leading car manufacturers in the world. With GM, we started already in 2009 with supplying them branded low-voltage chargers. And it was in 2020, we entered into discussions of common projects to develop home charger for electrical vehicles.

We came to the table with plus 10 years of experience through our acquisition of Chargestorm, and the GM thought is would be a good fit. So this started as a co-development between the companies. But the reason that this has been a challenge for, I guess, both GM and us is that we soon entered into the pandemic, all the development work that we were planning to do together has to be conducted remotely. We soon entered into component changes needed because of component shortage.

So CTEK, a lot of the development resources in CTEK, the last, I would say, almost 2 years, but then 1.5 years, has been either working on changing components in this development project for GM or changing components in existing CTEK products just to maintain supplies. So this has driven many redesigns, recertifications during the project, forcing delays and driving cost, both the development cost of the project, but also the product cost has gone up during the project.

In addition to that, we are operating in an immature market where things are changing during the project. Plus on GM side, customer needs, but also from the certification bodies, such as UL, which has -- where we have to certify the product. Those requirements were not the same when we started this project as they are today. So this has been a challenge. But on a positive note, we have now started to deliver. So we should have delivered in March, we delivered in August. We have ramped up good through the end of last year. The product is well received on the market. You heard from my interview, we have 3,000 to 4,000 units out in the market already.

And the last thing that is on the positive side is, of course, when we entered into this project, volumes that was anticipated or forecasted by GM was substantially lower than they are forecasting today. So that's -- hence, that will be a big share of CTEK, but it also illustrates the potential in CTEK's unique position with leading car manufacturers. We -- there is trust in CTEK that we can do these kind of products.

And this is just one customer. This is a customer we have, but there are many potential customers out there. However, we start this deliveries with low gross margins, well below the group average, and we need to find ways to -- or we have the identified ways to reduce the cost of the products. And those measures will be implemented in -- mainly in the second half of this year so we can restore our profitability. And on a midterm basis, this will be a good and profitable business for CTEK.

We are also launching the second variant of the GM home chargers here in Q2 of 2023.

So that was a little bit background on General Motors. But it's growing quickly, and it's becoming a substantial share of our net sales over this year and going forward.

Some guidance on how we look at 2023. So we talked about 27%, I think, in 2022 of EV sales, share of total net sales. We estimate it to be almost 50% by end of this year. We expect a double-digit total growth for the company. And if we look at the different business unit, we still think that the Aftermarket will decline slightly driven by the same reasons as Thom were alluding to, a weaker consumer purchasing power, driven by high interest rate and inflation.

Original equipment will grow substantially driven mostly by GM. We still feel confident that we can grow Energy & Facilities on a good rate for this year, driven by the change in purchase of electrical cars. EVSE as a technical segment across the -- all the business units will also grow substantially also.

This will also lead to -- we will keep the margins we have in the different business units, but we will have a negative effect of almost 10% or around 10% decline of gross margin on group level. That is driven by a shift in between the business units and the growth of GM. That's the 2 main reasons. And of course, we declined the most profitable area and the other ones are growing.

Adjusted EBITA, we will see a further decrease in Q1, followed by a gradual improvement during the year towards high single-digit margin for the whole year, and we anticipate a double-digit margin in Q4. CapEx we've already talked about, we will come back to normal levels and materially lower than what we spent in 2022. Cash flow for the full year, we estimate to be positive, mainly due to lower CapEx and other actions to reduce our net working capital as well as the robust cost reduction activities that we just talked about. Net debt, we anticipate to be in line with our financial target after we completed rights issue.

And then we come over to the rights issue as I think the last slide we have. So the Board of Director has resolved SEK 350 million rights issue. of course, subject to EGM approval. And the purpose of this is to strengthen our balance sheet, lower our leverage and also create financial flexibility to execute on strategic initiatives, I would say, especially related to EVSE possibilities. This rights issue is fully guaranteed by CTEK's largest shareholders. Investment AB Latour, with more than 30% of the capital and the votes. We have additional commitments from big shareholders like AP4, Skirner, AMF, Tjänstepension, Swedbank Robur and SEB Funds, who together own 27% of the capital and votes of CTEK.

In connection with this, all the things we have talked about. The Board of Directors has also reviewed our financial targets and made the following revision to reflect the company's updated product mix.

So our new target is adjusted EBITA margin target revised to 20% in medium term, and that was previously about 25% in medium term. The other financial targets are unchanged.

And I think with that, we are ready with the presentation, and we welcome questions.

[Operator]

[Operator Instructions] The next question comes from Kenneth Toll Johansson from Carnegie.

[Kenneth Johansson, analyst]

Yes. So 2 questions. Do you think there will be more costs in the coming quarter for this cost reduction program?

[Thom Mathisen, executive]

Yes, it will be during the first quarter, predominantly, maybe a little bit into quarter 2, we expect something in the range of SEK 15 million to SEK 20 million more for finalizing our cost-cutting program, including shifting of the MD for the company or CEO for the company.

[Kenneth Johansson, analyst]

Okay. Then with the GM chargers, you said that you had delivered quite many now. Can you say anything about the take rate? I mean, if GM sells 100 electric vehicles, how many of them buy their electric vehicle chargers? Or is it too early?

[Ola Carlsson, executive]

No, it's not the kind of information we will share with the market.

[Kenneth Johansson, analyst]

Okay. But you said that in general, both GM and its customers seem happy with their product?

[Ola Carlsson, executive]

That's correct. That's correct.

[Operator]

The next question comes from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

It's Johan at Kepler Cheuvreux here. Just a question on your gross margin. Obviously, you have a lower gross margin on the EVSE product and then our traditional products, and that will have an impact when those grow. But you also have the situation that you've been forced to design -- redesign your product because of component issues. And firstly, I just wanted to sort of understand a little bit here. You are cutting costs on internal staff and consultants, but at the same time, you want to lower the gross margin -- or improve the gross margin and lower the component cost. I guess that's once again redesign cost that needs to be taken or am I wrong here?

[Ola Carlsson, executive]

It's Ola, I can answer that question. When it comes to our margins, we have been able to compensate for increased cost of components. So our -- if you exclude our GM business, we are on quite normal margins in all the business divisions and businesses. When I was referring to further need of reduction or redesign of products, it's specifically on the GM charger. The rest of the products has normal margins, and we have been able, by price increases to compensate for any of the increased costs of components.

[Johan Eliason, analyst]

But on the GM charges, I mean, this redesign, it will not carry significantly extra cost, you mean, because it's a one product sort of setup or...

[Ola Carlsson, executive]

In the CapEx, we -- and what we have indicated, we have taken room for that development work. The way you do it, we have identified real cost reductions possibilities that we are quite confident that we can do. But we also need to bear in mind that when we start changing the products, we -- to some extent, we might need to do a recertification of the product and we need to go through the GM testing again. But in discussions with GM, they will be -- they have said that they will be very supportive for us to do those changes to restore our margins.

[Thom Mathisen, executive]

And this is also part of our guidance we have done for 2023 that we have included this kind of CapEx.

[Johan Eliason, analyst]

Yes. Good. And then this issue about declining gross margins, is this sort of a hard gross margin? Or is it also an issue that you've had to capitalize much more R&D than you initially anticipated? Will this capitalized R&D depreciation hit the gross margin? Or is that actually lower in the P&L?

[Thom Mathisen, executive]

It's below EBITDA. So that is more depreciation, you are fully right, but that is not impacting the gross margin.

[Johan Eliason, analyst]

Okay. Excellent. Otherwise, this medium-term targets, do you have any new information on what medium term implies? Is it '25, '26, '27, '28, '30?

[Thom Mathisen, executive]

No. Let's say, something around 4 to 6 years is a reasonable expectation for medium term.

[Operator]

The next question comes from Johan Skoglund from DNB Markets.

[Johan Skoglund, analyst]

I have 2 questions to follow up on the earlier ones. So a shortage of critical components for EV chargers, that has been affected during the year. How does this affect your EV charging area right now? And where do you expect this to go through the next few quarters? I mean judging by the earlier question here, it seems like it's pretty much solid now, is it?

[Ola Carlsson, executive]

I can say the situation today is much, much better than it used to be. We are not totally out of issues, but it's on a much, much lower level today than it for 6 months -- just 6 months ago or -- so we don't foresee any problems to supply. Components costs though are still on a high level in the market. So that's our view. Does it answer your question or...

[Johan Skoglund, analyst]

Yes. Very good. So for my second question, it's good to see that your partnership with GM is progressing. How do you think about customer concentration here? And could we expect collaborations with other OEMs in the near future?

[Ola Carlsson, executive]

I wouldn't dare to say in the near future. But I mean, we are active in the markets and we normally get invited to all these kind of projects as a potential partner. That's -- but we don't have a new one to announce next week, if I say so. But we are currently actively working with many car manufacturers. We are in discussions, but it takes a bit of time. But we have a strong position with the car manufacturers. That's quite a strength for CTEK.

[Operator]

[Operator Instructions].

[Thom Mathisen, executive]

Yes. Again, Thom here just correcting myself, medium term in our perspective is more the 2 to 4 years, not what I indicated before, 2 to 4 year for medium term. Sorry for that.

[Operator]

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

[Ola Carlsson, executive]

So Ola here, really thankful for participating today. If you have any further questions, don't hesitate to reach out to me or Thom or Niklas here on IR. And I hope we have answered your questions in a good way. Thank you.

[Thom Mathisen, executive]

Thanks.