SFC Energy AG

XETRA:F3C

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the publication of the Q1 report of SFC Energy AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand over to Dr. Peter Podesser, CEO, who will lead you through this conference. Please go ahead.

[Peter Podesser, Chairman of Management Board & CEO]

Thank you, Martin, for the intro. Good morning, ladies and gentlemen. Welcome to our first quarter earnings call today. Together with my colleague, our CFO, Daniel Saxena, we thank you very much for taking the time, and we'll be pleased to lead you through, I would say, an exciting start of the year.We go through our presentation first, highlight some of the key results and then we'll be very happy to answer your questions. So if we are now looking at what we have produced here from January to March, we look at what we can state as the best first quarter in the company's history.A proper increase of sales revenues to pre-corona levels by 5.4% going across all markets and the 2 new reporting segments. A very positive development here on the earnings and on the cash flow side, and this all led us already to a confirmation of our outlook here in terms of year-end outlook on revenue side last week and also a substantiation of our earnings outlook for the year as we see consistent improvement here.But let us now look into the overall business environment. And I think we can report here a consistent strong momentum across all our customer segments, and therefore, also the 2 business segments. We, from a macro perspective, see an adoption of fuel cells as a replacement of conventional technologies like generators across the board, regionally broad and not specified to a single application where I think the broad market exits we've built -- we've being building up over the last 10-plus years is now bearing fruits here.And at the same time, naturally, this is supporting the macro trends and the macro mass to a reduction of CO2 footprint decarbonization in order to achieve climate targets here on a worldwide -- on a global level.But besides the macro picture, well, looking back a year, we had to adapt quickly to a new environment. We had to implement an efficiency program, which I think helped us now to master this corona endurance test. And I think we have been adapting this program over time constantly and consistently.Intensifying R&D, accelerating the launch of new products, which are now successfully sold already and apart and even I would call an important part of our first quarter results. At the same time, digitization of sales and marketing and a big element here putting out webinar for our customers across the end markets and on -- also on a worldwide level in order to make sure we still keep contact to customers, although no traveling has been possible up to right now.And now I think it's up to us to continue on this track and drive this forward. I think it's also important to show and make sure there is a differentiation seen here. Us being a healthily growing and operationally profitable company in the sector, we can also put it in a different way. At the end, we are not only producing ideas, we are selling products and we are generating solid results.Two elements to this: in the last year, regional expansion of the business as a cornerstone here of our also midterm strategy. In Asia, we are continuously expanding our activities together with our partner, Toyota Tsusho. And at the same time for our civilian and for the defense business, we have added OEM partnerships here over the last 12 months naming Jenoptik, ePropulsion, Leosphere, but also AdKor. The demand for methanol and hydrogen product is equally strong and intense. And at the end of the day, again, as said before, we are seeing a replacement of conventional technologies. Replacing diesel generators is the underlying theme here in the core part of our businesses.If we are now looking into the individual businesses and the segment, yes, 5.4% of revenue increase does not seem per se, very impressive, but I think it's worthwhile to mention that this 5-plus percent growth here has to be seen in comparison to Q1 2020, which was not affected by corona, in our case, in a significant way. So at the end of the day, we are even above pre-corona level, still being and staying in a pandemic situation, which shows the business is really resilient and big part of our customer base has adopted also to the pandemic situation.Looking at the growth rate here in the individual segments, where we have changed with now the fiscal year 2021 to a 2-segment reporting structure focusing on the technology platforms and not on the end markets anymore, which gives us, I think, more transparency in business development, but also especially on the earnings side, differentiating the fuel cell business from the power electronics business.And at the end of the day also for us is a more efficient way to look at the business. So the Clean Energy segment, which contains more or less the entire fuel cell business, shows a 4% growth here within the first quarter and still is accounting for about 60% of the group sales.Now looking into the end markets here, we've recently announced a good start on the end consumer business. Our caravaning and marine business had a phenomenal start into the year in terms of units. We expanded here. We increased the unit sales by 78%.There is a clear trend to caravaning, even supported also by the pandemic situation, and we are taking -- or we are growing with this being a long-term supplier to this industry.Going forward into the year, the outlook here is also pretty solid. On the industrial and civilian part of the business, also here, continuation of the environment of 2020 for methanol and hydrogen products, and in total for our civilian fuel cell business, we still expect a very solid double-digit growth throughout the year based on a good increase of backlog, but also a significant project pipeline, especially for the hydrogen part of the business.Defense and security. The most difficult part last year with delays in our international business. More activity in first quarter in terms of order intake than anticipated. We see here, despite the usual seasonality in this market, a good trend for the year based on the current backlog as of May 18, we expect 40% to 50% growth in this end market.On the clean power management side, our Power Electronics business, the former PBF business here out of the Netherlands and Romania as well as the Power business here in Canada, comprised in this new segment. We see a rebound here. We see positive effect hereafter, a corona impacted year of last year, 7.3% growth. But at the same time, the original PBF business also saw its best first quarter of the year with, I'd say, almost EUR 4.9 million of revenue.What is the driver? Large industrial customers like but also new laser customers ordering and lifting up their forecast and call off orders, also very positive backlog development in the last 3 months here since January of this year.Expectation. A good and solid double-digit growth for the year. What I've forgotten in the upper part here is, well, oil and gas end markets very solid, consistent growth based on an oil price that is consistently above $60 now even in the high 60s in the last couple of weeks.And at the same time, a very strong trend and pressure for our customer base to replace conventional technologies for energy generation with clean solutions like our EFOY-based fuel cell solution. So also there, we entered the year with an expectation of a flat development for the year. As of today, I think at 10% growth is a reasonable expectation throughout the year based on current activity and backlog.With this, I would like to hand over to Daniel to lead you through the earnings development and the financial results.

[Daniel D. Saxena, CFO & Member of Management Board]

Thank you, Peter. Before digging a bit deeper in our key KPIs, the balance sheet items and our cash flow 2 sentence one more time to our new segment reporting, which we adopted in the first quarter of this year and the new structure, as Peter already mentioned before.So as we also laid out in our annual report from last year, we will no longer be reporting by end markets, but by technology platform, respectively, products and service and solutions offered by our business units. That will be divided and allocated into 2 segments.The first segment is Clean Energy, which basically comprises our fuel cell modules, our fuel cell solutions as well as systems that we offered. And the second segment, Clean Power Management, which comprises as the name implies power management and electronic solutions as well as our variable frequency drive business.This is also the way that we internally steer and monitor our business. Going to the revenue development in the first quarter and without repeating what Peter has already laid out, but we'll see 2 trends that continued in the first quarter and basically 2 major topics that happened accompanying us already in the last and also in the first year -- first quarter of this year.The first one is basically the awareness of the environmental, economic and social benefits of our fuel cell solution, which is steadily increasing. And on the other hand, we still have to manage the challenges from the containment measures in context with the pandemic such as limitations on sales activities and business development, travel restrictions are still in place; customer visits and on-site testing, still challenges; and as well as meeting unique supply chain challenges in this environment as we did last year.Both of it have been positive and negative impact on our revenues as well as our cost. But frankly speaking, we managed to have positive impacts. Group revenue, Peter mentioned, up 4.5% quarter-on-quarter, reaching EUR 70 million from EUR 16.1 million in the last year, which is the strongest first quarter in the history of SFC.And also what we see the growth is driven by both segments, Clean Energy as well as Clean Power Management. We've got a pretty homogeneous evolvement across the segments. And if I look at the first segment, which is the bigger one in terms of revenue, Clean Energy, our revenues were EUR 10.1 million, which is up 4.1% from last year's first quarter revenues.Clean Energy revenues comprise basically the revenues of the former segment Clean Energy and Mobility. The segment, Defense and Security, and in this specific case, for the first quarter, approximately 2/3 of the revenues of the former segment Oil and Gas. Oil or Gas revenues, specifically fuel cell, sold and employed in the oil and gas sector as well as Telemetric Solutions and Service revenues.What did we see? What were the revenues driven by? Peter mentioned it, we saw extreme strong demand for consumer application, which are approximately 40% up quarter-on-quarter. We still saw continuous growth of professional or industrial application, which were approximately 3% up quarter-on-quarter. Let's -- it is the largest target application in terms of revenue contribution in that segment.Let's not forget that we saw the highest increase already last year and the first quarter last year was a very, very strong quarter with strong growth also for this application.Last, but not least, we also saw a strong demand in oil and gas applications, approximately 40% up quarter-on-quarter. And the only target market that remained challenging in the first quarter, Peter already laid out, was really Defense and Security.Revenues in Clean Power Management, EUR 6.9 million, which is up EUR 7.3 million compared to the first quarter of last year. The revenues or the -- not only the revenues, but the financial of the Clean Power Management segment comprises the revenues of the former segment industry and approximately the rest one of the third of the former segment, Oil and Gas.Revenues have been driven by strong demand for power electronics in the first quarter. Two sentences or 3 segments on the regional sales distribution. Obviously, regional sales distribution is always a function of the timing of the major -- of order intake of major customers within the quarter. They move towards the end of the quarter, delivery and revenue recognition may not happen in that specific quarter, just that to mention. Overall, we don't really see any major changes to regional sales from the trend we've already seen in 2020.Even though in Q1, there may be certain shifts. But as I mentioned, it has to do with order intake and revenue recognition. Europe, without Germany, still remains the largest regional market for us with approximately 49%; followed by North America, 36%, a bit less in terms of relative contribution than in the last year -- or the last first quarter. Together, Europe and North America is still about 85% of revenue.Asia was 2% in the first quarter. This is -- we consider this just a temporary effect. As mentioned, I want to stress one more time, it really has to do a bit with when do orders come in, when can we deliver and when can we recognize revenues. Germany, about 40%. Rest of growth very small.Quickly to give you some more points on gross margin development. The group gross profit in the first quarter was EUR 6.2 million, so about EUR 1 million higher than the previous year first quarter. That translates into a 36.5% gross margin, which I believe is noticeable increase from the 32.5% in the previous year's quarter.And even if we look at the full year of 2020, we're slightly above that level. The gross margin for the full year 2020 was 33.7%. So we've been able to expand our gross margin.What is reasonable function of that, the function are to some extent, lower personal expenses. We've got a slightly lower headcount in production. We do have some lower rent expenses in certain sites. And last, but not least, also lower material expenses. The latter, of course, always partially affected by the product mix of the quarter.We're still working continuously to gradually increase our gross margin, things as supply chain management, optimizable material, and as mentioned, we call the sensible growth, trying to take advantage of the opportunities while safeguarding our gross margins.Clean Energy gross margin in the segment, the EUR 4.1 million gross profit translating in a gross margin of 41%. Also, I believe, a notable increase quarter-on-quarter in the first quarter 2020, we're looking EUR 3.7 million and a margin of 38%.Clean Power Management gross margin -- gross profit, EUR 2.1 million, translating at 31% gross margin, also a noticeable increase compared to the 25% gross margin in 2020. Basically, saw higher gross margins over all product families.Looking at EBITDA, how does it impact EBITDA? The group reported EBITDA is EUR 2.5 million negative, which looks very negative, and it is very negative. However, we'll have to see that in this quarter, EBITDA -- reported EBITDA was significantly impacted by high expenses for the long-term incentive program for management, which is the stock option, the SAR-Program. And the total amount -- total expense of that was EUR 4.8 million. Let's remember, this is not a cash expense until the program becomes -- runs into maturity.In the previous year's first quarter, it was EUR 446,000. This expense, and I'll get into this a bit later, is a function of the development of the share price, i.e., the higher the share price, obviously, that expense is increasing. And if the share price should reduce, which we all do not hope that expense will also go down again.What we are looking at, as always, is the adjusted EBITDA, that is our key financial KPI, makes it more comparable apple-with-apple on the quarterly and also annual basis. And the adjusted EBITDA really excludes the expenses for the long-term incentive program for the SAR. So we've taken out EUR 4.8 million, and that then translates into EUR 2.3 million of adjusted EBITDA, which I believe is a solid margin of 14% compared to EUR 820,000 in the last year, which were basically 5%.I think 14% is the EBITDA margin, which for the first quarter is a solid performance. The SARs expenses, as mentioned, of EUR 4.8 million are taking out. Giving 2 more sentence on the background and how the SARs are valued. They're always valued as of the reporting date. So as of -- in the specific case of the first quarter as of 31st of March in 2021, and the share price -- closing share price was EUR 26.75.On the 31st of December 2020, share price was EUR 15.42. So you see the steep share price increase or appreciation. That's one of the reasons why the expense for the SARs has also increased, noncash, as I mentioned.Otherwise, the increase of our EBITDA margin is a combination, basically, of higher gross margin, as we see -- as I discussed earlier, in combination with lower operating expense, mainly driven by lower sales and marketing expenses, but also higher other operating income.Depreciation and amortization to get you to the EBIT were EUR 921,000. As in the previous quarters, the major part of that is IFRS 16 related, so of this EUR 921,000, 47% is IFRS 16 related. Second loss purchases R&D depreciation, which is 33% out of the EUR 921,000.So that really brings us to our adjusted EBIT. Adjusted EBIT is EUR 1.4 million. That translates into EBIT -- adjusted EBIT margin of 8.4% compared to EUR 13,000 in the first quarter of 2020.Two sentences to sales and marketing expenses. If we -- the SAR expenses are allocated to the personnel expenses of sales and marketing as well G&A. So we take the SARs expenses out of the sales and marketing expense and adjusted to look apples-to-apples and compare with the first quarter of last year. We have approximately 12% lower than the previous year's period EUR 2.6 million versus EUR 2.9 million. Still has to do with reduced traveling, reduced trade for expenses. The EUR 2.6 million then corresponds to 15% of revenues compared to 18% of last year's first quarter, 90% of revenues -- sales and marketing expenses for the full year 2020 were about 90%.And let me remind you, our long-term target range is about 12% and 13% as revenues are growing. R&D expenses, the cost we expense in the P&L, EUR 880,000 versus EUR 830,000 in the first quarter last year. So there's not a huge change really.We capitalized EUR 620,000 in the first quarter versus EUR 75,000 last year. So total R&D cost or invest, so to speak, was EUR 1.6 million, and that's pretty much on the same level as in the first quarter of last year. That corresponds to 9% of our revenues, roughly 10% in the previous year and is in line with our planning.Projects are still the same. Peter mentioned it, new product generation, hydrogen fuel cell power platforms getting our products ready. And in the long term, as we also mentioned in the previous call, looking at 6% to 7% of our revenues as R&D expense, obviously then from a higher revenue basis.G&A adjusted 40% higher than the previous years. What are the key reasons? It's personnel expenses that has increased a bit. We have increased our head count compared to the first quarter of last year. Also, we had a bit of higher IT spending in the first quarter.Fixed assets. Let me start with what I've been repeating in the last quarterly report, I hope you're not bored. We are an asset-light company. So there's very limited CapEx that we are doing. Most of the CapEx is really refers to capitalized R&D expenses. Total CapEx, EUR 763,000. Thereof, intangible assets, approximately EUR 637,000, and that's mostly capitalized R&D, the rest are PP&E but not in a huge amount.Cash, very healthy. I think for the first time, we'll look at higher cash at the end of the quarter that we started, and I think that's a very positive news. Cash fully available, EUR 32.5 million. Our financial debt has increased slightly to EUR 4.8 million, short term is 4.7 of this portion, and the increase is actually the working capital lines that we have with our affiliated companies in the Netherlands as well as in Canada.Equity ratio of 58%, a bit lower than in -- at the year-end has to do with a negative income. And 3 more sentence to cash flow. Our operating cash flow before change in net working capital was EUR 2.2 million. We didn't have a lot of change in the net working capital. It remains at the level of the year-end. Our inventory increase, cash impacting by EUR 740,000.Our accounts receivable decreased significantly, cash impacting EUR 1.5 million; but also our accounts payable decreased, cash impacting EUR 1.6 million. So overall, net working capital has been stable. But as I also already mentioned, in the previous calls, we are keeping high inventory level. We increased it last year to make sure that we don't have any -- that we don't have to face any supply chain challenges. So that's why there's a little moving in the net working capital.So after tax, this actually results in a positive cash flow from operating activities of EUR 2.2 million. As mentioned, cash flow from investing activities was about EUR 763,000. Cash flow from financing activity minus [ EUR 36,200 ]. So overall, the total change in cash was EUR 1 million positive, shown that we actually did earn some cash in the first quarter, which again, as Peter already mentioned, our goal is actually not only to grow, of course, we want to grow, but while we grow, we want to grow sensitively and produce money.Thank you very much. With this having been said, I'll turn it back to Peter.

[Peter Podesser, Chairman of Management Board & CEO]

Thank you, Daniel. Yes. So all in all, the outlook for 2021 from our point of view is a very optimistic view on the business. This is also why we confirm our guidance. We expect 15% to 30% growth here from EUR 61 million to EUR 70 million of revenue. And as mentioned before, we also have narrowed down here the bandwidth for the adjusted EBITDA and EBITA improvement, just recently.What is the basis for this? A, the momentum I described overall in all markets, and we expect, let's say, a further increase here of the backlog that has already improved significantly. If we look into the first 3 months of the year, we see an improvement of backlog here of more than 58% to last year's level here of EUR 15.6 million and the project pipeline is really solid and active.Activities in Asia, yes, a slower start at the beginning, but that's more, I'd say, seasonal effect here also with, let's say, a Chinese New Year in the first quarter, and naturally, some initial invests into the collaboration with Toyota Tsusho here. We are rolling this out right now, training is happening for the sales teams in Southeast Asia as well as in China.We are continuously working on a further expansion of the business access of the market access in India, naturally delayed by the difficult circumstances, but still ongoing work here with our local partner encourages us and we expect a result to be able to publish this within the upcoming couple of months.And not to forget significant improvement of in activity and demand here for clean energy solutions in North America, especially the U.S. where we have some high-profile projects in the pipeline due to be closed. So this all is important for our midterm targets.We continue to invest into our R&D. We have submitted substantial proposals here for R&D subsidies in Germany and doing the same thing in the Netherlands, exploiting now those programs that are implemented here on national, but also supranational levels.And we are still assessing opportunities here on complementary technology achieved here from an M&A perspective, assessing the capabilities of existing electrolyzers combined with fuel cells is another R&D program in the works.So overall, we have seen a good start into the year. We appreciate continuous momentum. And I think it's important also to see this differentiation here to the overall development in the sector. We are producing healthy growth, and we are producing healthy results, and there's yet a lot to come and to be expected in the current year, and we feel well positioned also for our midterm plan.With this, we would like to conclude the presentation here and we'll be happy to answer all your questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Karsten Von Blumenthal.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

If you look into the newspapers, you read a lot about raw material cost inflation. I've checked a lot of raw material prices, and we have seen massive increases. And if I listen to other companies, they report that procurement gets more difficult, they face supply chain problems. And my first question is what about your situation?

[Peter Podesser, Chairman of Management Board & CEO]

Thank you very much. Yes, I think we have 2 elements to look at. First of all, I think we have kind of been sheltered here in a way by our measures implemented last year simply increasing the stock levels here significantly due to the corona situation, which gave us a solid, stable supply chain throughout the year so far.What we have renewed at the beginning of the year doing the same exercise and I think in a timely fashion. But still, we are now analyzing on a key product group level in terms of incoming product, what is, let's say, the price effect, seeing natural effect here on electronics, seeing effects also on some of the base materials. The long-term agreement we have put in place early in the year here with our supplier for MEAs definitely helps us, too.What is ongoing is now an assessment of the impact. Daniel mentioned this, naturally, we want to continue growing our gross margin, and we need to now look into what is the effect of the pricing. Due to the stock levels, we have a good 3 months' time to accommodate and decide on pricing of products.

[Daniel D. Saxena, CFO & Member of Management Board]

And let me add to what Peter, just to say we have framework contracts in place that have a certain term. Of course, the term is not 18 months, but we always have term -- long-term -- medium-term agreements in place for few components, which to some extent, will provide for price -- raw material price stability.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

So that means you are at least completely safe in Q2.

[Peter Podesser, Chairman of Management Board & CEO]

Absolutely. This is reaching into Q3 in a solid way. And therefore, this gives us time to accommodate here in terms of pricing structure.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

All right. My next question is regarding your new segments. You explained that basically the new Clean Power Management segment is the old PBF, the industry business, plus the 1/3 of the Canadian nonfuel cell business. So we can have a rather smooth transition from the old to the new world. My question is if you look into your 2 segments and look into 2021 and into the medium term, do you expect different growth prospects for the 2 segments? Or do you think they will roughly develop in a similar matter?

[Peter Podesser, Chairman of Management Board & CEO]

This is actually one also of the reasons of the structuring because we see a different growth profile and naturally also a different profitability profile over time, as I think this gives us a good transparency here, whereas the fuel cell part is now accelerated not only by, let's say, the macro environment, it is really the established market access.But then with the higher unit prices of our hydrogen products, we will see a further acceleration here. And then Electronics is a classical industrial business where a part goes into our integrated systems, which is core and especially now the next generation of hydrogen fuel cells, we have already developed our own electronics in-house, our power electronics in-house.And still, we are in an industrial environment. So like for this year, 10% growth overall is a good and solid number, but we are not talking about high double-digit growth. So I think this gives us a good handle to steer the business and also do a proper resource allocation. And for you, from the outside, you get simply higher transparency and less granularity.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

Perfect. That is very helpful to understand to say the economic mechanics of the new segments. If I look into Q2 and the first 6 weeks when I understand right what you said, you see continuing strong business in your segments. You had a very strong Q1. So is Q2, on a very cautious basis, say, if you look into the future, can we imagine it in a similar way as Q1 from an operating basis?

[Peter Podesser, Chairman of Management Board & CEO]

Well, we expect really continuous activity similar levels. We might not reach, let's say, the same revenue levels than in Q1, slightly lower, but still, I'd say, significantly higher to -- on a year-on-year basis, Q2, and so also on a half year basis, our expectation is to be significantly up year-on-year.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

All right. My last question is regarding your SAR-Program. Daniel, you well explained the metrics. You mentioned the high share price at the end of March and the relatively low share price at the end of December. Still the EUR 4.8 million is a sum much higher than I expected. Is there any rule of thumb to calculate these noncash costs? Or is it such a difficult calculation that it is very difficult to have a rule of thumb for that?

[Daniel D. Saxena, CFO & Member of Management Board]

I wouldn't say -- well, it's a complex calculation based on a Monte Carlo simulation, which is running actually for quite -- when computing it is running for quite some time. This is not being done in 2 or 3 hours. But of course, the variables flowing into is really share price development. There's a bit with the volatility of the share also with the liquidity.It's a bit comparable as option pricing not exactly the same thing. So if you ask me, is there a rule of thumb? Very difficult to forecast those 3 or some more variables that are flowing in there. So actually, there's none except that as the share price increases, obviously, the provisions that we make for the SAR-Program also increased and therefore, the expense in the P&L that basically is all as deep as I can go, right?

[Operator]

Our next question is by Lotte Timmermans.

[Lotte Timmermans, Analyst]

This is Lotte Timmermans, ABN AMRO-ODDO BHF. First a question on new segmentation. This fuel cell division makes total sense if you to combine those. But I was wondering what the underlying reasons were to combine Oil and Gas and Industry? What are the synergies and the similarities between the two?And then my second question is actually on an underlying growth trend in Q1 in the fuel cell business. I do know the statement in the consumer segment, where you say is particularly strong in caravaning and stuff. You say that growth is accelerating, but with 4%, I don't think this is the case. Was this a statement on the year going forward?And could you give some more color on the underlying trends in Q1? Was the 4% growth purely due to clean energy mobility? Or do you see any deteriorations in growth in Q1?

[Peter Podesser, Chairman of Management Board & CEO]

Lotte. Thank you very much. On the segmentation, at the end, the key rationale is putting together the technology platforms. On the one hand side, fuel cell technology and on the other side, at the end, Power Electronics. And as we do some power product business also historically, in our oil and gas business, this was a logical rationale and the logical consequence to put this together. On a day-to-day sales activity, naturally, we are clearly following our end customers, our customer base. But I'd say summarizing it and then steering it makes for us a lot of sense and at the same time, looking from the outside to the different platforms, as said before in my answer to Karsten, we feel we give a lot more transparency from the gross margin up to the full profitability of the different technology platforms.And this is at the end of the day, the reason. It will take us, I would say, another 2, 3 quarters until we are all finally used to this. At the same time, naturally, we do not neglect our customer needs in the different end markets.Looking at the differentiated growth rates here, you mentioned clear, particularly nice start here on the end consumer side, a still solid development in the Civilian segment as such, but we had actually a big jump last year in the industrial part of the fuel cell business.And so therefore, some, I'd say, flattening effect here with only, let's say, 4% growth here. But this is, I'd say, there were some significant projects in Asia last year in the first couple of weeks of the year. Still, when looking now into, a, the backlog and the product -- or project pipeline for the civilian part of the business, as said, we expect a solid double-digit growth here for consumer and industrial businesses.At the end, a certain seasonality in there right now, especially coming from Asia, but seeing where we are today in terms of backlog not something that will have an impact on the overall development of the business.

[Daniel D. Saxena, CFO & Member of Management Board]

I think as Peter mentioned, let's not forget Lotte, we more than -- almost doubled the revenues for industrial applications in the first quarter of last year. So the basis that we're starting is much, much higher. And as we mentioned, we are still growing in there that I think is important to notice.

[Peter Podesser, Chairman of Management Board & CEO]

Does this answer your question here?

[Lotte Timmermans, Analyst]

Yes. That's why I also said hard comps. So okay.

[Operator]

We have the next question by [indiscernible]

[Unknown Analyst]

And congratulations on a great start to the year. Please provide a little bit more background to what is happening in the defense sector? Why it's weak at the moment? And why you're confident about the results for that sector for the year as a whole?

[Peter Podesser, Chairman of Management Board & CEO]

Peter -- yes, the starting of the year here on the revenue side, honestly, it's not surprising because that's really what we see as the traditional pattern, and it is slightly below last year.What we, at the same time, fortunately, could realize in the first couple of months of the year is significant order intake, which then again gives us the confidence and, I would say, justified confidence to show a growth between 40% and 50% throughout the year.So it's -- part of it is solid bookings here on the backlog side and good activity. Naturally, 2 of our key markets, especially on an international side, are now affected by external factors. You might know, we are traditionally strong in India. We talked about a slowdown there.Yes, this is factored in. We see some projects that we might see slipping for some time and naturally also Israel, 1 of our core markets, but this is factored in and summarizing all this, seasonally slow start, good order intake, solid prospect.

[Operator]

[Operator Instructions] Our next question is by Malte Schaumann.

[Malte Schaumann, Equity Analyst]

My question is for the hydrogen business. Maybe you can, yes, maybe elaborate a bit more in the near-term, mid-term prospect for the remainder of the year, what you see in the pipeline uptake in [ Pro fuel cell ]. Yes, all about.

[Peter Podesser, Chairman of Management Board & CEO]

Shipments on hydrogen still consistent here, I'd say, with the ending of last year for this German digital radio telecom program here, BOSSnet, we shipped out, I'd say, the next batches here. What we -- what -- and therefore, naturally significant increase in terms of year-on-year comparison to first quarter last year, but at the same time, particularly high activity here in terms of project pipeline.We saw RFIs and RFQs coming in, let's say, an order of up to almost EUR 100 million of revenue at pension, naturally, this is not order intake, this is not business for 1 year, but this is coming from telecom industry, this is coming also from government side. At the end, a continuation of what we have been seeing. As we are one of the first ones having product available, I think we have a good chance of accelerating here. Decision-making on those large infrastructure projects usually takes 3, 6 months. So we might see a good effect on the backlog from some of those projects.And they are not only here in Germany, we are talking here Europe, we are talking North America and initial projects also in Asia. So overall, I would say, also an initial outcome of some of those government investment programs are put in place last year, where people get incentives, people get subsidies by replacing conventional technologies here with hydrogen project in Canada, where it is, again, a telecommunication application and it's specified on hydrogen because it's subsidized and it is about replacement of diesel gensets for telecom stations. So in this respect, a lot of prospecting, a lot of business development, extremely encouraging as you can feel like, but not yet in the books, but good that this is happening because at the end now, it's our task to bring part of this home into our books.

[Malte Schaumann, Equity Analyst]

Yes. Sounds good. What's the typical success rate? I mean, seeing this $100 million pipeline. I mean, is it EUR 10 million, EUR 20 million, EUR 30 million, you would expect them to turn into orders over the next, I don't know, 9 months or so?

[Peter Podesser, Chairman of Management Board & CEO]

Well, the difficulty is there's not yet a typical success rate as it is an upcoming business. If I would be cautious here, I think I would say it's a 10% and not because of all the competition, rather because of delays and naturally government agencies included in the decision-making means it takes a certain time.If we look at the competitive landscape, I think we have a good head start here and want to capitalize on this. So I would see really 10% at the absolute low end. But if you pressurize me more now, I think I'm still not willing to go up with the probability. But maybe in 2, 3 months, we have good visibility here. Sorry, for being a little vague here, but it's really in the build up.

[Malte Schaumann, Equity Analyst]

No, fair enough. Then on Toyota, I mean, what's the current status, actually? So where in the process are you in terms of both, yes, gaining projects, et cetera. What's the collaboration like, currently? And what are the further plans for the remainder of the year?

[Peter Podesser, Chairman of Management Board & CEO]

We have 2 elements. The one is really the day-to-day business in Japan as well as now in the other regions. In the regions, say, speaking of China and Southeast Asia, it's about really technical training for the team's initial project assessment together, and we expect initial orders definitely in also within the year outside of Japan.And the other element is that we are still working and discussing a deepening of the collaboration. We published this before. We can still imagine to form a joint legal unit saying a joint venture with Toyota and also this management level discussion is healthily continuing.So if you ask me what is the priority right now is really? Well, the business development and the sales part of it driving our product into the region.

[Malte Schaumann, Equity Analyst]

Okay. Then on profitability. I mean EBITDA -- the adjusted EBITDA margin was quite strong in the first quarter. So what are your thoughts then going into Q2, Q3. Gross profit wasn't too bad with 36% besides not that high defense contributions. So what should we expect in terms of gross margin and going forward for the remainder of the year and probably OpEx will not that -- sharpen that much probably?

[Daniel D. Saxena, CFO & Member of Management Board]

So let me answer that, Malte. Three components really. I mean, if you look at the gross margin, it's a bit, as we mentioned, the product mix is, of course, the material expenses that are impacting it. And as I mentioned, the largest, let's call, savings or lower cost is really personnel expenses and rent.So nothing is going to change there, right? Headcount is what headcount is. Now rent is what rent is. As we mentioned with regards to our raw material, we'll see on site that we're wanting rather stable, given the measures we have taken in place.So if you're looking at those 3 components really impacting our cost or cost material than most, trying to be -- I don't see any significant change one or the other way, okay? So that's in the near and the midterm, talking about this year, rather stable. Does that answer your question?

[Malte Schaumann, Equity Analyst]

Yes. And something at the OpEx level, I mean, in the current setup?

[Daniel D. Saxena, CFO & Member of Management Board]

The same thing. OpEx level, also, we don't have a lot of volatility between the quarters and over the years. As long as COVID, unfortunately, is prevailing, I don't see any significant change in our sales and marketing expenses. Even once COVID may not prevail anymore, I think in addition to many other companies, we have introduced new digital technologies and so I would expect that there's going to be a huge change. In terms of G&A, same thing. Don't see any big items, one or the other way going up or going down to say more or less I would look at stability as we're always looking in potential to optimize our cost basis and R&D. Also, that's a long-term planning. So we're not planning R&D on a -- or we're not making changes in R&D and on a monthly or quarterly basis, that's really we have a plan that we execute and also there's a little volatility, a lot of stability with that expense item.

[Operator]

There are no further questions. So I hand back to Dr. Peter Podesser.

[Peter Podesser, Chairman of Management Board & CEO]

Thank you very much. Well, thanks to all of you for taking the time and as usual, if there are further questions and topics to discuss, please don't hesitate to reach out to us, to Daniel, Susan or myself. With this, we would like to conclude and thank you very much, and have a nice day.

[Daniel D. Saxena, CFO & Member of Management Board]

Thank you.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.