SFC Energy AG

XETRA:F3C

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Peter Podesser, executive]

Good morning, again, ladies and gentlemen, and thanks for joining us and taking the time. Welcome to the presentation of our first quarter results, showing a very good start into the year.

Together with Daniel, as always, we will try to give you a good overview on, let's say, the business and the financial performance, as well as the outlook. And after this, we hopefully will receive a number of questions and also your comments to be answered.

Looking at where we are, yes, we have a strong start into the year and strong, I think, in a number of aspects. If you look back what has been accomplished, we have a significant, let's say, revenue increase there of 46% year-on-year to last year's Q1. At the same time, we are seeing, again, a significant improvement and lift in profitability -- adjusted EBITDA from 12.2% first quarter last year or 13% approximately at the end of the year, up to more than 22% here in the first 3 months. And I'd say, accordingly also a big jump on EBIT here from 8% to more than 18.8%.

I think there, we will look into, let's say, the recent -- the key elements. But at the same time, I think it's a strong start into the year also when you look ahead. If you look at the order book incoming orders here of $51.6 million. As I'd say, the highest order intake we have recorded so far here in a 3-month period here for the company. And this results despite, let's say, those significant shipments and the revenue of more than $40 million in again, a substantial increase in backlog here by end of March.

So with all of this, I think we have a very solid -- a very good start into the year, which gives us, I think, the right basis to reach all our targets we have out there as a guidance, and we can confirm this. I think some of you might ask the question, yes, why don't we now touch on our predictions on our guidance immediately. I think here, Daniel and I can give you more insights.

We are in the midst of a massive growth phase with significant investments and building up of cost structures here in various parts of the organization. And also, naturally, we need to look at the capacity situation, and we'll be happy to elaborate on this, but this does not diminish I think, the good start into the year, which I think is a seamless continuation work what we have seen or what we have witnessed here in 2023.

We have -- and we have to be and we are grateful here to our customers still appreciating what we do, and seeing, let's say, a continuous ongoing demand here across the regions, but also across the different applications.

And again, I would like to draw your attention to the fact, and I think that's the key differentiating factor also in the sector. We are showing significant growth here. But at the same time, we have, again, our pairing in place also an expansion of margin and improvement in profitability, which has been, I'd say, our underlying plan here and is being executed over the last years.

Looking into, I'd say, some of the highlights. Well, we have put out a strategy saying we need to internationalize the business. We need to continue here with our investments into technology and technology leadership. And we also look at complementary M&A opportunities. And I think we see a mixture of all in those results.

India, we went into operation here in second half of last year. If we look now into the first quarter, a significant and strong contribution already out, let's say, of our Indian business here to first quarter results. We have completed major deliveries here, especially in the public security business in India.

If we look into the U.S., we are scaling up the team there. We are in full swing of hiring sales and service people. We will open up officially our sales and service and logistics hub there later in the quarter. And even though it might look like a relatively lower contribution now here in Q1, we have a solid and substantial order book also for the U.S. So we expect, let's say, overall performance also in North America according to plan, even though relatively, it shows a lower growth compared to Asia in the first 3 months.

Well, and then we come to, let's say, our existing site in Cluj. We are in the process of building our largest manufacturing entity there on track. We should be able to move into the new facility here by end of this quarter and go and ramp up here as of July.

Just to put it in perspective, we are right now at a total capacity here on fuel cells of approximately 15,000 units. And with having this, then, in full swing and full operation, we have at least a doubling of nominal capacity here with Cluj being online.

And then the U.K., we have taken over the technology, the IP. In the meantime, also a significant portion of the team here of our long-term partner, Johnson Matthey. We have today, I think, 25 people on the payroll already now in the U.K. for the membrane development and production. We intend to start production end of this quarter and then ramp it up throughout the year.

Coming back to, let's say, the impact of this in terms of cost and in terms of, let's say, also buildup of capacity or removal of capacity limitations -- also, Daniel will give you his view and thoughts on this. But at the end, again, the latter project here is not just an improvement of stability on the supply chain. This is an important element. But long term, we view this as an elementary and a key step of, again, improving competitiveness.

And also cost structure of our product means our profitability long term because we are integrating now materials science know-how with our application expertise here. And we are, I'd say, apart from ramping up or building this new facility in Sweden. What we have done is we have a manual production line already in parallel, we have built up in our facility in Brunnthal, not just as a backup, but especially also for the further development here on the technology side.

Looking at the order book. I mentioned this already. I think having, I'd say, highest shipments we ever were able to execute on in a 3-month period, with more than $40 million revenue and still showing a positive book-to-bill of 1.2 with $51 million order intake, I think is the right message also going forward and the right basis and gives us the visibility there.

Mentioning a key highlight there, yes, with our largest and longest-standing partner and customer on the power electronics side in the Netherlands, Thermo Fisher, we concluded another long-term contract here with $27.8 million. We are already now in execution and delivering on this contract, also showing, I'd say, there, and I'd say this is contributing also to the increase in revenue on absolute terms here for the clean power management and the power electronics per se. Even though the segment relatively is showing a lower contribution to group's revenues compared to clean energy.

If we then look into some other, let's say, orders coming in here, we saw order intake in Asia here out of Singapore. We saw some of our European partners here putting in orders in a single-digit million range.

Overall, a broad -- again, an order book that is covering both segments, that is covering again the different regions.

If we look at the product side -- and again, a big part of our competitiveness is based on a reliable, high-quality, maybe in some areas really superior product. We've just -- or we are just in the midst of conducting a survey here with key customers and partners and have hired an independent party to do so -- or an independent party is doing this for us. What we see is that the key performance criteria by far in terms of the decision for doing business with us is, I'd say, product performance. And therefore, I think being on top of this and making sure we are continuously innovating here, I think is also in the best sense of the business.

Yes, we have now with our H2Genset partnership here with 2 companies, TEST-FUCHS from Austria and Auto AG from Switzerland. We are now the first ones worldwide having a hydrogen generator that has also the capability to be fueled at a hydrogen gas station with CE marking with TUV.

So we are able now to sell this product within, let's say, a period of not even 2 years, we got it from the idea to the existing product. And we have already the first orders here from Scandinavia and Luxembourg in for this product. Naturally not contributing massively to the revenue right now, but that's, let's say, looking ahead into the pipeline.

We have developed for the Canadian government for some of their specific requirements in remote areas, what we call an EFOY shelter, which is a container-based fuel cell-based energy solution out there wherever there is no grid. We have the first follow-on order here for those systems.

Finally, civilian use, but also in terms of public security and defense application, we expect a significant potential out of this.

And in Hanover, we also presented our new platform now. We presented it the first time as the idea here in September last year. And we are now out there with the pilot systems, expect first piloting with customers. It's called the EFOY hydrogen power pack with 50 to 200 kilowatts power range, and we want to see the product out in the market beginning of '25.

I touched upon the segments briefly. I think what we see is an exceptional growth here on clean energy with a significant contribution out of Asia. But again, we expect on the regional side, a balancing out over the year, but then also in terms of segmental revenue. This is, let's say, the overall, I think, corridor, we are targeting at [indiscernible]

Clean energy is a higher growth business. We expect it to account for 75% of the revenue midterm anyhow, and we show it already within this quarter. And we, at the same time, can see that this has naturally a significant impact also on the profitability.

Let's look into, let's say, the end markets, yes, on the clean energy side, let's say, a 73% growth here year-on-year in the first quarter. Again, we see the industrial market being continuously strong and contributing. We have a significant increase here on defense and public security business in there. Daniel also look into the impact on the profitability here.

For our end consumer applications, we are seeing a continuously, I would say, not only challenging, but difficult environment because spending power is limited. And at the same time, yes, we did not see too much room here for pricing for pricing compromises no. Instead, we increased, as you know, our prices last year here, according to, let's say, also the material cost developments here.

And yes, both of it has naturally an impact on overall sales, but we also have to we look at it in an overall perspective. This is, I'd say, around 3% to 5% of the overall business. A market, I think that is long term, still interesting as a testing area here for new products, but revenue impact, we know and we accept is limited.

With this, I think, again, on the clean power management side, it is showing a relatively lower contribution to the overall revenues, but at the same time, in absolute terms, consistently growing and growing on a double-digit basis, not to forget this.

And with this, I hand over to Daniel to lead you through earnings and numbers related.

[Daniel Saxena, executive]

Good morning, everybody. Thank you for joining the call. Peter already said, we had a fantastic start into the year on level of growth but also in terms of earnings. You may have seen or you have seen the numbers. Let me quickly run you through the numbers starting at the top of the early number, which is the gross profit.

The gross profit increased to EUR 17.9 million, which is significantly up, 75%, from the first quarter 2023, where we were looking at EUR 7.7 million. Gross profit growth, as you've seen, has outpaced the revenue growth rate, which then translates also into an increased gross margin.

Gross margin for the entire group in the first quarter, 44.7%. What are the key drivers behind it? First of all, it's a combination of much higher revenues, which lead then to relatively lower overhead per unit. We discussed it also in the previous calls, if you've been there.

Secondly, obviously, also on our effective and conserving pricing strategy in both segments. And then -- andPeter touched it -- also, we had a very favorable product mix in the first quarter. You would say an extraordinarily favorable product mix in the first quarter that resulted in that high margin.

And last but not least, what we've seen, and we've seen it over the course of the last year, we're getting back to a normalized cost of raw materials. In addition, we didn't have any impairment on our inventory. Remember in the last year, certain quarters, we did have impairment of inventory on the components, which we purchased in 2022 at a relatively higher price to secure delivery. And then we had to impair those components, which were still in inventory, to market prices or, as I would say, more normal prices.

We've seen that the gross margin in both segments have improved significantly. Let me quickly start with the gross margin in the segment clean energy, which, as Peter mentioned, account for the largest portion of our revenue. Gross margin in that segment is at a solid 50%, compared to 43% in the previous year. We saw a huge jump in the gross margin, mostly due to, as mentioned, by product mix. The 50% is also above the annual gross margin of that segment from last year, which was at 46%.

The first driver is -- I keep repeating myself, it's really some project business that we delivered in the first year -- the project business based on our EFOY platform -- that came with very attractive margin. The second driver is that the fuel cells for industrial application, and we've seen it also in the last years are growing rapidly. The share is still from a perspective of segment revenues, the largest revenue shares. They are higher power, to some extent. They also have a higher level of integration and that all results in higher margin products.

If we look at the gross margin of the segment Clean Power Management also -- there, we saw an increase in gross margin. Gross margin went up to 28.1%, compared to 26.5% in the first quarter 2023. What have we seen? We've seen lower revenues in that segment. However, stronger margins. And that's the same reason as in the segment clean energy. It's mostly product mix in combination with the lower unit cost, and that especially applies for our power management product being manufactured and sold in the Netherlands and Romania.

Our midterm and long-term targets of the gross margin. Clean Energy, we said north of 44%. We are there. We are consistently there. So I guess at some point, we have to increase the target. But this is really where we want to be and need to be.

And when it comes to the gross margin target in Clean Power Management, we're looking north of 32%. So there, we have a little way to go, and we're working hard on that to realize gross margin targets.

Let me go to the EBITDA and EBIT, quickly. Starting with the group reported EBITDA that amounted in Q1 to EUR 8.6 million, margin of 21.6% compared to EUR 3.5 million and a margin of 12.8% in the previous quarter. Very strong margin expansion, as you have seen.

The reported EBITDA, as always, was impacted by nonrecurring expenses and nonrecurring incomes. These are, as always, and I just mentioned them for completeness sake, the provision that we make for the LTI equity-based programs, as well as translation expenses.

Nothing has changed to the way that we account for it and adjust those numbers in this quarter compared to the previous quarters.

In Q1, the impact, the net expense for the LTI program was lower than in the previous quarter. We are looking at a number of 20 -- sorry, it's EUR 270,000, where we had a net income in 2023 of EUR 190,000. So a net expense in the first quarter, 2024 versus net income in the first quarter of 2023.

Transaction-related expenses amounted to EUR 86,000 compared to EUR 31,000 in the first quarter 2023. And so if we then adjust our EBITDA for these numbers, we get to the group adjusted EBITDA, which ended up at EUR 9 million compared to EUR 3.3 million in the first quarter 2023. The EUR 9 million translate, then, in a very solid and very good 22.5% adjusted EBITDA margin compared to 12.2% in the first quarter 2023.

The margin in the first quarter '24 is also well above what we've seen in the full year 2023, where we were looking at 12.8%.

So quickly I want to dig into and dive into the key drivers behind the absolute EBITDA increase in addition to what I already mentioned with regards to the gross margin. So the first driver is really the fixed cost and the production overhead cost equation, resulting from the higher revenues that we had, especially in this segment, Clean energy, in combination with the product mix and, as I mentioned before, stable prices.

So if we looked on the relative contribution on the gross margin to that adjusted EBITDA, we saw that the gross margin increased by 7.5 percentage points and that would result in a relative contribution of EUR 3 million in adjusted EBITDA compared to the adjusted EBITDA of Q1 2023.

And then the second large driver that has a key impact is, let's call it, operational leverage, a term all of you have heard many times, are familiar with. We've seen that all functional costs increased absolutely. But what I also seen is that those functional costs grew -- have grown at an under-proportionally rate with respect to sales. Driver of the functional cost, most of them is really personnel expenses, some other items on which I will touch in a minute.

Adjusted sales and marketing expenses, which is still the largest portion of our functional cost, and they account for 40% roughly of the total functional cost, came up to 9.4% of revenues compared to 12.6% in the first quarter. You've seen it's come down notably by 3.2 percentage points relatively to revenue. And the relative EBITDA contribution would be $1.3 million lower compared to Q1 2023.

Adjusted R&D expenses also increased slightly, [indiscernible] in sales resulting in 3.9% of revenues comparing to 4.4% in revenues. Relative contribution to the increased adjusted EBITDA is EUR 179,000.

Last but not least, also the adjusted G&A expenses increased slower in relation to revenue. They -- marginally, though, and there were 0.4 percentage points lower in relation to sales than in Q1 2023, resulting at EUR 110,000 relative high -- relatively high -- lower G&A expenses.

Other operational and impairment loss on financial assets. You see this line has been added in the first quarter. We already had it in the full year report. That is basically the IFRS 9 provision that we've been made have been relatively higher by EUR 158,000. Depreciation and amortization, EUR 1.5 million versus EUR 1.2 million in 2023. So another huge increase. In terms of structure, not much has changed. A bit over 1/3 of the depreciation is related to IFRS 16. So that is in the first quarter 2024, EUR 563,000, followed by depreciation for capitalized R&D, which accounted for EUR 486,000, pretty much on the level of the previous year. And then other tangible and internal assets, the depreciation makes EUR 400,000.

That brings us to the adjusted EBIT. Adjusted EBIT was EUR 7.5 million, which translates in a margin of 18.8%. The effects for the increase in the EBIT is pretty much the same as in the EBITDA.

Operating expenses, let me quickly touch on those. One comment you may have realized that the Q1 2023 numbers that we now show in our report do not compare with the published Q1 2024 numbers for the operating expenses. That really results from the discussion we had with our new auditors at the end of last year. And the conclusion that the income of the reversal of the LTI provision, which we've shown in the other operating income, should either or needs to be presented in the functional cost. So you will see this income no longer in the other operating income, but directly in the functional cost, which changed a little bit the functional cost. No impact on gross margin, no impact on EBITDA, nor impact on EBIT is all happening within the functional cost.

So total or adjusted cost of sales and marketing, we saw a 8.7% increase compared to the previous year's numbers that results in EUR 3.8 million. What is the key driver behind the increase? It's really mostly personnel expenses.

We've seen the headcount increasing to 108 from 103. And then also what we've seen is an increase in sales provision, as well as some consulting and service provider expenses.

R&D expenses, let me break it down in the R&D cost that we spend, which is higher than the R&D expense, you'll see in the P&L. So what we spent on R&D in the first quarter was EUR 2.5 million compared to EUR 2.1 million in the first quarter of 2023. That's about 18% up.

How is that number being calculated or composed? Well, first, the R&D expenses that you'll see in the P&L adjusted for the nonrecurring items, which was EUR 1.6 million. Then we had the R&D that we capitalized in the first quarter. That was EUR 754,000, 2.2% up from last year, so basically on the same level. And then last but not least, we received subsidies of EUR 193,000, 12% up from last year's numbers.

So if you add up those 2 numbers, you get to the amount that we spent on R&D, which was EUR 2.5 million. It's a bit higher than what we've seen in the first quarter 2023. Key driver really here was material that is used in R&D, as well as consulting and advisory services purchased in R&D. That is legal advisory on patents. That also refers to some software advisory. So it all goes in that direction.

The total R&D spend in relation to revenues is 6.3%, compared to 7.8% in the first quarter of 2023. So that's about 1.5 percentage points lower than what we've seen in 2023. We are looking at a long-term spend for R&D of 6% to 7%. So we're pretty much in the corridor that we are and obviously with increasing revenue, also our R&D expense will increase.

G&A expenses, adjusted G&A expenses were EUR 4.4 million compared to EUR 3.1 million in the first quarter 2023. Large increase, huge increase, 42.3%. Again, it's mostly personnel, but also what hit us in the first quarter is higher advisory cost. Advisory cost in context with the audit in context with a tax advisory, it has to do.

I mentioned also in the previous quarters on transfer pricing, tax optimization and tax establishment with our foreign subsidiaries. We are working on this project and these projects will continue to be with us for the next quarters. That corresponds to 11.1% of revenues compared to 11.4% from last year, so it went down a little bit.

In the medium-term range, we are looking at adjusted G&A expenses to account from anything between 11.5% to 12%, 12.5% of revenues.

Balance sheet, really briefly, just let me touch on the CapEx that we had in the first half year. So total gross CapEx excluding rights of use in existing IFRS 16 accounting impact was EUR 2.1 million, so slightly down -- about EUR 600,000 down from Q1 2023. But remember, in Q1 2023, we had repurchased the EMEA assets from JOhnson Matthey that was really driving the high CapEx in Q1 2023.

CapEx split between intangible assets and PP&E, about 37% is in intangible assets versus 63% in PP&E, excluding right-of-use, intangible assets, as always, mostly Cap R&D. PP&E, mostly machinery and equipment across various categories and all subsidiaries, amounting to EUR 2.2 million has to do also with the build-out, Peter mentioned, ramping up Romania, ramping up the U.K., but also we did some investment in the U.S.

Cash and cash equivalent, a very important number for us to be stable to finance our growth and to invest. Cash freely available is EUR 66.2 million compared to EUR 56 million in the first quarter -- sorry, at the end of 2023. So we made a decent portion of cash in the first quarter. You will see in the next quarters that we will be spending cash mainly again on the build-out of our subsidiaries, mainly in ramping up MEAs, mainly in ramping up Hans' Romania to production.

Financial debt went down a little bit, EUR 3.4 million, all short term, still the working capitalized that we have in Canada and the Netherlands. That leaves us with a very healthy and solid net cash position of EUR 63 million compared to EUR 56 million equity. You've seen it increase mainly because of the positive net income.

Cash flow, let me quickly touch on that one. Cash flow before change in net working capital, $9 million, much higher from what we see in the first quarter 2023. Obviously, it has to do with the financial performance as well as with an increase in the revenues.

Inventory always a topic we're looking at. We're looking at inventory optimization and for our business. So you've seen that the inventories have decreased by EUR 1.1 million. So we're really getting back to normal levels. We will see -- we will still see inventory increasing as we move along with sales. We're really at a low level of inventories right now.

At the same time, you've seen that our accounts receivables increased by almost EUR 6 billion. This is really where cash is going. We mentioned on various calls previously, we will see that also increase going forward with sales.

Other short-term receivables, these are mostly prepayments and prepayment of taxes, increased by slightly to EUR 18,000.

And then you've also seen that the account payable have increased significantly by EUR 3.8 million as we purchased also more material, yes. So after tax payments and after the changes in net working capital, that results in a cash flow from operating activities of a solid positive EUR 9.6 million. Last year, we were still at negative $3 million, mostly driven by the change in net working capital.

Cash flow from investment activities, EUR 1.8 million and cash flow from financing activities, negative EUR 6.97 million.

With that, I would give it back to Peter.

[Peter Podesser, executive]

Well, thanks, Daniel. Maybe complimenting here, I think doing all this and driving this growth plan here naturally can only be done as a team method, and well, an increasing number of hats and pairs of hands and shoulders helping us to, let's say, pull this through.

We're looking at more than 400 permanent employees here as of end of March. And yes, we're still out there looking for, let's say, the next 50 to 80 and looking at our open position. So this is a continuous focus here on the operational side.

Apart from systems being upgraded, here, we have this program in place to work on our digital transformation, and we have, let's say, kicked off our group-wide SAP S/4HANA program. Not sure whether it's seen as a positive or a negative if SAP mentions us in their profit their Q1 call as one of the key projects. But yes, I think it shows there's visibility there here for us, with this large software partner there.

But also there, again, this result in resources being bound to this, but it's preconditioned for the further growth. And this leads me to the conclusion here on the forecast.

Mentioned before, one could see this, let's say, us confirming now with this excellent start now into the year with the numbers of Q1 by just confirming our guidance. I think with, let's say, all objectivity, one has to see that the guidance still is a 20% to 30% growth. We still have, let's say, the relevant bandwidth improvements here on profitability in there. So, we see Q1 as an excellent foundation here to really deliver on what we have promised so far.

But at the same time, we also know we are building up a higher cost structure, and we are also facing -- and I've mentioned this specifically here with the takeover of the core production of membrane electrode assemblies with the core element for our fuel cells, we have planned capacity limitations starting in the later period of Q1 now going through Q2, and we are planning to catch up now in Q3.

But doing all of this and doing the ramp-up, I think there's always a residual risk in there of delays, resulting then in increasing costs, but then also in prolonged capacity limitations. And therefore, I think bear with us. You give us a couple of weeks more to build out more or to create more visibility maybe even, let's say, until summertime. And then I think the moment we have this clear, nothing is between us and then touching on to the existing guidance.

But what can you expect from us then? If you look at the $40 million revenue here in Q1, you look at maybe 20% of it being really a project-based impact here. So netting this out, and then looking at the removal of capacity limitation of EFOYs, then we are back, let's say, solidly above a $30 million level here.

And even if we keep some of the capacity limitations here for the entire Q2, we are at a revenue level that is comparing to our best quarters here in the previous year. And this is what we show as the worst case.

So -- and I think that's where our presentation ends and happy to receive your questions. Thank you very much.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Karsten Von Blumenthal with First Berlin Equity Research.

[Karsten Von Blumenthal, analyst]

Congratulations to this extraordinary results, especially on the EBITDA level. This is really exceptional. My first question is regarding your, Peter, your 15,000 unit fuel cell capacity. I didn't understand, does that refer only to Brunnthal?

[Peter Podesser, executive]

Karsten, thank you very much. Well, if you look at it right now, you can look at, let's say, the 15,000 in split where we have already an initial production line now in Cluj running in the existing facility, where you take out, let's say, a number between 2,000 and 3,000 already being contributed here from Cluj.

But then at the same time, you can add, let's say, all our technical products with another 1,500 to 2,000 units here in Brunnthal, and another, I'd say, approximately 2,000 here for repair and refurbished. So the one or the other way, if you take 15,000 for Brunnthal, this is included. If we just say new EFOYs then it's, let's say, the 15,000 would be Cluj and Brunnthal. But if you then take the full amount, then we are somewhere at 18,000.

And by putting Cluj now into place, and not to forget also additional assembly capacity in India, we are looking at a rough doubling here. One shift, 1 shift production, a rough doubling of the capacity here going into 2025.

[Karsten Von Blumenthal, analyst]

Doubling means then in, in figures?

[Peter Podesser, executive]

30,000. 30,000.

[Karsten Von Blumenthal, analyst]

30,000? Wow. Okay.

[Peter Podesser, executive]

And everything else would then mean double shift.

[Karsten Von Blumenthal, analyst]

Okay. Yes. And so could you imagine when you start double shift?

[Peter Podesser, executive]

Right now, I think for this year -- well, honestly, today, we are doing, let's say, I mentioned also our manual MEA production line here, where we are, at the moment, doing 2 shifts. So even out of this, we are getting the same capacity we got from our long-term partner here out of the U.K. So that makes us self-sufficient.

But all the other planning here for this year is one shift planning. And also with the 30,000 units going into next year, I think we are still looking at a 1-shift plan.

Well, how long does it take to ramp this up? You can think about a quarter or maximum 4 months.

[Karsten Von Blumenthal, analyst]

Next question. When I look into your segment reporting. I mean it's amazing how strong the clean energy business grew. But having a look at the clean power management and Daniel, you mentioned it, sales were a bit lower compared to the prior year quarter. Could you elaborate on that? What is different? Why didn't it increase?

[Peter Podesser, executive]

Yes. I also, I need to specify what I stated before, I said, well, the power electronics part is still, let's say, on a double-digit growth, which in the segment, is great.

And also, let's say, if we look at the order book, I mentioned Fisher, the orders are in for the remaining part of the year for a double-digit growth there. But what we saw as the comparison to first quarter last year, especially in our energy business in Canada, we had some significant projects here on the clean power side, which I think is more a quarter-on-quarter comparison, and we are expecting to level this out throughout the year based also on the backlog, including Canada.

So also demand in the energy sector for both segments, which are covered there, oil and gas with the commodity price where it is very consistent.

[Karsten Von Blumenthal, analyst]

So it's a strong Q1 2023 that makes the difference. Further question from my side, you mentioned your capacity constraints in the MEA production. Do you also get still from your supplier, from Johnson Matthey MEAs -- or how do you manage that? What is this?

[Peter Podesser, executive]

No, this has already -- this transition has already taken place. We did a last time shipment here end of last year. And we are, let's say, a base -- we are working right now based on, let's say, the stocks we have built up to make sure we have enough safety stock here.

And in addition, as I said, we ramped up an initial line here in Germany. And within this quarter, we are -- well, it's really within the next 2 to 3 weeks that we really ramp up production now in the U.K.

But we have planned a capacity, a maximum capacity here, I'd say, a limitation from, let's say, March into July time frame. And this is where we look at. And whatever we can do faster and better will result in a removal of this limitation earlier.

The plan really is within Q3 to do, let's say, the catch up here and then also address naturally some of the shipment backlog that we will see until then.

[Karsten Von Blumenthal, analyst]

Correct. But then I perfectly understand why Q1 is so exceptional. You will run into some capacity constraints. You have stocks, but -- and you have your manual production, but still you have to start ramping up in a few weeks in the U.K. That takes time. And step by step, then you will have enough MEA and you have to rely on your own production. So that explains it very well. I, now I understood it.

[Operator]

The next question is from Malte Schaumann with Warburg Research.

[Malte Schaumann, analyst]

Maybe following on, on the last topic, capacity constraints. So what -- maybe more on a qualitative level, what would be your demand levels for the next 2 quarters or so without capacity restrictions? And then what revenue levels we can actually expect in light of the potential limitations you have?

[Peter Podesser, executive]

Peter again. I think, as I said, if you do the math here with our Q1 results, if you take out approximately 20% there, then I think that's the lower limit here, and this is really what we planned for. And then I'd say, where could we go based on demand? Yes, 10%, even 15% higher. This is really the corridor.

And the plan is really to catch up here most of it in the second half of Q3 and into Q4. And again, as I said, there are naturally always risks there with ramping up such a site, with doing all of this. I think we have been diligently preparing it. We are in good shape.

We have, I would say, 100% of the Johnson Matthey team on board. A good thing to have knowledgeable people, very experienced on the practical side but also on the manufacturing side, but also on the R&D side.

And still, it can take longer. And therefore, we need this couple of weeks and maybe until summer to really have visibility and then we look at the overall planning and the overall guidance again.

[Malte Schaumann, analyst]

And in terms of profitability impact, I mean, you pointed out that Q1 margin positively -- was positively impacted by a very favorable product mix, but nevertheless, and incorporating the headwind from the ramp-up in the U.K., what is then your gross margin expectation for Q2 and Q3?

I mean, your full year target kind of in the high 30s. Should we look towards mid-30s for the next 1 or 2 quarters before it then goes up again, once you're fully ramped?

[Daniel Saxena, executive]

Malte, this is Daniel. I think yes, you're looking what you said the gross margin of this spring, but you look -- should look at what we had last year, right? So this is what we consider a sustainable gross margin always depending a little bit on product mix.

But again, don't -- we do not expect any significant negative surprises, neither on the gross margin or the other margins.

[Malte Schaumann, analyst]

Okay. So even second quarter, March should be kind of quite satisfying despite the slight headwind you see from the U.K.?

[Daniel Saxena, executive]

It would be quite satisfying for us also the second quarter margin. Again, it depends. It depends a little bit on the revenue level of each quarter. That may be shifting from one to the other quarter, as also Peter mentioned. It may do some catch up eventually in the year.

So if you look at the -- on the quarterly margin, which depends on product mix, depends on actual revenue, we'll, of course, see it going back to more normal levels. But for the rest of the year, we are very confident.

[Malte Schaumann, analyst]

And in terms of the split, what was the contribution of -- in India from Indian customers in the first quarter?

[Peter Podesser, executive]

So if you look at this, yes, we are looking here at, let's say, high single-digit million shipments. We are looking at -- if you look at Asia, 27% and then you look at, I'd say, a good 20% deriving from India as a ballpark, which is a tremendous start. And naturally is, let's say, helping us to make this investment already in the first year a really profitable undertaking. So...

And we are working right now on, again, the further pipeline, together with our partner. I think we know, naturally, it is not, let's say, next quarter that you get the next defense orders in. There is always a cycle to it. But looking at the pipeline, I think there is, I'd say, the expectations in terms of order intake over the next 2, 3 quarters are at significant levels.

But right now, the focus was really to make sure we ramp it up. We are able to do the assembly. We are doing the quality testing. We shipped this out. So it was really the first full operational quarter.

[Malte Schaumann, analyst]

So do you expect major shipments during this year to take place? Or that was something, get large order intake and then ship early next year?

[Peter Podesser, executive]

Yes. We are talking about India still?

[Malte Schaumann, analyst]

Yes, right.

[Peter Podesser, executive]

Yes. That's right. Well, there is continuous, I'd say, smaller shipments now expected, but seeing the cycle of this business, we are, let's say, looking at an order intake, let's say, within this year's time line or within the Indian fiscal year and then subsequently, larger shipments would be in our next fiscal year.

[Malte Schaumann, analyst]

Then on the order intake, I mean that included the large order for power supplies in the clean power management business. So the book-to-bill in the clean energy business was then below 1%. Do you expect that to turn around in Q2 already?

I mean, I know, I mean, it could be quite lumpy from quarter-to-quarter, so that does not need to tell something. But so what is your expectation regarding order intake for the Clean Energy business on the growth path going forward?

[Peter Podesser, executive]

I think the good thing there, this is not at all lumpy and you are actually right by, let's say, splitting this up and looking at it on a segmental basis.

The projects -- or the business structure, fortunately, is different there and based on the broader customer base. We have some of those, I'd say, yearly commitments in from partners here from, as mentioned, Singapore, Netherlands. We are, I'd say, looking at our significant projects in the U.K., looking at a significant diversification of the customer base in the U.S. And I just came back from Singapore. I think also from there, we are seeing a massive rebound after a long Covid impacted, let's say, slowdown of the market.

And seeing all of this I would not promise now, that not everything is in until 30th of June, but we will make sure we have the majority in within this quarter to also look at, let's say, again, the balance then at end of Q2, but something might shift into summertime.

But again, geographically diversified and then also end markets, again, diversified. And so we also looked at, let's say, Southeast Asia as a business as such. We have, let's say, our Japanese partners in a week ago also there. They expect a continuous growth here in Japan. And we are seeing, let's say, first projects here, not only from Oneberry coming in, but also out of the wind industry in some of those markets. We are looking at Vietnam, we are looking at Taiwan. So really diversified.

Therefore, naturally, this lumpy -- this -- fortunately, this big long-term contract here with Thermo Fisher, let's say, had a significant impact on the structure of the backlog. But diversification is on its way, and I think it's a matter of timing now.

And you can be sure we are pushing on this end as much as our customers' let us.

[Malte Schaumann, analyst]

Last question is regarding then your Japanese business. So what's the current data here, I mean, is that finally picking up?

[Peter Podesser, executive]

Yes. As I said, I think we are really happy with the funnel in Japan. We are happy, let's say, with the wind industry in Southeast Asia. And -- we are looking at, let's say, also alternative partnerships and looking at, let's say, also the expansion of our collaboration with, for example, Oneberry in Singapore across different markets, and also in Indonesia with our partner there.

We've just come back from the largest defense show in Malaysia called DSA. We had, let's say, all our Asian partners, including also our Indian partners there. And as always, this business takes some time, but also there, geopolitical impact is seen, and we expect spending going up.

So I think we will see a more diversified picture also in Asia -- and we are -- we cannot afford to simply rely on one single party. I think that's the path forward.

[Operator]

The next question is from Thomas Junghanns with Berenberg.

[Thomas Junghanns, analyst]

I have 2 questions. Maybe you can go one by one. So my first question is also related to the capacity constraints. Are these capacity constraints exclusively caused by limited access to the membranes? And is there is no possibility to source the membrane from other third parties?

[Peter Podesser, executive]

We can, let's say, clearly limited to this single course. We have I'd say, taken over and transition the technology and in-store that by, I'd say, in a very conscious effort to really control this part of the supply chain.

And what we are doing is diversifying now the supply of the materials, being, if you look at the MEA -- that's called the membrane electrode assembly, and then you get the different, let's say, ingredients, call it, ingredients, not a technical term here, but the metals all -- let's say, the other materials, we are diversifying the supply base there.

So we in-source a larger part of the value chain. There's no intention to, let's say, expand the supplier base on MEAs but on the metals, and that's happening as we speak, including also German, very reliable sources here.

[Thomas Junghanns, analyst]

And my second question is also a little bit related to the capacity constraints. You have mentioned that you expect in your worst case scenario and in Q2, revenue of roughly EUR 32 million or 20% below Q1. This would be higher than the quarters we have seen in 2023. Do you expect that this is also be valid for adjusted EBITDA? That it will be in Q2 higher than what we have seen in each quarter in 2023?

[Daniel Saxena, executive]

Thomas, first of all, a very good question. And let me give you a very long answer to this question, even though I totally understand you want to have a point-on very short answer. But my answer isn't. It pretty much ties in what we have communicated previously.

So first of all, we confirm our guidance. I think that really gives you a strong sign of where we think we're going to have for. Secondly, also referring to what Karsten asked earlier, EBITDA on a quarterly level depends on various factors, depends on revenues. As you rightly said, Peter gave you an idea of where we're going to head up. But then it also depends on how we ramp up our subsidiaries. Thirdly, it depends on product mix. But fourthly, it also depends on how we ramp up our higher business over the year.

We are expanding on various levels. That means we're not taking on people in a linear line. It is also here and there a little bit lumpy. So these are all impacts that has an impact on the quarterly EBITDA margin.

We are very positive on the margins. Obviously, if we weren't, we would not confirm our guidance. So I think that is a very long answer to your question. But there's no reason, like I said, we don't see any right negative signs whatsoever at the horizon.

[Thomas Junghanns, analyst]

Thanks, Daniel. And one follow-up question I still have. In Q3 and in Q4, do you expect after the removal of the capacity constraints to get back on a similar level like in Q1?

[Peter Podesser, executive]

Well, if you look at, let's say, the midpoint of the guidance, I think that's the logical consequence here. And I think the real moving part here is how fast can we, let's say, remove the capacity constraints? Can we really catch up fully in Q3?

Right now, we are seeing, I'd say, this really towards the end of Q3. And as said, if we, let's say, see this moving into Q4, yes, then we have naturally a strong impact also on revenue in Q4.

Whatever -- I think the fact is we have the orders in means the order book is strong enough that we can, let's say, we are, at this point, also proportionately reducing shipments to different customers to make sure we can satisfy the needs of -- which is kind of a luxury problem, but you do not want to perpetuate this and prolong it because it doesn't make anybody happy.

But yes, you can see that demand is higher than the available quantity. But we target this really to be through this until the end of Q3. If it takes a couple of weeks longer, we will see, let's say, simply a shift of revenue into Q4.

[Operator]

The next question is from Usama Tariq with ABN and ODDO BHF.

[Usama Tariq, analyst]

Congratulations on the strong results. I had one small question with regards to North America. So year-on-year sales were down. And you also indicated that they expect fixed costs to rise with expansion of the service and sales subsidiary in oil in USA. How does that fit in going forward? Could you provide some color with regards to North America in the coming quarters?

[Peter Podesser, executive]

This is Peter again. Yes. I think what you see there is naturally, again, as we had it on the clean power side, in oil and gas, a very strong Q1 here, especially in the U.S. with our prime customer there in Q1 last year.

If we look at the order book and if we look also at the project pipeline, we expect this really to level out throughout the year. We are not looking at the similar growth here in the U.S., especially, let's say, with this largest account because we made this jump up last year.

But still looking at their pipeline. They are predicting larger demand, and we have, let's say, still a significant order book there. So we expect overall growth but this is also deriving from the diversified customer base we are seeing now initial orders coming in here from a broader customer base. So overall, yes, not the same level of, let's say, significant jump there or growth, but consistent expansion of sales, higher market penetration.

Well, and then in Canada, I think looking at where we are right now, as said, we have less of a dependency on the energy space than we have historically also there. I think energy, oil and gas, commodity prices and outlook are solid. So we expect here a continuous development as also in the previous year. And this means also solid double digit here overall.

[Daniel Saxena, executive]

When it comes to the costs and the expenses, you know that we're growing in North America and in Canada. Obviously, in the U.S. are much faster. We established our subsidiary there. We're ramping up the business.

So yes, expenses will increase in the U.S. business. We don't expect huge jumps, right? As always, as we do it with every geographical expansion, we do it very cautious, very much step by step, but it's really in line with what we've said and communicated before as we ramp up. Just as appears, obviously, also the operating expenses increase.

[Usama Tariq, analyst]

Just one follow-up question, a small one, if I may. Anything on M&A front?

[Peter Podesser, executive]

Yes. I think that fits into this topic as well as into, let's say, a more generic view on the sector as starting with the latter one, we see, let's say, with our profile here growing and being profitable, there are, let's say, not so many others in the sector doing this. And we expect some consolidation opportunities really materializing. And we are seriously looking at it.

Expect, I think, nothing here, I'd say, until tomorrow, but we are continuously looking at this.

And it's an opportunistic thing. Maybe we see some acceleration there.

And the other part is U.S., very clear, as also communicated before, we are looking at a long list of potential targets for acquisitions. For acquisition, we are following here the example of our approach here into the Canadian market, acquiring or looking to acquire a system integrator, well worth in, let's say, power products to our verticals to our customer base. And then converting this into an energy solution provider based on our fuel cells.

The long list is there. Don't expect anything to happen in first half of this year. But yes, we want to have a clear view and a short list within Q3.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Dr. Peter Podesser, CEO, for any closing remarks.

[Peter Podesser, executive]

Well, again, we are running out of time. I think we are hitting our time lines here. Very good to have you all. Thanks for the interest, and let's say, the trust in us. As always, if we have bilateral topics open, reach out to us, Susan, Daniel, myself. And also very glad to see some of you tomorrow in our AGM. Thank you very much. Goodbye.