SFC Energy AG

XETRA:F3C

Earnings Call Transcript 2021-Q2

[Operator]

Dear ladies and gentlemen, welcome to the publication of the Q2 report 2021 of SFC Energy AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you 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 very much, Lisa. Good morning, ladies and gentlemen. Thank you for joining us today in our half year earnings call. Together with Daniel, we will be happy to give you an overview of the business and financial results of the first 6 months and naturally also have an outlook with you together into the remainder of the year. As always, we will be very pleased to answer your questions in the subsequent Q&A session and look forward to this. So if we look now back to the first 6 months of the year, I think we can overall see and report a solid performance. We look back at the best first half of the year of the company's history, 2 main topics. We see healthy growth. After a good start in first quarter, we continued the path here with 12.3% of organic growth. And at the same time, the second element here, bringing to your attention naturally is the operational profitability significantly improving, almost tripling here in the first 6 months. But naturally, this is the past. Good to see and good to look at it, but then looking forward, big elements of, I think, interest and our close attention is the ongoing buildup of an order backlog. We see the order backlog, despite the growth in the first 6 months, up 73% compared to January 1 this year. And so overall, generically, we feel ourselves well on track to deliver what we indicated as the targets for this year but more so than also for the midterm targets here of the group. Let me now look into some of the key drivers here. The activity in the second quarter, being up 22% compared to last year across both segments of the company, is positive -- is strong. It's not regionally limited to one region. But at the same time, we also have to see, and I think we don't want to hide this, naturally, the second quarter last year was the first quarter where we saw some signs of COVID impact here in some of our end markets from the oil and gas part to the government part and also to the power electronics part. So I think factoring this in, still, I'd say, we see a consistent and solid growth picture. What are the key areas of focus, and what have been and what are those here for the future? Our key attention is always directed to the performance and the product -- of the quality of our products, applying our experience and learning curve out of the different markets here in a fast way. And I think seeing the introduction of the new EFOY series here started end of last year for consumers, second quarter here for the industrial customer base, our methanol product line fully renewed, already contributing significantly to the growth here is, I'd say, one proof of this being one pillar of our company policy. And the second area of focus always is and has been expanding existing market access and finding new market access, either direct or through partnerships. And I think also here, we will go into some of the details for the first 6 months of the year later in the presentation. If we look at the macro environment, yes, consistently improving here. Hydrogen and fuel cells are at the end. Now in the midst of society attention of, let's say, all of us in terms of a technology that can help us to meet challenges here of climate change, those technologies, especially also against, I think, the backdrop of the recent findings of the World Climate Council tell us we have to act sooner than later. We have to act now. And I think our contribution here can be and has to be having already products out there that can help our customers to improve their CO2 footprint, to reduce their CO2 footprint, replace conventional technologies like diesel generators by environmentally friendly stationary energy supply. And this ranges from our end customers' motor homes, tiny houses, sailboats to the bigger markets now, means industrial application, backup power generators, critical -- for critical infrastructure or telecom, smart traffic systems. Across all those applications, we see a growing attention but more so, it's not only interest. We have experienced this interest for a couple of years. We now see real willingness to invest into sustainable new solutions for replacement of incumbent technologies. And I think that the big advantage here of SFC is we have been out there now for more than 20 years. We have the products and we have the market access that needs to be expanded and improved as we speak. And some of the highlights, first 6 months on the partnership side to get market access, yes, we reported on this naturally earlier, but expanding our partnership here with Toyota Tsusho. Beyond Japan with a solid foundation in Japan but also now to Southeast Asia and China, the one with Jenoptik for traffic management system, with Leosphere for the wind energy and the most recent one, as recent as yesterday now with Nel, are simply building blocks and individual pieces to the puzzle we are putting together here for our midterm picture. Concrete orders, I think, as highlights only mentioning 2 of them. Again, in Japan, Toyota with a 3-digit number of EFOYs purchased in one lot, which, yes, has not been the case anytime before. Industrial application here again. Same in the U.S. with our partner LiveView, surveillance cameras here that are put out there on parking lots of Walmart stores and NFL stadiums to ensure that there is enough crime prevention done 24/7, 365. Also there, a 3-digit number of EFOYs purchased in one lot, which is, I'd say, a significant step forward. The key message here from us is there is a broad and strong demand for this technology, be it on methanol or hydrogen platforms. And this is regionally broad, and this is broad in terms of applications. And I think this is where I want to direct your attention to. This breath of the various application is the basis here for the stability and the resilience of our business model. What we see is, yes, at the beginning, maybe historically, one would say, well, dispersed and fragmented market access. I think now we are turning this into an advantage, making it broad and therefore more resilient. Some numbers now. Yes, I mentioned this, EUR 31.1 million sales, 12.3% growth, organic growth and, in the second quarter, year-on-year, 22% growth in both segments. Stronger growth in clean energy means the fuel cell part of the business but also solid growth here in the power division in clean power management. Looking at the details of clean energy. Year-on-year growth, 16.2% to EUR 19.3 million revenue. It's the segment that accounts for 62% of the total sales, driven by the methanol but also the hydrogen platform of our product range. In the second quarter here, significant improvement here of the growth rate to 33% here for clean energy in the second quarter of '21. Which applications are driving this growth? We mentioned this earlier in the year already, there is a very positive sentiment and big demand here in our end consumer business driven by sustainability requirement here from end consumers but naturally also the mere growth here of the motor home business in Europe, but also -- and with this, yes, resulting in a 55% growth here year-on-year for the first 6 months and even approximately 80% growth in the second quarter. But also the other end markets, industrial with 9% growth after a significant growth here last year already. The North American business here driven by our, I'd say, oil and gas end customers also, after a still slower start in Q1 because of a very strong Q1 in 2020, shows now after 6 months a positive 2% against last year's results. And I think important to mention, we started the year with almost no backlog compared to the EUR 5 million backlog the year before in the oil and gas part. And then looking into this, again, in a more detailed way, that the key message here is that the EFOY business in North America is on a -- today, on a 3-digit growth path. We recorded about 1 million of EFOY sales in Canada and the U.S. last year. Midyear, we are now at 2.6 million. So 160% growth here in the EFOY business in North America, so -- and this despite the limitations here still we are facing in terms of travel. We expect first travel being possible under current conditions later part of September, our salespeople being able to see customers again then in the U.S. The only end market where we are below, and we don't want to hide this by any means, below last year is our government defense and security business, down 2% compared to last year. So we did a pretty good catch-up in Q2. But we also have a solid backlog buildup here in this business. So the expectation for the year-end is also growth in Defense & Security, and I would say, a 50% growth rate here, Defense & Security, is definitely the realistic path. Clean energy management, as I said, also showing growth here, single-digit solid growth, 6.5%. And the mix of the growth, the mix of the shipments but also the order intake from existing customers like Thermo Fisher or ASML long-term industrial large partners, but also new customers, for example, [ Kumei ] Group, one of the also suppliers to the semiconductor industry using now initial units of our laser platform here developed in the Netherlands, is a healthy combination. Ongoing expansion of the business, large customers, a recovering from some of the slowdown of COVID, but the semiconductor business being on a strong cycle with ASML on top of it is driving this business. So also here, overall market expectation, and our own expectation for the year-end is to stay in the growth corridor we are seeing right now. On the regional split of the business, I would like to hand over to Daniel. He will also then naturally lead you through the financial results of the first 6 months.

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

Thank you, Peter, and good morning also from my side. Thanks for dialing in and the interest in our numbers. When we look at the regional sales distribution in the first half year, that Europe, excluding Germany, with approximately 43% remains the largest retail market for us. North America, as Peter also mentioned, is 37%. It's a bit less contribution than in the previous half year. Slightly lower is the U.S. business given the ongoing containment measures we have there. But like I said, it's just a bit lower from what we had in the first half year 2020. Together still, those 2 regions, and that is consistent with the previous quarters or the previous year, account for approximately 80% of our revenue. Asia has been picking up again. Peter mentioned Toyota Tsusho. They account for 6% more revenues in the first half year. And Germany, our strong domestic market, for 13% in the last -- first last -- first half year. So overall, you can still see there's no significant changes in the regional distribution. If you look at the gross profit and gross margin, the development is positive in line with our sales. Our gross profit amounted to EUR 11.2 million in the first half year, which is about EUR 2.4 million, up from the previous first half year. That translates into the 36% gross margin, which I believe is a noticeable increase from the 32% we had in the previous half years and also increased the full year 2020 gross margin, which came to 34%. The increase of the gross margin is a function partially of reduced or lower personnel expenses but also lower rent expense that we have and lower material expenses and, last but not least, also always impacted a bit by the product mix and the products we deliver in the period. We are aware of the challenges in the supply chain, as we also mentioned in our previous calls. And you have seen that by the development of our inventory, we have been stockpiling already since the third quarter last year. We will keep on doing that, but I'll touch on that later. We are still working in gradually increasing our gross margin. It is a function of supply chain management, also optimizing the bill of material of product and still looking in sensible growth, i.e., we want to make sure that we sell our products at these prices. If I go and have a look at the gross margin per business unit/segment, we're looking at a gross margin of 40% for the segment clean energy coming to EUR 7.8 million compared to EUR 6.2 million and a 37% margin in the first half year of 2020. That's also a noticeable increase of 3 percentages points. The gross margin is always impacted, and I mentioned that before on a half year quarterly base, by the product mix and the application mix. But however, the underlying trend that we can see in gross margins remain healthy and are expanding. The gross margin in clean power management was 29% in the first half year, translating into gross profit of EUR 3.4 million. That compares to EUR 2.6 million in the previous years and a 23% margin in the previous year. We could observe higher gross margin in all product families in the clean power management segment. But let's keep in mind, the first half year in 2020 was heavily impacted by the pandemic and the pandemic-induced recession. Having a look at our EBITDA. The group reported EBITDA is negative, negative is EUR 1.9 million, obviously an EBITDA margin of 6%. In 2020, it was negative EUR 2.1 million. But the reported EBITDA, as in each quarter or in most quarters, is -- or was significantly impacted by the high long-term incentive stock option and SARs option program valuation, and the expense that was charged is a noncash expense. But still, the expense was charged in the first half year amount to EUR 5.7 million. In the previous year, it was EUR 3.1 million. Also, we got to a minor part, transaction-related expenses in the reported EBITDA of EUR 100,000. SARs expenses, and I keep on mentioning it, is a function of the share price development as the share price rises or increases. Also, these SAR expenses will increase even though they are noncash until the maturity of the various programs. The group adjusted EBITDA, and as always, we report the adjusted EBITDA or underlying EBITDA to compare apples with apples and make it a more objective indicator for the financial performance. The adjustments in total to EBITDA were EUR 5.4 million for those extraordinary expense items that I mentioned before. The SARs expenses are allocated as always to the functional cost sales and marketing and general and administration expenses. They are classified as personnel expenses. The SARs expenses in total, EUR 5.7 million. Let's remember, the share price went all the way up to EUR 28 compared to EUR 16, EUR 15 at the end of the last year. The higher EBITDA margin is really a function of the higher gross margin that we saw, but also we had, to some extent, a bit higher operating income. Getting to EBIT, looking at depreciation, amortization, that was in total EUR 2 million. The major part of depreciation is IFRS 16-related, approximately 46%. And the second largest part in depreciation is R&D-related from our capitalized R&D, approximately accounting for 35% of the depreciation. The R&D depreciation is roughly EUR 250,000 higher than the previous year as we started to depreciate the new product generation that Peter mentioned we introduced last year. So that is now being depreciated as we have rolled out the product successfully in the market. So then we come to group adjusted EBITDA, positive of -- sorry, group adjusted EBIT of EUR 1.5 million, translating in a 4.5% EBIT margin compared to a negative -- slightly negative adjusted EBIT in the previous years. Let me briefly go into the operating expenses that we have. Sales and marketing unadjusted, i.e., unadjusted for the special effects, were higher than in the previous year with EUR 8.4 million versus EUR 7.1 million. EUR 3.4 million expenses of LTI program are included. Adjusted for these extraordinary expenses, the sales and marketing expenses stayed flattish in the first half year compared to the first half year 2020 at EUR 5.1 million. Still, sales and marketing expenses are at a pretty low level. It has to do with the reduced travel and reduced trade fair expenses that we had in the first half year. But as the pandemic -- or at least traveling starts to -- or travel activity starts, we also expect sales and marketing expenses to be a bit higher in the second half of the year. So overall, sales and marketing expenses are 16% of revenues compared to 18% in the last year and 19% of the full last year. We still stick to our long-term range where we see sales and marketing expenses around 12% to 13% of our revenues as revenues are growing. R&D expenses. The total R&D cost in the P&L was EUR 1.5 million, so about EUR 100,000 less than in the first half year of 2020 where it accounted for EUR 1.6 million. The capitalized R&D expenses were EUR 1.3 million versus EUR 1.9 million in the previous year, so a decent 35% lower. It has to do that we have acquired a few capitalized R&D expenses with our new product generation in the first half year of 2020. High software development prices -- costs that was included there. And as we launched the new product, obviously, the capitalization also went down. So the total R&D cost, i.e., the cost that we expensed out of the P&L, as well as the capitalized R&D expenses amounted to EUR 2.9 million, also a bit lower than in the previous year. And that corresponds into 9% of revenues. We had 30% in the last year. That's in line with our planning. And we're still driving forward our projects in -- development projects, which is new product generation, of course, the hydrogen fuel cell and the power platforms conversion. Long term, we're still looking at 6% to 7% R&D spend -- total R&D spend on our revenues. G&A. G&A unadjusted were EUR 6 million versus EUR 4 million in the previous year. If we take out again the SARs expenses and the transaction-related expenses of totally EUR 2.3 million, we'll come to adjusted G&A expenses of EUR 3.4 million. They are higher, approximately 30% higher compared to the first half year last year. It's personnel expenses. They account for the largest portion of these expenses, approximately 2/3 of it. And we had an increased head count, but also we had higher IT spending in the first half year and, last but not least, in legal and advisory costs. Quick glance at the balance sheet. Our fixed assets, I know I keep repeating myself, but we are an asset-light company. So we don't have a lot of CapEx in equipment and PP&E. The total CapEx, intangible assets and PP&E was EUR 1.6 million versus EUR 2.6 million in the previous year. The large part is intangible assets with EUR 1.3 million, and that is really the capitalized R&D, which account for 76% of our total CapEx. About EUR 200,000 were really equipment and machinery. Looking at our cash and our net debt. The freely available cash was EUR 28.9 million versus EUR 31.5 million at the end of last year. Our financial debt decreased by EUR 500,000, so we're looking at EUR 5 million -- EUR 4 million of financial debt versus EUR 4.5 million at the end of last year. All of this debt is short-term, and it's in large part, working capital lines with our affiliated companies and data companies in Canada as well as in the Netherlands. So that translates into a net cash position of EUR 24.9 million compared to EUR 26.9 million at the end of the year. Our equity ratio went down to 48 -- 58% versus 64% of last year. That's mainly driven by the net loss and also the SARs expenses. And a quick glance also at our cash flow. The operating cash flow before changes in net working capital amounted to EUR 3.1 million. So significantly up from last year numbers, which was EUR 1.1 million. However, also our net working capital increased. Inventory increased, cash impacting, by EUR 318,000. So we still have a high level of inventory. We will keep that. We will keep stocking raw material to make sure that we don't have any supply chain interruption especially with the challenges in the environment. So I expect that our inventory level will stay high. We also had a significant increase in accounts receivable of EUR 2.3 million. It has to do that we shipped quite a bit in June. So that is -- the account receivables really went up in the month of June. Accounts payable also increased by EUR 830,000. After taxes and after a change in cash flow -- sorry, changes in net working capital, our cash flow from operation -- operating activities was positive, EUR 672,000. Where did we invest our cash and our money? We have the cash from investing activities, as mentioned before, which amounted to EUR 1.6 million, mostly R&D. We had cash flow from financing activities also amounting to negative -- or spending of EUR 1.6 million. Thereof, we paid back EUR 600,000 in financial debt. And the largest position is IFRS 16-related cost of EUR 800,000. So that translates in a total change of cash of EUR 2.5 million. I think with that, I would hand it over back to Peter.

[Peter Podesser, Chairman of Management Board & CEO]

Well, thanks, Daniel. An important element on our path here to further growth is naturally also the number of heads, the pairs of shoulders and hands who are helping us to achieve what we are trying to achieve here. The number of people employed here at the end of the half year with 282 is almost stable. We saw some fluctuation, not significant, but the search for talent definitely, besides ensuring supply chain and making sure we are containing all our -- or we are continuing all our COVID measures are one of the 3 key elements also for the second half of the year or the remaining 4.5 months here for this year but turning into next year. We have about 40 open positions in the group right now, of which approximately half of it are already either contracted or have an offer on the table. So on a good track, but it is an area of specific and very high attention here of the whole management team because although the topic here of fuel cells, clean and sustainable energy, technology is attractive for young talent, still there is a fight out there for talent. And well, we managed this so far pretty well. As I said, almost half of the open positions are well on its way, but still we're looking for more. And then the outlook here. Yes, with the -- I would say the solid first and the good first half, and I think we can also say with good first, whatever, 7.5 months, we see ourselves fully positioned here to confirm the expected growth here -- growth rate between 15% and 30%, still, a broad range because some bigger projects are still in there, EUR 61 million to EUR 70 million is the expectation. And this is what we definitely can confirm from our perspective today. On the expected EBITDA underlying, we did a concretization already a couple of months ago to the range of EUR 4.756 million. And we are doing the same right now for the EBIT, concretizing the range here to EUR 1 million to EUR 1.6 million on the EBIT underlying. Summarizing, yes, very good almost 8 months now. There's no reason to sit back. There's no room for complacency. I think it's motivation and inspiration to even deliver better in the upcoming period ahead of us. And with this, I would like to hand back to Lisa and open then the floor for your questions. Thank you very much.

[Operator]

[Operator Instructions] And our first question comes from Karsten Von Blumenthal, First Berlin Equity Research.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

You showed a very strong increase in order backlog. Could you shed some light on in which markets these -- from which markets these orders came from and which products drive your order backlog?

[Peter Podesser, Chairman of Management Board & CEO]

Absolutely. I think we have a good distribution here amongst the end markets, starting from oil and gas to defense and security to our civilian fuel cell business and the power business. So pretty even distribution, a little higher backlog on the power side because of longer lead cycles and longer project cycles driven also by the supply chain.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

All right. Yesterday, you announced the cooperation with the Norwegian NEL, and you said first products will be out roughly, I think, second half of 2022. Do you have a rough sales expectation regarding this cooperation in 2022 and 2023?

[Peter Podesser, Chairman of Management Board & CEO]

Well, we are obviously particularly pleased here with this agreement here. At the end, what we did is -- we mentioned this also early in the year when we published our midterm plan, that integrating electrolyzer capabilities is one of the strategic targets here on the product road map. And instead of going out and doing an expensive investment into maybe an electrolyzer start-up, I think the idea simply was to form a coalition here of technology and market leaders. And this idea at the end led to me reaching out to Jon André Løkke and just explaining what we see as a market potential in the stationary power market, replacing diesel generators by integrated electrolyzer fuel cell systems. And looking -- well, and doing this with an established player, putting together 2 proven cutting-edge products, technologies naturally also gives us an advantage in terms of time to market. And that's why we are confident to bring this out by already second half of '22 for the first power range here up to -- between 10 and 50 kilowatts and the second one being then up to 500, which will take some time longer. But then -- well, looking at the market, I think we are maybe not there to have the budget numbers in there. But if you look at the overall market, if we looked at -- well, right now, independent research reports -- research houses see the stationary fuel cell market growing from about -- in our power ranges for our applications, growing from about, let's say, a single 4 million -- EUR 4 billion market here from today's perspective to a EUR 30 billion market in 2030. And what we see, and there the assessment naturally is our own assessment together with the inputs also from our Norwegian partners, we see 50% of SFC stationary fuel cell market really as a suitable market for on-site green hydrogen production. So we really target half of our sales then being really integrated systems by, whatever, 2025. So -- and in terms of really product numbers, units in the budget plan there, maybe you can give us some more weeks and months to go through our planning cycle. It is, I'd say, as recent as yesterday that we formalized all of this. But saying this, yes, the technical teams have been working on this for a couple of months already since beginning of the year. So we are good, on track to bring a really attractive product. And we are the first one worldwide doing this here for this market.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

All right. And 50% fuel cells for on-site green hydrogen is a very clear answer to my question in the medium and long term. That's very interesting. In the conference call, you mentioned that you expect your Defense & Security government business to increase roughly 50% year-on-year. And naturally, projects are in Q4. Is that likely to be the case this year? Or do you also expect a strong rise in Q3 already?

[Peter Podesser, Chairman of Management Board & CEO]

We expect the impact already in Q3. As said, we are fortunate with a strong backlog here already into the running quarter. And I think a range of EUR 5 million to EUR 6 million for the year-end still is doable, where EUR 5 million overall, we see as solid and, I would say, realistic, and the EUR 6 million is really the upper range. But it's not a year-end cluster risk where we are waiting for one single customer taking decisions in November. I think we have taken our learnings out of this.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

Okay. That's sounds promising for Q3 already. When I look into the Q2 figures, they were certainly strong. But compared to Q1, one might think that there is a certain loss of momentum if I see the top line figure. So was there anything that held you back in Q2 regarding even stronger growth?

[Peter Podesser, Chairman of Management Board & CEO]

No. I think we have to see here that we have a usual seasonality in the Oil & Gas end market with what they call the breakup season, where the permafrost goes up, and people cannot go into the field usually for a month time frame, which even this year took a little longer. So overall, if we see, let's say, the -- all the civilian segments, including also the power business, we have a consistent growth in there. And we had this discussion also yesterday here when discussing also the Nel collaboration with a couple of priorities even in summertime, and I'm talking July and August, we see consistent activity and demand. We have not done any shutdown in our production this year compared -- or in contrary to last year. We fortunately cannot afford to do this. And so therefore, besides the COVID measures still being in place and being cautious here, protecting our manufacturing team, yes, we need -- today, we need every single day to get product out.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

And that sounds really great. So we can expect a rather stronger Q3 than Q2.

[Peter Podesser, Chairman of Management Board & CEO]

Well, I think this is a precise assessment.

[Operator]

And our next question comes from [indiscernible] at ABN AMRO-ODDO BHF.

[Unknown Analyst]

First question is on your outlook on underlying EBITDA and EBIT. Can you explain the low end of your guidance range because it would imply a significantly lower result in the second half than in the first half? You just explained you expect Q3 to be better than Q2. And in Q4, you expect a sizable Defense to come back.Second question is based on your presentation. You talked about triple-digit orders in Japan and North America. Can you maybe explain the expected timing of these orders to actually come into your order backlog, probably a phased approach there? And maybe for my final question is on, let's say, the global shortage of components. Can you explain how the situation is on your sites, whether they're also scared of global shortage as well.

[Peter Podesser, Chairman of Management Board & CEO]

Absolutely. Maybe, Daniel, you want to start?

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

Yes. Please. So answering your first question, and as you know, I'm not known for being overly bullish when it comes to planning our operating expenses. And it's really a conservative case, but there are 3 impacts that I may want to highlight. As mentioned, we do see challenges in the supply chains, which we have handled very well so far. We are really well positioned, as mentioned, having started very early. But of course, we're not going to exclude that we may get certain challenges on the gross margin. Secondly, as I also mentioned, if you look at the functional cost, sales and marketing costs in the first half year were relatively low, basically flattish with the first half year of 2020. It has to do that there was very little travel activity, basically no trade fairs. We look -- the activity does pick up right now. We are looking at catching up also on trade fair and customary wins, so I would not expect that sales and marketing expenses and -- if the development of the pandemic keeps in certain development, I wouldn't expect our sales and marketing costs will be at the level of the first half of the year. And last, but not least, if you look at our G&A, we are growing rapidly. Peter mentioned it. We are looking for talented people. Of course, we do invest in our people to be prepared for also the opportunities that we're looking to. So also on the G&A side, if I want to be conservative or careful, I would expect the expenses to maybe go up a bit. So that really explains why -- and there's a range why there may be a lower operating income in the second half of the year.

[Peter Podesser, Chairman of Management Board & CEO]

And if I may add here, I think the moment we have clarity and visibility of some of those items, we definitely actually will have to look at the -- again, the corridor here, as we have done it now in the past 2 quarters in a sequence. But this also would lead -- does this answer your first question, [indiscernible]?

[Unknown Analyst]

Yes. That's all right, yes.

[Peter Podesser, Chairman of Management Board & CEO]

And then I'm coming maybe to the third question because it's related to this. Yes, supply chain, area of high attention and where we have covered our sales here in terms of risk hedging by simply doing a lot of stockpiling, not optimizing our working capital, but ensuring simply a supply chain. We have continued this also into Q3 and Q4. We do see very little risk here for Q3, but we are right now in the process of assessing Q4 risk size. There are regional and partial shutdowns again in China affecting some of the electronic supply chain, but still this is a concern at this point in time. It is definitely something we need to deal with in the next couple of weeks. But still, even factoring this in, we stick to, I'll say, our guidance here for the revenue side. And for example, we have also released all the purchases already here for critical components, especially on the fuel cell side for Q1. So this is already in the works. The second, yes, those orders, Japan and the U.S., the good part of it is it is already shipped. Products are already with our customers. The bad part of it is, yes, not part of the backlog. But also there, the good thing is still the backlog went up significantly. So at the end, EFOY orders, usually, the turn here is between 1 and 3 months, not longer. But we are seeing a tendency now naturally to get longer lead times because of the high loading we have in the factories.

[Unknown Analyst]

Yes. But going back on the triple digits, you said a triple digit on a 10-year frame, on a 5-year frame, on a 3-year frame?

[Peter Podesser, Chairman of Management Board & CEO]

No. We shipped both orders already out. But at the same time, we have repeat orders already in, again, from Toyota, not at, let's say, the 100 piece level, but between, let's say, 50, 80 pieces, and this is an ongoing business. And the same we see now, fortunately, with our new partner here in the U.S. also working on the next bigger projects and bigger orders. What they are doing there, and this is I think -- what we have been seeing in Europe already earlier with partners like [ Power Watch ], or our U.K. and Scandinavian partners in the surveillance business, they replaced their conventional generator, power camera systems that are mounted usually on trailers for the mobile systems. They're replacing this by fuel cells, and I think that's maybe the American part of it. They're doing this faster. Key decisions taken and then they just replaced. In Europe, usually, this would take maybe 2 years longer, first system out and 10 units tested for 1 year or 1.5 years, and then we get the first, whatever, 2 dozens. In the U.S., we did the testing with them together for a couple of months, and then they replaced about 100 -- and approximately 100 systems at once. So fast adoption.

[Unknown Analyst]

Good to hear, good to hear. Singapore has slowed down or is temporarily down due to COVID.

[Peter Podesser, Chairman of Management Board & CEO]

Yes. There was naturally, really, also an impact that the slowdown on COVID. We are -- and this is one of the reasons where -- when Daniel mentioned the regional distribution that Asia is slightly down in the first 6 months. We're expecting a rebound here in Q2 with already visible projects here in our project log.

[Unknown Analyst]

Yes. And I mean, India, similar issue.

[Peter Podesser, Chairman of Management Board & CEO]

Yes. We saw now, really, the initial orders already in -- part of it in Q2. We expect Q3 and Q4 activity here. We have been focusing also on broadening, let's say, our collaboration here with the existing partner -- potential new partners. So this is one area where we have been spending a lot of our attention and time to.

[Unknown Analyst]

Okay. Good to hear. And maybe final question on your motorhome business. New product that's really sexy, I must say. But of course, market circumstances have been exceptionally strong. How is that now doing, let's say, end of summer?

[Peter Podesser, Chairman of Management Board & CEO]

Well, and still there are also -- and actually, August really is the slowest month. We are preparing for next week's caravans alone. This will be really a present activity, means the trade show, the exhibition is happening. And besides OEM partnerships, we are also working on a concept for a green campground here, means off-grid energy supply also for the campground with our hydrogen products. We are -- we will come up with an innovative concept here end of next week in our press conference there.

[Operator]

And our next question comes from Anne Margaret Crow at Edison Group.

[Anne Margaret Crow, Director]

And congratulations on an absolutely brilliant first half. I'd just like to ask a follow-on question regarding the partnership with Nel Hydrogen. I'm wondering, you say you reached out to them. Will they be selling the combined product as well to their customer base? And if so, how are you going to -- I know it's early days yet, but how are you going to sort of organize arrangements, so that you're not competing with each other?

[Peter Podesser, Chairman of Management Board & CEO]

Well, and -- well, first of all, Anne Margaret, and Nel, yes, for the time being, I think the concept is very clear as Nel has not been active in this industrial distributed power market. At the end, we are bringing and offering a market access, and the distribution of task is pretty simplistic here. We both work with our technical teams on the product integration, and then we are the ones with the obligation to execute the sales. So therefore, no competition to be expected. But you're right, we are naturally also assessing how this product could fit into their offering into their markets. We are thinking of backup power for hydrogen stations because it would be an awkward picture. You're having a hydrogen filling station, and then the backup power there is generated by diesel gen set.So there is work being done already, but in the -- in our core markets, we will be responsible for the sales and have to make sure we make our Norwegian partners happy with high numbers.

[Operator]

And our next question comes from [ Severis Stefano ].

[Unknown Analyst]

I had one question, in particular, on the agreement you signed with Nordic Yachting. It seems an interesting development. Could you also give us an idea of what we could expect there and the potential revenues you see in that activity, especially in an area which is quite polluting? So maybe there is a lot of prospects for you. And the second question is also about your cash flows and when do you expect to turn free cash flow positive.

[Peter Podesser, Chairman of Management Board & CEO]

Can you help me with the first one? I did not get the first part of it properly, I guess.

[Unknown Analyst]

Yes. You've announced an agreement with Nordic Yachting to provide fuel cells, and it would be great to hear a bit more about it, please.

[Peter Podesser, Chairman of Management Board & CEO]

That's -- at the end, the strategy we are pursuing in this market with, I'd say, yachting, motorhomes, whatever, trying to get more and more into an OEM status because, at the end, they all have the pressure now to replace their conventional power sources over time. We have really challenges and big hurdles in terms of, let's say, initial CapEx of the fuel cell over the past years. This is now, let's say, eliminated step-by-step by a total cost of ownership approach, but also by the sustainability pressure. All the manufacturers are under. And put it in a different way, so far, we have only served some high-end markets where really the end consumer did decide for the fuel cell as a source, and now we try to go the OEM road. And on the cash flow, maybe, Daniel, you can take over.

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

Yes. So if you look at our cash flow and you see the 2 largest position really where we're investing that's, first of all, net working capital, which is increasing and visibly growing, and the second is obviously CapEx/R&D investment. We are growing at what we consider a decently high pace. We are expanding our business, as Peter also mentioned regionally, but also in different end markets. There are a lot of opportunities, and we will continue to do that. We believe, and I'm strongly convinced, and I mentioned our R&D spending will be adequately high going forward, especially with the hydrogen platforms developing for also the other existing platforms, with the cooperation Nel was just mentioning. So we have a very long answer to you to your questions. When will be cash flow -- free cash flow positive? We will be in the future cash flow positive, but we will definitely further invest in tapping the market and really keeping our head start that we have in the sector. And that means we keep investing in R&D. And I also expect that our net working capital will increase as we reach out into different regions and different countries.

[Operator]

And our next question comes from Malte Schaumann of Warburg Research.

[Malte Schaumann, Equity Analyst]

The first one, I wanted to touch again, in the functional costs. I mean, you indicated working cost -- moderate working costs in the quarters to come. But you had kind of a EUR 5 million run rate in the past quarters on average. So for the overall sum, can you potentially provide some more color where this will trend in the second half of the year and then going into the next year?

[Peter Podesser, Chairman of Management Board & CEO]

Functional cost.

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

Sorry, the functional cost. Malte, I didn't properly hear. So the functional cost will touch into the questions that the team has. I would expect that if you look at something EUR 5 million to -- going to EUR 6.5 million, like I said, I expect sales and marketing costs to increase slightly. I would expect G&A cost to really increase slightly. I don't expect any major impacts this year. We'll see on the R&D expenses. It also has a bit to do, as you know, with what do we capitalize, what we work on that will be slightly above the previous year's numbers. So that's where we're moving in. And it also depends a bit on what we get in terms of subsidies or joint development agreement that taps into R&D expenses. So I wouldn't expect really, and we don't plan for a significant increase. But I would not expect neither for them to stay flattish in the second half part of the year.

[Malte Schaumann, Equity Analyst]

No. Sure. So that EUR 6.5 million run rate, could you reach by the end of the year? And then the expectation for the next year, do you see the necessity to then scale up further significantly?

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

We will further scale up as we grow. You see the growth rate that we're having, especially also here in Germany. So yes, we are -- and as Peter mentioned it, we are hiring. We're getting people on board. It is a pretty high pace we're doing here. So yes, we will further invest also in more resources for our group.

[Malte Schaumann, Equity Analyst]

Yes. Sure. On the R&D budget, I mean, that was down year-over-year. So -- but generally speaking, how do you see the budget developing going forward? I mean, you have some development activities. Do you see the need for higher rising investments as well to support the future growth? Or where would you see R&D developing to?

[Peter Podesser, Chairman of Management Board & CEO]

If I may start here, at the end, I think the corridor is pretty similar. We have definitely now with, let's say, the next generation of our EFOY hydrogen. We have, at the end, a replacement for the previous EFOY methanol program. And we are also putting naturally now our resources on to the collaboration here with Nel. So -- and on the -- and in Holland, we are working on the second generation here of the power management here for the hydrogen fuel cells. But all of this, in the corridor, we have seen it right now, the 2 impacting factors, as Daniel mentioned before, is then how fast can we get things finalized and therefore then adapt the activation and the capitalization. And at the same time, we need to see how fast can we get some of those subsidies being really already now in application being then released. Although we see all those political announcements here on hydrogen being important, until this is then on the administration side executed, usually, you see, let's say, half a year passing by in a heartbeat. So, so far, none of our applications has been released so far. But this naturally can have a very positive impact into, I would say, latest months of -- latest 2, 3 months of this year and then naturally into 2021 and -- 2022 and 2023.

[Malte Schaumann, Equity Analyst]

That would have been my next question. I mean, what's the magnitude you see as a potential funding in the current environment for your R&D activities?

[Peter Podesser, Chairman of Management Board & CEO]

Well, we are, as usual, pretty modest here. And although everybody talks about the billions and billions spend, the biggest price goes again into the automotive industry, steel and chemical industry. I think, understandable, because of the high workforce being affected here. For us, we have now handed in projects of the size of EUR 5 million to EUR 6 million across Germany, Netherlands. And we are preparing something now for Canada and Romania. And usually, the funding rate goes up to about 40%. So that's -- and then we are talking about, I'd say, EUR 1 million, EUR 2 million, EUR 3 million direct subsidy. But naturally, if we can perpetuate this on a yearly basis, we have, for example, also hired a specialist here being fully dedicated on funding programs on government level, which is a pretty fast return of investment if you have one person really focusing on this. So starting slow with maybe an initial impact October, November, December time frame this year of EUR 300,000, EUR 500,000, and then next year between EUR 1 million and EUR 2 million. And then hopefully, we keep the EUR 2 million range ongoing. So that would be the corridor here.

[Malte Schaumann, Equity Analyst]

Okay. Good. My next question is on the JUPITER, if you can shed some light on what the revenue contributions were in the first half or second quarter. And how do you see the rollout going on in the next couple of months?

[Peter Podesser, Chairman of Management Board & CEO]

With all due respect to our partners, AdKor, on purpose, we have changed here the naming. And we have released our own EFOY hydrogen platform, which, at the end of the day, is the next generation here of this product. And in first half here, we have shipped approximately 100 systems. So, whatever, 83% more than last year. Yes, not a miracle because we just started in second quarter of last year. The second half of the year right now is -- there, we have a picture that is twofold. The rollout of the BOSNet systems, together with AdKor in Germany, will come to an end here in the second half of the year for the first orders here in Bavaria, but there is a new tender out that has been released a couple of weeks back where the Bavaria is going -- or is tendering a number of 500 to 700 new sites here, starting the rollout in 2022 and then into 2023. So this will be the biggest stationary fuel cell tender being released for the time being on fuel cell here for the telecom side, and it's ongoing. So we expect this to close somewhere in Q4. And naturally, we need to make sure we are amongst the selected parties, which we will not be, again, the general contractor there because there is all the civil works in there. So this is a large contract that's doing this. But naturally, we are out there for the integrated fuel cell systems together with AdKor.

[Malte Schaumann, Equity Analyst]

And what's the expectations for system shipments until the end of the year?

[Peter Podesser, Chairman of Management Board & CEO]

There, we might even see, let's say, a slower shipment rate than in the first half of the year because the big program coming to an end here now. But the number of new projects, the number of direct business here, be it in Germany, be it in other European countries, as well as now starting also in North America is, I would say, the good news here. At the end, the overall project size we are tracking, and I'm saying really project locked, we are seeing about EUR 100 million overall project locked out there. And not to be misunderstood, it's not EUR 100 million of orders. It is really the projects that we have been now working on, mostly driven by telecom and critical infrastructure. Yes, that's, I think, the realistic picture. We might see some slower sales here in Q3, and then it really depends on how fast we can close some of those projects. But seeing also that we bring our first 50-kilowatt system into the field, we sold this to an industrial park here in Austria is, I would say, a good reference case. So therefore, also the planning we have internally is showing the same curve. So we were not planning to simply repeat this BOSNet program here on a quarterly basis because we cannot impact the time line here.

[Malte Schaumann, Equity Analyst]

Okay. My question is on Toyota Tsusho. I mean, it's pretty early days but, so far, how the cooperation develops, how do you see them stepping into applications, et cetera? Is that more or less according to plan? Anything to mention about how the coalition develop in the first days?

[Peter Podesser, Chairman of Management Board & CEO]

So what we do is we have this regular ongoing management level, but also sales level team meetings here. We have done all trainings through webinars for all the regional teams. Toyota is right now dispatching fuel cell specialists from Japan, also to Southeast Asia as well as to China to run this fuel cell endeavor. First projects are being now work done in Southeast Asia. And expectation, really, a decision on formalizing this into a potential joint venture as indicated, together with Toyota earlier this year, well, I think that's happening then within their next fiscal year, which starts April 1 next year. But this does not hold us back from selling our EFOYs together. So it's really consistent operational work with the partner. Now the only difference is we are not only doing it in Japan. We are doing it in the other regions, too, and high attention on their end.

[Operator]

And we haven't received further questions. I will hand back to the speakers.

[Peter Podesser, Chairman of Management Board & CEO]

Well, with this, we conclude for today. Thank you very much for taking the time, for your trust and interest in SFC. And as always, the offer here, if you have further questions, don't hesitate to reach out to Daniel, Susan, or myself. Thank you very much for your time, and have a great 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.