SFC Energy AG

XETRA:F3C

Earnings Call Transcript 2021-Q3

[Operator]

Dear ladies and gentlemen, welcome to the publication of the Q3 Reports 2021 of SFC Energy AG.At our customer's 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, sir.

[Peter Podesser, Chairman of Management Board & CEO]

Thank you very much, Lucas. Good morning, ladies and gentlemen. We welcome you to our 9 months results call, and thank you very much for taking the time.Together with my colleague Daniel Saxena, we will lead you through the quarter 3 results as well as the 9-month results. And we'll be happy to take questions in the Q&A session afterwards.So let me look at the quarterly figures but also the 9-month figures. I think we are happy to report a continuously high growth momentum in the third quarter here, seamlessly following a first half year with the same profile. And I think -- especially on the operating profitability, I think we are showing strong -- or we are sending strong signals and showing strong performance. At the end, in a broad picture, I think we have a good receptance for our climate-friendly products, but we naturally benefit from the buildup of a broad customer base over the last 15-plus years. And overall, in a summary, we are seeing a really positive environment for our business, for our product, but at the same time, we by no means are blind for the obvious risks posed by naturally the ongoing pandemic situation with a, I'd say, subsequent topic here in terms of supply chain risks. And we will address this during the call today.Overall, I think we are fully on track with our activities. And the positive structure of the business in terms of a regionally broad and also a broad demand across our entire customer base across different industries, across the end consumer markets, yes, shows tremendous resilience. I think, for a couple of years, we had to address here or there the question why do we go into the markets in such a fragmented way. What we see right now is that this former or perceived fragmentation turns into a strong resilience. And at the same time, what we see is that initial, starting markets -- and taking here surveillance and security applications in the industrial area where a digitization process requires continuous and reliable decentralized power. There we see initial niche markets now becoming large and powerful markets where, yes, a first-mover advantage of building out partnerships here regionally across the different continents starts to pay off.We now look at where we are on the 30th of September. We see the overall growth here on a broad footing, and a large increase and more than doubling of our backlog also gives us a strong and solid visibility into the year. Following all this and summarizing all this, we concretized our revenue forecast and we lifted our earnings forecast as a logical consequence last week, on November 10.If we now see what happens on the macro side, yes. I think we all have witnessed the summit in Glasgow in the last weeks. Whereas this does not give, let's say, an immediate impact on a business like ours, I think the overall trend is nonreversible. We have to combine a growing demand for energy as a generic development. The overall demand of energy also in all, let's say, long-term forecasts is not going to be reduced, but at the same time, we have to combine it with the attitudes of making it a climate-friendly development providing preserving technologies that help combining a growing demand and still meeting climate targets. And I think what we can see now and what we can report, and to a certain extent naturally we are also really happy to see this, we are step-by-step making a measurable contribution here to this global race to net zero by replacing conventional technologies like diesel and internal combustion engine generators by our efficient and clean fuel cell technology, be it on methanol basis, be it on hydrogen basis.And I think a good example here and worthwhile to mention it, a customer project that we recently also published with a customer in the U.S., a dedicated surveillance and security company ordering, as a matter of fact, also the biggest order here for EFOY fuel cells in the U.S. for our company so far, ordering more than 600 EFOY fuel cells, 670-plus EFOYs in one order, combined with a previous order, almost 800 fuel cells. And I think that what is noticeable there, the time of decision-making, the time spent from testing to decision-making and then really replacing the incumbent technology that is a general -- a conventional generator was not even a year's time. So within, I'd say, 6 to 8 months, we could convert here the customer from conventional generator technology to EFOY fuel cells. And more so without being able, not -- neither our Canadian colleagues nor we ourselves from Europe here could go on site, so a very affirmative also fact, I think, for the future. And now with us being able to travel to the U.S., at least for the time being, we naturally expect a big impact. And it's a big focus for 2022 to make sure we have -- let's say, we are starting to exploit the potential in this market, but at the end, what is the application? We are providing a clean energy source to surveillance cameras that are set out on parking lots of a large store chain here in the U.S., providing more safety but also providing data to the owners of the stores there to see who is coming into their stores, when are people coming. So at the end, a digitization process. So we are combining green tech and IoT applications here.Stopping at this point in time and also looking at the risk factors. We keep a very diligent and watchful eye on risks being clear and being evident here by naturally the ongoing and now, let's say, resurging pandemic here in Europe but also elsewhere in the world and also potential supply chain issues and bottlenecks associated with it. If we start with the first one: Yes, we have constant COVID measures in place. We are continuously testing on all locations. We have different levels of vaccination rates here from approximately 50% in Romania up to more than 95% in Holland and a good 75% here in Germany. And we keep our routines in place with the testing. We keep the distancing in place. And naturally we are still making a wide use of mobile and home office working.Saying all of this, I think we are still cognizant of the fact that there is a residual risk and this might lead to capacity constraints here in the company in the upcoming weeks and months. And therefore, we also made it a cautious outlook here on the revenue side in case we -- on the lower end of the revenue side in our current guidance. This is naturally also associated with supply chain risks. I think we covered ourselves pretty okay-ish over the last 20 months by simply doubling stock levels on core components; nearshoring, onshoring of supply chain partners, but also we have to see that some late or last-minute changes in shipment days for components made approximately EUR 1 million to EUR 1.5 million revenue shift out of the third quarter, into the fourth and partially into next year. Overall we see it, let's say, as a EUR 4 million to EUR 5 million [ risk spend ] in terms of supply chain. And this is also the reason why we narrowed the guidance on the revenue side here, on the lower end to the midpoint, from EUR 61 million to EUR 65 million of revenue, which we feel is a necessary and, I think, realistic measure.Besides this, the implementation of the overall strategy, regional rollout with strong partners constantly ongoing. Just recently, we were able to publish an expansion of the partnership here with Schneider Electric in Eastern Canada, making use of our expertise here combining their product offering for SCADA and measurement products with a clean and off-grid energy source with our EFOY fuel cells. And covering, let's say, the industrial heartland of Canada here out of Ontario, I think, will give us good impetus also in the years going forward and in a bridging time also can serve as a hub for our business development in the eastern part of the U.S. The other regional projects are, I'd say, continuously evolving. We recently have the opportunity to be the -- first time on site in India, progressing the work there. And on the [ OEM ] strategy side, which is the second large initiative, I think we are seeing good traction here with partners like Jenoptik in traffic management and also digitization. Both for our mid-term plan instrumental initiatives to, let's say, reach the mid-term targets that we have out there in the market on the revenue side for 2025 between EUR 350 million and EUR 400 million of revenue.A few sentences on the structure and on the development of sales in the 2 segments: both segments growing; in the third quarter, a 33.4% growth not only showing a rebound from COVID but significant, I'd say, pickup in activity in some of the subsegments here of our product lines; and in the 9 months, an 18.5% growth year-on-year to EUR 46.5 million revenue.The Clean Energy segment is -- remains the larger of the 2 segments, increasing the share of total sales to 65.2% with a positive growth impact here in Q3, 41.5% growth compared to last year's Q3 numbers and year-on-year still 24% growth here in the 9 months period. Still consumer demand significant and high, where we are ahead 42.4% compared to the previous year, but also, say -- and naturally this part driven by a good environment, especially for RVs but also in the marine market, as well as some interesting projects on tiny houses. Oil and gas customers contributing still positively to our development here in this segment. Although the overall percentage on sales of EFOY fuel cells is now, I'd say, only, I'd say, 1/4 of the overall fuel cell units sold in North America means the diversification really shows traction. Still we are ahead of our expectations, 2 main -- in oil and gas, 2 main drivers there. We see big pressure on replacement of carbon-heavy alternatives, again generators in this respect, most of it natural gas generators being replaced by our fuel cells; and the other element, obvious, naturally a strong and stable oil price, as we are appreciating it now, simply increases investment activity.If we now look into, I'd say, another customer group here, security government customers. Well, in the defense and security market, we have a catch-up gain to last year. There was the biggest impact through -- especially through corona-related factors with delay in different programs. We were able to finalize a program here with the Swiss defense authorities, with the Swiss army. And overall, year-on-year, we are about 130% above last year also in Defense & Security. And I think we are good for a 100% growth corridor year-end compared to last year.Clean Power Management, significant rebound after, I'd say, a COVID-impacted last year's Q3, overall in the third quarter 16.8% growth and still 9.1% growth in the 9 months period. And besides the catch-up element here, we also see new project activity coming back. This was something that was really impacted in this business, where people usually have a hesitation to go into new development of products, replacement of incumbent technology without, I'd say, thorough and in this case also physical technical meetings. This activity is resuming. And here also, for the year-end, the outlook and the backlog is at the end -- orders in. It's a question what we can execute here on the supply chain.With this, the revenue side is concluded. And I am handing over to Daniel to lead you through the earnings and financial perspective.Thank you.

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

Good morning also from my side. Thanks for joining our call.And let me go into the gross profit and the gross margin of the group. For the first 9 months, we realized gross profit of EUR 17.1 million, which is about EUR 4.1 million higher than the previous year's 9 months. This is in line with the higher revenues. As Peter mentioned, we increased our revenues by 7.3%. Overall these translate into an expansion of our gross margin to 37%, which is a notable increase from the 33% we had on the first 9 months 2021 (sic) [ 2020 ]. Also it is above the 2020 full year level where the gross margin came to 34%.So the expansion of our gross margin in the first 9 months is basically a function of, first of all, relative lower personnel expenses in the manufacturing and production. And the second thing is relatively lower overhead expenses, which include rent expenses as well as lower material expenses, [ the latter part really impacted ] by the product mix as well as price stability for our products. We are, as always, working continuously on gradually increasing our gross margin. The key elements for that is really maintaining prices. Secondly is optimizing the bill of material; and thirdly, looking for opportunities where we can realize sensible growth, i.e., maintaining pricing power and selling our products. However, as Peter mentioned, we are also facing to some extent challenges with regards to the procurement of certain components, which may to some extent impact our revenues in the short term.Overall if you look at the gross margin on segment level. The gross margin for segment Clean Energy reached 42%, which is about 3 percentage point higher from the last 9 months in the previous year's. When it comes to the gross margin for Clean Power Management, it's about 26%, comparing to 24% in the 9 months 2020. Basically in the segment Clean Energy the increase is due to the product mix, as mentioned before. We believe the gross margin is healthy; however, always looking at expanding it. And when it comes to the gross margin development in Clean Power Management, the higher margins are mostly due to the North American Canadian business that was heavily impacted last year by the pandemic-induced recession.EBITDA. Group reported EBITDA, we are looking at minus EUR 640,000 compared to EUR 790,000 in 2020. The reported EBITDA was again significantly impacted by nonrecurring expenses, namely the provisions we have to make for the LTI programs, the stock -- and thus stock option and SARs program, which amounted to EUR 6.4 million in the last 9 months, comparing to EUR 3 million in the previous year's, also in these numbers included transaction-related expenses of EUR 300,000. The [ LTA ] program is valued using an option price model. And this expense is obviously a function of the share price and they are noncash until the maturity of the program. The reason why they are high is just look at our share price. The share price as of end of September 2020 was at EUR 14.60, and at the end of September this year, it was at EUR 28. We are adjusting our EBITDA for those nonrecurring expenses, also to have a comparable ratio apples with apples on a quarterly but also annual basis and give you a more objective indicator of our financial performance. So we adjust our EBITDA for those noncash nonrecurring expenses in total of EUR 6.4 million, then our adjusted EBITDA comes to 4.8 million -- EUR 5.8 million, excuse me, which then translates into a margin of 12.5%. That compares to EUR 2.2 million in 2020 [ and a margin of ] 6%.[Technical Difficulty]

[Operator]

There seems to be an issue with the audio line right now. I will go to a quick break and check it -- yes.

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

Lucas, we are back.

[Operator]

Okay. Thank you.

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

So...

[Peter Podesser, Chairman of Management Board & CEO]

Can you hear us properly now?

[Operator]

Yes. You are presented in the call.

[Peter Podesser, Chairman of Management Board & CEO]

Okay, well, sorry for the inconvenience. I have to say it's the first time in quite a number of years that we get disconnected here during the earnings call, but we will resume where we saw the line break up.

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

Thank you. I wasn't aware that my presentation is so dull that you hung up, but let me continue on that.So I was just going through the adjusted EBITDA. And well, the margin of the adjusted EBITDA was 12.5%. As I mentioned, the increase in the margin from 6% in the last year is a function of the higher gross margin that we were able to realize. Secondly, we had relatively, to the revenue development, lower functional costs, adjusted functional costs. And also there is a portion of higher other operating income included which leads to that margin expansion.If then we look at depreciation and amortization to get to EBIT. The total depreciation and amortization amounted to EUR 3.1 million. The major part is IFRS 16 related. So approximately 46%. The second largest part is R&D related, so depreciation of the capitalized R&D expenses, which is 35% of the total D&A. So although -- and EUR 500,000 higher than in the previous year's, which is really due to the start of the depreciation of our new product generations that we rolled out in September 2020. The rest of the depreciation is mostly PP&E and other. That leads us to a group adjusted EBIT of EUR 2.7 million, translating into EBIT -- group adjusted EBIT margin of 5.8%, compared to negative EUR 433,000 in 2020 and a negative margin of 1.1%.If we quickly dive into the operating expenses and the functional costs. We're looking at sales and marketing expenses. The total sales and marketing expenses, at first glance, were much higher than in the previous year's, EUR 11.4 million compared to EUR 8.9 million. However, as also mentioned before, in these expenses there are about EUR 3.8 million of LTI/stock option programs expense included comparing to EUR 1.7 million in the previous year's. If we adjust the sales and marketing expenses for those nonrecurring expenses, we are looking at a 6% increase compared to the previous year's period. And total marketing -- adjusted marketing expenses amounted to EUR 7.6 million compared to EUR 7.2 million in the previous year's. This is -- corresponds to about 16% of our revenues compared to 18% of revenues in the last -- in the first 9 months of last year and [ 19% ] for the full of last year. We still [ stay to a ] medium range of sales and marketing costs, looking at 12% to 30% of our revenues, as revenues are increasing.The increase in sales and marketing are mostly due to higher personnel expenses, which are due to lower wage support payments which we received in the Netherlands and in Canada last year in context with the pandemic but also higher sales bonuses as our revenues are increasing. Also travel [ and fair ] expenses are picking up slowly, not at the -- not yet at the level of pre-pandemic times, but they are going up.R&D expenses. We're looking at the R&D cost expense in our balance sheet and P&L. There were about EUR 4 million compared to EUR 4.7 million in last year. That's a 15% decline. We capitalized EUR 1.8 million of R&D expenses, versus EUR 2.6 million in the previous year. And our total R&D costs, which is made of the R&D which we expect in the P&L plus the R&D capitalized, plus joint development expenses -- we're taking away -- minus the LTI or nonrecurring expenses, amounted to about -- sorry, 7% lower than in the previous year. A bit of the reason why they are a bit lower is we had really high costs last year with the introduction of our new product generation, the EFOY 3.0, where we had a lot of software and programming services purchased. Overall total R&D costs are 8.6% of revenue, a bit lower than the 12% we have in the previous year. And we're looking at 6% to 7% of revenues in the long term. R&D costs are driven by the projects we are doing, new product generations, hydrogen fuel cells but also the power platforms in our segment Clean Power Management.G&A expenses. Total G&A expenses unadjusted amounted to EUR 8 million compared to EUR 4.5 million (sic) [ EUR 5.3 million ] in the previous year. [ LTA ] program expenses and acquisition-related expenses included in that number is EUR 2.9 million compared to EUR 1.3 million in the previous year's. If we adjust the G&A expenses for these nonrecurring expenses, we are looking at 26% increased compared to the previous year's and total adjusted G&A expenses of EUR 4 million compared to -- sorry, EUR 5 million compared to EUR 4 million in the previous year's. This is about 11% of our revenues compared to the 10% we had last year and also 10% we had for the full year 2020. The increase is mostly due to personnel expenses, once again less wage support payments than in the previous year, also higher bonus provisions that we made; and then also higher legal and advisory expenses as regulatory environment is increasing. And last but not least, we also have higher IT-related expenses.Quick look at our balance sheet. As always, let me reiterate that we're an asset-light company. Most of the CapEx you will see in our cash flow statement is related to capitalized R&D expenses, so -- and right-of-use IFRS 16 related.The total CapEx, intangible assets and PP&E, was EUR 2.6 million versus EUR 3.6 million in the previous year's, thereof intangible assets EUR 2 million in CapEx compared to EUR 2.8 million in the previous year's, which is mostly induced by the lower capitalized R&D expenses of EUR 800,000. The CapEx in PP&E was about EUR 610,000 versus EUR 818,000 in the last year. This is mostly due to lower IFRS 16 activation as a result of more favorable rental agreements that we've been able to close at the end of last year.Our cash freely available amounted to EUR 25 million compared to EUR 31 million at the year-end. We had a significant decrease in our financial debt, which was EUR 1.9 million compared to EUR 4.5 million in the -- at the end of last year. This is all mostly short-term debt. [ In large ], these are working capital lines which we have with SFC Netherlands and SFC Canada. So that together translates into a net debt or in this case a net cash position of EUR 23.3 million. The equity ratio is 60% versus 64% at the year-end.And a quick look at our cash flow. Our cash flow before change of net working capital amounted to [ EUR 5.1 million ] compared to EUR 2.3 million in the previous year's. Our net working capital has increased by EUR 4.7 million. If we look at it, it's inventory that increased cash impacting about EUR 800,000. We had a significant increase in accounts receivable, which increased by EUR 2.9 million cash impacting, mostly due with deliveries going towards the quarter end, but at the same time, we also had an increase in accounts payable with a positive cash effect of EUR 1.4 million. So after taxes, this result in a cash flow from operating activities of about EUR 400,000. Then we have the cash flow in investing activities CapEx. As mentioned before, it was EUR 2.4 million. And then we have cash flow from financing activities amounting to EUR 4.3 million negative. Thereof, it's EUR 2.8 million of financial debt that we reduced, and EUR 1.3 million is really IFRS 16-related expenses. Adding these all up translates into a change in cash of negative EUR 6.3 million for the first 9 months of this year.With this, I'll turn it back to Peter Podesser.

[Peter Podesser, Chairman of Management Board & CEO]

Well, thank you very much, Daniel.I think, in order also to catch up here for the break we had, I'll make it brief here on the guidance, yes. I mentioned this already. As a consequence of the first 9 months performance as well as the order backlog as well as the momentum but also the risks we are seeing, we did change our guidance. We concretize cautiously on the revenue side, which reflects our assessment of the market environment here for the upcoming weeks, so that we narrow it from EUR 61 million to EUR 65 million, but at the same time, we are confident on the earnings side to, I'd say, surpass previous target ratios. And on the EBITDA underlying, a range from EUR 5.7 million to EUR 7.3 million seems realistic and achievable from today's point of view; as well as a range for the EBIT underlying from EUR 1.6 million to EUR 3.1 million.Saying all of this, yes, we have, let's say, 6, 7 weeks ahead of us. If you ask us what are the challenges right now, well, obviously we have to further manage the COVID situation and potential negative impact here on the operation, the supply chain. And the supply of components is a major activity since early summer time, putting task force together, supporting core suppliers here with teams of what we call parts hunters. Also there, yes, we have, I think, a corridor defined that looks very realistic to us. And we feel comfortable with what we have, but going forward into the next year, if you ask me what is really now -- apart from all the mentioned initiatives here on the revenue side with OEM strategy, regional rollout, our activities here in India, with Toyota in Asia and, I'd say, a reinforced focus on the U.S., what are the challenges? Yes, it's managing growth. We have to on the supply chain be as attentive as we have been. What we do physically is at the end not only ordering core components now for the next 9 months here. We are purchasing it. We are preparing more space here in the vicinity for stocking. This sounds maybe a little old fashioned, maybe not optimized from a working capital management side, but we feel it's the right risk mitigation. And we are in the midst of execution. And at the same time, we have started a program to double the output here out of our Brunnthal facility here by mid of next year. It's mirroring the current setup in the same building, which is still doable, but with this naturally we will transfer some of our stocks to -- as mentioned, to other locations.And well, one of the key tasks and core areas of focus is naturally finding the right people, adding members to our team. On the 30th of September, we had 296 people employed. We are right now good beyond 300. And we are hiring on all locations, with a core focus here in Germany on fuel cells, but naturally also, in our regional locations, we are hiring. So a good 10% minimum addition to the workforce. So those are the key elements, but we still feel that we are fortunate here with a positive business and macro environment. And therefore, not only the revision and the lifting of the earnings forecast, I think, is important but at the same time also our conviction that we are laying the right foundation. And we are on a good track to deliver on our mid-term plan that remains fully intact and unchanged.And with this, we would like to conclude at this point and ask Lucas to open the floor for questions.

[Operator]

[Operator Instructions] The first question is coming from Karsten Von Blumenthal at First Berlin Equity Research.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

So my first question is regarding your stocking and the supply chain. Do you have a feeling how long this will reach into 2022?

[Peter Podesser, Chairman of Management Board & CEO]

Yes. Karsten, this is Peter. Well, I will say at least a good 9 months. So initially I think the assessment was more, so until mid of next year, but what we are doing right now is really we go up to September with our purchasing activities.

[Karsten Von Blumenthal, Senior Analyst of Cleantech]

Okay, so that is a pretty cautionary strategy which saves you your potential supply of fuel cells. Second question is regarding your gross margins in the segments in the third quarter. On the one hand, I see a very strong gross margin in the Clean Energy business in Q3, roughly 46%. Is that because there is more defense business in it? Or can we adjust all in all to gross margins in that sector above 40%? Is that realistic? And secondly, the Clean Power Management, in Q3, that was a rather low gross margin roughly 20%. That was below other quarters. Is there a particular reason for this? Perhaps you could go into detail a bit more there.

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

Thank you, Karsten. So if we look at the gross margin on a quarterly level, this is highly dependent really on the product mix in each quarter and also on the delivery of really larger orders. In those segments, you tend to have industrial customers who then really order in larger numbers. So yes, if you look at the quarter 3, if you look at Clean Energy, we do have some attractive aspects carrying over also from the defense business. That's correct. If you look at the gross margin for Clean Power Management, it's largely product mix that we're looking at. So it's not a trend. It's really on a quarterly basis, as I mentioned, induced highly by the product [ mix in the quarter ].

[Operator]

The next question is coming from Anne Margaret Crow at Edison.

[Anne Margaret Crow, Director]

My question is relating to the technology because the report and accounts that was published this morning talks about a focus for the period being the increase of the power of platforms from 4 kilowatts to 5 kilowatts. And my question is, how different is the technology required to increase power by that level?

[Peter Podesser, Chairman of Management Board & CEO]

Anne Margaret, this is Peter. Thank you very much for your question. On the technology side, this is a specific program here for our power conversion products, where at the end it's about what -- levels per form factor. And it's at the end the program that you can drill down to the point [ where you say ] more watts per cubic inch -- or cubic centimeter here in a power conversion product. And here in this specific one it is an increase naturally of, let's say, 25% overall power capacity which is on the same technology platform but again with a shrinked form factor, different cooling in it. So overall it's not a major -- well, it's no shift in the technology. It's just, let's say, compressing it [ again ].

[Anne Margaret Crow, Director]

All right. So it's not trivial. [ It's probably a tricky ] thing to do.

[Peter Podesser, Chairman of Management Board & CEO]

Yes. And it's -- most of it is then, let's say, long-term impact. Especially also the overall temperature management here is definitely the challenging part.

[Operator]

The next question is coming from Malte Schaumann at Warburg Research.

[Malte Schaumann, Equity Analyst]

My first question is on the U.S. market. I mean I think, the gain of LiveView as a customer and the follow-up order, that was a major positive during the quarter. Can you elaborate on, I mean, how many of such customers you already see in the pipeline? And are these customers developing at a similar speed like you pointed out towards LiveView? And then secondly, the opening of the hub, new hub, so to speak, new hub, in Eastern Canada, how does -- maybe you can elaborate on the planned rollout, further rollout [ or addressment ] of the Northern U.S. market from your side?

[Peter Podesser, Chairman of Management Board & CEO]

Malte, Peter here. Well, I think, if you look at the U.S. market, at the end what we have been doing is continuing a program that we had in place early in 2020, with the limitation of not being able to travel, neither from Canada nor from Europe here, to the U.S. So as much as possible, I think the business development has been ongoing over 20 months now. There are, I'd say, on a regional level, similar accounts in the pipeline which we now need to simply support, firm up. And over time, also no secret, one of the key long-term plans is naturally reestablish presence in the U.S. either through, let's say, a greenfields exercise or a suitable acquisition here, which at the end is on the agenda for '22 and '23, depending also on, let's say, the opportunistic situation. So I think that what really gives me a lot of confidence here -- and so I think, well -- and I am just translating the confidence of our sales teams here, is that decision-making is taken -- has taken less, far less, time than we are used to here in a European or also Asian context. I would say a similar project would have taken 3 years in a German context here with selling one fuel cell -- 1 year doing a winter-long testing then selling half a dozen; and then doing another Europe testing and then, hopefully, meeting the budget cycle of the customer. And in the [ first ] year, you get, let's say, maybe up to 100. And here at the end after a 6 months period, decision was taken to replace the incumbent generator going forward, full stop. And I think that's also where -- my experience tells me in the U.S. we have a much greater momentum here ahead of us. And finally, I think also the change in administration and putting green technologies here again on the political agenda here, with a significant also financial support and incentive program, should accelerate here.And on Canada, yes, a pretty conventional [ step ]. I think it was good for us to simply, I'd say, see our expansion plans, I would say, coinciding with Schneider asking us whether we would be willing and able to carry their products that we are selling also in a cross-selling exercise already in Western Canada in this Eastern Canadian market. We are starting very, I would say, conventional here opening up an office and a service location, with a couple of heads in it on the sales front and on the sales support and service front. And there is an existing business of Schneider out there which we will gladly integrate and then simply basically finance our business development through this. And the logic to the U.S. is simply it is then easier to cover the eastern part of the U.S. out of Toronto, which is an hour flight or 2 hours flight to some of the core regions we have defined. And then still this does not replace our endeavor and our plan to reestablish ourselves in the U.S., but it will definitely help us now in this bridging period here in '22.

[Malte Schaumann, Equity Analyst]

All right. So medium term, it obviously will be kind of, as I said, greenfield operations or development of greenfield operations or acquisition or [indiscernible].

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

[ Populations ].

[Peter Podesser, Chairman of Management Board & CEO]

[indiscernible], yes, yes.

[Malte Schaumann, Equity Analyst]

Yes, yes. Can you elaborate on -- where do you see most activities in the pipeline from an application perspective? Is it in the U.S.? Also the -- they are coming from oil and gas as a driver, security, surveillance...

[Peter Podesser, Chairman of Management Board & CEO]

And well, exactly what you mentioned. And this -- let's say this digitization here of the surveillance market is one big driver. Wind is upcoming; and on the hydrogen side, definitely now initial projects here on telecom and telecom backup. Not translating into orders yet, but the RFIs and RFQs are in for a significant, I'd say, replacement exercise here again of conventional generators, so we would expect the telecom side to pick up faster in North America than here in Germany because also you have a different level of stability in the grid and therefore there is higher pressure to do this. Overall I think what we have to see is to -- whether we are happy with the regional representation in the country. This is an exercise which is ongoing right now and where we are continuously looking for further also regional partnerships in North America.

[Malte Schaumann, Equity Analyst]

That would have been my next question, regarding hydrogen backup power. What are the major hurdles for quicker or accelerated market adoption? Is it customer access, as you just pointed out with regional presence? Is it customer decision taking? So what are the major things that have to be solved?

[Peter Podesser, Chairman of Management Board & CEO]

Yes, I think we will definitely see some, let's say, necessary adoption period. And again we expect this to take a little longer in Continental Europe than, for example, in North America. It is, I'd say, the qualification of the product itself. We are working, as we speak, on UL and CSA certification of our EFOY hydrogen platform. And I think what is a fortunate situation and what helps us here in our own planning is, say, this BOSNet radio program here in Germany for the first responder and police communication that has been ongoing already in some of the provinces and where [indiscernible] just issued a new tender that is due for submittance still this year. And I think we would expect a decision somewhen in Q1 of next year. That will help us there to get market penetration to get, I would say, a reference market installed here in our vicinity as a reference market for telecom applications worldwide.

[Malte Schaumann, Equity Analyst]

Yes, good. Then with respect to R&D: Then you pointed out that R&D is a bit lower this year in comparison to last year. Will that pick up next year again? I mean probably some developments are upcoming at the hydrogen side. What are your expectations regarding R&D costs?

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

Yes. Malte, as I mentioned, the main reason why R&D expenses are lower this year than in last year is that we really had a lot of software development which we -- where we have service that we purchased in the last year. So from, let's say, the internal costs of R&D, not much has really changed in this year. And we don't expect any significant changes also in the next year, so R&D will remain at the level and most likely increase in the next year.

[Malte Schaumann, Equity Analyst]

Okay, good. Then on gross margin: I mean that had been developed quite positively this year. I mean, is that the level you also expect, still expect to achieve in the future, upcoming quarters? And then specifically for Q4, if I look at your guidance, it seems to be the case that it still includes a certain level of caution. So it kind of implies a decrease in gross margin in the fourth quarter. Is that what you're seeing based on the product mix and based of potentially higher sourcing costs for component -- in light of component shortages? Or is that just a certain level of caution incorporated there?

[Peter Podesser, Chairman of Management Board & CEO]

Well, if I may answer this one here. I think -- overall I think that, although we have some -- as Daniel mentioned also answering Karsten's question before, naturally there are some mix effects also quarter-on-quarter, but the overall range we are now in there, I think, is also what we -- where we -- what we would expect here going forward for the year to come. And if we now look into Q4, yes, you are absolutely right. We are cautious here. One is just cautious out of the 2 major risks we are seeing. A COVID-driven disruption of the manufacturing here will naturally lead to, I'd say, some lower shipments. And still some delays in incoming components would have the same effect. So top line definitely is the key driver, not so much significant change on the mix side. And then naturally, the costs you mentioned, there's -- we have to take some, let's say, immediate action on some of the component availabilities where you simply accept higher costs. And this is, yes, also factored in. That's why the lower end of the guidance is where it is in terms of cautiousness. It's, I think, reflecting what we are experiencing here without saying that we expect this to happen, but I think we want to be prepared here.

[Operator]

[Operator Instructions] There is one more question coming in, from [indiscernible].

[Unknown Analyst]

I had a question notably on, first, the order intake. So we see obviously a very sharp acceleration. It seems to be in line with what you were anticipating. Could you remind us? [ Generally ] the [ delivery ] schedule is around [ 1 quarter ], if I remember well. And is it so the kind of acceleration you expect to see in the course of 2022?

[Peter Podesser, Chairman of Management Board & CEO]

Peter here. Yes, I think, if we look into the order intake overall and despite, let's say, strong shipments and increase of -- or significant increase of backlog -- and there is, I think, a dynamic across the regions, across the end users. So overall the dynamic is fortunately not depending on one region, on one industry or one customer as we had this in some of our early years. So therefore, factoring in naturally again now a more severe impact of COVID maybe for a foreseeable time frame, our optimism here is pretty high to see, let's say, a similar dynamic here. And if we look into our project pipeline, yes, this is really, really high activity. So we don't foresee right now a disruption or immediate negative trend here.

[Unknown Analyst]

Okay. And I had also a question on the M&A front. I mean I remember, Peter, you were expecting M&A to bring a significant, to have a significant impact mainly in 2024, so I guess you are not in a hurry, but are you seeing interesting options on this front?

[Peter Podesser, Chairman of Management Board & CEO]

Here, right, we're -- we might not be in a hurry, but still despite this, we are consistently working on it. And the one part is really the rollout of our regional partnerships, be it now in a format of a joint venture, for example, what is envisioned or envisaged in India as well as for other parts of Asia. As said, we were on site just a couple of weeks ago after the country opened up the borders. So our Indian partners are over here before Christmas. So this is really on the agenda as we speak. And on the direct strict M&A side, we already touched upon our plans and our activities in the U.S. We expect this to take a little longer because we also want to be really cautious there and maybe start with greenfield, support it out of Canada, et cetera, but then at the same time we are assessing also still, let's say, complementary technologies here and what you would call maybe some orphaned assets on the fuel cell side where with our competencies we can usually revise such product concepts pretty quickly and integrate it into our offerings. So this is high up on the agenda for '22 and '23 because it will need to make a significant contribution to our mid-term plans. So no immediate hurry but consistent work on it and high focus.

[Operator]

There are no more questions for the moment. For closing [ regards, I give it back ] to the speakers.

[Peter Podesser, Chairman of Management Board & CEO]

Well, with this, we thank you very much for your time and attention. And as always, do not hesitate to reach out to Daniel, Susan or myself for individual and bilateral conversations. We are wishing you a good day and a successful week. And stay healthy.Thank you.

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

Thank you.

[Peter Podesser, Chairman of Management Board & CEO]

Goodbye.

[Operator]

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