Zaptec ASA

OSE:ZAP

Earnings Call Transcript

[Peter Bardenfleth-Hansen, executive]

Good morning and welcome to the Third Quarter 2022 Zaptec Report. I am Peter Bardenfleth-Hansen and I am the CEO of Zaptec.

[Kurt Ostrem, executive]

My name is Kurt Ostrem. I am the CFO in Zaptec.

[Peter Bardenfleth-Hansen, executive]

So 2022, a bit of a rollercoaster and Q3, most definitely has been no exception. Central banks have been fighting inflation, interest rates have been going up and comes no surprise the macro economics and geopolitics plays a big part of this quarter. But despite these headwinds, we've been working very diligently, very hard, and that has paid off. We've had revenue growth on 73% year-on-year with something that I'm extremely proud. And despite this, we've had a growth in our team as well, 20% to 30% growth from Q2 to Q3, something again that, of course, has a cost-bearing element, and it's no secret that doing expansion in this market is something that has a cost on the bottom line, and that's something that we will be talking about as well this morning.

That being said, the industry is still relatively strong in the EU, although we are seeing some slowdown, but we are remaining bullish on our abilities in this market. As this market in EU and Europe is maturing, we're also seeing more regulations, more guidelines being imposed, something that, of course, Zaptec needs to navigate in, and we are very bullish in our ability to do so. Zaptec provides charging solutions that are without any compromise. We believe that we have the best tech in the market, not least our best designs, and we always aim to do future-proof designs and future-proof techs so that we have the highest quality in the market.

We've signed many new partners through this quarter, and we're staying very much abreast with our mission of providing cutting-edge tech and ensuring that we are future-proofing everything that we do. One of the testaments to this, we'll be talking about that also a little bit later, is a strategic investment into a company called Switch EV, ensuring that we have the best ability, the best software out there to provide vehicle to great solutions using AC chargers as well as Plug&Charge all on a ESO 15118 platform, basically putting Zaptec right at the forefront of technology.

Another highlight and something that, again, I'm super excited about is the fact that we have strengthened our working relationship with Sanmina, ensuring that production has started up in Q3. And that, of course, is moving towards Q4 with a full ramp-up in Q1 2023. And alongside with this, our working partner, Westcontrol has been ramping up so that they've been able to deliver even more products in Q3 and also, again, ensuring that the very large and big plans that we have for 2023 will definitely be able to be delivered during with the current setup that we have, both the Westcontrol as along and also with Sanmina. So we remain very committed to delivering on our very ambitious growth.

So the highlights, as I just went through, very strong revenue growth of 73% up to NOK 226 million and 58% increase in our order intake up to NOK 233 million compared to Q3 '21. We continue our international expansion now up to 70% versus 56% comparatively to '21. And as mentioned before, our gross margins are dropping a little bit due to these very, I would say, to a certain extent, aggressive investments that we're doing, and of course, that has an effect on our EBITDA, though it's still in a plus, and we have NOK 14.9 million there.

Electrification continues, as mentioned, in the megatrend in relation to EV adoptions across all markets, particularly in some of the markets that we are going into as new markets. We'll be looking at that a little bit later. As mentioned, the prototype on Plug&Charge functionalities is something that we've been working hard on to ensure that we are fully future-proof, specifically going into vehicle-to-grid capabilities. And then, of course, our successful Sanmina test production that started ramping up in Q3 and more so also coming from Westcontrol.

[Kurt Ostrem, executive]

Yes. As a preparation for the uplisting to the Olso Main Stock Exchange list, we are now preparing the key financial figures for the third quarter according to IFRS. This also applies for the comparable figures for 2021. As mentioned, the revenue was NOK 226 million in the third quarter. This is an increase of 73%. Year-to-date, we had revenue for NOK 509.9 million, up from NOK 296 million, and this is also an increase for 72%.

If you look at the graph on the right-hand side, you see that we have a very strong order intake, and it's increasing every quarter. The export share was 70% in the third quarter, up from 56% in the third quarter last year. And year-to-date, we have an export share of 69%, up from 47% last year.

As mentioned, the gross margin for the third quarter is affected by one-off expenses in this quarter. and was 38.8%, down from 44.8% in the third quarter last year. If we look at the gross margin year-to-date, it's 41.6%, is up from 39.2% last year.

The operating expenses was NOK 72.8 million in the third quarter, up from NOK 41.5 million in the third quarter last year. And year-to-date, we have operating expenses of NOK 185 million, up from NOK 85 million last year. The main explanation for this increase in operating expenses is that we have more than doubled the number of employees in the last 12 months. We have also increased our effort and expenses for marketing, sales and consultants and, of course, expenses expanding our presence in Europe.

This gives us an EBITDA for NOK 14.9 million in the third quarter. This is down from NOK 17.2 million in the third quarter last year. And year-to-date, the EBITDA is NOK 26.6 million, down from NOK 30.2 million last year. This gives us an EBITDA margin for 6.6% in the third quarter, down from 13% in last year and 5.2% year-to-date, down from 10% last year. And this reduction in EBITDA margin has to be seen in context of our investment to secure future production and revenue.

We have still a very strong liquidity. And at the end of the third quarter, the available liquidity was NOK 264 million. This is up from NOK 248 million last year.

[Peter Bardenfleth-Hansen, executive]

Yes. On a positive note, increasing addressable markets keep being strong, government's seek and incentivize emission reductions throughout Europe. And this is despite the geopolitical tensions that are going on throughout Europe. Automakers are still being very focused on that transition towards the electric. And this remains obviously very relevant. Customers demand more environmentally friendly solutions that is basically across all European markets. And favorable development in cost of ownership, of course, also is something that's pushing out the internal combustion engine vehicles. And then, of course, increasing availability of charging infrastructure, something that obviously plays very much into our hands is helping push this agenda. So we're seeing this -- these markets being very strong and in particularly the markets that we are naturally already in, but also and more importantly, the markets that we're just about to enter such as the U.K. as well as Germany and some of the Southern European markets.

So despite a slowdown in vehicle sales, electric vehicle adoption continues across Europe. We're seeing an increase across the European nations, particularly going up from 18.8% to 20.4% year-on-year in '22 versus '21, and this in itself remains -- shows the battery and EV plug-in solutions has a very strong market in EU as we move forward.

New market, EV sales for Zaptec core markets, it's important here to note that there has been a decrease in the actual sales of EVs in our current markets. However, as the numbers earlier showed in relation to revenue, we have an increase in our revenue share. And so despite the -- there is a decrease in the sales of EVs in these markets, we are taking quite a considerable land grab in these markets, despite having been in them for several years, we are very strong here. And what's even more interesting is that the new markets that we're going into, Germany, U.K. are actually increasing their sales on EVs, making and giving us even more tailwind as we go into these markets in the coming quarters.

In relation to the international growth, it's still very fast pace. As the graph on your right absolutely shows we've had a 10x increase in the last 2 years, which I definitely believe is very interesting to note, particularly as we are now focusing even more on international expansion. As the numbers showed earlier, we're now above 70% of all our revenue is export, and this will continue even more so as we go into the future. We now have subsidiaries in Sweden, Denmark, U.K., Germany, Switzerland, France and Benelux. The last Benelux was established here in Q3.

We have distributors across Western Europe. So this is in addition to the subsidiaries that we have in all the other countries. Our U.S. entry strategy is still being finalized and it's still very much on our agenda. And this is something that we've been working through in Q3 as well as the coming quarters. We're still not able to share an exact date as to when we're going to enter this market, but it is still firmly on our future plans.

In Q3, we've signed several new partners, both here in the Nordics, but more specifically in U.K., some of which are house builders, some are value-add resellers, others are B2B businesses. But it -- what has a -- what's very interesting here is that it's across the board, and they are partners that are willing to take a large number of chargers, both here in 2022, but most definitely also in 2023. Something that I'm very excited about and have been pushing in Q3 was that an investment into software company, Switch EV is a U.K. setup that has a specialization into ESO 15118 protocol, which is the -- basically a protocol outlining the communication between EVs and charge plugs, and ensuring that there is an easier flow of information between the cars and the charge points. giving the ability to do Plug&Charge. So that's basically an ability where you can plug in your car without using a credit card, without using an app. But basically, as the word implies, just plug and charge without making it very seamlessly easy for any users to be able to use that kind of technology. Alongside this, there is also the opportunity to have a vehicle to grid, something that usually is only related to DC charging, but we have successfully made a prototype that can do exactly that. This was showed in Berlin in September and something that we will be putting into production early 2023.

So the -- this investment into Switch EV ensures that we are staying very much abreast of the technology and ensuring that we can give the best future-proof products to our customers as we move forward.

Very important for this quarter has been the growth and in relation to reduce our risk associated with capacity and component market. And this has been done specifically through our production partner, Sanmina, which started production lines during Q3. And as you can see in the photo bottom right, that shows our first charter, Zaptec Pro being delivered by the German team to our team here in Norway. This, of course, is a monumental part of us now that we've gone from just having 1 manufacturer to now having 2, and the strategic partnership with Sanmina enables us to be able to go not just in the markets here in Europe, but actually opens an opportunity throughout the markets across the world. Sanmina now operates 41 to 42 sites across the world, many of which are placed in the Americas. And thereby, of course, giving us an opportunity to go into local production almost anywhere in the world. And we now have that blueprint ready to be able to emulate into these markets.

Something that also has been very, very important for us, it's been a long time coming, is our product market compliance for the U.K. This is a very large addressable market, 68 million population there. And actually, U.K. is now #3 of markets -- the market readiness for EVs with Norway being top, Benelux or Netherlands being second and U.K. is actually on the third place there. So a very, very important market for Zaptec to go into. We now have a very strong team. Our U.K. organization is actually the biggest outside of Norway with 16 full-time employees. And both our products, Pro and Go are now compliant to go into this market, and we're getting ready for the first deliveries in this -- towards the end of this year.

In Q3, we started using our Zaptec Park payment solution throughout U.K. as well, which is a collaboration with the Danish company, Monta. On top of that, we've had several significant and very large contracts, also what we alluded to earlier with partners, chip contracts being signed again, ensuring that we have a very, very strong pipeline as we go into 2023.

Reoccurring revenue potential is also something that's important. We have, of course, our Charge365, which is still growing. This is a solution only offered up to our Norwegian customers. However, even in this very mature market, even in Q3, we still have 800 new installations using Zaptec Pro with Charge365, which was added in Q3 and again, adding to our monthly reoccurring revenue. On top of that, as I mentioned earlier, we, earlier this year in end of Q2, beginning of Q3, successfully launched Zaptec Park, which is a payment solution system made in collaboration with Monta in Denmark, where we have a revenue share scheme, again, ensuring that we have a reoccurring revenue coming out of this. We launched Denmark and U.K. in Q3, and we are preparing launch in basically all the other European markets that we have subsidiaries in.

Also, further to the investment into Switch EV. This will also open up for further reoccurring revenue potential in relation to the full scope of the platform that ISO 15118 unlocks both in relation to Plug&Charge as well as this bi-directional capabilities. We're still working on the exact business case for this, but this will enable and give even more revenue streams for Zaptec as we go forward.

So just to sum up the investment highlights for Q3, increasing addressable markets, despite headwind we still see this as a bump on the road. There are strong electrical trends. Our technology still award-winning charging systems that, again, despite these headwinds, still are the winning recipe for most customers out there. We have a very user-friendly power balancing hardware and software, something that's become even more relevant in these energy crisis markets. And again, superior safety, high-quality products are certified at the very highest level. And we see a strong growth and ramp-up for full-scale European expansion. We are investing a lot into these markets. U.K. compliances as well as German and French compliances are following.

And very importantly, our component sourcing is in place. We managed to get all of this in place in Q3, also ensuring that we have everything for components in ready for the following quarters going into Q4 and Q1, Q2 in 2023. So production is on track, both in Germany as well as here in our neighboring town where we have Westcontrol.

And with that, I will now open up for questions.

[Peter Bardenfleth-Hansen, executive]

So, when adjusted for the one-off in gross profit, the gross margin was NOK 40.7 million, that seems low given comments on high Pro sales. Can you explain and do you expect?

[Kurt Ostrem, executive]

We don't have all the details here. We have explained in the financial reports, but we have had an increase in production costs from the 1st of July. And this has also increased more from the fourth quarter, and this is something we are planning to correct by adjust our prices from the 2023.

[Peter Bardenfleth-Hansen, executive]

Right. Great to see that Go charger is approved for the U.K., but what is happening with the Pro charger in Germany? When can we expect to have that to be approved? And when do we expect to start full-scale sales?

We are working diligently in ensuring that we have all the MID certifications in place, since this is predominantly aimed at Q3. Of course, this was something that we were working on throughout the previous quarters, but we're very bullish on ensuring that this will be ready by the -- before Christmas this year. And we have recently -- well, in Q3, we signed for a new German country director who started here in Q4 and building up a very strong German presence and a strong sales team. And with that, of course, we're ensuring that they have the right products to be able to win the German market.

We believe that all the certifications will be ready for production, so that we can go strong into 2023.

So, has Zaptec given any long-term financial ambitions in terms of revenue and profitability, et cetera?

[Kurt Ostrem, executive]

We want to follow the market. And when we go into new market, we expect to see the growth following this EV market as the EV adoption is growing in each market. And of course, we then get some large-scale positive effect, and that will do something with the profitability for the company.

[Peter Bardenfleth-Hansen, executive]

You mentioned large-sized contracts, how strong is the pipeline 2023? And how strong is the visibility for sales in first half of 2023?

Yes, when we mentioned these specifically for U.K., we have signed quite a few and very, very large contracts, specifically in the housebuilding sector. Anyone who has any insight into the U.K. regulations, will note that all new buildings in U.K. have to have a charger as part of new builds. And of course, we have not let that go by without having a specific focus. And our team in U.K. have had that as one of their main focus areas, and that has paid off with more than 2, I believe, actually 3 now contracts made specifically in this field. And therefore, of course, this will enable 2023 as being very strong when it comes to these contracts.

But in relation to our visibility into these, well, of course, we also have working relationships with many of our current partners, both in the Norwegian as well as the Danish and the Swedish market. And we believe that the -- that what we have seen and what's been presented gives us an indication that this will be a very, very strong first half of 2023.

Costs are increasing 75% year-on-year and annualizing costs in Q3. Have you have a run rate cost base at NOK 290 million. What would you expect in OpEx increases for 2023?

[Kurt Ostrem, executive]

Well, we don't want to present any numbers, of course, but the cost will increase in actual numbers, of course, but they're not in the same speed as the revenues. So we should improve the percentage of sales when it comes to cost in 2023.

[Peter Bardenfleth-Hansen, executive]

We're not seeing so many new questions here, but just a side note to all of this is, of course, that expansion and growth, of course, comes to the cost. And basically, that's what we're seeing. But it is a cost and an investment that we are willing to take as we move forward.

Do you see any signs of the expected consolidation in the market, EV chargers markets and is Zaptec already actively playing a role here?

Well, yes, we are seeing, and this is something that I've definitely been promoting or relating for quite a few months and few quarters as we go back, is that there is a very clear indications that consolidations are going to happen. And this was even before the -- let's say, the "financial or economic clout" we're starting to show. It's just from the mere fact that we see so many new layers in the market, that it is a natural given that consolidations will be going on.

And of course, we as one of the main players in this -- on this field, specifically, certainly being one of the older market players, we are naturally looking at what's going on out there. But we don't have any specific targets at this given point. However, it is an area that we're looking at with interest. That being said, right now in these uncertain times, we're being very diligent in ensuring that we have a positive bottom line and that we also have a strong war chest ready and it would have to be a very, very specific and interesting M&A acquisition target before we would move in that direction.

Thank you for seeing great results. You mentioned a lot of reoccurring revenue. Could you tell us more about the share of reoccurring revenue in your overall turnover? Furthermore, you mentioned the potential Switch EV. Do you have some figures in mind in terms of future revenue?

This is something that we'll lay very much into 2023. The revenues parts of the reoccurring -- percentages of our overall turnover is still relatively small. But we have a very clear ambition of 10-folding the number of online chargers that we have. This is part of our strategy for Zaptec over the next coming years. We are at approximately 150,000 chargers online at this point. And of course, for each new charger we put out there, the potential for having that as a revenue generator increases. And therefore, of course, in order to -- well, to be bullish on these numbers, we do expect that if we tenfold the number of chargers online, we will also be able to tenfold the amount of recurring revenue that's being generated on these figures.

We can't give an exact number right at this point of how large or small that is. But however, we can say that the potential that lies for instance, with Zaptec Park is big. There are so many more aspects to this type of revenue generation that you can add on and of course, increase all depending on what services you can add on. The same can be said for our collaboration with Switch EV. Switch EV is a strategic investment. It's no secret that also the American company, NewBay, which do specific software in relation to peak shaving and load balancing and actually making a business case on that, it's a listed -- NASDAQ-listed company. And we, of course, have a collaboration in relation to our investment with Switch EV. And we do see that there is potential here to find common ground on how we can continue and even grow that potential further in relation to having a strong reoccurring revenue stream as we go into the future. But I cannot share details with that currently.

Based on your purchase obligations of EV chargers from Westcontrol and Sanmina implies that production capacity of NOK 2.1 million in revenue during the next 5 quarters. To what degree of components secure for this production capacity?

[Kurt Ostrem, executive]

Well, we have secured all the components for the next 5 quarters, of course, but delivery will happen during 2023 when the production takes place. So we have no guarantee that we get all the components we have secured. But as we look today, it's looking good when it comes to future production.

[Peter Bardenfleth-Hansen, executive]

Is there a timeline for MNE calibration law? And will it affect the price of Zaptec Pro?

[Kurt Ostrem, executive]

It will not affect the price of Zaptec Pro. We have done the development. So the cost of the charger will be the same.

[Peter Bardenfleth-Hansen, executive]

Yes. You've signed a lot of new distribution agreements in Q3. Have you lost any agreements in Q3?

Not to my knowledge. But well, just a side comment to that one, of course, not to my knowledge. But there is, as mentioned earlier in the presentation, has been a slowdown in relation to the incoming orders, again, we're seeing this as a glitch as we move forward.

Do you expect the backlog to be delivered in Q4? If no, is that due to weaker production or stronger sales?

As it looks right now, our -- as mentioned before, in Q3, Westcontrol has been able to ramp up production. We're still working with Sanmina for them to start their actual serial production. Their full potential will be reached in Q1 2023. However, we do believe given the current numbers on production of Pro, that there is a possibility of us being able to catch the Q4 -- catch the backlog in Q4. There is a possibility. But we -- it's not a 100% certainty that we will, but we are aiming for a full backlog retrievable within Q4 at the very latest beginning of Q1.

[Kurt Ostrem, executive]

Yes. But it's a combination of the question that the sales is stronger. So one thing is the production capacity in the Q4, but there's also a question about the components available for so short notice. So as you say, we will probably go over in Q1 before we have got rid of all of the backlog.

[Peter Bardenfleth-Hansen, executive]

Is this the first time you've made significant purchases in the spot market and inventory write-offs, significantly impacting gross margin? And what do you expect for gross margin going forward?

[Kurt Ostrem, executive]

Well, it's not the first time we have done a lot of inventory due to components. And this is mainly that we redesign our chargers to secure further components to secure the production, so -- but this was a significant write-off in this quarter.

What is your expectation for gross margin going forward? It's very hard to promise a number because it depends on the production costs going forward. The raw material costs that we do not control and it also depends on the mix of sales of chargers. If we are able to increase the sales of Zaptec Go, it will affect the gross margin since we have a lower margin on the mass production product, Zaptec Go.

[Peter Bardenfleth-Hansen, executive]

Expansion of organization, how do you think about the trade-off between growth and profitability? At what pace do you expect to increase your organization in the coming quarters?

Well, yes, the expansion of our organization is, of course, a natural given our ambitious expansion plans. It has to be said that a lot of the expansion that's going on is, of course, directly associated with the new markets that we have established both in Q3, but obviously also in the previous quarters, so for each country, there will obviously be a need to build up an organization. I previously shared with you the number of our U.K. team, which is 16 at this point. And of course, that every time we add another subsidiary into the equation, a new market is being -- new numbers are being added. Of course, we are also adding to our technical teams as well as our product teams to ensure that we are completely abreast with the -- with new technology as we move forward. So those are some of the trade-offs that you will be seeing is that we need to ensure that we are strong enough to be able to meet the demands of our customers in the various markets that we go into.

But that being said, we have grown quite at a high rate here in 2022. And we are at a point where we will be reducing the number of new employees as we go into '23. However, we're only doing this to ensure that we can retain the DNA in the company, ensure that we have the strong part of Zaptec that can be carried over to new employees as we grow and as we move forward, and then we will again be pressing the increased button as we move further into the new year.

However, it's important for us to ensure that everybody is up to date. And of course, now that we've added a lot of new team members, they need to be trained. They need to come in up to speed, and that generally takes more than just 2 or 3 months. It generally takes up to 6 months. So we're seeing the effect on this rather large increase in new team members over the next coming months and again, giving us a very bullish insight into how the new year is going to look with that increased capacity of all the new team members that have joined us throughout 2022.

Do you believe that you have a long-term EBITDA margin target of 15% to 20%, if that's still valid?

[Kurt Ostrem, executive]

It's valid. But of course, we have to look at the timeline and we are spending a lot of expenses to build up organization, as Peter mentioned, to meet our new markets and to be up to speed to have this growth that we are planning for. So we were not be specific of the EBITDA target, but it's way higher than we have delivered in this quarter.

[Peter Bardenfleth-Hansen, executive]

What is your guidance heading for upcoming quarters?

[Kurt Ostrem, executive]

We expect to follow the growth in the market we are present in when it comes to EV growth. And as you know, we have very high ambitions since we have prepared for a high increase in the production in the next quarters.

[Peter Bardenfleth-Hansen, executive]

So I'd like to thank you all for listening in this morning. Again, just to reiterate, we remain very committed to delivering ambitious and very strong growth in the next quarters, both here in 2022, but also in the year to come. and we're very, very diligent in ensuring that we always deliver on a positive bottom line. So once again, thank you very much for joining us this morning.

[Kurt Ostrem, executive]

Thank you.

[Peter Bardenfleth-Hansen, executive]

Thank you.