Allego N.V. (NYSE:ALLG) Q3 2022 Earnings Conference Call November 14, 2022 8:30 AM ET

Company Participants

Sari Schwartz - IR
Mathieu Bonnet - CEO
Ton Louwers - CFO

Conference Call Participants

Maheep Mandloi - Credit Suisse
Matt Summerville - D.A. Davidson
Gabe Daoud - Cowen and Company

Operator

Greetings. Welcome to Allego Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to Sari Schwartz of ICR. Thank you. You may begin.

Sari Schwartz

Good morning. I want to welcome everyone to Allego's third quarter 2022 earnings call. Today's speakers are Mathieu Bonnet, Chief Executive Officer; along with Ton Louwers, Chief Financial Officer.

During today's call, we may make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions and as a result are subject to risk and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call.

For more information about these risks and uncertainties, please refer to the risk factors in today's press release and the company's filings with the Securities and Exchange Commission. Readers are cautioned not to put any undue reliance on forward-looking statements and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call.

During our call today, we will also reference certain non-IFRS financial information. We use non-IFRS measures in some of our financial disclosures, as we believe they represent our operational performance and underlying results of our business. The presentation of this non-IFRS financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with IFRS as issued by the IASB.

And our non-IFRS measures may be different from non-IFRS measures used by other companies. Reconciliations of IFRS to non-IFRS measures as well as the description, limitations, rationale for using each measure can be found in our filings with the SEC.

I'll now turn the call over to Mathieu Bonnet, CEO.

Mathieu Bonnet

Thank you, Schwartz. Good morning to everyone on the line and thank you for joining our third quarter 2022 earnings conference call.

I will begin today with an overview of our reserves, followed by an update on the progress we have made during third quarter of 2022. I will then turn the call over to Ton Louwers, our CFO for a closer look at the numbers.

To begin, I would like to highlight again that Allego is a leader in driving and enabling the electric vehicle revolution. We are building the backbone of public EV charging infrastructure throughout Europe and expanding.

As we may know, Allego is currently the global leader in the electric vehicle market. We have an existing network of over 34,000 charging points, public and private at nearly 23,000 diverse, mostly public locations across 15 countries, positioning us as a market leader in Europe.

Our current owned network includes some 13 androids plus and ultrafast charging points, which are our main focus as we see tremendous growth in this segment to meet significant demand and help accelerate the EV adoption. To that end, I am pleased with our significant progress and team's execution for the quarter.

Revenue increased in Q3 by 105% to €22.3 million compared to the same period of 2021. Our charging revenue increased by 107.7%, while our service revenue rose 102.6%. We saw growth across all key metrics, including charging sessions increasing by 36.6%, a utilization rate of 11.5% compared to 6.6% and total energy sold increasing by 81% to 37 gigawatt hours. This is all in comparison to the prior year quarter ended September 30, 2021. The Q3, 2022 operational EBITDA was minus €4.2 million compared to minus €1.8 million in the prior year period.

We are continuing to manage our input costs through the signing of power purchase agreement, which I will touch on later. But also through price increases, which have occurred in January, September and the last one in October of this year. We continue to execute on plan with several important initiatives during the third quarter of 2022 and more recently.

As announced last week, we signed the first of what we expect to be several power purchase agreements or PPAs for short. This first one has been contracted with a leading independent renewable power producer that will provide 25 gigawatt hour of solar energy.

It will cover the majority of our operations in Germany for 2023 and equates to roughly 16% of our total network need for 2022. This agreement, which is effective January 1, 2023, will provide us with a natural hedge in commodity and input pricing for the next 10 years with a fixed price.

As we have discussed previously, our goal is to cover over 80% of our production in 2023 with long-term, low-cost PPAs based on renewable power assets. We are in active discussions with power producers to meet these targets.

We see strong demand in the utilization rate of our chargers. The utilization rate of our ultrafast chargers are key metric for us, has reached 11.5% during the quarter and we expect will continue to increase. The need to charge quickly is very compelling for our customers.

We have a significant progress in the realization of our Carrefour project that we expect will bear fruit in the next quarter as we are now installing more than 310 ultrafast charging ports in parallel for these projects. We continue to see strong sales. One of our most notable new contracts is with Nissan, where we have secured 50 fast-charging locations in Spain, Portugal and Italy as a service.

In the Benelux region, we're expanding our cooperation with Retail Estates, which includes 20 ultrafast locations throughout the country. In the Nordics region, we are partnering with Trophi, the leading Nordic real estate company for grocery and retail properties, where we will build out more than 300 charging ports at 22 locations in both Denmark and Sweden.

In Germany, we see strong increasing demand with the signing of more than 120 sites for fast and ultrafast charging ports. Globally, during the quarter, we have contracted more than 800 ultrafast charging ports to be rolled out. Our backlog continues to grow at the month for electric vehicles charging increases and our size and scale create additional momentum.

As of September 30, 2022, our secured backlog was 1,270 sites with an additional pipeline of around 1,000 sites. Our ability to offer turnkey solution with strong core technological competency and use to be a unique value proposition and add on-page in a market.

Following those updates, I'd like to spend a minute highlighting the impact of inflation on our charging business and our mitigation efforts. As a reminder, we are working through some supply chain disruptions in hardware, but mainly in input cost inflation as a result of electricity costs. For this first component, we have in place and we are developing a long-term framework agreements with our automobile manufacturers and vendors across Western Europe, which has helped minimize any impacts.

Additionally, we continually buying bulk, which further enables us to negotiate and minimize the effects of supply chain disruptions and inflation on the hardware side of our business. I am happy to say that, we have already secured manufacturing slots and delivery for our whole 2023 program.

The second component concerns the increase in electricity prices and its impact on our cost base. It is our main variable cost of charging revenue, which we have seen to have an effect on our results. If we compare the wholesale pricing in our main market, they have been multiplied by more than 3.5 times in Q3 2022 versus Q3 2021. These increases are driven by the natural gas price hikes and the geopolitical situation in Europe.

However, given the strong demand for our fast and ultrafast charging station by our customers, we were able to increase our charging sessions price by an average of 10% during the quarter. We also implemented a new price increase of around 15% on average in October to accelerate our margin recovery. The impact of the price increase is significant and has mitigated partially the sharp cost increases. What is essential, is that despite the price increases, we have not seen any decrease in the demand of our charging stations by customers.

The last part of our income that greatly mitigates our efficient cost is the sale certificate or carbon credits directly generated from the sale of our Green Energy. This provides a robust natural hedge against rising energy prices and the value of these certificates also claim us energy rise. The income generated from the sale of these certificates were €4.2 million during the quarter versus €1.8 million during the same period of 2021. With this strategy in place, we believe we are well equipped to face the volatility of our cost base to provide stable visibility for our margin.

Before concluding for now, I want to reiterate, why we are confident in our outlook. Underpinning our business model is the demand environment supportive of our strategy. Most notably, the announced expected ban of the sale, internal combustion engines by 2035 by the European Union has now been confirmed by European government, meaning that we are on the road to change the entire passenger's fleet more than 200 million vehicles in a very short time from a base of 6 million vehicles today.

It is a comprehensive revolution in mobility and we expect the need to increase our capacity further to charge these new release very quickly. Already BNEF projects that the number of EVs in Europe is expected to grow to approximately 24 million by 2025. These growth rates will support Allego's already robust, a backlog of premium sites and its strong pipeline.

With that I will turn it over to Ton Louwers, our CFO for an overview of our financials. Ton?

Ton Louwers

Thanks, Mathieu and welcome, everyone.

I will begin by summarizing our financial results for the 3 months ended September 30, 2022, followed by a review of our balance sheet, cash flow metrics and financing options and capital structure, before closing with our guidance for full year 2022.

Starting with our financial results. For the 3 months ended September 30, 2022, on Slide 11. Total revenues for the 3 months ended September 30, 2022, increased 105% to €22.3 million in the prior year same period. This significant increase was largely driven by strong growth in both our charging and services revenue. Specifically, charging revenues were up 107.7% to €14.4 million, mainly as a result of the 36.6% growth in total charging sessions to €2.2 million and the price increases to offset input cost.

As a reminder, the 10% price increase in September came off of a 17% price hike in January. We've raised prices again by around 15% on average effective October 7, 2022, as we proactively implemented measures to mitigate the effects of higher energy prices. Despite these charging session price increases, utilization rate continues to grow and we will continue to monitor this situation.

The average utilization rate during the third quarter of 2022 climbed to 11.5% from 6.6%. Total energy sold inclusive of Mega-E was 37 gigawatt hours at 81% jump over the same period in 2021. We reiterate that our energy sold was 100% green energy.

Services revenue increased 102.6% to €7.9 million compared to €3.9 million for the 3 months ended September 30 2021. Services revenue benefited from the rolling out of the Carrefour project, which as expected it's weighted towards the second half of 2022 and is expected to accelerate during the fourth quarter of 2022.

As part of this project, we are installing more than 2,000 fast - Allego fast EV charging points across 200 charging locations in France with an operations and maintenance contracts spanning over 12 years. Gross profit for the 3 months ended September 30, 2022, was €1.8 million, a decrease of 43.5% from €3.1 million over the same period in the prior year. However, against the backdrop of commodity price inflation and notwithstanding our price increases, gross margin was adversely impacted by a net $4.8 million of higher energy input costs.

Some of that impact was offset by higher income generated from the sale of carbon credit certificates of €2.4 million. General and administrative expenses were €21.5 million for the 3 months ended September 30, 2022, versus €88.8 million for the same period last year. The decline in these expense is primarily a reflection of a decrease in non-cash stock-based payment expenses of €77.3 million.

Next, finance costs were minus €2.4 million in the 3 months ended September 30, 2022, versus minus €3.9 million in the same period of 2021. Finance costs were lower as the interest on shareholder loans was lower as these were converted into equity at the consummation of the Business Combination Agreement.

Net loss for the 3 months ended September 30, 2022, was €18.7 million compared to €80.5 million in the same prior year period, largely on account of the above-mentioned items. Operational EBITDA for the 3 months ended September 30, 2022, was minus €4.2 million versus minus €1.8 million in the same prior year period. The main reason for this decrease has been the impact of the increase in cost of electricity for €6.7 million.

Now moving to our balance sheet, in which the main relevant movements were, PP&E for the 9 months ended September 30, 2022, was up due to additional investments in our network and the first time consolidation of Mega-E assets of €88 million. Intangible assets for the 9 months ended September 30, 2022, and other financial assets clime to the first time consolidation of MOMA.

Non-current borrowings for the 9 months ended September 30, 2022, were lower, because of the conversion of the shareholder loan at closing of the business combination. Related to working capital, we've been proactively managing our inventory to minimize supply chain disruptions and mitigate delays on bringing new sites online. And supply chain issues mitigate, we expect to return our inventory to historical levels. Our cash and cash equivalents as of September 30, 2022, were €16.3 million.

On Slide 12 and 13, Allego had a secured backlog of 1,270 sites as of September 30, 2022,. As a reminder, all these sites are signed up for lease terms of an average of 15 years and include approximately 8,400 fast and ultrafast charging ports. This was an increase of 24% from the second quarter of 2022.

On Slide 14, I'll briefly discuss our access to Green financing. Allego has access to the Green infrastructure financing market, since we are EU green taxonomy eligible asset generator. What this implies is that we can access green loan financing at a relatively attractive cost of capital and other terms in the green infrastructure financing markets.

On Slide 15, moving to our capital structure and guidance. The combination of our expectation of being able to successfully expand the new credit facility in the very near future, the existing senior debt facility is €170 million and the ability to access the green infrastructure financing market at attractive cost of capital and other terms, together ensures that we expect to be fully funded to execute on and support the development of our secured backlog of 1,270 sites.

For guidance, we expect to generate a revenue of €135 million to €155 million and a positive operational EBITDA for full year 2022. Total energy sold is anticipated to be between 150 and 160 gigawatt hours for the full year. Our guidance considers that energy prices are expected to remain high for the foreseeable future.

In summary, against the backdrop of an uncertain world and commodity price volatility, Allego has performed very well during the 3 months ended September 30, 2022,. We're confident that we will be able to further mitigate the impact of supply chain disruptions and higher commodity prices over time.

We also believe that we have the ability to access third-party capital through a myriad of attractive financing options and believe we are very well positioned to execute on and support the development of our secured backlog of 1,270 sites.

With that, I'd like to think back to Mathieu.

Mathieu Bonnet

Thank you, Ton.

In closing, I am pleased with our results for the third quarter of 2022. We have a robust backlog of fast and ultrafast chargers that provides revenue visibility through 2023 and beyond and that is increasing. Our deep technological moat, a broad network and leading reliability that provides our customers with a frictionless experience is creating a solid customers base. We have begun to execute as forecasted on our unique strategy of re-correlating our cost base from commodity price volatility and our pricing power has been confirmed.

We believe, the favorable Germen environment for electric vehicles in Europe is here to stay. Meaning that the e-mobility revolution is going to accelerate. Finally, I want to thank all our people at Allego for their dedication as we close out the year.

With that operator, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Maheep Mandloi with Credit Suisse. Please proceed.

Maheep Mandloi

Hi, good morning and thanks for taking the questions. And then nice to see the reiterating annual guidance here. But just, if I could just probe more on the guidance. Could you talk about the impact of what you're seeing in the market on demand, either in Q4 and Q1? Some of your peers have been talking about potentially weaker EV deliveries kind of impacting equipment sales. I just curious, what you're hearing or what you're seeing for the energy sales on your network in Q4 and Q1? Thanks.

Mathieu Bonnet

Yes, thank you for the question. Mathieu Bonnet speaking. Regarding our guidance and this issue, we do not see any subject to be clear, given the number of cars we already seen. We have seen that in October our utilization rate which is a key metric for us again in order to understand our revenue and to see our revenue - charging revenue has seen an increase compared with the last 3 months. So I do believe that there won't be any impact.

Regarding our Q4 figures, I would say, it will come from as our charging revenue and our sales and service sort of projects we are in actually. So that's the reason why we don't expect to see - because of this issue what we call, any decrease on our charges.

Maheep Mandloi

Got it. And I appreciate that color. And can you just talk about like the impact of higher electricity prices? You did talk about it being partially offset by higher ASPs, which you saw in the last quarter and this quarter again. But as you kind of like look forward to - in Q4 and Q1 of '23, how should we think about the margins at least on the energy side for you guys?

Mathieu Bonnet

Yes, sure. So what we see that actually we consider that we will recover on our margin regarding charging revenue, given the trend of the actual price of electricity, which is - which has decreased very recently. And that's for mainly Q4 and as well we are set in place the price increase in October as well. So I think we are mitigating that and for Q1, our first PPAs will kick in as of January 1, so it will mitigate as well this risk. And yes, we can and will consider depending on the market and the situation other increase of price, if necessary.

What is really key and I would like to highlight here again is that, despite our price increase, we haven't seen any decrease in our charging sessions, which is key. So it means that we do believe that we have kind of price power here, which is - which will enable us to mitigate of course the margin, subject compared with the price of electricity. But as well, it mean that right now for our customers, the need to quickly - to charge is very important and that's the reason we have focused on fast and ultrafast chargers is really key and I think the first strategic moving right.

Maheep Mandloi

Got it. And I appreciate the color and thanks for taking questions. I definitely have more, but I'll jump back in the queue and congratulations on the quarter. Thanks.

Operator

Our next question is from Matt Summerville with D.A. Davidson. Please proceed.

Matt Summerville

Thanks, good afternoon to you guys. A couple of questions. First, I want to make sure, I understand how much of your current electricity buy is hedged, as we sit here today? And given your repeated comments around elasticity in kind of price power therein, why are we seeing such a lag between your inbound energy cost and your ability to capture price, meaning why I guess aren't you capturing price in a more real-time manner to really drive down that gap? And then I've a follow-up.

Mathieu Bonnet

Yes. So regarding our hedge, right now what we have is around 30% of attested new hedge with contract and the goal of course is to increase that at least - as I mentioned for next year to 80%. So at the beginning of next year, we will reach already nearly 60% and it will increase alongside the year, that's one.

Beginning the second question, actually we have a kind of lag because of the way it is, the market is organized in Europe. Because we go through third parties, what we call mobility service provider and we have, as you're speaking one month delay between the decision of increase and the actual one on all the networks in the country. So that's the reason why you see this lag.

So that's as well the reason why we have decided to a big push October and that so far we don't expect to see any other increase, given the price and the situation we see on the cost of electricity, so no need to increase more that's actual situation. But that's the reason why we see a lag and that's the reason why on our network, we are not able to put right now, because we have many MHP real-time price.

Matt Summerville

Got it. And then, I want to ask a question about the implied fourth quarter guidance. Obviously, you get full year be come back into the fourth quarter, which implies a Q4 top line that's pretty similar to what you've done on a year-to-date basis at the midpoint. So how much of the fourth quarter top line is going to be driven by Carrefour and then how should we be thinking about those compares as we move through 2023 meaning, how much of - because, I'm sure there's going to be some carryover into '23. But how much of the net Carrefour headwind should we expect next year? Thank you.

Mathieu Bonnet

So, as a matter of fact for this year in Q4 2022, we will see the same kind of pattern as last year and Carrefour project will be a bigger contributor for Q4. As well, the charging revenue should increase bit compared with Q3. Because the pattern of consumption in Q4 of a year is higher than the Q3 and that's what we had expected during the last year.

So now we have some experience, but definitely the seven sense with Carrefour would be a big one. And that's why I highlighted during the presentation, we are installing right now and here will commission many charger more than 300, so that will be quite important.

For next year, this - the Carrefour project will hand, because we'll have finished during the year 2023, it was scheduled and planed, because we will see a big shift in term of, new as well with more charging revenue given the fact that we are installing our owned network with fast and fastest chargers now. Maybe Ton, you want to elaborate a bit as well?

Ton Louwers

Yes. Maybe just to make it a bit more - to narrow down a bit Matt, because obviously we expect the question and it's a fair one. So the Carrefour project this year will and somewhere between 30% and 35%, probably at the high end of that. So charging revenue will be around five, we think today. So if you just add those two together, its €70 million then you come back to, let's say, the guidance that we've put out some other service revenue.

And I think for next year, ballpark Carrefour is around I think €25 million which is left, could be a couple of million off. But that's basically how it spins out compared to the first 3 quarters. And bear in mind that Carrefour revenue has a high margin and with the improvement of the margins, because the charging revenue will not only increase because of the seasonality pattern, but also because of the price increases.

We had one in September, so in Q3 you only see almost like a month and then in October, we did another one, so you'll see more of that in Q4 as well. So that's why the charging revenue will be higher and the margins will be - say, what we expect today back to normal.

Matt Summerville

Great. And then, I'm just going to sneak in one more. I want to understand some of the objectives with the PPAs. First, why not try and drive your hedge towards 100%. I get the idea that this is going to help smooth out your inbound energy costs. But I also wanted to dig into whether or not, there should be a pronounced upward impact on charging sessions profitability as you execute these PPAs? Thank you.

Ton Louwers

You take the first one?

Mathieu Bonnet

Yes, Ton. Yes, I will take it. So yes, regarding the hedge with 80%, we want to add some figures for 2023 that are realistic. And I mean given the fact that where we are I think that's what can be reached. We want as well to be able to make some opportunities may be for short term and some seasonality for instance in the summer in head of Q2 and Q3, so that's the reason why we may be lower than 100%. That could be the target and it will be decided next year given the evolution of the market design in Europe, mainly for the years to come. That for the first question and maybe for the second question, Ton I let you to go?

Ton Louwers

Yes. So I think on the margin, I just elaborate a bit on that through the price increase. What we've chosen to do is, rather than being kind of exposed to volatility on the energy market and implementing price increases and then coming down again blah, blah, blah. More focusing on the inbound, I should say, so really bringing stability to the predictability in a way. So this is going to help us develop a real pricing strategy out there. Knowing that the inbound will be very stable and gives us the ability to move along with the market or not to move along and capture a bit more of the demand out there. So that's the thinking behind it and again with very favorable prices.

Matt Summerville

Great. Thank you, guys.

Ton Louwers

Sure.

Operator

[Operator Instructions] Our next question is from Gabe Daoud with Cowen and Company. Please proceed.

Gabe Daoud

Thanks everybody. Good morning. I was hoping maybe just going back to 4Q. I guess Ton or Mathieu, can you maybe just give us a little bit of color on what the energy sold was in October or maybe what the session number was or the utilization rate was just to maybe give us a little bit more comfort on the ramp in that revenue that's expected?

Mathieu Bonnet

Regarding the - well, I would just give you the utilization rate, but we were on the third Q - on Q3 we were at 11.5% and in October, where the utilization rate was 12.6%, so it is increasing actually quite a lot.

Gabe Daoud

Okay.

Mathieu Bonnet

So the energy just follow.

Gabe Daoud

Okay, got it. That's helpful. Thank you. And then just noticed, it looks like quarter-over-quarter. I'm sorry, if I missed this, but the number of fast charge ports decreased quarter-over-quarter, obviously ultrafast increased. But is there anything to highlight there? The reason why it might have decreased quarter-over-quarter? Thanks.

Mathieu Bonnet

Yes, actually it was scheduled, one of our slow chargers and that's mainly we given the slow chargers was handed over by another network and it was scheduled and now what we do, instead of - for our existing network for slow chargers instead of charging them, as slow charger, we try to stop and to place fast or ultrafast chargers to replace them.

So that's the reason why you see here some quite some decrease in flow charger of course and we are focusing now mainly or only on fast or ultrafast. I remind you, fast for us, it's 50 kilo and ultrafast is 150 and higher.

Ton Louwers

And just, because I think you were referring to the fast chargers right and the ultrafast, we are replacing fast charges with ultrafast chargers, because of demand. And so we focus on the ultrafast.

Gabe Daoud

Just as an example, if you take a 150 Kilowatt charger that we currently have, you have two charging sockets, each 75. And if you have 150-kilowatt charger, there is one socket. So it's 150 times versus 2.75 times for almost the same price today. So from a grid connection it all works out, so we're really actively monitoring the demand and keeping up with them. That's what you saw happening, good guess.

Gabe Daoud

Got it.

Mathieu Bonnet

Yes. And last comment on that, because that's important as well regarding the market trend. We already see that our customer wants to have fast, ultrafast charging station. So the speed is quite important. So they really like to have at least 75 and two socket used or 150. So that's a big push and this trend is really seen right now and that's what we see. So that's the reason why we're pushing to change our chargers as well.

Gabe Daoud

Got it. Okay, great. That's helpful. Thanks, guys.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mathieu for closing comments.

Mathieu Bonnet

Well, I just wanted to thank you for your question and to highlight that while the execution is in full steam now on our path to indeed we have mentioned, we need install our ultrafast charger, because that's really where we see a big push from our customers and from the new EVs coming and hitting the road right now. Well, thanks a lot for your time and see you soon. Bye, bye.

Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.