Kempower Q2'24 preview: Corrective action needed

Translation: Original comment published in Finnish on 7/18/2024 at 7:15 am EEST.

Kempower will announce its Q2 interim results on Wednesday, July 24 at around 9.30 am EEST. Weak sales and low order intake have been known since the company issued a profit warning on July 11. On this basis, we expect the most important information in Q2 to relate to the possible details behind the decline in sales and the company's future measures to turn around the result and increase sales.

Weak Q2 performance is a known fact

On July 11, Kempower announced that Q2 revenue had decreased to 57 MEUR (-21% y/y) and order intake to 54 MEUR (Q2’23: 86 MEUR). With the decrease in revenue and the increase in the fixed cost base, the operating result (EBIT) also weakened to -8.5 MEUR (Q2’23: 13.9 MEUR). The guidance for 2024 has been significantly lowered. Revenue is now estimated at 220-260 MEUR, assuming that exchange rates will not have a significant impact (previously 360-410 MEUR). The operating EBIT margin is guided to be negative (previously 5-10%).

Interest in the details behind the decline in demand

In a press release issued on July 11, Kempower cited high customer inventory levels and installation bottlenecks caused by grid connections as reasons for the profit warning. In addition, waiting for the full availability of the company's next generation products in H2 has shifted order demand from H1 to H2, according to the company. In a positive scenario, signs of declining customer inventories, a pick-up in market demand or significant new customer wins could boost confidence in a return to growth. That said, we are not yet expecting any major positive signals from the Q2 report. However, the company's comments could clarify the still somewhat unclear situation.

Scope of adjustment measures remains a question mark

A key issue in Kempower's current situation is specifically related to the rapid increase in manufacturing capacity and cost structure, while demand for charging solutions has unexpectedly declined. Kempower has opened a new factory in the US in late 2023 and will open a new factory in Lahti in 2024. We understand that a presence in the US is essential for long-term growth, even if growth may be slower than expected. In the European market, however, we do not believe there is a current need for additional capacity from a second factory. In its July 11 press release, Kempower stated that it was considering significant measures to adjust its cost base. The scale of these actions would signal the company's near-term growth prospects. But too little adjustment would mean poor profitability in the short term if growth were to fall short of expectations. The company said in its July 11 release that it expects profitability to improve to break-even by Q4, which we estimate would mean either a stronger revenue development or significant adjustments to the cost structure. The company's adjustment plans may not be finalized by the time the Q2 report is released, but the interim report may provide some indicative comments.