Good Investing Talks - 2G Energy stock: The solution for Europe's energy crisis, Friedrich Pehle?

Episode Date: July 5, 2022

2G Energy is a German Mittelstand company that offers a solution for the Energiewende and European energy security. We had the chance to discuss the company's technology with Friedrich Pehle.

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And now, enjoy the video. Dear audience of good investing talks is great to have you back. Today we are discussing the energy sector or the energy transitions or as we German say, the energy vendor because there's a big shift happening in the way energy is produced in Europe, in Germany, and today we have a guest from 2G energy. 2G energy. Friedrich Pele, it's great to have you here. Yeah, hello.

Thank you very much for inviting me. It's indeed a very interesting issue, which needs to be discussed, definitely. We will do a deep dive in what the company is doing, and step by stack also explain their product and what they are planning to do, where they're planning to grow over the next years. But maybe let us start first with the whole topic

of the so-called energy. Yi vendor or the change of the energy landscape in Europe and Germany and also in other countries because we need to decarbonize worldwide. So Mr. Peeler, maybe you can explain a bit what is happening in Europe and Germany. How is the energy landscape changing over the last decades? Yeah, in principle, specifically in Germany, we see that the energy sector is split up into much more participants in former times we had these large players such as rwe in germany running large parts of the energy sector wattenfall and you name it this has been liberalized we saw number of new players coming up but i think the more important point is

that for number of years now it became clear that the entire society needs to shift away from fossil-based, nuclear-based power production towards much more renewable power production. That has changed the basic assumptions of the entire processes and the entire branch fundamentally. And a lot of new players came up, a number of new solutions came up. And again, all this was shattered or was put on a pressure on the 24th of February this year with the starting of the war in Ukraine. And the intention of the European governments, specifically the German government, but the EU as such, to become much more independent from Russian fossil energy. supply. You already mentioned like the war in politics. What role does politics play for the

energy market? Basically everywhere in the world with very very few exceptions. The energy market is highly protected or regulated by the relevant lawmaker. You always have books and large lists of regulations which needs to be respected when feeding something into the energy grid, specifically electricity, but also other resources. In the United States, you even have 50 states of America, which are an energy respect, less integrated than the EU where the integration is much more forward than in the U.S. But law and government plays always a role in the energy sector. So imagine an allocator in one country you can pick it.

And why should an energy allocator like someone who plants the future energy system, Choose a combined heat and power engine, which is your product. We will go deeper into this in a few seconds and not first and foremost wind and solar. Why is your product a solution? A smart designer for an energy sector would never decide either or. We would always think these two elements together. and we feel ourselves with our products to be the backbone for the fluctuating wind and solar energy. We have prepared some analysis in former times analyzing the actual weather situation, for example in Germany

and the resulting production of electricity based on wind and solar and the energy consumption and found out that there are hundreds and thousands of hours during the year, specifically with a misty autumn and winter weather, where the wind and solar energy is not delivering what is needed. And it would even be difficult to build more wind and solar plants to cover this, simply because if there is no wind in a winter night, then it doesn't make sense to have another 2 or 300% more windmills. If they don't turn, you don't get electricity. So that means you need to have something for compensation, either storing electricity,

which is them difficult and extremely expensive and basically not possible until today in large scale or you need to have another source of electricity whereas CHP which is based on a combustion engine if it is then run by hydrogen and we will come back to it later definitely then you have a kind of storage storing electricity from wind and solar in the form of hydrogen, which is then put into or brought into a CHP. So you already mentioned the idea of the backbone and like the backbone market share.

That's like this backbone you described. How big should this be? How much of the energy market or what kind of like how many of your combined heat and power engines should do we need to fill this? this backbone function. Of course, it's always a kind of network, but only to have some rough ideas. Germany is consuming around 500 terawatt hours of electricity annually, with a strong increasing tendency, should soon be at 7 and 800 terawatt hours.

And some people are saying it will also within the next few years at 1,000 terawatt hours. And we have a number of days and nights, hundreds of hours where wind and solar only deliver something like 1 or 2% of the nominal value. That means 98% needs to come from somewhere else. Either we have 50 times more windmills and solar panels as we need on normal days, which is completely impossible for 15. physical reasons and for acceptance reasons in society, but for many other reasons, or we need to compensate. And there are experts saying, well, in principle, you need for every windmill and every solar panel, a kind of backbone compensating energy source for the moments or for the hours and days where the solar panel or the windmill is not delivering electricity. So maybe

100% as a mural is a bit too much but it's at least a very very substantial part which is necessary and not talking about the decarbonization of the thermal energy which is even much more important for germany and for europe than the electrical sector so let us dive a bit deeper into your product and we also have a chart here for one of your presentation maybe you could Can you explain your product a bit? What is this combined heat and power plant? What you see is the heart of a CHP is a bit more. What you see here is a combustion engine driving a generator.

And this combustion engine is driven based on a gas, all kinds of gas on the input side. We have natural gas, we have bio gas, but also landfill gas, sewage gas, gas for mines, flue gas, flare gas, not flu gas, flare gas, but as well, hydrogen. So that's on the input side. And on the output side, we have achieved by the combination of using the electrical or the mechanical energy and the thermal energy, we have achieved overall efficiency far beyond 90%,

which is extremely high compared to basically all other ways of producing energy. And this electricity is fed either into a grid or it is consumed on site. That's relatively easy. Electricity is easy to handle in this respect. More interesting is the thermal energy. The thermal energy can be fed into a grid again. Or it can be consumed on site, which is more. challenging, more demanding.

We feel that we have a certain expertise in this. And that means we can change the thermal energy into the heating of buildings. That's relatively easy, but also in the production of steam, as it is used in hygiene, not hydrogen, hygiene, sector of a hotel or a hospital or in food factories. We also have high-temperature applications up to 400 degrees for other more industrial usage in this way. We are then, by combining electricity and the thermal heat, we achieve this extraordinary high efficiency level. Maybe let's go a bit on the heat side of the plant. What does the heat add for the efficiency? So if it's like rightly used, on one side, you generate power, on the other side, you generate heat.

How efficient can this plant be in combination of both energy and efficiency levels? As I said, we achieve or we exploit more than many cases, not always, but in many cases more than 90% of the input energy. That means 92, 93, sometimes even 94%. The key behind is you need to make use of the thermal energy in a perfect way. And also economically, you need to make use of it. It doesn't help to have a super perfect CHP, collecting all the thermal energy if you don't have the real need in your factory or in your hotel afterwards. That's the key.

The collected thermal energy in our CHP must definitely replace other thermal energy which has been produced in a traditional way. And in which setup is it an ideal setup to you just CHP? You already named some, but maybe you can make them clearer. Very typical is hospitals and food factories because they have high need of electrical energy throughout the year, but as well the thermal energy. But with the increased prices on the energy sector, the price for electricity went up, but also the price for the thermal energy went up.

So we see more and more that people, decision makers, decide for a CHB in their factory, in the administration building, although the CHP is only running during the heating period, meaning only 3 to 4,000 hours, or even less, that makes sense because energy is so expensive, not only thermal energy, but also electricity, that depreciation doesn't play the same role as it did in the past and also the service does not play the same role in an isolated profit and loss statement of one single CHP. So therefore we see specifically throughout the last three months more and more CHPs to be implemented in the surrounding where it's only running throughout the winter time.

So the high energy prices and the high gas prices are driver for your business? Yes, they are. Maybe I need to say around 40% of our orders which we get is for engines which are. engines which are designed or which are configured, not designed, which are configured for, as we call it, alternative gas, which is not natural gas. And that makes sense that, or it makes sense that a customer who is running his machine with a bio gas with landfill gas is benefiting from high prices for electricity and thermal energy because his input did not become more expensive, at least normally.

specifically for the agricultural biogas, we have to admit that agricultural biogas became more expensive in production. But all the other waste gas remained basically the same, whereas the output grew in money terms. So that's for the 40%. But also for the 60%, which is nature gas machines or which are nature gas machines, It's very obvious that the profitability for a customer is increasing. As I said, taking a very rough P&L, you have the cost and return for thermal energy and for electricity and for gas. But you also have depreciation and service. And depreciation and service remain basically the same.

And we have seen that the input costs have tripled over the last, say, six months or so. And they are the return as well in parallel. So service and depreciation is of minor importance these days. And we see that profitability has doubled or tripled bottom line. That's very interesting to hear. And it's a good tailwind for you. Maybe let's, let's, or do you want to add something on this point? In the last 10 years, we very often struggled when discussing with decision makers in industry specifically,

that these companies were only interested in increasing their capacities. Cost cutting was not on the agenda. So they asked, oh, is there a payback time beyond two years? No, then I will buy or spend my money on a new laser cutter or a new paint line or what? whatever they had on their wish list. And cost-cutting, which is then our sector, that was not an issue. Maybe ecological argument reducing the CO2 footprint, but not cost-saving. That was, in many cases, not their main driver on the agenda.

That will change in the next two to three years due to the overall economical situation in Europe. We strongly believe that cost-cutting will be. on the agenda definitely very high on top of it and also the switch in fuels maybe so let us talk a bit about the fuels you put in so there's natural gas biogas special gases are they different in handling and the way the engine has to be designed to use different gases yeah in principle we have a combustion engine that means you bring the as an gas air mixture into the cylinder and then there's the explosion. For bio gases and special gases, you need to have some processes in front to harmonize

this gas, to have it as clean as necessary, and sometimes also to blend it with nature gas in order to reach a minimum of energy content. The main difference is when it comes to pure hydrogen, because pure hydrogen is already explosive before it is mixed with air and before it is put under pressure. That means the one key is to bring in the hydrogen into the cylinder separated from the air in order to avoid that if something goes wrong, the entire engine explodes. It's two ways to bring it in. And the second point is, one target is, to have an extremely clean burning process. That means you need to have a relatively cold burning process, which means you should avoid to have one center flame, which is extremely hot because then you create CO2. In terms of nitrogen, steckstoxid, as we say in germ,

you need to have a flame which starts immediately in the entire cylinder so that the average temperature is much lower. And then you have almost perfectly clean burning process. And these are the differences. Sometimes I'm asking, but does that mean that a hydrogen engine can also run with a nature gas? Yes, it can run with natural gas. It's maybe a bit of the difference.

It's not as large as in car industry as we have with the different fuels, which you can put into a car engine. That's not the way. But in our cases, it would maybe be a bit expensive to take a relatively expensive hydrogen engine to run, let it run with nature gas. But in principle, it could work, yes. So the design of the engines, if you like, like want to switch from natural gas to hydrogen, you're offering both technologies like to get

carbon neutral. You have to upgrade the engine then. Yeah, exactly. Exactly. And that is a very important aspect when talking about 2G as a technology leader in this sector. We are the only company who already today guarantees its customers that every nature gas machine in the power range of 100 to 1,000 kilowatt can be modified from a nature gas machine into a hydrogen machine. As soon as the customer wishes, it will take a week or so, or three or four days. But if the customer one day gets access to a hydrogen pipeline, that's important because otherwise logistics costs simply too high. But if he gets access to cheap and reliable hydrogen, then we can modify.

his natural gas machine, so that there's no risk of ending up with a stranded investment saying, okay, I have invested into hydrogen, into a nature gas machine, but now due to local law, I'm not allowed to let it run anymore, or I feel that I'm the last one, still working with a fossil engine, then we can modify it, no risk for him. How much does this cost, or how is this process? the upgrade? In the perfect world, we see that a normal natural gas engine lives for 60,000 hours, runs 60,000 hours. It's basically eight to 10 times more than a car engine. But after 30,000 hours, typically everything is removed where the explosion takes place. Salinas, saline, and this kind of

things are taken away, and new ones are put on the engine. And this is the perfect point in time to replace the combustion chamber by a combustion chamber, which is hydrogen-ready. And then we talk about 10 to 15% of extra cost, 10 to 50% of the basic investment to be cost in addition to have afterwards state-of-the-art hydrogen engine, which can then run another 30,000 hours. You can do it earlier, but that, means that you take away combustion engine which is not yet at its end of lifetime. But you can do it if that makes economically sense or if for legal reasons you need to do so or for

whatever ecological reasons, it is technically doable easily. Okay, then maybe let's take a look again at the plant and maybe you can help me understand how you're producing the plants and walk us a bit through the production. So, in which regions are you present and in which regions are you producing the plant? Let's first talk about the production. We have one factory located in northwest Germany, close to the Dutch border. We are sitting in the neighborhood of Inche de, but on the German side of the frontier. of the border, and we are assembling the CHPs.

That means we don't have an own parts production. We buy all parts, we buy the engines, we buy the generators. Actually, we don't buy the engine, we buy the raw engines, and we put those parts on which we need, because we have developed our own engines based on raw engines. We buy the containers, the cooler and everything, and that is then assembled in our buildings. So looking into our production buildings,

you will see nice, clean assembly areas with heavy cranes, but basically no parts production, no laser cutter, no drilling, milling, and what else, because we buy everything on the free market for many years. Above 1,000 kilowatt we buy even entire engines, whereas below 1,000 kilowatt, we buy the raw engines to make them high-end, gasified stationary gas engines. The reason for that is the engines below 1,000, by rule of thumb, have been designed as diesel engines in the past. and then in the second step only be modified into a gas engine or gaseified, as we say. And that means that there are high potentials of doing it better,

of having these engines in a more specific way, have specific parts and components. For the engines above 1,000 kilowatt, this is not valid. that these engines have been designed originally already as gas engines and it's much more difficult to find potentials to make these engines more efficient. We are working on it, step by step, we have enlarged our own product range so that we already reach 1,000 kilowatt. But as I said, above 1,000 kilowatt, we buy the engines.

So, to summarize one assembly process, So one assembly factory here in northwest Germany. And no intention to modify this because we fear the complexity which is linked in a second or third assembly factory. When it comes to the sales process, Germany is our most important market, no doubt about it. Although we have to say that sales in foreign countries now for the first time have exceeded 100 million euros, and the share of foreign markets is increasing steadily. It is still below 50% because we have a very large base of installed CHPs in Germany. And by this we generate most of our sales in service in Germany.

So a very strong service business in Germany, whereas in foreign countries this is developing, simply for historical reasons. But when it comes to the order intake of machines, we see that in many quarters, order intake from foreign countries are above 50%. So in this respect, Germany is losing a bit of importance, not because it's shrinking, simply because foreign markets are increasing faster than the German market. If you have capacity at hand and the customer calls and wants to order an engine or a How much time does it take to deliver it?

It very much depends on the question, whether it's a highly tailor-made individual solution. There's maybe a hotel with historical buildings, somewhere in a difficult surrounding with extra requirements when it comes to the noise and this kind of things. Then you are in a real project which needs to be designed. If you are looking for a standardized solution, say, the CHP, which should be connected to a biogas factory, where everything is well defined, then we talk about delivery times of four to eight months. That means we still say to our customers, if you order now, we can guarantee you having the machine on spot before Christmas, up and running from our side.

You said you take a lot of raw materials or not raw materials produced materials in and build them to the plant you want to design. Has this system been challenged by the supply chain issues we had or are you still fine to stay with it and keep the system going? It has been challenged throughout the corona and COVID-19 situation already. We are sourcing basically everything from Germany and its neighboring countries. So all the engines are coming from central European countries, generators are coming from central European countries, containers, and basically everything. Nothing is coming from Russia, nothing is coming through Ukraine. And very little, very, very little is coming from Asia, mainly electronic components. But we are not in the same way exposed to these electronic components and others have been for two reasons.

First of all, we are relatively small consumer. We only need a few thousand microchips every year, and not 100,000. So we are anyway forced by our customers to buy in large lots. And secondly, we are not that much exposed to price increases when it comes to electronic components. Because the CHP has a limited number of microchips on the, board, but they are not determining the price for the CHP, other than a PlayStation, whatever you have in consumer electronics or in modern battery driven cars, where you have hundreds and hundreds of microchips.

So that means we have been challenged in daily life, but all our supply chains throughout the entire COVID-19 crisis worked perfectly. of course with much more phoning around and sometimes paying something in addition but at least the supply chains always remained intact we have no customer who can seriously say in Europe that his project was postponed because too G did not deliver the CHP as promised of course here and their CHP was too late but That was very, very often was perfectly in line with the expectation of customers because more than we are challenged, our customers are struggling on their construction sites, that they have not prepared the construction sites in time. And therefore, we are pretty optimistic that our supply chain should continue to be reliable also. within the next one or two years, which will be again challenging. No doubt about that.

I mean, we all read newspapers. We know what's happening in the markets, but we remain optimistic that based on the experience of the last two years, our supply chain will also work next two years. So I think you have this 25 years of company experience, like 2G Energy, you know, you joined them in the recent years but like this 25 years of building experience comes with also an experience of making mistakes along the way and around the process so what if learned over the years what could go wrong in this kind of project business that you're you're doing and how do you make sure to achieve very high quality hey tell money here i'm sure you're curious

about the answer to this question. But this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investor day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus. Just go to good minusinvesting.net slash plus. You can also find this link into show notes. I'm waiting for your application. And without further ado, let's go back to the conversation.

You're planning to grow over the next years, and so growing also for you means to scale up the physical production. How capital intense is this and how hard, easy is it to scale up your production? The limiting factor in production is definitely the availability of experts, of well-trained workforce, and in our case then also square meters when it comes to the assembly buildings. For both scared resources, we intend to increase the net sales and the output per capita per square meter by 10% year by year over the coming years. Still, we believe that here and there we need to add a new building in this industrial area and we are in discussion

with neighbours and with the municipality how to manage but that's a ratherogenic process which will not end in extraordinary high need of capital or funds it will be also a process which takes place over a number of years so that our very strong cash flow will help us to finance this. A bit different is maybe the situation when looking on our service sector, because we have calculated this and we see that the need of having varying parts and spare parts on stock having it available will increase over proportionally. That means we cannot hope that the need for logistic space will only grow by also 10% of something that's over the next year. It will rather be 30, 40% every year because of the complexity and let's say the need of keeping these spare parts is not only for one or two.

So, yes, for 15, 20 years, and that is a process which is, in the end, over proportional compared to the sales of machines. There we need to do something. We are currently investigating, but also there we believe in the end it does, will not mean that we have a need of capital from outside to a large extent it will be financed from our own cash flow. So after understanding your production, let's take a look again at the customers. You already explained customer cases. Maybe can you give me an idea for the range of the customers, like the smallest ones to the biggest organizations you're delivering CHPs? The smallest customer is maybe the owner of a small hotel or the facility manager of

an administrative building with something like 5,000 square meters. There we offer our 20 kilowatt so-called G-box. That's a small power plant far beyond the private sector, private housing, but as I said, for small hotels, old-age pensioners' homes and this kind of applications. Our largest engine has 4,500 kilowatt, but we have realized a number of projects where we combine various engines together. So one nice project, which is also available in Internet or in YouTube, was a hospital in the US with 14 megawatt, 14,000 kilowatt. It's not an issue for the engine.

It's more an issue for the project management, because of course, again, complexity is increasing over proportionally if you then combine various engines in the way how thermal energy is need within one project. Like, or do you want to add to in terms of product design and like future use cases that aren't really like something that is materially in your product pipeline or your revenue pipeline. Is there anything you're thinking of, what could be future use cases for your technologies?

We are not dreaming of having completely new applications. What we are fighting for is to get the right market share or the right attention when traditional fossil and nuclear power plants are shut down. and to get parts of this market. I mean, when a nuclear power plant is shut down, this is such an immense market potential for us that we need to fight for it because it makes sense.

So we don't see that completely new applications are coming in apart from this hydrogen. We are convinced that hydrogen will play the major role in the key role in the energy transition and after the transition in the normal running mode of the energy sector when it comes to the misty and cloudy autumn and winter days. Then hydrogen will be key. And there we are fighting. and working for that we will then play a major role in this.

I mean, we are already definitely the technology leader in this sector. We were the first one to present CHP fully driven by Hydrogen. And there's no company in the world who has already such a comprehensive product range when it comes to Hydrogen CHPs. And also no company who has already. realized so many projects and have machines, CHPs engines in the field who are doing or delivering electricity and thermal energy every day.

Thinking about the decision-making process of the customer, you already mentioned that efficiency becomes more and more bigger role. Like, why are, what is the decision-making process of a customer and why are they deciding? for you and what arguments play a big role in this? We have to distinguish a bit. In the old European countries, specifically in Germany, but also France, okay,

if the facility manager of a factory of hotel goes, wants to have a new energy supply, be it because his thermal energy is getting too expensive or to difficult or whatever, He will then turn to a kind of office of engineers and ask for a solution. And these engineers will always check the possibility of implementing a CHP. It's part of their standard process. And very often, CHP is one of various options. Seldomly, it's not an option.

But by this, we come already on the long list of options. And then we have to fight to come on the short list. And if we then can convince these engineers, then we will be the solution provider. Outside the European countries, specifically in the US, it's a bit different. There, our technology, or not our, the technology of combined heat and power is not very well known, specifically not in this containerized solution. The principle as such is of course well known, but there is no limited knowledge when it comes to the local applications as we deliver them. And there it's necessary to get in contact with the decision makers and make them aware of this highly efficient possibility of producing electricity and thermal energy. in the end if you succeed in convincing them

you have spent much more efforts but typically the customer will not say okay I have understood but now I will buy from your competitor because they are delivering it 2% cheaper than you are that's the main difference so more missionary work outside Europe more explaining

but then a bit less pressure on price and in average larger projects. As I said, the small hotel manager or the manager of a small hotel in the US will not easily switch over to a small CHP. It's rather the hospital manager or the factory manager who decides for something like that. So how then have you built your market entries into other like outside of core European geographies and how are your team structured in this market typically we are focusing on the markets of g7 or other industrialized markets we need high consumption of electricity but we also

need a stable legal framework even if we complain that there are so many papers to be prepared to connect an electricity production unit to the electricity grid, you still need this kind of administration. So in countries where the administration is weak, typically also the network for electricity is weak. There's a clear link. Good administration, stable networks, bad administration, unstable networks. And if you then have identified such countries, We travel around and look, for example, who is delivering the air conditioning for hospitals, who has access to the facility manager of hospitals. Or are there, say, European production sites belonging to European groups, where we know that

in Europe they are already working with CHP so that the decision makers are not completely astonished if they are contacted. So this kind of things, who has access to potential customers, and then we team up with partners locally. Very typical that in remote markets, we find competent craftmen's organization, companies, 50,000 people or so who have access to the customer group, which we believe is of interest for us,

and then we make a contract, we train them and do the sales process together. We don't let them alone. But we need their market knowledge. And we also need them to build the service infrastructure, which is definitely necessary afterwards. With the change after the Ukraine war, there was also a political shift in the energy

security topics. Are there any markets that now have opened up for you as potential future markets with this shift? I would not say that specific markets have opened, which were closed so far. Apart from the question that energy prices worldwide have increased, but the importance of efficiency is getting more important as we discussed in the beginning already. But there is one feature which needs to be explained when it comes to our CHP. Typically, our CHP require a connection to the electrical network. That has to do with synchronization. Now it becomes a bit technical.

Of course, you can drive a CHP on an island, technical island, no connections to the grid, but then you need to synchronize the CHP with all the consumers. That means when the consumption goes up, you need to make sure that the CHP is immediately riding faster, and when consumption goes down, it needs to stop within seconds or it used within second. It is possible with digitalization, this can be done, but to have such a feature cost money. And in the past, we have seen that in Europe the customers did not pay any extra money for this possibility to run your own electrical island. It was clear that the CHP were always connected to the public grid, and that is a clear indication that the decision makers

had trust into the public grid. It was not an issue to spend one or two percent of the investment sum into this possibility and this potential of keeping your own electrical island. That has changed a bit. I'm not saying that suddenly 20 or 30% or 50% of our machines are now equipped with this additional add-on, but we see that interest is going up, that discussion around this technical feature is going up and we believe that this becomes an issue. It is, I have to admit, nothing specific. Also, competitors have this feature. We are not the only one. But your question was basically, is there a change in customer behavior or customer view due to political situation? Yes, we see the beginning of a change and we will be ready to answer this demand or deliver for this demand.

And especially if you think about Eastern Europe, they are still or they were and are still highly dependent on energy from Russia. Are they more interested in your solution now? In principle, we see that there is more activity in Eastern Europe or in Central Eastern Europe. Again, we need a stable law frame and without now saying which state fits into this or not. But of course, there are some states in Central Eastern Europe where you have more trust into the legal framework than others and there we have seen also prior to the events of the 24th of February that the interest is increasing but in principle yeah we see that also Eastern Europe is trying to to make use of the nature guess in a more efficient

way than before let us think a bit about competition we all you already mentioned the competition a bit but I want to make an thought experiment. Like, if Elon Musk decides tomorrow to not to buy Twitter, but to go into the combined power and heat space and wants to invest there, where would it be easy, like, where it would be possible to come close to you with a lot of capital and a huge workforce and where would you be very relaxed and say you don't have any fear of such a competition in which expertise spaces? we are or we see the hydrogen to be the key for the future we believe that a combustion engine based on hydrogen will play a much more important role in future than the broad public today is aware of and we believe that the potential

investor who wants to spend awfully a lot of money, we will be consulted, we will have consultants. You will understand that hydrogen is the key, specifically the name which you have mentioned. He will be aware that electricity cannot be stored only by traditional batteries, but that hydrogen is the key. So either he spends awfully a lot of money in developing own hydrogen, competence or then it will

be kind of challenge for us of course because then we suddenly have to fight against someone

who has 100 times more money than we have a thousand times more money than we have presumably

or we are not oh but at least we can see it as a kind of confirmation because that

will be the way with Hydrogen To make a bit more realistic, the raw engines which we buy today and which we, to a certain extent, modify also into being an idogene-ready engine, they are coming from Leapair. And Leapair, the Germans with Earth Moving Machine Company, Cranes, Fritzers, Technology Group with 10 billion euros net sales or so. They have officially stated that they stop the production of gas engines and recommend to their customers that they should buy these engines from us. The learning point out of this is it is completely different if you produce thousands and thousands, 10,000, 100,000 of diesel engines, that's one technology. but to produce gasefied engines is something else, not the production, but the development, is something else. In former times it was close to each other, but then these gas engines, which were the result of this cooperation or combination had lousy efficiencies.

We now have developed 15 years or spent 15 years of development on increasing the efficiencies. And we see that such a potent player as Leeper now says, OK, we stop the gasification of engines because we see it is not just a product which we can do en passant. Either you do it properly with a lot of money and a team of engineers. who really knows what they are doing or there's no chance to compete. So therefore, yeah, it would be interesting to see what Mr. Elon Musk could do with all his money and what his decision would be. But like Lee Perry is still supplying you.

With raw engines, yes. Yeah. And you're doing the upgrade for the gasified. Yeah. Okay. Yeah. Then I better understand it. So the Ford experiment with Elon Musk aside, who is your real competition?

at the moment and why are customers choosing you? Maybe you already had the hydrogen argument, but outside that. Although we have to admit that most of our customers don't have access to hydrogen and will not have it within the next two or three years. There are no statistics available. It's not like car industry or like moving machines in the where you have perfect statistics for the entire Western world, that doesn't exist. What does exist is a statistic prepared by the German well-reputated magazine called Energy

and Management, reflecting the installed power base annually for Germany. Germany is the most mature market, the oldest market, the largest market for CHPs. So it's still worth looking on these limited figures. And looking on these figures, we see that there are two companies who have more CHP power plants, or more the power base is later what they have implemented. That's Jenbacher from Austria and Caterpillar, MVM and WM, WM, or MWM. But for these two companies, you also have to say they deliver engines to other CHV producers. So we buy a number of engines from Yanbacher.

What I want to say about this, there's a double counting in the statistics. They are definitely on place one and two, but their importance is maybe not as large as it looks. But on place three, you will find two G energy. we are basically the largest CHP producer in Germany who is independent, not belonging to a large group, who is completely independent, completely focusing on it. And then you have another 25 companies following us, but there is extremely rapidly falling importance.

So that means in Germany we are number three, number one and two and four are engines producers who have just one branch also producing CHPs for them CHPs is only one way of bringing more engines into the field we are the only one who is focusing on CHPs as core competence and have an own R&D when it comes to the engines and why should the customer decide for us and not for number one number two or number four, number four is, by the way, MTEU, Wols-Royce. These companies, the other three companies are coming from the serial production with thousands and thousands, in some cases, also 10,000s of engines every year.

And as I said, for them, CHP is only another way of bringing more engines into the field. They don't like these very specific applications, as I said, a historical building somewhere in the inner city where you have specific demands for everything. That's not the thing what they like. These are not the projects they like. So if you have customers who have a specific need for the thermal applications and who feel that they have complex projects and not just standard projects, they will rather turn to 2G than to this mass production companies,

although their engines are also very nice. You mentioned that there are a lot of smaller players around. Is it interesting for you to acquire some of them to consolidate the market? No, we are very, very reluctant because we believe that the smaller ones will disappear, not all, but many will disappear due to two reasons. One is emission. The emission requirements are increasing year by year. And second, also the digitalization will be a major issue

because all the efforts which you spent on digitalization need a certain base to distribute the cost on. Otherwise, it becomes very expensive. But we are very, very reluctant of taking over a producer and continue with his products because this means immediately an increase in complexity, maybe doubling the number of master data, although the top line only increased by, let's say, 10 or 15% or so. However, we have acquired a number of smaller service companies over the last two, three years. service companies who have access to other brand names customer base

who are doing the service for CHP which have not been delivered by 2G the reasoning behind is that these CHPs which are serviced by our new affiliated companies they will come one day to an end physically and need to be replaced. And in such case, it is a very normal behavior pattern for decision maker that he looks on the service and says, well, the old machine is gone, but the service was done perfectly over the last 15 years. I first turned to my expert who is anyway coming every year, doing a perfect job, and ask him for his advice,

which CHP, which producer should deliver the next CHP. So, yeah, of course, we want to benefit from the fact that smaller CHP producers are disappearing, but not in the way of taking them over, increasing complexity, but getting access to the customer base with the help of a well-done service, which is then done under another flag than a 2G service. I'm not sure if you can disclose anything, but at which rough multiples you're buying such a service company? Not very high, multiples rather under average, because we typically try to incentivize the former shareholder in the way that we let him participate on the success in future.

There are very nice synergies. Typically, the net sales and profitability increases immediately after such transaction, for example, because we have much better access to spare parts. We can guarantee spare parts prices, which are typically substantially better than what they formerly had. So that means there's a kind of win-win situation. But of course, the seller has to pay for this win-win situation in the way that he does not get such a high price. He gets his benefits afterwards by his share in the avid margin. You already mentioned the lifetime of an engine. How should we think about the lifetime of an engine or a plant?

How long does it operate? Is it like in years or is it like? The engine typically has 60,000 hours. The surrounding CHP, the container and all these pumps and coolers and whatever you have in connection with CHB, their lifetime depends very much on the end-year running time of the CHP. That means if you only have 3,000 hours because it's only running in winter the engine, then you have 20 years.

of lifetime, but then the CHP is over. Also, the container and everything else is over after 20 years. If you have a CHP connected to a foot factory running 8,000 hours so that the engine is at its end after less than nine years, the rest, which is exposed to the weather, for example, is not yet at its end. So typically in such cases, the engine is removed. another engine is brought in, and then you have another 10 years.

So it depends on the application and the situation. What is the rough estimate of these two cases? Is it more like that you over time observed, like you have a lot of engines that are in the field that run for certain cases, like the foggy winter days where it's problematic, or is it a lot of engines that run like 24 hours a day? In the past, it was rather these 24 hours, specifically the biogas CHPs in the early phase. They were running 24-7 throughout the entire year, completely independent what the demand of electricity was at that time,

simply because their impact was so marginal on the overall electricity production. There was no need. So that means in the beginning, we had very, very... very high base of engines and customers with a very steady, high demand on service. That has changed, and furthermore, it will change further. That means we believe that the sales of machines will increase over-proportional compared to the service, because running time will go down. And in our outlook, in our guidance for the year 2024, and specifically for 2006, we say from 24 to 26, the EBIT margin will go down a bit slightly.

And the reason behind is that the service will lose a bit of internal market share, simply because machines will run less time over the near future. So in future, we will have much, much more machines running only 3,000 hours compared to 6 or 8,000 hours. And some will also only run 2,000 hours, specifically if the gas prices, the energy price, not the energy prices remain such high or continue to grow. How does the service business work for you? So you have different, especially in Germany, where you have a dense network, you have different service stations and they are 2G energy workers and they drive around like from service to service job. Do you track like the data from the machines directly? You can do a lot of remote work. Explain a bit the service business and

the economics there also. In principle, we have a combination of own service people and service provider. Specifically in remote markets, we are heavily dependent on partners who can do the service. We cannot fly to Australia only to change the oil on the machine. So that means in the young markets we have more service providers and step by step we have a kind of mixture with service and own service forces. And specifically in Germany, northwest Germany, our home turf, we have an extremely high density of own cars. They are either stationed here in Hague, in northwest Germany,

or in the backyard of the private home of the service technician himself. We are collecting 100 million sensor data every week here on a central database. For many, many years, we collected these data's already long before we were able to analyze them. It was a kind of good smell that this one day will become very valuable. And actually, 70% of the problems reported by the machines can be solved remote. Only around 30% we need to send a service technician physically on spot. We have tools in place to analyze this immense amount of data in a way that we try to do a service anticipating the problems already when our technicians is at the engine.

So the perfect world would be that we can switch parts on the engine, although these parts seem to be perfect, knowing statistically that this part will come to its end within the next, I don't know, three to six months or whatever. We are not yet there. There are still some hurdles to be overcome, but we are supporting our service. planning substantially already with statistical data and analysis, which is not yet artificial intelligence. We are still following some algorithm to find these areas, and these are algorithms which have been calculated or developed by the engineers and not by the machine itself. But still, we believe that we can improve the efficiency of our service.

much more by exploiting these data. Again, an important advantage compared to all these smaller and minor competitors in the world who are still in the beginning of collecting data in the same way. How do you ensure in this remote young markets that the quality of the service stays on high level? We have an own department for quality checks when it comes to service. And secondly, within the 100 million sensor data every week, we get a clear understanding whether the service was done properly or not. We can of course not control whether the service guy from a service provider has done it nicely,

cleaned everything afterwards of course if the customer finds black dots from the fingers everywhere that's something outside our centers but whether the machine was done or was the service was done properly or not is something what we can easily read out of our data and I did not mention it so far within the COVID-19 crisis we have implemented augmented reality tools, which allow us that the service is supported and even the commissioning of machines. The initial commissioning of machines can be done by well-trained partners without having our own people physically.

And that, of course, is also a way of controlling, especially when there's a one-to-one, face-to-face cooperation, one expert sitting here in Germany and the other one working, somewhere in Australia for example you can basically follow step by step and talk to each other and make sure that he's doing things correctly that's five-fold cost savings yeah absolutely coming to money so how are you earning money with a combined heat and power a plant. Yeah, as in other comparable companies, we of course earn more money on service than on machines. It's basically double, the margin is double in service than in machines.

And by this very much comparable to other industries and other machine building companies. We earn on every CHP. We are not selling a CHP without earning a certain habit, at least in the planning. Of course, we have sometimes projects where hindsight, we say, okay, we should have never signed the contract because things went wrong. But in principle, the planning is that we should earn on each CHP, which we deliver already a certain margin. because we in many cases cannot 100% be sure that the customer gets the service from us.

There is not a one-to-one connection. If the customer wants, he can also get, can buy the service on the free market, then it might be lost. For some, in some constellations specifically, for the engines between 100 and 1,000 kilowatt, the customer is still depending on our spare parts but behind 1,000 kilowatt he could also try to get the spare parts on the free market at least those spare parts connected

to the combustion chamber that's where the most money is sitting yeah very important in principle we want to earn on every CHP and we need to have a service which is competitive to the free service companies which are available on the market. Of course we can ask for a certain premium, 10% more, something like that, but there are limitations. We cannot ask whatever we want. We are in a daily competition with those delivering this service on the free markets.

What is the recurring component of your revenue? Like which are parts recurring on a yearly basis? In a model, you could say if a CHP costs 100,000 euros, the customer wants to have the super gold all-in service with everything. Then he has to spend another 100,000 euros over the lifetime. Out of this, 100,000 euros parts would be 50% and labor, 30%. And another is oil and lubrication, another 10 to 15%, something like that, around depending a bit on the model. But that indicates how much cost comes in addition to the investment over lifetime.

and what this could potentially be recurring for us if we do it properly. In the recurring nature, you already explained a bit like this, this, this model you have with the boxes where the plant is in. So if they run all the time after 10 years, you could replace the inner boxes. And also you have the plants that are after 20 years are just like not, you have to change the whole system. if you have this 25 years of experience maybe or do you already have some data like from customers that were with you like over the 20 years or the 10 years how much they tend to just stick with you that you have this like after 10 or 5 till 20 years that people tend to buy again with 2G energy there's a high tendency without now delivering a percentage point but in normal cases we should have have a probability, which is definitely above 50%, that we get the following order as well. But there's no guarantee. Definitely not.

Do you have already data points that point into this direction, or is it just like that the fleets of plants is still too young? The hard facts is a bit limited because we of course started with, low number of machines when we started the company, and that was primarily biogas in northwest Germany. But based on this, those customers who bought 2G CHP in northwest Germany will definitely have a strong tendency to come back to us again. Apart from that, many of our competitors of that time have disappeared over the last 25 years. there we have definitely a higher market share today than we had 20 years ago

what role does service play in your revenue share like in the future like what is your scenario with like rolling out more plans more plans what do you see over time yeah as I said earlier we believe that more and more of our future plans will have rather limited running time, annual running time. Maybe only running in winter and completely stopped in summer, for example. And therefore we believe that in average the service will halfen, at least on the individual machine. On the other side, we see that we will see more and more plants outside

bio gas installations which is a good news because those customers outside tend to not only buy the CHB they also want to have service calculation service contract over lifetime because their controller before signing will always ask how much does a kilowatt hour cost apart from from the input gas but all others how much that cost and he prefers to have a of guarantee. That means we have two tendencies. One is reduced operating hours, which is bad for the sales of service. On the other hand, more customers asking for full service contracts. Specifically, the farmers on the biogas factories in the past, they are used to do either the parts of the service themselves because they have combines and tractors, or at least to negotiate every time what it could be and not to be too much dependent on one supplier. And this is a customer group which is not growing as fast as the other customer group.

I'm not saying that it's shrinking, but the other customer group who wants to have a fixed calculation base and who is ready to sign a contract for the entire lifetime, or for a very long period, that group, one is shrinking or the market internal share is shrinking and the other is growing. So we have in the end to tenancy, what does that mean in the end? We believe that we come a bit under pressure when it comes to the margin, but we believe it will only kind of marginal input. We have reduced our margin outlook from 10% to 9.25. That is of course a lot of money, which is in between, but it's not a fundamental game changer.

How long do you usually do service contracts? You said you have these farmers who just like, if they have a service issue, they negotiate every time. We have some revolving service contracts, which are basically over lifetime, or at least to the big steps, say 30,000 hours and then 60,000 hours. Others are for a certain period or a certain number of running hours. That's very typical. But as I said, in tendency, it's a relatively long part of the overall lifetime. However, the lifetime is not comparable to other products, maybe.

So for example, when you take a lift in a hotel, for example, you put it in once and then the next 50 years, you will earn the service. That's not the way, as I said, very often after 10 years, the product is gone, latest after 20 years. So we always need to fight and struggle in a competitive way. Otherwise, our product will sooner or later, our product base will shrink. And by this also the potential for service does not exist anymore. You're planning for growth in the future years. What is the growth you expect over the coming years and other scenarios where you would need another capital raise? Our guidelines indicates 400 million euros net sales for the year 2026.

This guideline is not brand new. It has been issued before the inflation really took off. That means it's basically a one-year-old of these guidelines and needs to be revised sooner or later in the light of these strongly increased prices, which we see also in our sector. But in principle, we believe that there's a kind of volume increase of around 10% what we see, simply because it is a product which needs to be explained. It's a quite complex production, a sales process. so therefore might be a year where you have a bit more than 10% of volume growth

maybe a year as we have seen in COVID where something goes wrong where you have a bit less but around 10% is what we feel as the nature of growth based on quantities and if so we don't believe that we need capital increase the good news is that globally in our sector customers tend to do prepayments when signing the order.

So we get around 25 to 30% from our customers when the customer signs the order. And another 65% when the machine is ready for shipment. That means we collect at least in the traditional business around 90% of the money prior to shipment of the machine. And that means with increased order intake, we typically also have nice cash-in. And that's why we are a bit reluctant to indicate that with strong order intake, one day we need to have capital increase to enlarge our production base

and buy new factories or whatever. Thank you very much for this insights. For the last question of our interview, I want to give you the chance to add something we haven't discussed. Is there anything you want to add for the end of the interview? No, in principle, we have already mentioned all these issues. We believe that CHP as such will play more important role than our audience will recognize today in media.

People are talking about fuel cells, about very fancy solutions. We read that combustion engines should be abolished, which is only the case for the mobility sector, for cars, not for the rest. We as CHP producer, not only T2G, the entire industry, is struggling a bit with this image of combustion engine, which seems to be old-fashioned. But that's not the case. Hydrogen-driven CHP has the same extremely low emissions than a fuel cell has. Therefore, it is sometimes often underestimated, which important role this smaller CHP will play in the future energy transition.

Then thank you very much for your time. thank you much for the audience just staying till you thank you yeah well pleasure and bye bye bye as in every video also here is the disclaimer you can find a link to the disclaimer below in the show notes the disclaimer says always do your own work what we're doing here is no recommendation and no advice so please always do your own work thank you very much