VARTA AG Group

Quarterly Report Q1/2023

as of 31 March 2023

We are defining the future of battery technology to empower a more independent life.

MISSION

Through continuous investment in research and development, we set the benchmark in battery technology and customization to strive for market leadership in our business segments.

VARTA AG – SELECTED GROUP KPIs
(€ k)	31 March 2023	31 March 2022
Revenue	164,225	185,291
EBITDA	-7,590	37,130
Adjustments:
Cost of share-based payment	1	4
Costs of M&A transactions	0	940
Restructuring costs VARTA AG Group	5,579	0
Adjusted EBITDA	-2,010	38,074
Adjusted EBITDA Margin (%)	-1.2%	20.5%
Group result	-37,789	6,033
Earnings per share	-0.89	0.15
Investments (CAPEX)	24,862	30,812
Free Cash Flow	-97,107	-23,853
Equity ratio*	20.4%	19.0%
Balance sheet total*	1,232,643	1,258,454
Employees at the end of quarter**	4,390	4,610

* Comparison period relates to 31 December 2022

** Prior year adjusted according to IAS 8

VARTA AG

VARTA Aktiengesellschaft (VARTA AG), Ellwangen (Jagst), Germany, is the parent company of the VARTA group. Since October 2017, VARTA AG has been listed on the Frankfurt Stock Exchange in the Prime Standard segment and listed on the SDAX. The business activities of VARTA AG and its subsidiaries encompass the research and development, production and sale of micro and household batteries, large-format batteries, customer-specific battery solutions and energy storage systems. The business activities of the VARTA AG Group are divided into five reportable business segments: "Micro Batteries", "Lithium-Ion CoinPower", "Consumer Batteries", "Energy Storage Systems" and "Other". Through intensive research and development, VARTA sets global standards in many areas of lithium-ion technology and microbatteries and ranks among the innovation leaders in the key growth markets of lithium-ion technology in addition to primary hearing aids and household batteries. Our production processes that have been developed and refined over the years, including customised production systems in some cases, round off the Company's competence profile alongside a highly qualified and experienced workforce. The VARTA AG Group currently employs 4,390 staff. The Group operates five production and battery manufacturing plants in Germany, Romania and Indonesia in addition to distribution centres in the USA, Europe and Asia, from which sales to customers in more than 100 countries around the world are coordinated.

Micro Batteries

The segment "Micro Batteries" covers the business activities in the area of microbatteries and hearing aid batteries. The Group is one of the leading manufacturers of microbatteries for hearing aids.

Lithium-Ion CoinPower

The segment "Lithium-Ion CoinPower" represents the business with small lithium-ion round cells, also known as CoinPower, for OEM applications. VARTA boasts reputable firms as clients and manufactures batteries in numerous key electro-chemical systems as well as in a variety of structural shapes and sizes, while the range of applications extends from hearing aids to True Wireless Stereo Headsets all the way through to automotive applications operated by way of microbatteries. The two segments "Micro Batteries" and "Lithium-Ion CoinPower" work together in a synergistic manner.

Consumer Batteries

The "Consumer Batteries" segment comprises the product categories of household batteries, rechargeable batteries, chargers, portable power (power banks) and lights. VARTA AG is one of the European market leaders with production activities located in Germany for household device batteries. "Consumer Batteries" is predominantly geared towards end customers. The innovative, high-quality products from the "Consumer Batteries" segment are developed and manufactured using cutting-edge technology and by leveraging the expertise of internationally qualified specialists. A combination of innovative capacity, breadth, quality and design make the product range unique. An intensive focus on the lifestyle of consumers and close cooperation with retailers are crucial in enabling VARTA to react quickly and flexibly to the latest device trends with the best energy solutions.

Energy Storage Systems

In the "Energy Storage Systems" segment, the Company primarily manufactures energy storage systems for private households in addition to large-scale commercial storage solutions for trade customers. In this context, VARTA is playing a key role in the energy transition by developing and manufacturing energy storage systems. The energy storage solutions developed by VARTA in the home and mass storage markets range from compact, basic models such as the wall-mounted VARTA pulse neo to large-scale storage solutions including the VARTA flex storage for commercial applications. The existing product portfolio for private households as part of the VARTA pulse neo and

VARTA element backup product series comprises AC-coupled systems, which feature integrated battery inverters and can therefore be combined with photovoltaic systems without the need for additional PV inverters. As such, they are perfectly suited to new installations as well as retrofit projects. The smart energy management system also ensures optimal use of self-produced solar energy and is designed to significantly increase domestic solar power use. With the VARTA.wall, the Company presented a stateof-the-art system based on round cell technology in 2022, which is extremely flat and space-saving and benefits from a small installation depth of around only 10 centimetres. The DC-coupled VARTA.wall storage system is set to be launched on the market with capacities of 10 to 20 kWh and is therefore geared towards the particular capacity requirements of individual customers. In addition, the modular stacking design facilitates a subsequent storage capacity expansion in order to ensure sufficient capacity even if the energy demand increases in the future. With this design, VARTA is aiming for an installation in under 30 minutes, which means installers would save a significant amount of time in comparison with existing products. In addition, compatibility with various market-leading inverter manufacturers facilitates the use of the VARTA.wall for both new installations and pre-installed PV systems.

Other

The "Other" segment includes the business units "Lithium-Ion Battery Packs" and "Lithium-Ion Large Cells". The Group can call on extensive industry experience in the construction of high-performance, safe and needs-based lithium-ion battery packs within the Lithium-Ion Battery Packs business segment – for medical technology, robotics, connectivity, household and telecommunications applications. The product portfolio ranges from fully customer-specific battery packs all the way through to fully configured standard batteries that can be used immediately. With the Lithium-Ion Large Cells division, VARTA is planning to offer large lithium-ion round cells for automotive (V4Drive) and non-automotive (RoundPower) applications. Preparations for the Company's entry into the e-mobility business are focused on the V4Drive large-format lithium-ion round cells. An initial small scale production line is supplying up to 10,000 round cells per week, which are already being used in the pre-series production for an OEM customer. In the non-automotive business, the focus with RoundPower is on all fields of application outside of classic e-mobility. This includes, for example, industrial vehicles, power tools, home and garden applications, e-bikes and various other potential application areas. However, at present, no sales are being generated here.

Business development in the first three month of 2023

VARTA AG meets the challenges in a difficult market environment

Macroeconomic aspects as consequences of the global crises and reduced customer orders continue to weigh on results.
Q1 revenue € 164.2 million (Q1 2022: € 185.3 million), Q1 adjusted EBITDA € -2.0 million (Q1 2022: € 38.1 million).
Energy Storage Systems increases revenue by a factor of 2.7 and becomes the second largest segment. High order backlog until the 4th quarter of 2023 ensures high predictability for Energy Storage Systems' sales potential in 2023.
The development of the Energy Storage segment together with an easing of energy and raw material prices and the restructuring that is underway will, in the opinion of the management, lead to a stabilisation of the annual result.
Forecast for financial year 2023 unchanged: Revenue € 820 870 million, adjusted EBITDA to be at least in the order of the previous year.

VARTA AG stands by its assessment for the 2023 financial year despite the ongoing global challenges. The reasons for this are the continuing high order backlog for energy storage systems and the resulting increase in customer demand in the wake of the energy transition, the significant fall in energy and raw material prices observed since autumn 2022 and the successive adjustment of product prices over the course of the year. According to the company's assessment, these factors will ensure an improvement in the margin picture. In addition, the Executive Board of VARTA AG is convinced that it will return to profitability with the adopted restructuring programme, the successfully implemented capital increase and targeted investments in growth markets.

Like all companies producing in Europe, the consequences of the global crises continue to burden the business of the Ellwangen-based technology company in the first three months of the 2023 financial year. Stock purchases by private households in the previous year are one of the consequences of the global crises, as is the current lower market demand from important customer groups. The decline in demand in the Lithium-Ion CoinPower segment is also related to the significantly lower demand from a single major customer.

In the first three months of the 2023 financial year, the VARTA AG Group's revenue fell by 11.4% year-on-year from € 185.3 million to € 164.2 million. Adjusted EBITDA fell from € 38.1 million in the previous year to € -2.0 million. For the 2023 financial year, VARTA AG's Executive Board continues to expect sales of between € 820 million and € 870 million and anticipates adjusted EBITDA in 2023 to be at least on a par with the previous year.

Dr Markus Hackstein, Speaker of the Executive Board of VARTA AG: "2023 is a year of change for VARTA AG. The restrained customer demand in the majority of the segments requires a very strict savings course. We are currently implementing the measures of our restructuring programme. Unfortunately, this also means painful cuts in personnel. Our customers' business is generally focused on the second half of the year, with only the home storage business running evenly strong throughout the year. In the second half of

2023, we expect higher utilisation of our production capacity for our lithium-ion cells, but also in the Consumer Batteries segment, due to our customers' forecasts."

The restructuring programme decided in March includes cost savings in all areas and reductions in working capital, especially through a reduction in inventories. Savings in human resources amount to around 800 positions worldwide. More than half of these will come from planned departures and fluctuation. Another roughly 240 jobs will be cut at the German locations this year, and about 150 more jobs are to be relocated abroad next year. Talks with employee representatives are already underway.

1. Development of Financial Position and Financial Performance

1.1. Financial Performance

Consolidated income statement for the period 1 January 2023 to 31 March 2023 (unaudited) VARTA Aktiengesellschaft, Ellwangen (Jagst)

(€ k)	31 March 2023	31 March 2022
Sales revenue	164,225	185,291
Increase in finished and unfinished goods	19,966	32,398
Own work capitalized	6,441	2,669
Other operating income	5,085	20,368
Cost of materials	-103,204	-97,671
Personnel expenses	-63,450	-68,202
Other operating expenses	-36,653	-37,723
EBITDA	-7,590	37,130
Depreciation	-22,397	-25,446
Operating income (EBIT)	-29,987	11,684
Interest income	368	335
Interest expenses	-5,291	-1,478
Other financial income	880	258
Other financial expenses	-189	-778
Financial result	-4,232	-1,663
Earnings before taxes	-34,219	10,021
Income taxes	-3,570	-3,988
Group result	-37,789	6,033
Appropriation of loss (PY profit):
Shareholders of VARTA AG	-37,789	6,033

Revenue

In the first three months of financial year 2023, VARTA AG Group revenue fell by 11.4 % year on year from € 185.3 Mio. €m to € 164.2 Mio. €m. The reason for this is a slowdown in consumer behaviour owing to high inflation and the current economic landscape.

Revenue in the "Energy Storage Systems" segment rose from € 14.7 m to € 39.7 m, an increase of € 25.1 m. This pleasing development is due to the high demand for home storage solutions.

In the "Consumer Batteries" segment, revenue fell from € 82.2 m to € 74.9 m, which reflects a decline of € 7.3 m. This revenue drop is the result of a downturn in demand for household batteries.

Revenue in the "Micro Batteries" segment fell by € 9.0 m from € 43.3 m to € 34.2 m. The economic slowdown has led to a decline in demand that has impacted business with rechargeable hearing aid batteries in particular, as well as zinc-air batteries to a lesser extent.

Revenue in the "Li-Ion CoinPower" segment was down by € 31.9 m, falling from € 34.6 m to € 2.7 m in the process. The main driver in this respect is the fact that one of our largest customers took significantly lower volumes.

Expenses and other operating income

In the first three months of the year, the cost of materials amounted to € 103.2 m compared with € 97.7 m in the same period of the previous year. This equates to an increase of 5.7 %. The cost of materials ratio in relation to total output (sales revenue plus increase in finished and unfinished goods) rose from 44.9 % to 56.0 %. The rise in the cost of materials ratio is primarily the result of increased prices for raw materials and changes in the product mix. The sharp rise in raw material prices did not have a significant impact until the second quarter of 2022. The Company has already initiated measures with the aim of bringing the cost of materials ratio back down.

Personnel expenses declined by 7.0% from € 68.2 m to € 63.5 m. This development can be attributed to the personnel measures implemented, such as the short-time work in Nördlingen and the non-extension of limited employment contracts, in addition to general fluctuations in staff turnover.

Other operating expenses fell by a total of 2.8 % from € 37.7 m to € 36.7 m. On account of short-time work and falling revenue, the expenses for energy fell by € 1.5 m, while those for outward freight and customs duties declined by € 0.6 m. Miscellaneous other operating expenses fell by € 2.6 m, mainly due to a non-recurring effect in the previous year. Conversely, expenses for legal, auditing and consulting fees increased by € 4.0 m, mainly in connection with the restructuring concept. Furthermore, expenses for warranties increased by € 1.7 m.

Other operating income declined by € 15.3 m from € 20.4 m in the first three months of 2022 to € 5.1 m as at the end of the first quarter of 2023. This decline is primarily the result of reduced income from subsidies and public grants, which was down as expected by € 16.1 m in the first three months of 2023.

EBITDA

In comparison with the same period of the previous year, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) declined sharply, falling from € 37.1 m to € -7.6 m in the process. This was mainly due to the negative factors described above and the significantly more restrained development of sales revenue by comparison with the same period of the previous year.

Adjusted EBITDA

Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation, adjusted for extraordinary effects) represents a sustainable earnings indicator for the Group. At the same time, adjusted EBITDA is the appropriate control parameter for the Executive Board to assess the operating earnings capacity of the Group and the five segments. The non-cash expenses for share-based remuneration payments and expenses linked to the restructuring plan were adjusted as extraordinary effects. The table below shows the reconciliation from EBITDA to adjusted EBITDA:

(€ k)	31 March 2023	31 March 2022
EBITDA	-7,590	37,130
Expenses from share-based remuneration	1	4
Expenses for M&A transactions	0	940
Restructuring costs VARTA AG Group	5,579	0
adjusted EBITDA	-2,010	38,074

The restructuring concept resulted in additional expenses. These have been identified as an extraordinary effect and are to be adjusted this year.

Operating result (EBIT)

At € -30.0 m, the operating result is significantly below the previous year (€ 11.7 m). The main effect results from the operating business as well as the negative influencing factors outlined previously.

Financial result

The financial result deteriorated in the reporting period from € -1.7 m in 2022 to € -4.2 m in 2023. This is primarily due to the growth in interest expenses, which rose by € 3.8 m from € 1.5 m to € 5.3 m, on account of increased borrowing. This was due to the increase in the volume of debt financing and the rise in variable interest rates compared with the same period of the previous year.

Taxes

As at 31 March 2023, there was a tax expense of € 3.6 m on the back of deferred tax liabilities that arose due to temporary differences and the expected actual tax expenses as a result of the positive earnings situation of the Consumer companies.

Group result

Due to the reasons outlined above, at € -37.8 m (2022: € 6.0 m), the group result was well down on the value recorded in the prior-year period.

1.2 Financial position

Consolidated balance sheet as at 31 March 2023 (€ k)	31 MARCH 2023	31 DECEMBER 2022
ASSETS
Non-current assets	746,666	749,220
Current assets	485,977	509,234
Total assets	1,232,643	1,258,454

(€ k)	31 MARCH 2023	31 DECEMBER 2022
EQUITY AND LIABILITIES
Equity	251,762	239,465
Total liabilities	980,881	1,018,989
Non-current liabilities	197,430	196,035
Current liabilities	783,451	822,954
Total equity and liabilities	1,232,643	1,258,454

Non-current assets

Non-current assets fell by € 3.0 m from € 749.2 m in 2022 to € 746.7 m. This decrease is mainly the result of the decline in deferred tax assets from € 19.7 m to € 10.1 m as at 31 March 2023. Intangible assets developed in the opposite direction, rising from € 99.6 m to € 104.1 m. Capitalised development costs were crucial to this development.

Current assets

Current assets decreased by € 23.3 m in comparison with 31 December 2022, falling from € 509.2 m to € 486.0 m as at 31 March 2023. This change is due to the increase in inventories by € 21.2 m, as well as the reduction in tax refund claims by € 8.0 m and in cash and cash equivalents by € 30.8 m. Trade receivables also fell by € 6.2 m compared to the end of 2022.

Equity/equity ratio

Equity increased from € 239.5 m as at 31 December 2022 to € 251.8 m as at 31 March 2023. The equity ratio amounted to 20.4 % as at the reporting date (31 December 2022: 19.0%). The increase here is mainly due to the capital increase of € 50.7 m. The negative consolidated result of € -37.8 m trended in the opposite direction.

Non-current liabilities

Non-current liabilities rose by € 0.9 m from € 196.0 m as at 31 December 2022 to € 197.4 m as at 31 March 2023. The main factor behind this development is the decline in deferred tax liability claims from € 16.9 m to € 9.2 m. Conversely, other non-current liabilities in connection with the capitalised development costs increased from € 27.4 m to € 31.3 m. Furthermore, long-term lease liabilities grew by € 3.8 m in comparison with 31 December 2022.

Current liabilities

Current liabilities fell from € 823.0 m to € 783.5 m as at 31 March 2023. This development was essentially due to the reduction of € 38.5 m in trade payables compared with 31 December 2022. Moreover, tax liabilities declined by € 12.4 m and deferred liabilities were down € 12.2 m versus 31 December 2022. The reduction in deferred liabilities is mainly due to deferred customer bonuses of € 15.4 m. Other financial liabilities developed in the opposite direction, rising by € 25.5 m from € 497.0 m to € 522.5 m in the process.

Net Working Capital

Net working capital rose from € 162.7 m as at year-end 2022 to € 232.4 m as at 31 March 2023. This corresponds to growth of € 69.8 m year on year. The net working capital ratio is calculated in relation to the revenue of the last three months extrapolated to one year and stands at 35.4 % as at 31 March 2023 (31 December 2022: 17.1 %). The change in the net working capital ratio by 18.3 percentage points is mainly due to the restrained development of sales revenue in the last three months, increased inventories and the decline in receivables.

31 March 2023	31 March 2022
	73,107
	22,092
	-45,945
	228,397
	204,544
-211	261
77,917	277,912
	108,709 -65,885 -31,222 66,526 -30,581

Cash flow from operating activities amounted to €-65.9 m as at 31 March 2023 and therefore stands € 88.0 m below the value recorded in the same period of the prior year.

The reason for the decline in cash flow from operating activities is the drop in earnings of € 44.2 m year on year and the reduction in trade receivables due to the weaker fourth quarter, which resulted in a decline of € 47.5 m.

Cash flow from investment activities moved from € -45.9 m in the prior-year period to € -31.2 m in the first quarter of 2023. Payment outflows in connection with investments in intangible assets and property, plant and equipment (CAPEX) are lower than in the same period of the previous year and amount to € 24.9 m (2022: € 30.8 m). They were adjusted to the current business development.

Cash flow from financing activities fell from € 228.4 m in the first three months of 2022 to € 66.5 m in the period under review here. The positive cash flow in the first quarter of 2023 results from the capital increase of € 50.7 m. In the same period of the previous year, the high cash inflow resulted from the raising of the promissory note loan in the amount of € 250.0 m.

As at the reporting date of 31 March 2023, cash and cash equivalents totalled € 77.9 m (2022: € 277.9 m). As at the balance sheet date, existing credit lines had been drawn down in full.

2. Financial performance Segments

The company is divided into the segments "Micro Batteries", "Lithium-Ion CoinPower", "Consumer Batteries", "Energy Storage Systems" and "Other".

Many of VARTA's customers around the world are facing major challenges. The war in Ukraine, which has resulted in cost increases for raw materials and energy prices, in addition to the downturn in consumer behaviour as a result of high inflation, are leading to reduced demand for our batteries in the "Consumer Batteries", "Micro Batteries" and "Other" segments. However, the "Energy Storage Systems" segment is clearly bucking the general trend, which is firstly due to the high order volume generated in 2022 and secondly to high levels of demand for domestic energy storage solutions.