Norbit ASA (NORBT) Earnings Call Transcript & Summary

[Foreign Language]

So with respect for some of our international investors, we'll conduct the presentation in the most common language in the world, bad spoken English. Thank you for taking the time. Norbit has once again delivered a record quarter. Being a growth company, we need to do that continuously. The second quarter of 2023 ended at NOK 418 million in revenues, with an EBITDA margin of 30% giving NOK 127 million. For the first half of the year, we have delivered NOK 795 million in revenues which is more than full year of 2021, so shows the momentum in the growth. And with a margin of nearly 30% for the half year, we have an EBITDA of NOK 231 million. Going into the different segments. So all 3 segments has delivered growth in the Ocean segment, it's been a continued strong demand for our multibeam sonars. So we've delivered NOK 152 million in revenues with an EBITDA margin of 38%, giving NOK 57 million. And for the first half, a total of NOK 288 million and 37% EBITDA margin. So as the last quarters, we have given a split on revenues to give better insight as the ones following us closely. Now we have 2 sonar families. It's the iWBMSh and the WINGHEAD platform, both continue to grow. There is some quarterly fluctuation and some regional fluctuations, but summing it all together, there is a growth on both platforms year-by-year. During the quarter, we have strengthened our U.S. setup by acquiring our North American distributor, Seahorse Geomatics, adding lots of domain knowledge and experience to the team. We see that there is a potential for more growth in the U.S. than we have yielded lately. So in addition to acquiring Seahorse, we have been able to recruit some very well-experienced sales colleagues and really strengthening the setup in Americas. We believe this will be a very good addition. In this Ocean segment, we have 2 very strong drivers, which we expect would support continued further growth, one being in renewable energy. When building a new renewable energy like a wind farm, you need to map the sea floor to plan for the installation. When this is installed, you have more critical infrastructure. With the geopolitical unrest we see in the world currently, we have experienced that critical infrastructure under water should be better monitored than we have done up till today. We have a growing prospect list on surveillance applications. The market is maturing slowly. We need to be patient, but we believe this to be a strong contributor to our future continued growth. Going into connectivity. It's been a stellar quarter for connectivity. Our organization has demonstrated the scalability in this segment. with some very good order intake with quick turnaround times. We've been able to deliver NOK 172 million in revenues with an EBITDA of NOK 65 million. for the first half year. We're north of NOK 300 million in revenues and 36% EBITDA margin, which is strong growth and strong margin improvement from last year. Also sharing with you a revenue split in this segment, where we see that our strategy of migrating the business onboard unit business or toll tag business to move away from tender markets going more into business to business, really going in to be a technology partner of selected clients where we can make a broader offering than just competing on supplying to our lowest possible price. So this has been quite successful. So the onboard unit business represents NOK 215 million out of the NOK 308 million for the first half year, and the margins is where they should be. What's worth mentioning, looking into the future for connectivity, I think is we have -- during the last 12, 18 months, we have been awarded very attractive contracts. And one of the things -- so the contracts themselves are good because they give us revenues and margins, but also some of them are very important references, qualifying us to take on larger tasks. So we have the headline from niche to notable. And I think this is very relevant now in with sort of -- with new references, qualify to take on larger tasks. In our Product Innovation and Realization segment, we do as some of you might know, we do some contract manufacturing and R&D services to utilize on spare capacity in the factories and also to allow our engineers to get new insight and knowledge in new domains that could be valuable for us in the future. The revenues, if you compare with last quarter, it would say that it's a decrease of 9%. But if you adjust for customer reimbursement, which is extraordinary material cost we've had due to supply constraints in the component market, which our customers has reimbursed and directly on the expense without any margin, this was NOK 47 million first half 2022, and this is down to NOK 7 million. So if you adjust for that, the underlying revenue growth is 26%. The EBITDA margin in the quarter is very high for this segment. It's a 22% comparing to 10% in Q2 2022. In a more long perspective, we would expect this margin to be on at different levels. So it's a very high margin in this quarter. But we are happy to collect the margin when we can. But in a long perspective, the highest margins would remain in Oceans and Connectivity and a lower margin in Product Innovation and Realization. Yes. So some news also in the Product Innovation and Realization, we see that this trend of industrial customers being eager to manufacture in Europe and in Norway is continuing. So made in Europe, made in Norway is a clear trend. And a recent contract 1, NOK 80 million of manufacturing, some electronics for data collection and transmission to our clients' cloud solution is an example of that. So NOK 80 million contract to be delivered over 30 months. So it's a very good contract for the PIR segment. With that being said, I'll leave the floor to Per Kristian to give you some more flavor on the financials.

Thank you, Per Jorgen. I will spend some minutes walking you through the financial highlights of the quarter. Revenues in the second quarter amounted to NOK 417.6 million, representing an increase of 32% from the corresponding period of last year. Adjusting for the effect of customer reimbursement of extraordinary material costs, which Per Jorgen mentioned, we invoiced certain customers in the PIR segment without the margin. The underlying growth for the group was 47%. Of this, 47%, approximately 15% was driven by currency. EBITDA for the quarter was NOK 127.2 million compared to NOK 77.7 million in the second quarter of 2022. This represents a margin of 30% compared to 25% in the same period of last year. Operating profit was NOK 100.6 million, while net finance expenses were negative NOK 11.3 million. Of that number, NOK 6.8 million relates to net interest expenses. Tax expenses were NOK 21 million, while net income for the period was NOK 68.4 million. In the second quarter, all 3 business segments delivered improved EBITDA compared to the corresponding quarter of last year. Segment Oceans reported a 16% increase in revenues on the back of strong sonar sales and favorable currency development in euro and dollar versus Norwegian Krone. Gross margin was 68% in the quarter, an increase of 4 percentage points from the corresponding period of last year, largely due to lower share of sales on commissions. The increase in gross profit was partly offset by an increase in operating expenses, primarily due to a strengthening of the organization. As Per Jorgen mentioned in Americas, in particular. In Connectivity, revenues more than doubled on the back of strong onboard unit sales, supported by NOK 150 million contract won earlier in the year. Gross profit increased largely due to revenue effects with the gross margin down 9 percentage points on revenue mix with DSRC sales representing an increasing share of the total revenues in the quarter. The EBITDA ended at NOK 65 million, representing a margin of 38%. In segment PIR, reported revenues were down 9% year-over-year. However, adjusting for customer reimbursements, underlying revenue growth was 26%, driven by higher sales of contract manufacturing. Gross margin increased 6 percentage points. Adjusting for the reimbursement effects, which combined with underlying revenue growth led to an increase in EBITDA to NOK 23 million in the quarter. Next, balance sheet and financial position. Property, plant and equipment increased NOK 2.9 million in the quarter following investments in machinery and equipment, partly offset by depreciation. Intangible assets rose NOK 18.9 million to NOK 297.7 million. Of that increase, NOK 17.8 million relates to additions following the acquisition of Seahorse. Inventories increased NOK 51.8 million in the quarter, of which inventory relating to the Seahorse acquisition explained NOK 6.2 million. Trade receivables increased NOK 26.6 million on revenue growth quarter-over-quarter and sales skewed towards the back end of the quarter. Trade payables was NOK 155.2 million at the end of the quarter, down NOK 3.6 million from the end of the prior quarter. Our net interest-bearing debt stood at NOK 235.9 million at the end of June, an increase of NOK 18.5 million from the end of the first quarter. And our equity ratio was 52% at the end of June. Next, our working capital position. In the second quarter, our net working capital ratio was 26.7% of quarterly revenues, a decrease from 27.5% in the corresponding quarter of 2022. Inventories have increased last year due to revenue growth and our strategy of maintaining a safe stock of components to safeguard deliveries and seize opportunities in what has been a challenging market for supply of components. With the supply market for components now improving, we see potential both to optimize the composition of the inventory as well as the level itself based on current activity. Although this will take some time to realize, we believe the optimization will lead to further improvement in the working capital efficiency going forward. In the second quarter, our net interest-bearing debt-to-EBITDA ratio remained largely unchanged at 0.8x. Our balance sheet remains strong. We have a strong liquidity buffer of approximately NOK 496 million to support our organic growth ambitions, pursue strategic acquisitions as well as distribute dividends to our shareholders. Lastly, the cash flow for the quarter. Cash flow from operations was NOK 60 million, explained by an EBITDA of NOK 127.2 million, a net increase of NOK 50.5 million in working capital, NOK 11.3 million in net finance expenses and NOK 5.4 million in taxes paid. We invested NOK 31.5 million in the quarter, primarily explained by NOK 14.1 million in R&D investments, NOK 8.7 million investments in machinery and equipment and NOK 8.7 million in net cash flow from acquisition of Seahorse. For 2023, we reiterate the expectations of investing between NOK 60 million and NOK 70 million in R&D, primarily allocating capital to the Oceans and Connectivity segments for new product innovations. Investments in fixed assets are guided to between NOK 50 million and NOK 60 million this year, up from NOK 35 million to NOK 45 million previously. The main driver of this increase is the investments in the new production line to reduce capacity constraints as well as certain other investments to derisk operations. Cash outflow from financing activities negative NOK 18.7 million and is explained by NOK 41.6 million in dividends paid, partly offset by an increase in borrowings. Then I will give the floor back to Per Jorgen for the outlook section.

So looking into the future, I'd like to have a look on our long-term ambitions. So August 2021, we announced our 2024 ambition level, which was to deliver NOK 1.5 billion in revenues with an EBITDA higher than 25%. Today, we announced that we aim to reach this target already in 2023. That being said, we're now having a high sense of urgency of setting on new targets because we see that during first half this year, it's demonstrated the scalability again in Norbit. And if you look on the last 12 years, our average revenue growth in this period has been 30%. There is some strong drivers in these markets. So we look forward to come back on a later stage to announce new targets. On the more short-term outlook; in Oceans, we target to deliver growth in the third quarter compared to third quarter in 2022. In Connectivity, based on the strong order intake we have had we, give a revenue guidance for second half of this year in the range between NOK 230 million and NOK 250 million. As explained, we see a higher demand within contract manufacturing. We expect that to continue. And I'm happy to give a revenue guidance for second half in Product Innovation and Realization between NOK 210 million and NOK 220 million, implying 10% to 20% growth from second half 2022 adjusted for customer reimbursements. So with that, I leave it back to Peter, if there should be any questions.

Yes. There are several questions online. And I think I will just aggregate them into growth, the margins and to investments. And the first question goes to the key growth drivers within each segment for the company?

Yes. So we could start with Connectivity, where we see that tailoring technology to our clients and really being on the toes to make the technology and products be adapted in the look and feel that the clients prefer when they present this in their markets has been very successful. And if you look on drivers for the DSRC technology, we know that more and more countries rolls out satellite-based tolling, it's 6.3 million trucks in Europe. We expect countries in Europe to continue to collect the tolls. It's an effective way of financing roads. I expect that to continue to be strong. In the Ocean segment, generally, 70% of the globe is covered by water, 5% is explored. We need to explore more. The resources in the oceans will be extremely important for the future. More specifically, as already mentioned, renewable energy and the surveillance demand coming from the geopolitical unrest is strong drivers. And in the Product Innovation and Realization, we have this home shoring to Europe. The reindustrialization of Europe is a strong driver.

And just a follow-up on the Ocean segment that also have been asked on the call. It seems that you have taken a lot of market share within sonars over the last years, given your growth. Do you have any figures with regards to what is your market share within that market?

We haven't given any estimates on what's the total market. And maybe I'd like to rephrase this a bit. Our focus rather than focusing on taking market share of an established market. Our focus is to tailor solutions to open up a larger market. we tailor the solutions to open up for new use cases, allowing for professionals in the past, not having access to multibeam sonar technology to really get the access. So maybe our focus is a little bit different than just taking market share from the competition.

Okay. And secondly, on sonars, you have also talked a lot about critical infrastructure and surveillance of critical infrastructure today. And is it possible to say something about the market potential there as compared to, for example, what we have seen since you launched the WINGHEAD sonar?

I think as with all things we do in Norbit, all initiatives is regarded an element in continued growth there is not one element really meant to drive quadrupling. So it's very strong demand. It's a good driver, and we expect that to be a good contributor to our growth.

All right. And just then jump over to -- more talk about margins and priorities. There's a question here regarding how you kind of internally discuss how much money you used on R&D to kind of continue to innovate as compared to kind of the focus on margins? And then how you kind of balance that out internally given the importance of R&D in Norbit?

Yes. So what maybe could say to that is that if you look on the percentage of revenues, so the R&D investments as a percentage of revenues has gone down. But one thing that has gone up is customer contribution to finance our R&D. And for us, when working with market-driven innovations, it's important to see that we could have customer commitment to contribute to finance the R&D because that's a confirmation that this is something they really need. So maybe more important than the money coming. It's the sign of the commitment. So we continue to invest in R&D. We will continue to do that. And that's very important, but the focus on getting customers to co-invest is increasing.

Okay. And just to jump back to the sonar discussion again. Are you seeing kind of more concrete discussions with regards to securities sonars since kind of Ukraine war?

Yes. So the prospect list is growing.

And secondly, with regards to margins, you talked about -- or you mentioned at the end of the presentation that you have basically deliver 2024 in 2023, both on growth and margins. And I guess you might likely return to this in a further presentation with regards to outlook, but is there potential for further operational scalability in the business model as you see it today?

Well, I think there's always potential to increase efficiency in the business, I mean, by tuning and optimizing the business and the different segments. But if we look on the ambitions that we set out in 2021, we said on proprietary technology, we have an ambition to deliver more than 35% EBITDA margin. And I think this quarter, we're on track to see that. And in terms of -- so in terms of the technology that we own, I mean, we have a certain ambition level where we want to be. And obviously, there's potential to scale that and even fine-tune the margins. I think on the PIR segment, where we have 75% contract manufacturing, it's more difficult and challenging to extract much higher margins because the landscape is -- it's a totally different competitive landscape than what we see in the 2 other segments. So.

And also with regards to margins, obviously, you have taken market share. But can you also comment on how this has been relative to the competition and how you see kind of your competitive positioning has moved one or way or the other as compared to others? I guess it's mostly related to Oceans, I guess?

Yes. So I think we focus a lot on what kind of offerings we think the market would like to have. We focus more on that than focusing on the competitors. So trying to be ahead and innovate and tailor new solutions. I mean that's the main focus. So we haven't given any estimates on comparisons towards competitors. And also, I think the total global sonar market is enormously large. But Norbit addresses a couple of niches within that. So it's not so easy to get any good data on it. And several of the competitors would have a different product offering. So you cannot directly compare.

Okay. And just to jump over to cash flow. You talked about some working capital initiatives. Can you elaborate a little bit more on what type of initiatives you're talking about?

Well, I think as always with working capital, it's a continuous improvement, trying to optimize whatever can be optimized and I think in the receivables and a couple of years back, we took some steps by entering into a nonrecourse facility for that part. And that's continuously being updated as we move along. So I think right now, we're more focusing on making sure that we are optimizing the inventory and working towards the supplier and to make sure that everything is more balanced. And so as I mentioned in my presentation, I mean, obviously, the inventory has increased quite a lot over the last few years, but also due to the fact that we have -- well, we're targeting close to doubling our revenues since 2021. So I mean it's a natural effect of that. But I think, as always, when you come out of the phase over the last 2 years, we have with a very challenging component market and that starts to normalize, then it's time to start optimizing and see what whatever excess stock we can potentially divest and sell to make sure that we increase the efficiency even further. So I guess, the market sort of balances out and then there is not the same need to maintain the same level of security stock that we've been having over the last years.

All right. And with the new investments that you talked about in fixed assets today, is it possible to quantify how much capacity increase you get from those investments? Do you have enough capacity in 2024 with the investments that you have or are doing this year?

So I think it's fair to say that the utilization of our capacity has been quite good. But still, we have been running the factories mainly on 2 shifts. So there is some spare capacity in that. So the way we level this is that we try to have a normal of 2 shifts leaving some room for scalability. That's more cost efficient also than having continuously 3 shifts. And then there is some follow-up investments. And I think we're on track on -- as guided when it comes to the level on the investment.

All right. And then 2 final questions there, which goes to the outlook. The first one is related to the second half within Connectivity, which is lower compared to the first half. If you can give any explanation?

Yes. This is due to -- in the first half, we've had very high deliveries in the contract announced to one client within the insurance business on NOK 150 million, which was completed in the first half. So it was, I would say, extraordinary high in the first half. But still, if you compare with last year, second half will also be high but lower than first half.

Yes. And secondly or finally, do you have -- you talked about M&A as well. Do you have any concrete M&A targets or short list of names currently?

We continuously work on identifying and maturing acquisition targets. And our priorities remains that we mainly look for potential strategic add-ons, which fits into the segments where we have a strong platform in the market. So in the Connectivity and in the Oceans domain. And when there is something concrete, we will announce it.

All right. Perfect. Is there any questions from the audience here?

My name is [indiscernible]. I wonder if you could comment on the employment costs? Because it seems that it increased by 60%, is that predominant due to new hiring or increased benefits for employees?

Well, look, if you go back one year and you look at the main drivers of that increase. I mean, it's different components, obviously, but most of that relates to that. We are hiring new people in order to essentially support the growth period that we've been into and hopefully will also continue to have in the future. So most of that increase relates to that. And in addition, we've made some certain provisions for bonuses. And then we've obviously -- we've taken some provisions for what will be the salary adjustments for this year. So I think all combined, that sort of gives some explanations for -- given an explanation for that increase.

Perfect. Then I think we are done here, and I think we are done on the web as well. So I don't know if you want to say any final words at the end?

Yes. So maybe the final slide speaks for itself. That, "Technology is part of the solution." And Norbit is ready to contribute.

Perfect. Thank you very much.