Vow ASA (VOW) Earnings Call Transcript & Summary

Welcome to our third quarter presentation and good morning to you all. Today, I'm also joined with Erik Magelssen, our CFO; and also our Chief Operating and Deputy CEO Jonny Hansen that could also sort of participate in the Q&A session afterwards. But in this presentation, we'll go through our financial performance. But I will open up with some sort of short introduction on the VOW operation. VOW is first and foremost a technology provider and we deliver technology in through 4 units Scanship, C.H. Evensen, ETIA, and Ascodero. We have been for many years a market leader with clean tech or technologies to purify wastewater and process waste onboard cruise ships. We maintain a strong position in cruise and the forward outlook just maintain sort of a market leader position in many years to come. We provide technology to help industries towards fossil-free future. That means that we today deliver technologies to help high temperature industries to electrify their processes, hybrid solutions where they could go from natural gas or to renewable gas. We have core in our technology is also a pyrolysis technology applicable for many different industry applications where we are converting biomass and waste into energy, into renewable energy and into carbon products that replaces fossil carbon. One of our -- I would say one of our strongest value propositions that we come to market with is that we have delivered advanced technologies for many years. We have deployed technology for many years, we know how to do the, I would say deploy technology on complex industry applications and now more and more larger industry capacities. That's why we also acquired Evensen to get technology that are sort of have a larger capacity to meet sort of larger industry demands going forward. We have a strong backlog of orders and a large installed base that provides recurring business for us as well. Some highlights being a technology provider, we have a large patent portfolio of 117 patents today. We have a portfolio of our IP that sort of a portfolio of 35 technology applications we have developed over the years that we are now delivering to several markets. We have a large installed base and with also the acquisition of Evensen that increased substantially and with now more than 4,450 systems out there and that sort of we are building that installed base moving forward. Increasing our team, we are 244 people as we speak with operations in 6 countries. Headquartered in Norway, we are at 3 locations in Norway. We are in France on 2 locations. We are now in Poland, folding up all whatever we do in Poland, we are also increasing our staff in Poland. I'm going to talk more about that in the presentation. And we are in U.S., Canada, and Italy. And on sort of the strong backlog of orders we have more than 144 systems that we are delivering to market in coming years. On sort of HSE we have zero sort of serious incidents in our business and a very low sick leave at 2.2% in latest period. Of course our net zero ambitions and that we are bringing more women into the organization, more girl power, it's definitely needed. Okay. We -- the first 9 months of this year, key takeaways, we are doubling our revenues compared to last year, the same period. So it's actually we continue to deliver some of our best ever -- we delivered our first half year best ever and we deliver also compared to last year, doubling our revenues. And we are increasing our EBITDA 78.4%, 13.2% EBITDA margin and that's up from NOK 28 million last year, same period. And we increased sort of our land base revenues are fourfold. Aftersales is back to pre-COVID levels and projects continued steady course. I had sort of -- I'm going to talk about these different business areas in the following slides. Further growth is supported by a continued high backlog and a solid financial position. And we are now developing projects together with clients. We're building a pipeline and I will speak more about that activity. Looking at quarter by quarter, the third quarter is coming in at sort of NOK 194 million, NOK 82 million of that is cruise projects, NOK 32 million of those are aftersales and NOK 79 million landbased. And you see the year on year development from the third quarter '21 where we delivered NOK 98 million. We deliver sort of on 12.9% EBITDA margins in the third quarter NOK 25.1 million and our backlog is continuing being strong. But just looking at the trend, last 12 months rolling you see the underlying growth of the business, how in the period we're standing now looking 12 months back, you see the cruise projects are now at the level of NOK 333 million on a yearly basis, aftersales is NOK 101 million. And let me remind you aftersales, pre-COVID was NOK 125 million, almost NOK 130 million. So when there was no COVID and that's actually returning and you see landbased on a 12-month rolling as we see it now it's NOK 340 million. And looking at the margin in the same period would have been 12.2% and NOK 91 million, just looking at sort of the trends underlying the growth trend of the business. Okay. Looking at each business segments we're reporting, reporting landbased in one segment, we're reporting cruise project in other and then the third is the aftersales. This is just for the third quarter, isolated third quarter where landbased is 41% of our revenues, cruise is 42% and aftersales is 17% today. Historically that has been 1/3 of our business and of course we are working to increase that. And of course we're getting sort of a headwind with when the cruise is coming back to the sort of at the pre-COVID levels. But EBITDA margins 15.1% in the third quarter, landbased 22% remain strong, very strong in cruise, and aftersales is picking up as revenue comes back, but at the moment 11.2%. But that's just the fact of lower revenues compared to the fixed cost of that business segment. Okay. Looking at landbased year-to-date, NOK 262 million in that business area, share of total 44% of our revenues in that business area. Backlog is 400 to Vow Green Metals in Norway, the following projects, so that's sort of a large part of their revenue in this period. And we are doing the engineering stage of the U.S. contract that we announced in June. We got sort of a separate part of that contract was the engineering. So that's what we have been very busy in this period to do the engineering for that project pending the permit for the full contract. And in this period, we are actually developing many projects. Now despite the period we're in, challenging times I would say, despite the fact that there's a lot of uncertainty on energy availability, energy prices, uncertainty on cost of capital moving forward, still we are developing many large projects within several industry verticals. And what's actually the trend we see is our projects are becoming larger and larger. Going back 1.5, 2 years ago, the cruise projects were so the large contracts that we had, we had sort of landbased contract in the range between EUR 3 million and EUR 5 million. Now these contracts are tenfold, there's much larger contracts in the pipeline that we're now building. We of course supported by new incentives and regulations in U.S., the Inflation Reduction Act, we see more activity in U.S. And we are sort of building more people. We're also setting up an office in Oregon to handle sort of increased demand we definitely see in U.S. For isolated for the period NOK 78.9 million third quarter and EBITDA margin of 15.1%. So this business area is definitely progressing very nicely. And on the right side you see a picture from -- this is actually Vow Green Metals team at our test facility. And there's a lot of interest on sort of developing that biocarbon for the metallurgical industry. And I have a separate slide to talk about not only what we are doing together with Vow Green Metals, but also several other large players within the metallurgic industry. Moving towards cruise. This is year-to-date NOK 250 million, 42%, a strong EBITDA margin of 23.4% for the year-to-date, NOK 839 million of order, firm orders in the backlog. And on the right side, you see Icon of the Seas. This is one of our 40 cruise projects, cruise ships, newbuilds that is coming to market from this year onwards. Icon will carry up to 10,000 people onboard. And it was actually announced in the media last week. And one of the features they announced is that they had sort of they are sort of implementing a lot of energy efficiency systems. And one of those energy efficiencies was that waste onboard are converted into energy with Scanship and VOW technology, fantastic. So it's like the cruise, the Royal Caribbean is using that to brand that ship and to brand their focus on environmental sustainability. We have, for the third quarter isolated, revenues of NOK 82.4 million, that's stable compared to the last period. The last -- the second and the first quarter, EBITDA margin at 22% just for the third quarter. And the difference between the margin in the third quarter and year-to-date is could be the different projects we have, but in general, very high margins. We're very satisfied, I would say, with that margin level. It just demonstrates that we're able to deliver technology, advanced technology to these projects with good margins. Aftersales, lifecycle services, you see the -- we're out of the valley. You see the illustration on the right side, you see pre-COVID numbers, NOK 33 million in the fourth quarter '19 and we are back third quarter '22 at NOK 32 million. And the valley was the COVID. Another interesting illustration here is the newbuilds coming to market being delivered from shipyards '22, '23 on the way, from even after '29, you see the number of ships that are entering service with our technology onboard. Next year, there are 11 ships being put into service with our technology onboard. In that period, we had delivered technology last year and the year before. So there's sort of -- you can look -- when you look at those numbers, most of the revenue are 2 years before that number. But you see the optional contracts are that are sort of sister-ships of contracts, the earlier contracts, normally being converted into firm contracts. You see the buildup of -- or, let's say, the difference between the firm orders and the optionals in our backlog. And we are reporting both. We are reporting the firm and the optional contracts, taking us to NOK 2.2 billion in total. You see 81.6% year-to-date, NOK 32 million actually at the third quarter. And the 81.6% year-to-date is lower because of we just have to remember that the first quarter was still restrictions in the cruise industry and the pandemic was still there. But the second quarter, the third quarter and it's looking very good moving forward in this business area. And we are bringing more landbased into this business area going forward. So we have ambitions to grow this part of our business. It's a very important part of our business because it's all about making sure that our clients are able to operate our systems producing energy, being in compliance with environmental regulations. So it's from the aspect of having or taking a market leader position this business area needs to be good and that's why it's important to focus on it. Okay. Market and outlook, I have been sort of talking about the main drivers. And as said in the introduction that there are, of course, there are challenging times, but we still see that regulations, governmental policies are and will drive demand for our technologies. More and more focus on circular economy, industry, how do the industry react these days. With the fact that what -- are the industry able now to operate through the winter? Or will they have to reduce their production capacity? What will be the price of the energy going forward? These are the sort of the big challenges for industry. But definitely, what's good here is that we can provide an alternative, we can actually produce energy for this industry by using renewable resources as biomass and waste. We have -- I've been talking many times about sort of Philip Morris International in Switzerland, talking about sort of the circular carbon biocarbon project in Hamburg. Those projects are energy -- we're delivering technology that produces energy. As enabling those industries to be self-sufficient, that matters. And it's a way for them to control the cost of energy going forward as well. That means that's why we have a very strong value proposition these days. We -- and I'm repeating that many times, the ambition of EU and ambitious now we see in U.S. is to reduce fossil-based energy to go towards renewable energy. It's a big transition. But we see, for example, our REPowerEU, the next 5 years, EU is going to incentivize investments to increase the content of renewable gas. And that means that, for example, within the biogas area in Europe, their ambition is to increase the capacity, the production of renewable energy with sort of 20x compared to the level of what they're producing today. That market, we are working to become more and more relevant for. So the drivers are in place, but of course, there are difficult times now. But despite that fact, we are developing in this period, large projects with clients. We're building pipeline. So we are -- I would say it's fair to say that we are currently focusing on 4 areas. One is the green metals. We did sort of -- we established Vow Green Metals. We made sort of a large client for VOW. They turned and had order process equipment from us for EUR 22 million last year. But not only is Vow Green Metals in this space, we announced earlier this year a project, an LOI for a project that would be 5x larger than the following projects. We are continuing to develop that project with that large player. And this day, this week, we have another large player in the metallurgy industries at the table discussing new projects. And those projects are huge. So we see that -- and that sort of -- the trend we see, the projects are becoming larger and larger because we're moving into an industry, there is a huge demand for renewable carbon. And we -- when we announced last year, when we announced the Vow Green Metals, we announced that we're building the largest biocarbon production to date, we sent out a strong signal, a strong message. And this month after, we had one of the large players at the table, discussing a project that was 5x larger. I would say that talking about [ Fulin ], it also made the Americans interested. So the largest to-date landbased we announced in June for this energy company in U.S. was a result of them seeing that we were moving on this. And also, when we announced that we were -- we did acquire Evensen to scale up our technology, to get larger capacities, we sent out a strong signal. So it's a very interesting period when we are now seeing that we have these players at the table and are developing larger projects. And this is sort of the pipeline we're building and it's giving us the ambition that we -- to grow this business going forward. Green Metals for sure. The next is the cruise industry, market-leading position, but what we're doing now and as I said, with the Icon, not only are we delivering over the years technologies to purify wastewater to process all the food waste onboard, all the garbage. Recycling for landing, but also processing through of the residues for the wastewater and the biogenic material, incinerating that. But what we have done in latest years is that we have developed the technology to convert that into energy onboard, meeting the cruise industry's ambition to reduce their consumption of fossil-based energy into something that is climate-neutral. That's what they did, decided within [indiscernible] to move along those lines, and we are now developing projects with the cruise industry to do that same for the other ship-owners. And what that brings is actually, for us, a growth within cruise. We have a strong position. Of course, there's these number of cruise ships that will be built. But if you look at it, we have now the capability to also deploy this type of technology onboard ships. And that's not cannibalism. It's that we're just bringing more technology onboard. Projects are becoming larger. And the cruise industry is actually seeing us as sort of a very good partner in deploying that type of technology. And what they have been seeing now that in the latest years is what we have communicated on the landbased side. The project we have entered into the landbased side, they see that we are now capable of doing that onboard cruise ships as well. Third one is the biogas or renewable gas, energy production as an alternative to natural gas, as an alternative to help also industry as we do in C.H. Evensen to help them optimize existing systems to use less energy, to electrify processes, but also to have hybrid solutions to not only have to run on natural gas, but also on renewable gas. And some of the projects actually now within the -- it's actually interesting to see because Evensen have been delivering systems in the galvanizing industry. And then for a while, they have been sort of producing -- electrifying these processes. But what actually the galvanizing industry is looking at now is that can we sort of do pyrolysis on waste streams, produce gas from those waste streams to power the galvanizing ovens and furnaces. And that's sort of a very good synergy because suddenly we have a client there as well. And -- but it's also the same we do within Green Metals. We are focused to produce biocarbon, but we're producing gas that is usable for other industries. So there are a lot of synergies in developing these projects. And biogas when Europe is really now moving forward, it will be huge investments within renewable gas, biogas. We as a company, we need to take a position here. That's why this is our focus area. And the third one is circular economy. We have been talking about plastic waste valorization. We have talked about the test facilities we have. We have talked about previously that we have been delivering technology to petroleum industry. But if you look at the ongoing Horizon project with Repsol on plastic to olefins, we're talking a lot about that. But what we definitely in this period see and that we are today developing is projects for clients within the end-of-life tires to convert end-of-life tires, tire ground leads into recycled carbon black. The tire industry is looking for that solution. It's high on their agenda. And [indiscernible] oils as a replacement for petroleum products in that industry and the gas that we're producing from that process. So remember that those are the sort of the 4 focus areas that this business is now very much concentrating in this period and to build sort of our forward pipeline. So as a summary, we are growing the business, doubling our revenues compared to last year. We have a solid backlog that provides visibility. We have a strong financial position and we've been generating cash moving forward. So we are not financing our growth in this period. We are sort of providing -- we are generating cash. And this is also supporting moving forward, even though we haven't signed up any contracts lately, but remember the large contract we signed up the summer, the biggest so far. And -- but the pipeline is definitely growing. So if you look at sort of the -- in the short run, we are also saying that we have doubled our revenues year-to-date compared to last year. And we are expecting to have sort of revenues in the fourth quarter in line with what we are delivering now in the third quarter. And we're now -- that means that we are also working with projects where we think we can conclude now with contract and move forward now in the fourth quarter. So on the picture on the right side, before we open up for Q&A. This is actually an inspection, an FAT we're doing in France with both our French team and our team from Tonsberg for shipments going to clients in Norway and in Spain. So this is sort of part of a multistep pyrolysis reactor. It's the same configuration we have. We have 6 of those lines now for the first step of the following projects. So with that, we can open up for some Q&A.

Gard from Pareto. So I want to just start asking a question on the Vow Green Metals delivery. How much revenue has been booked there so far, given that Vow Green Metals also had their issues regarding the facility and the location there? How far along the way are you on that?

We have it actually sort of -- we have actually never done a split on our revenue reported for a period, how much projects -- which type of project we have in that. But there is a substantial part of that revenue is Vow Green Metals. But for us, we are delivering technology and producing and delivering technology. So independently of, let's say, when you start off the system, most of our cost occurred to a project delivering to Vow Green Metals or anybody else will be in the period we are producing until we basically are shipping the technology or the systems. Was that a…

Yes. No, it was just since that order in itself is the largest one you've been delivering until this date and so it's a substantial part of the growth for the overall business. It's interesting to see how much of that is already reflected in what you've reported.

Normally, when we deliver -- when we have delivered all our equipment to our cruise newbuild, we have recognized 80% of that project, for example.

Okay. And as the last bullet on the slide there states, revenues in 2022 will perhaps be a bit lower than the ambition of a full doubling compared to last year. Could you give some more color on, is this missed revenue? Or will that same revenue be pushed until next year? So what can we expect? And what's the reason behind that?

The right way to see it is actually pushed. It means that the revenue we expected when we were in the first quarter this year was, I would say, a bit pushed over to next year. That's why I also said that in the coming years, when looking at sort of the consensus of the reports for those analysts following us, we're not afraid of the numbers in the longer run. But of course, in this period, it's all about how much we could sort of recognize as revenue before we close our books by the end of the year.

Yes. So not that much [indiscernible]?

No, we haven't lost any projects. We're not sort of -- we haven't sort of been outcompeted on anything. So it's just a matter of timing of contracts, permits, local permits for our buyers of the technology when they can basically start their projects.

And my last question is relating to the growing interest from heat intensive industry that you actually stated seeking, among others, renewable gas. And I find this to be a very interesting opportunity given the energy crisis we're in. But how fast can we see potential orders and revenues specifically coming from those opportunities? I mean you've been talking about GRT gas for some quarters. And it's a lot of bureaucracy, how lengthy are these processes? When can we expect to see some of this materialize?

Some of it is within the C.H. Evensen portfolio. And if you look at C.H. Evensen, their order intake is record high in their business and more than doubled compared to the last year, and that's sort of based on sort of demand from these high temperature industries. When it comes to projects where we are converting syngas into heat, we have several projects that we're working on. And we have announced earlier that we are delivering technology to some projects. There's a sort of scale-up opportunity there, meaning that those clients are takers for -- of more systems. So if there are one area that could be a bit harder to get the visibility into is perhaps some of these projects when it comes to utilizing this type of gas to replace natural gas. But we have several of these projects in the pipeline. We have interest -- keen interest from the market. But looking at those 4 areas, the metallurgic industry seems to be very sort of confident to move forward. There's more about making sure that the projects are developed because these are large CapEx investments for these companies. There's an extensive work to get to that level to get sort of a final investment decision. And it's more that those clients need to secure that project to know whether it's a NOK 100 million project or if it's NOK 120 million. So that's why it's an extensive amount of work we're doing in this period to make sure that we can provide that security for them. It's not sort of a question whether we want to do it or not that we don't feel that when we're talking to those. But if you look at businesses that are like Philip Morris International, those ArcelorMittal. They're in a situation, they don't know exactly how that map will be in the coming months. They know what's the development on the energy side, how much do we actually need in the short term need to close down because they are not enough natural gas in the supply chain. So that is perhaps the area where it's harder for us to provide visibility.

Thomas from SpareBank 1 Markets. A question on the margin side, especially on cruise because you've delivered Q3 has historically been quite a strong quarter. You had 28% in 2020, 27%, I believe, last year. Is there any specific reason for the 22% margin this quarter?

I think that -- I can answer that Henrik. I think that, as Henrik said, that I think on the cruise side that we mean look and best to look at year-to-date because there could be a mix of projects going on in a certain quarter, which is different, of course, from the mix to another. So you see, I think on a year-to-date basis that we have around 23% EBITDA margin in Cruise, and it was -- at the same time last year, it was around 26% something. And I think that is a 2.7 percentage point difference in the year-to-date EBITDA margin. And I think in that you see part of that is increased materiality prices, freight prices and those kind of things you see. So I think that the 27% is a bit a special kind of combination and sister ships and difference. So I think that the 22%, 23% is kind of a very good margin for us in this kind of cost environment that we're seeing. So I think that we mainly -- best to look at that on a year-to-date 2021 level and then kind of where we are at this point. But we don't expect that to go further down. We already have cost prices on steel and kind of certain freight elements. But we do see the freight costs are actually going down a bit now. So that is going down from the peak we have seen maybe going back a year or 2 or so, Henrik.

[indiscernible] maybe the same in aftersales. Margins are also improving, but at the same revenue level a couple of years ago [indiscernible].

Yes. That's also a good question. Because we are -- to facilitate further growth, we are kind of growing the cost base in the business, and we do allocate certain of the costs to the different segments, and then we have certain costs in this admin group. So it's also so that cruise and aftersales are -- they get certain of the costs that we do on building up the group in a way through this allocation kits, so. But definitely, what you will see aftersales are growing from this space, that growth in contribution margin would just go straight down to the EBITDA level. So we definitely get that business up to 15-plus percentage point on EBITDA margin.

Question on [indiscernible]. Is there anything for service?

Yes, they're definitely -- we are, as I said, in the -- only within the metallurgic industry space, we have several at the table that are -- that could be the offtaker or the taker of that reactor. And we might even have a conclusion on that in a very short time.

My follow-up question is on the landbased where our backlog is not much, but it's slightly down versus Q2, but you still say that you're comfortable with the analyst estimates for 2023, which I believe are around NOK 1.3 billion in turnover. Is that driven by 1 or 2 single large orders that you expect on landbased that have short lead times from? Or it's received...

It will be a buildup of more projects. And that's sort of reflected. It's also reflected in the high activity now developing new projects, I would say. That gives us sort of that type of visibility where we stand today.

Turner Holm from Clarksons is here. Just to continue on the margin discussion. So Landbased margins have actually come up a little bit and higher than where they are year-to-date. Is that a level that you expect to be sustained? Or is there something about project mix or otherwise that has driven it higher just in this particular quarter?

I think that we follow up and you might elaborate with me, Erik. But to some extent, one thing if it was sort of a cost structure in the projects with a lower margin, that's not what -- we are building up the business. So the fixed cost base of the business area is actually, as you see, for example, now in lower margins in the Aftersales is not because we are squeezed margins out there in the market. It's just that revenue is not picking up yet to support the fixed cost base. So I've said it earlier that we deliver energy systems. We are delivering systems to provide renewable carbon into market driven by an attractive business model. It means that what we do is more a top-down view on it. We see that what kind of CapEx can that business allow. You have a business case, for example, in that particular industry, where you know that you can get that price on the biocarbon, that price on the gas, that price on the liquid fuels or in condensates. And you go from that, you see what kind of P&L can that factory provide? What kind of cash is coming out below there? How much is that? How much are you geared? How much debt compared to equity and what kind of return can you accept on that? That gives you sort of a CapEx for that project. So it means that we're not sort of moving into -- and it doesn't make sense for us to move into a vertical where that sort of that CapEx, is that too low. What we see today is that we are moving towards many different industry applications where actually it's a very attractive market for us because it allows for higher CapEx and a better margin for us, more economical, sustainable to move in that direction. That's sort of -- that's what we're actually doing here. So it's not only the process engineering, it's also the financial engineering supporting why we are moving in these directions.

Yes. I was wondering if you could say anything more about the cooperation between Elkem and Vow Green Metals that was recently announced?