Vow ASA (VOW) Earnings Call Transcript & Summary

Welcome to this Second Half Year 2023 Presentation. Today, I'm also joined with Tina Tonnessen, our CFO. She will run through the financials. But first, I will start by showing this picture. It's a picture I took myself in January. I was invited on board Icon of the Seas by the senior management in Royal Caribbean. It's a very prestigious project for Royal Caribbean. It's a groundbreaking project and it's also a very important project for Vow as a company. The ship is actually fully equipped with our technology from bow to stern. And I will have a separate slide explaining more about the zero -- net zero technology we have delivered on board that ship. Looking back at 2023, taking stock, forging ahead. We are delivering an EBITDA -- a growth on the revenue, plus 17% to NOK 918 million, significant. But I regret to face you with a negative number and it's even frustrating that we had to dig deeper in the fourth quarter, down to the bedrock. It's been a very important process. It's been a painful one. But I will assure you, we will come through stronger. And we're starting 2024 with clean sheets. But for the period, minus NOK 23.4 million of EBITDA. On the strong side, backlog is robust at NOK 1 billion with another NOK 920 million of options reassessed. We have delivered a long list of projects in the period successfully. And we have entered into milestone contracts, confirming and securing basis for increased profits in years ahead. I'll also show you of the rich list of potential projects we have in the pipeline. And, Tina will go more into that as well, we are on track to getting fit for 15% from 2025. Never have we, in the business, delivered so many systems during 2023, 18 ship sets of advanced technology to the cruise industry, 17 to cruise newbuilds under construction at shipyards and 1 for a retrofit project. And we have undergoing 12 large commissionings, meaning that we are starting up systems, we are tuning them, we're making sure that they're getting into compliance -- environmental compliance and handing them over to ship owners. Again, it's been a very, very busy year, and we have demonstrated our position and make sure that we are a leader in this industry. And what follows is high activities within Aftersales. Now this business in 2023 has grown to NOK 180 million of revenues; recurring revenue, building up as we are delivering more and more ships. And we're enjoying favorable positions with leading cruise operators and this large installed base. And what do we actually deliver within this industry segment? We deliver parts to our systems, consumables and operational assistance. And I would say, one of the reasons why we have this strong foothold in this industry is that we have this one-stop service provision. And we're located very close to the center of this industry in Florida. And you see, revenues for the second half is up 29% compared to last year; for the full year, almost 50% up. So this is a nice development, and we are increasing the focus on this side, and we also want to obtain better margins in this segment. But not only the cruise industry plays an important role for us going forward, we see that our heat treatment part of the business is now increasing significantly. And that industry, those customers that are our subsidiaries is working with, is faced with high energy costs and cost of emissions. And the heat-demanding or heat-intensity industries, they need to decarbonize. And one way to do that is to electrify their processes. C.H. Evensen have that offering, and we're delivering on that. And we have secured a stronger position in that space. And this company -- this subsidiary is really working with blue chip companies, delivering our electrified heating processes. And you see, demonstrated by a good development after they came into the group, we have doubled the revenues within this segment, and we have also a backlog that supports the revenues going forward -- the growth going forward. Important wins that we have last year. It was a milestone for us to get our first large land-based contract in U.S. with Quonset Soil Solutions owned by Green Development, this renewable company that had been working with solar and wind and are moving now into this interesting field of converting biomass into clean energy and biochar for carbon sequestration. This contract, USD 27 million, is where we are delivering technology to produce biochar and renewable energy. And it's actually 1-to-1 with what we're doing in -- at Follum for VGM. So we're reducing actually the risk here. And it's a very sort of standardized systems and we're sort of leveraging this on what we actually have been now working on for several years with VGM in Norway. Detailed engineering, including process equipment, piping and electrical is well underway. And the main equipment delivery from our end will be primo 2025. And not in our contract, but our client is now in -- constructing all the civil works in U.S., ready to receive our equipment. And when this system is commissioned and operational, it will convert green waste into 6,000 tons a year of biochar. It's a significant project and is well recognized in U.S. these days. Another one, speaking of Vow Green Metals, we confirmed Phase 2. So we -- the existing contract was increased to NOK 332 million. And with that, VGM are now capable of producing 20,000 tons of biocarbon to the metallurgic industry with this changed order. And that part of this changed order is the large C.H. Evensen reactor that is -- will be delivered as part of this new factory. And it was actually the reason -- the main reason why we made sure that we got C.H. Evensen on board a couple of years ago. Also very important, that plays a tremendous importance for us and for VGM, is that we have the demonstration plant up and running. And you see the picture here is there the demonstration plant installed during the fall of 2023 and now operational, producing biocarbon for the metallurgic industry, but also, we have invited a lot of our clients to the site. So it not only demonstrates the capability of VGM going forward, but it also demonstrates the capability for Vow as a group. And for us, Vow as a shareholder in VGM, it's very important to say that they have a very good progress in their buildup. They have, during the latest weeks, actually confirmed partnerships with and funding from energy producer Vardar and Siva is onboard to support -- to fund the civil works at the site. So I would say this project is really now moving forward. And we just have to imagine what we have done in latest years is that we're building for us, Vow, in our -- just looking at our numbers today, we are working with the metallurgic industry vertical with projects around NOK 400 million, amazing. Cruise is also -- we have had some important wins. Over the last months, we have signed up contracts for an accumulated volume of NOK 350 million. We signed an important contract with Carnival for retrofits. There will be more retrofits. The cruise industry is moving forward in making sure that the existing fleets are environmental-compliant. We have a strong history there and we are well positioned to take more contracts within retrofit space. We do sign up new contracts in the newbuilding space. We got two contracts in France for a total value of EUR 8 million. And a couple of weeks ago, we signed up two additional contracts with a system -- the most advanced system for almost EUR 20 million. And look at the numbers. You see the average value on the conventional system in France is almost doubled in size because we're now implementing more advanced technologies, making sure that these systems will have a much higher environmental impact. Speaking of the Icon of the Seas, this really sets a new standard, and we see that the cruise industry is moving along. What Icon demonstrates has really paved the way for a lot of new projects that is also requesting not only advanced ways for purification, waste management and food processing from Vow, but also technology to convert this into clean energy on board; biochar, clean energy to replace fossil energy on board and biochar to offset some of their CO2 emissions. And it sort of resonates well with their -- the cruise industry's ambitions to reduce their carbon footprint. And we are a key supplier in that transition. And these -- you see some pictures of the technology. As I said in the introduction, we have really equipped this vessel from bow to stern with our advanced technology, and it's highly recognized in the industry, highly recognized. Tina, you have done a tremendous job together with your team. Please run us through the financials, and I will be back with a market update.

Thank you. 2023 was a cleanup year for us. We met our guiding of above NOK 900 million in revenues. However, we continued to increase our cost prognosis in our contract portfolio during the fourth quarter. This led to a reduced gross margin in the second half and also for the full year of 28.1% -- to 28.1%, sorry, from 37.8% last year. And the adjustments that we have done during the second half has two main effects. One of the effects is that we are reducing recognized revenue as a result of a reduced percentage of completion for the entire lifetime of the contract. And the second effect is that we get a cost increase in the period. The margin in the remaining backlog, despite this correction, remains solid, and we have the solid backlog of above NOK 1 billion, and we have intensified our project reviews. EBITDA before nonrecurring costs came in at NOK 23.4 million negative. This is highly influenced by the corrections that we made. We have nonrecurring costs of NOK 31.3 million for the year. Nonrecurring costs is what we see as not related to our operations, and one-offs. The majority of these was recognized during the first quarter, amounting to NOK 28 million, and this was mainly due to a balance sheet cleanup and contract accruals. We have initiated a comprehensive cost-cutting program, which we will get back to shortly, which will secure our margin and also maintain the target that we set towards achieving an EBITDA margin of 15% towards the end of the year. We recorded a depreciation cost of NOK 52 million, up from NOK 32 million the year before. The increase is due to that we've closed some of our development projects and started to depreciate them and also the inclusion of our new office in Tonsberg and starting to depreciate our new ERP system. Net financial items came in at negative NOK 41.8 million and includes our share of the net result from VGM and also interest costs. Result before tax ended at negative NOK 148.7 million. Moving over to our segments. The Industrial Solutions segment represented 40% of our revenue; Maritime Solutions, 41%; and Aftersales 19%. The Aftersales segment has delivered a solid and good performance during the year, and we also expect this to continue. EBITDA for this segment came in at NOK 22 million, representing a margin of 12.5%. And we expect good development also going forward for this, as Henrik said earlier. The two remaining segments are at the places where we see the effects of the corrections that we've done during the second half. For Maritime Solutions, we have had all-time high activity level during the year. But due to the corrections that we've done in the contract portfolio, EBITDA ended at NOK 11.8 million and 3.1 percentage margin. The backlog is solid of NOK 584 million. This also includes the contract value of Icon 3. And we also, in addition to this, have an option backlog of NOK 921 million. Industrial Solutions increased its revenues by 20%, up to NOK 364 million for 2023. However, due to the capacity buildup that we've had during the year for future growth possibilities within the segment and also the corrections on the contract portfolio, EBITDA before nonrecurring ended at negative NOK 12.5 million. The backlog within this segment is NOK 450 million and consists mostly of our VGM Follum contract and also our Rhode Island project and C.H. Evensen. Moving over to our balance sheet. The increase in assets is mainly related to investments in new technology. We have reduced our working capital at year-end following a working capital release during the fourth quarter and also the deconsolidation of Ascodero. Due to the negative net result that we've had, our equity ratio has decreased to 25% at year-end compared with 36.5% at year-end 2022. Note that we have renegotiated our loan agreement and received an amendment covenant level. We are aware that we have high leverage, and we expect this to remain high during the first half of the year. But then, towards the end of 2024, we expect to be down at more normalized levels. Our operating cash flow was neutral for 2023. This also is a result or a proof of -- that the corrections that we've made during the second half of the year has not had a full cash effect. In addition to this, we have also worked extremely well with our working capital and received a working capital release during the first quarter. And investments for the period came in at NOK 100 million. This includes the investments that we've done in R&D and also our net proceeds from the sale of Ascodero. The net proceeds amounted to NOK 20 million and was used to repay debt in January. Cash flow from financing includes the refinancing that we did this summer or December last year and also leasing and interest payments. Available liquidity at year-end amounted to above NOK 100 million, which is up from around NOK 80 million during our Capital Markets Day in November. And now over to the cost-cutting program that we have initiated during the second half to secure a controlled and profitable growth. We have, during the second half, done a complete mapping of our organization with the aim to identify the targets that we need to move towards, and also extract more synergies and efficiencies in our delivery model. We have intensified our project reviews not only to secure the margins in our projects and reducing costs by benchmarking suppliers, but also working towards our working capital to improve our own payment terms and also get an improved contract structure in the form of higher prepayments. We have two concrete examples that we want to go through. We have the divestments of Ascodero, which has led to freed-up management capacity and other resources and also a reduced cost base for the group. We have also, during the beginning of the year, done a reduction in our capacity and initiated a temporary layoff process in Scanship. Together with securing new contracts, we believe that these initiatives will lead us towards the targeted EBITDA level of 15% from 2025.

Thank you so much, Tina. Thank you for fantastic job you have done and your team in the period, as I said, when I introduced you. Moving on. Markets outlook and concluding remarks. I want to show you a slide that I'm very proud of. It's the order backlog and activity in the cruise newbuilding space. We have a strong backlog, it's reassessed. We're delivering technology to 32 cruise ships from this year onwards to 2028. You know what that market share is? 71%. And another 15 ships are options that naturally are called upon. And we're tendering for new projects, 28 ships, and you see the gray part. So that means that we are in a very good position to grow the order book. And another point I want to address is that 18 of these 28 ships is requesting now more advanced technologies from us that includes the Vow Pyrolysis systems, larger contracts. And doing underway three retrofit projects with Carnival. So the retrofit side is also well. But it's a solid foundation. It was all, of course, a painful process, as I said, to reassess, but we have the projects, we're working on them, and we are maintaining a very strong position in cruise. And we said it before, we are relevant for new markets. And we have done important investments to get there to position the business. If you look at our investments over latest years, NOK 300 million in total, it's for a reason. We are positioning the business to expand and to do more environmental impact, not only in cruise but in other industry verticals. Look at this for example, 48% is the development of the application in the metallurgic industry space. Already, we have revenues in the range of NOK 400 million because we did this type of investment. We are working now with new projects. You will find on the list here. You see end-of-life tires. You see PFAS on the sludge side and other initiatives that is very important for us to foresee the opportunities we have. Again, we did it for a reason. And this is the response. I talked about this slide many times. We are faced with opportunities that we have never seen before in this size. We're working on prospects that are 10x larger than our order backlog. This really motivates us to, in the future, grow the business profitable and create value while we're doing environmental impact. Here, 43% of this portfolio is the metallurgic industry space, important. ELT is a large part of it, waste valorization, sewage sludge valorization, et cetera. And we see the industry is responding. We really see the industry is responding. Outokumpu, we talked about. They were part of our third quarter trading update. They're really committing to replacing their fossil coking coke using biocarbon. And to demonstrate that commitment, they invested in Envigas in Sweden. Envigas in Sweden, do you know what kind of technology they are using? They're using our technology. And they are working alongside with VGM because together, we need these type of companies to help this industry decarbonize. And we have a very good position to grow within this segment. Elkem finally came along and confirmed the offtake with VGM. This also demonstrates the viability of these business cases. And you saw what happened latest with VGM, they were able to raise more capital, get more funding in place in these periods. We all read newspapers. We know what we're going through. In this period, they have raised funds to move forward, pay attention to that. And we are developing very interesting projects going forward. We talked about it, end-of-life tires. We have teamed up with the third largest distributor of natural rubber to the tire manufacturers. We teamed up with a company that collects 2/3 of all the tires coming off the roads in U.K. We're now working with them on two projects in U.K. It takes a longer time, but it's an important progress. We're working closely with them. And this will, I assure you, this will materialize. And this is not something we recently started with. When we acquired ETEL back in 2019, we had that technology with the client already. So they have had many years now to verify technology and to demonstrate recovered carbon black for the tire manufacturers. We are really moving forward within that vertical. Another very important trend we see, an enormous challenge we have to recycle sewage sludge as an organic fertilizer to maintain the nutrients such as phosphorous and nitrogen and to deal with the PFAS, the forever chemical problem. We already have a feed, a client that has committed us to fully engineer a system so they can make a final investment decision on a large plant. This project alone, it's larger in size of what we're delivering as revenue last year. So we are moving ahead. And thirdly, CirCon Energy that was part of our third quarter update, they are progressing. I received an e-mail this morning. They are really progressing. And we, on our side, we are helping them in their dialogue with their investors and with authorities to document our technology. So the future is very interesting for us. Pay attention to that. So let's conclude. All-time high activity. It's so high activities in 2023. And we have a long list of successful deliveries. We haven't failed on the deliveries. They're coming in at a higher cost, but we haven't failed on the deliveries. We are maintaining our position. And milestone contracts confirms that we are relevant and that secures the basis for increased profits in the years ahead. And we have invested in technology to position the business, a substantial investment, but it will pay off. I assure you, it will pay off. And now, Tina, as we said, we're going to focus the business and operation on profitable growth. Thank you so much.

And we're then opening for questions. We have quite a few questions from our online audience. And while we're waiting for them to type in more, we'll just check with the audience in the room. There's a question all the way in the back.

How will you work now to rebuild trust to the market, considering -- will we get more details on how long the misreporting has been? And you're right that margins will now normalize, what are normalized margins? I saw also in this quarter that -- in the Q3 report, you disclosed that this was an issue within the maritime industry. I see now that gross margins are down also in Aftersales and in Industrial Solutions. Will we get more details? Will there be published a report where we can see how this actually happened? Or -- yes, any comments on that would be great.

Tina, first, you can respond to some of these questions.

Yes, we also made a correction to our industrial portfolio during the fourth quarter. We have done -- reassessed margin, and we have a solid margin in the remaining backlog. So it's not that we have negative projects. But the correction that we do during the period leads to -- has a significant effect, but we do it to correct the margin for future periods, so that we can deliver on a more stable performance going forward. We do expect, however, that the first half will be slower than the second half of next year. But then we maintain our target of an EBITDA level of 15%.

Yes, just to fill in. As we said, it's a painful process when we have to do these adjustments. But again, we're delivering on our projects. And we have very interesting projects ahead of us. So of course, we have to walk our talk. We have to walk our talk going forward when it comes to getting the business back on a profitable level again. And that's the main target for -- the main objective for the Vow team in the coming months.

Okay. We'll then turn to questions from the online audience. And the first comes from [Nikolai Rulam]. In regards to the backlog solidity, are there contractual mechanisms in place to secure the margins?

It hasn't. Of course, the inflation we've had, we have been able to forward some of these costs to the customers, obviously, as we are taking that hit. What I would say is that we have been able to increase our pricing in the market going forward. And the price -- the project we signed up two weeks ago was signed up with higher prices to absorb some of the inflation we've had. So yes, we -- in that sense, we are able to improve margins. But another important thing is that we have -- of course, we are in close dialogue with our supply chain, and we're working right -- really working to mitigate and to get price levels back on time. And we also have, of course, an extensive benchmarking ongoing and value engineering throughout the organization to make sure that we are lean in execution and perform better on the margin side.

And there are quite a few questions from Gard Aarvik. First, is the EBITDA target for 15% in '25 driven by revenue expansion from current levels or gross margin expansion beyond historic levels?

It's a combination, I would say, Tina, really.

Yes. That is a combination. We also need to secure new projects in addition to completing the program. So a combination of both.

Next, you state that you've been working well with working capital during Q4, reducing net working capital. What else besides finally getting paid from Vow Green Metals has been done to improve the situation? Is it better payment terms, for instance?

Well, we have increased our focus on it, and we're working really hard, both on future payments, but there's no like concrete thing I would like to exemplify during the period. But we are intensifying our focus on it. And it's a result of that.

And I would perhaps add that, [ really as a fact ] that in 2023, we have had a large number of supplier -- supplies to the cruise industry. And some of these contract is, of course, naturally back-end loaded when it comes to the cash flow. But as you see that the account receivable is really building up and the cash is on the way.

The next question is actually about the high number of deliveries in 2023. And Gard wonders if this means that we should expect a revenue drop in Maritime in '24 and '25, given the lower number of ships entering service in those years?

No, we shouldn't expect that.

Are you confident with the current financial position, given that working capital likely will build up with new orders that we're expecting in the Industrial segment?

The Industrial segment is not the main segment that builds working capital. So in that sense, we should expect more favorable terms actually in terms of working capital.

This is where we have our prepayments. So that's important to state.

And then the final question from Gard. At the Capital Markets update, you stated that some of these projects you have highlighted in the Industrial segment should turn to orders in the first half of '24. Is this still the case?

It's still the case. Of course, we have done our part of it, making sure that we are tendering on these projects. We're working closely, supporting them in whatever they need to make their final investment decisions. Of course, the time line we couldn't control. But what we said in third quarter, we don't see the need to adjust that.

Okay. That concludes the questions from the audience online. And I don't think there are any more questions from the conference here. So thank you.

Thank you so much. Thank you so much for the attention. And we will be back.