Vow ASA (VOW) Earnings Call Transcript & Summary

Welcome to first half year presentation of Vow. Tina, the CFO, and myself will give you an update on the business. Then, we're going to show you how we are progressing well, how we develop the business now and also talk about that we have in place now a new bank agreement that provides comfort for the business going forward. Moving on to the -- basically, the key points of today's presentation. It's a -- we have a robust business. And, Tina, margins are back on track. We are positioned to grow the business. And, Tina, we have done something to strengthen the...

Yes. We're also executing on a very important remaining step. We are strengthening our balance sheet. And also together with this, we are obtaining an improved covenant going forward. And this will give us good headroom.

We have been through, I would say, a significant turnaround, where we have taken out some costs from the business on the OpEx side. And we have managed to get new contracts with better payment terms. We have -- and that's very important, we have 3 robust business areas that we are developing the business with. And we have a solid backlog of orders to support it. So we have a positive financial outlook for the business. Positioned to grow the business, we have invested substantially, and we have a slide covering that, that we have invested in technology, we have done acquisitions, and we have invested in market accessibility. And as I said, we have now been able to enter into new contracts with, Tina, better payment terms, better conditions. And to prove that we can deliver on growth, we have 2 projects, 2 large-scale projects ongoing, one in Norway and one in the United States. That demonstrates actually our capability to move into large projects, large-scale projects for sure. And we will, of course, give some more in flavor to these 2 projects. And, Tina, you might sort of talk a bit about sort of how we have -- are going to strengthen our balance sheet. And we are getting back on track with the margins. And, Tina, you could sort of explain shortly.

We are increasing our revenue. And we also show that we are done with the reassessment that we did of our contract portfolio last year. Our margins are increasing, and we have a solid consistent backlog.

And you see we are growing. We are growing the top credit line, and see the different -- how the different business areas are -- have a nice development. Status and outlook of the business, 3 robust expanding business areas that I will talk more about and a rich pipeline of opportunities with 2 successful scalable projects that, as I said, demonstrates our capabilities. Riding the third wave. This is an important slide actually. It shows you the development in the cruise industry in the last 24 years. The first wave we got was after 9/11. We started again contracting new ships. The next one was after the financial crisis in 2008-2009. Now we've been through the pandemic. Already, the first 6 months this year, the industry has ordered 17 new builds. It's expected more. And why is that expected? Today, we are actually working with shipowners and shipyards for another 10 series of ships, totaling more than 30 new builds. So we see from the work we have with shipowners and the yards that the new wave is coming, and we believe that we will be part of that wave. And we are well positioned to be part of that wave because we have over the years become a preferred partner in the industry and actually a trusted partner. Today, in 2024, we are delivering technology to 16 ships, 8 ships will be handed over to operations to -- from shipyards to shipowners with our technology on board. And the ninth is a retrofit we're doing with Carnival that are now in operation. It's a significant operation, and it also shows in the order book, that's why we're -- in our revenue that we are doing more within the cruise project side. And this here is also very interesting. It shows that we have firm contracts for ships being delivered from shipyards from 2025 until 2028. That's 27 vessels that will hit the water with our system. Additionally, we have 8 options. And we're tendering for multiple ships. Here, we're actually tendering for a total of 32 cruise new builds with a -- just roughly give an indication of the size of that, that's around NOK 2.5 billion, an average price per ship going forward of NOK 80 million per ship. And that's twice the past -- than the earlier average we had. So the contracts are becoming larger, more ships are coming our way. And to demonstrate that even further, during the first half, we entered into large contracts with better payment conditions, better conditions for the margins.

Yes, and for margins...

Firstly was the Icon class. We signed up one firm that was Icon #3 and an option for Icon #4. We did that in February. And you saw the media, you saw the newspaper 2 days ago, Royal Caribbean confirmed Icon #4. And they also said that they will -- they have options for 5 and 6. So it means that more orders on that series is expected to come from the shipyard. And also, Carnival, with the contract we have with Meyer in Papenburg, I was together with Lars Ljoen who is the appointed, now the Chief Operating Officer in Carnival Corporation & plc, that's the biggest shipowner in the industry. They have nearly 100 cruise ships. And as he says -- he's saying in front of journalists in [indiscernible], we are building more ships. So in addition to more ships at Meyer Werft, they have already, during the spring and into the summer, ordered ships -- large ships at [indiscernible], the Carnival ace project, exciting, and we should be in a good position to capture those contracts. We're working on it. So we had a lot of exciting things ongoing in the cruise industry. And of course, the recurring part, Tina, what we had provision of life cycle services aftersales. As the installed base with our systems are growing, the revenues are. And now we're about to hit the NOK 200 million of just recurring services that they are -- the ship orders are coming back, and they're sourcing spare parts. They're sourcing chemicals and operational assistance. And having that type of position, I'd tell you, one of the reasons why we have this strong position in the cruise industry is that we are delivering on this side. We're making sure that shipowners are capable of running our systems and making sure that the ships are in compliance with environmental regulations. We have a sweet spot here. And we have developed -- this illustration, this graph tells, I would say, the fantastic growth story we have in Vow. From we did IPO in 2014, our Cruise business is 4x larger, purely organic growth, purely organic growth by taking our technology leadership in cruise and by making sure that they can operate our systems with a good life cycle service. This one is growing. Another thing we did, we acquired ETIA back in 2019. We followed up with the acquisition of C.H. Evensen in 2022. That gives us some growth, but I will talk about 2 projects here that actually is driving this part of the business and today is equal sized with what we do in the cruise industry with cruise projects. So, yes, we are growing average 21% in this period even through periods where you have a slowdown from the pandemic. We are actually very proud of this growth story, and I think it's recognized. So these large-scale projects that is driving growth for us in -- within land-based industrial solutions, that also demonstrates our capability, and we have a huge demand now for similar projects. And we have a rich pipeline, I've also talked about, but just talking about this project, you heard me talk about this project many times, it's progressing. Here is the factory now being built in Follum for VGM. VGM Is now taking a position to be a leading metallurgic biocarbon producer with using our technology. So here you see the factory. This is the illustration of the pyrolysis equipment that we're delivering to that factory. We have a NOK 335 million contract with Vow Green Metals. That actually sparked interest in U.S. and in Europe. And another thing that's been very important for us, Tina, is that we were able to build a demonstration line. That's one of the lines in the [ full ] factory that's built separately to verify technology and to verify the products coming out of the production line and very useful for Vow Green Metals to qualify for other clients, but also useful for us because it demonstrates our technology. And the fact here is that this technology -- this configuration is what we're delivering now in U.S. It's another application, but it's the same configuration. This is the scalability of the business that we are now approaching land-based. In the U.S., USD 27 million contract with Quonset Soil Solution, owned by Green development, that is a leader in large-scale renewable energy projects in the northern east of U.S. with ambitions. We have advanced now with all the necessary engineering. And during the fall now, we are delivering equipment that gives us revenue and cash flow. So, to conclude on, let's say, the rich pipeline we see, outside cruise. And we talked about that in the introduction. We have invested substantially in the business to take a position, nearly NOK 950 million over the last 5 years. And I would say, well spent because we have now technology available. We have, of course -- we funded Vow Green Metals in the demerger in '21. That was important, but we created a substantial client of us. We did the acquisition of ETIA and C.H. Evensen to get hold of more technology, larger capacity technology and more confidence that we now are delivering on. And our technology is relevant for several new applications that I've been talking about many times, end-of-life tires; this one coming up, sewage, the removal of PFAs from sewage; waste-to-liquid fuels; biochar carbon removal, is one of the ways to really mitigate climate change. And the project now in Rhode Island is such a project. And then, the metallurgical biocarbon that today, if you look at the tender activity, Tina, of the bid pipeline, if we draw that line until -- end 2027, it's a pipeline of NOK 12.5 million (sic) [ NOK 12.5 billion ] of projects that can come our way. If we draw that line until 2029, we double it to NOK 25 billion. I think people will remember the NOK 25 billion, but I'm just saying in the shorter run, it's still half of it. And these are not sort of happy-go-luckies. I would say that 14% of that bid pipeline is start-ups. The remaining part are companies with a strong balance sheets. That's a very important point. So yes, we have these 2 projects to demonstrate our capability. We have done the investments. We are ready. And we are positioned to grow the business. So with those words, Tina, perhaps we should -- of course, we can talk about -- I'll give you a short update before I give you the -- Tina, on the numbers. But of course, end-of-life tires is progressing well. We are now with ITOCHU, ETEL, Murfitts. It's the same company basically. ITOCHU is one of the global leaders in distribution of natural rubber to the tire industry. Their subsidiary in U.K. controls more than 60% of all the tires coming off the roads, handling 20 million tires a year. We're working on their first advanced studies now on their first factory to be built in U.K., progress as well. The sewage plant FEED, the Front-End Engineering Design contract, a customer paying us to do all the engineering on this factory you see here, with 4 of these large C.H. Evensen reactors we have is progressing well. And this area is really coming. We definitely see that. And the partner, we are not delivering that FEED to, they have ambitions to roll out multiple parts because they have a very strong business model because they are getting paid with the feedstock or, let's say, the [indiscernible] these factories is creating a very good business model to attract capital. But there is a company that has themselves a strong balance sheet. And we also got the latest update on the project we talked about last year in our third quarter presentation. Circon Energy, they have secured significant equity funding and governmental support. So exciting days for us, exciting days. Tina, sorry for taking so long time.

No, that's fine. So I'll take you through the numbers. So let's first have a look at the segments. We're delivering growth in all segments, and the margins are back in black. So let's start with the Industrial Solutions. We're well positioned for growth as we went through, and we have revenues of NOK 164 million, up from -- 11% from the same period last year. The margin has improved, and we have a backlog of NOK 365 million at the end of the period. For Maritime Solutions, we are delivering revenues in line, and the margins have increased compared to 2023. We have a solid backlog here of NOK 696 million, and in addition, also options of NOK 316 million. For Aftersales, as we said, we're approaching the NOK 200 million recurring revenue mark. We delivered a margin of 10% for this segment. This is a bit lower than what we prefer to see. So we have implemented their concrete initiatives to improve this going forward. Moving over to the group. We have revenues of NOK 485 million, up 8% compared to the same period last year. Our gross margin ended at 30.9%. We have, during the period, as we said, delivered on our cost improvement program. If we compare with the same period last year, we have decreased our operating expenses by NOK 20 million. And we have also set a target to decrease our operating expenses by NOK 40 million to NOK 50 million in 2024 compared to 2023. Some of the initiatives that we do in the cost improvement program also is related to the nonrecurring costs that we have for this period, which is the restructuring -- mainly related to the restructuring of our French subsidiary, ETIA. Our EBITDA ended at NOK 20.6 million. Moving over to our balance sheet. I think it's fair to say that we've spent a considerable amount of time here in the last couple of months. So we are now strengthening our balance sheet, and we're looking to strengthen it by NOK 150 million. Together with this, we are also securing an amended bank agreement with improved covenants. So most importantly, we're amending the leverage covenant and increasing it to 5.75x together with a strengthening of the balance sheet of a minimum of NOK 125 million. We expect this to give us a really good financial run rate going forward and liquidity headroom. Other important developments during the period is that we decreased our net working capital. We have equity ratio of 24% and an ending cash balance of NOK 42 million. For more information on the amended covenants, please see our financial report in the Note 4. And then moving over to our cash flow, which actually shows the things that we've already done to strengthen our balance sheet. So our operating cash flow came in at almost NOK 17 million. We are focusing very much on our working capital situation. As we said, we are also -- we've invested substantial amounts and are well positioned for growth going forward. We are, therefore, reducing our investment level, and our investments came in at NOK 30 million for the first half year, significantly down compared to historical levels. We are also deleveraging our balance sheet. So we have repaid debt during the period and the interest cost. Our net cash flow for the first half was a negative NOK 16 million. And I think I'll leave it over to you to do some concluding remarks.

Okay. Before we open up for some questions -- just bring us back to the slide that we opened the presentation with. We are a robust business. Margins are now improving, definitely. And we have done things to enable the business to have -- to follow that growth pattern that we had since 2014 and the actions we are now taking to strengthen the company's financial position. So with those head points, main points, we can open up for some Q&A.

Gard from Pareto. So firstly, is it possible to comment a bit more on the expected working capital development near term, so that we know a bit more because, of course, on the top line and on margins, it's easier to make assumptions. But obviously, you have done some rounds with the clients in your backlog. So some comments on how you see the working capital development for H2 and maybe into H1 next year?

Well, we don't delve on it. But we have fluctuations depending on when we receive milestone payments. What we can say is that we are improving our working capital situation on the new contracts that we have, which is more in favor of us in terms of payment terms. And we're also delivering, as you said, on some substantial contracts this fall, which we expect to contribute positively.

The land-based projects are better payment terms. But, of course, as you said, the new cruise contracts, with these downpayment structures against guarantees, is releasing cash earlier from the shipyards, and that's positive.

And also one question on the gross margin, previously, at least on your slides, you have stated that this 30-plus or 31% is more of a normalized level. I didn't see that today. So what do you expect? If you look back, you had sort of mid- to high 30s gross margin. So where approximately should we expect that the fair gross margin level going forward should be?

Yes. Well, we did a reassessment last year, and that decreased the margin also in the backlog. So now we are delivering according to our backlog, but we do expect this to improve going forward as we secure new contracts. But we also have some older contracts in our backlog, which also will contribute to an increase when we deliver on those.

So we expect them to -- we need to improve that for sure. The gross margins in this business needs to come up. Some other questions in the room? No. Do we have some questions online?

Yes, there are some questions that come in from online, and a couple from Thomas Naess. First is new equity is secured. The new net interest-bearing debt over EBITDA covenant stands at 5.75x. And your thoughts on how comfortable you are on staying within this? Given equity is raised at a minimum of NOK 125 million, wouldn't it be much better removing more debt?

We are comfortable on the amount that we have said now based on the forecast that we've done. It gives us substantially or more comfortable headroom towards the covenant that we have. And...

So the NOK 150 million that we -- I would say the NOK 150 million is well based on, I would say, a conservative projection going forward. And it gives us, together with this new amended bank agreement, comfort in the business to deliver on the backlog and the growth we see. And of course, we are, in this period, capable of serving our debt facilities. And of course, our ambition is to reduce debt over time.

There's one more question from Thomas Naess. He asks, no equity was raised following the completed presounding round. You state that you are considering other options to strengthen the financial position. What are those other options?

We couldn't go into details on that, but we're looking at several things. I would say that the presounding that was done was very short because we have been working now extensively to land sort of a bank agreement, and the presounding continues now as one alternative. The other alternatives, we will give an update on when we feel that we can disclose those.

There is a question from Helen [indiscernible]. Can you provide some more details around expected CapEx spend in the second half and into 2025?

Yes. We don't guide on a specific number. But what we said that, and also shown, is that we are down compared to historical levels, and we expect this to continue going forward.

Yes. We've said that several times. And of course, we have to -- you have to see that we have done. We have been through large investment programs that has reached conclusions. And these contracts that we're delivering on now is as a result of the investments we've done in the past. And so that is coming down definitely.

There are a couple of questions from [indiscernible]. First is when do you plan to start releasing comprehensive Q1 and Q3 reports, supplementing the full-year and half-year remarks?

I think if you look at -- we have increased the information that we give on both the trading updates and also now in the second half -- or first half report. And that's -- we always evaluate on what we're giving of information, and I don't want to provide any more visibility on that number.

And Mr. [indiscernible] also asks about the margins. He says you said several times that margins are improving, that reported margins have never been weaker, except for second half last year, which presumably was significantly impacted by [indiscernible]? Why are margins down compared with history when revenues are higher and then progress report is so good?

That's part of the reassessment that we did last year. So we corrected the margin that we're delivering on in the backlog, and that's also why we see a lower level now. This will increase as we secure new contracts with improved margins.

You see actually a very nice development now during the first and second quarter of this year, that we are coming out of that adjusted level and the hit we had to take last year.

Then there are a couple of questions about cruise. I think it was Mr. Badin who talked about Icon 3, 4 and possibly even more at Turku and also some from Carnival. How many of these are already in your backlog, either as concrete contracts or options?

When it comes to the Carnival project, those 2 I showed on the slide, Carnival Excel at Meyer Papenburg, those are in our backlog and in our option backlog. The firm ones are in the firm backlog and the others in the option. What I said that now Royal Caribbean have ordered -- called on that option that we have as an option. So the likelihood of that is converted into a firm contract when the shipyard turns towards us is very large. It means that it's a high likelihood of those coming, meaning that they are calling on the #4 and that we're getting option for 5 and 6. And the other thing I said is that Carnival Corporation has ordered new ships [indiscernible] basically on a very similar platform as the project we have in Papenburg for the same owner. So it means that this is really an addressable market for us, and we're working to be in a position to get these orders. I can't promise anything, but I think we are in a very good position.

And then there is now one more question from our online audience, and that also is about margins, this time in aftersales, where the company -- aftersales is growing, but margins are still lagging compared to previous times. Can you elaborate on the margin potential you see and what you're doing to achieve this?

We're looking at this now, and we're implementing and investigating it. I think, yes, for the first half, it was particularly chemical sales that had a lower margin, and we're looking to improve that going forward.

There has been in that period an inflation on the chemical side. And we are now working to recover that by renegotiating with our customers basically because these chemicals are used to operate our advanced wastewater purification systems on all the ships. So it's a significant part of our business. And we are very sort of -- our ambition is to increase, and we believe that we can increase. When you have the revenue, you can always increase the margins.

Okay. That concludes the questions from the web audience. We'll hand back to the presenters if there are no further questions in the audience. Thank you. Do you want to take it?

Thank you so much for stopping by and to your continuous interest in our business.