Earnings Transcript for SSHPF - Q2 Fiscal Year 2023

Henrik Badin: Welcome to Vow's First Half 2023 Financial Presentation, our trading update. This presentation will be in two sections. First, Tina and myself will go through the financial updates. And we will also have a section with a deep dive into our technology applications, our industrial -- industry scale-ups and new interesting developments on the market side. And that part of the presentation, we will be joined by our Chief Development Officer, Per Carlsson, and our Vice President, Innovation, Paal Jahre Nilsen. But first and foremost, the update for the first half year. This picture shows the rendering of our new projects in US, where we have been waiting for in order to proceed, a contract that we signed last year. And that order to proceed came in July. Great news. And this will be a large project in land-based US. It has received a lot of attention, and we truly believe it will be basically snowballing opportunities in the coming years in the United States. Let's look at the key takeaways for the first half year. We continue our growth in revenues with a 12% increase year-on-year to NOK449 million. Our EBITDA at NOK29.6 million reflects good performance in cruise and heat treatment solutions in our well-established part of our business, but also the cost of building up pipeline towards Industrial Solutions towards our land-based opportunities. Aftersales delivered record high revenue and profits well above the pre-pandemic levels, and it continues to perform well. Order backlog at NOK1.145 billion remains solid, providing good visibility into revenues and cash generations on the medium term. And we do have high tender activity. We have intensified our tender activities in this period. And also very important, new long-term financing agreement in place, we have been working on this through the summer. Tina, our new CFO, has been instrumental in leading that, and we successfully obtained new financing with DNB that provides financial support in continued growth. So looking at the development of the last five half years. You see the revenue development, a steady, sustained growth in cruise through the pandemic period is actually a fantastic development and now also the development in after sales. Last year was dominated by our major delivery of equipment to Vow Green Metals first factory in Norway. So we had higher revenues. This year, we are developing new projects and the revenue stream is impacted from that. You see the development of the EBITDA, and I will -- it going down, but I will explain why it's going down temporarily. And you see the development of the order backlog. Looking at 12 months rolling the trend each half year, we're now at the trend of NOK832 million because of lower revenues in the first half this year and also the EBITDA development in that trend. So looking at the business segments. And what to say before we dive more deeply into them. Industrial, the pipeline we see to deliver on the opportunity, it's according to a strategic plan we have set and we're staying firm on that. It's one-third of -- it's 33% of our revenue. And in the period, we're breakeven. Maritime, continued high activity and good performance, 48% of our revenues at 20.4% EBITDA and Aftersales so nicely recovered 19% of our revenues, 50% EBIT. Looking at the Industrial Solutions, our land-based activities. Revenues are down to NOK147.7 million in the period and were breakeven on an EBITDA level. Backlog, NOK509 million, as I said in the introduction, we got the order to proceed in July. We're actually expecting according to our plan to obtain that order to proceed in the end of the first quarter, beginning of the second, it came in July. C.H. Evensen is performing very well. They have good growth and strong margins. And they have good demand for their technology to many different industries, and they are signing up orders. We have intensified our tendering activity. We're increasing our capacity and our capability within this segment. Why are we doing this? This is why. We see huge opportunities and when we presented our numbers in the first quarter of this year, we had, at the time, identified around 80 projects, Industrial scale of projects for a total potential order volume of NOK25 billion in the period until 2029. And already now, when we leave the first half year this year, we are working on 33 projects, develop them, some of them we have already tendered. We see several new industry majors are evaluating our technologies. Some customers are considering multiple projects. We -- now -- the project we now are working on in the pipeline. Well, we truly believe there will be an investment decision on this project in order to proceed within the next three to four years. And the average of these are EUR40 million. So it's a change in the dynamics. Again, we're building capacity. We're increasing our capabilities. We need speed. We're staying firm on our plan to grow. Temporarily, it hits our margin. Going back to the well-established part of our business, cruise. Continued high revenues, driven by high activity. This first half year, we are delivering main equipment to 14 cruise newbuilds. Two retrofits. And we have our backlog now at NOK636 million, our revenue at NOK214 million. And as I said in the introduction, 48% of our revenue stream. And this is the picture we see. We already have 30 confirmed contracts for ship that will be entering service until 2029. On top of that, we have 16 optional contracts following these contracts. And we are tendering for a volume of 47 new cruise ships. The cruise industry have recovered from pandemic. They are coming back into black numbers, and we truly believe with the intensified activities at the yards and the discussions we have with the ship owners that they are now ready to continue their growth plan, building washers. And already 47 ships, we are working on the tender for. And also, they have seen -- they are really interested in our new technologies for also some board cruises. Most of our cruise ships are equipped with waste handing based on incineration. Moving into Pyrolysis. We will be able to recover energy and help them offset CO2 emissions and final end of waste. The industry is very keen on that. Already now in the latest months, we have had the large major cruise owners in Norway, looking at our test facilities, had very interesting meetings and 10 projects were out of this 47 is very likely now to be equipped with this type of new technology that we are bringing to market. And we see more interest now as the cruise industry is back and back that they will continue with retrofit. So we're working now on three AWP potential projects that are considered. Aftersales, as I said, NOK86.9 million of revenues in the first half year, record high. Full year was NOK119 million in 2022, impacted by COVID. You can do the math where we are now heading this year and a 50% EBITDA margin. And the installed -- and this is driven by the installed base. More and more ships are entering service, and this will drive this business area going forward. Tina, why don't you give us some input to the balance sheet -- the P&L balance sheet and the cash flow?

Tina Tonnessen: Yes. Thank you, Henrik. So now over to some figures for the group. We delivered all-time high revenues for the first half of 2023 coming in at NOK449 million and representing a 12.2% growth. This is mainly driven, as I said, by the Maritime Solutions and our Aftersales business and also offset by the reduced activity that we see in the Industrial Solutions space. Our EBITDA came in at NOK29.6 million, representing a margin of 6.6%. This is impacted by the investments that we've done in the organization and preparing ourselves for the growth in the Industrial space. We recorded a non-recurring cost of approximately NOK3.3 million for the first half of 2023. This is mainly related to IT costs for the new ERP system. EBIT came in at NOK5.5 million and net financial items consists mostly of interest and gain on the convertible loan that we settled for the -- related to the acquisition of C.H. Evensen in May and also our share of the net profit from our associated company, Vow Green Metals. Result before tax was NOK9.1 million. Moving over to the balance sheet. The increase that we see in our asset side compared to year-end 2022 is mainly related to the investments that we've done in R&D and technology to grow Industrial Solutions. We also have some increase in working capital due to our high activity level. It's important to note that the balance sheet does not include the effect of the refinancing that we did during the summer. This gives us good flexibility and ample room to grow. Our equity ratio came in at 35.4% at the end of Q2 compared with 36.5% at the end of 2022. Moving over to the cash flow. We recorded a negative operating cash flow of NOK15 million for the first half of 2023. This is mainly driven by working capital due to our high activity level. Investments came in at NOK46 million. And this is also mainly related to, again, the investments that we do in Industrial Solutions space within R&D and technology. Net cash from financing ended at NOK35.8 million and consists of debt leasing and interest payments and also included in this is also the repayment of the convertible loan to C.H. Evensen in May, which was settled in cash. Our cash ended at NOK17 million for the period. Again, important to note that this does not include the refinancing that we did during the summer. And another important aspect is that we received a large incoming payment related to the contract we received this summer, which is also not included here. As of today, we have a solid available liquidity position of above NOK100 million that will provide us with ample room to grow.

Henrik Badin: Thank you, Tina. Now we're moving over to the next section. We have -- and I'm very proud of that. We have a strong team with a lot of experience in this company, highly qualified people that comes from many different industries. And we have also a team of PhDs and two of them are here today. They don't like to -- that I say PhD, but it's a strong asset for us. Per Carlsson, our Chief Development Officer. Why don't you give us some insight and I will return with some summary.

Per Carlsson: Thank you, Henrik. I would like to give you a small technical insight how we work with our technology developments. And what I consider our four main industry verticals primarily metallurgica and end-of-life tires with insights to energy, and Paal will give you a deep dive into the waste valorization. So let's jump into ELT, the developments that we have been doing together with Mark Murfitt at Murfitts Industries for some three years now. And we are now moving into scale up of that business together with Mark and his team. And it's important to know what do we do when we go from a smaller scale development like we have at Mark Murfitts at Lakenheath in England and how do we grow that into an industrial production site. And key takeaways that are important for us when we work with this system modularity, scalability and standardization that we get repeat developments and repeat implementations that we don't develop one-offs that we can replicate in different parts of Europe primarily. And this is the example where we have a modularized units, you're seeing three modules here that will cover some 4 tonnes an hour roughly of granulate producing TPO and recovered carbon black. One important aspect here is that this is a two-stage process where we've used one biogreen reactor to do the main conversion, and we have a polishing step at the end. And this is something that we also transfer to our work when we work with biomass for metallurgical purposes primarily. It's a two-step process which lets us have better process control and increased capacity of each production line. This is Line 7, which will be mechanically completed in the coming weeks, and there is no change of plans for the Q3 start this year. Talking about Repeatability, Modularity and Standardization. This is a green development concept for Soil Solutions production line. And you see the same type of configuration here as Line 7. Here, we are using three -- four machines or four parallel production lines. But the same technology as we are building at Follum Line 7, same technology will be used at Follum, the main Phase 1 factory. That's the repeatability, the standardization program that we've been working on to get to this point. That's a capacity of roughly 10,000 tonnes a year of production capacity of biocarbon. What happens when we move beyond that is now we are starting to impact the logistics surrounding the factory. Now the energy offtake becomes much more important. This is a production line with roughly twice the capacity that we see as follows. And now we see impact in the surroundings. The energy offtake becomes much more important. The logistics for the biomass becomes much more important. And that is something to keep in mind why do we choose this production? Why do we have 5 tonnes for the CH Evensen machine? Why not 10? Why not 20? Is the impact that each of these machines will have on a site becomes much more important. And we -- the selection here is that this size of produces reactor will have many more areas where it works in a good envelope in a good framework compared to a bigger solution. Instead, we choose to have parallel lines. But there are exceptions on some sites, the framework in which the technology operates brings us an opportunity to have many parallel lines. And this is an example that was announced in February 2022, we engaged in a letter of intent with a global world-leading provider of non-ferrous metals. Since then, we have worked closely to them to find a production concept that works with a product quality that they can work with and by product management that is feasible for them. And we have finally, at the beginning of August, reached agreement in the scope of supply and have submitted a firm bid for six parallel lines with a production capacity of 50,000 tonnes annually. This is a major change in the capacity. It's 10 times -- five times larger than the following factory and a significant impact on our business if this is realized. So this is a very interesting development for us. On that note, I will give the word to Paal which will show our fourth vertical. So it's large primarily and how we deal with the Forever Chemicals.

Paal Jahre Nilsen: Thank you, Per. Good to be here. I will talk about, Vow, valorization of organic waste, that is. In our circular economy, with the circulation of materials and stuff, we often face unwanted compounds that needs to get out of the circulation. One of them is PFAS, one of the strongest molecular bumps in chemistry, carbon and fluid. Some of you in Norway may know some of it under your skis when you try to reduce your friction to zero to win competitions in cross country. There are these very toxic materials are called for every chemicals for a reason, they don't degrade biologically and they accumulate in the nature, unfortunately. We have been working very hard lately with research partners in Norwegian Geotechnical Institute, among others, to prove that we could eliminate these materials in our pyrolysis processes to the extent that we could benefit from the valuable part of the waste, in particular, carbon and fluid -- sorry, phosphorous, which is another fossil resource we need to take care of. So we could treat waste streams that are polluted in a way that we can benefit from the valuable parts but destroy the poisonous part. And these chemicals are costly. The expense in US now late paper came out last year, estimate the annual cost of diseases related to these pollutants could be as high as $60 billion a year. Finally, the authorities come to terms with the fact that we need to clean up, and that is a strong pole to tidy up. And if you have some spare time rather than going looking at Oppenheimer movie, which is, of course, a serious issue with atomic bombs, but this is a sort of a slow-moving atomic bomb. These chemicals could really harm us big time. And I don't think you should see Barbie either because Barbie dolls, they provide maybe this type of PFAS to the environment. Like here, this is an example from Europe of exposed areas where we really have these type of chemicals, big time. If you look at any other place in the world, you will find it, you find it in the Antarctica. So it's not only necessary to avoid these type of materials to come into the nature. Unfortunately, it's so polluted already. So we need also to remediate the polluted areas. With that, back part of the presentation, I would say there are some good news. And that is we could take sewage sludge, for instance, which is one of the -- in the circular economies, sewage sludge is collected, treated and then used on land again to use the nutrients like phosphorus beneficially. Unfortunately, now, this sludge is polluted with PFAS, what to do. We can pyrolyze the sewage sludge, make biochar from the Sewage sludge, thereby taking the carbon, 50% of the carbon, we can convert to geological stable carbon that is a cheap way of doing carbon capture and storage. We remove carbon from atmosphere at the same time, we eliminate these pollutants so that we could still apply the nutrients in that sludge for benefits of the agriculture, well aware of the fact that we eliminate the pollutants. Secondly, and that's sort of even better, we could modify the surface properties of that biochar to the extent that they have a big affinity to the same pollutants -- so we have shown that we can use biochar from sewage sludge as a sorbent to clean up the mess from the past. So this is a valuable proposition for the current systems. This is the sort of the business as usual. We have a circular economy. And as an example, we have paper with acid glazing. We take paper, use it, throw it away, then we recover the fibers use it all over, like single-use paper cups coated with PFAS, then they are collected to recirculated, we don't circulate into toilet paper. Then we have a higher concentration of PFAS in the toilet paper accumulated from the single-use paper cups. And then we wiped that pipe toilet paper on the most sensible part of our body. To the extent that we again put it to the sewage and then out in the nature. So this is sort of the negative part of the circular economy. As you can see, if we could take out some of these systems or components without compromising the good part. This is what we have to do. And we are so happy now that we have the academic evidence that this is a good thing. And then we are part of the European biochar industry consortium. I am in the Board there, and we pushed the European authorities now to implement pyrolysis and biochar as a part of the solution for a sustainable treatment of Sewage sludge. So last, in US, they have these incentives. They have really now understood the problems also thanks to this film Dark Waters, the pond get big lawsuits against it due to pollutant of PFAS. So now they are to tidy up in many states in U.S. now, it's not any more allowed to spread sewage sludge on agricultural land due to this. And then what is the alterative? Pyrolysis is the best alternative and now we work with good clients in US to develop these big projects. Here, you could see a facility or a project we are developing now, where we have two parallel feed streams that is sewage sludge, 6 tonne an hour of dried sewage sludge. And then garden waste and wood residues in the other parallels. So here it's a super optimal commingling of different rate streams that could be treated with some different parameters and optimize and valorize the organic waste again. Thanks.

Henrik Badin: Per and Paal, thank you so much for the deep dive. I hope it was interesting. Sure it's for me. So to sum up, we continue our growth, 12% increase. EBITDA lower for the period temporarily, but it's sort of good performance in our well-established part of our business but we're building pipeline, increasing our capacity and our capabilities and that hits us in the short term. Order backlog remains solid, providing good visibility in the medium term, high tender activity, very intensified tender activities. As you see that Per and Paal is actually showing these projects. So we have a continued activity developing many new industry applications that we truly believe will materialize in the coming years. So we are staying firm on the strategic plan, as previously informed. Thank you so much. We will open up for some Q&A.

Q - Thomas Dowling Naess: Thank you. Thomas from SpareBank 1 Markets. As I will start on the -- or first of all, congratulations with a nice first half year. But with regards to the balance sheet, given the performance you had in the first half year, are you comfortable with having 10 times net interest-bearing debt to EBITDA?

Tina Tonnessen: We are comfortable with the levels we see -- the level that we have now to service that. And we believe that leverage level will decrease when EBITDA starts to improve.

Thomas Dowling Naess: And can you give us some more insight on -- you have NOK500 million now in land based, but it's very difficult for us to kind of foresee when this revenue is coming. Could you tell us a bit about the development you expect in the second half year?

Henrik Badin: We -- as we said, we are developing now 33 projects. We cannot control entirely the time frame of when we will enter into new contracts, but it's very promising. So we stay firm on our plans, and we're confident that some of these will materialize.

Thomas Dowling Naess: And the bid you place now early August. Do you have any idea when that might conclude?

Henrik Badin: We don't know exactly, but it's a high momentum. And we actually these days have the team from the client in Norway. We had them in [indiscernible] yesterday, and we have meetings for them [indiscernible] today. So that's all I can say.

Thomas Dowling Naess: Okay. And what magnitude will that be 6 line C.H. Evensen, would that be in the magnitude of NOK750 million to NOK1 billion?

Henrik Badin: I wouldn't go specifically into the sort of the price on it. But as I said, we were -- the average contract value on the pipeline is around NOK40 million. This is higher.

Thomas Dowling Naess: And also with us on details on the Murfitts Industries solution, how is that progressing?

Henrik Badin: We entered into the LOI in December. We have been now in the first half year developing the system, the application. And we have been looking at sites in France and in UK. It's not finalized yet. So let's see how -- how this will progress during the fall, but it's a high momentum.

Thomas Dowling Naess: Thank you.

Unidentified Analyst: [indiscernible] from Nordea. In terms of your US project, is it fair to assume that you will start to record revenues here during H2? Or how should we think about that contract?

Henrik Badin: Yes, we definitely will. We will -- we are working now actively with it, and we will build up cost and that will drive the revenues as well.

Unidentified Analyst: Thank you. And also, like in terms of the margins, do we see a similar development in H2 like in H2 '22 in terms of the margins? Or how should we think about that now going from these levels?

Henrik Badin: The margins, I would say, in that business area will be very dependent on the top of the revenue or the revenue in that segment. As we said, we see now in the first half, the cost is highest to develop the pipeline, but the more revenue will come in will improve the EBITDA. And it will be actually a very strong improvement when you get revenue on top. It means that it wouldn't -- it would not much revenue we missed out actually in the first half to move the EBITDA for the group upwards from 6.6%.

Unidentified Analyst: Great. Thank you.

Unidentified Analyst: Hi, [Daniel] (ph) from Clarksons. I was just wondering if you could tell us a little bit about the status at Follum with the start-up that's obviously planned for later this year, but also how the work with the with your offtakers with [indiscernible] is progressing and how much testing you've done and how much you think is still needed? Or what the status of that is?

Henrik Badin: We can say what we have done. We have had the major equipment delivery last year, and that reflects sort of the revenue in Landbased or Industrial Solutions. We are now starting up in these weeks, financing, as Per said, the Line 7, that will be very important. And that will now be up and running in the third quarter. I guess, I think Vow Green Metals have a presentation tomorrow and they will give more insight into where they are. They are the ones that are working with off-takers and the overall development of the project. But we have done our part.

Unidentified Analyst: Thank you. Just one more question on the balance sheet. It’s written in the report that the term loan with DNB was fully drawn up on August 4 and also that you received the payment of [NOK70 million] (ph). How should you read this? Is it the repayment of the overdraft facilities or...

Tina Tonnessen: The NOK380 million term loan and the payment from the large.

Unidentified Analyst: Yeah, just considering it says in the report that is fully drawn up on August 4.

Tina Tonnessen: Yes.

Unidentified Analyst: So I wonder why it's fully drawn when you received the NOK70 million payment in July. Is that due to repayment of the overdraft facilities, et cetera?

Tina Tonnessen: Yes, and also the revolving credit that we previously had was refinanced during the summer, yes. And it's also due to the nature of the term loan, that is fully strong.

Unidentified Analyst: So with that payment, would you expect a positive inflow from working capital or cash effect?

Tina Tonnessen: Yes, we expect a positive effect from that.

Unidentified Analyst: Okay. Thank you.

Unidentified Analyst: [indiscernible] from Clarksons. Just to kind of understand a bit more of the competitive situation. You are saying you are bidding developing 33 project. Is that mainly project you are developing? Or is it a project that you are bidding against competitors just to kind of understand.

Henrik Badin: The majority is something that we are developing with clients and they have before that we have come to that stage, they have been evaluating other technologies, and they have decided to work with us developing that. But of course, there are -- I guess, there's competition out there, but they have done some preselections when we are at that stage.

Unidentified Analyst: Yes. So in most of those 33 projects, it's not that you're not competitive on price, its more that either the project makes sense or it doesn’t make sense.

Henrik Badin: And you see some renderings of some of these projects is substantial. You have actually passed some clarification when you're developing the renderings and you're developing that detailed setup. But of course, it will be always -- we don't control whether we -- when the contract will come. But in this process, the client is very fully aware because we're building the business case basically with the client, making sure that, that investment becomes attractive for them.

Unidentified Analyst: Thank you. One question on the US project. Is that -- does that project -- the economics of that project, the business case as you referenced, is that -- do they receive IRA benefits? Is there a carbon capture element to that?

Henrik Badin: They have a business model on the offset of biochar as far as I understand. But it's the first project, the way I have understood that is fully financed by themselves. This is a company that has been building within renewable for many years, building solar and wind parks and have been sort of selling that down. So they have a strong balance sheet and are capable of building the first plants on their own book.

Unidentified Analyst: Sure. I guess the essence of the question is whether biochar, for example, in this project is -- qualifies for IRA benefits? I mean is this a sort of a one-off project or could we see this business case be replicated in other projects in the US?

Henrik Badin: When it comes to -- for sure, we see this and this client is considering building multiple plants. When it comes to the, let's say, the business case and the revenue opportunities, there are several revenue streams from such a plant. You have the -- Paal, you might add.

Paal Jahre Nilsen: The carbon capture on credit part of it relates to the stability or the permanence of the carbon in the biochar. In this project, we will have some 85%, maybe 90% of geological stable carbon in the biochar. So we should be entitled to a high carbon credit for that in this -- and that -- I mean, when you look at the carbon credits and see who have delivered carbon removal by this biochar is now sort of the big provider at now. Other technologies, maybe in the future, but I think biochar. And this is well documented and part of the equation here.

Henrik Badin: Any more questions in the room? I think that's it.

Per Carlsson: We have some questions that come in from the web from Gard Aarvik. What is the main drivers for the revenue decline in Maritime and Industrial in Q2 versus Q1?

Henrik Badin: The main driver for the revenue…

Per Carlsson: Decline in Maritime and...

Henrik Badin: There's no decline in Maritime, but there's a decline in the new business area, Industrial Solutions compared to last year. We had last year was this large delivery to the VGM. And then we are now building new pipeline. The first half year, we will -- we have revenues from the Line 7. But we didn't record any revenue -- major revenue from the concept of the green development in US. So that explains in a way, lower revenue first half compared to last year.

Per Carlsson: One more from Gard. You list several verticals for growth within Industrial. Which do you see as most promising for our short term and long term?

Henrik Badin: I would like to say all and honestly, those 33 projects we are now developing with clients is a mix from the metallurgic applications in the life tires and biomass. And obviously, incentives are in place, the willingness to invest and to really develop these projects are large within all these applications.

Per Carlsson: And then there's one final question from Gard with so promising prospects within land-based opportunities, the competitive landscape must become more crowded, from where do you see most competition, in-house solutions from customers, other pyrolysis providers, older competing technologies? Can you elaborate on that?

Henrik Badin: We -- there are -- what I think that we have, in a way, positioned ourselves good now because we have been working on scaling up technology. And we see that we are perhaps in a sweet spot of production capacity where we see that we could -- we have unique technology. If we would look at small projects where you would convert some few thousands of tonnes into 3,000 tonnes of bulk carbon, I guess that space is crowded. And we're looking at now industrial capacity and industrial sized projects, where we are producing -- or to be producing tenths of thousands of tonnes. We don't see that's not a crowded space for sure.

Per Carlsson: Okay. Thank you. There are no further questions from the online audience. So back to you.

Henrik Badin: Thank you so much for showing up, listening.