Earnings Transcript for SSHPF - Q4 Fiscal Year 2022

Henrik Badin: Welcome to the Second Half Year 2022 presentation. My name is Henrik Badin. I'm the CEO. Today, I'm also joined by Erik Magelssen, the CFO. We're starting off with this picture. It's actually the large reactor that we have under construction in [Fredriksen], Norway. And you see one of our team members inspecting the wells inside, and you can get sort of a grip out of the size of this new vector that we truly believe will be a game changer for us going forward. Just jumping straight to key takeaways from last year. We have a sharp increase in revenues. Growth in all segments and with landbased growing nearly threefold. The full year revenues is reported at NOK783 million. We're reporting in Norwegian kroner, NOK783 million. And that's a 72% increase year-on-year. Profits improved significantly. EBITDA more than doubled, NOK292.2 million before nonrecurring for the full year. That's 11.8%. We're doing our best year ever in cruise, and we continue with strong margins in projects, and we have really a rebound in aftersales. In landbased, we have healthy profits, which also reflects costs related to scale-ups. I will provide more insight into that in coming slides. Order backlog remains high at nearly NOK1.2 billion, adding the options we were at NOK2 billion. And that provides for us very good visibility for revenues and cash flow going forward. We do see a strong demand for VOW solutions across several industry verticals. And our technology for biocarbon production and now recovered carbon back in the tire industry is identified as candidates for rapid scale-ups. Moving onto how we have developed the latest four years. I would say that we have performed well through the pandemic. But coming out of the pandemic last year, we have a sharp growth. We're coming from an EBITDA level in the 40s up to more than NOK90 million to NOK92 million. So we have a very strong development coming out of the pandemic. Looking at the numbers on the half-year basis and you see we report our numbers within three segments. We have the cruise projects. We have aftersales and we have landbased and you see how that developed. I will highlight three effects. You see on one side, a very strong performance in cruise and the way we develop that business to the all-time high activity. In the second half, that has sort of the impact of the contract we entered into in June last year, the US-based contract that is recognized a lower revenue in the last part of the second half. While we have full force in our engineering activity to develop our scale-ups going forward. That sort of the result is the margin development from the first to the second. Looking at the second half, all business areas are profitable. Looking at the share of revenues in the second half, 31% is landbased at 10.7% margin. And that comes back to the previous slide. We are doing extensively development of new projects and we are now planning for the scale-ups. And with the low revenue in the fourth quarter, the EBITDA comes a bit down. But again, we do that because we have said earlier, we're building for growth and we have good prospects going forward. Cruise projects is 50% of our total revenues in the second half at 19.1%. I will explain a bit about the EBITDA margin in that segment in the coming slides. Aftersales, 19% of the revenues, historically, that has been one-third of our business, but it's coming back as all ships are mostly back in operations, and that's a 13.6% margin. And as revenue grows, the EBITDA margin comes up within that sector. Let's look at the landbased specifically. For the full year, revenues of NOK304 million, that's a 39% share of the total revenues. Looking at how we have developed for the full year, 12.4% EBITDA and 10.7% for the second half. NOK441 million is the backlog, and that's around 37% of the total backlog is now from landbased. Last year, we have delivered sort of an extensive part of the technology to the first factory at Follum for VOW Green Metals, supporting them in their plan for rapid expansion. We have been doing engineering for the US-based project. The construction start is still pending permit, but we have very strong and good signals from US that the permit will be granted shortly in the beginning of the second quarter. So we expect to have a very large activity on that project this year. The strategic partnership with ETEL, I will share some more light about both that opportunity, but also more on the VOW Green Metals later. But that is something that we have been developing in the second half of last year. We're building pipeline by developing projects, both in Europe and in U.S., actually driven by the macros around the EU Green Deal, the REPower EU, higher intention in Europe and also the inflation reduction act in the US plays an important part. We see that in communication with our clients. The pictures you see on the right is the construction, again, of the large reactor. One plan is to deliver that reactor to the increase of capacity at Follum, but we also are in discussion with other possible takers of that first reactor and we have plans to build more. The small picture there is actually the Biogreen reactors that has been produced and delivered to Follum. Moving onto the cruise part of our business, NOK359 million for the total year, it's 46% of the revenue. For the full year, we have a 21.4% EBITDA, coming a bit down to 19.1%. And I will say that that's sort of an inflation effect that slightly brings down the EBITDA margin within that segment. Backlog with confirmed contracts well into 2026 options into 2028, provides very good visibility for us for future revenues and cash flows. We are in a dialogue with several shipyards for newbuilds. We also have been focusing on not only delivering waste management and wastewater purification as an offering to the cruise industry, but also waste-to-energy in board ships, because the industry has the target to decarbonize their operations and waste and biomass onboard ships can be used to produce energy that replaces hydrocarbons. What's good to see is also that in the first half of this year, a ship will be commissioned with our first waste-to-energy pyrolysis system to map and will enter service during the year. So we are progressing, we are moving forward, and we see a lot of interest around this new technology that will increase our technology portfolio in the cruise industry. Looking at aftersales, 15% of our revenues in 2022, NOK120 million. For the full year, 11.7% EBITDA, increasing to 13.6% and of course, it will continue to increase as we are booking more orders. It is a high activity. Recurring revenue is expected to increase as installed base continues to grow. It means that our addressable market within aftersales is increasing. And we have had several commissionings and several ships have entered service, both in the two years of pandemic, but also we see now we have a very high activity during the first half with commissioning activities. And just to explain that, commissioning is sort of our handover of the systems already installed before the ship enter service before it's handed over to the shipowner. We have another 35-plus Scanships that will enter service. It's more than 35 Scanship systems. It's actually ships equipped with our technologies. We have multiple systems onboard, and those will be delivered in the coming years. On top of that, we have the options. Just to explain the activity level now in the next months is very high. Normally, historically, we have had sort of three-four large commissionings at shipyards. Now before the summer, we have 10 large commissionings. We actually have additional four of smaller vessels which of course, a small supply, but it's all-time high. And when those are entering service, they will generate revenue in aftersales. So it's looking very good. We will then move on to looking at income statement in a balanced balance sheet and cash flow, we issued our full report this morning, but our CFO, Erik Magelssen will walk us through some of the details on those, and I will be back to talk about sort of market outlook and way forward.

Erik Magelssen: Okay. Thank you, Henrik. Henrik said he will be back. There's more details on the income statement in the full report, of course, just some key figures here. The drivers for the increase in revenue and EBITDA is the segment that we just showed and explained. Just on the depreciation and amortization that is increasing from last year, mainly due to the inclusion of C.H. Evensen, which has kind of a production facility and then some fixed assets. In the net actual items in 2021, there's a special item that's the fair value gain from the demerger of the VOW Green Metal sales operation. So you can see the details of that in also the annual report. Also the net financial items in each year will have in the financial items, the share of net profit from the associated company, VOW Green Metals and also some internal gains effect on that. So that you can also see more details on in the full income statement. On the balance sheet, I think that our total balance sheet increases both from the inclusion of Evensen and from the high activity level and the increase in revenue and working capital from that. We're doubling revenue from 2021. We are investing in intangible assets and also fixed assets for future growth. Part of the increase there also in intangible assets is due to the CRMs coming in with the acquisition purchase. The increase in contracts in progress and also the receivable is reflecting the high activity level. The net contracts in progress is a value of NOK198 million, and that with the accounts receivable will convert into cash to a large part in the first half year 2023. With the credit facility we have available in addition at the year-end '22, we have NOK68 million in addition to the NOK42 million level in cash. So in total, NOK111 million. I'll give you some more comments on the cash flow on the next slide. The equity ratio is 37%. And clearly you will see in the report that the purchase of own shares accounting-wise is deducted directly from that accounting value of equity. So if I adjust for that, the equity ratio is 39%, which is kind of, I think, a solid position for the group to have. We do have negative cash flow for operations in the second half year of '22. But that will change in the first half year 2023. Following there's two major payment streams is the payments from the accounts receivable and from the net contracts in progress. After investments and payment of interest cost, that will convert into a significant net cash inflow in the first half year '22. Just to understand our structure, we can have singular customer payments coming in between NOK20 billion to NOK40 million. So if you have two or three of these coming in next month compared to the month you're standing in, it will have a significant effect on the cash flow you're showing exactly in that reporting period. So it's not so that our customers are not particularly concerned about whether we closed 30 June or 31st December. So you have to look at this balance sheet values will convert into cash and all the EBITDA will be cash. So just to give you insight into those kind of large customer payments, they are coming in bulks and they are coming at the level of NOK20 million, NOK30 million, NOK40 million each payment. So I think that just the value of our balance sheet of NOK1.4 million is reflecting the growth in the group and the value that we are creating. So that's kind of a positive -- it is also that we are including CRMs, which is showing up to be a very good acquisition that we did. I think I'll hand back to you, Henrik. I promised that you will be back.

Henrik Badin: Yes. I'm back. Never leave you. Thank you, Erik. So let's look at the market and outlook and our current focus areas. We talked about these current focus areas last time. We have divided those into four areas. One is the focus towards the metallurgic industry space where we have technology to produce biocarbon that replaces fossil reducing agents, meaning that we're helping that industry to become carbon neutral, lowering their emissions. We continue in cruise and extending our technology portfolio and not only helping them to reduce discharge overboard, eliminate that, but also to play a role in decarbonizing that part of the business. We have our area where we called the Clean Energy, energy transition and carbon sequestration, where we are producing renewable energy. We are working on waste valorization, producing Biochar for carbon sequestration and other interesting things that are driven by the need to go fossil-free. And the last circle economy, where we are looking at plastic recycling and recycling of polymers with a special attention on end-of-life tires. So while technology is relevant across a wide range of applications. So if you look at our projects, initiatives and clients we're working on within these four areas at the moment, we continue to support VOW Green Metals, but we're also working with other clients. One is an undisclosed client we announced last year that has an ambition to go five times larger than the first Follum stage plant with 50,000 tons of biocarbon a year. We continue to develop a project with that tire. We are introducing a map will be started up in the first half of this year in cruise, and we are working on larger capacities to cruise using the ETIA-Biogreen technology. Clean energy, energy transition and carbon sequestration, we had earlier announced working with GT Gas to produce renewable gas as a replacement for natural gas in the grid. We work with Circular Carbon to produce renewable gas that replaces natural gas in Hamburg. While these states also working, starting up the NSR plant in Sweden, a plant that the client, the waste management company was getting funds to have a new business model at that site to convert green waste into Biochar as a climate mitigation effort. And we are working with concepts around finding an end of waste solution for [indiscernible]. And that is relevant for the biogas infrastructure and the need to scale up the capacity of biogas in Europe. And we have talked about the initiatives under REPower EU, where EU has the ambition to increase the bar gas production more than 10x up to 350 terawatt hours a year. So we are definitely relevant in many applications around clean energy, energy transition and carbon sequestration. And the last circular economy where we have earlier announced that we're working with Repsol and lately, when we had delivered sort of a test plant to their R&D center in Spain, in Madrid, and we're working on this Horizon 2020 project, the plastic to all of it and now the ETEL Itochu end-of-life tires, where I will provide more details into. So just looking at sort of the two -- as I said in the introduction, we have two potential scale-ups that we're working on. Scaling means that we could multiply well in the coming years. One is the bar carbon scale-up. The reason why we demerged out VOW Green Metals, why they now are developing a pipeline of prospects. We're working together with them. Last time, when we gave you some insight into their scale up plan, they talked about 470,000 tons of biocarbon annually towards the metallurgic industry. They had their presentation to the market last week on Friday, where they gave more insight even to a larger capacity target of around 600,000 tons a year. Let me sort of remind you that the first plant that we have delivered technology to this last year, and that was sort of a large part of our growth, which only for 10,000 tons a year. So this represents sort of a huge opportunity for us to grow our business as a technology. Importance of getting an early production at Follum. We made an investment decision earlier to build a plant. And as Cecilia announced in her presentation last week at VOW Green Metals was the -- they had the ambition to take over the plant that we have under construction at Follum ourselves and that we will have operational this summer. And that means that Vow Green Metals can start qualifying biocarbon together with their clients, and they can start having revenue in biogreen metals already this year. And this plant will also be very important for VOW, because it will also be a demonstration plant for our clients. And here, you see the picture of the steel construction that will sort of -- where we will assemble our pyrolysis system based on a multistep biogreen setup. And I would say that this setup represents sort of somewhere between 20% and 25% of the total capacity of the factories, the Phase 1 factory that the VOW Green Huawei metals will be building in parallel. So this is good news and I think it's well-appreciated in the market that we see that we are moving faster forward on the biocarbon opportunity. The other example of a scale-up for us is the recovery -- the end-of-life for tires. It's all about producing carbon black from end-of-life tires, a recovered carbon black. And the pictures on the right side is an agreement we entered into in December. You see representatives from ETEL Jack and on the right side, Mark, Mark [indiscernible]. Mark [indiscernible], we have been working with for several years when we acquired ETIA back in 2019, they had already then delivered the first test site at one of their facilities in UK. So since that time, we have been running that plant together with Murfitts Industries, producing recovered carbon black to verify and qualify that product for the tire manufacturers. We're actually aiming for a very high-quality recovered carbon bank, and we have had a lot of interest from the tire industries. But Mark is somebody within the end-of-life tire industry, and I will speak more about sort of the rationality of why we are working with them. But you see the pictures on the left side is the test site in the U.K. at Murfitts in Lakenheath. It's a huge attention around getting the [indiscernible] economy working within the tire industry. And the tire manufacturers are really pushing forward to recover carbon black instead of extracting hydrocarbons for that purpose. Today, tires are landfilled or burned. We want to recover it to have sort of a sustainable way to produce tires in the future. And the carbon end-of-life tire market is huge. That matter is on an annual basis, 33 million tons a year. And 10% of that is in Europe and at the convention during last year, Michelin and Bridgestone has the ambition to believe that by 2030, they will utilize in their factories, 1 million tons of recovered carbon black. And that means that to reach that amount, you would need to process all the no-life tires in Europe. Why is this partnership so unique? Why is this partnership so good for us. ITOCHU are producing rubber natural rubber for the tire manufacturers. So they are trading that, delivering that to the big tire manufacturers. ITOCHU is actually one of the third largest suppliers to the production of new tires in the world. Some years back, Itochu acquired ETEL, established ETEL in Europe. And that's a tire wholesaler, and they also owned Stapletons and Kwik Fit in the U.K. and in the Netherlands. And Stapletons and Kwik Fit in U.K. has 2/3 of that market. That means that they are selling and collecting 2/3 of all tires in UK. Murfitts, they acquired Murfitts two years ago. And that's the partner that we have been working for several years with Mark Murfitt and his team. So what we are basically doing here, we are closing that gap, so we are sort of making this circularity with VOW technology to produce recovered carbon black and tire ores. Recovered carbon black for Itochu to sell to the big tire manufacturers and tire ores that will be used in the petrochemical industry as a recycled product to reduce the amount of petroleum products. But this is why this is so good for us. We are working together being well-positioned for us to deliver technology to their ambition to build several factories in the coming years. When we announced the partnership in December, we always said that there are three factories under planning, but we're also working with more. So let's summarize. Cruise steaming ahead. We actually did our best year ever increase, we are very proud of that. And also it's driven by more activity on the aftersales side. And we truly believe there will be more business also in the short run, because we are in negotiations with shipyards for newbuilds. Landbased. We were very busy part of the last year with delivering equipment to Follum and VOW Green Metals. And as our margins reflects, we have been building the team, and we're doing extensive engineering for these two scale-ups, but also developing other new projects. We do see with what we're working on that this will have significant effect on revenue and profits already in 2023 this year. Order backlog, including options at NOK2 billion and that provides also good visibility for us to plan provides good visibility for revenues and cash flow short term and well into 2025-2026 and very important. We continue to develop and invest in technology. We want to make sure that we are well-positioned in this green transition of energy in the coming years. That's why you see in latest years, we are investing a lot to develop technology. And the opening picture, you see this large-scale reactor is an example of that, that we are really pushing the limits because we need to sort of make sure that we are very relevant working with the industries in the coming years. And biocarbon technology that we had developed for biocarbon production and recovered carbon black is identified as top candidates for rapid scale-up that potentially can multiply well in the coming years. Thank you so much. We will open up for some Q&As.

Q - Thomas Dowling Naess: Thomas, SpareBank 1 Markets. I guess it's a bit covered already, but I have a couple of questions on the balance sheet. Should we interpret it that growth will be a bit slower in the first half of 2023 as you expect the reverse low working capital?

Erik Magelssen: The net cash inflow, I was referring to is the net cash inflow from the backlog and the present operations that we have from the aftersales of accounts receivable and contracts in progress. The growth in landbased, that has an advanced payment structure. So that will be coming on top of that in a kind of a positive element for the first half year. So then what we're working on is for instance, this large scale up with ELT is a structure that we will be looking at that will not include kind of a financing element for us. So when I refer to net cash inflow, it's excluding the ELT and the Murfitts and those big elements that we're working on for the first half year. So it's just converting what we have in the balance sheet to cash in the first half year.

Thomas Dowling Naess: Yes, because in my eyes you are just assuming the period from the 31st of December until now. You also will build up kind of new contracts in progress and new receivables, et cetera?

Erik Magelssen: Yes. I think the net contracts in progress has been increased with NOK100 million from year-end '21 to year-end '22. So that including the accounts receivable that we will convert to cash. And then it's kind of particularly high now. And then we see already that it's converting to cash in the first quarter. And then the growth will also be -- there will also be growth in project cruise and landbased, but the landbased is -- does have this advanced payment structure.

Thomas Dowling Naess: Okay. And in terms of the margin on Cruise, you talked a bit about inflation, but I also saw that there was a doubling in the employee expenses there. Is there any explanation for that from first half to second half 2022?

Erik Magelssen: Yes, I think that the -- it's just the expenses within the business segment, then there was some allocation keys allocating the OpEx base we do have. So we are kind of building from growth. And there is -- generally, you will see that the OpEx base in the last half year will be higher than in the first half year. Now there's something to do with the summer period and there's some months there without the salary payment given the holiday pay structure in Norway. So generally, we'll see that OpEx in the second half year. If you go back and look, it's been generally higher than in the first half year. And that's why the margins should also be slightly lower in the second half year.

Thomas Dowling Naess: And one last question, and I guess it's also on this slide. You will continue to develop an investment technology, but we're still seeing that kind of the investments in -- are higher than your depreciation. Do you expect that to continue in '23, '24? Or is this kind of were there any special one-offs this year?

Erik Magelssen: I think it's a good question, and if you look at the investment level of NOK117 million for the year and you have a depreciation of NOK32 million. So of course, you're building for growth and you're building that base. I think the investments in the second half year was NOK56 million, and that includes the -- at this point, the investments in the new ERP system, et cetera. So we're -- we'll be at a somewhat lower level in 2022, we're looking at, because we have made significant investments in both 2021 and '22. So this year, at this, what we're looking at now is which will be somewhat lower in both first half year and second half year 23 than the level we have seen in 2022.

Elliott Geoffrey Jones: Elliott from Nordea. Could you have a couple of words on the competition of the biocarbon and the carbon black space. They look like great opportunities, but just a couple of words on the composition there that you see?

Henrik Badin: When it comes to the biocarbon towards the metallurgic industry, we have interest from several clients. And I would say the market is huge. If you just look at the Norwegian market, I think there's a need to and the ambition is to replace almost 50% of the consumption today. That's a 1 million ton a year. And we have Follum now VOW Green Metals says, their ambition is to double the production at Follum and that will take us to 20,000, 25,000 tons a year. So currently, we have a lot of interest from -- it's not sort of a market that is very crowded with competition. That's not what we see. It's actually -- I see that we are, to some extent, first movers. And we have, of course, also supported others because we are a technology provider. We are free to deliver our technology to several players that want to pursue sort of a business in producing biocarbon. When it comes to ELT, there are more initiatives we definitely see. But I think we found a good way to move forward working with these partners, because they control the entire value chain. And they have a strong interest in taking our position to be a large supplier of recovered carbon black to the tire manufacturers. And they own more than 65% of the tires in of the collection of end-of-life tires in UK and a large here in the Netherlands, and they have ambitions to do more. I think if we would be operating there on our own, it would be another game. But I think that with the partnership, we have a unique position to be part of a scale up here.

Elliott Geoffrey Jones: Yes. And then kind of following on to Thomas' question on margins. The explanations are quite helpful, but just kind of digging into the -- what you're seeing now in the first half of 2023 after the dip in H2. Do you expect margin levels to kind of rebound quite quickly back to, say, H1 2022 levels? Or are you seeing the potential effects are still kind of taking place for the first half of 2023.

Henrik Badin: I think that within the margins we have, if you look at the cost we have in our project in Cruise, I think we have that sort of a very good visibility in that now. We don't foresee that it will continue to grow. When it comes to landbased, we are delivering technology on, I think, in many cases, strong business cases, meaning that it's not sort of that price sensitive. But again, what you have to think about when we're a company that are growing, we are investing to grow. We're building capacity. And once we get the projects in, once we get the revenue, of course, the margins comes up. But in a way, if you look at last year with the huge investments we have done, we have revenues to support investments in technology to take the future positions and we are able to finance that ourselves.

Unidentified Company Representative: We have a couple of questions from the audience online. Actually, they are both from [Anders Rosenlund] concerns the cash flow and the balance sheet. So you might have commented on this already, but in case you wanted to elaborate. First question is on debt. Why has that been increasing so much in the past year? And I'll do the second question right away. That concerns the total net cash flow from operation, yes, calculated from 2016 to '22 is minus NOK24 million. And he asks, why is this the case? And could you please give some explicit guidance on what you expect in terms of cash flow in '23? So net debt and cash flow in '23?

Erik Magelssen: That's a good question. I'll take the last question first. I think Henrik remind me about the first. I think if I remember correctly, the revenue we had in 2016 was NOK171 million and now it's NOK800 million. So it's four times higher. That demands some kind of working capital that is kind of effect. We have basically financed that through kind of our operations with some increase in debt over that period and some equity. And it's also so that in this period, the landbased is not only investments. It also has a negative EBITDA quite significantly over some years. So that is kind of also reducing the cash flow of operations. Then we have had, I think, 1.5 or 2 years with negative cash flow EBITDA in the aftersales business or close to zero. So those two kind of factors are helped by the cash flow and profits within the projects cruise. So if you look from that summary he made, if you exclude the second half year '22, the figure is a bit different. So that's a good question. I think the combination of those factors are kind of giving back that picture. So it's important to remember that we had a negative EBITDA, and we were investing through OpEx also in landbased, and we have had aftersales we've been very down due to COVID. The increase in debt last year is just that we're drawing on the credit facilities we have to meet the increasing contracts in progress and the working capital. And also, in a way, the large part is as a revolving credit facility we have recorded as a short-term debt, but it is actually a long-term because you draw it up and down, is kind of doesn't have any repayment structure. So you will have it for many years in a way, but accounting-wise as a short term that is actually in its nature, it's kind of long-term. That isn't -- I'm kind of wearing off a bit, but that's just some add-on on that.

Unidentified Company Representative: There is one more question from [Anders Rosenlund]. This concerns the order backlog, which he says is down 8% year-on-year and 15% in the second half last year. Could you comment on the development of securing sales? Is the customer attitude more muted? Or is the drop just coincidental, reflecting inherent volatility in order intake.

Henrik Badin: To respond to that, we are working on several prospects with clients, both in Europe and in United States. We see a keen interest. There are some timing effect on it. But then also these scale-ups. So I think we are in a good position to see that we will start booking larger contracts in the short run. So I would say it's a timing effect. We don't see less interest, rather the opposite. We see a huge interest in these things. And that's what we're trying to give some insights into here.

Unidentified Company Representative: Thank you. I think that sums up the questions that we have received from the web. So back to you.

Henrik Badin: Thank you so much. Erik, do you have anything more to say?

Erik Magelssen: No. Thank you for coming and visiting looking at the web as well.

Henrik Badin: Yes. Thank you so much for your attention. Have a good one.