Cambi ASA

OSE:CAMBI

Earnings Call Transcript 2022-Q2

[Eirik Fadnes, executive]

Hello, everyone, and welcome to Cambi's second quarter results presentation. As always, please read the disclaimer included in the presentation and published report, especially on the outlook section.

With me, as usual, I have Maarten Kanters, Managing Director of Cambi Invest. And together, we will take you through the highlights of the second quarter. But first, let us recap what Cambi is all about and how market conditions have developed in the first half year.

We have established Cambi as the global market leader in our niche. It's built on our core technology called thermal hydrolysis or THP. And it's the combination of better environments, increased renewable energy output, reliable performance and solid financial business case that makes our solution attractive for utilities and communities worldwide.

The industry is on the cusp of unprecedented change, managing the increased volume of wastewater because of urbanization, aging infrastructure, stricter regulation and the drive to net [ sale ].

With Cambi, the utilities will lower their carbon footprint irrespective of handling room of [ fan ] products, providing a future-safe solution for plants built to run for the next decades. It's also enabling existing [ fans ] to increase capacity with limited required footprint due to the higher throughput in existing digesters. And in most cases, it gives the lowest life cycle costs.

In some markets, especially in Europe, the current geopolitical situation has increased the focus on being energy independent. Cambi we can play a role in this by increasing biogas production by up to 40%. And at the same time, it gives the sterilized product free of harmful pathogens and circulate important nutrients back to land. So our already-strong drivers have become ever clearer during the first half of this year.

So moving on to market activities and how we see that with these drivers improving. There is a fundamental strength of our business reflected in the pipeline of projects. We've talked about before the more than 300 active leads and more than 3,000 -- sorry, identified plants with sound business case for our solution.

Order growth is strong and tender volume is up 27% in the first half year as more sites are looking to invest in sustainable and cost-effective solutions. The increase that we have seen is partly due to our pricing policy, enabling us to increase our prices to at least match our cost increase in the last year.

We secured 3 new equipment contracts during the quarter, one of which is in a new country, Morocco. In addition, we were awarded 2 contracts that at quarter close were not signed. One of these is the previously mentioned contract with [indiscernible] which is currently in collaboration phase, starting in the second quarter.

So let's toes take a look at the new orders. In essence, Greece, we signed a contract for our second system delivery to a repeat customer. With additional system in operation, it would treat the remaining biological sludge, lowering the energy demand and increasing the biogas production at the [ at the top ].

So we have several repeat customers in many markets, and these are, as we talked about before, some of our best ambassadors in increasing awareness of our capabilities.

Our first contract in Morocco and second in Africa is also to an industrial client, it is a world leader in phosphate fertilizer, start of operation on this contract is scheduled for 2023. So it's a faster delivery than what we normally see in equipment sales.

Our first contract on the continent. The pilot for Sasol in South Africa was successful, and the customer has published papers of the results. We currently have a signed contract with the customer, which may lead to a larger-scale plant in the future.

NRA is a project we have followed for some time, where it was later split in several packages. We targeted one of these and were awarded towards the end of the second quarter. The project is under execution and progressing as planned, with start of operations scheduled in 2025.

So I'm very pleased with how we built a stronger backlog in the period and managed client expectations in a complex operating environment. But closely monitoring changes in the market and taking a proactive approach towards clients, tender and contract negotiation stage, we have, as already mentioned, been able to increase our prices to at least be in line with cost increases seen in the last year.

We continue to experience delays in supply chain. And although the pace is starting to pick up on site, some customers are still not ready to accept delivery of our scope, which is delaying the execution and delivery of backlog orders.

I do want to take the opportunity to thank my colleagues across the group for the good progress in maintaining our strong [ HES ] record despite these external challenges.

After quarter close, we have signed 2 contracts, both with an extended scope. In Fredrikstad, Norway, we signed a collaboration-phase contract similar to the one we have with [indiscernible]. This phase of the contract is expected to take approximately 6 months, after which the main contract will be signed and reflected in order intake and backlog.

In Copenhagen, Denmark, the project includes extended equipment scope and building, with the handover expected in 2024. For these larger scope projects, the gross margin expectation is lower than what we normally see for core equipment sales. So for larger scope projects, the margin would typically be in the 30% to 40% gross margin range.

Taking a look at the outlook. The conditions in the industry are very favorable, as I've already touched on. We make sludge management more sustainable and address some of the biggest challenges our industry faces, achieving net zero emissions, increasing efficiency and keeping costs down.

Today, Cambi is a global business with plants in more than 80 locations. And we're proud to say that many large cities of the world are trusting Cambi as a core technology to make their sludge management safer, more sustainable and cheaper. And the prospects of the wastewater industry is extremely strong, but so too is the pressure to become more sustainable.

That requires partnerships across the industry, but particularly between utilities, consultants and technology providers such as Cambi, whose job is to take a problem to create a solution. And Cambi always focused on leading the technology change in our niche with innovations that we have made sludge management more sustainable and cheaper. And we have rolled out new products in the last 12 months that further improves the energy efficiency of our system.

So as we move into the second half of the year, I'm excited about the prospects and confident in our ability to deliver growth and an order intake in 2022, '23 of NOK 1 billion and for the period leading up to the end of '24, an order intake of NOK 1.7 billion. And with that, I'll hand over to you, Maarten.

[Maarten Kanters, executive]

Thank you, Eirik. And in the second quarter, Cambi has acquired 2 complementary THP technologies. This acquisition increases our existing patent portfolio with 2 complementing ready developed products. It's one continuous system, the Exelys and [ batch ] system, the Bio Thelys, where the [ batch ] system is more similar to what Cambi is offering today with our THPs.

The Exelys system is a very interesting addition to our portfolio because of the small footprint, the low amount of steel it uses, it is a standardized product that can be easily placed on a site. The fact that it is a continuous system means that it doesn't offer a complete pathogen [ killer ] its a slightly higher energy consumption, but it is particularly interesting in application for smaller plants and possibly also for non-sludge substrates.

So it allows us to look at other markets with this technology, and that's something that we're doing at the moment because we have closed the transaction, and we are now internalizing the know-how and looking to see how we can deploy these new technologies elsewhere.

Then I'll move over to DBO projects. The project development in the U.S. and in the U.K. has been going according to plan so far. And the emerging markets, we are seeing a slightly different situation, where we are experiencing some delays, outside of Cambi's control. And these are very different causes.

Just to give an example, there have been flooding events in South Africa. This has caused our customer to focus on restoring basic infrastructure before they can talk about PPP projects on sludge treatment again.

In other countries, you see that the municipal decision processes are taking more time than they had initially indicated, other challenges we're facing in some of the emerging markets. But again, the progress in our core focus markets, U.K. and the U.S.A. are promising.

So we -- going forward, we anticipate to enter into exclusive negotiations on at least one DBO project before the end of this year. And in addition, we are also stepping up our efforts to promote our as-a-service offering. This should reduce the threshold for customers to adopt the THP solution. And we will come back with more news on this in the fall.

If we move over to the Recycling side of the business, ingredient growth has delivered the results that is comparable to last year, where the sources of revenues have shifted slightly.

We've seen more sludge coming in, while on the same time, after 2 years of quite high garden waste volumes, we see a slight reduction of this, this year as could be as a bounce-back after a COVID period, where people spend more time gardening. And also, the soil volumes have slightly fallen behind last year, but we managed to partially offset this shortfall by increasing the prices.

The green growth is working in various directions to deliver profitable growth for the coming years. For example, looking at pricing and operational strategy reviews that have already been initiated a year ago and they are now starting to pay off.

They also see that there are plans to set up soil production in new regions, Bergen and Stavanger area are becoming a reality now. And in addition, the soil bag factory that we're setting up in Kristiansand will be a key component of this.

And let me give you a little bit more detail on what soil that facility [ fields ] and what that is. And I'll take a step back and start with why it's peat-free. Why is that a good thing? Why do we need to do that?

Because in many soils today and the only soil that you can buy in a garden center, you'll find peat. But when peat is mined for gardening, the reserves of stored carbon are unlocked. The peat [ FA ] carbon sync.

And there's 3 things that happen. When a peat land is drained before mining, it immediately starts to emit greenhouse gasses. After mining, the remaining peat also continues to release carbon dioxide and methane into the atmosphere.

And when the carbon in the peat is spread on gardens around fields, it quickly turns into a carbon dioxide as well. So it really tremendously increases greenhouse gas levels. Establishing peat lands does take years, and they are depleting at the moment. So it also means that the unique biodiversity of peat [ land ] is lost.

Grønn Vekst has been aware of this for a long time already. They started off with the first peat-free soils already in 2026 -- sorry, 2006. At the time, the market wasn't really ready for a peat-free product.

But they picked up the development work again in 2015, '16, and they have been testing and trialing different alternatives to peat to create a similar structure and fertilizer content in the soil, by using [ compass ], biochar, manures, bark and other residues from forestry and construction, for example, focusing on products or materials that are locally available and ideally recycled.

And as a result of this R&D work, Grønn Vekst is now in a position to introduce a complete peat-free soil range in next season, and that includes products for sowing, potting and planting. So it's really different types of soil with different characteristics, so that you can grow plants completely peat-free.

The feedback from garden centers has been very promising. And the products that they have seen so far in the market have been quite low quality. The response from the garden center is really positive. And also, there is an increased demand, especially from educated garden or [ some of these fields ].

So this is kind of a pull from customers, from professional farmers from garden centers to get a good peat-free alternative on the market. And this market is quite an interesting one, relative to what Grønn Vekst is already doing.

The total market for soil banks, and that includes peat-containing and peat-free banks is around is estimated between 300,000 to 400,000 tonnes, 15 million to 20 million bags a year.

The peat-free size of that is very low at the moment, and the Grønn Vekst is already providing a large amount of those peat-free bags together with a production partner that has been producing and bagging these products for them.

Now by setting up their own soil bag factory in [ Kristiansand ], it will allow Grønn Vekst to produce their own -- under their own supervision their own products, sell those to different channels, different gardening centers. And the capacity of this line will be able to provide nearly 10% of the total market. This will, of course, need some ramp-up time for the customers to get used to it, but we really see signals that the market interest is there.

Until we have it fully loaded with peat-free soils, we can also use the bagging facility to pack other products. And if we see that the demand exceeds 2 million bags a year, it's also very flexible in the way that we can set up additional capacity to expand the production ability.

This is something that we are in Grønn Vekst quite excited about. But it requires the market to adopt peat-free soils as an environmental-friendly alternative. And that's something -- that awareness is growing.

With that, I would like to hand back the word to you, Eirik.

[Eirik Fadnes, executive]

Thank you, Maarten. Let's take a look at the financials for the quarter. Revenue is down 21% compared to last year. And while we see a positive development from the first quarter of more than a 50% increase in turnover, we are still affected by the market situation compared to last year. We continue to experience delays at customer sites and the project in Lviv remains under force majeure.

EBITDA is primarily a reflection of the lower revenue and higher activity, especially in sales and marketing, on conferences, seminars picking up the post-COVID. In addition, this has changed in recognition of holiday pay, which is now split over several quarters as opposed to last year. It was a reduction in payroll costs in the second quarter.

Looking at the Cambi Group segment, being the largest segment -- the consolidated numbers, the impact mentioned the environmental conditions, the project in Lviv, then also the challenges in longer lead time and supply chain is the same for Cambi Group, with a turnover reduction of 29% compared to last year and with an EBITDA of NOK 7.6 million negative.

The [ Invest ], Maarten touched on the changes seen from last year in the product mix, for example, but despite that change, we delivered a turnover in line with last year and an EBITDA slightly above last year.

Order intake and backlog, I have already touched on. In -- compared to last year, order backlog is up 16% due to the new orders coming in, but also, as I mentioned, the delay in execution of backlog orders. The total value of awards, LOIs and also framework agreements that we have in place, that's not reflected in backlog, amounts to more than NOK 460 million as of today.

In summary, for the first-half year and also talked about in the last quarter, the operating environment has caused delays in projects, and the total revenue is, therefore, down 28% compared to last year and is also the lion's share of the reason for the lower EBITDA in the first-half year.

We had a positive operating cash flow in the quarter due to milestone payments on projects. And as you can see from the balance sheet, intangible assets increased following the acquisition of technologies from Veolia, different from technologies that we develop in-house that we do expense, and these will be reflected in intangible assets, and the rest is primarily deferred tax assets on our balance sheet.

This ends the presentation, and I propose to take your questions.

[Eirik Fadnes, executive]

There is one question. What is the impact of the Ukraine-Russia crisis and related energy cost increase? Well, there's both direct and indirect consequences for Cambi. And the most obvious is the project that we have in Lviv that's currently on hold under force majeure. We are in weekly contact with the city of Lviv.

Both parties want to move the projects forward. But for obvious reasons, we are not able to be on-site, but we're looking at ways to continue the projects by manufacturing outside of Lviv, but that is still discussions ongoing. Indirect consequences. It's a delay in supply chain that we're experiencing. But also, we see a higher focus on being less dependent on import of energy.

So as I mentioned earlier, the focus and attention to biogas due to the crisis is a positive long-term development for Cambi, not only for sludge treatment, but also, as we talked about before, we're looking at other substrates, where we can apply our technology to increase the biogas yield.

And the question. In your Q1 presentation, you said that 1/3 of order intake by 2023 is backed by tender awards and letter of intent, while you now changed your [ wording ] to 30% of expected order intake by 2023 and 45% by 2024 when including tender awards and LOI.

What is the reason for a change? Do you now expect the letter of intent to come in 2024 instead of 2023?

Yes. The changes in -- from the 1/3 to 30% is due to two main things. One is that we have received an additional award but also -- which is part of the question, and expectation is that it is one project that where we see a higher risk of delay to 2024, early 2024. It may still happen within 2022, '23. But based on latest discussions with the customer, we see a higher probability of it coming in, in 2024.

Any more flavor on the DBO project in terms of the expected exclusive negotiation by end of 2022 will be appreciated. What is remaining before an exclusive negotiation? How long does this kind of negotiations typically take? I'll leave that to you, Maarten.

[Maarten Kanters, executive]

Yes. Thank you. It's a bit of a difficult question to answer. It's project-specific. We don't like to give project-specific details in this relatively early phase of the development still.

But I do think that in -- not just in one project, but there are more projects, where we are about to enter into exclusive negotiations. That requires an [ acceptance ] of the actual decision from a customer to go into those negotiations, and that is what is pending. There, negotiations will obviously be conditional on some factors, which are again very project-specific. So I won't go into too much detail.

I think we are -- the outlook is promising that we will go into negotiations, and then it is about reaching acceptable terms for both parties in that phase. It's difficult to say at this point how long that will take exactly because there are several factors involved. I hope that gives you a little bit of a flavor. And if and when there are more details to be communicated, we will be back [ to you ] with that.

[Eirik Fadnes, executive]

Okay. Then there are no more questions, we'll conclude the presentation and session. Thank you all for participating. If there's any questions after this call, please do not hesitate to reach out. Thank you.

[Maarten Kanters, executive]

Thank you very much. Have a nice day.