Cambi ASA

OSE:CAMBI

Earnings Call Transcript 2022-Q4

[Dragos Talvescu, executive]

Good morning, everyone, and welcome to Cambi's Fourth Quarter Results Presentation. I'm Dragos Talvescu, Director of Corporate Relations at Cambi, and I will moderate today's call.

In the coming half hour or so, you will hear from Cambi CEO, Eirik Fadnes; CFO, Mats Tjemsland; and Managing Director of Cambi Invest, Maarten Kanters. Together, they will walk you through the most important developments in the quarter and our current business and financial outlook. At the end, we will be happy to answer your questions, including those received before the start of this call. You can submit questions in writing any time during the call in the Q&A tab. As a reminder, this call is being recorded and will be available for replay on our website later today.

Before we begin, let me caution that in the presentation, we may make forward-looking statements subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in these statements.

And now without further ado, I will give the floor to Eirik Fadnes, Cambi's CEO.

[Eirik Fadnes, executive]

Good morning, everyone, and thank you for joining us. Let me start by saying that 2022 was a historical year for Cambi, as a focused business built on decades of operational experience and proprietary technology. We have a world-leading market position. The results we present for the fourth quarter today demonstrates the benefits of that focus and the scalability of our business. In our 30th anniversary year, we entered 2 new markets, Morocco and Bulgaria. We launched and sold new products and improved energy efficiency and acquired technologies to broaden our product portfolio.

Moving on to the key financials. As we have talked about in previous quarters, it has been a turbulent year with the geopolitical situation affecting our project in Ukraine and also progress on other projects being affected in the first part of the year. Material prices have increased significantly. We've experienced longer lead time on materials, and we have experienced a general inflationary pressure.

Towards the end of the third quarter, supply chain challenges started to ease, customers gained pace at site, and we had an accelerated progress in projects in the fourth quarter. Despite the challenges, we expanded our margins and improved our operating cash flow and achieved this while making good progress in meeting our medium-term order intake targets and also maintaining our gross margins on new projects signed.

For the year, the value of new equipment orders exceeded NOK 900 million, and we closed off the year with a record order backlog of more than NOK 1 billion. The demand for spare parts and other services reached record levels. Revenue from spare parts and consulting increased by 31% from last year, with a margin expansion of 460 basis points, delivering on our strategy of increasing recurring revenues.

The Services segment's total revenue ended NOK 10 million lower than last year due to fewer upgrade projects executed in the year. However, due to the mentioned margin expansion, the gross margin in Services ended in line with the year before. With the recently announced upgrade project in Dublin, we expect the segment to deliver growth in revenues from 2021 levels in 2023. I want to thank everyone in Cambi for their hard work and determination to achieve an excellent performance in this challenging external environment.

Now let's take a look at the new contracts that we signed in the fourth quarter. Cambi signed 3 contracts in the fourth quarter with a landmark project in the U.S., an industrial client in South Africa and the first contract in Bulgaria. In Bulgaria, we had a sizeable contract to supply 2 THP systems for the main wastewater treatment plant in Sofia.

In San Francisco, we signed a major contract to supply 3 THP systems as part of a comprehensive project to upgrade the biosolids digester facility. In South Africa, we will supply 2 THP systems to treat industrial biosludge at Sasol's Secunda Operations.

Let us now turn to the outlook. Going into 2023, conditions in our industry remain attractive, and we started the year with a record level of order backlog with expectations to deliver growth in both revenue and profits to income '23. Over the longer term, our growth opportunity is very exciting, driven by urbanization, need for investments in critical infrastructure, tighter regulations and for our industry to be more sustainable.

Sludge management has a critical role to play in over the coming decade wastewater treatment plants need significant investments to transition to net zero. To meet that target set by an increasing number of utilities in cities, they need to adopt new solutions and become more sustainable. And this made up a -- solution well positioned. I am confident in our ability to deliver excellent outcomes as a high-quality business with strong market position, proprietary technology and our strategy to ensure sustainable growth. So overall, we invest -- for the fourth quarter, and we are highly confident in our prospects. Reflecting this confidence on behalf of all lease parameters at a dividend of NOK 0.15 per share approval.

We are making good progress in our DBO developments, which I will now let Maarten take you through. So over to you, Maarten.

[Maarten Kanters, executive]

Thank you, Eirik. Let's talk you through the updates on DBO projects, both during the fourth quarter and project developments. In Q4, we saw several customers announcing DBFO projects to the market and we leverage our interest as well as in business -- towards projects in the earlier stages of development. While on the more mature market unit with most of the projects we were focusing on were awaiting customer actions or decisions. After reviewing the capital need the mature DBO pipeline, we foresee that we have both and will be less capital intensive than anticipated. And therefore, we are -- and that's because we're acknowledging that Cambi is expected to take ownership stakes in these projects that range between 15% to 40%, which is slightly lower than the 30% to 50%, which we communicated at the time of the IPO.

And this is mainly the result of those projects that are progressing well. Those are the ones where we have joined forces with strong partners. In addition to that, we are increasingly confident that we will be able to partially finance the equity contribution through the profits generated from equipment sales into the projects. And then over to the recent developments with a conditional award on a U.S. DBFO project. This is a project that we've been working on since 2020 and the public procurement process has now been completed.

And that resulted in a conditional award to the consortium that Cambi is a part of. After we submitted a proposal a year ago, that core strong on both technical and financial selection criteria as set by the municipality. And this is a great step forward. Though the award is conditional on 2 elements. It's both to negotiate final terms for the municipality as well as obtaining the necessary permits to build and operate the sludge treatment facility. For these, the project requires approval by regulatory bodies. Some permits are to be provided by the municipality itself, while others require state EPA approval.

And it's especially the latter that's difficult to predict here. But a firm DBFO contract might be signed towards the end of this year. We will come with more concrete information on the project once it is available. For this particular project, we are working together with strong well-established local partners, where Cambi will take a minority interest in the project and also deliver core technology.

Now I'll move on to the next page, please, for a recycling update. On the existing biosolids handling contracts, everything went according to plan. We were also able to secure 2 issue contracts in the quarter in Sondre Follo and Gjøvik with a combined value of just short of NOK 2 million. In terms of soil sales, typically, the fourth quarter has low activity as the winter season starts, but still, the sales volumes were slightly above the year before. And for the entire year, the soil sales volume ended up at 220,000 tonnes, which is just 10 tonnes -- 10,000 tonnes less than the year before. And this is mainly due to lower activity in the construction sector in Norway, as I explained on earlier updates.

Now most of the soil factory and all the equipment has now been delivered and the plant is set up. We've started the operations. We plan -- we expect to be fully operational later this month. And as you can see from the picture here on the left-hand side, the production has already started. You can see that there are several bags -- pellets with full of bags ready for shipments. We've seen an increasing interest from garden centers in these peat-free products, and we expect to be able to produce the planned volume of soil bags ahead of the spring season.

With that, I'll give the word to Mats for the financial results.

[Mats Tjemsl, executive]

Thank you, Maarten, and good morning, everyone. I will now take you through the financial results for Q4 and full year 2022. We are happy to report a strong financial performance in the last quarter of 2022. Q4 revenues ended at NOK 157 million, which is up NOK 70 million from the NOK 87 million same quarter last year. A key driver for this strong performance is accelerated execution on equipment projects as the supply chain challenges experienced early in '22 started to ease and several projects started to gain pace, as also Eirik mentioned earlier.

For the full year of '22, the revenue was NOK 440 million, slightly below NOK 458 million in 2021. EBITDA was at NOK 29 million in Q4, which is up NOK 34 million from the negative NOK 5 million in Q4 2021. The increase is primarily driven by higher project revenues. And in Q4, gross margins also saw an uplift from 52% to 57% contributing positively to the EBITDA. Sales and general and admin expenses were NOK 12 million higher than the same quarter in 2021, reducing the EBITDA. A key driver for this is increased sales activities, more higher in personnel and a general cost increase from inflation pressure that we see. For the full year of 2022, the EBITDA was NOK 3 million down from NOK 39 million in 2021.

Now looking at the Cambi Group segment on the next slide. The revenue was NOK 136 million in Q4, up from NOK 66 million same quarter last year. The uplift is primarily driven by reaching delivery milestones in several equipment projects. The project in Lviv, Ukraine remains on hold under the clause of force majeure. Services revenue ended the quarter at NOK 22 million, which is slightly up from NOK 18 million in the same quarter of 2021.

For the full year of 2022, the segment revenue was NOK 341 million, down from NOK 359 million in 2021. The EBITDA ended at NOK 31 million in Q4, up NOK 35 million versus negative NOK 4 million in the same quarter last year. A key driver for this uplift is the revenue increase from projects and also the previously mentioned improvements in gross margins.

Now looking at the Cambi Invest segment. The reported revenue in Cambi Invest is solely from Grønn Vekst part of the recycling subsegment. And the revenue here was NOK 21 million in Q4, which is in line with the same quarter last year. And for the full year of '22, the revenue was NOK 99 million, which is at the same level as full year 2021. There were no major disruptions in production or deliveries of soil volumes. EBITDA for this segment was negative NOK 2 million, which is slightly down in NOK 1 million in the same quarter last year. And this reduction is primarily driven by increased activity in developing DBO projects.

And now looking at the order intake and the order backlog development for the company. We are very pleased to report a record high order intake in Q4 at NOK 604 million, which is significantly up from the same quarter last year. The order intake is primarily from the 3 mentioned contracts signed during the quarter, which I did mentioned earlier. And for the full year of 2022, the order intake was over NOK 1 billion, up from NOK 480 million in 2021.

Looking at the order backlog, it reached an all-time high by the end of Q4, surpassing the NOK 1 billion mark. This order backlog provides a solid financial foundation for coming years for Cambi, and let's have a little bit closer look at the backlog distribution. So based on our estimates, we have indicated the order backlog distribution over the next years on the left-hand side. And we estimate that close to 80% of this backlog is executed before 2025.

Looking at the order backlog, currency distribution, we see that the backlog mainly consists of U.S. dollars and euros. And these 2 currencies make up more than 3/4 of the total order backlog as of end of 2022.

Now looking at some recent announcements in '23 that will have an impact on the order backlog, which we reported end of Q4. There's one negative and one positive announcement, which in some will reduce the order backlog in Q1 '23. The first one is related to the project in Calgary and the large contract to deliver THP to the Bonnybrook wastewater treatment plant in Calgary, Canada will not be extended.

And this contract was signed in 2016 but has repeatedly been delayed by the customer due to budget constraints. And the financial impact for Cambi ASA Limited as the latest project schedule expected a project to begin its execution in 2026. And although we have now removed it from the backlog, we are optimistic that there may be an opportunity to revive the project on a later stage.

The second announcement is related to the upgrade project in Dublin. And here, we have signed the early works for the upgrade project in the Ringsend wastewater treatment plant in Dublin. These 2 announcements will have an impact on the order backlog in Q1. And we see support from strong economic, regulatory and environmental drivers driving the demand for our products going forward.

Let's now look at the equipment contracts. As of end of 2022, we are pleased to report that we have signed NOK 911 million of equipment contracts. We previously have communicated an expectation to sign NOK 1 billion of equipment contracts in the 2-year period, '22 and '23 and reaching this NOK 1 billion target for '22 and '23 is expected shortly. And on the back of this, we have now also decided to establish a new target to sign NOK 1.2 billion of new equipment contracts for a 2-year period 2023 and 2024.

Now let's have a look at our balance sheet. The assets were NOK 574 million end of '22, up from NOK 523 million. Intangible assets increased from the transaction with Veolia in the middle of 2022, where we acquired the complementary technologies, as Eirik mentioned earlier. Also, the cash position increased to NOK 167 million in 2022, up from NOK 70 million end of 2021. Financial assets, mainly money market funds decreased from NOK 201 million as of end of '21 to NOK 102 million end of '22, and the reduction was partly used to fund the transaction with Veolia I mentioned earlier. And to summarize this, Cambi maintains a very strong financial position.

And with that, we are ready to move over to the Q&A section.

[Dragos Talvescu, executive]

Yes. We have received several questions. I will start by reading out the first one. You can still submit questions in the Q&A tab. The first question is, what was the average margin for projects completed in 2022?

[Mats Tjemsl, executive]

Yes. I think I can answer that. So we see that our projects typically have a gross margin of above 50%, which is depending on the scope of projects, larger projects typically have lower gross margin. And on the top of this, we typically have other project-specific costs such as payroll, hiring personnel and travel and et cetera. So this will reduce the gross margin on projects or this will reduce the average margin for projects. And I cannot go into the details on the exact project margin that we have, but this gives an idea.

[Dragos Talvescu, executive]

Thank you, Mats. Next question. On your updated order intake target, could you elaborate the changes on a like-for-like basis? And if you have applied the different foreign exchange rate compared to Q3?

[Mats Tjemsl, executive]

Yes. So the NOK 911 million that we reported on equipment contracts, it uses the actual FX rates in our books, not the fixed Q1 FX rates. So like-for-like, the equipment order intake in -- with using the Q1 fixed FX rates would be NOK 810 million. So we have a positive contribution from FX development. But in addition, also the NOK 911 million also now includes smaller variation orders, which are below the NOK 55 million mark, which we excluded previously.

[Dragos Talvescu, executive]

Okay. Next question. In terms of backlog, we expected NOK 456 million to be executed in 2023. The question is, could you provide any details on how it relates to equipment contracts.

[Mats Tjemsl, executive]

Yes. So the backlog distribution is an estimate that we have made. I cannot comment on the exact share of how much relating to the equipment contracts. But I think a good proxy would be the historical share that the equipment revenues make out for Cambi.

[Dragos Talvescu, executive]

Thank you, Mats. The next question. Notice is the solid gross margin in Cambi Group compared to last year, while personnel expenses and OpEx went someone up. Given the cost inflation across industries, how much have we managed to pass over to customers? And what is our expectation on margins going forward?

[Mats Tjemsl, executive]

Yes. Thank you for the question. I mean we see inflation pressure across the regions where we operate. What they can say is that we have been successful in maintaining our margins on new contracts signed and larger contracts that have typically a long duration, we also have included price escalation mechanisms in the contract. So in sum, we are able to protect our margins.

[Dragos Talvescu, executive]

One more question. Are there any details you could provide on the conditional award of the DBO contract announced in February? What assessments are you doing in terms of return requirements, leverage and risk sharing?

[Maarten Kanters, executive]

There's a lot I would like to talk about, but I need to be careful what we share here as the contract, as I mentioned earlier, it's conditional on final terms and obtaining necessary permits. And while securing those conditions, we will, in parallel, together with our partners, also work on putting in place all the necessary commercial contracts connected to the plant. And that has a significant impact on how the project looks. So at this point, there is a lot of moving objects that we still need to secure. Once we have more concrete information about the project economics, we will come back and inform the market.

[Dragos Talvescu, executive]

Okay. It doesn't look like we have received any other questions. Give it maybe 10 more seconds. Okay. It seems like these were all the questions for today. Thanks to all attendees for your attention. We hope that you found the presentation insightful. The video recording will be available under the Reports & Presentations tab on Cambi's website later today, and we also invite you to follow us on LinkedIn, where we regularly post the latest updates. Thank you all, and have a good day.

[Maarten Kanters, executive]

Thank you.

[Mats Tjemsl, executive]

Thank you.