Hav Group ASA

OSE:HAV

Earnings Call Transcript 2022-Q1

[Gunnar Larsen, executive]

Welcome to HAV Group ASA First Quarter Financial Results Presentation. My name is Gunnar Larsen. I'm the CEO of HAV Group. And together with me, I have Marius Koksvik, which is the Vice President for Business Development in the Group.

Today, I'm going to tell a little bit about the highlights of the quarter. I'm going to tell you about the HAV Group in general and the subsidiaries and their market opportunities. Marius will come in and present the financials in more details, and I will give a market outlook for the group and for the subsidiaries at the end. We also open for questions and answers. We already got a lot of good questions from our stakeholders. So we will take a session with questions and answers at the end of the presentation.

Q1 has been another exciting quarter for HAV Group. We had a revenue of NOK 199 million with an EBIT of NOK 8 million. Cash from operations was NOK 21 million, and our total cash balance is at the end of the quarter, NOK 373 million.

Some of the key developments in Q3 is that Norwegian Electric Systems signed their so far, largest contract approx NOK 100 million for a totally electric ferry for Scandlines to be built at Cemre shipyard in Turkey. We also established our new company in Turkey, operating in the Turkish market and taking care of the important shipbuilding market in Turkey.

And in addition to the ferry installation for Scandlines, as Norwegian Electric Systems also signed the order for the land-based onshore ferry charging system. Norwegian Greentech also had a very important milestone in Q1 where they finally got the U.S. Coast Guard approval for the Ballast Water Treatment System, which will be opening even more markets for their good products.

In addition, we also had some good events after the Q1. HAV Group, together with HAV Hydrogen, received preliminary approval for our hydrogen-based energy systems for ships, also a very important milestone. And HAV Design also got an order for our design and equipment package for an SOV for the offshore wind market for Ørsted to be built at [ Cemre ] in Turkey, also a large contract for hard design. We also secured last remaining shares for Norwegian Greentech. So we now our own also Norwegian Greentech 100%.

HAV Group, as I said earlier, is a young company were established in February 2021. And but we are based on the experience from 4 companies with several years of experience in the maritime shipbuilding market. We are an international provider of sustainable marine and maritime technologies. Our vision is a sustainable future at sea. And that is very much in line with all the activity that all these companies also have been doing up until we organized these companies in the new group.

We will consider ourselves to be specialized and experts in guiding the marine and maritime industry towards the zero emission. The 4 companies within the group is HAV Design. HAV Design is a global leader within their segments, within energy efficient and competitive ship design with zero emission ambitions.

Norwegian Greentech is the water cleaning expert in the company, and their main product today is Ballast Water Treatment Systems for small- and medium-sized vessels.

Norwegian Electric Systems is a world-leading total supplier of low and zero emission propulsion and control systems, and they can deliver to a wide range of vessels for the global maritime market.

HAV Hydrogen is the youngest company in the group and were established based on a large research and development projects funded by the Norwegian Innovation and Norwegian Research Council. And with that technology, we are now commercializing hydrogen energy systems for vessels.

So how we are creating value within this group is that we are coordinating the strategy of the companies in order to extract synergies. And so we actively take part in the strategic developments. We are stimulating intercompany business within R&D and business development. We are extracting synergies through economies of scale, standardization and standard processes and systems. And we also have an ambition for growth, both organically and through cooperation with strategic partners, mergers and acquisitions and other growth potentials, either organically or inorganically.

The management team of HAV Group consists of Group -- HAV Group management in addition to each of the managing directors for each of the companies. And together, we represent very many years of experience within the marine industry from different companies Also, we have a very experienced Board of Directors, also with expertise from financials, from industries, from tech business. And in addition, also, we have representatives from the employees in the Board of Directors.

So then we go on to subsidiaries, tell a little bit more about the subsidiaries, the results in the quarter and also what the opportunities are for the future. HAV Design. We say they deliver simulation-based ship design. So they have used years in research and development in knowledge and technology and tools in order to design the optimal vessels with good digital tools, to the best according to the requirements of the owners and also documenting the performance of the vessels before they are going into the operation.

And that will enable the shipowner also to calculate this OpEx and CapEx before is building the vessel or taking a decision to invest so that he has the best grounds for making a good financial investment decision.

In the quarter, they had operating income of NOK 21 million with an EBIT of NOK 0.3 million. The main reason for the low income and EBIT in this period is the low capacity utilization of the company. Even though the potential for the products is very good. We still see a little backlash from the COVID period, also the lead times from when we are taking an order for a design until the income for the deliveries are coming is long.

So we see that the orders that we are taking now will give results at a later period of the year. They are position -- positioned for further growth. And that is basing their experience, their references, their customer base within segments that is potential for growth and using that to also enter into new potential markets.

At the time being, the most potential markets that we are in is the offshore wind power production market, where we also got our latest order, and we see a huge demand for new vessels supporting this market.

In addition, also HAV Design has a great experience within fully electric car and passenger ferries where the market in Norway has been extremely good for a couple of years, and we see that now also that international markets are looking at the same in order to reduce emissions and save energy.

Norwegian Greentech is the experts within Ballast Water Treatment Systems and also other water treatment systems. They are experiencing now a very good growth and also a very good profitability, and that is based on a good product in a good market. Since the IMO convention for installing ballast water treatment systems on most vessels worldwide, where went into force in 2019, Norwegian Greentech has had a steady growth. And we see also that growth will be continuing for the 3 to 4 years ahead. And after that, there will be a more continuous demand for ballast water treatment systems for new buildings.

We also see that when we are delivering more and more installations of ballast water treatment systems, the also the aftermarket and the retrofit or the aftermarket and service market and the income from that will continuously grow depending on the number of vessels, the number of installations and also the age of the installations.

So the operating income for this company was NOK 82 million in the second quarter with an EBIT of NOK 8 million. In addition to ballast water treatment systems, they also have a good potential within land-based aquaculture. We see that the prognosis for growth within this market is very big. We are already delivering to the aquaculture on vessels for water treatment. And we have started delivering and developing products also for the land-based fish farming. So this is one of the potentials and areas of growth and development for Norwegian Electric, Norwegian Greentech when the ballast water treatment market is steadying out.

Norwegian Electric Systems is the company delivering energy design and smart control. They deliver fully electric propulsion systems that deliver smart control systems and they deliver navigation and communication system for the bridge. So we say that they are the preferred supplier of product and systems from bridge to propeller. This company is also the same as for HAV Design, a little bit affected of a slow order income during the COVID period and long lead times from order to delivery and income. And that is also reflected on the EBIT of the company for this quarter. Operating income of NOK 95.5 million and with an EBIT of approximately NOK 1 million.

But what we see is that the main drivers for the market for Norwegian Electric Systems is still there. Energy optimization and emission reduction and zero emission is still very much sought after. And electrification and smart control will be one of the key factors for utilizing the potential for reducing energy and also for reducing emissions.

So -- and also Norwegian Electric Systems can deliver the technology for most type of vessels around the world. And our strategy there is, as we have done in Turkey to strengthen our efforts and our presence internationally in strategic markets and growing step-by-step in utilizing international market possibilities.

HAV Hydrogen has also now entered into the next phase where the focus is very much on finalizing the technical solutions, finalizing their new products and commercializing the products. The approval, the preliminary approval of the hydrogen energy system in the FreeCo2ast free cost project is a very important milestone. The work behind that process is huge and has been going on for a long time. But that has, at the same time, given us a lot of knowledge and made us able to develop new technology.

So then the 2 major technology developments or finalizations that we have now is to continue working on projects where we integrate the complete hydrogen energy systems in ships. And together with that, we are also developing more modularized systems that can be easily fitted for instance, the retrofit of vessels. Also, we have made huge investments in the organization and competence of the organization. So you will see more power in the market and also in the development within the company onwards.

HAV Hydrogen has been and will still also take advantage of being a part of a larger group, where they can utilize the resources within other companies that are related -- which have related technology and knowledge to what they are doing in HAV Hydrogen.

So they have now achieved very high degree of knowledge about how to reduce risk, how to design, how to assist the customers in implementing hydrogen energy systems. And this advisory role will also make it attractive to customers to utilize HAV Hydrogen when they're going for new projects.

There is several actors, of course, working within hydrogen in the different parts of the value chain from production to bunkering to transport and onboard the vessel. But for complete systems on board a vessel, HAV Hydrogen is in the very front of having the technology in order to advise their customers on what is the right solutions to choose.

So with that, I give the word to Marius Koksvik, who will run you through the financials, and then I will talk about further outlook afterwards. So Marius?

[Marius Koksvik, executive]

Thank you Gunnar. Hello. My name is Marius Koksvik. And I work with business development in HAV Group. I'll take you through the highlights of the financials.

Okay. If we start with the key figures here, we had an operating income of NOK 200 million in Q1 '22. The EBIT was NOK 8 million, and this translates to an EBIT margin of 4%. Compared to last year's Q1, revenues were lower due to less trading and also the EBIT margin was lower due to lower capacity utilization. It's also worth mentioning that last year's Q1 was driven by large revenues to Havila Kystruten.

If we take a look at the balance sheet, there are only minor changes from Q4. The most notable change is the decrease in booked equity of NOK 15 million. This is due to the purchase of our own shares in the share repurchase program.

If you have a look at the cash flow statement, we had a positive operating cash flow of NOK 21 million in Q1. In total, there was a decrease of NOK 2 million in cash holdings after investments and financing.

The order backlog, it increased in Q1. It increased from NOK 382 million to NOK 418 million. The notable contracts, as Gunnar mentioned, after Q1 or HAV Design NOK 200 million contract with ESVAGT.

Okay. Now Gunnar will take you through the market outlook.

[Gunnar Larsen, executive]

And for those who have followed the presentation, you will see that this is very much the same that we have done previously, and that is actually what the general market outlook is also the same fundamentals for Maritime Cleantech, that has been there for many years and since the start of [ Havyard ] possibly still there. Even though we see the -- there is special times now, of course, with Ukraine crisis, and rising energy prices and energy demand, higher energy demand. The necessity to reduce emissions and save energy and sale environment is still there.

We are an established group of companies with leading offers, and we are very well positioned to take -- to utilize the requirement for new technology that is needed in order to save energy and to reduce emissions.

We have profitable operations and a very robust balance sheet, enabling us both to stimulate organic growth and look at opportunities in companies that can add something to our group and with complementary technology and knowledge that -- where we can also see further possibilities for synergies between our existing companies and new companies.

Short term, the market and company performance is characterized by somewhat of general uncertainty, especially with regards now to the Ukraine crisis. We see that some of the decisions from our clients is a little bit postponed whether they want to build a new ship or take an investment decision. But -- and also for the supply, there can be some delays in supplies. We see a raise in prices. But the general underlying fundamentals are still there.

The requirement for clean energy and for lower emissions, is still fully in line with the technology that we are delivering. There is -- we see also that there is a good speed in the newbuilding market of vessels. So -- and also, we see increase in the investment in the traditional offshore oil industry also. And also there, the focus is to reduce the environmental footprint when they are operating in this market.

So all in all, short term, there is a little -- some bumps in the road. It might be, but then the underlying fundamentals are there. And we maintain our outlook for the 2025 where we expect NOK 1.3 million in turnover internal with a good profit margin.

In -- on the road towards that, we will experience fluctuations also normal fluctuations because we are in a project-driven market in many of our companies. where the revenues can go up and down from quarter-to-quarter.

So that ends the presentation and it takes us maybe to the most exciting part where you have been able to ask questions, and we will answer them to the best of our abilities, both with regards to what we can answer, taking market considerations and what is possible for us to answer.

So Marius, you have an overview of the questions. So...

[Marius Koksvik, executive]

I thought maybe I could start out with a question that came in that asked us how much of our cash holdings are prepayments. And we actually have a line item in the report that says this advanced payment from customers.

So for Q1 '22, this is NOK 205 million. And as I said, you can find that in the report.

All right. Yes. Also, I can take a question on working capital. We were also asked how large a share of our cash holdings should be considered working capital. As Gunnar has mentioned, we have an attractive -- we have a project-driven business, and we have attractive funding of most of our projects. So our projects are either cash neutral or cash positive for the most part. And occasionally, this will lead us to have large cash balances. Though we do not have a stated working capital target, we see that over time, we wish to have a positive net working capital, but though we see this might fluctuate from period to period.

Okay. Gunnar, do you want to take...

[Gunnar Larsen, executive]

Yes, you just asked the question, and I'll try to answer the...

[Marius Koksvik, executive]

Yes. Okay. Yes. So we have a question here about the EBIT margin, especially for NES, which is lower in Q1. Can we elaborate on why NES is experiencing lower capacity utilization?

[Gunnar Larsen, executive]

It is, as I explained a little bit earlier also, NES has long lead times for new orders. For instance, the new order they got for Scandlines, the lead time until they deliver the major deliveries is more than 1 year. That means also that the income will come at a later stage. And that means also that if the work that we are doing now was ordered at least 1 year and even before that. And that there was a drop in the market also because of the COVID situation.

So we have a bigger capacity in NES and in some of the other companies also that we are utilizing today, meaning that the overhead cost compared to our capacity and utilization is higher, but is, at the same time, very important for us to continue to develop products, retain important knowledge within the company and competence. So that is the major reason for the dip in the EBIT that we are seeing now.

[Marius Koksvik, executive]

Yes. Okay. And then we have a question here about visibility. Are we doing anything specific to increase our visibility in the market? Also, I interpret this as towards investors?

[Gunnar Larsen, executive]

Yes, we are. We have developed a communication strategy also together with some advisers. And our main target with our communication is 2 things. Maybe the first priority is to communicate so that we attract customers and we generate leads, which then again generate orders, generate profit, generate turnover. But we also have, of course, have a focus to give the market and the investors as good information about what is happening in the company as possible.

So we employed more resources also within the company in order to be able to do this. And I hope that you have already experienced better communication from our side. And we are, of course, taking input from you also on how to improve. And we hope that you will see that we will -- will constantly be better also informing the market in general.

[Marius Koksvik, executive]

Okay. Speaking about the markets. We have a question here that asks us. We've been on your next growth for a year and more. What can we say about the value creation since inception? And the share price development? How are we going to -- how are we working to secure return on investment for our shareholders?

[Gunnar Larsen, executive]

We are working long term. And as we have said earlier also, we have an ambition for profitable growth. We have an ambition to continuously be profitable and deliver results. And that is, I think, the major contribution for us in order to also give value back to the shareholders by increasing the share price.

We see that the market or the business that we have been in with green technology took a severe hit in general after we were introduced in March '21. And if you compare to maybe other peers in that market, I think still we have had a good development.

There will be, of course, periodic fluctuations, but we have to focus on long-term strategies and on making good results for all our interest for all our stakeholders long term. So that is the strategy, and that is what we also hope will reflect on the investor value of the company in onwards.

[Marius Koksvik, executive]

Absolutely Okay. So we have another question here about Norwegian Greentech. The topic was mentioned briefly earlier. How is the aftermarket for NGT going to affect their business model? What kind of margins should we expect our customers bound to use Norwegian Greentech after they have delivered their products and new sales?

[Gunnar Larsen, executive]

The aftermarket, the potential for the aftermarket is growing with a number of installations out on the vessels and also the age of the installations. We see now that the number of installations sold and delivered each year is growing quite rapidly. And then that will, of course, reflect also on the revenues from the aftermarket.

And in general, the margin also from the aftermarket in order to have the sufficient service level to the ship owners and the clients. But also the margins there are normally better. We have our own special developed ballast water treatment systems with a specific certification, so you cannot just take all kinds of parts and put them together and get it and use the same certification.

So there is a certain, let's say, dependency on using Norwegian Greentech also in order to have the same quality and also retain the certification. So the aftermarket for Greentech, will be looking very promising onwards.

[Marius Koksvik, executive]

Yes. Okay. We have a question about HAV Hydrogen. If they get a contract, are there also big synergies for other companies, such as Design and NES?

[Gunnar Larsen, executive]

That is a good question. And I appreciate that question being asked because that is a good way of showing the synergies and the complementary, complementarity in the group because in a complete hydrogen energy system, you also need smart control and indeed energy management.

So Norwegian Electric System is a natural partner and collaborator with HAV Hydrogen in the total system deliveries. In addition, also for HAV Hydrogen to give the best advice on what kind of systems and optimize the systems and also how to integrate the systems in a vessel. The knowledge from HAV Design is very valuable.

So the customer can also, of course, choose how we want -- what kind of -- what extent of service he wants from HAV Hydrogen. But if you go comes to a HAV Group, you get a very wide range of knowledge and technology that is, I think wider than most of potential customers can offer for the same systems.

[Marius Koksvik, executive]

All right. Good. We have another question about the share. When are we going to start paying dividends?

[Gunnar Larsen, executive]

What we have said earlier also that we aim to have a good policy for paying dividends and creating value to our shareholders. And what we have also said earlier is that we are constantly evaluating how to give the best value to the shareholders, either paying dividend or investing in new profitable business areas.

And as I said earlier, we are working with different cases. There is potential transactions or partners in the market that we are looking at. So at the time being, we feel that it will be most valuable for our stakeholders that we retain the power to do, for instance, investments in companies that can complement the rest of the group and give more growth that we are able to do in the short term at least organically.

So dividend is in the front of our perspective also. But at the time being, we feel that it's more -- it's a better investment for the stakeholders that we are looking at other type of business opportunities.

[Marius Koksvik, executive]

Yes. There's a question about the difference in the HAV Hydrogen systems now. What has changed with the preliminary approval that we received.

[Gunnar Larsen, executive]

I am not quite sure if I understand the question, but the preliminary approval to try to explain that is that, compared to approval in principle, which is a more general approval for a component or a system, we have got actually close to a final approval of a complete system installed on a vessel. That means that it's much shorter time and less work and less things that has to be done when we get a physical or a project in order to get the installation actually approved onboard the vessel.

But -- and again, we are utilizing that knowledge and experience that we have got in order to develop also, as I said, more modular systems. And for the modular systems, we will also have the possibility to seek approval more like a type-approval or approval-in-principle for different modules. And then we can put those modules again into a system and make the complete approval.

So I'm not quite sure if that answered the question, but the approval or the preliminary approval is at least a very big milestone, and it's a very good proof that we are in the forefront of being able to implement this type of systems on water vessels.

[Marius Koksvik, executive]

Good. Also, there's a question here about any updates on transactions on M&A. After our -- for example, after our 100% share purchase of Norwegian Greentech, which was already a subsidiary. Do we have anything more to share on transactions?

[Gunnar Larsen, executive]

No. We can, of course, not share anything until they are public. So we are constantly looking for new possibilities. And we also have possibilities that we're looking at today. And we see that there is many companies in different businesses that can be complementary and can add value to our group.

So -- we cannot say more on that than we are working. And I think since you started in the group, you have been quite heavily loaded with this type of work. So there's a lot of promising things.

[Marius Koksvik, executive]

Yes, I can add that we're working in a structured manner with potential transactions.

Okay. And what seems to be the last question here. It's about our listing status. Currently, we're listed on Euronext Growth. Do we have any plans on moving up to the proper Oslo Stock Exchange to the main list?

[Gunnar Larsen, executive]

We are evaluating that, of course. We -- at the time being, we think that maybe the critical mass, the size of the company also doesn't necessarily -- doesn't necessarily have an advantage at the time being to go to the main list. But of course, if we are growing at a pace that we are expecting, that will be something that we will be considering. And we will take that decision when we feel it's right to eventually go to the main list.

But we think that at the time being, it's a good place to be on Euronext Growth. We see that the interest for the companies is good there, and we also see that, that is still a good tool for us for financing the growth that we are planning in the short term.

[Marius Koksvik, executive]

Absolutely. Okay. Well, I think that concludes the Q&A session here.

[Gunnar Larsen, executive]

Yes. So I thank everybody for following our presentation. You have, of course, possibilities as you are utilizing also the whole year to contact me or Marius or Pal, the CFO of the company and ask questions by me. Let me try to answer as best as possible on that also.

And we hope that you continue to follow our company and that you will be -- have good experience also from presentation to presentation. So thank you again for attending and looking forward to talking to you again at the next occasion.

[Marius Koksvik, executive]

All right. Thank you.