Hav Group ASA

OSE:HAV

Earnings Call Transcript 2022-Q2

[Gunnar Larsen, executive]

Hello, everybody, and welcome to HAV Group ASA Second Quarter Presentation. With me today, I have Pal Aurvag, CFO, he will do the financial presentation a little bit later in the session. Today, I'm going to speak about the highlights in Q2.

Again, I'm going to present more in about the HAV Group in general and talk a little bit more about the subsidiaries in particular. Pal is presenting the financials, and we sum up with future market outlooks. At the end of the session, we also have a Q&A. We have got a lot of questions this time also. It is very good, and it's also possible to ask questions during the presentation.

Another good quarter for HAV Group. We had revenues of NOK 160 million and EBIT of NOK 14 million. Cash from operations of minus NOK 23 million. Pal will explain more about the details in the figures. And we have a cash balance of NOK 300 million. The external backlog has all eased, so we have now a backlog of NOK 557 million. And we have 4,400 (sic) [ 4,442 ] shareholders and market cap as per yesterday of NOK 475 million.

The key developments in Q2 was that we got a large contract to HAV Design for an SOV offshore wind support vessel fueled by methanol for Ørsted and ESVAGT, including a large equipment package. HAV Group also received preliminary approval for the hydrogen-based energy system for ships, which was a big milestone in our hydrogen efforts.

HAV Group also acquired the 100% in Norwegian Greentech to have better flexibility with regards to how to operate the company. We also signed a letter of intent to acquire Høglund Marine Solutions.

And I'm very -- also exciting milestone, I was also on board when Havila Kystruten vessel sailed emission-free in the world heritage field of Geirangerfjord where we have designed a vessel, we deal with the electric propulsion and battery system and a lot of equipment on [ board ] these vessels. So it was a big milestone both for Havila Kystruten and also for HAV Group.

We also continued the repurchase program for HAV Shares, which is a tool for us. Both we find it's a good investment for HAV Group to invest in our own shares, and we also use it -- can use it in future strategic purchase of companies, for instance. In addition also, we had some -- we are listed also what has happened so far in 2022.

And very important milestone also again for HAV Hydrogen was that they introduced that they're going to launch their containerized deck-based hydrogen energy system for ships, which can be used both for retrofits and also for new buildings. And we feel that -- we mean that this will enable the zero emission for shipping quicker when we have a solution that is more easy for shipyards and for the owners to install.

Many of you now know what HAV Group is doing, but I hope also there are some new stakeholders taking part in this presentation. So I'll say a little bit about what is our strategy. HAV Group is an international provider of sustainable and maritime technologies and services.

Our vision is to contribute to a sustainable future at sea. We are in the maritime and marine market with technologies and services internationally. And we consider us also to be experts and have special knowledge in guiding the actors in this market towards the zero emission future.

We have four companies within the group. HAV Design, which is a ship designer. They are a leading ship designer with a energy efficient and competitive ship designs with zero emission ambitions. I've already delivered a lot of vessels that is growing zero emission. Norwegian Electric System is a world-leading total supplier of low and zero-emission propulsion and control systems and navigation systems and communication systems. And they have products for a wide range of vessels for the whole global market.

Norwegian Greentech is the water cleaning expert in the company, specializing mainly today on ballast water treatment systems, utilizing the large boom in need for ballast water treatment systems for especially retrofits but they also use the technology to deliver to aquaculture for cleaning water and see a big potential for aquaculture, especially on land-based aquaculture.

HAV Hydrogen is the youngest company in HAV Group, founded based on a large R&D project, developing hydrogen energy systems for ships -- larger ships, sailing longer distances. And they are also now entering into the market with their new products. We will say a little bit more about the subsidiaries also later.

HAV Group's value creation is that we are on top of the companies coordinating and also directing the strategic development in the companies. And that is in order to stimulate intercompany business within R&D and business development to take out synergies so that we are, as a group, able to deliver more value to all our stakeholders, then these companies would have been able to do separately.

We have an ambition to grow and we grow both organically through developing our own companies. And we are looking at possibilities for acquiring or cooperating strategically with companies outside of the group in order to create more value. What we are looking for then is companies with complementary technology and knowledge.

This is the management team in HAV Group consisting of the managers of the group functions within HAV Group and each of the Managing Director of the four companies. And we also have a very experienced Board of Directors consisting of representatives from the main shareholders and also two representatives from the employees.

So then I'm going to say a little bit more, in particular, about the subsidiaries. HAV Design, they have delivered ship designs to more than 120 vessels globally. They were very well known in the beginning for delivering to a lot of offshore service vessels.

We have, in the later years, developed more into aquaculture, into wind farm offshore wind production support vessels, electric ferries and also passenger vessels like the Havila Kystruten.

They had -- what is also defining the figures for HAV Design is that in addition to delivering the design package. They also, from case to case, deliver smaller or larger equipment package included or integrated with the design. So sometimes, when we deliver only design, then the turnover is lower, and the profit margin is higher.

And at other times, we deliver large equipment package, then the turnover will increase, but also the margin totally is a little bit lower. So that explains a little bit the fluctuations that you will see from quarter-to-quarter and year-to-year from HAV Design.

This quarter, the had an operating income of NOK 31 million and EBIT of NOK 8 million and a profit before tax of NOK 11.6 million. The outlook for HAV Design is also very good because they are also specialists in energy optimization, reducing energy for the ship sailing and also reducing emissions and zero emission -- enabling zero-emission technology. So both within the existing segments as the agriculture, the offshore wind and the transport, there is still a lot of potential.

And there is also a lot of potential in other segments that we see will need this type of knowledge and technology in order to reach the goals for reducing emissions towards 2035 and 2050. In particular, now, we see also that the offshore industry is coming back, and they are requiring the same technology in order to reduce total emissions.

Norwegian Greentech, as I said, our water treatment, water cleaning experts. They now experience a very good growth due to the investments they have done in technology for cleaning ballast water and the big need for ballast water treatments for retrofits of the world fleet. So they have a very good quarter with operating income of NOK 64 million, EBIT of NOK 5 million and a profit before tax of NOK 5.1 million.

We expect the ballast water treatment market still to be good and growing for the coming -- for the next years. Then that will slow down a little bit, and it will be more new buildings and also then the aftermarket will create more and more recurring revenue.

But we also are doing now research and development, product development for enabling also the technology within other segments. And land-based fish farming is one of the very big and growing segment, which also have big requirements for water cleaning. So that will be in our strategy, the next growing segment for Norwegian Greentech.

Norwegian Electric Systems deliver hybrid and electric -- fully electric propulsion systems that deliver automation and control systems and they deliver navigation and communication systems. So we say that they are a total supplier from bridge to propeller in a vessel.

Electrification is a key figure in order to reduce emissions and enabling zero emission. And the technology that Norwegian electric system have is relevant for very many ship types in very many different geographical segments.

The operating income for Norwegian Electric Systems in Q2 was NOK 67.9 million, EBIT of NOK 4.1 million and profit before tax of NOK 4.2 million. The key to success in Norwegian Electric Systems is to get out to the market with our products. So one of the key strategic elements is to grow internationally and have a network for sales, service and customer support internationally.

We earlier this year announced that we have established in Turkey, which is a very big shipbuilding market and a very big potential market and also already a market for Norwegian Electric Systems. And we will launch also in the other strategic markets for the future.

And the big driver here, as I said, that most of the vessels that new vessels and retrofits that shall reduce or totally get rid of emissions, they need to use some kind of electrification and a very good automation system. So the future or the prospects for the technology and products for this company is very good.

And HAV hydrogen, as I said, is the youngest company, has done a lot of research and development in order to come to the market with products that will enable zero emission sailing on vessels that are not able to do that today through using hydrogen or hydrogen-based fuels. They have developed and delivered -- sorry, got preliminary approval for hydrogen-based energy systems for a large vessel through the FreeCO2ast project.

And now also going to launch the containerized fuel cell energy system that can be placed on deck. This will enable the ship designers, the shipyards and the shipowners in an easier way to install this type of system by reducing the risk that is already taken by designing the systems within the container.

They see the market also for very many type of vessels, but we'll concentrate on near coast or short sea shipping vessels where you cannot utilize batteries, for instance, for zero emission where the batteries has not high enough energy density. And from there, when you up to where also the hydrogen energy systems has this limitation.

So there is niche there with a lot of vessels that can utilize hydrogen in order to either reduce or totally go zero emission. So I think you will see a lot of exciting news from this company onwards. And I get a lot of attention now also from the market, especially after the preliminary approval for the FreeCO2ast project.

So then Pal, our CFO, he will give you a little bit more details about the financials.

[Pal Aurvag, executive]

If we look into the turnover for the quarter, we have NOK 160 million. And if we compare it with last year's quarter, it is quite a decrease but that's due to quite heavy delivery of equipment, last both first and second quarter in 2021. If we compare with the first quarter of this year, we also have a reduction from NOK 190 million to NOK 160 million.

But if you look at the margins and the EBIT, we have a NOK 14 million EBIT out of the NOK 160 million. So we have an EBIT margin of 8.7%. And in the first quarter, it was 4%. So we have a increase or a better quarter in quarter 2 but it's a bit lower than last year.

If we look at the balance sheet, minor changes from year-end reporting increase in receivables and in reduction in cash is the main changes. We see that the equity is reduced by NOK 13.9 million.

And when we look at the result, we should think that we should have an increase, but the decrease is due to the purchasing of our own shares, NOK 24 million this year and also the rest -- the purchase of rest of the shares in Norwegian Greentech. So in sum, that lead to a reduction of the equity from year-end to end of second quarter.

If we look at the cash flow, in total, we have a reduction of NOK 75 million this or year-to-date. And if you look at the operations, we have a negative development of the cash related to operations, and that's related to the project progress.

And the negative investment cash is related to the purchase of the Norwegian Greentech and also activation of costs related to R&D. The negative cash from finance is again, as commented in the balance sheet, it's related to purchase of the shares, of own shares in HAV Group and installment and interest payment of NOK 10.4 million per second quarter.

We see now again, increase in the order backlog. It increased from NOK 418 million to SEK 557 million and it's mainly related to a large contract in HAV Design with both design and equipment supply.

When we look at the segments, Design and Norwegian Electric system had an increase and Greentech had a smaller decrease or a decrease in this quarter, and also related to their quite good turnover in the second quarter.

So Gunnar, should go back to the market outlook.

[Gunnar Larsen, executive]

We'll round out the presentation by saying a little bit about the future. As we have said, I think from the beginning when we introduced the company and started this group, we are founded on the strong fundamentals for Maritime Cleantech. Even though it's a lot of -- a lot of things have happened since we launched the company in '21, early 2021.

We ended the corona. We entered into the crisis, Ukraine crises, and we have the energy crisis. And we see that the focus now also is very much on energy, of course, but this actually strengthens the fundamentals also for HAV Group because our philosophy and our main technology knowledge is about reducing energy consumption onboard in maritime shipping and also reducing emissions.

As we have said many, many times, we are established companies with leading offering. We have customers, we have products, we have order book, and we have a lot of experience. So we have a strong foundation to utilize on the possibilities for the future.

We have, since the beginning, been a very profitable company and the profitable operations. We have a strong cash position. So we are in a position to both continue to do the necessary developments organically and look at potential external possibilities.

Short term, there is, as I said, very uncertain times what happens that also inflect our companies. We see difficulties also in the supply chain, getting equipment. We have managed this so far and taken actions in order to do it also onwards. We see the price increase in goods and things used in our technology. And we have actions how to do that also.

The high energy prices, as I said, makes it more like a potential for an opportunity than a threat for HAV but of course, it inflects also our customers. So it's a little bit difficult to say how this goes. But in the long run, this will still be one of the fundamentals for our continued growth.

The focus on reducing the climate crisis and reducing environmental footprint is as strong as it has always been. And we see that it becomes almost continuously more difficult to reach the goals. That means that we need more effort continuously also.

We need to put more technology into the market, realize more technology in order to continuously reduce energy consumption and emissions. So that is also strong fundamentals, strong -- strong incentive for our products also.

All this gives us very much confidence in the guiding that we have done already that in 2025, we expect a revenue of NOK 1.3 billion -- million, sorry. And due to our project type of business, we will see fluctuations as we have seen also so far this year. But we have still very good faith in steady growth onwards.

So with this, we have ended our presentation. As I said in the start of the presentation. We are lucky that so many are interested in the company, and we have got a lot of questions. We will answer as many as possible of them now.

Pal will join me here. So he will answer some of the questions that is relevant for him. And I will answer the others. We have Marius Koksvik, who also was with me during the Q1 presentation. He has moderated the questions, and he will answer the question. So Pal and Marius, we are ready to try to give you some good explanations on what you are looking for.

[Marius Koksvik, executive]

Okay. We have some questions regarding acquisitions, both specific and general. What does Høglund Marine solutions bring to HAV Group? And which of the four subsidiaries, would it fall under?

[Gunnar Larsen, executive]

Yes. Høglund, we have a letter of intent to acquire Høglund, and we are in the due diligence process now. The strategic reason for wanting to acquire Høglund is that, first of all, we know Høglund very well. We have cooperated quite closely with them for many years, especially within automation systems.

HAV Group has a strategy to develop digital functionality. And we see that Høglund has very complementary technology that will enable us on a quicker way, at least a very quick and effective way to get these type of products and solutions into the market, using the knowledge in Høglund and HAV Group together.

They also have the fuel gas systems, which has complementary technology and can also be used -- their knowledge around these systems can also be used in the hydrogen-based energy systems. So there is a very big strategic reasons for acquiring this company.

This company will be put alongside the other four companies in HAV Group. And we are using the same strategy and as we use for the other companies to extract synergies through cooperation between the companies.

[Marius Koksvik, executive]

There's also a question how the transaction will be financed?

[Pal Aurvag, executive]

I can take that one. The transaction will be or the finance will be a mix of bank financing and cash from our own book.

[Marius Koksvik, executive]

Okay. Then there's a more general question. What are our plans for looking for future acquisitions? And how do we plan to finance those, if we make any?

[Gunnar Larsen, executive]

Yes. What we have said many times, I think, is that our philosophy in looking for cooperation partners, external cooperation partners or possible acquisitions is that they need to give some kind of complementarity with regards to technology and/or competence so that we can extract synergies.

So we have tools for looking for these companies. We are lucky to get the tips on companies that can be fit in this strategy. With regards to financing, we have a lot of options. We have a strong cash balance. We had good relations to banks. We can go to the bond market. And we have also possibilities to use our stock as a trade in those respects.

[Pal Aurvag, executive]

Yes.

[Marius Koksvik, executive]

Then there's a technology question. Do we see HAV Group expanding into other energy sources or fuels such as ammonia or maybe nuclear in the future?

[Gunnar Larsen, executive]

First of all, HAV Design, they use all available and future technology in their products and in their product development and R&D. So as we saw from the latest contract in HAV Design for ESVAGT and Ørsted, the offshore wind support vessel, they are also designed for using methanol. HAV Hydrogen is looking at all kind of hydrogen-based fuels, so ammonia can be, for instance, a part of this.

And we are not -- we can use any type of fuel in our designs. I don't think we will go very quickly into producing or enabling nuclear energy. But of course, that can also -- when this technology is more mature, we used, for instance, in our designs. So we are open for all possibilities or all type of technology that will enable energy reduction and zero emission.

[Marius Koksvik, executive]

The increase in energy prices, including electricity, commodities and fuels, how are HAV Group affected by this? And is the group able to move the cost to its clients or take it back and keep their margins?

[Gunnar Larsen, executive]

Yes, it's a good question. With regards to our operations, we do not use very much energy in our operations. So we are not so affected in operations with regards to the energy prices. But of course, with regards to parts and technology used in our products, we are effected. And of course, then we have to take this into consideration when we are going into the markets with new products and new offers also now.

So the effect is that while we previously, for instance, could give an offer and have a quite long validity on the offer, now the validity offer is very short, and we have to have a much more stronger focus on securing the cost in the other end. And so far, we have been quite successful with that.

[Marius Koksvik, executive]

Okay. There's a question specific to HAV hydrogen here. and it's about the [ Buddha ] Miskinis project that was mentioned in the Q2 '21 project -- presentation. Is that still a relevant project for HAV Hydrogen?

[Gunnar Larsen, executive]

No. When we enter into this kind of bid competence or bid competition, then you have to choose your partners. So there is -- the partners are normally the designer, the ship operator and the equipment strategic or important equipment suppliers. So the constellation we were in did not win this bid. So HAV Hydrogen is no longer in that project.

[Marius Koksvik, executive]

Then there's a question about the last 2 Havila Kystruten ships. Is there any work or significant revenue for HAV Group left in these projects?

[Gunnar Larsen, executive]

Maybe you can answer that, Pal.

[Pal Aurvag, executive]

Yes. Two out of four is delivered. And the next one or the two next one is going to be planned to be delivered this year. So there are some final installation and start-up of the system that is left for us. So there will be some income and, I would say, low risk related to our supply.

[Marius Koksvik, executive]

Is HAV Group looking at expanding its footprint and establishing offices in new locations?

[Gunnar Larsen, executive]

I said a little bit about that in the presentation also and especially for some of the companies that is extremely important. But it is a strategy that we do whatever is necessary in order to have market penetration in the markets that we see are important for us. And that will, for many of the companies mean that we need to have more local presence than we have today.

[Marius Koksvik, executive]

And there's another financial question here. Are there any major income from contracts that is not already calculated in Q2 that will show in the next quarter?

[Pal Aurvag, executive]

If it's referring to the order book, there is no new big orders that is signed after end of second quarter. So the answer is no.

[Marius Koksvik, executive]

Why did HAV Group decided to prolong its share repurchase program?

[Gunnar Larsen, executive]

It's because we find this as a good instrument, as I said, to use in future possible acquisitions. And also, we see that it is a good investment. So we will continue this program under the regulations that we have today.

[Marius Koksvik, executive]

Are there any news regarding subsidies from the government when it comes to hydrogen going forward?

[Gunnar Larsen, executive]

There has been some news along the way. I attended Arendalsuka, this earlier this month, and there was a lot of discussions between the industry and the politicians with regard to what is necessary, especially for enabling this new technology.

And the requirement from the industry was quite -- they quite agree on what is needed now, especially with regards to least mature technology like hydrogen and other of the new alternative fuels. It's not only that you get support for the OpEx -- sorry, the CapEx, the investment in technology but because as per today, the fuel is very expensive, and the development of the fuel prices is very uncertain.

The government or the demand from the industry is that the government also comes with more support for the operation and differential contracts, which means that the ship owner doesn't have to take risk on the fuel price is one of the most important demands from the industry.

So it was a very unified demand from the industry. And I hope -- I sincerely hope also that the Norwegian government steps up and enables this technology because the technology for this -- this type of technology, marine technology in Norway is very, very strong.

And if we don't get the projects out, if we don't get sufficient support and the support is better in other countries, risk losing out. So I'm quite sure that the Norwegian government and the rich Norwegian state will be able to facilitate growth in this new technology.

[Marius Koksvik, executive]

There are some questions regarding contract announcements. Why have we seen so few contract announcements the last couple of months?

[Gunnar Larsen, executive]

It's a little bit combined. We have, for many of the companies, except maybe Norwegian Greentech, we have large contracts with quite long lead times. So that means that we don't need so many contracts in order to fill our capacity. So in general, there will be some space between when we are announcing new contracts.

We have also seen from the Ukrainian crisis that some of the projects that we were quite certain would be realized already have been postponed. We don't think they have been deleted, but that they will come a little bit later. So that are the main reasons for that you have not seen so many big contracts lately. While, for instance, Norwegian Greentech, they get their contracts continuously, but we don't announce every small contract.

[Marius Koksvik, executive]

Okay. And then the final question here is about the container-based hydrogen system. How long do you think it will take until or from a client orders the product until it can be used or installed ownership?

[Gunnar Larsen, executive]

It's difficult to say. But this at least will enable the customer to take this quicker into operation and use. Then if you have a system that needs to be designed from scratch because the alternative is to have the system now that will already have the approval in principle when it will be launched. That can be very quickly finally approved and put on the vessel.

The alternative is that you need to design it from scratch. And then also you have a long process getting it approved. So difficult to say when, but at least it's a big step in our opinion, for this type of technology because it will enable the technology to be implemented quicker than what was before.

Okay, Marius, thank you. Thank you Pal, for joining me and thank you, everybody, for listening. I hope that it was interesting. I hope that you find our company still interesting. We will be working continuously for creating value for our stakeholders and to realize our vision to contribute to a sustainable future at sea.

I hope that we have answered most of the questions that you have had. But of course, please feel free to contact us also directly, and we will try to answer as good as possible. So we will go back to our base and continue to work to develop the company, and we hope to see you again on the next presentation for the Q3. Thank you very much.