Hav Group ASA

OSE:HAV

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Gunnar Larsen, executive]

Good morning, and welcome to the third quarter presentation results for HAV Group ASA. My name is Gunnar Larsen. I'm the CEO of HAV Group ASA. And together with me today, I have Pal Aurvag, who is the CFO, and he will be presenting the financial results in more detail.

Today, we have the same agenda as we normally have. We'll say a little bit about the highlights of the quarter. More about the company and our strategy, some business update on each of the business divisions, financials, and we will sum up and give an outlook on our perspectives of the future. After the session or after the presentation, we will, as normal, have a Q&A session where you have the possibility to ask questions on the link that was provided together with the invitation to the presentation.

HAV Group, we are an enabler of the green transition at sea. We are an international provider of green technology and services, mainly for the maritime industries. Our vision is a sustainable future at sea, and we have a long, good history as a renowned supplier of maritime products, systems and integrated solutions.We consider us to be experts in guiding the marine and maritime industries towards zero emissions.

Some of the highlights for Q3 for our company. We had a good order intake of close to NOK 290 million and a book-to-bill of 1.48x. This includes also this NOK 200 million contract for HAV design to develop an SOV for the offshore wind market for the company ESVAGT. The revenue was NOK 193.2 million, that was up 41.3% from Q3 2022.

As we guided already in the Q2 presentation, we have expected a weaker EBIT in the second half of 2023, and also that shows in the results for this quarter. This is primarily caused that we have a lower activity than -- because of sales and that we have invested in development and retaining the people for the expected growth for the future.

There is many positive trends in our opinion from the last presentation. And we are experiencing now a much healthier sales pipeline especially for the design -- Ship Design segment and also for the Energy Design and Smart Control segments. In the quarter, we also completed the acquisition of Undheim Systems, and that adds dynamic positioning capabilities to our group.

Another very important milestone or development in the quarter was that we, together with Fjord1, won the tender for the new autonomous fully electric ferry, four ferries, that is going to operate one of the major highways on the west coast of Norway. That is something I will say a little bit more about also later in the presentation.

External backlog was NOK 607 million, and we had a cash balance of NOK 232.7 million at the end of the third quarter.

Our strategy is still to extract synergies and to generate value with cooperation within the company, exploiting the complementary technology and competence that we have so that we can both give added value to our customers, and also become competitive on the synergies that we have with the cooperation within the company.

We think that we are perfectly positioned to leverage the maritime greentech megatrends. We are an enabler of the green transition. That also means that we are an enabler with regards to reducing cost, reducing energy consumption and also lower emissions. We do that by advising customers on what technology to select on -- we can offer total cost of ownerships and analysis in order to help them with investment decisions.

And of course, we are specialized in developing total integrated concepts, including ship design, in order to give them the optimized vessels for their purpose. We have low and zero emission energy propulsion and control systems. And we have also very energy-efficient compact water purification systems.

Our focus is continuously to be improving and giving more added value through being an integrated system provider. So in addition to selling services and solutions from each one of the technology fields, like ship design, energy design and smart control system, hydrogen-based energy systems and water treatment systems, we combined these technologies and systems into integrated packages, giving added value to the customers in the lifetime of the vessels.

Moving over to each of the segments, the business segments. Ship Design, they are a developer of the most efficient vessels possible, covering every aspect of the vessel performance and functionality. Some highlights for the Ship Design segment. We got the repeat order from ESVAGT for developing methanol-fueled SOE.

That was early in the quarter, where we deliver ship design, we deliver integrated equipment package, both from our own companies, our own group, and also integrated from suppliers -- external suppliers outside the group. And the contract value of that was approximately NOK 200 million. And also for ship design, the ferry contract, autonomous ferry contract together with Fjord1 will give a good impact on the order book when these contracts are signed.

Energy Design and Smart Control Systems, they are a supplier of low and zero-emission energy propulsion and control systems for the global maritime market and for almost all different ship types. Some highlights from that segment. We completed the acquisition of Undheim Systems, as I said earlier. That is also a very strategic good decision and acquisition in relation to the Lavik-Oppedal, the Fjord1 autonomous ferry connection.

The IMO, the strength in IMO regulations with respect to reduction of greenhouse gases is also something that drives the technology that we have within this segment as we are experts in reducing energy and also smart control systems in order to reduce emissions.

And again, we were chosen by Fjord1 as the partner for the autonomous ferry contracts. And for NES, that represents a total overall system integrator role. We have system delivers for power and system automation on the vessels. We have the bridge design, including navigation and communication solutions. We have the onshore charging systems, and we also are responsible for delivering the autonomous vessel functions, so that the vessel can operate autonomous when they are supposed to be delivered and after a period in 2028.

For the Hydrogen-based Energy Systems division, we have some -- we had a successful test of the hydrogen fuel cell with the maritime control system together with Norwegian Electric Systems. That was also a very important milestone, proving that our theoretical competence and the technical development that we had done was proven in practice. So that makes us -- is a good stepping stone to advance further into pilot projects and projects for owners.

We were also invited by Ocean Hyway Cluster in a project, which aims to lower the threshold for adopting zero-emission fuel systems through vessel retrofits, which we also see as a great possibility.

We also, together with the shareholders in Pherousa Green Technologies agreed to divest our 10% shareholding in the company. HAV Group is an industrial owner. And our main aim is to have a majority shareholding in the company that we are invested in. In this case, we were not able to move forward in the direction we wanted. And therefore, we decided to divest our shareholding rather than being a minority shareholder in the company with limited impact of the strategic direction of the company.

That said, bunkering ammonia as a hydrogen carrier is still a technology that is of interest of HAV. And we will continue to investigate and pursue our opportunities within this technical field. Pherousa Green Technologies is also a player that we can collaborate with, with the technology development further in this field. The sale of the shares was done at a price approximately of the cost price of the shares. So that this transaction has limited effect on financial results.

For the Water Treatment Systems, where we have the ballast systems for ships and also water treatment systems for aquaculture, both on land and sea, we announced contracts with Chinese Yantai CIMC Raffles yard for delivery of 2 very large ballast water treatment systems to Havfram Wind vessels.

We have got additional orders through our various frame agreements with shipowners, including new orders from Wilson, also new orders for newbuilds Wilson. And we got a good order from some important customers in Greece, totaling delivering 13 new systems.

So the order intake in Q3 was solid. We see that we have a positive order backlog development. We have a positive book-to-bill. And as I said, the pipeline now seems also positive for the future.

A little bit more details about the Fjord1 autonomous zero-emission ferries, where we work together with Fjord1 in the whole bidding period and our partner now for the delivery of the vessels and the equipment to the vessels. So there's 4 new builds, totally autonomous. They will be in operation in 2026, but there will be a period developing the autonomy of the vessels, and they will be autonomous in 2028.

As you see from this map, they will be operating crossing the Sognefjorden, the largest fjord in Norway, which is a part of the highway, the main important highway in the west coast of Norway. There will be 4 ferries crossing this fjord. For HAV, this means, of course, it's a very -- potentially very large order when the contracts are signed. One of the largest orders that we have ever had in HAV. And at the same time, it also gives us a tremendous opportunity to accelerate the strategy that we have in developing digital functionality and in this case, particularly autonomous functions.

So for HAV, this means very lot and we are very glad and honored that we have been chosen by Fjord1 for these operations. And we have a very good cooperation now with them in preparing the project and negotiating the contracts for the final deliveries.

So then Pal, the CFO, will say a little bit more about the financials.

[Pal Aurvag, executive]

Yes. My name is Pal Aurvag, I'm the CFO in HAV Group, and I will take you through the key financials. If you look at the revenue and EBITDA in the third quarter, we see we have NOK 193 million in turnover and an EBITDA of minus NOK 17 million. So it's quite high activity, and this is related to a lot of trading with low margins. And we see also that the result is negative, and this is caused mainly by overcapacity in the companies.

If you look into the details, we see that if you compare to the quarter last year, we see that we have a higher turnover, but we have lower margins. But if we compare year-to-date 2023 with 2022, we see we are on the same level, both on an operating income level and also the margins. So -- and year-to-date, we are on NOK 503 million in turnover with an EBITDA of NOK 35.2 million.

If we look into the segments, we see that all segments are negative in the quarter. We see that the Ship Design is quite a high turnover, reflecting deliveries to the shipyards in -- according to trading, but still negative due to lack of our capacity. In Energy Design and Smart Control Systems, more or less on the same level as last year in operating income, but a weaker result due to lower capacity utilization.

In water treatment, we see the same level of operating income as last year, but lower EBITDA. This is both due to mix of products, but also lower capacity utilization than we had last year. And hydrogen is according to plan, developing hydrogen systems.

If we look into the balance sheet, we see that there is an increase in noncurrent assets in the quarter. This is mainly due to the purchase of Undheim Systems. If we look at the rest of the balance sheet, it's more or less on the same level as at the end of 2022. We can highlight there is still a high level of cash, NOK 233 million, and we have an equity of 25% at the end of third quarter.

If we look at the cash flow, the cash flow in the quarter is negative, both in operations, investments and financing. In operations, this is mainly driven by the result in the quarter. Investments is mainly due to the investment in Undheim and development of R&D. And in financing is interest payments and installments. And we are also in this quarter bought own shares corresponding to NOK 1.5 million. If you look at year-to-date, the cash flow is positive.

We have a positive development of the order backlog in the quarter. And this is mainly driven by Ship Design segment. And we have a book-to-bill 1.48 in the quarter.

So to sum up, our result in the quarter is lower than first half year, and this is what we communicated in the first -- or the second quarter. We see that order book is building up, and we see a positive trend in the order pipeline.

Thanks.

[Gunnar Larsen, executive]

Thank you, Pal. So our message to the investors is the same as we have had for a long time. There is still very strong fundamentals for maritime greentech, and we are very well positioned to utilize these megatrends. We have a track record of profitable operations, and we have a very robust balance sheet. And we have a solid position for continuous value creation.

So what do we think about the near future? The near and the long-term future, as we said, the global megatrends and the requirements for technology that will reduce cost, reduce energy consumption and emissions is still there. And they are only growing. We see that the efforts that have been made so far, they are not enough.

If we shall reach the common goals for the climate in 2025, for instance, we need to accelerate all technology development on all technology -- change of technology in the existing fleet, for instance. And we possess a lot of technology that can assist and enable this green transition.

As Pal also explained, and as we also guided in Q2, we're expecting a lower margins in the second half of 2023. One of the reasons was that we decided to maintain the competence within the company, maintain the people, use them for developing technology, developing company further, more efforts into sales. And we see now that this investment will pay off.

So as I said, the pipelines for -- the company's sale pipelines now seems much healthier. And we see that the project that had been postponed for a while, they are now coming closer to a decision. And we feel that we are in a good position to get orders from what we have in the prospective pipeline.

Therefore, we also reiterate our 2025 guiding that we are able to reach approximately NOK 1.3 billion in revenue. And we will see fluctuations also on the path to this goal because we have a very project-driven business with large orders and smaller orders and depending on the delivery time, this revenue will fluctuate from quarter-to-quarter.

So that was the sum up of our presentation. And then Pal, we are ready to take questions that have come in through our link on the website. And we have our Vice President for Business Development, Marius Koksvik with us, who will be asking the questions.

[Marius Koksvik, executive]

Thank you. We have some questions here. The first one is regarding HAV hydrogen. What is the status of the company after the successful test published in October?

[Gunnar Larsen, executive]

I'll try to understand and answer that question. The status of the company is that, of course, to have a successful test, as I said, is a very good stepping stone for the further development. We have had a long-term plan for the company, and the long-term plan implies that at a certain stage, the market will be stronger. We will be in position with technology to supply to the market.

And on to that -- onwards to that goal, then we will invest in further product development, market development and also getting pilot projects or customer finance projects out into the market before the market is totally commercialized. So I would say that the status is that we are on track and on plan with HAV hydrogen.

[Marius Koksvik, executive]

And then there's a follow-up question to that, which you touched on here. What remains for us to be able to sell a container product from HAV hydrogen?

[Gunnar Larsen, executive]

We are in a position to sell the product already. In the process of delivering, we will also have to do some more full-scale tests, maybe some prototyping, but we are ready to receive orders for the hydrogen container already.

[Marius Koksvik, executive]

And then there's a more general question about HAV Group. Does HAV Group plan to become a dividend company?

[Gunnar Larsen, executive]

We always said that we will have a sound dividend policy for our shareholders. At the moment, as we have said earlier, we feel the best investment for our owners is that we'll continue investing in developing the company, in seeking opportunities also in mergers and acquisitions. But of course, at the right time, we will also make sure that we give sound dividends -- pay sound dividends to the shareholders.

[Marius Koksvik, executive]

And another more general question is, why should a new investor invest in HAV Group?

[Gunnar Larsen, executive]

What we say is that we have a sound balance. We have the technology. We have the competence. We have references. We have customers. We have markets. We have everything ready for exploiting the possibilities that we see in the megatrends within the green transition. So it's -- from our side, at least, it's a matter of time until this market becomes more -- we can realize the potential of the market that comes closer and closer.

And the main issue for us now is, as we have mentioned earlier, we have operated for a while with lower utilization of the capacity than we have expected. And when we are fulfilling or optimizing the capacity, our profitability will be much sounder, and we are also very scalable for growth. So that is what we at least see should be the value creation for our investors that we aim and we are expecting to grow, and we are expecting to have a sound profitability for the coming years.

[Marius Koksvik, executive]

Do you have any specific actions to make HAV Group more interesting to invest in and getting the message out there to more investors?

[Gunnar Larsen, executive]

Yes. We're trying to get the message out. Our primary goal is to generate growth and generate profitability. We think that, that is the best message that we can send to the market and also the best communication that we can have for the investors that already invested also. And in addition to that, of course, we have a strategy on how to get the message out.

And one thing I can mention is that next week, I will be participating in investor conferences, both in Sweden with Redeye arrangement. And I will also take part in Fearnley's Clean Technology Conference next week. So that is some of the actions that we are taking. And I also hope -- I think both these events are broadcasted via the Internet also. So I hope you can take -- participate if you like to know more about what you think and how we communicate with our investors also.

[Marius Koksvik, executive]

Regarding market growth, does HAV Group have any plans to open any new international offices?

[Gunnar Larsen, executive]

Yes. If we shall support our customers, the shipowners, during the lifetime of the vessels, we also need to be present in more markets than we are today. So that is certainly a part of our plan, to have more foot on the ground, in important markets both with regards to sales, but also with regards to support to the vessels in operation.

[Marius Koksvik, executive]

And there's a specific question about India. Is that a market that we have specific actions towards?

[Gunnar Larsen, executive]

Yes. India is certainly on our radar. And we have also a part of our sales pipeline as projects or prospects in India. And we see that India is coming very strongly back as a shipbuilder again. And also, there is a large ship owning business in India. So India is certainly one of the segments and the markets that we are looking at.

[Marius Koksvik, executive]

And then there's a question about the U.S. market. Has HAV Group or HAV Design experienced any additional interest after the first design contract that they won there?

[Gunnar Larsen, executive]

In U.S., we are -- in general, for the offshore SOV market, we have a close cooperation and an exclusive cooperation with ESVAGT. And we follow ESVAGT on all their projects that they have in U.S. Also for the other segments in HAV Group, U.S. is an interesting market, including also Canada. So that is also a market that we see increased interest from.

[Marius Koksvik, executive]

And regarding design, are HAV Design working to develop new types of designs?

[Gunnar Larsen, executive]

The simple answer is yes. We are strong in the segments that we have already operated in, and we are looking at new segments in addition. So we are trying to see what our strengths are within design and the other companies and targeting market where we can have -- can be competitive based on the strength and the experience that we have already. So we are also looking into new markets for design and are in discussions there also with clients, customers in different and new ship types.

[Marius Koksvik, executive]

What are the tasks or new assignments of the Undheim Systems organization that has been acquired?

[Gunnar Larsen, executive]

Undheim was acquired, as we said, to speed up the process of getting accessibility to the dynamic positioning functionality. The dynamic positioning functionality is critical when you shall have, for instance, autonomous operation of the ferries that we have partnered with Fjord1 for.

And especially with regards to an autonomous transit from one key to another and also for the docking process that ships are docked safely, and they are going safely across the fjord, so we are working now to integrate the Undheim technology into our platform for navigation and communication, developing the necessary functions for this autonomous functionality.

[Marius Koksvik, executive]

Why should ship owners choose HAV Group as technology supplier?

[Gunnar Larsen, executive]

I think the main reason is that we have a very broad knowledge because we are both experts within hydrogen energy system or hydrogen-based energy carrier systems. We are experts within water treatment, which is important on board vessel. We are experts in optimizing the energy systems and the power systems and the propulsion systems and control systems on board. And as a foundation or a cover of all this, we are experts in ships design, which is a total expertise of the vessel.

That means that we have something that very few others have. When we integrate and we collaborate about this technology, then we are able both to give very good advice to the ship owners when they are going and -- taking their investment decision and delivering and optimizing the total integrated product and the vessel together with the ship owner.

So that makes us very competitive, and there is not so many others that can offer the same total integrated solutions that gives added value in our opinion to the ship owners.

[Marius Koksvik, executive]

Could you give more details surrounding when the recent Fjord1 contract will be signed and how big it is?

[Gunnar Larsen, executive]

We cannot say very much more than we have said already. We are in the process now of finalizing the contracts. Fjord1 is in the process also of finalizing their contracts, and we are collaborating very closely with them in this process. And we -- the contract amount, as we have said, will be of the biggest in HAV history.

You saw that we had a contract in third quarter for HAV design of NOK 200 million. It will be bigger than that. So this is very good and very important order for us, both with regards to filling the capacity, increasing the profitability of the company and also being able, as a facilitator or a driver, to accelerate the development of our digital functionality.

[Marius Koksvik, executive]

Do we -- is there a possibility to continue stock buybacks after we hit the 10% limit?

[Gunnar Larsen, executive]

If we hit the 10% limit, then we cannot buy more unless that we are selling shares, using shares for acquisitions or using them in the shareholder program for employees. So until next general assembly, we have to operate within these limits.

[Marius Koksvik, executive]

Okay. And that concludes the Q&A.

[Gunnar Larsen, executive]

Thank you very much, Marius. And thank you very much for all that have been listening to our presentation. We hope you will follow us onwards. We hope that we can continue providing good news for the shareholders and for our other stakeholders. And if not before, I'm looking forward to speak to you again and answering questions at the next presentation, which will be for the Q4 results in March.

Thank you very much.

[Pal Aurvag, executive]

Thank you.