Hav Group ASA

OSE:HAV

Earnings Call Transcript 2022-Q4

[Gunnar Larsen, executive]

Good morning and welcome to HAV Group's Fourth Quarter 2022 Presentation. Together with me today presenting is Pal Aurvag, CFO in HAV Group. Today I'm saying a little bit about megatrends and our strategy, I will give you a business update on the subsidiaries, Pal will give more details about financials and we have a summary and how we look at the future. And afterwards, we have as usual a Q&A session with questions that we have received through the link that we presented previously. So HAV Group, we are enabling the green transition at sea. We are an international provider of green technology and technologies for marine and maritime industries. We comprise of 4 subsidiaries with vast experience and technology within these sectors and our vision is a sustainable future at sea. We are a specialist in guiding the marine and maritime sectors and the industry towards 0 emissions.The figures for Q4 is we had a revenue of NOK124 million, we had an EBIT of minus NOK19 million in the quarter and a profit before tax of minus NOK17 million. The cash balance at the end of the year was NOK224 million and we had an external backlog of NOK482 million giving a book-to-bill of approximately 1. The key developments of Q4 was that we signed contracts for battery packs for 3 vessels for upgrades for Volstad Maritime's offshore vessels and we have totally signed 4 vessels with upgrade there. And this is also a potential that we see for the future to upgrade existing vessels with battery packs in order to reduce energy consumption and emissions. We received extensive interest for our containerized hydrogen energy solutions for ships and I'll say a little bit more about the development there also afterwards in the presentation.The revenue in the quarter compared to 2021 is reflecting that in 2021 we had significant equipment deliveries together with our ship design and this is something that can fluctuate rather much with regards to the revenues in a project driven business that we are operating. The majority of the loss in the quarter also reflects projects and provisions to projects that was already taken in order in 2018. What we see now is a positive market development that we have been expecting for quite a long time, which has been postponed by first, the pandemic and then the Ukrainian war. But we see now a very positive development and that reflects also that we have got orders already now in 2023 for NOK200 million. And as maybe some of you have seen today or this morning, we also received a new order now for a very exciting market for Norwegian Electric Systems with energy systems for reducing emissions and saving fuel and energy consumption on a yacht, an existing yacht.So also the retrofit of this market, we have a large amount of yachts, is potential market for our products. We also secured in January and February order for a breakthrough in U.S. where we have the first order as a European ship designer to design service vessel for the offshore wind farms in U.S. And this is also a market that we see is potential for the future. They are going to develop a lot of offshore wind farms and we hope together with our partners to be a part of that extension. We also signed a significant contract for energy systems and smart control at Cemre Shipyard in Turkey for GC Rieber Shipping also for the offshore wind sector. So the offshore wind sector will be important for many of the subsidiaries in the group onwards. And not at least, we have obtained DNV Approval in Principle for our containerized hydrogen energy system that is used for ships, which I will speak a little bit more about.So we have spoken about the maritime megatrends that we are very well positioned with regards to what we expect will be the drivers and the requirements for the future especially with regards to reducing emissions. And we have some graph here showing that the global megatrends, they are still very valid. There will be a greener fleet renewal and regulations and incentives with regards to new technology for reducing energy and emissions will still be a very big part of the future. We are already positioned, we have already delivered, we have already technology for the future energy fuels; but we also see that this is a wave that is still about to come. So even as we have sound operations and are profitable today, we see the even bigger potential in the future. So from these graphs on the left side is a projection of how many wind turbines that will be installed -- new wind turbines that will be installed in the future years to come.And with our experience, we have correlated this to the need for service operation vessels for the offshore wind production where we are 1 of the leaders in designing these type of vessels together with our partners. So we see from this graph also that there will be a huge demand for new vessels for serving the offshore wind farms also. In general, we also see that the world commercial or merchant fleet is aging. That means that that is also driving a need for new vessels. The scrapping will take up because of so many vessels that are becoming older. And in addition, all these vessels will also need to apply to the new regulations and incentives with regards to reducing emissions. And effective designs and energy optimization and electrification and smart control will be a big part of what they will be requiring of technology in regards to reducing emissions. So the megatrends are still very much in favor for what we have positioned the company to be.We are positioned to leverage the greentech maritime megatrends. In addition to, let's say, hardware and products, we also utilize our knowledge and advise our clients on what they should do and how they should approach their market, how they should approach defining what kind of vessels they want to build or should build and what kind of technology they should apply in order to reduce emissions. We are pioneers in design and construction of 0 emission and energy optimized ships. We are a world leading supplier of low and 0 emission energy systems, propulsion systems and control systems. And we are also a supplier of energy efficient and compact water purification systems. And altogether, we can supply a total package and specific needs to the shipowners that wants to build a new vessel, which will be low emission or 0 emission or want to retrofit the vessels in order to reduce emissions.We create value as a group where we coordinate strategic activities. We make sure that the strategic plans for the subsidiaries is in line with the overall strategy of the group. We utilize the complementarity in technology and competence in order to generate higher value for our stakeholders than we could have done separately in the subsidiaries or that separately competitors can do. We also extract some synergies and save cost through economics of scale and standardization. And we are pursuing value accretive growth through organic development and mergers and acquisitions. So we are enabling green transition at sea and we have 4 subsidiaries with leading positions within their segments. This is within ship design, it's in energy design and smart control systems, it's in hydrogen-based energy systems and water treatment systems. And now I'm going to give a little bit more insight in these companies and their outlook.For the ship design, we can deliver and have delivered the most efficient vessels possible covering every aspect of the vessel's performance and functionality and we are delivering everything from concept development and detail design to detail engineering, systems engineering and integration of all the systems on the vessel. We have also developed over the years very advanced simulation-based ship design tools so we are able to design and predict the performance of the vessel long time before it's built, which is very valuable for the client in order to choose the right design and calculate his total cost of ownership for the vessel. We have a large portfolio and a large reference list so we have delivered design to more than 120 vessels. And we have a leading position within several segments as offshore wind, electric ferries and agriculture. In Q4 there was no orders for ship design, but we had a great breakthrough with the design for a service operation vessel for offshore wind farm in U.S. in January.This is a breakthrough as we are the first European designer together with our partners and together with a U.S. shipyard to design and then build a service operation vessel for the U.S. wind farm market. And we see that there is a big potential as they are under construction and under plan and invested in a lot of new offshore wind farms and there is a lot of new wind turbines to be installed and serviced also in the U.S. market and we hope to take our share of that market within the service operation vessels. In general also for this design, we see that there will be a requirement for new technology, the adaptation of new fuels, saving emissions, saving energy. With our competence, with our tools, we are very well positioned to take a part of several other segments of ship types also.Water treatment systems, our main product is the ballast water treatment system where we have seen now the last couple of years very good development. We have sold now more than 700 systems worldwide and that is mainly because we are delivering a very energy efficient and compact system that will also save energy and emissions and it's also easy to incorporate both in retrofits and in newbuildings. They are also IMO and U.S. Coast Guard certified. What we see now because we have so many installations being set into operation and that is a number constantly increasing is also that we are getting increasingly higher proportion of the revenue to be recurring business from the aftermarket services and also we see very good margin in this increasing revenue. We had a solid order intake in Q4 and we see also that we have a good development in sales up till now in 2023.Just an example of 1 of the contracts that we got in Q4 was ballast water treatment systems for 2 service operations vessels built at a Norwegian shipyard for a Norwegian owner in this case with options for 2 more vessels. But we see that we have a lot of orders and the orders are more and smaller of course with regards to the total revenue in Norwegian Greentech, but we have a good order intake. And in addition to what you see in the order books for Norwegian Greentech, we also have the fleet agreements that do not come in the order book until they are actually ordered from ship to ship from the ship owner. Another very important focus for the water treatment systems is land-based fish farming. We are already in and delivering components and systems and we see that there is still prognosis for a good growth with regards to new installations on land-based fish farming and we are positioned and we have focus and we see that this is 1 of the new growing revenue streams that will be for water treatment systems.For energy design and smart control, we supply low and 0 emission energy systems, propulsion and control systems for the global marine markets and for most ship types. We have the energy design and smart control from bridge to propeller as we have the navigation systems and control systems on the bridge and we have energy systems and we have electric motors and control systems also for the complete ship systems in the vessel. Smart control will also be important -- is important and will be more important for the future with regards to controlling the vessels in a best possible way to assist the crew on board and to give good advice on how to operate the vessels, semi-autonomous operations in order to make things more effective and safe and also to reduce fuel. So this is 1 of the strategic developments that we have a high focus on also onwards.And we see for instance 1 of the market trends that builds the potential for this part of our company is for instance the new EU Emission Trading System that has been implemented or will be implemented also for shipping [Audio Gap] emissions. They need to do a lot of measures and they can do a lot of measures by operating the vessel, but eventually it will also need new technology. And a big part of enabling reductions with new technology is electrification and digitalization. And within this subsidiary, we are very well positioned with products and are also developing new products and technology in order to assist and guide our ship owners into the green transition. Hydrogen-based energy systems is of course 1 very exciting segment that we are operating in and we deliver complete scalable 0 emission hydrogen-based energy systems. They are suitable for vessel newbuilds and also retrofits.And we see that retrofits will be a big market also with regards to implementing new technology for reducing emissions. We have already last year been granted a preliminary approval by the Norwegian Maritime Authority for the maritime-based energy system with liquid hydrogen tank incorporated in vessel. We have leading components also with regards to guiding clients in when to use this type of energy carrier and how to incorporate it into their vessels. So we have developed very good tools and competence to give good analysis also for the total cost of ownership of a vessel with this type of system. In Q4 or in end of last year, we had a soft launch of what we call the containerized hydrogen energy system. And 6th of March, we announced also that we had the Approval in Principle for this system. And this Approval in Principle confirms that the design is feasible and that there is no significant obstacles to prevent it from being realized.So this is a very, very exciting product and technology that we are expecting a lot of for the future. And here again, also the megatrends and also the regulatory support is expected to drive the adaption of hydrogen and hydrogen-based fuels as ship fuels. As you saw on 6th of March, we launched or we published that we had the Approval in Principle for our containerized hydrogen energy systems. We feel this is a breakthrough and the response we get from the market also confirms that we have been doing something right. This is a stand-alone complete hydrogen fuel cell-powered generation system. We call it Zero Emission Pod. As you see in the illustration, the Pod is containing all the fuel cell, all the subsidiary equipment, everything that is needed in order to deliver power from hydrogen. And the system that we have delivered now -- or sorry, develop now is a 1,000 kilowatt system in the size of a 20-feet container and that is very, very compact with regards to the power that we can generate from this container.We have possibility to design larger or smaller containers. And with regards to the fuel, that can also be containerized and in this case, it's a matter of using compressed hydrogen. With this installation application, we significantly reduce risk for the ship owner in the yard by integrating a turnkey system. So it makes it much easier now for anybody considering using hydrogen as a energy carrier onboard ships to implement it. And the main focus for this product now in the beginning is Northern Europe and we see a big potential. There is a large addressable market and also in most relevant segments. As you will see from the presentation, for example within short sea cargo, there's more than 2,500 ships. Some of them will be retrofitted, some of them will need a newbuilding and it's a big market and hopefully also a lot of this will use hydrogen or hydrogen-based energy systems as basis for the fuels.So we got significant interest for the soft launch for this system in August. We were contacted by around 75 shipowners all over the world. We have still ongoing discussions with 25 shipowners within a lot of different ship types. And we saw from the reaction from the hard launch also with the publication of the Approval in Principle that we got a lot of interest both from clients and investors and we expect also that to generate into concrete sales leads now onwards. So that was the brief introduction -- sorry, not a brief introduction, but it was an introduction to the highlights of the group and more about the subsidiaries and the products and the general outlook for each of the subsidiaries.And now CFO, Pal Aurvag, will give you a little bit more details about the financials for Q4.

[Pal Aurvag, executive]

I will guide you through the financials. The lower turnover in the quarter compared to 2021 was related to extensive deliveries of equipment registered in 2021 and it's a natural variation due to the activity we are running with projects. But the turnover in Q4 is according to the plan. The poor result in the quarter is related to loss provisions and that's related to a project that was awarded in 2018 and we have also less or low capacity utilization in the quarter. And it has been a strategy for us to use the resources for development and internal training to, let's say, be ready for the activity that hopefully will come in the coming years. If we look at the segments, we see now a much more balance between the 4 -- or the 3 different companies. Design was the running business with an enormous turnover last year.We see now that Norwegian Greentech is coming more into business and we see as a result of many years of development and a booming in the retrofit market. So the Greentech is the main contributor to the result in the last quarter, but also for the whole year. Hydrogen is still a development company. The loss provision is related to activities and projects in Norwegian Electric System and we see the figures in the last quarter is substantial negative. If we look at the balance sheet, we have a strong balance sheet and we are well financed in relation to operations and plan development. And there is no capital requirements in short or in 2023. If we look at the cash flow, there is negative cash flow from operations and that's mainly related to the lower activity level in 2022 related to 2021. Investments, that's R&D and purchase of the greentech.And financing, it's repayment of loans and purchase of own shares. If we look at the order book, the order book is book-to-bill at 1, more or less that's the same level. And as mentioned, we have secured order intake for more than NOK200 million year-to-date. And we see also the mix between different segments and the NOK200 million is mostly related -- the majority is related to orders in NES, Norwegian Electric Systems. Yes. That was the sum up.

[Gunnar Larsen, executive]

So to sum up the presentation before we go to the Q&A. We maintain what we have said all along since we introduced the company to Euronext growth. Why should you invest? There is still the same strong and maybe even stronger fundamentals and megatrends for maritime greentech and there HAV Group is perfectly positioned to leverage and utilize the need for technology within this industry. We have profitable operations and a robust balance sheet so we are very well financed for our operations and our development onwards. And we have a solid position for continuous value creation for our stakeholders. So for the outlook, the global megatrends provides incentives and requirements for the marine industry to reduce environmental footprint both short and long term.We have the technology, we have delivered the technology and we are continuously developed the technology that enable the green transition at sea. We see now that the market trends and the global maritime outlook is becoming steadily more positive. We see it in the activity in sales, we see it in activity in the order income now in 2023. And as Pal mentioned earlier also, we have utilized our overcapacity to be prepared for the future with regards to training people, with regards to developing new products, with regards to planning new business development. And that also means that we continue and we reiterate our 2025 revenue outlook of NOK1.3 billion. And as we have said previously because we are a project driven company, there will be fluctuations with regards to the revenue especially.So that was the presentation. Thank you very much for the attention. And now we go to the Q&A session. And we also have with us Marius Koksvik, who is the Vice President of Business Development, who has taken all your questions and now we will try to answer to the best of our abilities.

[Marius Koksvik, executive]

Okay. Let's start with a market-based question here. Are there any new markets we are looking at for establishing new offices for example the U.S. or India?

[Gunnar Larsen, executive]

Yes, we have plans and we have said earlier also that internationalization is 1 of the big potentials also for the HAV Group. We are established very well in Norway, we are established very well in large parts of Europe and also we have smaller portions of market elsewhere. U.S. of course is a very important and very potential market. We see that we have had breakthrough with the design. You see that there is big potential for energy design and smart control and other hydrogen also. So that is 1 of the markets that we are considering. India is also of course an interesting market. So what you will see is that we will have a higher focus or we will have a higher footprint in several other markets, but at the same time it's important not to spread. So we are focusing on where we see the potential biggest in the near future and then the long-term plans is to develop markets even further.

[Marius Koksvik, executive]

Does the company have any plans for uplisting to the main list in Oslo Stock Exchange in the nearest future? There are several investors who would like to invest in HAV Group through a share savings account. There's a question here.

[Gunnar Larsen, executive]

I think we have answered that question also previously and we are still considering to do that. We are considering when is the right timing. It's of course about -- investor strategy is about size, is about the plans that we have. So we are considering it might happen, it might happen not. So we have no concrete plans, but this is constantly considered with regards to what is most efficient and effective both with regards to financing eventual further development and also with regards to creating value for our shareholders.

[Marius Koksvik, executive]

There are relatively low values capitalized to the balance sheet for example for HAV hydrogen. Is this a conscious strategy from our side?

[Gunnar Larsen, executive]

Maybe you answer a little bit.

[Pal Aurvag, executive]

I'd say there's a mix between cost running through the books and activation. But related to hydrogen, a lot of hydrogen was born out of our project that was FreeCoast and that project was started when we were under the Havyard Group umbrella and activities and knowledge related to that 1 is not activated in our books. So yes, in a way the historically or the knowledge running through that project in a way is not in our books and in a way, something. It's because of how we have set up the company and the split out of Havyard Group. So anyway it's correct, but we have started now to activate the development related to the hydrogen container.

[Marius Koksvik, executive]

And then there are a couple of questions about ship design. Is the design company developing any new ship designs for new segments?

[Gunnar Larsen, executive]

The easy answer is yes. So we are strongly represented and leading positions within some segments and we are looking at other segments as well. We see that a lot of segments that is also suitable for our knowledge and our way of designing vessels will require our tools in order to optimize the vessels for safety, efficiency and energy or environmentally friendly issues. So we are looking at different. But you will see, we will launch some more ideas on that also I think during this year.

[Marius Koksvik, executive]

And a continuation of that question is, do we expect that HAV Design will recover to 2021 revenue levels?

[Gunnar Larsen, executive]

That can happen. This is very much driven by what kind of projects that we have. The 2021 revenue was driven by 4 very large projects with very large equipment packages attached to the design. So I don't think in the near future, it will be a very standard revenue for HAV Design. But we have seen also last year that we got an order for a ship design with a rather large equipment package. So this, with regards to HAV Design, will fluctuate a lot over the years. And what we see also in addition is that the margin will not fluctuate the same as the revenue because the margin is naturally lower when you do a lot of trading compared to when you deliver only the design. So the margin levels for design will be more stable and the revenue can fluctuate a little bit more.

[Marius Koksvik, executive]

And then there's a question about how we communicate contracts. Could we maybe start separating strategic contracts above NOK50 million revenue and smaller contracts, separating between the 2 that are above or beyond or above or below NOK50 million threshold?

[Gunnar Larsen, executive]

We are considering when we are publishing contract what is to the interest of the market and also of course to the interest of generating more business. I don't think we can have a clear cut on for instance size of contract because what can be equally important is if it's a major breakthrough or if it's a new product or it has a big potential. It can be equally important with a smaller order and a big potential as a big order which is a oneoff. So I don't think that we will categorize very strictly. But we will try to keep the market as update as possible and we'll also try to be as visible as possible with regards to the potential of new contracts and new news when we publish it.

[Marius Koksvik, executive]

Could the hydrogen containers also be used onshore, for example on construction sites and could they potentially in the future run on other type of fuels?

[Gunnar Larsen, executive]

This container is designed for hydrogen and it's based on the hydrogen fuel cell. Of course you can make containers for other fuels also. But what we are aiming at here of course is the hydrogen fuel. This can be used anywhere. The most advanced place you can use it or at least 1 of the most advanced place is onboard a vessel because a vessel has special conditions and also very special requirements. But we have already now seen that we have interest for instance placing a container onshore for generating shore power where we have requirements for reducing emissions when the vessel is at shore, but you don't have enough clean power. So our focus will be onboard vessels, but of course can be also that there will be some applications that can be on land maybe harbors is the most relevant market or relevant place to have a container when it's not onboard a vessel.

[Marius Koksvik, executive]

Is HAV going to become a dividend paying company soon?

[Gunnar Larsen, executive]

We have said that we should have a sound and good dividend policy and pay dividend to the shareholders when that is the right thing to do. We have growth strategies and I think that the foreseeable future or at least for the coming years, the growth strategy will require the financing and hopefully, we generate value through the growth. And when we came to a certain level, of course then we will pay dividend from the results that we will be making.

[Marius Koksvik, executive]

Have we considered deleting some treasury shares that we have bought back in order to expand the 10% limit or extend our purchase of our own shares, extend the program?

[Gunnar Larsen, executive]

There is no plans with regards to that at the moment. We are following the frames that we have got from our Board and from the general meeting with regards to buying up to 10% of our own shares.

[Marius Koksvik, executive]

Are you still working on potentially acquiring other companies or is that halted after the Hoglund transaction didn't materialize?

[Gunnar Larsen, executive]

We are constantly, as we say also in the beginning here, we pursue growth and value accretive growth through internal business development and mergers and acquisitions. So we are considering both how the group is set up, what kind of business is fitting into the group, what kind of new businesses can we take into the group by mergers and acquisitions that will generate this added value when we make these subsidiaries work together and deliver a total package. So we are very much still looking for new possibilities, new opportunities to grow also through mergers and acquisitions.

[Marius Koksvik, executive]

And the final question for today is how likely is it to return to an EBIT margin of historical levels of 10%?

[Gunnar Larsen, executive]

We are not guiding. The only guiding that we have given the market is our 2025 guiding on NOK1.3 billion. If we talk in general with regards to the business that we are doing, 10% EBIT margins should be obtainable.So that was the last question. I thank you very much for all the followers. I hope you have got a better explanation and better understanding both of the company and the Q4 figures. We are very much looking forward to the onwards activity. We have positive outlooks both for long-term and short-term market. And we are looking forward again to seeing you at our Q1 presentation. And if there is anything in between, I'm quite sure that you will reach out and contact us if there is anything we can assist you with.

[Pal Aurvag, executive]

Yes. And for more details, look at our websites or newsweb.no for the official report for the quarter.

[Gunnar Larsen, executive]

Okay. Thank you very much.