Nekkar Asa

OSE:NKR

Earnings Call Transcript 2023-Q3

[Ole Hansen, executive]

Good morning, everyone, and welcome to this third quarter presentation for Nekkar. I am Ole Falk Hansen, the CEO of Nekkar, and today, I'm with you from our offices in Kristiansand. Today's presentation will start with a recap of Nekkar's value proposition and our company. Furthermore, we will present the key financial highlights from our third quarter. We will give you an update on each of the portfolio companies developments in the quarter, and we will round off with some more financial highlights and also have the opportunity for Q&A for all of you.

So Nekkar. We are an industrial technology company with focus on efficiency and sustainable solutions for ocean-based industries. We have world-class expertise within engineering, industrial software and complex project execution, to mention a few. And Nekkar is an engaged long-term active owner. We are focusing on building profitable growth in all our companies, and we have an active agenda including both operational and structural tasks in our companies. Nekkar is also flexible in terms of ownership and operating model for our different companies and investments.

As an introduction, let's start with a short recap of our current business portfolio. Syncrolift is the global leading provider of shipyard solutions for safe and efficient ship docking worldwide around. Intellilift delivers industrial software solutions, focused on digitalizing workflows through automation and remote control system for boat building and offshore load handling. Techano Oceanlift, which was acquired at the start of the year, delivers intelligent load handling systems, such as cranes, gangways, for both renewables, subsea and the aquaculture market.

And finally, the latest acquisition, our co-investment into FiiZK, which is a leading provider of closed-cage solutions, technical textiles and software for the aquaculture industry. And finally, we have SkyWalker, our disruptive wind turbine service and installation machine for both onshore and offshore use.

The Nekkar portfolio is targeting 4 business segments, as you can see illustrated here. Syncrolift towards the shipyard business segment; Techano, both as renewables, aquaculture and offshore energy; and Intellilift, both a supplier and a key builder in all Nekkar companies in addition to targeting the Offshore Energy segment through its InteliWell joint venture. For FiiZK, it's primarily aquaculture, which is the focus for both hardware and software solutions. And finally, SkyWalker as the wind turbine service machine towards the renewable wind market.

The Nekkar portfolio is spread across the business life cycle, providing a balanced exposure towards generating solid financial performance in the short term and providing strategic opportunities for the future. As you can see, starting from the left at the innovation stage, we innovate new solutions and products in partnership with customers and industry partners. Here, we will find SkyWalker, our wind turbine installation machine. In the growth phase, we find businesses which are starting to generating financial results through commercial contracts with customers. The target for our companies here is to broaden the customer base, scale the business and also expand products and services and aftermarket business. Both Intellilift and Techano Oceanlift are positioned here. And additionally, our investments into FiiZK, including the merger of Starfish into the FiiZK Group, is also a growth-positioned company as we define it.

And finally, to the right, for the established phase, Syncrolift represents the niche market leader for shiplifts. And the business is associated with a large installed customer base and targeting both newbuilds and upgrades and are executing aftermarket services, delivering solid financial results.

So let's move over to the highlights for the third quarter. And we are proud that we have delivered yet a solid quarter. The revenue is up over 100% year-on-year to NOK 162 million in the third quarter, which is also an increase of more than 20% from the last -- second quarter this year. EBITDA came in at NOK 29 million, equivalent to a roughly 18% margin, which is a 71% increase from last year's results. We are still maintaining a strong balance sheet with NOK 166 million in cash. And in the quarter, there has been some working capital buildup related to the project business in Syncrolift. We see a strong fundamentals going forward with a backlog of about NOK 750 million. And additionally, yesterday, we are glad that we could announce the signing of a newbuild shiplift contract to the Indonesian government player, PT Pal of roughly USD 15 million, which actually adjusting the backlog to above NOK 900 million as of today.

In terms of operational highlights. In Syncrolift, we continue to see steady execution of projects and services. A NOK 30 million contract was signed in August, and we continue to see high tender activity as illustrated with yesterday's award. Intellilift are finalizing the full scope on the Transocean Norge and are receiving good customer feedback. Techano Oceanlift is progressing well with the production of the offshore crane awarded earlier this year and are also taking parts in many tender processes for both subsea and renewable lessens. And with SkyWalker, we are discussing cooperation models for targeting SkyWalker as a tool for major component exchange on both bottom fixed installed base and also future new wind turbines.

And finally, for our latest co-investment, FiiZK, we have finalized the transaction at the end of the third quarter and also moved our Starfish technology into the FiiZK Group. The restructuring is progressing as planned, and FiiZK are now actively marketing the services in all business segments. As I mentioned, in Q3, we have seen a solid revenue of NOK 162 million, a more than 100% increase year-over-year, reflecting good operational performance and high activity in both newbuild and also aftermarket business in Syncrolift. Also, the EBITDA of NOK 29 million represents a margin of about 18%, which is in line with the historical averages for the last quarters, as illustrated to the right.

The order intake in the third quarter is mainly driven by Syncrolift Service and the NOK 30 million contract. And the backlog for the quarter is adjusted to the currency development through the quarter and is solid at about NOK 750 million. And please note that these figures does not include last day's announcement of the USD 15 million contract, where the backlog is more around NOK 900 million at the current point in time.

So let's move over to Syncrolift and some company highlights. And let me start with yesterday's news. The order confirmation for the USD 15 million shiplift contract to PT Pal Indonesia shows Syncrolift's clear global market-leading position. And we are glad that the contract in Indonesia is yet another large shiplift contract awarded to Syncrolift. Additionally, in the beginning of the quarter, we signed a NOK 30 million contract for an advanced ship transport system to a European naval yard, and we continue to see high tendering activity within both newbuilds and services.

And if you look on Q3, in the 3 months, no major tenders were awarded nor lost in this quarter. We have established offices in Australia and India throughout this year as part of our global reach and working closely with our customers on a global basis. For the financials, the revenues sees an 88% revenue growth versus the same quarter last year for Syncrolift and the service activity is somewhat increased from the previous quarter, and we are expecting a solid service quarter at the end of the year. In terms of operations, we have good progress on ongoing projects. And we also see that our establishment in India gives good sourcing opportunities in the region.

And finally, we also see high customer activity in our Innovation Lab in Vestby outside Oslo. And as mentioned, yesterday, we announced an order confirmation for a newbuild shiplift and ship transfer system to a government-owned Indonesian player, focusing on both naval and commercial ships. The contract value is about $15 million, and Syncrolift have received an order confirmation, and we expect to sign the contract within short time. Delivery is expected to be within approximately 2 years, and we will construct and do project management engineering sourcing from our Syncrolift headquarter in Vestby.

So going forward, we see a good outlook for the activity level of Syncrolift. On the backlog on the left-hand side, you see our current expectations in terms of execution of our total backlog of about NOK 700 million. And you can see that about NOK 500 million of the backlog is expected to be executing in the remaining of this year and also into 2024 as the coming year. And please note that we have not included the latest award in these figures. And on top of this, as you can see on the right-hand side, we are still having a very high tendering activity in both newbuild and upgrade segment. And we still see a strong tender pipeline in the coming months and quarters. And so far in the fourth quarter, Syncrolift have 1 contract, which actually is included in the tender pipeline figures for '23 and '24. And we hope that we can secure more contracts in the coming quarters and years.

Let's take a look at the Techano Oceanlift, which came into Nekkar from the start of the second quarter this year. For marketing and sales, there is high tendering activity for equipment deliveries to both subsea and renewable vessels. And the financial figures from Techano is impacted by the execution of the large offshore crane, which Techano were awarded in April, May earlier this year. We see a solid execution of the 70-tonne offshore crane, as I mentioned. And also Techano has delivered 2 small offshore cranes to Salmar's Artic Offshore Farming in the second and third quarter.

For Intellilift, the InteliWell joint venture with Transocean and Viasat is still pursuing new contracts for automation systems. And in addition, we have a tendering for simulators and other drilling controls directly from Intellilift to our customers. The activity level in the third quarter is primarily driven by the Transocean Norge scope, which are now in the finalization stage. And last quarter, I showed you a video from the rig. And now we are also glad to share we can give some good customer feedback related to this contract. And as the project and the rig is now working on a month-by-month basis, we expect that the good customer feedback will also be a positive in terms of receiving new customer contracts for Intellilift and InteliWell.

So let's look at some more detailed financials. First, for the revenue. The revenue for the quarter ended at a solid NOK 162 million, which is more than 100% increase compared to same period last year. Year-to-date revenue is close to NOK 400 million, which is about 50% year-over-year growth from last year. Our EBITDA margin remains healthy at close to 18% in the third quarter, although it's slightly down from the 22% in the third quarter last year. Year-to-date EBITDA is 43% up year-over-year from last year's figures.

The net financial items are driven by gains and losses on FX contracts, not qualified for hedge accounting and agio effects. These are now reported as financial items and were previously reported under EBITDA. And you will also be able to see in the appendix for the historical figures with a new reporting method. Profit for the period is NOK 22 million compared with a negative NOK 2 million in the same period last year, resulting in a third quarter EPS of NOK 0.2 and year-to-date Q3 EPS of NOK 0.49.

In terms of sales, we have already mentioned the order intake in the third quarter was about NOK 61 million. And the order backlog is solid at NOK 750 million. And please note that yesterday's contracts are still not included in the figures. In terms of capital spending, the net capitalized development cost remains unchanged in the third quarter. And the reason for this is that the CapEx was offset by received soft funding of about NOK 7 million. So the net effect of these 2 items is 0 in the third quarter financial items.

So let's take a look at our assets. The intangible assets decreased of about NOK 21.5 million in the third quarter. And this is mainly due to the Starfish technology, which we utilized as part of the FiiZK transaction with a contribution in kind, taking it out of Nekkar's intangible assets, where we valued at NOK 25 million. And as you can see, the financial assets is now just about NOK 50 million, which are linked to our investment into the FiiZK Group in the third quarter.

Moving on to the working capital. At the end of Q3, we have a working capital of about NOK 121 million, which is mainly related to the projects in Syncrolift. And this is an increase with about NOK 60 million from last quarter. And this increase is driven by accrued non-invoice production, especially from projects where we are approaching key invoicing milestones but we have not met the actual invoicing milestone. And I think it's fair to say that for a project execution business, like the Syncrolift business, there will be natural fluctuations from quarter-to-quarter, where you will at sometimes have a very good cash flow generation from the projects like we had last quarter. And you will also have some quarters where there will be working capital buildup before you, again, can invoice and redeem the invoice and, of course, the cash from the customer. We have still no interest-bearing debt, and we have a solid equity of about NOK 400 million, representing a 74% equity ratio.

So let's move on to the cash flow. The operating cash flow for the third quarter is negative with NOK 35 million, driven by an increase of the working capital, as I mentioned, and of course, offset by the positive EBITDA in the period. Cash flow from investment is negative at about NOK 25 million, which is primarily related to the NOK 25 million cash contribution we did into FiiZK in addition to the Starfish contribution in kind, which does not have a cash flow impact. And you will also see that the share buyback program, which we launched at our last presentation, has resulted in about NOK 6.5 million in cash spending in the quarter.

And in summary, despite the negative cash outflow in the quarter, we have still a financial position which remains sound. And the available cash reserves assures continued operational stability and gives also strategic flexibility for the Nekkar Group.

So to round off a few comments about our capital allocation strategy. In the current market condition, Nekkar is seeing several opportunities to grow our businesses within organic investments into our existing portfolio of companies and also M&A for new businesses within our defined segment. And on top of our investments, we are executing the share buyback program of up to NOK 80 million, as described in the last quarter's presentation.

So let's try to sum up before we move to the Q&A section. I will make some conclusion remarks. I think we have a strong revenue and EBITDA in the third quarter and also shows a significant growth from last year's figure. The order backlog, combined with a high tendering activity and also yesterday's award creates good visibility going forward, especially for Syncrolift as the key financial driver. Nekkar is still maintaining a strong financial position. And we are also seeing that our investments this year, both in Techano Oceanlift and also in FiiZK are positioning Nekkar towards new products, new customers, which we are expecting to generate positive results in the coming quarters and years to come.

So with this conclusion remarks, I will open up for Q&A. So please, Andrew, let us guide us through it.

[Unknown Executive]

Thank you, Ole. There has been a few questions that have come in. Firstly, a question about the FiiZK business. In Norwegian media, there has likely been a lot of media coverage about the fish farming industry's negative impact on fish and fjord health in Norway, how does this impact the FiiZK business?

[Ole Hansen, executive]

Yes. I think as many of us have read and highlighted in newspapers lately, there is -- I think there is, at least, seems to be some sentiment towards changes in the industry. And as some of you know, FiiZK and also Nekkar with its Starfish technology is a provider of new, more sustainable solutions, basically both collecting sluggish and waste from the harvesting process in order to prevent the fjords and the surroundings from the waste and in addition, providing a better environment for the fish health through the harvesting.

And I think actually, FiiZK has more than [ 42 ] production cycles, where there has been no sea lice development and also have a very low mortality rate. So we believe this is positive for the products and solutions that the FiiZK Group is targeting. .

[Unknown Executive]

Thank you, Ole. There is also a question about what's the reason for the slightly lower EBITDA margin this quarter compared to previous quarters?

[Ole Hansen, executive]

Yes. I think we will have some fluctuations like we are presenting this quarter, and there will be some quarters where there will be higher EBITDA margins related to project execution and also a mix of businesses and services. And I think if you look on the last 7 or 8 quarters financials, I think the average is close to where we reported this quarter. So there are no kind of signs of worries that we should kind of expect a significantly lower EBITDA margins going forward, but there will be some natural fluctuations from quarter-to-quarter.

[Unknown Executive]

You've addressed net working capital. But there's a question here, but do you expect the net working capital to decrease again in the fourth quarter?

[Ole Hansen, executive]

I think more in general. Of course, when you build up working capital in one period, of course, as I mentioned, you are approaching invoicing milestones, but you are not yet there. And of course, in theoretically and in natural sense, you would expect then that in the coming days and weeks and months, you will hit that milestone.

So that's why I said that there will be fluctuations from quarter-to-quarter, where you will, some quarters, have somewhat buildup and some quarters, you will have a decrease again after you have hit those milestones. And of course, these -- we are not building up inventory or kind of more kind of long-term working capital level. This is primarily related to project execution. And of course, projects goes day by day. And when the project is finalized, you will end up with 0 in working capital for the project.

[Unknown Executive]

There's also -- I think it's worth clarifying if it's not been clear to everyone, how large is the contract that you mentioned that you have won in the fourth quarter? And by that I assume he -- that person refers to the contract announced yesterday.

[Ole Hansen, executive]

Yes. The contract value is USD 15 million. So of course, this is a significant contract for Syncrolift and, of course, also something which provides good visibility and also is a good sign for the total shiplift market that Syncrolift is the leading provider of new shiplifts and upgrades and services all world around. And I think that's also why, as I mentioned, we are now building setups in both India and in Australia to be closer to our customers and able to both serve them on newbuilds, upgrades and aftermarket services.

[Unknown Executive]

A question about SkyWalker, Ole. There seems to be lower interest than initially expected in offshore wind auctions in Norway. Has this affected market interest in SkyWalker? .

[Ole Hansen, executive]

I think first of all, for SkyWalker, we are now targeting the service and upgrade market for offshore wind. And that means that our kind of key focus, after we have commercialized the technology, is to target the installed base of primarily bottom fixed turbines in the European market. So you could say, in kind of bringing SkyWalker into the market and getting products and services and contracts later on, I would say it's not critical in terms of whether Norwegian offshore wind will be developed in 2030 or later. But of course, we are all seeing positive news in terms of getting this development. And of course, we hope that the Norwegian programs are progressing at least as planned for now.

[Unknown Executive]

Thank you. There are also a couple of questions about share buybacks and one question about why there hasn't been acquired any shares in the last -- in the past 2 weeks.

[Ole Hansen, executive]

So the share buyback program is kind of -- is regulated in terms of when you are able to make the purchases, and we are following those regulations. So there will be periods where there will not be acquired shares. And then, of course, the program is still live, and we continue to plan for that until the Annual General Assembly, the coming year.

[Unknown Executive]

There is also a question about the status of the buyback program, the number of shares and so on. If you don't have that -- those numbers by heart, Ole, I can share them with you, but do you want to give it a go first?

[Ole Hansen, executive]

No, please, please do.

[Unknown Executive]

Yes. Okay. So the status is that Nekkar has purchased a total of -- currently owns a total of 1,365,965 own shares, corresponding to 1.27% of total shares in the company.

[Ole Hansen, executive]

Thanks. And I mentioned it's about NOK 6.5 million of cash outlay in the third quarter, representing the third quarter effects.

[Unknown Executive]

Yes. Yes, there's also a question about how our Syncrolift newbuild margins compared to aftersales and service margins?

[Ole Hansen, executive]

Actually, they are quite corresponding or in line. And I think normally, you would probably expect that you would have a higher aftermarket margin in, I would say, most industries. In the shiplift business for Syncrolift, they are quite in line in terms of what should we say, the gross project margins. And I think the key effect here is that, of course, the project margin in Syncrolift are very good. And I think also, we are gradually building up the service business over the last few years. And of course, in the longer term, both increasing the top line for the service business and, of course, also increasing the revenue, now the margin level is part of that.

And as I mentioned, like setting up an India entity, having people on the ground in India and also could do local sourcing for simpler parts and equipment would also be positive in terms of increasing the margins for the service business.

[Unknown Executive]

Thank you, Ole. There is a question here about, where is the Excel sheet with updated EBITDA number to be found? And I assume that will be published in the Investor Relations sections on the Nekkar website, correct?

[Ole Hansen, executive]

That's correct. And as I mentioned, we have now in the third quarter made a decision, whereby all the FX, hedging FX, are now reported under financial items in order to present a more kind of clean EBITDA margin with no adjustments, as we previously have presented an operational EBITDA margin in addition. So now we have said that the foreign exchange effects, including agio are now reported under net financial items, which I would say is probably what more you would expect it to be.

[Unknown Executive]

Just to add to that, there is also a slide in the appendix of the Q3 presentation, which provide historic quarterly results with the updated EBITDA definition.

Yes, a question about what's the update on the Darwin tender, please?

[Ole Hansen, executive]

Yes. I think, of course, we cannot disclose any key project specifics related to that. We have submitted a bid for Darwin earlier this year, and we are still waiting for the final decision from the Northern Territory group, which is the contracting party.

[Unknown Executive]

Thank you. I think that covers the large majority of the questions today. There is one very specific question about the accounting of the share buyback. I'm not sure if you can answer that, Ole, but we'll try. Under which line in the balance sheet, can we find the shares that you have acquired? I thought it was under the financial assets line, but it seems like there is only FiiZK under that line. Ole, are you able to answer that? Or is it too detailed?

[Ole Hansen, executive]

I would have to get back on that question if -- to answer that one. .

[Unknown Executive]

But I think in general, I think if I'm guessing, they will be accounted as a separate line under equity because own shares should not be accounted as assets, is the sort of base case gut feeling here, but we can verify that later.

[Ole Hansen, executive]

That's true.

[Unknown Executive]

I think that covers all questions today. So with that, it remains to say thank you for joining this morning.

[Ole Hansen, executive]

Thank you, everyone.