Norbit ASA

OSE:NORBT

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Per Weisethaunet, executive]

[Audio Gap] We appreciate that you're showing interest in NORBIT. And in addition to walking you through the figures for Q2, which came in as a new record for NORBIT, we will give you some more flavor to some strategic milestones achieved.

So as mentioned, Q2 2024 came in as a new record quarter. We ended with revenues of NOK 419 million with an EBIT of NOK 102 million, yielding a margin of 24%. I think this is a quarter to remind the audience that quarterly fluctuation is to be expected. Three months ago when we presented Q1 2024, we saw quite low EBIT margin due to one or both of our most profitable segments, Connectivity and Oceans, delivering slightly lower than expected.

In Q2 2024, you will see that Oceans and Product Innovation and Realization is the segments driving the growth and contributing the most to the result. Yes, so for -- the accumulated for first half of 2024, we have recorded NOK 829 million (sic) [ 823 million ] in revenues with EBIT on NOK 143 million, representing a margin of 17%. As you know, our target is higher than 17%. And it's good to see that we are on 24% in Q2, having a little drag from Q1 then coming to 17%.

So as mentioned, today, we'll also give you some more insight into some strategic milestones, acquisition of Innomar. We have completed a private placement during the quarter, strengthening our cash position with NOK 200 million, and I'll give you some more insight into a new product under development in Connectivity, where we have disclosed that European leading client in truck tolling, Toll4Europe, has awarded us the first contract of NOK 160 million.

So first, the acquisition of Innomar that we completed in July. We're happy with this transaction. This is a company with nearly 60 years -- sorry, 30 years of experience in underwater acoustic solutions for sub-bottom profiling. So as you know, NORBIT is using sonars to map the sea floor and then inspect things in the water column.

This parametric sub-bottom profiler technology from Innomar is used to penetrate the sea floor and sea sub-bottom. So it's a very good addition. This is a very good driven company out of Rostock in Germany. They have delivered products in more than 80 countries and is recognized as a world market leader in this specific domain.

So for NORBIT, it's a very good strategic fit. But we think this is a very good addition and fits to our strategy to broaden our product offering in the Oceans domain. We will manage the company and run it under the Innomar brand. But going forward, it's now Innomar and NORBIT company, because Innomar is very well recognized in the global maritime market.

So a little bit into the figures in Oceans. So Oceans has delivered the best quarter ever with the NOK 195 million in revenues, which is a very steep growth from the comparable quarter last year. And you see then some operational leverage on this revenue, giving a 41% EBIT margin. So then it's NOK 80 million in EBIT from Oceans in this quarter.

And again, I'd like to pay some attention to 3 months ago we saw a weak quarter from Oceans. And this is -- so first of all, it's seasonality in the numbers for Oceans, where Q1 typically is the weakest quarter. Q2 is typically strong, 3 slower and then 4 usually the strongest during the year.

We will expect also seasonality and quarterly fluctuation going forward. And maybe also, I'd like to remind you that if a system having a price tag between NOK 1 million and NOK 3 million, if you have well-spec system, say, like NOK 2.5 million per system, so if a number of those goes from one quarter to another, it will affect our numbers.

For the first half of 2024, in Oceans, we have delivered NOK 317 million in revenues. That's 10% increase from first half in 2023. For the half year, the EBIT margin is then 28%. Looking into the revenue split for the first half, so out of this NOK 317 million in revenues, it's NOK 205 million coming from the base sonar platform, which we market under the name iWBMS.

And we have NOK 70 million from Winghead sonars. And then you see it's some revenues from security, environmental monitoring and others. In this sonar sales, first half year, this year, we tend to see that over time, as average. We have 1/3 of our revenues in North America, 1/3 Europe and Middle East and 1/3 Asia Pacific. In first half of this year, Europe has been the strongest region.

Behind this growth and quite satisfying numbers, we've seen that demand from both autonomous underwater vehicles and autonomous surface vehicles has been strong and driving the growth. In addition to the known technology platforms, as we've spoken about in the past, NORBIT is also allocating capital to develop other sensors that is relevant in this segment.

Hopefully, we can show you a little bit more specific later what this is. But what I can say is that from the allocated capital to R&D, it's already released some new interventions, which also is shown in the numbers just presented.

NORBIT's vision is to be recognized as world class. And to be honest, I'm a little bit proud when we see that when Paris is arranging Olympics 2024 and they do that in the heart of Paris, they're using the river Seine as both one of the arenas, and the base for the full Olympic Games.

They need to have security, the French Security Services, then showed NORBIT the trust that NORBIT together some local French companies also deployed underwater surveillance in the Seine during the Olympics. So being qualified for the Olympics feels like being recognized as world class.

So into Connectivity. As we have told you before, Q1, Q2 2023 was very strong due to Connectivity delivering on a very big contract, NOK 150 million, onboard unit contract towards one client. In Q1, Q2 this year, we've seen some reduction of sales on onboard units, and this is partly explained about some larger clients rescheduling some of the supply.

Revenues came in at NOK 101 million with NOK 21 million in EBIT result. So for the full year, we see NOK 252 million in revenues compared to NOK 308 million in the first half year last year. And with an EBIT margin of 25%, which is then slightly below the 29% in first half last year.

So -- and if you look on -- compare first half year 2022, '23 and '24, you see also -- if you consider this opportunity, we jumped on to deliver on a big contract in short time towards our client, the first half year 2023. If you adjust for that, you see the underlying growth in the segment is very good.

So first half year 2023, NOK 215 million of NOK 308 million came from onboard units, whereas the other product segments has now in this quarter, all shown very good growth. Where enforcement modules, this is for tachographs, has grown from NOK 29 million to NOK 40 million. Enforcement modules for satellite-based tolling has gone from NOK 16 million to NOK 46 million, and subscription and e-toll services is up from NOK 45 million to NOK 54 million. So this decline in onboard unit sales is partly offset by growth in all other product segments.

We announced in April that we've been awarded a contract on onboard units to a nondisclosed client. Quite recently, we were allowed to disclose that this client is Toll4Europe. And Toll4Europe is a leading European electronic toll service provider, maybe the leading, not only a leading. GNSS onboard unit is a unit that is installed in commercial vehicles.

When it's compliant onboard unit, it enables the driver to go through the whole of Europe with only one subscription, and he has to pay invoice only from one provider. And in this case, Toll4Europe will be that provider.

So NORBIT has, for approximately 10 years, been a supplier of enforcement modules based on our core technology, which is dedicated short-range communication. We have delivered modules like that to other GNSS OBU manufacturers or vendors. So we are now stepping up in the value chain. This is done after Toll4Europe approaching NORBIT and asking if we were willing to make new design.

They saw a need for some new functions and features in such a unit. And I'm very glad that -- so our strategy from niche to notable and accumulating skills and references is what should qualify us to tempt our clients to ask NORBIT for support on larger, more important tasks. And this is what has happened here.

So maybe it's fair to mention also that with this initial contract for Toll4Europe, which now is NOK 160 million contract to be delivered second half next year, the product is currently under development. We have been through a couple of proof-of-concept tests. So it's quite mature already.

And to give you some numbers to see why we're so enthusiastic about this is that if we instead of getting this GNSS onboard unit contract being NOK 160 million contract, if instead should have delivered only this enforcement modules, that would have been a contract in the range of NOK 10 million to NOK 15 million. So for us, it's a very significant step-up, and we take a much larger share of value creation by doing this.

Since 2019, it's a number you could have also -- we've delivered 2 million of these enforcement modules. So showing a little bit that this is a well-established and quite, in a NORBIT scale, large market.

In Product Innovation and Realization, it's also a satisfying quarter to see that when it comes to the margins, and also it's a good growth to comparable quarter, as Q2 is somewhat affected about holidays in this segment. But revenues of NOK 134 million, that's 32% increase from the comparable quarter last year and then with an EBIT margin of 13%, which is less than we had in the same quarter the year before, but it's an improvement.

We've had some quarters with weak margins due to some projects we were committed to fulfill, which had slightly negative margins. And it's good to see when these projects are concluded that we get the margins back where they should be for this segment.

So for first half year, NOK 280 million. And the average margin first half year is then 8%. And as you see -- so the growth in the segment is fully from contract manufacturing services, and it's driven by a very strong demand from industrial clients.

With that, I'll give the word to Per Kristian, who is on a telephone link. So please Per Kristian, take us through the group financials.

[Per Reppe, executive]

Thank you, Per Jørgen. I will spend some minutes walking you through the financial highlights of the quarter. Revenues in the first quarter amounted to NOK 418.9 million on par with the level reported in the corresponding period of last year. EBITDA for the quarter was NOK 131.9 million compared to NOK 127.2 million in the second quarter of 2023. This represents a margin of 31% compared to 30% in the same period last year.

Operating profit was NOK 101.8 million, resulting in a margin of 24%, same as last year. Net finance expenses were negative NOK 8.5 million, mostly explained by net interest expenses. Tax expenses were NOK 21.3 million, while net income for the period was NOK 72.1 million.

In the second quarter, Oceans was the main driver behind the result improvement, reporting an [ 28% ] increase in revenues on strong sonar sales in Europe compared to the corresponding period of '23. Gross margin improved by 5 percentage points on lower sales on commission and favorable product mix.

Partly offsetting the gross profit improvement was an increase in payroll expenses driven by a continued strengthening of the realization and the acquisition of PING DSP made in fourth quarter last year. EBIT under that was NOK 79.7 million in the quarter.

In Connectivity, revenues declined by 41% year-over-year on lower OBU sales, while gross margin was up 5 percentage points to 66% in the quarter, as subscription e-toll share of the segment revenues increased. Offsetting the negative gross profit effect was a decrease in operating expenses of NOK 5.5 million, mainly driven by higher capitalization of internal R&D, lower allocated costs from the factories as well as reduced cost of freight, consultancy and credit loss provisions. EBIT for the quarter was NOK 20.8 million.

In segment PIR, revenues were up 32% year-over-year driven by growth from industrial clients within contract manufacturing. Gross margin declined 6 percentage points on customer mix. There was, however, a significant improvement in the margin, sequentially following a normalization of the gross margin after a challenging first 3 months of the year. An increase in operating expenses and depreciation of NOK 7.9 million, mostly explained by payroll expenses, offset the results leading the PIR reporting an EBIT of NOK 17.8 million.

All in all, as we sump up the first half of the year and after a seasonally first quarter for Oceans and low margins in PIR, I'm pleased to see that all our business segments reported operating margins within our target range for the first 6 months of the year.

Next, balance sheet and financial position. Property, plant and equipment including right of use assets, increased NOK 22.2 million in the quarter, following investments in machinery equipment and lease additions of new production equipment, including a new production line for enforcement volumes for tachographs to increase capacity to cater for demand. Intangible assets rose NOK 3.8 million to NOK 312.4 million as amortization on the partly offset in R&D investments.

Our new capital position continues to improve in the quarter, primarily driven by NOK 32.9 million reduction in inventories and a NOK 6.4 million increase in trade payables partly offset by an increase of NOK 9.3 million in receivables. Net interest-bearing debt stood at NOK 184.4 million at the end of June, an increase from NOK 132.6 million at the end of the previous quarter. Our equity ratio was 51% at quarter end, down from 57% end of last quarter due to a dividend payment.

As mentioned on the previous slide, our working capital efficiency has continued to improve in the second quarter to [indiscernible] 24% second quarter annualized. The reduction in inventory has been the main driver behind the improvement. Since year-end, inventory reduction has been close to NOK 100 million, which is a result of continued improvement in inventory management as well as reduced safety stock of components, as supply chains have become more reliable.

We have previously highlighted that inventory turnover has been high on the strategic agenda, and I'm pleased to see that we are achieving concrete results from the initiatives taken, but more work is still to be done.

Second, we continue to maintain a high cash conversion rate on our receivables with our nonrecourse financing facility in place, which also supports an increase in free cash flow. While we continue to work on optimizing our working capital position, including also negotiating payment terms, requesting advanced payments, one must expect that the ratio will fluctuate from quarter-to-quarter.

The long-term ambition, however, is to continue to increase the efficiency in order to make the business more capital light without compromising NORBIT's core value #1, we deliver.

In the second quarter, our net interest-bearing debt-to-EBITDA ratio increased to 0.7x, and our liquidity position stood at NOK 462 million as per the end of the quarter. Subsequent to quarter end, several finance activities were concluded in connection with the acquisition of Innomar and to strengthen the capital base for further growth.

In July, we closed the acquisition of Innomar. At closing, we paid EUR 34.9 million in cash to the sellers and EUR 4.8 million in consideration shares to founding management, being the preliminary purchase price for the shares. For the cash portion, post-closing adjustments and working capital financing, we had entered into a EUR 38 million loan agreement. The loan carries a margin of 175 basis points, subject to our net interest-bearing debt-to-EBITDA ratio being below 2.5x, which is the higher end to our financial policy.

The margin is a [ 14 ] basis points reduction compared to the last term loan issue. And in order to strengthen the financial flexibility and capital base for further growth, we raised NOK 200 million in gross proceeds through our private -- equity private placement. Adjusting for the acquisition of Innomar and the prior placement, our interest-bearing debt-to-EBITDA ratio would have been 1.1x at 30th of June, providing a strong financial platform to deliver on our capital allocation framework and the ambition plans we have set out.

In addition, by repaying existing term loans and issuing a new loan of improved terms, we have lowered our cost of debt and tax optimized our financing so that the cost of borrowing stood up 4.1% post tax compared to 5% previously.

Lastly, the cash flow for the quarter. Cash flow from operations was strong and ended up NOK 149.5 million, explained by an EBITDA of NOK 131.9 million and a decrease of NOK 33.7 million in working capital. Taxes paid was NOK 7.4 million and NOK 8.5 million in net finance expenses.

We invested NOK 37.4 million in the quarter, explained by NOK 19.9 million in R&D investments and NOK 6.5 million investments in machinery and equipment. We also made an NOK 11 million investment in Cellula Robotics in the quarter. Cellula Robotics has developed a series of autonomous underwater vehicles used for marine security, inspection and data collection. And the investment is made in order to position Oceans as a strategic supplier of acoustic technology to [indiscernible].

For 2024, we expect our R&D investments to end up in the higher end of the NOK 65.75 million range due to development of the GNSS OBU in Connectivity, while NOK 90 million to NOK 100 million guidance for investment in fixed assets is reiterated. So far, we have invested with NOK 51.7 million in machinery equipment, including the lease portion. Cash outflow from financing activities was NOK 109.9 million in the quarter, mostly explained by dividend payment of NOK 152.9 million, partly offset by an increase in debt.

Then I will give the floor back to Per Jørgen again for the outlook section.

[Per Weisethaunet, executive]

Thank you. Per Kristian. So going into the short-term outlook first and then looking on the third quarter. And as already mentioned, third quarter is typically a slower quarter than second and fourth quarter in Oceans. So we'd like to express that we expect to deliver growth in third quarter in Oceans compared to the corresponding period of 2023, and this is excluding the contribution from Innomar. So Innomar revenues will come on top of that.

In Connectivity, we give a range. We expect revenues in Connectivity to be between NOK 120 million and NOK 130 million. The growth from Q2 is because we see increased supply both of onboard units and enforcement modules for tachographs. In Product Innovation and Realization, we see continued high demand for manufacturing services. And based on this, we think the revenues in the third quarter also will be NOK 120 million to NOK 130 million.

With that, we reiterate our 2024 outlook, where we've given a range of NOK 1.7 billion to NOK 1.8 billion. Based on the current forecast, we've said that we expect to be in the lower part of the range, but still in the range. And the growth from '23 to '24 is expected to be strongest in Oceans and Product Innovation and Realization.

We also reiterate that we expect to have EBIT margins in line with what we had in 2023. And of course, as we have demonstrated with the Innomar acquisition, it makes sense to do also inorganic initiatives. And we will continue to do that, and we remain focused that any acquisition should be value accretive.

Also like to remind you on our 2027 ambition, which also is what helps us to prioritize to work every day. So our target is an organic growth, helping us up to NOK 2.75 billion in revenues in '27 with the EBIT margin in the range of 20%. We have also, during the last years, increased our focus on the balance sheet and on capital allocation. So we have a target of a return on capital employed to be in the range of 30%. And as Per Kristian told you, our EBITDA range from 1 to 2.5 in the capital allocation framework, remains the same.

So with that, I think maybe, Per Kristian, we could see if there are some questions from the audience.

[Per Reppe, executive]

Sure. So first question would be from [indiscernible] Securities. What is the difference between the hybrid OBU product you have developed for Toll4Europe versus the one they are currently selling?

[Per Weisethaunet, executive]

Yes. So I think -- so I don't want to say too much about that as I have -- out of respect that Toll4Europe is preparing a campaign to introduce this new product later this autumn. So the base functionality is, of course, the same. But I think it's been taken some measures where you take the perspective of the user into this to make it more easy usable. That's the main, so -- yes.

[Per Reppe, executive]

And then the second question from [indiscernible]. Is there any risk of 5G taking over for GNSS in tolling and threats from ANPR?

[Per Weisethaunet, executive]

So I think in tolling, it's been many different technologies for many, many years. And I think you could add to the list, so the question from 5G, ANPR, could add also why don't use equipment from the infotainment system containing the vehicle also to do this?

But I think it's -- so one thing is technology. One other thing is regulations and legal aspects. As of now, the European Union has issued a directive for the EETS, which then supports very well that EETS-approved suppliers like Toll4Europe, will need some equipment to be able to deliver their services.

[Per Reppe, executive]

And then a final question from [indiscernible]. What is the average replacement cycle for a typical sonar system? Same question for your average DSRC product.

[Per Weisethaunet, executive]

Yes. So I think when it comes to sonar systems, it of course -- NORBIT sonar that is in the storage, it will last many, many, many years. But it's a rough user environment, and we see that wear and tear and also that suddenly they run into some rocks with the sonar or crash into [ decoy ]. So we've estimated that the average lifetime of a sonar system is approximately 5 years.

When it comes to DSRC products, that varies. So I think if you consider the enforcement modules for tachographs, the lifetime of such a module would be the same as the lifetime of the truck or the lifetime of the regulation demanding this. So what we have seen now is that with this mobility package coming from the European Union, where more functionality is needed in the tachograph itself, that has been good for our sales. The standard onboard units for tolling of passenger cars, et cetera, that's a battery-operated product. The average lifetime of such a unit is typically 5 years. Next?

[Per Reppe, executive]

So next question or just 3 questions from the same participant. I'll try to summarize them a little bit. They are quite long. So first question up, given Ukraine's recent success in using acoustic sensors to detect and counter drone strikes, does NORBIT see potentially adapting acoustic technology for land-based defense systems?

[Per Weisethaunet, executive]

I think as of today, we're focusing our initiatives based on acoustic technology in the underwater domain. I think that will continue. But the geopolitical unrest as such, of course, also affects that demand for underwater surveillance, as we've spoken about before.

[Per Reppe, executive]

Okay. And then next question, as a public company measured on a quarterly basis, how does NORBIT ensure that its focus remains on not only delivering functionality but also creating general value for customers?

[Per Weisethaunet, executive]

Yes. So I think it's in the company's DNA. So we started in 1995. One of the key elements in our strategy is to deliver market-driven innovation and tailored technology. I mean it's always -- I mean -- the vision also enabling people to explore more. I mean, it's all about finding where we can contribute better than others and then do that. And then I think this is in the core of the company's DNA, and I don't think being publicly listed has changed that.

[Per Reppe, executive]

Okay. I see there's one comment to -- that there's no sound on my microphone so please let me know if there's any issues with the technicalities.

Okay, moving on. In light of the potential benefit of vertical integration, so I would presume that this mostly relates to Oceans, how does NORBIT plan to optimize this commission-based relationships from mutual benefit? And is the vertical integration strategy the company is considering to [indiscernible] value for NORBIT and its partners?

[Per Weisethaunet, executive]

I think generally, not only in Oceans, but generally NORBIT is very much vertically integrated. And that's been very important for us because we really want to be in charge of our own destiny. And also when creating new things and to be able to set up the right manufacturing of it, having R&D engineers working on the technology together with other colleagues having the NORBIT logo on the chest also working on the conceptual production process stuff, is really where we see that we become different from competition. So it's been strategically very important for us. And we will continue to go in that direction also going forward.

[Per Reppe, executive]

And maybe just add to the question. Since there was a reference to commission-based relationship, as some of you might know, Oceans has an indirect distribution model where we use distributors that are commissioned on the sale of our sonar systems.

And I'd also like to remind all is that we have made some strategic acquisitions over the recent years to position ourselves better in the geographical markets that we see potential. So over time, of course, we will continue to evaluate whether we should make further acquisitions to also strategically position us in some new markets. So that's just an ongoing evaluation that we have. And we think that, that's certainly creating value for both NORBIT and our shareholders.

So next question. The current NIBD/EBITDA ratio is well below the facility covenant level. Taking into account the additional equity that you raised, could you give some guidance on possible M&A?

[Per Weisethaunet, executive]

So I think the answer to this is that, as we already said, we continue to explore for value-accretive acquisitions. We see an advantage of having the financial flexibility to do that. And of course, when there is something to report, we will do that, but we have a continuous process. And we've -- during the latest years, we have added more resources internally to be better positioned to do this. So yes, I think, that's the answer.

[Per Reppe, executive]

And with reference to the same question, with regards to the covenant test, could you confirm this is tested for [indiscernible]? And I can confirm that the NIBD/EBITDA ratio is calculated on a quarterly basis, while the equity ratio covenant is calculated per 30th June and the year.

A question from Marcus. Does the new product offering within Connectivity open up for greater margin realizations moving forward?

[Per Weisethaunet, executive]

So I think the answer to that is that when it comes to gross margins during the last years, so our product -- different product lines within Connectivity has come more on the same level. So also new products is expected to be in the same range, as what we've experienced in the past for Connectivity.

[Per Reppe, executive]

And then second question from Marcus. Does the acquisition of Innomar improve the revenue visibility within Oceans? Also, if you mind elaborating on how the acquisition changes the customer dynamics within Oceans.

[Per Weisethaunet, executive]

Yes. So maybe I could start and you could fill me in, Per Kristian. But the revenue visibility is somewhat the same for Innomar, as we have for the rest. The seasonality fluctuation is historically a little bit lower in Innomar than we have experienced in our sonar business. So given that -- so maybe it flattens out a little bit on seasonality. But we still have to live with a quite short visibility within Oceans.

And to the part with any potential change in the customer dynamics within Oceans, so we have experienced that we did acquisition of a smaller company last year. So we bought PING DSP located on Vancouver Island in Victoria in Canada. It's a much smaller company, also offering some quite special [ hyperparameter ] side-scan sonars.

We have taken that into NORBIT in a way where we branded PING and NORBIT company. We see that this is well regarded in the marketplace. I think that NORBIT has strong position and good recognition in the market. We're doing the same now with Innomar, so Innomar, a NORBIT company. And we think this will also be well regarded. So probably we could benefit from that, yes. So I'm not sure if that answers the questions, but if you see anything to add, Per Kristian, please feel free.

[Per Reppe, executive]

No. I think generally, the customer landscape -- I mean, some of the customers of Innomar, we already know quite well. Obviously, there's some new customers on that base that could have potential for us to also sell our existing sonar technology too. But there's also the benefit of [indiscernible] with a one-stop shop solution. So I think also that's a strategic element to take into account in this acquisition.

Okay, Per Jørgen, I don't think there were any more questions from the audience. So I think we can wrap the Q&A session.

[Per Weisethaunet, executive]

Good. Then I'd like to thank you all for spending the time and showing the interest in NORBIT. We'll continue to explore more. Thank you.