Norbit ASA

OSE:NORBT

Earnings Call Transcript 2022-Q3

[Per Weisethaunet, executive]

Welcome to Norbit's third quarter presentation 2022. My name is Per Jorgen Weisethaunet. I'm the CEO of Norbit. Together with me today, I have our CFO, Per Kristian Reppe. Thank you for showing interest in our company and investing time to follow this presentation.

Q3 ended with the second highest revenues in our company's history. As those of you who have followed us for a while, you'll know that we've delivered an average revenue growth over the last 10 years of 30% per year. We have ambitions of continuing to grow and developing the company in a sustainable way to benefit all our hard working colleagues as well as our shareholders and the communities where Norbit have local presence.

As you can see from the historical figures on this slide, quarterly fluctuations are expected. That's part of the nature in our business. The revenues in Q3 ended at NOK 270 million with an EBITDA of NOK 47 million. For the first 9-month, we delivered revenues of NOK 820 million, which is 52% more than the same period last year with an EBITDA of NOK 169 million. For comparison, we could remind you that for the whole 2021, we delivered annual revenues of NOK 788 million with an EBITDA of NOK 143 million.

So I'll guide you through some highlights from the different segments. First, Oceans. The demand for our sonar solutions has remained strong. The visibility in this market is generally low. But the trend is that our strategy to utilize a global market platform by broadening our product offering has proven to be successful.

The revenue growth in the quarter is primarily driven by increased sonar sales. As Per Kristian will give more flavor on later, increased operational expenses is primarily explained by strengthening the organization to support for future growth.

The revenues in Q3 for Oceans ended at NOK 104 million with an EBITDA of NOK 27 million. Year-to-date, Oceans has delivered NOK 316 million in revenues with an EBITDA of NOK 107 million, representing a margin of 34%, which is close to the target we have communicated for the segment with 35%.

As mentioned, in Oceans, we have a strategy to broaden the product offering. On this slide, you can see some illustrations of the different segments within Oceans. So our way of broadening the product offering follows 2 paths. One is adding new features to our sonar. The sonars consist of 2 families. It's the WBMS and the Winghead family, where we build new features and open up for new users and open up new markets. This has proven to be successful as we see both the initial family, WBMS, continues to grow, and we are adding more revenues on the Winghead.

The other direction we're trying to grow and see good traction is where we tailor technology in some niches in other verticals related to the Ocean domain.

As we all experience, the world is facing challenges due to tense geopolitical landscape. We have seen several examples of critical underwater infrastructure being damaged. This increases the demand for underwater surveillance applications.

Last year, we launched -- or earlier this year -- sorry, earlier this year, we launched a new sonar, the Guardpoint sonar, which is tailored for use in underwater surveillance applications. We expect this to be a good contributor to support future growth.

So going into the Connectivity segment. This segment was rearranged last autumn after Norbit acquired the European fleet management specialist iData, doing tailored reporting towards subscription-based clients and merging that with our capabilities within low-power wireless technology.

In the third quarter, Connectivity segment delivered revenue and EBITDA on par with Q2 with NOK 81 million in revenues and EBITDA of NOK 20 million. We see that our strategy of migrating the onboard unit business from tendering to business-to-business, where Norbit takes a position as a long-term technology partner for our customers has proven to be a good strategy.

As mentioned, the segment is formed by the previous ITS segment in combination with the iData that was acquired last autumn. So key element in the strategy for Connectivity is to utilize on Norbit's vast experience in low-power wireless devices, high-volume robotized manufacturing and subscription-based tailored fleet management.

Focus now is to tailor sensors and connectivity in selected niche applications, benefiting professional clients' ability to digitize and improve their performance by providing better control on critical physical parameters. So the focus of the segment is also broader than it was. We look in other verticals than traffic. Long-term goal is to increase the share of subscription-based revenues in this segment. We have seen that it's a lot of good cooperation and demand from, for instance, the insurance industry.

Of Norbit's total manufacturing capacity, 50% is used to manufacture our own products. The remaining 50% is sold to European industrial clients on contract manufacturing terms. This gives us volume advantage, and it ensures that our manufacturing capabilities remain competitive.

The Product Innovation & Realization segment encompasses this contract manufacturing and R&D services offered to key selected industrial clients. So the profitability in the segment has continued to be strong. The demand for manufacturing capacity in Europe and Norway also remains strong. This is probably strengthened by international geopolitical unrest.

Q2 ended at NOK 96 million with an EBITDA of NOK 12 million for this quarter. For the first 9 months of the year, Product Innovation & Realization has delivered revenues of NOK 306 million for the segment, a strong EBITDA margin of 12%.

Now Per Kristian will give you some more insight of our consolidated financial figures.

[Per Reppe, executive]

Thank you, Per Jorgen. I will spend some minutes walking you through the financial highlights of the quarter. Revenues in the third quarter amounted to NOK 269.7 million, representing an increase of 35% from the corresponding period of last year. So far this year, revenues amounted to NOK 820 million, up 52% from the prior year period.

EBITDA for the quarter was NOK 47.2 million compared to NOK 32.9 million in the third quarter of last year. This represents a margin of 17%, up from 16% in the same period of last year. The improvement in the results is primarily driven by increased revenues in all segments, partly offset by an increase in payroll expenses and operating expenses. We continue to scale the organization to prepare for further growth and to pursue strategic initiatives.

Operating expenses increased from last year's period, mainly due to rising electricity prices, while higher activity is driving an increase in travel expenses and freight cost. We also made additional provisions for loss on trade receivables.

Operating profit was NOK 25.7 million in the quarter, while net finance expenses was negative NOK 10.2 million. Of that number, NOK 6.2 million relates to foreign currency exchange losses as the dollar strengthened against the Norwegian krone in the quarter. Norbit purchases a substantial part of its components in dollars and is a net buyer of dollar.

After provision for tax, the profit for the period ended at NOK 11.6 million.

Segments Connectivity and PIR were the 2 main drivers behind the result improvement in this year's quarter comparing third quarter of last year.

In Connectivity, revenues were up 76%, primarily driven by strong demand for DSRC products and in particular, onboard units. Partly offsetting the contribution effect was the increase in expenses of NOK 8.4 million, where iData stood for NOK 4 million of the increase, mainly as a consequence of the consolidation of iData from end of July last year, and NOK 3 million increase relates to additional costs allocated from the factory at Røros.

Segment PIR saw an increase in revenues of 40%. As in prior quarters, a significant share of the revenue generation was customer reimbursement for extraordinary material costs, where Norbit has no margin. Adjusted for this, revenues were up approximately NOK 26 million year-over-year, and the underlying gross margin improved.

At the same time, PIR has been able to maintain cost discipline and with operational leverage, the EBITDA result improved by approximately NOK 12 million from third quarter of last year.

Segment Oceans reported 13% growth in revenues and stable gross margins. The contribution was, however, offset by an increase in cost base due to continued strengthening of our organization to pursue strategic initiatives to grow Oceans even further.

Next, the balance sheet and financial position. Property, plant and equipment remain on par with that of 30th of June. Intangible assets rose NOK 3.5 million due to R&D investments in the quarter. Inventories increased by approximately NOK 60 million in the quarter. The increase is both a result of the activity increase that we expect going forward and also the fact that the supply market for components continues to be challenging, requiring us to hold more components in stock to mitigate risk of component shortage.

Trade receivables decreased NOK 38.1 million in the quarter and is explained by lower revenue generation quarter-over-quarter as well as invoices sold under the nonrecourse facility we have established. Trade payables was NOK 151.4 million at the end of the quarter, up from NOK 136.3 million at the end of the second quarter as we purchased raw materials to inventory.

Net interest-bearing debt stood at NOK 276.8 million at the end of September, a small decrease from NOK 281.2 million at the end of June. And our equity ratio stood at 50% at quarter end.

With reference to the title on this slide, our leverage ratio continues to improve, and we have a strong balance sheet. As per the end of third quarter, our net interest-bearing debt to EBITDA stood at 1.4x. This is a decrease from 1.8x when we entered the year as we have a continued financial improvement throughout 2022. Our long-term target range is between 1x and 2.5x EBITDA.

Today, we announced that we are strengthening our liquidity position even further as we have received credit approval for a refinancing of the overdraft facility, and we are establishing a new term loan at competitive terms. In total, this provides us with NOK 220 million in additional liquidity, bringing available funds under the credit facilities to more than NOK 470 million. This provides us with ample flexibility and solid financial platform to execute on our growth plans and our capital allocation framework.

Lastly, the cash flow for the quarter. Cash flow from operations was NOK 14.4 million, explained by an EBITDA of NOK 47.2 million, a net increase in working capital of NOK 21.6 million and NOK 10.2 million in net finance expenses. We invested NOK 18.2 million in the quarter, primarily explained by NOK 50 million in R&D investments and NOK 5 million in investments in machinery and equipment. For 2022, we expect to invest approximately NOK 60 million in R&D.

Cash outflow from financing was NOK 3.2 million, explained by NOK 12.7 million in repayment of leases and debt, partly offset by NOK 9.6 million in proceeds from issuance of shares related to incentive programs to all our employees.

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

[Per Weisethaunet, executive]

Thank you, Per Kristian. Last autumn, Norbit presented long-term -- or short-term financial targets. So we communicated that we were targeting a revenue ambition to deliver in excess of NOK 1 billion this year. This is increased now. So we plan to deliver in excess of NOK 1.1 billion in 2022. So our ambition to deliver organic growth revenues above NOK 1.5 billion with 25% EBITDA margin in 2024 stands firm. Further steps towards the target is expected in 2023, and we will give you guidance on that when we present the Q4 results.

More specifically, for end of this year, as mentioned, our Oceans segment experienced quarterly fluctuation and some seasonality in the business, whereas Q4 historically is the strongest season for Oceans. We expect to deliver growth compared to the fourth quarter last year.

Connectivity is benefiting from strong demand from our onboard unit products, where we have some new long-term strategic clients. We expect to deliver revenues in the range of NOK 70 million to NOK 75 million in the fourth quarter.

The demand in segment PIR remains strong, and we expect to deliver growth in revenues compared to third quarter this year as well as for the fourth quarter last year.

So finally, so -- as we've tried to carry across in this presentation, we realized, as we all do, that it's a lot of challenges in the world. We strongly believe that technology will be a vital part to the solution for several of these challenges. Norbit being an international company, offering tailored technology in carefully selective niches is prepared to contribute to solve this, and by that, continuing to grow the company.

[Unknown Executive]

Thank you, Per Jorgen. With that, we will move on to the Q&A section. And we have received a few questions on the web. The first one concerns segment Oceans. Could you please elaborate on what the main drivers for potential margin acceleration are for this segment?

[Per Weisethaunet, executive]

Would you like to comment first?

[Per Reppe, executive]

Well, I think if you look on Oceans, you have to take into account that there are seasonal fluctuations. Per Jorgen mentioned that also in his presentation that Q1 and Q3 are historically a little bit -- it's not as good as Q2 and Q4. So you have to have a longer perspective when you view the profitability. And so far this year, Oceans has been delivering 34% EBITDA margins, which is very close to the 35% target.

So when it comes to sort of how we can address a further margin uptick in that segment, I think you have to look on how we're building that segment in terms of the verticals. We are pursuing and broadening the portfolio and offering towards those niches. So I think we've been fairly successful in doing that over the last years in Oceans, and there's no change in that strategy. I think we just want to carry on with that and see how we can broaden that portfolio.

[Per Weisethaunet, executive]

And also, I think we've done some brilliant recruitments lately also to further strengthen our global market footprint, and especially towards very interesting sectors as renewable and security. So we think we are in a very good position to continue to grow, and through growth, also get better margins.

[Unknown Executive]

Also on Oceans, you touched upon it already, but is it possible to give some more information on what strategic initiatives entails in the Oceans segment?

[Per Weisethaunet, executive]

Yes. So I think maybe as I mentioned, building up even stronger market organization. And also there is investments in new products, especially as we mentioned this in the security part, where we launched the Guardpoint sonar earlier this year. These initiatives is expected to be good contributors.

[Unknown Executive]

Next one is regarding the current inflation environment and how that impacts Norbit, both in terms of demand and also your ability to push costs over to customers?

[Per Weisethaunet, executive]

So I'm very glad that Norbit is working towards professional industrial clients and not towards consumer. Until now, we haven't seen any sign of reduced demand towards any of our segments. When it comes to cost increase on raw material, we continuously monitor that and we take all possible steps to see how we could defend our margins. And so far, it looks like we've succeeded quite okay with that.

[Unknown Executive]

Great. And then a question on CapEx, CapEx guidance for Q4 in 2023. Given your strength and financial position, can we expect to see some large investments in the short term? Any color on this?

[Per Reppe, executive]

Well, I think when we report Q4, we will say a little bit more about how we think about investments in the next year. I mean, if you look on what we are investing in, and that's part of our capital allocation strategy as well, we're investing in R&D to broaden our product portfolio and expand the addressable market in the niches that we're in. So that stands firm and is a key element to reaching the ambition level in 2024.

We do not expect that we will have to make any big investments next year in terms of our operational setup. Obviously, there will be some, but we don't foresee expanding our capacity a lot next year. I think we have sufficient level on that.

So I think, overall, we're in a pretty good position, and we'll try to allocate capital in the same way that we've done and always to balance that out with how we see profitability.

[Unknown Executive]

And then a question on segment Connectivity. How does the order intake look for Connectivity in 2023 compared to how it looked for 2022 in 2021?

[Per Weisethaunet, executive]

Well, I think we have announced some of the contracts that is going into 2023. So I think we especially have mentioned that we got a new contract or a new purchase order from Toll Collect that has not taken so much volumes lately. So it's been 0 in 2022, whereas there is a -- it's a good order for 2023. More than that, I think we'll have to come back to the specific guiding on that when we present the Q4 results and we will be more in detail telling about the outlook for 2023.

[Unknown Executive]

And perhaps along the same lines, a question on how is the sale of new trucks and trailers holding up in Europe in general and in Germany, in particular? And how is the outlook?

[Per Weisethaunet, executive]

Yes. So maybe I'll answer a slightly different question, because I think if you look on the correlation on the revenues in Connectivity towards the manufacturing of trucks, you might think that it's a strong correlation. There is some correlation, but it's not very significant.

So we are delivering connectivity modules for tachographs towards Continental. But on the revenue level Connectivity is at now, this is not really the largest part. So our dependency on new manufactured trucks is lowered during the last year. That being said, the volumes we see currently, they are on a normal level.

[Unknown Executive]

Then a question on revenue growth. How much of the growth was organic as compared to currency effects?

[Per Reppe, executive]

Well, I don't have a really good answer to that without looking into the details. But it's fair to assume that given the strengthening of the dollar and the euro, we've had some tailwinds on the revenue side.

But if you look lately on how the currency is developing, at least up until the last weeks, the dollar has been quite strong, which is not favorable for us. So if you look on the margin level, I think -- I would say that we have been pretty neutral so far this year. But we certainly have had some headwinds. But I'm not able to share a split on that.

[Unknown Executive]

And then the last question for now. You say that value-accretive acquisitions will be added to the organic growth ambitions. Can you elaborate a bit around the market for M&A right now? And how you're working with identifying the right targets? And any potential targets in sight?

[Per Weisethaunet, executive]

So we're continuously exploring acquisition targets. What we experience is that the valuation in the nonlisted market seems to be -- the expectation of valuation remains a bit high compared to what's on listed companies. So that's a challenge when we say we will do value-accretive acquisitions. Probably this will normalize.

And we continue to look for targets fitting into the Connectivity and Oceans segment primarily, where we look for both potential market synergies or technical synergies. And yes, we're cherry-picking. So when we find something fitting, including that we have a strong belief that it could be a cultural fit, then we will announce acquisitions when it's ready.

[Unknown Executive]

Sounds good. That was the final question. So that concludes today's presentation, and thank you, everyone, for attending.