Norbit ASA

OSE:NORBT

Earnings Call Transcript 2022-Q4

[Kenneth Sivertsen, analyst]

Okay. Welcome all to this presentation by Norbit Q4 results, with a splendid quarter delivered and then update guidance for '23. So with that, I think I'll just leave the floor to the CEO, and he can take us through what we can expect.

[Per Weisethaunet, executive]

Thank you, Kenneth. So I'll give you some update on the Q4 and the full year for 2022 for Norbit. So as you can see, the numbers we presented today is a record when it comes to revenues for the quarter. It's up 40% from the same quarter in the previous year.

The EBITDA ended at NOK 67 million, representing 19% EBITDA margin. The good thing in this quarter is that all segments has continued to contribute to the growth. You see from the chart that the quarterly fluctuation is part of the nature of the company. So this is expected also going forward.

Looking in the full year 2022 numbers. We see we are on a good path towards the announced 2024 target. So it's satisfying to report 48% revenue growth year-over-year, and the margin is lifted to 20% EBITDA margin. If you look from 2018 until 2022, this is the period from -- so Norbit did the IPO and became stock listed in June 2019.

We had a long-term financial target in the IPO process, where we said we're targeting a CAGR of 25% with an EBITDA margin of 20%. So we're well on that, and we'll get back to our target going forward. So it's satisfying also that the earnings per share has more than doubled since last year. So we have delivered NOK 1.82 last year. And our eminent Board of Directors has proposed a dividend of NOK 0.7 per share.

So I'll give you some flavor on the different segments. So in the Ocean segment, it's been very good sales on sonar. And this has given a total revenue in the quarter of NOK 127 million with an EBITDA margin of 32%. We see for the full year, NOK 443 million, which is an increase of 17% from the year before. The EBITDA margin is 33% for the full year in Oceans.

So to give you some more insight what's underneath this and what's behind the numbers, we have a split showing here that our sonar sales is a very big portion of the revenues in the segment. So the Winghead sonar has -- is the newest family, and this has grown from NOK 71 million to NOK 122 million whereas the old family, the WBMS platform is on a similar level as the year before.

So -- but what this shows is that our strategy of broadening the product offering is really what is fueling the growth. We have a very, very good global platform for sales. The distribution is working. It's able to sell new products, new innovations. So our investments in broadening the product offering is really the key behind this growth.

Connectivity, it's been quite stable revenues the last 3 quarters, slightly north of NOK 80 million. The margin is lifted to the 30% EBITDA margin. So for the full year, in connectivity, we have NOK 308 million in revenues. It's approximately a doubling from the year before, and EBITDA margin of 25% compared to 16%. It's been asked before if we could give some split on this, and we -- they share this.

So you see that the base in this is onboard units, it's road tolling devices. We have had a strategy of migrating that business from public tenders to business-to-business partnership with long-term key clients. And this has been quite successful.

So this has grown from around NOK 50 million to NOK 136 million in 2022. And the margins in this subsegment has been improving a lot. On top of this, we have enforcement modules for tachographs representing NOK 37 million. And we have modules for enforcement on satellite-based tolling representing NOK 48 million.

The subscription and e-toll being represented as the -- we did the acquisition back in August 2021 of a company in Hungary where we have a fleet of 45,000 vehicles being tracked towards 4,500 clients. It's a high percentage of recurring revenue. It's a subscription-based business model.

So this yields for NOK 77 million last year. Mention our strategy of really through partnering with some key customers to have business-to-business relation on onboard units, it was a nice pickup last year. And this year has started very, very well where we announced early in January that we've received an order from a European client for delivery of these products for NOK 150 million first half.

So connectivity is on a good pace. Product innovation and realization. It's been a very, very good improvement or growth in revenues. Part of that is explained by customer reimbursement for higher material costs. So we'll get back to that. But despite of that also, it's been a very good growth. It's a record quarter.

For the full year, we've booked NOK 457 million in revenues, which is an increase of 57% and with an EBITDA margin of 10%. The split in this segment, so the main elements in this is -- so as I've spoken about before as of Norbit's total manufacturing capacity, we're utilizing approximately 50% to make our own products.

The remaining 50%, we offer on contract manufacturing terms out in the open market. This has a strategic importance for us to ensure that our in-house manufacturing capabilities are sharp, also manufacturing our own products. So the main part is the contract manufacturing, which yields for NOK 256 million.

And then on top of that, we have R&D services and some customized products we are offering to some key industrial clients, yielding NOK 94 million. On top of that, we have this customer reimbursement, which is extraordinary, and this passes through without any margin.

So -- but if you -- if you adjust for that, it's still a very satisfying growth also in this segment. So with that, I'll leave the floor to Per Kristian to give us some details on the 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 fourth quarter amounted to NOK 347.3 million, representing an increase of 40% from the corresponding period of last year.

All 3 business segments reported solid growth rates. For 2022, revenues were close to NOK 1.2 billion, up 48% from 2021 and exceeding the guidance provided. EBITDA for the quarter was NOK 66.5 million compared to NOK 41.5 million in the fourth quarter of 2021.

This represents a margin of 19% compared to 17% in the same period of last year. The improvement in the results is primarily driven by increased revenues in all segments, lower operating expenses, but partly offset by an increase in payroll expenses as we continue to scale the organization to prepare for further growth and to pursue strategic initiatives.

Operating profit was NOK 42.6 million, while net finance expenses was negative NOK 8.9 million. Of that number, NOK 5.4 million relates to net interest expenses. Taxes was positive NOK 6.1 million due to recognition of a deferred tax asset in the quarter. Net income for the period was NOK 39.8 million. In the fourth quarter, all 3 segments delivered result improvement compared to the corresponding period of last year. Segment Oceans reported 9% growth and stable gross margins.

The increased gross profit was, however, partly offset by an increase in cost base due to continued strengthening of the organization as we pursue the strategic initiatives mentioned to grow Oceans even further. The EBITDA in the quarter increased to $40.6 million. In Connectivity, revenues increased 25%, primarily driven by strong demand for DSRC products, while operating expenses were $3.8 million lower than in the fourth quarter of 2021.

This resulted in an EBITDA for the quarter of NOK 23.9 million. Segment PIR almost doubled revenues in the quarter to NOK 250.2 million, driven partly by strong demand for contract manufacturing. As in prior quarters, a fair shareholder revenue generation was customer reimbursements for extraordinary material costs, where we have no margin.

Adjusted for this, revenue growth was still at 79% from the corresponding quarter of 2021. And as a result of the higher revenue base, gross profit increased NOK 14.1 million year-over-year. Partly offsetting this was a NOK 3.3 million increase in operating expenses as payroll expenses rose.

For the quarter, PIR ended with an EBITDA result of NOK 13.3 million. Next, balance sheet and our financial position. Property, plant and equipment increased NOK 25.3 million in the quarter, primarily due to an increase in right-of-use assets as we lease finance the purchase of 2 production lines to increase the capacity at our manufacturing sites in Norway.

Intangible assets stood at NOK 258.8 million on par with prior quarter. Inventories decreased NOK 4.4 million in the quarter, while trade receivables increased NOK 61.1 million and is explained by the higher revenue generation quarter-over-quarter as well as revenue being more skewed towards the back end of the fourth quarter.

Trade payables was NOK 132.6 million at the end of the quarter, down from NOK 151.4 million at the end of the third quarter. Net interest-bearing debt stood at NOK 295.6 million at the end of December, an increase from NOK 276.8 million at the end of September. Our equity ratio was 59% at quarter-end.

In the quarter, our net interest-bearing debt-to-EBITDA ratio remained at 1.4x. Heading into 2023, we expect the ratio to decline throughout the year due to expectations of improved results and free cash flow generation. We remain firm to our capital allocation framework, where we prioritize to maintain a strong balance sheet and liquidity buffer to support our organic growth ambitions, requiring investments in R&D, working capital and machinery and equipment.

In the fourth quarter, we strengthened our liquidity position further and established a new term loan and refinanced our overdraft facility. In total, this provided us with NOK 220 million in additional liquidity, bringing the available funds under the credit facilities to NOK 439.4 million at the end of the quarter. In the fourth quarter, our net working capital ratio was 29%.

As we have stated before, our target level is to be between 25% and 30%. Over the last 18 months, the challenging environment for components has put pressure on our capital efficiency, primarily due to lower inventory turnover as we have purchased longer series of components to safeguard deliveries.

There are, however, some signs of improvement in the supply chain for raw material components, but for certain semiconductor components, the market is still challenging. Lead times remain elevated and remain unreliable. Heading into 2023, we will work actively to improve our capital efficiency to strengthen the free cash flow. Our ambition is over time to reduce the working capital ratio down towards 25% assuming a normalization of the supply environment.

Lastly, the cash flow for the quarter. Cash flow from operations was NOK 7 million, explained by an EBITDA of NOK 66.5 million, a net increase in the net working capital of NOK 42.2 million and NOK 8.9 million in net finance expenses and finally, NOK 8.4 million in taxes paid.

We invested NOK 27.2 million in the quarter, primarily explained by NOK 11.8 million in R&D investments, NOK 10.8 million in investments in machinery and equipment and NOK 7.8 million in net cash outflow relating to the acquisition of Aursund Maskinering, a long-standing supplier for our sonar production.

For 2022, our total investments in R&D were NOK 60.5 million, while investments in machinery and equipment were NOK 31.5 million, excluding NOK 27.2 million in lease finance machinery. For 2023, we expect to invest between NOK 60 million and NOK 70 million in R&D, primarily allocating capital to the Oceans and Connectivity segments for new product innovations. Investments in fixed assets are expected to be between NOK 35 million and NOK 45 million, primarily related to expansion of our production capacity at the Roros site.

Cash inflow from financing activities was NOK 31.4 million, primarily explained by NOK 25.8 million in net change in borrowing and leases and NOK 5.6 million in a sellers' credit issued in relation to the mentioned acquisition of Aursund Maskinering. Then I will give the floor back to Per Jorgen, who will take you through the outlook section.

[Per Weisethaunet, executive]

Thank you. So looking into the future. It's with pleasure that I can say that we have a target for 2023 of delivering revenues above NOK 1.4 billion. And that shows that we will -- we aim to take further steps towards over 2024 ambition of NOK 1.5 billion. When it comes to margins, we expect the margins to improve compared to this year, and we aim to deliver better margins so that we -- we also, on the margin side, take steps towards the 2024 ambition, where the ambition is to deliver more than 25% EBITDA margin.

Looking into the segments. So this year has started out very, very well. In the Oceans, we see high activity in the first quarter. And I'll remind you that historically, the first quarter is low season for this segment. Despite that, we see a very strong start of the year, and we target to deliver growth compared to the corresponding period of 2022.

In Connectivity, as mentioned, we have this recently announced contracts for onboard units to be -- NOK 450 million to be delivered towards 1 customer in the first half of this year, and we're continuing the discussions for the volumes for the second half. With this and all the other business in connectivity, we expect to report revenues between NOK 270 million and NOK 300 million in the first half of 2023.

In PIR, we see that the trend of this -- the interest from the market to have products made in Europe remains strong. And we expect that this will continue for 2023. So the first quarter, we expect to report revenues higher than we had in the corresponding quarter. So all in all, we see a very strong start. We see good drivers for all segments and are very positive for the outlook of the company, both in short term and long term.

[Kenneth Sivertsen, analyst]

With that, we will move on to the Q&A session. So if you have any questions, please post it online.

[Kenneth Sivertsen, analyst]

I have received a few already. So we will -- I will address them shortly. But we do the easiest thing for us to start by my myself.

So if you start on Oceans, it's -- yes, thank you for a split here on the revenue side. But given the macro outlook and also increasing tension globally, how did that impact your demand on the sonar side and security and offshore wind and so on? I guess it's required a lot of sonar.

[Per Weisethaunet, executive]

So we see a very strong demand, especially in the renewable segment, offshore wind, as you mentioned, where we -- that's part of that -- let me say that it started very well already in this quarter. That's -- one of the drivers for that is the renewable where we see that our clients offering surveying of fields where you will install these offshore wind farms, make use of our tailored sonars for that.

When it comes to the security surveillance sector, underwater surveillance is also very hot. If you see it from -- you start working with the lead until that materializes into a purchase order, it's a slightly longer lead time and longer process time. But the lead pipe is very interesting.

[Kenneth Sivertsen, analyst]

On the split also, it seems like Winghead is moving at a rapid speed on demand side. But on the older one, you still have a significant demand there. But if you look into '23, how do you think the mix will -- will it be the same as we saw this year?

[Per Weisethaunet, executive]

Yes. So when we look into the WBMS part of the sonars, we see that it's -- in some regions, there is still good growth, whereas other regions have been more flat. So we expect that we will be able to continue to grow also on the WBMS, probably not as much as we aim for on the Winghead, but our target for this year is also to continue to grow the WBMS.

[Kenneth Sivertsen, analyst]

Just explain us the short -- what's the difference between the Winghead, what's the main benefits here compared to...

[Per Weisethaunet, executive]

So they're addressing slightly different markets. So the Winghead sonar is a more high-resolution sonar that could be very suited for very accurate inspection of valuable assets under water, et cetera, whereas the Winghead approach is a more classical surveying bathymetric market. So it's slightly different market segments. And also on the Winghead, we have a stronger platform where we easier can tailor new user features to continue to open up the market for new applications and new users.

[Kenneth Sivertsen, analyst]

Okay. Moving on to connectivity here. It's growing significantly here. And also here, thank you for the split here. But could you share some comments around the mix on the margin side on -- within each different components there.

[Per Weisethaunet, executive]

Yes. So maybe you'd like to...

[Kenneth Sivertsen, analyst]

Just a broad comment.

[Per Reppe, executive]

I mean, broadly speaking, given our strategy to migrate more of the OBU business into the B2B segment, I would say that the margins there are quite similar, actually. So there's not a lot of difference anymore between the margins. In the past, there were substantially much lower gross margins on the overuse because there was a completely different market for the products. So -- and in that case, we operated in primarily -- mainly in Norway, where the tendering process was quite different and price was the first and foremost criteria for purchasing -- they will use.

Now we've sort of tried to innovate us to the insurance industry and have the strategy of that, which have been as Per Jorgen said successful.

[Per Weisethaunet, executive]

And I think maybe it's fair to add to that, that working in a business-to-business relation, we can -- in addition to work on the technology and to innovate to have the world's best microwave circuitry, low-power devices, we can also do things on logistics, et cetera, which makes life easier for our customers so that we can have more added value in the value chain.

So I think we have some advantages for that, that working closely together with the customer, we can reduce a lot of cost and we can simplify life which has a value and they're willing to pay for.

[Kenneth Sivertsen, analyst]

And on the insurance side, there you have attracted some interest from -- at least reportedly some interest from insurance side. So just to link here, if you can share some comments around this one?

[Per Weisethaunet, executive]

So we see that in several countries, in Europe, the insurance actors are entering the scene on toll collection as in Norway, where it's now the insurance companies setting up subsidiaries taking care of the tag issuing service and collecting the tolls. And it's a trend, and we're following very closely.

So there is other European countries also in the same position as in Norway, and we follow very carefully that we expect that maybe this could be relevant in even more European countries. So I think a significant portion of the revenues we show is European customers now. So it's very interesting right now.

[Kenneth Sivertsen, analyst]

But it's right to understand is that is it just in the starting point right now here, and it's quite early days compared to adoption for...

[Per Weisethaunet, executive]

It's -- I would say it has really started. It's really running on a good scale.

[Kenneth Sivertsen, analyst]

So moving on to the peer segment here. So also here is quite significant volumes. You indicate 50-50 between internal and existing external clients. Could you indicate some kind of level of utilization right now or...

[Per Weisethaunet, executive]

Yes. So I think we are running our factories right now on 2 shifts. So there is still some headroom. We're doing some add-on investments in machinery, so that we could continue to do even more on 2 shifts and not necessarily stepping up to the third shift in the factory to have that as a security valve going forward.

[Kenneth Sivertsen, analyst]

And that brings me over to the guidance. I think we have more -- guidance currently indicated that growth on a revenue basis is more than 20% from the '22 level to '23?

So -- but looking into the guidance on Connectivity, the first half seems extremely positive, close to 70% year-on-year growth. So that's -- yes, I guess what I'm looking into here is that the confidence you are expecting above NOK 1.3 billion here or NOK 1.4 billion, sorry. So -- but it seems at least first half will be a tremendous growth rate?

[Per Weisethaunet, executive]

Yes. I think this is also what the beauty of transferring the business model from this public tendering to more business-to-business more long term, where you could do better planning together with the customer in the public tendering, you could win a tender and then you have to deliver within a certain time frame, and then it's nothing.

So this is to plan and have more leveled. So I think the visibility in the Connectivity segment is at the best right now. So...

[Kenneth Sivertsen, analyst]

Okay. Perfect. And we have received a few questions here online. So first of all, if you can provide an update on the component market within each business segment, how -- I guess, how it's affecting each business?

[Per Weisethaunet, executive]

I think the challenge is very different. So in the connectivity segment, that's very high volumes. So securing material for this high-volume manufacturing, it's quite different from -- in the Oceans segment, where we do hundreds of sonars. And in the Connectivity segments, we do several hundred thousands and millions. So that's very different.

So we have tailored security strategies, supply chain strategies for the different segments. And as Per Kristian mentioned in the presentation, we see that the component market has signs of improving. It's still challenging. So we continue on our strategy to have security stocks to ensure that we can deliver. But we also see that with some more improvement, there would be room to scale down some of the security stock and reduce some inventory.

[Kenneth Sivertsen, analyst]

So on that note, on the working capital, you mentioned the target -- long-term target, should that be within reach within '23? Or is this more '24 potential here?

[Per Reppe, executive]

I guess that's heavily -- I guess the answer to that question heavily depends on how the component market will develop during 2023. And as we say, in some parts of the value chain, it's been improved, but there are still quite expensive critical components that have very long lead times still.

[Per Weisethaunet, executive]

And they're unreliable, which is the challenge.

[Per Reppe, executive]

So I don't think you will expect to see a major improvement in the capital efficiency in 2023, but we will certainly work very closely of improving that ratio and improve the inventory management so that we are able to increase the efficiency.

[Kenneth Sivertsen, analyst]

Okay. Moving on to -- on the question here. How much growth can you handle within the current production facilities? Can you shift or restrain volume from the contract manufacturing to own production?

[Per Weisethaunet, executive]

So I think that's part of what's good in this strategy also giving this flexibility. And I think when you look on these orders, we have announced recently, stepping up. It's -- it simplifies life to have your own in-house manufacturing to do that because we can really do a strategic planning in a different way than relying on external capacities to do this manufacturing. I think our scalability is good.

We need to do some additional investments to be prepared for further growth, but it's not any major investments needed to continue and take the growth.

[Kenneth Sivertsen, analyst]

Okay. And staying on the growth side, demand for environmental monitoring in the quarter '22 was lower than in '21. So any particular reason here?

[Per Weisethaunet, executive]

Yes. So at least the booked revenues is lower. I think the demand is fairly good but the decision time in this subsegment is a little bit harder to predict. So there is a very interesting lead pipe and we'll continue to ensure to get some of that on orders and then deliver.

[Kenneth Sivertsen, analyst]

And let me continue within Oceans. And any comments around the possibility of investing in new products, new market segment, et cetera?

[Per Weisethaunet, executive]

Yes. So we continue to do investments. We're also doing in some new subsegments. I think that the major contributor going in the near future for that would be in the security field where we announced earlier, the introduction of this guard point sonar family for underwater surveillance.

We continue investments in that and have very good hopes that this should be a major contributor to the growth.

[Kenneth Sivertsen, analyst]

Staying on that topic. So I guess with -- in the world we are living today, increased security is something we should expect and anticipate going forward and harbor within the port is important, but also out in the Oceans, I guess, around pipes on offshore wind. But any restriction on the current portfolio that you are looking at to solve or to expand the offering here?

[Per Weisethaunet, executive]

So I think it's a lot of interesting things going on. Being part of the security market, a lot of the things we're working on would also be quite confidential given the nature that this should be security measures. But -- so we've done some very good recruitments on the commercial side for that also.

So you see that we've strengthened our organization with some seniors that really has a very, very valuable domain knowledge in this field. So we think we're well positioned to really contribute solving some challenges in that part.

[Kenneth Sivertsen, analyst]

Okay. And staying on this segment, how long do you think you can expand the product portfolio? I guess it's quite open so...

[Per Weisethaunet, executive]

Yes. That's -- I mean underneath the logo of Norbit, it has explored more and I don't see an end to it. So we'll work hard to continue to grow and be profitable as we grow.

[Kenneth Sivertsen, analyst]

Yes. And on the new project you are looking into sort of the internal rate of return here on requirements? Is there any ...

[Per Reppe, executive]

I mean that obviously depends on the type of project and the risks and sort of the opportunities that we see in that. There's no general threshold for starting such an R&D project. In general, I think the overarching goal is to reduce the payback period to as low time as possible. And I think we've been fairly successful on that.

A good example of that is the Winghead platform. We invested lot of money in 2020. And I think what we see now in the slides is that we really just started to see some value creation being made of that investment.

[Per Weisethaunet, executive]

I think also what we really try is to balance the investments that has short return on investment, but also to have some more long term to be positioned for the growth not in this strategy period, but also for the years ahead of that.

[Kenneth Sivertsen, analyst]

I guess, that's about your management team, and we are more focused on the near term. But a similar question actually also on the R&D, so I guess the answer is not that different on the R&D side, if you have any threshold here on the -- what you are investing in on R&D?

[Per Reppe, executive]

No, I was referring to R&D. So maybe I got the question mistaken.

[Kenneth Sivertsen, analyst]

New product for development of sonar and other products [indiscernible] products over there. Yes. If there are no more further questions, I'll refresh it. No, that's all I think. So congrats to another great quarter, and that's what is from us. So we're looking forward to the future. So -- okay. Thank you all.

[Per Weisethaunet, executive]

Thank you.