Earnings call: Vow reports mixed financial results, focuses on growth

 

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Vow (ticker: VOW), a provider of advanced technology solutions, has reported a year of mixed financial results during its Second Half Year 2023 Presentation.

CEO Henrik Badin shared that the company saw EBITDA growth of 17% to NOK 918 million for the year, yet faced a negative EBITDA of NOK 23.4 million in the fourth quarter.

Despite this, Vow maintains a robust order backlog and is implementing strategies to improve its financial standing, including a cost-cutting program aimed at achieving a 15% EBITDA margin.

Key Takeaways

• Vow’s annual EBITDA grew by 17% to NOK 918 million, but Q4 saw a negative EBITDA of NOK 23.4 million.
• The company has a strong backlog of NOK 1 billion and options assessed at NOK 920 million.
• Vow delivered 18 ship sets to the cruise industry in 2023 and is commissioning 12 large projects.
• Aftersales revenue rose to NOK 180 million, with a focus on improving margins in this segment.
• Significant contracts secured include a NOK 27 million biochar and renewable energy project and a NOK 332 million contract for Vow Green Metals.
• The company’s demonstration plant for Vow Green Metals is operational, with secured partnerships and funding.
• Vow signed NOK 350 million in contracts in the cruise industry and is focusing on retrofitting and newbuilds.
• The cost-cutting program is expected to normalize leverage levels by the end of 2024.

Company Outlook

• Vow is confident in future growth and profitability, with an emphasis on delivering projects and regaining profitability.
• The company is expanding into new industry verticals, including metallurgy and waste valorization.
• Vow’s target is to achieve a 15% EBITDA margin level despite a slower first half in the next year.

Bearish Highlights

• Gross margin reduced to 28.1% in 2023 due to cost increases and contract portfolio adjustments.
• Negative EBITDA in Q4 and for Maritime Solutions and Industrial Solutions segments due to portfolio corrections.
• Decreased equity ratio to 25% at year-end.

Bullish Highlights

• Vow has a solid order backlog, especially in the cruise newbuilding space.
• The Aftersales segment performed well with an EBITDA of NOK 22 million and a 12.5% margin.
• The company is actively working on improving margins by securing higher-priced projects.

Misses

• The company reported a negative result before tax of NOK 148.7 million.
• The Industrial Solutions segment saw a 20% increase in revenue but faced negative EBITDA.

Q&A Highlights

• Vow is increasing prices to secure margins and is closely working with the supply chain to improve working capital.
• The high number of deliveries in 2023 is not expected to cause a revenue drop in the coming years.
• Projects in the Industrial segment are anticipated to turn into orders in the first half of 2024.

Vow’s strategic focus on aftersales and securing significant contracts, along with its cost-cutting initiatives, suggests a pathway to improved financial health. The company’s demonstration plant for Vow Green Metals becoming operational and the expansion into new sectors are steps towards diversifying its revenue streams. However, the challenges of a negative EBITDA in the fourth quarter and corrections in the contract portfolio highlight the hurdles Vow faces. The company’s efforts to rebuild trust in the market and its confidence in the current financial positioning will be essential factors in its performance in the upcoming years.

InvestingPro Insights

Vow’s mixed financial performance is a tale of strategic initiatives amidst market challenges. To provide further context, InvestingPro data and tips offer a deeper dive into the company’s current standing and future prospects.

InvestingPro Data:

• Market Cap: 77.89M USD, reflecting the company’s valuation in the market.

• P/E Ratio (Adjusted): -6.26, indicating that the company has been unprofitable over the last twelve months as of Q4 2023.

• Revenue Growth (Quarterly): 22.7% for Q4 2023, suggesting a robust increase in sales that could signal potential for future growth.

InvestingPro Tips:

1. Analysts anticipate sales growth in the current year, aligning with Vow’s own projections and strategic efforts to improve financial health.

2. The stock is currently in oversold territory according to RSI, which may interest investors looking for potential rebound opportunities.

InvestingPro provides additional insights into Vow’s stock performance and financial metrics. Currently, there are 11 more InvestingPro Tips available for Vow, which can be accessed for a deeper analysis. For those interested in obtaining these valuable tips, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.

Full transcript – Scanship (SSHPF) Q4 2023:

Henrik Badin: Welcome to the Second Half Year 2023 Presentation. Today I’m also joined with Tina Tonnessen, our CFO. She will run through the financials. But first, I will start by showing this picture. It’s a picture I took myself in January. I was invited on board Icon (NASDAQ:ICLR) of the Seas by the senior management in Royal Caribbean (NYSE:RCL). It’s a very prestigious project for Royal Caribbean. It’s a groundbreaking project and is also a very important project for Vow as a company. The ship is actually fully equipped with our technology from bow to stern. And I will have a separate slide explaining more about the Net Zero technology we have delivered on board at ship. Looking back at 2023, taking stock, forging ahead, we are delivering EBITDA growth on the revenue plus 17% to NOK 918 million significantly, but I regret to face you with a negative number. And it’s even frustrating that we had to dig deeper in the fourth quarter down to the bedrock it’s been a very important process, it’s been a painful one. But I will ensure you, we will come true stronger and we’re starting 2024 with clean sheets. But for the period minus NOK 23.4 million of EBITDA. On the strong side, backlog is robust at NOK 1 billion, with another NOK 920 million of options reassessed. We have delivered a long list of projects in the period successfully. And we have entered into milestone contracts, confirming and securing basis for increased profits in years ahead. I will also show you of the rich list of potential projects we have in the pipeline, and Tina will go more into that as well. We are on track to getting fit for 15% from 2025. Never have we in the business delivered so many systems during 2023. 18 ship sets of advanced technology to the cruise industry, 17 to cruise newbuilds under construction at shipyards and 1 for a retrofit project. And we are undergoing 12 large commissionings, meaning that, we are starting up systems, we are tuning them, we’re making sure that they’re getting into compliance, environmental compliance, and handing them over to shipowners. Again, it’s been a very, very busy year and we have demonstrated our position and make sure that we are a leader in this industry. And what follows is high activities within aftersales. Now, this business in 2023 has grown to NOK 180 million of revenues. Recurring revenue building up as we are delivering more and more ships and we are enjoying favorable positions with leading cruise operators and this large installed base. And what do we actually deliver within this industry segment? We deliver parts to our systems, consumables and operational assistance. And I would say one of the reasons why we have this strong foothold in this industry is that we have this one-stop service provision. And we’re located very close to the center of this industry in Florida. And you see revenues for the second half is up 29% compared to last year. For the full year, almost 50% up. So this is a nice development, and we are increasing the focus on this side. And we also want to obtain better margins in this segment. But not only the cruise industry plays an important role for us going forward. We see that our heat treatment part of the business is now increasing significantly. And that industry, those customers that our subsidiaries is working with, is faced with high energy costs and cost of emissions, and the heat demanding or heat intensive industries they need to decarbonize. And one way to do that is to electrify their processes. C.H. Evensen have that offering and we’re delivering on that, and we have secured a stronger position in that space. And this company, this subsidiary, is really working with blue chip companies, delivering our electrified heating processes. And you see demonstrated by a good development after they came into the Group, we have doubled their revenues within this segment, and we have also a backlog that supports the revenues going forward, the growth going forward. Important wins did we have last year? It was a milestone for us to get our first large land-based contract in US with Quonset Soil Solutions, owned by Green Development. This renewable company that had been working with solar and wind and are moving now into this interesting field of converting biomass into clean energy and biochar for carbon sequestration. This contract, NOK 27 million, is where we are delivering technology to produce biochar and renewable energy. And it’s actually one-to-one with what we’re doing at Follum for VGM. So we’re reducing actually the risk here. And it’s a very sort of – standardized system. And we’re sort of leveraging this on what were actually have been now working on for several years with VGM in Norway. Detailed engineering, including process equipment, piping and electrical is well underway. And the main equipment delivery from our end will be Primo 2025, and not in our contract, but our client is now – constructing all the civil works in US ready to receive our equipment. And when this system is commissioned and operational, it will convert green waste into 6,000 tonnes a year of biochar. It’s a significant project and it’s well recognized in US these days. Another one, speaking of Vow Green Metals, we confirmed Phase II, so the existing contract was increased to NOK 332 million. And with that, VGM are now capable of producing 20,000 tonnes of biocarbon to the metallurgic industry with this change order. And that part of this change order is the large C.H. Evensen reactor that will be delivered as part of this new factory. And it was actually the main reason why we made sure that we got C.H. Evensen on board a couple of years ago. Also very important, that plays a tremendous importance for us and for VGM is that, we have the demonstration plant up and running. And you see the picture here, is the demonstration plant installed during the fall of 2023 and now operational, producing biocarbon for the metallurgic industry. But also we have invited a lot of our clients to this site. So it not only demonstrates the capability of VGM going forward, but it also demonstrates the capability for Vow as a Group. And for us, Vow as a shareholder in VGM, it’s very important to say that they have a very good progress in their buildup. They have, during the latest weeks, actually confirmed partnerships and funding from energy producer Vardar and Siva is on board to fund the civil works at the site. So I would say, this project is really now moving forward. And we just have to imagine what we have done in latest years is that, we’re building for us, Vow, just looking at our numbers today, we are working with the metallurgic industry vertical with projects around NOK 400 million. Amazing. Cruise is also, we have had some important wins. Over the last months, we have signed up contracts for an accumulated volume of NOK 350 million. We signed an important contract with carnival for retrofits, there will be more retrofits. The cruise industry is moving forward and making sure that existing fleets are environmental compliant. We have a strong history there, and we are well positioned to take more contracts within the retrofit space. We do sign up new contracts in the newbuilding space. We got two contracts in France for a total value of EUR 8 million. And a couple of weeks ago, we signed up two additional contracts with a system, the most advanced system, for almost EUR 20 million. And look at the numbers. You see the average value on the conventional system in France is almost doubled in size, because we’re now implementing more advanced technologies, making sure that these systems will have a much higher environmental impact. Speaking of the Icon of the Seas, this really sets a new standard and we see that the cruise industry is moving along. What Icon demonstrates has really paved the way for a lot of new projects, that is also requesting not only advanced wastewater purification, waste management and food processing from Vow, but also technology to convert this into clean energy on board, biochar, clean energy to replace fossil energy on board and biochar to offset some of their CO2 emissions. And it sort of resonates well with the cruise industry’s ambitions to reduce their carbon footprint, and we are a key supplier in that transition. And these you see some pictures of the technology as I said in the introduction, we have really equipped this vessel from bow to stern with our advanced technology and it’s highly recognized in the industry. Highly recognized. Tina, you have done a tremendous job together with your team. Please run us through the financials, and I will be back with a market update.

Tina Tonnessen: Thank you. 2023 was a cleanup year for us. We met our guiding of above NOK 900 million in revenues. However, we continued to increase our cost prognosis in our contract portfolio during the fourth quarter. This led to a reduced gross margin in the second half and also for the full year of 28.1% – to 28.1%, sorry, from 37.8% last year. The adjustments that we have done during the second half has two main effects. One of the effects is that, we are reducing recognized revenue as a result of a reduced percentage of completion for the entire lifetime of the contract, and the second effect is that, we get the cost increase in the period. The margin and the remaining backlog, despite this correction, remains solid and we have a solid backlog of above NOK 1 billion and we have intensified our project reviews. EBITDA before non-recurring costs came in at NOK 23.4 million negative. This is highly influenced by the corrections that we made. We have non-recurring costs of NOK 31.3 million for the year. Non-recurring costs is what we see as not related to our operations and one-offs. The majority of these was recognized during the fourth quarter, amounting to NOK 28 million and this was mainly due to a balance sheet cleanup and the contract accruals. We have initiated a comprehensive cost-cutting program which we will get back to shortly, which will secure our margin and also maintain the target that we set towards achieving an EBITDA margin of 15% towards the end of the year. We recorded a depreciation cost of NOK 52 million, up from NOK 32 million the year before. The increase is due to that we’ve closed some of our development projects and started to depreciate them, and also the inclusion of our new office in Tonsberg and starting to depreciate our new ERP system. Net financial items came in at negative NOK 41.8 million and includes our share of the net result from VGM and also interest cost. The result before tax ended at negative NOK 148.7 million. Moving over to our segments. The Industrial Solutions segment represented 40% of our revenue. Maritime Solutions NOK 41% and aftersales 19%. The Aftersales segment has delivered a solid and good performance during the year and we also expect this to continue. EBITDA for this segment came in at NOK 22 million, representing a margin of 12.5% and we expect good development also going forward for this as Henrik said earlier. The two remaining segments are the places where we see the effects of the corrections that we’ve done during the second half. For Maritime Solutions, we have had all-time high activity level during the year, but due to the corrections that we’ve done in the contract portfolio, EBITDA ended at NOK 11.8 million and 3.1 percentage mark. The backlog is solid of NOK 584 million. This also includes the contract value of Icon 3 and we also in addition to this, have an option backlog of NOK 921 million. Industrial Solutions increased its revenues by 20% up to NOK 364 million for 2023. However, due to the capacity buildup that we’ve had during the year for future growth possibilities within the segment and also the corrections on the contract portfolio, EBITDA before non-recurring ended at negative NOK 12.5 million. The backlog within the segment is NOK 450 million and consists mostly of our VGM Follum contract and also our Rhode Island project and C.H. Evensen. Moving over to our balance sheet. The increase in assets is mainly related to investments in new technology. We have reduced our working capital at year-end, following a working capital release during the fourth quarter and also the deconsolidation of Ascodero. Due to the negative net result that we’ve had, our equity ratio has decreased to 25% at year-end, compared with 36.5% at year-end 2022. Note that we have renegotiated our loan agreement and received an amendment covenant level. We are aware that we have a high leverage and we expect this to remain high during the first half of the year, but then towards the end of 2024, we expect to be down at more normalized levels. Our operating cash flow was neutral for 2023. This also is a result or a proof of that the corrections that we’ve made during the second half of the year, has not had a full cash effect. In addition to this, we have also worked extremely well with our working capital and received a working capital release during the fourth quarter. And investments for the period came in at NOK 100 million. This includes the investments that we’ve done in R&D and also our net proceeds from the sale of Ascodero. The net proceeds amounted to NOK 20 million and was used to repay debt in January. Cash flow from financing includes the refinancing that we did this summer or the summer last year and also leasing and interest payments. Available liquidity at year-end amounted to above NOK 100 million, which is up from around NOK 80 million during our Capital Markets Day in November. And now over to the cost-cutting program that we have initiated during the second half to secure a controlled and profitable growth. We have during the second half done a complete mapping of our organization, with the aim to identify the targets that we need to move towards and also extract more synergies and efficiencies in our delivery model. We have intensified our project reviews, not only to secure the margins in our projects, and reducing costs by benchmarking suppliers, but also working towards our working capital to improve our own payment terms and also get an improved contract structure in the form of higher prepayments. We have two concrete examples that we want to go through. We have the divestments of Ascodero which has led to freed up management capacity and other resources and also a reduced cost base for the Group. We have also, during the beginning of the year, done a reduction in our capacity and initiated a temporary layoff process in Scanship. Together with securing new contracts, we believe that these initiatives will lead us towards the targeted EBITDA level of 15% from 2025.

Henrik Badin: Thank you so much, Tina. Thank you for fantastic job you have done and your team in the period as I said when I introduced you. Moving on markets, outlook and concluding remarks, I want to show you a slide that I’m very proud of. It’s the order backlog and activity in the cruise newbuilding space. We have a strong backlog. It’s reassessed. We’re delivering technology to 32 cruise ships from this year onwards to 2028. You know that market share is 71% and another 15 ships are options that naturally are called upon, and we’re tendering for new projects, 28 ships and you see the gray parts. That means that, we are in a very good position to grow the order book. And another point I want to address is that, 18 of these 28 ships is requesting now more advanced technologies from us, that includes the Vow Pyrolysis Systems, larger contracts and doing underway 3 retrofit projects with Carnival (NYSE:CCL). So the retrofit side is also well, but it’s a solid foundation. It was, of course, a painful process I said, the reassess, but we have the project, we’re working on them and we are maintaining a very strong position in cruise. And we said it before, we are relevant for new markets and we have done important investments to get there to position the business. If you look at our investments over latest years, NOK 300 million in total. It’s for a reason, we are positioning the business to expand and to do more environmental impact, not only in cruise, but in other industry verticals. Look at this, for example. 48% is the development on the application in the metallurgic industry space. Already we have revenues in a ratio of NOK 400 million. Because we did this type of investment. We are working now with new projects that you will find on the list here, you see end-of-life tires. You see PFAS on the sewage side and other initiatives that is very important for us to proceed the opportunities we have. Again, we did it for a reason, and this is the response. I talked about this slide many times. We are faced with opportunities that we have never seen before in this size. We’re working on prospects that are 10 times larger than our order backlog. This really motivates us to in the future grow the business, profitable and create value, while we’re doing environmental impact. Here, 43% of this portfolio is the metallurgic industry space. Important. ELT is a large part of it. Waste valorization, sewage sludge valorization, et cetera. And we see the industries responding. We really see the industries responding, Outokumpu, we talked about, they were part of our third quarter trading update. They’re really committing to replacing their fossil cooking coke using biocarbon and to demonstrate that commitment, they invested in Envigas in Sweden. Envigas in Sweden, do you know what kind of technology they are using? They’re using our technology. And they are working alongside with VGM, because that together we need these type of companies to help this industry decarbonize. And we have a very good position to grow within this segment. Elkem, finally came along and confirmed the offtake with VGM, is also demonstrates that the viability of these business cases. And you saw what happens latest with VGM. They were able to raise more capital, get more funding in place in these periods. We all read newspapers. We know what we’re going through. In this period, they have raised funds to move forward. Pay attention to that. And we are developing very interesting projects going forward. We talked about it, end-of-life tires. We have teamed up with the third largest distributor of natural rubber to the tire manufacturers. We’re teamed up with a company that collects two-thirds of all the tires coming off the roads in UK. We’re now working with them on two projects in UK. It takes a longer time, but it’s an important progress. We’re working closely with them. And this will, I assure you, this will materialize. And this is not something we recently started with. When we acquired ETIA back in 2019, we had that technology with the client already. So they have had many years now to verify technology and to demonstrate recover carbon black for the tire manufacturers. We are really moving forward within that vertical. Another very important trend we see and the enormous challenge we have to recycle sewage sludge as an organic fertilizer to maintain the nutrients such as phosphorus and nitrogen, and to deal with the PFAS, the forever chemical problem. And we already have a FEED, a client that has committed us to fully engineer a system so they can make a final investment decision on a large plant. This project alone, it’s larger in size of what we’re delivering as revenue last year. So we are moving ahead. And thirdly, CirCon Energy that was part of our third quarter update. They are progressing. I received an email this morning. They are really progressing and we, on our side, we are helping them in their dialogue with their investors and with authorities to document our technology. So the future is very interesting for us. Pay attention to that. So let’s conclude. All time activity, it’s so high activities in 2023. We have a long list of successful deliveries. We haven’t failed on the deliveries. They’re coming in at a higher cost, but we haven’t failed on the deliveries. We are maintaining our position and milestone contracts confirms that we are relevant and that secures the basis for increased profits in the years ahead. And we have invested in technology to position the business. A substantial investment, but it will pay off. I assure you, it will pay off. And now, Tina, as we said, we’re going to focus the business and operation on profitable growth. Thank you so much.

A – Unidentified Company Representative: And we’re then opening for questions. We have quite a few questions from our online audience. And while we’re waiting for them to type in more, we’ll just check with the audience in the room. There’s a question all the way at the back.

Unidentified Participant: Thank you. And thank you for the presentation. How will you work now to rebuild trust to the market considering? Will we get more details on how long the misreporting has been? You’re right that margins will now normalize. What are normalized margins? As also in this quarter that in the Q3 report you disclosed that this was an issue within the Maritime industry. I see now that gross margins are down also in Aftersales and in Industrial Solutions kind of. Will we get more details whether we published a report where we can see how this actually happened or? Yeah, any comments on that would be great.

Henrik Badin: Tina, perhaps you can respond to some of these questions.

Tina Tonnessen: Yes. We also made a correction to our Industrial portfolio during the fourth quarter. We have done reassessed margin, and we have a solid margin in the remaining backlog. So it’s not that we have negative projects, but the correction that we do during the period leads to, has a significant effect. But we do it to correct the margin for future periods, so that we can deliver on a more stable performance going forward. We do expect, however, that the first half will be slower than the second half of next year, but then we maintain our target of an EBITDA level of 15%.

Henrik Badin: Yeah, just to fill in. As we said, it’s a painful process where we have to do these adjustments. But again, we’re delivering on our projects and we have very interesting projects ahead of us. So, of course, we have to walk our talk. We have to walk our talk going forward when it comes to getting the business back on a profitable level again. And that’s their main target for – and main objective for the Vow team in the coming months.

Unidentified Company Representative: Okay, we’ll then turn to questions from the online audience. And the first comes from [Nicolai Rulam] [ph]. In regards to the backlog solidity, are there contractual mechanisms in place to secure the margins?

Henrik Badin: It hasn’t, of course, the inflation we have had, we haven’t been able to forward some of these costs to the customers. Obviously, as we are taking a hit, what I would say is that, we have been able to increase our pricing in the market going forward. And the price – the project we signed up two weeks ago was signed up with higher prices to absorb some of the inflation we had. So, yes, in that sense, we are able to improve margins. But another important thing is that, we have, of course, we are in close dialogue with our supply chain and we’re working, right, really working to mitigate and to get price levels back on time. And we also have, of course, an extensive benchmarking ongoing and value engineering throughout the organization to make sure that we are lean in execution and perform better on the margin side.

Unidentified Company Representative: Then there are quite a few questions from Gard Aarvik. First, is the EBITDA target for 15% in ‘25 driven by revenue expansion from current levels or gross margin expansion beyond historic levels?

Henrik Badin: It’s a combination, I would say, Tina –

Tina Tonnessen: Yeah, it’s a combination. We also need to secure new projects in addition to completing the program. So a combination of both.

Unidentified Company Representative: Next, you state that you’ve been working well with working capital during Q4, reducing net working capital. What else besides finally getting paid from Vow Green Metals has been done to improve situation? Is it better payment terms for instance?

Tina Tonnessen: Well, we have increased our focus on it and we’re working really hard both on future payments. But there’s no concrete thing I would like to exemplify during the period. But we are intensifying our focus on it and it’s a result of that.

Henrik Badin: And I would perhaps add that, read us the fact that in 2023, we have had a large number of supplier – supplies to the cruise industry and some of these contract is of course naturally a back-end loaded when it comes to the cash flow. But as you see that, the account receivable is really building up and cash is on the way.

Unidentified Company Representative: The next question is actually about the high number of deliveries in 2023. And Gard wonders if this means that we should expect revenue drop in Maritime in ‘24 and ‘25, given the lower number of ships entering service in those years.

Henrik Badin: No, we shouldn’t expect that.

Unidentified Company Representative: Are you confident with the current financial position giving that working capital likely will build up with new orders that we’re expecting in the Industrial segment?

Tina Tonnessen: The Industrial segment is not the main segment that builds working capital. So, in that sense, we should expect more favorable terms actually in terms of working capital.

Henrik Badin: This is where we have prepayments, so that’s important to state.

Unidentified Company Representative: And then the final question from Gard, at the Capital Markets update, you stated that some of these projects, you have highlighted in the Industrial segment, should turn to orders in the first half of ‘24. Is this still the case?

Henrik Badin: It’s still the case. Of course, we have done our part of it, making sure that we are tendering on these projects. We’re working closely supporting them in whatever they need to make their final investment decisions. Of course, the timeline we couldn’t control, but what we said in third quarter, we don’t see the need to adjust that.

Unidentified Company Representative: Okay, thank you. That concludes the questions from the audience online. And I don’t think there are any more questions from the conference here. So, thank you.

Henrik Badin: Thank you so much for your attention. And we will be back.

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