Norbit Asa

Welcome all to this Q2 presentation by Norbit. The company delivered a stellar quarter this morning, and I guess I will leave the details into the CEO and the CFO. So welcome all, and with that, Per-Kristen, sorry.

Thank you Kenneth and thank you all for taking the time to listen in to our second quarter presentation. As Kenneth said, it was a good quarter. The quarter landed according to our plan. It's a new record with in excess of 300 million Norwegian kroner in revenues. And on this level, the EBITDA also comes in the right direction. So we had in the quarter a new record also on EBITDA margin on 78 million Norwegian kroner. This represents a relative margin of 25%. So we say that we are on track on our 2022 target to deliver in excess of one billion Norwegian kroner. So if you have a look on the four last quarters and try to make a sum out of that, you will see that it's already the last 12 months on that level. In the quarter we have also distributed the dividend which was decided in the annual shareholders meeting in May with 0.30 NOK per share. So for first half we've delivered 550 million Norwegian kroner in revenues with 63% growth compared to first half last year. I think the quarter overall is as indicated according to the plan. What is awesome to see is that all three business segments have contributed very well. Going forward, we see that having these three very diversified business segments is very favourable. So I'm diving into each segment, giving you some highlights. Oceans, which is the largest segment, has delivered 29% growth. ending at a revenue of 131 million Norwegian kroner. We've seen that the American region has been very good this quarter. And as you see, the margin is also very good. This is the first time we deliver more than 50 million Norwegian kroner in EBITDA in this segment. On this slide, you can see how this is decomposed. As you can recall, Norbit started out doing sales of a first generation sonar called the IVBMS. In 2021, we released the winghead sonar and we had a good growth on that. So you see the light blue or blue-gray columns showing that also the first sonar family still is growing. And then the winged is a good contributor to the growth. And then we're adding more. So this strategy in oceans to broaden the product offering is really helping us to continue to deliver growth. So coming slightly back to that after the outlook. Connectivity. Connectivity is back with full speed. And we've seen that in this quarter, we have a very good contribution revenues from over dedicated short range communications product, the toll tags and similar products. These products have improved margins compared to what they had in the past. We see that our strategy of migrating that part of the business from tendering to business to business, where Norbit takes the position as a technology partner for the client, gives us more long-term relations and gives us the ability to innovate in the value chain in a different way to bring value to the clients which again they are willing to pay for so the quarter ended at 83 million knock and with a 24 ebta margin amounting 20 million knocks The final segment, product innovation and realization, this is where we sell the spare manufacturing capacity as contract manufacturing services and we have some R&D services in addition to that. So the demand for these services is very strong. So you see we're delivering a good growth. We have also had some challenges to when it comes to components in this quarter. But despite that, it's still a very good quarter, good growth and margins on the level which we are heading for also in the longer term. Revenues of 112 million for the quarter. 42% growth year over year, and 210 million for the second half, 44% compared to the same period last year. There is some special pass-through invoicing in this, which Per-Christian will comment on in his part also. So then maybe Per-Christian could give us some insight in the financial details.

Thank you Per-Jurgen. I will spend some minutes walking you through the main financial highlights of the quarter. Revenues in the second quarter amounted to 315.3 million kroner, representing an increase of 66% from the corresponding period of last year. Adjusted for the acquisition of iData, which was completed in July last year, the organic revenue growth was 55%. All business areas delivered record high revenues. EBDA for the quarter was 77.7 million compared to 50.5 million in the second quarter of 2021. This represents a margin of 25% compared to 27% in the same period of last year. The improvement in the results is largely driven by increased revenues in segment oceans and connectivity. And partly offsetting this was an increase in payroll expenses as we continue to scale the organization due to the activity, as well as an increase in operating expenses. Of the approximately 21 million increase in operating expenses compared to the same quarter last year, IDATA stood for 10 million. And the remaining difference is largely explained by an increase in cost related to consultants, legal advisory, freight, electricity, and travel following easing of the restrictions. Operating profit was 56.9 million in the quarter, while net finance expenses was 2.5 million, and the profit after tax was 42.8 million. All three business areas delivered improvement in the results in the quarter when compared to the second quarter last year. Ocean's result improvement was driven by an increase in revenues of 29% on higher sonar sales, while the gross margin was on par with that of last year's second quarter. This was partly offset by an increase in cost base due to continued strengthening of the organization to manage the activity level, as well as an increase in travel costs post-COVID. Connectivity had a solid result improvement compared to last year's second quarter. This was primarily explained by sub-segment ITS growing revenues by 45 million, as well as IDATA delivering 21.6 million in revenues. Part of the positive gross profit effect was partly offset by an increase in expenses of 23.4 million, where IDATA stood for 15.7 million. Despite the 42% growth in revenues from second quarter last year, segment PRR reported only a small increase in the EABTA. This was primarily due to the large share of revenue generation in this year's quarter being invoicing of extraordinary material cost on a limited set of components to a limited set of clients. These are components that are purchased at alternative marketplaces due to low availability, and we invoice this extra cost directly to the client without the margin. In total, 33.4 million was recognized in such invoicing in the quarter, and adjusted for this effect, revenue growth was 7% in the quarter. As a result of this effect, the EBITDA margin fell 4 percentage points to 10% in the quarter. Next, balance sheet and financial position. Property plan and equipment decreased 2.9 million from the end of last quarter. Intangible assets rose 6.8 million due to R&D investments in the quarter. Inventory increased 36 million in the quarter. The increase is both a result of the activity decrease we are experiencing and also the fact that the supply market from components continues to be challenging, requiring us to hold more components in stock to mitigate the risk of component shortage. Trade receivables decreased 18.3 million, despite revenues increasing more than 30% sequentially. The reduction was primarily a result of us facing in a non-recourse facility for factoring where we sold invoices for approximately 70 million in the quarter. Trade payables was 136.3 million at the end of the quarter, down from 153.2 million at the end of the first quarter. Net interest bearing debt stood at 281.2 million at the end of June, a small increase from 278.3 million at the end of March. Our equity ratio was 49% at quarter end. As per the end of the second quarter, our net interest-bearing debt to EBITDA stood at 1.5 times. This is a decrease from 1.7 times at the end of the first quarter, following the results delivered in the second quarter. Our balance sheet remains strong. We have a solid liquidity position with more than 270 million in available financing under our credit facilities, and this provides a solid foundation to finance our growth plans going forward. Lastly, the cash flow for the quarter. Cash flow from operations was 44.9 million, primarily explained by an EBITDA of 77.7 million, a net increase of 29.7 million in working capital, and 2.5 million in net finance expenses. We invested 23.4 million in the quarter, explained by 17.8 million in R&D investments and 5.7 million in investments in machinery and equipment. The guiding for 2022 is reiterated where we plan to invest between 50 and 60 million in R&D. Investments in machinery and equipment is expected to be between 40 and 50 million gross and before lease financing. We expect a major share of the second half investment to be financed with leasing. Cash outflow from financing was 6.4 million, explained by 18 million in dividends paid, repurchase of shares, partly offset by an increase in borrowings. I will then give the floor back to Per-Jurgen for the outlook section.

Good day, Christian. So it's exciting to have a look at the outlook. Before doing that, I'd like to remind you about Norbit's strategy for how to cope with the uncertainty in the current supply chain and the market. Norbit has for a long period had a clear strategy of building security stock on components. We're benefiting from having R&D resources in-house. So when there is a shortage on some component, which some component could be completely not available, We can use our brilliant engineers to do some redesigning and to make use of alternative components. And it gives us a very good flexibility to have in-house production where we can do reprioritization and replanning to have the flexibility to catch up on possible delays. So this has been very fruitful and we continue to work according to this strategy. So having a look into the short term outlook, meaning for this year, In the ocean segment, we have some seasonality. First and third quarter is usually slow. Second and, sorry, first quarter is usually the slowest quarter. Second quarter is better. Third quarter is down again. And fourth quarter is very often the most busy quarter. It's often some element of budget flushing also in the fourth quarter. So we expect the next quarter in oceans still to show growth compared to the third quarter of last year, but the seasonality would make it probably less than what we've seen for second quarter. In connectivity, we have quite good visibility today, so we expect the second half of this year to be at the same level as the first half. We see that these mentioned orders on products for business clients, where we are more like a technology partner, is very helpful on the standard DSRC products. and also the recurring revenue stream from iData gives us also a solid foundation going forward in the sub-segment smart data. In product innovation and realization, we expect to deliver a third quarter in line with second quarter. It will require that we get the needed material. The mentioned strategy for building security stock helps us. The priority on the security stock is also affected by the fact that in the connectivity and ocean segment, where it's Norbit proprietary technology to be delivered out in the market under Norbit branding, we will secure more material than in the contract manufacturing, where we need to rely on the commitment from the clients. Adding to this outlook, I'd like to give you a reminder on our strategy looking towards 2024, which was presented exactly one year ago. So first, this target for this year, 2022, one billion, as mentioned in the introduction, last 12 months is already one billion. So we have good belief that we will be delivering in excess of one billion this year. As mentioned, there is some quarterly fluctuations should be expected also going forward. We communicated last year the ambition of delivering an organic growth, lifting the revenues to 1.5 billion in 2024 with the EBITDA margin in excess of 25%. This ambition level is still valid. In addition to that, we continue to explore for value accretive acquisitions with a priority mainly in companies that could help to further lift connectivity and oceans. A little bit about the key elements in the strategy in each segment. I think the numbers on the part of this 1.5 billion Norwegian kroner to be delivered from each segment speaks for itself. So the target for oceans is 700 million NOC with the EBITDA margin in excess of 35. As you might recall, it's in excess of 40% this quarter. So in the long-term ambition, it's 35%. You might say that this is not very ambitious, but continuing to grow, We see that there could be a very interesting business with new products, maybe having less margin potential than some of what we have today. So we find it as a sane ambition to aim for in excess of 35%. Oceans has a very strong market presence with a broad distribution platform in a combination of direct distribution with Norbit colleagues being present around the globe and indirect distribution. So we are growing and we plan to continue to do that by broadening the product offering to utilize on this global market distribution. We also plan to continue to increase the market presence, to build some more presence by adding more seniors to support on the continued business development. And as shown in the segment part of the presentation, we are expanding into new market segments, to new sub-segments. For connectivity, last 12 months we've delivered 257 million NOCs. The ambition level for the 2024 target is 350 million. It's the same margin ambition as for oceans. We have delivered now, a margin which is below this, we see that we can scale connectivity quite good without adding too much resources. So there's more volumes on this business to business related sales of the DSRC products and continued scaling of the subscription-based revenues from iData being part of segment smart data supports the belief that we can deliver also better margins going forward. In product innovation and realization, we continue to add new clients. We see that we benefit from synergies of being able to deliver both R&D services and contract manufacturing. I think I mentioned it a couple of times before that made in Europe, made in Norway is quite popular. We see more and more customers really looking to do manufacturing in Europe and in Norway again, where they in the past probably has been looking to more low-cost countries. When you really prioritize to do automation and robotization, the labor cost level in Norway does not affect as much as it would have done in the past with more manual labor. And we're broadening the industrial focus in this segment. In the contract manufacturing currently, it's a high portion of automotive revenues. We see an increased demand from electrification clients and also from security. So very interesting also for this segment going forward. With that said, the presentation is concluded and I'll leave it to Kenneth if there are any questions.

Okay, thank you for the presentation. It was nice to hear some color on it. We have actually received quite a few questions from the audience, so I'm getting more attention out there. So I'll just start, and I will try to go through them. I think the first one we have is on the revenue side, and how should you think about pricing and a product mix going into second half in 2023?

I think you have to look at this from the different business segments. If you look into the guidance we have given for third quarter and for the second half for connectivity, I think the guidance speaks for itself. We are growing revenues quite a bit now. Obviously, as Per-Jurgen mentioned, we have a plan towards 2024 and we also hope that we will take some steps in that direction next year. Obviously, with the inflationary picture that we're seeing now, we're obviously closing monitoring our margins and, of course, taking the necessary and appropriate measures to adjust prices in order to have acceptable margins within the business segments. I think we managed that quite well over the last year. Remember that the component market has been quite challenging since the start of 2020. So we definitely have some experience in maintaining margins and adjusting accordingly. So I think moving into next year, our ambition is to take some steps in the direction of the ambitions that we have for 2024, both on revenues and margins.

Thank you. And I guess being running at a billion, you should have some upside to this one. But you are guiding above one billion. So... On the peer segment, I think I got a few questions actually on this one. First of all, are you running at full capacity? And then secondly, on the margin side, I think you said something in presentation, you had been charging a bit around for a component situation. So that's a pass-through. How should we think about margins now for second half and going into 2023?

So first, when it comes to capacity, we still have some headroom on the capacity and we are, as we speak, adding more capacity. So part of this PPE investments that Christian mentioned in his part is for new assembly lines in the Røros factory, which will help us to increase the capacity quite smoothly. When it comes to margins, I think for the contract manufacturing, the margins shown in PIR, I think it's good margins. I think in our strategy, we've said that for the... ocean segment and connectivity segment where we have proprietary technology on their own branding out in the international market we're aiming for a margin in excess of 35 percent in the pir segment we've said that we're aiming for something between eight and ten percent and we're above that as it is today so i think it's a appropriate level this around ten percent

Just to remind us on the capacity side, are you running a two shift or now at peer as some of the facilities?

So during this year it's been mainly two shifts, so there is spare capacity also to add a third shift. But we're scaling things so that the normal should be two shifts, so that you have a third shift to have the headroom. So managing a factory like that, you should, so we have the rule of thumb that we should be able to cope with the doubling and survive if it goes to the half. So it should be in between there, so.

Moving up to connectivity now, it's a different segment than it was when we listed you back in 2019. But on the auto part of it, you have some contracts, particularly within the truck segment. Could you share some color, how you see the market developing and anything we should be aware of going into second half?

I think what's worth mentioning there, reminding you, is that it's towards the automotive industry in this segment, the main product which is a couple to the to the automotive macro is this wireless modules connected to the tachographs in the trucks which you can use to read out the driving resting hours for the driver remotely The last 10 years, it's an average of 400,000 trucks being manufactured over client continental as 80% market share. And we've seen that what we deliver fits to this macro been quite stable. The margins on these products are not the best in our product mix. we have announced earlier a big german client which we delivered a lot prior to covid and they had an inventory build up during the covid and they've been now scaling down the inventories again we announced a new order to be delivered to them in in early during next year So I think the product mix for connectivity second half will be quite similar to first half and hence the margin should be in the same range.

And for connectivity with the iData acquisition you have made, you have also acquired a more recurring revenue. So should perhaps the volatility we have seen prior to 2021, it should not be there.

It's at least more sustainable with this subscription-based revenue model, 4,500 clients, 45,000 vehicles being tracked. And then I think also this change in the strategy where we have more long-term contracts on the toll tag business where we agree on annual volumes to be delivered on a monthly basis instead of in the past fighting in public tenders for something to be delivered in two months from being awarded. And the price level is quite

And this has been a strategy since day one, since we met, to try to develop the company or expand the company, so avoiding the cyclicality and low-margin products, which you see some of your competitors or peers have been in. Given your balance sheet, I guess you have enough room. You are still targeting M&A as part of your strategy, and is perhaps connectivity the segment that we should expect or is it split, even the split between this?

I think what we've said is that we're mainly prioritizing companies that could fit into oceans and connectivity. But with the core purpose of the company being explore more, if we see all the things really being valuable for the company, hence the shareholders for the future, we will look into it. We're not looking for acquisitions in the PIR segment, so we see that growing the manufacturing capacity organically is what we prioritize.

We received a question on OpEx within iData. Is it related to software platform development or indirect OpEx?

Well, I mean, it's a broad set of cost elements, of course. Obviously, we have some salary expenses there, which is in that number. There's around 110 employees in Budapest. And obviously, they have some direct costs attached to them. Then again, we certainly have some costs relating to the software and IT ecosystem around iData, which ties into that, and also costs for fuel. GPS trackers being installed in companies and obviously they're out and meeting and supporting their clients. So I think we should expect that the cost base will increase somewhat in IDATA with the fuel prices being sort of an inflationary item in there. But then again, as I said, we are obviously monitoring that closely and we'll take the necessary and appropriate measures to adjust also the pricing to maintain acceptable margins in that company as well.

Just to follow up on this, the platform is quite scalable. Just to be clear on that one. Moving on to saving the best to the last oceans, and you're quite positive on the sonar sale in Q2, and I guess also that you mentioned in the report that the speed going into Q3 was quite high. So just bring a little elaborate a bit on the cyclicality that you mentioned in the report.

Yeah, so as mentioned, Q1 is typically low season. Doing surveying on boats, et cetera, is not as nice to do in January as it is during the summer. Then it picks up in Q2. Q3 is usually a bit slower, and Q4 is where we see the highest traction. So maybe what I could add to this is also that we see that it's an increased activity within the renewable energy part of the business. So we announced and had on earlier presentation with some contracts where we deliver our sonars to companies doing surveying related to offshore wind farms etc. We see that also the US market is picking up on that. It's a tendency that it's an increased activity for that as well, where it maybe was earlier started in Europe. We also see some increased demand in the security field. We announced earlier a contract with a completely new sonar for surveillance purposes where we do some diver detection solution. This has also been a contributor to the revenues in this project. quarter and that's then the first delivery of a system like that and with the uncertainty in the world I think security segment will not go away, it will increase. So this solution we're delivering there really takes care to protect valuable assets for intrusion from divers planning to do some sabotage, et cetera.

yeah now we actually received a few questions regarding the the security segment with the notions and i guess you answered most uh this partly or mostly is that potential and further growth so i guess that's um But then again, a few questions here around untapped niches for the ocean segment that you see. It's still a broad range that you could tap into. You elaborate a bit on that from the renewable side.

So I think probably part of what we've done reasonably well is to, instead of just fighting for market share in an established market, We've been looking if there are potential use cases where we can do some tailoring to open up the market and expand the market. And we continue to do that. So I think on a large exhibition in London earlier this year, we released a new version of the winged sonar called I-80S. Quite nice sale on that and this is added some functionality that makes it suited especially for light unmanned vehicles doing autonomous surveying. So we will continue to do that, to continue to innovate and make new features, add features to our solutions to grow the market and expand the market.

Okay. Following up on this one, in Q1, you mentioned that the increased volume in oceans required fewer third-party sales, and that would obviously leave more left for Norbit, or more value creation left for Norbit. Could you give some example, or could you comment on this one, how it's been through Q2?

Yeah, so if I understand the question correctly, it has to do with the distribution. So I think we've had some increased part where we do direct distribution compared to what we did in the past with more indirect distribution. So I think it's comparable in this quarter compared to the past quarter.

I think that if you look at the gross margins in oceans in Q2, it was on par with what we have seen in 2021. So I think if you look on it on a broader time series, you will see that the commission part is relatively stable, and I think Q1 was probably an exception to that.

Moving on to the financial part, more on the capex side, you're giving a guidance both for R&D and also machinery equipment, but given the inflationary pressure we see, how certain are you on the capex estimate for second half and perhaps moving into 2023?

We're relatively certain that we will be within the guidance range that we have provided. We definitely see that inflation is obviously impacting some of the cost elements, also on the capex side, but not hugely. So I think for the guidance that we have provided, I think you should take that with We're taking the inflation into consideration.

On the R&D spending, got a question here on this one. And any...

what kind of results do you target on the r d spending and also any product segments that can be mentioned so um i think what what we have mentioned is what we might repeat uh so so so in oceans so we've we've invested resources and money into this security segment and also some of the new versions of the winged sonar, as I mentioned. So what I might add is that in the connectivity segment, we've seen an increased interest from insurance companies. where they'd like some more added functionality into the Tall Tags with additional technology. I think it's been mentioned before also that we're working on solutions where you can combine this technology with also other technologies so that you could have some kind of collision or equal functionality also built into this product. I think when some more of the development and some trials has been concluded, we might show some more business coming in that direction also.

Staying on the R&D, do you have any announced or any target on return target you give? I guess you have it internally, but you...

Well, I think when it comes to R&D investments, you have to look at them from different perspectives. They are quite different in nature when it comes to risk, the strategic importance for the different segments. And obviously, we measure all the R&D investments by the cash flow that they're generating. We don't have an explicit target or a threshold for when you can actually go ahead and move the investment forward. But I think the most important thing is that we focus to minimize the payback period as much as we can on the R&D investments. And that's the main goal, overarching goal for how we are managing the capital allocation between the R&D investments. So it's a dynamic process.

Maybe I'd like to add to that, having some ambition level towards 2024. If that were the end game for the company, of course, we would prioritize only R&D investments which would contribute to that. But it's our ambition also to continue to grow the company after 2024. So we're also looking into technologies and products which could support the growth to 2028 and 2030. So we need a balance.

On the networking capital, you have invested in inventory levels. Any projection on how it will carry on this one or is it getting close to a cyclical peak, what you call it?

The nominal working capital will obviously be a reflection of the general activity level. And it certainly has increased quite a lot over the last 12 months. But then again, our revenues have increased quite a bit as well. So we obviously monitor the working capital efficiency. It was around 27%, 28% now in Q4, if you analyze Q2. And it hasn't been that low since end of 19. So I think the efficiency part is moving forward as part of the plan, but it will certainly fluctuate, and particularly on the inventory side as the component market is quite challenging, and we need to build stock in order to deliver according to our plans with the current lead times that we are observing. We have a target and ambition to be between 25 and 30% of net sales. In Q2, we were in the middle. Over time, we hope to move closer to the end of the range, bottom of the range, and then I think with the current component market, we will probably not be there in the short term, but we at least have a longer term ambition to increase the efficiency even further.

I think we are getting close to the end here, but just one final question for me, actually. Given that we're standing today, are you more or less confident than you were three months ago?

I cannot recall how confident I was three months ago, but I'm happy with what we have presented and I'm looking forward to come back and present the results for Q3 when that is ready.

Same here. I'm looking forward to the Q3 and the rest of the year. Thank you so much. Thank you all for participating.