Norbit Asa

Welcome to Norbit's Q2 and first half year 2024 presentation. We appreciate that you're showing interest in Norbit and in addition to walking you through the figures for Q2, which came in as a new record for Norbit, we will give you some more flavor to some strategic milestones achieved. so as mentioned q2 2024 came in as a new record quarter we ended with revenues on 419 million knox with an ebit of 102 yielding a margin of 24 percent I think this is a good quarter to remind the audience that the quarterly fluctuation is to be expected. Three months ago, when we presented Q1 2024, we saw quite low EBIT margin. due to one or both of our most profitable segments, connectivity and oceans, delivering slightly lower than expected. In Q2 2024, you will see that oceans and product innovation and realization is the segments driving the growth. and contributing the most to the result. So for the accumulated for first half of 2024 we have recorded 829 million NOX in revenues with EBIT on 143 million representing a margin of 17%. As you know, our target is higher than 17%, and then it's good to see that we're on 24% in Q2, having a little drag from Q1 then, coming to 17%. So, as mentioned, today we'll also give you some more insight into some strategic milestones, acquisition of Indomar, we've completed private placement during the quarter strengthening our cash position with 200 million and I'll give you some more insight into a new product under development in connectivity where we have disclosed that a European leading client in truck tolling told for Europe has awarded us the first contract of 160 million NOx. So first the acquisition of Innomar that we completed in July We're happy about this transaction. This is a company with nearly 30 years of experience in underwater acoustic solutions for sub bottom profiling. So as you know, Norbit is using sonars to map the seafloor and then inspect things in the water column. This parametric sub-bottom profiler technology from Innomar is used to penetrate the seafloor and see sub-bottom. So it's a very good addition. This is a very good driven company, Otto Rostock in Germany. They have delivered products in more than 80 countries and is recognized as a world market leader in this specific domain. So, for Norbit, it's a very good strategic fit. We think this is a very good addition and fits to our strategy to broaden our product offering. in the oceans domain. We will manage the company and run it under the Innomar brand but going forward it's now Innomar and Norbit company because Innomar is very well recognized in the global maritime market. A little bit into the figures in Oceans. Oceans has delivered the best quarter ever. with the 195 million NOX in revenues, which is a very steep growth from the comparable quarter last year. And you see then some operational leverage on this revenue, giving a 41% EBIT margin So then it's 80 million NOx in EBIT from oceans in this quarter. and again i'd like to pay some attention to three months ago we saw a weak quarter from oceans and this is so first of all it's seasonality in the numbers for oceans where q1 typically is the weakest quarter q2 is typically strong three slower and then four usually the strongest during the year we will expect also seasonality and quarterly fluctuation going forward and maybe also i'd like to remind you that If a system having a price tag between 1 and 3 million NOx, if you have a well-specced system, say like 2.5 million NOx per system. So if a number of those goes from one quarter to another, it will affect our numbers. For the first half of 2024, in Oceanus, we've delivered 317 million NOX in revenues. That's 10% increase from first half in 2023. For the half year, the EBIT margin is then 28%. Looking into the revenue split for the first half, so out of this 317 million NOx in revenues, it's 205 millions coming from the base Sonar platform, which we we market under the name iwbms and we have 70 millions from winged sonars and then you see it's some revenues on from security environmental monitoring and others In this SONAR sales first half year this year, we tend to see that over time as average, we have one third of our revenues in North America, one third Europe, Middle East, and one third Asia Pacific. In first half this year, Europe has been the strongest region. Behind this growth and quite satisfying numbers, we've seen that demand from both autonomous underwater vehicles and autonomous surface vehicles has been strong and driving the growth. In addition to the known technology platforms, as we've spoken about in the past, Norbit is also allocating capital to develop other sensors that are relevant in this segment. Hopefully, we can show you a little bit more specific later what this is. But what I can say is that from the allocated capital to R&D, it's already released some new inventions, which also is shown in the numbers just presented. Norway's vision is to be recognized as world class and to be honest I'm a little bit proud when we see that when Paris is arranging Olympics 2024 and they do that in the heart of Paris. They're using the River Seine as both one of the arenas and the base for the full Olympic Games. They need to have security. The French security services then showed Norbit the trust that Norbit together with some local French companies also deployed underwater surveillance in the Seine during the Olympics. So being qualified for the Olympics feels like being recognized as well class. So, into connectivity. As we have told you before, Q1, Q2 2023 was very strong due to connectivity delivering on a very big contract, 150 million NOC onboard unit contract towards one client in q1 q2 this year we've seen some reduction of sales on onboard units and this is partly explained about some larger client rescheduling some of the supply The revenues came in at 101 million NOX with 21 million in EBIT result. So for the full year, we see 252 million in revenues compared to 308 in the first half year last year. And with the EBIT margin of 25%, which is then slightly below the 29 in first half last year. So, and if you look on, compare first half year 2022, 23 and 24, you see, so if you consider this opportunity we jumped on to deliver on a big contract in short time, towards your client the first half year 2023. If you adjust for that, you see that underlying growth in the segment is very good. So the first half year 2023, 215 of 308 million NOCs came from onboard units, whereas the other product segments has now in this quarter all shown very good growth where enforcement modules um this is for for tachographs uh has grown from 29 to 40 million um enforcement modules for satellite-based tolling has gone from 16 to 46 million and subscription and etol services is up from 45 to 54. so this decline in onboard unit sales is partly offset by growth in all other product segments. We announced in April that we've been awarded a contract on onboard units to a non-disclosed client. Quite recently, we were allowed to disclose that this client is Toll4Europe. Toll4Europe is a leading European electronic toll service provider, maybe the leading not only A leading. GNSS onboard unit is a unit that is installed in commercial vehicles when it's EATS compliant onboard unit. It enables the driver to go through the whole of Europe with only one subscription and he has to pay invoice only from one provider. And in this case, Tall4Europe will be that provider. So Norbit has for approximately 10 years been a supplier of enforcement modules based on our core technology, which is dedicated short-range communication. We have delivered modules like that to other GNSS OBU manufacturers or vendors. So we're now stepping up in the value chain. This is done after Toll for Europe approaching Norbit and asking if we were willing to make a new design. They saw a need for some new functions and features in such a unit. I'm very glad that our strategy from niche to notable and accumulating skills and references is what should qualify us to tempt our clients to ask Norbit for support on larger, more important tasks. This is what has happened here. Maybe it's fair to mention also that with this initial contract for Toll for Europe, which now is 160 million NOC contract to be delivered second half next year. The product is currently under development. We have been through a couple of proof of concept tests, so it's quite mature already. to give you some numbers to see why we're so enthusiastic about this is that if we instead of getting this GNSS onboard unit contract being 160 million NOC contract if instead should have delivered only this enforcement modules that would have been a contract in the range of 10 to 15 million so for us it's a very significant step up and we take a much larger share of the value creation by doing this. And since 2019, it's a number you could have also, we've delivered 2 million of these enforcement modules. So showing a little bit that this is a well-established and quite in an orbit scale large market. In product innovation and realization, it's also a satisfying quarter to see that when it comes to the margins and also it's a good growth to comparable quarter. Q2 is somewhat affected about holidays in this segment. Revenues of 134 million NOX. That's a 32% increase from the comparable quarter last year. And then with an EBIT margin of 13%. which is less than we had in the same quarter the year before, but it's an improvement. We've had some quarters with weak margins due to some projects we were committed to fulfill, which had slightly negative margins. And it's good to see when these projects are concluded that we get the margins back where they should be for this segment. So for first half year, 280 million. and the average margin first half year is then 8%. As you see, the growth in the segment is fully from contract manufacturing services and it's driven by a very strong demand from industrial clients. With that, I'll give the word to Per-Christian, who is with us on a telephone link. Please, Per-Christian, take us through the group financials.

Thank you, Per-Jørgen. I will spend some minutes walking you through the financial highlights of the quarter. Revenues in the first quarter amounted to 418.9 million kroner on par with the level reported in the corresponding period of last year. EBITDA for the quarter was 131.9 million compared to 127.2 million in the second quarter of 2023. This represents a margin of 31% compared to 30% in the same period last year. Operating profit was 101.8 million resulting in a margin of 24%, same as last year. Net finance expenses were negative 8.5 million, mostly explained by net interest expenses. Tax expenses were 21.3 million, while net income for the period was 72.1 million. In the second quarter, oceans was the main driver behind the result improvement, reporting a 28% increase in revenues on strong solar sales in Europe compared to the corresponding period of 23. Gross margin improved by 5 percentage points on lower sales on commission and favorable product mix. Partly offsetting the gross profit improvement was an increase in payroll expenses during buyer continued strengthening of the organization and the acquisition of Ding DSB May 4th quarter last year. EBIT ended at 79.7 million in the quarter. In connectivity, revenues declined by 41% year-over-year on lower OBU sales, while gross margin in the quarter, as subscription-neutral share of the segment's revenues increased. Partly offsetting the negative gross profit effect was a decrease in operating expenses of 5.5 million, mainly driven by higher capitalization of internal R&D, lower allocated costs from the factories, as well as reduced cost for freight, consultancy, and credit loss provisions. EBIT for the quarter was 20.8 million. In segment PIR, revenues were up 32% year over year, during by growth from industrial clients within contract manufacturing. Gross margin declined six percentage points on customer mix. There was, however, a significant improvement in the margin sequentially following a normalization of the gross margin after a challenging first three months of the year. An increase in operating expenses and depreciation of 7.9 million, mostly explained by payroll expenses, offset the results, leading to peer reporting an EBIT of 17.8 million. All in all, as we sum up the first half of the year and after a seasonally weak first quarter for oceans and low margins in Pierre, I'm pleased to see that all our business segments reported operating margins within our target range for the first six months of the year. Next, balance sheet and financial position. Property, plant and equipment, including rights of use assets, increased 22.2 million in the quarter. following investments in machinery equipment and lease additions of new production equipment, including a new production line for enforcement modules for topographs to increase capacity to cater for demand. Intangible assets rose 3.8 million to 312.4 million as amortization only partially offset the R&D investments. Our working capital position continues to improve in the quarter. primarily driven by a 32.9 million reduction in inventories and a 6.4 million increase in trade payables, partly offset by an increase of 9.3 million in receivables. Net interest-bearing debt stood at 184.4 million at the end of June, an increase from 132.6 million at the end of the previous quarter. Our equity ratio was 51% at quarter-end As mentioned on the previous slide, our working capital efficiency has continued to improve in the second quarter to 26% or 24% second quarter analyzed. The reduction in inventory has been the main driver behind the improvement. Since the end, inventory reduction has been close to 100 million, which is a result of continued improvement in inventory management, as well as reduced safety stock of components as supply chains have become more reliable. We have previously highlighted that inventory turnover has been high on the strategic agenda, and I'm pleased to see that we are achieving concrete results from the initiatives taken. But more work is still to be done. Second, we continue to maintain a high cash conversion rate on our receivables with our non-recourse financing facility in place, which also supports an increasing free cash flow. While we continue to work on optimizing our working capital position, including also negotiating payment terms, requesting advanced payments, we must expect that the ratio will fluctuate from quarter to quarter. The long-term ambition, however, is to continue to increase the efficiency in order to make the business more capitalized without compromising Norbit's core value number one, we deliver. In the second quarter, our net interest-bearing debt to EBITDA ratio increased to 0.7 times as per the end of the quarter. Subsequent to quarter end, several financing activities were concluded in connection with the acquisition of InnoMark and to strengthen the capital base for further growth. In July, we closed the acquisition of InnoMark. At closing, we paid €34.9 million in cash to the sellers and €4.8 million in consideration shares to founding management, being the preliminary purchase price for the shares. For the cash portion, post-closing We entered into a 38 million euro loan agreement. The loan carries a margin of 170 basis points, subject to our net interest bearing debt to EBITDA ratio being below 2.5, which is the higher end of our financial policy. The margin is a 40 basis points reduction compared to the last term loan issued. And in order to strengthen the financial flexibility and capital base for further growth, we raised 200 million kroner in gross proceeds through our equity product placement. Adjusting for the acquisition of Inamar and the private basement, our net interest-bearing debt-to-EBITDA ratio would have been 1.1 times at 30th of June, providing a strong financial platform to deliver on our capital allocation framework and the ambition plans we have set out. In addition, by repaying existing term laws and issuing a new loan on improved terms, we have lowered our cost of debt and tax-optimized our financing so that blended cost of borrowing stood at 4.1%, Lastly, the cash flow for a quarter. Cash flow from operations was strong and ended at 149.5 million, explained by an EBITDA of 131.9 million, a net decrease of 33.7 million in working capital, taxes paid of 7.4 million and 8.5 million in net finance expenses. We invested 37.4 million in the quarter, explained by 19.9 million in R&D investments, and 6.5 million investments in machinery and equipment. We also made 11 million investments in cellular robotics in the quarter. Cellular robotics has developed a series of autonomous underwater vehicles used for marine security inspection and data collection. And the investment is made in order to position oceans as a strategic supplier of acoustic technology to cellular AVs. For 2024, we expect our R&D investments to end up in the higher end of the 65.75 million range due to the development of the GNSS OBU in connectivity, while the 190 to 100 million guidance for investments in fixed assets is reiterated. So far, we have invested 51.7 million in machinery equipment, including the least portion. Cash outflow from financing activities was 109.9 million in the quarter, mostly explained by a dividend payment of 152.9 million, partly offset by an increase in debt. Then I will give the floor back to Per-Jurgen for the outlook section.

Thank you, Per-Jurgen. So going into the short-term outlook first, and then looking on the third quarter, And as already mentioned, third quarter is typically a slower quarter than second and fourth quarter in oceans. But we'd like to express that we expect to deliver growth in third quarter in oceans compared to the corresponding period of 2023. And this is excluding the contribution from Inomar. So, even more revenues will come on top of that. In connectivity, we give a range. We expect revenues in connectivity to be between 120 and 130 million NOx. The growth from Q2 is because we see increased supply both of onboard units and enforcement modules for tachographs. In product innovation and realization, we see continued high demand for manufacturing services. Based on this, we think revenues in the third quarter also will be 120 to 130 million. With that, we reiterate our 2024 outlook. where we've given a range of 1.7 to 1.8 billion NOx. Based on the current forecast, we've said that we expect to be in the lower part of the range, but still in the range. And the growth from 23 to 24 is expected to be strongest in oceans and product innovation and realization. We also reiterate that we expect to have EBIT margins in line with what we had in 2023. And of course, as we've demonstrated with the InnoMar acquisition, it makes sense to do also inorganic initiatives, and we will continue to do that. And we remain focused that any acquisition should be value accretive. Also like to remind you on our 2027 ambition, which also is what helps us to prioritize at work every day. So our target is an organic growth, helping us up to 2.75 billion Norwegian kroner in revenues in 2027. with the EBIT margin in the range of 20%. We have also during the last years increased our focus on the balance sheet and on capital allocation. So we have a target of a return on capital employed to be in the range of 30%. And as Per-Christian showed you, our nibs over EBITDA range from 1 to 2.5 in the capital allocation framework remains the same. So with that, I think maybe, Per-Histjan, we could see if there are some questions from the audience.

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

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

And then a second question from Jep. Is there any risk of 5G taking over for DNSS in polling? Any threats from AMPR?

So I think in tolling, it's been many different technologies for many, many years. And I think you could add to the list, so the question from Jeppe, 5G, ANPR, you could add, so why don't use equipment from the infotainment system contained in the vehicle also to do this? But I think it's... So one thing is technology, one other thing is regulations and legal aspects. As of now, the European Union has issued the directive for the EATS, which then supports very well that EATS approved suppliers like told for Europe, will need some equipment to be able to deliver their services.

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

I think when it comes to sonar systems, It, of course, assists the Norbit sonar that is in the storage. It will last many, many, many years. But it's a rough user environment. And we see that wear and tear and also that suddenly they run into some rocks with the sonar or crash into the CHI. So we've estimated that the average lifetime of a sonar system is approximately five years. When it comes to DSRC products, that varies. So I think if you consider the enforcement modules for tachographs, the lifetime of such a module would be the same as the lifetime of the truck or the lifetime of the regulation demanding this. So what we have seen now is that with this mobility package coming from the European Union, where more functionality is needed in the tachograph itself, that has been good for our sales. the standard onboard units for for tolling of passenger cars etc that's a battery operated product the average lifetime of such a unit is typically five years yeah next so next question uh or just three questions from the same participant i'll try to to summarize

defense systems?

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

Okay, and then next question. As a public company measured on a quarterly basis, how does remains on not only delivering functionality, but also creating general value for customers?

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

Okay, I see there's one comment that there's no sound on my microphone, so please let me know if there's any issues with the technicalities. Okay, moving on. In light of the potential benefit of vertical integration, so I would presume that this mostly relates to oceans. How does Norbit plan to optimize this commission-based relationships for mutual benefit? And is the vertical integration a strategy the company is considering to enhance the income value for Norbit and its partners?

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

And maybe just add to the question, since there is a reference to commission-based relationship, as some of you might know, Oceans has an indirect distribution model where we use distributors that earn a commission on the sale of our solar systems. also like to remind the audience that we have made some strategic acquisition over the recent years to position ourselves better in the geographical markets that we see potential. So over time of course we will continue to evaluate whether we should make further acquisitions to also strategic position us in some new markets. So that's just an ongoing evaluation that we've done. certainly a great value for Northern Orbit and our shareholders. So next question. The current into EBITDA ratio is well below the facility covenant level. Taking into account the additional equity that you raised, could you give some guidance on possible M&A?

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

And with reference to the same question with regards to the covenant test, could you confirm this is tested quarterly or annually? I can confirm that the need ratio is calculated on a quarterly basis, while the equity ratio component is calculated per 30th of June and end year. Question for Marcus. Does the new product offering within connectivity open up for greater margin realizations moving forward?

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

And then the second question from Marcus, does the acquisition of Inamar improve the revenue visibility within oceans? Also, If you mind elaborating on how the acquisition changes the customer dynamics within Oceans.

Yeah, so maybe I could start and you could fill me in, Christian, but The revenue visibility is somewhat the same for Innomar as we have for the rest. The seasonality fluctuation is historically a little bit lower. in Inomar than we have experienced in our sonar business. So given that, so maybe it flattens out a little bit on seasonality, but we still have to live with a quite short visibility within oceans. And to the part with the any potential change in the customer dynamics within Oceans. So we have experienced that we did acquisition of a smaller company last year. So we bought Ping DSP located on Vancouver Island in Victoria in Canada. That's a much smaller company also offering some quite special hyperferometric side scan sonars. We have taken that into Norbit in a way where we brand it Ping and Norbit company. We see that this is well regarded in the marketplace. I think that Norbit has a strong position and a good recognition in the market. We're doing the same now with Innomar. So Innomar and Norbit company and we think this will also be well regarded. So probably we could benefit from that. Yeah, so I'm not sure if that answers the questions, but if you see anything to add, feel free.

I think generally the customer landscape, I mean, some of the customers of InnoMar, we already know quite well, obviously there are some new customers on that list. That could have potential for us to also sell our existing solar technology too. But there's also the benefit of bundling both sub-bottom profiling and multi-beam solar to our client with a one-stop shop solution. So I think also that's a strategic element to take into account in this acquisition. Okay, I don't think there were any more questions from the audience. So I think we can wrap up the Q&A session.

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