VOW ASA (SSHPF) Q2 2022 Earnings Call Transcript

VOW ASA (OTCPK:SSHPF) Q2 2022 Earnings Conference Call August 25, 2022 3:00 AM ET

Company Participants

Henrik Badin – Chief Executive Officer

Erik Magelssen – Chief Financial Officer

Conference Call Participants

Turner Holm – Clarksons

Thomas Dowling Naess – SpareBank Markets

Sander Lie – Nordea Markets

Henrik Badin

It’s with great pleasure I welcome you to this First Half Year Presentation for VOW. And I’m very proud of — on behalf of the entire VOW team to present our best ever highest revenues, highest profits and highest order backlog. Since we are webcasting this presentation, I would also like to start off with sort of a short elevator pitch on VOW as a company.

We are a company that provides technology, world-leading technologies to eliminate pollution, to enhance circular economy and to mitigate climate change. We offer patented unique technology to turn waste and biomass into CO2 neutral energy into decarbonized energy, low-carbon fuels and biocarbon. We have, over the years, proven our ability to develop technology for complex industrial applications. And we have been doing that for many years, jointly together with our clients. We have a strong order backlog with large industry clients and the installed base that provides over the years recurring revenue for us.

On the right side, you see the logos in the VOW Group, Scanship, our company that works in the cruise industry space that are market leaders in the cruise industry. We have ETIA, Ascodero and C.H. Evensen that works on different landbased markets. We also have the Biogreen, a very strong brand within pyrolysis in Europe and United States.

Some key figures on the business. We are well established with a proven delivery model, and that’s also sort of demonstrated by the numbers we’re providing today. Technology provider, solution provider, we have more than 117 patents and we’re — have also new technologies that we have pending patents on. We have — in our sort of intellectual property right portfolio, we have 45 technology applications. We have more than 4,450 references in many different industries. We have a strong order backlog, as I said, with now the delivery of 144 systems to be delivered to market over the next three to five years.

We are growing. Today, we count 238 employees in the group operating out of six countries. We are now at four sites in Norway. We are in — with two sites in France. We’re in Poland. We’re in the U.S., and we also have people working out of Italy and Canada. We, of course, are very precautious as we are deploying technology at different sites around, the ambitions to have sort of serious incidents, zero serious incidents. The HSE is rooted in our business. We have a net zero ambition, and we are working with our clients, helping them to become net zero as well. And our ambitions also on the gender equality, more and more women are joining, and that’s good to see.

So let’s talk about our performance the first half year. Key takeaways. It’s the highest ever revenues, profits and order backlog, as I said in the opening statement. We are doubling our revenues to NOK400 million. We — and this is from sort of a positive development in all business areas. The landbased revenue side is becoming the biggest business segment for a while, and it’s increased 4 times, compared to last year same period. We — is happy to see that the cruise is back, and we are now back on pre-COVID levels when it comes to the activity level, supporting the cruise industry with operational services and operational consumables, and projects continued in a steady, very steady course.

Profits improved by great team performance and efficient delivery model, of course, have separate slides on each business area, where we’re going to dig more into details on that. But overall, EBITDA more than doubled to NOK53 million, and that’s an EBITDA margin of 13.3%.

Total order backlog increased 32%, compared to the same period last year to a record high NOK2.2 billion that also includes optional contract for NOK844 million, and that’s, sort of, those optional contracts are related to our cruise industry activities and specifically the newbuild contract portfolio as those contracts we have with shipyards are mirrored with the contracts between shipyards and ship owners. They are securing future slots and have options on future deliveries, and that’s also in our contracts with the shipyards.

We do see that industry trends supports continued growth in demand for VOW Solutions, both at sea and on land. And I have, in the last part of this presentation I will talk more about the — these type of trends that are sort of very relevant for our business going forward.

So looking at these numbers and the development of those. On the left side, you have the revenue and you see the revenue split between the three business areas, how we report them and you see reaching NOK400 million now in the first half this year. And you see the last ever since the first half of year ’20, and you see a very nice development. You see, of course, to a large extent, dominated by the increase of activities on landbased upto NOK184 million of revenues. Good to see that the aftersales activities in cruise is returning to pre-COVID. And of course, solidly, we are delivering strong within the cruise projects we have in our portfolio.

Margins is very much picking up, that’s because now we have not only cruise projects through the COVID period where we have been profitable within that business segment. Now the profit returns in aftersales, and we have a strong delivery and profits on landbased. And of course, that is why we see this very good development on the margin side. And also a nice development on the order backlog that provides a very good visibility for the business, good for us to plan our business going forward.

Landbased. As you see, we are now talking about the landbased as the first business area, because this time, it’s 46% of our revenues in the period. We — it’s become the largest, as I said. We have — we are now, for the second quarter, we are consolidating the numbers for C.H. Evensen, the company that we acquired in the beginning of — or the end of first quarter, and that’s consolidated in a NOK16 million revenue in that business. Evensen is actually doing excellent, they are growing.

If you look at just the order intake now it’s double what they had last year. So it’s a very nice development with that business unit. It’s very happy to see that growth, and we see sort of a huge interest for that type of technology portfolio towards many different landbased industries in Europe that seeks to electrify their heating processes and to have sort of a combination of running high-temperature processes with either renewable gas or electrified support as to what they’re doing today with natural gas. And the industry is now really moving on finding alternatives due to the situation with the gas supplies, the gas constraints and of course, tremendous increase of gas prices over than last month.

We are happy to announce in May a large new contract in U.S. It’s a NOK27 million — it’s a conditional contract, I would say. It’s pending on local permits in U.S., but it’s sort of a typical — I think that’s all the renewable projects you will find around in Europe and United States are a bit pending on local permits. We’ve seen that in Norway, for example, if you look at the wind energy side. It has been difficult to deploy a bit. But here, when it comes to our system to be deployed in U.S., it’s about emissions from the gas we’re burning on the boilers. But we are doing the engineering. So part of the contract, we are sort of doing the engineering, and that’s some revenue in the first half year is related to the engineering part of that project.

You see the EBITDA improvement from the first half ‘21 to first half ’22, it’s almost NOK33 million. So we’re happy with that. Still, we don’t meet the EBITDA margins of the cruise, that’s sort of 24% — in the 24% environment. But this is also because of, as I’ve said it many times, we are scaling up our activity towards land. And of course, the more volume, the more revenue we have, we are likely to meet and beat the numbers we do in cruise. But for the period here, with that revenue, we’re happy to see an EBITDA margin of 13.5%. And the backlog is NOK512 million in total.

The picture on the right side is actually one of 12 pyrolysis reactors for the Follum project. So a part of the revenue for the first half is on the equipment that we are now — have produced and are producing and to be delivered to Norway for the Follum — the VOW Green Metals Follum factory.

Project cruise keep on delivering very strong within that business segment dominated by deliveries to the cruise new building program, but also, in this, we also have revenue from retrofits. We’re doing three retrofits in the period, two with the Carnival Cruise Line and one with Royal Caribbean. We — I would say we are delivering according to plan. You see the solid EBITDA margins throughout the period. This time around, we’re 24.1%. And it’s a very good strong delivery, and we have sort of been mitigating inflation. We don’t have any constraints in our supply chain. That means that we have been able, through that period we’ve been through, to deliver to the yards on time.

So of course, if you look at many other industries with sort of faced with huge increase on materials and, of course, also constraints in the deliveries, we haven’t experienced that. And I think that’s because, of course, we have a lot of replications. We’re delivering to the same newbuild programs, so we have been able to secure our components over time, our manufacturing over time. And of course, it comes out with strong margins, and we keep on delivering that. The backlog in that business area is 888, and that’s for a relatively large new building program, where we will have revenues well into 2025 on those projects. 42% of our total revenues.

On the right side, you see under construction at Chantiers de l’Atlantique in Saint-Nazaire, close to Nantes where that shipyard is building, have a large program for Mediterranean Shipping Company, MSC Cruises, and this is for the new work class that we signed up a couple of years back, and this is MSC Europe. World Europa is the name of that vessel, and this is fully equipped with our technology on board. We do wastewater purification, we do garbage handling, we do food waste processing, and we take care of all the biogenic waste coming from these main waste streams on board.

Aftersales Cruise. As expected, activity in aftersales is coming back. And during the second quarter this year, most of the ships are back in operations and fully deployed. And we see that sort of — we see that in our numbers. So if you look at the graph on the illustration on the right side, when we delivered our first — our fourth quarter 2019 pre-COVID, we had a NOK33 million per quarter, and we had NOK126 million in total. Now on the second quarter this year, the first quarter, of course, still there was some restrictions on — COVID restrictions applied. But on the second quarter now, you see we’re back on NOK29 million, and this is only growing.

And just to remind you that in this period, the last two years, we have increased our installed base with around 12% to 13%. So it means that our addressable market within aftersales is also increasing. And we are also working to replicate this type of activity more now on landbased. So we see that, of course, landbased here is — our aftersales here is predominantly cruise, but of course, we expect to do as good when we now — to a larger extent, get sort of the landbased systems operational, and we can work with clients on land on operational support and operational consumables.

12% of our total revenues and in a — back in time, that was one-third of our business. So it means that going forward, providing operational support, working closely with the owners of our technology that our installed base, it’s — it will be an important part of our business, and it’s also, I think, to a large extent explains our strong position in cruise that we are working so closely with the ship owners. So it’s a model that we should replicate definitely on that.

Okay. Talking more about the trends. And of course, this slide is a repeat. I’ve talked about this many times. There are some changes, for sure. But we are positioning this business to become more and more relevant in the bigger picture. It’s a circular economy for sure. We have a lot of projects that are related solely to the circular economy. And of course, circular economy plays a role in mitigating climate change. It plays a role in reducing CO2 emissions. But also, I would say, regulations are now coming into play in Europe, strong — more strong. REPowerEU is the now five year plan to even speed up Fit for 55 to become more independent of the Russian gas. In this plan, REPowerEU, what’s particularly interesting for us is the ambition to increase the production of biogas in Europe.

And today, Europe is producing biogas around 30, 35 terawatt hours, but only less than 10 terawatt hours is actually converted into renewable methane. The ambition, the next five years in Europe is to increase this to 350 terawatt hours renewable methane biogas. And this is said to be part, sort of, nearly EUR40 billion of investments in Europe, a part of sort of their program, the total RePowerEU is at EUR200 billion investment, so it’s a large part. And actually, when it comes to the amount of terawatt hours of energy from biogas, it’s actually higher than the ambitions on hydrogen.

So this is very important for a while, and it’s — we’re working now with clients to see how pyrolysis in larger scale will become more and more relevant in the picture of increasing biogas in Europe. And of course, the energy — security energy, I would say, crisis scrutiny that Europe is now going through, we see that when we calculated business cases for our clients back one year ago, we had natural gas prices on EUR25 per megawatt hour. Today, that’s EUR200. So it means that back in those business cases the value of the gas that syngas would replace the natural gas that would be replaced would be less than one-third of the potential revenue stream for a facility with pyrolysis. Now it’s more than 60%.

So the gas prices and the focus on finding ways to replace natural gas is actually driving, to a large extent, demand for pyrolysis going forward. And that’s very good to see, and that’s sort of definitely something that we’re going to pursue. Okay, how does our customer respond to this recent news and events and to see how our customers are taking concrete actions?

I talked about it in the introduction, the green waste to energy project in U.S. is definitely on something that is, I would say, a higher focus in U.S., and I did mention that on the RePowerEU, the EU sort policies are drivers, but also the U.S. Inflation Reduction Act now enforced in U.S. is actually important now, because it’s attractive to move towards renewables and of course, to a large extent, also circular economy solutions. So this is — the contract in the U.S. is definitely as a result of those, kind of, developments we also see in U.S., not only in Europe.

I talked about the heat intensive industries where Evensen now are sort of very relevant. You see the contracts so far this year within high temperature, electrified high-temperature processes with Evensen are now for us more than NOK50 million during the first half year, and that’s a very nice development from last year. We see that, we — in the 14th of June, we informed about this Horizon 2020 program with Repsol in Spain has selected our pyrolysis technology as part of their technology application to convert plastics into olefins — and as plastic waste into olefins. And that’s for — what does that mean for us?

It means that we are, of course, selected for an application that Repsol is wanted to develop not only for their own infrastructure, but Repsol is also licensing our technology to other players within the petrochemical industries. So it means that not only can we deliver in the future our systems to Repsol, but also under that type of license program, to a larger part of the petrochemical world. We see, of course, natural gas, which we continue to develop it. We work with GRTgaz in France, because they have on the agenda to use pyrolysis gas to convert that into renewable methane as a way to increase the amount of renewable energy or the biogas in Europe going forward to the grid.

We have recently, and I think that was one of the key — one of the rationalities buying Evensen was that they have been working also towards other interesting applications where pyrolysis is of interest. And one is, for example, towards the battery side. They’re talking about sort of the ambition to produce better batteries, not only a way where Evensen have technologies on the calcination side to heat up and take out the humidity from, let’s say, the fossil carbon that they are using to produce batteries. But also, there are needs to recycle batteries in the production and in the end-of-life batteries.

But also, I would say the fourth point is also that there are development programs looking at biocarbon produced with pyrolysis as a first step to produce advanced anode materials. So we see definitely a lot of interest from that industry and that we are responding to.

Another interesting development is the cruise industry are now more and more looking at what we are doing on land with converting biogenic waste into energy. We have the MAP technology being now deployed on one of the biggest cruise ships under construction in Europe. But definitely, both Norwegian Cruise Line, Carnival Corporation and Royal Caribbean are looking at how to deploy this type of technology on their existing fleet, but also on newbuilds. So we — I think that we have received a lot of attention from what we are sort of doing on land. So our sort of our clients are coming to us in that space saying we want to try to now see how we could replace our conventional incinerators with this type of technology going forward.

We are also within the circular economy side, working with end-of-life tyres. We have now a full operation of our test site in U.K., the test U.K., that’s together with Murfitts Industries. I talked about that many times. But the outcome of this testing, we see sort of a much more interest from that application, and we are sort of in bidding for projects at the moment. So it’s going to be exciting to see how that — and how fast we can develop that part of our business.

And of course, not to forget a huge interest to — from the metallurgic industry space, while green metals have huge ambitions going forward. And that has sort of become a very large client of us. We also have this non-ferrous metal producer that we announced earlier this year, the letter of intent for a factory that is 5 times larger than the Poland plant. So of course, it’s very — a very nice development for our business. So I would say that the team are very sort of busy now to develop these new prospects and hopefully, we have — we will have good news going forward when some of these are converted into contracts.

So the summary, we are delivering record high best ever revenues and profits. Landbased, more than 4 times higher than we had last year. Aftersales back and continued high activity is within the cruise industry space. And I would say we are progressing according to plan. We’ve said it many times that we are delivering strong on the cruise synergy side, the cruise projects. We are very concerned, focused on delivering profits, and we’re doing that according to plan. And we see that we are sort of efficiently mitigating cost increases and supply chain constraints, and that’s very good.

Backlog is strong. And I think that would be — what we have demonstrated that what we have communicated is that we are delivering large-scale technology, delivering capacity that are relevant for industry. While green metals, when we communicated that we were building Europe’s biggest biocarbon production that was a strong message. When we acquired Evensen and we put in work the construction of the biggest pyrolysis reactor to-date, that would be sort of 5 times, 6 times larger than we have for the Follum plants, the units we have with the Follum plants. It has sort of, has been well received by markets, and we see a lot of interest from big industry that comes to us.

And that’s sort of definitely a different position we have today than we had six months ago. And of course, industry trend supports a continued growth in demand for VOW solutions, ETIA and on that.

So thank you so much for listening, and I’m opening up for some questions.

Question-and-Answer Session

Q – Turner Holm

Hi, Turner Holm from Clarksons here. Congratulations on the report. So I wanted to touch a little bit on the landbased segment first. I guess, it seems like the issue in the landbased segment, I mean, it’s performing extremely well. I guess some of that is driven by the delivery to Follum in the VOW Green Metals project. So I just wanted to get your sort of thoughts on whether you think that, that level of performance is possible to continue as we think out for the next half year, a year or two years? And what are sort of the key items for maintaining the level of performance you saw in the first half?

Henrik Badin

Tha — if we look at the performance, if you look at the revenue growth, I would say that we’ve seen an increased interest from industries. Of course, we now are not only delivering to VOW Green Metals. We have the project in the U.S. that given that the permits will be obtained will have a huge impact on our revenue going forward. And we are working with several others, so I would say that newbuilds on the landbased side has become a large part of our business, the biggest now in the first half. We truly believe that we will grow that business going forward.

When it comes to profits, we see that the business cases invest in this type of technology for industry, that type — the macros are becoming better and better. So when we — it means that we should be able to deliver good and strong margins on landbased projects, because we — it makes sense from a financial point of view to invest in our technology. And you see that — when you see that the natural gas prices have increased 10 times over just — not even a year, when you see the value of biocarbon as a substitute to fossil carbon in many different industrial processes.

So I see that a lot of things supporting strong margins within that business area going forward. And thirdly, I think that we come across as a company that are really a player and a relevant player for industry.

Turner Holm

Just following up on that. I guess it’s not only natural gas prices, but also coal and metallurgical coal prices have skyrocketed as well. And I guess the type of product that is being delivered from Follum is essentially a replacement for that. And you mentioned the 50,000 — the potential 50,000 ton biocarbon project, which would be 5 times larger than at least the first phase at Follum. What’s sort of the potential time line for that? And are you seeing interest from other players for similar type projects? I mean just with the backdrop of this incredible move in gas and coal prices and carbon prices for that matter?

Henrik Badin

Looking at the metallurgic industry space, there are interests from several other players in the Nordics and also in Continental Europe. If you look at the LOI for — with the large nonferrous metal producer, they have ambitions to replace a certain amount within a certain time. If that would move according to plan, it will have an impact on our revenues next year.

Turner Holm

Okay. Touching then on the U.S. side. Obviously, new landmark law signed just in recent weeks. It’s the mind-boggling numbers NOK370 billion of climate and energy spending. There seems like there may be some new incentives for biogas in there. Are there any particular incentives for the products that you deliver in the U.S.? And how do you see this new law potentially opening up the market for VOW in the landbased segment in the U.S.?

Henrik Badin

For us, U.S. is pretty a new market for sure. We now had a commercial team working in — on land in U.S. for the last sort of 18 months, I would say. And the outcome of that is very positive with that first contract. I would say that there are a lot of industries and companies that are evaluating this type of technology to produce renewable gas to produce biocarbon. Biochar, as an example, is a much more mature market in U.S. Biochar as a soil enrichment product. But of course, in the past, it has been perhaps difficult to get the right prices on Biochar to drive sort of these investment cases, but the investment cases have become much better. And the prices on Biochar also for soil enrichment have increased.

But I can only sort of reflect on what our customers in U.S. are saying and doing, and there are more interests and definitely, they see access to — they have access to capital. Today, we have a lot of interest from startups that now have finances. They claim to have financing in place to do investments, but also from industries that have — for example, the project in the 27 million project in U.S., it’s from a business that are — that have been working, have a strong track record, have been working for many years, deploying solar and wind. And then they are sort of converting some of their business segments into gas and green waste into gas and biocarbon. So they are sort of moving that because they see they can — they are capable of financing that.

I point to say it. I don’t see anything else that is a contradiction or creating sort of not an interest for it for sure.

Turner Holm

Yes. Certainly, NOK370 billion can’t hurt. We can agree on that. So last question for me is just on the cruise projects side. I think anybody who traveled this summer is seeing that everything is very full and no different for the cruise industry. What’s sort of the mood in terms of newbuilds there, right? Because most of the companies have — most of their ships, if not all of their ships in full operation. I mean now that we have seen this resurgence in travel and I guess, sales for those companies, what do you think the potential time lag is before they think about new orders and therefore, I guess, contracts for VOW?

Henrik Badin

There are — it’s an extensive new building program the industry has. And there are — in that contract portfolio, there are ships that will be delivered in 2027 as well. And we have contracts and you looked at the serial the ship that was for MSC world-class was also a ship — the last in that serial will deliver to market in 2027. We are discussing with several cruise shipyards and ship owners on projects to — for ‘26, ‘27 to start filling up. We are sort of — so it means that we have now revenues for some years on what was booked actually before the COVID.

But also, if you look at our order intake last year was very large within cruise newbuilds as the second year of the pandemic. We had almost sort of one of the highest order intakes in the history of our business for newbuilds. So we don’t — there hasn’t been any postponements. There hasn’t been any cancellations on the newbuild program. But of course, what eventually — when will the ’27 slots be filled up, I don’t know. But we, for sure, in our prospect portfolio, we’re looking at two, three series of vessels that, or let’s say, some of them are repeats just adding on. So it’s going to be exciting to see when they call on these projects.

Turner Holm

Thank you.

Thomas Dowling Naess

Thomas from SpareBank Markets. Congratulations from me as well. Is the current backlog sufficient to cover the doubling of revenues versus 2021? Or are you still — requirement of some additional orders?

Henrik Badin

We have a strong order backlog for sure. And you mean if you want me to guide on the second half, I will not do that. But of course, we are working on a lot of projects. So let’s see how that turns out.

Thomas Dowling Naess

And a bit more specific question. As aftersales has more or less recovered and the margins were around just short of 12% this quarter, which is somewhat lower than they were in 2019, is that due to cost inflation and higher costs on aftersales margins in Q2, like if I separate out the Q1?

Henrik Badin

That is sort of — it’s a volume issue actually. It means that when you have — if you look at margins we have had in recent quarters, it’s because we have higher fixed costs. So when revenue comes up, we can cover the fixed cost. So I don’t know if you want to add some —

Erik Magelssen

I’ll add to that, Tom. We are still not at the full pre-COVID level. Whatever sales we get now on the contribution market that will just go straight down to EBITDA. So where we have the cost base there, there’s been certain cost increases. But the kind of the — what we have got on revenue now, which will grow, it will go straight down to EBITDA and then contribute to margin. And if that the business area, we just had an EBITDA margin of 15% to 20%.

Henrik Badin

And then it’s not a long-term contract, so we’re locked into sort of delivering on old prices. I mean that they are sort of every — when they are procuring chemicals or spare parts or whatever, it’s the latest and greatest price that we’ll give. So we’re — that we have been able to accommodate any higher cost on logistics and the material itself.

Thomas Dowling Naess

For Evensen, on a stand-alone basis, what margins are they delivering?

Erik Magelssen

I think we — in the report, we say that Evensen has — it’s a revenue level of NOK16 million for the three months in Q2 EBITDA at NOK2.3 million.

Thomas Dowling Naess

Okay. Thank you.

So it’s a positive and good start for us with C.H. Evensen.

Henrik Badin

As I say, it’s very good. It’s the way we knew that business is developing now if it’s more than perfect.

Erik Magelssen

And we are also, of course, integrating that business into our kind of present landbased business in Scanship and Etia in a way that will try to streamline operations, the purchasing function, the project management and everything like that.

Thomas Dowling Naess

And I had a question on the MAP system, and I see you had it on the slides already, but so I can — I guess I can ask a bit more concrete question. Like when do you think the interest in pyrolysis for cruise vessels will turn into fixed orders?

Henrik Badin

It’s we see — when we met that sea trade back in April, we saw a very keen interest from the industry. Everybody was back, I would say, Carnival and Royal Caribbean and Norwegian Cruise Line were particularly interested in this. MSC, we see now is picking up interest. We are doing feasibility studies with a couple of the cruise liners. So — and in the past, they have been very innovative and capable of moving.

And I think that with that type of technology would enable the industries to reduce landing based in a much larger extent, and they will eliminate fully sort of the charge to see. And knowing that the cruise industry is pretty much under scrutiny for many years, they are very eager to improve their environmental footprint. So it’s a very sort of — when now the cruise is returning, they’re working very much on sustainability. And I think that this really fits their environmental ambitions, I would say. So that’s, I think, explains their interest. And let’s see how fast we can able — are able to convert that into business for us.

Thomas Dowling Naess

Other talks or any regulations that will — yes, cruise lines aren’t allowed to incinerate their waste basically offshore. And if so are they going —

Henrik Badin

The regulations have been there, of course, because that’s the conventional way they are delimited. You just have to imagine a large hotel with all this garbage. They need to process it. They are not able to land it. So they have incinerators, but there are restrictions in operating incinerators more and more in ports. They are not able in — along certain itineraries, they are not able to operate. So of course, when they have, let’s say, a system that is more considered sort of not an incinerator, but an energy producing device in a way. That’s, of course, what the industry is working for, and we have been working now to get the right approvals now for the MAP system, together with class societies, Port State and the ship owners.

Thomas Dowling Naess

And are there any other companies with such approvals on systems like pyrolysis systems and?

Henrik Badin

Not at this size — not at this size, but we will continue now because the MAP system was — had a 1 type of capacity. Now the ships are getting bigger and bigger, and we want to deploy them on ships carrying 5,000, 6,000, 7,000 to 8,000 people. So that’s why — we see now that looking at not only the MAP but the biogreen from ETIA and the rotary kiln technology that Evensen brings along, we have a very good technology toolbox to — for the cruise industry. So I think that we are much, much better positioned now towards the cruise than we were in — before 2019, so to speak. And of course, if it hadn’t been COVID, think about that if we’re — we most likely would have been much longer. We would have had much better progress in deploying that type of technology in the cruise industry as well.

Thomas Dowling Naess

Okay. Thank you.

Sander Lie

Sander from Nordea Markets here. I was wondering if you could put a bit more color on how you handle cost inflation and also the different type of contract structures, especially for the long-term contracts?

Henrik Badin

Perhaps I’m going to give you that opportunity to Erik. Just taking care of the numbers.

Erik Magelssen

I think it’s a good question. We do, of course, see cost increases on, for instance, freight to and from China in certain materials. So we have kind of — has been kind of 5% to 10% increase. And what we have — we are doing several things to kind of mitigate and meet that. We are — we do have agreements with certain of our suppliers that will split the cost increase. And we also have ordered — focus on ordering goods and equipment quite much earlier than we had done before. So we kind of lock in the prices on certain things and kind of key materials.

And we also are — in a way, so we do see on cruise projects that the gross margin in the first half year ’22 is 2 percentage points lower than in the first half year ’21 and also the same on the EBITDA margin. So that is an effect of the — in some of the cost increase in the inflationary pressures. But I think we managed to get — keep the EBITDA margin at a good and satisfactory level. We have been up to 26% on cruise projects. So that 2 percentage point drop is kind of a combination of difference is mainly that effect.

Sander Lie

Yes. And which components and parts do you typically see the most pressure right now and the largest risk moving forward?

Erik Magelssen

I think what we have — and the supply chain is the electrical components that we use for our cruise projects. And what we do with that is that we will deliver the main equipment to the cruise yards without those electric if they are late. And that the building process at the yard takes a bit of time. So when it’s time to install our systems and do commissioning, we have those electrical components. So in a way, we don’t stop the building process at the yards.

So I think that the freight, what we have seen actually is the, they see the freight particularly in China, and they were doing different things to — we might look at different setups in using other companies now. But it’s not a big part of our cost base.

Henrik Badin

But you would also say when we recognize revenue and this question is valid on the long-term contracts we have in the cruise industry. It means that landbased are more up to date because you caught every project you quoted now and you make sure that you have the right cost structure. But long-term contracts in the cruise is, of course, what we’ve been talking about here. But of course, it’s — we also have always improved our design, and you can — you can almost sort of imagine what kind of margin we would have been recording if it wouldn’t have been for these effects that he’s talking about.

Erik Magelssen

I think last one, of course, that we need to — we will have a system for communicating those cost increases to our sales department to move that into the pricing for new contracts. And we also do have on sister vessels, we will need — we are having price discussions with the yards on those contract levels because everybody is facing cost increases. So that’s also part of the process to kind of keep the margins both on the contribution margin and the EBITDA margin.

Sander Lie

Very clear. Thank you. I think that was ll from me. So congratulations on another strong quarter.

Henrik Badin

Thank you so much. Any other questions?

Operator

We’ve had a couple of questions online. Three questions. First one is what are the aftersales/consumables in the landbased segment? Will the aftersales to landbased ratio be similar to aftersales to cruise projects over time or less?

Henrik Badin

It’s to support those type of installed bases or that type of technology would require consumables. And so we don’t see why it should be on the same level, actually going forward.

Erik Magelssen

Today, now, what you’re recording aftersales because the aftersales within landbased is very small today and it will grow. So today, the aftersales, which we report in the segment is basically more or less totally the cruise project, the cruise side. Then we have a small aftersales very, very small, which is part of the landbased segment at this point. But we will — going forward, we’ll factor that out.

In regards to the cruise project, the consumables is a large part of the aftersales, of course. I mean it’s a potential for us going forward, of course, when these get more and more landbased —

Henrik Badin

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