Hidden beneath the surface of Vow ASA's Q4 2023 and Q1 2024 earnings calls lies a story of strategic transformation, one that seems to have been largely overlooked by analysts fixated on past margin adjustments. While the "misreporting" narrative dominated the conversation, Vow has quietly executed a series of moves that suggest they are poised for a dramatic profitability leap in 2025, even exceeding their own ambitious 15% EBITDA target.

The skepticism surrounding Vow's past margin corrections is understandable. The company underwent a significant reassessment of its contract portfolio in 2023, leading to reduced recognized revenue and a hit to profitability. Analysts, understandably, questioned the validity of the adjustments, the company's ability to secure margins in the future, and the achievability of their 15% EBITDA target.

However, a closer look at the Q1 2024 transcript reveals a new narrative taking shape. Vow is not simply relying on cost-cutting measures and hoped-for contract wins to achieve its profitability goals. They are fundamentally shifting their business strategy, pivoting from a focus on pure revenue growth towards a model that prioritizes margin expansion and operational efficiency.

Shifting Tides in the Cruise Industry

This shift is most evident in their cruise industry segment, which historically contributed significantly to revenue but suffered from margin pressures. Vow is capitalizing on a trend towards larger cruise ships requiring more sophisticated and expensive clean ship systems. The average value of contracts in this segment is demonstrably increasing, as seen in the recent nearly EUR 20 million contract, the largest in Vow's history. This contract showcases not just the demand for Vow's technology, but the company's ability to command higher prices for its advanced systems.

Furthermore, Vow is strategically phasing out older contract options with lower margins. While this shrinks the overall backlog, it creates space for new, higher-margin projects. The expiring options, negotiated in a pre-inflationary environment, were likely becoming liabilities, holding back the company's profitability. By letting them expire, Vow frees itself to negotiate new contracts that reflect current market realities and ensure stronger margins.

Strong Signals from Q1 2024 Results

The Q1 results themselves tell a compelling story. Despite a slow start to the year in terms of profits, Vow's Maritime Solutions and Aftersales segments delivered double-digit EBITDA margins, a clear indication of the effectiveness of their strategy.

"Segment Q1 2024 Revenue (NOK Million) Q1 2024 EBITDA Margin Maritime Solutions 107 13.2% Aftersales Approaching 200 annually 12.3% Industrial Solutions Currently 34% of total revenue Unprofitable (Capacity buildup & delayed orders) Source: Vow ASA Q1 2024 Earnings Transcript"

The Sleeping Giant: Industrial Solutions

But the real potential lies in Vow's Industrial Solutions segment, a segment that currently represents 34% of revenues but remains unprofitable due to capacity buildup and delayed order intake. However, Vow has initiated "comprehensive cost savings" and is awaiting the final investment decisions on "three large industry projects" that could dramatically alter the segment's financial landscape.

These projects, collectively representing a potential EUR 120 million in contract value, are not pipe dreams. Vow has already demonstrated its capability to deliver on large-scale projects, particularly in the US, with the $27 million Rhode Island biochar project.

Additionally, Vow's deep involvement in Vow Green Metals, a biocarbon producer targeting the metallurgical industry, provides another avenue for significant revenue generation. Vow has already secured a lease agreement for its early production line delivered to Vow Green Metals, guaranteeing direct payment and further validating their technology.

A Conservative 15% or a Realistic 20%?

While Vow aims for a 15% EBITDA margin in 2025, the data suggests they might be underestimating their potential. Here's a hypothesis:

Cruise Industry: Assuming Vow secures a significant portion of the EUR 200 million in potential cruise contracts at the enhanced margins they are now commanding, this segment could see EBITDA margins exceeding 20%.

Industrial Solutions: If just one of the three large industry projects materializes, coupled with the cost-cutting measures already in place, this segment could swing to profitability, achieving an EBITDA margin of 10% or higher.

Aftersales: As the installed base of Vow's systems continues to grow, this segment should maintain its double-digit EBITDA margin, potentially approaching 15%.

Combining these factors, it is conceivable that Vow could achieve a group EBITDA margin closer to 20% in 2025, a figure that would significantly outperform market expectations and redefine the company's trajectory.

Projecting Vow's Potential EBITDA Growth

The chart below illustrates a potential scenario for Vow's EBITDA margin, assuming successful execution of its strategy.

Looking Beyond the "Misreporting"

The Vow story is not merely about recovering from past missteps; it's about a company strategically repositioning itself for a new era of profitable growth. While analysts are looking back, Vow is looking ahead, and the view from the future looks remarkably bright.

"FUN FACT Vow ASA was initially known as Scanship Holding ASA, reflecting its focus on marine sanitation systems. The name change to Vow ASA in 2020 signaled the company's broader ambitions in the circular economy and its commitment to a sustainable future."