Meeting between Kalle Anderson, Kevin Holst and CEO, Andreas Blomdahl

We then proceeded down to the harbor where one of the test boats, equipped with 2x200hp OXE Diesel engines, was prepared. We had a long ride with Roger (one of the CIMCO Test Pilots), he was very enthusiastic and explained everything about the engines. He also gave us the chance to test the engines ourselves.

A true WOW experience, the engines performed really well! We were especially impressed by how the gearbox managed to go from full speed ahead (40 knots) full reverse, which made the boat come to a complete stop. Even though the OXE Diesels can withstand crash stops, it should be viewed as a last resort maneuver as it risks to break the boat Roger explains.

After the ride, we were driven back to CIMCO HQ and were given a long session with Andreas. He gave us plenty of time and answered all questions we and the aktieägarforum had come up with!

Summing up the day at CIMCO Marine AB: We are very satisfied with the information that we received and that Andreas took time of his obviously extremely busy schedule to answer all our questions. We look forward to coming years!

Kalle and Kevin 

The Tour

Before the boat ride and the session with Andreas we were given a tour through the

premises. It gave us a very good sense of what CIMCO Marine AB does and is.

CIMCO Marine AB consists largely of three facilities and four major departments:

• Research and Development,
• Prototyping and Prototype Production,
• Testing
• Sales and Aftermarket including warehouse. 

During the tour it became clear to us that the CIMCO Marina AB staff believe in their products.Mostly smiles in a clearly hectic environment.

The access to three internal test cells was mentioned as a great asset by several of the testing and R&D team that we talked to on the tour. CIMCO has one test room for emissions, one for powerheads and one for complete outboard. These three test cells enable CIMCO not only to develop the products from drawings to first prototype, but also to move through the testing of the prototypes, which they say is not usually the case for smaller companies. Praxis seems to be that you rent time in someone else’s test chambers, located elsewhere which significantly limits the availability of time in tests for the prototypes. One of the engineers’ stated that without these test cells CIMCO Marine AB could not have taken the OXE Diesel to the market.

The R&D, like the testing department, is the full activity, it is made clear that we are not allowed to enter all rooms as development is on-going but judging on the level of activities, they have plenty to do right now. Although they use Semcon as a consultant to develop parts of the powerhead for BMW 3.0l, it seems that CIMCO does quite a bit of development themselves.

In the AM department there is as much activities as in the R&D department. We get the feeling that there are a lot to do before the holidays and that many deliveries will be coming out prior to these. It's a pretty big warehouse and we cannot get into it as cranes are operating but we see it from the outside, it looks busy.

In the same building sits sales and while being guided through the sales department, we identify several languages. It was actually here it all began, says Andreas. In these rooms the initial team sat, burning midnight oil while developing the first prototype. In what is now the aftermarket department we had our first workshop and it was there, the first OXE Diesel was assembled. The first engine we showed at a fair was green, we quickly changed. We are not focused on military application but on commercial, we designed and produce the OXE Diesel with them in mind. Black suits us better. Easier to keep up for our end users.

After the tour and the boat ride we were guided to a conference room where we sat down with Andreas. Andreas seemed very confident, it is clear that he believes 100% in CIMCO Marine AB, his staff and the OXE Diesel.

What is CIMCO Marine AB?

CIMCO Marine AB was started in 2012 as a development company. It was started from an initiative between myself and a British equity group called Camco Equitt Group Ltd. Not long after also Power Equipment from Australia joined in, the three formed a great basis of knowledge from the marine industry, start-ups and the financial sector. We bought the first patents from a US company (Gill Marine). This gave us control over the belt drive that we have refined and developed since. This is really the basis of everything we still do says Andreas. Guidelines for the development team were first to further develop transmission with our patented technology and we came u with a stern drive that was significantly better than anything else on the market, but when we came up with the outboard all development was shifted to focus on developing the first diesel outboard for commercial use.

CIMCO has a (what we can determine) very well-functioning and put-together development team. It's a good feeling inside the CIMCO Marine AB premises and it feels like everyone is excited to participate in delivering the world's best outboard. There is no doubt that they are very proud of the OXE Diesel products and that it is the product they want to show to the world. People are clearly proud of what they are doing, and they like to talk about it with us.

What products does CIMCO's sell?

• OXE 125,150,175 and 200hk
• OXE Kreta
• Service kit to the OXE Diesel
• Liquids (Oils and coolants) (Specially designed for the OXE Diesel)
• Duopropp solution with belt technology
• Options such as controls (can only be ordered through CIMCO Marine AB)
• Licentiate of patents, so that others can develop on the same technology
• CIMCO Marine AB also offers services to other development companies through design, testing and prototype development and field engineers.

OXE DIESEL

What is OXE Diesel, can you describe the product?

OXE Diesel is the world's first and only high-performance diesel outboard engineer designed specifically for commercial use.

What is OXE's USP:s (Unique selling point)?

Diesel - Lower consumption, usually cheaper than gasoline, safety (less explosion risk).

Driving train - Instead of vertical motors and axles transferring power to the gearbox located under the waterline, OXE Diesel builds on a patented technology with a horizontal engine, heavy duty design gearbox over water line and a belt, transferring the power down to the propeller. Proven technology in new application. This allows OXE Diesel to use modern diesel engines from the automotive industry instead of uniquely developed engines used in pleasure craft outboards.

Commercial use - Designed for professional use. OXE Diesel is built to be a tool that can be used by commercial users every day.

Why does customers choose OXE Diesel?

The biggest reason customers choose OXE Diesel is the safety, fuel consumption, serviceability and the fact that it is a diesel (it is often easier to get diesel).

Fuel consumption is on average 40-50% lower compared to a gasoline engins, the lower fuel consumption also increases the range by 60-70%, which allows the boats to go further without being forced to land to refill.

For a cruise ship like Hurtigrutten, it's a big advantage that it is powered by diesel as their ships are powered by diesel, they do not need to have a separate tank for gasoline but can refill directly from their fuel tanks, they can also do longer expeditions than they were able to previously. With OXE Diesel they only need to refuel once a day instead of two times a day.

The option for cruise boats and luxury yachts is to build fire-rated rooms in the boat where they are allowed to store the gasoline. They are forced by law to empty all tender boats from gasoline before the larger boat can move as they are not allowed to keep gasoline outside of the fireproof cells during operation.

Which customers do you consider to be of great potential?

Fishing industry, taxi and small but commercial people transportations, cruise ships tenders, such as Hurtigrutten, government use (police, military, coast guard, customs authority) are the customers that I believe has the most use for the OXE Diesle.

Service-friendly - The entire engine can be serviced when it is in the water. It is porously designed to be service-friendly, to service a regular petrol engine or inboard and stern drive system, you need to have the entire engine / boat above the water.

Really anyone with the need to use their boats for more than 500 hours over the life cycle of the engine. The beak even period when comparing to pleasure craft engines is basically between 500 and 1000 hrs depending on the operation and price of petrol and diesel at location.

We have seen movies / pictures of US Coastguard and Chinese Navy testing OXE Diesel, what is the results of these tests?

Us Coastguard - positive feedback, they have asked us to send them a OXE 300 when it is ready for testing, report on the OXE 200 should be ready in March.

Chinese Navy - positive feedback, report expected to be ready in March.

I want to point out that it always takes a long time to get acceptance for products from players like the above. They have very rigorous tests and are subjected to very large lobbying activities. It may take up to 5 years to come in and be accepted. We are in a kind of fast track, as the benefit of Diesel carries so much potential for the,m but it still takes a very long time for them to make such decisions. Even though their reports are coming in March (which probably it will not, based on experience, they tend to take longer than what they initially indicates), we do not believe that they will take any decision regarding including the OXE Diesel in standard stock until later.

CIMCO has also sent engines to several other players but are not allowed to mention anything about which ones, as this could be perceived as stick-price-driving information. Andreas mentions that the interest is great and that, among other things, there have been visitors at CIMCO Coast Guard and other authorities from, for example, Poland, Germany, Great Britain and several other countries as has been presented previously.

Are there other important customers that has shown interest in the OXE?

There are several big projects ongoing with key players that CIMCO Marine are currently working on, they will be presented in press releases during 2019, when everything is signed.

Is it possible to buy a 150hp engine and update it to 200hk at a later stage?

No, it doesn’t work, as the engines are approved as 150hp. The 200 hp model has a different design in the gearbox, turbo and parts of the engine which was introduced before starting the production of OXE Diesel 200.

How have customers perceived the OXE Diesel?

We have received great feedback. There is no secret that we had initial problems with the first 200 hp units that we launched, but this was sorted out. Now, many of our customers are impressed by the low fuel consumption and the extended time on the water this allows. CIMCO Marine is currently working on developing a loyalty program where customers can leave their feedback and be rewarded for it.

You can see many comments from end users on the website. Overall, positive feedback.

Could you compare OXE Diesel with Neander och COX?

• Neander 50hk - built as a regular outboard but powered by diesel, no competitor for the OXE as it is adapted for a lower hp segment. At the same time, it costs about the same amount as OXE. If the customer needs 100 hp or more and if their boats can carry the extra weight of the OXE we would be the logical choice.
• COX 300hk - built as a regular outboard but is powered by diesel. Cox is not built or adapted for commercial use. They have no internal cooling system, which means they will have the same challenge as all other pleasure craft products. When you drive them in saltwater, they corrode. It is also difficult to extract heat from them, something Andreas believes is important, especially for commercial customers, or for boats that operates in a more northerly climate. The engine is vertically mounted, which means that it will be difficult to keep the oil evenly distributed in the cylinders. A problem many outboards have. As it is not directed to the same market niche as the OXE they do not need to last as long.

Andreas welcomes the fact that there are several players with diesel engines on the market as they help the market to raise the eyes on diesel outboard engines. Both Neander and Cox are important as they spread awareness that there are diesel alternatives available, and the benefits of Diesel. CIMCO's target is 10% (7700 engines) of the global commercial market between 125 -900 hp per year, a unique niche where other outboards do not fit into. There is room for more players on the market as a whole, especially in the pleasure boat market where CIMCO does not do any marketing at all.

The reason why CIMCO does not market OXE Diesel on the pleasure boat market is that they do not see how pleasure craft user would benefit from buying an OXE Diesel. The leisure craft outboards on the market are good enough, approved for 380 hours according to the CE marking. A pleasure boat usually does not make more than 10 hours a year, which means that a regular outboard would be good for 38 years for these users. We believe that leisure users are satisfied with that, says Andreas.

However, a commercial user operates the boats for much more, 1000 hours a year is not rare, depending on their boat. They depend on their boats as carpenters depends on their tools and use it as accordingly. Then other parameters will be included as security, range and fuel cost. OXE diesel is usually sold for 2.5 times what a petrol outboard sells for and provide a comparable 40-50% lower fuel consumption, diesel is often cheaper, OXE Diesel also provides about 20% lower service costs.

In Europe, it would be a break-even cost at about 500. As a comparative example, you can compare two similar boats with 200 hp one with OXE Diesel and one with a pleasure outboard engine. In this example both boats run on WOT at all times when in operation during a period of 10,000 hours. It is assumed that the gasoline will last for 2000 hours, which is optimistic, and OXE 10,000 hours for which it is designed. In this example the cost difference between the two boats over the 10 000 hours will be around 580,000 Euro - about 6 million SEK, lower for the operator using the OXE Diesel.

What differentiates the OXE Diesel from other products on the market?

OXE Diesel looks like a regular outboard, drives like a regular outboard but is completely different from the other outboards under the cowl. It is based on a completely different technique, which makes it more suitable to compare it with commercial inboard as it has closed-end cooling system, electro-hydraulic gearbox (above waterline) with trolling function, enabling low speed, ability to change gear (speed or strength). In addition, the patented belt system enables transfer of increased torque (up to 900NM) over a very long time period.

Unlike the stern drive, which is often connected to inboards, the entire system is adapted to hold up to 10,000 hours while the CE regulation on the stern drives only indicates that they should last for at least 450 hours. For a leisure boat, it's OK, but for a commercial customer, it's often not even half the season. We see examples of it all the time, taxi boats operating in quiet waters of Stockholm archipelago constantly have to change stern-drives due to that they are worn out.

At the same time, The OXE Diesel retains the benefits of an outboard as they are easy to replace and service and that they do not occupy space in the boat, which means that today's machine roos can be used as extra space for the crew.

What are the biggest risk for CIMCO at this stage?

Our biggest risks right now is that the coordination between deliveries from subcontractors and production is disturbed, or that our suppliers are not able to provide what we have been promised. This is the reason to why we have not been able to produce 25 engines a week for several months now. We are getting the but I still deem this as our biggest risk still.

CIMCO has been working hard with the supply chain in recent months which includes finding and evaluating the right dual sourcing channels on key components. It has been both time consuming and challenging but we are pressing through and it feels like we are there now.

Andreas is looking forward to what the future will bring. It looks good he says, at the moment, we are all working hard to ensure a good flow in production to reduce costs.

There is little risk and I consider it highly unlikely that we will encounter any technical problems with the engines at the moment. Everything is very well tested by now.

How do you look at today's goals with 25 engines a week and 1000+ engines in 2019?

The target of 25 engines per week should be reached before new year, 1000 engines in 2019 feels reasonable. Our only bottleneck that I see to succeed is the supply of goods and ensuring that our suppliers are able to deliver on their promises to us. We are mitigating this

risk by opening up dual saucing on several critical components, but we have learnt the hard way how suppliers have a hard time meeting our high-quality standards. It takes time and we are not accepting anything that is not approved by our quality department.

Highest production capacity for UFAB with and without investments?

The capacity that UFAB currently offers is 25 units/shift and week, there is the possibility to increase with more shifts, the total capacity without major investments is therefore 75/week, equal to approximately 4000 engines/year. We can extend this further and include weekend shift also, therefore in 2019 we do not see that we need to make any bigger investments in UFAB as they can cope with well above the perceived need for 2019

In 2020, plans for a high-production line will be made, as start of production of the OXE 300 will be initiated. This will require further investments, production is expensive and resource consuming. CIMCO currently has no plans to start any production abroad as the assembly is not the big cost, or the bottleneck. Suppliers and supply chain are the focus, here are the most savings to make short-term.

Since the assembly itself is not very complicated, it is possible to start production elsewhere. If the trade war is stepped up, it may be necessary to look at it.

What does UFAB do for CIMCO?

UFAB conducts all production of OXE Diesel, they also do all quality tests (each engine is tested before dispatch) and delivery control.

Does CIMCO pay a fix fee to UFAB or per engine assembled?

CIMCO notifies UFAB in advance of expected production and pays a fixed cost for it. You can say that it is a combination of the two. E.g. if CIMCO expects to manufacture 20 engines / week but materials for only 10 engines arrives at UFAB that week, CIMCO still has to pay for the assembly of the expected 20 engines as UFAB has already commanded their staff to be present and assigned space in their plant for that volume. We think this is fair. It is not their fault that our suppliers were not able to supply the parts. UFAB will still use the manpower to assemble what they can over the week but as parts are missing, they are not completed. This has resulted in that CIMCO for some months has to sell the engines with less margin, if we were to produce the agreed 20 engines/week, they are sold at a higher margin.

The production problems this fall have been due to the fact that a subcontractor has failed to deliver parts on time, which means that UFAB has not been able to assemble the expected volumes previously ordered by CIMCO.

Is there a possibility to reach over your goal of 1000 engines in 2019?

The goal is already over 1000 engines 2019, at the moment, CIMCO Marine is working hard with the cost cuts and transition to high-performance suppliers to achieve better margins, which may generate the opportunity to build even more engines if we get such demand and even generating a positive cash flow. However, as we have learned the hard way, we must

allow a rather long break-in period for suppliers so that we can be sure that the parts we are get also holds our high-quality standards.

How will you handle orders in the future if you receive more than you expect?

At the moment, the capacity of our subcontractors is the limiting factor, by 2019 the idea is to switch to high-performance suppliers, which will help us to increase production.

How does your orderbook look?

Our distributors have signed a contract with a combined minimum commitment of 1141 engines per year. Andreas thinks that the order book looks good and says that it is continuously filled with ordered engines and committed orders from new distributors.

Myrons presented a slide during investment days showing 1100 units in the order book, when are these expected to be shipped?Andreas explains that production has been a problem due to lack of parts from sub- contractors, but if CIMCO had been able to manufacture 1100 engines in 2018, 1100 engines would had been delivered. Demand is there. He emphasizes that 1100 is the minimum volumes that the distributors have assumed and committed to. He also states that the figure is growing all the time as the distribution network is growing.

Why did you only sell 4 engines in Q3?

We had to stock up, partly to focus on the production of OXE Diesel 200 and partly in order to meet the demand of 150hk in Q4 when some important customers expect delivery. You can say that we moved the sale to Q4.

Have you had any complaints?

We had some for the previous OXE Diesel 200 hp version, initially we did not understand why. But when digging deeper we saw that many of our users would overload their engines, as they offered so much ore torque it was difficult to realize that they were forced to carry much more load than what was expected. The engines could take so much load than other outboards, which naturally led to that the end users loading more than the boats were built for, completely changing their drag in the water. This forced the engines to work overloaded for long stretches which a seal in the turbo could not cope with.

Instead of just replacing the seal, we took the opportunity and pretty much redesigned the drivetrain of the OXE Diesel 200, we had learned a lot from our own and others' experiences and were ready to take a better product. You cannot tell on the outside, but it is vastly improved.

For the OXE Diesel 150 we have had very few complaints. And we find more and more users for them. One example is the MS Thames that is working to maintain the riverbanks on Thames, propelled by 3 OXE Diesel 150.

After solving the problem of 200hp we have had very little complaints on it too. All tests we made suggest that there should not be many complaints on the new version of OXE Diesel 200.

When are you getting payed for your engines?

We are paid by our distributors for the engines we deliver. Most of them pay in advance. But it's important to keep in mind that CIMCO only sells through distributors, we do not sell OXE Diesel to end customers. Distributors themselves choose how they charge or payment solutions on their respective markets. It would have been strange otherwise as they know their customers best.

Who can buy the engine, Are you only selling through distributors?

We only sell through our distributors. Our distributors are super important for us. We are working hard to build a reliable distribution network and we have managed to attract very many good distributors to us.

We are represented on all continents around the world. You can even say that we are in Antarctica through Link Norway and Hurtigruten. But also, through our Chilean distributor as the expeditions often set sail from Punta Areas where they are located.

What are you current biggest expenditures?

The development of OXE Diesel 300hp, having to hold a large stock and production are carrying our heaviest costs right now.

Also, the fact that we have been unable to produce the expected volume has carried some cost as we did not get parts from a subcontractor.

When do you think CIMCO will achieve positive cash flow?

It's not far away, if all things goes according to plan, I would say that we can achieve positive cash flow within a reasonable future.

Do you expect the need for more emissions?

As the answer to the question can be perceived as insider information, I am not at liberty to speculate or answer.

Are there any other funding options?

Well yes several. Positive Cash Flow, Bonds, Export Credit Committee and Loans there can certainly be more options, and if Myron would have been here, he would come up with even more alternatives, he is a star and has an incredible experience as CFO, which gives CIMCO a very good starting position, but as above, I cannot comment on funding options from the perspective of CIMCO.

Are you positive about a buy-out or do you want to run CIMCO with current owners’ structure?

It's not something we work towards, but of course CIMCO could be seen as a good fit for many investments, marine or engineering companies. The patents we own can revolutionize the entire industry and enable many new sought-after products, e.g. stern drive with the same solution, duoprop, or just horizontally mounted engines over a gearbox and over a propeller shaft, in the end, it is the shareholders who decide if a bid should be accepted.

Which are your biggest markets today? 2020?

At present, the largest market is Asia, North America, Europe. Asia is probably the largest also in 2020, but we are working on several large projects with potential customers that could change this.

Do you have any price list for the various models?

We do not have a fixed price to end customer as we do not sell to end customer. We have previously said that they should cost about 2.5 times more than a leisure outboard, but it's just for having something to compare with. It's really the same as saying that just because a Ferrari costs 3 million a truck should cost 7.7 million. They really have very little to do with each other and therefore the comparison is faulty.

It is the distributors who put it on their respective markets. The pricing image looks different for different parts of the world, most depending on the costs carried by the suppliers due to salaries, taxes and what kind of users that operates on respective markets.

How does distributor network look like?

We have a large network by now but continuously work to cover more regions as well as getting more service stations built. We have 22 distributors, covering about 90 countries by now.

How do you look at the aftermarket?

It is very attractive for us in the long run, as other players have about 80% margin, which CIMCO also strives towards.

An OXE should be serviced about 5 times a year when used commercially and CIMCO are well prepared to supply the after-market parts and service kits needed. The aftermarket has the potential to make up 10-20% of CIMCO's sales.

How does CIMCO control the aftermarket?

Only CIMCO sells service kits and after-market parts as we have developed the entire OXE Diesel ourselves we control it fully. Bushings, Aluminum parts, Gaskets, Straps, some of the filters and other service components are specially developed for the OXE Diesel, which means that we are the only once manufacturing and selling them.

What does it cost to manufacture an OXE Diesel?

Today, the manufacturing costs of the OXE Diesel is too high. We know that they can be reduced further, and we work hard on the cost cuts. Both from a manufacturing side to find better way of producing the OXE Diesel but also from a supply chain and purchasing side to get shipment costs and parts costs down. We have engaged a very good team in the USA that is headed by well trusted team member from the states. He has built up a team with a very relevant background. They are now actively working with solutions to reduce material costs and production costs of current and future OXE Diesels.

It is also a volume issue. As we build larger volumes, our ability to demand cost cuttings from our suppliers also increases as we become a bigger part of their business.

How much profit do you do per engine? In%?

The engines are sold with a good positive margin if we manage to produce the expected volume. We also allow for a good margin for our distributors as they are expected to carry marketing cost and display the OXE brand in their region. The more they earn the more likely it is for them to market our brand, which will bring more profit to CIMCO Marine over time.

Do you have plans for additional factories abroad?

Not at present, it depends on whether we get big orders and, of course, a factory like UFAB in that region. UFAB is a great partner for CIMCO Marine with plenty of capacity to deliver on higher orders. As UFAB is relatively close to CIMCO its location offers great opportunity for us to improve in production and to learn the most effective way of producing the OXE Diesels. The more we learn the more effective we become.

Do you plan to change to BMW's engines completely or continue with the current 125-200hk GM engine?

Not currently but sooner or later, it needs updating, these engines will go out of production over time and them we need to change powerhead. Our OXE Diesel 150 hp engines have been very well received, and it performs great.

There are several advantage of using the engine from GM on the OXE Diesel series on the market today as it has a very robust cast iron block, that have proven itself in the field for several years in various application. It is also relatively easy to work with, which is great for our end users.

Will you be able to afford 2000 engines from BMW 2020?

The engines will not be ordered all at once, but in batches. Simultaneously we expect to receive orders for OXE Diesel 300 that will be paid in advance, generating the cashflow needed to pay for the engines ordered from BMW.

We have committed to a volume of 2000 engines during 2020 but our expected sales volumes are much higher than that, as communicated in previous press releases.

What is the budget for the development of the 225-300hk engine?

The budget and also the cost for developing the OXE Diesel 300 is substantially less then our costs for developing the current OXE Diesel line-up. As presented in the recent video “the Bison project” we are currently ahead of schedule and also below budget as we have not run in to as many problems as we anticipated. We are not at all out of the woods yet but we see that we have learnt a lot from the development of the first OXE prototype launched in 2014 and all series thereafter. All this knowledge becomes very clear now that we work with the block from BMW. A diesel is still a diesel.

/Kevin & Kalle 14 December 2018