AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Good morning, everybody. Knut Nesse, CEO of AKVA group here, and very much welcome to this virtual Q1 presentation for AKVA group. We are on time. We are -- how many people here?

28.

We have 28, which is way more than normal. So that shows that the virtual way is probably the future. But since we're on time, more people than normal, I better start. So we are living very, very special times. We are sort of experiencing new territory for all of us. So it's unforeseen territory. So the only statement I can give to investors and to shareholders is that all the employees of AKVA group and the management in AKVA group, we are really, really doing our best and trying our best, I thought, to manage our business during these extraordinary times. This morning, we will first look at some high-level overview, which I will do. And then we will go further into the financials, which will be done by Pierre. And then after that, we will open up for Q&A. So please take note, reserve all your questions, and we do a Q&A at the end of the presentation. Let's move to order intake and the overview there.

Can we please have the presentation shown?

As you can see, we had an order intake of NOK 709 million for the first quarter. And that is excluding the NOK 100 million delivery of the Tube Net, a new contract, which was announced in April this year by means of a stock notice. So some specific, we had a strong quarter for Europe and Middle East and especially within export from Norway. And as you can see for Q4, we do an adjustment of the order backlog of NOK 600 million. That is illustrated here in the bar for Q4 '19. And that is linked to the contract with Cooke Aquaculture for our RAS facility in Chile and the Nordic Aqua Partners with a project in China. That has been canceled. So to be prudent, we have taken that out of the order bank even though both customers are indicating to us that it's likely that the project can start up again at a later stage. Moving on to revenue development. Overall, NOK 752 million for our first quarter and that is down from NOK 823 million a year [Audio Gap] NOK. You see strong momentum for Egersund Net. Actually, Egersund Net had a bit of a soft start [Audio Gap] we still maintain our focus on full grow-out RAS facilities. That's still core of our land-based strategy. With regards to the specific of the NAP project, the final financing is still pending, but the company is guiding us positive and is maintaining their -- some activities that it can happen later in the year. And we are also still busy with additional projects in the pipeline. And then my final comment before we go into the specifics on the financials is a statement around COVID-19. It's hitting the entire world, as we all know, leading to collapse of different kind of systems. And for now, AKVA group is some affected, but we label it moderately impacted. The major impact for time being is for the most that we have those 2 RAS contracts postponed and that we see some headwind in some marketplaces. Early on, we took appropriate actions based on what we could do with the knowledge we had at that point in time. And we actually had 4 focuses early on following mid of March. Number one for us was to focus on our employees with regards to safety and health. We did a lot of -- we implemented a lot of measures there. And secondly, we did -- we took a lot of measures and actions to optimize the overall liquidity situation of the company. Internally, we launched our cash is king project, which we are following and monitoring almost on a daily basis. We have a weekly deep dive in this task force cash is king. Also, the third one we started to focus on was security of supply to make sure that we could get all the kind of supply from our suppliers in order to deliver on our customer contracts. And I'm happy to share with you that so far until date, we have no red flags with regards to our supply and sourcing system that is working throughout this crisis. And finally, we are monitoring our order intake even on a weekly basis, certainly, in order to make and take appropriate decisions and actions when needed. So if you take one step back with the industry we are part of, the thing to monitor is certainly the salmon price. For time being, the salmon price is still kind of acceptable. Our customers are still making money, having positive cash flow, so far the most. They are doing their normal spending and investments. But of course, this sector, this industry is not immune. If you should see a deep dive -- or a dive in the salmon price, we will be affected. Our customers will be affected. But for now, it seems to work in a reasonable way. So that's the end of my introduction. I hand over to the CFO, Pierre, so you can guide them through the more specifics on the financials, please.

Thank you very much, Knut. We then move to the financials. And one more slide, please. We'll go straight into the revenue. And on the 12 months trailing revenue, we have -- and order intake. We are approximately on NOK 3 billion for both of them, but we have a decrease for the first quarter compared to first quarter last year from NOK 850 million in Q1 2019 to NOK 752 million in Q1 2020. The main causes are -- stemmed from the Cage Based Nordic operations in AKVA group ASA, which is significantly down and also, as Knut mentioned, a slow start in the Land Based segment. I guess from that, we also experienced somewhat lower revenues in Q1 2020 compared to the same quarter last year. In 2019, we also have NOK 29 million revenue from the company Wise that was divested in Q3 2019, which, of course, then we do not have any revenue from in 2020. Moving on to the margins. We ended the quarter with EBITDA of NOK 86 million compared to NOK 97 million in Q1 of 2019 but achieving the same relative margin on 11.4% as first quarter 2019. Out of the NOK 94 million, as mentioned with the divested company Wise, we've included -- that was included, an EBITDA of NOK 4 million in those NOK 97 million. For the period this year, Egersund Net and export has shown improved nominal margins and also relative margins compared to last year. While we, on the Land Based segment, have been hampered by the postponement of 1 delivery project. Moving on then to the Cage Based Technology segment. We start with -- we have an increase in margin in this segment for the quarter compared to last quarter, up to 12.3% compared to 11.1%. For the Nordic region, it is especially the net service coming out of Egersund Net that is contributing very strong, both for the region itself and also for the segment. But for the remaining part of the Nordic region, we have both lower margins -- both lower nominal and relative margins compared to last year. In nominal, quite significant. We also experienced lower activity within the marine service business the first few months this year due to weather conditions. When we move on to the Americas region, overall, there's a slight decrease in the margin for the region versus last year, but Chile is still delivering on same high level as last year. We also, as Knut mentioned, finalized the acquisition of Newfoundland Aqua Services, and they are included, consolidated into the P&L as from March 1 but with insignificant impact as for now. When we come to the Europe and Middle East region, we have experienced a very strong quarter with solid performance from especially the export out of Norway, Scotland and also Turkey, even though they are smaller in nominal amounts. So the activity has been really strong for those 3 countries especially -- or areas. When we move on then to the Land Based, it's already -- some of this will naturally be a bit repetitive, but we did expect a slow start to the quarter due to a new generation of projects started up in this year, but we were also hampered by the fulfillment of one specific project that was delayed but will be picked up. We also strengthened our Land Based deliveries and segment. We also split out a separate company in Chile out of AKVA Chile called Land Based Americas. Over to the Software segment. We have seen that the renewal of the Fishtalk solutions have started to materialize in increased sales, but we -- but the AKVA group Software company did deliver margins lower than anticipated and expected due to high -- too high costs. These costs have been looked into and action has been taken to reduce them immediately. As mentioned several times now, also for 2019, that the Wise company, our software business on Iceland, is included in the figures. So it's not comparing apples-to-apples for the segment. Then over to the detailed P&L, we have a revenue of NOK 752 million, ended on an EBIT of NOK 38 million this year in the first quarter compared to NOK 49 million in first quarter last year. The net profit are after allowing for a tax cost of EUR 10 million ended at NOK 21 million compared to NOK 29 million for the first quarter in 2019. There are no specific items to comment except for that. Then we move on to our financial profile, which remains strong. Knut informed and commented on the actions taken with the outbreak of COVID-19, especially when the cash is king project has been of great importance, of course, for everyone to do such, but we see a strong and solid cash situation at the end of the quarter at NOK 409 million. This is after fully utilizing the NOK 200 million revolving credit facility that we had and have in Danske Bank. We have seen a large increase in working capital coming from what we would consider a normal low level at the end of year 2019, giving us a 15% working capital ratio of the trailing 12 months revenue. We move on to the CapEx for the quarter. We have a capitalized expenditure of NOK 30 million in the quarter, which is 4% of the revenue in the quarter, whereof approximately 60% is intangible -- relates to intangible assets, thereof development of our digital solutions and also the new generation of plastic cages. The net interest-bearing debt for the quarter has increased end of March compared to end of 2019, up to NOK 780 million. And the decrease -- the increase, sorry, is caused by an increase in working capital and also the acquisition of Newfoundland Aqua Services. The net interest-bearing debt to EBITDA ratio is now at 3.0. Equity remains strong with an equity ratio of north of 37% when excluding for the effects of the new lease standard, IFRS 16. The net interest-bearing debt on equity ratio has increased to 0.75. When we come to return on capital employed and also the return on average capital employed, this was significantly impacted by the poor EBIT achievement in Q4 2019. Also, for Q1 2020, the consolidation of Newfoundland Aqua Services gives an impact with a full balance sheet impact with no contribution on the EBIT level. Then moving on to the cash flow statement. Clearly, the main focus here is cash, and we have had a slight decrease compared to year-end of NOK 5 million in cash and cash equivalents and approximately NOK 9 million in decreased cash compared to first quarter last year. When we come to the balance sheet, we've experienced an increase in total assets of approximately NOK 130 million, whereof inventory and the consolidation of NAS being the main cause for the increase. As Knut mentioned, a dividend of NOK 1 per share was paid prior to the main outbreak of COVID-19 in Norway. Yes. And moving on, at last, and as last info on the financials, we have a presentation of the share development and largest shareholders. So then I will hand over to Knut to take us through the outlook for AKVA.

Yes. Can you please go to the outlook slide? All the way, please. Further down. One more. Yes. So the quick summary. The order backlog is still a good one. And we are investing in one new service station to be built in the Northern Norway, [ Karlsøy ], together with our partner, [ Novi ]. The next or new-generation tube net is launched. We see pretty strong interest in the marketplace, and we are now at the stage to really commercialize this important innovation. And we signed a NOK 100 million contract as mentioned. Presence in Eastern Canada important for us because we believe that's a new region for salmon farming, which will grow quite a lot in the next 5, 10 years. Internally, we have also initiated a cost-saving program, where we both look at the external spending but also on personnel to adjust for activity level. And we maintain full focus on our new RAS strategy ongoing. And we are working on several prospects there and full focus on our digitalization strategy as well. So if we leave AKVA for a minute and then we go back to our Q&A, but I just want to end on -- next slide, please. I just want to end with a bit of a more industry perspective before we go back to Q&A. So AKVA is engaged in a special task force nominated by the Norwegian authorities. There are 10 aquaculture companies in Norway, which are there to give advice to the Norwegian authorities. So what's stated here is the input and the position of AKVA, what will be helpful in the months and the years to come to compensate for some of the setback COVID-19 is causing in our industry. So bottom line or to the point, we believe that the Norwegian authorities should focus on strengthening where the Norwegian salmon business and aquaculture business have their natural comparative advantages, and they should do that by stimulating innovation in the means of new licenses. So if you think about it, the real comparative and competitive advantage of the Norwegian salmon farming, as it has been in the last 30, 40 years, that is farming in -- within our fjord systems, alongside the entire coastline. That is the real core of the core in the advantage of the Norwegian salmon farming business. That's the thing which cannot easily be copied. It cannot easily be copied. Only a few regions in the world have the same kind of natural infrastructure with the same kind of seawater temperatures. So that is what needs to be strengthened per AKVA's view. And that's why we give advice to the Norwegian authorities that they should further strengthening all kind of innovation and development to stimulate technology innovations which can strengthen that position. We believe that they should more rapidly and with speed give more attention to this and issue permits for supporting development because that will, at the end of the day, advance Norway's natural advantage and strengthen the position as -- Norway as the locomotive in the global salmon farming sector or industry. And it will also help to promote the focus on sustainable fish farming with new innovative ways of farming and build and operate it. So to be a bit selfish, I will say, we need more innovations than -- as our tube net solution, sorry. That's what we need. And the Norwegian authorities should stimulate this kind of development. So that is our perspective on what can be done here in a more dynamic way in the months and the years to come. So I'd like to end it here. It's time for Q&A. [Operator Instructions] So I now open up for questions. So who wants to go first?

Carl-Emil in Pareto. Can you hear me?

No, it's good. It's good.

Yes. A question on the Cage Based segment and on the margins that you have achieved in Q1. Is it something special with the export to other markets that leads to this high margin? Or is this the margin and activity level as something you think can make above?

Yes. The export business was at a high level and export business -- someone is unmuted and not asking questions. So maybe help me to mute it. Okay. Carl-Emil is asking a question related to the margins in the Cage Based business and also related to export. But what I can say about the export business that it is very much project related. We had quite good invoicing. It was actually, in fact, in these projects to Russia. And you will not see that at the same high level throughout all the quarters because much variations also goes with projects. But with regards to the relatively good margin in the whole segment because for us for more than just the exports as such. So we -- the -- in particular, the -- I guess the net business model was working full flow so that's good to see. We see that more structural rather than the export business, which can vary over some time. So we -- I think it was a good performance and good operational excellence given the activity level we have. So that's my perspective on your question, Carl-Emil.

And in terms of the rest of the Cage Based -- or not the rest, but the more -- the Marine Service segment, when you say that things are a bit more challenging and with lower activity, how do you see this part of your business developing? Is it still a lot of competition here? Or do you see improvement in margins and activity level in the Marine Service segment?

Yes. I think Q1 is fairly seasonal. And this year was also a pretty rough year with regards to weather, was a rather windy first quarter. So that -- the season as such there -- a little bit of weather was pushing down activity, but we expect Q2 and Q3 to be good quarters with regards to this business with the normal activity level and normal market here. So that's our expectation. Anybody else?

Yes. It's [ Trygve Magly ]. Question from my side on the canceled project in China with Nordic Aqua Partners. First question, how can a project that is already in the backlog be canceled? What does it mean contractually? Are you guys receiving penalties for that? Also, what does it mean for your equity participation in the project? So that's my first question. My second question would be on the bank loan, where obviously, another quarter has gone by. We just wanted to get an update on sort of how comfortable do you feel on the backlog with the current sort of margin and profitability outlook and also the risks that you have sort of in the bank loan.

I will appreciate if people are muting if they aren't speaking. It was a little bit noisy. I was -- I think I got clearly your first part of the question, which was about NIP. So I do that first, and then we can go back again. On NAP, we sent the stock notice on December 20 that we took in NAP with NOK 500 million in our order backlog. But we said at that point in time that it was still subject to final financing. And that was -- it was dealt with in the contract as well. And the company NAP, they -- it took some time for them to complete the financial procedure, and then they came to the window of COVID-19. And then they decided the course of some kind of headwind from some investors. They decided to stop it and postpone it. And with regards to our contract, it was always subject to finance, and that's how we also communicated it. So we -- contractually, there is nothing more to talk about as such. But to give you some kind of guidance here, we believe that the company will have their bridge financing so that they will continue activity level in the months to come. That's the signals we are getting. So we expect to do quite a lot of engineering on that project for the coming months and for some parts of the contract. And then it will still depend on the final financing before we step up and do more than engineering. So it's a bit more to it than -- rather than its accounts but just communicate clearly. And given that it is not fully financed, we took it out of the order backlog because we thought that was prudent to do.

And maybe I'll repeat my second question because it was a bit noisy.

Yes, please.

And that was on the backlog in the Land Based business. And in particular, sort of having spent another 3 months in the business on sort of how your comfort when it comes to the margins in that backlog and the risks that you have on board, how that has developed.

Yes. We don't change our guidance from last time. We think we have -- we stripped out everything in Q4, which was related to any issues. We have a new generation of projects there. And we expected a little bit higher activity level in Q1. It was one specific project which -- it took their time to get finally financed and give green light to us for us to start the work. It only happened in April when it should happen in January, likely. So -- but no, that is working with full force. So we will -- you will gradually see a step-up in the quarters to come. Q1 -- second quarter should be a bit higher activity level than Q1. And then Q3 and Q4, you should see still a step-up. And with regards to the margins on the projects in the pipeline, we maintain the guidance we have that over the full life cycle of those projects, you should see a normally good EBIT margin, which should be a double digit, meaning at least 10%. So we maintain that guidance. We -- I also want to say that we are getting a bit more advanced on other growth projects as well. Of course, it will not happen a lot over the next weeks and months, but I hope something can happen before -- at least before the year-end with regards to sizable other growth projects. But of course, we don't know how the financing window will develop during the years. You need to get back to our relative normal again that the projects with somewhat risk like Land Based project can be financed in a good way again. But if that is there, we expect that we can make progress. Anybody else for questions?

One more question here from Carl-Emil from Pareto. In terms of your customers or the salmon farmers, are you seeing any push from them to kind of push you to lower your prices for your products or for the services that you offer to them? Or is it still kind of business as usual and then normal discussions with your clients?

For time being, I will say it's business as usual with regards to your question, even though we see more unexpected behavior. And you see -- I will give you one example that -- with one customer -- it was not in Norway. We got indication or they wanted to place an order of a relatively sizable amount. And just 1 week later, they changed it to half. So it's much more unpredictable, the order situation, than it used to be. We see some companies are more prudent and conservative than others with regards to their CapEx spending. So that's why we have -- we are very alert on the order situation. But so far, so good. Our order backlog is still reasonable. And we just signed a very nice barge contract in Norway. It's below the level we are normally flagging, but it was NOK 31 million earlier this week. So -- and there are a lot -- still a lot of requests for new orders. So -- but more variations than normal, I would say. But so far, this -- with regards to pricing and with regards to behavior, I think things are very much normal.

And then 2 short questions on cash flow lately and working capital going forward. Do you see any big fluctuations there? Or should it be at the levels it is at the moment and CapEx?

We are not entirely through with the working capital. We have initiated several restructuring projects to bring down anything from stock levels. We are watching receivables much more closely than before. So we have programs in place to, over some time, structurally bring down the working capital level. So that's what we are working for. That's what we are aiming for. CapEx level, we will be very disciplined on CapEx this year as a general statement. All right. Anybody else? All right. If no other questions -- last chance for anybody. Okay. Okay. If no other questions, thank you very much for attending. Then I'd like to close this virtual meeting. I hope it was useful in a different format than before. So we will find out how to go about for the future. So -- but thank you very much for participating. Have a nice weekend.