AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and very much welcome to the first half year presentation for AKVA group. I'd like to go straight to the headlines. So starting with the order intake development. We had an order intake of NOK 994 million for the first -- for the second quarter. And that is up 31% year-on-year. And I have to start with this, I'm very pleased with that number given all the uncertainty and the COVID-19 situation. Furthermore, we had NOK 100 million Tubenet contract secured. And that is a very strategic, important contract for us. It is based on a patented concept, and it gives a lot of potential and opportunities into 2021. I'll come back to that a little bit later. The main increase in the order intake is related to Nordic and to Land Based. In the last 12 months, order intake of NOK 3.25 billion. So that's pretty acceptable. Revenue development, NOK 862 million for the quarter, up 8%. And we have a -- see a record high revenue from America in Q2 with positive development in Chile and North America. We have increased revenue in Cage Based Nordic versus the second quarter of 2019. On the flip side, the other side, we have a low revenue in the Land Based. And that is due to early phasing of new generation projects and delayed projects. I have to say, we had a severe COVID impact for Land Based segment in the second quarter. I will give some more details later on. EBITDA development, NOK 93 million for the quarter, which was down 8% year-on-year. Europe, Middle East have an improved EBITDA compared to last year. And also Egersund Net companies with solid and improved margins compared to the same period of last year. And then a little bit more specifics to the Land Based for this -- the Group Controller will give a more detailed breakdown in the financial details. But in general, the situation where in Q1, before COVID hit, we were about to start several new projects. And what happened in practice when you're on that situation is that you have to ramp up your organization, you have to staff up. And that was the situation into the second quarter. Then due to the COVID-19, we got 2 cancellations of 2 large projects, and we got a couple of postponements on already contracted projects. And that is just the situation. So at the one hand, we expect very high activity level. You staff up for that. You build organizational capabilities and capacity. And then you see almost like a full stop overnight. So we unfortunately had to make adjustments. So we had to lay off the 25 people within the segment, the majority in Chile because we staffed a lot of project resources for our project there. So that was the situation, difficult quarter. But now it's done in the second quarter. We have a rather controlled situation going forward. But the Group Controller will give some more details on that one. This is ending up in a pretty high order backlog of NOK 1.8 billion, which is up 13% year-on-year. You see strong momentum for Egersund Net. We see order backlog in Americas high. And we see increased backlog for the Land Based segment. And the tubenet sales contract in Norway, as mentioned, is also certainly included in the backlog. So overall, I will say a good situation and gives some comfort for the second half of the year. Summing up the last 4 years for the first half year-on-year comparison. So we see a relatively positive trend line for revenue and EBITDA. With regards to our presence, what took place in the first half was our new company acquired the Newfoundland, Newfoundland Aquaculture Services. And that is kind of promising. We see potential from that area, Newfoundland, because the 3 big players are investing there like [ Movie ], Cooke and [ Greek ]. And we have also hired a very senior business executive, Chris Beattie, with more than 20 years of experience within the aquaculture industry, to lead and provide leadership on our North American business. With regards to the revenue, you see that basically, the big change here is that quite some good step-up in Americas and Europe, Middle East. And if you compare year-on-year, you go from a 24% this year to 30%. And in absolute numbers, it's also up. With regards to OpEx based revenue, it's relatively, year-on-year, the same number. You can see the number -- total number going down a little bit. But you should be aware that in Q2 '19, it sits in with still NOK 23 million from Wise. So if you eliminate for that, it's a bit of a positive trend line there on the absolute number. And I have to say that the -- this area of our business, the service segment, was somewhat affected by COVID-19 because in the service business, you also have quite a number of service technicians. We need to send them physically to the site. And it was a lot of travel restrictions in the second quarter, some -- quite some headwind here, even though the numbers are not too bad, but we didn't have the best capacity utilization due to the fact that we could not send our service people around. And then on revenue on product group, what is -- on product group, what is changing the most there is that Cage Based is up with NOK 100 million. And if you look on the right-hand side, on the species, you see a positive trend on other species and salmon, which is also kind of good for the robustness of the business. So this is ending up with some operational highlights like this one, talking first about the Tubenet contract signed in April. Deliveries started in Q2. And all the deliveries here are to compete -- completed in 2020. We did see high activity within Egersund Net and all the related business there. And the Cage Based business in Chile with also high activity level despite some uncertainty there regarding the COVID-19 situation. And these days in Chile is not easy because you have practically a lockdown in Chile. So it's harder to operate, but still our business is seen as a critical business for country and society. So we have close to our normal operation, I would say. So we still expect a relatively normalized business picture from Chile in the months to come. But for the total society, it's a big burden there going on for time being, particularly in the Puerto Montt area. Export out of Norway with solid order intake and Land Based, as already mentioned, severely impacted by the COVID-19 crisis and the 2 large deliveries canceled in April. And then finally, we exercised an option we had to go to 100% of the shares in the company Sperre AS. And that was an investment of approx NOK 70 million, 7-0. Then moving over to the strategy or the strategic agenda of AKVA group. We have told you earlier that in our strategy, and we are still busy with that because we had to stop all the work there for some months because we had to ask all our people to have a good eye on the ball. It was not time to talk about the long-term future for a few months. It was time to concentrate on day-to-day cash flow and day-to-day deliveries and security of employees at [ the AKVA group ]. So we just stopped it for some months. It's restarted now and will be completed later this fall. But content wise, there are 4 building blocks in our strategy or strategic agenda. And it's about Land Based, within Land Based, there is a two-leg system. It's about on-growing and it's about post-smolt. I have 1 specific slide on the on-growing in a minute. So I'll talk a little bit more about that. It's also about stepping up the innovation agenda, the R&D agenda of AKVA. Also the R&D spend will be stepped up. And it's about creating more Tubenets. Tubenet is a very promising product, a patented product. It took 6, 7 years of development to come to the commercialized solution. And I like to see more Tubenets in different fashions in the future. And that's why we have to step up the innovation agenda. And the same with our digital agenda, we have 1 very promising product there, which is called Observe. We are working together with a start-up company out of London. And Observe can replace, to quite extent, the role of the fish farm when it comes to feeding. So it's based on AI technology, artificial intelligence. It's a self-learning system. And we have seen in practical operation that this can improve the KPIs, FCR at [ Sicra ]. So it's about automating the feeding operation. So we will do more there in the months to come. And then the fourth dimension, the fourth platform is more internal, but it's about learning and development. I think it's very important that we are a good learning organization. We have good people, but it's also very, very, very important to make sure that everybody is very much updated when it comes to capabilities and competencies at all time. So we will conclude this process by end of October, and then we want to share it with you. End of November, we will invite you to our Capital Market Day. Hopefully, it will be a physical one, in person, to one of our sites. But let's see how -- where we are in November when it comes to the COVID situation. If not, we will need to do a virtual meeting. But I hope I can invite you to one of our sites end of November to host a full Day Capital Market Day, so we can update you on the outcome of our strategy process. And I hope that will be exciting. And then just a few comments on the more exciting things we are busy with. Back to the Tubenet, as mentioned already, a patented concept for improved fish welfare. So basically, what the concept is about is to bring the fish below the surface. You see in the illustration to the right here that the idea is to bring the fish, let's say, 15 meters below the surface and then below what is the normal sea lice belt. And then the fish has this snorkel surrounded with a scoop to go up and snap air. So -- and -- so that's basically the concept. It's about underwater feeding. So you bring the fish down, you keep it there, below the roof 15 meters below. And the fish has access in this corridor, the snorkel, to get air. And we are now installing several sites with [ Movie ]. And this is so far working well. The deliveries are ongoing and per plan. It will be very exciting later this fall to hear the feedback from field because there are 2 things to look at here. Of course, it is more handling and more burdensome for the fish farmer to operate this system compared with a normal site. So it takes more handling, more resources. But the benefit should then be, of course, much greater, and the benefit should be in best of fish life and measured by much lower sea lice level and less sea lice treatments. So -- and I expect and I'm really hopeful that this is going to work very well in practical operation. And if that is the case, 2021 could be very, very promising for this product category because then I hope we will be busy. Then on the Land Based activity, the situation here, I'm not -- sorry, talking about on-growing large fish, sorry. And we are busy, in particular, with 2 customers. We have a pipeline of several customers, certainly, but 2 of them are rather concrete. One is AquaCon, which is a Norwegian-based company but with the ambition to put in place a full grow-out facility in Maryland in the U.S. with a total capacity of 45,000 tonnes. First phase will be of 15,000 tonnes. There, the situation is the following. This company, they have secured their own bridge financing, which should be sufficient for quite some months of project progressing, including engineering with us. We are part of that bridge financing with NOK 5.5 million. We have signed a complete term sheet agreement with them for the 15,000 tonnes. But we have a legal binding engineering contract, which is covering the next 6 months. So we are already doing real engineering in that project in a stand-alone legal contract. And then there is a term sheet for the whole lot, the 15,000 tonnes. So that's the situation there. What 15,000 tonne is for us in terms of turnaround contract size is around NOK 1.3 billion, but still, once again, subject to financing. And basically the same situation with this project in China. That's about a full growth facility in Ningbo in China, Ningbo's right outside Shanghai. And there, the total capacity of close to 10,000 tonnes and half of it in the first phase. Also, the other situation is that this company has secured bridge financing, at least for the rest of this year. And we are also there participating with EUR 0.65 million. Also there, there's a signed engineering contract, meaning that we are doing quite some work for this project. And the main contract is also signed, but subject to financing, and that is a contract of NOK 500 million. So this fall will be exciting also with regards to those 2 projects and to see if the projects can secure project financing. And then we will be very busy next year, if that is the situation. Then on COVID-19, well, difficult and very challenging times for everybody, also within our industry. But talking about AKVA, if I should label it, I would say we are moderately impacted, at least. If you look around and see to look to other industries, I would say we are moderately impacted for AKVA Group as a whole, but more severely impacted on Land Based. But I believe we are through the tunnel on Land Based that we will now see a step-up. And Pierre will provide a little bit guidance by the numbers for the second half. Since so much are happening there, we will give a little bit update. But in general, with regards to COVID-19, of course, our first priority has been always in the last months to secure safety and health for our employees. We have also been very, very focused. I said we needed to have the eye on the ball. So we have been very focused on managing day-to-day the liquidity of the company. Actually, we have been doing very well. We have actually a better financial situation today in terms of free cash available rather than just before COVID-19. So that has been working very well. We have managed a internal cash is king project in a very thorough way. Also, with regards to security of supply, which is very important, we have a lot of commitments and agreements with our customers. We need to control our supply chain and our security of supply. And I have to say that very few issues there. We have been operating the company in a good way. So I would say, at least if I take high ground, all the contracts are being on -- there are very, very few deviations. And then finally, full focus on the order intake because this is the time to secure activity and work for the second half and into next year, and that went reasonably well in first half as well. So that is kind of comforting. So I think we should now go to the more details with regards to the financials, and I invite the Group Controller to do that part of the presentation, and then I come back with a summary, and then go to the Q&A. But please, Pierre.

Thank you, Knut. We'll move straight on to the financial highlights, and for the -- at the end of second quarter, we've got last 12 months order intake of just above NOK 3.25 billion, that's up from just above NOK 3 billion end of Q1. The last 12 months of revenue is north of NOK 3 billion. And as Knut has mentioned, the activity in Chile has been very high with an increase year-on-year Q2 of 43% in the revenue. We have also seen an increase in Egersund Net with 12% year-on-year on revenue. But on the flip side, Land Based is down with 26% on the revenue. Wise, that was included last year, sold in Q3 2019, contributed with NOK 23 million in revenue in Q2 2019. The EBITDA ended on NOK 93 million in Q2, which we see as a stable margin, given the uncertainty that we went into and have had in the quarter with the COVID-19 situation. This is, of course, a bit mixed picture within our segments, whereas the Cage Based segment delivered strong margins overall in Q2, up from 12.8% EBITDA in Q2 2019 to 14.3% Q2 2020. We have seen positive development in our margins in the Marine Service business in Q2 compared to last year and also within -- from the technology sales and deliveries out of the region. And again, we see Egersund Net contributing very solidly as strong in the quarter with an EBITDA margin increase of 34% compared to what was a very strong Q2 in 2019. Moving on to the Americas region. Chile, high activity, somewhat down on the margins compared to last year. But we have also had a step-up in North America, which came back with stronger margin after a very slow first half -- first quarter in the year. Also the business in Newfoundland is picking up, and we've seen higher activity since the acquisition in February this year. For the Europe and Middle East region, it's a bit of a mixed picture where we have seen a cancellation of orders in the Mediterranean, both in Q1, Q2, but also gaining new contracts. The export out of Norway has had high activity throughout Q2 on back of a very strong Q1, but margins are somewhat down compared to the first quarter this year. Our operations in Turkey has had throughout the year, really, and also in Q2, strong margins and delivering really good. Then over to the Land Based segment. This business has experienced an extraordinary quarter, as we'd mentioned or Knut has mentioned already. There are several incidents impacting the low activity level and negative margins. First, the COVID-19 situation, as mentioned several times, with the cancellation of orders and also postponement leaving us with much lower activity than expected before the outbreak. This has also caused a cost with the downsizing of the organization. As Knut mentioned, we did ramp up to meet our obligation and deliveries coming and with some of the canceled orders and also postponed, especially Chile was hit hard. And this downsizing of the 25 layoff of people in Chile mostly and some in Denmark has come with a cost. We also have had a closing of old projects that came with an extra cost, a bit higher than expectations, and also the new generation of projects coming in, which do not lead to high revenue and high numbers in our books in the first -- early phase of the deliveries as this will come later on in the project lifespan. But we have a very strong order backlog of NOK 775 million for the Land Based segment, which is 43% of our total order backlog. And on the back of this and things we see now, our expectations are that both for Q1 -- no, Q3, sorry, and Q4 this year, we expect revenue north of NOK 100 million that should generate a positive EBIT for second half. The Software business has shown improved margin if we compare apples-to-apples year-on-year as Wise in Iceland was in there in 2019, Q2 2019, and they have also shown improved margins from Q1 this year to Q2. Even though this segment now is in -- revenue-wise relatively low in the total of AKVA group, our software and digital solutions become really more and more important part of the overall total product offerings that AKVA Group see in the future and have today. On the detailed P&L, I will comment on the first half where we're down from NOK 1.65 billion in revenue last year to just above NOK 1.6 billion. We have an EBIT of NOK 80 million first half this year compared to NOK 102 million in 2019. And the profit -- net profit has come down from NOK 60 million first half 2019 to NOK 48 million in first half 2020. We have, on the back of the initiated programs when the main COVID-19 outbreak started in Norway, seen an effect of the work done and the effort put in, in the total organization with an increased cash position from NOK 409 million end of Q1 to NOK 516 million in available cash for the group. And the group financial profile remains strong. Capital expenditures is relatively stable. And from Q1 to Q2, most of the investments within the ordinary in capital expenditures in Q2 is related to our service business, especially in Norway, Chile and North America. We have had a decrease in the net interest-bearing debt to financialists -- to financial institutions from Q1 to Q2 of NOK 112 million. The net debt of the 12 months EBITDA ratio is at 3.0. We have, throughout the quarter, come to agreement with Danske Bank on an amended covenant and agreement as IFRS 16, the new lease liability, is now fully reflected in the agreement. Meaning that the lease liability that came in as a new liability into our balance as of 1st of January 2019 now is to be part of the net interest-bearing debt, and the covenant ratio is to be increased from 3.0 to 4.25. So the threshold top ratio is 4.25. Equity of still just north of NOK 1 billion and 35.9% of the total assets when we exclude the IFRS 16 impact on the balance. Our gearing is down from 0.75 end of Q1 2020 to 0.65 at the end of second quarter this year. The return on capital employed and return on average capital employed was heavily impacted, as we can see, with the loss in fourth quarter 2019. When we normalized this for the exceptional items in that quarter, second quarter would have been for both of them approximately 9%, and we have a short-term target of 10% on the return on capital employed. Regarding the long-term target, we would like to communicate that at the Capital Markets Day as Knut has invited you to participate in. Cash flow is strong on operation, exceptionally strong really. And we're really satisfied, and this has to do again with the efforts and the focus we put in on the day-to-day business, leaving us with a cash of NOK 215 million. The balance sheet, not a lot of change from year-on-year, up NOK 250 million compared to year-end. And except for that, nothing special to report on. When it comes to the dividend, we did pay out a dividend of NOK 1 per share on March 3, just before the main outbreak of COVID-19 in Norway. Due to the uncertainty and the situation that the pandemic brings, it is decided not to pay a dividend in the second half of 2020. On the financial side, this is the last slide showing the largest shareholders and share development. So with that, I'd like to pass the word on back to Knut on the outlook part.

Thank you very much, Pierre. And let's go straight to the summary to the outlook. Here we are. First of all, order backlog remains high. With regards to some of our activities, we are busy with our service station in the North, in Carlson, and plans for additional service stations are underway. That's a part of our business and business model, which is working very well for us, and we want to invest more there in the future. As already mentioned, we have signed a term sheet with the company AquaCon with a potential of $130 million for a new Land Based facility in the U.S. And we have also been talking with NAP of NOK 500 million. Tubenet is a very promising product for us. It's now launched. We are busy with the deliveries. And it will be exciting to see what 2021 will bring with regards to this product. We have done the integration of our newly acquired, a small company in Newfoundland Aqua Services, and that is going as per plan. And also, we maintain full focus on our plans, our strategy for full grow of RAS facilities. We are actually very busy with building organizational capabilities for that part of our business as we speak. And our digitalization strategy is also progressing well these days. COVID-19 is, of course, impacting the global economy severely. And if we translate it into our sector, it's very much about monitoring the salmon price because the salmon price is -- we are highly dependent and sensitive with regards to the salmon price. 70% of our turnover is normally linked to our customer, the fish farmers' CapEx. And they need some confidence regarding the salmon price to stick to their CapEx budgets. So that's the uncertainty in our business going forward, the salmon price, if I like to condense it. So that's the thing to watch in order to give some prediction for what COVID will impact our company and our industry. Finally, finance profile remains strong, and that's a good place to be these days. So I like to end this here. We are now going to go straight to Q&A. We have a good participation here in Oslo. So I propose that we start with the people in the audience. And then people participating in through the webcast can also post their questions. There are some instructions there on the web page how to do that. So if you are listening in, you can post your questions, and your questions will be read here by the moderator.

But let's start within the audience. Who wants to go first? Carl-Emil, please?

Do I need a microphone? Or...

Yes. Oh, I thought so.

Carl-Emil for Pareto. Can you say something more on what's driving the very strong margin in the Cage Based technology segment? And second question regarding Land Based. Can you say something here, what's driving the higher revenues in the second half of the year this year? And something about order intake that seemed to be quite strong despite that you have not reported any large projects?

What is driving Cage Based is, first of all, we had overall a good activity level. So when you have a good activity level, high turnover on basically the same cost base, that is in itself pretty helpful. Secondly, we have made some progress with regards to project management. We have had quite some mistakes in the last year in parts of our project execution. We see -- I'm not saying it's entirely solved, but we see a bit less of them now. So we are more closer to a solid margin when you close a project rather than something else. And that was not the situation typically a year ago. So when we close, for instance, a botched project, and we have quite some of them, we see today that we typically enjoy the solid margin because we have delivered what we should with the right time and right quality without too many issues and hiccups. So a combination of all those factors are driving profitability. So starting with good activity level and then better operational excellence. So we are more closer to what the potential of the business should look like in that segment. But I'm not saying we are at the end state because I'm still very hopeful that concepts and products like Tubenet can give us a step-up in the years to come and other things in our pipeline.

Just a quick follow-up on that before the Land Based there. Is the activity level driven by you taking market share? Or is it, in general, more activity in the salmon farming business?

I cannot tell you. There is not enough visibility in this sector to be very exact about the market share. I know that in parts of our business, we were -- we had pretty good activity in the second quarter because we had all our -- we had very good control of our security -- sorry, supply chain, security of supply, I should say. And I've probably heard some rumors on The Street that, that was not the situation with everybody else. So maybe we got a little bit boost from that one. But our market share, it's so fragmented product portfolio and the depth of -- and with -- and the best depth of this business is a bit hard to comment on. I came from a feed there. It was pretty simple. But with regards to Land Based, first part of your question, if I remember it correctly, was about a increased activity for the second half. And we -- there have been a couple of projects, large post-smolt project, which were expected to start into second quarter or even back in March, which has been put a bit on hold due to some uncertainty from -- at Board level from the customers. At least we see 2 of them now being fully released and they go full steam. So that did not generate too much turnover in the second quarter, but that will generate turnover in the third and the fourth quarters. Also, those 2 engineering contracts with both AquaCon and NAP, the magnitude of those kind of activities could be NOK 10 million each, but you didn't see any of that in the second quarter. And that will be fully delivered on in the second half. So the sum of those factors will give -- should give a turnaround per quarter north of the NOK 100 million. And that should certainly not be the end station, we should be more at NOK 150 million level to generate good business. Given the kind of fixed cost base we have, NOK 100 million is still not a good level. It's a good level to achieve profit, but it's not a good level to be acceptable, profitable than when we talk about NOK 150 million and more for a quarter. And that's the target into next year, which I think is doable. But I now I'm almost going into the trap. I'm not going to give guidance for next year.

And just a short comment on that order intake in Land Based this quarter of...

Yes. We materialized...

It's a sum of...

Okay. Okay. It's a sum of the parts. Okay. Who's next? Yes?

You mentioned the salmon price in a couple of Land Based projects that have been postponed. But could you apart from that say a little bit about how your core salmon farming customers think of CapEx in this time of COVID? Are there any change in priorities in order to preserve cash during uncertain times? Or a change in focus as you set your own company from sort of strategic long-term to just day-to-day operations?

I would say that, to talk in general, we see some farmers behaving a bit more cautious than, let's say, a year ago. But we don't see dramatic cutbacks from some of the -- typically, the largest -- some of the larger ones are more cautious than the smaller ones, the small and mediums one seems to be more confident, believe in the future. And maybe they have less obligations on dividend, whatever, but that's a speculation. But in general, they behave a bit more cautious without having -- we don't see dramatic cutbacks by anybody. And we don't see -- we have had a few cancellations, but really not too many. And I'm now talking outside the 2 Land Based, large Land Based contracts. On smaller contracts, we have seen a couple of cancellations, but really not too many. And we see -- yes, the order intake is a normal one, even a good one in the second quarter. And nothing changed during the summer either because we just had a status on that one. So I would say a bit more cautious but generally, people are confident. But that could change rapidly if the salmon price hits. If it is sold for NOK 40 for some weeks in a row, then my imagination is that they can change behavior. So I was very happy to see 1 week ago that after some weeks of trailing at NOK 40 that you see a step-up again. So from -- I think that is very healthy and also helpful. So it's a bit hard to be more concrete on your question. But for the most, it is business as usual. Okay. We have another one? Is there any questions from the webcast, from the call?

No.

Nothing? Okay. No more questions? Okay. If no more questions, I say thank you very much. It was good to see people again and be in front of people. So that was very much appreciated. So thanks for coming over and showing interest and see you again in November. Thank you very much.