AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and very much welcome to this webcasted Q3 presentation of AKVA Group. We are living in very turbulent times given the COVID-19 situation. However, as AKVA Group, we will still perform our traditional Q3 update based on our normal agenda. Highlights, I will do first, followed by financial performance with our new CFO, Ronny Meinkøhn. I will do the outlook. And then at the end of the day, we will have the Q&A. You may post your questions during the presentation in writing to our moderator or you can post them during the interactive Q&A session. Let's start with the highlights and the order intake. We had order intake of NOK 647 million for the quarter, which is down 17% versus the same quarter a year ago. We see solid increase in Cage Based Nordic business in Norway compared to the last quarter of '19 -- the same quarter of '19. And then within Cage Based International, Chile and Canada in particular, they experienced a lower order intake compared to both Q2 2020 and also Q3 '19. There is a specific there, a swing factor, which is a barge contract in Chile of NOK 110 million, which came in last year, Q3, and a similar swing factor for Canada of NOK 30 million, which came in Q3, and that did not repeat itself this year. So that's NOK 140 million swing factor. In Land Based, we have some positive development with a new engineering contract for a full grow-out facility, and that's representing an order intake up 43% compared with Q3 2019. We have reported a new engineering contract in the Middle East, and also yesterday, we announced another engineering contract with the Norwegian company Ecofisk. And the last 12 months is altogether order intake of NOK 3.175 billion. If you look at the revenue development, first of all, we had a turnover for the quarter of NOK 806 million, which is up 4% versus the same quarter a year ago. And Cage Based Nordic had a revenue increase of 6% versus same quarter a year ago, and that's on a like-for-like basis, excluding Wise. The revenue remained high in Cage Based business in Americas with a 32% increase compared to Q3 2019 and Land Based with increase in revenue both versus second quarter this year and Q3 2019. Then importantly, the EBITDA development. We came in with an EBITDA of NOK 105 million for the quarter. And if you do a like-for-like comparison, we booked sales profit -- book profit of NOK 18 million a year ago for the sale of Wise. So if you do a like-for-like comparison, we are up 8% quarter-on-quarter on EBITDA. Positive drivers are being the Cage Based Nordic, including Egersund Net, with a very solid contribution and increased EBITDA with 35% versus Q3 2019. Within Cage Based International, also Americas delivered 28% increased EBITDA compared with a year ago. So I can say, overall, Cage Based is performing well. Our Land Based segment below last year with EBITDA of NOK 0.2 million for the quarter. It is representing a positive development since the second quarter this year. However, let's be honest, still not at a good level. We have decided to step up in Land Based. We have changed leadership, and we will have a number of measures in place in order to improve operational excellence within that segment. And Ronny will explain some of the more specifics with regards to the financials of the quarter. Next one, we have a reasonable high order backlog, order backlog at end of Q3 2020 of NOK 1.6 billion, which is 7% higher versus a year ago. We have strong momentum for the Cage Based Nordic business with 17% increase compared to end of Q3 '19. And within Cage Based International, Export and the Mediterranean had a solid increase compared to end of quarter 3 '19. Order backlog for Land Based is 46% of the total backlog. So overall, we can say a reasonable healthy order backlog. Revenue, and this is about year-to-date figures up -- and including Q3, NOK 2.4 billion turnover, which is same level as a year ago. And EBITDA is, on a like-for-like basis, 3% down versus a year ago. And please bear in mind, we had a rather soft Q1, soft start of this year, and then followed by a very reasonable Q2 and Q3. With regards to our, let's say, asset footprint, our presence, there are no big changes to where we are in the last quarter. So altogether, we are present in 10 countries. And revenue with regards to geographical regions. You can see at the right-hand side that we are -- 68% of our turnover sits with Nordics, 24% with Americas and 8% with Mediterranean. And we also measure our development in OpEx-based revenue. We see a relatively stable level at around 30%, Egersund Net contributing NOK 89 million in the quarter. And it's also important to take notice that we are increasing our activity and margins in the Chilean service business. That's about net cleaning business, and that is making us more robust and resilient in Chile. AKVA Group Software revenue on par with revenue Q3 last year, and also the Norwegian marine service business in high season, contributing positively. If you break down the same turnover into product groups, you see NOK 473 million in Cage Based turnaround, NOK 221 million in services and NOK 93 million in Land Based. To the right, we can be clear about it. For the time being, we are very much a salmon technology company. 92% of our turnover is within the salmon business. That brings me to the operational highlights for Q3. First of all, we did -- the delivery of the NOK 100 million Tubenet contract with Mowi is very much completed in the third quarter; Cage Based Nordic business with solid performance in the quarter; and also, the Cage Based business in Chile continue with high activity despite the uncertainty of the COVID-19 outbreak. And please bear in mind that Chile is very much affected by COVID-19, and the country's practically in a lockdown situation. Also, increased activity on design and engineering for full grow-out RAS facilities within the Land Based segment and already mentioned, we got 2 new contracts very recently. And our financial position remains strong. And also, please take notice that we are going to conduct a strategic review of our AKVA Marine Services business. And that business, AKVA Marine Services, is our service provider in the region south in Norway. We have 6 diving vessels and 8 service vessels in that company, annual turnover of around NOK 120 million and very much profitable. And the message here is that we will do an evaluation of -- and review of the strategy within this area going forward. And that brings me very much to the group strategy. We have informed you earlier that we are busy internally with conducting and working out our strategy. Good development there. We had our Board meeting yesterday, and we got a full support from our Board with regards to our new growth strategy. So that's good news for us. And it's very much based on 4 strategic themes, one being Land Based where we have a [ 2-leg ] system: on-growing and post-smolt. It's about stepping up and really ramping up our innovation with a lot of focus on fish health concepts. It's about further develop our digital agenda and also the internal focus ongoing to first-class learning and development. So we will update the market, analysts, investors and stakeholders in our Capital Market Day, which is to be webcasted on November 24. A couple of updates with regards to our strategic agenda, innovation. The Tubenet contract -- or the Tubenet product, I should say, is a patented concept for improved fish welfare. It is proven to reduce lice infestation with 80%, with the potential to reduce the lice presence to almost 0 if the tube is deep enough. So as already mentioned, we completed the Mowi contract and all the deliveries there during Q3. So the next chapter there is to follow fish and fish performance because now there is a lot of fish in the Tubenet. So that's going to be interesting to learn more about that in the months to come, and we are still very hopeful for increased activity and sales there into 2021. A couple of specifics with regards to our grow-out customers. AquaCon is a Norwegian-based company with a full grow-out -- plans for a full grow-out facility in Maryland in the U.S. They're planning total capacity of 45,000 tonnes, first phase of 15,000 tonnes. Their bridge financing is in place. So a lot of work is happening. For instance, the engineering contract between us and AquaCon, we are very busy. A number of engineers are working actively day by day on that contract as we speak, and that is representing a potential contract for AKVA Group of NOK 1.3 billion, certainly subject to financing. And there, the message -- or the information we have from the company is that they are going to be busy in the next 1 to 2 months in completing their financing. The other one is Nordic Aqua Partners. It's a company with plants in Ningbo outside Shanghai in China. That's about total capacity of 9,600 tonnes, where the first phase will be approximately 5,000 tonnes. Also, there are bridge financing in place where also AKVA Group is participating in the equity. And also there, an engineering contract is signed with AKVA Group and detailed design is going on and we are making good progress there as we speak. Also there, potential contract for AKVA Group of NOK 500 million for the first phase. But also, they are subject to financing and there, the status is that the company is very busy now in the next few weeks to complete their financing. Two other customers we are working with, a little bit behind the 2 other ones but still making very good progress. And also here, we have signed engineering contracts. They are typically EUR 1 million each of those engineering contracts. One is Vikings Investment Holding in the Middle East. And also announced yesterday, we have signed an engineering contract with the company Ecofisk in Norway. They are located in Tysvær, Rogaland in Norway, and Phase 1 there is going to be 5,000 tonnes. They have already got hold of a license to produce 40,000 tonnes, so pretty advanced there. And they have very recently concluded their bridge financing, where also AKVA Group is participating. And that brings me very much to the end of my part. The COVID-19 situation, if you look back for Q3, was relatively limited for AKVA Group. We had pretty normal operations in place, and we have a long list of actions in place. But like everybody else and all companies these days, we are certainly not immune. Winter might be challenging, in particular, for our operations. We have service people. They need to travel to visit customers. And as we can observe, a lot of lockdowns, a lot of restrictions these days. So we are watching this on a daily basis. Certainly, no need to say, we are putting safety and health of our employees as #1. But within those constraints, we are trying to operate the company as good as we can. And so far, so good, but winter is ahead of us. So by that, I will hand over to my colleague, our new CFO, Ronny Meinkøhn, which will take you through the details on the financials.

Thank you, Knut. Good morning to everyone. I'm pleased to take you through more details regarding the financial performance and the development in the financial position of AKVA Group during this third quarter. We will start with financials on group level. The circumstances taken into account with COVID-19, we have had an acceptable order intake of close to NOK 3.2 billion the last 12 months and a corresponding revenue of close to NOK 3.1 billion. Adjusted for the effect of Wise in 2019, we have had an increase in Q3 with regards to revenue of 7%. We have experienced an increase within Cage Based business of a total 9%, with 6% in our Cage Based Nordic business and 16% in our International Cage Based business. It was, of course, driven by a solid growth within Americas of 32% compared to the same period last year. And as Knut mentioned, the activity within Land Based increased slightly with 4% compared to the same period last year. On group level, we have an EBITDA of NOK 105 million in Q3 compared to NOK 115 million last year. And as Knut mentioned, adjusted for the gain on this Wise transaction, the Q3 EBITDA this year is an increase by 8% compared to the same period last year. And we are, of course, very pleased with the financial performance within our Cage Based business. In total, this segment improved the EBITDA by 25% this year compared to the third quarter in 2019. The Land Based segment has a slightly positive EBITDA of NOK 0.2 million in the quarter. We move on to the Cage Based Technology and focus on the Nordic region. As mentioned, we have had an increase of 6% and a strong increase in EBITDA of 35% in the quarter compared to the same period last year. And we have a strong contribution from Egersund that improved their EBITDA of 46% compared to 2019. Also, several barge contracts were awarded during this third quarter, and the total order backlog was increased by 17% compared to third quarter 2019. Within the International Cage Based business, the financial performance varies between the different regions. The revenue within the region of America increased by 32% in Q3 this year compared to last year, and both Chile and Canada experienced a strong growth in revenue. EBITDA for the region improved by [ 28% ] compared to the same period last year. Within the Export and Mediterranean business, we had a reduced revenue of 17% compared to last year. However, the EBITDA increased, and we had a very positive development in our business in Turkey. Within our Land Based segment, we have a strong order backlog, close to NOK 750 million at the end of the quarter. And as mentioned, we have increased activity both compared to the second quarter and the third quarter last year. The increase in activity compared to the second quarter this year is 37% and is partly related to increased activity on projects that started up during the first half year and partly related to start-up of several engineering contracts within the on-growing business. The EBITDA is influenced negatively by recruitment costs, training costs and unproductive time related to new employees during the third quarter, and we expect that the new employees will be fully utilized during the fourth quarter this year. Within Software business, adjusted for the effect of Wise in 2019, the revenue is at the same level this quarter as last year. We still see high margins within this business area, and above 30% in this third quarter of 2020. If we look into the year-to-date figures, as Knut mentioned, total revenue is at par level compared to last year, and we see a reduction in EBIT of NOK 30 million from NOK 168 million last year to NOK 138 million this year. Adjusted for this gain on the Wise transaction, the reduction is NOK 12 million. Our group financial profile remains strong. At the end of Q3, available cash, including unused credit facilities, was NOK 562 million, an improvement of NOK 45 million compared to Q2 2020. The net working capital ended at 10.3% at the end of the third quarter, a slight increase compared to Q2 but a significant improvement compared to last year. And we see clearly that our "cash is king" project has had a good effect on net working capital, and we will, of course, continue with this high focus going forward. CapEx. No significant CapEx items during the quarter and are relatively stable quarter-by-quarter level so far in 2020. Total CapEx of NOK 28 million in the third quarter and NOK 94 million year-to-date. Net interest-bearing debt-to-EBITDA ratio was reduced from 3.0 in Q2 2020 to 2.9 in -- at the end of Q3 2020. And we see a reduction in net interest-bearing debt of NOK 51 million in the quarter if we exclude the IFRS liability. And total interest-bearing debt at the end of the quarter was just about NOK 1 billion. Looking at the equity. It's increased by NOK 42 million during the quarter, and excluding the IFRS liability, the equity ratio was 37%. If you include the IFRS liability, it's down to 32.5%. Our gearing ratio was reduced during the quarter from 0.65 in Q2 to 0.57 in Q3. We still see that the one-offs incurred in Q4 2019 has a significant impact on our return on average capital employed. If we adjust for the one-offs in 2019, the adjusted return on average capital employed is 8.3%. And we will, as also communicated during the second quarter presentation, give an update in our Capital Market Day with regards to our targets on return on capital employed. So please join the webcast, November 24. If we move on to our cash flow statement, we have an operational cash flow of NOK 48.9 million in the quarter. It's, of course, negatively impacted by the increase from 9% to 10.3% in our net working capital. We have a positive investment activities of NOK 8.2 million, and it's positively affected by the sale of one barge that has been rented out for some time to one of our clients. Total cash at the end of the quarter was NOK 262.1 million. With regards to our balance sheet, there's no significant items to comment on. Total assets increased by NOK 270 million compared to year-end 2019. We paid NOK 1 in dividend during -- in Q1. And as informed during our Q2 presentation, the company has decided not to pay any dividend in the second half of 2020 due to the uncertainty caused by the COVID-19, and there are no changes to this decision. My last page is only an overview of our largest shareholders and the development in the share price. So -- but finally, I'll just give a quick summary of our financial performance and the financial position at the end of the quarter. We are very pleased with the strong group financing profile, and we see a very strong performance within our Cage Based business and also a very strong momentum. We see also an increased activity within our Land Based segment and obviously, we are seeing a good potential in this business segment going forward. Okay. Thank you for your attention. Knut will now move on to the outlook.

Okay. Thank you, Ronny. I'd like to go straight to the outlook. Starting with the order backlogs. Still at a healthy level, so that's fine. We experienced in the marketplace strong interest for our Tubenet solution. That's the preventive sea lice solution. And as already mentioned, we have signed very recently 2 new engineering contracts: one with the Norwegian company Ecofisk and the other one with the company in Middle East. So that is representing a nice potential moving on. So just to be very clear on that. Once again, we maintain our full focus on our RAS facilities, the grow-out facilities within the Land Based segment, and we have, in total, 4 engineering contracts signed. Strategy process is concluded, supported by our Board. We are going to report that to the market. It's about our growth agenda, our innovation agenda and our digital agenda. That's going to be on November 24, and that's going to be webcasted. Currently, we experience pretty low salmon price, both out of Norway and out of Chile, and that is certainly causing some uncertainty with regards to the customers' willingness to invest in technology. Still, once again, our order backlog is healthy. So it's not going to be in the very, very short-term picture, but just want to be clear that this is a very important indicator for customers' willingness to invest. The digitalization strategy is important for part of AKVA Group's total product offering, and we are -- also there, we're going to be very specific in the Capital Market Day, how to go about that going forward. And also these days, important to mention that our finance profile remains strong. So we are in a good situation there. So that's very much the conclusion and the summary of our presentation. So I hope you will have quite some questions. So we will now move to the Q&A, and I will do that together with Ronny and we have a moderator which will read all the questions received. So please, [ Giulio ].

Yes. The first question is from [ Erik Dinsmore ]. Who -- he's asking who is your adviser in the strategic review?

We are going to look into that in the next couple of weeks. So far, we have not chosen any adviser because we have just discussed this matter with our Board yesterday and concluded on the conclusion. And now we are going to start to organize and execute.

Next question is from Carl-Emil Johannessen. It was another quarter with very good Cage Based margins. What is the main driver in the quarter? And do you expect margins to stay at this level going forward?

So what we see basically, both during the second quarter and the third quarter is that we are making progress with regards to our operational excellence. I mentioned that after the second quarter that I used our barge business as one example, but there are certainly others. But we have been improving our project execution capabilities within our operation, meaning that our sold margin, what we expect to have as a margin, for instance, when we deliver a barge is these days what we see really being the actual margin after we have done all the work. And that's basically how it should be if you are in control of your business. But I have to be clear that, that was not the situation a bit earlier. So that is translated into a positive margin step-up simply because we are doing the job with less quality costs, less mistakes than we have seen before. And that is a positive development, and I hope certainly that, that can continue. In Chile, we are still doing fine within Cage Based. We have a bit of headwind with regards to new orders. But -- so that's on one hand. But at the other hand, we're also making very good progress with our new net cleaning service business in Chile. So I expect that we will still see reasonable activity level and numbers off of Chile despite that there might be a little shift between the product groups. But we have a very good uptake there on the service business. So the final little comment, even though the questions were about the Cage Based business, the positive experience we have had from our operational excellence program in Cage Based, we want now to translate that even more into Land Based so we can have even a better project execution in that part of our business as well. Very long answer to a short question, but trying to be a bit complete. Back to the moderator.

There is another question from Carl-Emil Johannessen. Can you say something more about the rationale of doing a strategic review of AKVA Marine Services? And what is the potential outcome of this review? And then he's asking also what is the plan in terms of investment in Land Based facilities? How many do you plan to invest in? And how do you look at grow-out facilities in Norway compared to U.S. and Asia?

Okay. To the first question, I think we will give a more specific update on the question related to AMS during our Capital Market Day. We just thought it was correct of us to reflect it in our communication today since it was decided by our Board yesterday. But we will give more specific update on our plans for that part of our business during the Capital Market Day. With regards to number of, if I understood the question correctly, the number of Land Based customers and projects, we think we will not work with a long list of customers because each and one of them, they have very large and high ambitions. They are typically talking about a full scope of 40,000 to 50,000 tonnes of capacity. So in the medium term, over the next 2, 3 years, if we can have 4, 5 good customers which are there in the long run for ramping up to 40,000, 50,000 tonnes, so then the math is very simple. A 50,000 potential customer and if you have 5 of them, then you need to do 250,000 tonnes of [ RAS ] capacity. And that's a lot and a lot and a lot, and that is representing a significant contract value as well. We are going to explain this more in detail when we come -- when it comes to our Capital Market Day, how we view this, let's say, new spot, this new marketplace, and how we want to play it. We have worked out very detailed plans for our value proposition and how we are going to, let's say, operate this new marketplace and our offering and our game plan for that. So we're going to explain that over a few hours in our Capital Market Day. With regards to the last part of your questions about Land Based locations in Norway versus other marketplaces. We believe that there is a huge growth potential for the whole sector. If you just play around with a few numbers, in the next 10 years, if you believe in the demand side of salmon of only 5%, only 5%, which is very much possible, 5% could be exercised likely on a price neutral basis, you will need to produce 2 million tonnes more of salmon. And that will take a combination of Norway ramping up and Land Based facilities -- new Land Based facilities closer to the consumer in Asia and North America. That's how we see it. So we as AKVA, we don't have a specific view on who should do this and that investment in which marketplace. We are going to support development based on what our customers decide to do. But we think there is enough growth possibilities to do some Land Based in Norway and probably many, many closer to the consumer in Asia and North America. But also, that one is -- also there, we are a little bit ahead of the game. We are going to do a very specific update, an overview on what this is going to look like in 2030. So we have a Vision 2030, and that's what we are going to explain in detail during our Capital Market Day. But we believe this part of the business, both on the Cage Based side and the Land Based side, is suited for a lot of growth in the next 10 years.