AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and very much welcome to this Q4 presentation of AKVA Group. Also this time, we are organizing a virtual meeting and webcasted due to the COVID-19 situation. We are 3 weeks delayed compared with the original plan that has to do with this very unfortunate criminal cyberattack, which happened on January 10. I will come back to some more details on that later on. But saying that, we are very, very pleased to be in position to report our 2020 financials this morning. Starting with the mission statement of the company, which is about technology for sustainable biology. That is the purpose of the company. We're organizing that -- I do the highlights and the outlook and Ronny Meinkøhn, our CFO, will report the financial performance. And then at the end of the day, we will do the Q&A session. And I would strongly recommend you to post any questions during the duration of the presentation, and our moderator will read the questions at the end of the session. Starting with the highlights for the fourth quarter. Activity level increased by 18% in Q4 compared to the last quarter a year ago. However, EBIT was impacted by a significant amount of quality costs within the Cage Based segment. Positively, we received a delivery contract of EUR 50 million for our Nordic Aqua Partners and additional 2 new pre-engineering contracts for grow-out facilities are signed, and they are for Ecofisk and the company And the cyberattack, combined with COVID-19 implication, contributed to a challenging start to 2021. Some update, high level updates on our innovation and digital agenda, which is in the core of our growth strategy. We have, during the last quarter, also strengthened our organization, both within innovation and digital. We did a very strategic important acquisition of -- with an equity stake in Observe Technology. I will come back to some details there as well. That was done in February this year. And also the development of a standard RAS recirculation module is progressing in accordance to our plan. We have also established a separate new department which is about fish health, and that new department will report to myself and the function is established to strengthen our innovation program. And we have very recently hired 3 PhDs with competencies within RAS and fish health. Looking at the key figures for the quarter, starting to the left, you see a positive trend on revenue, and we ended that on our revenue at NOK 770 million for the quarter, EBITDA ended at NOK 53 million and EBIT came in at NOK 9 million, which is fairly much below expectations. So I need to give a little bit of color on that one. So talking now about the EBIT, it was impacted by NOK 16 million of unwanted quality costs for the Cage Based segment in the quarter. The CFO will give further details into the nature of that one. And on the slight positive side, I would say we made good progress within Land Based with a final EBIT margin for the quarter of 5.7%. So that is representing some progress compared to the previous quarter of 2020. But still with a gap to our guided target of 10%. So if you do the math, the delta between the 5.7% and the 10% in -- based on the turnover and million is NOK 6 million. So then you have a situation with -- we did NOK 9 million, we are talking about unwanted quality costs of NOK 16 million, and we can say there is still a gap on Land Base compared to where we like to be of NOK 6 million. And then you end up with NOK 30 million plus as what we would have considered a decent performance for the quarter, given the activity level. And I have to say, that is still -- if we did that early, just to talk like that, that is still below the kind of consensus by the analysts. So I want to give that a little context. And that's why we put in this special slide here, which is about turnover of Cage Based over the last 3 years, quarter-by-quarter, and the red line is the average over the 3 years. So what you can see here is that Q4 is clearly low seasonality. And typically, if you compare with the average, but also the previous quarter, you can say that Q4 is NOK 100 million below average, but also NOK 100 million below Q3. And what is then the impact on the quality of earnings of that. If you are about 30% gross margin and are 100% lower, that has a bottom line impact of NOK 30 million because how we deal with overhead and fixed cost, innovation costs, et cetera, you just distribute them evenly throughout the year. So it has some -- has a pretty big impact this seasonality when it comes to the quality of the earnings. So I just wanted to give a little bit color on that one. But overall, some progress made on Land Based. We have some unwanted quality costs for Cage Based, which is linked to the quarter. For the year 2020, you see this kind of pattern, starting from the right here revenue and steadily increasing over the years. EBITDA landed at NOK 337 million and EBIT came in at NOK 147 million and ROACE is a gradual step-up with 7.9%. So if I'm going to give a few comments on the year as such, I have to say, first of all, it was a challenging year due to COVID-19. We had very good activity level, but there were quite some extra cost during the year. It was hard to operate. We couldn't deal with import of workforce from Lithuania and Denmark. We are very dependent on that. So we had to do a lot of extra work with Norwegian labors. That landed, of course, more costly than how we normally like to operate. So we were affected on the cost base by COVID-19 for the year. Also, we started the year 2020, in particular the first half, with quite some headwind in our Land Based operation, and we made a lot of changes there. We changed very much of the organization, and we started to add more people. We are still doing that. We are now moving in the right direction there. But for the year, in total, it was a very challenging and costly first half of the operation. And then we ended the year with some specific quality costs for Cage Based in Q4. So -- but given this, I still want to label the year a respectable year when it comes to financial performance, and it was a lot of additional effort from our employees, from our 1,400 colleagues. So I want to thank them for a very respectable year the way I see it. At high level, some -- a quick view on the market development, some of the macro environment, important for our business. And that is, of course, first and foremost, the salmon price. It's a little bit of a busy slide here. But as you know, the salmon price has been very much below NOK 50 in the recent months. Bit of a surprise that, that also happened during Christmas. Part of the answer is also, as you see bottom left, that it was very high volumes being supplied to the market. So then you have a kind of a double issue. We have a situation with COVID closing down the HoReCa, hotel, restaurant and catering segment, leading to a shortfall of normally 30%, 40% of the volume is distributed on that platform. And then on top of that, you have very high volumes. And of course, that has translated into a very low salmon price. But good news there, as we speak, is that salmon price is back on roughly NOK 60 over the last 3 weeks. So that is kind of promising. So why I'm talking that much about the salmon price when we are in the technology business because 70% of our turnover is CapEx based for all customers. So they make decisions on CapEx, and that is investing, by all things, in technology from AKVA. And if salmon price is too low for too long time, you see CapEx restrictions by many of the players, and we have noticed that in the recent months, so -- which is very natural, and that's why we are rather dependent long-term on a very healthy salmon price. That's very important for the industry and certainly also for AKVA. So what to say about the salmon price going forward? Well, not my cup of tea. There is a forward price. There are a lot of analyst reports. Very much consensus is that it would stabilize now at a higher level and bottom right. Yes, we are waiting for the vaccine or the vaccination program, to be more specific, to be fully in place so society can reopen again around the world. And by that, reopening also the HoReCa segment, I think you will never see real stability in the salmon price before that has materialized. And most people can know more about that than myself, but the summer -- after the summer and during the fall, we will likely see a normalization, which is absolutely needed here. So we are waiting for the reopening. Quickly about the order situation. And we did see a high order intake of about NOK 1 billion in Q4, driven by the award of the delivery contract for Nordic Aqua Partners within Land Based. And also, we did see a stable overall order intake for quarter 4 for the Cage Based segment, and also with some good increase in Chile and Canada in Q4 compared to the year before. So the total order backlog sits at NOK 1.864 billion at the end of Q4, which is representing a 10% increase compared to the quarter -- quarter 4 in '19. Then some words about the very unfortunate cyberattack, which is causing very significant nonrecurring costs for Q1. So I'm not talking Q4 now, but I'm talking some kind of guidance to you on what will happen in Q1. So the situation where that on Sunday, 10th of January, we had -- we fell victim for our criminal cyberattack. And the impact of that, the consequence of that was that most of AKVA Group's internally hosted services were shut down and all the data, including backups were encrypted. So that was what met us when we came here on January -- Monday, January 11. So pretty bizarre situation to be in. You read about it, and now it came to us. So what we did, we mobilized and organized with all kind of global and regional expertise. Of course, we worked well also with the police, which were engaged immediately. So quite a number of experts working for us at that point in time and still is. And the situation more specifically is that our IT systems are being recovered in a safe environment, but also with a massive, massive focus and job on IT security. You cannot just restart what you had. You had to harden it and make sure that it is done on a pretty good platform and basis when it comes to IT security. Good news is that no data were lost and also that the main IT systems, we have 23 of them, are now being recovered. However, we also have a lot of support systems. And it's like that with IT, it's not working, it's not perfect, it's not ultimate before everything is being clicked in, and we have 75 systems and not all the systems and support systems are still up and running, but they are being recovered and restarted as we speak. We have still a massive team of 15 to 20 people, experts working close to 24/7, within boundaries, of course with this -- handling this situation and still our #1 priority. So we have said that the direct costs related to this and we have made a complete estimate for handling the whole thing, even though it will translate also into the Q2. I mean this expert team will still do work for more weeks to come. But we have done a total estimate, which will be accounted for in Q1 of the whole matter, nonrecurring cost of NOK 40 million to NOK 50 million. There might also be some so-called consequential operational costs, which is not the incident or the data incident in itself, but kind of loss of productivity. I can describe it in the following way. When it comes to operational impact, where we have physical production, where we are producing products, we have managed very well with so-called manual workarounds. So that is handled by our organization in a good way. However, if you're running an engineering or project environment, you are just dependent on your data system. So if you are without your data system for 4, 5 weeks, no wonder that productivity will go very much down. It's a bit limited what you can do if you are in a pure engineering environment, and you don't have access to your data system. So that will also translate into Q1 with some -- I mean, cost base is the same, but productivity rate, what we are able to invoice, will be lower than normal. We don't have that overview -- what that will look like today. So that will be reported as part of the Q1 results. However, from an operational standpoint, the cyberattack should have no impact or very limited impact in the second quarter and onwards. So final words about cyberattack is that, overall, we are managing this operational situation pretty well, at least from customer standpoint. We have very, very few delays in our deliveries to customers. There are a few exceptions. But overall, it's working very, very well. And once again, complement to all our employees for all the extra effort done during those difficult times. So just to be clear, and as already mentioned, we have some short-term headwind in Q1 and probably also a bit into the second quarter due to the COVID situation. And that situation, so already explained to you. But I'd like to stress that the way we see it, the long-term fundamentals are solid. And then I want to repeat the strategic guidance we shared with you back in November of 2020 when we did our Capital Market Day. So -- and first and foremost, we are really going for organic top line growth. We will have a credible operational excellence program in place within the company. And we are aiming and targeting to deliver 25% EBIT increase year-on-year. Certainly, with all the incident costs in 2021, I think what I'd like to say for 2021, we have to exclude the one-off cyberattack cost. However, the long-term guidance remains the same with minimum step-up of 25% year-on-year and the same with the ROACE to be stepped up to 15%, minimum of 15% in the year 2023. And 2 important tools for us, our strategic tools, will be to increase innovation spending with a minimum of 50% and also do quite significant investments within our digital platform. Then coming to the end of my part. First, about Land Based, we still see high activity level, high demand for Land Based technologies, those sort of 4 most advanced projects we are working with. Nordic Aqua Partners, that's a final contract, and that is already informed about before Christmas. And then the 3 others, there, we have signed engineering contracts. However, financing is still pending on those projects before it can be translated into the final contract. But hopefully, we will see some good development there in the second quarter. And then finally, we announced on February 9 that we are doing a strategic investment in the London-based company Observe Technology. We took ownership or equity stake of 33.67% at the back of a total consideration of GBP 3.5 million. And the core of the core here is that this is an automated system for feeding of salmon based on artificial intelligence. So we have today approximately 20 installations on different farming sites around the world. And we consider the sales potential for 2021 to be a good one. And we also believe that this technology platform, Observe Technology, can also support our digital agenda for Land Based. And that's my first part, and then I'd like to hand over to Ronny for doing the financials, and I'll come back with the highlights, and we do the Q&A. So once again, if you have any questions, you can post them on the platform, and we -- our moderator will read them during the Q&A session. Please, Ronny.

Thank you, Knut, and good morning to everyone. I will start my presentation with the consolidated income statement for Q4 and for the full year 2020. Adjusted for the seasonal fluctuations within our Cage Based segment, the activity level in Q4 was acceptable. However, as Knut mentioned, we are not satisfied with the overall financial performance in the quarter, and the slow performance is mainly related to the unexpected and high amounts of quality costs within our Cage Based segment. I will come back to that a bit later in my presentation. On the other hand, we continued the positive development in the Land Based segment with an increase in both revenue and margin compared to Q3 2020. Also, the EBIT margins within Digital Solutions remained strong and above both Q4 2019 and Q3 2020. Please also note that we have recognized unrealized gain in the quarter of NOK 8.3 million related to our investment in Nordic Aqua Partners. For the full year, in total, revenue increased by 4% and EBIT improved significantly compared to 2019 by NOK 85 million. Looking at the revenue development, the book-to-bill ratio for the last 12 months is just around 105%, with a total order intake of NOK 3.4 billion and revenue close to NOK 3.2 billion. The company had a solid increase in revenue in Q4 2020 of 18% compared to the same period last year, and we experienced an increased activity level in all 3 business segments. As mentioned, the reduced revenue compared to Q3 is due to the seasonal fluctuations within our Cage Based segment as both our Land Based segment and Digital Solutions increased their revenue compared to Q3. Our relative shares of revenues in the various markets is roughly unchanged during 2020. The increase -- the nominal increase in revenue is mainly related to the Nordic market in Q4. Looking at the segment split, we see that the activity within our Land Based segment increased gradually throughout of 2020 and was 42% higher in Q4 compared to Q4 '19. Also within our Cage Based segment, we had a good increase of 12% in Q4 '20 compared to last year. As Knut mentioned, we experienced a significant drop in our EBITDA margin from the high level of 13.1% in Q3, down to 6.8% in Q4 and, of course, a corresponding negative effect on our EBIT margin. The low-margin is related to the Cage Based segment, which experienced a drop in EBITDA margin from 14.4% in Q3 to 6.3% in Q4. And it's partly related to the activity level, but also related to the high amount of quality costs. And the quality cost is related to a handful of product deliveries made during 2020, both in the Nordic and the international market. All the quality issues appeared in Q4 are mainly closed in Q4, and we do not expect any additional costs from these identified quality issues going forward. And just to repeat, we have a positive margin development within our Cage Based -- sorry, within our Land Based business, and the margins within Digital Solutions remains strong. Despite the low EBIT performance in Q4, we are still satisfied with the financial position of the company. Available cash, including the unused credit facility, was NOK 521 million at the end of the quarter. Reduction in available cash of NOK 41 million compared to Q3 is mainly related to plant CapEx activities and also equity contribution into ongoing Land Based projects. We have also put a lot of effort and focus to improve our net capital ratio and we are satisfied with the development and also the ratio of 8.5% at the end of Q4. Of course, there are still areas for improvement, and we also expect some fluctuations on the net working capital levels going forward due to the nature of our business and also the seasonality. Net interest-bearing debt was just below NOK 1.1 billion at the end of the quarter and the NIBD/EBITDA ratio increased somewhat to 3.2 due to a combination of a somewhat increased net debt, but also a reduced 12 months rolling EBITDA. So please note that the NIBD/EBITDA ratio in the period Q4 2019 to Q3 2020 was adjusted for nonrecurring items of NOK 108 million in agreement with our bank. As expected, we had a significant increase in the return on capital employed and it was 7.9% at the end of Q4. Further improvements are expected and also required to meet our target of minimum a 15% at the end of -- or during 2023. Dividend. As the company as an intention, a target to pay dividend twice during the year. Due to the overall uncertainty related to COVID-19, the company decided not to pay any dividend for the second half year in 2019. And of course, the COVID-19 and its implication still have an effect on the company and the industry, but we are comfortable with the decision to pay a dividend of NOK 1 per share at the start of Q1. Then a brief update on our divestment of AKVA Marine Services. As informed during our Capital Markets Day back in November, the company decided to initiate the sales process of the company headed by Danske Bank. Due to the cyberattack, we are delayed by 1 month, but it's now progressing according to plans. So both marketing and management presentation are scheduled for Q2 and we will give you an update on the process when we present our Q1 results at the start of May. Then last, I have some additional comments on the financial performance in our various business segments, and starting with the Cage Based segment. The order intake compared to Q4 2019 was at the same level while the revenue increased by 12%. EBITDA improved from 5.9% to 6.3%. But remember, as Q4 2020, Q4 2019 also included several extraordinary costs. Looking at the various regions, the revenue in the Nordic region increased by 12% in Q4 compared to Q4 '19, and it's mainly related to increased sale of nets and services. The total order intake of NOK 350 million is a reduction of 8% compared to Q4 in '19. In the region Americas, revenue and order intake increased, respectively, by 14% and 164% in Q4 '20 compared to '19, driven by our operations in Canada and Chile. And last, within Europe and Middle East, the revenue increased by 9% despite a reduction in order intake of 38%. Looking at the development of our OpEx-based revenue, this positive trend continued in Q4 and the OpEx recurring revenue was 37.6% in the quarter in percentage of the total Cage Based revenue. Also, as informed during our Capital Markets Day, we have a high focus to increase the recurring revenue and our planned and ongoing investments in 2 new service stations in Norway will, for sure, strengthen this part of our business. The order intake within the Land Based segment was strong in Q4 and was 76% above Q4 '19. The revenue increased by 42% and the business segment experienced a significant increase in EBITDA of NOK 7.7 million compared to Q3. Please note that the margin is still impacted by recruitment costs, training costs and development of the land-based organization, and we expect this to continue also to a certain extent in '21. Last, Digital Solutions. There is a positive development in both revenue and margins both compared to Q3 '20 and Q4 '19 and ended with a solid EBITDA margin of 37.5% in the quarter. Okay. Thank you for your attention. Knut will now continue with the outlook.

Thank you very much, Ronny. The outlook statement is that the order backlog remains sound and forms a good foundation for our organic growth strategy. That's the starting point. In the short term, the company expects some headwind, as already explained, both in relation to the ongoing COVID-19 implications and also costs related to the cyberattack. However, long-term fundamentals remain unchanged, as presented in our Capital Market Day in November. And also, the market for grow-out facilities in Land Based is strong. And the company is currently working on several pre-engineering contracts with the target to end up in potentially -- or in delivery contracts. Digital product is an important part of AKVA Group's total product offering, and the company will continue to invest and improve our solutions. And the finance profile remains strong and the company is fully financed to execute on our strategy. So that brings us very much to the Q&A session. So I will kindly ask our moderator to read any questions.

Yes. Then we have 1 question from Lag Egos of A24 . He is asking how much of the estimated cyberattack cost is the ransom fee?

So what we have reported is that the total estimated cost of the cyberattack is NOK 40 million to NOK 50 million. That's the totality of it. And the situation is that data is recovered, main systems are being recovered and some support systems are being recovered. And also, I want to stress that deliveries to our customers is working very well. We have very, very few delays here. So I'm pleased with that. And frankly, that's basically all we like to say about the cyberattack.

Okay. The next question is Mindaugas Cekanavicius. He is asking, when should we expect first revenues from Nordic Aqua Partners to start being recognized?

Yes. That's -- the status in that project is that it is still in the engineering and project planning phase. We have not started with people at ground there. But that will probably happen in -- soft start in Q2, and then it will start really to materialize into the second half of the year. Then we start to do on-site work. And then, of course, that is when you see the relatively big step-up in revenue from that project. So mostly in the second half of the year.

Then we have a few questions from Carl-Emil Johannessen of Pareto. The first is, do you know the reason behind the quality issues in the Cage Based segment?

Well, it's a number of projects, product deliveries over the years. They were all identified in the fourth quarter, but it didn't -- the underlying cost is not only related to the fourth quarter. It was identified in the fourth quarter because customers came to us. But it's a bit of -- the situation is that it's a bit of delivery throughout the year, where we had some kind of claims from customers during the fourth quarter, and we had to deal with that. So if you look for the whole year, I'm not overly worried about the quality costs as such. But it came quite a bit at the same time and also very much visible because it is the lowest quarter when it comes to activity. So that's a bit the context there. I think we have fully accounted for it, and we should be basically fine going forward.

Carl-Emil Johannessen is also asking is the entire NOK 50 million contract with Nordic aquaculture rate included in the backlog. Total contract EUR 50 million, but order intake in Q4 only in [ NOK 385 million ].

Yes. That's a good observation. We said that in the footnote that we -- what we did, we did complete a audit everything with regards to our order backlogs. And we did some kind of cleaning out there because it was accumulated over quite some time, probably some years. And now we did a complete audit of it and we had to make some adjustments in the order backlog.

He's also asking what's the reason for the positive D&A in Land Based division?

Positive -- oh, yes. Okay.

I can answer that question. that's an adjustment on the currency. We had a choice there to use NOK as a currency or local foreign currency. So when we use the NOK currency and locked it from the time of the acquisition, there was a positive adjustment of approximately NOK 3 million in the quarter. It's a bit accounting technical, yes.

But it's also -- going forward, we will also lower the D&A quite a bit here because we just ended a depreciation, what you call it, period, for the acquisition of the Aquatec Solutions, was that around 5 years ago?

Yes, that was ended in Q3.

Yes, exactly.

That's correct.

So it will be a more structural lower level despite the thing with the currency.

Next question, very strong in net working capital. Do you expect it to stay at this level in percentage of revenues going forward?

Well, as I mentioned, we have a strong focus on reducing net working capital, and we still see improvements in several areas. But due to the nature of our business, when I say the nature of our business, it's about the contracts we get from our customers, some of them are cash positive, some of them are cash neutral and so on. So that's the nature of our business and also the seasonality has a role in the net working capital levels. But our long-term target is to reduce even more from the 8.5%.

Then the final question from Mr. Johannessen, do you expect the activity level seen in LBT in Q4 to continue into 2021?

That was the Land Based segment?

That's what Land Based technology, LBT.

Yes. Okay. Okay. Okay. Yes. We came at a good level there in Q4. And of course, it -- for the whole of the year, it depends, of course, whether we will enter into new contracts with the 3 customers where we are doing engineering. That will, of course, really help to uplift the revenue. And before that materialize, you will not see a huge step up, but we talked about the NAP contract already, which will materialize more in the second half of the year when it comes to turnover and invoicing. And -- so not a further step-up in the first half, but probably -- I'm more hopeful for the second half of the year.

And there are no more questions for the moment.

Let me wait a few more seconds because there is a little delay. All right. If no more questions, we say thank you very much for your attention, and have a nice day. Thank you very much.