AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and very much welcome to this first quarter financial presentation for AKVA Group. The agenda for this morning is that I will first do the highlights and the outlook; and then Ronny, the CFO, will do financial performance; and then followed by a Q&A session. My opening statement before going into the facts and the numbers is that this was a very challenging quarter for AKVA Group due to the cyberattack and also the COVID-19 implications and also restrictions, in particular, in Norway. But I have to say that despite that pretty serious situation, from a customer and delivery point of view, we managed pretty okay with relatively limited impact on our deliveries to customers. And that's very, very much thanks to the 1,400 employees of AKVA, which did fantastic in this quarter. Going to the facts, first on operation. Activity level reduced by 4% in Q1 compared to the first quarter of '20, and EBIT impacted significantly by NOK 49.7 million in nonrecurring costs related to the cyberattack. Also, the COVID-19 restrictions started to hit us now, not too much in 2020, but very seriously in '21. I'll come back to the details later on. We also successfully delivered 4 barges to customers in Chile. On the strategic agenda on our innovation and digital, high focusing on developing our capabilities within Land Based and technology and advisory services. So we stick to our services, we do our investments and we acquire -- we hire new people to build the capabilities it takes to be successful for the future. Also, we did a strategic important acquisition of one equity stake, 34%, in Observe Technologies, which was completed in February this year. Also on the digital side, we hired a new Chief Digital Officer, and we significantly strengthened our digital organization. Looking at the hard numbers. Revenue at NOK 719 million for the quarter, which is down NOK 33 million from 1 year ago. Notably here, we have some pretty serious COVID-19 impact on the top line. We will give some details on that later on. And then to illustrate the EBITDA and EBIT, we have chosen to exclude the cyberattack cost of NOK 49.7 million, as clearly stated here. But we think it's better for our reader to see it on a like-for-like basis. On a like-for-like basis, EBITDA for the quarter is NOK 83 million, down from NOK 86 million a year ago. And the same on EBIT, NOK 36 million, down from NOK 38 million a year ago. Important for AKVA is certainly the macro factor and most notably the salmon price. A little bit of a busy graphs here. But the key points, the key takeaways are is that there is certainly a positive development on the salmon price year-to-date. Currently, it's traded around NOK 60, even a little bit higher for the time being. And that price development is supported by more better demand on -- better balance between demand and supply on the volume side. So currently, volumes are more like it used to be a year ago, which, for instance, for last year, were 22,600. But year-to-date, it started with very massive big volumes in this sector. And year-to-date, it's still 18% higher than a year ago. Going forward, it is more likely a balance between demand/supply and most people watching the sector, they have an expectation of plus/minus 60 for the remainder of the year, maybe on the soft side of 60. And what does this mean for AKVA? I think that will translate into a gradually normalization of the market, of the willingness, of the salmon farmers to invest in barges, in infrastructure and all other type of technology we are providing, which basically, for the most sit on the on the CapEx budget of our customers. So we expect a normalization during the second half of the year, also on the back of a likely reopening of the HORECA segment, hotel, restaurants and catering. So that's a bit the macro surroundings, which is important for AKVA. With regards to the order intake, it came in at NOK 651 million, which is down NOK 58 million a year ago. And most notably, there, the total market of barges has been close to 0 in the first quarter. So we didn't do too much business there, which is very normal for the year and for the season to have quite a number of contracts of barges. So that's the main difference between this quarter and a year ago. Then looking at the order backlog, still healthy at a level of NOK 1.8 billion and the split between Land Based and Cage Based is NOK 929 million for Land Based and NOK 829 million for Cage Based. Then some specifics on the COVID-19. We have some negative impact on our operations. Actually, during the whole of 2020, it was somehow struggle-some. It was struggle-some with security of supply, in particular, in the beginning after the outbreak. And we had to do a lot of hassle with import of labor during 2020. But it was still pretty manageable, but that changed very much in Norway. And please bear in mind that 2/3 of AKVA's activity and turnover is Norway. But in January this year, as you know, it was some new measures and restrictions in Norway that you could not easily import foreign labor anymore. And that has impacted our operation. If you look at Cage Based, it's about our service stations. As I said, difficult to replace those foreign labor with local labor. And as part of our operational model, we have a subsidiary in Lithuania, and we have very skilled labor there for -- real specialists for our net activity, net business in Lithuania. And part of the working model is they are rotating between being part of their time in Lithuania and part of their time in Norway. So in our service station, at every point in time, there are at least 30 of those excellent specialists working for us in Norway. And they're already specialists, so you cannot easily replace them. We don't find the same type of labor with this specialist easily in Norway. It will take 1 or 2 years to train them. So when we got those kind of restrictions, and we have applied for exemption, but so far not successful, that is harming just our activity level. And then cost is going up because we try to mitigate some with all-time from our Norwegian workers. So that is just how our operation model is working. We have to guide that this will translate into the second quarter as well. But maybe we will get some exemption and can receive our foreign employees later in the quarter. But so far, we have not got green light. Also, we saw some supply chain restrictions in Chile. And that was about importing some kind of technology of input factors, I should call it, from Asia into Chile, and that didn't work for a couple of months, but that's working when we are into the second quarter. So that will normalize again in the second quarter. On the Land Based, a bit the same as with the service stations. We have a lot of our workforce for Sweden Land Based, is located in Denmark, and it has been struggle-some to get people into Norway. And if you get them into Norway, it's very costly. So overall, since we have EBIT of NOK 36 million for the quarter and the impact of those things, I'm talking about, is around NOK 10 million. We thought it was worthwhile to mention for you to understand the underlying strength of the margins and the numbers. Then to summarize, the cyberattack and the significant nonrecurring costs we booked for the first quarter. And just to repeat the issue, that was on Sunday, January 10, the AKVA Group fell victim to a hostile or criminal cyberattack. And we have explained that in -- both for the Q4 and -- reporting and in different press releases. So I don't repeat the issue as such. But the current status is that all main IT systems are now restored in a safe environment, so we are back to normal there. But there are still some -- in order to work seamingless, you still need to have up and running all the support systems, not all of them are up yet, but all will be done before the summer. So that's a positive development there. And the cost of the thing is NOK 49.7 million, including an accrual for the remaining costs in the second quarter. Direct costs are NOK 40.7 million, and the consequential operational costs are NOK 9 million. And since we have also accrued for the ongoing activities in the second quarter, the cyberattack will not impact operations or incur any additional cost in Q2 and beyond. Then I want to use this opportunity to give a little strategic update on our strategic agenda for Land Based. Six months ago, we had our Capital Market Day, and we explained the high-level agenda of Land Based on this slide. So the fundamentals, if you see underneath, is to develop a standardized 4,000 tonne -- 5,000 tonne models for On-growing and also to build up our Land Based organization in Norway. And also this should be supported by the AKVA Group innovation agenda and create a center of excellence. It is progressing very well. In general, if I can be a bit specific, if I go into box number one, the strategy is based on our core technology, which is called the Zero Water Concept, which has been developed over several years, so that is the starting point. But we believe, in order to really serve this new segment and this market, we need to be more complete than just the technology. So we need to have supporting technology like feeding, the fish tanks, the fish handling, the cameras, the lights, the sensors and the control system. So that's all the other hardware and technology it takes to operate a RAS facility, either that is On-growing or post-smolt. So I can report that we have initiated several innovation programs started and is on track. To some extent, you have just a copycat or copied a bit what has been the technology on the Cage Based side into the tanks or to the RAS environment. But we think we have to start all over again from scratch and make it really adapted and fit for purpose, given that this is another way of farming. And so several innovation programs started to develop the supporting technology. In box number 3, that's a bit about precision farming. The visionary concept is that when you bring a fish in a tank, you can be pretty precise in what you are doing. You can have sensors. You can have very advanced cameras. You can get so many data point that you can automate even more. And you can have much better monitoring than on the sea side. So -- but in order to do that, you need to develop the smart systems. And we have done 2 things to support this development. One is to acquire the 34% equity stake in Observe Technologies, which is a pretty well advanced AI, artificial intelligence company. So they are working exclusively for us, and we are, together with them, setting the agenda for development, what type of algorithm do you need in order to totally digitalize Land Based farming On-growing or post-smolt. And the other thing is that, in-house, we have completely changed and rebuilt our digital team under the leadership of a new digital director. So quite serious investments in organizational capabilities there as well. And the box number 4 is that we have the visionary perspective that we, as a technology provider, also need to talk with the fish. We need to understand the fish biology and the fish health and the true needs of the fish in order to succeed. So also that with help of box number three, which is algorithms and sensors and the data collection. But we have hired 3 very experienced PhDs, in box number four, and in order to bring in very specific RAS knowledge, know-how, from our fish health and fish biology perspective. We haven't had that in AKVA before. So overall, that is going to make a difference in the long run, not in the next quarter, but over the next years. That's my true expectations. And despite some kind of, let's say, challenges in the first quarter, we have developed our strategy. We really believe in our strategy. And we are not holding back on investments. We are investing in those new organizational capabilities. It takes to make the change, which is needed for the future. And then final comment with regards to Land Based is a bit update in the market. On the On-growing side, we have NAP. That's our reported contract in China, Nordic Aqua Partners. That company is fully financed for building its first 4,000 tonnes. And I can report that, that project is on track, and we are making progress there as per planned. And then we are busy with 3 other prospects where we are full steam ahead on the engineering phase, and we are executing those 3 engineering contracts. But also very importantly, we have seen over the course of the last few months that a lot of more attention on the post-smolt segment in Norway. Several companies are reporting that they are going to do significant investments. It's going to be billions of NOK over the next 5 years in building and acquiring post-smolt capacity. So we are in process with many of those companies, and our ambition is to gain a good market share for post-smolt segment for us in Norway. And that brings me very much to the end. As already mentioned, unfortunately, for the first quarter, we have seen some sort of short-term headwind because of the cyberattack, because of the COVID-19 implications. And still, I want to maintain the strategic guidance for our AKVA Group for the long run. And that's about the organic top line growth. We don't foresee to acquire companies. It might be specific products or technologies. But the main focus is really to grow organically, supported by operational excellence. We are -- we have acquired specialists to help us with that program in-house. And we are investing seriously in our innovation program. We are stepping up 50%, and we are also investing significantly in our digital program, first and foremost, 3 products, AKVA Connect, AKVA Observe and Fish Talk. And then in the middle, all those actions we expect to result in EBIT increase year-on-year of 25% and ROACE to be minimum 15% in year 2023. So that brings me very much to the end of my part. We -- our CFO, Ronny Meinkøhn, he will now explain and talk you through the financials. Please, Ronny.

Thank you, Knut, and good morning to everyone. I will start with the consolidated income statement for the first quarter. As Knut mentioned, this first quarter has been very challenging for AKVA Group, and the cyberattack had a huge impact on the P&L by costs of NOK 49.7 million. Actual EBIT was negative of NOK 14 million in the quarter. Adjusted for the costs related to the cyberattack, EBIT was NOK 36 million and close to the same level as in Q1 last year. Also, the COVID restrictions had a negative impact on the P&L by the estimated NOK 10 million. So -- but please note that the COVID restrictions is mainly impacting our top line as we could not run our service stations in Norway at full capacity, and we also experienced supply chain restrictions affecting operations and activity level in Chile. So adjusted for the costs related to the cyberattack and the COVID-19 restrictions, we think that the financial performance in Q1 was acceptable. The high financial costs in the period of NOK 17 million is mainly driven by the share price development on our investment in Nordic Aqua Partners. In Q4 last year, we had a positive effect of NOK 8.3 million. This was reduced by NOK 7 million in the first quarter, and the accumulated positive effect is now NOK 1.3 million. Then a few more details on the costs related to the cyberattack. As communicated during our Q4 presentation, we estimate the direct costs to be in the interval NOK 40 million to NOK 50 million. Direct costs ended at NOK 40.7 million and is all related to third-party costs. So no internal costs or indirect costs are included in this amount. The direct costs are recognized or booked in our Cage Based segment, but is, of course, related to the entire AKVA Group of companies. Consequential costs, our indirect costs related to our operations, amounted to NOK 9 million. A large part of this is related to unproductive time, both within our Cage Based and Land Based business. In a normal situation, we would have booked these hours to our projects and, of course, invoice them. And the effect is greatest in our Land Based segment with the cost of NOK 3.7 million, as our designers were without IT systems for more than 6 weeks and we're 100% unproductive. Fortunately, this had no significant consequences on the project deliveries. And last, we have this effect of NOK 3.1 million in Digital Solutions related to the downtime of the IT systems. So in total, we have recognized NOK 49.7 million in cyber costs in this first quarter. But please note, we have not included any internal costs related to the really time-consuming manual operations or through the system recovery process. And as Knut mentioned, the most important is that we do not expect any more costs related to the cyberattack in Q2 and no effect on the operations going forward. Looking at the revenue development, the order intake in the last 12 months is close to NOK 3.3 billion, with corresponding revenue of just about NOK 3.1 billion. Compared to Q1 last year, the revenue was reduced by 4% in Q1 this year. We see a positive trend in -- and increased activity in our Land Based segment, but reduced revenues, both within Cage Based and Digital Solutions. Looking at the various markets, we see a positive revenue development in the Nordic market with an increase of 16% in Q1 this year compared to last year. A significant reduction in Americas is mainly driven by the COVID-19 restrictions and the algae bloom in Chile. On the segments, we still see that the Cage Based revenue still represents about 80% of the total revenue in the group. And compared to Q1 last year, the somewhat reduced revenue in the Cage Based is, to some extent, related to the COVID-19 restrictions that affected the activity level, both in Norway and in Chile. Adjusted EBIT and EBITDA margin was at the same level in Q1 this year and -- as in Q1 last year. And as we expected, significantly improved compared to the low performance in Q4 2020. Despite a very, very challenging quarter, the financial position of the company is still solid. Available cash, including the NOK 300 million in unused credit facility amounted to NOK 469 million at the end of the quarter. The reduction of NOK 56 million compared to year-end is a combination of the negative impact from the operations with this EBIT of minus NOK 14 million; acquisition of Observe Technologies of NOK 36 million; and last, ordinary CapEx activities of NOK 9 million. Given the fact that we were without IT and ERP systems for more than 6 weeks, we are very satisfied with the development in net working capital and that we maintained the same level as in Q4, and, of course, also significantly below the 15% in Q1 last year. NIBD/EBITDA ratio increased to 3.4 in the quarter. Please note that we have included the adjustment of NOK 49.7 million in cyberattack costs when calculating the ratio. This is an agreement with our bank. On return on capital employed, it's marginally down compared to year-end. We still have the target of 15% in 2023, unchanged, and we still think this is achievable and realistic. As communicated during our Q4 presentation, the company decided to pay a dividend of NOK 1 per share in Q2, and this dividend was paid on April 14. Then last, I want to go into some more details on the financial performance in the various business segments, and starting with the Cage Based technology. Overall, the revenue was reduced by 10% in Q1 '21 compared to the same period last year. And EBITDA adjusted for costs related to the cyberattack was down to 11.7% compared to 12.3% in Q1 2020. In the Nordic region, the revenue increased marginally by 2%, while both Americas and Europe, Middle East had a significant reduction in revenue. Especially, Chile are facing headwinds, both with the COVID-19 restrictions and algae bloom. The order intake for the Cage Based business was reduced by 70% in Q1 compared to the same period last year and there is a significant reduction, both in Nordics and Americas. As Knut mentioned, the reduction in Nordics is mainly related to barges. We had an order intake of NOK 90 million in Q1 2020 compared to no new contracts in the first quarter this year. We also see a significant increase in order intake in Europe and Middle East. This is mainly driven by export out of Nordic, but also high order intake in our company in Turkey. On the recurring revenue, OpEx-based revenue, a significant part of this revenue is related to our service stations in Norway. And of course, the COVID-19 restrictions has put limitations on our capacity in the service stations, resulting in reduced revenue in Q1 '21 compared to last year. We expect to be back on a positive trend when this situation is back to normal. For the Land Based technology, we had an order intake of NOK 69 million in the quarter compared to NOK 10 million in the same period last year. Revenue increased by 46% in the same period, and the adjusted EBITDA margin improved from 3.7% in Q1 '20 to 8.2% this quarter. The revenue from the delivery contract with Nordic Aqua Partners awarded in Q4 last year is still limited, but we expect the activity to increase in the project gradually during the second half of this year. And last, we had the Digital Solutions. The margins remains strong. The adjusted EBITDA margin in the first quarter this year was 34% compared to 37.5% in Q4 last year, so a bit down compared to Q4, but significantly above Q1 last year of 13.1%. So that was a financial summary of the status in the company. Knut will now continue with the outlook.

Yes. Thank you very much, Ronny, for the update. With regards to the outlook and the summary, the order backlog is sound and forms a good foundation for our organic growth strategy going forward. In the short term, specifically for the second quarter, the company expects the negative impact from the COVID-19 implications, more specifically, the travel restrictions into Norway to continue. We sincerely hope it will be resolved later in the quarter. But as of today, the situation is still that we are not able to bring in all the workers we need to have a normal operation. The long-term fundamentals remain, however, unchanged, as presented in our Capital Market Day in November 2020. And our digital products is an important part of AKVA Group and our AKVA Group's total offering, and the company will continue to invest and improve our solutions both within Cage Based and Land Based, as I have explained earlier in the presentation. And also important these days, the finance profile remains strong and the company is fully financed to execute on our strategy. And that brings us very much down to the Q&A session. So Ronny, if you can come over, please.

The first question is from Ola Tova or Carnegie. He's asking, can you give an update on the process related to Aqua Marine Services?

Yes. The status on the -- that's the service boat company in the south of Norway, Aqua Marine Services. We have announced that we are conducting a strategic review for that company. We are also considering to divest the company. But this strategic is ongoing as of now. And we expect it to be concluded on during this quarter, in the second quarter of the year.

Next question is from Carl-Emil Johannessen of Pareto Securities, asking, can you say something more about the situation in Chile? Have you seen activity picking up now in Q2?

The start of the year in Chile was relatively low. And the big picture in Chile is that there are multiple challenges. The salmon price for the farmer in Chile is not a favorable one, and you will not see likely too many companies in Chile earning money. So that is really pushing down their investment willingness and capacity. Also, this was further kind of boosted by this unfortunate algae bloom, which is also costing quite some biomass and also affecting the company's willingness to invest. And then we had some specifics on the AKVA side with regards to supply chain restrictions. And those supply chain restrictions or the implications we had, they are gone. So we are back to normal. That was one specific product we couldn't sell in the first quarter, which is a good product for us. We will sell that product in the second quarter as normal. So that is going to help us quite a bit. But on the macro picture, and that is -- I would say, that's still a slow train. So there is still quite some headwind in the Chilean marketplace, generally speaking.

Next question is also from Carl-Emil Johannessen of Pareto Securities. The post-smolt activity seen in Norway, is that mostly established farmers or do you also see new players coming into that market?

There is a little of both. But for the most, it is established farmers investing in their own smolt -- post-smolt capacity. But there are also some examples of independent companies, either alone or in partnership with farmers. So -- but for the most, it is established farmers, but you see some newcomers also as well, either in a partnership with a farmer or stand-alone. But if I'm going to quote it, I think it's still more than 90%, which is from established farmers.

There are no other questions for the moment. So there is an opportunity to come up with more questions.

Okay. So no more questions. So ladies and gentlemen, thank you very much for listening in, and have a nice day.

Thank you.

Thank you.