AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. We are very pleased to invite you for this Investor Call on a very short notice. The agenda for this morning is that I will do the presentation. And then together with Ronny Meinkøhn, the CFO, we will together do the Q&A following this presentation. During the presentation, you are invited to post any questions. This morning, you have seen several announcements and news from AKVA. I will try to summarize it all in the highlights. First of all, we are talking about the private placement corresponding to 10% of the outstanding shares in AKVA at a subscription price of NOK 96.50 per share. The background on the basis here is that we have been running a very solid process together with Israel Corp., the new strategic investor in the last few months, also together with a [creditor] due diligence. And that all together led to this share [indiscernible] and a complete transaction and partnership at a share issue of NOK 96.50. Secondly, we are talking about a share sale from existing shareholders at a purchase price of the same NOK 96.50 per share. So Israel Corp. will purchase approx 6% of existing AKVA shares. And then, in combination, the private placement plus the purchase of the shares will lead to Israel Corp. taking our 15% ownership in AKVA, at least 15% ownership. The third element is about establishment of an investment platform for investments in land-based projects world worldwide. And here, the context is that AKVA and Israel Corp. together expect to contribute with USD 10 million each with the goal and the aim to reach up to $100 million for this investment, the platform together with co-investors. And the fourth element is the announcement of a signed RAS contract with AquaCon, which is still subject to fully financing. So the value for this contract for AKVA is about $150 million. And then consequently, we are also calling for an Extraordinary General Meeting on October 20, 2021. So those are the highlights. That's the summary. The basis for this transaction, I will take you through a few slides, that's about the market outlook and the strategic agenda for AKVA Group. First, the global high-level picture, the underlying demand with growth, which implies 1 to 2 million tons of volume increase by the year 2030. So if you look bottom left here, that's the [indiscernible]. That's what happened with regards to volume growth, the global salmon supply in the last 10 years. So that came up with 1.1 million tons, which is representing a CAGR of 6% year-on-year. Then looking forward, there is a kind of consensus in the industry that the industry has the capacity based on current technology platform, which is basically cage-based, Norway and Chile and the other regions, the traditional farming, which will probably allow the industry to have a supply growth of 3% year-on-year. However, if you take the global demand into equation, it's likely that that can grow on a higher pace, faster pace than the supply side. And there, the estimation is that a price-neutral growth could be as high as 5% annually. And the gray area is then representing the supply gap, I call it, the window of opportunity. And that's going to be 800,000, 900,000 tons of salmon over those years, or into 2030, I should say, which needs to come from new production platforms, which could be offshore. But probably the majority needs to come from land-based closer to the consumer. So this demand we expect to happen on the global megatrends which has to do with salmon as a favored species. Salmon carrying positive environment and health attributes, the EPA, DHA or Omega 3 is well known within salmon, and also distribution and access to new markets, new product development, the sushi, sashimi trend, et cetera. So all this is leading to the expected growth. So if we summarize what I just explained on the previous page, you have the demand side here on upper left, also into regions with the 5% year-on-year CAGR. I also explained about the conventional production with a 3% CAGR. That is the capacity likely on the global growth on the traditional production platform. Once again, that's cage-based farming as we know it today. And then thirdly, the window of opportunity to supply gap the potential of ballpark 800,000 tons, which we believe a big part of the solution, and answer to that needs to come from land-based. And there are some more details on the slide, but I'd like to stay a bit high level. If you look upper right, we believe that the implications for AKVA Group is that, this is calling for a still very strong cage farming segment with quite some growth. And we expect to see exponential growth in the land-based revenue for RAS like technology. So once again, land-based farming to be part of the solutions into 2030 to fill the consumer gap. However, what we have been seeing recently, there is a massive headwind in land-based grow-out segment. Here, we just illustrate that by putting the share price development for the 7 listed land-based companies. And as you can see, year-to-date, 6 of the 7 have seen a massive decline in valuation year to-date. So once again, we believe the land-based farming has a great potential. This is our pipeline. To the very right, we could have illustrated NOK 500 million contract with this project in China. That is going well. That is being executed in accordance to plan. And then we have AquaCon, which is now announced this morning to be a final contract. And Ecofisk, Svensk Lax, where we are in process of finalizing RAS contracts. So if I should then summarize the challenge for this segment, the full growth salmon segment, the land-based segment, we see it this way that the main challenge is access to equity financing. And the land-based business has been too dependent on Norwegian capital. There are just a lot of projects. And many of those key projects will be overseas projects, closer to the consumer in North America and Asia. And we believe it's crucial and key to have access to international equity financing to realize those projects. And this is also the background and the basis why we have entered into the strategic partnership with Israel Corp. [indiscernible] one element in the announcement is the establishment of the investment platform, which is between AKVA and Israel Corp. We have agreed to establish one investment platform. The legal structure is not decided yet. And the investment in the land-based projects worldwide is based on using AKVA technology and solutions, but also bearing in mind ESG considerations. So both parties will contribute with $10 million each, and this can be in a pre-established project as well. And the goal is to raise further commitments from co-investors and partners up to $100 million. And this investment platform will target projects which are, what we call, closer to the consumer, for instance, in North America, Middle East and Asia. And a few keywords above the announcement this morning with regards to AquaCon and the RAS contract there. The location is in Maryland in the U.S. The parent entity is AquaCon AS in Norway. And the first phase capacity is planned to be 16,000 tonnes. The total master plan for this project is approx 50,000 tonnes, and they have secured the land for 3 equal sites, 3 times 16,000 tonnes approx. The status for us is that basic engineering and design work is very much completed and the delivery contract is now signed but still subject to final financing. There, the contract is that Israel Corp. together with AKVA will participate in the financing with a USD 5 million convertible loan and the option to invest additional $15 million, both under certain conditions. Also there, we can give the [context] that Israel Corp. will actively back AquaCon in the fundraising using their own investor network. So to summarize what this could mean for AKVA going forward, there are basically 3 elements here. With regards to land-based activity and the turnover ramping up from where we are today at approx NOK 500 million and the first milestone to double to NOK 1 billion annual turnaround. So 3 building blocks. One is about tapping into the fast-growing post smolt segment in Norway, which is working very well, fast growing. So there all our projects, customers are very well financed as well. Secondly is about the Nordic Aqua Partners. So here you see the evolution and the illustration for the [indiscernible] the first couple of years. And then we also bank on our Phase 2, which we expect to kick in, in a couple of years. And then the third element on top is the [indiscernible] from a new ongoing contract now illustrated this morning with AquaCon. So what I'd like to say about this, with the new investment platform, I explained on the previous page, of course, still under construction as a disclaimer. But with this in our toolbox, we are confident that we will make the [indiscernible] as illustrated here. And that leads me very much to the guidance. We posted this in November last year during our Capital Market Day. Basically, we are talking about organic top line growth, operational excellence programs in place. We are talking about stepping up our spending and increase in innovation, both with regards to product development and organic growth and also focusing on the 3 digital platforms, AKVAconnect, AKVA Observe and Fishtalk. And the guidance is that the combination of those levers will give and deliver a minimum 25% EBIT increase year-on-year and gradually a step up to improve our ROACE to a minimum of 15% by 2023. Yes, as you have -- if you have been following AKVA Group, you can see that we have been facing some type of headwinds, in particular in the first half of this year due to the cyberattack and also COVID situation. So I would say that 2020 is expected to be a year in between. However, we expect this step-up as illustrated here to really take part and accelerate as of 2022. Then we talk about the share issue. We consider this a -- or an attractive share issue to accelerate our strategic agenda. And basically, what it means for AKVA is that we will get access to NOK 300 million -- about NOK 300 million as part of this share issue, and that's to the benefit of our strategic agenda. And just to re-verse very quickly what we mean with our strategic agenda. We have the strategy, the 4 pillars in our land-based strategy, which is building on our Zero Water Concept RAS technology. We are leading there when it comes to water scarce technology, which is important in overseas market. Secondly, it's -- box 2 is about completing the complete value proposition and offering. It takes to run a successful land-based activity. And that's about feeding, fish tanks, fish handling, camera, lights, sensors and control systems. So we have a R&D agenda to support that development. And thirdly, it's about more the digital agenda to support what we call Precision Farming. And finally, we also need to care about what is going to happen within production, the biological production and fish health is key there. So we have already established a very strong team with know-how, [ 3 Ph.D. ] to support our customers in succeeding. This is the land-based part. With regards to digital, we believe that the digitalization in Aquaculture is basically about 3 generic trends. It's about remote operations. In the future, you will do feeding -- you will have automated feeding and operation from maybe a big center per region or even on a -- in a country level. So less people will be on the site. Precision Fish Farming is about having as precise feeding as possible to avoid waste of feed and have as good feed conversion rate and growth factor as possible. And thirdly, it's about bringing different systems together in a global ecosystem in order to have more power from big data. So with regards to those 3 generic trends, we believe that AKVA is well equipped to be a leading player here. We have currently observed technology. That's our automated feeding solution. We have Fishtalk, 60% of the global salmon will be on our production system, Fishtalk, and we have also AKVAconnect, bringing hardware and software together. And then on the sea-based side, the so-called caged-farming, we have 4 building blocks there as well, which is about Marine Infrastructure, Precision Feeding, Digital and Fish Health and Lice Solutions. And underneath there in the blue color, the blue font, you can see different concrete products, which we already have today in the marketplace. We believe those are the 4 fundamental dimensions you need to cover in order to be successful with your sea-based operation. So we are fairly advanced today, but we also realize that in order to be successful we really, really need to speed up and accelerate innovation even more. So those 3 elements in land-based, sea-based and digital, together with the internal focus, we call it our operational excellence program, which is about The AKVA way, getting it right first time. It's about building a strong global ERP platform and also strengthening capabilities within project and business controlling. All those together, we believe we can stimulate even more and accelerate. And that's about the base. That's why we are doing this share issue. And Israel Corp. will be and become an important strategic partner for AKVA. And the investment platform will be the driving force for realizing of new land-based projects as well. And we consider the whole transaction to be at a pretty attractive subscription price of NOK 96.50 per share, which is at a premium from trading the last weeks. With regards to Israel Corp., that's a reputable public investment company that owns and invests in high-quality companies with established management and go-to markets. Israel Corp. new investments focuses mainly on food, food tech, agri and agri tech, health care and industry 4.0. And Israel Corp. tries to generate return on its investment through active board participation and its operational and managerial expertise, I'll come on that in a minute. But I have to say that we have been working very intensively in the last few months with the management of Israel Corp. And I have to say that has been truly inspirational. And then final slide, just to conclude on the partnership with Israel Corp. And Israel Corp. and AKVA will form a strategic partnership with a purpose to share and utilize experience related to technology, digital and food industry. And also, as part of the arrangement and the partnership, Israel Corp. will be entitled to appoint one Board member in AKVA while it holds a strategic ownership position of minimum 12%. Also, we are going to work together, and the chosen model is that Israel Corp. will be part of an advisory committee to provide advice to CEO and the management of AKVA in matters of strategy, technology and innovation, where they are carrying a lot of capabilities. AKVA and Israel Corp. to be General Partner for the investment platform, which is still under construction. And the goal is to invest in land-based projects either by direct investment or through the investment platform. And last and not least, Egersund Group will still hold the majority ownership in AKVA. So as a closing remark before we go to the Q&A, I consider this transaction with the partnership with Israel Corp. together with the new agreement with AquaCon to be truly, truly a great news for AKVA this morning. So very, very happy to share that with you, and thanks for listening in. And then we like to move to the Q&A session. So I will ask Ronny to join me, and our moderator to read any questions.

We don't have any questions yet, but...

Still time to post questions. If you like to post any questions, we kindly urge you to do it shortly. Okay. If it was crystal clear, that's absolutely appreciated by us.

Perhaps we can give it 15 seconds more.

Yes. All right. Thanks for joining on a pretty short notice, and I appreciate that you listen in. So thank you very much. Have a nice day.

Thank you.