AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and very much welcome to this Q3 presentation for AKVA group. The agenda for this morning is that I will do the highlights and the outlook. Ronny, the CFO, will do the financial performance, and then we will do a Q&A session. And I kindly invite you to post any questions during the presentation. I'd like to start with the highlights of Q3 from a operational perspective. First and foremost, we were awarded the full grow-out contract from AquaCon. That was at a value of $150 million and still subject to final financing. Low activity level and profit from the Sea Based business segment and also limited impact from COVID-19 during the quarter. We completed the private placement of NOK 321.7 million in October. And we also completed the agreement to combine AKVA Marine Services with Abyss Group as a contribution in kind. AKVA group will own 25.5% in the combined company. And we consider this as a very good combination. That will be a start of consolidation of the several vessel industry, which we think is needed. Looking at financials for the quarter. Revenue came in at NOK 738 million, which is 8.5% down from last quarter or the quarter a year ago. And EBITDA, NOK 79 million, down from NOK 105 million, and EBIT ended at NOK 32 million. I like to give some color to the somewhat soft trading. So those are the specific comments to the third quarter. The profitability in the third quarter is negatively impacted by the low activity level in the Sea Based business segment. And the revenue for the segment was NOK 91 million lower in Q3 compared to a year ago. And the kind of business we have is that earning is significantly impacted by lower revenue, because the OpEx or the costs are pretty much fixed in the short window. The reduced activity level is temporary and mainly related to low revenue from the core AKVA products in the Norwegian market. We talked earlier about the kind of headwind we had at the start of the year. That was on the back of pretty low salmon prices, so we didn't sell barges for the first 4 months of '21. That is normalized now, but we have a phasing issue, and that has translated into lower activity and turnover in the third quarter. We expect this to gradually normalize during Q4, and then back to normal fully into 2022. In addition to the lower activity level, the profitability is also impacted by costs related to ramping up of the innovation and the digital organization. We truly believe in the future of digital, so we have hired 10 real specialists within digital capabilities. And that is to build up and ramp up for the business case within digital. We will give more details on that later. So 10 more people there. And also within Land Based, we are gradually ramping up to serve both our innovation agenda and higher activity for the future. So we have added 30 to 40 new employees and colleagues with first-class capabilities there as well. If you look at year-to-date, it stands at NOK 2.289 billion, which is down 5% from a year ago. And EBITDA ended at NOK 241 million. EBIT is year-to-date NOK 101 million, and that is excluding the cyber-attack costs. And as we have explained earlier, there are 3 issues -- the 3 kind of headwinds affecting the numbers year-to-date. It's the impact of COVID, that's -- it's mainly in the first half. And we earlier talked about NOK 50 million EBIT effect -- negative EBIT effect of that. And also in the second quarter, we talked about the commercial cleanup within Land Based, which charge the P&L with NOK 25 million for Q2. And then we have some lower activity level within Sea Based for Q3. So those are the specifics. Looking into market development. AKVA group is dependent on a healthy salmon price, because our customers are the salmon farmers. 70% of our activity, of our turnover is basically CapEx for our customers -- investments. And they tend to invest more when salmon price is healthy. If it is under NOK 50, we see a lot of constraints or less orders. And if it's NOK 55 or even NOK 60 or above, you have a pretty hot market, so to say. So currently, the salmon spot price is around NOK 55. People following the industry, analysts, companies, they expect a stronger salmon price during or towards Christmas, I should say, so should be NOK 60 plus. And the outlook for 2022 and 2023 calls for our forward and consensus price at around NOK 60, which we believe is very, very healthy also for our business. Please take notice that the volumes this year, and if you look at the European supply, has been very, very strong. Expected around plus 13% for the total 2021, and that's really the strongest in many years. And still the salmon price is very healthy. So that calls for a good future there. So, overall, salmon price development calls for a normal or even good market development for technology into 2022. And we see that as we speak -- because that our sales pipeline is more promising -- the most promising in 2 years, certainly. Looking at order intake for the quarter came in at NOK 1.933 billion, very much on the back of the awarded AquaCon contract of NOK 1.3 billion, still subject to financing, but we have recognized it in our order intake, because we think the financing is more likely than not, and we have a signed contract there. Our order backlog is high at NOK 3 billion. Land Based is a bit more than 70%, and Sea Based is NOK 808 million. Please take notice that when we divested the company AMS, AKVA Marine Services, they also had some order backlog that was NOK 79 million. So, of course, when we divest the company, the order backlog will follow the company. So we have adjusted down the order backlog with NOK 79 million. And if you then compare like-to-like, it would have been adjusted SEK 887 million, which is actually the strongest order backlog for Sea Based over the recent quarters. COVID, very quickly, limited impact on operation for the third quarter. And as it looks now, it's not going to affect us in the coming quarter. But winter is coming, and no one can predict the full impact of COVID. Then I'd like to spend some time on the strategic status of the company. Starting with the big news in October, that we got the new strategic investor into AKVA. We completed a private placement corresponding to 10% of outstanding shares in AKVA at a subscription price of NOK 96.50 per share. That is representing a total capital increase of NOK 321.7 million. So this transaction will accelerate AKVA's strategic agenda in all the business segments. So I will say that AKVA is now very well capitalized to drive a dynamic organic growth agenda, providing fast growth and market -- and, in particular, market outlook into 2022 is very promising. In addition to the private placement, it was also some share sale of existing shareholders equal to 3.3 million shares at a purchase price of NOK 96.50 per share at a total amount of NOK 315.2 million. So, furthermore, in the news package, it was also about establishment of an investment platform for investments in Land Based projects worldwide and also the awarded RAS contract from AquaCon, which we already talked about. So all in all, we are forming a strategic partnership with Israel Corp., and we are very pleased with that. We think they can bring a lot to the table. With regards to current shareholding, Egersund Group is still the main shareholder with 51%, and Israel Corp. is now at 18%, and other shareholders is 31%. And I'm very pleased to inform that this transaction is now entirely closed. Then looking into the big picture into 2030. Where we came from was a CAGR of 6% year-on-year in terms of salmon production in the last 10 years. Over the next 10 years, we expect that the demand side suits for a CAGR or year-on-year growth of 5%. And that's on the back of focus on environment and health -- I'm talking consumers' behavior. Salmon is among favored species. Distribution into new markets. New markets can be open, and there is a lot of product development -- the sushi, sashimi trend, et cetera. So that is driving the 5% CAGR year-on-year. However, the supply potential for the next 10 years based on traditional cage farming is more around 3% year-on-year. So you can see there is a supply gap. And this is the summary of the supply gap. You have the demand on the top, which I already talked about. And then the traditional supply to conventional production, that's based on the current way of doing salmon farming. That is geared towards a CAGR of 3%. So you see a supply gap there of something like 800,000 tonne of salmon, and that's a lot if you are going to organize that based on new technology. And some will likely come from offshore, but we also think a big chunk will come from Land Based and Land Based also overseas closer the consumer in North America, Middle East and Asia. And I think we need the best of the 2 worlds in order to meet with the big demand from consumers worldwide. And how to fill the gap? That also calls for huge investments in Land Based. So the AKVA group application is calling for a strong cage farming segment. So we are doing a lot there, investing in new technology, new innovation and also exponential growth in Land Based revenue. Looking quickly into the smolt segment -- or sorry, the Land Based segment. First, traditionally, we have been doing smolt for many, many years. AKVA has been deliverer -- a supplier of smolt facilities. Typically, smolt has been produced at around 100 gram and later on a bit bigger than that as well. Secondly, new development last 5 years has been post-smolt development. That's when you produce the smolt bigger or post-smolt the fish bigger on land from 250 gram and even up to 1 kilo. That calls for big infrastructure investments to get that production capacity at land. And then thirdly, the new kid on the block, that's the Land Based. That's about producing the fish all the way to harvest size. And that's about getting closer to consumer in overseas market as well. So AKVA believe in the Land Based farming, and that it has a great potential. So this is an quick overview of our pipeline. We have divided into 4 phases. It's early engagement, where you see a number of projects we are working with. We have pre-projects, 2 of them, and we have engineering contracts with Ecofisk and Svensk Lax in Sweden. And then we have 2 awarded delivery contracts, which is AquaCon and Nordic Aqua Partners. Some specific about NAP, the project in China, that is progressing well. And in the fourth quarter, we will start with the bigger deliveries, which will generate much higher [ active ] and turnover for Land Based. That will kick in, in the fourth quarter this year. So overview of our strategic agenda for Land Based. First, the basis is our Zero Water and RAS technology, which is a very water efficient, water scarce technology. Secondly, we are busy with delivering and developing the complete scope of fish farming technology like feeding, fish tanks, fish handling, cameras and lights, and we have several innovation projects ongoing. And third -- the third box is about precision farming and the digitalization of the Land Based activity and the Land Based farming. Here, earlier this year, we acquired a 34% stake in the AI, artificial intelligence company, Observe. And we have solutions in place already, which is working on sites, more than 25 sites on the sea side. And now we are going to develop the same for the Land Based segment as well. And we're also developing an advisory capabilities, and we have a new team in place. So we believe in fast growth within Land Based. And we are -- as already mentioned, we are making considerable investments in building new organization and new capabilities. So we have hired in the last 6, 9 months, 30, 40 more people in order to drive this agenda and also ramp up for the projects to come. Another tool in our toolbox is the establishment of the investment platform to accelerate the growth ambition. So AKVA and Israel Corp. has agreed to establish an investment platform. And the investments or the scope for this investment vehicle is to invest in land-based projects worldwide using AKVA technology and solutions bearing in mind ESG considerations. So both parties will contribute with $10 million each, and this can be in pre-established projects as well. So the goal is to raise further commitments from co-investors and partners up to $100 million investment vehicle. The scope -- the geographical scope, is going to be investment within what we call, closer to the consumer, within North America, Middle East and Asia. So I think this is a very valuable tool in our toolbox in order to accelerate growth within on-growing and Land Based. Some few words about the market for post-smolt, the Land Based facility. That is expected to be a strong one towards 2030. So overall, I would say that there is really and truly a proof-of-concept here. Fish farmer see that bigger smolts -- 500 gram or even up to kilo is bringing better fish health, better license utilization and better production economy. So depending on the size of -- the average size of the post-smolt, there are different scenarios here. We truly believe it will be at least 400 gram. So if you look at the investments needed behind the ambition, if the entire industry is going to at least 400 grams size post-smolt, that market is NOK 33 billion for the next 10 years. And you can see the assumptions on the right-hand side. So this area has a very high focus for AKVA group. So overall, if we combine both our ambition and the market position we have within smolt and post-smolt, together with on-growing, we can illustrate the ramping up like this. So if you look at the bottom here, the current base is -- it's an annual turnover of NOK 400 million to NOK 500 million. And -- but we expect a step-up of the post-smolt segment, the turnover from the post-smolt and smolt for at least 10% year-on-year in the years to come. The second building block here is the current NAP contract we have been awarded, and we are delivering on a contract for 4,000 tonne on-growing in China. And later on, we expect that to translate into a Phase 2 contract. And then we have been awarded the AquaCon contract. So there, you can see in a couple of years when all this kicks in, we should be able to step up to a turnover of NOK 1 billion, which is the first milestone here. So that is really our ambition. And with this investment -- vehicle, the investment fund in our toolbox, I think this is highly likely to happen. On the sea operation, the Sea Based operation, it's all about what we call precision farming for Cage Based solutions. And those 4 focuses here is what we consider the main focus for the fish farmer. It is about marine infrastructure as such to secure containment and efficient operations. And you can see in the blue letters here, the type of products and solutions we have within marine infrastructure. So we have a very complete portfolio of products there. Second is about precision feeding, that's to optimize feed conversion and growth. Also there, we have a very complete product portfolio, both consisting of what you can say, hardware and digital solution, but it comes together in a solution. And digital as well to support precision farming with leading open and modular digital solutions. There we have 3 products, which we think are market leading. And then it's about lice solution and fish health, and that's to minimize the number of lice treatments. And that's actually the farmer's license to operate. And also there, we have a good product portfolio. And digging a bit into some details, there, we -- within Sea Based farming -- Cage Based farming, we think that deep sea farming concepts is very promising. If you look at the left here, the benefits we have been seeing so far from pilots and even commercial production we have done together with some key customers, it's about avoiding or reducing the unwanted surface influences like lice, algae, currents and high temperature. Its providing better fish health and reduced mortality. And it's also about improved fish welfare and reduced frequency and cost for reactive lice treatments. And on the right-hand, you see some examples of products we have there, but there are also quite a few products in our pipeline. The future is also digital. Many people and analysts are talking about that. We think the 3 drivers are very much about remote operations. It's going to be about precision fish farming and also Ecofisk, when you combine different systems and make one big digital ecosystem. So as I said, we are really stepping up here, we are making considerable investments in new capabilities. And we do that on back of Observe technology, which is our automated feeding AI-based software or digital technology. Fishtalk 60% of all the salmon production is based on Fishtalk, our system, and AKVAconnect, which is about bringing and binding hardware and digital capabilities to get on. And that brings me very much to the conclusion. So despite some headwind this year, we maintain our strategic guidance for the years to come. We truly believe in a very positive market and momentum into 2022, both for Sea Based and also Land Based, plus digital as well. And I can conclude and be very firm that we are well financed to drive a solid organic growth agenda, providing fast growth. And that brings us to the financial performance and looking into the financials, and I hand over to you, Ronny, please.

Thank you, Knut. Good morning, everyone. I will give you an overview of the financial performance to AKVA group in Q3, and I will start with the consolidated income statement for the quarter and year-to-date. Despite high order intake in the quarter, the revenue came in at NOK 68 million below the same period last year and ended at NOK 738 million. Year-to-date, the revenue is close to NOK 2.3 billion and approximately NOK 130 million below last year. EBITDA and EBIT in Q3 was NOK 79 million and NOK 32 million and NOK 26 million below last year. The reduced profit is mainly related to lower activity and to some extent, also the product mix within our Sea Based business. I will comment further on this a bit later in the presentation. Adjusted EBIT year-to-date of NOK 101 million is a reduction of NOK 37 million compared to last year. And please note that the NOK 101 million is adjusted for costs related to the cyber-attack of NOK 49.7 million. And as informed in our Q2 presentation, the P&L for the first half year is, in addition, impacted by the estimated NOK 15 million related to the COVID-19 restrictions and also the NOK 25 million in costs related to the final commercial cleanup of old Land Based projects. Higher financial costs in Q3 compared to last year is primarily related to lower share price on our investment in Nordic Aqua Partners with a negative P&L effect of NOK 3 million in the quarter. The book-to-bill ratio is close to 150% the last 12 months with an order intake close to NOK 4.5 billion and a revenue just above NOK 3 billion. The revenue in the quarter is reduced by 8% compared to last year and is all related to the Sea Based business. The trend is positive in both Land Based and digital with increased activity. Looking at the various markets, the revenue in the Nordic market was reduced by NOK 81 million or 16% in Q3 this year compared to last year, and the trend is still positive within Europe and Middle East, with an increase in revenue of 52% in this market compared to last year. In Americas, we see a reduction of 25% compared to last year. However, we see a very positive development last quarter with regards to the order intake in this market and expect this to have a positive effect on the revenue level going forward. Last, on the segments, the revenue from our Sea Based business still represents the major path with a share of 82% of total revenue, down from 86% last year. EBITDA of NOK 79 million and EBIT of NOK 32 million in the quarter was at the same level as in Q2, but was NOK 26 million below Q3 last year. As we have already stated, the main part of the reduced profit is related to lower activity level, and the activity was NOK 91 million lower in our Sea Based business compared to last year. And since the main part of our OpEx cost base is fixed, a reduced revenue of NOK 91 million has a significant P&L impact. In addition, a part of the reduced profitability is also related to the product mix in the Sea Based business as the reduced revenue was mainly related to our core AKVA products in the Norwegian market. While the COVID-19 restrictions impacted our business by the estimated NOK 15 million during the first half year, the impact in Q3 is very limited. The financial position in AKVA group is acceptable with available cash of NOK 311 million at the end of the quarter. Considering the private placement of NOK 322 million completed in October the financial position is currently strong, and we are fully financed to execute on our organic growth strategy. The reduction in cash was NOK 11 million during the quarter, the positive EBIT contribution of NOK 32 million and the reduced net working capital of NOK 7 million was offset against the payment of the convertible loan to AquaCon of NOK 21.5 million, ordinary CapEx activities of NOK 23 million and last payment of interests of NOK 11 million. There are no significant changes in net working capital during the quarter. The ratio is 12.1%, the same level as last quarter. However, we are not satisfied with the current net working capital levels, and there is clearly potential for improvement. So this will, of course, require focus, and we will work in a structured way to get down to the levels we had late 2020 and start of 2021. And as a consequence of the reduced profit in Q3 this year compared to last year, the NIBD EBITDA ratio increased to 4.1% at the end of the quarter. Please note that we have -- the EBITDA used in calculating this ratio is adjusted with the cyber-attack costs of NOK 49.7 million in agreement with our bank. At the end of the quarter, we are pretty close to the threshold of 4.25%, but this will, of course, be significantly improved during Q4 when we can include the private placement of NOK 322 million, fully completed in October. Since we are still faced by headwinds with regards to our profitability, the return on capital employed remained low and was 5.1% at the end of the quarter. Despite this slow development, we still think that a ROACE of minimum 15% by the end of 2023 is achievable, and this target remains unchanged. A dividend of NOK 1 per share was paid on April 14. And also as informed during our Q2 presentation, the company decided not to pay any dividend for the second half year of 2021 and there are no changes to this decision. Then some more details on the financial performance in the various business segments, starting with the Sea Based technology. Overall, for the business segment, the revenue was reduced by 13% in the quarter compared to the same period last year, while the order intake was at the same level. EBITDA came in at 11.6% compared to 14.4% last year. And as already stated, the reduced EBITDA of NOK 30 million is a direct consequence of the reduced activity level. The Nordic region experienced a reduction in revenue and order intake of 25% and 22% in Q3 compared to last year. But please note that adjusted for the divestment of AKVA Marine Services, the reduced order intake is 10%. Within the Nordic region, the reduction in revenue of NOK 115 million is mainly related to core AKVA products such as feed barges and to some extent, also sale of new nets. We expect this situation to be temporary and that activity level will be back to normal levels gradually during Q4. In Americas, the revenue was 24% lower in Q3 this year compared to last year. However, the order intake is very strong and was 140% above last year. The high market and tender activity is mainly related to our operations in Chile. Europe and Middle East continued the positive development from the first half year, and the revenue was 47% higher in Q3 this year compared to last year, and it's mainly driven by high activity in our company in Turkey. Order intake was 25% down compared to last year. However, we still expect high market and tender activity in this region going forward. The main part of our OpEx based or recurring revenue is related to our service stations in Norway. And during the first half year of 2021, the activity was lower than normal due to the COVID-19 restrictions related to travel to Norway for our employees in Lithuania. As the travel restrictions were lifted at the end of Q2, the activity has stabilized at a higher level. The recurring revenue amounted to NOK 238 million in Q3, same level as last year and is equal to 39.5% of the total Sea Based revenue in the quarter. Land Based technology, high order intake in the period of NOK 1.35 billion, where the award of the AquaCon contract has an estimate value of NOK 1.3 billion. The revenue increased by 20% this quarter compared to last year. And as Knut mentioned, the full grow-out contract for our Nordic Aqua Partner is progressing according to plan, and we expect increased activity from this project in Q4. EBITDA ended at NOK 6.6 million in the quarter compared to NOK 0.2 million last year. But please note that the profit margin is still impacted by the ramp-up of organization, including more resources to further develop our innovation agenda as we are preparing to take on a higher activity level going forward. So the net increase in personnel so far this year is between 30 and 40 new employees. Last, digital, increased activity in the quarter with a revenue of NOK 20 million compared to NOK 16 million last year. The EBITDA margin was reduced from the high 31.6% last year to 13% this quarter. We have really strengthened the digital organization the last months and quarters to execute and deliver on our organic growth ambition. And net increase of new employees is close to 10. So in the short and medium term, this ramp-up will have an impact on the profitability in digital. Thank you for your attention. Knut will now continue with the outlook.

Thank you, Ronny. Just a few concluding words at the end. Overall, I believe outlook is pretty positive. And with regards to order backlog, it is solid and forms a good foundation to execute our organic growth strategy. Also, we consider the trading environment, the market for technology into 2022 to be a positive one. So long term fundamentals remains unchanged, as presented in our Capital Market Day in November 2020 a year ago. Private placement of NOK 322 million, that is there to accelerate our strategic agenda within all our 3 business segments. And then establishment of the investment platform, investment vehicle to facilitate our organic growth ambition within land-based business, that’s going to be mandatory for success within that segment. And then finally, Digital Solution, that's an important part of AKVA group and the total offering in order to come to complete solutions. And we are continuing investing there to improve our complete value proposition, both within Sea Based and Land Based technology. So that brings me very much to the end, and we are now entering the Q&A session. So please post any questions you might have. So moderator, any question, please?

Currently, we have no questions.

Okay.

Give that a minute or 2 perhaps. Now we have a question.

Very good.

Question is from Carl-Emil Johannessen. And he asks, how would you say discussions with Norwegian salmon farmers regarding large smolt facility are going? What is the main driver behind the strong order intake in Chile? And how is the Q3 order intake in Chile compared to pre-COVID levels? How will you also report results from the Marine Service segment Abyss going forward, will it be accounted for as an associated company? Perhaps you could start with the first one.

Okay.

Do you want me to repeat the first question?

Yes. The first one was about the post-smolt segment in Norway. So during this year, we have seen growing interest and appetite for the so-called post-smolt segment. We think that proof-of-concept is true leader. We have seen different salmon farmers, for instance, movie in their Capital Day, saying that they are going to do considerable investments within the post-smolt segment. And the benefits from growing a fish on land to either 500 gram or even up to a kilo, is that you get a better license utilization. If you stock a fish from land to sea at a kilo, you can go down to even 9 months production phase in the sea. And that reduces the pressure on fish -- sea lice, fish health, et cetera, et cetera. So there is merit in doing that, and we have seen very good results with regards to biology in the post-smolt facilities we have built. So we are currently engaged in different commercial processes there. And that's why we are talking very, very positively about this segment. This is well-established farmers. Technology is proven. They are all well financed as we know. So we really hope over the next years, that this is going to step up our activity level within Land Based. But we are engaged in several commercial processes there. And then Chile, Chile had a bit of a soft start of the year. On the back -- we had some supply chain constraints generally in Chile due to COVID. But we see Chile is very much stepping up now in the second half of the year. Salmon prices are also much stronger in the second half in Chile. And we see merit for our core products, which is steel cages, and we see generally AKVA products being traded. We sold our first 3 barges to Chile earlier. They are already delivered. We see a lot of interest for time being also for buying barges. We are producing in Vietnam and bringing them into Chile. So, overall, Chile is seeing a pretty good step-up in the second half. If you want to comment more on Chile, Ronny, please, and you can also explain about the accounting for AMS.

It came in strong just after a really slow start to the year, Chile came in strong and with the order intake in both Q2 and Q3. And I think the pipeline there is very strong at the moment. So can you please repeat the question regarding AMS?

How will you report results from the Marine service segment, Abyss going forward? Will it be accounted for as an associated company?

Yes, that's correct. We will account for AMS according to what we call -- refers to as equity method. So we will recognize the 25.5% of the profit in the combined company. But not do any consolidation, only recognize the share of profit.

I don't think we have any further questions for now.

And we'll wait for a little bit. Please feel free to post any question.

I think we're good.

Okay. But thank you very much for listening in, and we wish you a nice day. Thank you very much.

Thank you