AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and very much welcome to the first quarter presentation for AKVA group. The agenda for this morning is that I will do the highlights and the outlook. Ronny Meinkoehn, the CFO, will do the financial performance and then we will do a Q&A. And please post any questions during the presentation, and our moderator will read the question during the Q&A. Starting with the highlights for Q1 on the operation. We had a high market activity with order intake of NOK 1,048 million for the quarter. We had some negative EBIT impact from cost inflation and supply chain restrictions, come back to that later. And also, we enjoyed some profit from the sales of the shares in Atlantis Subsea Farming, which was completed with a gain of NOK 33 million. Later in the presentation, I will also give you an update on the progress we are making with regards to our innovation and digital agenda. Starting with the high-level numbers for the quarter. We had a revenue of NOK 849 million, which is representing a fairly high activity level. EBITDA came in at NOK 102 million at the gross level, and EBIT NOK 59 million. So overall, fairly good numbers. However, please notify that EBITDA and EBIT is also inclusive of the profit from the sales of the shares in Atlantis with the NOK 33 million. And because of that, I will also explain the quality of the earning on the next slide. So the underlying quality of earning is certainly impacted of some major macro events. COVID has been there for quite a while. And also what is certainly new for the quarter is the Russia-Ukraine war, which has certainly intensified the inflation and supply chain restrictions worldwide and has significant implication for AKVA's profitability. So a few examples there. We have seen, in a few cases, some exponential increase in freight rates. Generally speaking, we have high energy prices. We have also increased price level on some certain raw materials and, in particular, some electronical components and also a bit more minor, but we also see some delayed progress on some land-based projects. So if I were to elaborate a little bit on the first one because that's the big ticket, that's roughly 40% of the total negative EBIT impact of NOK 30 million. So 40% ballpark is related to freight. And it's basically one incident or one issue, and that was 2 barges, which we completed in a shipyard in Vietnam, and we had a cost overrun of double-digit numbers for bringing those 2 barges to Norway compared with what was the sold freight cost. So that is one single incident costing quite some money. The good news is that we already changed our contract practice back in July last year, meaning that, as of July almost a year ago, we are selling everything ex-work, meaning that the customer is now paying for the freight. So we have kind of closed that issue, but it came with a cost for this quarter. The other 2 examples with high energy price and some certainly inflation and price increases on key raw materials or in particular some key electronical components, that is, in a way, more structural. And how to see that is that typically, in our order backlog, we have -- on sea-based as the example here, we have 3 to 6 months of delivery time on our order backlog. And what is in our order backlog? There, we have fixed prices. We do not have a mechanism for inflation adjustment or cost regulation mechanism in the short-term order backlog. So what we have to do is basically to reprice and pass through costs when we enter into new contracts. And that's basically what we are doing. We are doing all kind of contract management and mitigating actions as much as we can. Also, with the limitations the market and the competitive scenario will give you. So that's very much the dynamic there. So we are not immune if you have very short-term kind of price shocks. But generally speaking, we have a relatively robust pricing model. With regards to land-based, in the past, it was tradition for price regulation mechanism during the life of the contract, but we also changed that practice during 2021. So that will all be more back to back going forward. Finally here, just an update on the Russian situation. First of all, AKVA has the view and has made the stance that we will not enter into new contracts in Russia in the foreseeable future, given all the hassle or complication there with the sanctions, payments, freights, et cetera, et cetera. We will not, for time being, do any more business. How important is the Russian market for us? Over the last years, it has accounted for about 5% of AKVA's total revenue in recent years. But also, there are some pieces of good news that all existing contracts have been delivered and fully paid. So we now have a clean sheet there. Very interesting to watch the salmon price these days. It has been kind of spiking. So a very, very strong sentiment there. And for us, that's certainly important because that's fueling a high activity level going forward. That's our expectation. And we see that also in the marketplace, quite good activity level. So no doubt that HORECA, hotel, restaurants, catering segment is coming back. So that's good. And the expectation for the year with regards to salmon supply is a very low growth, if any, for the year. Also, we see that forward prices for the full '22 and next year is now reaching a new level. So maybe the new floor is set to be NOK 80. So this is very positive. Also for the quarter, we had a solid order intake of NOK 1,048 million, NOK 254 million within land-based. We got 2 new post-smolt contracts in Norway, one for Tytlandsvik, Step #4 there. And also, we got an add-on from [indiscernible] as well, and also strong order intake for sea-based. Order backlog is now at NOK 1,849 million. So that's a good step up from the last quarter. So that's fine. Please also notify that the order backlog is adjusted for the land-based ongoing contract related to AquaCon. So the situation with AquaCon is that we are still working with AquaCon. We support the project. However, in U.S., in particular, we see a very high inflation related to building and construction costs these days. So that means that the project will be delayed and project start is currently postponed. And because of this, we have taken the project out of the order backlog with NOK 1.3 billion. Then moving on to an update on strategic status. We really, really see a strong fundamental for salmon now in the coming decade or all the way to 2030. And we think there is appetite for salmon, driven by the key demand drivers on the right-hand side. So there is a very positive sentiment for consumption of salmon. And basically, there is a real consensus there that the demand potentially is going to stay at 5% on a price-neutral basis. That's what all players or analysts and everybody believes. However, we think that the supply potential is way less and that it's probably at the max of 3% annual growth. So there is a massive, I call it, window of opportunity between supply growth and the demand potential. And if we look a little bit more into this upper left, a repetition of the demand potential with 5% annual growth. And then in the midst there, the conventional production, which is typically the sea-based production today based on the traditional technology we see, we believe that the max growth there, very much driven by Norway, it's not more than 3% year-on-year. And that leaves bottom left, a huge supply gap or a window of opportunity for land-based or another technology. So we believe that the AKVA group implications of all this is still a very strong cage farming segment with at least double-digit growth year-on-year to total market and also exponential growth in land-based revenue. And why do I say double-digit growth in the cage farming segment when the volume growth for salmon is 3%? That's because of modernization, professionalization, more exposed sites, et cetera, et cetera. So that's why you have a growth on the technology, which is more than the biomass growth. If we dive into the land-based segment, we have the traditional smolt market, that is rather stable. And then we have in the midst there, the post-smolt segment, which is the salmon in between or the smolt in between 250 gram and 1,000 gram or 1 kilo. We believe that the post-smolt segment is now a very proven concept in our view. You have seen several sites being constructed in the last few years. Our key reference is Tytlandsvik, which produced 3,000 tonnes of post-smolt and on average size 750 gram with less than 1% mortality and FCR of 0.87. That was the biological results of last year. This year, they will produce even more. And the very same fish produced by Grieg Seafood went very well in the sea. So you basically stock 750 gram and you harvest 5-kilo fish 8 or 9 months later. And that fish went to harvest without any sea lice treatment. So the combination of post-smolt size of up to 1 kilo, short production time in sea, less or if any sea lice treatment, that is a win-win. We think that's the best growth opportunity you have in the Norwegian market these days, that combination, because you typically can utilize your license even more, plus the additional growth you get on land. So that combination, we see a great interest for that now when we start to travel and visit a lot of customers following COVID. So we are pretty hopeful that the post-smolt market will see a very, very strong momentum in the coming years. And then finally, the grow-out segment. We still believe and repeat that the fundamentals there, in our view, is unchanged. We believe that a complete cycle on land, a growth of 4 kilo to 5 kilo is really part of the solution to close the supply gap going forward. Then our strategy or, let's call it, innovation agenda for the land-based farming. The building block #1 is about the RAS technology as such. There, we have our market-leading Zero Water Concept, which enable the farmer to produce with as little water consumption as possible. And then building block #2 is about the other technology which is needed in addition to the core RAS technology. That's the feeding, the fish tanks, the fish handling, the camera, the lights, the sensors and the control system. So there, we have built a very strong R&D organization, which is fully dedicated for doing those R&D projects. And I can report that we have very good progress within several of those projects, and we will commercialize -- for instance, feeding, the fish handling will be commercialized later this year. Also, we have a strong digital team in place for block #3. And also, #4, we have a strong team in place for offering production advisory services. Those are specialists in RAS and fish health. So overall, if we take the internal approach here, we are really building our capabilities within land-based, stronger projects organization, more specialists in supply chain, contract management, R&D and even within sales. So we are certain that we are going to harvest from that, all the investments we are making and all the organization we are building up or the capabilities we are building up. So that's positive. Of course, in the short term, it comes with a higher OpEx. The CFO will elaborate a little bit more on that one. Then on the sea-based solutions, we call it precision farming, and it's about also, therefore, building blocks, marine infrastructure for secure containment and efficient operations, precision feeding for optimizing feed conversion and growth, and digital to support the precision farming with leading, open, and that's important, and modular digital solutions. And then we also have a lot of focus on deep farming. So let's talk a little bit more about deep farming. Deep farming comes with quite some clear benefits. You are worried to reduce the unwanted surface influences like sea lice, algae, currents and the high temperature; better fish health and reduced mortality; and also improved fish welfare and reduced frequency and cost of the reactive sea lice treatments. So Nautilus is a concept we now have tested in full-scale production together with Sinkaberg-Hansen in the Rorvik area. So basically, the concept is about bringing down the salmon 20 or 30 meters below the surface, and they are kept there during the whole production and oxygen is supplied via an air dome. So by doing that, the theory is to bring it below the sea lice belt. And we see that working now together with Sinkaberg-Hansen. They have 3 full sites operating with the Nautilus concept, and that's altogether 26 cages and nets. And one site -- one complete site is now harvested fully out and without any sea lice treatment and the smolt started at ballpark average size at 150 grams. So it's really a full production cycle without any sea lice treatment. And we believe that has not happened in the Rorvik area for 20 years. So this is very, very promising, and I can report that we have many leads on new sales for this new technology. Then moving on to digital. And those are the key digital trends in aquaculture we see. We believe that the future is truly digital. Radical changes is needed to meet the supply/demand with more sustainable solutions. And we are working equally with both solutions for land-based and also sea-based farming. And we do that on the back of the 3 megatrends for digital within aquaculture, which we believe is remote operation, precision fish framing and business ecosystem to unlock the information throughout the whole of the value chain. So overall, we are truly, truly stepping up and also investing in our digital capabilities. We have a 3-year plan approved by the Board to invest some NOK 30 million, NOK 40 million annually to accelerate the AKVA digital agenda. And we expect in a few years that digital will become strategically important for AKVA with attractive returns. And those are the 3 key solutions we are focusing on is AKVA Observe, which is our AI solution, artificial intelligence solution, also based on ML, machine learning, and that is to automate the feeding, which today for the most is done manually. And today, we have already installations on 34 sites around the world, salmon world, and we have a good momentum with regards to commercialization -- further commercialization and sales there. Also, AKVA Fishtalk, we have 60% market share, and this is more the kind of fish ERP system for the planning and the biological steering and control, the production system. AKVA Connect is bringing the hardware and the software together, and there also we have a fairly high market share. So we have, during -- gradually during '21, and also this year, we are stepping further up. We are making considerable investments within digital with a focus on building a strong team. And altogether, we have 120 people within the digital team. And we think that's by far the strongest team within digital within the space of aquaculture. So we have strengthened the digital leadership with a new team, also product management. And also, we acquired last year a 1/3 stake of Observe, the AI company outside London. And that brings me very much to the end. Starting to the left, we are focusing on our organic top line growth. We don't foresee any major M&A. And we are really, really focusing on building on what we have, investing in what we have, and having a strong operational excellence program in place. On the right-hand side, we are stepping up our innovation spending, both for our innovation agenda on land-based and sea-based as well. And then the 3 digital platforms, AKVA Connect, Observe and Fishtalk. So we are going to step up our EBIT over a time and improve ROACE in direction of 15% in a couple of years. So that's very much the end of my presentation. Now Ronny Meinkoehn will give some more details with regards to our financial performance. So please, Ronny.

Thank you, Knut, and good morning to everyone. I will start with the consolidated income statement for the first quarter of '21 (sic) [ '22 ]. And the activity was high during the quarter, both with regards to the revenue level and also the market activity. So the revenue came in at NOK 849 million, which is NOK 130 million above Q1 last year. And adjusted for the sales of Atlantis, that's included with the NOK 33 million in revenue, the total revenue was NOK 97 million above Q1 last year. EBITDA ended at NOK 102 million. That's NOK 19 million above last year, while EBIT came in at NOK 59 million and NOK 23 million above Q1 '21. So the profit from the sale of Atlantis, that's included both in the EBITDA and EBIT numbers with the NOK 33 million. So adjusted for this transaction, the profit in Q1 was below last year. And as Knut stated, the profitability in the quarter is negatively impacted by cost inflations and global supply restrictions. So in general, we have experienced high pressure on profit margins during the quarter. And as pointed out by Knut, we have implemented several mitigating actions to manage this challenging situation. So last, the financial items, that's NOK 11 million in Q1. That is down from NOK 17 million in Q1 last year, and the reduction is all related to our investment in Nordic Aqua Partners and the development in the share price. What's included with that, decrease in market value of NOK 7.5 million in Q1 last year compared to a decrease of NOK 1.4 million this year. So the book-to-bill ratio is close to 100% the last 12 months with both order intake and revenue close to NOK 3.3 billion. Revenue increased by 18% in Q1 compared to last year and adjusted for the NOK 33 million on Atlantis, the increase in revenue was 13%. So in general, we see a strong momentum and increased activity in all 3 business segments compared to last year. And looking at the markets, we have increased revenue in all our markets in Q1 compared to last year, except from Europe and Middle East due to the situation in Russia. We also see a strong increase in the Nordic market of 14%. So as in Q4 last year, the revenue in the Australasia market is just north of NOK 60 million in Q1 this quarter, and it's mainly related to the full grow out project with Nordic Aqua Partners in China and a smaller land-based project in Korea as well. So the sea-based revenue, that's still the major part of our revenue with a share of 80% in the quarter, the same level as last year. However, we also see a positive development within both land-based and digital with significant increased activity level compared to a year ago. EBITDA, NOK 102 million, 12.1% in the quarter. That's NOK 19 million above last year. And adjusted for the NOK 33 million in Atlantis profit, EBITDA is NOK 14 million below last year. EBIT of NOK 59 million, that's 6.9%. And also on a like-for-like basis, adjusted for the Atlantis transaction, the EBIT was NOK 10 million below last year. And as we have already stated that the macro events resulting in global supply restrictions, high cost inflations had a negative P&L impact of NOK 30 million in Q1. And the main part of these costs sits in our sea-based segment. So we are, of course, striving to reflect the cost inflations in the pricing of new contracts and at the same time, we are -- we have initiated several internal improvement projects to reduce the cost base of our products and to improve our competitiveness. The financial position at the end of Q1 is strong with available cash of NOK 561 million. And as mentioned during the Q4 presentation, we are refinancing our credit facilities, and we have signed a term sheet with DNB, and we expect to finalize the agreement during May. And this will add another NOK 200 million in available cash compared to the existing facilities. So the available cash was reduced by NOK 42 million in the quarter. On one hand, we had a positive EBIT contribution of NOK 59 million. which was offset by CapEx of NOK 46 million and payment of interest of NOK 10 million. So the reduced available cash, it's all related to net working capital, which increased from 11.6% in Q4 to 12.6% at the end of Q1. That's an increase of NOK 47 million. And this increase is partly related to some slight delays on 2 major payments from customers. They both were paid during April. So we are fine about that now. But the main part of the increase that's related to the inventory, and we have increased the inventory quite significantly during Q1, has a mitigating action related to the supply restrictions and the cost inflation. So first, we need to ensure that we have raw materials and key components available in a much longer time horizon than we used to plan for. And secondly, we need to increase our stock to secure profit on new sales. And last, NIBD/EBITDA ratio was reduced from 3.1 in Q4 to 3.0 at Q1 this year. Development on the return on capital employed is positive, increased from 5.6% in Q4 to 8.1% in Q1 this year, and we keep our strategic guiding unchanged and still believe that ROACE of a minimum 15% by the end of 2023 is achievable. As we communicated during Q4, we paid a dividend of NOK 1 per share in Q1, and this dividend was paid on March 11. And then some more details on the various business segments, and I will start with the sea-based technology. So overall, for the business area, we see a positive development with regards to activity level. Both revenue and order intake increased strong in the quarter by 15% and 34% compared to Q1 last year. So the Atlantis revenue, the sale, the NOK 33 million, also sits within the sea-based revenue. So adjusted for the Atlantis transaction, the revenue increased by 9% in the quarter. EBITDA came in at 13.9% or 9.5% adjusted for the Atlantis compared to 11.7% last year. So the underlying EBITDA margin is lower than last year due to the cost inflations and the supply restrictions we have already mentioned. The Nordic region is strong with an increased revenue of 19% and an increased order intake of 16% in the quarter. So on a like-for-like basis, the revenue increased by 11%, adjusted for the Atlantis, and this is mainly driven by strong activity in our net business out from Egersund Net. In the Americas region, the revenue increased by 14%, and there's still a very strong momentum in Chile. Order intake in this region, a strong increase by 176% in the quarter compared to last year. And this is mainly driven by high order intake in North America with the 3 new barges. So in Europe and Middle East, we clearly see the effect from the situation in Russia with reduced activity in our export business. So all existing contracts with our Russian customers, they are delivered in Q1 and are fully paid. So we have also decided that, as Knut mentioned, not to enter into any new contracts in Russia. The revenue and the order intake was down by 7% and 29% in the quarter. Our recurring revenue represented 27.5% of the total sea-based revenue in the quarter. That's NOK 8 million lower than last year. However, if we adjust for the divestment of AKVA Marine Services back in Q3 '21, there is an increase in revenue of NOK 7 million. So we see acceptable activity level at all our service stations during the quarter, and it was at the same level as last year. Then land-based technology, a decent acceptable order intake in the quarter of NOK 255 million. That's mainly related to the 2 new post-smolt contracts in Norway and revenue increased by 32% or NOK 36 million in the quarter compared to last year and close to 20% of this revenue is related to our contract with Nordic Aqua Partners in China. And this project is progressing according to plan. The EBITDA of NOK 4.2 million in the quarter, that's down from NOK 9.4 million last year, and the slow financial performance is all related to lower-than-expected activity level. So during both 2021 and also in '22, we have invested significantly in the land-based organization with a high focus on improving our innovation capabilities, our innovation agenda and also the project execution capabilities. So a total of 50 new employees have joined the land-based organization the last 18 months. So we think the organization is now complete and ready to take on a significant higher activity level. However, due to slow financing of new full grow-out projects, we still think that it will take some more time before we see a significant shift and increase in activity level. So based on the current cost base in this business segment, we need a run rate of closer to NOK 1 billion in annual revenue until we can deliver a respectable and decent profit from this business segment. And then last, the digital segment. The activity level in Q1 '22 was 50% higher compared to last year. Strong growth, both in Nordic and in Americas. The EBITDA margin is, however, down from the high 34% in Q1 last year to 20.2% this year. And we also discussed this during the Q4 presentation that the reduced profitability, that's a result of the increased investments and ramping up the organization within digital. So the development of this business segment, that's in line with our strategic ambition. However, on both short and medium term, the earnings will be somewhat soft from this business segment. Okay. Thank you for your attention. Knut will now continue with the outlook.

Okay. Thank you very much, Ronny. Okay. This is the summary and the outlook. So the salmon price is expected to remain strong, driven by reduced supply. So that calls for a pretty high activity level in our segment. And on the other hand, the uncertainty related to supply chain restrictions and cost inflation may impact the profitability. Just one little reflection on the salmon price and the fundamentals. I've been 25 years in this industry, following the aquaculture industry for many years and the way I see it, for time being, the fundamentals are really, really strong, stronger than I ever can remember. So I believe the next 5 years-plus is going to be very, very strong when it comes to the salmon price and also the activity level. So that's just my personal reflection. The order backlog for AKVA group is solid and forms a good foundation to execute our organic growth strategy. Also long-term fundamentals remain unchanged as presented in our Capital Market Day 1.5 year ago. And the digital solution is, as already stated, an important part of AKVA group's total product offering, and the company is going to continue to invest in new solutions, both within sea-based and the land-based technology. So that brings me very much to the end. So we are now prepared to start the Q&A session. So please post your question on the line and then our moderator will read the questions. So far, no questions, so you have to hurry up.

We have no questions for today?

So last time you did very well. We had 15, 20 questions. So you have to beat that one. Probably a busy day with many presentations. Are there no questions?

We have one. It's from Carl-Emil Johannessen. How would we think about the margins in cage-based for the rest of 2022? Will impact for cost inflation and supply chain issues be similar as in Q1? Or should we expect a better or worse situation?

I think there were some specifics for Q1. That was the freight example, that is not going to repeat itself later in the year. So that is at least a positive one. That was roughly half of the cost -- or the inflation issue in sea-based. So at least that is calling for some gradual step-up. So very hard to give guiding in this environment. But we know that at least 50% of the ticket is not going to repeat itself. So we hope that we will see a gradual step-up. And we are also hunting for passing on -- passing through the cost increases as well. So -- but this world has been more dynamic than ever before. So very hard to give guiding. But with the information we have today, we hope to see some gradual step-up.

Yes. And then we have 2 questions from Mr. [ Hoganas ]. On Page 22, in your presentation, you state last 12 order intake was NOK 3.285 billion, but you have taken out AquaCon now in your order backlog representing NOK 1.3 billion. How do you explain that?

Can you repeat the question? Why we took out AquaCon? Was that the...

That was the question because we booked this as order intake back in Q3 '21.

Yes. So we did that 7, 8 months ago. We had some expectation based on the information from the company that project start were going to happen, something like mid this year. Now we are informed by the company that, that is going to be delayed and postponed due to spiking CapEx or building and construction costs in the U.S. And because of that, we think it's more correct to reflect this uncertainty and take it out of the order backlog. That's, of course, not a very desired situation, but we have to stay close to reality. So that's basically what happened there.

Yes. And a follow-up question from Mr. Hoganas. If you have taken out AquaCon, shouldn't you write down the investment made there?

We are still -- fair question. We are still working very closely with the company. The project is making good progress. We have been doing a lot of engineering also on the civil side. So the company, AquaCon themselves, they believe this project will happen but somewhat later than planned, and we share that view now. We have invested ballpark NOK 30 million in the company. And of course, we will give that another evaluation later in the year. But the way we see it today, we think the project will happen but later on.

A question from Mr. [ Niels Thomasen ]. Do you expect to be able to increase margins in sea-based going forward if the industry book-to-bill goes above 1x? Or is there space capacity out there?

In sea-based, well, of course, scale effect in our business is also very, very important. So activity level is the #1 positive driver for us. So if activity level is going to be fairly much higher than it used to be, then we will have scale advantage of our operation. And then everything else equal, you will see some margin step-up, but that's driven then by higher activity and scale. And the other driver is about our production innovation or technology innovation program. And just one example there, we are hopeful with the concept of Nautilus. If that is taken up by other farmers, you can also see some increased activity level because the farmers believe that's a winning concept. However, it's always a slow trend to implement fundamentally new way of farming practices. So typically, you get one pilot for one cage and you have to prove yourself for one generation and then you see an uptake afterwards. So -- but activity in general, together with innovation, can drive margin uptake.

Yes, I think we have one more question from Carl-Emil Johannessen. How should we think about the margin in the cage-based for the rest of 2022? Will impact for cost inflation and supply chain issues be similar as in Q1? Or should we expect a better or worse situation?

I think you read that question.

That was number one.

Then I don't think we have any further questions.

Okay. We'll wait for a little while in case you'd like to post any other questions. Okay. If no other questions, thank you very much for your attention, and have a nice day and weekend.

Thank you.