AKVA group ASA (AKVA) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and very much welcome to the third quarter presentation of AKVA Group. The agenda for this morning is that I will do the introduction and the highlights. Ronny Meinkoehn, our CFO, will do the financial performance, and we will also have a Q&A session at the end. So please post any questions during the presentation, and our moderator will read them during the Q&A. Let's go straight to the highlights for Q3. It was a high activity with revenue of NOK 936 million for the quarter and an intake of NOK 803 million. It came with a solid financial performance of EBIT of NOK 78 million. And also, please notify that not for the quarter, but into fourth quarter, we also announced that we were awarded the LOI from Cermaq related to our RAS contract for our new post-smolt facility in Chile with estimated contract value of EUR 30 million or approximately NOK 350 million. Also, we completed the acquisition of the 100% ownership of Observe Technologies that was also completed in Q3. And we continue to focus to further develop and improve implementation of the Nautilus solution. Actually, we will release the second version of the add on. We will come back to that a little later. Starting with the numbers. We had a record high revenue for Q3 on a like-for-like basis of NOK 936 million. Please notify that all the numbers I'm talking about is excluding the accounting impact from the acquisition of Observe, which was completed. So, my numbers are excluding the impact. EBITDA overall for the group of NOK 128 million, in Sea Based leading on with NOK 112 million, Digital with NOK 11 million and also Land Based notable with a positive EBIT of NOK 5 million. For the group on EBIT, NOK 78 million, which marked our strongest Q3 ever. Year-to-date, we have a revenue of NOK 2.7 billion, EBITDA of NOK 305 million and also EBIT year-to-date with NOK 162 million. And I have to say that I'm pleased with this positive development in the financial performance following the last few troublesome years. Looking into development of order intake and the order backlog. Order intake overall of NOK 803 million is acceptable for Q3. There is some certain seasonality also in the order intake, in particular for Sea Based or mainly Sea Based. So, on a like-for-like basis versus Q3 last year, it's a nice step-up. Also, I want to be very, very explicit that we expect a very strong order intake because we have a very strong momentum into Q4. Let's talk about that 3 months later, but the momentum into deep farming is a strong one. So, we see a very interesting marketplace there. Also, as already mentioned, the Cermaq contract of approximately NOK 350 million will also be booked in the order intake for Q4. So, with that into consideration, I consider the order backlog now by end of Q3 at approximately NOK 2.4 billion to be at a fair level. Then we have included some specific comments on what you could expect for Q4. For the overall OpEx, we expect to see a revenue of NOK 3.6 billion, which is representing 5% growth versus a year ago. Underneath there is NOK 600 million revenue in the Land Based for 2024. More specifically for Q4 on Sea Based, we expect NOK 650 million. So, NOK 400 million will be taken out of the existing order backlog and NOK 250 million. So, the NOK 450 million altogether, NOK 650 million, but the NOK 250 million will come from OpEx-based revenue, as we explained last time. Then some comments on the strategic and operational status. If we start with the high-level picture on the demand and also the expected supply growth over the next coming years into 2030. We just saw that the Kontali came in with an expectation of 4 million tons of salmon production in the year 2030, which corresponds with this orange yellow line. And there is a 5% consumption growth behind that year-on-year, which will lead to the 4 million tons in 2030. Then the big question is that, can traditional cage production based on exactly how we are doing things today, will that support the 5%? Likely not, probably that's more in the area of 1.5% to 2% growth. So, the light blue one is the delta between the 2, which needs to be some new growth or support of new growth from new technologies. And our view on the development, if we focus on the next 5 years plus into the year 2030 is that starting here on the right-hand side on the traditional coastal farming, which is in the normal fuel system where we have been farming all the years. We think that in this time window or the next 5 years plus that deep farming will be a very important contributor because deep farming comes with typically very much significantly lower mortality, hence, Hence, you can release growth. We think closed in this 5 years window will have some impact, but relatively limited in this short time frame. Whereby bottom right, we think post-smolt will be a big support, a big contributor to the growth, and we come back a little bit to our arguments there. And then to the left in the picture, we think semi-offshore and offshore in the next 5 years plus window that it will have some impact, but relatively limited because it will take new regulations and even new tax system to support growth. And those things just take some time. This plot, we find extremely interesting. Here, we have observed the correlation between production time in the sea, which is the horizontal axis here. You see the number of months grouped 3 and 3 months there on the horizontal axis and then the correlation of diseases. So, behind those 3 lines or curves, you have data from more than 5,000 production cycles all the way back from 2012. If you look at the yellow line here, you see that the number of PD pancreas disease outbreak is at a level of 10% up to 12 months. And if you are in more than 15 months, it's 25% or higher. So, you see a factor of 2.5 there correlated with time in the sea up from the first bucket, 912. And the same pattern you see with the mechanical sea lice treatment. Also there in the first bucket, you have a level of 30, 30 plus. And if you go 15-plus months, you have a factor of 2.5 there as well. So, I think what you can read out of this picture or this graph is that long production time in sea is driving higher mortality and hence, higher production cost. So, if we are to conclude on this, a preliminary high-level conclusion, we are saying that a viable production strategy will be to reduce the number of months in the sea. We think that will likely lead to reduced number of treatments, better fish health and lower mortality. And based on available technology commercialized today, we think that a strategy on a post-smolt, either on land or closed in sea is probably today the most proven technology to go to fewer months in the sea because everybody knows that if you start with a post-smolt of up to a kilo, you reduce the number of months to, let's say, 8 to 9 months or something. And the alternative to, for instance, the post-smolt strategy, either on land or closed in sea is to try to avoid the sea lice belt. And here, we talk about deep farming. AKVA is a complete supplier within Sea Based precision farming, that's our innovation agenda. We have a very complete offering, whether we talk about marine infrastructure precision feeding or deep farming as such. And I just want to comment a little bit more on deep farming. Here is the concept described. Fundamentally, it's about bringing the fish down in the deep 30-meter underneath compared with the surface. And the intention is to be below the sea lice belt. One of the important innovations were the airdome. We came with an airdome some few years ago, and that was first generation, first version, but we also saw that we could improve it. So now we have done important new innovation, and that is to improve the current version of the airdome. So we have just last week, Friday, we have technically released this new version. So that is now commercially available in the marketplace. And we expect to see a good momentum related to this new important innovation. Today, we have 17 active sites in sea based on the Nautilus technology. And overall, at a high level, the biological results, they are very promising. We see on a consistent basis that we are achieving; our customers are achieving a 90% plus reduction in the number of sea lice treatments, also consistently achieving 90% plus superior quality. On the marketplace market outlook for AKVA, we see a very good momentum there, as I already mentioned. We have some existing customers, and we also see very good interest for several new customers. So, we expect to see a very strong order intake for this product segment in the fourth quarter. The total market we estimate to be something like NOK 5 billion, NOK 6 billion over the next 8, 10 years. Post-smolt RAS, we have spoken about before quite a few times. But just to recap, in our view, there are significant benefits from our post-smolt strategy. Number one, it comes with reduced time in the sea if you apply a post-smolt strategy, which means based on the graph I just showed you, less sea lice treatments and improved fish health. Also, better utilization of the licenses from improved volume with 30% or higher, dependent, of course, of the size of the post-smolt. Moving on to NOAP Phase 2. The construction of Phase 1 was, as earlier reported, completed in Q2 with annual capacity of 4,000 tons. And the financial closure of that project is already done. And now we are busy with Phase 2 started there. That will bring revenue in Q4 this year and also into 2025. And translating this into expected activity for Land Based, we have an order backlog end of Q3 of NOK 1.5 billion. Also, we have announced the new Cermaq contract of NOK 350 million and probably a few smaller ones during Q4. And that will bring us into a situation with a solid order backlog into 2025, and that is supporting a minimum 30% step-up in activity compared with the NOK 600 million we are guiding in 2024. With regards to the market of post-smolt in Norway, we still see relatively slow momentum, but we expect to see more momentum into 2025. Also, with regards to ongoing in China, we expect to see new investments there during '25. On our digital solutions, AKVA Observe, very pleased to close this strategic important acquisition for us and become the 100% owner of Observe during the quarter. Observe is now installed at 112 sites. It's about automated feeding based on AI technology. Fishtalk, which is the biological ERP system, there we have a global market share of 60%. Also, AKVA Connect is related to bringing hardware and software together. And there, we have 383 modules active based on our recurring revenue model. Also, our relatively recent acquisition about AI-based camera submerge, there we have 23 installations now. And that's about having control of your estimated biomass control, which is important in general and particularly important when you are in the deep. Then coming down to my last slide, which is about the medium-term financial targets. 2024, we have consistently been guiding 5% growth and NOK 3.6 billion turnover for this year, and we are confirming that one. Moving on into next year and onwards, we are guiding at a 10% top line growth. And the reason for that is we expect Sea Based to be at 5%, and we expect to see higher growth from Land Based with minimum 30%, which we are rather confident we can do in '25 based on the order backlog we have and also digital higher with 10% to 20%. EBIT for the year approximately NOK 185 million, which is representing 5% of the revenue. Q4 in isolation, the EBIT for Q4 is lower than, for instance, Q2 and Q3, and that's due to seasonality with both lower turnover and a little weaker product mix than the Q2 and the Q3 quarter. 2025, we expect a minimum 6% EBIT, and we expect to see an improved ROS of 10% to 15% by 2025. So, what has been behind the very good step-up we see in EBIT from the last few years, with underperforming to more acceptable in '24 is our operational excellence program, the cost and the rightsizing program we implemented end of last year and also now going on, moving on, scaling of the digital and Land Based business. But also, very important has been a new contract management for Land Based. So, the sum of it has been the enablers for us to step up our profitability. So, I'll leave it there and I'd like to hand it over to Roni.

Thank you, Knut. Good morning to everyone. We are, of course, pleased to report this third quarter with a solid financial performance, and I will start with the consolidated income statement on group level. But first of all, we have this extraordinary positive one-off in the quarter related to the Observe transaction, which was completed early July. So, the reason behind this one-off is that we are according to the IFRS had to remeasure the previously held ownership of 33.7% at fair value. So, there is a positive one-off related to this remeasurement of NOK 76 million included in revenue and NOK 71 million included in profit. And the difference between the NOK 76 million and the NOK 71 million is transaction costs related to the acquisition. So, in my next slides, when I present both revenue and profitability on group level and for the Digital segment, I have adjusted for this one-off to compare apples to apples. So adjusted for the Observe transaction, we had revenue of NOK 936 million in the third quarter, which is a solid increase of NOK 118 million compared to Q3 last year, while revenue year-to-date is approximately just about NOK 2.7 billion and NOK 100 million higher than the same period last year. On EBIT, adjusted for the NOK 71 million on Observe, EBIT was NOK 78 million in Q3, which is NOK 49 million higher than Q3 last year. And this improved profitability is mainly related to the higher activity level, but we also see positive impacts from improved project margins in Land Based, a favorable product mix in Sea Based and overall, a lower cost level compared to last year. Year-to-date, we have an EBIT of NOK 162 million, again, adjusted for the NOK 71 million on Observe, which is NOK 85 million higher than the low NOK 77 million for the same period in 2023. We have high net financial costs of NOK 52 million in the quarter, which mainly consists of 2 items. First, we have the ordinary interest and the IFRS 16 interest of NOK 26 million. And then we have the impact from the reduced market value on the investment in Nordic Aqua Partners of another NOK 26 million. So, the book-to-bill ratio the last 12 months is 94% with an order intake of NOK 3.3 billion and revenue of NOK 3.5 billion. So, we're getting closer to reach our target for this year of NOK 3.6 billion in revenue. In Q3, revenue was 14.5% higher than the same period last year. And we are, of course, satisfied to see increased revenue in all 3 business segments. In Q3, book-to-bill ratio of 86%, and due to the seasonality in Sea Based, we expect as normal a somewhat lower revenue level in Q4 compared to Q2 and Q3. However, as Knut told you, we expect a solid order intake in Q4. We have already reported a EUR 30 million contract for Land Based with Cermaq in Chile. And so far, it's also promising with regards to Sea Based, which should result in a decent start to 2025. We have a strong momentum in the Nordic market with revenue 25% higher than Q3 last year. Relative stable revenue in other markets, except from Europe, Middle East, where we have this reduction of 33.5%, which is mainly driven by our operations in Turkey. Overall, Sea Based represented 79% of the total revenue in the quarter. We have a strong increase in Land Based revenue of 30%, increase in Sea Based of 12% and a slight increase in digital as well of 2%. A solid EBITDA margin in Q3 of 13.7% is mainly driven by a really strong EBITDA margin in Sea Based of 15.2%. The profitability in Land Based is also improving, which is in line with our expectations and guiding and is partly related to the higher activity level but also due to improved project margins as we closed the old legacy project in Q2 earlier this year. With regards to the financial position, we improved the position significantly during the quarter. Cash increased by NOK 156 million. And at the end of Q3, we had available cash of NOK 448 million, including available credit facilities with DNB. So, our current financing arrangement with DNB expire May next year. So, we have initiated the refinancing process with DNB and expect to close this process during Q4. Net working capital was reduced from 10.4% in Q2 to the low 7.3% in Q3, which is an improvement of NOK 92 million. However, we expect the net working capital to increase somewhat during Q4 as we are planning for high activity at our production facilities start of next year. And last, we have this important improvement in our NIBD/EBITDA covenant, which was reduced all the way down to 2.96 end of the quarter compared to the threshold of 4.5. So, the improved profitability, combined with the positive one-off on the observed the NOK 71 million contributes to this significant improvement. And also, the waiver we have had with DNB for the last year expired end of Q3, and we expect a comfortable headroom on the covenant going forward. With regards to the net interest-bearing debt development, it remained at the same level during the quarter. We have a positive impact from operations and reduced net working capital of a total amount of NOK 220 million, which was offset by CapEx of NOK 46 million. We have interest of NOK 26 million and this new debt of NOK 150 million related to the Observe transaction. Year-to-date, we see increase in net interest-bearing debt of NOK 156 million. On CapEx, we had NOK 46 million in the second quarter, where NOK 21 million is related to our 3 innovation agendas and another NOK 7 million is related to our new global ERP project. And regarding this new ERP project, we went live in several of our Sea Based companies 1st of October, which, of course, is an important milestone for this project. And implementation will now continue for the rest of the AKVA Group companies over the next few years. With regards to dividend, as we communicated in August, we have decided not to pay any dividend for the second half of '24. However, we are on track to get back in a position to pay dividends on a regular basis, and we will make a new assessment of this for the first half year in '25 as a part of our Q4 reporting in February next year. And now some more details on the financial performance in our 3 business segments, starting with the Sea Based Technology. So overall, a strong performance in Sea Based. Revenue increased by 27% quarter-on-quarter and EBITDA margin increased from 11.9% last year to the strong 15.2% in Q3 this year. We are, of course, very pleased with this development. In Q3, we had both a very strong product mix with regards to profitability and also high activity level, which provides great economies of scale. And we also see the positive impact from the rightsizing process we executed in Q4 last year. So, on the regions, in the Nordic region, a strong increase in revenue of 27% compared to last year and a slight increase in order intake of 2%. In Americas, both revenue and order intake is reduced by approximately 9% and 18%. And last, Europe, Middle East, reduced revenue of 24%. On the other hand, we have a strong order intake, which is 130% higher than Q3 last year, which is a signal that the revenue trend may turn positive going forward for this region. So, both the 12 months revenue trend and order intake trend is positive, and we expect this to continue, supported by what we forecast to be a solid order intake in Q4. So, order backlog of NOK 711 million is NOK 20 million lower than 1 year ago. And the OpEx-based revenue in Sea Based, that's an important contributor to growth and the high activity level. Close to 40% of the total revenue in the quarter was related to OpEx-based revenue, and this revenue was NOK 23 million or 9% higher in Q3 this year compared to last year. In Land Based, we had an order intake in Q3 of NOK 138 million, which is mainly related to variation orders on existing contracts. So, the award of the LOI from Cermaq Chile with the expected contract value of EUR 30 million will be added to the order intake and order backlog in Q4. We had a strong increase in revenue of 30% in the quarter compared to last year and the progress on the 2 larger contracts for NOAP, the Phase 2 and SalMar Finmark is according to plan. So overall, we expect the activity level for Land Based to increase gradually going forward. And finally, and most important, we also see improved profit margins for the business segment and EBITDA improved by NOK 16 million in Q3 this year compared to last year. And as I mentioned to you, the main reason is the increased activity level, but what is also important is the improved project margins. So, the current project portfolio within Land Based has now healthy profit margins and consists either of cost-plus contracts or fixed price contracts with mechanism for price escalation. So, we expect the profitability for Land Based to improve in Q4 and also into next year. So, after several quarters for Land Based with negative momentum, both on 12 months revenue trend and order intake trend, we now see signs of improvement. We still need more activity, new projects to generate a decent profit from this business segment, but we are for sure on the right track. So, order backlog of NOK 1.5 billion remains stable. And last, digital with an order intake of NOK 30 million in Q3 compared to NOK 21 million last year, a slight increase in revenue of 2%, while the profitability is at the same level as last year with an EBITDA margin of 31.9%. We still believe that the profitability in digital is on the soft side as the current cost level is too high compared to the current revenue level. So, the overall focus in digital is to further grow and boost the top line as we have the organization in place to deliver a significant higher revenue than we are at today. And also, the 100% acquisition of Observe Technologies will be an important engine to deliver on our growth ambitions. So, the 12 months revenue trend and order intake trend for Digital is positive. We have an order backlog of NOK 147 million, which is at the same level as last year. So that was my financial update. I will give it back to you, Knut, to talk about the outlook and the Q&A session.

Thank you very much, Ronny. So just concluding with the outlook, we think the high-level macro-outlook for our industry and also consensus amongst analysts and farmers is that salmon price is expected to remain strong in the next few years to come, driven by relatively reduced supply. We think this calls for a positive momentum from our customers, the salmon farmers to invest in technology, both within Sea Based, digital and Land Based. AKVA expect to see a normalization of the post-smolt market into '25. I could also add here that we see a strong momentum in the deep farming market. And also, with regards to the financials, we are aiming for or expecting a revenue of around NOK 3.6 billion for the full year with an EBIT of 5% in 2024. And for next year, we have guided around NOK 4 billion and a minimum 6% EBIT. And on this basis, we will and we are committed to continue to invest and improve our solutions, both within Sea Based, the digital and the Land Based technology. So, we leave it there, and let's open for Q&A.

We have one incoming question from Mr. Sander Lie in Pareto Securities.

You reiterate your medium-term targets in today's presentation. Despite acquiring the remaining share of Observe, can you explain why you are not increasing growth targets for digital?

For the last years until '24, we have seen a growth of roughly 30%, but from a low base. Now we have a higher base, and we think a 10%, 20% target is a good guidance going forward. We believe we have a lot of possibilities within Observe. That's why we acquired the company. We also believe that during '24, we have not been as successful with our go-to-market model, our sales approach as we should. We are now making many changes there. We are hiring quite a few specialists within the digital field in order to meet our customers. So, on that basis, we are pretty positive and optimistic that we will return to a reasonable growth of 10%, 20% in the years to go. That's the ambition level.

I can also add one comment to this because so far with Observe, we have had a reseller agreement with Observe. So, we have already included the revenue from Observe in our numbers. So, the effect from the 100% acquisition is not to increase the revenue. It's to improve the profit margins because we are now able to consolidate the company 100%. But most important for us doing the acquisition was, as Knut told you, is to get control of the company and the competence.

We have 3 incoming questions from Ola Trovatn in DNB. I think we'll take them one by one. First question is, can you comment on how deep farming sites have performed with respect to sea lice through Q3 and into Q4?

We just can repeat in general, what our customers are saying, and they are basically saying that they see a roughly 90% reduction in the number of sea lice treatments. I was in Oslo a couple of weeks ago and [indiscernible] Leroy, he was repeating that message at least 2 weeks ago. And that's the latest information we have. Leroy is one of our, by far, bigger customers using deep farming.

Second question is, would it be possible to integrate lasers against sea lice and deep farming pens? And is this something you are looking into?

No, we are impressed by the development of Stingray, which is, as far as I know, the only player within the laser technology. We think that's a very, very, very specific technology, which takes a lot of special effort and a lot of innovation and development over the years. So, that's not part of our innovation agenda, at least not for now. And we are focusing very much on preventive measures like deep farming and also digital support. But for now, that's not part of our innovation agenda.

And then the last one, will you contribute with equity in NOAP Phase 3, assuming FID?

That is not relevant for now. And in general, we are fine with the position we have in NOAP, but let's see what will happen in the future here. But for now, we are absolutely fine with the position we have in NOAP.

That's good. We don't have any more incoming questions for now. Perhaps we can give it more 15 more seconds.

Okay. Thanks for listening in, and have a nice day.