Nordic Aqua Partners A/S (NOAP) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Nordic Aqua's presentation of Q2. Today, we present myself Ragnar, CEO; and with me here in China is Andreas, our Managing Director; and from Oslo is Tom, CFO, also joining. If we go to the agenda today, then we will start with some highlights. Andreas will come in and present the market. I will come back with the operations and budget and then our CFO, Tom will come in with the financials, and I will sum up in the end. But remember also when we have this session that it is a possibility to come in and ask some questions in writings during the presentation, and then we will answer them in the end of the presentation. But first, starting with highlights. If we look at how things are going, we are quite satisfied, I think we can say with many things. If you look at the production, we are, you could say, at the goal where we wanted to be when we have Stage 1 and Stage 2 together, aiming for 8,000 tonnes harvest. And then we have just under 2,300 tonnes in production for the quarter. And if we just continue what we are producing right now, we will be at the level where we should be. Total biomass is quite high and the cost is coming down. The harvest has been ramped up during Q2, and we will further ramp up during Q3 and further going on. Sales price is EUR 7/kg and especially a strong achievement for the EUR 5 plus/kg area, where we are just under EUR 8 per kilo. Farming costs during the quarter came out at just over EUR 6. And operating EBIT is just under breakeven. So in Stage 2, we have completed. We are producing it full now, just some minor issues still ongoing. And we have also started to design the Stage 3. Our Managing Director in China will come just after me and explain more about the market, but we can still see that the market is just getting stronger and stronger in China. So hereby, I'd just like to give the word to you, Andreas.

Thank you, Ragnar. Yes, we are pleased to announce the Q2 results when it comes to the market performance and the harvest. The volume in the Q2 quarter ended up at 1,362 tonnes. And we've done some research on that, and we see that according to third-party Kontali, that is the first land-based salmon farmer that actually harvested more than 1,000 tonnes at an average weight, about 4 kilo in a single quarter, and that just underlines the trajectory we are in, which also Ragnar gave in his introduction. So the actual numbers for the quarter was 4.4 kilo HOG, which is a 5.3 kilo Live Weight, and we had a solid superior share of 96%. The average sales price achieved was around EUR 7, EUR 6.94 per kilo. We were obviously somewhat impacted by the softening spot prices that we saw in this Q2 and which was also a trend through the first half year of this year, which was also somewhat below the initial forecast that we've given late last year. It's also worth noting that some of the harvest volumes were skewed towards the end of the quarter as we were ramping up. I think it's also good to highlight, and this is something we are tracking closely, is that for the 5-plus superior grade we have, we are at a 21% price premium to the Sitagri export prices from Norway, and the prices for the quarter came in at EUR 7.85 per kilo. I think if you also look at the average harvest rates in general, we are tracking now closely what is the average harvest size from traditional salmon farming in Norway. And that is something which we think is important here in the local market to make sure that we get sizes that are attractive for our price achievements. If we look on the actual sizing, this is a topic we talked about before, but we think it's worth mentioning that there is a price band in China. We know there is a preference for larger sized fish. There are some local reasons for that in terms of taste and texture, yield, and also that there is a sashimi consumption. So there is a bigger sensitivity in terms of the pricing. But I think it's important to note here that we are improving when it comes to the premium we get, especially now if we compare it to earlier quarters. If you see all our sales and we look at it towards the Sitagri index, and we weight this and we do it weekly. So you have an apple-to-apple comparison. We are at 8% above Sitagri, which was an improvement from last quarter. And we see that being steady now in the market, being a player that is our customers are getting used to, they like our stability, they like our product. We see that, that is now gradually yielding results, and it also gives an encouragement for the future and the further building of the market. We also participated at the various events throughout the year. In Q2, we were at some customer-facing events where we also put our salmon, Nordic PureAtlantic, the brand in the spotlight, and we also received some award during the quarter, which was from the Shanghai Climate Week Lighthouse Outstanding Case Award for our sustainability efforts and also our green manufacturing when it comes to using solar panels. The overall value proposition, and we talked about this many times, but it still is something we talk to the market about, we talk to the customers about. And we feel that the freshness we can supply to the market is a unique feature that is very much a key aspect of seafood in China, where fresh seafood is something that is related to quality and that we can do it here in the way we do it, locally produced, localized Atlantic salmon with the RAS technology is a strong selling point. Furthermore, for safety, we have no antibiotics use in our facilities. We also do not use any type of medication and there's no parasite risk and so on, which also resonates well with the local market. We also, by being locally here, we take down the transport costs and also the transport carbon footprint, which has a sustainability aspect to it. And we are agile in terms of developing the market and looking to build more strategic partnerships when it comes to developing both the Food Service and the retail sector. Next. For those of you who don't know China that well, we are very well located. It's near Shanghai, the Yangtze River Delta. It's in an affluent area of China where you have in the radius of 5 hours, 500 million consumers that focus on health that are increasing the salmon consumption as we will see in a minute when it comes to how China is developing market wise. And it's also a good location to serve a wider population of China, more than 800 million within 12 hours. So we think the location we are at the moment has been a very good starting point when it comes to developing this local market. The actual development in Chinese market and ones who follow it will see that there's been strong growth year-on-year, especially since 2024. So far for this quarter, there was a year-on-year 25% increase. We had almost for the first half year, touching close to 100,000 tonnes. So the growth story of China continues, and there are some, obviously, some projections that have been made some years ago, 2023, Alibaba predicted [ 210,000 tonnes ] in 2030. We think that will be exceeded not in 2030, but before that, but there's also other, Pareto made a suggestion of 300,000 tonnes in year 2030. Who knows where it ends up? The key factor is that China is a growth story. It continues to be a growth story as the penetration of salmon continues with Chinese consumers as well as higher frequency. So we see very positively on the market development in China. And it's also a market with many origins, and we know that from before. You have Norway as the clear leader, which has especially these 2 last years when you have lower-than-expected pricing, Norway has been able to capture a lot of market share also in China and has an impressive growth in China for the first half year of 33%. And pricing, a bit depressed from what they've been used to. That is reasons that are related to the supply situation from Norway. But we think that the prices will, as some analysts also look at, will have a potential for improvement. And historically, we've seen that it's more than EUR 10 per kilo that's been a local pricing here. And that is not something which obviously will further strengthen our business case, but being here in China, which we think is being in the right market at the right time with the right product. Thank you.

Thanks, Andreas. We continue to go into operational parameters. As I mentioned to start with, I mean, the overall production is going very well. So the biomass production was just under 2,300 tonnes, especially in May and June, the production came really up to where we wanted to be month-on-month. We finished this facility in late February and already in May after we come up to full production. So we think that is a very good result to achieve. So the total biomass, 5,600 tonnes. And if you look at the cost, I mean, during the quarter, we have reduced that cost to EUR 4.7 per kilo, while the average cost because the cost before has been higher is EUR 5.4 per kilo. So if we can continue with the cost that we have at the moment, it will gradually come further down. If we look at what we have produced so far in the facility since the start, then it's just over 14,000 tonnes. Mortality has been on a fairly low level under 6% in all batches, of course, some batches are much lower than that. If we look at the harvest, we are just under 6,000 tonnes, and we have guided now going forward that for this year, we will be between 5,500 and 6,000 tonnes. Average weight of the harvest, 4.3 HOG. We have discussed that we wanted to come up to a higher level, but as we can see with the high biomass that we have right now, we don't have so much flexibility to produce the fish [ in our own ] facility now much larger. So we have a very high number, good survival rate. And that means that it will take a little bit longer than we have said before to get up the size. We have already guided now also that the size this next quarter or this quarter that we are in now, Q3 will be around the same level that has been in Q2. And we expect the same level in the end of the year. And sometime next year, maybe not before first, but at least before second quarter, we would like to come significantly higher than that. If we could get the size up to live weight up to 6 kg to 6.5 kg, we think that, that would be really beneficial for the prices, and generally good superior share also. And just looking briefly to the project, I mean now we are in full operations in Stage 1 and Stage 2. So we can say that Stage 2 has also been completed. We still haven't paid all the bills, but that is just a matter of a process that we always have in such projects. But as we mentioned before, the cost of Stage 2 was significantly lower than we expected when we started the project. And we are also looking into Stage 3 now to design, we have started up on designing. Always, of course, we find some improvements. So we think that Stage 3 will become a better facility than Stage 2, just like Stage 2 was a better facility than Stage 1. So we continue to improve also on that stage. And we don't know quite yet when the construction will start. There are still some issues to be discussed. And also, of course, we are not alone. We have also the government and we have financing partners and so on, and all that should be in place before we push the final button that we start. So okay, from this, I'll just give the word back to our CFO, Tom, and the financials.

Thank you. Yes. In the second quarter, our revenue was EUR 9.4 million, reflecting an 84% increase year-over-year, but perhaps more relevant, a 57% increase since Q1 this year. And obviously, the key driver for this is increased harvest volume, also increasing 77% to 1,362 tonnes from Q1 to Q2. We have touched upon the prices, which came in lower at EUR 6.94/kg compared to Q1 due to market conditions, but also due to the fact that we had harvest volumes skewed to the end of Q2. But we're happy to note that we are out of Sitagri 8% all over and 21% of the largest 5 kilo plus. Farming cost was EUR 6.05 per kilo, which was down from EUR 6.3 in Q1, and this is due to consistently good growth over time. And therefore, we had an operating EBIT of minus EUR 646,000. We had fair value adjustments during Q2 of minus EUR 4.2 million, reflecting the lower price band. And we had financial items in Q2 of positive EUR 100,000 basically due to unrealized currency gains. So that gives a loss for the quarter of EUR 4 million. Then we had positive net cash flow of EUR 722,000; EUR 580,000 from operations and about EUR 140,000 net from investments of CapEx into Stage 2 and financing of the same. Cash at the end of the quarter EUR 5.4 million and equity, EUR 108 million, corresponding to 56%. Then we have loan agreements with a broad base of Chinese banks for the long-term project finance and for the working capital. For the project finance, we have drawn equivalent to EUR 37 million of the EUR 49 million available, leaving EUR 12 million approximately for remaining CapEx. And for the working capital finance, we have currently around EUR 8 million available and have drawn EUR 5 million of those. For Stage 3, we will address the financing with our bank group as we progress our process towards final investment decision. So back to...

Thank you, Tom. I'll just remind people also once more that if you have any questions, there's a time delay in writing comments and questions, so please write down so we can see them when we end the presentation. But we just have a brief look at the outlook. And as we, as Andreas mentioned also that the market is growing still as we can see here in China significantly. And if you look at harvest volumes for Q3, we expect to be between 1,400 to 1,600 tonnes during the quarter and similar average weight as we had in the quarter before, 4.5 kilo. And we can say that we started to harvest some of the Q3 fish now early to mid, early in the quarter. So we will come up to full harvest volumes also in the time to come. For the year, we now guide 5,500 to 6,000 tonnes. And if we look at the price achievements, of course, as has been mentioned, we are above the Sitagri with the bigger fish on 21%, 8% on average, so that the small fish is still not really paying a large premium compared with Sitagri. And as we can move forward and get the sizes up as we intend, then the price achievement should further improve from stage that we are at now. Looking at the cost, we just mentioned it briefly, we are producing in Q2 at a lower rate than the standing biomass. So the cost development is going down. But of course, we know also that there will be some negative effects going forward, mainly from increased feed prices. So we will see next quarter or the next quarters, how the development will be, including some increases also. So we, the production is still running according to what we call full run rate on Stage 2. And as I mentioned before, we are working with the Stage 3 project, and we'll come back to you with the -- when the final decision is made, but it can be made by the end of this year or early next year. We will still wait to announce when exactly we think that we should put on the start button for the Stage 3 project. If we just go briefly to the summary of what we have presented today, then we can say that the financials, EUR 0.6 million loss at the EBIT value and harvest, high production, very good and project completed #2 and well away also to do to get ready for starting on Stage 3. So with this, we conclude the presentation today. Thank you for listening. And then I just want to ask my people, my person in Oslo, Tom, are there any questions, comments?

Yes. I will read some of the questions we have, some people have. Yes, I will start with one. What is the expected time line for ramping up harvest weights beyond Q3 this year?

I mentioned it in the presentation also that we will come with larger sizes. And I think we can be quite okay saying at least Q2, and we will see if we are able to take the harvest base up before that, but at least in Q2 next year, that's when we expect to come down. We could, of course, do something so that we can get it quicker. If we just harvested quite a bit of small fish now, then all the fish will be going to the higher size sooner. But we think it's better both working with the customers and also for the total financial picture that we gradually build it up. And on the prices, I think there was a question. So then I think I will leave it to Managing Director here to answer. Can you repeat the question just what it was, wasn't there a price question also?

It was, the first one was on harvest weight. Okay. But we have one on price. On price achievement, should we expect a similar price premium in Q3 versus Q2, given flattish average harvest weight? And what do you expect in Q4?