Aker Biomarine ASA

OSE:AKBM

Earnings Call Transcript 2024-Q1

[Matts Johansen, executive]

Welcome to the presentation of Aker BioMarine's First Quarter 2024 results, where myself and CFO, Katrine Klaveness, will take you through the key financials and the highlights from the quarter.

This is also the first quarter where we report according to the new structure of Aker BioMarine. We have started 2024 very well. We ended Q1 '24 revenues at $78.3 million, which is 13% up from the same quarter last year. It was driven by very good development in the QRILL Aqua segment with 33% growth and also 11% growth in the Superba segment.

The consumer health products had a relatively soft quarter first quarter this year, but generally, the underlying demand is good. As a result, EBITDA for the first quarter ended at $15.2 million, up from $6 million the same quarter last year. On the harvesting side, we achieved an all-time high for the company in the first quarter with more than 21,000 tons of products produced onboard our vessels. That is 7% more than we did the same quarter last year, which was also a very strong quarter.

And if you look at year-to-date offshore production as of yesterday, we have now produced more than 28,000 tons of products, and that is 10% more than what we had the same date last year. The drone is now in full operation, and it has already proven its worth, and we have used it several times to identify krill and move the vessels, improving the operations of our vessels.

We have also announced a strategic review on the Feed Ingredient business, but we will not comment on the process today. In Korea, the company has also received the second preapproved health claim from the Korean government that will further strengthen our position in the Korean market. We have also launched officially now our algae value proposition and our algae product and brand called FloraMarine, and we have now started ramping up production in our Houston facility.

And last but not least, Aker BioMarine was also recently awarded the Export Company of the Year of Norway in 2023 given out by the government organization of Innovation Norway and Export Finance. $78.3 million in revenue, a 13% growth year-over-year. That is, in fact, the seventh quarter in a row where the company delivers year-over-year growth. I will now take you through each of the segments and give highlights on the financials and activities for each of those segments.

As you remember, we have restructured the company into 4 distinct businesses. We do that to achieve focus and adjustments to strategy to address the particular market dynamics for each of these segments. We went live first of January this year and have now separate organizations, separate leadership, separate ERB, separate P&L in all those 4 segments. The 4 segments are Feed Ingredients, which compromises of the harvesting operation, our logistical operation as well as all our Krill with Q products. It is the Human Health Ingredients segment, which is our manufacturing facility in Houston as well as all our ingredients that we sell into the human dietary supplement market, such as Superba, PL+, LYSOVETA and now also FloraMarine, our algae product.

Then we have Consumer Health Product business which is what we formerly called Lang, our private label business to the major retailers in the U.S. And last but not least, we have our Emerging Businesses which is the early phase businesses in Aker BioMarine that is still not cash positive, where the focus is to get them into profitability as soon as possible. In this segment, you will find both Kori, our plastic company, AION as well as Understory Protein.

Now digging into the Feed Ingredients segment. We delivered very strong performance in that segment in the first quarter, 41% growth year-over-year. That is driven by very good demand in the aquaculture segment. We delivered close to 20% volume growth as well as 10% growth in prices year-over-year. That is reflecting the significant demand we see in that segment and is actually above what we expected coming into this year. On top of that, we have signed new large agreement for our pet product effectively more than doubling the sales compared to what we had last year. As a result, the Pet segment delivers more than 160% growth in the first quarter of 2024.

We are also seeing improvements in the margins, both driven by the underlying performance of the business, but also coming out of a change in cost allocation from the harvesting in the fourth quarter. I want to highlight the effects of selling what we call Nutra meal from Feed Ingredient to Human Health Ingredients.

So when we make the Superba krill oil in our Houston factory, we source what we call Nutra meal from Feed Ingredient. They will produce it, and they will sell it to Human Health Ingredients. And in a given case, let's say, we will produce and sell from Feed Ingredient to Human Health Ingredients, 5,500 tons in a year of this Nutra meal. Then that product is being processed in our Houston facility, and those 5,500 tons of Nutra meal will result in about 825 tons of oil that we will sell the normal way in the Human Health Ingredients side, but it will also generate more than 4,000 tons of what we call QHP, QRILL High Protein Meal. QRILL meal with high protein content.

That will be sold and the revenues will be recognized in the Human Health Ingredient segment. The Houston facility, they will typically produce what they need for the coming 9 to 12 months period and they will, at the end of the year, provide instructions to the Feed Ingredient segment, how much Nutra meal they will need the coming year.

For 2024, Human Health Ingredient has ordered 6,500 tons of Nutra meal from the Feed Ingredient side. The revenues from the Nutra meal will be recognized in the Feed Ingredient side of the business as it's shipped from Feed Ingredient to the Human Health Ingredient business.

Typically, we will produce the Nutra meal in the first quarter and second quarter of the year, but we haven't shipped any of those products yet from our logistical operation in Montevideo to Houston. And as a result, in the first quarter '24, we have 0 revenues in the Feed Ingredients segment from that Nutra meal business.

In our pro forma numbers from 2023, we moved all the inventory we have of Nutra meal. We moved that and sold it from Feed Ingredient to Human Health Ingredients in the fourth quarter of '23. You can see that in the previous slide in that light blue color on top of the revenue stack on the graph. We have higher prices on the Nutra meal compared to what we have on the aquaculture product. And as a result, the margins for the Feed Ingredient will improve when we sell the Nutra meal to Human Health Ingredients. Also on the previous slide, you can see illustrated at the bottom there in the fourth quarter '23, the gross margin for the business with -- or the EBITDA margin for the business with and without that Nutra meal effect going from 36% to 57% gross margin.

Moving over to the offshore and harvesting side. As mentioned, more than 21,000 tons of product produced in the first quarter, 7% up from the same quarter last year, an all-time high for the company on top of a very strong first quarter last year as well and we have continued even better into Q2. So year-to-date, as of yesterday, we have now produced more than 28,000 tons of product, and that is 10% more than what we did the same period last year.

The drone is now in full operation in Antarctica and have several times identified krill and moved the vessels and hence improving the offshore operation. So far, we have operated a drone in pretty close proximity to the vessels. But as we learn to operate it more and more, we will move it further and further away from the fishing field and covering a larger and larger area.

We have also changed and improved our fueling strategy and signed a new contract with a fuel provider. As you might remember from last year, there is a spread of fuel prices between Rotterdam and where we buy fuel in Antarctica or in South America. That spread has been quite volatile the last years and especially high. Now we have signed a new fuel contract where that spread is fixed. And as a result, we will lower the cost of our fuel purchases, but more importantly, we will now fuel directly from the fuel tankers on the fishing field which means that our logistical vessel do not have to stop by Rio Grande in Brazil, for instance, to pick up fuel when we do our offload operation. And as a result, we avoid the fishing vessels becoming full and we will get more fishing days as a result.

The good start of the year tells us that 2024 looks promising. If you look at the red dotted line to the right, that represents the Q1 harvest levels, you need to be able to reach 60,000 tons of product production for a full year. So as you can see in the first quarter, we are tracking ahead of that plan.

We still need to harvest in Q2 and Q3 and Q4, but so far, so good. Moving into Human Health Ingredients, where we delivered $22.4 million in revenues, up from $19.9 million the same quarter last year but is 13% up. That is driven 11% by improved Superba sales. And what is especially nice to see in the first quarter is now also U.S. is coming along with good growth that has been the last market to respond to our turnaround plan.

We have also good growth with Algae coming in as a new business unit and also selling more QHP at better prices in the first quarter compared to the same quarter last year. We have also received the second preapproved health claim from the Korean government. This claim is for skin health or beauty and will further strengthen the position of QRILL in the Korean market.

We continue to work with our partner to step-by-step develop that market and optimize the communication and the value proposition and slowly and day by day, we are improving. It is going a little bit slower than what we anticipated when we got the first claim but still developing positively.

We have now set up about 100 tons of Algae production in Houston, as we have reported earlier, that 100 tons is already sold out, and we are currently now ramping up production and increasing capacity in the Houston facility for algae. We will talk more about that soon.

I wanted also to share some more light on our Human Health Ingredient business in the Chinese market. China has been a priority for Aker BioMarine in the recent years, and we have strengthened our position and our organization in the Chinese market over the last years. As you can see on the graph to the bottom, we delivered in 2023, about $12 million of revenue, which is about doubling from the year before. And also in 2022, we also delivered a doubling from 2021.

We also see a strong beginning of the year in Superba in the Chinese market as well. Recently, we have also signed a large strategic agreement with the largest Superba customer that we have in China. This is a customer we've been working with for many years, and now we are significantly strengthening our partnership. The agreement that we signed here in Oslo a couple of weeks ago has 3 components.

First, it has a 10-year contract for Superba where the customer will buy all their krill needs from us going forward. They have indicated volumes in the next 5 years that potentially will take this customer to the #1 largest customer in Aker BioMarine. Secondly, they are taking a significant chunk of the Ski protein factory for Understory and launch a protein supplement in the Chinese market.

This is also a long-term agreement with minimum volume commitments. And last but not least, we have also signed a strategic partnership for Kori, where our partner will launch Kori in the Chinese market. They will do marketing, they will do distribution through their channels, and they will also do local production of the product. They will source in Superba from us at normal market rates and then they will pay a royalty to Kori to use the brand.

Also in this agreement, there are minimum commitments in the years to come. Then on the Algae front, in March this year, we launched our algae value proposition. We call the product, FloraMarine, and it is the highest available product on the market when it comes to DHA content from a natural source. So it's got a strong value proposition from that point of view.

Also, with our Algae business, we're utilizing the existing organization, the existing cost base and existing infrastructure in Houston, which means we have a very favorable cost base. We're also building on the reputation Aker BioMarine has built in the dietary supplement space over the last 15 years and utilizing the existing customer relationship and sales organization across the globe putting us in a very good position to take a leading position in this Algae space.

The Algae market consists of 3 elements. It has one part which is infant formula, second part, which is food and beverage and the third part, which is dietary supplements. We are focusing today on the dietary supplement side of the Algae business because that is where we have our knowledge, our position and our relationships. That market is about $82 million of revenue and has been growing about 10% per year.

We plan to be a significant player in that space. What is also exciting about the algae opportunity and also one of the key reasons why we make this move is that we believe that with the continued increased pricing for Omega 3s going forward, Algae and fish oil will reach price parity, which means that Algae will become a direct substitute for fish oil and you will then no longer just tap into that Algae market of $82 million, but rather the global dietary supplement market for fish oil which is significantly larger.

Moving over to Consumer Health products, our private label business in the U.S. As you can see on the Q1 '24, we delivered a relatively soft quarter with $26.1 million of revenue, which is down quite significantly from the first quarter last year. This is mainly driven by promotional activities that we had in the first quarter last year and timing of orders in the first quarter of '24.

If you look at underlying demand for the products from consumer health products, we see continued strong demand and look at the first quarter '24 as a timing effect. Looking at the EBITDA, we delivered $1.7 million of EBITDA, which is quite good given the drop in revenue. That means that the gross margins, they are stable, and the fixed costs are coming down.

Then moving into emerging businesses. The numbers you see on the right side is mainly Kori. As the Understory factory has not yet started to invoice customers and the cost of that factory is still being capitalized.

As you can see, we delivered $3.1 million of revenue from Kori in the first quarter 2024, which is down from the first quarter '23. The main difference between those quarters is that we have national distribution of Costco in the first quarter of '23, which was a significant chunk of that business that we do not longer have. But you can see the positive development of Kori, the last quarters.

Also, we have now shifted Kori marketing over to fully digital channels and making our marketing efforts significantly more efficient and as a result cutting our costs. And as you can see, EBITDA is then improved, and we delivered now negative $1 million for the emerging businesses in the first quarter of '24. The protein factory in Ski is now producing commercial batches and will soon start shipping the first batches to customers.

With that, I will now give the word to CFO, Katrine Klaveness, which will take you through the highlights of the financials.

[Katrine Klaveness, executive]

Good morning. I will take you through the financials for the quarter, presented in a new and, I believe, an improved structure. Aker BioMarine reports a strong first quarter, driven by good underlying performance in the Feed and Human Ingredient segment, in addition to a change in offshore cost allocation that I will come back to.

For the group, sales were up 13% year-over-year, while gross margin was on par with same year at 29% due to lower realization of internal profits. SG&A is down $3 million compared to same quarter last year due to savings from the improvement program as well as lower marketing spend in Epion.

The increase in depreciation of production assets is due to the new cost allocation that I will explain in a second, but offshore depreciation is now done over 10 months per year, resulting in a higher amount in Q1 than compared to last year.

Adjustments are $3.4 million in the quarter were $3 million is related to the restructuring -- to the strategic review process in Feed Ingredients and the improvement programs, while $0.4 million is related to a restructuring effort in line, including severance packages.

Finally, this takes us to an EBITDA of $15.2 million for the quarter, significantly up from same period last year, driven by good underlying operational performance, but also accounting changes where increased depreciation improves the result, and this is partly offset by lower internal profit, reducing the results year-on-year.

This illustration tries to explain the main changes in the new cost allocation for the Feed Ingredients segment. The intention behind the change is to better align gross margins with periods of high operational activity.

Historically, Q1 has been a 0 margin quarter despite strong harvesting, while Q3 has been the opposite. And with the vessels in layup for most of Q4, the following 3 changes have been implemented. First, all maintenance-related operational cost in Q4 is now booked as CapEx in addition to regular shipyard CapEx. The amount is then depreciated over the following 10 months in January to October and the amount that was capitalized in Q4 2023 was $7.2 million.

Second, also now ordinary vessel depreciation is spread across 10 months per year. And thirdly, a standard cost will be calculated for each year. This will result in a negative COGS adjustment for the second half of the year but equally and improved COGS for the first half the following year. In year 1, 2024, there will be a negative gross profit effect as no standard cost adjustment were done for 2023.

After the initial year, EBITDA will increase with the same amount that is allocated from OpEx to CapEx the year before. On a quarterly basis, this will lead to a new depreciation schedule with corresponding gross margin changes versus the current structure, as illustrated on the right-hand side.

As the figure shows, Q1 2024 will have an improved gross margin of about 11 percentage points, while Q3 and Q4 will have negative changes of approximately 20 and 10 percentage points, respectively. When rolling forward into the second year 2025, the Q1 effect will be significantly higher and the total gross margin change is netted throughout the year.

In addition to the 4 business segments that Matts presented, there is a fifth segment called Other Elim. Two main items will flow through these segments. First one, all SG&A costs not directly attributable to the segment's operations. This includes corporate costs like finance, legal, HR, communication and IT.

It should be noted that the Consumer Health Products segment, which is Lang Pharma has all their corporate costs embedded in the segment as this is a fully autonomous entity. Corporate projects like the improvement projects, restructuring efforts and the Feed Ingredients strategic review are booked here and then adjusted out in the adjusted EBITDA.

Second item, all eliminations related to internal sales between the segments are booked here. Nutra sales between Feed Ingredients and Human Ingredients will make up a new internal sales stream in addition to krill oil to Lang and Epion. There were no Nutra sales in the quarter as a significant Nutra inventory was transferred end of 2023.

As a result of the above, the EBITDA contribution from this segment will be negative as shown in the graph to the bottom right. Working capital. The increase in net working capital from last quarter is mainly driven by lower payables this quarter as large payments have been made for the last year's shipyard and fuel purchase end of 2023.

For inventory, we expect Superba to stay on current levels going forward to keep the necessary safety stock to avoid airfreight and have product in case of an unexpected plant shutdown. Working capital is down from the same period last year as there has been inventory build downs for Superba krill oil as well as for Lang Pharma products.

Moving over to CapEx. With the protein plant investment behind us, there are no new Board approved larger investment projects in the pipeline. We have guided on CapEx of $15 million to $20 million for the year, which includes shipyard operations at the Ski plant, Houston maintenance and Algae production capacity increase.

This figure is before we allocate additional offshore operational maintenance costs according to the new costing model. CapEx in the quarter include shipyard payments from last year, Houston maintenance and Ski protein plant operations.

Cash flow in the quarter were negative $1.5 million from operations, driven by an increase in working capital as a result of lower payables as mentioned earlier. Cash flow from investing activities was $5 million and includes the before-mentioned shipyard payments, Houston maintenance and Ski protein plant operations. Cash generation in the quarter was $4.4 million, ending the quarter at a cash balance of $32 million.

The company has, in addition, $11 million available under its financing facilities. Net interest-bearing debt in the quarter is on par with same quarter last year at $372 million indicating that the company is now able to cover all expenses with its operational cash flow.

Leverage covenant was reported below the threshold of 5x EBITDA or net debt for the quarter, which is an important improvement in the company's capital structure. I will end off with the balance sheet. Most of the important items have already been discussed, but I would like to draw your attention to a few additional items.

First, the deferred tax asset of $25 million was recognized in Q4 2023 as a result of the restructuring. This tax asset sits with the Feed Ingredient segment. Second, with all fuel option contracts now being sold end of 2023, derivative assets are now set at 0. And finally, we still have -- we have a stable equity ratio at 44%. That concludes the financial section, and I will leave the word to Matts to sum up.

[Matts Johansen, executive]

Thank you, Katrine. So just to summarize what we have now seen in the beginning of 2024, and how that kind of tells a picture going forward. First of all, we have now successfully implemented the new structure. We did that without any interruption on our business or any lack of focus, and we can already see the effects of that increased focus, dedication and accountability from those 4 new segments.

We delivered strong top line growth in the first quarter, and we have an outlook to continue that in the quarter and years to come. We see very good operational performance in the offshore operation. And as mentioned, we are now tracking at the 60,000 tons of product produced for 2024 as of year-to-date.

The market sentiments for the Feed Ingredients segment is very strong coming into the year even stronger than we saw last year, and we saw that both in the volume increases and especially the price increases of 10% year-over-year.

We have seen also similar strong market sentiments for the Human segment, mainly driven from strong development in the Asian region. As mentioned, for the human health products, we saw a relatively soft quarter in the first quarter '24 but that is timing effects, and we are comfortable with the underlying demand and performance for the Consumer Health product business.

So that concludes our presentation today. We will now move into a Q&A session, where you can send in your questions to [e-mail] and me and Katrine will answer those questions.

[Unknown Executive]

Okay. So opening up the Q&A here. Not a lot of questions received yet, but maybe you can start off then explaining if you see any risk to krill meal prices now as the fisheries in Peru has opened up again, with a sizable quota.

[Matts Johansen, executive]

Yes. So the quota for the krill industry for the first half of '24 came in at 2.5 million tons which is quite okay quota, but in line with expectations from the market. There is long lag of omega-3 needs, especially for the Human Health segments from the dietary supplement space. And it's believed that a significant part of that quota will be absorbed by that segment just to get their inventories in check into the levels they need to have it. We believe that it will have a limited impact on prices, especially for Omega-3 at least in the short and medium term.

[Unknown Executive]

And then staying on Feed Ingredients. Can you say something about what you see in the market? You had good revenue growth for the quarter? Is it generally good demand across the board? Or is it some market that drives this specifically?

[Matts Johansen, executive]

Yes. I mean you saw the 41% revenue growth for the Feed Ingredients segment, which is exceptionally strong. I think it's probably one of the strongest quarter we have had in that quarter, and we see really good demand across all segments, also from the shrimp markets despite the shrimp markets being a little bit depressed with lower pricing.

So -- and I would say that it surprises a bit, but we would see that type of strong demand. And you can see the effect also in our pricing coming up 10% but it's also very nice to introduce the new contract we signed on the Pet side, which will significantly drive the volumes there, more than double the volumes and the prices for Pet is also significantly higher than what we have in aquaculture. And together with the Nutra meal, those -- the Pet and Nutra volumes will improve the overall price mix for the segment as a whole. So we're very satisfied with the market development and our performance from that segment.

[Unknown Executive]

And then for Superba and sales to Korea, how is that developing?

[Matts Johansen, executive]

Yes. So it's work happening every day. I think we have explained it a little bit before. It takes a little bit longer now than before. I mean, typically, the way they work is that they go live on a TV show, selling the product, analyze each section of that and make improvements for the next program.

In the past, you have several TV programs every day, and you will change it from the morning to the afternoon. Now all these changes you do need to be approved by the government. They have a quite efficient process, but it takes 10 days for every change you do. And as a result, that kind of cycle of kind of finding the optimal recipe is going slower than last time and the main players there, they want to wait until they have really optimized the messaging before they kind of put the full pressure on the market.

But it's making improvements every month, it's better and better, and we are now just waiting for the moment where it will come of -- open up the kind of full marketing spend in that market from our partners.

[Unknown Executive]

So we received no further questions, that I guess, concludes the Q&A session.

[Matts Johansen, executive]

Thank you.