Aker Biomarine ASA

OSE:AKBM

Earnings Call Transcript 2022-Q2

[Matts Johansen, executive]

Good morning, and welcome to Aker BioMarine's Second Quarter Presentation, where myself and CFO, Katrine Klaveness, will take you through the numbers from the quarter, as well as the highlights. We will have a section at the end for Q&A, and you can already now start to e-mail your questions at [e-mail], and I believe you will see the e-mail address at the bottom of your screen throughout the presentation as well.I'm very pleased with the performance of the second quarter as well as the outlook for the rest of the year. Our revenue ended on par with the same quarter last year, but with significant growth from the previous quarter. Our EBITDA of $21.4 million shows good growth from the second quarter last year, as well as significant growth from the previous quarter. I'm also happy to report positive numbers, black numbers at the bottom line with $15 million in net profit.On the ingredient side, we experienced strong growth both in volume and prices for our Qrill Aqua segment, while our Superba segment has been impacted by some of those macroeconomic challenges we see around us today. On the branded side, the private label demand is good, but we had some supply chain challenges in the second quarter that impacted the numbers. But I'm also happy to report that the Kori branded sales offset some of those challenges in the private label and had a very strong quarter.Harvesting was also very strong with an all-time high second quarter number of 16.5000 tons of production, that's 19% higher than the same quarter last year. We also spin-out AION, our plastic circular start up in the quarter, resulting in a net profit of $6.9 million. The revenue ended at $73.4 million, that's on par with the same quarter last year, but 28% growth compared to the previous quarter. And as mentioned, the EBITDA ended at $21.4 million.On the harvesting side, our vessels were operating perfectly through uptime, no technical issues. There is good krill availability and there is less competition on the fishing field compared to previous years. So far this year, we have harvested 66% of all the krill that's been harvested globally so far this year.We have now moved the fleet to area 48.3, that's the most Northern part of Antarctica. And if you look to the graph on the right side, you can see that in the third quarter last year, we struggled with harvesting both in year 2020 and 2021. That was because we were not able to find any krill in area 48.3. But I'm very happy to report that the vessels are now harvesting in 48.3, and there is krill in the area.We're getting delivery on our autonomous drone in the third quarter and we'll take it back to this harvesting operations after the shipyard this autumn. This will be an important tool for us to make our fishing operation much more efficient. We're planning to end this season at the beginning of October and go into shipyard and be back in the fishing field at the end of November.Last quarter, we gave you a deep dive in our branded business. This quarter, we'll dig a little bit deeper in the ingredient side of our business. Starting with Qrill Aqua or Animal Health and Nutrition segment. As mentioned, we had a very strong quarter for Qrill Aqua with 18% growth compared to the same quarter last year. We got an important approval by the FDA for the U.S. market for our Qrill ingredients, that is very important, because most feed producer look at both the Canadian and the U.S. market as one market. So being able to access the U.S. market also open up the Canadian market. So that's a whole new market for us to go in with our products, where we expect good demand in the years to come. It took us actually 10 years to get that approval in place.Also in the quarter, we published a new study demonstrating the superior growth benefits of Qrill in shrimp diets, where we basically compared Qrill with other key growth ingredients and Qrill outperformed everybody. This is good documentation for the shrimp customers globally and all the prospects that we're working with, and shrimp feed also the fastest growing segment within our Animal Health and Nutrition segment.There is significant price inflation in the aquaculture industry, both on the salmon prices and shrimp prices, but more importantly, also on all the other raw materials and ingredients that goes into feed. As a result of that, we are also planning to -- or have already increased prices for our Qrill products.If you look at the slide and the graph to the left, you'll see that salmon prices has grown more than double the last year, while shrimp prices are up more than 30%. When you have higher prices like that, you have good demand for feed and ingredients that facilitates growth both for salmon and for shrimp. This is a key driver for us for why we see an increased demand for Qrill these days.On the right graph, you'll see the development on some of the other key ingredient that goes into feed formulas. And as you can see, all ingredients has been growing quite significantly the last year. That makes the competitiveness of our Qrill ingredient high. So on the back of this, going into third quarter, we have increased the prices for our Qrill portfolio quite significantly.And even if we increased our prices significantly now into the third quarter, we're still very competitive and our ingredient provides a good return on investment for all the shrimp and salmon farmers out there. We have done many studies both in shrimp and salmon, where we document the benefit our products make and these studies are very often done in controlled environment.When farmers come and look at these data, they always discount the results with that there is going to be lower effects when you're looking at commercial, large scale operation. So if you discounted by two-thirds, so you only believe in one-third of the results that we see in our studies. You'll see that both for salmon and for shrimp, there's a 300% return on investment if you add our Qrill ingredient into the diet. So, certainly look very positive going forward for the Qrill segment.On the Superba side, we did $14.5 million of revenue in the quarter, which is lower than what we anticipated earlier. There's two key drivers for that. Number one is the key growth market in China, has basically been locked down for the last several months, because of COVID, which means that both our sales rep and our customers hasn't really been able to do business the last month. Things are looking like it can start up, but there is still uncertainties for how this develop into the coming quarters.The second effect is what we see in, especially in the U.S., but also in other markets, how retailers and customers are preparing for a potential recession. We see the big retail chains in the U.S. changing their policy for inventory to go from 10 weeks of sales to five weeks of sales. That impacts the orders that retailers send to our customers and the orders our customers send to us. And typically the customer will do the same, giving us a double impact. That has hit us quite significantly now in the second quarter, and we believe you might see some of those effect also in the third quarter coming up now.Consumer demand is still good, so this is about balancing inventories. And of course, you will have the same effect the other way around once things starts to normalize again. We have a sales acceleration plan in-place for Superba, and I'm actually very pleased with the development around that. The underlying activity, the leading indicators for Superba are very good.There's four pillars in the sales acceleration plan for Superba. Number one is to strengthen the sales organization with more resources on the ground, close to the prospect and the customers. Number two, is a high-quality pipeline that we systematically follow up, both to increase it with new high quality prospects, but also convert it into hard business. Number three is new products and innovations that we are launching this year that will increase the addressable market for krill oil. And number four, last but not least, is the new studies and the new claims that will strengthen the competitiveness and the value proposition of Superba krill oil.And I will now take you through each of those four pillars. Starting with the organization side. So at the end of first quarter, Simon took over the leadership for our Superba segment or the Human Health and Nutrition segment. And he is starting to make his mark on the segment. He has recruited two new leader in the most important markets: Charlie, which is responsible for Americas, South America and North America; and Thong, which is responsible for the Asian region.Both Charlie and Thong has been recruited several new resources during the last couple of months, more or less doubled the sales force. So that we can be closer to the customer in Asia, open up new offices and new markets, and making sure that we can convert all those opportunities that we see out there. These new hires are typically senior industry salespeople that already have the networks, know the industry and can get a flying start with Superba in the market.On the pipeline of prospects, most of our growth going forward will come from new prospects. We will also get growth from our existing customers, but the most important driver for growth is all those opportunities we see with new customers, both in existing markets and in new markets. And that's why, both for Simon and myself, it's a big focus to build a high quality prospect pipeline, but we constantly fill with new prospect and that we're able to follow up and convert into harder business.With combining the increased sales force and the network they have with the strengthened value proposition and the new studies and the new products coming out, we have a good basis for building up a very strong prospect pipeline. In the capital market update that we did in December, we shared some of the views of what we see as the potential for Superba, and as you can see illustrated on this slide from that presentation, we see an upside or more than 3x the current sales of Superba.The third driver is new product and innovations that we also talked about in the Capital Market Update in December. Now, we have done the first soft launch and planning now for our full rollout of our new product concept called phospholipid plus. You can read more about it on www.phospholipid.plus. You'll see it in the bottom of the screen the e-mail address.What it is? It is a new product technology that will increase significantly the addressable market for krill oil. What we are doing, we're taking the properties of krill oil that makes it a more efficient omega-3 to utilize those properties also for other ingredients. And simply explained, if you remember the reason why omega-3 from krill works better than other sources of omega-3 is because it's connected to this phospholipid molecules.And all the cells in our body has this layer of phospholipids and in order to enter the cells and have some effect, it needs to be in that phospholipid format. So what we have developed now is a technology where we can wrap this phospholipids you find in krill oil around other ingredients, other molecules to enhance the performance of those other ingredients.So far we have developed four products, where we both have formulated the products, but also done studies where we can demonstrate actually how much better the other ingredient becomes. You can see on the right side here a little graph, and this is from one of those ingredients that we have developed a product for, which is CBD, fast growing ingredient globally today.And the red line in the graph basically shows the uptake of CBD when you formulate it with our phospholipid plus formula compared to the other competing kind of formulas in the market today. And as you can see, the uptake of CBD is significantly higher than all the other possibilities to formulate CBD, that either drives the cost down for the CBD brand, so they can use less CBD in their formula or they can make a superior CBD product to differentiate and drive growth.The importance of this product innovation is that it increases our addressable market. Those four formula we're working with starts from the -- actually on the omega-3 side, where we're looking at our phospholipid technology to be used to wrap around other sources of omega-3 and expand the addressable market in the omega-3 space.The curcumin market or the curcumin ingredient, which is another ingredient that we've been working with. It's today a $200 million market growing quite fast. We will now be able to address that market as well with our krill oil formula. The same goes for CBD, $1.6 billion, and CoQ10, which is a $600 million market. So by this, we suddenly have a much larger prospect group and much larger addressable market for our krill oil products. We are planning for a full rollout of this product in fourth quarter, and part of the shutdown that we talked about earlier in Houston is to prepare for commercial production of these type of formula.Last, but not least, it's the improved studies and claims that have been developed lately for the Superba segment. We talked about the first -- in the first quarter, we talked about this new important cardiovascular study that came out, that demonstrate how krill oil significantly reduce the risk for cardiovascular disease. In the second quarter, we had another very important published paper, documenting how krill oil enhances strength and muscle size for seniors. That gives our customers a new large addressable market, new value proposition in a market where there is big demand for these type of products.The third important study is a study on arthritis. It's not published yet. It will be published about August, so in about a month. And what that study demonstrate is that by taking a krill oil supplement, you reduce the pain related to arthritis significantly. This is a solid study and one of the few studies in omega-3 space that really documents how an omega-3 product and specifically here, Superba krill oil reduces all the pain and discomfort related to the arthritis, which is a big problem for a lot of people in society today.On the back of these studies, we are seeking pre-approved health claims by some of the governments globally. In Australia, we have now filed with the Australian government and asked for a health claim based on that arthritis study. If we get this approved, it will be the first health claim of that type related to arthritis for any product in the Australian market, that will open up new possibilities for Superba in Australia. We expect a decision on that by the end of 2022.In China, we have filed for six, that's called blue hat, that is also health claims, pre-approved by the Chinese government for six different type of health indications. This processes typically take some time and we expect the first one to come through within next year. Also in Korea, we are making good progress. We have now three application in -- with the Korean Government, and our partner in Korea is preparing for a decision quite soon for the first ones.So that was a little deep dive into the ingredient side. In sum, we have these macroeconomic challenges that we've been facing right now on the Superba side, but I'm very happy with the underlying development for Superba, and I feel quite confident that we're going to reach our long-term targets of 15% to 20% growth per year for Superba.On the branded side, we have good demand for the private label products. We have order backlogs building up, but we've been having some supply chain issues, especially with ingredients coming from Asia during the quarter that has impacted sales. We are working hard to set up a secondary supply for most of the important ingredients. We have to make sure we are more robust in situation like this going forward. And by the end of Q3, we should be having all those secondary supplies up and running and qualified.Also happy to see that Kori performs well in the second quarter, offsetting some of that shortfall that we had from the private label business. We also launched Mind & Body, as you can see illustrated on the right side on the slide, which is a new Kori product that will position Kori in the brain health category. We have received the first consumer feedback on the product, which is quite positive. Also Lang, in part of the growth strategy is about entering into new categories and they have won recently some very important businesses in some of those new categories that had been developing, that will hit our revenues from the beginning of 2023.

[Katrine Klaveness, executive]

Good morning. I will now take you through the financials of the second quarter. Second quarter was more or less on par with the second quarter last year, slightly below on revenue with $73 million versus $74 million last year, and slightly above on adjusted EBITDA with $21 million versus $19 million last year. The adjusted EBITDA margin was up at 29% from 26% same period last year, as a result of higher gross profit for Qrill Aqua in the Ingredient segment. Due to good harvesting in Q1, higher Aqua price and lower cost base.Brands is also showing a high gross profit as the relative higher sales of Kori, the brand compared to Lang in the quarter increases gross margins. Net interest-bearing debt has increased with $25 million since Q1 and $38 million last 12 months, due to investments in growth projects like the INVI protein launch plant, Lysoveta as well as maintenance CapEx. In the second quarter, the Lang earn-out was paid out amounting to $11.1 million, including interests. This concludes the earn-out program with the former owners of Lang.Moving into the Ingredient segments. Revenue in the Ingredient segment is up 8% from same quarter last year at $49 million, this is driven by the Krill category. And more specifically, Qrill Aqua after a very strong quarter with 26% increase from second quarter last year, marking the quarter the all-time high for Aqua.High demand on the back of global food ingredient price developments and good harvesting in the first quarter led to high sales of Qrill Aqua, and prices was slightly up compared to same quarter last year. Going forward, we expect to see a significant price increase for second half of the year, as a result of the implemented price increase for the product across all customers and accounts.Superba sales were lower, 12% lower than same period last year, mostly as a result of lower average price due to customer mix. However, compared to the first quarter this year, Superba was up 22% as a result of the new sales organization coming in place and ongoing implementation of several initiatives as Matts explained earlier.Adjusted EBITDA was 22% -- $22 million for the segment, up from $18 million last year. This is driven by higher sales and higher gross margins for the Qrill Aqua products, that in turn increases the EBITDA margin to 45%, up from 40% last year. Higher harvesting combined with lower cost drives down unit cost and increases gross profits.In addition, the company has managed to keep cost inflation under control, despite a record high shipment of Qrill Aqua in the quarter. There were no adjustments for EBITDA in the Ingredients segment in the quarter. I will come back to the AION adjustment, which is done on a Group level.The Brands segment performed below same quarter last year, which was the second highest quarter for Lang. This quarter, Lang has struggled with supply chain and logistical challenges and this has led to issues with sourcing key ingredients and several retailers' shipments have been pushed out of the quarter. As a result, Brands was down 16% compared to same period last year. Part of the Lang decline was offset by increased sales from Epion of the Kori krill oil brand. The increased distribution in Q1 with Sam's Club and Costco continue to drive higher sales in the quarter compared to Q2 last year.As marketing support for the Kori brand continues, the adjusted EBITDA for this segment is on par with same period last year at $0.3 million and with an adjusted EBITDA margin of 1%. Lang is struggling with inflation, especially payroll and supply chain, leading to a lower EBITDA margin than last year. Gross margin for the segment, however, is up as the mix between Lang and Epion has shifted to a larger portion of Epion sales that carries a higher gross margin. Marketing spend for the Kori in the brand -- Kori brand in the quarter was $1.6 million.A few items on the P&L, I would like to share some more detail on. First, the SG&A levels shows stable development compared to last year, which indicates good cost control despite significant increase in Aqua freight volumes and higher inflation levels. Second, other operating income includes the transactional gain from the deconsolidation of AION of $6.9 million. In addition, a gain from rebalancing our fuel hedge contracts of $2.9 million.Third, net financial items include a net agio effect of $5.4 million as a result of denominated NOK debt for our overdraft facility. Fourth, depreciation for operating assets is down as a result of longer useful life for Saga, our oldest vessel, which has been extended from 2025 to 2029. And finally, the fifth adjustments in the quarter include the $6.9 million from the AION transaction that is categorized as a non-recurring item and hence excluded from adjusted EBITDA.For the balance sheet, I would like to point to the following key comments. First, investments in equity-accounted investees includes AION at fair value as per the transaction with Ocean 14 Capital. Second, inventories continues to grow, but the ongoing shutdown in Houston for the rest of the year will help balancing this to a more normalized levels. Three, derivative assets include the fuel hedge contracts. Mark-to-market value was $21.4 million and that is booked here. While the change in value since last period has booked at other comprehensive income. Realized gain is booked towards the fuel cost and rolled out as a reduction in COGS.Fourth, other non-interest bearing, non-current liabilities is down as a result of the payment of the earn-out to the former owners of Lang. $10.5 million plus interests was the amount of the total earn-out. Five, equity is up as a result of positive net profit year-to-date and increased value of our hedge contracts reflected in the other comprehensive income, and equity ratio is currently 49%. And finally, the company has obtained a waiver for the leverage covenant this quarter with a maximum threshold of 6.5 net interest-bearing debt over the last 12 months EBITDA, of which we are compliant.Finally, the cash flow for the quarter. Cash from operating activities was negative $6.8 million, net agio effects of $5.4 million contributed positively, while working capital changes, including -- continues to be negative due to inventory build-up and higher accounts payable. Cash flow from investing activities was negative $19.5 million with CapEx of $7.7 million spent on growth projects such as protein and Lysoveta, as well as some maintenance CapEx, both the vessels and Houston, and the earn-out to the former owners of Lang amounted to a total of $11.1 million.Additional drawdown under the debt facility resulted in cash flow from financing activities of $24.3 million. And finally, net cash flow in the quarter was negative $2 million. Wrapping up the presentation, based on second quarter figures and year-to-date, we reiterate our full year targets of revenue growth of 20% to 25%, and adjusted EBITDA margin of 20% to 25%.That concludes the quarterly presentation, and we will now open up for Q&A. Please send any questions you might have to [e-mail].

[Carl Bachke, executive]

Okay. Thank you. Let's open up the Q&A session with the question from investor Stian Larsen. What is the status in South Korea. I think, he refers to the Superba krill oil sales.

[Matts Johansen, executive]

Yes. So we have just been in Korea and visiting both customers and the regulatory bodies there to get the good status. I mentioned we have three application now in progress and our partner in Korea expect the conclusion on the first one quite soon. So we'll keep investors updated as soon as something happens on the regulatory side.

[Carl Bachke, executive]

The second question from Stian is, how large is the historical sales of Superba in China?

[Matts Johansen, executive]

I believe it's -- depend on what you mean by historical. But I think today it's about 8%, 10% of our sales, but it is the second largest omega-3 market in the world after the U.S. So there is a significant potential in the Chinese market for our products.

[Carl Bachke, executive]

Last question from Mr. Stian Larsen, and as he puts it, is 16,500 tons in offshore production as good as it gets. It seems like everything went well for the company on, and also he adds, why is the volume down from first quarter?

[Matts Johansen, executive]

The volume is always down in the second quarter typically, so that's normal with the seasonality. I think we have still a lot of areas to improve when it comes to harvesting even that 16,500 was quite good. We have still a lot of fishing time lost in logistical operations. We have our new vessel provider in operation. It take some time to get that kind of going smoothly and making sure that vessels are not idle, because they're full and that we are able to do offload quick.So that's areas of improvement there. And also in the quarter we spent quite some time moving between the different areas. So having, for instance, our drone in place will also save us a lot of time and help us make better decision in terms of where to locate the vessel. So there is still a lot of areas of improvement. So -- but all in all, a good quarter.

[Carl Bachke, executive]

Thank you. Moving over to a couple of questions from Axel Jacobsen, equity research analyst at Arctic. Can you please comment on the gross margin for Qrill Aqua in the second quarter?

[Katrine Klaveness, executive]

Yes. It's -- I mean, the gross margin is driven by three factors. It's the sales, the price and the cost base or the unit cost. And this quarter we see a positive development on all three, which is then driving the cost margin up. So we have increased sales, we have slightly higher prices, although the full price increase haven't been implemented in Q2, that will come in the second half of the year. And then we also have a lower cost base or a lower -- which translate into lower unit costs last quarter, which again then translates into a lower COGS for the second quarter. We also have a very favorable cost base development now for the second quarter, which again will translate into good margins also for next quarter for Qrill Aqua.

[Carl Bachke, executive]

Speaking of which, he has another question. Any comments on how much Qrill Aqua prices will increase in the third quarter?

[Matts Johansen, executive]

Yes, we have set the prices for the third quarter already. So -- and customers have accepted it. I think, we will not go into the details of it. But it will be quite a significant lift in prices for the quarter.

[Carl Bachke, executive]

Thank you. And by that, I think you answered the question of Carl Emil Kjolas Johannessen from Pareto as well. There are no further question at the moment. I suggest we wait a few seconds and see whether there are others coming in. Okay. Doesn't seem to be the case. So...

[Matts Johansen, executive]

Okay. Thank you for listening to us today, and feel free to reach out to Carl Bachke, if you have any further questions later.