Aker Biomarine ASA

OSE:AKBM

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Matts Johansen, executive]

Good morning, and welcome to the presentation of the second quarter results for Aker BioMarine where myself, Matts Johansen, the CEO; and the CFO, Katrine Klaveness will take you through the highlights and the financials of the quarter. We will also end the session with a Q&A session, and you can already now start sending in questions to [e-mail].

So the main event of the last period is the sale of the Feed Ingredients business that we concluded last week, valued at $590 million. According to accounting rules, already now in the second quarter, the Feed Ingredients business will be classified as held for sale or discontinued business, and will be taken out of many of the account statements you will see in our financial report. We'll get back to the transaction a little bit later.

Then talking about the overall business of Aker BioMarine. It's great to be here again now for the eighth quarter in a row [indiscernible] growth year-over-year. We delivered $94 million of revenue and $29 million of EBITDA, and the growth was driven both by strong development in the Human Health Ingredients segment, where we had 22% growth, but also by very strong growth in the Feed Ingredients segment with 25% growth. We had strong harvesting, 13% up from the same quarter last year, producing more than 20,000 tonnes of product. And also on the Human side, we got the third health claim approved in the Korean market. For Consumer Health Products, we have a relatively weak second quarter, but that is mainly driven by inventory adjustments on the retail side, while sales out of retail of our products still overperforming strong for the quarter.

So we concluded last week the sale of the Feed Ingredients business of Aker BioMarine. And as you might remember, 1st of January, we have restructured our company into 4 distinct businesses; one of them being Feed Ingredients, which is the combination of our harvesting fleet, our logistical hub in Montevideo and all our Krill [indiscernible] business, and that is the business that is now sold. And then we left with remaining Aker BioMarine with Human Health Ingredients, which is our Houston facility and all our Ingredient business that we sell business to business; our Consumer Health Products business, which is our branded businesses sold through the largest retail chains in the U.S. and the emerging businesses, which is the portfolio of the early phase businesses in Aker BioMarine.

The transaction that we closed last week, valued the Feed Ingredients at $590 million. At closing, we will do normal adjustments for working capital. On top of that, we will also be compensated for any excess stock that we will have at the closing time beyond what is needed to deliver on the business plan for the remaining of the year. We will distribute any excess cash from the transaction as an extraordinary dividend. We will finance the remaining Aker BioMarine at the appropriate level, depending on the level of financing, we will pay out an extraordinary dividend between NOK 35 and NOK 45 per share. We expect the closing of the transaction in the third quarter following the customary competition review by the relevant government.

Moving in to the business. So we delivered $94 million of revenue for the quarter, that is 6% more than the same quarter last year. Also worth remembering that in the second quarter of last year, we had a $10 million one-off sale to a new Feed Ingredients customer that made the second quarter especially high. So the underlying growth for the second quarter this year is even higher than those 6%. And then we delivered $29 million of EBITDA, which is up 35% compared to the same quarter last year.

I will now take you through an update of each of the segments, starting with Feed Ingredients and it's always good when you are in the sales process that you're performing well and the second quarter has been a good quarter for the Feed Ingredients segment, delivered 25% growth in that area, $52 million of revenue and close to $26 million of EBITDA with growing margins. We see good growth across all segments. Volumes are a little bit down on Aqua given that one-off $10 million I talked about that we did last year in the second quarter, but prices are up 17% year-over-year. Extraordinary high price increase due to the nature of that $10 million business we did last year. But nevertheless, the underlying price development for the Aqua products are developing very healthy.

Then also, the Pet Food segment continued to deliver healthy numbers, doubling versus last year on the back of that new agreement that we talked about in the last quarter. And then also, we have sold about $7 million worth of Nutrameal, which is the raw material that Human Health Ingredients will use to make the krill oil. It's fortunate to mention that as part of the transaction with Feed Ingredients, we have put in place a solid supply agreement between Feed Ingredients and Human Health Ingredients that secures Human Health Ingredients' access to all the raw material they need at predictable pricing.

On the harvesting side, we had a good first quarter, delivered a 7% growth year-over-year in the first quarter and continued to develop even better in the second quarter with 13% improvement versus the second quarter last year. So we have had a really strong first half of '24 and are tracking well towards what we call a normal harvesting level.

Moving over to Human Health Ingredients, delivered 22% growth for that business landed at $25.5 million of revenue with an EBITDA of about $9 million. This growth is driven by 2 things. One is the underlying growth of the krill oil business. That is about 7% year-over-year. But important to mention that in the first half of last year, we delivered quite significant volumes to Korea for them to be ready for the launch. That launch has taken a longer time than we anticipated, and it still have inventory left from those purchases, which means they haven't purchased any new orders this year. If you normalize for Korea, the growth in all other markets for the krill oil business is 30%. So it's really developing strongly.

And then a few words about Korea. So it's -- we got our third claim approved now in the second quarter. This time it's for joint health and arthritis-related pain. And our partners are now are preparing new campaigns to incorporate that claim that will be launched now in the third quarter. What we see in the Korean market is that it's taking a longer time to build the market, the dynamics of the market is such that the partners, they will book their TV shows, they will optimize the communication to get positive ROI immediately after they air home shopping show. And they still haven't reached that ROI state where they will just kind of poor marketing dollars entered. So it's still optimizing to get to that ROI level. And as soon as they get to that level, they will pour money into the category.

Our partners are still very optimistic that we will get there. It's just taking longer time than what we anticipated. Then also on the light blue color on the top right side, you'll see the Other Ingredients revenues. That is mainly QHP. QHP is by-product in Houston. So after extracting out oil, we have a protein-rich meal, but we are selling back to the Feed Ingredients segment as part of that supply agreement. So we're buying the raw material for making the oil and then we're selling the by-product back, giving us a predictable economy related to that. Quite pressure of the margins on the Human Health Ingredients business this quarter is driven by the relatively high share of those other ingredients that has high -- that has low margins, also with, I would say, quite high fixed costs now following the Feed Ingredients business exiting out as well as having relatively low Superba margins that over time will grow towards the 50% to 60% gross margin area.

We continue to roll out the Algae business, launched it in Europe in the second quarter. We produced 30 tonnes in the quarter. So the capacity in Houston is now above 100 tonnes per year, and we continue our work to develop this business. On the Consumer Health Products side, we have another relatively weak quarter in the second quarter. It was similar in the first quarter. There's a couple of reasons for that, but the main reason is that the retailers are building down their inventory levels. And you can see that by the graph on the lower left corner, where we measure the sale of our products out of stores. And if you look at the last 3 years, as you can see there, quarter-by-quarter, you can see quite good development for our products.

So 13% growth year-over-year in the first quarter, 3% year-over-year growth in the second quarter, while our sales to retailers are down 13%. So from time to time, retailers will adjust their guidance for what type of -- how many weeks of inventory they want to have. And right now, they're building that down, and that's impacting our numbers short term. But other times, they will build it back up. So we expect this situation to normalize in the second half of the year. But given also the nature of that business, where we have a fairly large proportion of fixed costs when you get lower revenues, it also hurts your EBITDA quite significantly. And therefore, we are delivering quite a low EBITDA in the second quarter.

For Emerging Businesses, the revenues here are mainly the quarter business, delivered $2.3 million in the quarter, which is slightly down from the second quarter last year. That is all driven by Costco that we exited in the second half of last year. So we had some Costco revenues in the second half of last year or in the second quarter last year. But all the other channels are developing well, 5% growth in retail and 70% growth in Amazon. And Amazon now stands for about 1/3 of the total sales of Kori, so that's starting to become a very important channel.

We have also now officially launched internationally with Kori. We talked about that in the last quarter as well. But now we have prepared the first products to enter into China. And the model we have there is that it will be locally produced by our partner. The partner will buy krill oil from Aker BioMarine and pay a royalty to Kori for the use of the brand. And we expect the products to hit the consumers in China in the second half of '24. And similarly, we have in Japan, where our products now will appear in Costco in Japan through a similar model where we have a local partner that will make the product locally in Japan. They will buy krill oil from Aker BioMarine and pay a royalty to Kori for the use of the brand.

On the protein side, we also now got the first commercial purchase order for the protein products and are now in the commercial phase of that business. So now after the sale of Feed Ingredients, what will happen with the remaining Aker BioMarine. So even if we now are pure-play human health and nutrition company on the Oslo Stock Exchange, our mandate still is the same, which is about maximizing shareholder value. And we're going to do that through 2 avenues. The first one is to continue to grow and streamline and optimize the businesses that we have to build EBITDA and cash flows from those businesses. And in parallel of that, we will seek transactions for each of those businesses to find capital that can price and value each of those businesses to its full potential. So this work will happen in parallel. And we're not in a hurry. We're going to optimize timing in terms of the development of these businesses and what the markets look like to make sure that we really can maximize the shareholder value.

And if you look at the businesses that we have now in the remaining Aker BioMarine, the Human Health Ingredients business is the last 12 months, $35 million EBITDA business. It's a growing business. It will grow faster in the second half than it did in the first half of this year. And we will expand our EBITDA margins there as we are getting some of the full effect of Houston production and utilizing the operational leverage of our business. Then we have the Consumer Health Products business, which despite having a weak first half of the year, still is $9 million of EBITDA in the last 12 months. It's the same story there, drive growth, utilizing operational leverage and the fixed cost base we have to expand the EBITDA margin on top of the -- of the top line growth.

Then the last 12 months on the Emerging Businesses side, we had a drag of a negative $7 million of EBITDA, and this is too high given the size of the remaining Aker BioMarine now. So the focus here is to really get that business towards breakeven as quickly as possible. And we achieved that through 2 things. One is to grow them and get scale and through that, get closer to breakeven, but also very important with cost discipline and the combination of those 2 will take them towards breakeven. Also here, we will seek transactions sooner rather than later.

And then we have a fourth segment, which is what we call the Corporate segment, which is all our overhead costs, all the shared functions in Aker BioMarine. Historically, before we sold off the Feed Ingredients business, that was about $18 million to $19 million per year with the sale of Feed Ingredients about $6 million of those $18 million to $19 million goes with the Feed Ingredients business, which means that we're left with $13 million for the remaining Aker BioMarine, which is also too high given the size of the remaining businesses. And therefore, we have a job to do over the next 6 months to streamline the overhead cost and get them rightsized to the businesses that we have now left in Aker BioMarine.

So again, the focus now is to drive shareholder value by driving growth, optimizing EBITDA and cash flows from these businesses and in parallel, seek transactions with optimal timing, finding the right capital to get the full potential value out of each of those businesses that we have in the portfolio.

And with that, I will give the word to Katrine that will take you through the financials.

[Katrine Klaveness, executive]

Good morning. I will take you through the financial section for the second quarter. With the announcement of the sale of the Feed Ingredients segment earlier this month, we have classified the Feed segment as held for sale. And hence, this is reported as a discontinued operation from this quarter until the transaction is closed. Just a quick guide on how to read the accounts this quarter based on how IFRS handles such discontinued operations. For the P&L, the discontinued operations are reported as one line item and a net profit called net profit from discontinued operations. Historical figures are equally adjusted.

For the balance sheet, discontinued operations are reported as one line under assets and one line under liabilities. Historical figures, however, are not equally adjusted. So these include the Feed segment line by line, so no changes. The cash flow statement reports the discontinued Feed operations line by line as before, so no changes at all.

Moving over to the P&L. For continued business, where Feed Ingredients, as explained on the previous slide, is included as discontinued operations under net profit. Net sales were at $49.2 million, up 4%, driven by increased sales of Krill oil and new products in the Human segment, including Algae, PL+ and QHP. This is both Lang Pharma and Epion sales were down 13% compared to Q2 last year. Gross margin for the continued business is down in the quarter from 40% to 33%. This is due to the broader product portfolio in the Human segment with lower margin, including Algae and QHP in particular. As well as lower Superba krill oil prices due to customer mix.

SG&A is on par with last year with selling expenses in Human up and marketing costs in Epion down. For the discontinued business and estimated portion of corporate overhead costs are carved out. Post closing, Aker BioMarine will take measures to adjust the corporate cost base to reflect the remaining business, as Matts alluded to earlier. Net profit was $0.7 million, where our net profit from discontinued operations were $3.6 million. Adjusted EBITDA of $7.7 million, down from $9.9 million of Q2 last year on comparable figures for the continued business with adjustments of $1.3 million, including Feed Ingredients transaction costs, restructuring and improvement program costs, all booked in the Corporate segment. Reduction in EBITDA is driven by diluted margins in the Human segment and lower Superba prices.

The Corporate segment that we call [indiscernible] have the following elements included. All overhead costs, excluding Lang, nonrecurring costs related to various corporate improvement programs, projects and transactions, eliminations of profit from internal sales between the segments, and this will now also include Neutra sales from Feed Ingredients to Human Ingredients. As alluded to on the previous slide, an estimate of corporate cost has been carved out and allocated to the Feed segment, including finance, IT, HR and facilities. This figure is estimated to $5.6 million on an annual basis or $1.4 million per quarter. For this quarter, internal profit elimination from the 1,900 tonnes of Neutra sales from Feed Ingredients to Human Ingredients result in a significant negative adjusted EBITDA.

As mentioned on the previous page, Aker BioMarine will review the Corporate cost once the Feed transaction is closed. Out of the current base of $18 million to $19 million, it is expected that between $5 million and $6 million will follow the Feed Ingredients segment, leaving $12 million to $13 million behind or shall be closely reviewed to adjust costs to a sustainable level.

There are limited change in inventory from last quarter for the whole group, including Feed Ingredients. Inventory in the Human segment is up with increased production of Algae while inventory in the Feed segment is down due to strong sales in the quarter despite good harvesting volumes. Accounts receivable in the Feed segment is also up because of high sales in the quarter. Total net working capital is down from $234 million in Q2 last year to $214 million this quarter. Of the $214 million, $132 million or about 60% is related to the continued business, including Human, Lang and Epion and this figure is relatively stable from Q1 last year.

With the carve-out of the Feed Ingredients, a significant portion of the CapEx is removed and remaining investments are related to maintenance and upgrades in Houston as well as completion and further development of the Ski plant and the protein products. In total, CapEx is estimated between $10 million and $50 million for the full year, where about half will be Houston related and half will be protein related.

Cash flow in the quarter, including Feed Ingredients line by line, shows positive cash flow from operations of $2.7 million in the quarter, including a significant increase in accounts receivable from the Feed segment. Cash flow from investing activities includes certain upgrade projects in Houston and operations of the Ski plant. Cash flow from financing includes a down payment of $10 million under the RCF to the banks. Net cash flow in the quarter is negative $12.3 million, leaving $19.6 million in cash and $28 million in available liquidity for the entire group, including Feed Ingredients.

Net interest-bearing debt for the whole group, including Feed Ingredients was $376 million in the quarter, down from $399 million a year ago, but slightly up from last quarter due to increased working capital. The company reports well below the covenant threshold of 5x net interest-bearing debt over EBITDA. At the close of the Feed transaction, the company will settle all current debt and refinance RemainCo with a new structure. The company already has a bank approved financing structure that will enable dividend within the communicated range.

Finally, a quick look at the balance sheet. Figures reported are for the continued operations with a discontinued Feed segment reported as a separate line named held for sale under assets and liabilities, respectively. Historical figures are not changed, so it's difficult to do any comparisons. However, key items for the continued operations include PPE, slightly up due at $97.9 million due to the Ski protein plant and Houston upgrades added since Q2 last year. Inventories in the Human segment are relatively stable, while inventory in Lang and Epion is down compared to Q2 last year. Total assets are at $810.1 million, down from $819.7 million same quarter last year and equity ratio is stable at 44%.

With that, I'll leave the word back to Matts to conclude.

[Matts Johansen, executive]

Yes. So just a real quick recap and a few comments on the outlook. So we're about in the third quarter now to close the Feed Ingredients transaction. As we talked about, the goal is to pay a dividend in the range of NOK 35 to NOK 45 per share. And after that transaction, Aker BioMarine will be a pure-play human health and ingredient company, playing in that attractive market with strong underlying growth and demand across the global markets. We expect continued good growth on the Human Health Ingredients business, as we have seen historically, and we also expect that going forward. And we also expect that inventory situation in the Human Health Products division to normalize and get back into growth mode there as well.

So we are well equipped now for a good path going forward with a more focused business. And again, our mandate is to drive that shareholder value.

So with that, we'll open up for questions. You can send in your questions to [e-mail].

[Unknown Executive]

Okay. So opening up the Q&A session, we have received a few questions. Superba, so how much of the sale of Superba came from South Korea this quarter. In general, can you say anything about the split per country this quarter?

[Matts Johansen, executive]

Yes. So we had zero sales in Korea this quarter. So -- and as I mentioned, when we talked about the Human Health segment, we had quite a lot of sales in the same period last year. So if you take that out and just look at all other markets, we're growing actually 30%, and that is across the board. So we're growing well in the U.S. We're growing well in Europe, in China. So across all markets, we are doing very well on the Superba side.

[Unknown Executive]

And then another question on Human Health. So the margin is quite volatile. Could you comment on why that is and the dynamics of that?

[Matts Johansen, executive]

Yes. So from quarter-to-quarter, prices will fluctuate with customer mix. So basically, pricing for the Human Health Ingredients or the Superba business is very stable. So there's no change in pricing with customers, but there is quite big differences in pricing between different markets. So depending on what the mix looked like, the pricing for a quarter, the average pricing might fluctuate from quarter-to-quarter, but over a year, it is fairly stable. And in the second quarter now, we have an especially low mix, and that is driving the average price down for the second quarter. So that is the price component. And then the other component is the cost of goods and the margin that we should expect. We are having now margins in the 40s in the second quarter. But normally, you should expect margins for the Superba business to be between 50% and 60% and with growing gross margins as we get more and more production in our Houston facility.

[Unknown Executive]

And then, yes, on the contract between Feed and Human, so can you comment on the terms in the offtake agreement between -- or with Feed Ingredients.

[Matts Johansen, executive]

Yes. So it's a long-term agreement. So it basically secures the needs for raw material for Human Health into the future. The pricing that Human Health Ingredients will pay for the raw material is $3,500. And typically, the yield you will have and you make always about 15%. The by-product, the remaining 85% more or less becomes this QHP product that we mentioned that is sold back at $2,000 back to the Feed Ingredients segment. So that is the economy of that. And then it's a mutual exclusive agreement, which means that Feed Ingredients cannot sell to any other Human companies, and we need to source all our needs from Feed Ingredients.

[Unknown Executive]

Yes. And then can you comment on how the inventory situation for Feed Ingredients looks like today relative to a normalized situation?

[Matts Johansen, executive]

Yes. So I guess the question is relevant in terms of kind of closing working capital on the Feed Ingredients transaction. And as mentioned there, I mean, we have the normal working capital adjustment that you typically have in any transaction on closing. But there is a special item in the agreement where we will do an adjustment for any excess inventory above what Feed Ingredients need to deliver on its plan for the year, which means that any excess inventory that we have more than what you need to sell on the plan, we will get paid for in Aker BioMarine. And so that will depend on the fishing in the coming months towards closing, how much that will be. But if you deliver on our plan, it will be a substantial amount.

[Unknown Executive]

Can you please comment on how much of the Corporate cost that is belonging to Feed, Human and Emerging Business on a stand-alone basis?

[Katrine Klaveness, executive]

Yes. No. So what we have commented on is the share that will go out with the Feed transaction, the remaining $12 million to $13 million as we have discussed in the presentation, will be reviewed. But at this point in time, we want to kind of comment the split between the segments, which is also very difficult as part of this is system cost being part of the Aker Group and being a large corporate company.

[Unknown Executive]

So staying on Corporate costs, can you comment on the potential you see for cutting SG&A costs in the remaining operations?

[Katrine Klaveness, executive]

I think that is also a bit early to say anything about now. We will come back to that once we have had the proper review, which will happen in the fall.

[Unknown Executive]

So moving back to Superba. Can you please comment on how you see the market outlook for HHI in general and Superba in particular across its main markets?

[Matts Johansen, executive]

Yes, I mentioned a little bit earlier, I think the trend for Superba is really good. We turned the corner there with the turnaround plan we developed more than 2 years ago now, and have that underlying growth of 30%. So we see strong performance. We have a great sales team now, a great science team, marketing team that really drives the demand through our partners. So the outlook is very good for Human Health as a whole.

[Unknown Executive]

So we have received no further questions. So that concludes.

[Matts Johansen, executive]

Thank you. See you next quarter.

[Katrine Klaveness, executive]

Bye.