Aker Biomarine ASA

OSE:AKBM

Earnings Call Transcript 2024-Q3

[Matts Johansen, executive]

Good morning, and welcome to the presentation of the third quarter results for Aker BioMarine, where myself, Matts Johansen; and CFO, Katrine Klaveness, will take you through the highlights and the financial results for the quarter.

I am traveling today. So we will have no video, just the slides and the voice. And for the same reason, we will not have a Q&A session at the end like we usually have. but you can reach out to [e-mail] if you have questions, or reach out to Katrine or myself directly, and we will try to answer your questions. You can also contact one of the brokers in DNB that will host a roadshow on Monday, where we also will have a group call, where we will present and also where we'll have a live Q&A session at the end.

So starting with the highlights for the third quarter '24. The key milestone for the quarter is the closure of the transaction of Feed Ingredients, ended up at a total value of $624 million after we had adjusted for working capital and inventory. And that resulted in a net gain of $214 million. We have paid out already an extraordinary dividend of $373 million, equivalent of NOK 45 per share.

The revenue for the third quarter ended at $49.3 million. That is down from third quarter last year, driven by large eliminations of sales between Human Health Ingredients and Consumer Health Products, because when we sell products from one segment to another, those revenues are eliminated out on the group level even if they're counted in the segment side. EBITDA ended at $8.4 million, up 10% year-over-year, mainly driven by Emerging Business getting closer to breakeven.

For Human Health Ingredients, continued good growth, 8% year-over-year, driven both by more sales and favorable cost development, and ended at around $10 million EBITDA. Consumer Health Products decreased 5% year-over-year. We had a very strong third quarter last year when we launched and rolled out our products.

But what I would say now is that we have struggled the first half for Human Health for the Consumer Health Products because retailers have building down inventory. We start to see that normalizing now, so that is good to see, and Consumer Health Products starting to get to kind of their normal sales levels. Emerging Business grew 14%. This is mainly Kori. So it continued to develop well, especially on Amazon, and as mentioned, getting closer to breakeven. We also now rolled out Kori in Japan, and we're about to roll out in China, as was mentioned in the previous quarters.

We have also said earlier that for Emerging Business, we are seeking partnerships and transactions. In this quarter, we have now launched a process and mandated a bank to divest the protein business, Understory. We have also refinanced the RemainCo after the sale of Ingredients, and have now secured a bond of about $150 million. And on top of that, we had also $30 million in bank facility as a backup.

As mentioned, you can see revenues down 7% year-over-year, but on par with the previous quarters. Again, mainly driven by eliminations between the segments this quarter because we have quite positive underlying development in each segment. Good development throughout the year and also year-over-year for adjusted EBITDA, $8.4 million EBITDA for the quarter.

Now moving into Human Health Ingredients, continued positive development for krill oil. Volume is up 11%, and we see continued improvement across several segments, ended at $24.6 million in total. And if you see the bars to the right, the dark blue is our krill oil business and the light blue is other products, mainly -- consistent of Algae and QHP. QHP is the byproduct from krill oil production.

And you can see that's a little bit lower than what we saw in the second quarter, that's driven by a lower QHP sales, which is just timing of when it goes out. This product is sold back to Feed Ingredients. We have a little bit decrease in average price for krill oil, but that is all driven by customer and product mix. We have stable pricing with customers.

We continue to do well in Europe. We have now formalized the partnership with Barentz, a distributor in Europe. We've been working with them now for the last year, but now that's formalized in the long-term agreement. So that is positive to see. But also the other regions are developing positively for the quarter. Algae is continuing to ramp up, both on the production side, but also in the markets. We sold 16 tonnes in the quarter and see great demand for our algae products, both in Asia, especially, but also globally.

In the quarter, Houston produced a little bit lower volumes than what we planned due to weather. There's been some bad hurricanes in the third quarter. For safety of our employees, we then shut down control -- control shutdown of our factory, which impact the volumes produced in the quarter, but that will then just be caught up in the following quarter.

But when that happens, we will shift the gross margin 1 quarter out because we will then produce less for the third quarter, and you will have a higher cost of goods for that quarter. And the consequence of that is also then more production in Q4 and lower cost of goods in Q4 impacting next year. EBITDA $10 million, mainly driven by a little bit lower margin here from product and customer mix.

I wanted to give a little more details on our Human Health Ingredients business, that is now the key business that we have, and go through some of the drivers behind that business. What you see here on the left side is the revenue development the last years, '22, '23 and the last 12 months as of third quarter, and you can see a good positive growth development. Purple -- sorry, orange shows the revenues from our krill oil business.

And if you look to the right, the krill oil business consists of the core Superba business. It's our PL+ technology, where we combine krill oil with other ingredients. And it's Lysoveta, where in the third quarter, we had our first revenues. Then that blue color is of the products, which consists of QHP, that's the byproduct from extracting krill oil in our Houston factory. All that product is sold back to Feed Ingredients at a fixed price. That was part of the supply agreement when we buy Nutra meal, or the raw materials that we used to make krill oil.

And there, you will also find -- on the blue bar, you will also find the FloraMarine, our algae product. You can see an okay step-up on the blue, the other products, driven partially by Algae, but mainly by QHP as we, in 2024, have full production in Houston; while in '23, we have limited production in Houston as we were building down inventory. So as we start to produce, we'll make more QHP that will be sold to Feed Ingredients.

Then looking at the margins, our Superba margin, high-margin products. If you look at the 2 other products we have on the krill oil business, Lysoveta and PL+, Lysoveta will have higher margin than Superba. PL+ will have slightly lower margins. Algae, a little bit lower than PL+ again, and QHP is more or less zero sum kind of game where we have -- we're selling it at the coastal allocation we make in Houston. So as we grow the QHP sales, especially in all 2024, that will impact the overall gross margin for the Human Health Ingredients as the QHP margins are diluting the total revenues in the segment.

There are 4 drivers for the Human Health Ingredients, and I will take you through all 4 of them in more detail. But the first one is driving volumes, which is kind of the #1 priority for the business. And we do that both by being part of a market that grows healthy year-over-year as a segment as a whole, both in the supplement market and Omega-3 specifically. And then secondly, us taking market share in the overall Omega-3 market. So that is kind of driver number one, and I will go through more details soon.

Driver number two is price. As you heard me mention a little bit earlier, we have a somewhat lower average price to our customers now than what we had in the past. And that is driven by customer mix and product mix, meaning that our pricing to customers have been stable the last couple of years, but it's just then the weight of sales into the different type of customers and products that give us a decline in average pricing.

We have hold our prices. So even if you have had an inflationary environment generally worldwide, but also in supplements generally, we have not increased pricing to customers. That was the right decision to do because we have been in a turnaround situation to get growth into all our areas or our geographical areas.

But now when we are starting to see, we are success-ing with that -- having success with that turnaround plan, we are going to continue or start do inflation adjustments annually on the krill oil side of the business to also then continue to drive prices up from that perspective. We expect the customer mix and the product mix to normalize back to what it was in the previous years, and I will take you through the details of that.

Then on the cost side, we talked about earlier that after the sale of Feed Ingredients, we will come to rightsize our corporate costs, which we are in the process of doing. But we also see a large opportunity to, what we call it, optimize, streamline the Human Health Ingredients cost base. We're doing that in parallel as we are looking at the corporate cost. And then, of course, utilizing the scale as we continue to grow, we have limited additional costs and have high incremental margin for additional sales.

And then we have our innovation portfolio, which will both drive revenues and EBITDA going forward, driven by Algae, Lysoveta and PL+. As mentioned, we have our first Lysoveta revenues now in Q3 in the supplement market. And especially Algae is ramping up these days.

So let's have a look at volume. So back in mid or summer of 2022, we presented our turnaround plan for the Superba segment after the Korean business had exited and also impacted global business. As Koreans were buying products all around the world, we had to sharpen our value proposition, improve our product offerings and also build out our sales and marketing organization globally, which we have done on the right side.

But bottom side, you can see that, that has resulted in some higher costs from having a typical $5 million, $6 million in sales and marketing OpEx annually, that has now doubled to around $10 million per year, which is now the level we're going to stay up. So we have now built it up. It is at the level it should be. And sales and marketing costs should stabilize, almost $10 million, $11 million.

And then on the top side, you can see how volume has developed. And we are now as of the third quarter, almost back to all-time high for sales volumes, which is great to see. So we have completely filled the hole from Korea and are now ready to grow further from there, both with Korea and also all the other markets.

Then talking about how we're going to grow this business. So -- and there's 2 drivers for growth of Superba volumes. One is that the overall Omega-3 market is growing very healthy, about 6% per year and is expected to continue to grow at that growth rate. So just by being part of that segment, we're going to have a general growth of 6% annually. But then we're going to take market share in that Omega-3 market. So today, we have about 7% market share of all the Omega-3 sales globally. So every dollar a consumer spends somewhere in the world on an Omega-3 product, 7% is our product through Walmart Out customers globally.

Then we know in our most successful markets, that market share can go all the way up to 30%. So looking at Australia as an example, we have about 30% market share. So all the Omega-3 consumers in Australia buys, 30% of that if our product through Walmart Out customers. In the mass market in the U.S. So with Walmart, CVS, Target, these type of big retail chains, about 22% and of all the Omega-3 sales that are happening in those stores is our product through Walmart Out customers.

That means that we know -- even if we have a super-premium product of 400%, 500%, we know that when we have the right distribution with the right customers, we can get between 20% and 30% market share. And what recognized the mass market in the U.S. and the Australian market is 2 things.

It is that the distribution of products is very good, meaning that we have multiple brands with multiple [ phasings ] in the retailers. So if you walk into Walmart, you will find 3, 4 different krill oil renal brands and 1 liter of different type of krill products and it's easily available. The same goes for Australia, 4 large brands all have krill oil products available in retail and online.

And secondly is that those brands spend some money on marketing and educating consumers about the differentiating factors and the benefits of krill oil. So if you can achieve those 2 things, good distribution and convince the customers on that it's very positive ROI to invest in marketing, we know we can achieve between 20% and 30% market share.

And that is our simple job in, let's say, the commercial teams in Human Health Ingredient. It's go out there, get new customers on board, so we get more distribution of our products, and help them, convince them that they should put some marketing dollars behind it and that is a very positive ROI on that, and then we know we can achieve 20% to 30% market share. So we will both grow through being part of the overall growth, but also be more and more successful adding distribution, getting more marketing into the different markets, and through that, grow our volume business going forward.

Okay. Then let's look at the second driver, which is pricing. So what you see here on the graph to the right, is that those blue bars, that's the average price that we have with the whole customer and product mix. And you can see then a decline after Korea disappeared out, and that is because Korea was a high-priced market. You can see it spiking back up in beginning of '23, and that is because Korea came back online with a substantial volume in '23.

And then Korean customers, during '24, had enough inventory from the '23 purchases. So we haven't sold volumes in Korea in '24. And then you can see the corresponding impact on average price from that. We expect now sales to pick up again in '25 in Korea. They have exhausted their inventories, so that will have a positive impact on pricing into '25.

The second key factor here is that we have a new customer that we got on board about a year ago, a little bit less, that had significant lower price than the rest of the customer and it's a significant volume, and that customer will be converted to normal pricing soon. So those 2 elements will continue to start to normalize that, let's call it, customer and product mix.

The red dot is what you see, the average price for all the other customers accept those 2 customers in Korea and that introductionary offer. So we expect this kind of product customer mix to somewhat normalize what we have seen historically moving into '25 and beyond.

And then also I mentioned earlier that we have not changed our pricing either down or up the last years, even in this kind of high inflationary environment we've been in the last years. And the reason why we haven't increased pricing is that we have been in that turnaround plan.

So as you try to kind of get growth into the market again, it's not the right timing to also start to increase pricing. But starting in '25, we will start to adjust pricing annually based on inflation, which will also drive these prices up. So that is the second driver of price, some increase in pricing and a normalization of product and customer mix in '25 and beyond as expected.

Then the third driver is cost or cost of goods or margins. So if you can firstly drive prices up by some increase in price and the product and market mix, then the other factor is how can we, both through scale and cost optimization, drive the cost of goods down. And what you see here on this slide is the development of cost of goods.

So you can see in all the way to the left, you can see the cost of goods in the previous kind of high production volume in Houston in 2020 and '21, and you can see the levels it's at. And then as we shut down the production in Houston in end of '22 and '23, you can see the cost of goods coming up as we have less products to divide the cost in Houston on. And then at the end of '23, we started ramping up production in Houston on, and you can see the cost of goods coming down.

But if you then look at the average cost of goods for the year in '23 and '24 versus kind of that shutdown period, it's still more or less the same, because it takes time before you dilute in your inventory with a new lower cost of goods. And then illustrated to the right, you can see what the cost of goods are at the current run rate. And let we just say production equals sales. And then you can see how it drops down in 15% growth, with 30% growth or 50% growth.

So as we continue to grow and are able to kind of utilize that operational leverage, we should see cost of goods coming down, and you can kind of get that kind of croc down mouth where you have pricing coming up and combined with cost of goods coming down, and quite nice margin expansion on our krill oil business.

Today, the marginal cost for krill oil production is about $27. So as we add more volumes, the incremental gross margin for that incremental sales is very high, and that is before we start optimizing the costs, which we will do. So this is the third driver of growth both in top -- on EBITDA.

And then the fourth one is innovations. And then that we can look at this slide here, where we're trying to build it up. So if you then look at the EBITDA of our business, the last 12 months as of Q3, EBITDA for the Human Health business is $36 million. If you look at the run rate EBITDA as of third quarter, it is $40 million. And then we can look at the impact of the drivers we just talked about.

So looking at -- talking about volume growth, if we use then a 15% growth, just getting 15% more sales than what we have today and use that $27 of marginal cost of goods for that growth, that will yield $10 million more EBITDA. By normalizing those 2 cases we talked about, getting Korea volumes back and getting that introduction offer that we have to one customer back to normal, you will get about $5 average increase in price for the whole base. That's another $5 million of EBITDA when that is achieved.

Looking at 3% inflation adjustment on our whole customer base, another $3 million. Innovations, driven by PL+, Algae and Lysoveta, and I would say, mainly driven by Algae, you can drive quite interesting additional EBITDA. You can see the sensitivity on the bottom right corner, depending on what type of EBITDA you can get out of -- or what type of growth you can get out of that. I would say that, on average, the innovation products will have around 50% gross margin. So if you can get $15 million of sales, you will yield in $7.5 million of EBITDA.

And then last but not least, we have what we call the post-Feed Ingredients cost rightsizing on the Human Health Ingredients side of the business, which starts with actually fighting inflation, because there is inflation still going on. So it starts by being different type of optimization and improvements to not have inflation in the customer base. But then our expectations beyond that is that we will also further cut costs despite us growing the size of the business.

So when you stack these kind of drivers on top, you see that you very quickly go from $40 million in EBITDA to $60 million and beyond. So that was some more details about the drivers of Human Health Ingredients, which is the main kind of value driver for Aker BioMarine going forward.

Then moving over to the other segments. Consumer Health products, that's our brand business that we sell through the main retailers in the U.S., our private label business. You can see how, on the right side, our revenues in Q3 is coming back up from a weak first half of the year. As we saw during the quarter, the inventory levels at retail started to stabilize, and now sales to retailers is now getting closer to equal sales out of retail.

We have an especially high third quarter last year, so comparison here is kind of unfavorable, but we start to see Lang being in a good position now with both good POS sales and -- but also now inventory levels being normal. And we should see sort of a development of Lang back to normal in the coming quarters.

Private label business is performing strong in the U.S., both for our products and in general, and they typically do well when there's uncertainty for consumers and they see kind of value offers. So it's a good place to be in the current market conditions.

Our Consumer Health Products, they have been working good with costs and basically taking down their fixed costs quite nicely. So that positively impacts the EBITDA. And we delivered $2.1 million on the quarter with the same EBITDA margin despite having somewhat lower revenue than last year, which just proves that the overall cost base is down. So but Lang, I would say now is in fairly good shape going forward or the Consumer Health Products business is in good shape.

Emerging Business, 14% growth, 12% with Kori, driven both by some growth in retailers in general, but mainly by Amazon, starting to kind of reach critical mass on Amazon. We launched Kori without an online presence in the beginning as part of our commitment to the retailers. But a couple of years ago, we started launching and building up, getting reviews and getting momentum in Amazon. And we see now 22% growth of the Amazon channel and a continued positive development there.

As we have mentioned, we launched Kori in Japan in August, it's now available in Costcos in Japan. And the model there is that we have a licensing partner, which means we licensed the core brand to another company in Japan. That company buys krill oil from Human Health Ingredients and pays a royalty for a license fee to Kori. So we're not involved in manufacturing or complexity related to that, and we're not involved in marketing investments or building market. That's what our partner is doing. So that kind of reduces both complexity and investments needed. Now that is the same model that we have in China. We have signed a similar agreement in China, that is about to enter into the market.

In first quarter '24, it was a significant kind of adjustment on revenue, a catch-up of some revenues from the past. So it's an artificially high first quarter 2024. But generally, we have an okay development of Emerging Businesses and especially Kori developments, and getting closer and closer to that breakeven point.

Then if we try to summarize the kind of focus for Aker BioMarine going forward for the different segments we have. So we have 3 business segments, plus kind of our corporate or overhead costs for the group. So for Consumer Health Ingredients and Consumer Health Products, it's all about growing development -- developing and optimize those businesses. Make them stronger, better, more attractive.

For Emerging Businesses, it's also about growth, getting them into scale. Main focus is to stop the bleeding and get them to breakeven. But here, I have previously also been quite explicit that we are actively seeking partnerships and transactions to realize the values that is there, and also take out the kind of burden on Aker BioMarine on investing and growing those businesses going forward.

And then I've also said that the overall goal and mandate that I have and my management team have is to continue to explore opportunities to maximize shareholder value. So for Emerging Businesses, that means that right now, we have, in the third quarter, launched a formal process for seeking divestment of Understory, our protein business. That is the main cash and cost driver in the Emerging Businesses segment. And we believe there are other companies out there that are better equipped to drive that category and that business forward than Aker BioMarine.

We have mandated a specialized bank called Oghma Partners that are now driving that process. And we expect a 6 to 12 months' time window to -- for completion of that process. And then for the other businesses, the key focus is, as management grow, develop and optimize and then seek and explore opportunities to how we can optimize shareholder value, similar to what we did in Feed Ingredients just recently.

And then for Corporate, we're going to scale the cost to, let's say, the right size, the sustainable level for the business that we now have. And that is something that we are very focused on in the coming couple of quarters. But we also focus on the 2 other segments, especially in Health Ingredients also when it comes to cost.

So with that, I'll give the word over to Katrine Klaveness that will take you through the financials for the quarter.

[Katrine Klaveness, executive]

Good morning. I will take you through the financial figures for the third quarter. In the P&L for the quarter, Feed Ingredients is only included on the net profit from discontinued operations.

Starting at the top with net sales for the quarter at $49.3 million for the group, which is 7% down from same quarter last year. Sales in Human Health is up 8% due to higher sales of krill oil and broader product portfolio. Also, sales in Emerging Business are up due to high sales in Amazon and Walmart. So the main reason why group sales are down 7% quarter-over-quarter is sales in Consumer Health down due to a very strong Q3 last year with the launch and rollout of the Multivitamin Gummy, and higher eliminations of internal sales between Human Health and Consumer Health, Lang, compared to Q3 last year.

Moving on to some other key P&L items. SG&A is on par with last year, but underlying cost is reduced with $1.2 million, as this is related to improvement programs and adjusted out in the adjusted EBITDA. Net profit from discontinued operations include net result from Feed Ingredients for 2 months and Understory for the full quarter, as well as the gain from sale of Feed Ingredients of $214 million. Adjustments of $4.4 million includes costs related to the improvement program as well as certain inventory effects following the Feed Ingredients transaction.

The segment that we call other/elim includes corporate and overhead costs for the entire group, with the exception of the Consumer Health segment, which is Lang. All Corporate and group projects and programs are also booked here. It has been estimated that an annual amount of $5.4 million will follow the Feed Ingredients segment, and that will leave about $12 million for RemainCo.

However, for Q4, a somewhat higher cost should be expected as the transactional service agreement that we have in place with Feed locks in certain costs for RemainCo. Also, it is still uncertain to what extent Feed Ingredients will take on all allocated costs in an early phase. The improvement and restructuring program is initiated to scale corporate cost for RemainCo to a sustainable level going forward. Effect of this program is expected during first half 2025.

There were limited changes to inventory on group level, but a significant transfer of more than 5,500 tonnes of Nutra meal to the Human Health as part of the transaction. This was offset by certain inventory effects and costs following the Feed Ingredients' reducing inventory values and resulting in a net change in inventory of only $1 million on group level.

Total net working capital was down from last quarter, driven by an increase in payables due to the Nutra payable that will be settled against a seller's credit in December, as well as fees and costs related to the Feed Ingredients transaction of about $17 million that is due over the next 2 quarters. After the sale of Feed Ingredients, only smaller maintenance and development CapEx remains.

Year-to-date maintenance work in Houston amounted to $4.5 million, and the protein launch plan amounts to $3.6 million. For the full year 2024, we estimate between $5 million to $8 million in maintenance CapEx, mainly for the roof repair in Houston, and $5 million to $7 million for the protein plant and development of the protein products, leaving another $2 million to $5 million for Q4 in CapEx. The protein business is classified as held for sale and recognized under discontinued operations in the balance sheet.

In connection with the Feed Ingredient transaction, all existing debt was either transferred to Feed Ingredients or settled with the banks. RemainCo completed a full refinancing in the quarter with a 3-year NOK 1.6 billion bond, swapped $150 million bond and a $30 million senior secured bank facility with a tenure of 1 plus 1 plus 1 year. The bond only has a liquidity covenant of $7.5 million, and the bank has a leverage covenant, but with grace this quarter starting in Q4 at 6.5x EBITDA.

Net debt in the quarter was $135 million, resulting in a leverage of 5.4x EBITDA. The company was in compliance with all covenants in the quarter. The cash flow for the quarter is a bit messy as Feed Ingredients is included 2 out of 3 months. Nevertheless, cash flow from operations was positive $3.5 million, mainly due to lower working capital for both RemainCo and Feed Ingredients.

Cash flow from investing activities includes net proceeds from the sale of Feed Ingredients of $413 million. Cash flow from financing activities include down payment of all outstanding RemainCo debt of $187 million as per the transaction closed; as well as the issue of new debt of NOK 1.6 billion or $115 million; and finally, the dividend payment of $373 million equal to NOK 45 per share. Net cash flow in the quarter was $4.8 million, ending the cash balance at $15 million. And total available liquidity of $45 million, including the undrawn bank overdraft facility.

Ending off with the balance sheet. The balance sheet for the quarter excludes Feed Ingredients as the transaction was closed end of August, but for comparable figures, Feed Ingredients is included. Property, plant and equipment is significantly down as all the vessels are out of the books, and this now mainly relates to the Houston plant. The protein plant is included in assets held for sale.

Intangible assets have also been reduced as part of the goodwill. Goodwill has been derecognized and booked under discontinued operations. Understory protein and Aion are booked under assets held for sale, protein with a book value of $31.8 million and Aion with a book value of $5.6 million. The equity ratio is at 46% out of the quarter.

That concludes the financial section, and I will hand the word over to Matts to take you through the outlook section.

[Matts Johansen, executive]

Thank you, Katrine. I will now give a summary and outlook for the business. So as mentioned, we have completed the Feed Ingredient transaction, refinanced the company, paid down an extraordinary dividend and our focus gets into the remaining 3 segments. We continue to see solid demand for krill oil across all the markets we operate in, and that gives us also tangible opportunities to lift pricing both driven by product and customer mix, but also through inflation adjustments on our pricing.

The private label segments continue to be robust and the inventory being done with retailers are now finished, putting our Consumer Health Products segment in a good position for growth in the coming quarters. And then Emerging Business will continue its progress towards breakeven, both by scaling the businesses we have, but also through the process we have now launched to divest our protein Understory business so that we can focus our business going forward on the main 2 segments, which is Human Health Ingredients and Consumer Have Products.

So thank you. That's what we had for you this quarter. No Q&A session now, but again, you can send questions to [e-mail], and then we will answer your questions. You can also reach out to me or Katrine directly, or contact a broker in DNB and join the group call we're going to have on Monday, where we will both present and answer any questions you might have. Thank you.