Nordic Aqua Partners A/S

OSE:NOAP

Earnings Call Transcript 2022-Q1

[Operator]

Hello, everyone, and welcome to this first quarter presentation by Nordic Aqua Partners. With us today, we have the company's Chairman, Ragnar Joensen; CEO, Ove Nodland; and CFO, Hjalti Hvitklett, who will walk us through today's results. [Operator Instructions].

So with that, I leave the word to you Ragnar.

[Ragnar Joensen, executive]

Thank you. Thank you, Charlotte. So we will go through presentation today of Q1. And I'm very sorry, we have some technical issues right now. I can't see the presentation myself. Okay, thank you so much. So we will go through the highlights, and then we will go through a brief project review, market situation, assumptions and KPIs, financials and outlook, and we will share the presentation between us.

If we look at the highlights first, we are still on time and on budget, as communicated earlier. The hatchery is completed. Some might remember, we laid in the first eggs in March. And we started the first feeding in May. RAS 1 is then completed. That's where the hatching is. RAS 2 and RAS 3, they will be completed in July and September, respectively. And we also now signed a contract with the local energy for installing solar panels on the group of all the facilities that will supply partly the facility with energy. As you will see during the presentation, we have very good prices, of course, prices are high in Norway, but even better in China. And one thing that we have been looking also at the first quarter is to move the head office or jurisdiction of incorporation from Denmark to Norway to simplify the structure since we are listed on Oslo Stock Exchange.

We have spent some money on the CapEx again in Q1, of course. And we are now totaling DKK 147 million in relation to the total CapEx of DKK 370 million. So available liquidity is now DKK 476 million, where cash is DKK 253 million, and working capital alone are DKK 37 million and DKK 186 million, respectively.

If you go to the company in freight, we just remind you that we are fully funded to reach a production of 4,000 tonnes, and we do have deal pace to continue increase up to 8,000 tonnes. So the last -- the growth from 4,000 to 8,000 will be financed at extra long benefit. In the land and the plant that we have, we are able to take the production to 20,000 tonnes, and we can neighbor plans increase the production all the way up to 50,000 tonnes. And we are located just south of Shanghai.

We are also assessing whether we should grow on large unit at Gaotang or whether we should replicate what we are doing at Gaotang in areas close to Beijing and Hong Kong. In the area we are in now, Shanghai, we can access 100 million consumers within a 5-hour drive, so it's very -- with an open market we have in front of us. As you will see, also, we have a very good management team on RAS on fish production expect to experience on producing salmon online. And we have also extensive experience from these businesses in China. And lastly, I will mention that we have a very strong and good partner in the local authorities and also leading industry players in the Geco and AKVA group.

But to take us through the project status, I will give the word over to Ove Nodland.

[Ove Nodland, executive]

Thank you, Ragnar, and good morning to all of you here from Ningbo. I will briefly give you a project status. We are on budget and on time. The construction are in full motion, and it is carried out on the lease agreement that we have introduced several times. There's no change to that one. We -- in the very back, you see the small building, as we call it, housing the hatchery RAS 1, 2 and 3, administration and other service function. It is close to completed insight and the outdoor external panels will be put on the wall within the next 2 or 3 weeks.

We did the first inlay, in early March. And we started feeding in 1st of May, actually on May 17. The COVID-19 situation and lockdowns that I guess everybody has heard about, has not infected us, combination of good planning and that we are in an area which are not affected by lockdowns. The small building will be completed end of Q2, and we will move offices and our administration within early part of Q3.

The large building, I'll show you a picture next to show you the progress. But what you see here is to the far upper left corner, we have started the pipe -- laying of the pipes for RAS 4, which and will then continue downwards to us 7 and 8. The building to the bottom left is our power station, transformer station, which is also about to be completed.

Can I have the next one, please? We have reported earlier on the good preparation. We have both with the local authorities and also with the contractor and the tremendous speed of the construction. Right now, to the left, you see the picture taken in March and then to the left in May, 2.5, 3 months later, indicating the tremendous progress we have. The sort of pink or orange , I think it is, indicates the Stage 2, the second phase, another 4,000 tonnes. So all in all, we continue to have good progress and will soon start to erect the building on top of the substructure for the large building.

Next, please. Again, we have seen our very focused farm manager to -- on the picture. Just to repeat, we successfully completed the inlay of 350,000 eggs by delivered by Benchmark. That was the first of four inlays scheduled for this year. The next one will come 9th or 10th of June as per current schedule. And as already mentioned, 17th of May, we start feeding. And with a planned production time of up to 24 months, we are still on schedule to do the first harvest in Q1 2024.

Next, one please. We -- of course, one thing is constructing, the other thing is the farm. We are focusing very much to make sure that we support our farm experts, which are shown on the pictures. We have now five locally farm operators, RAS operators, which has been with us now for 4 months, 5 months. There will be another two coming this month so that we are ready to run shift starting from July. And this is an ongoing process, and we probably employ more people than we need simply to make sure we are well staffed for the future increase of our activity.

I think that was it on that one, Ragnar?

[Ragnar Joensen, executive]

So what we are building now is we are starting with building a small building, where we have RAS 1, 2 and 3. And then we will continue on the large building that classes from four up to nine. And the people we have onboard, the four experts all we show just before, have been running this kind of systems for many years, decades and have been very successful in producing in such vicinities.

For most parts of our production, we will run in very low salinity just to take down the risk of incidents to happen but we will end with higher salinity in the forging facility. This is precautions just to make sure that everything will go smoothly in the production.

If you look at production schedule, we did put in the first eggs in Q1, which means that we will be able to harvest the first fish in Q1 2024. And as we have communicated earlier, then we will be ready to start from Stage 2, which is taking the production up to 8,000 tonnes in starting with eggs in Q2 2024, which then can be harvested at first eggs in Q2. But as we also have communicated earlier, we are still evaluating and we will do so for most of this year, whether we should go directly from 4,000 up to 20,000 tonnes.

As communicated earlier, we do have equity in place for Stage 1 and 2, if we need to go up to 30,000 tonnes, and we decided to do so sooner than planned earlier, then we will have a capital increase before we are starting that process. But we are still evaluating when to go up to 30,000 tonnes.

And Ove, you can say something about that market also.

[Ove Nodland, executive]

Yes. Of course, this is a very interesting part of our project, there is a reason why we are located in China. We saw a steady increase of the exports from -- of Norwegian salmon to China, the market is growing, continue to grow. But of course, due to the lockdown in Shanghai in April and May, it has sort of flattened out. Not due to lack of interest of salmon, but simply because most of the Horeca market, of course, was closed and it was very difficult to have salmon airfreighted and custom cleared.

We do expect this to catch up as soon as things are normalizing in China. And therefore, we still believe that by end of 2022, we will be surpass the pre-pandemic levels. The online and home delivery of fresh seafood, including salmon, of course, continues to grow. And there is a reason why we have discussed this acceleration of the -- our plan to maybe bring the capacity to 20,000 a little bit earlier than originally planned for because the market for salmon is increasing while the supply is complicated right now. We think it will ease. But still, we are not concerned about the market as such, as I think this is clearly illustrated here.

The next one, please? As we have referred to in the highlights, the prices of salmon in China continues to be extremely high. What we illustrate here is, first of all, the bottom dotted line is our budgeted EBIT cost per kilo of NOK 51. The blue one is the FOB-Oslo prices, the normal FOB-Oslo price. And the gray one is FOB-Oslo China price. And that is simply because to be able to export salmon from Norway to China, there were a limited -- or there are some restrictions, so not all can export and also there are requirements of certain special packaging. So therefore, that illustrates the gap.

And then on top of that, of course, you have the airfreight, customs duty, clearance, handling and you then reach NOK 185, which is actually today, current market price. Of course, we do not expect that to continue when things normalize. But still, it is an interesting thing to observe a NOK 51, NOK 97, NOK 185, there is a significant margin that, of course, we will take the margin. We also believe that there are some upsides because we will have fresh -- daily fresh salmon delivered, and we do have the possibility to be flexible on delivery 24/7. Again, it's easy to do the math and to see what kind of margins we expect to see when we are selling.

Next one, please. Back to you, Ragnar.

[Ragnar Joensen, executive]

And we can say a few words also about the assumptions for the budgeting, how they look. And the lease contract that we have on the building side which accounts for usually 40% of the CapEx is fixed in the lease with the local government, and it's fixed on price. So there will be no inflation affecting the lease cost.

If we go to the AKVA Group CapEx on technology agreement, that is also a turnkey contract at fixed price. So when we are building the first 4,000 tonnes, we do not see any price increase on the cost. When we look at the common -- or the coming stages of CapEx, we did actually plan to have a reduction since we have already in place some infrastructure for the coming stages. But of course, as the world looks prices are increasing. But since we had the reduction to take away first, so we think that we can be quite within the cost level that we are in Stage 1 at the moment. But of course, things change very fastly, very quickly now during these days. So we will see.

And the same is for the production costs. We did put in some room for increasing feed prices. And we have reported so far that they will be within these NOK 51 that we have cascaded within scope still. But of course, if the situation continues to escalate, we might also see that we need to increase the costs on our side. But that will pan show.

If we take briefly some key numbers, there are many numbers on this slide, but just focus on a few of them. If we say what was the plan, what is the plan, Stage 1 is 4,000 tonnes, Stage 2 is additional 4,000 tonnes, so it takes us up to 8,000 tonnes and then additional production also affect us. And then what is the CapEx per kilo? Our CapEx per kilo is NOK 125, which is quite low. And of course, related to the lease agreement we have with the building from local governments. And then we have said that the cost is estimated to NOK 51 in Stage 1 and then some decrease, not so much, but there is some decrease over the next stages. And we will see, of course, whether we can keep this NOK 51 as the situation continuing changes in the world.

If you look at the CapEx, we then only paying for the CapEx on the technology part. So that is our scope and then just local government is building the construction buildings for us. Normally, I have been participating in several land based plants before. Normally, distribution between technology and CapEx and buildings is 60% to 40%.

So since our CapEx is NOK 125, we need to add something to the CapEx on the buildings. And if you look at the lease agreement, it is actually not 40% because we have a good agreement and it's also cheaper to these buildings in China. So it is equivalent to between NOK 40 and NOK 45 per kilo, which takes us up to NOK 165, up to NOK 170 per kilo in total CapEx in our case.

If you look at the production capacity assumptions that we have, we have been maybe some would say a bit cautious on how much we expect to reduce on the volume that we have. We have placed a production capacity at NOK 137 kilos, live weight, a cubic meter per year. So that is the figure that we will be focusing on. This is within the area that others that are producing on land today are reaching.

So we have not assumed in our budget but should be better than us. If we look ahead and say that in the future, we will be more efficient and we would be able to produce, for example, 150 kilo per live weight particularly for the year. Then the production of Stage 2 will not be 8,000 tonnes but close to 10,000 tonnes. And the cost reduction from increase in the production would be approximately NOK 5 per kilo. So there is a potential upside if they're doing very well, but we are still looking at figures where the industry is today.

I will now give the word to our CFO, who will take us through the financials.

[Hjalti Hvitklett, executive]

Thank you, Ragnar. The first slide here, we have project financial CapEx. We have a graph -- quarterly graph payments that we have made and planned CapEx. CapEx is still budget of DKK 370 million. Next slide, payment will be in the second quarter. That is for the major components that have arrived on site to speak and are going to be paid in the second quarter.

Profit and loss. The financial performance is according to what we have planned and our budget. If we compare it to last year, you'll see there are some increases as related to new hiring of RAS experts and administration staff. The financial expenses is the commitment fee that we have on the loan and some exchange deviation. And we have plus on DKK 6.8 billion.

Cash flow is also according to our plan and budget. We expect to have first utilization of loan in fourth quarter this year, start of that. And the net change in cash this quarter was DKK 31 million. We have available liquidity of DKK 476 million, and that is DKK 253 million in cash. We have a working capital of CNY 35 million to DKK 37 million and a loan of EUR 25 million to a DKK 186 million.

You can see the assets. We have total assets of DKK 406 million. And for the first time, we have biological assets, and we have a total asset of DKK 400 million. And as mentioned before, we have the equity to reach Phase 2 of 8,000 tonnes annual production. But to come to that 8,000, we have to have external loan of the equity is in place to 8,000 tonnes. Thank you.

[Ragnar Joensen, executive]

Thank you, Hjalti. As outlook or summaries. We just have -- we wanted to announce also that we have onboard two new board members in Vegard Gjerde. Vegard Gjerde is from Kontrari and Tore Hopen is also onboard from Farvatn and we are very pleased to welcome them in the Board.

I'll just say a few words also about ESG. So we are finally now starting production. We had stable production, and we have made sense for how we will work with ESG or the carbon footprint, we want to be quite strict and quite good on that one in spite of we are in China, and we cannot see that the market is there, but we still know the company, and we want to represented all the values in the company. So we have said that we would like to be audited by Audit Scopes 1, 2 and 3 in capacity. And we also want to work with being certified by GLOBALG.A.P. and ASC.

If we just mentioned a few of the ESG topics, you can say that we will -- we are producing our fresh waters ourselves from seawater. And the reason we are doing that is that we have freshwater is normally a scarce resource in China, and we were offered that we could take freshwater from a reservoir at the island were we are located. But since we could see that in dry summers, we would be competing for this scarce resource with agriculture neighbors that is when we decided we can operate with quite a small amount of freshwater as it is fine, we can introduce our own freshwater. So that is, of course, I think to avoid conflicts with these scarce resources.

If you look at renewable energy, we will cover the full roofing with solar panels. We just signed agreement, as I mentioned earlier. And at production this can cover around 20% to 25% of the required energy at facility. And if you look at the island, here we look at it, they are producing more renewable energy on site, then they are producing or consuming that site. So they are net exporter of renewable energy. And they have a 400-gigawatt hour solar and wind power plant in the immediate vicinity of the facility, which we will, of course, benefit from.

The wastes are treated very carefully. We treat carefully as to a very, very high standard and we collect the waste and will deliver to our bio farms to take out the energy and then leave the fertilizers back to the neighboring agriculture in the area. And we can say, in China, it's very common to take very care of all byproducts also helps us all in the supermarkets, the salmon has. So nothing is going to waste and the same with regards they are treated and used for this mostly.

Since we are located in the market, there's no need to have air transports. So that was lower the carbon footprint compared to other competitive products in the market. And if we look at the relationship with neighbors and local government, we are having -- local government is a very good partner and following very closely. And of course, we are doing what we can to be a good neighbor also.

And Ove, you could say something also about ESG in China.

[Ove Nodland, executive]

Yes. As we all know, China is by far the largest both consumer and producer of seafood has been doing that for many, many years. In 2015, '16, '17, China realized that they had to upgrade and restructure, particularly the farming part of agriculture because it was not safe, it was not efficient, it was not sustainable and it was polluting. We came with our project basically when this directive was introduced and implemented. And as Ragnar said initially, we intend to be the best-in-class, not because we are in China, but everywhere.

So therefore, we took this directive into planning. Doing Atlantic salmon farming in the RAS system in China was quite new. So there were certain places in this directive which didn't fit in. So we have been very active in communicating with the authorities. We could not say that we have been part of developing the various standards. But at least, we have influenced in a positive way, meaning making sure that they meet the standard of the international agriculture industry.

In addition to that, of course, it is also one reason why our project has received so much positive attention in China simply because we -- our technology can be used as a basic for the ongoing restructuring.

Next one, please. So I will end by just giving a quick summary and outlook. The project is on time and on budget. We started feeling in May 2000. That was an important milestone, of course. The second, the inlay of eggs has been decided through June 9. Recruitment and training and local farming operators keeps on going, and we are very happy and pleased with the progress.

As we have seen the market for Atlantic salmon China continues both on the volume side and also on the price. We have initiated discussions with potential local partners for the processing market and sales part. It is important for us to stress that, that has always been the plan. When we're doing our sales and marketing, we'll do together with people who knows how to do it. The reason why we put it up here is also a little bit related to our message about a possible acceleration towards 20,000 tonnes, so therefore, we brought that a little bit upfront.

And that has been the thing that is mentioned in the last bullet point, our plan to grow faster. But I would underline that we will not compromise on the main principle. We are doing something in China for the very, very first time. And we will make sure that we have a good foundation but we think it can be possible to be a little bit more front-loaded on the capacity increase.

Thank you very much. Back to you, Ragnar.

[Ragnar Joensen, executive]

Yes, thank you. And the final part of the session is to see if there's any questions or comments to us. Charlotte.

[Operator]

Thank you very much for a great presentation. I can't see any questions coming so far. So I guess that means everything is clear. Anyway, in case anyone has any questions and they feel free to contact CFO, Hjalti, the details are on the investor page of the Nordic Aqua Partners website in case if you have any other questions.

And with that, I, therefore, thank you all for a great presentation, and everyone participating and wish you all a great day.

[Ragnar Joensen, executive]

Thank you.

[Ove Nodland, executive]

Thank you.

[Hjalti Hvitklett, executive]

Thank you very much. Have a good day.

[Operator]

Bye.