Nordic Aqua Partners A/S

OSE:NOAP

Earnings Call Transcript 2022-Q2

[Operator]

Hello, everyone, and welcome to this second quarter presentation by Nordic Aqua Partners. With us today, we have the management team who will be presenting the results for you this morning. And I just want to let everyone know that if you have any questions, you may ask these in writing in the Q&A function here in the app, and I will read them out loud to the management team after.

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

[Ragnar Joensen, executive]

Thank you so much Filipa and welcome to the second quarter presentation by Nordic Aqua Partners. Today, we're going through the highlights, project review, say a few words about the market, some assumptions and KPIs, financials, and we will end with the outlook and summary.

So starting with the highlights. So the project is still on time and on budget. Since last time, we have installed the second RAS facility, RAS 2, and that's completed and fish are transferred from RAS 1 to 2. That was mid-July. So the biology is going well. It's going a little bit better than planned and the fries are 3 grams. So still small, but growing bigger.

As you will see later in the presentation, prices in China have been very strong. The CapEx, we have spent DKK 56 million in the period, second quarter, and now are up at DKK 188 million. So that is approximately 50% of the DKK 370 million that the project cost is set at. So the available liquidity is now DKK 428 million as of end of June, and that is cash, including undrawn credit facilities.

Just a reminder of who we are, where we are. So we centered just south of Shanghai. And we are fully funded to reach the first 4,000 tonnes of production, which is the project that we are in for a stage one. And we do also have the equity in place for doubling that up to 8,000 tonnes. We have mentioned before that we have an existing plan of getting up to 20,000 tonnes.

And if possible also to get up to 50,000 tonnes at the same site. But we have -- as we have mentioned before, also options of going to establish our company in Beijing and close to Hong Kong.

If we look at where we are located, within 5 hours drive, we can reach 100 million consumers. So the market is very good and close. But also, if we use train combined with cars, we can reach to 800 million consumers within 12 hours. And all of China can be reached within 24 hours. So the market is very big where we are allocated.

We have a very strong RAS team and also a team in China that has long experience doing business there. We have dedicated support from the local authorities and strong industry partners in Nutreco and AKVA group.

Ove will now take us through the project review.

[Ove Nodland, executive]

Thank you, Ragnar, and good morning to all. Let's start with the most important thing. The project is continuing according to time and on budget, and we see no reason why that should not continue going forward. The construction is now in full swing. And finally, something is happening above ground. So it's more visible. I'll come back to some details a little bit further on in the presentation.

The installation of RAS 2 was completed in time and the fish moved into from RAS 1 to RAS 2 according to schedule, that was the last month. The installation of RAS 3 continues on plan and will be ready for fish transfer from 2 to RAS 3 in October. And as I will mention in the other slides, you will see that activities on RAS 4, 5, 6 is in full swing. So next, please.

We have always referred to the small building, and this is a close up of the small building. To the very right, you will see the cooling tower a little bit further to the right, you would have seen the oxygen tank being now installed and commissioned. The small building is now completed with exterior aluminum panels and the roof ready to receive the solar panels.

To the left of the building, you see some scaffolding and that is the preparation for the installation of the glass facade for the entrance. To the very left, you will see the entrance gate now in construction. But maybe most importantly, in the corner of the big building, you can see that the concrete basin for the filter units are completed. The fish tanks for RAS 4 will be poured this -- in the next 2 weeks. So all 4 tanks will be completed by end of August.

RAS 5, today, actually, this morning, the concrete was poured for the filter basin. And the fish tanks for RAS 5 will be poured and completed within next month. And to the left -- right of the building, you see the feed room, [ line ] room and also the technical room for the cooling systems and the desalinization. Next picture, please.

This is the picture we show in other reports the progress over the recent months. And finally, as mentioned earlier, you can now start seeing things happening above ground. In the bottom left, we have now completed the transformer house. Installation is ongoing with the emergency generator and all the cabinets. And you can also see in the orange rectangle that backfilling for the phase 2 has commenced. Next, please.

This is a little bit of the update on the actually project and production, which is what we obviously are there for. On the hatchery, it was completed on schedule in March. First eggs was inlaid in March 9 and the second in June 10. For RAS 1 also completed on schedule, first feed started in June, and batch 2 will be moved from hatchery to first feed in August. RAS 2 also completed on schedule, on time, and the fish were transferred from RAS 1 to RAS 2 in July. RAS 3, it is all the concrete work is now completed upwards in full swing with the installation of process equipment. It will be ready for transfer of fish from RAS 2 to RAS 3 in October. So everything is going as planned.

Thank you. Back to you, Ragnar. Sorry, there was one more. My mistake. We continue, as we say, to build on our organization. First, the RAS team, there is a new member to the bottom right, Alejandro Millar from Chile is our Fish Health Manager scheduled to arrive on site end of August. We have also increased the number of local farmers. We do now have 8 local employees being trained and supervised by this team. And of course, this process will continue as we now start to add new batches and move fishes into larger systems. Thank you. Back to you, Ragnar.

[Ragnar Joensen, executive]

Thank you, Ove. Yes. And just to say a few words about the biological in performance. So we started in May, on May 17, national day of Norway to start feed fish, and it has grown now 50 grams. And that is a little bit better than the expectations that we had.

And if we look at the survival, there has been low mortality relative to our expectations. So we have lost 5%, 6% in total, and that is from eggs until 3 gram, and that is also better than we expected and also better than would normally go in batches.

So we have been -- start feeding is in RAS 1 and we have now completed RAS 2, and fish have been in there since July. And the next step is to move into RAS 3 in October. And then every 3 months, we will take and use one of the larger systems.

So if you look at the time line of the build-out, we are now discussing stage 1. And construction start was Q3 last year, so 1 year ago. And first eggs in hatchery were in Q1 this year, meaning that Q1 2024, the first harvest is scheduled for, and that is in order to reach a steady state of 4,000 tonnes.

And then next page will be to include Stage 2 and the construction start for that is planned in Q4 next year. And then eggs can be laid in, in 2024. And we will reach in 2026 steady state for 8,000 tonnes. So this Stage 1 and Stage 2 is -- has always been the plan, and it is fully financed with equity. We just need an additional loan to reach up to 8,000 tonnes. But then we have discussed also the Stage 3 lifting for production up to 20,000 tonnes. And we have looking at advancing the project, so that it can start simultaneously with Stage 2, so Stage 2 and Stage 3 at the same time.

We are still looking at and planning for this to happen. And if we go to start on Stage 3, we will go out and have a capital increase, but we have not decided yet exactly if we do so or if we just focus on Stage 1 and Stage 2.

So Ole, if you could say something about the market also.

[Ole Jorgensen, executive]

Sure. First of all, the market for Atlantic salmon continues to -- we couldn't say grow, but at least stabilize and are still good. But there are restrictions, as we know, both with -- due to the pandemic and limited air freight. But prices remained high as we will come back to later on. The expectation is still that the market will reach 250,000 tonnes by 2025.

There might be a little delay, as we say, in the last relevant year because due to the COVID outbreak and the lockdown, we think that the growth have been somewhat halted, but it will pick up again. It's illustrated on this graph with the slim blue line, it is a monthly-by-monthly export of fresh Atlantic Salmon to China. And the thicker one is the accumulated last 12 months export to China.

So the market is still good. And as Ragnar mentioned in the second or third slide we have a potential of reaching 800 million consumers. So market in that sense is something we are not concerned about. The market is there.

Next one, please. Our growth market is one thing and price is the other thing. This is a graph, which all of you should be familiar with. So before I go into the graph, I'll just repeat a few bullet points. The market price remains high and we expect it to continue to be on the high side even after the pandemic restriction has eased.

As you will see from the graph, we expect very interesting margins. The wholesale prices were NOK 205 per kilo in June this year. And with our EBIT cost per kilo of NOK 51, it implies a very interesting margin of NOK 154 per kilo. And if you look only to the relative FOB-Oslo prices at NOK 97 per kilo the margin for HOG [indiscernible] China is as high as NOK 108 per kilo.

I would like to just mention a little bit about this graph. Then you can see the pink one is our estimated EBIT per kilo NOK 51, then you have the FOB-Oslo price being the thick blue one and then the light blue one is HOG China prices, which are higher due to special requirements to be allowed to ship to -- or export to China. And then the difference between the blue and the dark blue is other costs, which are added to the salmon until the salmon is on the right side of the custom barrier in a [ 2 storage ] ready where the -- to the first or lower level of the market, which is the wholesalers.

And there is also a very interesting point here to mention, and that is the retail prices of salmon, whether that is whole salmon or [ fillet ] is as high as [ 250 to 300 ] for whole salmon and up to [ 400 to 450 ] for [ fillet ] . So there is still a very interest in margin for those companies in China involved with processing and retail sales. So we are very optimistic to also the fact that the prices will remain high and that we will yield a very interesting margin for our product. Thank you.

[Ragnar Joensen, executive]

Yes. If we look at the world today, you can see that there is a very high inflation. But in our project, we have fixed most of the costs related to the CapEx, so to say, all of the costs related to CapEx. If we look at building first, we are leasing the building from the local authorities, and that is cost. And if we look at the contracts we have on technology, it's also marked as a fixed costs. So even though prices in the world have increased, we still remain on the same cost level as we were when we started on the project.

If we go to production cost, operational cost, of course, we are following the development in China. And the inflation has not been at the same rate in China as it has been somewhere else in the world, but feed costs are still increasing. And we are still holding a cost at the same levels that we have decided before. But feed, if they continue to increase as they have done now, we will lift the production costs from our current NOK 51 to what is related to feed cost in the future.

If we look at [ coming stages ], we are still negotiating with the local authorities on if we are going for this 20,000 tonnes, what the cost should be, but it will not increase very much. We will still have a very good -- attractive agreements with the local authorities.

And with Aqua Group, we are looking at also next stages. There might be some -- or there will be some additional costs related to price increase in general, but we do also have an option to source smarter than we did in Stage 1. So it happens somehow.

So if you look at the milestones with the KPIs. In the first stage, the main number maybe to look at for the 4,000 tonnes is how -- what is the CapEx and it still is NOK 125 per kilo. And for the coming stage, we still have within NOK 125 per kilo. This might increase somewhat, but we will come back once we have negotiated in terms of -- but still, we have set it at NOK 125 per kilo and operational costs are NOK 51 for the first stage.

If we look at how much we are thinking of producing per cubic meter of tank volume, we have set maybe a bit conservative, but at levels where production is at today in other companies. We have set the production per cubic meter line weight to 127 kilo per cubic meter. And that gives us [ 8,000 ] tonnes in production for phase 2. If we were a bit more optimistic and said that we could produce 150-kilo per cubic meter live weight, then we will close -- we will get up close to 10,000 tonnes for Stage 1 -- Stage 2, and that would reduce the cost by utilizing fixed costs better with approximately increased to [ NOK 5 per kilo ].

Now I will hand over the word to our CFO, Hjalti who will present the financials.

[Hjalti Hvitklett, executive]

Thank you, Ole, and good morning. We have this graph here on the right side. The lighter blue is payments for CapEx up until second quarter -- the second quarter this year and the darker blue are payments which are coming back. We see a few high in the second half year of this year is when we are receiving even more technology on site.

CapEx is now up to around 60% on DKK 82 million (sic) [ DKK 182 million ]. We have -- the CapEx still remains on budget. We have an attractive lease agreement with the local government. And on the split between CapEx technology and facilities or building would be 60%, 40%. The main message from us is that we have -- our scope is to 60% and the 40% CapEx is a leasing agreement with the local government, which is our building and construction of building for us. And we have a 10 plus 10-year lease agreement with the fixed prices.

Profit and loss is according to our plan and our budgets, we have -- personnel is it's getting higher. We are hiring more RAS people and some administration also. The financial expenses are still mainly interest or the commitment fee on the EUR 25 million loans from exchange.

Cash flow also as planned, we have the payment of our fixed assets. We are expecting to utilize the loan, the first [ part ] of loan in the fourth quarter of this year. This quarter, in the second quarter, we have had a net change in cash of DKK 52 million. And we have available liquidity for us is DKK 428 million. Cash, DKK 204 million. And we have our working capital facility in the bank in China about RMB 35 million, equivalent to DKK 37 million and the EUR 25 million loan equivalent to DKK 186 million.

Assets, our total assets are DKK 406 million, and we also have the [ DKK 188 million ] again the assets under construction, and we have biological assets, just above DKK 2 million. Thank you.

[Ragnar Joensen, executive]

Thank you, Hjalti. Just a few words about the ESG profile also. We have plans of be certified by both GlobalGAP and ASC , which are the highest standard certificate in our industry. If we look at some of the more direct ESG items that we have been working with. So -- since fresh water is a scarce resource in China, we are producing our own fresh water from the sea by a very thorough cleaning process of the fresh water. So it will be of the highest quality.

For renewable energy, we are producing 20% to 25% of our energy from solar panels on the roof. We will be doing so once we install them in 2024. And close by, we have a very green power supplier with the 400 gigawatt hour solar and wind power plant that we will receive most of our energy from.

We are -- from the outlets. We are cleaning outlets very well and cleaning out sludge, which will be used as fertilizers in the neighborhood agriculture. Since we are in China, there will not be any air transport into the market, and this is the main contribution to reduce the CO2 level. And we are working very closely with neighbors, also with the local government for having -- being a good neighbor to them.

And in the end, Ole I'll just give you the word again, so say something about summary and outlook.

[Ole Jorgensen, executive]

Yes. I will say a little bit about the future. The project is, as we said, on time and budget, and we have no indication that, that should not continue going further. We have transferred fish from RAS 1 to RAS 2 in July, and we will schedule and will do -- transfer into RAS 3 in October. And then as Ragnar mentioned, it will continue into RAS 4 around year-end January.

The biological performance remains good and fish are now 3 grams. Continue to build and strengthen the organization, the Fish Health Manager I mentioned and also our focus now is to train farm operators to be in position when activity continues to increase. There is a strong development of the Chinese market, both in volume and prices, which, of course, is very good for our project.

We are investigating all aspects of accelerating the expansion plan to reach 20,000 tonnes, as Ragnar has mentioned, and we hope to reach completion by the end of the year. And hopefully, that will end up with completion to be in position to deliver 20,000-tonne capacity by 2026.

And finally, I'll just add that even if there are 18 or close to 20 months until our first sale, we are now entering to more concrete discussions with leading distributors and sellers of Atlantic Salmon especially within China, and we hope to be closer to at least have enough input to start making concrete strategies by the end of the year. So it all looks good going forward. Thank you.

[Ragnar Joensen, executive]

Thank you so much Ole. We are now -- we've now finalized the presentation, and we are ready for some questions. If you have received any Filipa.

[Operator]

Thank you very much for a great presentation and it's -- and we're glad to hear that everything is moving according to plan. I have not received any questions yet in the Q&A function. But if anyone has any questions, you're welcome to post them in writing, and I will read them out to the management.

Otherwise, I guess that everything was clear. And of course, anyone listening, if you have questions, you're welcome to contact Nordic Aqua Partners directly as well. Their contact details are in the release this morning. So with that, I think I want to thank you all once again for participating here today, and wish you all a great day. Thank you.

[Ragnar Joensen, executive]

Thank you very much.

[Ole Jorgensen, executive]

Thank you.

[Ove Nodland, executive]

Thank you.