Nordic Aqua Partners A/S

OSE:NOAP

Earnings Call Transcript 2023-Q2

[Unknown Attendee]

Hello, everyone, and welcome to this 2Q presentation with Nordic Aqua Partners. With us, we have CEO, Ragnar Joensen; CFO, Hjalti Hvitklett; and Chairman of Nordic Aqua China, Ove Nodland, who will present for us today. In case you have any questions, please write them into the Q&A function here on the Teams app, and I will read them out to management after the presentation.

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

[Ragnar Joensen, executive]

Thank you. Thank you, [ Sheila ]. So yes, this is second quarter of our Nordic Aqua presentation. And the agenda today is, as always, I'll start with highlights and then there will be a project review. Ove will come in and say also something about market. We will say something about KPIs, financials and with outlook and summary.

So the very brief message today is, again, we could say that things are going as planned in line with both time and budget. CapEx for Q2 was DKK 29 million. The biological performance are doing in line with our plans. The largest fish now has an average weight of around 900 grams. We are continuing to develop the organization, and we are strengthening competence and capacity in farming. But we have also started now to -- our first hiring in sales. So we are getting closer to our first harvest.

The liquidity is around DKK 475 million, and this is based on cash and then a loan from Eksportfinans Norway and also some working capital in China. And we are changing from being a Danish company to a Norwegian company actually as of today. So next time, we will not report in Danish krone but in Norwegian.

We are located south of Shanghai. The plan that we started with was to produce 4,000 tonnes. We have just increased, so that in Stage 2 we will take the production up to 8,000 tonnes. And we do have a plan also to reach 20,000 tonnes on site. And if we include the neighboring site, then we have the option to go up to 50,000 tonnes on site. But the current plan is firmly 4,000 plus 4,000, so we'll go up to 8,000. And then we also have a plan to go up to 20,000 tonnes.

We are very proud of our own team and -- both within RAS competence and from doing business in China. And we feel also that we have very, very strong support from authorities and also major industrial players like the Nutreco and AKVA Group. So we will go to the project review, and Ove from -- our Chairman in China, please say something about the project status.

[Ove Nodland, executive]

Thank you, Ragnar, and good morning to all.

I can just repeat what Ragnar just said. We continue to be on time and on budget. We finished the installation and commissioning of RAS 5 as scheduled, and we moved the fish from 4 to 5 in May. We have now finished the installation of RAS 6, and we have moved the fish this month into -- from 5 to 6, on schedule with the construction of RAS 7 and 8 and 9 are finished. But we are way into now the final installation of the process equipment. That will also be done in on schedule.

We moved finally and completely our administration activities into the -- always refer to as small building, as you can see up in the upper corner of the building. And for the first time, we show all of you a complete building on the roof housing RAS 4 to 9. And then the very corner to the right, you can see the entrance door into our processing facility, which are now taking shape. I would also just mention that it looks -- it could look a little bit kind of messy when you see the different colors on the roof. That's simply because we haven't peeled off the protection layer where it appears to be sort of aluminum colored. And as reported before, all our roofs will be installed with solar panels in due course.

Next one, please. Again, same picture, which we are proud to show you every time we do this quarterly report. You can see the one from April where the concrete tanks and concrete basins were already installed, and Aqua had just barely started the commissioning of 6, 7 and 8. And then we move to the picture on the right, again, where you see everything is under the roof. You can also see that we are -- we have now completed the main entrance, which is the asphalted road to the left of the picture, going into the main entrance. We are now ready, as Ragnar will come back to a little bit later, with Stage 2, and that is on the inside of the orange rectangle. All backfilling inside preparation are in place, waiting for the final construction to start.

We would also mention that we have a plan now over the next months to prepare ourselves for a production and a project going on continuously. We will therefore segregate the 2 areas and it will not look like a combined project and production facility. That includes greenery and proper segregation. So that would probably be the biggest change to that picture during our next report. But all in all, things are going well. And as Ragnar said, we work very closely with both Aqua and the government, who continue to support us in this hectic final stages of Stage 1, preparing for startup of Stage 2.

Thank you, Ragnar, Back to you -- sorry, I was a bit too early. Organization, the most important part of our organization. We are now a total of 55 employees, out of those, 11 experts. You can see the split in the bullet points. This is a picture of part of the farming team with Farming Manager, Ola; and Alejandro, the official Health Manager. We're focused, of course, very much of strengthening our organization continuously.

We are very proud to again be able to report that our new farming team, local team, fresh out of universities, are doing very, very well. So the process of transferring years of experience to our local new talents are going very, very well. We also would like to mention the new senior hiring since last report: process manager from February 2023, sales manager, which was referred to, and a farming expert which Ragnar will come back to. And then we have also strengthened the group accounting system with an accounting manager working with our CFO.

Then, Ragnar, back to you.

[Ragnar Joensen, executive]

Thank you. Yes, the RAS team is in place. We have presented this before. So it's myself and these 3 guys who have a lot of experience in running RAS. And Alejandro, who has come in as Fish Health Manager; but then Orfa Cabrera who also start -- she started actually the 1st of August, and she is on the base now to China to start physically here. So a lot of experience in producing fish and similar systems to what we have here.

If we take the system, we have referred to today that we have been transferring fish from RAS 5 to RAS 6. So I just want to illustrate also where this is. So we have RAS 1, 2, 3, 4, 5, and now we are moving fish from 5 into 6. This is the second last transfer of fish because 7 and 8 are similar projects -- are similar facilities. So one group, the first group, will go into 7 and then to harvest, and then the next group will go from 6 into 8 and then to harvest. So that is the process. The next transfer is scheduled to be in November. So this is the first stage in light blue.

And then we will have 8,000 tonnes. That means that we are going to install 4 more systems, we call this 101 to 104, and then also some more capacity on [ start feeding ] but with smolt. So we secured the financing or the funding with DKK 300 million capital that was raised earlier this year, but it's also necessary to have a result from '24 and '25 included to be fully financed for Stage 2.

We have signed agreement with AKVA Group for Stage 2. And this agreement is not on a fixed price, it's on a target price arrangement. So it's indexed, and Hjalti will come a little bit more into that later. We have also signed an agreement with the Chinese authorities, so they will be responsible for the construction and the infrastructure. So very similar to what we did in Stage 1. And the further plan to go up to 20,000 tonnes is also in our plans, but we have not -- we have not been very firm on exactly when the start should be on the 20,000 tonnes project.

So now we have 6 batches in production. First batch was laid in as eggs in March last year, and they are now being transferred into -- from RAS 5 into RAS 6. So we just have as small video clip taken by an iPhone, but just to show you how the fish looks like when they are moved. And probably, the film will be running not so smoothly, but we'll...

[Presentation]

[Ragnar Joensen, executive]

Here, you can see the sizes. The size of this fish is around 1, 1.2 kilo. And they have been, first, weighted, and then put into tanks inside of RAS 6. And then we are counting and distributing into the respective tanks that they're going to.

So the growth, how has the growth been? We have 4 batches I will show you the results from. So in this first slide, you can see batch 1 and 2. Batch 1, we are -- we cooled down the water in November and December, January. So we lost a little bit of weight there. But we have received -- we have gained some of this back. We are, at the moment, around 3 weeks behind schedule -- 2 to 3 weeks behind schedule. In all other batches, we are from 1 up to 6, 7 weeks ahead of schedule. So all in all, we can say that fish are growing very much according to schedule. And the survival in all batches has also been very good also in Q2.

So here, you can see batch 3 and batch 4. And here, we are around at least 6 to 7 weeks ahead of schedule in the production. So the first batch is lagging a little bit behind, but it's caught up more than that with the batches right behind it. And as you can see from batch 1, the average weight is now around 900 grams, second is 400 and then it's 160 and then 35. So we started to put fish in Q1 for stage 1. We started Q1 in '22. We will harvest the first fish, we have set all this in Q1 2024. So it will be in March that it's scheduled, and it will be March or April -- it will be in this area. We think it will be in March.

For stage 2, we will start the first eggs in Q1 this -- next year, and then it will take 24 months until we can harvest. And for the 20,000 tonnes project, we have said that the earlier start we could have was middle of next year and that is still the case. But we have not decided yet whether we will start exactly on that. We are working on getting the funding finally in place and so on for this one. So we will come back to that later, the exact timing.

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

[Ove Nodland, executive]

Yes. The growth and marketing for Atlantic salmon in China continues to grow. We've seen a tremendous growth from previous year '22 into '23. Total import of fresh Atlantic salmon as per Chinese customs for first half was approximately 45,000 tonnes out of Norway, which Norway had about 44% or close to 20,000 tonnes. And you can see the split of various countries in these pictures and a nice picture to the rate of our salmon. We expect -- or the market expects the growth in second half to continue, which means that the total market volume in 2023 is expected to reach somewhere between 95,000 to 100,000 tonnes.

On the next slide, I will talk a little bit about the Norwegian picture only. If you could change. As we already mentioned, the market has continued to grow. This is just a breakdown on the price structure of the Norwegian part of the export. The bottom, the dark blue, is the same graph that we refer to at all time. It's the FOB Oslo to any other country but China. And then we have the thick orange, which is FOB Oslo for destination China. And as you can see, it represents a few elements. One is that China mostly buy large fish. There's also a requirement for special packaging and a limited number of food processing plants to export to China. So that's the basic explanation to that significant gap between FOB Oslo to China.

And then the difference to the blue one is the freight cost, air freight cost. And then on top, we have the cost to get the imported salmon through customs clearance and into a cold storage area on the, should I say, right side of the custom barrier, including 7% income tax and handling fee of region of NOK 3, which bring the total up to somewhere like NOK 175 per kilo. I think that should explain what we have indicated throughout the entire project, that the market is huge, still growing. But we are very well positioned to take our share of that market at favorable margins.

Back to you, Ragnar. You are muted.

[Ragnar Joensen, executive]

Thank you very much.

We'll just go through the table of some KPIs or economics on the project also. We have presented this before and is unchanged. So stage 1, 4,000 tonnes; Stage 2, 8,000; and stage 1, 2 and 3, that will be 20,000 tonnes. And then the CapEx costs, where they will be around. And I should just mention, when we mention Norwegian kroner, none of the costs we have are in Norwegian kroner. So this is just from our currencies switched into Norwegian. And mostly for the CapEx, it's euro. And we have used the euro exchange rate of EUR 1 to NOK 10 between euro and Norwegian kroner here. Anyways, so there will be a slight increase in the cost as the years has passed by and there's been some inflation.

The lease cost is actually going down because we are adding less square meters per produced volume. And the costs are still in line with what we have presented before. But of course, if we took currency of today, the Norwegian kroner would be a bit higher than the NOK 10 that we have assumed in our setup here.

If we -- I mentioned this before, that we have assumed also certain production capacity within our site. So we say that we can produce 127 kilo per cubic meter of water -- or tank water we have. So that gives us 8,000 tonnes for stage 2. If we are able to grow the fish faster or just to produce more from our site, then of course the volumes will go up and also the cost will be reduced. So that's in the nature of it. And we have been, as we think, okay, careful with how much we expect to produce from the facility.

So now we'll go to the financials, and they will be presented by our CFO.

[Hjalti Hvitklett, executive]

Thank you, Ragnar. Before entering the financial figures, just briefly on the agreements we have. Our usual split between technology and facility is 60-40. And as Ragnar explained earlier, the lease -- deferrable lease agreement we have with the local government corresponds to NOK 40 to NOK 45 per plant production kilo. And with adding the RAS equipment, we will reach close to NOK 175. As Ragnar explained also, we had a fixed price agreement with AKVA for stage 2. The contract is based on target price agreements. But based on our experience from stage 1 and also the calculated buffers, the likelihood that we should exceed the target price are limited.

Next slide. Key figures. Financial performance is in line with plan and budget. There's one number that stands out, that's financial expenses, I'll come back to that on the next slide. We are still mainly financed by equity with an equity ratio of around 80%.

Take the next slide. As I said, this is in line with our plan and budget. We are, of course, increasing the external expenses and staff costs as production is increasing. That's natural. The financial expenses are DKK 18 million. This is -- we had DKK 2 million expenses from loan and also financial income from cash, around DKK 1.5 million. But the rest is -- the DKK 18 million is a noncash deviation from the Chinese subsidiary.

The Chinese subsidiary is financed by a registered capital from the mother company and also an intercompany loan of EUR 25 million. And as the exchange rate fluctuates between local Chinese currency and euros, we have a loss on the exchange rate between -- on the loan and intercompany loan and also on the Eksfin loan, but these are noncash deviations. So apart from the extraordinary or the financial expenses on the exchange deviation, we are in line with our budget.

Next slide. Total assets have increased. It's mainly from the capital increase we had earlier this year. We, of course, see an increase in the property, plant and equipment or assets under construction, which has increased to a total noncurrent assets on DKK 357 million. That is -- included also DKK 9 million in deposits. Biomass has now reached DKK 16 million and it's equivalent to 210 tonnes as of June. We have secured funding for our stage 2 through our DKK 300 million capital increase, but we also have to include the results for '24 and '25.

Next slide. Cash flow, same story. It is according to our plan and budget. We can -- the main figures are the capital increase and the first drawdown of the loan from Eksfin. And we have still remaining a loan from Eksfin later this year.

Thank you. I think that was my last slide.

[Ragnar Joensen, executive]

Thank you, Hjalti. Now I will just continue.

Just a few words about some of our ESG profile also. So as we have mentioned before, we are producing our own freshwater since freshwater is a scarce resource in China. So we're producing it from the sea. And we are establishing solar panels on our roof, as Ove mentioned also. That will be done once we are finished with the building of stage 1. And covering the roof of stage 1 will assist us with 20% to 25% of the energy. And the rest of the energy is arriving from a very big wind and solar panel power plant here on the island of Gaotang in China.

We are going to put all the sludge and send that in to -- we are trying to get a finalized agreement with a biogas plant so they can use their waste into fertilizers into the local farming area around here. We are not -- of course, since we're producing in China, we are not buying fish anywhere else. China is our market. And we're continuously trying to improve the relationship we have both with our neighbors, but especially also with our local government.

So just to sum up, the project is still in line with both time and budget. We're moving fish according to plan. The growth rates and performance and mortalities are in line with the expectations also. We are building up the organization. Market looks still interesting. Even though prices have dropped a little bit, it's still very interesting. We are continuing to work with our plans, first, on stage 2 to get 8,000 tonnes, and then we'll come back with the plans to progress further into 20,000 tonnes.

So this completes our presentation. Thank you for listening.

[Unknown Attendee]

Thank you very much, Ragnar and the team, for a great presentation. I can't see if there has come any questions in until now. But if you have any questions, anyone on the line, you're free to contact Hjalti and the team with your questions later to receive a written answer. You can reach Hjalti at [e-mail].

So thank you very much, Ragnar, Hjalti and Ove. And I wish you all to have a great day.

[Ove Nodland, executive]

Thank you. Thank you to all.

[Hjalti Hvitklett, executive]

Thank you.

[Ragnar Joensen, executive]

Thank you. Bye-bye.