Nordic Aqua Partners A/S

OSE:NOAP

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Ragnar Joensen, executive]

Welcome to Nordic Aqua's presentation of second quarter. This presentation is a special presentation for us. This is time that we actually have had turnover in sales. We have been waiting for this moment since we started. It was a long time for planning, after that construction and then since we have built up biomass. I think we can say that everything has gone very well according to plan.

To present today, myself, Ragnar Joensen, I'll start; and then we have with us also from China, our Managing Director, Andreas Thorud; and also a finance -- CFO, Tom Austrheim.

So let's go through some highlights to start with. As I mentioned, this is the first time that we have had sales and turnover. We harvested about 523 tonnes during this quarter, relatively big fish and a very good superior share of 99%.

And sales price just under EUR 9 per kilo. And as we reported in July, we had an incident of geosmin. And this geosmin case has also continued into Q3. So we can see for us now that we will have lower turnover, lower sales and harvesting through third and fourth quarter.

As we have presented in most of our quarters so far, biology has been very strong: good growth, low mortality and thereby also very good fish out. We have available liquidity of just over EUR 10 million. And when we look at the reduced harvest that we have, we can see that there will be less income and therefore, we have planned for equity financing of NOK 250 million, which will be raised during this year. And we have already good backing by core shareholders that have been primary insiders covering around 40% of the shareholding.

So I'll take you through some operational data. Average farming cost has been just below guiding, EUR 5.23 per kilo. And the biomass production has been just over 1,000 tonnes, so the total biomass going out of the quarter is 2,400 tonnes.

And we can say since -- I mean during the second quarter, we have built up the production so that we have reached a steady-state production of 4,000 tonnes now. And this will continue into Q3. As we said, this geosmin incidence that we reported in July, and also has continued further into this quarter, means that we will have -- we expect to have no harvest during Q3 and reduced harvest in Q4.

We have seen also in China that there is in the market a preference for larger fish. And due to the good biology that we have seen also including producing fish up to 6 kilo, we are just -- we are considering now whether we should adjust our production plan to produce somewhat larger fish adapted for the Chinese market.

If we look at the batches, we have on the white lines, how the growth has actually been in each of the batches and the orange one was how we expected. And every production batch is just according to expectations.

If you look at mortality, mortality for Batch 1, we have reported earlier, was just 1.9% accumulated from 150 gram, excellent performance. The same is the case for Batch 2 and 3. Since 150 grams mortality has been as low as 1.4% and 1.2% in these batches. And if we take the other batches to follow, it's similar picture, very low mortalities, very good fish out.

If we take this case that we have reported now on geosmin, we have identified the root cause of the problem. And we have taken initiatives to assure that we can continue to produce premium quality fish. And I can mention the initiatives that we have taken. So we have implemented protein skimmers into the production units. We have changed the operational protocol that we have for the biofilters. It's mainly in the biofilters where geosmin is arriving from. So we have also increased the ozonation. So all these 3 initiatives are to take down the pressure, the level of geosmin. Geosmin is in every RAS facility, it's just a matter of controlling it. And by these measures, we can control it.

So if we had put fish -- new fish into the production units today with implementing these initiatives, we believe that we have not entered into a situation with the geosmin that we did. But we are there now. We need to bring the levels down and it will take a little time.

And also in the purging unit, we have implemented some technology to take further the geosmin levels down. So as we mentioned, the harvest plan will be adjusted. And we will take down the levels in Q3 and also Q4. And some of the biomass we will be able to transfer into beginning of 2025. And of course, the liquidity will be affected, but that will -- our CFO, come closer into later in the presentation.

If we look at the project, we had a grand opening during this quarter, a grand opening with Chinese officials and also executives from the management in Nordic Aqua. A great day in May. And we were very pleased to announce that we have built and produced fish and facility according to plan. And we have continued to build and we still continue to build. So Phase 2 is also underways now. We have built the units for the small fish hatchery and also we start feeding, so that is ready now and being tested. And the larger building next to our sister building is also well underways now. We have piled, and we have started very much on the concrete work also. So project Phase 2 is going according to plan.

So if we just sum up with the project plan, we started back in '21 to build the facility. We started production in 2022, we started harvest second quarter this year. And for the second phase, we started last year, last autumn, and we expect to put in the first eggs in Q3 this year, so that means that we will start harvesting from Phase 2 in 2026. And we have also planned further to expand the project up to 20,000 tonnes. And we have said that we will set the exact time line for that during Q4 this year.

So now I'll give the word to Andreas, our Managing Director in China.

[Andreas Thorud, executive]

Thank you so much for that, Ragnar. I have the pleasure of talking about this huge milestone that the company achieved this year in quarter 2, that Ragnar already mentioned, that we are doing commercial sales in the Chinese market.

We started a few weeks out in April, and then we ramped up the harvesting and sales throughout the quarter. We saw in April an harvest of 43 metric tonnes, 134 in May and also in June, we were up at 345. As you can see from the pricing, we had a good average prices in April and May. This was also a time where the global salmon market was experienced strong prices.

In June, we also saw some of the global pricing for salmon going down, which also affects the Chinese market. In overall, we saw sales of EUR 4.7 million with an average price per kilo of EUR 8.94. It's important to highlight that with the average rate we achieved 4.5 kilo in HOG, we had a superior rate of 99%. This is a strong achievement and also a testament to the quality that we delivered to the market.

We developed customers. We have established distribution into both foodservice and retail sectors. If you take a little bit of an overview, a bigger view of the Chinese market when it comes to imports of Atlantic salmon, we see that China is experiencing another strong year in terms of growth.

If you look at the first half year, there is an almost 10% year-on-year growth in volume. So the Chinese market has basically picked up the trend that was there before COVID and is now growing year-on-year. It clocked in at 43,000 metric tonnes for the whole fresh Atlantic salmon that we witnessed.

We also look at a little bit the dynamics of the Chinese market briefly because it tells a little bit about how this market is when it comes to country of origins. We can see from just the breakdowns, when you're looking at the different -- the country of origins in the local market, there is a lot of countries involved. You have Norwegian, you have Chilean, you have Tasmanian, you have Faroe Islands, you have Scottish and so on and so forth.

It's a market with quite a lot of competition, and it's also a market where we can see that the majority of the consumption is being done into the foodservice sector, around 80%-or-so are our estimates on it. So it's quite a traditional market in that sense that you have a very strong foodservice sector, while as the retail sector, although growing, is not that high that you may see in other markets.

This kind of country of origin setup is quite unique in an Asian context, where you usually see Norway has a very dominant position for fresh Atlantic salmon. Norway has for these -- if you look at the first half year this year, has decreased their overall market share vis-a-vis during the COVID years. So you see a little bit of normalization in terms of what was existing before 2020, where Chile has taken now a bigger share of the market.

Finally, on the macro setting of things, I just want to quickly touch upon a little bit of the dynamics when it comes to if we group the country of origins into 2 types, we have what you call European, that's based in Norwegian, Faroe East and so on, and Scottish. And then we also have Chile and Australia. And there's a price gap there. And this speaks to a little bit also some of the dynamics we see when it comes to the preference for large fish in the Chinese market, particularly 6-plus in many cases because of the foodservice nature. This is a 6-plus-or-something Norway has a relatively strong supply and is a strong contributor to the market.

Norway also have import duties of 7% on the products coming into market, while as Chile and Australia has no import duties. So the Norwegian prices are often skewed towards a 6-plus market, while as Australia and Chile would often be more on the -- can be more on the smaller size of 4 to 5 and 5 to 6 and so on.

So what are we going to do in the market? I mean being a new company, we are proud to be a Norwegian company based in China producing a commercially scaled up land-based Atlantic salmon farming -- excuse me, Atlantic salmon farm. This is also for us, as in many cases, a year where we are now getting into things. We've done 1 quarter. We are developing the market.

We are continuing to develop, looking at new channels. However, we think with what we can offer to the market, by taking a premium position, is something that creates attention among the local players, especially when it comes to the freshness story we can provide; the food safety aspect, which is important; and also such as sustainability. So we continue to develop within the important foodservice market as well as when it comes to the retail and online market with our Nordic PureAtlantic brand that we are now establishing.

And just to briefly look at some of the events we have done. In quarter 2, we had a launch event, we have had some activities towards the end users as well as we have garnered a lot of PR attention by national media in China exactly because of the uniqueness of the products and the project that we are doing. So we are very excited to continue this development of establishing ourselves as a premium positioned Atlantic salmon locally produced in China.

Yes, I think we move on to the financials. Tom?

[Tom Austrheim, executive]

Thank you, Andreas. All right, so what you heard is a quarter that saw production and harvesting sales ramping up through the second quarter to almost full capacity in June, where we have 70% of our sales approximately and unfortunately, at a lower price that we saw in June. So that generated income, as has been mentioned, of EUR 4.7 million of 523 tonnes that were sold in second quarter.

By the way, a full P&L and balance sheet and cash flow and everything is in the appendix. We have, in the presentation, chosen to concentrate on some key figures.

The farming cost was EUR 5.23 per kilo, giving an EBITDA of nearly -- minus nearly EUR 1.5 million. Cash flow from investments in property, plant and equipment and also right-of-use assets, which is the land and the building, was EUR 8.2 million. And we raised net EUR 6.1 million from financing with present export finance arrangement we have with Eksfin and Rabobank.

The biomass at the end of the quarter was EUR 16.8 million, including fair value adjustments of EUR 4.6 million. And then we have an initial recognition of deferred tax assets of EUR 1.1 million, that gives an operating EBIT of minus EUR 1.5 million and profit or loss for the period of almost EUR 1.7 million.

The net cash flow was minus EUR 2 million. The cash at the end of the period was approximately EUR 10.4 million and that excludes retention account or security accounts, which is not available to us, and it excludes undrawn facility with the Chinese bank -- on a portion of the facility with the Chinese bank. So we had an equity ratio of 58% of a balance of EUR 124 million.

Looking at capital, the capital expense and the funding. We have for Stage 1, which is the building and there you see closest to us in the picture, the CapEx is EUR 61 million approximately in total with the split that you see, whereof we have paid or incurred approximately EUR 54 million already.

For stage 2, which is the building here you see behind the buildings, the CapEx is EUR 63 million, whereof we have incurred approximately EUR 16 million. Then we have related to the geosmin incident, which has been explained, we estimate that we will incur another EUR 2 million in CapEx related to the mitigating factors.

So how will we fund all of this? And given the situation with the income side that Ragnar has explained. So we are at an advanced stage with discussions with a group of Chinese banks and also banks closer to home. I think there will be agreements on that quite shortly. And we are planning an equity raise during second half of this year of approximately NOK 250 million to take account of the lost revenue and also the geosmin CapEx. And we are very pleased that we see a strong support from key shareholders and primary insiders represented at board to participate in such an equity raise.

I think that was short for me this time. I have a feeling there might be more next time. So back to you.

[Ragnar Joensen, executive]

Thank you. Just to sum up the quarter. I mean this was the first time that we actually had fish and products to sell, a milestone for us. We continued with very strong biological production. We are up at full speed now on production during second quarter. We had this incident with geosmin, and we will adjust the harvest plan accordingly.

And we can see if we look -- of course, there will be changes in the harvest plan, but we don't see any changes in the production and the way we will produce the fish in 2025. Some fish might be turned over. Production will be as we expect. So maybe harvest will go a little bit up due to the transferred biomass. And then we are still on schedule with the Phase 2 project. And as Tom just explained, we have planned for NOK 250 million on equity raise during the second half.

So this concludes our presentation, and we are open for any comments or questions, please.

[Ragnar Joensen, executive]

We can see that there are some questions, but we can also take questions from the room. Question in the room?

[Unknown Analyst]

Yes. [indiscernible]. When it comes to the biomass, you have now 2,432 tonnes, how is that impacted by the geosmin issues? Can it be some culling ahead? Or how big biomass can you have in the system given that you won't harvest in Q3 as well?

[Ragnar Joensen, executive]

Yes, there will be -- I mean we will be able to produce as planned during the coming time, but we expect also there will be some culling, and that is included also in the funding needs that we have explained for it because we cannot grow all that biomass and still have reduced harvest, so some culling. But to a certain degree, we can accommodate most of the growth in the facility.

[Unknown Analyst]

Yes, because how much biomass can you have standing in the system today?

[Ragnar Joensen, executive]

I don't have the figure in my mind right now, but it is considerably higher than -- it will be just over 3,000 -- between 3,200 tonnes, 3,600 tonnes, something like that, I expect.

[Unknown Analyst]

Okay. And when it comes to financing for Phase 2, you say that you're in a bank -- do I understand it correctly that the remaining NOK 500 million roughly is bank financing all of it or do you expect equity for that as well?

[Ragnar Joensen, executive]

I think we'll have Tom to answer your question on this one, please.

[Tom Austrheim, executive]

We expect -- this planned equity raise that we are describing here, we expect the rest to be covered by bank finance.

[Ragnar Joensen, executive]

Thank you very much. Maybe we should have a look at the questions also from the audience and online. As we can see here, the first question is, it says, first of all, congratulations on a very impressive project. Can you elaborate on the price achievement in Q2?

Andreas, could you maybe come up and say a few words about that?

[Andreas Thorud, executive]

Yes, I can. As was presented, we reached an average price of EUR 8.94 per kilo. We saw that there were some fluctuation in terms of month-by-month, then also given the nature of the global market in that respect. We see that there are different ways you can look at this price achievement. You can benchmark it towards various indexes and so on, such as NASDAQ and whatever it may be. We feel confident that with the product we are providing to the market is going to be well received from the freshness, from the superior rate, the whole, all the values that basically Nordic PureAtlantic stands for.

And we see this as a process moving forward. And we will also look at seeing how can we grow the fish a bit bigger because that is something we see there is obviously a preference for a bigger fish in the local market. So we got started. We are in the peloton of sorts of different types of country of origins where we are established ourselves as a newcomer, but an exciting newcomer with the high quality. Thank you.

[Ragnar Joensen, executive]

Thank you. And then we can see another question. Would it require a major additional CapEx changes to facility in order to grow larger-sized fish?

No. I mean, in order for us to grow a larger fish, we should not change anything with the facility. We are -- we have been producing fish of just over 6 kilo and the production of that went very well. But of course, taking the step to produce fish on land has not been done in so big scale before by so many.

So I mean, we need to focus on if there are any risks. And then we will, therefore, grow the fish control up to a higher size, but we have said that we have -- we are in the consideration of doing that. And that is bringing all these different risk elements into the equation, and then we think that we will be able to go for a production of a larger fish.

And then a final question. Your EBITDA cost net of [indiscernible] is lower EUR 10 per HOG, but you report a farming cost around EUR 5. How is the farming cost calculated? What is included and then what is not?

Should I take that? Yes, I can take it. It's -- in the farming cost, we account for all the farming that is put. So all the feed, all the energy, the people working directly with the fish is included in the farming cost. And farming cost is just before the fish is handed over to processing.

So that is the number that we have calculated into the farming cost. So administration. Of course, during a quarter like this one where we have relatively reduced harvest since this is the start-up, the fixed costs are spread over quite few kilos.

But on a run rate -- full run rate, the part above the farming cost will get smaller and smaller. And as we have said also previously in our presentations, we have rigged ourselves for a bigger company than we are now administrative wise. So we are quite many people and quite strong administration for only a 4,000 tonnes production.

We are rigged for 8,000 tonnes first and partly also for the 20,000 tonnes. So that is the explanation for the gap between the farming costs that we have and also the total cost.

We have no more questions here, but we can see also that there's one in the audience.

[Unknown Analyst]

I have 1 question regarding, you said that Nordic Aqua is well received in the Chinese market and we are talking about the paradigm shift from sea-based to fish on land or land-based, as you said. And talking about this paradigm shift, you also mentioned freshness, especially, but I would also focus on the food safety. What about Chinese legislation regarding food safety? Can you say something about that?

[Andreas Thorud, executive]

Yes. Thanks for that question. It's a very good question because we know that if there's something that is a key concern in the market like China is food safety. So we are doing -- we have a QC department just on the regulatory side of things. We are doing testing, and we are making sure that we are following all relevant types of standards when it comes to food safety-related aspects to our type of product. And this is also one of the areas where we continue to communicate into customers that we have a controlled environment.

We have customers coming and they're seeing it for themselves. And we feel that this is a strong selling point, if you will, as well when it comes to the -- to our mission or establishing ourselves with our unique value proposition in the local market. So that's very much an important factor for us in our business development drive moving forwards.

[Unknown Analyst]

I have another question as well if it's possible. You can read today in [indiscernible] about Atlantic Sapphire in Miami in Florida. Can you short point out the [indiscernible] formula that you have made or are you working with in China in Ningbai (sic) [ Ningbo ]? What is -- you can read about a lot of losses and new emissions now coming also in Florida. But what is really the great difference between you and Atlantic Sapphire? Can you tell me? You are both talking about you are the biggest in the world and that the first Norwegians with land-based, please explain that a little. Can you?

[Ragnar Joensen, executive]

I think I have to concentrate on what we are doing because I'm not fully updated exactly what goes on in Florida. But if I focus on what we have had as a plan to start with, it was to build our facility first that could accommodate the production that we anticipated and planned for. And we can see also from the production that we have had that production has gone very well. I mean, we have produced according to plan.

We have had very, very low mortality. So I think if we look at the overall picture from the production side, everything has gone according to plan. And yes, maybe we came a little bit late into the tackle, if you use the football analogy, with the geosmin. But if we had implemented -- we believe that if we had yet implemented all these initiatives that are taken now some months earlier, then we would not have this case. And now we need to let time reduce the levels that we are at until we can start harvesting again. So except from that, I think the project has been doing very well.

Okay, then it looks like the question part is also over. So just like you all for attending the presentation. Thank you very much.