Nordic Aqua Partners A/S

OSE:NOAP

Earnings Call Transcript 2022-Q3

[Unknown Executive]

Welcome to this third quarter presentation by Nordic Aqua Partners. With us today, we have Chairman, Ragnar Joensen; CEO, Ove Nodland; and CFO, Hjalti Hvitklett, who will present the results for everyone here. If you have any questions, please feel free to post them in writing here in the app. And I will write them out to their management team afterwards.

So with that, I'll give the word to you, Ragnar.

[Ragnar Joensen, executive]

Thank you so much, Filipa, and welcome, everyone, for the Q3 presentation of Nordic Aqua Partners. So today, we will go through highlights, project revenue, market, some assumptions, financials, and will end with the outlook and summaries.

So if we start with the highlights, so things are going as planned. Project is on budget and on time in Stage 1. And as we have said before, the CapEx is fixed for Stage 1. So there are no surprises there.

Biology is doing well. We have now fish average 50 grams in the first batch. And we have installed RAS 3, that's completed, and we are working on RAS 4, 5 and 6. There are 9 in total, so we are getting closer. Salmon prices in China are still very strong. supporting the business opportunity.

If we look at how much we have spent in CapEx in this quarter, it's DKK 51 million. So we are up in total now DKK 238 million out of the DKK 370 million. Liquidity is also as planned on DKK 379 million and that is including cash and undrawn credit facilities.

So we have a look again at our company. Where we look at it is sort of Shanghai and very good access to a strong base of consumers. The project is fully funded to reach 4,000 tonnes, and we have the equity in place for the 8,000 tonnes production. Our plan is still to increase up to 20,000 tonnes. And on the site, we have an ambition to be able to produce 50,000 tonnes. Stage 1 has commenced, and first harvest is still expected to be at around March or in Q1 2024.

Management team is strong. We will just come into that again later in the presentation, and we also still have the dedicated support from the government, local government. And we have very strong industrial players with us in the both AKVA Group and Nutreco, both on the supply side and as investors.

So those were the highlights, and I will now give the word to Ove Nodland, our CEO in China, to give us a project review. So please, Ove.

[Ove Nodland, executive]

Thank you, Ragnar, and good morning to all from China. I'll just start by giving you all an update. As we have heard, the project continues on budget and on plan. The installation of RAS 3 was completed on schedule and the fish was moved into RAS 3 in November. Installation of RAS 4, which you can see at the upper left corner of the blue rectangle, is also proceeding as planned with moving salmon from RAS 3 into RAS 4 in January. And you can also see in the picture that the construction process of RAS 4, 5, 6, 7 is well in process according to schedule.

The COVID situation in China is still lurking in the background, but we plan well. We've got all the equipment to site on time. And we have our operational team on site. So there has been no impact due to COVID-19.

Thank you. If I can have the next picture, please. This is a more close up to see the progress. You can see the building in the back behind the white rectangle. It is the building we have always repaired to, it's a small building. The Hatchery RAS 1, 2, 3 is not only completed, but there are fish in all systems. We will relocate our offices and administration towards the end of this year. You can also see that the roof on the big building is starting to be installed over RAS 4 and RAS 5. Aqua is in full swing with the installation of the process equipment. In the front of RAS 5, of course you have RAS 6. You can see all the concrete filters, tanks and also fish tanks are completed. RAS 7 is quite advanced as well, with 3 other tanks already costed. And then, of course, in the front right you have RAS 8, and in the back, RAS 9, and then the process equipment. So once again, things are going according to plan and schedule.

Next one, please. We have always said that things move very fast in China. This is a picture from August and then November, that's about 3, 4 months. and it's quite visible what has happened since our report in August. Up until August, it was mainly below ground and building the foundation. But now as we saw in the previous picture, it's really now taking shape. The emergency generators and transformers are already installed in the building to the bottom left. And again, the orange rectangle to the left -- or to the right of the blue is the area for next step, the next 4,000 tonnes. And you can see that, that has now been completely backfilled. So we are proceeding with construction and installation of the RAS equipment as planned and on time.

I think it's back to you, Ragnar now.

[Ragnar Joensen, executive]

Thank you. And also on the organization side, I mean, we have been recruiting and training additional local farmers. So they are now up in 8 farming operators, together with the 5 that you can see in the picture myself with experience from farming and both the Assistant Farm Manager and also extensive experience. And the RAS salmon expert that we have in place also. And during this quarter, we also had the addition of the Fish Health Manager, Alejandro Millar, from Chile. And we have just added also some of the reference projects that we have been working on, both post-smolt facilities. MOWI that Johan, the RAS expert and myself built and finalized in 2017 and Tytlandsvik Aqua, which I have been quite active also in Norway, where we also produce live post-smolts. And these have been in operation for 4 years now and have been producing as much as we're going to produce in Phase 1 for Chinese projects. So the similar size project.

If we look at our side, what is now Ove mentioned, we have already fish in the hatchery, RAS 1, 2 and 3. And the first batch came in, in March this year. And that fish is now 50 gram. Second batch came in, in June, and that fish is just about 10 grams now. And then we have batch 3 that is just about to be moved from the hatchery into the start feeding. And our fourth batch will come in December.

And now I'll see if it works, just show a small video clip of the fish when they were moved from RAS 2 into RAS 3. With video clips, sometimes, you can see them very clearly. I see them on my screen, I hope you did also. So the fish are live and very well.

If we look at how they have performed growth-wise, you can see now our graph or 2 graphs, on the left, that is Batch 1; on the right, that is Batch 2. And then for both of them, we had a gray line of expected growth, and then we have a dark blue line with actual growth. And you can see in Batch 1, fish have grown better than budget and the same with Batch 2. Actually, we were thinking that the Batch 1 since they are there like, we call them the front soldiers, they are the one experiences the first fish in each of the new departments that we put them into. But even though they are front soldiers, they have been performing very well.

If we take mortality wise, we are also ahead of budget. So things are project -- they're all developing very well for us. But of course, the fish are small. Still, they are 50 grams. So we need to get them up to 5 kilo. And the plan is to get there in Q1 2024.

So just a few words also about the facility. You can see the pictures from before. You can see that in the small building RAS 1, 2 and 3, and then in the big building, 4, 5, 6, 7, 8 and then the purging and processing. So this is how the facility looks like. If we look at what is it that we have focused on when we have designed these facilities because we have built so many before. We have focused on clean water. That is the primary focus area for us, to have clean water. So where the water intake when it comes in, it is extremely well cleaned and within the systems, we're having extreme focus also having a very, very clean water. That means extra mechanical filtration, very good particle removal also in the biofilters 6, 5 and so on. So that is our main focus.

Water temperature. At the moment, we are running with quite low water temperatures. Since the fish is growing so well, we're just adjusting a little bit with the temperature, but we have sufficient cooling capacity to reach levels that are well suited for the Atlantic salmon. And we have also been running with low salinities throughout the process, all just to create the best environment for the fish.

If we go to the timeline, so we said that we put our first eggs in Q1 2022. That means 2 years later in Q1 2024, that's when we're going to have our first harvest. And then we have these further stages, Stage 2 and Stage 3, taking the production from 4,000, first up to 8,000 and then up to 20,000 tonnes. The plan has been to start with the laying in eggs in the 2024 for the 8,000 tonnes. And we have also mentioned before that the 20,000 tonnes, we would like to start simultaneously or it will be postponed. We're just looking for it. When we go for 20,000 tonnes, we need to have extra capital and equity. But for the 8,000 tonnes, it's sufficient to have an additional loan in order to reach that. But we will come back to that at later presentations exactly how the plans are going to be developed from the current 4,000 tonnes up to the 20,000 tonnes.

So Ove, if you could take us through the market also, please.

[Ove Nodland, executive]

Yes, the demand for Atlantic salmon in China continues to grow. To the left, you will see the export of Norwegian salmon to China in tonnes. The majority of the salmon currently imported to China comes from Norway. The current market was approximately 80,000 tonnes in 2021. That is a little bit less than one would expect for -- or have planned for in 2021, but that is because of the COVID-19 setbacks in '20 and '21. But again, we will reach 216,000 tonnes in 2030 with a calculated growth of 12%.

The demand is very much driven by the shifting of buying pattern from the previous HoReCa market, which was the major -- it still is the major, but we see a much bigger growth in online shopping and home deliveries to consumers. And one also have to bear in mind that 15 years ago, salmon as such was very uncommon in China. Now it's more used in the typical Chinese kitchen.

Next one, please. This, of course, is a very interesting graph. We have put a period here of about 18 months. where you can see the development of the price FOB Oslo and also as it ends up at the right side of the border line in China after customs. The bottom one, the thick blue is FOB Oslo prices of the periods. And the light blue is the additional cost to get the salmon ready for export to China. Majority of that is special packaging, mostly related to the COVID-19 restrictions.

Then we have a light orange one, which adds the freight cost, which are currently around NOK 35 per kilo. And then the distance from the light orange to the dark orange or thick orange is the 8% import duty. And calculated NOK 7 per kilo for handling the salmon after landing in China through customs and into a cold storage. So in principle, you could say that the thick orange line indicates the absolute lowest cost to have imported salmon duty paid in a cool storage facility on the right side of the custom border.

Next, please. This of course, it's quite important and interesting to look at. We see a continuous high price in China for various reasons, but it's still stable at high levels. You can see the gray field and below the thick blue line. The thick blue line indicates our current EBIT cost per kilo of NOK 57 for 4 tonnes, and then, of course, the implied EBIT margin, which again is quite interesting and positive for the project.

The average wholesale prices in China are somewhat higher than the thick orange one. As you can see, as you remember from the previous slides, it is more like how the minimum cost to get it into a cold storage on the right side of the custom border. But then there were some additional costs. So actually, our first line buyers are paying somewhat higher than this. And we also see that, for instance, a salmon fillet sold at the high-end market is up to NOK 500-plus per kilo. So even if the wholesale prices are high, the price to the end user, is significantly higher. There is an interesting margin on top of that.

We are approached by quite a lot of companies in China who wants to sell our salmon on long-term agreement. I think one of the reason, of course, is that we are the first one able to provide locally farmed salmon. But our ability to deliver 24/7, obviously add to it. And as I mentioned before, the change in buying patterns towards online shopping and home deliveries make us even more interesting. We have decided to not enter into a final closing discussion with these parties because we want to continue to understand and negotiate. But we will be in position with contracts when -- in good time prior to our first harvest in Q1 2024.

Thank you. I think that was the last one on mine.

[Ragnar Joensen, executive]

Thank you, Ove. Thank you. So just to look at some of the KPIs that we have been discussing before, I mean if we take the 3 groups that we have, we have the CapEx, but the CapEx is divided into. We lease a building from the Chinese government, they have a building for us. So we have a fixed price leasing contract with these. So there have been no changes since the IPO, that means for the last 2 years, there's been no changes. And if we look at the RAS technology contract we have with AKVA Group, there are also no surprises because it's a fixed price contract.

When it comes to production costs, most of the production costs remain exactly the same area that it was before. But we can see that feed prices have increased and they have continued to increase over the past -- especially past year. And that means that we have been -- it has been necessary for us to adjust on the production costs. I will give you table just after.

And if we go to the further stages that we're going to build. So the lease once we come up to the 20,000 tonnes we need a new lease agreement with the Chinese government. We are ongoing with the negotiations, and it's going well, but we can see that there might be a change in the costs, but nothing significant in the project. And the same with RAS technology, and that is for the next phase, next stages, so Stage 2 and 3.

We have started discussions with the AKVA Group just to plan for the development. And of course, we have seen in many other RAS projects that costs have increased And that will be the same for us, but we have 2 advantages compared with the first stage, and that is that we are going to be very standardized for the next stages. So that gives a little bit decreased cost in CapEx, and then also by adding how much is purchased in China locally. We can also decrease the cost. So we will not have full effect of inflation. It will be slightly smaller than the inflation level that has been seen.

If we take first and look at the production costs, we have previously said that we could come in at lower levels than NOK 57 per kilo for the first stage, around NOK 50. And we try to illustrate that this graph that it has been on the fuel price. We started off with having big price levels. This is on the HOG level. So when we have fish and HOG, just the feed been part of the cost -- and they are now added NOK 34 per kilo. Previously, we have been down to NOK 17, NOK 18, NOK 19 at that area. So it has been increased. So that is the main change that we have.

Once we have the scale effect of taking the production up to 20,000 tonnes, we can see that the price will decrease down to the level around NOK 51.

Of course, we have energy also, and energy prices are very stable in China. So there has been no change there. And they are at the level of NOK 0.75 per kilowatt hour. So it's an okay electricity price and very, very stable. It's been stable for the past 10, 15 years.

So all in all, when we sum it, you can see and you can probably have a read after if you want. CapEx is going slightly up, as we have mentioned. Lease is going up per square meter, but per kilo it will be going down because we can utilize square meters better. And then finally, the EBIT costs at NOK 57 in Stage 1 and down to NOK 51 in Stage 1 in 30,000 tonnes.

We have previously mentioned that once we are producing and looking at production capacity, we have set our production capacity at site to 127-kilo mile rate per cubic meter of tank volume. This is the level that many farmers have shown that it's fully possible to reduce. It is possible also to go up. We can see that from other numbers, that it is possible to produce more, but we have been a bit conservative on how much we expect to produce out of each cubic meter of tank volume. But if we said that we could produce more, for example, 150 kilos, then Stage 2 will not be 8,000, but rather 10,000 tonnes in that area. And that will also decrease the costs -- production cost per kilo around 4.

I'll now give the word to our CFO, Hjalti, who will take us through the financials. So please, Hjalti.

[Hjalti Hvitklett, executive]

Thank you, Ragnar. Start off with the project financial. As Ove mentioned, we have a fixed price contract. So CapEx is still on the same. And we have on the right side, we see the payments for each quarter that has been and the dark blue is the quarters that are coming into payments. And CapEx still, as I said, remains on budget.

We have this lease agreement with the government that is fixed also for the first stage and that we don't have to capitalize money to invest in the facilities only and the technology. We have an annual lease of NOK 18 million for the first stage.

If you look at the sources and funds for the first stage, and this is up till the first harvest in the first quarter of '24, we have secured debt of NOK 300 million, raised equity and we have also capitalized lease to government. So just about DKK 1 billion in total financing. We used the funds, we used our funds as CapEx above DKK 500 million and the lease agreement. And the working capital, which is mainly the biomass, it's DKK 91 million. And financing and general expenses are NOK 164 million. We will remain with a buffer just before the first harvest on NOK 122 million. And if you see -- if you look at what has been paid and where are we today, we are 2/3 of the CapEx is paid for and installed. Land and infrastructure is secured. We are starting on the biomass or part of the working capital is also invested. And financing and general expenses is also around 2/3 of the project until first harvest in '24. So buffer on NOK 130 million.

Profit and loss. It's according to plan. We have, of course, higher personal expenses. That's driven by increased productions. And financial expenses are still mainly on the commitment fee EUR 124 million loan from Eksfin. We have a positive exchange rate deviation this year, and we expect still DKK 30 million to DKK 35 million loss this year. But that, of course, depends on the exchange rate deviations end of the year.

Cash flow is also according to our plan and budget. We have paid in this quarter, DKK 51 million in third quarter for CapEx. We expect the first utilization of the loan to be within the month. And we have a net change in cash of DKK 51 million. And we come to available liquidity of DKK 379 million. That is cash, DKK 156 million. And we have a working capital of about DKK 37 million equivalent to RMB 35 million in the local bank in China and a loan for EUR 25 million at Eksfin. That in total is DKK 379 million that we have in available liquidity.

Financial position. We have -- the total assets are DKK 412 million, cash as a maintenance, DKK 156 million. And the biomass is now just below DKK 4 million which at the point -- at the time of end September was around 4 tonnes and now is today is around 16, 17 tonnes. And as Ragnar also mentioned previously, we had the equity in place to reach Phase 2, but need additional loan.

Thank you. Go back to Ragnar.

[Ragnar Joensen, executive]

Thank you, Hjalti. Yes, just to touch upon again, the green profile that we are trying to work into the project. And if we look at some of the parameters, we are working on GLOBALG.A.P

certification and also ASC certification. So that's the level that we want to be at. And that will be once we are up at the harvest point or just after, then we will go for these 2 certifications. Freshwater, we have mentioned before also, freshwater is a scarce resource in China, difficulty get hold of. Therefore, we decided to produce our own freshwater.

Renewable energy. We have the roof covered with solar panels. They will be as soon as the facility is finished. That will cover 20% to 25% of the energy consumption. In addition to that, on the island that we are at, there is some big, big solar power plant and windmill power plant that we are sourcing our energy from. So our energy will be very green when it comes into the facility.

As fertilizers, we can use all the outlet or the effluents that's cleaned and we can use that for fertilizers in the neighboring area. Of course, since we're producing locally in China, we don't need air transportation to reach the market. And we have been working closely both with the government and also local neighbors to have a good relationship.

So just to sum up, projects on time and on budget. And equipment is being installed and going well. Biology is also doing well, low mortality and high growth compared to what we have set up and the setup is experienced from a long time in the business. We are building further building the organization, salmon prices are very strong in China still.

And as we mentioned briefly, we are still investigating or getting up to this 20,000 tonnes capacity by 2026. But if we do so, we need a capital increase and we have not decided exactly. We will come back on later presentations more precisely on how we're going to do that.

But with this, I would just say thank you. Thank you for listening. And please shoot, if you have received any questions from the audience will be last to, we just have that..

[Unknown Executive]

Yes. Thank you very much. We have a couple of questions here. So I'll just go straight ahead.

There's one question is what are the consequences for the better than budgeted growth of the salmon to operation? Will they reach maturity ahead of schedule? Is there a efficient growth in the tanks, et cetera.

[Ragnar Joensen, executive]

Okay. So I understand the question that if fish are growing faster, will they mature sooner. Is that the question?

[Unknown Executive]

It's more -- what are the consequences or how will it impact operations, as I understand the question.

[Ragnar Joensen, executive]

Yes, okay, first, just some brief first on maturation. So when fish are in clean and cold water and with light, with the proper light received, then they will not get mature before time. But if that should happen that something happened and fish were to be mature before time then these fish must be -- this group of fish must be taking out of the system because they are not growing so well after they have started into maturation and the quality will get very poor. So those fish need to go out of the system so that we can use the system for producing with the other -- the rest of the fish that's not mature. Of course, this is an issue, but the focus must be that prevent the maturation to happen. And we do prevent it by having the strong focus that I mentioned before, with having enough cooling capacity, having enough cleaning to make sure that we have clean water in the system. So if you have these 2 in place, we don't see maturation as a major issue.

[Unknown Executive]

The next question is have you tried to get prices from other suppliers or do you have an obligation to use AKVA Group for future construction phases?

[Ragnar Joensen, executive]

I would say that we are very satisfied with the development that we have with AKVA Group. And me myself, I have been involved in many, many projects. So I know well reference prices, what should RAS facilities cost, and we are also satisfied with the price level that we have in AKVA Group. So we don't see the necessity of going to other RAS producers but I have done so, and I'm still doing so, another pressure if I have been involved. And so, it's not because we are -- we need to be married to AKVA, but we see that they deliver very good on price, so we are very satisfied in this project with them.

[Unknown Executive]

Thank you very much. That was the last question today. So with that, I thank you very much for a good presentation. We look forward to welcome back. I thank everyone who's been listening in also for your attention, and wish you all a very nice day.

[Ragnar Joensen, executive]

Thank you.

[Ove Nodland, executive]

Thank you.

[Unknown Executive]

Thank you.