Icelandic Salmon AS (ISLAX) Earnings Call Transcript & Summary

Welcome to this presentation for first half 2022 for Icelandic Salmon. We will also give a summary of the quarter 2 results. My name is Bjørn Hembre. And I will have our CFO, Jonas Heidar Birgisson with me in this presentation. After the presentation, there will be a Q&A session, where our Chief of Business Development Officer, Jón Garðar Jörundsson will keep control on the incoming questions. You can send your questions to questions@arnarlax.is. Behind me, you see our latest purchase, the small plant Ísþór that we will tell more about later in the presentation. Icelandic Salmon AS is a listed company on Euronext Growth in Oslo, and it's the sole owner of Arnarlax ehf., which is the operational unit on Iceland. We use Arnarlax sustainable Icelandic Salmon as the common brand for the company and our activities. Arnarlax have currently four smolt facilities with a capacity of 7 million to 8 million smolt depending on the size of the smolts or farming activities in Sea is in 3 fjords in the Westfjords of Iceland, where we have a total maximum allowed biomass of 25,200 tonnes. The production there is ASC certified. Our harvesting plant is in Bíldudalur in the Westfjords with a capacity of 30,000 tonnes. The harvesting plant has a BRC certification. We have a sales team that sells all our fish both domestically and out in the global markets. We see for quarter 2, a strong operational performance with an EBIT per kilo of EUR 4,57. It was a strong market in the quarter with high prices and we had a low contract share of our sales. Most of the volumes were sold in the months of April and May, and there was a peak in price at that time. We had a stable biological performance in quarter 2, which also gave a stable cost level compared to previous quarters. We see low lice levels. And so far, in 2022, we have not had any de-licing. We expect a slightly higher cost level for quarter 3. This is because we now start to see the effect of the increased feed prices and other raw materials. And we continue to harvest on the 2020 generation that now have had a longer production time in sea since we are harvesting the autumn fish. Our growth plans are progressing and the acquisition of Ísþór, the smolt plant, secure access to more big smolt. We now have a smolt capacity of 7 million to 8 million smolt, depending on what size the smolt are produced. We got a new site approved in quarter 2. This is within the license of 12,200 tonnes in Patreksfjörður and Tálknafjörður. We will put smolt on the site in the spring 2024 and it will be a good contribution to utilizing the MAB of that license better. We have, this year, started to use 200-meter cages. This is because they are more adaptive to some of our exposed sites and give better utilization of the area on the sites. We have a limit according to law to have up to 200,000 fish in each cage. And in this 200-meter cages, we could put 200,000 fish, and we can do that without going over or limit of density during winter of 13 kilos per cubic meter. The work with our future harvesting strategy is in progress and to find optimal solution for Arnarlax in the future. During Q2, we have experienced an increased interest and demand for sustainable Icelandic Salmon, both in Europe and in the U.S., Canadian markets. First half of 2022, 23.5% our volume were sold into U.S. and Canada compared to 9.6% for the first half of 2021. We expect to harvest 16,000 tonnes in 2022. I would now like to show you a short video to introduce our smolt plant Ísþór and the operations there. Rolf Ørjan, our COO of Biology; [ Silja ], that is site manager on Ísþór, will take us through that video. [Presentation]

The purchase of the remaining 50% of the shares in Ísþór smolt plant will be a good contribution in our growth plans for the coming years. The development of the operations on the smolt sites, Laxabraut 5 and Fjallalax is progressing well. And we have now 3 groups of fish in Fjallalax that will be transferred to Laxabraut 5 for post-smolt production during coming winter and then released into our cages in 2023. And with 100% control of Ísþór, we will have a cluster of smolt production on the South Coast of Iceland. This is good because we can utilize the competence between facilities, which are located close to each other. The area itself is beneficial due to access to geothermal water for the production which lower our energy cost. Sales and Marketing update. We continue our strategy towards the U.S. and Canadian market. The volume in quarter 2 was a bit down to U.S. and Canada, and this is mainly because there was very good prices in the European market. We continue our strategy towards the U.S. and Canadian market. The volume in quarter 2 was a bit down to this market. And this is mainly because of very good price achievement in Europe. That was a better-paying market in periods. And this development, we will expect to see from time to time. This has also affected our volumes coming into this market from the production in U.S. and Canada that could affect the competition and the prices for shorter periods. The contract share in quarter 2 was 17%, and we expect 13% contract share in quarter 3. Arnarlax continues to offer head on gutted salmon and pre-rigor filets into the market. In August, we launched a brand IceFjord premium Icelandic Salmon in cooperation with a premium U.S. customer. This brand will be used in restaurants and by retailers in the U.S. market. Update on licenses for seawater. We still have licenses for 25,200 tonnes of maximum biomass, and it was very positive that we got one new site approved in Patreksfjörður, and we have an application for two more sites in on the Arnarfjörður and [ Ísafjörður ] license. That is a work in progress and will contribute to even better biomass utilization. First, output of smolts on the new site that we got will be in 2024. The application for 10,000 tonnes in Ísafjarðardjúp is still in progress, and we expect it to be issued before end of the year. There is a uncertainty about the share of fertile and sterile salmon in this license. So that is still an open question. For the 4,500 tonnes application in Arnarfjörður, there is work being done to update the application. This is because the authority or authorities decided to treat this application according to new Aquaculture. The time line for this is still undetermined. I will then give the word to our CFO, Jonas Heidar Birgisson, for a more detailed financial update.

I will go shortly through the financial position of -- for Icelandic Salmon. As shown in the previous slide, the operational EBIT, as a proportion of operational income, were 39%, but that's the main reason for strong positive net cash flow from operational activities, that was nearly EUR 26 million in the first month -- in the first 6 months compared with EUR 2 million in the same period year before. Icelandic Salmon continued its growth projects and keep having the focus on increased smolt capacity and investment in seawater equipment for increased production. Cash flow from investing activities totaled up to north of EUR 7 million in the first half of 2022 compared with EUR 5 million in the same period year before. We expect to continue our growth projects with investments in our operation for the coming period at the same pace as before. Including our financial activities, the company has a net change in cash and cash equivalents with an increase of EUR 15 million for the first half of the year. Strong cash position and strong balance sheet allows initiative for further growth and gives the company a stronger position to reduce cost. Continued investment and good operational performance has also increased the company assets during the first 6 months south of EUR 27 million, whereof is an increase of fair value of the biomass of nearly EUR 4 million during the period. Noncurrent assets increased by 4% in the period and ended at EUR 93 million and current assets increased by 28% and ended at EUR 105 million, setting the balance sheet to a total of EUR 198 million at the end of last June. Changes of increased cash has resulted from strong operational results, increase of biological assets that include fair value, and continued investment in our growth projects are the main reason for a total of 16% increase of our balance from the end of last year. The company's equity continues to remain strong with a total of EUR 130 million at the end of the period. The equity ratio increased from 64% at the end of 2021 to 66% at the end of second quarter, providing the company with strong financial position going forward. Now this is the end of the presentation. Me and Bjørn Hembre would like to thank you all for joining us on this session, and we hope you will join us in the Q&A as well after just a few moments. Thank you.

Welcome, everyone, to the questions-and-answer section of our presentation. My name is Jón Garðar Jörundsson, and I will try to drive the question to Bjørn and Jonas today. First half -- I would like to remind you that you can send in questions through questions@arnarlax.is, and we will be following that closely. I will start with a question to you, Bjørn. Can you tell us a little bit about your prognosis on cost going forward?

I can do that. As I said in the presentation [indiscernible] raw materials, especially feed have been high increase. If you look -- compare the prices in quarter 1, 2020 with quarter 3 this year, we see an increase of about approximately 70%. So that will, of course, affect our cost level going forward. And we also see a rise in prices like on fuel boxes and so on. So we expect a higher cost in line with the rest of the industry, so to speak. But we, of course, also do whatever we can every day to keep our cost level down. But we expect increased cost when we now start to take out of our stock, the fish we have produced over the last year.

Very good. I have a question here from [ Axel Jacobsen]. 7 million to 8 million smolt capacity. What smolt size does the range imply?

That implies smolts from 600 grams down to what we could call a traditional smolt size of about 150 grams, but we try to push as much as possible to the bigger sizes because we see the benefit of reducing the production time and gives us the opportunity to utilize the maximum allowed biomass better. But we will have a wide range of smolt sizes, but the average rate will go up and we will push towards bigger smolt.

Another question. Biological performance for the 2020 generation is said to be good. Is this also the case for the '21 generation?

I would say so, yes. Absolutely. We have performed pretty well on both the spring fish and the autumn fish. So -- but we are very well aware of that there still a room for improvement. So that is also working in progress. But yes, it's quite similar.

Thank you. Question here from Ola Trovatn. He asks, "you say that the Ministry of fisheries has initiated work on mapping opportunities for the sustainable growth of the industry in Iceland. Does this mean potential opening of new fjords for salmon.

I think that is too early to say, but I hope and think that, that is a part of the evaluation because that will be a significant contribution to growth strategy. And I hope that both the Ministry and the politicians in Iceland see the potential that the salmon industry have for Iceland as a nation. So it's way too early to say if that is going to happen, but it, in my head, should be a part of that evaluation they are doing.

Thank you. Another question from Carl-Emil Kjølås Johannessen. He wants to know, do you expect to send more fish with the vessel to the U.S. going forward? What is the current capacity of the vessels?

The current capacity of the vessel is way beyond our needs. So that is not a limitation. And we are continuously working to try to use the benefit that we have in the lower transport cost towards that market. And it will always be like -- the fish is 7 days older. That's just stated on the label, and then we need to prove for the customer that the quality is good even though -- so that is a continuous work, and we need to kind of get a bigger shareholder savings in the logistics. So we see this as a benefit, and we think it will be something that is good for us for the future. And the capacity of the vessel is -- it could take 500 containers, and we are not in that position yet.