Icelandic Salmon AS (ISLAX) Earnings Call Transcript & Summary

Welcome, everyone, to this quarter 3 2022 presentation for Icelandic Salmon. Today, we have [indiscernible] as a background. On this site, we have the '21 generation, which we will start harvest on next week. At the end of this presentation, there will be a Q&A session, and you can send your questions to questions@arnarlax.is. Icelandic Salmon is a listed company at Euronext Growth in Oslo, and it's the sole owner of Arnarlax ehf, Arnarlax sustainable salmon is our common brand for our operational activities and our products out in the market. Arnarlax have today 4 smolt facilities and a current capacity of 7 million to 8 million smolts depending on size. We have our farming activities in the southern part of the Westfjords, where we have 23,700 tonnes of maximum allowed biomass. I will comment on that number later in the presentation. All our production is ASC certified. And we harvest our production in Bildudalur at our harvest plant, where we have a capacity of approximately 30,000 tonnes, and harvest plant is BRC certified. We sell all our fish to our sales team to both the domestic and, of course, mainly the global market for salmon. Icelandic Salmon show a continued strong organic growth in the quarter with over 50% increase in volume compared to quarter 3 '21. The market prices were lower in quarter 3 than in quarter 2, but we still see good price achievement compared to market price. Most of the volumes we had in quarter 3 was harvested late in the quarter. At the -- and the market prices were lower in the end of quarter, which have effect on the price achievement. We see some increased cost in quarter 3. This is due to a general higher raw material prices. We also did a reevaluation of stock when emptying out 2020 generation and that was due to a lower biomass than expected. This partly happened in quarter 4, but loss was taken in quarter 3. In quarter 3, 2020 generation was harvested and that happened at a high average rate and a high superior share. We expect increased volumes and stable cost levels in quarter 4. The 2020 generation will be finalized in quarter 4, and we will start harvesting on the 2021 generation in that quarter as well. We expect to continue with high average rate and also high superior share. And this shows us that we have a good biological performance. In quarter 4, we also will have a good utilization of the capacity due to higher volumes through our harvest plant. Growth plans are developing according to plan, Ísþór smolt plant was acquired and is now under full integration into the Arnarlax family. It means we have all systems and everything. We expect a stable demand for Atlantic salmon from Iceland in quarter 4. And for volume guidance, we have still 16,000 tonnes for this year, and we expect approximately same level for 2023. For 2024, we expect a significant increase following the investment in smolt capacity in this year and 2020. We have now completed our smolt strategy and want to summarize that up in this presentation or present capacity, you can see on the slide where we have a total maximum allowed biomass in our smolt facilities of approximately or not approximately, exactly 3,000 tonnes, and a capacity up to 8.5 million smolt. But the number will vary with the decisions around smolt rate. With no adept or smolt production to give us the best MIB utilization in sea, and that will mean a higher proportion of bigger smolt. Part of the strategy is also to build a competence center around our smolt production on the South Coast of Iceland connected to the facilities Laxabraut 5 and Fjallalax. We think that by doing that, we secure implementation of best practice in our operation, which again will give us a better smolt quality. And that is 1 of the areas where we know we can improve. We expect, as I said, to see effect of the smolt strategy on the harvest volumes in 2024, based on the output we then do in 2023. The main effect of bigger smolt is reduced time in sea. The upper line of the chart, where you see a 100-gram smolt put out in sea late in autumn is a long production time and 2 full winters in sea, which gives us a higher risk and a higher cost. On the lower chart, we see the effect of putting out bigger spot early in the spring and over the line, which then will be harvested before the second winter in sea. When we put out a big smolt in the autumn, we see that we reach harvest weight during the second winter and therefore, reduce the risk with the fact that the fish is ready to harvest. So if an incident should occur, we can take it to the harvest plant and harvest it. Then we go to sales and marketing. For sales and marketing, communication directly with customers have been a main focus in the quarter. That has been done to participation in seafood shows and direct visit to the customers. This has given us new customers, and we also see an increased demand. The contract share for quarter 3 was 17%, and we expect in quarter 4 a contract share of approximately 22%. We saw an increase in the U.S. market in quarter 3 compared to quarter 2 and 73% of the volumes to the U.S. market was transported with Eimskip vessel from Reykjavik to Portland, Maine. And that is the solution of production and transport that probably serves the U.S. market with the salmon to have the lowest carbon footprint. Our brand IceFjord came out to the end consumer in quarter 3 in L.A. And we are very proud to show the menu from The Ranch restaurant in L.A., where we can eat our salmon in the restaurant. Kjersti our CFO, and I was visiting L.A. in September. And we can just confirm that it tasted excellent. We also see an example of our salmon in a store in L.A., where the price per pound is almost $19. So it's a well-paid product. I said in the beginning that our license capacity is now 23,700 tonnes of maximum allowed biomass, and this is due to that we had renewal our license on the site Fossfjörður to 1,500 tonnes, which previously was 3,000 tonnes. This is our decision that the management in Arnarlax don't agree about, and the decision will be appealed. Fossfjörður is a license that is connected to 1 site, which means you will get a low maximum allowed biomass utilization. If you look at the lower chart on the slide. That said, we also see an opportunity to merge the license of Fossfjörður with a big license in Arnarfjörður, which is 10,000 tonnes, so we can get that up to 11,500 tonnes. That will give us a much better MAB utilization and compensate for almost all of the production that will be lost in Fossfjörður if we don't succeed with the appeal to get it back to 3,000 tonnes. For the other licenses and applications, we have got our first new site out of 3 applications to give us a better utilization on the Arnarfjörður license and license in Patreksfjörður and Tálknafjörður. The application in Ísafjarðardjúp for 10,000 tonnes is still in process. We expect answer on that by end of 2022 or quarter 1, '23. We expect the answer to be 10,000 tonne of sterile salmon. Then it's the application for 4,500 tonnes in Arnarfjörður that is being worked on, and we are preparing for an auction that we hopefully will get in some time. The legal framework around auctioning of licenses in Iceland is not in place yet. So the exact time line on this is undetermined. I will then give the word to Jonas Birgisson, our CFO. So [indiscernible] Jonas.

Thank you, Bjorn. Icelandic Salmon acquired the remaining shares of the smolt facility Eldisstooin Ísþór with an equity value of EUR 16 million in this year. And the consolidation is affected from that date as it is now fully operational with the ownership of Icelandic Salmon. This had an impact on the group's fixed assets, which increased by EUR 29 million within the quarter, ending with total assets of EUR 234 million. The acquisition had an impact on the net interest-bearing debt, where the net interest-bearing debt increased by EUR 24 million within the quarter. But with other investments, the acquisition mostly changed the group's cash position, but interest-bearing debt increased by EUR 7 million and the changes in cash decreased by EUR 17 million during the quarter. The group met all covenants at the end of the quarter and continued to have a strong equity ratio. In the process of the acquisition, the company secured additional financing through group loan lines with [indiscernible] that have been supported to the group quite significantly over the last few years. The additional financing was not used for the acquisition, but further to secure continuing financing in other group's growth projects. Net cash flow from investing activities totaled up to EUR 15 million and changes of net cash flow from operational activities was negative of EUR 9 million mostly based on increased biological inventory at cost value. Total investments, excluding the acquisition of Eldisstooin Ísþór totaled up to EUR 4.4 million within the quarter. Year-to-date, Icelandic Salmon has invested for EUR 11.5 million in addition to the acquisition. Those investment contains deposits for purchases up to 900 tonne purchase that to be delivered in next year as well as 200 meter cages for our sites in [indiscernible] frame, nets and other items to support increased production in sea as well as continuing focus on our investments on the land-based facilities. The group equity ended up at EUR 143 million at the end of third quarter and had increased from EUR 13 million from the end of last quarter. 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 in just a few moments. Thank you.

Yes, hello, and welcome to our questions-and-answer session of our presentation. My name is Jón Gardar Jörundsson, and I will be directing the questions to my colleagues Bjorn and Jonas today. You can still send in questions through questions at Arnarlax. So feel free to send them in, and we will try our best to answer as many as possible. We have a question already from Ola Trovatn. The question is, do you expect to benefit from the high contract prices in '23 following a stop in the contract market in Norway?

We feel a strong demand out in the market for contracts, which, of course, is a good situation for us. We are very selective when we go into contracts now, but we see a potential to have a good contract portfolio when we go into 2023, absolutely.

Okay. He also asked if the contract price is going forward, a realistic, you mentioned 90 mark?

I don't think I will comment on the prices we achieve on the contracts. But it's high forward prices, and that means also high contract prices, yes.

Another question from Carl-Emil Kjolas. What do you expect maximum allowed biomass utilization will be with 500-gram smolt?

We expect to reach up to a ratio up to approximately 1 between if you divide the harvested volume on the maximum allowed biomass, that is -- and hopefully, we can get north of that as well, but in around that range is our expectations for that.

Okay. There's quite a lot of questions coming. But question from [ Axel Jacobsen ], maybe somewhat similar to what you said earlier, but can you say something about the contract here for '23? Any price level indications?

We don't have the overview of the contract share yet. We have a decision to not have a very high contract share, but we want good contracts that what we are aiming for and as well the price itself, I don't think I should comment on.

Yes. Question from [indiscernible] the ISA infection in the [indiscernible], is there any ongoing review of the case within Arnarlax at the moment? Or has the case been seen as an isolated case to the citing question?

We are -- so ISA and biosecurity is something that has -- or worked on at the moment in the Ministry of Fisheries. So there will be review all the regulations and laws around that. The industry has had the opportunity to give input to that group. So I think that was a very good process to build a structure that the industry agrees about. It will take some time to implement it, and it's something we take very serious. And we -- yes, ISA is a threat that could happen. And we need to be prepared and are working every day on improving those routines.

Thank you. You guide on -- this is a question from Carl Emil again, you guide on a flat cost for in Q4 from Q3. Is this adjusted for the reevaluation of biomass?

Yes, that is adjusted. So we don't expect any realization for quarter 4. And we see that we -- we will still, of course, see the effect of the general price increase, but we also see that we have a better biological performance that compensate for that.