Icelandic Salmon AS (ISLAX) Earnings Call Transcript & Summary

Thank you all for taking time to be a part of this quarter 4 presentation for Icelandic Salmon. The Icelandic Salmon industry have been through a challenging period for our industry in a buildup phase. There have been incidents related to production, heavy campaigns from our opponents with bad publicity about our activity, both national and international, and uncertainty around the new legal framework for the industry. We are glad and appreciate the fact that we have a good and open dialogue with the authorities in Iceland. We share a common opinion with many Icelanders of developing a growing and sustainable aquaculture industry and jobs in Iceland. The country is well placed to make an important difference to feed a growing world population with healthy food from the ocean. I will touch into this later in the presentation. I want to start this presentation with a few words about our company. So Icelandic Salmon is a listed company in the Euronext Growth market in Oslo and on the NASDAQ First North list in Reykjavik. The company is the sole owner and the parent company of Arnarlax ehf. All operational activities of the group are performed by Arnarlax ehf. Arnarlax - Sustainable Icelandic Salmon is our common brand for all our operational activities and our products from Icelandic Salmon. The company have today 4 smolt facilities with a current capacity of 7 million to 8 million smolt depending on the size of the smolt. We operate farming in sea on 7 sites in 3 fjords in the Southern Westfjords of Iceland. All our harvested volume is ASC certified, and we have a total maximum allowed biomass of 23,700 tonnes. We have our harvesting plant in Bíldudalur, which is also BRC certified with production and have a capacity of 30,000 tonnes per year. We do all our sales by our internal sales team, both domestically and out in the global markets. Quarter 4 '23 was volume-wise all-time high with 7,219 tonnes harvested compared to 6,000 tonnes in quarter 4 '22. We harvested all the autumn '21 generation early in the quarter and started then on the spring '22 generation later in the quarter. The spring '22 generation shows very promising results when it comes to KPIs, such as growth, feed conversion ratio, and mortality. The company had revenues in quarter 4 '23 at EUR 51 million, same as quarter 4 '22. And the EBIT for the quarter was EUR 2 million, and this gave an EBIT per kilo of EUR 0.28. The cost level per kilo was high due to a one-off related to biological challenges in the beginning of the quarter. This one-off amounted to EUR 5 million. And if you look at the EBIT per kilo without a one-off, that ended at EUR 1 per kilo. The one-off is related to high lice levels that caused mortality. This was an extraordinary situation and mitigating measures to avoid this to happen again is activated. The harvest volume for the year was also all-time high and ended at 17,919 tonnes compared to 16,100 tonnes in 2022. The volume for the full year '23 is 900 tonnes above our last guiding on the quarter 3 presentation. And the volume was increased due to good growth on the spring '22 generation and also to reduce the risk after the de-licing of the same fish. The total revenues for the year was EUR 165 million, and the EBIT for the year ended at EUR 20 million. Full year '23 gave an EBIT per kilo of 1.13. And without the one-off, throughout the year, it was EBIT of EUR 1.52 per kilo. Our sales team have done a great job, but there was a drop in market prices in the quarter 4 compared to quarter 3 '23. But our price achievement towards the market price was good. And then let me give you an update on our operations. During the fourth quarter, we were reminded that we are working with nature. We experienced extraordinary high lice levels on our sites. And in Tálknafjörður, so high that it resulted in significant mortality and culling of fish. We are in a position where we had to de-lice all our sites twice and also mitigate the situation by increasing the harvesting due to fish welfare. Due to good performance on the '22 generation, the average weight of the harvest was normal. This situation will affect the harvest volumes in '24. We have evaluated the situation with our neighbor companies and the authorities to implement mitigating measures to limit the risk that this situation will happen again. This involves partly access to nonmedical de-licing capacity among other measures. We have also some positive development in our operational performance to report. There is still good demand for sustainable Icelandic Salmon in the market, or spring '22 generation that we are now harvesting on shows, as I said, very promising results when it comes to both growth, feed conversion ratio and mortality. And this shows the strong potential for strong biological performance in the fjords we are operating. If we then go to the sales and marketing update, we still see a strong interest for Icelandic Salmon in the market. The product is known for its high quality, the sustainability features, and quite a few of our customers claim that the best tasting salmon is the one from Iceland. Due to the low carbon footprint with the boat transport to the U.S. market, which reduced the carbon footprint 95% compared to airfreight, we have been focusing on that market. But we have seen a slight decrease in the demand over the last 2 quarters, and this resulted in that 16% of our volumes were sold to the U.S. market in quarter 4. But we are strong believers that we have a good product for American consumers and a good logistics solution to transport the fish into that market. And we will continue the work towards the U.S. market. For full year '23, 80% of our products were sold to the U.S. market and 82% were transported by ship and 18% by air. The sales to U.S. is also affected by relative high prices in Europe and especially Asia. U.S. and Asia is our main markets for 6-plus fish. And in quarter 4, 21% of our 6-plus kilo fish was sold to the Asian market. In the Asian market, Iceland has a free trade agreement with China. Initially, that means 10% tax benefit into that market compared to many other salmon producing nations. In competition with other salmon producing nations in Europe, we see that this tax benefit at least covers our extra logistic cost due to the transfer flight into Europe. We are continuously working closely with premium customers in North America, Asia and Europe to promote our high-quality sustainable Icelandic Salmon. And at the moment, all our contracted volume is related to premium customers. The contract share for quarter 4 was 16% and gave a positive contribution into the price achievement. I'm also very happy to introduce that we have a new CSO in our company, Linda Gunnlaugsdóttir, started in the beginning of January. Linda has a long experience in several branches, the latest years from logistic companies, sales of seafood, and we are very happy to have Linda as a member of Team Arnarlax and see it as very beneficial for the company to have her competence when it comes to leadership, sales of fish and logistics. I will then give the word to our CFO, Jonas Heidar Birgisson. So welcome, Jonas.

Good morning, everyone, and thank you, Bjorn, for the introduction. It's a pleasure to share an overview of Icelandic Salmon's financial position as we close out 2023. After a period of high reduction of biological assets at fair value and continued investment, the total assets on the group's balance sheet decreased by EUR 19 million within the quarter. In line with that, the group liability decreased by 8% during the quarter, where the balance on our accounts payable reduced significantly against increase of our loan line of EUR 7 million. The highlight of this quarter for financial position is the implementation of a new sustainable linked financial agreement. The new loan agreement places the group in even stronger financial position than before, and compared to our beginning of the year, the group stands even stronger towards its liability and growth focus. As stated in the third quarter presentation, the new loan agreement with DNB and Danske Bank has a tenure of 3 years with 2 1-year extension options. Our equity ratio remains in a strong position and the group remains compliant with all covenants, ensuring that the operations are within the group's set financial guidelines. Our focus remains on maintaining financial stability and advancing to our sustainability goals. The new financial agreement is a part that the group had towards a sustainability performance, and we keep our focus on continued improvement in that area. Our net interest-bearing debt, including leasing, decreased slightly, but I will go over that here in the next slide. This slide shows the changes in the net interest-bearing debts during the quarter. Net interest-bearing debt totaled up to EUR 52 million at the beginning of the quarter, and the group delivered a positive EBITDA of EUR 4 million. Our EBITDA was affected by the challenges of biological mortality during the period, as Bjorn explained here earlier, affecting our EBITDA of EUR 5 million. The group paid EUR 2 million in the quarter in taxes and changes in working capital was EUR 5.8 million and was driven by a reduction of biological assets, mainly in harvest at the end of the year. We also had material changes in our account payables, ending the quarter with lower liability. And investments during the quarter amounted to EUR 6.7 million, where the focus continued on investments in seawater equipment and improvements in smolt facilities. That focus has been a priority in our growth strategy during the year, and the group total investments for the year in total were EUR 28.5 million. At the end of the year, total net interest-bearing debt, including leasing, ended at EUR 51 million. Now before I hand the word back to Bjorn Hembre, I want to mention that our consolidated annual report will be issued on our homepage on 19th of April. So thank you for your attention, and I'll give the word back to you, Bjorn.

Thank you, Jonas. I forgot in the beginning of the presentation to inform that just after the presentation, there will be a Q&A session. And you can send the questions to us on the e-mail address questions@arnarlax.is. Then I want to give you an update on our license situation. We still hold our application for farming license in Ísafjörður, and Arnarlax is in position to receive a license of 10,000 tonnes. It is an uncertainty, the share of fertile fish of this license, but we expect to get this license in the near future, and are in good dialogue with the authorities about it. There are a process going on now that should lead to this conclusion in a short time. Our application of 4,500 tonnes in Arnarfjörður is still by the authorities. And if the new law goes through in Althingi this spring, this volume seems to be auctioned out. We are also currently in process to establish bigger sites for better MAB utilization and 2 new sites are in application process in Arnarfjörður. This has also been a process that has taken some time, but we expect the final decision during 2024. Our smolt plant Gileyri got a new license recently for 1,000 tonne of maximum allowed biomass, which is up from the previous 200 tonnes. This gives us opportunities for a slight increase in production on the existing investments done there, but the main purpose is to have the license ready if we decide to increase the production there with further investments in the future. As mentioned in the beginning, there has been a challenging period for some time for the industry in Iceland. We have seen outbreak of serious disease, escapes, and significant challenges with lice. Everyone agrees that such incidents should be avoided. And we, as an industry, are doing all we can to do so. After all, healthy and happy fish is of much greater value for us and the customers and for jobs and value creation on Iceland. Discussions are running high about our industry and its place in Iceland going forward. As I already said, we appreciate the open and honest dialogue and respect the fact that there are different opinions. In our view, the dialogue with the authorities is constructive, and we feel that we share the same objective. The world needs more sustainability grown food for people. We think Iceland and Salmon should play a role in this. A new law, which is currently being debated, is an opportunity to build a better structure for the industry than we have today. The official hearing process for the new law was finalized January 15. There is no dialogue between the direct stakeholders to try to find a common ground that is acceptable for a sustainable development of the industry, both ecological and economical. As the proposal is today, it will be to a benefit for the farmers that have low mortality, low or no escapes, and good control of the life. But we also see that the law proposal is quite aggressive when it comes to tax level. And our message to the authorities is that they should not weaken the competitiveness of the industry, because we are all still in a buildup phase and need to attract capital and investors for further development. Signal from the ministry is that this will be taken into account. The tax model that is proposed is a top line tax related to salmon price. The industry is of the opinion that tax should be based on profit and at a level that is compatible for a young and growing industry. Since it's not concluded on the most essential items in the law, no proposal yet before it's sent Althingi, we believe and hope that the final proposal will give a regulatory environment that supports development of a sustainable salmon industry on Iceland. So now let me conclude with our outlook for quarter 1 and the rest of 2024. Our volume guidance for '24 is 15,000 tonnes. That is, as I said, affected by the incidents we had early in quarter 4. But this biological challenges is not expected to affect the volumes in 2025. The CapEx for '24 is expected to be EUR 15 million, and that's down from the EUR 25.8 million Jonas referred that we had in 2023. The investment is mainly related to operational equipment on sea such as both cages, nets and moorings directly related to increased production, in addition to maintenance investment done on freshwater and the harvest plant. For the smolt output in '24, we will start to use a new site, Vatneyri in Patreksfjörður, and this will be an important step for better MAB utilization of our license there. One of the limiting factor has been availability of sites to optimize the utilization. The environmental investigations done on this site is very promising when it comes to current and so on, and we have high expectations for the coming biological results there. And we still see a potential for growth up to 26,000 tonnes within our existing licenses, and are positive to get there quite soon based on the results we see from the quality of the smolt we put out last year and the performance we see on the 2022 generation. I will, at the end, thank everyone that is working in Team Arnarlax for their contribution and hard work every day to bring the company forward. We will then soon move over to the Q&A session. And again, I will thank you all for watching this presentation from Icelandic Salmon. Thank you.

My name is Hjortur Methusalemsson, and I'm the project manager in the business development team in Arnarlax, and I will be managing the questions for you today. You can still send in questions at questions@arnarlax.is, and we will do our best to answer all those questions when they come in. Bjorn, you mentioned that the tax levels need to be compatible. Can you make any comments on how does the tax level look?

So in the proposal as it is today and as it's communicated that the intention from the Ministry is that it should be at a compatible level compared to Norway and the Faroe Islands. It's also communicated that they expect introduction period over some years when this is ramping up, so the young industry on Iceland can get some time to do the needed investments and, yes, get up to speed, so to say.

Okay. Jonas, going into the Icelandic Stock Exchange market in September last year. How has that affected the company?

Well, we haven't really seen much liquidity in our shares after the listing in First North, and there are multiple reasons for that, that I'm not going to speculate into. But we still believe this is the correct choice and correct decision to go in there and increase the access of the Icelandic investors, especially, into the stocks of Icelandic Salmon.

[ Mowi ] seems to believe in effect of new vaccine against winter sores. Do you think that could help against the Icelandic winter sores?