Icelandic Salmon AS (ISLAX) Earnings Call Transcript & Summary

Welcome, everyone, and thank you all for taking time to watch this Quarter 2 presentation for Icelandic Salmon. We are strong believers that the second quarter marks the end of an extraordinary period for our company. As you know, and as you will hear and see, several times during our presentation, our operations and KPIs have been heavily affected by biological challenges over the past 9 months. The challenges, combined with low harvest volume, have resulted in weak operational EBIT and EBIT per kilo. The biological challenges seem so far to be behind us. We will increase harvesting in the second half of the year. Smolt output is going according to plan, and we have implemented new procedures for lice control, and we have introduced new vaccines and also very important, we have -- we see continued good demand for Icelandic Salmon in the market. I will say more about this later in the presentation, but first, let me remind you about who we are. Icelandic Salmon AS is a listed company on the Euronext Growth market in Oslo and the NASDAQ First North market 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 the common brand for all our operational activities and products from Icelandic Salmon. Today, we have 4 smolt facilities with a capacity of up to 7 million to 8 million smolts, depending on the size of the smolts. We are doing farming on 8 sites in sea in 3 fjords, in the Westfjords Iceland. All our production is ASC-certified, and we have a total maximum allowed biomass of 33,700 tonnes in sea, whereof 10,000 tonne is for sterile salmon. We have our harvesting plant in Bildudalur in the Westfjords, which has a capacity of 30,000 tonnes per year, and the factory is BRC certified. And then we have our own sales team that sells all our fish out in the domestic and the global markets. In quarter 2, Icelandic Salmon was issued a new license in Ísafjarðardjúp. The license is for 10,000 tonnes maximum allowed biomass of sterile salmon. The license also includes three sites for operations in that fjord. As already mentioned, quarter 2 '24 was a challenging quarter for Icelandic Salmon and that is reflected in the numbers presented here. The harvest volume was 702 tonnes compared to 88 tonnes in quarter 2 2023. This is affected by biological challenges and seasonal production cycle that we experienced with low temperatures during wintertime. We started harvesting on the autumn 2022 generation in the quarter. That shows the same promising results as our spring '22 generation in our site Reykjavik. The smolt output started in May according to plan. We had an operational income of EUR 9.7 million and the operational EBIT for the quarter was negative of EUR 3.8 million. This includes one-off costs in the quarter of EUR 3.9 million, due to the biological challenges that is already mentioned. With low harvest volumes, we experienced a high operational cost related to low-capacity utilization of both harvest plant and the WellBoats. As mentioned, quarter 2 was quite challenging. We had a normal high mortality rate on our Autumn '23 generation in sea, and this will affect the 2025 harvest volumes. EBIT per kilo for the quarter was negative of 5.37. The number is quite affected by the low volume in the quarter and one-off costs. Adjusted for one-off costs, the EBIT per kilo was EUR 0.19 per kilo. Due to biological challenges at the end of 2023, the stock value at site was reassessed in the first half of 2024. Lower forward prices on the salmon and accumulated cost at this site led to a decision to partly expand this reassessed stock value during the reporting period. This impacted the EBIT in quarter 2 with EUR 2.3 million. This EUR 2.3 million is included in the EUR 3.9 million mentioned earlier as one-off costs. If you look at the license status. So Icelandic Salmon received a license of 10,000 tonnes of sterile salmon in Ísafjarðardjúp. You can see it on the map where it's located, it's north of where we have operations today. The license also include three sites for operation in the fjords, but it's not decided our own start-up of sterile production yet, but we are working on analysis towards both existing technique for sterilization of fish that is in the market today, and also look at new techniques for sterilization that is coming up. A third alternative for utilization of this license is that the risk assessment for wild stocks is increased, and we can then apply for conversion to fertile salmon. So it will be a process in the coming time to fully map out the potential for this license over time. We still have an application for 4,500 tonnes of maximum allowed biomass in Arnarfjörður, that is still with the authorities. And if the new law proposal that is proposed to Althingi goes through, it is reason to believe that this biomass will be auctioned out. We are also currently in a process to establish bigger sites for better MAB utilization, and two new sites in the application process in Arnarfjörður. This has also been a process that have taken some time, but we expect a final decision around this in first half 2025. A new law proposal concerning aquaculture was sent to the Parliament 23rd of April this year. The law was not approved by the members of Parliament before the summer, and there was especially two topics that the political party could not agree about. One of them was the tax level proposed in the new law and the other was fines that was proposed for escaped fish. Our main concern about the new law has been also the same, when that comes to tax level and also fine level. But we also see that there is a potential for sustainable growth in the proposal as it is today, and we hope and believe that during the autumn, a good framework for further development of the industry on Iceland will be approved by Althingi. Salmon farming has become a significant contribution to the Icelandic economy. And in 2023, 4.6% of all exported goods came from salmon. The sitting minister has given strong signals that she wants this law approved in the parliament. An update on the sales and marketing. We still see a strong interest for Icelandic Salmon in a strong market with high prices. The product is known for its high quality and sustainable -- sustainability features. And we often hear from our customers that the best-tasting salmon comes from Iceland. Icelandic Salmon has, for some time, been focusing on the North American market, especially since our shipment route by sea has meant a very attractive carbon footprint and low logistic cost. Shipping our product by both to the U.S. market reduces the carbon footprint with as much as 95%, compared to air freight. In the past 4 quarters, we have, however, seen a decrease in the demand in the market. For quarter 2, that resulted in that 11% of our volume were sold to the U.S. market compared to 18% for full year 2023. The volume sold to U.S. in quarter 2 was mainly contract volume. But we are strong believers that we have a good product for the American consumer and a good logistics solution to transport the fish to the market, and will continue the work towards that market. The superior share of the harvest was in the quarter 90%. We see a relatively good price achievement on downgraded fish. This, due to the possibility, we have to export head-on downgraded fish. This fish is allocated to industry customers, mainly in Europe, which used the downgraded fish as a raw material for high-quality end products that can be offered for sale to their customers. In the Asian market, Iceland has a free trade agreement with China. Initially, that means 10% tax benefit into the market. In the competition with other European nation in China, this benefit is covering our extra logistic cost related to flight into Europe for transfer. In quarter 2, 6% of our products were sold to the Asian market compared to 11% in quarter 1, 2024. This is affected by a lower harvest rate in quarter 2 and also that contracts in U.S. occupied most of our 6-plus-kilo fish. But we observed that the Asian market were more willing to buy smaller sizes than normal, to get access to Icelandic Salmon. In quarter 2, participation at Seafood Expo in Barcelona is an important arena to build new relations to customers and maintain relations to existing customers. So we were attending there. Contract share was for quarter 2, 59%. This affects the total price achievement a bit negatively. I will then give the word to our CFO, Jonas Heidar Birgisson. So thanks so far, and welcome Jonas.

Thank you, Bjorn. And good morning, everybody. Before I begin my part of the presentation, I would like to mention that we have issued our First Half Interim Financial Statement and that can be found on our homepage, arnarlax.is. But let me give my presentation for the financial position of 2024. The balance sheet is affected by both the already mentioned reassessment and operational challenges in the first half of 2024. These compliance challenges totaled up to EUR 7.5 million within the year. To compensate the biological challenges, the group delayed the harvesting to focus on biological growth. This strategy is reflected in the balance as the asset increased of EUR 8 million during the second quarter. Investments, including a down payment for a new hybrid vessel, nets, cages and all the seawater operation-related assets that we invested in, has increased our fixed asset balance during this period. The group focus on growth and investments in relation to handle more fish in sea, to utilize its license further. The group continues to have a strong financial position with an equity ratio of 65% and is compliant with old covenants. Net interest-bearing debt balance stood at EUR 65 million, which we will take a closer look here at the next slide. As we mentioned earlier, the second quarter faced low harvesting and biological challenges. The biological challenges, including reassessing the biological inventories at one of our sites. This reassessment along with extraordinary mortality impacted the operational profit by EUR 3.9 million. Trade receivables decreased reflecting the low harvesting volume and trade payables increased due to continued investment activities. Net interest-bearing debt, including leasing, ended at EUR 65 million at the end of the quarter. I will now take the presentation back to Bjorn Hembre for operational update, and thank you for listening.

Thank you, Jonas. Let me give you an update on our operation, and repeat and expand on my initial comments in this presentation. During the second quarter, we experienced continued outbreak of infectious diseases in sea. This gave increased mortality with the economic consequences mentioned earlier in the presentation. Fortunately, the situation was significantly improved at the end of the quarter and into quarter 3. In quarter 4, 2023, and quarter 1, '24, we implemented new procedures to avoid POX-virus outbreaks in our smolt-plant Ísafjörður. That has caused us a significant loss in quarter 1 this year and earlier. And so far, the mitigating measures implemented have been successful. To further mitigate risk in our operations in sea, we have implemented a new vaccine program, where we, in addition to vaccines used before, are adding vaccines against ISA and also an extra vaccine against winter wounds. This is done for all smolts put into sea in 2024 and going forward. The smolt output started in quarter 2, according to plan. For 2024, we expect to increase the number of smolts put into sea with approximately 10% compared to last year. The smolts will have an average weight of approximately 230 grams, and the biggest smolts that we put into sea will be approximately 600 grams. The smolt output started on our new site Vatneyri, that has so far showed very promising results. The usage of this new site will significantly improve the utilization of the maximum allowed biomass on our 12,200 tonnes license in Patreks and Tálknafjörður. To reduce risk related to lice infection, we have on-site in the Westfjords a delicing WellBoat with Optilicer and OptiFlash onboard. That gives the opportunity to do nonmedical treatment of the fish. In addition to this, we still have the opportunity to use medical lice treatment. The routines for approval of medical treatment have been reevaluated by the authorities to get an approvement -- approval for treatment sooner than experienced earlier years. It is also implemented and a coordinated lice monitoring and delicing strategy with all salmon farming companies in the Westfjords, and the coordination is done by an independent third party. The lice situation this year is under good control. And marketwise, it's still a good demand for sustainable Icelandic Salmon in the market. Now, let me conclude on our outlook for quarter 3 and rest of '24. Volume guidance for 2024 is reduced to 13,000 tonnes. This is done to optimize the maximum alone biomass utilization, due to the biological challenges over the last 9 months, we have available maximum allowed biomass that can be utilized for more production. The volume in 2024 is affected by the challenging situation we were through in October and November 2023. Based on the guided volume for the year, harvested volume in second half will increase significantly compared to first half. The biological challenges in the first half of the year will affect harvest volumes in 2025. It's worked on mitigating measures to reduce this effect and volumes for 2025 will be guided in the quarter 3 presentation, in November. We expect a slight decrease in the underlying cost in quarter 3 because of better utilization of capacities due to higher volumes. The contract share in quarter 3 is expected to be 10% and approximately 12% for full year 2024. We see a potential for growth up to 36,000 tonne on the existing licenses in the group. We are positive to reach 26,000 tonne of harvested volume on -- or fertile licenses in the coming years. This is based on the results we see of quality on this year's smolt and the performance we see on many of our sites, and also the mitigating measures implemented to improve the biological situation. To reach the full potential of 36,000 tonne, we'll need decisions related to utilization of our sterile license, so that will take some time. The company has committed staff and a strong company culture and a value chain that is well prepared to handle higher volumes. This, when it comes to smolt capacity and further growth in smolt capacity, production capacity in sea, harvest capacity and a strong sales team. I will, at the end, like to thank everyone working in team Arnarlax for their contribution and hard work every day to bring the company forward. The numbers we are presenting today is, as I said, many times, affected by biological challenges, but we see now good signs or better performance going forward. We will then move over to the Q&A session. So I hopefully see you in a few minutes. Thank you.

[Audio Gap] 2024, and thank you all for joining us here. My name is Hjortur Methusalemsson, and I'm the Business Development Manager at Arnarlax, and I will be managing the questions that have come in today. [Operator Instructions] And I see that the questions are already coming in. We have our question from [indiscernible]. She asks, Bjorn, can you give any guidance on quarter 3, quarter 4 volume split?

Yes. Of course, the total volume is, of course, given by the guidance, but we will see more harvest in quarter 4 than quarter 3. That's how it looks now, yes.

Yes. Okay. And she asks, what cost level should we expect the coming quarters? Should we expect below EUR 7 per kilo?

We don't guide on the exact cost level, but we expect a decrease in the underlying cost, because of better utilization of the capacities we're having.

Okay. Then here's a question, what are the main investment activities for the next 6 months? Can you say anything about the expected CapEx level?

I can take that. So probably the main -- well, we usually don't guide on investments in '25 or going forward. But for this year, we expect a reduction on our investments. Our main focus will be on seawater equipment to handle more capacity.

Okay. And then she asks about, when are we planning to start utilizing the new license for sterile Salmon in Ísafjarðardjúp?

Yes, that is a good question. So we are monitoring what's happening with production on sterile fish that is available in the market. That means triploids to see if that is a good alternative for our locations. And we also monitor development of new techniques for sterilization. So it's a bit premature to conclude yet, but that's a work in progress and hopefully, we see a good path there sooner than later, but still a work in progress.

Yes. Okay. Christian also -- [indiscernible] has also sent in questions. Can you comment on price realization in the quarter? Why does revenue per kilo appear so high in the quarter?