Icelandic Salmon AS (ISLAX) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for taking time to watching this quarter 3 presentation for Icelandic Salmon. Today, I have with me Jonas Heidar Birgisson and Hjortur Methusalemsson in this presentation. After the presentation, there will be a Q&A session. You can send your questions to questions@arnarlax.is at any time during the session. First, a brief overview of Icelandic Salmon. As most of you probably know, the company is listed on the Euronext Growth Market in Oslo and on NASDAQ First North Market in Reykjavik. The company is the sole owner and the parent company of Arnarlax ehf in Iceland. All our operational activities of the group are performed in Arnarlax ehf. We are present throughout the value chain from smolt to sales. We have 4 smolt facilities with a current capacity of 7 million to 8 million smolts, depending on the size of the smolt. We have farming operations in 8 sites in 3 fjords in the southern Westjords of Iceland, all production is ASC certified. The total maximum allowed biomass is 23,700 tonnes. We have our harvesting plant in Bildudalur that is BRC certified, a food safety standard, and has a capacity of 30,000 tonnes per year. We sell all our fish through our internal sales team out to the domestic and the global markets. Before we dive into the details, let me say a few words about the current status and the outlook. In quarter 3, we have successfully stabilized the biology after a rather challenging winter and spring this year. We have released more smolts into our pens, and we have recorded good growth in the biomass. We have been able to control the sea lice situation this year, and we have introduced 2 new vaccines on our smolts, which will reduce the risk of biological incidents going forward. We have also increased harvest volume somewhat compared to quarter 2, and we expect the growth to continue into quarter 4. But we still have a way to go before we fully return back to normal levels, which likely will be in the second -- or second half of next year. Now let us take a closer look into the quarterly numbers. In quarter 3 '24, Icelandic Salmon harvested 1,750 tonnes compared to 4,040 tonnes in quarter 3 '23. We continued harvesting on the autumn '23 generation. The harvest volume was affected by optimalization of the MIB and also the lice situation in autumn 2023. We see improved results compared to previous years on the smolts that we put out to sea this year, especially when it comes to survival rate. The EBIT for the quarter ended at negative EUR 3 million. This is affected by low revenues due to low volume and also high cost due to low-capacity utilization in the harvest plant and wellboat even though we see a reduction from quarter 2 on the cost. There was a one-off due to mortality in sea of EUR 0.4 million. This mortality was in the beginning of the quarter and was the ending of the challenges we experienced in first half '24. Then an update on the license status. The 10,000-tonne license in Ísafjarðardjúp of sterile salmon was revoked in quarter 3 by the Environmental and Natural Resource Board of Appeal. The main reason the Board of Appeal revoked the license was due to Icelandic Food and Veterinarian Authorities, MAST, did not provide a comprehensive weighted assessment of the potential increased risk of spread of diseases and parasites. We are now working towards the authorities to get a new approval for this license again. We are currently in a process to establish bigger sites for better MIB utilization. This has been a process that has taken quite a long time, and we have not planned for a final decision before end of year 2025. We hopefully have it in hand at that point, but utilization of these sites will be a bit later. Our application for 4,500 tonnes in Arnarfjörður is still with the authorities. Due to political disagreement, the government has called for a new election in November 2024. How this will affect the new law proposal is unclear. Will the new majority of the government and the new minister take up again and continue with what has been proposed? Or will they start from scratch on a new law proposal? We don't know that. So we will have to come back when we have more information. The company will, therefore, work under current legislation until a new law proposal is made, and this clears out. It's worth mentioning that salmon farming has become a significant contribution to Icelandic economy and is year-to-date end of September 5% of all value of exported goods from Iceland is farmed salmon. If we look at the sales and marketing update, we saw a good price achievement compared to market price. This is a result of great performance of our sales team, high average weight of harvested fish, above market average. There was a lack of 6-kilo-plus fish in the market and high superior share of 95% and increased sales to North America and Asia. If you look at the North American market first, that has been significantly stronger in quarter 3 compared to first half of the year. Price relative to spot prices in Europe were more favorable, and our harvest weights were well suited for the market, giving us a chance to greatly increase the share sold to North America, which ended at 25% of our volume for the quarter 3. The Asian market also had a strong demand for 6-kilo-plus fish at favorable prices. 18% of our volume was sold to Asia, and we are normally around 5%, so a big increase there. The increased volumes to other markets than Europe is partly on air freight and partly on boat shipments to North America. Improvements in our harvest plant have made it possible to increase the volume of air-packed boxes, which gives big opportunity for more air freight. The contract share in quarter 3 was 13%, and the contracts gave a positive contribution to the price achievement. I will then give the word to our CFO, Jonas Heidar Birgisson. Welcome, Jonas.

Thank you, Bjorn, and good morning, everyone. I will now provide an overview of our key operational and financial developments. Despite some continuing biological challenges that persisted into the third quarter and the quarter with a low harvest volume, the situation stabilized by the end of the quarter. As already mentioned by Bjorn, the third quarter was used to build up the company's biological assets. This in return is the main driver for the increased asset base. When we look at the financial position at the end of the quarter, the equity ratio was reduced to 54%, mostly due to weaker operational results. Net interest-bearing debt increased as we continue to build up the biological assets. Regarding our bank facilities, we have a credit facility in place to support our growth ambitions and plans moving forward. The main driver of our increased net interest-bearing debt is increased working capital, mainly due to the buildup of biological assets during this low harvesting period. Additionally, we continued investing in line with our strategy to expand our harvest volume up to 26,000 tonnes per year. And this included buying seawater equipment and finalizing projects in our smolt facilities. We expect that the smolt facilities will be fully operational within the first half of next year. Paid taxes amounted for EUR 1 million during the period. That's including EUR 860,000 in the resource taxes on the harvest volume for the first 6 months of the year. This brings the net interest-bearing debt, including lease liabilities to EUR 89 million at the end of the quarter. I will now hand the presentation back over to Bjorn Hembre.

Thank you, Jonas. A short operational update then. In quarter 3, we saw an increased harvest volume compared to the very low volumes in quarter 2. The volume is still below normal levels, but we expect to see a significant higher volume in quarter 4. Stable biology in sea during quarter 3 even though the sea temperature has been 1 degree lower this summer than in 2023. We have had good control on the lice with use of nonmedical and medical delicing. In quarter 2, 2025, we will implement even further preventive measures by start using stingray laser in one of our sites in quarter 2 next year in addition to lumpfish and lice skirts that we are already using. All smolts put into sea this year is vaccinated against ISA and an extra vaccine against winter wounds to reduce the biological risk. We see an improved performance on the smolts put into sea this year compared to previous years, especially when it comes to survival ratio. We expect to start harvest on the '24 generation in Q3 2025. We still see a strong demand for high-quality Icelandic salmon in the market, both for the quality, the origin and the sustainability features. Now let me conclude on our outlook for Q4 '24 and for '25. We are confident in the position that we have built and in our ability to deliver and support Iceland its efforts to become an even greater seafood nation. We have built a long-term ambition and potential to increase production within existing licenses and current regulatory framework to 26,000 tonnes per year. This can be achieved because we are building a company with a robust corporate culture and with a committed and highly competent staff. We have also patiently enhanced our value chain to address and overcome challenges related to smolt capacity, production in sea, harvesting capacity and sales. In the short term, our volume guidance for 2024 is 13,000 tonnes. This total volume for the year is much affected by the challenging situation we were through in October, November '23, where we lost significant amount of our fish, but you will understand from our guidance for the year that the volumes for Q4 is expected to increase significantly compared to the first 3 quarters. The biological challenges in first half this year will affect the harvest volumes in 2025. Mitigating measures have been put in place to address the challenges we experienced. Volume guidance for 2025 is 15,000 tonnes, where the majority of the volume is expected to be harvested in second half of the year. We expect a decrease in underlying cost in quarter 4 because of better utilization of capacity due to higher volumes and a stable production that we saw in sea in quarter 3 this year. The contract share for quarter 4 is expected to be 11% and approximately 12% for full year 2024. I would then also like to use the opportunity at the end of this presentation and thank all dedicated employees of Arnarlax for their huge effort made to take the company forward. We will then move over to the Q&A session. So I hope you all will follow us there. And please send us questions to questions@arnarlax.is. And I also want to thank you all for watching the presentation. So we move then to the Q&A session.

Good morning, everyone, and welcome to this Q&A session for the third quarter of 2024. My name is Hjortur Methusalemsson, and I will be managing the questions today. We will try to answer all the questions that is sent in, and you can still continue to send in questions to questions@arnarlax.is. Yes, we have already some questions here. One from Kristoffer Haugland from Arctic to Bjorn. How many smolts will you release in 2024 and 2025, respectively?

We -- for 2024, we ended at approximately 5 million smolts. We will not do any guidance on the smolt output for next year, but we expect an increase for next year compared to this year.

Okay. Okay. And then we have one question here from Christian [indiscernible] also on smolt. Is your smolt yield assumption substantially different in '25 versus 2024?

I would not maybe say substantially different. But as I said in the presentation, we will have most of the harvest second half of the year, and that is because we want to utilize our maximum allowed biomass as good as possible. And that is the same process we have been through this year, and that's why we have highest volumes in quarter 4. So I think it will be quite similar, actually.

Okay. Okay. Then I have here a question. Will the revoke of Ísafjörður license impact the potentials of reaching 26,000 tonnes?

No, the sterile license in Ísafjörður is not a part of the plan to reach 26,000 tonnes. So that will be an additional volume if we get the license and decide to do the sterile production. So it will not affect the 26,000 tonnes, no.