Icelandic Salmon AS (ISLAX) Earnings Call Transcript & Summary

Welcome, everyone. Thank you for taking time to watch this Q4 presentation for Icelandic Salmon. My name is Bjørn Hembre. And with me today, I have Jónas Heiðar Birgisson and Hjörtur Methúsalemsson. After the presentation, there will be a Q&A session, and you can send your questions to questions@arnarlax.is anytime during this session. First, a brief overview of Icelandic Salmon AS. Most of you probably know that the company is listed on the Euronext Growth Market in Oslo and on the NASDAQ First North market in Reykjavík. The company is the sole owner and parent company of Arnarlax. All operational activities of the group are performed in Arnarlax ehf. We are present throughout the value chain from smolt to harvesting. We have 4 smolt facilities, with a current capacity of 7 million to 8 million smolts depending on the smolt size. We have farming operations in 8 sites in 3 fjords in the Westfjords of Iceland, and all production is ASC certified. Total maximum allowed biomass for the company is 23,700 tonnes, and we have a harvesting plant in Bíldudalur in the Westfjords of Iceland. The harvest plant is BRC certified and has a capacity of 30,000 tonnes per year. We do all our sales by our internal sales team 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 Q4, we had a stable biology and were able to utilize the maximum allowed biomass of our license in Arnarfjörður quite good. We finalized the smolt output in October, and we have recorded good growth in the biomass. We have been able to control the sea lice situation. We have also increased the harvesting volumes significantly compared to quarter 3, and we expect low volumes in quarter 1. But we still have a way to go before we fully return to more normal harvest volume levels, which is likely to be in the second half this year. Now let's take a closer look on the highlights from the quarter. We have worked our way through a challenging period. And in the fourth quarter, we saw the results of our efforts: higher harvest volumes than in the previous quarters, a more stable biological situation and a good control of the lice in sea. In the quarter, we harvested 6,455 tonnes compared to 7,290 tonnes -- 7,219 tonnes in quarter 4 '23. There was a satisfying superior share of the harvested volume of 94%. The harvesting in the quarter reflects good MAB utilization of our license in Arnarfjörður. For the full year '24, we harvested 11,676 tonnes compared to 17,919 tonnes in 2023. The decrease in volume, both quarterly and annually, is related to biological challenges experienced in quarter 4 '23 and first half '24. We finalized harvesting on the autumn '22 generation and achieved a high harvested average rate to optimize the MAB utilization. The biological results on the spring '22 generation showed good and improved result when it comes to growth, mortality and feed conversion ratio. But the autumn '22 generation did not show the same mainly because of mortality and culling related to lice outbreak in the autumn 2023. From the site Hringsdalur with spring '22 generation, we harvested, during '23 and 2024, 11,000 tonnes from that site. And when we did the environmental sampling at the peak biomass, it showed the best condition possible. So a good performance on that site. We see good results on smolts put out in 2024, especially on larger smolt put out in the spring. We expect to start harvest on the '24 generation in the quarter 3 2025. The EBIT for the quarter ended at EUR 1.4 million. The cost level reflects the beforementioned biological challenges, which resulted in lower overall production and thereby higher cost per kilo. The quarter included a one-off cost of EUR 600,000 related to mortality at one of our smolt facilities due to a POX-virus outbreak. While this has been an ongoing challenge, we are seeing a positive development. The issue is not yet fully resolved, but many mitigating measures have been implemented with additional actions now underway. If we look at the licenses, the 10,000-tonne license for sterile salmon in Ísafjarðardjúp was revoked in quarter 3 by the Environmental and Natural Resources Board of Appeal. The main reason for the revocation was that the Icelandic Food and Veterinary Authority did not provide a comprehensive weighted assessment of the potential increased risk of the spread of fish diseases and parasites. We are now currently working with the authorities to get a new approval for this license. Then we have some applications pending for approval. We are currently in a process to establish larger sites for better MAB utilization in Arnarfjörður. The process has taken longer time than anticipated, and we do not expect a final decision before end of year 2025. We hopefully have the approval in place by then, but full utilization of these sites will take a bit longer. Our application for 4,500 tonnes of maximum allowed biomass in Arnarfjörður is still under review by the authorities. There was a new parliamentary election in November 2024 in Iceland, resulting in a new government led by a social democratic party and 2 other parties. The new government has expressed its intention to introduce an updated version of the new law proposal in Althingi during the fall legislative session, with a focus on ensuring a sustainable development on the salmon farming industry in Iceland. Until the law is in place, we and other companies in our industry will, of course, continue to operate under the current legislation. Salmon farming has become a significant contribution to the Icelandic economy and represented 6% of the value of all goods exported from Iceland in 2024. The new law proposal will be crucial to ensuring our continued sustainable growth of the industry in Iceland. If you look at the sales and marketing, we can report a quarter with strong price performance compared to the market and continued strong demand for our salmon. This is a result of great performance of our sales team. We achieved a high average weight on our harvested fish and reported an average weight of 5.2 kilo gutted weight in the quarter if we compare to the Norwegian market average size, which ended at a record low, 3.9 kilo average, according to official statistics from the Directorate of Fisheries. Based on that, we are even prouder of our achievements. During the period, we observed a lack of 6-kilo-plus fish in market. And with a superior share of 95% of our volume in this category, we also saw a continued high sales to North America and Asia. The North American market was strong in Q4 compared same as we saw in quarter 3. Price relative to spot prices in Europe were more favorable, and our harvest weights were well suited for that market, giving us a chance to greatly increase the share sold to North America. 18% of our volume in the quarter was sold to North America. The Asian market also had a strong demand for 6-kilo-plus fish and favorable -- at favorable prices. 13% of our volume was sold to Asia. The percentage is down from 18% in Q3, but the volume is up from 307 tonnes in Q3 to 786 tonnes in quarter 4. This increased volume to other markets than Europe is partly on airfreight and partly boat shipments to North America. Improvements in our harvest plant have made it possible to increase volume of air packed boxes, which is beneficial for the air transport, of course. The contract share in quarter 4 was 11%. And the contracts gave a positive contribution to the price achievement. I will then give the word to our CFO, Jónas Heiðar Birgisson. So welcome, Jónas.

Thank you, Bjørn. Good morning, everyone. I will now provide a quick overview of our key operational and financial developments for fourth quarter. But before we begin the review, I would like to note that the 2024 consolidated annual report for Icelandic Salmon will be available on the group's website, arnalax.is, on April 25. I'm pleased to announce that the group has reached an agreement with DNB and Danske Bank for additional sustainability-linked financing of EUR 65 million, which increased the group's loan facility up to EUR 160 million. This funding will support the group's operational and biological growth going forward, following a challenging period that started at the end of 2023 and followed us through the first half of 2024. Other than the extension of our financial agreement, there were no special extraordinary items to report on the group's balance sheet during the quarter. It was a relatively ordinary quarter, with changes in the group's balance mainly due to limited investments mostly directed to smolt facilities. Lease assets declined, and depreciation exceeded the amount of new investments. A high harvesting volume during the quarter led to a decrease in biological assets and increase in trade receivables. Total assets ended the year at EUR 263 million. The group's liability increased, primarily in current liabilities, driven by a reduction in tax liability and trade payables, while noncurrent liabilities increased due to higher interest-bearing debt and tax liabilities. Total liabilities ended the year at EUR 113 million. Our equity ratio improved following a positive operational performance. And net interest-bearing debt, including leasing, decreased over the quarter. The main driver of our decreased net interest-bearing debt is positive EBITDA and positive change in our working capital after a high harvesting period during the quarter. We continued our investments with continuing focus on smolt facilities and seawater equipments. The investments in our smolt facilities were, among other, connected to get our facility in Laxabraut in operation, which is planned in April this year. Paid taxes amounted for EUR 3.2 million in corporate taxes. This brings our net interest-bearing debt, including lease liability, to EUR 88.7 million at the end of the quarter or down by EUR 2.5 million over the period. I will now hand the presentation back over to Bjørn Hembre for operational updates.

Thank you, Jónas. So in quarter 4, we saw an increased harvest volume compared to quarter 3. The harvest was mainly controlled by the maximum allowed biomass utilization of our license in Arnarfjörður, and in October, we reached a record-high volume through our harvest plant of 3,000 tonnes in a month. We saw a stable biological situation in sea during quarter 4 even though the sea temperature has been 1 degree Celsius lower over the quarter than average from previous years. We saw a decrease in cost compared to previous quarters. This was mainly related to better utilization of capacities like harvest plant and sales but also a positive development on cost in seawater production. There was a good control of the lice with use of nonmedical and medical delicing. And in quarter 2 2025, we will implement even further preventive measures by starting using Stingray laser in addition to lumpfish and lice skirts that we are already using as preventive measures. We continued to experience some challenges with the POX-virus and an outbreak in one of our smolt facilities in the quarter. But we have seen a positive development as the consequences were less severe than in previous outbreaks. That is to -- due to the mitigating measures we have implemented, and we expect further improvements as we continue to apply new measures. This has shown not to be a quick fix, but a long-term work, where we see effects of any mitigating measures giving results together over time. Now at the end, let me conclude with our outlook for 2025. We are confident in the solid position that we have built and our ability to deliver and support Iceland in its efforts to become an even greater seafood nation. Our long-term ambition and potential is to increase the production within existing licenses and current regulatory framework up to 26,000 tonnes per year. In 2025, we expect a significant increase in biomass over the course of the year, followed by a much better MAB utilization. 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 enhedged our value chain to address and overcome challenges related to smolt capacity, production in sea, harvesting capacity and sales. Our volume guidance for 2025 is maintained at 15,000 tonnes as previously guided, where a majority of the volume is expected to be harvested in the second half of 2025. This volume guidance is affected by the biological challenges that we experienced in quarter 1 and quarter 2 in '24. However, in 2025, we expect to build significant biomass in sea and will, for the first time, fully utilize the maximum allowed biomass in our license in Patreksfjörður and Tálknafjörður. This is because we started to use a new site on that license for the smolt output in 2024. We expect an increase in underlying costs in quarter 1 and quarter 2 because of lower utilization of capacity reflected by the lower volume. However, we expect a lower cost second half of 2025, with full effect in quarter 4 when the volumes are ramped up. For full year 2025, we expect a lower cost level than full year 2024, and this is driven by increased volume and lower feed cost. For Q1 2025, we expect a contract share of 10% and approximately 10% also for the full year 2025. I will also like to use the opportunity to thank all the staff in Arnarlax for their contribution to these results that we now see that we are achieving. And then I will thank you all for taking the time to join us in this presentation, and we will now shortly head over to the Q&A session, and you can still send questions to questions@arnarlax.is. So we will take a short break, and I will see you soon. Thank you so far. [Break]

Good morning, everyone, and welcome to the Q&A session for the fourth quarter of 2024. My name is Hjörtur Methúsalemsson, and I will be managing the questions today, and we will try to answer all the questions that come in. Well, you can still send in questions to questions@arnarlax.is. So yes, looking forward to reach your questions. Jónas, could you elaborate on the funding agreement you mentioned in the presentation?

Yes. This is an extension to our current sustainable-linked financial agreement that we have with DNB and Danske Bank. It's increased the facility from EUR 95 million to EUR 160 million. So additional EUR 65 million to our facility. Given the challenges that we've met over the last year and end of 2023 with high mortality, both in seawater and fresh water, this facility comes as a crucial support for us to support us in our growth plans. This ensures that we can keep on track on reaching harvest volume of 26,000 tonnes according to plan and while reducing the risk of any delays in those plans.

Okay. Yes. Then I have a question to you, Bjørn. It's both from Oda Djupvik or Kristoffer Haugland that wonders the same. Also, volumes were moved from quarter 4 to quarter 1. You did not increase the 2025 volume guidance. Should this be interpreted as challenges with production or conservative guiding?

I think we -- based on the experience with the guided volume from last year, we have chosen to have a bit conservative approach to the guided volume for 2025. So that's -- I was expecting that question and -- but that is the reason.

Okay. Okay. Okay. And then other question from Oda Djupvik. What implications should we expect from the challenges with the POX-virus in the smolt production? Will this impact the sea fish production?

As where we are today, we don't expect an -- to see an effect on the smolt output for this year and going forward due to the POX outbreak. We have some surplus capacity on smolt production and -- luckily, so then we seem to be in a position to maintain the output plans.

Okay. Excellent. Yes. So we have then a question here from Ola Trovatn. Do you need larger sites to reach the 26,000 tonnes harvest target?

It would be beneficial to have that, yes. So it's -- that -- we will be very, very close without as well, yes.

Okay. And another question from Ola. Do you expect average harvest weight above 5 kilos head on gutted for the first quarter of 2025?