P/F Bakkafrost (BAKKA) Earnings Call Transcript & Summary

Live webcast here from Oslo. My name is Hogni Jakobsen, CFO of Bakkafrost. And I'm joined by Regin Jacobsen, which will take over the presentation in a while. So the agenda this morning, we will come to it, but after paying a short notice to the -- our disclaimer on forward-looking statements, you can read it entirely. It's included in the published version of the presentation. So the agenda is the usual agenda. First, a summary of the quarter, then we look into markets and sales, moving on to finance, operations and then finally, outlook. So an overview of the third quarter for Bakkafrost. Our revenues in this quarter were DKK 1.7 billion. We had a group operational EBIT of DKK 22 million. The harvest in the Faroes was up by 17.5% to 25.4 kilotonnes. In Scotland, we were on a similar level as in the same quarter last year, 5,300 tonnes. Fishmeal, oil and feed division at Havsbrun feeding -- the feed sales were up 18% to around 49,000 tonnes. We sold no fish oil and fishmeal sale was down by 45% to around 5,100 tonnes. Sourcing of marine raw material was on the same level as last year, around 40,000 tonnes. Cash flow from operations were positive with DKK 245 million compared to DKK 575 million last year. And we have positive EBIT in the Fishmeal, Oil & Feed segment, the Freshwater segment in the Faroes, Services and Sales and Other. Then, if we look at margins on a high level and regional level, and these are all-inclusive margins by the way. The margin for the group was DKK 0.72 per kilo compared to DKK 6.38 in the same quarter last year. In the Faroes, the margins were DKK 8.93 per kilo compared to DKK 14.35 per kilo in last year. In Scotland, margins were negative with DKK 38.72 per kilo. And then moving on to markets and sales, and beginning with the price development. The salmon prices in this quarter were affected by a large increase in the overall supply. Average prices for 4 to 5 kilo superior salmon dropped to NOK 63.73, which is 13% lower than the same quarter last year, 15% lower than in the previous quarter or corresponding to a drop from the previous quarter of around NOK 11 per kilo. Since late August, prices have been trending upwards again, and we expect stronger salmon prices as we look ahead into coming quarters where the supply is expected to reduce. In this quarter, we also saw that the price premium for large fish is starting to increase again after having dropped quite sharply from the peak in the fourth quarter last year. According to the latest update from Kontali, global sales increased 12% in the quarter compared to last year and actually increased to all markets except for the Middle East. The European market had an increase of 4%, which was lower than the other markets. And like in previous quarters, this is significantly below the European harvest, which means that a larger share of the European harvest has been exported to other markets. Sales to the U.S. increased 13%. Kontali estimates that 10% -- there was a 10% increase in the supply from Europe. Chilean export to Russia increased quite significantly. There might be some inventory buildup in that market as well. And strong growth in sales to China and to Japan, and also to the ASEAN countries. And the same goes for Latin America, which grew 12%. If we look at the harvest in the quarter, it increased by 12.2%, slightly more than the increased sold volumes. So again, some inventory buildup. All producing origin increased their supply, except for U.K., Ireland and the U.S. Europe as a whole increased by 12%, mainly driven by Norway, which was up 15%. Supply from Norway was especially strong in July and in August. Norway had a high incoming biomass to the quarter after a strong second quarter, generally good biology, high seawater temperatures, but we saw also some accelerated harvest in the quarter, partly driven by sea lice pressure. In September, the strong growth in Norway eased off. We saw -- we also see that the overall feed sale, which was very high in the beginning of the quarter dropped quite significantly. And the biomass at the end of the quarter in Norway is also lower than last year. In Scotland, harvest dropped with 5%. However, feed sales were up with 4% to 5%. Average weights increased slightly 2.5% to 4.5 kilo. In Bakkafrost case, we increased 13% on our average weights to 4.8 kilo. Biomass is low at the end of the quarter in Scotland. So we expect that there will be lower volumes coming from Scotland in the fourth quarter. In the Faroes, harvest increased 3%. This was driven by Bakkafrost with a 17.5% volume increase from Bakkafrost alone. Very strong biology for Bakkafrost it has been the strongest quarter ever recorded when it comes to biology. Average weights for the Faroes as a whole, 5.38 kilo and Bakkafrost was a bit lower on average weight in this quarter, which Regin will present in more details. [Audio Gap] Biomass as well significantly increased, 31% increase for growth for the Faroes as a whole. If we cross the Atlantic to the Americas, and the Americas increased supply with 14%, and this was mainly driven by Chile. Chile was 13% up on harvest volumes. And for Chile, it came mainly from August and onwards. Very strong feed sales, 20% up, average weights also increasing 3%. U.S. and Canada also had strong increases in July and August, but a significant drop in September. Then moving on to finances and starting with the P&L. Our revenues in this quarter decreased, as mentioned before, DKK 1.686 billion to be exact. Operational EBIT of DKK 22 million, which was lower than the DKK 173 million in the same quarter last year. We have fair value adjustments of DKK 122 million and paid DKK 18 million in revenue taxes compared to DKK 8 million in the year before. And profit after tax was positive with DKK 77 million. Adjusted earnings per share in this quarter was 0. And if we move on to the balance sheet since year-end '24, our PPE has increased with DKK 327 million to around DKK 7.1 billion by the end of this quarter. Fair value of the biological assets at the end of the quarter were DKK 2.7 billion. Inventories increased during the quarter with DKK 217 million to DKK 888 million. This is mainly driven by the activities in our Fishmeal Oil and Feed division. Receivables increased with DKK 145 million to DKK 286 million. And cash equivalents -- sorry, equity ratio dropped to 57%. And moving on to cash flow, DKK 245 million positive cash flow from operations. We invested -- spent DKK 311 million on investments, and we had a positive cash flow from financing of DKK 147 million. Net cash -- net change in cash during the quarter was DKK 81 million. During the quarter, our net interest-bearing debt has increased to DKK 4 billion. The main driver are the investments -- net investments of DKK 311 million. And at the end of the quarter, we had undrawn credit facilities of around DKK 1.4 billion. And with those words, I will hand it over to our CEO, Regin Jacobsen.

Good morning, everyone. Thank you. So I will start with the value chain, which is our pride in Bakkafrost. The power of our fully integrated value chain is what defines us. And in Bakkafrost, we produce salmon from raw material to healthy premium salmon, which are enjoyed by our customers around the world. In '25, we produce around 3.5 million meals per day. And that will increase over the next 4, 5 years to 5.6 million of healthy salmon -- 5.6 million meals of healthy salmon per day. And we control every step from feed to food, securing quality, efficiency and biological resilience through the system. The integration is not just about efficiency. It's also very much about knowledge, control and responsibility, ensuring that every step and every stage supports the next. Our value chain transforms low-value marine proteins to high-value sustainable nutrition efficiency responsibly and with full traceability. This is what creates high value, and this is what will make the difference for Bakkafrost and our competitive advantage also in the future. When we look into the third quarter, the FOF segment have stable operations and improving cost base with the volumes that we produce. The FOF segment delivered a solid operational performance with higher feed production, but reduced external sales of fishmeal. Marine raw material sourcing was unchanged compared to last year around 40,000 tonnes. The feed sales, however, increased 18% year-on-year, up to 49,000 tonnes, driven by strong demand of our own salmon feeding both in Faroes and in Scotland. External sales of fishmeal was down 45% compared to last year as inventories continue to be built up ahead of '26 when raw material availability is expected to tighten following the 41% reduction of the blue whiting quotas for next year. The operational EBIT was DKK 91 million compared with DKK 147 million last year, 38% down, corresponding to a margin of 12% versus 20% last year. The fishmeal prices remained firm through the quarter, supported by limited global supply. Fish oil prices have stabilized after a prolonged decline from record levels earlier in '24. Vegetable ingredients continue a slight upward trend, but overall input costs decreased, improving cost balance for feed and farming in H2. The planned expansion of the capacity at Havsbrun remains on schedule and will be finalized within the next 6 months. The new silos and process lines will increase flexibility in raw material sourcing and enable also more efficient feed logistics across both geographies. The FOF segment remains a cornerstone of Bakkafrost's integrated model, ensuring nutritional quality, cost control and supply stability across the value chain. The Freshwater segment is strong. In the Faroe Islands, it is stable and continuously improving quality and survivability for the marine operation. The Faroes freshwater operations maintained strong biological performance and stable financial results in the third quarter. The smolt production continues to operate at high levels following expansion in Glyvradal, Norðtoftir, Viðareiði with all sites now in steady operation. A total of 4.8 million were transferred during the quarter versus 4.9 million last year. The average weight was 427 gram, up from 423 last year. Year-to-date, 13.4 million smolt have been transferred versus 11 million last year. The average weight and robustness of the smolt continue to improve, reducing biological risk and strengthening the fish welfare at sea. The operational EBIT was DKK 83 million versus DKK 84 million last year, corresponding to a 36% margin. The post transfer survivability remains at 97% to 98% during the first 90 days at sea, which are among the best levels in the industry. In parallel, of course, the feeding in hatcheries have increased significantly, which we can see on the graph below. It's utilization of the new hatcheries, which have been increased significantly over the last quarters. And that's also the driver of the reduced cost in this segment. The full year stocking plan remains 18.5 million and is expected to go up to 20 million next year. The capacity utilization and biological efficiency continues to strengthen with clear cost benefit from larger and more robust smolt. The Faroes Freshwater division continues to deliver consistent high-quality smolt with strong survivability, providing the biological foundation for long-term sustainable growth across Bakkafrost. Coming to Freshwater Scotland. In the third quarter, the transfer number were 3.6 million versus 1.9 million last year. The internal transfer from own hatcheries was 2.7 million versus 1.2 million last year. The average weight of the internal transfer smolt was 229 gram versus 88 gram last year. The margin was, however, minus DKK 38 million versus minus DKK 6 million last year. The negative result is primarily driven by losses from the disease in Q2, where fish were culled to clear up the impacted batches. This also affected the third quarter. Following the organizational change in August in the Freshwater division, Bakkafrost has reviewed all operational procedures and technical systems and implemented a plan for safe and stable production. This includes revised production strategy, optimizing capacity use and biological performance. Applecross is therefore now a fully closed production, where only eggs are brought in and all water is cleared and disinfected and recycled. This ensures a high level of biosecurity and full cost control -- full control of water quality, enabling the production of robust large smolt of a higher quality. Since August, the production has been stable without major challenges. And under the new plan, Applecross will produce 200 to 400-gram fish in the future. So we will have a more flexible approach to the production plan in order to optimize the production facility. Experience from the Faroe Islands confirms that this is the key foundation for achieving a strong biology in the marine operation. Cost per smolt also at Applecross will come down significantly over the next 12 months, which will, of course, also benefit the financial performance of the Freshwater division in Scotland. This year, the target is to stock around 7 million alone in Scotland. And next year, we lift that to 10 million. After several challenging years, Bakkafrost Scotland is now in a phase where we feel that in the Freshwater, we are more in control, and we shift to -- from stabilization to sustainable growth. The Scottish business will continue to replicate the integrated Faroes model with the full value chain control, strong biosecurity and sustainable growth. The long-term goal is to build a resilient competitive Scottish salmon operation capable of producing premium large fish with high biological stability and profitability, fully aligned with Bakkafrost's mission to produce the best salmon in the world sustainably and responsibly. The focus is on biological risk management through the large production mirroring the proven model in the Faroes. The Applecross hatchery is now scaling up to produce healthy, robust smolt about 200 gram. This shift will shorten the marine cycle, strengthening the fish health and reduce the mortality with clear improvement expected from '26. Coming to the farming operation in the Faroe Islands. Exceptional biological performance, record efficiency but low market prices. The Faroes farming operation continued to deliver outstanding biological results in the third quarter, marking the best performance ever recorded in Bakkafrost. The total harvest reached 25,400 tonnes, 17% up quarter-on-quarter and 33% higher year-to-date compared to '24, reflecting strong growth and high biomass in the water. The average weight of harvested fish was 5.2 kilos versus 5.3 kilos, slightly lower but solid. Biological excellence was driving the efficiency. Ring costs reduced 14% in the quarter -- year-on-year -- 14% year-on-year, reflecting improved site efficiency, high survivability and strong feeding performance. Quarterly feeding increased 32% versus last year with new all-time feeding records set in October. Biomass growth is up 33% year-on-year, showing the cumulative impact of larger, more robust smolt and stable seed temperature throughout the summer. The operational EBIT landed at minus DKK 29 million as the benefit from lower cost and strong biology was offset by the lower salmon prices during the quarter. The EBIT was NOK 178 versus minus NOK 207 last year, confirming solid biology performance despite the market headwinds. The biological situation in Faroes remain among the best in the global salmon industry, characterized by record high survivability, highest in more than 10 years, strong growth rates and feeding efficiency and excellent fish welfare. In Scotland, the farming operation is -- volume is down 2% to 5,300 tonnes versus 5,400 tonnes last year. The average weight was 4.8 kilos versus 4.2 kilos last year, so 600 gram up. The operational EBIT was minus DKK 191 million versus minus DKK 179 million last year. The negative result was impacted by mortality cost, DKK 70 million and also driven by lower volume and significantly lower market price. The Portree disease impact was the main driver for the huge deviation. During September, Portree experienced elevated mortality in smolt, driven by the Pasteurella disease, which was confirmed through screening. We had to take all fish out. Site is empty. It was emptied within around 4 weeks. This Pasteurella is a huge -- driving a huge mortality. So we decided to harvest everything as soon as possible. The fish was only 2.6 kilo at a time, about 1 million fish. So we lost, of course, a lot of volume and had to harvest the fish at a low weight. Performance on this site was expected to be good. But as we harvest the fish at a low size, they will not give any value. The risk of disease in aquaculture is one of the industry most critical biological challenges. Fish are exposed to a complex mix of pathogen, environmental stress and handling factors that can quickly escalate if not managed properly. Effective biosecurity, robust smolt and early detection are essential to minimize the disease risk. Bakkafrost works continuously to improve our procedures and systems for fish health and biosecurity. The experience and methods developed in the Faroe Islands serve as an important model for our operation in Scotland. The Portree outbreak reduces the harvest, but larger smolt and improved freshwater performance point out a recovery for our operations from '26. We are constantly gaining new insight both in Faroes and in Scotland, which used to strengthen our practices and to ensure better biology results over time. And for Portree, I can say that these batches were impacted already in freshwater. They were large and they were performing good in the first 6 months, but they were impacted. The input mortality was 19% within the first 90 days. Even so they performed good, they did not have the capability to handle the stress events that they were going through, and they caught this Pasteurella virus, which is -- we don't see this in our farms normally, and this can give a lot of disease, and that's what we have seen in Portree. So in order to prevent this, it's really important for us to have this robust smolt to have fish which has not been exposed to stress levels during the freshwater phase. That is the key for avoiding these kinds of issues. So the strategy remains the same for our operations in Scotland to reduce the risk for this kind of events. Coming to the Services segment. The fleet performance continues to drive biological success in our farming operation. Operating EBIT doubled to DKK 38 million versus DKK 19 million last year, corresponding to NOK 2 and a margin of 15%. The integrated vessel operations cornerstone of biological control is driven by the freshwater treatment, Bakkafrost in Faroes has been pivotal in improving biological stability in the Faroes, together with Martin and Bakkanes, which are now fully integrated into smolt transport in Faroes and Scotland. The 2 FSVs are dedicated to smolt transfer, ensuring nearly 98% survivability. Increased vessel utilization across treatment, smolt transfer and harvesting. Record low smolt transfer mortality is the best ever recorded. The segment also includes other farming service vessels to ensure highest quality of farming operation. The service fleet led by Bakkafrost continues to underpin Bakkafrost biological excellence, operational efficiency and sustainability -- sustainable growth in the Faroes and Scotland. And controlling these vessels for us is also key to drive the operational updates and also, in some cases, also deliver new technology, for example, the freshwater treatment, which was started in Bakkafrost. So coming to Sales and Other, operating as one Bakkafrost continued to deliver solid results with strong volume growth and high-quality product supply across both regions. The total volumes from harvest were 14% up year-on-year to 30,678 tonnes, distributed to 15% higher HOG sales and 7% in the volumes transferred to VAP. The EBIT declined to DKK 73 million as higher volumes were offset on spot market at low prices and stronger supply of superior fish in the market generally. The EBIT per kilo were NOK 375 compared with NOK 864 last year, reflecting high global supply and tighter price achievement. Western Europe remains the largest market, but North America continues to see strong demand and increased its share to 24% from Faroes and 14% from Scotland. Asia continues to grow, now accounting for 15% from Faroes and 18% of Scottish sales, driven by the rising demand in China. All-in-all, I think the one company approach commercial platform is strong and continue to strengthen our global reach and brand presence for Bakkafrost. But the lower premium in this quarter is driven by our high exposure in the spot sales, which also was from our side, driven by the change in taxation in the Faroes where we feel it's necessary for us to be more in spot sales than we used to be. The outlook for Bakkafrost and for the industry as general, I think can be described as tightening supply and an improving market balance. The global supply slowly shows that the supply is coming down in Norway and Chile with reduced harvest following a strong first half in '25 and also a strong first half of the third quarter. The market balance is expected to improve into the fourth quarter and early '26 as global supply growth continues to moderate. Norway have declined -- we see declined volumes from Norway through this quarter due to biological challenges and MAB restrictions and fewer fish in the sea. Supply growth in '25 is now estimated to be below 4% and expected to flatten in '26. Faroe Islands remain above last year, supported by record biological performance and falling production costs. Full year harvest guidance for Faroe Islands is expected to be around 110,000 tonnes, all-time high, reflecting stable operations and continued high survival for the industry in general. In Scotland, volumes are expected to increase gradually as new generation of large, high-quality smolt enters marine sites. For Europe, overall, the strong growth phase is behind us. Europe harvests are expected to be flat, slightly up, maybe 2% in the second half this year and close to 0 in '26, supporting a tighter supply-demand balance. Chilean harvest increased in the third quarter after a weak '24, but growth will normalize towards '26. North America remains stable with regular seasonal patterns. Overall, '25 supply is up, but growth has slowed sharply in the second half of the year. And looking ahead at '26, global growth is projected at around 2%, indicating a more balanced market and potential price support in the new year. If we look at Bakkafrost and our own numbers, our routes in the Faroes are strong, and they continue to drive steady growth across the group. Faroes' volumes are revised up to 82,000 this year, which brings us up to 104,000 combined versus 97,000 previously. For '26, the harvest plan is 112,000, 92,000 from Faroes and 20,000 from Scotland. The breakdown in '26 between the quarters are in the report, but I can mention them. In Faroes, in the first quarter next year, it's 24%. Second quarter is 24%, third is 25% and the fourth is 28%. So these numbers on this graph is for '25. But in the report, you can see 26%. And in Scotland next year, the breakdown is 30% in the first quarter, 14% in the second, 18% in the third and 38% in the fourth. But you can see those numbers in the report. So in '25, as I said, 18.5 million to be transferred to Marine and 7 million in Scotland. So 25.5% all-in-all, which is around 10% up from last year. And next year, 20 million in Faroes and 10 million in Scotland, which is then 30 million, which is another increase from this year. So we continue the growth in Bakkafrost, and we have high focus on cost reduction. We have high cost -- high focus on the operation in Scotland. And I think that we are getting there. We are getting there. The raw material outlook is for the feed -- for the FOF segment on the Fishmeal & Oil is a bit challenged next year. The quotas for blue whiting is down 41% to 851,000 tonnes. With the new expansion of Havsbrun, we have very good flexibility. We can manage any recipe. So we won't have a problem to produce feed. Of course, it will -- it might be a challenging with external sales of fishmeal, which can drop slightly. But we will manage. On the contracts, we say around 15% to 20%. We are open to negotiate contracts, but we need contracts also, of course, to reflect the expected prices also. So therefore, we have to wait a bit. So we are getting to the last slide here. Just to repeat that our target for Bakkafrost is to grow to 162,000 tonnes by 2030. So we remain focused on growth still. We are also very focused on cost reduction. As mentioned earlier, our costs are down in Faroes around NOK 4 this quarter compared with last year, DKK 4 from DKK 34 -- actually DKK 5 from DKK 34 to DKK 29. And in Scotland, they are down DKK 2 from around DKK 50 to DKK 48. So this remains a key focus for us to get cost prices down. As volumes is increasing, utilization of assets are improving and that helps significantly, and that will be the main driver for Scotland over the next 2 years. We also have a lot of projects, which includes the feed capacity, which will be finalized within the next 6 months, larger smolt capacity in Faroes and Scotland. Now Applecross is about to be finished. Now it's about scaling up. In Scotland and Faroes, we still have Skalavik, which will be starting operation already in the second quarter next year, then we will have the first eggs in. It will be a gradual buildup then over the next 2 years in Skalavik. So we remain firmly on track with robust operations, a clear strategy and investments needed to secure sustainable growth and long-term value creation. Challenging quarters test us, but they also make us better. Calm seas never made a skilled sailor. And Bakkafrost is ready for the journey ahead. Thank you very much. If there are any questions, then now is the time.

Christian Nordby, Arctic Securities. Can you comment on how much extraordinary mortality you have in Scotland Freshwater and farming in Scotland so far in Q4?

So far in Q4. In Freshwater, there shouldn't be any. In Marine, there will be some mortality. In Scotland, what you account for as extraordinary is everything which is above 4%. And there will be some. I don't -- do you have a number on that, Hogni?

Not in --

October?

No.

No, probably. But --

In Marine --

Yes.

If we look at Q3, 71% of the mortality was Portree.

71% of the mortality in --

Of the cost.

In Q3 was from Portree?

Yes.

And Portree was harvested out in the second or third week, I think, in October. So there is some mortality. I think the number in the fourth quarter was 3.7 million pounds so far in the fourth quarter, 3.7.

And so based on that, you expect positive EBIT from Freshwater Scotland in Q4?

No, because the capacity utilization is really a driver. We have built a mega structure there, which will be really, really good. It will be really, really good when it is in full operation. But just as in Faroes, the utilization of the costs is -- it takes time. You need a full production before you have a big operation but produce a low production. But as we scale this up over the next 12 months, we will see cost to come down. The cost price in the Faroe Islands to produce one smolt of 500 gram is less than the cost in Scotland to produce a smolt of 80 gram. And we will match that in Scotland, but it will take us probably 2 years before we will match that. But at the moment, we are far off.

And in your sales and market segment, if you compare this quarter to Q2, you have quite similar EBIT, but the spot prices were much lower. So I would have assumed that you would have had a bigger contract gain in Q3 than you had in Q2. But is it big -- is it price premiums that hurt the sales and market segment? Or was it -- why is the EBIT not higher?

In the third quarter?

Yes.