Proximar Seafood AS (PROXI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this presentation of the first half of 2022 of Proximar Seafood. My name is Pal Grimsrud, I'm the CFO of the company, and will, together with Joachim Nielsen, run through this presentation. We have a split location today as Joachim lives in Japan for a close follow-up of the construction and operational startup, which we will get back to. And in this presentation, we will take you through the highlights of the last 6 months as well as some forward-looking thoughts.

We believe Proximar is well positioned in terms of our ongoing construction, our upcoming operations and our long-term business model. Since founding the company in 2015, we believe all important aspects have developed to our benefit and certainly during the last couple of years. As we're now halfway into the construction of our 5,300 tonnes facility, we are encouraged to see how the trends are moving in favor of local production. From our location, just 1.5 hours from Tokyo, we are looking forward with great excitement to be serving our first locally produced salmon to the Japanese consumers in mid-2024. The construction has been going according to our plans, and we're still on track in terms of time and costs. We're also pleased to see the very limited impact to our CapEx due to inflationary pressure seen around us, and we do not expect to see any material impact going forward. With more than 95% of our CapEx on fixed contracts, the visibility remains very good. We're these days preparing for the operational startup of the Hatchery & Nursery building, which is to be completed in September, and the first batch of eggs scheduled to be brought into the Hatchery in October, marking the production start. Presently, we are increasing our efforts, together with Marubeni, in terms of marketing and sales planning and are experiencing strong interest from large players for buying our fish in the future. When it comes to the technology, we are following the operations of the AquaMaof facility in Poland closely and are very encouraged to see how the solutions are delivering stable and good water conditions for the fish. Our competitive advantage is significant, and we believe our business model remains robust. The long term outlook looks promising, and we see a long-term growth of salmon consumption in the Japanese market. The sharp increase of prices of Atlantic salmon seen during the first half of 2022 driven by the export prices from Norway and further price increase related to imports to Japan driven by complicated and expensive transportation as cause of the geopolitical situation has impacted the import volumes. However, we believe the long-term trend remains intact. During the first half, we have maintained our expectations for the ongoing construction on time and on budget. We have successfully recruited a strong operational team with extensive and very relevant experience, and I'm proud to say we have succeeded in recruiting all our #1 candidates. Another year -- half year has passed, and the facility in Poland continues delivering stable production volumes. In April, we signed the sales and distribution agreement with Marubeni, and we're also very pleased to see the time and resources Marubeni is currently dedicating to Proximar as we are moving into the sales and marketing strategy and planning. At the general assembly in April, Viggo Halseth and Peter Hermanrud joined as new Directors of the Board, bringing in extensive experience and a combination from the aquaculture industry and the financial industry. We also received the highest rating from Japan Credit Rating agency, JCR, in terms of ESG, which is an important acknowledgment of our ESG efforts and also a helpful -- also helpful for the processes of debt financing in Japan. The left picture here shows the Hatchery & Nursery building where the tanks are now installed, and currently, the ongoing work is related to equipment installation and interior finish. The first batch of eggs will be brought into the hatchery, as said, in October, and the timing of this also reflecting our growth expectations and the completion of the grow-out building. On the right, you see a picture from the grow-out building, where we are now more than halfway when it comes to the steel erection, including mounting of roof and walls. The concrete works for the water treatment is completed. And as you see on the picture, there's ongoing installation of ventilation duct in these days. And we're also starting installation of production tanks shortly and the target completion in third quarter 2023 of the entire grow-out building, which is according to the initial schedule. This picture illustrates what we believe is the key in our business model in terms of economics. On the left, we show our expected production cost compared to the average production cost of the Norwegian industry. The positive here is that the gap between conventional production and RAS has narrowed significantly over the recent years, making RAS more competitive in general. The picture reflects our most updated cost expectations following the feed price increase, and the Norwegian industry figures are based on 2020 numbers. Adding our significant cost advantage of said transportation costs, we believe we are very attractively positioned for the future. The graph on the right, illustrating this point, where we show the black line being the average cost of the industry in Norway and the increase seen over the last 10 years, the flat gray line being our cost estimates and the red line being our sales price. This is not the Toyosu Market price, but the import price to Japan, adding taxes and local handling, but excluding price premium. We are still confident in attaining a price premium, as communicated before and as seen for other salmon and fish, but this will come in addition to the illustrated reference price shown on this graph. So with these 3 data series, we believe our business model in terms of our financial outlook is clearly demonstrated. And with the previous page in mind, we would also like to emphasize the robustness in our business model. Proximar is not dependent on high market prices and will generate good profitability, both in a lower-price environment and if production levels are, for some reason, not achieved. This, we try to illustrate here, where the achieved production volumes are illustrating -- are illustrated, assuming different densities achieved, ranging from 30 kilograms per cubic meter up to 100 kilograms per cubic meter, with the implied production volumes shown on the line on the left-hand side. Our target is 80 kilograms per cubic meter, but starting the production at 64 kilograms and then gradually increasing in the years ahead. Our target is also based on what we've seen in Poland and is transferred to the graph on the right, where you will see that even with more conservative densities, we are still at profitable levels. And even at average densities, as low as 30 kilograms per cubic meter, we would be generating a positive earnings before tax, assuming the reference price calculation shown here using the 2024 forward prices, adding the import-related costs from the previous slide and also assuming a 10% price premium. We're well positioned as we now enter the operational phase and all our key operational positions are secured and on site. Our team brings in extensive experience for farming of Atlantic salmon and RAS also with experience from grow-out. During the second quarter, we've sent members to the AquaMaof facility in Poland for training, learning how to operate the AquaMaof facility. And we are now continuing our recruitment of local production workers, with more members joining in third quarters and going forward. The performance seen in the AquaMaof facility in Poland continues its consistent results into 2022, and we are encouraged to see the achievements from this facility. We believe the low complexity is a key to maintain stable operations and gives the production staff time to take care of the fish rather than spending time on the system and maintenance of equipment. The performance from Poland is in line with our expectations, also in terms of densities and growth, and we see the system's ability to maintain adequate water quality for Atlantic salmon. The facility, initially built in 2011 but rebuilt in 2016 for cold water species and Atlantic salmon, started its production of Atlantic salmon in early 2017 and has been harvesting since mid-2019. And during this period, the performance has been rather consistent, with low mortality and growth curves according to our expectations. We also have the pleasure of arranging a trip together with our Board, visiting the facility in Poland in May, and this is what you see on the right-hand side picture.

Okay. And then to the financial highlights of the last 6 months, and then let me start with the profit and loss. We will have our first income in 2024, meaning that there will only be expenses until then. Our operational costs increased as we are ramping up the team for the operational startup. And as we are reporting in Norwegian kroner, we will have currency effects all the way. And in these figures, the effect of the weakened yen is included as well. For the balance sheet, the asset under constructions keep increasing, as it will do until the construction completeness in 2023. The cash balance by the end of June was close to NOK 74 million. The equity is still strong with NOK 362 million. And the full debt of the JA Mitsui Leasing facility is also presented in these figures. Next slide, please. Regarding the debt, we are making good progress in our debt discussions, especially in Japan. The increased local presence, combined with signing of the sales and distribution agreement with Marubeni in April this year, have been important to the process. As we have communicated before, it has been a requirement from the Japanese banks to see an offtake for our fish. And during the negotiation with Marubeni, the banks have therefore been waiting to see the conclusion of this. It's been very positive to see the increased bank activity following this, both in the second quarter and then into the third quarter. We are in discussions for both construction financing and long-term financing, but we are emphasizing on the long term. Because when we have the long-term debt in place, we will be in a far better position regarding the construction financing, and we do have several options available. And as communicated before, we are encouraged to see more banks making contact lately following the signing with Marubeni, and we are actively working on the different tracks. And the most advanced long-term debt discussions are now in the final stage of the credit committee. We expect to have this conclusion in the next quarter. This is a syndicated loan structure with approximately 50% debt ratio at what we find at least as attractive levels. Fortunately, we would have hoped to have this concluded by now, but these are time-consuming processes, but we are at least pleased with the development in the recent months. The next slide, please. A good thing for us working at Proximar is that we rarely have to choose between ESG and profitability. The business model itself is based on sustainability, and we are building our business and brand following this path. We believe this is one of the reasons we're also able to attract new people to join us, and we have a number of stakeholders, especially in Japan, who find this more and more important. We do our utmost in the ESG field, but we're also having external parties verifying the choices we have made so far and the plans that we have going forward. And therefore, we're also pleased that we again have received the highest rating, and this time from the Japan Credit Rating agency, which is very highly recognized in Japan. And this Japanese rating agency, they assessed a number of topics in their process, and the most important were the reduced carbon footprint by limiting airfreight, the fish welfare and the gentle way fish are being handled in the facility and for the benefits of the local food supply. So next slide, please. And this is to sum this presentation up. In 2022, we have started very well. It started as an exciting year for Proximar. We were pleased to say that our progress on the construction is still intact. The Japanese market is strong. We have seen a sharp increase in salmon prices internationally and very high transportation costs to Japan, leading to salmon prices above NOK 150 per kilo. This has impacted the demand negatively, but we believe this is a short-term impact on the dramatic price increase and expect long-term development to continue. AquaMaof, they have continued to produce steadily in Poland, with production figures which do support our own operational plans. We have been able to attract highly skilled employees, and we have now secured key employees for the operational start-up. And during 2022 and certainly into the second quarter and now into the third quarter, we have made good progress in our discussion with banks in Japan and remain optimistic on securing the long-term debt at targeted ratio at, as mentioned, what we find as attractive levels. Last, but not least, we do have a first-mover advantage in Japan which has a significant value, giving us a very attractive position towards any future competition, not only time to market, but also considering our attractive CapEx level. And by this, we would like to open up for questions, so -- and if you should also have questions after this session, please do not hesitate to contact us.

Okay. We have already had one question. Can you comment on the expected timing of CapEx going forward? What we can say is that we have some significant milestones for some of the -- yes, some of the big contracts. But in general, the remaining part is according to the construction progress. So this is all in line with the plans that we made initially. Another question. It sounds like the dialogue with the banks is progressing well, but could you also add some details on the dialogue with AquaMaof and Daiwa House with a postponed milestone payment. Do you see any risk of slower progress on the construction going forward if the debt finance is further delayed?

Yes. I think when it comes to the bank discussions, we are progressing well and certainly after we signed the offtake agreement with Marubeni. When it comes to the dialogue, well, it's not really -- we have better aligned the milestone payments with the production plan and for that reason managed to do some adjustments, but no impact on the construction. And we are -- construction is going as planned, with the same intensity as initially also planned.

Yes. So we don't really see any increased risk or change of risk at all compared to this. It's just an alignment of the plans that we have and, of course, the more specific details of when a milestone has been reached. So it's no specific changes. And we have another question. How do you see the electricity prices developing in Japan lately? How the prices now compare to your estimates? Are you planning to enter into long-term electricity agreements?