Proximar Seafood AS (PROXI) Earnings Call Transcript & Summary

Good morning all, and welcome to the third quarter presentation of Proximar Seafood. My name is Ole Christian Willumsen, I'm the CFO of Proximar and together with me today is our CEO, Joachim Nielsen, and we will now present the third quarter. Today, we are broadcasting from our facility here in Oyama at the foot of Mount Fuji. What you see behind us here is our nursery, where we currently have 6 batches of Atlantic salmon in production since March this year. And we would very much like to start this presentation by showing you the facilities that we're now taking ownership of through a small video. Here you go. [Presentation]

We hope you enjoyed that video. We are now ready to go on with the presentation, and I'll leave the word over to Joachim to kick us off.

Thank you. Good morning. Through the third quarter, I'm pleased to say that we have achieved many important milestones. Production is strong and very well, and we are continuing building the biomass. In September, we took delivery of the facility from Daiwa House. This marking end of construction and a 6-year loan process, including extensive preparations, design works and construction works. The quality of works are very high and the facility was handed over with no remarks or repair works to be done. In conjunction with the handover, we also took the formal ownership of the buildings, releasing the second and final tranche of our bank loan of NOK 8.8 billion. We have through the quarter continued with great success recruiting new colleagues. And as I've been expressed in several presentations, I remain encouraged by the high level of qualified members joining our team. With the current team, we are well prepared for the years ahead. And finally, and perhaps most importantly, is the stable production and encouraging results seen across all batches. Through the quarter, we have seen the fish driving across all batches and departments, demonstrating good growth and low mortality. Here are some pictures from our nursery department, which you can see from behind me and some fishes also from inside tanks. The nursery is where the fish stays from 2.5 grams until fish transfer to the grow-out, which will on normal production be around 100 grams. And this department is the same design and lay out as they grow out building. The main difference being the number of tanks as well as the amount of modules. When it comes to the market, we continue to see a strong market for Atlantic salmon. The robust supply demand outlook, coupled with the price and transportation costs to the Japanese market to Proximar in a highly attractive position. The sharp increase in transportation costs of Atlantic salmon for Norway to Japan is expected to remain at high levels. The Japanese import prices for salmon was first affected by the pandemic and then further impacted by the geopolitical situation. Following the rerouting of air traffic from flying the shortest route over Russia, the distance to Japan has increased even more significantly. Carrying the implications related to this in terms of carbon emissions, fuel [ flies ] and flying costs. Looking specifically at the implied transportation cost from Norway to Japan of Atlantic salmon, we see the graph to the left illustrating this point. This shows the difference between export price and import price. From averaging about NOK 24 per kilogram in 2018 to 2019 and NOK 13 per kilogram for 2020 to 2021. It has now averaged NOK 41 per kilogram for the last 12 months. This is illustrated on the right-hand scale, looking at the tinted area on the graph on the left. This, coupled with record high export prices from Oslo translate to import prices averaging around NOK 129 per kilogram for the last 12 months into Japan. This excludes local handling costs and other costs incurred on the Japanese side as part of the import costs. The corresponding average on the market price in Tokyo and the Toyosu market for the last 12 months has averaged NOK 125 per kilogram. So the fundamentals are very effective. Following the previous slide, we see this translating into very robust fundamentals and a very attractive outlook for Proximar going forward. We believe Proximar is uniquely positioned in the Japanese market with strong fundamentals, a robust business model and no local competition in the coming years. Based on our revised forecast, we expect production costs to be around NOK 69 per kilogram on an EBIT level. And looking at the expected market prices based on the benchmark mechanism attracting the relevant cost elements from the previous slide, the graph on the left illustrates the background for our optimistic outlook. In this graph, we are illustrating the margin potential, showing the benchmark selling price in red and the blue line showing the expected production cost on an EBIT level at full capacity. This also provides leeway in terms of volumes achieved, meaning we should still be able to deliver attractive returns even with lower achieved production levels and this, we are trying to illustrate in the graph on the right, with the blue columns showing production costs assumed -- assuming different attained production volumes versus the benchmark price represented by the red line. As shown on this graph, we are still in positive EBIT levels, even at the low end portfolios in this sensitivity. Having said that, based on the performance we see in our own facility and the results show since 2007 in the AquaMaof facility in Poland, we remain confident in reaching our production volumes. As we've now seen the good progress in our production, we are also increasingly spending our time and efforts on sales and marketing. With our 10-year sales and distribution agreement with Marubeni, we are very confident in a successful execution when it comes to sales. Marubeni has taken a strong involvement as working together with the Proximar team in a highly dedicated manner. The interest for our upcoming products remain strong, and we have been welcoming many potential buyers to our facility this year, including supermarket chains and restaurant chains. We expect the discussions to become more specific in the coming months, we have already received requests for price and volumes. Our current goal together with Marubeni is to address the premium market and Proximar space is well aligned with the consumer preferences. We're looking into the months ahead with great excitement and remain optimistic of securing good results. The installation of equipment by AquaMaof is ongoing. And the first transfer of fish of the 2 first batches is scheduled in December. Unfortunately, we have seen some CapEx increase following in our recent review and our expectations going forward partly related to the time of completion works of the construction and final settlement with Daiwa House combined with higher transportation costs related to equipment deliveries, but also in some additional equipment related investments driving these changes. This resulting in total increase of NOK 45 million, leaving the total CapEx at NOK 1.24 billion or equivalent to 17% increase since we started construction in 2021. Again, we believe the most support for Proximar now and going forward is the production and the development here. It is therefore very encouraging to continue seeing the positive results and performance across all our batches and departments. We see stable water quality, a steady and robust operations, which again then translates into strong growth. We continue building our biomass, currently standing at 19.5 tons. And the production is developing according to our plan. We are on track for the first harvest in third quarter 2024, less than 1 year from now. As informed previously, we have experienced some operational start-up issues relating in mortalities. However, I'm very pleased to say that we have had no such experiences in third quarter. We are in line reduction plan in terms of [ harvest ] volumes for 2024 and 2025, and we are continuing to bring more eggs into the facility to secure adequate buffer in case of incidence in our buildup eggs. The water quality continues from stable conditions and within adequate levels for the fish again demonstrated in the growth curves from the previous slide. We have reduced the temperature levels in the short term for the nursery slightly as part of the contingency for the start-up of our grow-out building also to secure some buffer during the start-up action session of the first batches. If the fish grows to quick, we could have bottlenecks, and this is what we're trying to avoid. We have good capacity in terms of oxygen levels, as you see here, also illustrated in the graph. And we see the ammonia data from the ammonia data levels as the biofilter has now matured and has shown steady and good performance. We are 31 employees and more to join going forward. I continue to be impressed by the strong enthusiasm and across our team and the strong dedication to Proximar. Our team continues doing a great job every day, 24 hours. We are continuing, recruiting talented people to our team, and we're well on track for the future. We have also secured more experienced members to our team, including a production manager with extensive and relevant experience from the aquaculture industry. Secure qualified and dedicated production personnel is key for the success, and I'm pleased to say that we are well positioned. And now I will leave the word to Ole Christian.

Thank you, Joachim. Let's start with the P&L, where we report a quarterly loss of NOK 14.4 million. This result is in line with our expectations, reflecting the increased activity in Japan included -- including added personnel costs. Moving over to the balance sheet. Our assets have roughly tripled in value since we reported a year ago, standing now at about NOK 1.6 billion at the end of the quarter. About 3/4 of this asset value is related to land, asset under construction and associated equipment. The remaining 23% of our assets consist of biological mass, other short-term receivables, mainly coming VAT refunds and cash. Looking at the debt side, over 90% of the current liabilities relates to the JAML loan of about NOK 230 million. As described in Note 7 to the accounts, the majority of this loan was repaid now in October. The remaining part of the loan has a maturity in March next year. The noncurrent liability consists of 3 main components: the convertible loan of about NOK 216 million, the loan to [ accrete ] capital of NOK 95 million and the syndicated loan of NOK 607 million that was mentioned by Joachim, in total NOK 918 million. Finally, on the equity side, the equity has risen through the converts from the convertible loan during the quarter, while being reduced by the net loss. In addition, the weak at the end in the quarter compared to NOK has led to a negative effect of NOK 42 million. The equity stands at NOK 402 million at the end of the third quarter. Now let's turn over to looking -- to look at the financing of the company going forward. As already explained by Joachim, we have experienced an increase in CapEx in the quarter of NOK 45 million, totaling NOK 90 million over the last 2 quarters. In addition to our ongoing work with the budget for 2024, we are seeing a combination of some higher costs driven by inflated input prices as well as additional required costs to secure adequate headroom as we are now moving into full production. Furthermore, we see the liquidity effects related to the timing of consumption tax refunds. In sum, this translates to higher OpEx and working capital requirement of about NOK 45 million. A large part of this effect is seen in the second and third quarters next year just before we start harvesting and generating positive cash flow. On the financing side, we have seen higher incurred costs driven by processes with banks and various advisers, increased interest rate levels and changes in our financial planning assumptions. We are now evaluating several options for how to fund the additional capital need seeking a combination of debt and equity, both in Norway and Japan in the coming months. In doing so, the company is working closely with the largest shareholders who are very supportive in seeking good solutions. There are indications of several alternatives covering the majority of the capital need. We are working with advisers, both in Japan and Norway in this process. Following from our financial planning, we are also continuing our efforts to seek strategic opportunities for Proximar. This is increasingly relevant as we now look into the future and consider further capacity growth. Since 2015, we have continuously been working hard with a long-term perspective and patients and believe we so far have succeeded in building a very strong platform for the company, as we now can showcase the completed facility and positive production results, we expect this to fuel further interest and see progress in 2024. We are also actively developing our Japanese foothold and are engaging in Japanese investment bank to advisers going forward. Overall, and I believe it's important to emphasize this in light of the announced funding increase, we are working with a strong focus and dedication on creating shareholder value. And with that, I'd like to hand it back again to Joachim for the summary and outlook session.

Thank you, Ole Christian. Wrapping up, we continue to see stable water quality and good growth conditions, which is also demonstrated in the growth curves of our fish across all batches. Our team has further strengthened and we are well on track to meet our planned production growth. Going forward, we will continue building our team and focusing increasingly on production. We completed the handover of the facilities and made the final drawdown of our Japanese bank loan in third quarter. Looking forward, the market outlook remains very promising in terms of economics, and growth, we believe Proximar is well positioned for the future with the first mover advantage, years ahead of competition and with very attractive economics. In terms of required funding, we are working actively on this with support from our major shareholders to secure a good solution for all our shareholders, and we are also addressing strategic opportunities. So with this, wrapping up, the outlook remains very attractive and we are looking forward to the years ahead. And I will now open up for questions.

With Proximar Q3 reporting. My name is Marius Birkenes. I'm the Director of Strategy in Proximar and I will function as the moderator in this Q&A session. Our CEO, Joachim Nielsen; and CFO, Ole Christian Willumsen, will be answering the questions from our facility in Oyama. Let's start with the first question here. Given the slight ramp-up issues with the biofilter in the nursery, should we expect similar issues in the grow-out facility? Or have we found any new way to speed up the maturation in the biofilters?

Yes, we have -- we do expect time to the biofilter to mature, which is part of the normal start-up procedure. Having said that, we also have quite a large water to fill up the [ PS3 ] or the grow-out building. So that means that the level of recirculation and dependence on the biofilter is less in the beginning. So we expect this to be a gradual buildup, and we'll also take the advantage of the relatively large biofilter and the limited load on it by introducing sequentially the batches. So we do not expect any large issues related to this.

Moving on to the next question. What is our expectations around premium pricing for the Atlantic salmon and also the thoughts around the proximity to Mount Fuji for the sales?

Yes, I can answer that. We definitely expect to be able to take a premium for our Atlantic salmon. We know that Japan and the Japanese like to be self-sufficient and also with food. So there is a clear expectation that there is willingness to pay for some -- for a premium product made in Japan and hard to quantify exactly, but that is what we have in our modeling. When it comes to the brand name, we know that Proximar is already directly and strongly related to Mount Fuji. It is the strongest individual brand name in Japan and across all industries. And we are planning to use Mount Fuji in our marketing going forward.

Could you say anything more about the plans to list on the Tokyo stock market and if we had done any talk with local investors and how the interest has been?

Listing on the Tokyo Stock Exchange is something we are also looking into as one alternatives of many. It's nothing specific, but we are obviously aware of that as one opportunity. We also see the strong interest in Japan for Proximar and despite being a small company, we are attracting a lot of interest. And as Ole Christian said, we also believe this is linked to the location close to Mount Fuji, which makes it come on top of the memory of many of the Japanese consumers. . We do have -- and continuously, we have meetings with Japanese potential investors as with many other investors. And I will say that we are receiving a lot of positive attention there. And again, it's something that Proximar is a company that many are aware of. And we are getting from time to time, also space in the media, in newspapers, in industry papers and also on TV.

Yes. It's -- I think it's fair to say that for most Japanese, they are not very accustomed to the Norwegian Stock Exchange, obviously. So we do receive questions about this because for them it will be more natural to invest in a stock in Japan. So as Joachim is saying, it's something we need to assess or address going forward. But no, no decision as of yet.

Okay. Then we have no more questions, and that does conclude the Q&A session. Our next financial reporting is the Q4 presentation, which will be held on the 23rd of February 2024. And before that, we will also distribute production update at the beginning of January. Have a nice weekend.

Thank you.