Proximar Seafood AS (PROXI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this First Quarter 2024 Presentation from Proximar Seafood. The presentation will be given by our CEO, Joachim Nielsen, who is us always sitting in Japan; and myself, CFO, Ole Christian Willumsen, currently sitting here in Bergen. Following the presentation, we will have a Q&A session, and that will be moderated by our Strategy Director, Marius Birkenes. And with that, I'd like to hand it over to Joachim to kick us off. Joachim?

Thank you, Ole Christian, and good morning. We are now approaching first harvest, which is scheduled in September. We remain on track with our production target of 5,300 tonnes HOG in 2027, and the facility is demonstrating good and stable performance, also in the grow-out building, which was taken into use in December. Since starting our production in October 2022, our biomass has developed positively and currently stands at 188 tonnes. As we are approaching harvest, activities on sales and marketing together with Marubeni is further intensifying. Market conditions remain very favorable, which we expect to translate into attractive financials when we now can finally start harvesting. We believe being first mover in Japan has a good value, and we are well positioned to distribute our fish close to major markets and end consumers. As we now see production up and running and harvesting starting, we will continue our efforts in planning further capacity growth. Proximar has a great potential to take advantage of our established platform and experience and to position ourselves to become the leading producer in Japan. 2024 is an important milestone year for Proximar. We are well on track in our transition from product and construction to steady operations. Biomass is continuing to increase, driven by regular inserts and good growth performance. By the end of the first quarter, we had 12 batches in production, and we also continued through the quarter, our successful recruitment of new employees and aligned with our production requirement. And at the end of first quarter, we were 38 employees in the company in total. The Japanese market outlook remains attractive. Atlantic salmon is a popular fish, especially in the -- amongst the younger generation, which is an important driver for the future consumption growth. However, the sudden price increase seen over the last couple of years, combined with the relative picture comparing to other competitors of Atlantic salmon has impacted consumption somewhat, but we believe this is short term. Long term, we believe the fundamentals are intact, and we expect the growth to continue as we look into the future. Prices remain high, driven also by the high cost of transportation to Japan. These -- the transportation costs have come down somewhat lately, but still remain at very high levels. As for highlights of the quarter, most important is the progress in our biomass, which we saw close to tripping. We continue our transfer of fish to the grow-out from the nursery building. And currently, we have 5 batches in the grow-out building as we speak. On the financing side, we raised NOK 165 million in the private placement and repair offering. We also extended the maturity of the JA Mitsui Leasing loan from end of March 2024 to end of December 2025. Our production staffing developed according to plan with all key positions secured. We see stable water quality and growth conditions, which is also very encouraging. And just last week, we did sample tests from our first batch. And this is what we see here on the right-hand side. This fish just above 3 kilograms with good color, good fat content and also very good taste. Production is continuing to develop positively across all departments. We also see the growth curves have picked up again for the batches, which were exposed to the restricted feeding due to the biofilter maturation and reduced temperatures in conjunction with the transfer of the first batch in late December. We see low natural mortality. Unfortunately, we lost approximately 50,000 fish in conjunction with the tank bridge, as communicated in early February. However, we have successfully continued transferring batches from the nursery to the grow-out. We have a total of 5 batches now transferred and we see no abnormal mortality or other impact on growth post these transfers. We will also start maturing the biofilter now in the second module shortly to develop the bio filter ahead of fish transfer into this module, which is expected in June. This is also to avoid feeding limitations like we saw in the first model. Standing biomass is now at 188 tonnes and the first batch planned to be harvested in September. This slide shows you some of the water parameters in the grow-out building. We continue to see stable water temperatures, which is the graph on the left-hand side, also during spring and with -- despite this sharp and sudden temperature variations and increases. We're now approaching summer and peak temperatures. But from what we saw last year in the nursery building and also what we've seen so far in the grow-out building, we are confident that the water temperature will remain stable. As for the other water parameters, we see steady conditions and well within the suggested range for Atlantic salmon. Commenting on the ammonia. This was also commented last time. We saw the biofilters starting to work early end of January, early February. And since then, we have seen stable performance, which also means that the feeding has been back to normal since the end of January and early February in the grow-out. Here are some pictures from the grow-out building. And from the samples tested last week, this is the first batch, which will be harvested in September. Currently, average size around 2.5 kilograms although the biggest sample was around 3.1 kilograms. The sample testing showed very good results with a color around 26 plus, texture and taste was also very good. And with these results, we are also very excited in terms of the outlook and the harvesting ahead of us. I will now hand it over to Ole Christian for some comments on the pricing in Japan and a quick review of our business model.

Thank you, Joachim. When we talk about pricing, it's natural to look at the cost picture for an importer of Atlantic salmon into Japan as this represents the floor for the prices that can be expected. The blue part of the columns in this graph shows the import price into Japan from the National Statistical Bureau. We are also adding 3.5% duty and local handling costs. For local handling, which includes repackaging, re-icing and some logistical costs, we add an element of [ NOK 5 ] per kilo. Adding these 3 elements together brings us to the cost of importing Atlantic salmon from Norway to Japan. As you can see in this graph, we have represented the last 9 quarters, and the total importing cost has varied between NOK 101 at the lowest level. and NOK 164 at the maximum. During the second half of last year, we saw a dip in the importing costs to NOK 120 per kilo, but we have lately seen an increase to approximately NOK 152 per kilo at the end of the last quarter. The average over the last quarter was NOK 143 per kilo. With this in mind, we remain optimistic in terms of good price achievement and believe we are very well positioned for the first harvest soon to start with a robust business model. Now let's look into what this can imply for the margins that can be obtained. Starting with the left-hand side, the red line illustrates what we just saw on the previous slide, namely the cost of importing Atlantic salmon from Norway into Japan. The horizontal blue line at the bottom between NOK 60 and NOK 80, you see there, represents the estimated EBIT cost per kilo at the targeted annual harvest volume of 5,300 tonnes. Therefore, the shaded area in between those 2 lines is an indication of the profit margin that can be obtained for Proximar at our targeted volume. On the graph on the right-hand side, we are illustrating our EBIT costs at different harvesting volumes. And you see the dotted box around the target of 5,300 tonnes. But the point with this graph is to illustrate that we could obtain good profitability also at lower levels, including as far down as approximately 2,000 tonnes harvesting harvest a year. I'd now like to hand it back to you, Joachim, for an update on our cooperation with Marubeni.

Thank you, Ole Christian. And following up on the slides from Ole Christian, it is now crucial to execute on the sales strategy as we proceed. We are therefore very encouraged on the activities here and the progress being made in Japan. Marubeni keeps showing a strong commitment to Proximar. And as of April, Marubeni reorganized, also strengthening their internal focus on agriculture, which we believe is very positive for us. This also shows a strong dedication to the industry and long-term perspectives. Marubeni has also in conjunction with this established a Proximar division with a dedicated team in Benirei, which will be renamed to Marubeni Seafoods from July, consisting of 4 full-time dedicated members. And the strong interest for Proximar Salmon remains, Marubeni is experiencing increased numbers of inquiries, not only from Japan, but also from several markets abroad. Focus recently has been to narrow down customers, focusing on those sharing the value of Proximar salmon sustainably and domestically produced. Typically, larger retail chains and restaurant chains on the national level are on the short list. And recently, discussions have also moved into more specific topics, including pricing and volumes, and we expect the first contracts well before first harvest. As for branding, this is ongoing, and we are making good progress. And the branding work is also done in collaboration with Marubeni but Proximar is the owner of the brand. And I repeat what I've said before, I'm very pleased about the good partnership with Marubeni. They show a strong commitment which also allows Proximar to focus on production as we now move forward. We continue to see strong interest for our company in Japan. We see a good media coverage in different channels. And currently, we're also participating on SusHiTec Tokyo, which is a large event hosted by the Tokyo Metropolitan Government. In terms of visitors, the expectations for SusHiTec is more than 500,000, and Proximar will also hold the presentation at the event. Going forward, as we approach our harvest, more efforts are being planned, and we are also planning together with Marubeni, media plan, targeting major media channels. This to build even more visibility, awareness and expectations of our upcoming harvest. We are on track in terms of staffing and aligned with the production requirement. We have a dedicated and motivated team with a strong commitment to making success. All key positions are filled recently with our Denitrification System Manager on board, bringing further extensive and relevant experience from aquaculture and wastewater. We have an outstanding team in place with broad and extensive experience making Proximar well positioned for the future. We also just recently started our internal training program to secure transfer of this large experience to the broader team. We're now 44 employees in total. Still some positions are to be filled in the future, but in a more gradual and selected way. Our colleagues are doing a fantastic job on site and this is a strong motivation for us all. I will now give the word back to Ole Christian to go through the first quarter numbers.

Thank you, Joachim. Let's start with the P&L, where we report a loss of NOK 29.5 million before tax for the quarter and NOK 30.0 million after tax. As planned, we see that the increased activity level in the quarter is reflected in the income statement, where more people, more feeds, more electricity and also increased depreciation have led to operating expenses of about NOK 20 million. I'd like to highlight 1 issue in the P&L statement that might need some explanation. It's the fair value adjustment. It's a first quarter that we report such a fair value adjustment since we now have multiple batches of fish in our post-smolt grow-out facility. The biological assets are in accordance with international accounting standards measured at fair value. For salmon in the grow-out facility, the present value model is applied to estimate this fair value. Changes in fair value of biological assets are recognized in the statement of profit and loss. For the period ending March 2024, fair value adjustment is performed for the first 3 batches in the post-smolt grow-out building, resulting in a reduction of cost of about NOK 2.0 million. This implies that we are accounting for some of the profit we expect to earn once harvesting commences. More information about the methodology is given in Note 3 into the accounts. Then moving over to the balance sheet. If we look at the overall picture, we have approximately NOK 1.5 billion worth of assets financed 2/3 by debt and 1/3 by equity. Approximately 88% of these assets are noncurrent, meaning long-term assets, it's the value of our land, our property, plants and equipment. The current assets are mainly made up of cash following the private placement and repair offering, whilst the increase in biomass also has contributed. Looking at the passive side of the balance sheet. The equity is strengthened in the quarter through the private placement and subsequent repair offering whilst being reduced by the net loss in the quarter. The net effect is an increase of approximately NOK 122 million in equity over the quarter. Looking at the liabilities. All our loans are now classified as noncurrent liabilities and no repayments are due before August 2025 when the syndicated loan in Japan will fall due. The other 3 loans we have, the convertible loan, the shareholder loan and the loan to JML, are all maturing in fourth quarter of next year. Finally, a comment on the current liabilities. These are mainly related to normal trade payables and accrued interest in the convertible loan. And with that, I would like to hand it back to Joachim for the summary and outlook slide.

Thank you, Ole Christian. Wrapping up we continue to see encouraging performance in the system in terms of biology. We are well on track in terms of staffing and the damaged tank causing the loss of the 50,000 fish in February is now repaid, and we keep doing preventive measures to avoid leakages and breaches in the future. Sales and marketing activities are developing as planned, and we remain very optimistic when it comes to the sales of our fish. We are well positioned for the future, and we are focusing on continuing now building our biomass. We are ahead of competition and we'll start planning further capacity growth to take advantage of being first mover as we now get [ approved ] facility up and running and harvesting. As for harvesting volumes, we estimate around 4,700 tonnes HOG for 2024 and 2025 combined, then gradually increasing to 5,300 tonnes in 2027, according to the production plan. And for more specific estimates on 2024, we will get back on this. The main uncertainty related to the timing of volumes in December and January, not to the overall volumes. So with this, we will now open up for questions.

Yes. Welcome to this Q&A session in conjunction with Proximar's first quarter reporting. My name is Marius Birkenes. I'm the Director of Strategy in Proximar, and I will function as the moderator. Our CEO, Joachim Nielsen; and CFO, Ole Christian Willumsen will be answering the questions. Joachim from our Yokohama office and Ole Christian from our Bergen office. We have gotten a few questions already, of which the first 1 goes to you, Joachim again. Can you say something about the interest for your product in Japan and the rest of Asia and whether many potential customers are visiting the production facility?

Yes, we are experiencing quite strong interest for Proximar and our products. In the media, we have certainly had a very good coverage since we started construction. And we now see that this is intensifying as we are getting closer to first harvest. We also know the people are becoming familiar with fish that will be harvested now in 2024. And we also receive -- or Marubeni is receiving an increasing number of inquiries related to potential buyers of the volumes. This is in Japan, but also interest from other markets in Asia. And regarding the potential customers visiting the facility. We are having very frequent visitors coming by, latest today. So we do experience quite strong interest and also physical business to decide to see the production.

Okay. Moving on to the next question, also to you Joachim. Are there any updates on entering the Japanese stock exchange?

We've previously communicated that we are looking into various alternatives the long term, and that is 1 of several alternatives that we will, of course, also explore but no decisions, and this is, again, 1 of possible developments for the future.