Proximar Seafood AS (PROXI) Earnings Call Transcript & Summary

Hello, and a very good morning to you all, and welcome to Proximar Seafoods presentation of the third quarter. The quarter where we present our very first sales income as promised. As always, the presentation will be given by our CEO, Joachim Nielsen, in Japan; and myself, Ole Christian Willumsen, CFO, here in Bergen. We will start the presentation by giving you the highlights of the quarter. Before we move over to the section where I think many of you are very interested, the sales and marketing part. Then we'll, of course, give you an update on the production before we revisit our business case and give you the financial summary. We will then close by having a look at the summary and outlook session. And with that, I'd like to hand you over to Joachim in Yokohama to get us started. Joachim?

Thank you, Ole Christian. Third quarter has been a milestone quarter for Proximar. On the 30th of September, we harvested our first fish after 10 years of preparations and hard work. This was a trial harvest, meaning that we only harvested a limited number of fish, equivalent to approximately 1.2 tonnes HOG. And the result of the harvest showed 100% superior quality and average weight around 4 kilograms HOG. It was also a fantastic acknowledgment to see the fish being sold at premium pricing in the market, translating to approximately NOK 130 per kilogram in price achievement to Proximar. This translates to approximately 10% price premium over the imported fish from Norway using our benchmark approach. On the 30th of September, we also announced our brand, Fuji Atlantic Salmon. In terms of financing through the quarter, in August, we sold NOK 40 million in our convertible bond, which was held by the company and later secured an additional NOK 75 million in loan facilities from Japanese banks for working capital purposes. Looking at the production, we continue to see good biological performance and stable water quality. Fish health remains good, and we continue to see low mortality. Unfortunately, the turbidity issues remained through the quarter, forcing us to reduce feeding as a precautionary measure. The ozone system was installed and started carefully testing in September, but due to design weaknesses and needed improvements, primarily for safety reasons, the proper dosing could not start as planned prolonging the period of reduced feeding machine. Biomass developed positively, but lower than expected due to turbidity issues. The standing biomass at the end of the third quarter was 733 tonnes, split into 18 batches and we are on track aiming for full utilization of the system in 2027. We're now counting 47 employees in addition to 8 in-sourced harvesting employees and most of our employees are today working at our facility in Oyama. For the market of Atlantic Salmon in Japan, it remains stable, and we see demand is picking up as the record high prices have eased somewhat. Prices have fluctuated. However, we see a rather stable picture when looking at the significant cost advantage of our local production in Japan, which is shown here on the lower right graph, showing the implied transportation cost between Norway and Japan in terms of transportation of Atlantic Salmon. As mentioned briefly in summarizing the quarter, the first sales have really confirmed our expectations. We have achieved price -- premium pricing, not only for the trial harvest but continuing into the fourth quarter as we're now harvesting and shipping out fish on a weekly basis from the facility. And the average price achievement so far is approximately NOK 125 per kilogram to Proximar, which shows a price premium of approximately 10% compared to the imported salmon from Norway using our benchmark approach. And I'm also pleased to see that quality remains high, 99.2% superior grade. And so far, we've harvested 19.2 tonnes, averaging 4 kilograms HOG. The price achievement does not come by itself, and I believe Proximar, so far has been very successful in the long-term preparations done together with Marubeni ahead of our first sales. Our brand, Fuji Atlantic Salmon was released in conjunction with the trial harvest on the 30th of September, and the brand is combining the essence in our production. Our location at the foot of Mt. Fuji in Japan and the product itself, Atlantic Salmon. Salmon tends often to refer to all salmonids, and for Proximar, it's really important to emphasize that our product is Atlantic Salmon. And this is also the reason why we're including it in our brand name. In the logo, we also wanted to combine Norway and Japan, Norwegian know-how and Japanese excellence, which is really what we're doing in Proximar. And we believe that the brand and logo is simple and clear and associates directly to our product, and we're also emphasizing future differentiation to coming competitors as 1 of the aspects in the branding. And going forward, we will continue building our brand, which so far has started off very well. After shipping to various supermarkets, we're encouraged to see how the brand is actively being used in the supermarkets and shelves, building our visibility and consumer recognition. We have previously experienced strong interest for Proximar and enthusiasm in Japan. I can really say that the last months have taken this to new highs. Our media plan, which has been part of our planning in terms of branding and marketing strategy has worked out fantastically following a smaller ceremony at the Oyama City Hall with a mayor and local media. We arranged a larger press conference together with Marubeni on the 25th of October in conjunction with the first -- with the start of our first commercial and regular sales. The press conference was well attended with 18 different media channels, including international and national media and TV stations. And we believe the strong enthusiasm in Japan for Fuji Atlantic Salmon is also a result of being the first and only domestic supplier of Atlantic Salmon combined with our location at the foot of Mt. Fuji. And this has also translated into large press coverage after the conference. We see here some extracts. We were in the main TV channels in the news as well as in large national media, including Nikkei. And we continue receiving inquiries and in the next couple of weeks, we will also have another 2 large TV stations coming to film at site. Following the fish to the supermarkets, we're also very pleased to see the efforts here, both from Marubeni but also from the supermarket chains helping build our brand and product awareness. Fuji Atlantic Salmon has been very visible and primarily available in the high-end supermarket chains. And the feedback from customers is very positive. We were pleased to see that the enthusiasm for our fish is shared. The value of the recent marketing activities through media and supermarket chains is enormous and is truly exciting and motivating to see this development. Unfortunately, it's taken much longer time than expected to get the ozone system to supply the required amounts. Safety is a key for us and due to poor design and missing safety functions, the ozone system has not been able to run at the planned levels. Turbidity has therefore forced us to reduce feeding, which we also communicated in our second quarter presentation. We have, over the last couple of weeks, been able to increase dosing to our C module, which is currently running with a targeted dosage. And we see that turbidity has dropped sharply and is now well below 1 NTU which is referred to being crystal clear and drinking water quality. And during the last couple of days, we've also been able to finally increase the dosage for our second module in operation and expect the same results within a very short time. We're already seeing a drop in turbidity and expect this to continue like we have seen in the C module. This means we are finally able to resume feeding as normal and get our growth curves back on track. For the 2 remaining modules, the ozone system is already being prepared and will be fully operational as required from the first fish being introduced to them. Turbidity aside, we keep seeing a stable system and good water treatment capacity. All key parameters or good growth conditions for Atlantic Salmon are well within the acceptable range and tolerances which just gives us good growth conditions. We've also been through a summer with peak temperatures about 35 degrees celsius outdoor, maintaining temperatures below 15 degrees in the production water. And the water quality is stable, although we see some variations due to the fact that we're building up biomass and fine-tuning the system. And the data points here are from the C module in the grow out where we have had full utilization and is also in line with the performance that we've seen in the nursery department, where we have had full utilization for more than a year. When it comes to production and fish performance, the overall picture is positive. However, reduced feeding due to the turbidity has had a significant impact on growth. And certainly here for the December '22 batch, which is very visible on this graph. This is also the batch with the highest densities our feeding has been most constrained. And with the previous slides in mind as for water quality and turbidity, we're therefore confident in getting the growth curves back on track going forward. We continue to see low mortality and fish health was good, both very important indicators of our growth expectations. And currently, we have 10 batches in our grow-out system and a total standing biomass in the facility of 877 tonnes and more than 2 million individuals. I will now hand over the presentation to Ole Christian to revisit the business case in brief and also go through our financials.

Thank you, Joachim. We've always said that when looking at our business case, an important part of that is to assess the cost of importing Atlantic Salmon into Japan since this represents a floor of the prices that can be expected for Proximar. And this graph on this slide is then updated with the latest cost of importing salmon into Japan from -- for the third quarter, and the average cost has then been NOK 118 per kilo. It's then very both comforting and encouraging to see that we have been able to sell our fish in the market at prices considerably higher than this benchmark represented by the NOK 130 per kilo for the first harvest that Joachim has already mentioned. So that's about 10% higher than the benchmark. Then looking into what this may mean for Proximar's margins going forward. We can start by looking at the left-hand side of this graph that we've also shown before. The red line here is then the updated cost of importing/adopting salmon over the last 3 years. It's been varying between NOK 100 and NOK 160 per kilo and the horizontal line is the EBIT cost per kilo that we estimate when we are in full production in 2027. So that the shaded area between those 2 lines indicate a profit margin per kilo. When we then move over to the right side of this graph, we are illustrating the expected EBIT cost per kilo at varying annual harvest volumes. We have a dotted line around the box of 5,300 tonnes, which is our base case in full production representing an EBIT cost of NOK 68 per kilo. What is good for our business case is that even with lower harvest volumes, the expected price is still considerably higher than the expected EBIT cost at that volume. So that gives us confidence in our business case and the way forward for Proximar. If we move over to having a look at the financial summary, I'd like to start by saying that as the revenues now will increase over the coming quarters, we will move over to report on the well-known EBITDA and EBIT, also including EBIT per kilo. However, it's still a little premature to do so given the still very low harvesting volumes. So then looking at the P&L, we are reporting our first, yet very small still, but still our very first sales income of NOK 145,000. The earnings before tax came in at minus NOK 23.7 million and NOK 14 million after tax. No big surprises in the P&L account in this quarter. Moving over to the balance sheet. We now have total assets of about NOK 1.7 billion where about 85% of that is represented through the fixed assets. And when we look at the current assets, the biggest item there is the cash balance of NOK 114 million at the end of the quarter and the inventory standing at roughly NOK 98 million. Looking overall, the balance sheet is funded roughly 70% by debt and 30% by equity. And moving over to the passive side of the balance sheet. A quiet quarter for the equity has only been adjusted with the comprehensive loss in the period, and the equity stood at NOK 470 million. Looking at the debt, there are no payments due until August next year when the syndicated loan in Japan has its due date and that's also why that loan is now classified as a current liability since it's less than 1 year until maturity. We have always said and keep saying that we will refinance that loan well before its due date, and have already started the discussions with our banks and having very good dialogues with them regarding this. The remaining noncurrent liabilities of NOK 501 million consist of some loans in Norway, the convertible loan and the loan to credit capital and some loans in Japan. And with that, I'd like to hand it back to Joachim to give us an update on the equipment installation and the harvest outlook.

Thank you, Ole Christian. Finally, we are approaching in the last installation works and expect all the work to be completed by this -- the end of this year. As of today, 3 of 4 modules are completed and the fourth module is close to completion. Our feeding system is also expected to be completed in November, making the everyday lives of our production team easier and freeing up time. And since we're close to completion and all equipment is on site with very few exceptions, we have a good visibility in remaining costs and remain on track on what was communicated in our second quarter presentation. This transferring to remaining CapEx in the fourth quarter of approximately NOK 15 million, in line with expectations. As for the harvest outlook and volumes. The overall plan remains with some slight timing adjustments. We're targeting to harvest approximately 4,700 tonnes combined in 2024 and 2025. However, we will delay some harvest from December '24 to 1st quarter '25 due to a combination of customer requests, supply balance and the lower growth rate to our December '22 batch. But this is a timely matter with limited impact of the overall volumes. Therefore, we expect a harvest of 80 tonnes in 2024 delaying 270 tonnes into first quarter 2025. We are on track in terms of our target utilization, expecting full utilization of the facility in 2027, equivalent to a harvest volume of 5,300 tonnes per year HOG. So summarizing the current status and outlook. We remain very encouraged to see the price expectations since starting Proximar close to 10 years ago, now materializing. Our business case remains strong. The production is running well and having solved the turbidity issues, we remain optimistic on the growth and biomass performance going forward. With the completion of installation works this year, we can fully focus on production in 2025. In terms of harvest expectations, we are on track with the initial plan with some timing variations and we'll work hard to deliver on the production targets going forward. We have a very competent team in place, and are, therefore, well positioned for the future. And as a first mover in Japan, well ahead of competition, we are generating strong interest, and we'll continue to work to explore strategic alternatives and further growth, creating shareholder values. We feel Proximar has successfully delivered on many of the important goals from early 2021, and we'll work hard on delivering on our targets going forward. So with this, we have come to the end of the third quarter presentation and appreciate your attendance this morning.

Welcome to this Q&A session in conjunction with Proximar's third quarter reporting. My name is Marius Birkenes, I'm the Director of Strategy in Proximar and will function as the moderator. Our CEO, Joachim Nielsen; and CFO, Ole Christian Willumsen, will be answering the questions. Joachim from the office in Yokohama and Ole Christian from our office in Bergen. We have gotten a few questions already, which the first 1 is whether it is fair to assume a back-end-loaded harvest profile in [ Suisan ]. I guess this will be for you Joachim.

Yes, I would say that we -- from second quarter, we will be on more stable production volumes going through the year and reaching a more steady state biomass second half of 2024 -- sorry, 2025.

And connected this, what should we think as a steady-state biomass level in the facility to reach an annual harvest of 4,000 tonnes?

4,000 tonnes would be approximately slightly below 2,000 tonnes standing biomass approximately, yes.

Okay. A question for you, Ole Christian. Can you give any color on what you expect for the net working capital in the coming quarters? Any guidance for expected CapEx in [ Suisan ]?

We haven't guided yet on the CapEx for 2025. So we will come back to that. We have guided the remaining CapEx for the Phase 1 and we are keeping that guidance. So far, we don't have anything to communicate on these figures, but we stick to the current estimates.

One for you, Joachim. We now have 10 batches in the growth tanks. Then the question is, how many growth tanks are currently in use and whether we are splitting the biomass between tanks?

So we are now using 2 of 4 modules, although we have still spare capacity tanks in the 2 modules in operation. We will take the third module into use early December. So that's when we will be filled up with 2 of 4 modules, taking the third 1 into use. Each module has 6 large tanks. However, the 2 modules in operation have 4 large tanks -- sorry, 5 large tanks and 4 quad tanks, which is 1/4 of a large tank. So that means that we have -- in December, we will have approximately 12 tanks ready to -- 12 large tanks ready to be taken into use.

And another question, how is the appetite in the Japanese financial market for a potential listing of Proximar Seafood on the Tokyo Stock Exchange and whether we have done any market soundings regarding this?

I would say on a general level, we are experiencing quite a lot of interest for Proximar in Japan, and that also includes the investor side. So we see that there's a high interest and then we have to explore more the opportunities. We have communicated Tokyo Stock Exchange listing is 1 possible track that we are considering. And we are continuously meeting with potential investors to do soundings but also to present the company and build the appetite.

Then we have no more questions, but you're always welcome to send any additional questions to Ole Christian Willumsen by e-mail. Our next scheduled communication to the market is a production update at the beginning of January before we will return with the fourth quarter and full year presentation for 2024 on the 28th of February. So then all that remains from us to wish all of you a nice day and a good weekend, and goodbye from us.