SalMar ASA (SALM) Earnings Call Transcript & Summary

Hi, everyone. My name is Christian Nordby, and I cover the seafood space here at Arctic Securities. Today, we're so lucky to have SalMar joining us after they presented the Q1 numbers today. With me, I have Runar Sivertsen and Hakon Husby. Unfortunately, we are not joined by the CEO and CFO because they had to run early to join -- to take a flight to London. But I'm sure the webcast will work out great anyhow. We will start with a bit of a highlights, and then I urge you all to ask questions to me here on the chat, and then I will ask them further. Yes. But yes, what is yours?

Thank you, Christian. So to wrap things up shortly, we don't want to go through the entire presentation, as you may have seen most of it earlier this morning today, but we would like to go through some of the highlights. It was -- it's fair to say it was a challenging quarter. We have summarized in the Q1 presentation today, where we had harvested 45,400 tonnes from our Norwegian operations with an operational EBIT per kilo of NOK 34.1, rounding up to a little bit above NOK 1.5 billion from Norway. In the group in total, including Icelandic Salmon and SalMar Aker Ocean, we have harvested 52,900 tonnes with an operational EBIT per kilo of NOK 28.6, which gives us an operational EBIT of NOK 1.512 million in the quarter. So the results are impacted by the challenges we had in the farming segments and especially in Northern Norway, where the challenges resulting from string jellyfish has hit us quite hard, where it has resulted in lower superior share of the fish we have harvested and the average rate has also been quite low, which is the main cause of the -- reason for the -- as we would like to say, the low result in Q1. We see, although, that our operational setup we have with sales in the industry is working quite well in quarters like this by handling volume from challenges in farming segments. But the peak volume we had to handle on VAP had been too high in some periods, which was challenging in the period. When it comes to SalMar Aker Ocean, it's good to see that we harvested from both semi offshore projects. Both of them are now finished, Arctic Offshore Farming and Ocean Farm 1. The remaining volume left in this year will come a little bit later to the summer because it was of a traditional site. We saw the figures from Icelandic Salmon was also affected by biological challenges related to elevated mortality at one sea site and in one small facility. But we still have kept the volume guidance for this year at 15,000 tonnes, and we still see the potential for up to 26,000 tonnes in Iceland unaffected due to this. And it was very good to see the results we presented from Scottish Sea Farms today, where we see quite a significant improvement compared to the previous quarters, which we have had over the last almost 1 to 2 years, where we see the biological status in all regions in U.K. is now performing better, where we see the average weight of the fish is increasing and the cost level is going down, which is very positive for the price achievement and the results as such. To sum things up on the financial side, quite easy. We still have a continued strong and robust financial position. Our key metrics in the balance sheet and everything is going in the right direction. So we are still in a very good position there. And volume-wise, in '24, we keep the volume guidance unchanged in all regions and in all segments. So that is the easy sum up of the quarter.

Yes. So again, as a reminder, please submit your questions in the chat, and then I will read them up for you. The first question is relating to your volume guidance from the Capital Markets Day and how it looks today. Are you still on track for that? Or how does it seem today?

We are still on track. Nothing is altered from what we said in September, the 362,000 tonnes, as we said there, this will come in '27, '28, the volume from that. And we are -- this is unaffected by the challenges we have had this year. And just to also give you a glimpse on why we are going to reach it. As we said today, that we are increasing the smolt release quite significantly in Norway this year. We're talking double-digit percentage growth from last year, which is on track in order to reach our target a bit further down the line. So this is still valid.

So that means that the volume growth that we communicated is the same. The time line to reach it, it's the same, and our expected volumes for '25 is also not affected by the fish that we needed to take out in '24 because that has been offset by the larger smolt output which Hakon mentioned.

Very good. One question here as well. Could you comment on feed cost changes in the quarter and your views on feed cost over the year?

So as we stated last time as well, we saw that during '23, it was quite stable the feed price we had to pay during the year. What we see now, we see it actually in Q2, ticking a little bit down, but there are some positive views out there. It's hard to say exactly what the effects will be yet because the -- with the Peruvian fisheries having a quite large quota and the first results from the fisheries also showcasing quite good yield gives a outlook that the fish oil prices, which has been the one which is highest in the recipe, may come down. But it's still too early to say what the effect will be because, call it, the stockpiling of fish oil has been quite low, meaning that we will have to wait until Q3 to see the real effects there. And then -- but this will not be visible in our P&L before we see it in '25 when we start harvesting there, but there are positive signals. When it comes to other elements such as fish meal and also the vegetable ingredients, they have slowly gradually ticked down. So it's positive to see that we may have see a peak in the feed price, especially as we saw in Q4, actually.

Yes. And in addition, I think it's fair to mention that the feed cost in the group as a total is tracking down. And the main reason there is that, of course, we got [indiscernible] volumes coming in, and they are now in our feed contracts and our feed prices, and that is slowly being turned into the volume that is going to be taken out, and we will see that come into effect already second half this year.

Yes. Very good. Could you also comment on the actual tax paid this quarter touching on cash out/implementation effect/fair value adjustments?

Yes. Good question on tax. When it comes to tax paid in the quarter, that's quite easy. Usually, we pay some small taxes during the year, but the main bulk, we pay in Q4. So there is actually not a large tax cost now in Q1 itself. There are so small or some minor companies we have in the group. When it comes to the tax calculation for Q1 itself, you saw it was NOK 76 million from the P&L. But if you see the notes to the -- in the report, you may see that there is almost a positive resource rent tax calculation this time, and that is actually based on the calculation from the fair value adjustment. We have to calculate the deferred resource rent tax on fair value adjustment. And since that fair value was in minus NOK 320 million, and we have to calculate a deferred one there together with the calculated for the profit in the period, it adds up to -- actually to a positive result. So -- but this is something we do during the quarters during the year. And -- but the final tax calculation, we always do in Q4 when we present the results.

But we do appreciate that this could be a bit complicated. So more details is to be found in the notes in the quarterly report. And if you are left with any question, feel free to contact Hakon and we'll be more than happy to follow up. It's very technical, some aspects here.

Yes. Exactly. Could you comment on salmon pricing? Is there still resistance around EUR 9.5 per kilo level, how are each of the geographical end markets performing?

We see a strong demand across the board. When you call the EUR 9.5, call it, EUR 10 per kilo market, we see some resistance in some geographies in, call it, most mature markets. But also note that the EUR 10 per kilo is in superior whole fish. It doesn't necessarily reflects the price going out from Norway because that's a mixture of both fillets and superior whole fish.

In addition to contracts, of course.

And in contracts, of course. So usually, a customer for us, they have some mix in contracts, some mix in spot and maybe something in value-added processing as well. So in total, the picture looks okay for them. But we see some resistance when you come into high levels in some mature markets in Europe. But in -- for us, at least, the overseas markets looks very good. And it's fair to say we have a higher share of value-added processing to the overseas markets.

Yes. Just to summarize, we feel that supply -- sorry, demand is very strong. We feel it's strong all over the -- all geographies, some mature markets, we meet some resistance, but our main problem is now to make sure that we have enough volume to keep up with the demand that we are experiencing to our different customers. And of course, also a lot of new customers looking at the door as well. So we're happy that we have this ramp-up planning volumes because that will help us in the years ahead.

And just to also add there, you may have seen that there has been a lot of, call it, seafood fares during the first half and most recently in Barcelona, where the overall tone from our customers was the same. They want more volume. They want more salmon and they -- some were eager to sign contracts for full year '25 at very high level. So there is a very good demand for our products out there.

Yes. Did you say that potential extra Icelandic MAB license was sterile? Is this the triploid salmon you phased out gradually earlier?

Yes, it's proposed to be sterile salmon for those 10,000 tonnes MAB. But the details, as we said today, is not clarified yet, the final confirmation, because there is different type of steroid technology to call it like that, and triploid is one of them. So that is not clarified yet. As correctly said, we phased out triploid in Northern Norway because due to fish welfare reasons, the food safety authority didn't want us to continue with it. So it's not used with conventional salmon. But this is something we need to clarify with the authorities in Iceland before we can get back to you with more details around it.

Yes. And a tax follow-up. And I assume this has to do with the implementation effect. But it says can you better explain the situation concerning the significant provisions for taxes you booked in 2023 P&L accounts for resource tax, what amount are you going to pay? And when the cash out for 2023 tax booked will occur? Is it already paid? Or will you still need to pay it?

Okay. So in last year, we booked NOK 4.5 billion roughly in taxes and a little bit over NOK 2 billion of those was the implementation effect. That is not a cash effect. That is basically a pure accounting view because they stated that we can't get a deduction of cost prior to '23. That means that we need to take a deferred tax, to call it like that, on all the costs we had on the biomass going into '23, that's the NOK 2 billion. The actual payable tax, as we disclosed last quarter, was NOK 464 million in payable from resource rent tax. In addition, we have payable from normal corporate tax, which was a little bit higher, over NOK 1 billion, all that is due in Q4 this year, that's when we paid the taxes. For more details and the exact figures, I would like you to go to the annual report, where we have it more broken down and also in different geographies.

Can you please comment on the profitability of the SalMar Aker Ocean?

Yes. So SalMar Aker Ocean had a result of minus NOK 5.9 million in this quarter, as you can see. I can jump to the slide here. You see it here. And it was basically harvesting from both units Arctic Offshore Farming in January and Ocean Farm 1 in March. In Arctic Off Farming, we also harvested in December. But the last cage, we harvested now in January was actually hit by string jellyfish. It didn't lead to so much mortality, but it leads to a lot of downgrades of the fish, meaning it affected the price achievement of the fish when we had to harvest it out. That is the main reason why we get a rather bad EBIT per kilo point of view here this quarter. When it comes to Ocean Farm 1, that actually performed quite well and also got a quite good price achievement. But the low capacity utilization of this unit in this first production cycle after it was upgraded meant that in EBIT per kilo, it doesn't gave that much. But if you look at the -- as you see on screen, the EBITDA on the -- from the farming result in the period was 19.3, which is showcased more relevant metric for our offshore operation as the depreciation is natural higher.

But the biological performance for both sites has been really good with the highest arrival rates, we have had, in 3 generation, the Ocean Farm 1, we didn't have any sea lice treatments at all, but the end of this cycle, we needed to have the first one. That also helps a lot when it comes to the quality of the fish, the number of downgraded fish -- or the lack of number of downgraded fish and also, of course, on the high survival rates. And we saw that with a smolt output on 500 grams, the production cycle was over 10 months. So the biological performance has been really good. So that gives us motivation to keep on developing these types of units and see how we can better them. Of course, as of now, with the tax regime, we are looking mostly with the -- in the current production areas. And we also see that we are putting new fishery out there now hopping in this week, yes. So the fourth generation is going in.

Exciting. What is the latest in achievement of synergies? Are you at 100% of targeted level?

Yes, we are at 100%. And we didn't disclose it today because we talked about it last time that we reached it early 2024, but we have reached that synergy target we set at NOK 844 million. We reached that. And now as we -- our CFO commented during the presentation today, now we are more focusing on the entire group in order to reduce cost and increase effectiveness in the entire group. We -- I can show you the slide we have today because it showcase how we think about it. And basically, we have -- we are launching a new improvement and strategy period now this year, which we will go through the entire group and how we can do it more effectively, optimizing the cost base, biological performance and so forth. And by the end of this year, we expect to share some details of this work because we are in the start of that now. And last time, when we did this was back in 2018, when we started a period like this, we increased the -- you can call it the difference from us to the peers in that period. And now we still see a huge potential for improvement. And especially since we now have a larger base to build it on, we see a large potential for improvement. So this is our focus going forward.

And it's also a natural next step because last year, we were very focused on getting out of those close to NOK 850 million in yearly recurring cost savings from the group that we bought, right, meaning [indiscernible] SalmoNor. And now we lift ourselves and our focus to look at the entire group, as Hakon said and see, okay, how can we strengthen the entirety of the new group and do it restarting such a strategy program and improved program is the best way to do it and look at the -- all of the group now as one big new SalMar and take the benefits out of that.

So do you see any additional synergies on top of what you already said? Or is that not the way you think any more and more as one group?

We see additional synergies, yes. But also this is a part of the work we are now in, to look at it and to quantify them and look where -- when we're going to attain them and so forth.

And there's a follow-up question on the tax. There has been a change in the notes for the full year 2023 tax regarding the calculated tax effect of adjustments. Can you explain the reason for that? It goes from minus NOK 243 million to plus NOK 520 million.

That was -- if it was 2023, I thought you were talking about the NOK 2 billion payable tax that we didn't do payable because of the resource tax clarification we got during '23. But when it comes to minus NOK 200 million to 500 million, I have to get back to that. But feel free to contact me, and I will give you a concrete answer. I just have to -- need to add the figures in front of me.

A follow-up on Aker or Salmar Aker Ocean, why are you using so diverse smolt size?

The reason why we had so diverse smolt size in those 2 production cycles as you see on the screen now. In Ocean Farm 1, it will be around 500 to 700 grams, which we will transfer to the unit. And Arctic Offshore Farming, actually was -- will be the same. But in the development licenses, which is on our Arctic Offshore Farming, it was planned to have a large-sized fish in short time production before you do that and convert. When we convert it, we will be as the same as Ocean Farm 1.

And when can you convert it?

We can start the process now after the first production cycles. But if you take lessons learned from Ocean Farm [Audio Gap]

Versus 1 year ago. Are you benefiting from this feed element price reduction? What about marine oil and small feed components?

Like I said earlier, yes, the vegetable prices has come down because they had a peak after following the start of the war in Ukraine. But when -- they have come down during '23 all vegetable prices and also continuing now in '24. But you see that the fish meal, fish oil prices and especially fish oil has increased and offset that effect basically in 2023. So now, as I said, in terms of the outlook of the new -- the Peruvian fishery is opening up for larger [indiscernible] signs of at least better yields so far, which is positive signals in order to get that down as well.

Yes. And feed price, of course, extremely important element, but it also comes down to what you pay in total for your feed, as I said, for the new parts of the coming into the group. And of course, also the feed conversion ratio, meaning however effective you are with the feed. So the feed cost is what we're looking at, which is a [Audio Gap]

That you had this quarter? Or is the intention that these should be excluded?

They are including.

And when it comes to the -- do you want to -- when it comes to the price achievement in the quarter, should we expect this to be similar in Q2 as well? Or how do you think about that?

If you look at the different segments, you should expect it to be somewhat similar, yes. The challenges, especially where Norway, it's not over by the end of Q1. We also saw challenges going into April. And we -- because the water temperatures have still been very cold, we see that it has ticked up now in early May. So we expect it to be still a problem in Q2, yes. But we want to -- we also expect gradual improvement during Q2.

What long-term synergies are you developing to fight jellyfish?

That is a difficult question, actually, because it's very little knowledge about the jellyfish itself, where it originates, why it came to large extent this time. The last time we had, it was more than 20 years ago. And our problem with that was that the best source of knowledge when it hit us end of last [indiscernible] was basically the people experiencing 20 years ago. So we have been in dialogue with research institutions, the ocean-based research institute in Norway and similar type of research institutes about getting more competence and knowledge about this. But this is something we need to -- are structuring now in order to learn more about it because we don't know enough about this type of jellyfish, actually, which is difficult. When it comes to what we have learned during this winter is that we have seen that the fish, which is -- has this natural slime on the body still, meaning it is not -- has not been treated with sea lice so much as others are performing well. They can handle the jellyfish more. So one of the things we are investing in this year is more gentle sea lice treatment technology, for example, sea lice lasers because we see that, that is more gentle to the fish. We can keep the sea lice levels down, and it has worked quite well in those areas where it has affected the jellyfish. But it's fair to say, it's hard to know this. We see that it's better. We still see the jellyfish today as we're standing here on stage, but it's a lower level compared to what see in Q1. So we are working very hard with this in order to prepare ourselves even better going into next winter if this string jellyfish comes.

Could you comment on the EU antitrust case?

Yes, it's not much to comment. It's not much news. Of course, we saw the EU antitrust came and said that they thought there was reason to look further into the case. Parties of the case has been provided with a lot of questions from the EU. We are now working -- we are working hard to answer all of those questions within the time frame, which is quite soon, and we will deliver that to the EU. And based upon that, we will have more questions or some sort of verdicts steady on, I think, in regards of no other news other than, of course, we are collaborating with everything we got to help shed some lights on the question that is asked by the EU. And of course, we are strongly against their intermediate conclusion that they have, and we try to argue at the best of our case to make them see this as well.

Could you comment on the potential increase in the, "Flexible capacity in processing," will this require more investment?

[indiscernible].

Yes, this new, call it, directly translated for Norwegian is environmental flexibility technology arrangement. Is it that what you mean?

I think it has to do with -- I mean processing capacity, how you need to -- I can be able to make more fillets, is my understanding of the question.