P/F Bakkafrost
OSE:BAKKA
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Earnings Call Analysis
Q2-2023 Analysis
P/F Bakkafrost
In its second quarter 2023 earnings call, Bakkafrost, headquartered in the Faroe Islands, presented mixed financial results. The company, led by CFO Høgni Jakobsen and CEO Regin Jacobsen, saw a second-quarter revenue of DKK 1.670 billion, falling short of the previous year's numbers for the same quarter.
Despite challenges, Bakkafrost reported high production in fishmeal and fish oil, marking an all-time high for the quarter. The company witnessed positive cash flow of DKK 376 million with all segments registering positive EBIT except for the VAP segment, which showed an operational EBIT loss of DKK 26 million, yet this was an improvement from the DKK 108 million loss in the second quarter of the previous year.
The seafood market experienced increased supply and a divergence in pricing between smaller and larger fish due to varying availability and demand. Prices in Norwegian kroner have significantly dropped in the current quarter, echoing the trend seen in the previous year.
Competitively, Chile marked a 6.8% increase in their harvest volumes, while North America witnessed a 16% decrease, primarily due to the exit from Discovery Island.
Operational EBIT dropped by a stark 40% to DKK 353 million, influenced by a 34% decrease in harvest volumes and substantial negative fair value adjustments stemming from lower forward prices and additional factors such as production costs and new tax regulations. Consequently, the company registered a net loss of DKK 123 million after tax this quarter.
New tax regulations have redefined production costs, with an increase from DKK 39.15 per kilo to DKK 42.22, which in turn affects tax rates and profitability margins. The Faroese farming segment saw a decrease in operational EBIT of NOK 43.76 per kilo, lower than the previous year.
Year-to-date, the operational EBIT stands at DKK 918 million, with adjusted earnings per share in the quarter at DKK 3.79 and NOK 10.98 year-to-date.
The net interest-bearing debt was reported at DKK 2.9 billion at quarter-end, accompanied by undrawn credit facilities amounting to over DKK 2.3 billion, indicating strong liquidity.
Even with a reduction in harvested tonnes by 19% year-over-year, the smolt transfer increased 6% and 11% by volume in the Faroe Islands and Scotland, respectively. The average sizes of transfers were also up in both locations. Meanwhile, operational margins varied significantly across regions, with the Faroese farming operations experiencing a drop from 54% to 27%, and the Scottish division seeing an improvement from 9% to 12%.
In the Faroe Islands, the observed margin decline of NOK 19.62 per kilo was attributed to smaller fish sizes with higher associated costs. Nonetheless, there is an expectation of increased harvest weights in the upcoming quarter.
The value-added products segment remained resilient with positive margins in spite of high salmon prices and slightly reduced volumes. Bakkafrost's long-term contract strategy for selling its products could face a revamp due to changes in the Faroese revenue tax that may alter its impact on operations.
The company achieved a milestone in raw material sourcing, doubling to a record level of 156,000 tonnes from the previous year. This boost is concurrent with the ICES's recommendation for an 81% increase in blue whiting catches in the North Atlantic for the year, providing a favorable sourcing environment amid a global decline due to low catches and reduced quotas in Peru's key fishing season.
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Good morning and welcome to the presentation of Bakkafrost's Report for the Second Quarter 2023 and the First Half of '23. My name is Høgni Jakobsen. I'm the CFO of Bakkafrost. And this morning, we are webcasting from our headquarters here in the Faroe Islands. The agenda today is first a summary of the second quarter. And then we look into market and sales before the financials for this quarter. And then Regin Jacobsen, our CEO, will take you through the more detailed information about the segment performance in this quarter and then take a look at the outlook.
So to sum up this quarter, the revenues were DKK 1.670 billion, slightly short of the revenue that we had in the second quarter last year. Operational EBIT was DKK 353 million compared to DKK 587 million last year. However, last year, in Q2, that was our strongest quarter ever in Bakkafrost's history. The main driver for the lower operational EBIT in this quarter was the low harvest volumes that we had in the Faroes and also lower harvest weights. We harvested 8,658 tonnes in the Faroes which is approximately 4,500 tonnes lower than in the second quarter last year.
In Scotland, we harvested more volumes in this quarter than last year, 7,346 tonnes.
Feed sales were slightly lower in this quarter, 30,231 tonnes. But overall, in our FOF fishmeal, oil and feed segment, there has been very high activity in this quarter. And we have record high sourcing of marine raw material. We have sourced 148,000 tonnes in this quarter compared to 97,000 tonnes in the second quarter of last year. Year-to-date, as of today, we have received around 380,000 tonnes of marine raw material in our FOF segment, which is more than any full year total for Bakkafrost ever.
As a result, the fishmeal and fish oil production in this quarter was high, all-time high for quarter.
Cash flow was positive in this quarter with DKK 376 million. And all segments have positive EBIT except for the VAP segment, which had an operational EBIT of minus DKK 26 million, however, an improvement from the minus DKK 108 million that we had in the second quarter last year. Negative margins in the VAP segment is common when we have high salmon prices. In May, we paid out dividends corresponding to DKK 10 per share, which amounted to DKK 591 million.
And just a short note on segments. On our Capital Markets Day in June, we announced that we plan to restructure our reporting and moving from having 4 segments to 7 segments in our financial reporting. The plan was to have that ready by this quarter. Unfortunately, that work has not been completed, which is why this report follows the structure that we have been using so far. Once the re-segmentation is completed, hopefully, for the next quarterly report, the Q3 report, we will provide both actual and historical figures in the new 7 segment structure that we announced on the CMD.
And then market and sales. If we look at the global markets, the average price for 4- to 5-kilo superior salmon in the quarter was NOK 108.5 of a kilo, which is slightly higher than the record strong second quarter of last year. However, this is a Norwegian kroner. And the Norwegian kroner has lost strength towards the euro and also to the Danish kroner, which is our reporting currency. So in euro, the average salmon price for the quarter was around 15% lower than the same quarter last year.
Overall, the supply increased in June, especially of smaller fish, while there has been less availability and strong demand for large fish in the spot market. And this has led to an increasing differentiation or a difference in the price for smaller fish and large fish in the quarter.
Prices in Norwegian kroners have dropped significantly in the third quarter, just as we saw also last year. But it's staying slightly ahead of the price development that we had last year. In this quarter, global sales to Europe was down 2%, but very large differences in the different countries, European countries. For instance, Germany and Sweden had significant drops in sales. Global sales to the U.S. was down 2%. The U.S. market has otherwise been a very strong market for a very long time, but it was down 2% in this quarter.
Global sales to the Russian market increased by 69%, mainly supplied from Chile. And sales to Greater China also increased with 57% this quarter, driven by strong demand also for large fish and mainly supplied from Norway and Chile. The Japanese and Asian markets were weaker in this quarter, primarily affected by higher airfreight costs.
On the supply side, global supplies was quite stable in the quarter, only a 0.3% increase if we include inventory movements. Supply from Norway, the Norwegians have harvested 3.1% more than the same quarter last year. It was low harvest in May, but higher-than-expected harvest in June from Norway. Average weights in Norway dropped around 3% to 4.26 kilos whereas feed sales in Norway increased during the second quarter by 8%.
In U.K. and Scotland, the harvest increased 4.7%. Also here with a slight 1% drop in average harvest weights. Harvest from the Faroes dropped 13.7%, 1% increase in harvest weights, 10% increase in feed sales and the low harvest volumes that we also have been contributing to is to build biomass in the Faroes. In Iceland, there were very little harvest in this quarter due to biological issues but a very significant increase in feed sales of 20%.
Chile increased their harvest volumes by 6.8%, and North America has dropped around 16% combined North America and Canada, to a large extent, driven by the exit from Discovery Island. And then into the financial group P&L. As mentioned in the summary, we had a slight drop of revenue compared to the second quarter of last year, a 1% drop and delivered DKK 1.670 billion in revenues. Operational EBIT dropped 40% to DKK 353 million. We had 34% lower harvest volumes, as mentioned before.
If we look at the P&L, there is a large negative development on fair value adjustments in this quarter, minus DKK 432 million compared to plus DKK 576 million in the same quarter last year. The biggest drivers for these adjustments are a lower forward price, which contributes to more than DKK 400 million in effect on the fair value, so minus DKK 405 million to be exact. We also have changes in production costs and a new revenue tax, which also affects the fair value adjustment and changes to the total biomass and the size distribution. As a result, profit after tax in this quarter was minus DKK 123 million.
And a note on the new revenue tax, which is in effect as of 1st of August here in the Faroes. The difference between the Nasdaq price and the average production cost is what is used to determine which tax rate is applied in the revenue tax and the greater the difference, the higher the tax rate. The tax rates go from 0.5% to 20% of the Nasdaq value of the fish.
So far, the average production cost that has been used in this calculation has been DKK 39.15 per kilo. This has now been recalculated by the authorities and set to DKK 42.22, which means around NOK 4.8 increase in the production cost used in the calculation. So that means that the Nasdaq price needs to increase by NOK 4.8 compared to previously -- in previous calculations in order to trigger a certain tax rate on the scale.
If we move on to the margins. The Faroese farming segment. In this quarter, we had an operational EBIT of NOK 43.76 per kilo, which is lower than last year and again, primarily driven by the low volume and lower harvest weights. The Scottish Farming segment improved its margin by around NOK 7 per kilo and delivered NOK 15.22 per kilo. The VAP segment also improved its margins by NOK 16.37 and delivered a margin of minus NOK 8.08 per kilo. And EBITDA in the FOF segment was 17.2%.
Year-to-date, the operational EBIT is DKK 918 million, and adjusted earnings per share in the quarter was DKK 3.79 and NOK 10.98 year-to-date.
If we take a glimpse at the balance sheet and look at some of the main changes there, there is an increase of DKK 304 million for property, plant and equipment with the end of the quarter amounting to just short of DKK 6 billion. Inventories are high, very much driven by the high activity in the FOF segment and amounted to DKK 1.050 billion at the end of the quarter. Cash and cash equivalents reduced by DKK 176 million to DKK 544 million, and the equity ratio has dropped from 62% to 61%.
Cash flow from operations were positive with DKK 376 million, minus DKK 304 million from investments and financing was minus DKK 99 million. In this quarter, we have increased our net interest-bearing debt by DKK 554 million. One large contribution to this increase is from the dividend payment that we made amounting to DKK 591 million. The net interest-bearing debt was DKK 2.9 billion at the end of the quarter, we had undrawn credit facilities of just in excess of DKK 2.3 billion.
And now Regin Jacobsen, our CEO, will go through the segment information with you.
Good morning, everyone. I will go through the segments for the quarter. In this quarter -- in the second quarter of '23, Bakkafrost harvested -- we harvested 16,000 tonnes compared with 19,700 last year, a drop of 19% from last year to this year. The drop was driven by a 34% lower harvest in the Faroe Islands from 13,100 to 8,700 tonnes. The drop in volume was primarily driven by lower weight, which dropped 9% from 4.7% to 4.3%, which was unfortunate development in this quarter.
And during the second half of the year, we expect now to increase the harvest weights back to the level where we used to be.
In the first half, this was mainly driven by the unfortunate early harvest in January in Hvannasund. If you look at the breakdown of the numbers in Faroes of the harvest, in this quarter, 64% of the harvest was from the West division in Sundalagio; 21% was from the South division, in [indiscernible] and Hov, and 15% was from the North division from Kunoyarnes and Hvannasund. The smolt transfer in this quarter increased 6% to DKK 3.6 million versus DKK 3.3 million last year. And the size was 23% up from 326 grams last year to 400 grams for the second quarter this year.
The temperatures in the Faroese farming floors increased in May and June to a higher level, but still within the normal range in the last 20 years. We don't think this compromises our biological performance in the Faroes with this temperature. The harvest weight was in Scotland increased 15% to 4.6 kilo from 4 kilo last year. Smolt transfer in the quarter increased 11%, to DKK 3.1 million from DKK 2.8 million last year. And the size was 24% up to 125 grams from 101 gram last year.
The new hatchery at Applecross transferred the first trial batch with 250-gram fish in the second quarter this year, and this will be a new data point for us following that first batch. The second large batch from Applecross will be transferred in the fourth quarter. That will be a large batch of around 1.5 million fish.
If you look at the farming operation in the Faroes, the EBIT dropped DKK 375 million in the quarter -- to DKK 242 million from DKK 617 million last year. The drop in operational EBIT was 61%. The harvest volume was 34% down and measured in euro, Nasdaq price dropped 15%. That was also the element of the average size of the harvested fish, which impacted the price achievement, of course, also the cost.
The operational EBIT margin dropped from exceptional 54% last year to 27% this year. The farming operation in Scotland increased DKK 30 million, the EBIT, in this quarter to DKK 71 million from DKK 41 million last year. The improvement in the operation in the Farming division in Scotland was due to a good period from October last year, given good conditions to grow the fish to larger sizes with stronger biology. With a larger average size on harvested fish price achievement improved significantly. The operational margin improved from 9% to 12%.
The temperatures in May and June increased to a higher level, but within the same range as the last 20 years. This means, however, that the temperature in June was -- in June this year, was the same as July last year. And July '23 was on the same level as August '22. So 1 month earlier. Today, in August, the temperature seem to have muted somewhat.
So at the moment, it is like a 0.5 degree above last year. So it seems to be coming down.
The Faroe Islands reduced the margin by NOK 19.62 per kilo in the quarter to NOK 43.76 from NOK 63.38 last year. Lower-sized fish with higher cost and lower value per kilo impacted the margin negatively. The low harvest volumes were driven by lower number of harvest, but also the lower mean weight, which was a result of the unfortunate development of the early harvest in January and a continuous early harvest of fish mainly driven by contracts. We see increased harvest weights going forward in the third quarter and forward. In our Faroese farming operations, the sun seem to be appearing from the sky cover in the last 9 months.
In Scotland, we improved the margin by NOK 6.93 per kilo to NOK 15.22 from last year NOK 8.29. The first 5 months of '23 were relatively good. But towards the end of the quarter, mortality levels increased due to environmental challenges impacted 3 of our sites with jellyfish. Jellyfish blooms have created some mortality on these 3 sites from -- which are located from the south to north and also in East in our total area. The common factor for these sites seem to be that the impacted fish have their second summer in the sea and should have been harvested in the fourth quarter.
Now we are ramping up harvest on this fish, which will drive down the average weight of this fish and therefore, volumes will be impacted on the costs on the same. The blue skies from Q2 in Scotland are darker in the third quarter. Cost of mortality rates will be negatively affected and can compromise planned harvest in '23 in Scotland with 5,000 to 6,000 tonnes depending on the continued biological development.
Growth in biomass in Faroes in the first half of '23 was driven by 4 different factors. 1-year delay of hatchery expansion in Glyvradal Norotoftir, the larger smolt and early harvest in January of the site harvest, creating rolling gap during first and second quarter. And finally, contract-driven harvest fulfilling agreed deliveries. The growth of biomass creates, however, a good platform of upscaling harvest going forward. The new capabilities with dual freshwater treatment and good biology have created a good platform for healthy biomass and driving mean weight back up where they must be to produce large, high-quality salmon and create good value for our operations.
Low mortality and good growth has continued during the quarter and into the third quarter.
The value-added products segment performed well in the quarter with positive margin despite high salmon prices. And the negative effect is by a bit lower volumes. Value per kilo sold products increased around 27%. However, 13% per kilo had [indiscernible] as yield from raw materials is around 50%. As a consequence of low harvest activity, the allocated share of Faroese harvest into this quarter, to [up] was 57%.
Our strategy remains though to sell around 40% of the harvested volume of salmon as products on contract.
The contracts are fixed with 6 to 12 months period with fixed prices. Bakkafrost contract strategy is impacted negatively by the changes of the Faroese revenue tax made effective from the 1st of August. The Faroese government has, however, indicated that adjustments could be made to the revenue tax in order to reduce the negative impact on contracted sales of VAP products. This remains, though, to be seen. Bakkafrost might revise the VAP strategy depending on this outcome.
The FOF segment has delivered a record high operation in the first half of the year. The inventories are full and of course, a lot of the finished products are therefore still at inventory at cost price. The EBITDA increased 8% from DKK 119 million last year to DKK 128 million this year and the margin was 17% versus 23% last year. External fishmeal sold tripled from 5,200 tonnes to 21,000 tonnes in this quarter. Total feed sales however dropped 3% from 31,200 tonnes to 30,200 tonnes in this quarter.
Raw material sourcing doubled in the quarter to a record level of 156,000 tonnes from 78,000 tonnes last year. Year-to-date, sourcing of raw material is above any previous full year volume since 1966. Our inventories, both of fishmeal and oil are at record high, both in volume -- and volume, a share of them will be sold externally as sourcing is significantly higher than needed for internal use.
Our sale of fish feed in '22 was 128,000 tonnes and is expected to increase to around 130,000 tonnes this year. Raw material sourcing is difficult to forecast. But in general, the scientific recommendation for catches is a good indicator. The ICES recommendation for blue whiting catches in the North Atlantic increased 81% in '23 versus last year. The timing is good for sourcing possibility as supply and global market for marine raw materials have been challenged very much because of the low catches and reduced quotas after the El Nino canceled Peru's key fishing season.
The exceptional development of fish oil has continued in the quarter and into the third quarter, boosting the gap between marine oil and vegetable oil at all-time high. This will certainly have some consequences in the market.
Looking at the forward-looking supply situation in the market, we see supply, which was flat coming out of the second quarter compared to last year. And according to the latest estimates from Kontali, we expect this, together with good -- with the food inflation that we have seen in the last 2 years to be a driver for a tight market. However, we see that the high salmon prices and the difficulties in the market are causing some challenges for the end consumer with these high salmon prices. Salmon spot prices measured in euro were 15% down in this quarter compared to last year. However, 1% up in Norwegian kroner, but that's due to the FX effect.
In general, consumers are paying in euros and U.S. dollars. Therefore, the drop of 15% is more relevant than the 1% increase.
The supply in the second half of this year is expected to increase 2% to 4% and will affect the prices in the market. Next year, the supply growth is expected to be around 3%. And there will be a similar development between the first and the second half of the year next year also. There's no doubt that the extreme increase in food prices has had an impact on demand. Value of purchase seemed to stay relatively stable, but volumes dropped per customer.
However, more consumers are getting used to high food prices, the new normal is driven by higher costs for all food producers, which also need to get their bills paid. The global harvest was flat in the first half of this year and is expected to be muted for the period in front of us, and therefore, there will be a tight market. There will be a seasonal drop in prices for the second half of the year and a seasonal increase of prices for the first half of next year. Our forecast for this year is 93,000 tonnes. But with darker skies over Scotland, 5,000 to 6,000 tonnes are at risk.
And therefore, the total volume could be 87,000, 88,000 tonnes for the group with Scotland dropping to around 24,000 tonnes. In the third quarter, Faroe Islands is expected to harvest around 17,000 to 18,000 tonnes and sizes are better than in the first half of '23. The opposite is the case in Scotland, where sizes have dropped in order to harvest the fish at risk. We follow the situation closely in Scotland and evaluate a range of risk mitigation measures.
The contracts are -- we have signed are at 26%, not 23% of the volume for the second half of '23. The FOF segment will increase in the third quarter. The sales will increase our feed in the third quarter and is expected to reach 130,000 tonnes for the full year. And the positive development with sourcing raw material for fishmeal and oil has continued into the third quarter. I have a few slides on the development we see, which we announced on the Capital Market Day.
And just to rephrase or to recap a bit on our focus. We focus on growing sustainably. We want to improve our performance, both in the Faroe Islands and in Scotland. . The business case in Scotland is to lift the quality of the operation closer to Faroe Islands and similar proven technologies to drive the change.
Faroe Islands has already had a strong development over the last 15 years, but there are still room for improvement. Smolt weights will increase both in Faroes but especially in Scotland. Feed conversion ratio is in focus in both regions, but especially in Scotland. Yield per smolt, average harvest weight and survival rates are interlinked and 1 of our important KPIs to improve in both regions. In Faroe Islands, 3 hatchery expansions are finalized just a few weeks ago and will gradually increase production of large smolt to lift volumes and size further in Faroe Islands.
The new hatchery in Faroes will most likely be built around '24, '25, the new additional hatchery and start delivery in '26, '27. In Scotland, the hatchery expansion already in place is at Applecross, AP4 is starting to full operation now. And the remaining part of Applecross referred to as AP5 and AP6 will be finalized during '24, given a production capacity of 7 million smolt at 500-gram or 14 million at 250-gram if we choose to do so. The next expansion at [Farley] will hopefully be in operation in '26.
And to recap on the overall plan, this is a DKK 6.3 billion CapEx plan, which we presented on our Capital Market Day in June as a case to grow the production to 165,000 tonnes combined in '28 and the actual capacity across the whole value chain to 200,000 tonnes. The updated plan is to focus on site optimization and new technology. Cost efficiency is key and optimizing return on investment is crucial. Therefore, we will continuously reevaluate all investment cases depending on the market conditions and general financial environment.
In general, Bakkafrost is continuously committed to around 50% to 60% of upcoming 12 months investments, and we can postpone or cancel not contracted plans if the expansion conditions or outcome changes. So therefore, the plan is, of course, at all times to be reconsidered, but this is our main plan. And around 2 years from now, we will update the next plan. So we have been doing this 5 years investment plan since 2013, and this has been a good way to drive our company forward. So this was our second quarter presentation.
And now we are open to take questions if there are any.
Yes. Christian Nordby, go ahead, please.
So I have a question regarding Scotland, where you see that there are darker clouds ahead. Can you comment on the situation, how you see based on information you have today, second half versus second half last year? Is it worse? Or is it in line? Or is it somewhat better?
And how does the dual treatment system you have there helped you this year versus last year? And you mentioned it's been jellyfish, how has the gill health been as well?
Yes. So yes, thank you for the question, Christian. As you said, darker skies over Scotland, we had hoped that our good capacity of freshwater dual treatment systems would help us through these circumstances. And it seems to protect our fish, but when you have a very heavy jellyfish attacks, which had been the case in the last 2 months from -- especially on 3 sites with fish, which have been standing 2 years in the sea, it seems like eventually after a long time, they do not cope so well. So therefore, despite we have good capacity of protection, we lose more fish than we would like to. And therefore, we have to harvest.
The mortalities in July this year were higher than in July last year. The mortalities in the first and second week of August this year were higher than last year. We have good capacity to treat with dual freshwater system, which seems to protect the gills well. But as I said, these 3 sites are all with fish in the second summer in the sea. We have so far no sites with fish, only one summer in the sea impacted. So that's at least one of the common factors.
So there are, at the moment, several impacts or several measures that we are looking to take to make sure that we don't repeat the same situation next year. For this year, however, we have to harvest these 3 sites early, and that will reduce the volume. Auckner? Alexander?
Yes. So I have 3 questions. One is on the cost development in the Faroe Islands in the second half of this year and into next year, particularly given the increase in raw material costs into feed. So comment on that. The second question is on the fishmeal and oil business.
You have higher sales of meal and oil versus last year and higher prices. Some of it surprised that EBITDA margins is dropping. If you could comment on that. And the last question is on the low harvest weights in the Faroe Islands this quarter. I'm still not completely sure I understand why you had to take out the fish early.
Yes. Thank you, Alexander. So commenting on the costs, there is, as you know, it takes 3 years to grow a salmon. And salmon price -- sorry, feed prices in the market have generally increased very rapidly over the last 18 months. I think that generally, you can say that feed prices have increased around 50% over the last 18 months.
So we have still not seen the full impact of this cost increase. And on top of that, we still have also other cost inflation from salaries, which are increasing more than normal and other costs as well. So there is still a development of increased costs in farming operation all over for ourselves, we have also seen the highest cost increase ever over the last 18 months, and there will still be a gradual cost increase over the next quarters.
Coming to feed, producing internally is an advantage, especially in these times where fish oil are very scarce. And this is a very exceptional situation where we have all-time high internal production, that gives an advantage. But as said, we put inventories at cost. So that means that we have a lot of inventories, which has been produced, but at cost. So that's probably the driver for the drop in EBITDA margin.
It depends on what value the inventory has been set out and the high production. We also have -- we have full inventories both in Faroes and have also some external inventories outside Faroe Islands of raw materials. So I guess that's -- do you have any other comment, Høgni on? No. Coming to the low weights and why they are so low in Faroes.
As said in January, we emptied 1 of our sites. This came into the cold season into the cold season where the growth is very low. So fish that should be harvested in February were already harvested in January. And thus, we have the contracts, which is both an advantage and sometimes a disadvantage. We had to continue to harvest because to fulfill our commitments.
In the first half, contract here is relatively high. In this quarter, it was 56% of the total sales, and that's relatively high. So it has been very much driven by the need to deliver contracts. So going to the next site to harvest means that we had to harvest smaller fish. And with low volumes available in this period and low growth, this has been a rolling snowball in front of us during this period.
Now we are coming into larger batches. And as normally, we would have dropped biomass by around 2,000, 3,000 tonnes in the first half. Instead, we have built biomass this year. So it's also a combination of the fact that we are going to larger smolt and the combination where we don't have the sites available for harvest in the first half that we used to have because the system is changing because we are going from 2 years' production time to 1-year production time. So there's a couple of unfortunate combinations.
Probably that did not give a full flavor, but that's -- I think that's what I can say. Alex, go ahead.
Three from my side as well, please. First 2 on Scotland. You mentioned in the presentation you released a batch of trial large smolts in the second quarter. It's very early days, but can you give us a little flavor for how that's been performing in the first couple of months? The second question, you mentioned you're evaluating risk mitigating measures and maybe even more farming equipment in Scotland.
You talked about early harvesting, but could you expand on anything else you're considering and whether that would involve additional CapEx from your side above and beyond the plan outlined at the CMD. And then the final question, just to follow up on the feed division. Clearly, as you highlighted, fish oil price has been going up a lot. Does the high sourcing environment give you any possibility to sort of source lower prices than that and see a little less correlation to the rising price? Or are you seeing exactly the same in the price you're sourcing at?
Thank you, Alex. The trial with large smolt, what we can already say now is that this fish will only be one summer in the sea. This fish is already now at 1.3 kilos. And that means that this fish will be harvested during the first half of next year, hopefully at good sizes. That is very, very important for us because we think that this is one of the drivers for us to reduce the risk in Scotland. So this fish that was stocked in the second half would normally go 2 years in -- on the sites. But that will not be the case because of the size of the smolt.
The next batch, which is planned to be transferred in November will also only have 1 year in the sea. So I think that is very interesting to follow. And with Applecross only in place, our strategy is to go to 500, but it probably is a better idea for us to use the capacity we have to go to 250, so that we -- sooner rather than later, can take all fish only into one summer in the sea. So that is, I guess, the first indications that we will use this information to see if we can increase the survivability in Scotland so that we have a more healthy operation. Coming to the risk mitigation.
We are looking at several things a few of things which can be done early, not very costly, but with ideas from Faroe Islands, I will not go into details, but they are not very capital intensive. So it is not going to impact very much on CapEx. It's just a minor. And then it is more operational. If we can be more -- there are some ideas how we can set up operations more clever.
There might be some sites that we should avoid using during the third quarter where we have experienced losses. So that is some of the things. But we are, at the moment, of course, brainstorming all ideas that we can come up with especially looking into next year. So I guess that's what I can say there.
On the feed, on the prices on the sourcing, we have a good position, of course, with a lot of raw material coming in, and that should have a positive impact using our capacity to a full capacity utilization is, of course, an advantage and should be seen. Also with a lot of processing in Faroes and off-cuts that should also be an advantage. So in general, I would say it should be an advantage. I don't think I can say so much more than that. Nils?
Yes, another question of feed...
Maybe you can present yourself.
Sorry, Nils Thommesen from Fearnley Securities. On the feed and the formula you have, you have a higher marine content than other farmers. Have you considered in this market environment to produce the share of marine environments, both to reduce the cost of the feed, but also to capitalize in the FOF segment.
As you said, we use a higher ingredients of raw materials from marine origin. And that has been a key driver for us to obtain higher value in the market because of higher Omega-3 and marine content, and that is very important for our branding strategy. So we -- and as we have -- these are our local raw materials, and we think that is also driving our sustainability because it's a low CO2 footprint. So we are continuing our strategy on feed content. Martin Kaland?
Martin Kaland, ABG Sundal Collier. I have 2 questions. And the first one is another one on the expected cost development at the Faroes in the second half because I would expect that you should benefit from increased harvest weights and increased total harvest volumes. So should that be enough to offset that gradual increase in feed costs, do you think? And the second question, do you expect the same volume distribution at the Faroes next year as you have seen this year with these very low volumes in the first half or could you get back to the historical harvest distribution?
Yes. Thank you, Martin. So first on the cost, Clearly, there will be a benefit on cost development in Faroes in the second half of the year because of larger volumes that will be a benefit. It will also benefit with larger fish. So those 2 takes the -- is in the right direction.
I don't have the data behind me to say that this will offset the development in costs, do you have any more flavor on that, Høgni?
Not directly, but volumes are a quite significant driver of costs in general.
So we don't have a clearer answer than that, that volumes are important. But in general, the drivers on cost from feed are very, very strong. And as said, it takes 3 years to grow a salmon. So this is a result that is a bit -- there's a time lag -- that's a time lag in -- when you see the costs coming into the market. So I would say that it is likely that cost will still increase in general for farmers for the next couple of quarters, and that's also for ourselves.
On the volume distribution for next year, I think that we should be better to give quarterly volume guidance. That's why also we mentioned now the volume for the third quarter. And I think that we will give an overview on expectation for quarter when we are going to give our volume for next year. But it is likely that we will have more volume in the first half of next year, but still, there will be more in the second half. When I say more, I mean more than this year.
But we will confirm that on the next presentation when we give volume for next year, when we can give more detailed information on the quarters, I think that will be beneficial.
I think we can take the last question from Wilhelm Dahl Røe.
Wilhelm? Wilhelm, can you go ahead? Wilhelm Dahl Røe.
Yes. Sorry. So Wilhelm from Danske Bank here. Just a quick question on the incident based mortality at the hatcheries in the Faroes. Could you just elaborate a bit on what's the reasoning behind the incident based mortalities? And if this might be a risk going forward?
Yes. Thank you. We had the 2 hatcheries in Glyvradal and Norotoftir starting the operation in the new sites. And the first incident was at Glyvradal, where there was -- from the construction, there was a tube of foam, construction foam, which was inside one of the water tubes or water...
Water pipes.
Or water pipes. And after a couple of weeks, this foam tank exploded. So this was some remains from the construction that had not been removed. And that killed unfortunately a batch of fish because of the poison coming from this foam. So that was very unfortunate. This was a hidden failure, you can say, from the construction. Apart from that, Glyvradal has had a successful start. So you can say when you start a new site, there are some risks especially in the beginning when the handover is from the construction. And of course, we are eager to start the operation sometimes early.
In Norotoftir, which is the second hatchery that we have started here in the Faroes during the first half of this year, we had an incident, this was a Saturday morning. the electricity was a bit unstable in the area. So there was a switchover from external electricity to our backup systems. And during this, there was a failure in some of the oxygen systems. And 1 of our new departments with 4 tanks, did not give alarm correctly.
So the operators on site did not prioritize this during this period for 1 or 2 hours. When they discovered the failure, a lot of fish had already died. There is an automatic alarm system on oxygen that should turn on. And there was also some mechanical failures on this automatic alarm system, which caused high mortality.
So I would categorize both of these accidents to be related to the start-up and where there is a higher risk and a lot of things that can happen when you start up a new system. And unfortunately, we have seen also similar things at Applecross, which we also have told you about.
Thank you, and thank you for all the questions, and have a good day.