P/F Bakkafrost
OSE:BAKKA
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Earnings Call Analysis
Q2-2024 Analysis
P/F Bakkafrost
In the second quarter, Bakkafrost reported revenues of DKK 2.067 billion, representing a remarkable 24% increase from the same period last year, reflecting a growing demand for their products. Despite being impacted by a general strike in the Faroes which halted operations for four weeks, production volumes remained robust. The operational EBIT rose to DKK 388 million, a 10% increase from DKK 353 million last year, primarily driven by a significant 35% growth in harvest volumes.
The strike during the quarter caused a crucial setback, pushing around 4,000 tonnes of fish harvest into the subsequent quarters. This led to a shift of high-value fish sales to a lower price segment as the market normalized. The company is now adapting its strategy, with a keen focus on cost management while ensuring robust operational plans to recover lost ground in the coming quarters.
Bakkafrost has taken decisive steps to manage costs amidst changing dynamics, including workforce reductions from about 650 to around 400 roles, as they mothball operations at one of their processing plants. They expect capital expenditures to be reduced by DKK 300 million this year and a further DKK 500 million next year due to adjustments in their five-year investment plan. This restraint in spending is aimed at preserving cash flow as they navigate through transitional challenges.
Looking forward, Bakkafrost is expecting a total harvest of approximately 88,500 tonnes for 2024, with 63,500 tonnes from the Faroes and 25,000 tonnes from Scotland. A stable demand picture is being observed in Europe, which is crucial for balancing the overall supply and demand across global markets. However, they anticipate a moderated supply growth of 4% to 6% in the latter half of the year.
For the first half of this year, the operational EBIT reached DKK 1.098 billion, and the adjusted earnings per share year-to-date stood at DKK 11.03, reflecting the company’s strong performance despite operational disruptions. The focus moving forward includes enhancing fish welfare and optimizing operations to ensure quality, which should lead to better margins and profitability as market conditions stabilize.
In Scotland, Bakkafrost's operational EBIT showed a notable 146% improvement, hitting DKK 133 million compared to DKK 52 million last year, aided by larger harvest volumes even though the average weight of fish decreased. The operational improvements have significantly reduced mortalities, enhancing the overall health and quality of the fish. They are now poised to see larger smolt entering the marine phase, promising better yields moving forward.
Bakkafrost is navigating a complex landscape with strong market fundamentals and operational adjustments. Their emphasis on cost management, investment prudence, and an adaptive harvest strategy positions them well for future growth. As they move through 2024, the combination of operational improvements and a focused approach on market demands could very well enhance their profitability and shareholder value significantly.
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Good morning, and welcome to the presentation of Bakkafrost results for the second quarter this year. Webcast is here from Oslo. My name is Hogni Jakobsen. I'm CFO of Bakkafrost, and I'm joined here this morning by Regin Jacobsen, our CEO.
First, please consider our disclaimer regarding forward-looking statements, which is included in the presentation.
The agenda this morning is first an overview of the second quarter. Then we continue with markets and sales, operations and finally, outlook. There are also some slides included in the appendix, those will not be present this morning.
In the second quarter, we had revenues of DKK 2.067 billion, around 24% up from the same period last year. Group operational EBIT was DKK 388 million, up from DKK 353 million last year. Faroese harvest was 10,226 tonnes around 1,600 tonnes more than the same period last year. The Faroese harvest was significantly hampered by the 4-week strike that we had in May and June during which we could not do ordinary harvest. So this reduced the overall harvest for the second quarter with around 2,300 tonnes compared to our original harvest plans that we announced in the previous presentation. That harvest is then pushed into the second half of this year.
In Scotland, we harvested 11,366 tonnes, which was around 4,000 tonnes more than the same period last year. FOF division had sales increased by 9% to around 33,000 tonnes of fish feed. The strike also affected the activity in the FOF segment, especially on the external sales and sourcing of raw material. Sale of fish oil was 6 tonnes in this quarter. Marine raw material sourcing dropped from 148,000 tonnes in the second quarter last year to 91,000 tonnes in this quarter. An external sale of fishmeal was 16,000 tonnes compared to 21,000 tonnes last year.
Cash flow from operations was positive with DKK 1.036 billion up from DKK 376 million last year. And all segments have positive EBIT, except the Scottish freshwater segment and the Sales and other segment. We also paid dividends in this quarter, DKK 515 million.
Moving on to markets and sales. Beginning with the global market. The average price of 4 to 5-kilo superior salmon in this quarter was NOK 111.82 per kilo, around 3% higher than the same quarter last year and 1% up compared to the first quarter. Prices were very strong at the beginning of the quarter but dropped fast and deep towards the end of May. The market was affected by a normalization of the volumes of large fish. The issues that previously was in Norway with downgrade fish and winter wounds eased off. That normalization came faster this year than we have seen in previous years. Consequently, the price gap between large and small fish reduced in the quarter.
According to the latest update from Kontali, sold quantities to -- sold continues to the market, global sales in this quarter has been quite stable compared to the same period last year, with only 0.4% reduction in volumes. Demand in Europe has been strong. Global sales to Europe increased 3%, which is in line with the increased production volume coming from Europe. The U.S. market was weaker with a 7% drop in volume being sold to the U.S. market. And lower Chilean volumes is one contributing factor to that development. Also to the development in sales to the Russian market where lower supply from Chile contributed to a drop of 47% in volume sold to Russia in this quarter.
China dropped 3%, partly also affected by the low supply from Chile, whereas the ASEAN market as a whole was quite stable. Sales to other markets increased by 12%. That was mainly to Australia, Middle East and Canada.
Global harvest in this quarter dropped by 1% with an increase in Europe by 3%. Harvest in Norway was down 2%, especially driven by lower volumes coming in June. Incoming biomass in Norway was lower than normal, and growth was moderate. However, that picked up significantly in July and also in August, which we can see in the 14% to 15% increase in the feed sales in July in Norway. And also, we see an increase in that in August. Harvest weights in Norway increased 3% to 4.38 kilo. In Scotland and Faroes, there was good growth and also positive development in the harvest volume. Improved biology in Scotland with reduced mortality, we had increasing harvest base as well from 4.25 kilo to 4.4 kilo in Scotland and an increase in feed sales in Scotland by 6%.
In the Faroes harvest weights increased from 4.78 kilo to 5.01 kilo, and feed sales increased 11% in the Faroes. Harvest again in the Faroes was significantly hampered by the strike, but nonetheless, increased 6% in the first quarter. Harvest in the U.S. market or in the Americas dropped 7%. That was mainly driven by the 12% drop in Chilean harvest. Average weights in Chile were stable at 4.5 kilo.
Moving on to finance. This picture, by the way, is taken a week ago, approximately from Loch Fyne, it is in Scotland, a beautiful salmon. And starting with the P&L. Revenues in this quarter increased from DKK 1.670 billion to around DKK 2 billion. And EBIT, as mentioned previously, DKK 388 million compared -- which is a 10% increase from last year. Fair value adjustments were negative with DKK 393 million. Our revenue tax amounted to DKK 84 million in this quarter compared to DKK 30 million in the same quarter last year, primarily driven by larger volumes in the Faroes, but also by the strong salmon prices we had, especially in the beginning of the quarter. Profit after tax was negative with DKK 117 million compared to minus DKK 123 million last year. Operational EBIT for the first half of this year, DKK 1.098 billion. Adjusted earnings per share year-to-date is DKK 11.03 whereof DKK 3.37 is delivered in this quarter.
Moving on to the balance sheet. We see that property, plant and equipment amounted to roughly DKK 6.5 billion, an increase of DKK 227 million since year-end '23. Fair value of the biological assets in this quarter amounted to DKK 2.9 billion, a reduction of DKK 429 million since year-end, largely driven by lower forward prices. Inventory reduced in this quarter by DKK 265 million to DKK 884 million. Our receivables also reduced by DKK 188 million and amounted to DKK 732 million by the end of the quarter.
Cash and cash equivalents increased to DKK 608 million and equity ratio also ticked upwards with 1 percentage to 62%. Cash flow from operations, DKK 1.036 billion, minus DKK 241 million on investments. And cash flow from financing was minus DKK 759 million. And as mentioned earlier, we paid dividends in this quarter of DKK 515 million. This quarter, we have decreased our net interest-bearing debt with DKK 214 million. At the end of the quarter, it was just short of DKK 3 billion in net interest-bearing debt. We had undrawn credit facilities amounting to DKK 2.4 billion.
And of relevance to the future development in our net interest-bearing debt, our 5-year investment plan, which we announced on the Capital Markets Day last year is on the constant review. And recently, we have made changes in the prioritization of the projects and also the sequences on some of the projects. And consequently, we expect that CapEx for this year will be around DKK 300 million lower than previously announced. And next year, it will impact with around DKK 500 million reduction in the CapEx compared to what we announced on the CMD.
I will hand over to Regin now. He will provide more detail on this and also on the operations and outlook.
Good morning. Looking at the performance per region, we see -- when we look at the operational EBIT, it increased 10% to DKK 388 million from DKK 353 million last year. This was mainly driven by a 35% volume growth. The margin per kilo dropped by 19% to NOK 17.96 versus NOK 22.08 in the same quarter last year.
In Scotland, the EBIT margin increased 2% to 9.96% from 9.73%. In Faroes, the EBIT margin increased by 17.5% to DKK 26.86 versus DKK 32.56. If we convert the Faroes margin to NOK per kilo, the number is NOK 41.62 per kilo in this quarter. The Farming segment, of course, delivers the largest share of the EBIT for the group, which we will touch on following pages.
Looking at the FOF segment, the general strike, which closed the whole country from May 14th to June 9, prevented our operation at the fishmeal and oil plant. All imports and exports from Faroes was stopped, which also stopped our export of fishmeal and oil. This was the first general strike in Faroes in 20 years.
The impact of the strike was also on raw materials, where 60,000 tonnes of raw materials were lost. So also a significant impact on external sale of fishmeal compared to last year. The marine raw material sourcing was 19,500 tonnes in second quarter versus 148,000 last year, a reduction of 58,000 tonnes. The record high sourcing of raw material in '23 to our FOF segment and the record high market price of fishmeal and oil boosted our margins last year.
'23 was an exceptional good year for our FOF segment, although '24 is expected to be reasonable, we definitely will not see similar development in us in '23. The feed sales were not affected by the strike and was up by 9% in this quarter compared with last year. The external sales of fishmeal and oil was 15,700 tonnes versus 21,300 tonnes.
External sales of fish oil was unchanged at 6,000 tonnes. The operational EBIT was down by 7% to DKK 112 million from DKK 121 million. We expect lower raw material intake in H2 compared to H2 last year. By end of August, our accumulated raw material intake this year is 250,000 tonnes. The market price on fish oil has dropped slightly since the peak in '23, but fishmeal seemed to be tight. And recently, prices have moved up again. .
Looking into the freshwater segment. In Faroes, we are ramping up production since the 50% increase of capacity last year with Glyvradal, Norotoftir and Viðareiði. In Q2 this year, we transferred 11% more fish, 4 million smolt versus 3.6 million. The size of the fish was marginally smaller, 391-gram versus 400 gram. The operational EBIT in Q2 increased 124% to DKK 74 million from DKK 33 million. This was a result of good cost development as capacity utilization is increasing and general good biology. The operational EBIT per kilo was DKK 73 per kilo and a margin of 40% versus 21% last year.
Ramping up production in the freshwater segment in Faroes is progressing well. The total capacity increased 50% last year, now we see actual production in freshwater increase, as we can see on the graphs below. Biomass is now up by 80% from the same time last year from 1,250 to 2,250. Number of fish in the biomass in the freshwater is also increasing, and feeding monthly has doubled. This will lead to a further increase in transfer in coming quarters.
And now the construction of Skalavik is progressing that started early in Q2. This hatchery will add another 40% to our freshwater capacity in Faroes, bringing the total capacity to around 12,000 tonnes by '27. The building time of this site is expected to be 2 years from now.
Looking at the freshwater segment in Scotland. In Q2, the average weight of released smolt was 95 gram only, which is 23% lower than in last year and the transfer volume was 52% lower, only 1.5 million versus 3.1 million last year. The reduced average weight and delayed ramp-up of the production is a direct consequence of the start-up issues at Applecross. This was described in previous presentation relates to the heating system or cooling system at Applecross where we have had issues in the fourth quarter and the first quarter.
So a lot of the fish were lost, and we needed to restart the whole system. Applecross is expected to supply large batches of smolt in the third quarter and especially in the fourth quarter, where we expect to see the first batch of large fish. This is around 9 to 10 months delayed compared with the plan we had one year ago.
When the Applecross 5 is -- the Applecross 5 expansion is completed in 2 months from now. Bakkafrost will have the capacity to produce all smolt in Scotland to around 200 to 300 gram. With the completion of Applecross 6 in the first quarter next year, and Applecross 6 is the fry and parr unit, where we expand that number. That means that the Applecross will be able to supply all fish in Scotland and the biosecurity in that site will be further improved.
As shown in the Faroe Islands, big and healthy smolt will face a lower risk in the marine environment in Scotland because of the shorter production cycles in the sea and a more robust salmon. Unfortunately, the development in Scotland, which is the main driver for the turnaround operation in our marine operation has been delayed.
Our strategy remains focused on fish welfare with large healthy, robust smolt. The issues with the system, the cooling system in the fourth and first quarter set us back so that the planned ramp-up was delayed. However, I was on the site a week ago, and I am confident that the site is now in a good position to start up the ramp-up journey and deliver a healthy, robust smolt.
Current stages of the development at Applecross 5 will be completed shortly in 2 months. And that means that the capacity will be in place to run the operation. Work has now started to renewables, the energy, which is coming from hydro scheme so that the whole site will be powered by renewable energy.
In '25, the transition will be a transitional year for our marine stocks where we will have a larger smolt, robust smolt delivered to our marine sites and thereafter, predominantly one summer cycles. '25 will again be a year of derisking strategy with inconsistent harvesting with slightly lower than overall volumes.
Due to marine stocking being driven by smaller smolt and the flow-through production smolt, there will be still some third parties deliveries in our biomass for some months more to come. But all smolt stocked are now being vaccinated with the latest antiviral targets to marine risk and time to reduce to summer risk.
Looking at the Faroe Islands marine sites, the volume increased 18% in this quarter to 10,226 tonnes from 8,658 tonnes last year. The average harvest weight increased 13% to 4.9 kg from 4.3 kg. The operational EBIT was DKK 206 million from DKK 150 million last year. The EBIT increased 15% to NOK 31.23 per kg versus NOK 27.15 per kg last year. But this was -- the segment was also impacted by the general strike, which prevented us to harvest for these 4 weeks.
And this was the first general strike in 20 years, but there was an agreement made in 2008, which excluded marine farming operation and freshwater farming operation from the strikes. So therefore, we were able to feed our fish and to nurture our fish, daily activities such as stocking, feeding, taking care of the fish continued during the strike.
So with around 4,000 tonnes of fish postponed during the strike that meant that there was a lot of fish, which was moved from a higher price segment to a lower price segment. The breakdown of the Faroes harvest volumes in the second quarter was 31% from the North region at a size of 4.8 kilo; 39% from West at 4.9 kilo and 30% from South at an average of 5 kilo. That included the ISA fish, which was harvested at 2.5 kilos.
The temperature in the Faroes farming fields were marginally warmer in Q2 versus the last 20 years. The deviation was around 0.5 degree Celsius. We see a strong biology and good growth across all farms in Faroes.
And then just some notes about the ISA fish. On May 26, during the strike, we detected 2 pens in A-19 in the South in Faroes with ISA virus. No increased mortalities, but tests were taken, and there was a presence of this ISA virus in 2 pens. The full site had 1 million fish with an average weight of 2.6 kilos. Strict measures were implemented to contain the virus and prevent further spread. The 2 affected pens were harvested out immediately within a week. And the site has been -- the site will be empty tomorrow. Tomorrow, the last fish would be harvested.
Weekly veterinarian testing, in all pens, every week, PCR test every week has not detected any virus in any of the other pens on that site nor of any other pens in the Faroes. So we are happy with our surveillance program and also that we were able to take the fish out early.
Also, we can see on this overview that the majority of the fish was harvested out in the third quarter. 436 tonnes in the second quarter, which were these 2 pens and the other 2,864 tonne has been harvested out from end of July until tomorrow, 27th of August, which was the last date. This is exactly 3 months after the incident. And you have also the average weights there of the fish that was harvested.
Moving to Farming, Scotland. The total harvest in this quarter was 55% up to 11,366 tonnes versus 7,300 tonnes last year. The average weight was, however, 12% down to 4.1 kilo from 4.6 kilo last year. The operational EBIT was 146% up to DKK 133 million versus DKK 52 million last year. The operational EBIT was 64% up to NOK 18 per kg from NOK 11 per kg last year. The margin increased 6%. The end of the second quarter, we harvested 70% -- 75% of the planned harvest this year, 75% in the first half of '24 as part of our derisking strategy.
Also, the derisking plans means that our volumes will be lower during the transitional period. Therefore, measures are taken now to align our costs and other -- both fixed costs, capacity costs and other direct costs to our actual production. The health situation in Scotland in the biomass is much better now than we have seen now for a number of years. The majority of the fish that we are harvesting, we are looking at size. Some cases are still with health indicators -- driver to take them out. Now by mid August, we see a better development in our fish than and the KPIs than for years. So we hope that the third quarter will -- the third quarter is always where there are issues, but it looks good at the moment.
There are no sea lice, no gill issues, less issues with jelly fish and plankton. And hopefully, this will continue during September. Thereafter, we should be out of the high risk season. The derisking strategy has helped to protect our business while we are working on the largest smolt. We still need to see the impact from the healthy robust large smolt in Scotland. Hopefully, that journey will give us some indicators by this time of next year.
As said, we are in a transitional period in Scotland, have been so for too long time. At the moment, we are focusing on derisking. We are now reducing some costs due to the reduced volume in Scotland. We have -- in the second quarter, we have mothballed one of our frozen site in Marybank, Stornoway meaning that we reduce staff. We are also reducing capacity cost, taking out well boats. We are sub-chartering and reducing costs where possible. Overhead costs will come down. Direct costs will come down. There are a lot of initiatives which have been mapped where we can focus to minimize the direct cost and indirect cost all over the line.
When we look at the service segment, we see an increased operational EBIT DKK 12 million versus DKK 1 million last year. This is NOK 0.87 per kilo. This is -- the most important is reducing sea lice. This includes a lot of things, but having a good health in our fish is, of course, the most important priority. Costs are, of course, important to keep low but we see that with the new innovative resources of freshwater system, Bakkafrost currently see more or less no sea lice. So this has moved significantly down on our risk agenda.
We very efficiently keep out sea lice. So we keep our salmon clear of sea lice and our farms are safe from spreading sea lice between farms. Obviously, the numbers here, which clearly give a good indication of a low, very low pressure. .
So coming to the sales and other segment, which includes also the VAP. In this quarter, we have reduced our VAP operation. But we must remember that the strike in Faroes was from mid-May to early June. So a lot of the raw material that we took into the VAP in this quarter was in the beginning of the quarter when raw material prices were fairly high. By the end of the quarter, they were lower, but that was when that period was finished. The operational EBIT was minus DKK 78 million versus DKK 15 million plus last year. The VAP share was 25% of the volume in the quarter down from 57% last year.
When we look at the market spread in the quarter, we see that the European market grew more in Q2 than the other large markets. So more of our fish was sold in Europe than previously. We think that both the U.S. and Asia will improve or recover as we go into the second half of the year but it's good that European markets are strong and are able to continue to increase the volume of purchase. Some of the negative developments for the sales and other activity in this segment are: Number one is the general strike, which contributed to reduced sales in the quarter and increased relative cost base. Number two is the ISA outbreak in Vagur where we harvested fish. But of course, during this period, we could not sell the fish. So they are in -- they were in stock by the end of the quarter or inventory. So costs have been taken. .
Another is that 4,000 tonne is moved from the beginning of the period when the prices were high to the end of the period when they were low. So revenues are moved to lower prices. And in this segment is also where we have taken provisions of DKK 9 million for the mothballing of Marybank in Stornoway, which is provision for costs relating to redundancy.
Outlook for the sector and for Bakkafrost. We expect moderate supply in the second half, moderate supply growth in the second half. In the third and fourth quarter, we expect and these are Kontali numbers. We expect growth to be between 4% and 6%, relatively speaking, compared to last year.
Chilean farmers see reduced volumes next 2 quarters, which means that some markets will be more affected than others, as we heard also earlier. The expectations of '25 looks to continue with muted growth, which probably, again, will make tight market conditions during the first half of '25. The dotted lines are the expectations that we had a quarter ago.
In the second quarter, we have had a challenging period. Looking for the whole operation in '24, we expect harvest of 88,500 tonnes in volume of harvest for Bakkafrost as a whole. 63,500 tonnes in Faroe Islands, 25,000 tonnes in Scotland. This is the Faroese downgraded number due to the ISA of -- in Vagur. The smolt release is 25.2 million. This 7.7 million was moved a bit down, 25.2 million is not moved on. So it is 24.7 million, not 25.2 million.
And the reason for the Scottish number to come slightly down is this issue, which was in the end of the first quarter moved slightly into the second quarter, where 0.5 million fish has been lost in Applecross. So 24.7 million all in all. .
The contracts are, we have a low contract volume, only 9% of harvest volumes totally for the year. We expect lower raw material sourcing for our FOF segment, 250,000 tonnes has been reached. There will be some additional in the second half of the year. So it will be much lower than last year at least. The market price on fish oil has dropped slightly since the peak in '23, but fishmeal seems to be tight. And recently, prices have moved up again.
As we heard about earlier, we have a strategy to build a capacity of 200,000 tonnes by '28, and actual production of 165,000 tonnes by '28 with the amendments in our investment plan by re-prioritization, there will be some further -- there will be some further changes in how we achieve that target. We will make changes in Applecross so that our actual production in Applecross will be something like 250 grams smolt, which means that with around 3,500 tonnes of capacity, we should be able to do around 14 million fish.
So there will be more details coming on that a bit later. However, we are still working on our plan and there will be a new Capital Market Day next year, where we will go further in those details. But the investments in '24 and '25 have been reduced by DKK 800 million as a direct consequence of this changed plan. And as we are in this pace of lower volumes in Scotland, we are continuously revisiting our strategy and, especially now looking on the cost side.
We are very much looking to reduce the risk side. So especially with the derisking strategy and that seems to have worked very well in '24 with significantly lower loss in our marine operation. So this will continue next year. The high focus on costs with strategic decisions and optimization of the operation will continue during the year -- next year. And then from the fourth quarter and into next year, we will see larger smolt come in into the farming environment, which will boost our operations from next year. '26, we expect to see all harvest production from larger one summer smolt, which should significantly contribute to our operations.
So I think that was everything for now. Thank you very much. And if there are any questions, you are welcome.
Christian Nordby, Arctic Securities. I see that you have very much lower mortalities in Scotland until today. Can you comment on how much you have booked of exceptional mortalities in Scotland in Q3 so far?
Yes. In Q3 so far, I think it is 2 million compared with was it?
31 million.
13 million?
31 million.
31 million. Yes. So in the marine phase last year in July and August, exceptional mortality was GBP 14 million and now we are less than GBP 1 million. So it's a huge difference.
And in the Faroes, is the biological situation in terms of harvest space is very strong so far in Q3 based on the metrics that you're showing?
Yes, except the ISA fish that has been harvested now in August, all the other biomass are very strong. Because of our good resources with freshwater, we now have ability to produce large and healthy fish. And because of the strike, we have had a huge biomass of large fish. I think right now, as we stand today, we have something like 10,000 tonne of fish above 6.2 kilos in the water, which is exceptionally high. So we will have a lot of large fish coming out as we continue. .
And for the group, do you see any particular negative one-off costs in Q3 as of today?
We have taken provision for whatever we see which was the mothballing, not anything else now.
Wilhelm Dahl Røe. On Scotland, can you say something what has led to the improved biology sort of decomposing [indiscernible] what's better weather conditions and temperatures and what's improved smolt quality?
Can you repeat it?
If you can sort of try to give us a picture of what has improved the biology compared to last year in Scotland. How much is related to better conditions and how much is related to improved quality on the smolt?
On the smolt, nothing yet because we have not seen the Applecross journey starting yet. So the -- it is very much to this derisking strategy where we are in a much better position with our resources but also that we have fish on sites where we have selected specifically because the fish is still too summer in the water. So I would say that is the main driver. The water temperatures in Scotland was a bit strange. There were a bit strange this year. I didn't comment on this, but you can see on this graph here, on the water temperature that in May, they spiked quite a lot, but then in June, the water temperature in Scotland developed flat compared with last year. Whether or not that has been having -- and a part of this, I don't know it was kind of a rare development on the temperature.
There were higher plankton issues or higher plankton numbers during July and into mid-August. But over the past 2 weeks, it looks like the water has cleared more up and the plankton level has come down. This can, of course, change from week to week. So this is not a guarantee. But some of the farmers, I spoke to last week said that normally, when the water clears up at this time of the year, it will remain clear further. But of course, this is just from experience, so it's difficult to say. But we have very good fish in the water in Scotland, where our majority of the fish is the gills are very nice and in good shape, and the fish seems to be healthy. So I think it's very much related to the derisking strategy that we put in place by the end of last year.
Stein Aukner at DNB. You take a DKK 20 million approximately one-off in freshwater in Scotland in Q2. Is this also related to the cooling situation on Applecross? Or is it something else?
Yes. Yes. So maybe I can just give a bit of flavor to that problem. So what happened was that the cooling system, which was installed, the system is making sure that the temperature in the water when it's very warm, they can cool the water down. If it's very cold in the winter, they can heat it up. So this system is taking seawater from outside into a system and using this as a driver to cool or heat.
And this is also the same way we do it, for example Strond in Faroes. But because of some strange thing sea water was mixed with the fresh water, meaning that sea water from the loch or from the fjord entered into the freshwater system inside in hatchery. We did not realize that in the fourth quarter. This has been from the start of the implementation, which was around August, September last year. And that means that until we discover this failure in around February, this has continued. So we had to take all that fish out because it seemed that the fish was affected by viruses and bacterias. We could not find out the source of this, but when we discover this, we had to take all fish out -- and that is a major setback because we need to take the biomass out, refill and even the biomedia needed to be refilled. So that's a major setback.
You need to take the whole biomass out and refill again. And we had diseases in the freshwater side, which is very abnormal. We never have diseases inside when you have a closed system. So that has been totally removed, and there are no viruses or bacterias now in the system. All systems are now in operation again. And now we are ramping up with healthy fish. So that's why this issue is causing so much pain. We had to fish out and it sets us back by 9 months.
And last one, can you comment on demand? How you see it across markets like North America, Asia, Europe and also across channels like food service and retail?
Yes. I think that there has been in the first or second quarter, big issues with a spot market price, which were all-time high, but also a situation where you had all-time high volumes of fillets, which were on a much, much lower price. So there were more than just 2 markets because of these issues with down-graded fish, there were a fillet market also coming to export markets like the U.S. and China.
So therefore, especially retailers are focusing very much on these volumes coming in. So these are giving -- these were giving clashes. And I think this has caused a lot of disruption for many customers but one of the drivers, which also Hogni mentioned, was that Chile reduced their supply significantly. And the markets they have been serving, which are the U.S. and Asia market mainly have less access to volumes. So that's also one of the drivers. These are just some of the thoughts that we have at the moment where we see that those markets have been affected. But now as prices are more or less harmonized, there are not these issues with different types of prices, different types of products. It looks like the market is now accepting the conditions and are climbing again all over the line.
There is a lot of demand. But of course, customers are in back of their head, psychologically looking to next year if this is going to continue. And therefore, this is a problem, I think, for the market that if this continues next year, it is not a disruption with the downgrades.
Martin Kaland, ABG. Can you say something more about the reasons why the Fairlie smolt facility and hold? Is it because we expect to see the strongest improvement moving from 100 grams smolt to 250 grams, so that you have you need to say that [indiscernible] to the runway to 500 grams?
So as we clearly all see our journey so far in Scotland has been more challenged than we expected when we started the journey. So therefore, we need to amend to change and to reprioritize as we phrased it, also to save our cash flow. And then when we will see because we very strongly believe that we will see upside from the Applecross, when the time is more right to do the next step. I think it is very risky to have all eggs in one basket, so to say, in one hatchery. So I think the next hatchery will definitely be built, but we need to see stronger operations so that the cash flow can protect what we are doing.
So reprioritization, retiming. But while waiting or while we are working for now, as we will wait for some years for the second hatchery, we need -- the original plan with Applecross was to build around 8 million fish at 500-gram capacity. 8 million is 500 grams, something like 3,500, 4,000 tonnes. But now when we only have one site, it is more wise to build that facility at something like 13 million, 14 million fish at 250 gram.
We think that the cycle time in Scotland with 250-gram fish might only be 12 months, meaning that we can grow them to 5 kilo in 10 months following the sites, so 12 months. But we will need to prove that first. The additional investment for a second site is both to have not everything in one basket, but also to be able to reduce that further down to maybe 8 months but the time is not right now because of the development so far, we need to get this done right and to prove that it works and to see the results of this investment before we take the next step.
Yes, makes sense. And then is it possible to quantify some of the cost savings that you are initiating in Scotland for example as the percentage of the cost base or...
We don't have a specific number. We have reduced the roles in Scotland significantly. We had at the peak, something like 600, 650 roles and now we are at something like 400 roles. So that's quite a lot. Now we take also some capacity out, 1 harvesting plant, 1 processing plant boats. And then, of course, we have a very high focus on the cost in general in the operation. So I don't think we can give a certain number, no.
And on timing, is that [indiscernible] from Q3 and onwards most reasons [indiscernible] 20% to 25%?
There will be some already from the third quarter. And then there will be more from the fourth quarter. As we said, we have already taken provisions for this redundancy costs on the processing and the harvesting side. Then we will subcharter some of the vessels, which also will then sequently come into numbers.
Wilhelm Røe, Danske Bank. Just a quick question on Scotland. Of course, we know quite a lot about the details of the issues that happened in Q1. But how do you see the risk of further delays as we stand now? Are we -- do we still have an elevated level of risk that we will have a delay in smolt release? Or do you see that as fully taken account for now?
I strongly believe that we have a much safer start of large smolt now in Scotland than 1 year ago. We have a site now. We have built a similar site in Faroes in Glyvradal, which is the same technology, the same builder, the same provider. In Glyvradal, we did not have this cooling system with seawater. In Glyvradal, the cooling system is with air. So therefore, no risk of contamination from seawater.
But this has been sold. Now there are 2 separate systems, which don't have any access to each other. So therefore, that problem has been solved. And -- we have, of course, a very close eye on this now. Now that we know that this problem was there from the beginning, but that has been solved. And the operations and the systems in general seems to work well. And we are operating them also in Faroes and the teams are working closely together.
So I think we are in a more robust situation now, a more robust place. As I said before, having all eggs in one basket is not the ideal way. But with 6 systems running in Faroes, one exactly the same system, we think that we have a good opportunity to make sure that we can take the point of lessons learned also in Faroes and the transfer that knowledge to Scotland with a large smolt. So I believe this should be quite safe now.
Thank you very much.