P/F Bakkafrost
OSE:BAKKA
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Earnings Call Analysis
Q3-2023 Analysis
P/F Bakkafrost
In a tale of resilience amidst challenges, the subject company managed to maintain stable revenue, clocking in at DKK 1.8 billion for the third quarter, mirroring the previous year’s performance. However, operational EBITDA dipped from DKK 325 million to DKK 269 million, indicating some pressure on profitability. The variance in operational effectiveness was illustrated by the stark contrast in harvest volumes across geographies. In the Faroes, the output remained relatively flat, while Scotland witnessed a precipitous drop by half from the previous year, impacting the bottom line. The silver lining appeared in the form of the Fishmeal, Oil, and Feed (FOF) segment, which continued its robust performance with a strong material intake that saw a significant year-on-year increase.
Investors should pay heed to the intriguing shifts in the market dynamics underscored by a 12% increase in average prices for superior salmon in Norway, with Europe also showcasing a price uplift. The demand was notably skewed towards larger fish sizes, especially from China and Asia, leading to historic price gaps between smaller and larger salmon. Despite growing sales in the US and Russia, a decrease in global sales by 4% and reductions in harvest imply a constricted market supply. These mixed signals in the market trajectory should be carefully weighed by investors for their potential impact on future revenues and margins.
On the financial front, the steady revenue belies a 17% fall in operational EBIT. With positive cash flows and most segments being EBIT positive, there's cautious optimism. The company restructured into seven reporting segments to provide clearer insights, which revealed divergent trajectories among them. While the FOF segment shone with a 165% operational EBIT increase, Farming in Scotland recorded a concerning operational EBIT of minus DKK 282 million. These divergences are crucial for investors to consider, especially against a backdrop of increased net interest-bearing debt, now at DKK 3.045 billion.
Operationally, Scotland faced significant challenges, and guidance suggests an intention to grow biomass in 2024 for better output in 2025. The Faroes are betting on improved capacity and smolt health, supported by recent learnings and better operational procedures. On the cost front, the company grapples with inflated operational costs, primarily feed, which are not showing signs of abating. For Value-Added Products (VAP), the company is adapting by lowering contracted volumes and adjusting capacity to match market conditions, a statement on their agility in the face of regulatory changes. Investors should note the company's nimble operational strategies as a response to external pressures.
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Agenda is first a summary of the third quarter before we go into markets and sales and move on to financials. And then our CEO, Regina Jacobsen, will go through the segment performance with you and the outlook as well.So to sum up the third quarter, our revenues in this quarter were DKK 1.8 billion, quite similar to the revenue we had in the same quarter last year. Group operational EBITDA of DKK 269 million, which is a reduction from the DKK 325 million we had last year. Very little change in Faroes' harvest volumes. We harvested 16,740 tonnes in the Faroes in this quarter.In Scotland, our harvest volume dropped quite significantly, down to 4,100 tonnes compared to 8,100 tonnes in the third quarter of last year. Feed sales were slightly lower in this quarter, just short of 36,000 tonnes compared to 37,805 tonnes in the same quarter last year.Our FOF segment, fishmeal, oil, and feed has had a very strong year. And especially on the raw material intake and that also continued in this quarter. So we sourced around 110,000 tonnes in this quarter compared to 76,000 tonnes last year.Cash flow from operations were positive with DKK 185 million, and all segments had positive EBIT except for Farming Scotland, which had an operational EBIT of minus DKK 282 million. And we'll come back to segments in -- shortly.So looking at the markets, according to the latest analysis from -- sorry, take the prices first. If you look at the global markets there. The average price for 4 to 5 kilo superior salmon in this quarter was NOK 78.71 per kilo, which is an increase of 12% compared to the third quarter last year. In euro, the price increase was 9.2%. Since mid-Q3, we have had increase in salmon pricing and prices and that development has continued into the fourth quarter as well.As we saw in previous quarter, there was an increase in gap in the prices between the smaller-sized fish and the larger sized. And that gap has widened during this quarter and has never been as high as for the past 5 years as we have in this quarter.Demand from China and Asia, in general, for large fresh salmon has contributed to the price difference between large and small salmon. According to latest data from Kontali, global sales in this quarter was down by 4%. Global sales to the U.S. increased 4%, and this is in a period where the harvest in the Americas has reduced by 5%. Global sales to the Russian market increased by 27%, mainly supplied from Chile. And sales to Greater China has increased by 26%, driven by strong demand, especially for the large fresh salmon.And regarding the Chinese market, it's also worth mentioning that Chile has also sold increasing volumes of coho into the Chinese market. The Japanese and ASEAN markets are also affected by supply of coho and wild salmon, but also from the higher air freight costs that are due to the war in Ukraine, with longer routes. So we had a drop in Japanese sales by 16% and 17% for the ASEAN markets.Global harvest dropped 2.8% in this quarter. If we include inventory movements, it's a supply reduction of 1.4%. 1% is down in the Europe. And if we look at Norway, harvest dropped by around 1.6%. There was, in general, a lower productivity in Norway in this quarter, probably also leading to some delays of harvest into the next quarter. Average weights dropped 5% in Norway to 4.12 kilo and feed sales increased by 4%.In the U.K., we had lower incoming volume biomass in this quarter and a reduction of harvest volume by 8.6%. There was high mortality in the U.K. in the third quarter. And however, with an increase of 20% on feed sales. In the Faroes, we have had an improved biomass position coming into the third quarter as we have been building up biomass during the first half of the year and harvest volumes for the Faroes as a whole increased by 9.7%. However, with a drop in average weights from 5.03 to 4.81 kilos. Feed sales are estimated to have increased somewhere between 7% and 12% in the Faroes in the quarter.In Chile, despite harvest volume dropping 3.6%, harvest was actually higher than expected for this quarter. Productivity in Chile has, in general, been good; however, with slightly lower harvest weights, but 6% to 7% increase in feed sales. And the North American harvest is continuing downwards as we also saw in the previous quarter.If we then look at the financials, as mentioned in the summary, the revenue in this quarter was DKK 1.867 billion, more or less unchanged to what we had the same period last year. Operational EBIT dropped 17% to DKK 269 million. Fair value adjustments were positive with DKK 55 million in this quarter. Revenue tax was minus DKK 57 million compared to minus DKK 43 million in the same quarter last year. And this is the first quarter where we pay revenue tax according to the changed tax that was introduced earlier this year. Profit after tax was DKK 219 million.And then back to segments. As we have announced previously, we have changed now our segments in our reporting. We are now moving from 4 segments, which we had previously to 7 segments. So the FOF segment; fishmeal, oil and feed, is unchanged, but we have introduced 2 new freshwater segments, 1 in the Faroes and one in Scotland. Similarly, we have introduced or changed to the Faroese farming segment and isolated marine farming in Scotland to its own segment as well.Then we have introduced the Services segment, which is, wellboat services, harvesting, packaging and also the biogas production and waste handling. And finally, we have a sales and other segment, which besides sales and marketing, also includes logistics and the VAP production, the value-added processing. So all the value-add adding activities after harvest is a part of sales and other.We have generated historical reporting figures for all these 7 segments. So just to give you an idea of how that looks. Revenue for the FOF segment in this quarter, according to the new segmentation, is more or less unchanged. So DKK 1.048 billion in this quarter, an increase of 55% from last year. The Freshwater, the Faroese Freshwater segment had a revenue of DKK 147 million. In Scotland, the Freshwater segment had a revenue of DKK 50 million and farming in the Faroes had a reduction in revenue of 9% and amounting to DKK 937 million in this quarter.Farming in Scotland dropped 50% to DKK 212 million and the Services segment dropped 6% to DKK 208 million. Sales and other dropped 5% and had a revenue of just short of DKK 2.2 billion. And for the group, the same number we talked about earlier, just in excess of $1.8 million in revenues for this quarter.Similarly, if we look at operational EBIT for the segments, FOF segment, DKK 316, an increase of 165% in this quarter. Freshwater Faroes, operational EBIT of DKK 47 million in Scotland, DKK 17 million, and the Faroese Farming segment had a reduction in operational EBIT of 61% to DKK 108 million in this quarter.Farming in Scotland, minus DKK 282. And the Services segment increased their operational EBIT in this quarter by 40% to DKK 21 million. Sales and other, DKK 78 million; and for the group, DKK 269 million. So year-to-date, we have an operational EBIT of DKK 1.188 billion for the group, and adjusted earnings per share in this quarter was DKK 2.93 compared and DKK 13.91 year-to-date.If we look at the balance sheet, some of the main changes is an increase of property, plant, and equipment of DKK 460 million, amounting to DKK 6.1 billion at the end of the quarter. Inventories increased to DKK 117 million to just short of DKK 1.3 billion and receivables increased with DKK 143 million and amounted to DKK 951 million. Cash and cash equivalents have reduced by DKK 349 million and amounted to DKK 370 million, and the equity ratio dropped from 62% to 61%.Cash flow from operations was positive with DKK 185 million, minus DKK 235 million from investments and minus DKK 124 million from financing. And during the quarter, we have increased our net interest-bearing debt with DKK 134 million. The net interest-bearing debt at the end of the quarter amounted to DKK 3.045 billion, and we had undrawn credit facilities of adjusted -- in excess of DKK 2.3 billion.And then I will hand over to Regin, who will go through the segment performance.
Good morning, everyone. We will go through the segments, starting with the fishmeal, oil, and feed segment, which had a record-breaking quarter. The marine raw materials sourced in the quarter was 109,685 tonnes in the third quarter '23, which is record for a third quarter.Last year, we sourced 76,182 tonnes. As the volume year-to-date is also record high at 413,485, versus 251,000 in the same period last year, EXTERNAL sales of finished products also set records in the third quarter. Fishmeal more than doubled to 16,000 tonnes in the third quarter versus 7,000 last year. And the feed sales, however, dropped 5% to 36,000 compared with 37,500 last year.Therefore, EBITDA increased for the fishmeal, oil, and feed segment, 165% from DKK 119 million to DKK 316 million in this quarter, and the EBITDA margin was also a record high on 13% compared with 18% last year. Year-to-date sourcing of raw material for the fishmeal oil is record high compared with any previous year.Raw material sourcing is difficult to forecast. However, the ICES advice on blue whiting catches in the North Atlantic increased 81% this year compared with last year and will increase further 12.5% for next year from 1,360,000 tonne to 1,530,000 tonne in the latest update from September 29.Global markets for fish, meal, and oil are still tight. Lower quotas after El Nino, council Peru's first fishing season and the second season for [indiscernible] is 1.7 million tonnes, which just was -- has started 12 days ago, which is a reduction on 26% from last year. The new freshwater segment in Faroes includes broodstock and hatcheries. The total number of smolt released in the third quarter was 3.3 million versus 4.1 million last year. The average weight was 405 gram, unchanged.The operation in the third quarter delivered an EBIT per kilo of NOK 53, which delivered a margin on 32%. There are 2 broodstock sites in Bakkafrost and 6 hatcheries in operation. The broodstock sites produce the Faroese strain of X, which give Bakka Salmon, a unique market position. Large smolt is the main driver behind Bakkafrost strategy to reduce cycle time in the marine phase, reducing risk and create organic growth.After the expansion of Glyvradal and Norotoftir this year with additional 24,000 cubic meters, there are now 4 large hatcheries, including Strond and Vioareioi. The combined capacity is 72,000 cubic meters, up from 48,000 in the beginning of the year. The total capacity now corresponds to approximately 9,000 tonne of smolt versus 6,000 before this expansion.With increased capacity now available, the decision has been made to postpone the part of the transfer in December to February to reduce final harvest -- to reduce time to final harvest and give a safer environment, especially during the winter and to increase survivability. The journey to large healthy smolt has not been a straight line.Bakkafrost are first mover on this, and we take some of the hits along the road. Scientific reports from Faroe Islands have concluded that there are potential for good growth in the marine phase using large smolt produced in freshwater and RAS systems. The results also show that slower grown smolt in the production and the freshwater phase leads to better growth and lower mortality in the marine phase.Since the first generation of large smolt was delivered from Strond hatchery back in 2020, Bakkafrost has made significant improvements, both in knowledge and procedures to improve the quality and performance of the large smolt. In '23, however, I'm afraid that there are still some dampening effects on the small output volume, which is a lagging effect from start-up phase where production procedures are tuned in.Now the large smolt is transitioning into a phase emphasizing consistent size and quality of the smolt where upscaling production of volume is coming. The hatchery expansion in Norotoftir and Glyvradal, production in the Faroes are steadily ramping up after being expanded in capacity. Bakkafrost has just committed to build a new smolt hatchery in Skalavik in Faroes. This new hatchery will have a total capacity of 28,600 cubic meters and is expected to be up and running late 2026.The annual production will be around 7 million smolt of 500 gram. Once Glyvradal hatchery is completed, Bakkafrost annual salmon smolt production capacity will be in excess of 24 million smolt at 500 gram. With this state-of-art hatchery in Skalavik, we continue to expand in order to achieve our goal to reduce biological risk, improve efficiency, and create organic growth.The building ground was acquired 3 years ago and has already been prepared and is ready to start construction. The site Skalavik is on the island of Sandoy, which is located just south of the capital Torshavn. Until now, this island has been isolated with a ferry connection. But from mid-December, there will be a new modern subsea tunnel connection, which takes down the travel time from Torshavn to Skalavik to less than 30 minutes by car.The new fresh water segment in Scotland includes also broodstock and hatcheries. The total number of released smolt in the third quarter '23 was 2% up to 2.5 million from 2.4 million last year. The average weight was 5% up to 112 gram compared with 107 gram last year. The operation in the third quarter '23 delivered an operational EBIT per kilo of NOK 91.46 and a margin on 33%.In Scotland, there are 3 hatcheries in operation and 2 broodstock sites coming back into operation next year. The broodstock sites use our own genetic strain, Native Hebridean, which have proved to be very robust to the local challenges. We are about to start a journey with large robust smolt in Scotland to reduce the time fish is exposed to the challenging in -- the challenges in the marine phase.The Applecross expansion is progressing well. A production batch of 1.1 million is now underway for transfer later in the fourth quarter. And in the first quarter next year, the first trial batch of 500 gram will be planned to be transferred to the marine phase.From next year, almost all our smolt will be sourced from our own hatcheries. All smolt stocks are now being vaccinated with the latest antiviral targeted to marine risk vaccines and timed to reduce the second summer risk. We are getting closer to our strategy to produce healthy, large, robust for only 1 summer in the sea.The Scotland fresh water operation is scaling up the production of large high-quality smolt at Applecross after the release of the first trial batch from May this year [Technical Difficulty] smolt next year.Then coming to the farming segment in the Faroes. As Hogni explained, this is now a pure farming segment, only including the actual farming operation in the marine phase. Other activities have been separated out.So comparing old numbers with this, we just have to have this in mind. Freshwater services and sales and other are now in separate segments. The total harvested volume in the third quarter is 1% down. The average weight is 4.8%, which is up from earlier this year, but 7% down from last year. The operational EBIT per kilo was NOK 9.90, down from NOK 22.02 last year. The operational margin was 12% versus 27% last year.The temperature in the Faroese waters were 0.2 to 0.3 degrees warmer in June to September comparing to average temperature in the last 20 years. The maximum temperature were, however, still below 11 degrees in Faroese water, which is a good temperature level. The breakdown of Faroese volumes were 12% from the West division [indiscernible] with average weight of 5 kilo gutted and very good performance. 17% came from the South division FOF with an average weight of 5.4 kilo, very good performance. 72% came from the North division, from [indiscernible].The average weight was 4.6 kilos. These sites had a batch that did not live up to expectations. Our analysis clearly conclude that root cause is back to the hatchery back in August 21, with an early phase start-up issues related to construction. The fish seemed to perform well. But during the third quarter this year, the fish became -- the fish grew slower and some -- was somewhat impacted on biology.The growth, therefore, in the third quarter changed negatively from a positive development in the summer to a more negative growth during the latter part of the third quarter. When planning the harvest profile for this year, at this time last year, we expected a similar development as we can see on the growth line on this page.Unfortunately, the trend shifted down. And therefore, we have postponed some of the planned harvest into the first quarter next year. This fish group, harvest in the North division was all from the same group of impacted fish. Some -- a few pens have been left into the fourth quarter, which have been harvested in October. One remaining pen is to be harvested in November.The remaining Q4 fish seems to be healthy and developing good with good health and growth abilities. Therefore, we have decided to postpone some of the planned fish for harvest in the fourth quarter, into Q1, where we expect to obtain better harvest average weight and better price premium.Coming to farming segment in Scotland. The same applies for this segment where freshwater sales and others are -- other activities are now separated to own segments. The total harvest volume in the third quarter was 49% down to 4,100 versus 8,100 last year. The average weight was 3.1 gutted, 8% down from 3.4 last year. The operational EBIT down from minus DKK 30 million last year. The operational margin was 133% versus minus DKK 42 million last year.El Nino brought earlier higher sea temperatures and with a significant increase in jellyfish. The temperatures in Scotland, Farming Faroes were between 0.5 and 1 degree warmer in the period from June to September compared to average temperature in the last 20 years and were highest levels seen in a period of 3 or 4 months in the summer period.El Nino have been quite strong this year and has impacted crops in agricultural production globally. Our main challenge in the third quarter was seas contributing to the increase of naturally occurring organism, jellyfish. With the particular impact of jellyfish on fish with other health complications such as pancreas disease, a viral disease prevailing in Scottish waters. The biological challenges arrived earlier than in recent years. But have in return eased off earlier as well.Hence, from mid-September, the biology improved significantly. The upscale freshwater dual treatment capacity in Scotland had a positive impact on fish gill health and ensure low stress level as well. This has reduced the potential impact on the biological threats during the quarter. The leverage from the improved biological development since mid-September, Bakkafrost plans to reduce the Q4 harvest in Scotland to under 1,000 tonne, allowing the fish to grow larger, similar to Bakkafrost approach in Scotland last year.This shift will push harvest volume into the first quarter, enhancing market value through higher average weights and better prices. In order to address the biological risk, Bakkafrost has made strategic adjustments to its short-term plans and production strategy for the Scottish farming operation. A comprehensive risk assessment has been conducted for all farming sites, evaluating the feasibility of stocking and farming these sites using various strains, hatcheries, and small sizes.Based on this evaluation, Bakkafrost will prioritize and advance the utilization of large, high-quality smolt from Applecross hatchery over external sources. Some farming sites might not be restocked or remain productive during the third quarter until the risks have been mitigated through the use of large high-quality smolts. This approach will reduce the biomass at risk in the third quarter and result in an increased harvest during the first half of 2024.The new segment -- service segment provides several services to the group. The segment operates a fleet of large wellboats and farming support vessels in addition to convert organic waste into biogas, heating, electricity, and fertilizer, which is sold externally. The segment also provides harvesting services, both to the Scottish and the Faroese farming operation as well as styrofoam boxes to the Faroese operation.Transactions regarding wellboats and FSV vessel services are long term-contracts and priced according to benchmarked market prices. The transactions for harvesting services and styrofoam boxes are based and benchmarks and arm's length prices.The operational EBIT amounted to NOK 1.52 per kilo in the third quarter, 89% up from NOK 0.80 last year. The operational margin was 10% higher in this quarter -- the operational margin was 10% in this quarter, up from 7% last year. The new multipurpose vessel delivered very good results in the operation in this quarter with high efficiency against sea lice very gentle and fish welfare friendly operation. We have high expectations to these operations for the future.The sales and other segment is the new segment covering sales, marketing, freight, logistics, and value-added products. This segment purchases salmon from the Faroese Farming segment and the Scottish farming segment based on market reference prices. The sales and other segment optimizes the value retention and provides freight and logistics services. The segment has processing capacity in Faroe Islands, in Scotland, Denmark and in the U.S. for production of value-added products.A significant share of the salmon is sold as value-added products for the retail market. In this quarter, the sales and other segment transferred volumes to up 6,997 tonne, 8% up from last year and delivered a margin on 5.70 per kilo, 145% up from 2.33 last year. The margin was 4%, up from 2% last year. The main markets served in this quarter changed slightly. Western Europe, 53%, 2% down from 55% last year. North America, 28%, 5% up from last year. Asia 13%, 1% down from last year. VAP contracts. This year of sales in the quarter increased to 42% from 38% last year.As a result of the revenue tax made effective from 1st of August this year, contracts for next year on VAP products are more than halved to only 9% of the 2024 volume versus 22% last year. The capacity in the production will be adjusted accordingly.So now coming to the outlook, the supply of salmon on the world market reduced 2.8% in the third quarter, according to the latest estimates from Kontali Analyze. Salmon prices measured in euros increased 9% in the quarter, measured in Norwegian kroner 14%. The supply in the first half of next year is expected to increase 3% to 4% and then 24% for the full year, around 5%.The global harvest muted supply growth over the last many quarters have been somewhat reduced every quarter, indicating weaker biological operation globally for salmon farmers. We update our guiding volumes, and now we start to indicate quarterly volumes. And for the first quarter next year, as you see, we have higher volumes than normally because of the transfer from the fourth quarter.So on Faroes, 23% of the volume is in the first quarter and 23% in Scotland. In Scotland, there are some learnings from 2023, which I will briefly go through. 94% of the mortalities were second summer fish. Mortality levels were increased in third-party smolt and specific genetic strains. We remain committed to our core strategy that the production of large, healthy, robust, elite strain, select strain smolt will be in the sea for the first summer.The current position on the Q3 challenges came earlier, greater and differently, but so has also our improvement. All current stock in Marine is in an improvement health position. And we plan to maximize production value through growth, not harvesting small fish in the fourth quarter. Therefore, harvest volume for the fourth quarter will come down as we grow our fish into the first quarter next year.Our progress on Applecross expansion progress as well and the production start-up batch of 1.1 million will be transferred in Marine in the fourth quarter and from -- in the first quarter next year, a batch of 500 gram fish. We expect to supply all our fish next year from Applecross. All our fish are now stocked, are being vaccinated with the latest antiviral targeted to marine risks and time to reduce the second summer risk that we saw this year.The future, our focus to derisk to one summer, even before 500 gram can be stocked by adjusting stocking profiles to marine risk factors. Production volume will fluctuate quarterly, but mortalities are expected to be reduced. As we move forward to our 5-year plan, production volumes will increase from current levels. The bumper road will definitely push some investments a bit back to create better visibility before large investment decisions.Our strategy remains focused on fish welfare with large, healthy, robust, smolt, our own genetic strain on the lead fish from native Hebridean, proactive health management with latest vaccines best practice husbandry and investing in capacity and capability.For Faroe Islands, we are lower than expected some time ago, and there are still some dampening effects from the smolt output volume, which is a lagging effect from the startup phase in the hatcheries where production procedures are tuned in.Now as large-smolt production is transitioning into a phase, emphasizing consistent size and high quality of the smolt while upscaling the production volumes and larger capacity becomes available, production in the Faroe Islands are steadily ramping up. We have, therefore, decided to postpone harvest of some of the plant fish to next year to obtain better harvest weight on price premium.As a consequence, that larger proportion than previously will be harvested in the first half of the year compared to the second half, we expect to have a positive impact for the group. And therefore, we take the guidance for harvest 23 down to 73,000 tonne and 24,000 to 91,000 tonne. We are now guiding by quarter, which hopefully will give some better visibility. The smolt release for next year is guided on 27.1 million versus 24.9 million this year.Contracts for '24 are more than half to only 9% compared with 22% last year. The FOF segment expects to be record high this year. We expect a continued high fish meal production in '24, but probably more normalized fish oil production. Our CMD from June '23 guided the CapEx plan for the period '24 to '28. The overall objective is to build a capacity across the whole value chain on 200,000 tonne and to achieve this by 2028 and an actual production on 165,000 tonnes.The growth path is established on existing licenses in Faroe Islands and the continued transition to large smolt where the hatcheries are the main driver. A similar development in Scotland based on learnings we have had during this transformation will drive the turnaround and eventually growth in Scotland as well.The journey continues, and I'm sure, despite some hits as first movers on large smolt, we have knowledge, expertise, and the strength to fulfill and reach the goal. I am especially confident about the potential using large smolt produced in freshwater and RAS systems to reach the good growth and low mortality in the marine phase, the learnings, unchanged procedures with slower grown smolt and the freshwater phase.Thank you very much. And now we open up for questions.
Nils Thommesen, Fearnley. A question on Scotland and the volume guidance for '24 and also into '25 because you have such low volumes of the total share in the second half is the idea that we're going to grow biomass in 2024 in the second half, so we could maybe expect an uptick in volumes for '25 in Scotland, even though you don't increase the smolt release in '24?
So there are one main difference we are taking down the risk. And the second big difference is that we're trying to move bigger part of the fish to first half of the year than second half of the year. So that shift makes an impact. Of course, better survivability should have a positive impact on the volume produced. And of course, our target is also to increase the average weight of the fish which, of course, should also have a positive impact on the volumes.
And then a quick one on the smolt release for the Faroes in '24. Is there any time line risk in terms of the ramp-up of the new facilities there as well? Or is most of that being taken out?
We have unfortunately seen that often when you start up new facilities, there are some issues. Now with Glyvradal and Norotoftir, they are now in operation. So therefore, in Faroes, I assume that we should be in a better position now. We have also -- we must also remember that when Strond started, Strond was around 60% of the total capacity. Now as we add on, even if these are large hatcheries, we don't add 60%. We add a bit less. And in this case, with Norotoftir and Glyvradal, even if we have added 15% this year, it is on 2 sides.The next add-on Skalavik, which you just have signed is a strong size, but this takes the total capacity 20% up from 72,000 to 100,000 meters. So therefore, the relative increase is lower. And I also would like to emphasize that we have now a lot of learnings. There are huge learning and expertise in the group now. So we have a better starting position with new sites. And of course, we try also to make sure that the learnings are adapted also to the startups that we have now in Scotland.
[Indiscernible]. So 2 questions. The first, there is a comment on the farming costs into 2024, given the backdrop with higher fish oil prices in particular? And the second question is on the VAP side. Obviously, you're cutting volumes quite substantially. How much is that going to hit the profitability in the VAP segment? In terms of the lower capacity utilization that is?
Yes. So in the VAP, we lower the contract share, and we will adjust the capacity accordingly. So we will sell more on the spot market. And it could also be VAP products but sold from week-to-week or month-to-month. If that's going to hit the margin is difficult to say. It depends on the difference between contract price and spot price. Normally, we have seen that, especially in the first half of the year, that is a high price on spot products, where we normally see in the second half of the year is the opposite.Now as the revenue tax is calculated as the basis from the NASDAQ price, we see that the risk for Bakkafrost to go into contracts has increased. So therefore, we have reduced our contract exposure. It's a bit strange that our regulation takes this approach and actually makes it more difficult to make contracts on VAP products in the Faroe Islands. We have made this approach or this clear to the authorities. But so far, there has been no change. So we have to adapt to the new situation.Coming to the cost price. The prices on feed have been relatively high now for a while. They are the main driver for the increased cost. There are, of course, also other drivers from inflation all over the line. But I think that the biggest increase is behind us. The feed cost is not in -- has not been increasing for the last 6 months. It has been quite stable. It might go somewhat down again. But the price on producing salmon has increased significantly over the last 2 years, probably more than over the last 20 years. And I am afraid that at the moment, we don't see them coming down again.
Wilhelm Roe, Danske Bank. Just a question on the August '21 batch. My understanding is that you really increased the smolt size during that period. Should we expect any impact on the following batches or is this more an isolated event for that particular batch?
This is an isolated event for that particular batch. This is related to that period in the summer where there were some construction issues with the Strond facility. There were adoption to temperature, but there were also some constructions, which needed to take place during that period, which had a negative impact on the water quality. It did not appear we didn't have any mortality and it did not appear that the fish were impacted at that time. But it is very clear now that this group has had some negative impact as we see that it is very outstanding in the numbers in the benchmark internally in the company. So we can see very clearly these pens are not performing as well as all the others. So that's why both stocking after that batch and the fish that is now relatively large for coming quarters seem to be doing quite well.
Christian Nordby, Kepler Cheuvreux. We have seen in the Faroes for the last 4 or 5 years that harvest weights have come down somewhat, if at least if you look at a rolling 12 months basis. Can you give some reasons to why this is? And can we expect sort of being above 5 kilo again in the future?
Yes. So -- and especially in the first half, we were not very comfortable with the situation. We were very, very low. But over the last 2 years, we have had some dampening effects compared with previously. We see now that especially since we have better tools available that we have a better position to keep the fish longer. We have a very strict veterinary and sea lice regime in the Faroe Islands.So therefore, sometime as we did not have all the tools needed, we needed to harvest early. That's what happened last year. If you remember the Haraldssund site in December, we had to harvest that fish early, which caused the plant fish for February harvest was actually harvest in January. So it was a snowball effect where we had to continue harvesting early on a lot of fish, taking average rates down for the first half of the year.In this quarter, in the third quarter, we actually expect it to be over 5 kilo, which also was the case for the South segment, [ Hov ] and also the West [indiscernible], where we were on 5 kilo and 5.4 kilos. But unfortunately, this batch, which was in [indiscernible], which is in the north, had a lower average weight because of this batch issue that I talked about. So this was not related to sea lice.Sea lice situation is all time arose. We have lowest numbers that we have recorded in Bakkafrost at the moment. And this is -- relates to the good tools that we have, especially with the freshwater dual treatment system with Bakkafrost. So therefore, my answer is that, yes, we expect higher growth at the higher average rates in the future.
And another question on the fish meal and fish oil volumes. How do you say fish oil normalized next year? What does that mean compared to this year? And do you have a lot of inventory of fishmeal, fish oil now for sale into '24 or else that situation?
We still have full inventory more than full. So we are selling off also here in the fourth quarter. So this year, we talk very much about fish meal, but actually, we have produced a lot of fish oil also this year. I guess we have -- can we see that somewhere in the report, the fish oil or is it only fish meal?
Does not specify that.
No. So we have sold a lot of fish oil also. So we had a lot of fat fish also during the summer. We don't plan or don't expect that to continue. So that's why we just indicated that, that's not part of our budget. But we expect to be self-supplied and maybe a bit more also on fish oil because there's a lot of offcuts also now from the pelagic operation in the Faroes with the factories doing pelleting where we get all the offcuts which is very high on fish-oil. That's mainly in the summer period and then the autumn period.Good. Thank you very much.