Mowi ASA
OSE:MOWI
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Mowi ASA
Earnings Call Analysis
Q1-2024 Analysis
Mowi ASA
In the first quarter of 2024, Mowi demonstrated substantial financial performance with operating revenues reaching EUR 1.33 billion and an operational profit of EUR 201 million, aligning with the company's earlier trading update. Despite facing significant biological challenges, such as seasonal winter sores and an unusually cold winter in Mowi Norway, the company managed stable margins and strong demand in most markets.
The harsh winter conditions, compounded by string jellyfish infestations, severely impacted Mowi Norway. Consequently, the region experienced reduced price performance and higher production costs. However, there is an optimistic outlook as biological conditions have improved in the second quarter, enhancing price and cost performance.
European markets showed strong demand and prices, particularly for salmon of European origin. On the other hand, the North American market faced softer prices due to a higher cost of living affecting consumer demand. Notable regional performance included Mowi Scotland, which reported improved biology and higher harvest volumes, resulting in increased operating profit of EUR 32 million from EUR 27 million year-over-year. However, Mowi Chile and Mowi Canada reported lower margins largely due to soft prices in their respective markets.
Mowi maintains a strong financial position with a net interest-bearing debt of EUR 1.82 billion and an equity ratio of 48%. The company successfully refinanced a EUR 200 million bond and improved liquidity by issuing two new green bonds totaling EUR 298 million, maturing in 2026. Additionally, Mowi enjoys the lowest cost of bond financing in the industry, supported by an investment-grade rating from NCR.
In overcoming the cost increases driven by feed inflation, Mowi leveraged a significant reduction in feed prices by approximately 5% in the first quarter alone. Predictably, fish oil and fishmeal prices have fallen by 22% from their peaks. The Peruvian anchovy wild catch quota above normal levels also presents an opportunity for further reductions in marine ingredient prices. Mowi continues to focus on organic growth, supported by an extensive post-smolt program, with expectations of further yield improvements.
Mowi maintains its guidance of harvesting a record 500,000 tonnes of salmon in 2024, a 5.3% increase from the previous year. This guidance is buttressed by a record-high standing biomass. The company also expects a lower cost level in the second half of the year due to improved biological conditions and reduced feed prices. Furthermore, Mowi anticipates that the price divergence between American and European salmon will resolve, reinstating a global salmon price.
Addressing the challenges faced in Norway due to unusual environmental conditions, Mowi is taking preventive measures, such as introducing a more effective vaccine and expanding its processing capacity. These steps are aimed at mitigating future biological risks. The company emphasizes its commitment to strategic growth and operational efficiency by focusing on sustainable practices and technological advances.
In light of its solid performance, Mowi has declared a quarterly dividend of NOK 1.50 per share. This reflects the company’s commitment to delivering value to its shareholders despite the challenging market conditions.
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[Presentation] Good morning, everyone, both in the room and online. Welcome to the Presentation of Mowi's First Quarter Results of 2024. And with me today to present the financial figures, I have as usual our CFO, Kristian Ellingsen and after presentation, our IRO, Kim Dosvig will routinely host our Q&A session. For those of you who are following the presentation online, can submit your questions or comments in advance, so as we go along by e-mail. Please refer to our website at mowi.com for the necessary details.Disclaimer, I think we leave for a self-study. So, then we are ready for the highlights of the quarter again. And as the first bullet point reads, Mowi posted EUR 1.33 billion in operating revenues in the first quarter, which translated into an operational profit of EUR 201 million, which was in line with the trading update the 18th of April. And if you are to sum up the quarter in just a few words, I think it's fair to say, it was a rather challenging quarter biologically for largest farming region, Mowi Norway due to seasonal winter sores and downgrades this time around, significantly compounded by issues with apolemia or string jellyfish in addition to an unusual cold winter with many storms. So, much tougher environmental conditions than what we are used to in this region. And this impacted both our price performance and cost performance significantly in the quarter in the form of a higher share of so-called production fish in addition to lower average harvest rates.As far as our 6 other farming countries are concerned, biology was good in the quarter, I would say. In terms of the market, we continue to see strong demand and strong prices for our salmon of European origin, at least salmon of the right size and quality, whilst regrettably, we still see soft prices for salmon of American origin after a promising start to the New Year. So, the 2-way division of the market we have seen since the second quarter last year and the termination of the last COVID-related benefit schemes in the U.S. seems to continue. So, it looks like the cost of living crisis makes a greater impact on the U.S. market than on our other markets, probably due to a confluence of factors, including the salmon's over-indexation to the Foodservice segment in the American market.But we have been through periods of price divergence between the American and European salmon before and we strongly believe history will repeat itself also this time around with price convergence when the dust settles and the reestablishment of once again, one global salmon price adjusted for logistics and quality. So, now [Technical Difficulty] it's a question of when. Whilst realized blended farming -- weighted farming costs for 7 farming countries was as expected, relatively high in the first quarter due to seasonally low harvest volumes and thereby low dilution of costs in addition to already addressed issues with winter sores in Norway.On a positive note, however, biology has improved for Mowi Norway in the second quarter and what is more the feed price, which is the most important input factor by far in salmon farming is also somewhat down in the New Year. And it may fall even lower with a normalized anchovy fishery in Peru this year after El Nino disrupted fishery last year. So as of today, we expect a lower cost level for Mowi Farming when we enter the second half of the year. And hopefully, this is some sort of a cost peak after a few years with an unprecedented cost inflation.The second quarter on the other hand well as the first quarter be seasonally impacted by low harvest volumes and low dilution of costs in addition to knock-on effects of winter sores for Mowi in Norway. From one thing to another, the FX hit versus our Norwegian [Technical Difficulty] first quarter in the wake of the weakening of the NOK we saw last year and the fact that [Technical Difficulty] EUR 10 million in the first quarter. So, it's still a considerable amount, although it's gradually diminishing this year, at least as long as the NOK does not weaken further against the euro.In terms of harvest volumes, we harvested 96,500 tonnes in the first [Technical Difficulty] somewhat lower than our guidance due to primarily a negative harvest volume deviation in Mowi Norway as a result of factors already addressed. Despite this, we still expect that our farming volume guidance of record high 500,000 tonnes is within reach, which is also supported by a seasonal record-high standing biomass in sea at the end of Q1. When it comes to [Technical Difficulty] both Consumer Products and Feed delivered a reasonably good quarter [Technical Difficulty] and a slower market in the U.S. So on balance, I think we landed on our feet after all in a quarter, which I think is fair to say will go down in history as one of our more challenging quarters.So, big thank you to my 11,500 colleagues for that, is, of course, much appreciated. And finally, the Board of Directors has decided to distribute a quarterly dividend of NOK 1.50 per share after the first quarter. I think that does it for the highlights of the quarter and we are ready to have a look at the key financial numbers. Kristian will go in depth on these numbers later this morning, so as not to be too repetitive, I think we will just touch briefly upon the most important ones now.And first, turnover, which we already have been through. Mowi posted EUR 1.33 billion in operating revenues in the first quarter, which translated into an operating profit of EUR 201 million. Net interest-bearing debt came at EUR 1.82 billion, which is somewhat above our long-term debt of EUR 1.7 billion. But equity ratio was a healthy 48% [Technical Difficulty] so we still have a sound composition of equity and debt in Mowi. Furthermore, underlying earnings per share was EUR 0.21 in the first quarter and annualized return on capital employed was 15%.In terms of regional margin value chain, we saw particularly strong margins for our Atlantic, Faroes and Irish salmon this time around on biology and strong prices for our European salmon, whilst regrettably, we once again saw soft margins for salmon of American origin [Technical Difficulty]. And on that note, [Technical Difficulty] 2-way divisional markets for American and European salmon will last. [Technical Difficulty] Price performance in the quarter [Technical Difficulty] in terms of mixed bag because outside Norway, it was good as it oscillated around the reference price, which is the standard [Technical Difficulty] internally and in the quarter, the reference price was very high, whilst in Norway, it was a very different story Q2, already addressed issues with winter sores and apolemia in addition to contracts and contract prices below the prevailing spot price in Q1.I also think it's fair to say it was further exacerbated by [Technical Difficulty] capacity in Norway for our downgrades. Bear in mind that our secondary processing capacity is located outside Norway. So in Norway, our upgrading options are confined to [Technical Difficulty] compared to at least some of our peers and export of so-called production issues that you note are allowed, which brings us to the different business entities and after this, to be more natural than to start with Mowi Norway, and so by far our largest and most important entity. And if we take the numbers first. Operating profit was EUR 138 million in the first quarter, margin was EUR 2.52 per kilo and harvest volumes, 55,000 tonnes, all of which were negatively impacted by -- I already addressed issues with apolemia. And sorry, again, there were lot of technical issues this morning. Unfortunately, in our different venue. So, we sort of little bit to get everything in place. So again, I apologize.Back to Mowi Norway, so because of issues with apolemia and string jellyfish and much more issues than are used to due to a series of unfortunate circumstances have already been obviously impacted both our price and cost performance in the quarter. But on a positive note, as we said in the highlights, biology has improved for Mowi Norway in the second quarter, which obviously helped on both price and cost performance. But as in football, it's always about the next match always. And as for next winter, we are now vaccinating all our fish in Norway with a new and presumably more effective and more tailored vaccine, which is a very important preemptive measure in this.And speaking of measures, we're also taking further preventive measures at sea and we are looking into our upgrading capacity on land. And what is more, there's also a reason to believe that this winter's co-issues with apolemia or string jellyfish are of temporary nature, as it has been 20 years since last time we saw these levels of this species in Norwegian waters. So hopefully, this winter was an example of a perfect storm and a low point in terms of winter sores for Mowi in Norway.Then shortly about the margins for the different regions for Mowi Norway in the quarter. As you can see from the chart here, we saw particularly strong margin for Region West, this time around. They had almost [ EUR 1 ] better margin than the other regions on good biology as well as being less impacted by winter sores and downgrades. Other than that, I don't think there is much more to say about the regional margins in Mowi Norway in the quarter.So, then we are ready for the last slide on Mowi Norway, our sales contract portfolio. Contract share was 32% for Mowi Norway in the first quarter and was with that approximately in line with our guidance, adjusted for a negative harvest volume deviation in the first quarter. And as I said earlier, these contracts contributed negatively to our earnings in the first quarter. As for the second quarter, we expect contract share to be about 30%. That's relatively stable prices quarter-over-quarter contract prices.So, then it's time to address the other farming countries and first one out is Mowi Scotland. As we guided in connection with the fourth quarter lease biology, improved significantly for our Scottish operation in the first quarter on lower sea water temperatures and decimating of pathogens following a challenging second half last year with severe gill issues. And this resulted in an operating profit of EUR 32 million for Mowi Scotland in the first quarter on 14,000 tonnes of harvest volumes, which is also up from EUR 27 million in the comparable quarter last year than 11,000 tonnes harvest volumes. EBIT margin on other hand was relatively stable year-over-year at EUR 2.19 per kilo in this quarter versus EUR 2.34 per kilo in the first quarter last year. And the second quarter also looks promising for Mowi Scotland on high volumes and continued strong prices for our Scottish salmon.Then overseas to Chile. Mowi Chile delivered another set of strong biological metrics in their first quarter with low mortality and good growth to mention a few. They have also come out of the allergy and low [ DO ] season reasonably well in Chile with no major biological hits. And we have now entered the winter season in Chile, which normally means much lower biological risks, knock on wood. But soft prices, unfortunately, weighed once again on an otherwise strong quarter for Mowi Chile and operation profit came to only EUR 12 million on our 13,000 tonne harvest volumes. This is also down from EUR 60 million last year in the first quarter on the 11,000 tonnes harvested volumes. EBIT margin is also down year-over-year from EUR 1.51 per kilo to EUR 0.95 per kilo.And soft prices are also a recurring theme for Mowi Canada in the quarter. On top of that, we also took a hit on cost in the first quarter due to a high share of harvest volumes from Canada East, which resulted in a loss of EUR 2 million in the first quarter, which is substantially down from the EUR 60 million we made in the first quarter last year, and we also saw fantastic prices for Canadian salmon. Harvest volumes on the other hand were quite stable year-over-year, 9,000 tonnes this quarter versus 8,000 tonnes in the first quarter last year. Other than that biology was a good for Mowi Canada in the first quarter with good growth given the prevailing seawater temperatures. It's always called a Newfoundland during the winter and low mortality, which brings us to our 2 smallest farming entities, Mowi Ireland and Mowi Faroes.And if we start with Mowi Ireland, our Irish operation delivered both strong earnings and margins in the quarter of EUR 4 million and EUR 3.90 per kilo, respectively, partly driven by ag sales. Biology was also once again good for Mowi Ireland in the first quarter. We saw also strong earnings for Mowi Faroes, EUR 9 million in the first quarter by means of a margin of EUR 3.50 per kilo on 2,600 tonnes harvest volumes. Biological metrics were also strong for Mowi Faroes in the first quarter.Then the latest addition to the Mowi family, Arctic Fish, our 51% owned Atlantic subsidiary. After a challenging second half last year, I have to say it's very encouraging to post strong biological metrics for Arctic Fish in the first quarter and a solid margin of EUR 3.79 per kilo, which resulted in an operational profit of EUR 10 million in the quarter on 2,500 tonnes harvest volumes. Things have also developed well so far in the second quarter for Arctic Fish, but heads up on realized production costs in the coming quarter due to a very low harvest volume. Other than that, I don't think there's much more to say about Arctic Fish in the first quarter.And I think we can conclude on Mowi Farming and move on to Consumer Products, our downstream business. Operating profit was EUR 24 million for Consumer Products in the first quarter, which is down from an unusual strong operating profit of EUR 37 million in the first quarter last year, which is mainly explained by a slower market in Americas and tighter margins in Europe. Otherwise, we continue to see strong demand and strong prices for salmon of European origin, whilst the market for our American salmon is a bit more sluggish. But as we said earlier this morning, we expect things to work themselves out in the American market in due course.Then last one out, Mowi Feed. The first quarter is low season with all that entails for our Feed business. But adjusted for that, I would say the first quarter was another strong quarter for Mowi Feed that increased volumes year-over-year and the pace out of the starting blocks, indicating new volume and earnings record for the year. And if you take the numbers, sold volumes were 98,000 tonnes in the first quarter, which is up by 4,000 tonnes year-over-year and operational EBITDA was EUR 6 million in the first quarter, which is in line with the first quarter last year. And Feed performance was once again strong in the first quarter, which is, of course, of utmost importance to us as the world's largest farmer by far.So then, Kristian I think the floor is all yours. You can walk us through the financial figures and fundamentals in depth. Thank you so far.
Thank you very much, Ivan. Good morning, everyone. I hope you're doing well, and I hope that you can hear me loud and clear.So as usual, we start with the overview of profit and loss, which shows a top line of EUR 1.33 billion revenue. Operational EBIT of EUR 201 million translated into underlying earnings per share of EUR 0.21 and annualized return of capital employed of 14.7%. With regards to the items between operational EBIT and financial EBIT, the main difference is the net fair value adjustment, which was a positive EUR 61 million this time around on higher prices. When it comes to result from associated companies, the operational result from Nova Sea was EUR 3.20 per kilo in Q1, including positive FX effects. And this was equivalent to the result in Mowi Region West in the quarter.Financial items were mainly related to interest costs. Then we move on to the financial position, where the balance sheet was somewhat reduced compared with year-end 2023. Mowi has a strong financial position with a covenant equity ratio of 51% end Q1. With regards to cash flow, Q1 earnings were partly offset by a net working capital tie-up, mainly related to Feed inventory and tax payments on high 2023 earnings. CapEx was reduced from 2023 as several large projects have been completed.And when it comes to cash flows, cash flows have been affected by high working capital tie-up in 2022 and 2023, driven by Feed inflation. On a positive note, cost of stock is down in Q1 versus Q4, and Feed prices are down approximately 5% in the same period. Note that the marine ingredients represent approximately 40% of the Feed price and thereby approximately 20% of the full cost in box in farming. This means that the development in raw material prices is key for further improvements in cash cost and working capital and then, of course, also realized costs. Bear in mind that the entire cost increase we saw last year in Mowi was related to Feed inflation as the other inflationary effects were offset by other improvements related to cost improvements, operational improvements and scale effects from higher volumes. So, this means that this is the key to see further improvements now in costs.And with that in mind, it's very positive that we have seen a good quota for this year's first season of the Peruvian anchovy wild catch. The quota of 2.7 million tonnes is above normal levels and above the 10-year average, as indicated in the top graph here. Approximately 0.7% is caught already, and the yields have been good so far. And this indicates a positive outlook for further reductions in marine ingredient prices. Fish oil and fishmeal prices are already down 22% from the peak. And the backdrop here is that last year's prices for marine ingredients were particularly high, driven by negative El Nino effects. And the price drop is illustrated in the graph below here. So, looking into the expected P&L cost development ahead. We expect a lower P&L cost level per kilo in the second half versus the first half of 2024, on improved biology and prospects of lower Feed prices and the positive scale effects. As Ivan already mentioned, Q2 is expected to be impacted by seasonally low volumes and the knock-on effects of winter stores in Norway.When it comes to the full year cash flow guidance for 2024, we have kept that unchanged versus the Q4 reporting, but with a potential upside, i.e., potentially lower tie-up in working capital depending on the Feed price development. In April, we successfully issued 2 green unsecured bonds. We are glad to state that Mowi has the lowest cost of bond financing in the industry. As part of this process, we obtained an investment-grade rating from NCR. We issued 2 NOK bonds, but these have been swapped to euro. First one is a 5-year bond amounting to EUR 213 million with a coupon of Euribor plus 1.19%. And the other one is an 8-year bond amounting to EUR 85 million with a coupon of Euribor plus 1.47%. Both are floating after swaps. And this means that we have now performed the refinancing of the 2020 bond of EUR 200 million, which matures in January and we have also improved our liquidity.So, this slide shows an overview of our financing and this has then been updated with the 2 bonds amounting to a total of EUR 298 million issued now in April. And then there are no instruments maturing until 2026. And we have a 95% sustainable financing, with the remaining instrument being the EUR 150 million Schuldschein. So much for P&L, balance sheet and the finance situation. So, we move on to market fundamentals and start with the industry supply of salmon. Global supply of salmon was relatively stable versus Q1 when adjusted for inventory release. Adjusted for this, supply increased by 0.5%. Volumes from the Norwegian farmers were impacted by winter sores, string jellyfish and an unusual cold winter. In Scotland, we saw improvements in survival rates. This provided somewhat higher volumes, while in Chile, volumes were reduced as expected. Both in Norway and Chile, standing biomass is down approximately 2% year-on-year, which indicates muted volume growth ahead.Consumption growth was 4% in EU plus U.K. We see strong demand in Europe on continued good retail demand and a stable good level for foodservice. In the U.S., consumption decreased by 3% on muted demand developments in retail and the foodservice sector, which has experienced headwinds from increased cost of living. But shelf prices in the U.S. trend down and we believe this will boost demand from the consumers in the time ahead. This is the dynamics we usually see. The U.S. market has grown by 6% CAGR the last 5 years, double the global growth rate and we expect the current short-term demand fluctuations to work itself out in due course and demand to improve in the U.S. The U.S. is the largest single market and we think that the U.S. presents lots of opportunities for Mowi.Brazil saw a good growth in the quarter, driven by foodservice. In Asia, the recovery in China continued on strong foodservice developments. This was partly offset by a lack of volumes in the rest of the regions. So, while European prices have been strong, Chilean and Canadian prices have been on the soft side. But I would say that at least for Canadian, the most recent price developments in Americas have been positive and we believe that this situation will nevertheless improve in the time ahead. When it comes to industry supply growth, we estimate low supply growth of only 1% for the industry in 2024, in line with the estimate from Kontali. And we expect limited supply growth also in the coming years, around 2% on average.But with regards to our own volume guidance, we maintain the guidance of all-time high 500,000 tonnes, supported by seasonal record-high standing biomass in sea. And this means that 2024 is expected to be a continuation of the growth journey we have seen in Mowi now for the last years with 125,000 tonnes of mainly organic growth in 6 years and a CAGR of 4.9% versus the industry at only 2.7%. And the key contributor to further organic growth is our extensive post-smolt program, which we only now are beginning to reap the rewards off. This is also expected to further improve our biological metrics, including survival rates. And by the end of 2024, we expect 25% post-smolt coverage for the Mowi group and 50% for Mowi Norway, excluding the naturally and more resilient Region North. And these slides illustrate various concepts we have with regards to ongoing post-smolt projects in the group.With that, it's over to Ivan for some comments on the outlook.
Thank you for that Kristian. Much appreciated. That is time to conclude with some closing remarks before we wrap it up with our Q&A session hosted by our IRO, Kim Dosvig.And I said earlier this morning, the first quarter goes down in history as one of a more challenging quarters due to seasonal issues with winter sores and downgrades in Mowi Norway. This time around significantly compounded by issues with apolemia or string jellyfish in addition to an unusual strong -- not strong, an unusual cold winter with many storms. On a positive note, however, biology has improved for Mowi Norway in the second quarter and what is more, the Feed price, the most important input factor by far in salmon farming is also somewhat down in the New Year. And it may fall even lower but a normalized anchovy fishery in Peru this year after El Nino disrupted fishery last year. So, as of today, we expect a lower cost level for Mowi Farming as we enter the second half of the year. And hopefully, this is also some sort of a cost peak after a few years with unprecedented cost inflation.The second quarter on the other hand as the first quarter impacted by seasonally low harvest volumes and low dilution of costs in addition to knock-on effects of winter sores for Mowi in Norway. In terms of the market, we continue to see strong demand and strong prices for our European salmon, whilst regrettably, the market for our American salmon is a bit more sluggish. But as we said earlier this morning, we have been through periods of price divergence between the American and European salmon before. And we strongly believe history will repeat itself also this time around with price convergence when the dust settles and the reestablishment of once again a global -- one global salmon price, adjusted for logistics and quality. So in our view, it's not a question of if, it's a question of when.And furthermore, the supply side looks favorable within practice no growth this year and very limited growth in the coming years. So all in all, fundamentals are still looking good in our view. For our part, we have, as Kristian just showed us, maintained our harvest volume guidance of record high 500,000 tonnes for this year, which is equivalent to a growth of 5.3% year-over-year and which means that once again, our growth rate surpasses that of the wider industry by a large margin. And this volume guidance is also supported by a record high, seasonal record-high standing biomass in sea at the end of the quarter.And last but not least, please save the date of the 25th and 26th of September because then we will arrange our Capital Markets Day in Mid Norway, where we will present our strategic and operational plans for the coming years. And there we'll also get the opportunity to have a first-hand look at our 410,000 tonnes Feed factory in Bjugn, our 6,200 tonnes smolt and post-smolt facility at [indiscernible], our brand new state-of-the-art 100,000 tonnes primary processing plant at Josnoya, our remote operations center in Mid Norway, a smart farming concept, site visits, of course, to mention a few. So once again, please save the date of the 25th and 26th of September. I think it will be worth your while.So, this marketing at the end, Kim. I think we are ready for the Q&A session. So, if Kristian can please join me on the floor.
Thank you, Ivan. So, we have received some questions from the web, but I think this time, we'll start with questions from the audience. Christian with Arctic Securities.
Can you comment on how superior shares in Norway are today versus the average during Q1?
We are not specific about the numbers as such because it's commercial sensitive, obviously, but it's better and it's gradually increasing. So, the second quarter is a recovery quarter in terms of quality, in terms of harvest rates, growth, et cetera, we are back on track. So, things are looking much better in Mowi Norway in the second quarter. And as for the 6 other farming countries, things are still looking good and the first quarter was excellent. So, we apologize for the first quarter, but sometimes nature hits and it did this time around. What was unusual this time was that it happened in Norway. We're not used to that.
And when it comes to Chile, we've seen for a number of months that there's been weak smolt stocking. Do you think that now that we have El Nino behind us that we will see higher small stockings in Chile?
I think Chile has reached to a point now where we won't see any substantial growth. For our part, we will continue to grow gradually as we have done over the past few years. I think for Mowi, you can think of the growth trajectory you have seen. For the rest, I think you have reached to some kind of a level where not much will happen at least in the coming few years. In the longer term, I don't know. It depends on technology regulation, et cetera.
Okay. Then continuing with some questions from the web. Alexander Sloane, Barclays. He has also a question on winter sores. But more specifically, what's the outlook for next year given the new vaccine?
Yes. So no one knows, of course, but we have a strong -- we strongly believe things will be much better next year. We do. Now we have our new vaccine in place and if we take history into account, all ways out of previous disease issues in this industry have been through a vaccine. So, I think that will also be the solution this time around. And what was very special this year was the jellyfish, so that compounded the issues with winter sores significantly. And then I really mean significantly. We didn't see this coming. We were not prepared. So next time, we are also prepared with regard to jellyfish. So, we have several preventive measures we can take. So, I strongly believe that next time, we stand here, so 1 year ahead, we will talk about much better superior quality numbers for Mowi Norway.
Okay. And then his second question is on the 2024 volume guidance. Do you have any buffer left if biological challenges pick up year-over-year? And can you comment on the biomass development?
Yes. No. Of course, our reserves, they are shrinking, so -- but if you take the biomass, we have in sea, use last year and added up, then I think you end at [ 500, maybe 501 ], depends on how you calculate. So, if things can be in line with last year, I think we are good. But of course, there are also limits for us in terms of buffers. So in this industry, everything can happen. But last year, it wasn't great. So, I strongly believe in these numbers, I got to say. And as of today, it's the best estimate. But if, of course, big things happen, then it will impact it. That's the name of the game.
Martin Kaland, ABG Sundal Collier. You talk about expanding your processing capacity in Norway for upgrading fish with winter sores, what kind of upgrades are you talking about? Any meaningful CapEx, adding on filleting lines to existing facilities or new facilities?
Yes, to the last part of your question and no the first part, and if I shall repeat the question. So, no additional CapEx. And yes, we are increasing our filleting capacity in Norway. So, we are doubling it year-over-year. So, we are taking all the measures we can, right? So, we do not put all our eggs in one basket. We introduce vaccine, we take preventive measures at sea. We are increasing our operating capacity. So, I cannot guarantee anything, but we do everything in our power to avoid such a situation again because this is -- this is the core of our business. So, we have 7 farming countries, but Norway is and will always be #1 region for Mowi Norway. And we are used to very different numbers than what we are reporting this time around. So, then we take actions.
Alexander Aukner, DNB. So in the U.S. market, you say demand is a bit sluggish. Is it possible to give some more color? Is it certain products? Is it the high end? Is it the low end? Yes. So just some additional color on sort of why it's sluggish.
Yes. So we see that there is somewhat more headwinds related to prepacked products and natural fresh, but we also see that we have now several quarters with the downward adjustments of -- and retail prices, 3%, 2% and then last quarter, 1%. So, I would say that these numbers suggest that we should see some boosting effects on demand in the U.S. in the time ahead. But there's no question that it has been a little bit sluggish so far. I would say that bulk salmon has offset some of these developments in prepacked and natural fresh, but the overall price development is for everyone to see, but we are confident that this situation is temporary and this will improve in the time ahead.
And then one question from the web, Alexander Jones, Bank of America. He's got a question on the market division for you, Kristian. If the markets had a very strong quarter and how much of this is sustainable versus how much is a one-off perhaps linked to the strong trading activity in the quarter.
Yes. So, we have done reviews of agreements and of the subset. So, we believe that you will see a higher earnings in the market segment versus what has been the history in a Mowi. So I would say that, of course, in general, you will see higher earnings, but note that the upgrading effects we have had now in Norway in the first quarter related to filleting, they have been included in the market segment. So that means also that due to the special winter sore situation this time around, there is an extra effect related to that. Yes. So, this time around, there is 2 effects, I would say, in general, a review of agreements and the setup and a special filleting effect. And yes, so I think we can leave it at that so far.
And then one last question from the web, back to Barclays and Alexander Sloane. On costs, 20% cost in box is Norwegian feed and prices are down 20% from peak. Can we assume material cost reduction into next year, all else being equal?
Yes, 20%, I think that's volume-wise, cost-wise, I think it's 40%. But we have only guided on the second half where we believe in our cost reduction which also we have support in our numbers next year. It's very early days. We have a second half, biologically, we have to work ourselves through. It's so hard to say. But during the presentation, we said that we hope this is some sort of a cost peak after a few years with unprecedented inflation. So indirectly, we also suggest that we hope that we can see a drop also next year. But for us, we don't know. So, we have any numbers saying that. So, this is just us looking into a crystal ball, but we also include some hope. So, take it for what is. But for the second half, we have support in our numbers. So, unless nothing goes wrong significantly, I think we will see that. If not, I will be disappointed.
Okay. That concludes the Q&A.
Okay. Then it only remains for me to thank everyone for the attention. We hope to see you back already in August on our second quarter release and we also hope to see some of you in Region Mid at our Capital Markets Day in the 25th and 26th of September. Thank you.