SalMar ASA

OSE:SALM

Earnings Call Transcript 2023-Q1

[Frode Arntsen, Chief Executive Officer]

Good morning, everyone, and welcome to the presentation of SalMar's results for the first quarter of 2023. My name is Frode Arntsen. I'm the CEO of SalMar. Joining me today is our CFO, Ulrik Steinvik.

Today, as we present the quarterly results for the first quarter of '23, it has been 16 years since SalMar was listed on the Oslo Stock Exchange on May 8, 2007. The 16 years before and 16 years after the listing have been a story of growth for SalMar, where we have gone through both ups and downs; and come out stronger with an increasingly competent, professional SalMar. At SalMar, we have always had a strong belief in farming salmon on its own terms and that healthy and nutritious food is something that never goes out of fashion.

Therefore, we have been fortunate enough to have access to risk capital and made strategic moves in the value chain that have strengthened us. This has led us to where we are today and given us a good foundation for further growth. Today, our review will follow the same order as before. I will take you through some highlights and operational results before our CFO takes you through the financial update. Finally, I will focus on the sustainable development of our industry before rounding off with a review of the outlook for the future, but let's move to the results for the first quarter of '23.

The start of 2023 has shown us new records on the salmon prices; and this has led to a very strong result for the first quarter of '23, in fact the highest quarterly result in the company's history. In Norway, we harvested 42,000 tonnes at a margin of NOK 41.10 per kilo. Overall for the Norwegian operations, we delivered an operational EBIT of NOK 1,725 million. Including Icelandic Salmon and SalMar Aker Ocean, we harvested 48,500 tonnes, with a total operational EBIT of NOK 1,884 million at a margin of NOK 38.8 per kilo.

Central Norway delivers a strong result; Northern Norway, somewhat weaker than expected as a result of the high proportion of NRS volume in the quarter. Sales and Industry shows very good operational performances and demonstrates the strength of the structure we have in SalMar. And Iceland posts an all-time-high quarterly harvest volume. In short, we are satisfied with the results in the quarter.

We are very well underway in realizing the synergies with NTS, NRS and SalmoNor; and 63% or NOK 425 million out of NOK 671 million have already been realized. In addition, we became the owner of all the shares in NTS at the beginning of January. And the process with Frøy is progressing as planned. Ulrik will return to this.

As I mentioned last time, 2023 is the year of culture in SalMar. To introduce this, I will now show you a short movie.

[Presentation]

[Frode Arntsen, Chief Executive Officer]

All of SalMar's employees must have a beating heart with a passion for salmon. That's why we have named 2023 the year of culture. And this short movie and also this picture shows you an example on how we are acting and how we are working with the culture and building team in SalMar. Now with NTS, NRS and SalmoNor on the team, we have brought together several of the strongest aquaculture companies in Norway.

Through the SalMar School, we create the way forward together and ensure ownership of the new strategic direction that will lift SalMar even further. We also work with a joint company culture where we take the best from the new companies and SalMar and together create a clear understanding of what it means to work at SalMar and what it is like to be an SalMarian. We get up a little earlier, work a little longer, challenge a little more and always look for improvements. It costs a little, but it's always costs to be in front and try to be number one.

Last weekend, we gathered the whole new SalMar under one roof in Trondheim. It was a fantastic atmosphere with an incredible number of skilled and competent employees. I was very proud when I saw all the people, all the competence, all the commitment and the wonderful passion. We have a very strong team going forward. Everything is set for us to be able to reach our goals and take new steps forward, but let's now go through the results from the operating segments.

In Central Norway, we harvested 22,200 tonnes in the quarter, with an operational EBIT of NOK 1,109 million, which gives an EBIT per kilo of NOK 50. As expected, the cost level is somewhat lower than what we had in the fourth quarter, where the volume from SalmoNor contributed about 15%. In addition, at the end of the previous quarter, we had some available licensed capacity as a result of the fish with a low average weight that we chose to harvest in Q4. This meant that we were able to build biomass throughout the first quarter and resulted in most of the volume was harvested towards the end of the period.

We have mainly harvested the autumn '21 generation, which is now nearing its end. And we started harvesting our spring '22 generation towards the end of the quarter. In Q2, we will continue to harvest these generations, where autumn '21 will be finished and spring '22 will account for a larger share of the volume. In the second quarter, we expect higher volume and higher costs compared to the first quarter of the year. Volume guidance for 2023 is unchanged at 148,000 tonnes.

In Northern Norway, we harvested 19,800 tonnes in the quarter, with an operational EBIT of NOK 837 million and EBIT per kilo of NOK 42.3. After several good quarters in the North, where we have shown strong results, this result for the first quarter is somewhat weaker. This is a result of the volume being harvested mainly early in the period but also because the NRS volume made up to 56% of the volume in the segment.

As expected, the NRS fish has a higher cost than the old SalMar. In addition, we are also seeing effects of the cost inflation we have experienced. Therefore, this increased the cost from the previous quarter. Altogether, this means that the results from the segment is somewhat weaker than expected. Looking forward, we will continue to harvest autumn '21 generation in the second quarter and we will start harvesting our spring '22 generation. NRS fish still have a higher cost, but in the second quarter, they will account for less of the volume compared to Q1. In the second quarter, we expect to harvest a lower volume with a lower cost level. Volume guidance for '23 is unchanged at 95,000 tonnes.

The Sales and Industry segment delivers an operational EBIT of minus NOK 81 million. The segment delivered a very good operational performance in the quarter. Through the structure we have built in SalMar with a focus on high harvest capacity and high local processing capacity near the areas where we farm, we have managed to handle the fish in a good way and achieved a good price in the market in the quarter.

As expected, the contract share was 25% in the first quarter, where the high spot price in the period contributed to a negative contribution from the fixed-price contracts. During the period, we also sold the sales office from NRS in Kristiansund. And the harvest facility in Rørvik, SalmoSea, has been closed down. The results from these actions are included in the first quarter but will be omitted from the second quarter and onwards.

In the second quarter, we expect a contract share of 25%; and for the whole of '23, around 12%. As mentioned earlier, this is somewhat lower than usual in the second half of the year as a result of the proposed new tax in Norway. We are still working actively with our customers to put in place new models for how we can sell fish and not just on fixed-price contracts, and we have gotten some new agreements in place. Unfortunately, we have still not been able to get as large a number of contracts as we would have liked, especially for secondary processing.

Now to the Westfjords in Iceland. In Iceland, 6,600 tonnes were harvested in the quarter, with an operational EBIT of NOK 204 million and an EBIT per kilo of NOK 31.0. This is the highest harvest volume we have had in one quarter in Iceland, where the '21 generation has accounted for the volume. This generation has had a higher cost compared to what we had in Q4. And in addition, biological challenges have affected the result in the period by EUR 1.8 million or approximately NOK three per kilo. However, very good salmon prices and continued good price achievement means a satisfying result for the period.

As we have mentioned before, we still have strong ambitions in Iceland, but there is still a way to go to utilize the capacity we have in the licenses. We will therefore prioritize building biomass and optimizing biology in the second quarter. Therefore, a very low volume will be harvested in Iceland in the second quarter. Although this is unfavorable in the short term given the high prices we are experiencing these days, this is in line with how we want to operate. It must be on the salmon terms. Volume guidance for '23 is unchanged at 16,000 tonnes.

For the first quarter of '23, SalMar Aker Ocean had an operational EBIT of minus NOK 45 million. Finally, we are back in business, and we have now started production in Ocean Farm 1. After the unit has been for upgrade at Aker Solutions shipyard in Verdal, it was transported back to its location at Frohavet in March. During the weekend last week, the first smolt came into the unit, a total of 600,000 fish with an average weight of 500 grams. A further 500,000 smolts from the same batch are planned to be released to the Ocean Farm 1. We expect to harvest the fish at the start of 2024. And we look forward to deliver the first fish from this segment when we present the results in a year's time.

We still see significant potential for future value creation and volume growth for offshore farming, but as you know, offshore aquaculture is proposed to be not included in new tax in Norway. This creates uncertainty. Time lines for new units have therefore been delayed and final investment decisions have been postponed until further notice.

Then we move on to our joint venture in U.K., Scottish Sea Farms. In the first quarter, the company harvested 5,200 tonnes, with an operational EBIT of NOK 9 million and EBIT per kilo of NOK 1.7. After a challenging second half of '22, it was expected that the harvest volume was low in the first quarter of this year, where they have chosen to build biomass at the start of 2023. Results for the period are still characterized by the challenges of the last year with high mortality and low average weight and therefore also a high cost level in the quarter, something that also is expected to continue in the coming periods.

In addition, 61% of the volume has been sold in the contract at prices that have been below the record-high spot prices we have seen, but overall there is a significant improvement in results from the previous quarter. Volume guidance for the year is unchanged at 37,000 tonnes. With this, I have come to the end of the operational update.

And I would now like to give the floor to Ulrik, who will take you through the financial update.

[Ulrik Steinvik, Chief Financial Officer]

Thank you, Frode. And good morning, everybody. I will first take you through the financial update. And I will end my part of the presentation with some comments on the resource rent tax proposal in Norway and update on the synergy realization of the NTS acquisition, including status on ongoing process with Frøy, but first, some comments on the profit and loss statement for the first quarter of '23, which is the first whole quarter for the merged company.

As Frode has already mentioned, it is the record-high salmon prices that have led to the strong quarter we are presenting today. You can see this clearly from the graph at the top right, where the price increase is the main cause for the improvement in results compared to the previous quarter. At the same time, costs out of stock are somewhat higher than in the previous quarter. This is due to a higher cost on the volume acquired from NRS. This volume made up roughly half of the volume in the region North in the quarter.

We are continuously working to counteract the cost inflation and the increased feed prices experienced in the last quarters. In addition, one of the main reasons for the mergers in '22 is to take advantage of greater economies of scale. I'll get back to that a little later in the presentation. It is worth noting that, in the first quarter, we have transactions and restructuring costs of NOK 60 million or NOK 1.24 per kilo which affect the result negatively. In addition, the graph also shows that the contribution from Iceland has increased, which is also mainly driven by the prices in the period compared to the previous quarter.

If you move to the profit and loss statement, you will see that we have paid NOK 32 million in existing resource rent taxes, production tax in Norway and resource tax in Iceland. In accordance with IFRS, the new proposed resource rent tax is not included in the financial statement, as it is still under consideration. As a result of higher prices, the fair value adjustment of the biomass is positive. This increases the result by NOK 635 million.

Income from associated companies and joint venture was NOK 27 million for the first quarter, where Scottish Sea Farms had a negative contribution, while our new associated companies after the merger with NRS, which is Hellesund Fiskeoppdrett and Wilsgård Fiskeoppdrett, contributed positively. As the increased debt was a part of the incoming balance and due to the higher interest rates, the net finance increased to NOK 279 million.

Overall, it's a strong start to '23 for SalMar. Net profit after tax is NOK 1.7 billion, excluding Frøy. As a result of looking at strategic alternatives for Frøy, we have classified this as held for sale. And in the profit and loss statement, Frøy is shown here as profit for the period after-tax on its own line and is NOK 108 million.

Then on to the balance sheet, where there have been fewer changes in this quarter compared to the last quarter. As mentioned, Frøy is classified as held for sale and is included here with NOK 11.8 billion as a separate item among the assets. In '23, we have continued our investment program on the investments to date already approved, but larger industrial investments are still on hold. As normal, we have somewhat lower biomass at the end of Q1 '23 compared to last quarter. And compared to Q1 last year, the biomass is naturally higher, driven by the previous mentioned acquisitions.

The equity ratio has increased by nearly 2% two percentage points to 41%, an increase mainly explained with the result in the period. The leverage ratio net interest-bearing debt, including leasing, on EBITDA has been reduced to 3.4. Without leasing, the leverage ratio is 3.1. The key figure is naturally affected by the acquisition, including the fact that EBITDA is still mainly from the business from before the acquisition. At the end of Q1 '23, we still have a very solid liquidity reserve.

We have approximately NOK 8 billion in available liquidity in the form of cash and unused credit facilities. In summary, we still have good financial flexibility through our solid liquidity reserve. At the same time, we plan in the near future to refinance the debt to ensure a more optimal capital structure and maturity profile going forward. Further, we expect the debt to be reduced due to good operational performance and ongoing strategic processes.

I would like to give a brief explanation of the change in net interest-bearing debt, including lease liabilities, in the quarter. We started the year with a NIBD of NOK 19.1 billion and leasing of NOK 1.4 billion, a total of NOK 20.5 billion. During the period, we have had a good cash flow from operations, where EBITDA was just above NOK 2.2 billion. Payment of tax amounted to NOK 106 million. At the same time, we have reduced working capital by paying trade payables, which results in a change in working capital of NOK 835 million.

We have also carried out investments during the period. In total, this amounted to NOK 1.251 billion in the quarter. The total investments are affected by the fact that the compulsory acquisition of remaining shareholders shares in NTS was carried out in January '23, where a total of NOK 671 million was paid out. Other investments amounted to NOK 580 million, of which the largest single investment is linked to the construction of the smolt facility in Tjuin. In addition, ongoing investments in both maintenance and capacity-increasing investments in other parts of the value chain, including Iceland and SalMar Aker Ocean, continue. Both businesses represent future growth opportunities.

During the period, we also commissioned our second battery hybrid well boat, which is now in operation along the coast in Norway. When we take these into account as well as what we have spent on interest and installments on leasing in the period, we end up at NOK 21.1 billion in net interest-bearing debt, including leasing obligation, at the end of Q1 '23. That is an increase of NOK 549 million from the end of '22.

As we have mentioned on several occasions, the end of '22 was strongly and negatively affected by the pricing tax proposal the Norwegian government launched at the end of September. At the end of March '23, the government put forward its updated proposal with a tax rate of 35% as well as some other minor adjustments. The proposal is now being considered by the finance committee in the Norwegian Parliament, the Storting, and it is expected that a clarification will be received closer to the summer.

SalMar is still clearly negative to the proposal. That applies to both the proposed model and level. The proposed model is not neutral when it comes to investments and will therefore clearly affect growth and value creation. As is then here today, May11, '23, when more than one third of the year has passed, much is still unclear. Actually it is so unclear that we cannot book the resource rent tax cost in the financial statement for this quarter. And even more important, we do not know what tax system to deal with. This makes it difficult to make decisions both organizationally, operationally and strategically.

In SalMar, all new major industrial investments are put on hold until we have clarity on the framework conditions under which we can operate. Neither our industry nor other adjacent industries benefit from this. The Storting's decision with respect to the tax proposal will, in other words, have substantial ramification for the Norwegian aquaculture and industrial sectors in the time ahead. As the country's highest decision-making authority, the Storting; and the finance committee on its behalf therefore shoulder a heavy national responsibility as they embark on the consideration of this proposal.

As we mentioned to you at the previous quarterly presentation, we would like to give you a status on the synergy realization of the NTS acquisition quarterly in '23. We can today report that 63% or NOK 425 million of total NOK 671 million in annual cost savings have already been realized. The estimated total restructuring cost of NOK 103 million is unchanged from the previous quarter, and we estimate that NOK 10 million to NOK 20 million of this remains at the end of Q1. These amounts are annual recurring savings linked to optimal operational structure, increased efficiency and economies of scale.

Some of that potential will take time to be realized in cost out of stock presented in the profit and loss statement. A production cycle for salmon takes several years. Therefore, we expect a gradual improvement through '23 which will be partially realized in '24 and with full effect from '25. And in addition, we will utilize the potential that lies in our common resource base, for example, our licenses and facilities in the value chain.

At the same time, the process to assess strategic alternatives in Frøy is ongoing. The aim is both to find good solutions for Frøy and to maximize the value of SalMar's shareholders. Based on the fact that we have several concrete alternatives on the table and received strong interest from several parties, the process continues. This will probably still take some time, but we will update you on the process and our assessment when significant milestones are made. And as I mentioned a little earlier, we have classified the company as held for sale in our balance sheet and a sale of our ownership in Frøy is a possibility for SalMar, but no final decision is made.

And with this, I give the floor back to you again, Frode.

[Frode Arntsen, Chief Executive Officer]

Now I want to talk about sustainable development of our industry. Sustainability in everything we do has been one of the most important cultural tenets in SalMar. For us there is a close connection between environmental, social and economic sustainability. Production and economic growth are not sustainable over time unless it is environmentally rooted. Therefore, we have defined three pillars in how we report on sustainability. We must ensure that the fish and our people thrive while at the same time taking care of the environment.

At the end of April, SalMar published its latest sustainability report, and the results for the year 2022 show constant improvements in our sustainability work. We work tirelessly for our fish welfare indicators to be even better and have set ourselves ambitious goals, with plans for how to achieve them. At the same time, the injury statistics shows that the work we have put in to reduce accidents in the workplace is working, as we can report the lowest number in history on our injury statistics.

And another KPI that we are very happy with is the reduction in the greenhouse gas emissions. Last year, we set ourselves ambitious goals in the -- line with the Paris Agreement and a 1.5-degree target. And since 2020, we have reduced our absolute emissions by 22%, well ahead of the curve to reach our emissions target of a 42% reduction until 2030. This shows that we are taking our share of the responsibility. And this contributes so we can deliver even more sustainable food to customers all over the world because we do have a responsibility as the world's second largest producer of salmon. We have a responsibility to ensure that the growing world population gets healthy and nutritious food on the table because the world needs more sustainable proteins. And salmon is one of these proteins.

With low freshwater consumption, low energy requirements, low feed factor and high yield, salmon is one of the most sustainable proteins. In 2023, we in SalMar alone will deliver two billion meals from our facilities, two billion meals. This corresponds to us being able to provide one salmon meal to every resident in Norway every day of the year. This underlines SalMar's position as a key supplier of Atlantic salmon. And we work around the clock to increase our production, always on a sustainable matter and always on the salmons' terms.

Everything we do must still be on the salmon terms, and this impacts how we think throughout the entire value chain from roe to plate. In order to succeed in this, each and every one of us who work at SalMar must ensure that we succeed at every step in the value chain. SalMar must be the most cost-effective salmon producer. And we secure that position through an unwavering operational focus throughout the value chain, from smolt to customer.

Good smolt, good biological conditions, the right feed and feeding regime, good fish welfare and fish harvested with the right size and good quality, locally harvested and locally processed are all crucial elements in this work. It will give us the best starting point to ensure our customers worldwide a fantastic product. And there are several projects underway at SalMar which ensure a further sustainable development of our industry, and I would like to mention a few of them.

During 2023, one of the world's largest smolt facilities at Tjuin in Trøndelag will be put into operation for the production of around 20 million smolts. The plant is equipped with the latest RAS technology. And in connection with the plant, a separate biogas plant will also be established, with full utilize the resources in the sludge from the plant. In a little over a month's time, we will have our second closed net pen in operation, the Marine Donut. This will be installed at a location just outside Molde, in Møre og Romsdal.

And in addition, in 2023, we will also produce fish in two offshore farming facilities: Ocean Farm 1, which I mentioned earlier. And during this summer, the first production cycle will also start in the Arctic offshore farming development project. All three of these examples are important milestones for SalMar in 2023 and clearly show that we take responsibility for leading the sustainable development of new technology within the aquaculture industry.

Now let's move towards the end of the presentation. The last period has shown us how strong the salmon market is with then new records within the salmon prices. Our job is to ensure that people and fish thrive and utilize the strong platform we have in SalMar. As I have said before, we must work with both heart and mind to achieve this. And I am confident that our talented people and strong culture we have in SalMar will realize the potential we have for further sustainable growth both in Norway, Iceland and Scotland.

As Ulrik mentioned, the integration work and the extraction of synergies are going very well. And we will announce to the market when we have more details about the process with Frøy. We are keeping the volume guidance for the year unchanged. And I have commented on guidance for the second quarter and you can see it summarized on the right side of this slide. Supply growth globally for '23 is expected to be low, but in this situation, SalMar will grow significantly. And we also have several options for further growth and untapped potential within existing licenses in all regions.

As we have discussed, we are still waiting for an answer about how we will be taxed in Norway in 2023. We at SalMar are clear that we are against the proposal that is on the table. And we expect clarifications about the tax before the summer, but with the tax proposal that is now being considered by the finance committee and the Norwegian Parliament, the future has become more uncertain. The people of the coast have experienced stormy days before, and Norwegian aquaculture has great opportunities in the future as well.

SalMar intends to make use of these opportunities so SalMar's skilled, hard-working and loyal employees also have safe and profitable jobs to go to in the future. They are the ones who get up in the morning every day and make SalMar the powerful company it is and ensure healthy and sustainable food. The demand for healthy and nutritious food such as salmon is high. Unfortunately, the Norwegian authorities have recently caused some dark clouds over the possible outlook for our industry in Norway. Our hope is that the Norwegian Parliament will help remove some of these clouds, preferably this spring, because we at SalMar are optimistic about the future. We do have plans. We do have hopes.

And it is appropriate to remind you of our Capital Markets Day in September. We look forward here. We look forward to welcoming you at our planning and existing program, where you will both have the opportunity to get to know us and hear about our plans but also see our value chain in the beautiful surroundings of Troms and Senja. It should be very exciting for all of us, so if you are interested, go to our website and register for our Capital Market Day, sixth and seventh September 2023.

With this, we have come to the end of the presentation. Thank you for your attention. The next quarterly presentation is August 24, where we plan to present our results at Aqua Nor in Trondheim, so you are all welcome to fantastic Trondheim at the end of August to experience both Aqua Nor exhibition and our quarterly reporting for the second quarter. Until then, enjoy spring and summer. And as always, eat a lot of delicious salmon.

Thank you very much.