SalMar ASA

OSE:SALM

Earnings Call Transcript 2023-Q2

[Frode Arntsen, executive]

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

As the largest aquaculture company in Central Norway, it's natural for us to be here today to present our results in Trondheim and at Aqua Nor. This is the world's largest exhibition for aquaculture technology and a crucial meeting place for all stakeholders in the aquaculture industry. Our industry is forward-looking with plans for sustainable growth for communities along the entire coast. That's why I plan to talk about innovative projects in SalMar during the strategic update today. But first, let's move onto the review of the second quarter. Our presentation will follow the same order as before. I will take you through some highlights and the operational results for the different segments. Then our CFO will provide you with a financial update. Finally, I'll focus on innovation and technology in our industry before wrapping up with an outlook for the future.

The second quarter was another strong result and a strong quarter for SalMar, where the salmon price remained at a high level, resulting in very good results. In fact, it was the best result in history for the Norwegian part of our business. In total, we harvested 44,300 tonnes in Norway during the quarter with a margin of NOK 40.5 per kilo. For our entire Norwegian operations, we achieved an operational EBIT of NOK 1,790 million. When including Icelandic Salmon and SalMar Aker Ocean, we harvested 44,300 tonnes in the quarter with a total operational EBIT of NOK 1,745 million at a margin of NOK 39.4 per kilo. Central Norway has delivered good operational performances in the period but the result has been impacted by onetime costs, a very strong result from the Northern Norway. Sales and Industry continues to show excellent operational performance, demonstrating the strength of SalMar's structure. As expected, there was almost no volume harvested in Iceland during the quarter. In short, we are pleased with the results of second quarter.

As you are aware of, the resource rent tax of 25% was approved at the end of May. SalMar strongly opposes the resource rent tax model and level and believes the arguments outlined in the company's consultation response in January '23 still holds. The company will continue to argue for a review of the tax system and tax level for Norwegian aquaculture through closed and fact-based dialogue with authorities and decision-makers. And SalMar is open to legal steps in due course.

We have also taken some significant financial steps during the period. Frøy has been sold in August, which significantly reduces our debt and strengthens our balance sheet. Additionally, in August, we have secured new financing for SalMar, paving the way for our continued growth. And the Board of SalMar proposes to cancel Treasury shares. CFO, Ulrik will provide more details on this. We also reached a milestone by having 2 offshore units in operation now both Ocean Farm 1 in Central Norway and Arctic Offshore Farming outside Tromsø in Northern Norway. And at the end of Q2, our new smolt facility, Tjuin, came into operation.

But now let's dive into the details, starting with Farming Central Norway. Central Norway harvested 28,300 tonnes in the period with an operational EBIT of NOK 1,108 million, which gives EBIT per kilo of NOK 39.1. There has been good operational performances in the period. And as expected, the cost level is higher than what we had in the first quarter. However, it turned out slightly higher than anticipated due to slightly lower average weight towards the end of the period, where we decided to start emptying a site that had been affected by ISA. This site has now been completely emptied in August. Additionally, during the period, we had some one-off costs related to the write-down of biomass due to an incident at our cleaner fish facility, which has had a negative impact.

During the period, the volume from the former SalmoNor has contributed about 28%. We finished harvesting from the autumn '21 generation in the second quarter and we continued harvesting from our spring '22 generation. We will also continue with this generation into the third quarter. And there is a good biological status in sea. Moving into the third quarter, we expect higher volume and lower costs compared to the second quarter of this year. The volume guidance for the entire year 2023 remains unchanged at 148,000 tonnes.

In Northern Norway, we harvested 16,000 tonnes in the period with an operational EBIT of NOK 858 million and EBIT per kilo of NOK 53.7. As expected, Northern Norway is delivering strong results with a reduction in the cost level. During this period, we have harvested from several good sites and the volume from NRS accounts for 15%. NRS sites has a higher cost than the old SalmoNor sites. And since we have a lower proportion from them in the mix of the sites we have harvested from, it is as expected that the cost level is lower than the previous quarter. During the period, we mainly harvested the autumn '21 generation and started harvest our spring '22 generation.

Looking ahead, we will conclude the harvesting of the autumn '21 generation and continue to harvest of the '22 generation in the third quarter. Similar to the Central Norway region, there is also good biological status in the North. In the third quarter, we expect higher volume and somewhat higher cost levels than what we have experienced in the second quarter. The volume guidance for '23 remains unchanged at 95,000 tonnes. Sales and Industry delivers an operational EBIT of minus NOK 67 million. The segment continues to deliver solid operational performances through the structure we have built in SalMar, focusing on high instant harvesting capacity and high local processing capacity near the areas we operate. We have managed to allocate the volume effectively and achieve good market price in the quarter. The contract share was as expected, 25% in the second quarter, where the high spot price in the period contributed to a negative impact from fixed price contracts. However, compared to the same period last year, there is significant improvement as we have had a lower contract share and better prices on our contracts.

In the second half of the year, we expect significantly higher volume to be harvested at our facilities. With the harvesting and processing plants in InnovaMar and Vikenco in Central Norway and InnovaNor in Northern Norway, we have the tools to handle this. These facilities provide us with high and flexible instant capacity in both regions, which is important as we now expect to have weeks with high harvesting volume. In the third quarter, we expect a contract share of 15%. And for the entire year '23, about 16%. The resource rent tax still leads to some uncertainty for fixed price contracts, given that the normative price council is still under discussion. But we have secured some new agreements for the second half of '23 and are actively working with our customers to establish new agreements and models for '24.

Moving to Iceland and Westfjords. As expected, a very low volume was harvested in the second quarter. This led to an operational EBIT of minus NOK 35 million in the period. We have prioritized building up biomass in the quarter to better utilize the licenses and harvesting resumed in July. Even though this might be unfavorable in the short term, given the high prices experienced in the second quarter, it aligns with how we aim to operate. It should be on the terms of the salmon. In the second quarter, we expect higher volume and the volume guidance for the entire year '23 remains unchanged at 16,000 tonnes. Simultaneously, we are in the middle of refinancing our loan facilities. And we have also started the process of listing Icelandic Salmon on the Icelandic Stock Exchange, aiming to attract more local shareholders on Iceland.

For the second quarter, SalMar Aker Ocean had an operational EBIT of minus NOK 10 million. Since -- till the production has started at Ocean Farm 1, a larger share of the cost is now allocated to the biomass, which is why the results are better than in previous quarters. Production at Ocean Farm 1 started in May and so far, the production looks promising. And we anticipate harvesting this fish in early 2024. Together with Arctic Offshore Farming, SalMar has 2 offshore units in production and we're looking forward to delivering volume from our offshore into the not-too-distant future.

Then moving to Scotland and Scottish Sea Farms, our joint venture in U.K., which delivers a very weak result. In the second quarter, the company harvested 6,300 tonnes with an operational EBIT of minus NOK 144 million and EBIT per kilo of minus NOK 22.8. As we mentioned in the previous quarterly presentation, the biological situation in Scotland has remained challenging. The issues we faced in the second half of last year have persisted into 2023. These challenges have led to the harvest of fish with low average weight, high costs and low price realization. Additionally, the figures for the second quarter have been affected by costs related to incident-based mortality, particularly in Shetland and Scotland, which have contributed to particularly poor results.

Looking ahead, the biological situation remains challenging, but we see improvements in both the average weight of harvested fish and cost levels. These challenges have also led us to reduce the annual harvest volume by 10,000 tonnes, bringing it down to 27,000 tonnes. We have planned for the Managing Director of Scottish Sea Farms, Jim Gallagher, to join our Capital Markets Day in 2 weeks, during which we will present how we address these challenges and our thoughts moving forward.

With this, I have concluded the operational update and I now want to hand over the floor to Ulrik, who will guide you through the financial update.

[Ulrik Steinvik, executive]

Thank you, Frode and good morning to all of you. I will now take you through the financial overview and I will conclude with comments related to synergy realization, the sale of Frøy and the new financing agreement we have established in SalMar. But first, I need to give some comments regarding the resource rent tax.

As you are aware, this was approved by the Norwegian Parliament at the end of May with a rate of 25%. There is still significant uncertainty regarding how it will be calculated. Detailed rules for calculating and handling costs and revenues are not yet clear and won't be clarified until later. Therefore, we haven't been able to include an estimate for the tax in the period for 2023. However, we have estimated an implementation effect, which has been incorporated into our numbers as this is deemed to be the most material. This implementation effect highlights how incorrect the proposed model is, by stating that we won't receive deductions for the costs incurred on the fish earlier than 2023, they essentially imply that the resource rent tax as retroactive effect well beyond the declared date of first of January 2023.

We have estimated this effect to be NOK 2.3 billion. SalMar has consistently been clear about our strong opposition to the resource rent tax, both in terms of the proposed model and the level of taxation. Therefore, moving forward, it will remain important for us to maintain an open and fact-based dialogue with authorities and other stakeholders to highlight the implications of this tax. Our goal is to establish a model that is better suited for the industry and the local communities along the entire coast and SalMar is willing to pursue legal steps in due course.

Let me now provide some comments related to the profit and loss for the second quarter of 2023. As Frode has already mentioned, the high salmon prices have continued into the second quarter, allowing us to present a very strong operational result today. This is clearly visible in the graph at the top right, where the price increase remains roughly unchanged from the first quarter level. At the same time, cost level are slightly higher than the previous quarter but what mainly impacts the operational EBIT compared to the previous quarter is the very low volume from Iceland.

Moving to the income statement. You can see that we paid NOK 25 million in production tax in Norway and resource tax in Iceland. Due to the increased biomass, the fair value adjustment is positive, which increases the result by NOK 375 million. Income from associated companies was minus NOK 71 million in the second quarter but a weak result from Scottish Sea Farms weighs down the overall figure, while all the new associated companies following the merger with NRS, Hellesund Fiskeoppdrett and Wilsgård Fiskeoppdrett contribute positively.

Net financial items are at approximately the same level as in the first quarter, totaling NOK 259 million in the second quarter, this -- the increase from 2022 is due to both higher debt and higher interest rates. In total, this results in a profit before tax of NOK 1,766 million. The estimated implementation effect of the resource rent tax amounting to NOK 2.3 billion for the first half of the year, contributing to an after-tax result of minus NOK 939 million for the second quarter and NOK 806 million for the first half of the year. Due to the sale of Frøy in August, it is classified as held for sale and Frøy's results after tax are shown separately in the income statement totaling NOK 161 million for the second quarter.

So moving on to the balance sheet. In 2023, we are still continuing our investment program for the previously approved investments but larger industrial investments are still on hold. Our biomass at the end of the quarter is higher compared to Q1. And compared to the previous year, it is naturally higher due to the acquisitions last year. During the period, we paid a dividend of NOK 20 per share. And along with the effect of implementing the resource rent tax in the financial statements, this contributes to reducing the equity ratio to 35%. Key figures for the net interest-bearing debt to EBITDA ratio, including leasing, have decreased to 3.1% and without leasing, the debt ratio is 2.9%.

As mentioned, Frøy is classified as held for sale and is listed here with NOK 12 billion as a separate item among the assets. This was removed from our balance sheet in August and in the third quarter, we will recognize a gain from this sale. All else equal, this will strengthen our balance sheet by increasing equity to 40% and then net EBITDA ratio will decrease to 2.2%.

I would like to briefly explain the changes in the net interest-bearing debt, including leasing for the quarter. We started with a net interest-bearing debt of NOK 19.4 billion and leasing of NOK 1.6 billion, in total NOK 21.1 billion. During the period, we had a strong cash flow from operations with an EBITDA of NOK 2.1 billion. Tax payments amounted to NOK 12 million for the quarter and there was a change in working capital of minus NOK 61 million. The increase in biomass is offset by higher supplier debt and reduced customer receivables during the period.

We have also carried out investments during the period. In total, this amounted to NOK 584 million for the quarter. The largest individual investment is related to the construction of the smolt facility at Tjuin. Additionally, ongoing investments in maintenance and capacity-enhancing projects in other parts of the value chain, including on Iceland and in SalMar Aker Ocean, we see both of these activities as significant future growth opportunities.

During the period, dividend payments of NOK 20 per share were made totaling close to NOK 2.7 billion. When considering interest and leasing payments made during the period we ended up with NIBD, including leasing of NOK 22.5 billion by the end of Q2 2023. This is an increase of NOK 1,483 million from the end of the first quarter. And as mentioned, Frøy was sold in August, where we received a cash consideration of NOK 4.8 billion. This brings our current NIBD, including leasing to NOK 17.8 billion.

As mentioned in previous presentations, we will provide ongoing updates on the progress of synergy realization from the acquisitions of NTS, NRS and SalmoNor in 2023. At the end of the second quarter, we can report that 76% or NOK 508 million out of NOK 671 million in annual cost savings have already been realized. The estimated restructuring costs to achieve this remain unchanged. These amounts represent an annual recurring savings associated with optimal operational structure, increased efficiency and economies of scale.

Some of the potential will take time to be reflected in costs in the P&L. A production cycle for salmon spans several years. Therefore, we expect gradual improvement throughout 2023, partially realized in 2024 and the full effect from 2025. Additionally, much of this process involves harnessing the potential inherent in our shared resource base, such as our licenses and facilities throughout the value chain. And in August, the sale of Frøy was completed. After a successful process with strong interest, we reached an agreement with Goldman Sachs Asset Management to sell our ownership stake in Frøy at the price of NOK 76.5 per share.

Throughout the process, we feel that we have found a positive solution for Frøy with an owner committed to further development, while also securing a favorable price for the company, benefiting our shareholders. The total cash consideration to SalMar amounted to NOK 4.8 billion, significantly reducing SalMar's debt and strengthening the balance sheet by increasing the equity ratio.

And we have also secured a new financing arrangement for SalMar. For SalMar, having strong financial flexibility with access to credit facilities is important. These facilities should enable us to continue growing our company and achieve an optimal capital structure. With a substantial reduction in debt due to the sale of Frøy and further improvements driven by sound operations and strategic initiatives, we are confident that the agreement we have established will position SalMar for further growth.

We have established a new financing arrangement with DNB, Danske Bank, Nordea, Rabobank and SEB, which is unsecured and aimed to be sustainability linked after we finalize the negotiations of the ESG KPIs. This consists of 2 facilities, a 3-year term loan of NOK 6 billion with no amortization during the period and a 5-year RCF of NOK 10 billion, both with a possibility of extending for up to 2 years. Together with our other existing green bond and credit facilities, considering the sale of Frøy, we now have NOK 5.4 billion in available credit facilities. All of our long-term facilities are now unsecured and with the intention of making also the new arrangement sustainability linked. It demonstrates our commitment to sustainable development of ourselves and the industry at large.

And as some of you may have seen last week, SalMar was recognized as one of the climate winners among Norway's 100 largest companies in PwC's Climate index. This is an important acknowledgment for us and showcases the strength of the seafood industry. SalMar currently holds 13.7 million treasury shares following the acquisitions of NTS, NRS and SalmoNor last fall. During 2023, SalMar has improved its financial position with lower debt levels and subsequently improved financial metrics. This achievement has been realized through solid operations and the sale of Frøy. Additionally, we have secured new long-term external capital. Based on this, the Board of Directors will propose to cancel 13.1 million treasury shares. A separate notice for an extraordinary general meeting will be issued at a later time.

And with this, I have concluded the financial update and I wish to give the word back to Frode.

[Presentation]

[Frode Arntsen, executive]

[indiscernible] launching. These projects are good examples of how we are moving the industry forward in close collaboration with others. Standing here on stage at Aqua Nor in Trondheim and in Central Norway, we are perhaps in the heart of the region that drives innovation and further development of the industry. This has been made possible through strong collaboration between aquaculture companies and leading players in the supplier industry, educational and research institutions, authorities and environments with strong industry knowledge. Building upon this expertise across various fields is something we must carry with us as we continue to develop the industry. Because we all have a responsibility to further develop the industry, we will ensure that both the fish and our people thrive while taking care of the environment. We need new technology, new solutions and individuals with different backgrounds to continue developing this field. And at SalMar, we are not idle when it comes to industry development.

On the screen, you can see a range of areas where we have ongoing projects, originating from the environment here in Central Norway. First to Tjuin. SalMar has been building the world's largest R-A-S facility, RAS facility for smolt production over the past few years, called Tjuin. This integrated facility covers everything from hatchery operations to initial feeding and growth before we can transfer the smolts to our farming sites. During the summer, 8.8 million roe were introduced into the facility, which will develop into smolts, ready for sea in spring 2024.

During the fall, we will complete the facility. Once finished, it will have the capacity to produce 20 million smolts annually each with an average weight of 200 grams. The facility is equipped with the latest RAS technology. And additionally, an on-site biogas plant is being established to utilize the resources from the facility's sludge. It is sustainable and thinking in a circular manner.

We also have several projects underway where we are incorporating new technology such as closed, semi-closed and submerged cages are examples of technologies that we have in operation at various locations along the coast here in Central Norway. Aquatraz is a semi-closed unit that is currently located just north of Rørvik and multiple production cycles have been completed there. Just outside Molde, we are testing closed technology. Neptun 4 was our first closed unit and we have already completed 3 production cycles there.

In July, our second unit, the Marine Donut, also arrived at the same site. Marine Donut is a development project and this fall, we plan to put this unit into operation as well. Furthermore, we are conducting tests with submerged cages such as the [indiscernible] cage shown on the screen. We are doing all this because we want to advance the industry and continuously seek new opportunities to improve our production even more efficient and even more sustainable.

And as I've already mentioned, we now have 2 offshore units in operation. At SalMar, we always maintain that our development should be on the terms of the salmon. By developing technology that enables operations in areas with optimal biological conditions, we aim to take the industry further out in the ocean, the natural habitat of the salmon. With 2 units currently operational, we are already on our way. However, SalMar holds even greater ambitions for more units out in the open ocean. We still see significant potential for further value creation and volume growth in offshore farming.

However, the tax regime for offshore aquaculture is not ready. This creates uncertainty. Time lines for new units are, therefore, delayed and final investment decisions are postponed for the time being.

Outlook. The global supply growth for '23 is expected to be low. However, in this situation, SalMar is rigged for further growth. We have several options for further expansion and untapped potential within existing licenses in all regions. In the second half of the year, we anticipate lower prices compared to the first half due to the higher seasonal volumes entering the market. Nevertheless, we still observe strong demand for our products in the markets. Our task is to ensure the well-being of both people and fish and to leverage the strong platform we have at SalMar. As I mentioned before, we need to work with both heart and mind to achieve this.

I am confident that our skilled workforce and the robust culture we have at SalMar will unlock the potential for sustainable growth in Norway, Iceland and Scotland. I've already commented on the guidance for the third quarter and volume expectations for '23, which you can see summarized on the right side of the slide.

As you may be aware, we have planned the Capital Markets Day in Tromsø and Senja on September 6 and 7. We are looking forward to welcoming you and have designed an exciting program. You will have the opportunity to get to know us better and hear about our future plans and also experience our value chain in the beautiful surroundings of Northern Norway.

So with this, we have reached the end of the presentation. Thank you for your attention. Have a nice autumn. And as always, remember to eat a lot of delicious salmon.