SalMar ASA

OSE:SALM

Earnings Call Transcript 2022-Q3

[Frode Arntsen, executive]

Good morning, everyone. Welcome to this presentation of SalMar's Results for the Third Quarter 2022. As SalMar's brand-new CEO, this will be the first time I present our quarterly results. With me today, I have another first-timer, Ulrik Steinvik, who is SalMar's new CFO. My name is Frode Arntsen. I am 52 years old, raised in Trondheim and have lived the past 25 years on Hitra, a neighbor island to Froya.

I have worked in the seafood business for 22 years, here under 13 years in Leroy. I have strong operational knowledge. And in my new job in SalMar, I will still have a strong operational focus. And my favorite cultural tenet is we care. We care about our culture. We care about our people. We care about our salmon. We care about our customers, our owners and our new colleagues, and we care about the local communities where we daily operate.

So now let's move on to today's third quarter presentation, which will follow the same pattern as previously. I will take you through some highlights on our operational performance in the quarter before our CFO Ulrik Steinvik takes you through the financial details. Then both Ulrik and myself will turn our attention to the biggest strategic initiative in SalMar's history, the transactions with NTS and NRS Before I round off with a review of the outlook going forward.

SalMar continued to deliver a strong operational performance in the third quarter 2022. This was driven by the fantastic effort our employees put in every single day along the entire value chain.

In Norway, we harvest a total of 49,800 tonnes in the quarter at a margin of NOK 26.29 per kilo. For the Norwegian business as a whole, we posted an operational EBIT of NOK 1,309 million, including Icelandic Salmon and SalMar Aker Ocean, we harvested 53,600 tonnes in the quarter, generating a total operational EBIT of NOK 1.3 billion at a margin of NOK 24.51 per kilo. Our Fish Farming segments continued to deliver solid results despite the cost inflation we are experiencing. Sales & Industry made significant improvements in profitability from the previous quarter as a result of better results from sales in the period, but also because of strong capacity utilization at our harvesting and processing facilities.

Iceland achieved a lower margin than in the previous quarter due to lower spot prices. Work to take the next steps offshore continue at SalMar Aker Ocean with Ocean Farm 1 on track for the transfer of smolt next year. In brief, we are well pleased with the quarter's results and I would like to say thank you to all our employees throughout the value chain. Substantial changes have happened in SalMar since the end of the quarter. The offer for shares in NTS and the merger with NRS were approved at the end of October. And the transactions are being completed now in November. We will come back to this later in the presentation.

However, the quarter was also affected by the surprising tax proposal announced by the Norwegian government in late September. The proposal that has been circulated for consultation will triple the tax on seafood production, raising it from 22% to 62%. No other country has introduced a tax of this nature and at such a level on its food production. If adopted, it would severely impact the entire agriculture industry's capacity for innovation and investments in Norway. We in SalMar, are strongly against the proposal and we will issue a detailed response in the upcoming hearing round.

But let us now go through the operational results, starting with Fish Farming Central Norway. Fish Farming Central Norway harvested a record 36,000 tonnes in the quarter and made an operational EBIT of NOK 977 million, which corresponds to an EBIT per kilo of NOK 27.17. As expected, the level of costs was somewhat higher as a result of the cost inflation we are experiencing, particularly for feed. The spring '21 generation of salmon accounted for the bulk of the volume harvested in the period 80% and we also started harvesting the autumn '21 generation. Compared with previous periods, the biological situation has been more challenging and we have experienced slightly lower growth than expected in the period.

From November this year, we will be including the volume from SalmoNor in this segment. We are, therefore, increasing our expected harvested volume for 2022 as a whole by 1,000 tonnes to 118,000 tonnes, where we have flexibility in our licensed capacity to optimize biological performance. In the fourth quarter '22, we therefore expect a higher volume, but also a higher cost level compared with the third quarter.

Fish Farming Northern Norway harvested 13,800 tonnes in the quarter and made an operational EBIT of NOK 428 million, which corresponds to an EBIT per kilo of NOK 31.04. The segment delivered a result that we are very pleased with continuing its solid trend. As in Central Norway, we are also seeing an increase in costs in the North as a result of the cost inflation we are experiencing. The autumn '20 generation of salmon accounted for 40% of the volume harvested in the period, and we also started harvesting the spring '21 generation.

As previously stated, the segment continues its solid trend with further good performance. The inclusion of volumes from NRS means that from November, we are increasing this segment's volume forecast for 2022 as a whole by 4,000 tonnes to 62,000 tonnes, where we have flexibility in our licensed capacity to optimize the biological performance. In the fourth quarter '22, we therefore expect a higher volume, but also a higher cost level compared with the third quarter.

The Sales & Industry segment posted an operational EBIT of minus NOK 34 million. This is a significant improvement on the previous quarter and was driven by several factors. The profitability of our sales to customers worldwide is substantially improved, both through higher profitability on our contracts, but also because the spot price achievement we had in the period was better. The contractor in the period was 34%.

We are particularly pleased with the operational results from our harvesting and processing activities in the period. We have never harvested as much fish at our plants as we did this quarter. And for me, it is particularly gratifying to see that the results from our facility in Northern Norway, InnovaNor, is improving. For several weeks in the third quarter, we actually harvested more fish at InnovaNor than at InnovaMar in the Central Norway. And that gives us a strong belief in the potential in the new factory, InnovaNor.

As we have said before, when InnovaNor soon becomes fully operational, we expect it to provide cost savings and improve performance in the value chain for our fish from Northern Norway. This will also enable further sustainable growth in the North and improve our distribution of fish into the market. Looking forward, we expect the contract share to remain the same in the fourth quarter at around 35%. And as a result of the acquisition of NTS and NRS, the SalMar Sea harvesting plant and these companies sales departments will be included in this segment with effect from November 2022.

Moving over to Icelandic Salmon. A total of 3,800 tonnes was harvested in Iceland in the third quarter. The segment made an operation EBIT of NOK 39 and an EBIT per kilo of NOK 10.16. The margin was slightly lower than in the previous quarter, primarily due to a fall in the spot prices during the period. Price achievement on the fish sold from Iceland remained good and better than previous years. In the period, we continue to harvest the 2020 generation of salmon, which has maintained a stable biological performance. In Iceland, as in Norway, we are also seeing cost inflation on input factors, which is affecting our results. We also had certain non-recurring costs relating to our biomass in the quarter. This has affected operational EBIT by approximately NOK 5 per kilo.

Iceland has also taken important initiatives to position itself for further growth by completing the acquisition of the remaining shares in Isthor in August. This gives us increased capacity and flexibility to transfer the smolt we need, which underpins our growth plans in Iceland. In the fourth quarter, we expect a higher volume and stable cost level. We finished the harvesting of the 2020 generation of salmon and will start harvesting the '21 generation. The volume forecast for 2022 as a whole remains unchanged at 16,000 tonnes. In 2023, we expect volume to be at the same level. The increase in smolt capacity undertaken in '21 and '22 will not take effect until 2024. At that point, however, we expect a substantial increase in volume in Iceland.

With effect from 2022, SalMar Aker Ocean is being reported as a separate segment. For the third quarter 2022, the segment made an operational EBIT of minus NOK 34 million. At present, the company is giving priority to upgrading Ocean Farm 1 and designing new units. Upgrading work is on schedule. Once completed, Ocean Farm 1 will be transported back to its site in the Frohavet outside Froya, ready to start the next production cycle in the spring of 2023. In the third quarter, some steps were taken to establish elements of a regulatory framework. In August, the Norwegian Food Safety Authority announced that it had approved the location for the operation of the company's Smart Fish Farm. This is an important step on the road for final approval for the site.

In addition, the authority announced their performance of impact assessments on offshore areas. And in November, they announced new rules for establishment of offshore aquaculture. All these are important steps towards the establishment of a regulatory framework for offshore fish farming. Naturally, SalMar Aker Ocean must also evaluate how the proposed tax increase will affect its business plans and projects going forward. This work is ongoing. We are continuing to work on the design of new production unit. However, no decision concerning a new semi-offshore unit will be made in '22. This has now been rolled over to 2023.

Moving to Scottish Sea Farms. The third quarter was a challenging period for Scottish Sea Farms. The company harvested 11,300 tonnes in the quarter and made an operational EBIT of NOK 47 million. This corresponds to an EBIT per kilo of NOK 4.20. Biological challenges affected the results in the third quarter with issues relating to micro jellyfish and gill health, having a negative impact in the period. This has forced the company to harvest out fish earlier than planned. As a result, the average weight of the fish was low and its cost of harvest high. In addition, 44% of the volume was sold under contract at a price below the spot price. All in all, this means the company posted weak results in the quarter. The challenges it experienced also means that the expected harvested volume for '22 as a whole has been reduced by 8,000 tonnes to 38,000 tonnes. The company expects to harvest 43,000 tonnes in 2023.

This concludes the operational review. I would now like to hand over to Ulrik, who will take you through the financial results.

[Ulrik Steinvik, executive]

Thank you, Frode, and good morning to everybody. Before I start on the financial results, I would like to say a few words about myself. My name is Ulrik Steinvik. I'm 48 years old and from Norway. I have been working in SalMar since 2006 in different positions within the executive management group, latest as Director of Business Improvement. Before I joined SalMar, I worked in Arthur Andersen Norway and in Ernst & Young. In respect of education, I have a degree from Norwegian School of Economics and Business Administration as a Norwegian state-authorized public accountant. And I truly look forward to continue to be a part of the SalMar story going forward, now in a position as CFO. As you may be aware of, this is the last financial statement for SalMar as it was. From November, the financial statements will include NTS, NRS, SalmoNor and Froy, which means that the numbers will change a lot.

So let's move on to the financial update. We start with a comparison from the previous quarter. First, Norway alone, which means without Icelandic Salmon and SalMar Aker Ocean. Norway saw a decrease in EBIT per kilo of NOK 6.05 in the third quarter compared with the previous quarter. Price achievement was lower as a result in a fall in spot prices. However, the decrease was experienced was not as large due to profitability of our fixed price contracts and price achievement as a spot being better than in the previous quarter. Also, it is positively impacted by lower contract share.

Within the Fish Farming segment, our costs increased in the quarter, but higher volumes, good capacity utilization and value creation at our harvesting and processing plants helped to offset the rise in costs. This means that total costs in the value chains are at the same level as in the second quarter. If you look at the group as a whole, which means including Icelandic Salmon and SalMar Aker Ocean, we see that EBIT per kilo decreased by NOK 7.84. In addition to the previous comment, the decrease is attributable to reduced margins in Iceland.

Some comments on profit and loss in the third quarter this year compared with the third quarter last year. Revenues has increased as a result of higher volumes and higher prices. This means that operational EBIT is higher than in the same period last year. The production tax in Norway, along with the resource tax in Iceland came to NOK 23 million in the third quarter. Onerous contracts have been reduced as a result of higher prices in the contract portfolio.

The fair value of the biomass has been adjusted downwards as a result of higher expected costs at harvest due to the cost inflation within a special feed that we are experiencing. Income from associates is affected by the negative fair value adjustment in Scottish Sea Farms as well as weaker margins from Scottish Sea Farms that Frode has already commented on. The higher interest rates are the main reason for the increase in interest expenses. The group's EBIT per kilo was NOK 10.16 higher in the third quarter this year than in the same quarter last year. This increase is due to higher salmon prices compared with last year.

And now over to the balance sheet, which we compare with the close of the second quarter. Ongoing investments are proceeding according to plan, which have increased our noncurrent assets in the quarter. The standing biomass is slightly higher compared with the close of the previous quarter, but slightly lower than at the same time last year. However, we have higher number of fish in sea this year compared to last year, which is positive for future growth. Net interest bearing debt, including leasing, decreased by NOK 470 million in the quarter and now stands at NOK 6.5 billion, of which leasing accounts for NOK 957 million.

Overall, we continue to have a solid financial position with an equity ratio of 52.5% and a key figure need, including leasing divided by EBITDA stands at 1.22. This gives the company's strong financial flexibility to implement the strategic investments we are now making in the value chain as well as the transactions with NRS and NTS. Looking ahead, the transaction with NRS and NTS will not alter our financial strategy. We have a strong focus both on operational and financial risk, something we will continue to have going forward. But the major risk in relation to the future financial structure of the industry has in this quarter, been related to the proposed new tax regime on Norwegian aquaculture. They are good control over our operations.

I will now give a brief explanation of the change in net interest bearing debt, including leasing liabilities, NIBD in the quarter. NIBD and leasing liabilities start as per the close of the second quarter 2022 at NOK 6.9 billion. EBITDA in the period was a little over NOK 1.5 billion. In the third quarter, we invested a total of NOK 833 million. The largest individual investments relate to the construction of the smart facilities, Senja 2 and Tjuin. In addition, we continue to invest in both maintenance and capacity increases in other parts of the value chain. In addition, Iceland has completed the acquisition of Isthor during the period, which increases smolt capacity in Iceland and paves the way for further growth.

If you also take into account that we have spent on interest and installments on leases during the period, we end up with a NIBD of NOK 6.5 billion, including leasing liabilities at the close of September, which is a decrease of NOK 470 million from the close of the previous quarter. At the end of the next quarter, this balance sheet will naturally be really changed as a result of the transaction that these days is run through the VPS registers, really use this opportunity to deliver more robust companies going forward. As Frode mentioned in his introduction, the quarter was unfortunately impacted by the surprising tax proposal that the Norwegian government announced at the end of September.

On 28 September, 2022, the Norwegian government proposed to increase the resource rent tax on aquaculture production in Norway. The proposal that has been circulated for consultation with result in a threefold increase in the corporation tax on seafood production, up from 22% to 62% in addition to production tax, local property tax and payment for production licenses. The objective is to extract additional 48% of all future revenue streams from the largest fish farming companies. A tax increase, we in SalMar field has no bearing. Both the level and the design of the new tax will contribute to growth investments in Norwegian aquaculture being diverted to other countries and other business sectors. This will have an impact on the capacity for innovation and investments in our industry.

In light of the proposal that is currently being concerted on, SalMar considers it will be imprudent to take any new investment decisions. After the proposal was announced, therefore, SalMar exercised its right to cancel its purchase of capacity growth at a fixed price. For the same reason, SalMar declined to participate in the Ministry of Trade, Industry and Fisheries traffic light auction in October.

We see that the auctions of aquaculture licenses confirmed that the value of farming and licenses fell significantly due to the proposed new tax regime. It's not just a profitability that matters, it's the uncertainty about the future itself that represents a huge insecurity. If the tax system changes, so does the industry. Tax affects both investments, efficiency, profitability and various parts of the value chain and the way we organize both companies and capital. Major decisions in these areas cannot be made until we are more certain of what the future tax system will look like.

And now to the strategic update. Despite the uncertain framework conditions caused by the Norwegian government's new tax proposal, the strategic and operational rationale for going ahead with the transaction remains. If anything, both increased political uncertainty and higher tax pressure make it all the more necessary to be best inflows in respect of operations. It is a transaction that will strengthen the business in the regions in which we operate. These are the core regions in an industry where Norway has a leading position. As you will have realized, we have great faith that together we will develop something even stronger.

To sum up what is all about, this slide actually says a lot about what is happening. NRS has now carried out the previously agreed SalmoNor transaction and SalMar and NRS have merged. In addition, SalMar's voluntary offer for NTS has been completed. A mandatory offer on the remaining shares will be effected in a few weeks. As announced last week, Arctic Fish will be divested as part of this. This happened due to the European Competition Authority's response that Icelandic activities needed to be sold to give a green light to the transaction. This is regrettable, but does not change our faith and ambitions on Iceland going forward.

After the transactions have been completed, the new SalMar will include all the fish farming operations in NRS and SalmoNor and NTS will become a subsidiary of SalMar with a large shareholding in Froy and shareholdings in SalMar. The new company will quite simply be an attractive company with major plans for growth, both coastal and offshore.

And now over to a few of the details. After getting clearance from the competition authorities, the transactions are being implemented now at the start of November. Based on the acceptance rate and the voluntary offer and the completion of the merger, around 27.3 million new SalMar shares will be issued and a total of NOK 6.6 billion will be paid as a cash consideration to the shareholders of NTS and NRS. The bulk of this consideration will go to NTS as a result of its shareholding in NRS and SalmoNor.

As previously mentioned, Arctic Fish also be divested at a price of NOK 115 per share or NOK 1.9 billion in total. Naturally enough, SalMar's debt will increase. As a result of these transactions, we estimate that the new SalMar will have around NOK 18.6 billion in net interest bearing debt. At the same time, we have therefore secured financial capacity to handle these transactions and the mandatory offer for NTS. Together with DNB, Nordea and Danske Bank, SalMar put in place bridging financing in the amount of NOK 11.5 billion, which runs up to 24 months. This also includes a guarantee for the mandatory offer.

In addition, SalMar has increased its existing RCF facility by NOK 3 billion. This ensures that we will continue to have a high level of financial flexibility after the transactions have been completed with access to around NOK 6 billion free liquidity. After the voluntary offer for NTS has been completed, SalMar will fulfill its obligation to make a cash offer for the remaining shares in NTS as required by law. The timing of this offer remains to be clarified, but we expect it will happen shortly, and it will be communicated in separate announcements.

And with that, I hand it back to Frode.

[Frode Arntsen, executive]

Thank you, Ulrik. And I will take you through some overlapping industrial interest across the value chain. While the industry must scale back and reduce planned investments going forward, the need to seek economies of scale and improve efficiency has become even greater. SalMar is meeting the future with a larger resource base and a stronger organization. Despite the tax proposal has caused uncertainty in the sector, SalMar considers that striving for continued sustainability, operational competence and efficient use of resources will remain the best way to protect jobs and value creation in one of Norway's most important export industries, one which is also a vital contributor to the rural economy.

SalMar and NRS have a number of overlapping industrial activities in Central Norway, Northern Norway and offshore. This enables further sustainable growth in one of the world's best areas for the production of farm salmon. SalMar and NRS are highly similar companies, both industrially and culturally. All in all, this forms a good starting point for building something even stronger together. The merger increases the potential for value creation across the merged operations from hatchery to sea farm, from harvesting and processing to sales in international markets. And it is precisely these effects that prompt SalMar to want to undertake the transactions. We are very confident that this will be a good move for both people and fish. Together, we can build something stronger and realize the potential that lies in the combination of our companies.

Despite the uncertain framework conditions caused by the Norwegian government's new tax proposal, the strategic and operational rationale for going ahead with the transaction remains. It is a transaction that has strong support from shareholders, employees and the local communities as we experience it where we operate. The companies are already among the most important of jobs in coastal communities in Central and Northern Norway. In brief, we want to create an even stronger foundation for value creation and employment on the Norwegian coast. The coast is where the value and jobs are created. And this is a journey into the future that SalMar's want to take alongside NTS, NRS, SalmoNor and Froy.

In recent years, SalMar has achieved stronger margins than NRS and SalmoNor, but there is no reason why they should not perform at the same level as SalMar. We operate in the same regions, which are one of the most important regions for salmon farming in the world. We will, therefore, seek ambitious synergy, targets and expected transaction to increase shareholder value going forward. At the same time, we know that this will not be achieved overnight. But in line with the salmon's production cycle, we expect the volume to increase and margins to improve. We will achieve this by exploiting the potential that lies in our shared resource base.

We will ensure that we exploit our production licenses and sites in an optimal manner. We will ensure that the biological performance is improved and that production costs are lowered. We will use the unexploited potential we have in our small facilities and harvesting and processing facilities. And we will ensure we get our products to customers worldwide in a safer and even better way. We expect that all of this will considerably improve our performance and that we will realize the synergies that we see in the joint company. We will continue to lead the way in further developing the sector through the work that this has been done offshore, we will upon new areas for the fish farming industry.

In addition, we will expand our resource base by acquiring a substantial shareholding in Froy. Froy is currently one of the most important companies supplying services to the aquaculture sector. We will build on this foundation. SalMar aims to be a leader in the field of traditional coastal aquaculture as well as offshore farming. We expect a considerable volume growth in 2023 after completing their transactions. And SalMar has several opportunities for further growth and unexploited potential within its existing licenses in all regions. This applies both coastal in Norway, Iceland and Scotland but also offshore through the ambitious growth plans we have in that area.

In 2023, we expect to harvest 243,000 tonnes in Norway, an increase of 63,000 tonnes. In Iceland, we expect to harvest the same volume as this year, some 16,000 tonnes. But as previously mentioned, we expect a significant increase in 2024. In Scotland, after a challenging 2022, we expect volume to increase to 43,000 tonnes. So for SalMar as a whole, we expect to harvest 280,000 tonnes in 2023, including our relative share in Scotland. This corresponds to a 30% increase in volume.

Outlook. As previously mentioned, the transactions with NTS and NRS are being completed right now. This will trigger a mandatory offer for the remaining shares in NTS as required by law. And also previously mentioned, we in SalMar will further develop our strong foundation and will continue to focus on ensuring that people and salmon thrive. We have an organization that is positioned for growth and have further growth potential, both coastal and offshore. We will maintain our operational and strategic focus because we know that if we get the biology right, we will also have the lowest possible cost. This will be even more important for us going forward.

In the fourth quarter, we expect higher volumes and higher costs compared with the third quarter this year. The contract rate for the fourth quarter is 35%. We expect significant volume growth in 2023, following completion of the transactions with a total harvest volume of 280,000 tonnes, including our relative share in Scotland. We expect the growth in global supply of salmon to be lower in 2023. With the government's tax proposal, our industry is facing increased uncertainty. The proposal, as it stands would have a significantly adverse impact, not only on the industry as a whole, but also on the associated industries that we depend on. We, in SalMar, will therefore participate actively in the role of consultants currently ongoing with the Norwegian government in order to put in place more sustainable and predictable solutions.

And with this, we have come to the end of the presentation. The next quarterly presentation is scheduled for 22 February, 2023. Until then, I wish you all good pre-Christmas time and later on, a happy New Year. And as always, don't forget to eat plenty of healthy and delicious salmon. Thank you.