Faroese Strike Impacts Financial Performance, but Strong Operational Metrics

26.08.2024

Report:

Presentation:

The Bakkafrost Group delivered a total operational EBIT of DKK 388 million (DKK 353 million) in Q2 2024.

(Figures in parenthesis refer to the same period last year unless otherwise specified)

The performance in Q2 2024 per region was as follows

• Faroe Islands          Revenues of DKK 1,187 million (1,082 million)

                                         Operational EBIT of DKK 275 million (282 million)

• Scotland                  Revenues of DKK 880 million (587 million)

                                         Operational EBIT of DKK 113 million (71 million)

Commenting on the result, CEO Regin Jacobsen said:

"We are not content with the financial performance this quarter, largely due to the strike in the Faroes. Conversely, we are highly satisfied with our current operational position, particularly within our Faroese freshwater division, where both efficiency and production volume of large high-quality smolt are steadily improving. We are also pleased with the condition of the biomass in the Faroes and Scotland. Growth is robust; there are no sea lice problems in either location, and gill health in Scotland is well managed. Our de-risking strategy for marine farming operations in Scotland has been effective, resulting in significantly fewer biological issues and lower mortality than in previous years. With 75% of the planned harvest for the year already completed in Scotland, we have mitigated the risk for Q3 as planned. The ramp-up at the Applecross hatchery in Scotland is progressing well after addressing cooling system issues identified in Q1 2024. We anticipate achieving an average smolt weight of over 200 grams in Scotland by Q4 2024.

As mentioned, the strike in the Faroes significantly impacted quarterly results, partly by delaying planned harvest to after the strike and past a substantial market price drop. As a result, we harvested 4,000 tonnes post-strike at much lower prices and lower than planned harvest volumes for the quarter.

On May 26th, the ISA virus was detected in two pens at the A-19 farming site in the Faroes. Despite having to conduct an early and small harvest, we are very pleased with the effective containment of the outbreak, preventing further spread. This underscores the importance of robust farming practices and risk management procedures.

Looking ahead, the market appears softer compared to H1. To maintain a strong competitive position, we are focused on managing costs and adjusting capacity to our needs. Accordingly, in Scotland, we have initiated several cost-saving measures and capacity adjustments, including the closure of the processing facility at Marybank in July 2024."

During Q2 2024, the FOF segment sourced 90,575 tonnes (147,785 tonnes) of raw material. The Operational EBIT margin was 16% (16%), and fish feed sales amounted to 32,949 tonnes (30,231 tonnes).

For H1 2024, the FOF segment’s operational EBIT margin was 20% (16%). During H1 2024, Havsbrún sourced 227,449 tonnes (303,800 tonnes) of raw material.

 In Q2 2024, the Freshwater segments in the Faroe Islands and Scotland released a total of 5.5 million (6.7 million) smolts combined:

•        Freshwater FO: 4.0 million (3.6 million),
•        Freshwater SCT: 1.5 million (3.1 million).

For H1 2024, the freshwater segments have released a total of 9.1 (10.5) million smolts:

• Freshwater FO: 6.1 million (5.7 million),
• Freshwater SCT: 3.1 million (4.8 million).

In Q2 the Freshwater FO segment made an operational EBIT per kg released smolt of DKK 47.23 (DKK 23.42), corresponding to NOK 73.19 (NOK 36.63). The Freshwater SCT segment made an operational EBIT per kg released smolt of DKK -218.76 (DKK -31.51), corresponding to NOK -338.99 (NOK -49.28). In Q2 2024, the Freshwater SCT segment had incident-based cost of DKK 21 million (DKK 10 million).

The Farming segments achieved lower prices in Q2 2024 than in Q2 2023. The Farming segments had higher volumes in Q2 2024 compared to Q2 2023. In Q2 2024, the Farming SCT segment had incident-based costs of DKK 3 million (DKK 32 million).

The total combined harvest in Q2 2024 of the farming segments in the Faroe Islands and Scotland was 21,592 tonnes gutted weight (16,001 tgw):

• Farming FO:          10,226 tgw (8,658 tgw),
• Farming SCT:        11,366 tgw (7,343 tgw).

For H1 2024, the farming segments have harvested a total of 43,149 tonnes gutted weight (35,099):

• Farming FO: 24,520 tgw (19,663 tgw),
• Farming SCT: 18,629 tgw (15,436 tgw)

In Q2 2024, the Farming FO segment made an operational EBIT per kg of DKK 20.15 (DKK 17.36), corresponding to NOK 31.23 (NOK 27.15). The Farming SCT segment made an operational EBIT per kg of DKK 11.66 (DKK 7.05), corresponding to NOK 18.07 (NOK 11.03). 

The Services segment made an operational EBIT per kg of DKK 0.56 (DKK 0.09), corresponding to NOK 0.87 (NOK 0.14). The operational EBIT margin for the segment was 6% (1%).

The Sales & Other segment had a revenue of DKK 2,582 million (2,236 million) and an operational EBIT margin of -3% (1%). The operational EBIT per kg was DKK -3.63 (DKK 0.95), corresponding to NOK -5.63 (NOK 1.49).

The performance related to the Faroe Islands and Scotland as a region can be found in the Appendix of the Q3 Interim Report.

The long-term goal of the Board of Directors is that 30-50% of earnings per share shall be paid out as a dividend. Bakkafrost’s financial position is strong, with a solid balance sheet, a competitive operation, and available credit facilities. The Annual General Meeting convened on 30 April 2024, decided to pay out a dividend of DKK 8.70 (NOK 13.26) per share. The total dividend of DKK 515 million (NOK 811 million) was paid out on 21 May 2024.

OUTLOOK

Market

Flat supply in Q2 2024

The supply of salmon decreased slightly by 0.5% in Q2 2024 compared to Q2 2023, incl. inventory movements. Without inventory movements, the supply reduced 0.7%, according to the latest estimate from Kontali Analyse.

Stable salmon prices in Q2 2024

Salmon spot prices (Nasdaq Norway in EUR) were 0.6% higher this quarter compared to Q2 2023 with increased price differentiation between large and small fish. Prices were affected by the tight supply, reduced availability of large superior quality fish on the spot market, but also by increased consumer price sensitivity in some segments.

1% growth in 2024

The global supply is expected to increase around 5% in Q3 2024, compared to Q3 2023. In Q4 2024, the global supply is expected to grow around 3-4%, compared to Q3 2023. For the full year 2024, the global supply is expected grow around 1%, excluding inventory movements, and in H1 2025 the global supply growth is expected to be around 3-4%.

Bakkafrost has a strong focus on ensuring a well-balanced flow to the different markets to increase diversification and mitigate market risk. Bakkafrost operates in the main salmon markets, Europe, the USA, and the Far East. Since the beginning of the war in Ukraine, Bakkafrost has stopped all trading with Russia.

Farming

Overall, the biological performance in Q2 2024 in the Faroese farming operation was strong with good growth, continued high harvest weights and strong control of sea lice. Harvest weights were however affected negatively by the advanced harvest of fish from the most southernly farming site A-19, where the ISA virus was detected in two pens on 26^th of May 2024. The sitation was handled immediately according to the regulation and the virus has not been detecteded since then in other pens on A-19 or elswere in the Faroes. Due to regulatory requirements, the entire site with around 1 million will be harvested prematurely in August 2024, reducing the total harvest volume for 2024 due to lower harvest weight of the fish. This is partly counterweighted by the consequences of the 4 week general strike in the Faroes in May and June, which hindered all other harvest. Consequently, harvest volumes in Q2 reduced and was delayed into into Q3 where the fish is harvested at higher harvest weights benefiting the total harvest for 2024. The combined effect on the harvest volume for 2024 of the ILA incident and the strike is expected to reduce the annual harvest from 66,000 to around 63,500 tonnes.

In the Faroese freshwater operation, the main focus for Bakkafrost is to continue to increase the production volume of high-quality large smolt. In 2023, the hatchery capacity in the Faroes was increased by more than 50% through the expansions of the Norðtoftir, Glyvradal and Viðareiði hatcheries, increasing the total hatchery capacity in the Faroes to 18 million smolt of 500g. In Q1 2024, Bakkafrost started the construction of the new hatchery in Skálavík, Faroe IsIands, which will further increase the production capacity by around 7 million smolt at 500g. Once the Skálavík hatchery is complete in three years time, the annual smolt production capacity in the Faroe Islands will be 24 million smolts of 500g, as targeted in the 2024-2028 investment programme.

In Q2 2024, the farming operation in Scotland followed the de-risking strategy, Bakkafrost developed on back of the emerging biological recovery in late Q3 2023. One key element of this strategy is to harvest around 70-75% of the planned total harvest volume for 2024 during Q1 and Q2, ahead of Q3 which tends to bring more biological challenges in Scotland. Preparations to execute the strategy were made in Q4 2023 during which Bakkafrost built up biomass and increased the size of fish in the water by improved biological control minimising harvest volumes. In Q2 2024, the biological performance in Scotland has been good, harvest volumes increased significantly and by the end of Q2, around 75% of the planned harvest volume for 2024 had been harvested at good average harvest weights. The exceptional mortality year to date (by mid-August) is significantly lower compared to same period the previous 2 years. Sea lice levels and gill health have been under good control in this quarter. As a consequence of the de-risking stratey, Bakkafrost’s harvest volume in Scotland will be lower in H2 2024.

Bakkafrost’s de-risking strategy for the Scottish operation also covers the freshwater operation. In order to address the biological risks, Bakkafrost made strategic adjustments to its short-term production plans and conducted a comprehensive risk assessment for all farming sites, including evaluating the feasibility of stocking and farming these sites using various strains, hatcheries, and smolt sizes. Based on this evaluation, Bakkafrost prioritises and advances the utilisation of large, high-quality smolt from the Applecross hatchery over external sources. Consequently, Applecross will supply nearly all of the required smolt to the marine sites in 2024, however delivery of large high-quality smolt has been delayed to Q4 2024. Only by exception will smolts be sourced externally, if the size and quality of the smolt is sufficiently high.

In Q2 2024, the average weight of released smolt in Scotland was 95g, which is 23% lower than in Q2 2023. The reduced average weight and delayed ramp-up of the production is a direct consequence of the startup issues at Applecross, experienced in Q1 2024, as reported in previous quarter. Applecross is expected to supply large batches of smolt in Q3 and Q4 2024 at increasing average sizes, averaging 200g in Q4.

When the Applecross 5 expansion is completed in Q4 2024, Bakkafrost will have the capacity to produce all smolts for Scotland at around 200-300g. With the completion of the Applecross 6 expansion in Q1 2025, the biosecurity in the smolt production will be further improved.

As shown in the Faroe Islands, big and healthy smolt will face lower risks in the marine environment because of shorter production cycles in the sea and more robust salmon.

Smolt release

Bakkafrost’s smolt release in the Faroe Islands is expected to be around 17.0 million large smolts in 2024. In Scotland, the smolt release in 2024 is expected to be around 7.7 million smolts with an average weight of 140g. The number and average weight of smolts released are key elements of predicting Bakkafrost’s future production.

In the freshwater hatchery operation, Bakkafrost has a focus on ensuring stable growth and continuous improvements of smolt quality. In the Faroes Islands, it is important to harmonise the size and quality of the smolt as it leads to better utilisation of marine farming sites and increased harvest weights.

In 2024, Bakkafrost expects to harvest around 63,500 tonnes gutted weight in the Faroe Islands and 25,000 tonnes gutted weight in Scotland, giving a total of around 88,500 tonnes gutted weight. The quarterly harvest profile is outlined in in the table below. Biological, environmental and market conditions can affect the expected harvest profile.

Expected harvest profile as a % of total harvest pr. region:

The estimates for harvest volumes and smolt releases in both geographies are dependent on biological development.

Sales & VAP (Value added products)

Bakkafrost's highly flexible value chain includes state-of-the-art VAP processing capacity, which enables the company to adapt effectively to rapidly changing market situations.

As a result of changes in the Faroese revenue tax, Bakkafrost has adjusted the strategy for contracted VAP (Value-Added Products) to reduce contract exposure for 2024. 

For 2024, Bakkafrost has signed contracts covering around 9% of the expected harvest volumes in the Faroe Islands and Scotland combined.

In Scotland, Bakkafrost has decided to close down the facility at Marybank in July 2024, concentrating and optimising the harvest and processing at the facility in Cairndow. Provisions for redundancy costs for the affected employees (around 75) have been booked in Q2 2024.

FOF (Fishmeal, oil and feed)

The outlook of fishmeal and fish oil production is dependent on the availability of raw materials.

The ICES 2024 recommendation for blue whiting is 1,530 thousand tonnes, which represents a 12.5% increase from the recommendation for 2023.

In 2024 Bakkafrost expects continued high production volumes of fishmeal and normalisation of fish oil production volumes.

The major markets for Havsbrún’s fish feed are the internal Faroese and Scottish Farming segments.

Investments

On the Capital Markets Day on 6 June 2023, Bakkafrost announced a 6.3bn DKK investment plan for 2024-2028. The investments will enable a transformation of the operation in Scotland and provide sustainable growth in the Faroe Islands as well as Scotland.

The main purpose of the investments in Scotland is to replicate Bakkafrost’s successful operation in the Faroe Islands. A part of this is to implement Bakkafrost’s large smolt strategy in Scotland, which is achieved through building sufficient and energy-efficient hatchery capacity. The 2024-2028 investment plan includes projects to build hatchery capacity to produce above 15 million large smolts annually. Having large smolt in Scotland will transform the performance, lower the biological risk and increase harvest volumes. In addition to building hatchery capacity, Bakkafrost plans to strengthen the processing capabilities and increase flexibility in operation. Bakkafrost will also invest in more service vessel capacity to improve the mitigation of biological risk and improve the cost of operation. Further, Bakkafrost will make investments in marine site development.

The investments in the Faroe Islands include increasing annual hatchery production capacity to around 24 million smolts at 500g, cost-efficient repurposing of old hatcheries into broodstock operation, expansion of feed production capacity and growing sustainably by optimization of existing sites and new technology.

With the investment plan, Bakkafrost expects to sustainably grow the total annual harvest volumes to 165,000 tonnes in 2028. Over the same period, the total annual production capacity in Bakkafrost’s value chain will reach 200,000 tonnes gutted weight.

Update on the 2024-2028 investment plan

Since the announcement of the 2024-2028 investment plan, Bakkafrost has decided to change the priority of some of the investment projects in Scotland, including the second planned hatchery at Fairlie and new processing facility. Consequently, the capex spend is expected to reduce around 300 mDKK in 2024 around 500 mDKK in 2025, compared to the investment levels announced in the 2024-2028 investment plan.

Financial

The global salmon product market's long-term balance is likely to favor Bakkafrost. Bakkafrost has a long value chain and a cost-efficient production of high-quality salmon products and will likely maintain financial flexibility going forward.

In March 2022, Bakkafrost secured a 700 mEUR sustainability-linked credit facility (expandable by 150 mEUR) with a 5-year term and 2-year extension options which have been executed. This facility, along with Bakkafrost's strong equity ratio, bolsters the Group's financial strength for organic growth and cost reduction in Scotland, while also facilitating M&A and future organic growth opportunities, and upholding an unchanged dividend policy.

Please find the Company’s Q2 2024 report and the Q2 2024 presentation enclosed.

Contacts:

• Regin Jacobsen, CEO of P/F Bakkafrost: +298 235001 (mobile)
• Høgni Dahl Jakobsen, CFO of P/F Bakkafrost: +298 235060 (mobile)

This information is subject of the disclosure requirements pursuant to section 5-12 of the Norwegian Securities Trading Act.

About Bakkafrost:

Bakkafrost is the largest salmon farmer in the Faroe Islands and the second-largest salmon farmer in Scotland. The Group is fully integrated from feed production to smolt, farming, VAP and sales. The Group has production of fishmeal, fish oil and salmon feed in the Faroe Islands and primary and secondary processing in the Faroe Islands, Scotland and Denmark. The Group operates sea farming and broodstock operations in both the Faroe Islands and Scotland. The Group has built a biogas plant in the Faroe Islands. The headquarter is located in the Faroe Islands, and the Group has sales and administration offices in Grimsby (UK), Edinburgh (Scotland), Boulogne-Sur-Mer (France), New Jersey (US) and Munkebo (DK). The Bakkafrost Group has 1,686 employees (full-time equivalents).

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