P/F Bakkafrost (OTCPK:BKFKF) Q3 2023 Results Earnings Conference Call November 7, 2023 2:00 AM ET
Company Participants
Høgni Jakobsen – Chief Financial Officer
Regin Jacobsen – Chief Executive Officer
Conference Call Participants
Nils Olav Furre Thommesen – Fearnley Securities
Alexander Aukner – DNB
Wilhelm Røe – Danske Bank
Christian Olsen Nordby – Kepler Cheuvreux
Høgni Jakobsen
The agenda is first a summary of the third quarter before we go into markets and sales and move on to financials and then our CEO, Regin Jacobsen, will go through the segments, the segment performance with you and the outlook as well.
So to sum up the third quarter, our revenues in this quarter were NOK 1.8 billion. Quite similar to the revenue we had in the same quarter last year. Group operational EBIT of NOK 269 million, which is a reduction from the NOK 325 million we had last year.
Very little change in Faroese harvest volumes. We harvested 16,740 tonnes in the Faroes in this quarter. In Scotland, our harvest volume dropped quite significantly, down to 4,100 tonne compared to 8,100 tonnes in the third quarter of last year.
Feed sales were slightly lower in this quarter, just short of 36,000 tonne compared to 37,805 tonne in the same quarter last year.
Our FOF segment, Fishmeal, Oil and Feed, has had a very strong year and especially on the raw material intake and that also continued in this quarter. So we sourced around 110,000 tonne in this quarter compared to 76,000 tonne last year.
Cash flow from operations were positive with NOK 185 million and all segments had positive EBIT except for Farming Scotland, which had an operational EBIT of minus NOK 282 million. And we’ll come back to segments shortly.
So, looking at the markets, according to the latest analysis from – take the prices first. If you look at the global markets there, the average price for 4 to 5 kg superior salmon in this quarter was NOK 71 per kilo which is an increase of 12% compared to the third quarter last year. In euro, the price increase was 9.2%. Since mid Q3, we have had increasing salmon pricing and prices in that development has continued into the fourth quarter as well.
As we saw in previous quarter, there was an increasing gap in the prices between the smaller sized fish and the larger size. And that gap has widened during this quarter. It has never been as high as for the past five years as we have in this quarter. Demand from China and Asia in general for large fresh salmon has contributed to the price difference between large and small salmon.
According to latest data from Kontali, global sales in this quarter was down by 4%. Global sales to the US increased 4%. And this is in a period whether harvest in the Americas has reduced by 5%.
Global sales to the Russian market increased by 27%, mainly supplied from Chile.
Sales to Greater China has increased by 26%, driven by strong demand, especially for the large fresh salmon. And regarding the Chinese market, it’s also worth mentioning that Chile has also sold increasing volumes of coho into the Chinese market.
The Japanese and the ASEAN markets are also affected by supply of coho and wild salmon, but also from the higher air freight costs that are due to the war in Ukraine with longer routes. So, we had a drop in Japanese sales by 16% and 17% for the ASEAN markets.
Global harvest dropped 2.8% in this quarter. If we include inventory movements, it’s a supply reduction of 1.4%. 1% is down in the Europe. And if we look at Norway, harvest dropped by around 1.6%. There was in general a lower productivity in Norway in this quarter, probably also leading to some delays of harvest into the next quarter. Average weights dropped 5% in Norway to 4.12 kg and feed sales increased by 4%.
In the UK, we had lower incoming biomass in this quarter and a reduction of harvest volume by 8.6%. There was high mortality in the UK in the third quarter, however, with an increase of 20% on feed sales.
In the Faroes, we have had improved biomass positioning coming into the third quarter as we have been building up biomass during the first half of the year, and harvest volumes for the Faroes as a whole increased by 9.7%, however, with a drop in average weights from 5.03 to 4.81 kgs. Feed sales are estimated to have increased somewhere between 7% and 12% in the Faroes in the quarter.
In Chile, despite harvest volume dropping 3.6%, harvest was actually higher than expected for this quarter. Productivity in Chile has in general been good, however, with slightly lower harvest weights, but 6% to 7% increase in feed sales. And the North American harvest is continuing downwards as we also saw in the previous quarter.
If we then look at the financials, as mentioned in the summary, the revenue in this quarter was NOK 1.867 billion, more or less unchanged to what we had the same period last year. Operational EBIT dropped 17% to NOK 269 million. Fair value adjustments were positive with NOK 55 million in this quarter. Revenue tax was minus NOK 57 million compared to minus NOK 43 million in the same quarter last year. And this is the first quarter where we pay revenue tax according to the changed tax that was introduced earlier this year.
Profit after tax was NOK 219 million.
And then, back to segments. As we have announced previously, we have changed now our segments in our reporting. We are now moving from four segments which we had previously to seven segments.
So the FOF segment, Fishmeal, Oil and Feed, is unchanged. But we have introduced two new freshwater segments, one in Faroes and one in Scotland. Similarly, we have introduced or changed the Faroese farming segment and isolated marine farming in Scotland to its own segment as well.
Then we have introduced a services segment, which is well built services harvesting packaging and also the biogas production of waste handling.
And finally, we have a sales and other segment, which besides sales and marketing also includes logistics, and the VAP production, the value added processing. So all the value add adding activities after harvest is a part of sales and other.
We have generated historical reporting figures for all these seven segments. So just to give you an idea of how that looks, revenue for the FOF segment in this quarter, according to the new segmentation, is more or less unchanged, so NOK 1.048 billion in this quarter, an increase of 55% from last year.
The Faroese Freshwater segment had a revenue of NOK 147 million. In Scotland, the Freshwater segment had a revenue of NOK 50 million and Farming in the Faroese had a reduction in revenue of 9% and amounting to NOK 937 million in this quarter. Farming in Scotland dropped 50% to NOK 212 million and the Services segment dropped 6% to NOK 208 million. Sales and Other dropped 5% and had a revenue of just short of NOK 2.2 billion. And for the group, the same number we talked about earlier, just in excess of NOK 1.8 million in revenues for this quarter.
Similarly, if we look at operational EBIT for the segment, FOF segment, NOK 316 million, an increase of 165% in this quarter. Freshwater Faroese, operational EBIT of NOK 47 million; in Scotland, NOK 17 million; and the Faroese Farming segment had a reduction in operational EBIT of 61% to NOK 108 million in this quarter. Farming in Scotland, minus NOK 282 million. And the Services segment increased their operational EBIT in this quarter by 40% to NOK 21 million. Sales and Other, NOK 78 million. And for the group, NOK 269 million.
So, year to date, we have an operational EBIT of NOK 1.188 billion for the group and adjusted earnings per share in this quarter was NOK 2.93 and DKK 13.91 year-to-date.
If we look at the balance sheet, some of the main changes is an increase of property, plant and equipment of NOK 460 million, amounting to NOK 6.1 billion at the end of the quarter. Inventories increased to NOK 117 million to just short of NOK 1.3 billion and receivables increased with NOK 143 million and amounted to NOK 951 million.
Cash and cash equivalents have reduced by NOK 349 million and amounted to NOK 370 million, and the equity ratio dropped from 62% to 61%.
Cash flow from operations was positive with NOK 185 million, minus NOK 235 million from investments and minus NOK 124 million from financing. And during the quarter, we have increased our net interest bearing debt with NOK 134 million. The net interest-bearing debt at the end of the quarter amounted to NOK 3.045 billion and we had undrawn credit facilities of just in excess of NOK 2.3 billion.
And then I will hand over to Regin who will go through the segment performance
Regin Jacobsen
Good morning, everyone. We will go through the segments starting with the Fishmeal, Oil and Feed segment, which had a record-breaking quarter. The marine raw material sourced in the quarter was 109,685 tonnes in the third quarter 2023, which is record for a third quarter. Last year, we sourced 76,182 tonnes.
As the volume year-to-date is also a record high at 413,485 tonnes versus 251,000 tonnes in the same period last year, external sales of finished products also set records in the third quarter. Fishmeal more than doubled to 16,000 tonnes in the third quarter versus 7,000 tonnes last year. And the feed sales, however, dropped 5% to 36,000 tonnes compared with 37,500 tonnes last year.
Therefore, EBITDA increased for the Fishmeal, Oil and Feed segment 165% from NOK 119 million to NOK 316 million in this quarter. And the EBITDA margin was also record high on 30% compared with 18% last year.
Year-to-date sourcing of raw material for the fishmeal oil is record high compared with any previous year. Raw material sourcing is difficult to forecast. However, the ICES advice on blue whiting catches in the North Atlantic increased 81% this year compared with last year and will increase further [Technical Difficulty] for next year from 1,360,000 tonne to 1,530,000 tonne in the latest update from September 29.
Global markets for fishmeal and oil are still tight. Lower quotas after El Nino canceled Peru’s first fishing season and the second season for [indiscernible] quota is 1.7 million tonne, which just has started 12 days ago, which is a reduction on 26% from last year.
The new freshwater segment in Faroes includes broodstock and hatcheries. The total number of smolt released in the third quarter was 3.3 million versus 4.1 million last year. The average weight was 405 gram, unchanged. The operation in the third quarter delivered an EBIT per kilo of NOK 53, which delivered a margin on 32%.
There are two broodstock sites in Bakkafrost and six hatcheries in operation. The broodstock sites produce the Faroese strain of eggs, which give Bakka salmon a unique market position.
Large smolt is the main driver Bakkafrost strategy to reduce cycle time in the marine phase, reducing risk and create organic growth. After the expansion of Glyvradal and Norðtoftir this year with additional 24,000 cubic meters, there are now four large hatcheries including Strond and Viðareiði. The combined capacity is 72,000 cubic meters, up from 48,000 cubic meters in the beginning of the year. The total capacity now corresponds to approximately 9,000 tonnes of smolt versus 6,000 tonnes before this expansion.
With the increased capacity now available, decision has been made to postpone the part of the transfer in December to February to reduce time to final harvest and give us safer environment, especially during the winter, and to increase availability.
The journey to large, healthy smolt has not been a straight line. Bakkafrost are first mover on this and we take some of the hits along the road. Scientific reports from Faroe Islands have concluded that there are potential for good growth in the marine phase using large smolt produced in freshwater and RAS systems. The results also show that slower grown smolt in the production in the freshwater phase leads to better growth and lower mortality in the marine phase.
Since the first generation of large smolt was delivered from strong hatchery back in 2020, Bakkafrost has made significant improvements both in knowledge and procedures to improve the quality and performance of the large smolt.
In 2023, however, I’m afraid that there are still some dampening effects on the smolt output volume, which is a lagging effect from startup phase where production procedures are tuned in.
Now the large smolt is transitioning into a phase emphasizing consistent size and quality of the smolt where upscaling production of volume is coming. The hatchery expansion in Norðtoftir and Glyvradal, production in the Faroes are steadily ramping up after being expanded in capacity.
Bakkafrost has just committed to build a new small hatchery in Skálavík in Faroes. This new hatchery will have a total capacity of 28,600 cubic meters and is expected to be up and running late 2026. The annual production will be around 7 million smolt of 500 gram.
Once Skálavík hatchery is completed, Bakkafrost annual salmon smolt production capacity will be in excess of 24 million smolt at 500 gram. With this state-of-the-art hatchery in Skálavík, we continue to expand in order to achieve our goal to reduce biological risk, improve efficiency and create organic growth.
The building ground was acquired three years ago and has already been prepared and is ready to start construction. The site Skálavík is on the island of Sandoy, which is located just south of the capital, Tórshavn. Until now, this island has been isolated with a ferry connection. But from mid-December, there will be a new modern subsea tunnel connection, which takes down the travel time from Tórshavn to Skálavík to less than 30 minutes by car.
The new freshwater segment in Scotland includes also broodstock and hatcheries. The total number of released smolt in the third quarter 2023 was up to 2.5 million from 2.4 million last year. The average weight was 5% up to 112 grams compared with 107 grams last year. The operation in third quarter 2023 delivered an operational EBIT per kilo of NOK 91.46 and the margin on 32%.
In Scotland, there are three hatcheries in operation and two broodstock sites coming back into operation next year. The broodstock sites use our own genetic strain, Native Hebridean, which have proved to be very robust to local challenges. We’re about to start the journey with large, robust smolt in Scotland to reduce the time fish is exposed to the challenges in the marine phase.
The Applecross expansion is progressing well. A production batch of 1.1 million is now underway for transfer later in the fourth quarter. And in the first quarter next year, the first trial batch of 500 gram will be planned to be transferred to the marine phase.
From next year, almost all our smolt will be sourced from our own hatcheries. All smolt stocks are now being vaccinated with the latest antiviral targeted to marine risk vaccines and timed to reduce the second summer risk. We are getting closer to our strategy to produce healthy, large, robust for only one summer in the sea.
The Scotland fresh water operation is scaling up the production of high quality smolt at Applecross after the release of the first trial batch from May this year. [Technical Difficulty] million smolt next year.
Then coming to the Farming segment in the Faroes. As Høgni explained, this is now our pure farming segment only including the actual farming operation in the marine phase. Other activities have been separated out. So comparing old numbers with this, we just have to have this in mind – freshwater services and sales and other are now separate segments.
The total harvested volume in the third quarter is 1% down. The average weight is 4.8 grams, which is up from earlier this year, but 7% down from last year. The operational EBIT best per kilo was NOK 9.90, down from NOK 22.02 last year. The operational margin was 12% versus 27% last year. The temperature in the Faroes waters were 0.2 to 0.3 degrees warmer in June to September comparing to average temperature in the last 20 years. The maximum temperature were, however, still below 11 degrees in Faroes water which is a good temperature level.
The breakdown of Faroes volumes were 12% from the west division, Sundalaya [ph] with average weight of 5 kg gutted and very good performance. 17% came from the South Division, Hov [ph], with an average weight of 5.4 kilo, very good performance. 72% came from the North division from [indiscernible]. The average weight was 4.6 kgs.
These sites had a batch that did not live up to expectations. Our analysis clearly conclude that root cause is back to the hatchery back in August 2021 with an early phase startup issues related to construction. The fish seemed to perform well. But during the third quarter this year, the fish grew slower and somewhat impacted on biology. The growth therefore in the third quarter changed negatively from a positive development in the summer to a more negative growth during the latter part of the third quarter.
When planning the harvest profile for this year, at this time last year, we expected a similar development as we can see on the growth line on this page. Unfortunately, the trends shifted down and, therefore, we have postponed some of the planned harvest into the first quarter next year. This fish group harvested in the North division was all from the same group of impacted fish. A few pens have been left into the fourth quarter, which have been harvested in October, one remaining pen is to be harvested in November.
The remaining Q4 fish seems to be healthy and developing good with good health and growth abilities. Therefore, we have decided to postpone some of the planned fish for harvest in the fourth quarter into Q1, where we expect to obtain better harvest average weight and better price premium.
Coming to Farming segment in Scotland. The same applies for the segment where fresh water sales and other activities are now separated to own segments.
The total harvest volume in the third quarter was 49% down to 4,100 tonnes versus 8,100 tonnes last year. The average weight was 3.1 gutted, 8% down from 3.4 last year.
The operational EBIT down from minus NOK 30 last year. The operational margin was 133% versus minus 42% last year.
El Nino brought earlier higher sea temperatures and with a significant increase in jellyfish. The temperatures in Scotland’s farming fjords were between 0.5 and 1 degree warmer in the period from June to September compared to average temperature in the last 20 years and were highest levels seen in a period of three or four months in the summer period. El Nino have been quite strong this year, and has impacted crops in agricultural production globally.
Our main challenge in the third quarter was seas contributing to the increase of naturally occurring organism, jellyfish, with the particular impact of jellyfish on fish, with other health complications such as pancreas disease, a viral disease prevailing in Scottish waters. The biological challenges arrived earlier than in recent years, but have in return eased off earlier as well.
Hence, from mid-September, the biology improved significantly. The upscale freshwater dual treatment capacity in Scotland had a positive impact on fish gill health and ensure low [Technical Difficulty] level as well. This has reduced the potential impact on the biological threats during the quarter.
To leverage from the improved biological development since mid-September, Bakkafrost plans to reduce the Q4 harvest in Scotland to under 1,000 tonnes, allowing the fish to grow larger, similar to Bakkafrost approach in Scotland last year. This shift will push harvest volume into the first quarter, enhancing market value through higher average weights and better prices.
In order to address the biological risk, Bakkafrost has made strategic adjustments to its short term plans and production strategy for the Scottish farming operation. A comprehensive risk assessment has been conducted for all farming sites, evaluating the feasibility of stocking and farming these sites using various strains, hatcheries and small sizes.
Based on this evaluation, Bakkafrost will prioritize and advance the utilization of large, high quality smolt from Applecross hatchery over external sources. Some farming sites might not be restocked or remain productive during the third quarter until the risk has been mitigated through the use of large high quality smolt. This approach will reduce the biomass at risk in the third quarter and result in an increased harvest during the first half of 2024.
The new segment, Service segment, provides several services to the group. The segment operates a fleet of large well boats and farming support vessels in addition to convert organic waste into biogas, heating, electricity and fertilizer, which is sold externally. The segment also provides harvesting services, both to the Scottish and the Faroese farming operation as well as styrofoam boxes to the fairies operation.
Transactions regarding well boats and FSV vessel services are long term contracts and priced according to benchmark market prices. The transactions for harvesting services on styrofoam boxes are based on benchmarks on arm’s length prices.
The operational EBIT amounted to Bakkafrost 1.52 per kilo in the third quarter, 89% up from NOK 0.88 last year. The operational margin was 10% in this quarter, up from 7% last year.
The new multipurpose vessel delivered very good results in the operation in this quarter, with high efficiency against sea lice, very gentle and fish welfare friendly operation. We have high expectations to this operations for the future.
The Sales and Other segment is the new segment covering sales, marketing, freight, logistics and the value added products. This segment purchases salmon from the Faroese farming segment and the Scottish farming segment based on market reference prices. The Sales and Other segment optimizes the value retention and provides freight and logistics services. The segment has processing capacity in Faroe Islands, in Scotland, Denmark, and in the US for production of value added products.
A significant share of the salmon is sold as value added products for the retail market. In this quarter, the sales and other segment transferred volumes to VAP, 6,997 tonnes, 8% up from last year and delivered a margin of NOK 5.70 per kilo, 145% up from NOK 2.33 last year. The margin was 4%, up from 2% last year.
The main markets served in this quarter changed slightly. Western Europe, 53%, 2% down from 55% last year. North America, 28%, 5% up from last year. Asia, 13%, 1% down from last year.
VAP contracts, the share of sale in the quarter increased to 42% from 38% last year. As a result of the revenue tax made effective from August 1 this year, contracts for next year on VAP products are more than halved to only 9% of the 2024 volume versus 22% last year. The capacity in the production will be adjusted accordingly.
So now coming to the outlook. The supply of salmon on the world market reduced 2.8% in the third quarter according to the latest estimates from Kontali Analyse. Summer prices measured in euros increased 9% in the quarter, measured in Norwegian kroner 14%. The supply in the first half of next year is expected to increase 3% to 4%. And in 2024, for the full year, around 5%.
The global harvest muted supply growth over the last many quarters have been somewhat reduced every quarter, indicating a weaker biological operation globally for summer farmers.
We update our guiding volumes and now we start to indicate quarterly volumes. And for the first quarter of next year, as you see, we have higher volumes than normally because of the transfer from the fourth quarter. So, in Faroes, 23% of the volume is in the first quarter and 23% in Scotland.
In Scotland, there are some learnings from 2023, which I will briefly go through. 94% of the mortalities were second summer fish. Mortality levels were increased in third party smolt on specific genetic strains. We remain committed to our core strategy that the production of large healthy robust elite strain, select strains smolt will be in the sea for the first summer.
The current position on the Q3 challenges came earlier, greater and differently, but so has also our improvement. All current stock in marine is in an improvement health position. And we plan to maximize production value through growth, not harvesting small fish in the fourth quarter. Therefore, harvest volume for the fourth quarter will come down as we grow our fish into the fourth quarter next year.
Our progress on Applecross expansion progresses well. And the production startup batch of 1.1 million will be transferred in marine in the fourth quarter. And in the first quarter next year, batch of 500 gram fish. We expect to supply all our fish next year from Applecross.
All our fish are now stocked, are being vaccinated with the latest antiviral targeted to marine risks and timed to reduce the second summer risk that we saw this year. The future, our focus to derisk to one summer even before 500 gram can be stocked by adjusting stocking profiles to marine risk factors. Production volume will fluctuate quarterly, but mortalities are expected to be reduced.
As we move forward to our five year plan, production volumes will increase from current levels. The bumpy road will definitely push some investments a bit back to create better visibility before large investment decisions.
Our strategy remains focused on fish welfare with large healthy, robust smolt, our own genetic strain on elite fish from Native Hebridean, proactive health management with latest vaccines, best practice husbandry and investing in capacity and capability.
For Faroe Islands, we are lower than expected some time ago and there are still some dampening effects from the smolt output volume which is a lagging effect from the startup phase in the hatcheries where production procedures are tuned in.
Now as large smolt production is transitioning into a phase, emphasizing consistent size and high quality of the smolt, while upscaling the production volumes and larger capacity becomes available, production in the Faroe Islands are steadily ramping up. We have therefore decided to postpone harvest of some of the planned fish to next year to obtain better harvest weight and price premium.
As a consequence, that larger proportion than previously will be harvest in the first half of the year compared to the second half, we expect to have a positive impact for the group. And therefore, we take the guidance for harvest on 2023 down to 73,000 tonnes and 2024 to 91,000 tonnes. We are now guiding by quarter which hopefully will give some better visibility.
The smolt release for next year is guided on 2024, 27.1 million versus 24.9 million this year.
Contracts for 2024 are more than halved to only 9% compared with 22% last year. The FOF segment, expect to be record high this year. We expect a continued high fishmeal production in 2024, but probably more normalized fish oil production.
Our CMD from June 2023 guided the CapEx plan for the period 2024 to 2028. The overall objectives is to build a capacity across the whole value chain on 200,000 tonne and to achieve this by 2028 and an actual production on 165,000 tonnes.
The growth path is established on existing licenses in Faroe Islands. And the continued transition to large smolt where the hatcheries are the main driver. A similar development to Scotland based on learnings we have had during this transformation will drive the turnaround and eventually growth in Scotland as well.
The journey continues, and I’m sure, despite some hits, as first movers of large smolt, we have knowledge, expertise and the strength to fulfill and reach the goal. I am especially confident about the potential using large smolt produced in freshwater and RAS systems to reach the good growth and low mortality in the marine face, the learnings and changed procedures with slower grown smolt in the freshwater phase.
Thank you very much. And now we open up for questions.
Question-and-Answer Session
Q – Nils Olav Furre Thommesen
Nils Thommesen, Fearnley. A question on Scotland and volume guidance for 2024 and also in 2025 because you have such low volumes of the total share in the second half. Is the idea that you’re going to grow biomass in 2024 the second half, so we could maybe expected an uptick in volumes for 2025 in Scotland, even though you don’t increase the smolt release in 2024.
Regin Jacobsen
So there are one main difference, we are taking down the risk. And the second big difference is that we tried to move bigger part of the fish to first half of the year than second half of the year. So that shift makes an impact. Of course, better survivability should have a positive impact on the volume produced. And of course, our target is also to increase the average weight of the fish, which of course should also have a positive impact on the volumes
Nils Olav Furre Thommesen
A quick one on the smolt release for the Faroes in 2004. Is there any timeline risk in terms of the ramp up of the new facilities there as well? Or has most of that been taken out?
Regin Jacobsen
We have unfortunately seen that often when you start up new facilities, there are some issues. Now with Glyvradal and Norðtoftir, they are now in operation. So, therefore, in Faroes, I assume that we should be in a better position now.
We must also remember that when Strond started, Strond was around 60% of the total capacity. Now as we add on, even if these are large hatcheries, we don’t add 60%. We add a bit less. And in this case, with Norðtoftir and Glyvradal, even if we have added 50% this year, it is on two sites. The next add on, Skálavík, which we just have signed, is a strong size, but this takes the total capacity 30% up from 72,000 to 100,000 cubic meters. So, therefore, the relative increase is lower.
And I also would like to emphasize that we have now a lot of learnings that are a huge learning and expertise in the group now. So we have a better starting position with new sites. And, and of course, we try also to make sure that the learnings are adapted also to the startups that we have now in Scotland.
Alexander Aukner
Alexander Aukner, DNB. So, I have two questions. The first is a comment on the farming cost into 2024, given the backdrop with higher fish oil prices, in particular. And the second question is on the VAP side. Obviously, you’re cutting volumes quite substantially. How much is that going to hit the profitability in the VAP segment because of the lower capacity utilization there is?
Regin Jacobsen
In the VAP, we lowered the contract year and we will adjust the capacity accordingly. So, we will sell more on the spot market. And it could also be VAP products, but sold from week to week or month to month. If that’s going to hit the margin, it’s difficult to say. It depends on the difference between contract price and spot price. Normally, we’ve seen that – especially in the first half of the year, there is high price on spot products where we normally see. And second half of the year is the opposite.
Now, as the revenue tax is calculated as the basis from the [indiscernible] price, we see that the risk for Bakkafrost to go into contracts has increased. So therefore, we have reduced our contract exposure. It’s a bit strange that a regulation takes this approach and actually makes it more difficult to make contracts on VAP products in the Faroe Islands. We have made this approach or this clear to the authorities. But so far, there has been no change. So we have to adapt to the new situation.
Coming to the cost price, the prices on feed have been relatively high now for a while. They are the main driver for the increased cost. There are, of course, also other drivers from inflation all over the line. But I think that the biggest increase is behind us. The feed cost has not been increasing for the last six months. It has been quite stable. It might be able to go somewhat down again. But the price on the producing salmon has increased significantly over the last two years, probably more than over the last 20 years. And I’m afraid that, at the moment, we don’t see them coming down again.
Wilhelm Røe
Wilhelm Røe, Danske Bank. Just a question on the August 21 batch. My understanding is that you really increased the small size during that period. Should we expect any impact on the following batches or is this more an isolated event for that particular batch?
Regin Jacobsen
This is an isolated event for that particular batch. This is related to that period in the summer where there were some construction issues with the Strond facility. There were adaption to temperature, but there were also some constructions which needed to take place during that period which had a negative impact on the water quality. It did not appear – we didn’t have any mortality and it did not appear that the fish were impacted at that time. But it is very clear now that this group has had some negative impact as we see that it is very outstanding in the numbers in the benchmark internally in the company. So we can see very clearly these pens are not performing as well as all the others. So that’s why both stocking after that batch and the fish that is now relatively large for coming quarters seem to be doing quite well.
Christian Olsen Nordby
Christian Nordby, Kepler Cheuvreux. We have seen in the Faroes for the last four or five years that harvest weights have come down somewhat, if at least we look in a rolling 12 month basis. Can you give some reasons to why this is? And can we expect sort of being above 5 kg again in the future?
Regin Jacobsen
Especially in the first half, we were not very comfortable with the situation. We were very, very low. But over the last two years, we have had some dampening effects compared with previously.
We see now that, especially since we have better tools available, that we have a better position to keep the fish longer. We have a very strict veterinary and sea lice regime in the Faroe Islands. So, therefore, sometime, as we did not have all the tools needed, we needed to harvest early. That’s what happened last year. If you remember, the [indiscernible] site in December, we had to harvest that fish early, which cost the plan – the planned fish for February harvest was actually harvested in January. So it was a snowball effect where we had to continue harvesting early on a lot of fish, taking average weights down for the first half of the year.
In this quarter, in the third quarter, we actually expected to be over 5 kg which also was the case for the south segment, Hov [ph], and also the west, Sundalaya [ph], where we were on 5 kg and 5.4 kg, but unfortunately this batch, which was in [indiscernible] in the north had a lower average weight because of this batch issue that I talked about. So this was not related to sea lice. Sea lice situation is all time in Faroes. We have lowest numbers that we have recorded in Bakkafrost at the moment. And this relates to the good tools that we have, especially with the freshwater dual treatment system with Bakkafrost.
So, therefore, my answer is that, yes, we expect higher growth at the higher average weights in the future.
Christian Olsen Nordby
Another question on the fishmeal and fish oil volumes. You say fish oil normalize next year, what does that mean compared to this year? And you have a lot of inventory of fishmeal, fish oil now for sale into 2024? How is that situation?
Regin Jacobsen
We still have full inventory, more than full. So we are selling off also here in the fourth quarter. So this year, we talked very much about fish meal, but actually we have produced a lot of fish oil also this year. I guess we have – can we see that somewhere in the report, the fish oil? Or is it only fishmeal?
Høgni Jakobsen
Not specified.
Regin Jacobsen
So we have sold a lot of fish oil also. We have had a lot of fat fish also during the summer. We don’t plan or don’t expect that to continue. So that’s why we just indicate that that’s not part of our budget. But we expect to be self-supplied and maybe a bit more also on fish oil because there’s a lot of offcuts also now from the pelagic operation in the Faroes with the factories doing filleting where we get all the off-cuts, which is very high on fish oil, and that’s mainly in the summer period and in the autumn period.
Regin Jacobsen
Thank you very much.
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