Bakkafrost P/f

Earnings Release • Aug 26, 2024

Faroese Strike Impacts Financial Performance, but Strong Operational Metrics

Faroese Strike Impacts Financial Performance, but Strong Operational Metrics

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)

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.

Million smolt transferred '24e '23 '22 '21 '20 '19

FO 17.0 14.4 14.5 14.4 14.3 12.7

SCT 7.7 10.5 10.8 11.1 10.4 12.4

Avg. weight (g)

FO 450 396 345 376 320 205

SCT 140 117 107 95 88 83

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:

Region Q1 Q2 Q3 Q4

FO 23% 16% 29% 32%

SCT 29% 45% 19% 7%

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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