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Good morning, and welcome to the Bakkafrost Presentation of the First Quarter 2022. First, we'll summarize the quarter and then look into the markets and segments before Hogni Dahl Jakobsen will take us through the financials and the ESG. And then finally, the outlook for the market and the company.
In this quarter, Bakkafrost harvested in Faroe Islands record high volumes in the first quarter and actually for the third consecutive quarter, 17,459 tonnes compared with 14,025 tonnes last year. Also, we saw highest feed sales in our first quarter, 26,192 tonnes versus 23,717 tonnes last year. In Scotland, however, harvested volumes were low, 3,973 tonnes compared with 7,002 tonnes last year. The market balance is tight as supply of salmon is low in the first half of 2022. Our feed operations [ sourced, providing ] raw material in this quarter, 77,971 tonnes, which is up from last year. And in this quarter, we are proposing to the Board of Directors, we are proposing a dividend, which has been approved by the Board in the Annual General Meeting and will be paid out shortly. There were positive effects in the farming in the Faroese and the FOF segment, but negative in the VAP and in farming in Scotland.
The farming rise in the Faroe Islands was NOK 36.03 in the first quarter versus NOK 14.10 last year. The combined farming and VAP margin in the Faroe Islands was record high in this quarter, all-time high, actually, NOK 33.79. However, in Scotland, the margin dropped to minus NOK 17.67 compared with NOK 1.44 last year per kilo. The VAP margin dropped to minus NOK 5.65 compared to NOK 18.56 last year. The EBITDA margin for the fishmeal, oil and feed segment increased to 19.6% from 15% last year.
When we look into the markets [indiscernible] NOK 80.17 per kilo compared with NOK 54.48 last year. The driver for the increased salmon price [indiscernible] climate was the disruptor for years, [ then ] 2019 disrupted in 2020 and 2021. And now conflict take us to the new disruption levels even disrupting the other seas.
The total volumes harvested in the first quarter increased 2% from 21,432 -- to 21,432 from 21,027 combined for the Group. The Faroe Islands farming division delivered 24% growth to 17,459 compared with 14,000. Overall, average weight in the Faroese, however, dropped 5% from 5 kilos to 4.8 kilos, especially Lamba Wick came out low in this quarter at 3.8 versus 4.3. The other sites were all about 4.7, especially, Frooba came out good at 6.4 kilo in the quarter. Smolt transfer in the quarter was 2 million at 352 grams, slightly lower than last year in the same quarter. Temperature regime in the Faroese developed in line with previous years.
In Scotland, we had a low harvest. And the main focus in the quarter was on growing fish. We hold back in order to keep fish for the second quarter. The harvest was mainly from areas which had compromised biology from the fourth quarter. This led to lower average weight, some sites at 4.1 kilo, but most sites around 3.5, 3.8 kilos. Glyvrar, for example, at 4 kilos, [indiscernible]. Smolt transfer in the quarter increased to 2.3 million versus 1.6 million, and also slightly larger sizes, 102 gram instead of 89 gram last year. The results from investments from Applecross is not really yet materializing in really upscaling the size of fish yet. This will be more visible during next year.
The operational EBIT from the farming division in Faroe Islands increased 229% to DKK 471 million versus DKK 143 million last year. In Scotland, the operational margin dropped to minus 53% versus minus 7% corresponding to minus 22% versus minus 2% -- versus 2% last year. The operational revenue in the Faroese increased 86% to DKK 1.1 billion versus DKK 645 million. In Scotland, revenues dropped 27% to DKK 235 million versus DKK 322 million. And temperatures in Scotland developed more or less also in line with previous years, however, slightly higher temperatures.
In the Faroese, we see a strong margin on back of good biological development, and all-time low sea lice numbers. Strong growth and good price achievement in the market. In Scotland, the operation had huge issues in second half of '21 and some sites were impacted in the first quarter 2022. In order to get back on track, we decided to hold back on harvested fish in the first quarter to grow the fish to more optimal harvest sizes in the second quarter and then to get better sized fish to harvest. Low volumes has obviously impacted production cost in Scotland in the first quarter on the wrong side. Altogether, this led to a weak margin in this quarter with the intention to pay off in the second quarter.
The turnaround plan in Scotland is progressing. Procedures and operation have been updated. It has been a challenging period since last summer, but our focus is on securing the operation now, while we are investing in the operation with modern technology all over the line, but this takes time. Eventually, we are going to see results. We have, in this quarter, started the operation with Aqua Kvaloy for freshwater treatment, which means that we now have enough capacity to operate within safe measures with the issues that we see from the environment in Scotland.
In areas where we have stocked new fish under our new operational strategy, we see good biology. All stocking are now with our new farming strategy. A real test of our operation in Scotland will again be through the third and fourth quarter this year. We are now much more confident with the operation. However, we believe that large smolt will be a very important step for us to protect our fish with only one summer in the sea.
The VAP segment sold 24% more volumes in the first quarter versus last year. The revenue increased 37% from DKK 305 million to all-time high DKK 418 million. The operational EBIT dropped from DKK 75 million to minus DKK 29 million, due to high internally-sourced raw material prices. Internal buying are traded in line with spot price development from farm and sold on contracts. The EBIT per kilo dropped from NOK 18.56 to minus NOK 5.65 in the first quarter 2022. 38% of the volume in the quarter were used internally in our VAP operation flat from last year.
Bakkafrost fish feed department, Havsbrun, increased EBITDA 79% in the quarter compared with last year to DKK 86 million versus DKK 48 million last year. The margin increased to 20% versus 15% last year. Volumes of fish feed increased 10% to a new record in the first quarter at 26,192 tonnes. Raw material sourced were good in the first quarter, 78,000 tonne. By the end of April, we have sourced more volumes year-to-date than all last year, 152,000 tonne. Blue whiting season started late this year, which meant that we had better hatches coming in during the first part of this year. Fish feed in the first quarter was record high, and 96% of the feed is sold internally. So we now see the benefits also from our Scottish operation in the feed segment.
The market prices for feed raw materials have increased significantly during the first quarter 2022, mainly on vegetable ingredients. The share of local sourcing of raw materials for our feed operation is above 50%, which we think is a strengthening position of our operations. So we consider this to be a competitive advantage during the unstability we see in the global markets these days. We produce all fishmeal and oil internally, and source pelagic fish and offcuts from local fisherman and pelagic operations. This is both a driver of a strong position on using high-quality raw materials and also differentiation in the market of the product and taste, and a good biology in our farming operations.
And now Hogni Dahl Jakobsen will present the financials.
Revenues in this quarter for the group increased by 39% in excess of DKK 1.6 billion and our operational EBIT for the group rose by 87% to DKK 418 million in this quarter. The fair value adjustments of the biomass amounted to DKK 177 million and revenue tax increased to DKK 58 million -- minus DKK 58 million, and this is, of course, linked to the high salmon price that we have seen, but also the higher harvested volumes in the Faroese in the quarter. We also had minus DKK 31 million in onerous contracts in this quarter, and this is also linked to the very high spot prices on salmon as our contracts are produced by our VAP segment in the Faroese, and as Regin mentioned, the raw material prices for those contracts are delivered or the pricing is linked to the spot price. Profit after tax was more or less same as in the first quarter last year, and came out at DKK 405 million.
If we look in historical perspective, look 5 years back, quarter-on-quarter we see that this quarter the operational EBIT is higher than in any of the previous quarters over the past 5 years. And our adjusted earnings per share in this quarter was DKK 4.82.
Moving on to the balance: property, plant and equipment increased slightly and amounted to DKK 4.943 billion in this quarter. The biological assets increased by DKK 188 million to DKK 2.637 billion, whereof DKK 782 million were fair value adjustments. There has been an increase in working capital in the quarter, and receivables have increased by DKK 85 million and -- sorry, inventory and receivables have an increase by DKK 48 million in the quarter. Those 2 amount to DKK 794 million and DKK 872 million, respectively.
Cash and cash equivalents reduced slightly by DKK 64 million to DKK 445 million and equity increased by DKK 103 million to DKK 9.451 billion. Equity rates was -- the equity ratio was unchanged at 64%. The cash flow from operations have improved and was DKK 151 million. Cash flow from investments were minus DKK 175 million and cash flow from financing came out at minus DKK 40 million in the quarter.
If we look at the net interest-bearing debts, we have a slight increase of DKK 65 million in this quarter compared to last quarter. And this is caused by net investments of DKK 175 million. The changes in working capital that amount to DKK 336 million and the positive cash flow from operations amounting to DKK 446 million, which gives us a net interest-bearing debt at the end of the quarter amounting to DKK 2.191 billion.
In the fourth quarter we got commitment from our current banks, group of banks for a refinancing of the group, sustainability-linked facility agreement, which was closed in the first quarter. And with this, we have nearly DKK 3 billion of undrawn credit lines. And on top of that, we have EUR 150 million in an accordion option.
Brief update on the ESG. We have released our fifth sustainability report in this quarter, which is available on our webpage. Some headlines from that report will tell you that we have managed to decrease our carbon intensity per tonne of produced salmon in the Faroese by 38%. This is '21, last year, I'm referring to, which the report is covering. And we had, in Scotland, an overall decrease of 16% on our greenhouse gas emissions. We continue to source locally and this is both in the Faroe Islands and also in Scotland. Around 60% of all services and products sourced are done locally. And we also provide and report our full year review of our award-winning biogas plant, which is now up and running, and producing a significant contribution to the green renewable energy in the Faroese.
Then, Regin, will go through the markets and outlook.
In this quarter, we saw a significant drop on the supply side in the market, 7% drop, which is mainly driven by the volumes in Norway and Chile, and U.K. These 3 combined dropped their supplies 45,000 tonnes in the quarter. On the feed sales, we also see in this quarter a significant drop on 6% in the European biomasses. In Chile, it is more or less unchanged, maybe slightly 1% up maybe. Harvest weights in Norway in this quarter was more or less flat at 4.6 kilos, Chile was slightly down 4.4 kilos, 8% down and Chile was also -- and Scotland was also 8% down to 4.2 kilos, Faroe Islands was 11% down from 5.3 to 4.7 kilos.
If you look on the demand side, we see a drop, of course, on the same 7%, but the prices increased 47% on back of this 7% volume drop, so indicates a strong bargaining power on the demand side -- on the supply side, and the strong players on the demand side being able to pay high salmon prices these days. Probably also linked to the high prices on food in general in the markets these days.
The U.S. market increased their volumes by 1%, where EU, for the first time in a very long period, dropped their volumes by 9% in this quarter, maybe also linked to the fact that many of the big processors in Europe have difficulties with these very high prices and challenging conditions, in fact. The markets also, at least in the beginning there were some restrictions, which also created some constraints. In China, Hong Kong have big impacts from this right now. But increased in the period on back of very low numbers last year. Now, we see also better capacity for air cargo for Asia. And, of course, the numbers for Russia and Ukraine are very much impacted by the war.
On the outlook, we see a low volume here in the first half of the year, and that's both from Europe and also from Americas. So this is a year with 2 halves, where especially the first half is very weak, but second half is not that high, around 2% to 4% increase in volumes on back of very low in the first half. So overall for the full year we'll see around 1% drop of supply compared with last year. In '23, it looks like around 4% to 5% supply growth as it stands at the moment, slightly higher in the first half of the year than the second half.
Bakkafrost, we see our volumes this year coming out at 103,000 tonne compared with 98,000 tonne last year, quite flat, slightly up in Scotland. The smolt release are also quite flat 25.7 million compared with 25.5 million. We are investing on building smolt capacity in Faroese that will be in production by the end of this year into next year. So that will eventually give us a better lift in our smolt rates.
On the contract side, we have contracted around 32% of our total volumes into VAP products, both in Faroese and Scotland combined. We expect to produce and sell around 130,000 tonnes of feed this year and already now we have sourced more raw materials than last year or more or less the same, which is a good indicator for our fishmeal, oil and feed operation. Most of the production in the first quarter will stay in stock to supply the feed for the rest of the year.
On the business development, investments are made in line with our message on our Capital Markets Day last September. Investments in our new freshwater capacity in Faroese is progressing according to plan. And that is in Glyvradalur and Norotoftir mainly. We expect to start ground works in Onavik in South Island, that's a new site for the hatchery during this summer, and the building operations next winter.
In Scotland, Applecross project is progressing according to plan. And the building Phase 4 will start operations by end of this year or beginning of next year, around that. And Phase 5 and 6 will be finalized and start operations by end of '23. We had secured building ground for the second site in Scotland, similar as Applecross in size. And the work to secure authority licenses at the moment to start the building process, which we hope to start in the second half of this year. Our feed plant, Havsbrun is expanding the capacity during end of this year, and in '24 -- somewhere in '24, we expect to have doubled the capacity to around 275,000 tonnes of feed compared with 135,000 at the moment. Contracts have been signed with the suppliers of the new factory.
All in all, we follow the plan that we communicated to the capital market in September for investments, for our 5 years investment strategy. Our focus is to reduce the biological risk, to improve the efficiency and to create organic growth. We believe that we can use a lot of things learned in the Faroe Islands to improve the operations in Scotland. But it takes time to upgrade the whole value chain, especially to build new hatcheries, but we are confident and strong in our belief into the future. This is a photo of the site at Applecross taken last week, where the Phase 4 is progressing, and this will be in operation by end of this year.
Thank you. And now I am open to take some questions.
Yes. Two questions. First, on the cost side, yes, you see the cost inflation. Can you just comment on what are your expectations for the upcoming quarters?
And then we see that FishPool prices have exploded over the last couple of weeks, but it appears that you have the same contract coverage now that you have in last quarter. Is that your decision or is it -- or is the FishPool contract market not – yes, it's not the same as the FishPool market?
Yes. Thank you [indiscernible]. The cost inflation has developed quite rapidly during the last couple of months. I don't think we yet see -- it takes 30-some months, 35 months or 32 months, whatever to produce a salmon. So there will be a long period to absorb the cost inflation in the value strategy -- in the value chain. And for Bakkafrost, a bit more than 50% of the feed is sourced internally, feed cost is 50% of the farming cost. And so, we buy raw materials with our local pelagic sources and have good access to these. Fishmeal and fish oil are also increasing, but maybe not yet as much as the vegetable costs, which we have seen increased significantly. Around 30% of the wheat is produced in Ukraine and Russia, and this has to be sourced elsewhere. Bakkafrost is not selling and not buying from Russia since the war started and that means that we have to move around a bit on where we are sourcing. And this has impact on cost and will gradually be seen. However, we believe that with our strategy on marine ingredients is, this will be kind of a protection or at least give better position on the cost side.
During the first quarter, we saw some increased costs in our farming operations and this was mainly due to the fact that the first big batches of large smolt had higher mortality than what we see now in the operation. There were some adjustments made after the first batches of large smolt, and these adjustments had brought down the mortality rate, so that will come down again. So there are 2 different factors here, both the cost inflation, but mainly this impact of the mortality rate which was on the batches that was harvested in the first quarter higher than what we have seen previously, and that has an impact of something like DKK 2.5 per kilo.
As you mentioned, FishPool prices have exploded and FishPool prices and the spot prices are affecting a part of the market, and that's mainly the foodservice, which seems to have a very high buying power, at least contracts with retailers have not developed at the same way yet. There will be positive or an increase of those prices during the year. Many contracts have been committed for 6 to 12 months, and many of those contracts are committed by the end of 2021 and that means that the number of 32% is with full year contract coverage.
So these are not new contracts. There will be some new contracts eventually during the year because many of the customers are rolling over, many of those we have been working together with for 10 years, 15 years, even up to 25 years. So we believe that long-term relationships are also important, there must be a balance, not only short-term thinking, that's also important. So there will be a balance. And we will see contract prices coming up. We will see some of the old contracts might also be renewed and extended.
So there will be new prices on these coming during the summer and early autumn. So we maintain -- we stick to our strategy that around 40% to 50% of our products are sold at long-term contracts or relationships which are rolled over from year-to-year. The majority of this is value-added products.
Any follow-up question?
I have a question first on your harvest profile for the remaining of the year. What should we think...
Maybe say your name first.
Christian Nordby, Kepler Cheuvreux. And I have a question regarding the harvest profile. What we think regarding Q2 Scotland and Faroese and then also for the remaining quarters of the year?
As I mentioned, in Scotland, we have hold back harvesting in Scotland in order to move into the second quarter. So now in the second quarter we are ramping up harvest profile in Scotland, which means that in Scotland, we will be a bit flat for the rest of the year. In Faroese, we will probably be a bit lower in the second quarter, and then ramp up again in the third and fourth quarter, which will be higher again.
And on cost development, you've asked about some of the inflations, but I'm thinking more about year-on-year mix now for Faroese, for example, how is the cost at the moment, the farming cost?
Yes, as mentioned, there were some impacts with the first batches of large smolt, but this seem now to come slightly down again. So there are 2 different factors, which works 2 ways. So the 1 is the cost inflation, which, of course, will also impact us. There is a cost inflation on more or less everything these days, and that will also impact salmon farming, but the issues that we had with the first batches of smolt where we saw slightly higher mortality rates.
So the average mortality rate for us has been around 14%, but we want this to come down to around 8% again or below 8%. We see much better numbers now with large smolt. And we see that Strond is outperforming all historical numbers that we see -- that we have seen with the new -- with the fish that has been stocked since last summer.
So we are confident that the amendments have been good. We did not have any big issues with the start-up of Strond. That worked very well. But we had to make some adjustments on the production profile. And, of course, these are good learnings as we are upscaling now both Glyvradalur and Norotoftir, and eventually also Applecross and the new site in Scotland, where we can use these learnings on the profile.
On the inflation, I believe that the salmon is benefiting from the fact that generally with cost inflation with a low feed conversion rate. Salmon is versus other proteins are much more competitive protein than beef, pork and poultry. So generally, we should expect that salmon should stand out good in a competitive situation like this with cost inflation, but this is the first time we have seen this big impact in the short time in [ modern ] times.
Alex Aukner from DNB. So 2 questions. The first, you said you had record low levels of sea lice in the Faroese. Any comments as to why?
And the second is on the CapEx side, you have an investment program for the next 4 years of more than DKK 6 billion. How much is already committed or fixed price and how much will be susceptible to cost increases?
Yes, that's a good point. First on the sea lice, record low numbers. If you look at the average numbers in the Faroe Islands for the last 5 years, 5 years ago, we are counting all pens in Faroese every 14 days by independent counters, that's the only region in the world where we are doing that that way. Other places, farmers themselves count. Faroese is done by independent counters -- independent. 5 years ago, the average numbers were around 1 adult sea lice for all countings in the year. The levels have came gradually down and last year the number was 0.4. Right now, as we speak, the average number is less than 0.2. And on all Bakkafrost farms last week, it was 0.14, which is all-time low. We have been at 0.25 before, but not below 0.2 in Faroese, and Bakkafrost was 0.14.
There has been a very big focus on reducing sea lice numbers. This is also balance as everything else, because you cannot find salmon without sea lice. And with an increased focus comes more intensified treatments, which can be negative. So this is a balance that needs to be carefully managed, but we think that with our good tools available, we have a good position to handle this. And in August, our new vessel, Bakkafossur, will come to Faroese, which has a huge capacity, 10,000 cubic meters, whereof 3,000 is freshwater, 7,000 is sea water, can produce 6,000 tonne of freshwater per day, where we can handle the sea lice with this vessel, 700 tonnes of treatments, we could treat up to 2,000 tonne per day just with freshwater. So we believe this will also strengthen our position going forward.
On the CapEx, we have at the moment DKK 1.1 billion?
No, just short of DKK 1 billion.
Okay, around DKK 1 billion is committed -- contracted. And then we will make -- so there are around DKK 5 billion of this investment program, which has not been secured. And we saw steel prices exploding in the first 2 weeks after the war -- in the first 2 months after the war. But it seems like now like the steel prices are coming down somewhat again. So there might be a first reaction and then things will settle out, but of course, there are a lot of things that we don't know yet about. So there are -- of course, there might be some supply chain disruptions in this. We see at least that supply or lead time and deliveries are extended, things that used to take 12 months in some cases now take 15 months. But, I guess, also that there will be some improvements as we go on through the year. So hopefully, things will come a bit back into some kind of new normality.
Okay. And just one follow-up question on the contract side. Is the understanding correctly that if you have a 12-month contract, fixed price contract, you're currently able to renegotiate that fixed price up before the end of the contracts?
Yes. There are -- there might be a mutual interest between the parties to find a new solution to balance a bit out between the years. So that there will be a more gradual development in price development. So that might be possible, especially, I think for the second half of the year.
Yes, Ola Trovatn, DNB. Just follow-up on the sea lice situation. What kind of average harvest weight do you expect for Faroese given the good situation there?
That's a very good point, because the trend is that, with -- if you request a 0 tolerance on sea lice, that will mean that you will not be able to farm salmon. So, the balance between a low sea lice number and an operational -- and a high operational performance is somewhere in the year, but we have seen in Faroese that over the last 2 years our average weight of harvested fish has come somewhat down. And that is also part of the explanation that sometimes you just need to harvest a fish in order to avoid treatments. So, at the moment, you see that we are at somewhere around 4.7 kilos. I hope that we can come back to higher levels, but that's the balance that we must be careful on. I don't have a clear answer on the question. But that's why we are also with the new Bakkafossur, we are confident that we are in a better position as we enter into the second half of the year. Of course, it will take some time also for us to get the results with this new tool into our operations.
And 1 follow-up. Can you comment on [indiscernible] in Scotland as well? What to expect for second half of the year?
Yes. That's what I talked all about the test -- I see the second half of the year to be real test of our operations. Now, we have good tools in Scotland. We have 2 vessels where we can treat the freshwater every 3 weeks now. So we are confident that we have good tools. But on the same time, we know that smolt has still a low weight so the fish needs to be 2 summers in the sea, which is a bit challenging. So depending on the development, we are at least focusing now on trying to improve the average size, because that's where we see the huge advantage with our strategy. So, at least, we are coming up and hopefully, above 4.5 kilos.
Martin Kaland, ABG. And another follow-up on Scotland, where we see that the mortality has normalized, less extraordinary mortality towards the end of the quarter. But are there still some fish or sites left that could have had some issues through last year that's not harvested out, so that we could still see some of those being harvested in Q2, for example?
In Scotland, we harvested majority of the fish in the first quarter with these issues. In the second quarter, there should be healthy fish, but there are sometimes in Scotland things coming up very shortly with a short notice. But at the moment, we see healthy fish, all the full line in Scotland. So fish is able to grow. And especially, as I mentioned with the new stocks that we have in the sea, we are seeing record good performance, all-time high growth rates. Normally the TGC in Scotland was below 2.5, now we see TGCs above 3.3, which has never been seen in our operations in Scotland before. So that's a good sign because that will shorten the time the fish stands in the sea for several months, which is crucial in Scotland. But it is more risky in Scotland and that's why we need to shorten the time in the sea and to have good capacity of tools to avoid biological issues.
Okay. Good. And is it possible to say winter allocation? How much -- how large share of the fish currently in biomass in Scotland is the new batches and is old batches?
I don't have a number in my head, but I'd say that at least our stockings last year are with the new strategy. And the new strategy, there are a number of KPIs in that strategy, which have been implemented, which has a positive impact on the biology. Thank you very much.