P/F Bakkafrost

OSE:BAKKA

Earnings Call Transcript 2018-Q2

[Johan Regin Jacobsen, Chief Executive Officer]

Good morning, ladies and gentlemen and welcome to the presentation of the second quarter 2018 for Bakkafrost.First, I have a summary of the quarter, and then we will go through the market and sales in the quarter and then segments, group financials and outlook. If there are any questions, we can go deeper into the investment plan in the questions session. Otherwise, Bakkafrost will have a Capital Market Day in the Faroe Islands in June next year, where people are invited to go through everything.In the second quarter of 2018, Bakkafrost harvested 12,902 tonnes compared with 18,400 tonnes last year. The feed sales were also lower, 15,673 tonnes compared with 17,032 tonnes last year. Raw material purchased were 118,000 tonnes compared with 163,000 tonnes. The revenues were DKK 954 million compared with DKK 1,206,000,000 last year. The operational EBIT in this quarter was DKK 408 million compared with DKK 459 million. The cash flow from operations was DKK 279 million compared with DKK 498 million last year. There were positive margins results in the farming and feed oil and fishmeal segment, while the VAP segment had a loss. In this quarter, we paid out dividend to our shareholders of DKK 10.5 per share, which corresponds to NOK 13.52 in April. The result for the farming segment decreased, mainly due to lower volumes, and the VAP segment had a negative result. We saw all-time high salmon prices in the quarter, which, of course, affected the contracts. The combined farming and VAP margin increased from NOK 29.77 last year to NOK 37.41 in this quarter this year. The VAP margin was minus NOK 11 compared with minus NOK 13 last year. The farming margin was NOK 39.09 in the second quarter of this year compared with NOK 33.50 last year.The FOF segment had EBITDA margin on 20% compared with 15% last year. And the group operational EBIT together was DKK 408 million.If you go to the market and sales, the main trends are the sales to the EU market came very much down, mainly due to the fact that we sold less on contracts, which is mainly to the EU. And these sales were split more or less equally to other markets like Asia and Eastern Europe. So we see EU going down from 46% to 27%, the U.S. market goes -- is more or less flat, Asia goes up from 16% to 25% and Eastern Europe from 22% to 33%. And we see that contracts are on the lowest level that we have seen for a long time, 15% in this quarter.In this quarter, we have finalized the negotiations about acquiring us into the U.S. And the deal was finalized -- it was closed in the beginning of the third quarter, so the operation starts by the beginning of the first quarter. The ideas with Bakkafrost U.S. is better access to the market, handling of process -- and processing facilities in Clifton, New Jersey. The idea is to grow in this market and securing our position there for the longer term and especially to be able to penetrate the market with VAP products but also in order to sell our products to high-end customers in the whole area. We also have sales offices in U.K. for many years. Looking at the price development in the quarter. We see development, whereas in the first quarter, we saw huge difference between high/low. We see also the same this quarter, just the opposite direction. The difference between high and low prices were close to all-time high, slightly less than in the first quarter, NOK 24.88 corresponding to 44% change from NOK 56 to NOK 80. And on the -- if we -- if you look at the price development from last year to this year, there is a deviation on NOK 1 per kilo. So it's an all-time high average price for the quarter. Quarter-on-quarter, the prices changed from NOK 61 to NOK 70 per kilo. We saw also in the quarter that there is a huge increase in the volumes, especially during the end of the quarter where there is a double-digit growth in the supply into the markets. This also is the reason why the prices dropped significantly by the end of the quarter. Totally, the global supply in the second quarter was 8% up but as this came to the end of the quarter, it had a big effect on the price situation.Looking at the origins of the supply increase. We see that Norway increased with 8%, while Chile increased 19%. So this totally ended up with 8% growth. Looking at different regions. We see that in Chile, the average weight of salmon increased up to 4.8 kilo gutted weight; in Norway, the average weight was 4.5 kilos. Other regions had lower harvest, like U.K., Ireland, Faroe Islands and the U.S. Canada is slightly up. So the main deviation compared with what we expected in the second -- in the first quarter is that Chile increased their supplies more than expected, mainly due to the higher average weight of their harvest but also due to good biology in the region. That's the main deviation also in the outlook.When we look at the markets, we see that both the EU and U.S. performed well. And in the EU, we see that there is a big difference between the spot prices and the contract prices. In the U.S., we see a growth on 13,000 tonnes, the same as in the EU, so the growth is mainly taken by the EU and the U.S. market, 13,000 tonnes each. The total growth is close to 38,000 tonnes in the quarter. China is also doing well, but we have to look at China and ASEAN combined, as ASEAN is going slightly down. The growth in Russia is all from Chilean origin. The growth is 9,000 tonnes. This -- the growth from -- the supply from Chile to Russia is 1,000 tonnes higher than total growth into Russia. The same is also in China where there is a big growth from Chilean origin.So overall, we see quite a strong market to absorb the volumes, of course, with lower prices.Looking at the forward outlook of the supply side. We have taken the expected growth up to a region between 6% to 8% for the year 2018. But we must remember that the largest part of the growth is behind us. We had 10% growth in the first quarter, now 8% in the second quarter. So going forward, we will see an overall growth between 4% and 5% per quarter.And if you look at the different regions, we see that in the third quarter of 2018, the European growth goes from -- goes up to around 6% and then in the fourth quarter down to around 5%. In South America, Chile, there is much lower growth in the third, fourth quarter, and also into the first quarter of next year, nearly 0. So overall, unexpected growth rate around 4% going forward. The picture shows the first salmon oil and meal, which was produced in our new factory earlier this month.Then we will look into the segments. In this quarter, 13,000 tonnes of the volumes were harvested -- 12,902 were harvested and all of -- all the volume came from the North region. Around 30% came from Borðoyarvík, which was harvested slightly earlier than planned. The total volume decreased 30% compared with last year, where we were very high in volumes. The average weight for the whole quarter was 4.8 head on gutted, which is lower than normal, mainly due to the low average weight in Borðoyarvík, which was 4.1 kilo in Borðoyarvík of this 30% of the total volume. We transferred 2.8 million smolts in the second quarter to the water compared with 1.9 million last year. The seawater temperature in the Faroe Islands have been slightly lower this year than the previous years. And in this quarter, it was -- they were 0.1 degree lower than last year. Now they are coming up to similar levels as previous years.The performance in the second quarter was quite good, mainly due to the high price but also the lower contracts here that we had in the quarter. So this has a positive effect on the margin, which is 51% compared with 47% last year.Also we see that the margin -- the total margin is DKK 393 million compared with DKK 489 million last year due to lower revenues as the volumes came down. The picture is from Gulin [indiscernible] where we, on the 22nd of July, had Løland in operation cleaning nets and Hans á Bakka harvesting fish.In this quarter, the margin went up from NOK 33.5 to NOK 39 per kilo in the farming segment. There are nonrecurring gain included in this EBIT on DKK 1.62, and the negative effects from Borðoyarvík with lower fish is due to biological issues, where we decided to harvest fish early because this fish seemed to be weaker and was not -- seemed to have higher mortalities when we were treating for sea lice. So therefore, we decided to harvest the fish earlier.The value-added products had a negative margin, again. Contracts does not reflect NOK 71 per kilo in the quarter. The positive side is that volumes were low and therefore, affected not that much.Going forward, we have, at the moment, low contract this year but we are in a period where we will sign some contracts. The higher raw material prices in the quarter where we expected high prices during this period and therefore, we took down the contract here.Going forward, we think that it's reasonable to expect more aligned prices compared with the expectations from the supply and demand side, which means that it could be easier to make contracts.The volumes this year was only 1,970 tonnes compared with 5,200 tonnes last year. So it's a significant lower activity level in this segment. I think this is mainly a sign that we decided in December last year to take down the volumes, not that the market is not there but mainly that we took this decision because there was a very big deviation between the expectations on the supply and demand side. This will come up again, and still we expect that this is important part of our strategy in order to balance the sale and also to maintain high quality on our sales of fresh products.Fishmeal, oil and feed. This is an important part of our strategy, especially with the high inclusion of marine ingredients and the taste of salmon from the Faroe Islands. The EBITDA in the FOF segment came out on the higher level than the same quarter last year. The total EBITDA was DKK 66 million in the quarter compared with DKK 48 million. And the margin 20% compared with 15%. The feed sales decreased. However, we had big sales of fishmeal and oil. And this was external sales. The first half of 2018 is the first time ever where we see external sale of Havsbrún higher than internal sale in the group. The sourcing in the quarter was slightly lower than last year. But so far, we have sourced 248,000 tonnes of raw materials. We expect some raw materials coming closer into the end of the year, especially in the fourth quarter, then the blue whiting season starts again. The market prices for fishmeal and oil have dropped significantly in the quarter, and we took action early, of course, with raw material prices.We see on the upper graph, the development of volumes sold in feed and the raw material acquired during the years. Normally, we acquire a lot of raw material in the first 2 quarters, while the main season for feed is in the second half. The biomass of Bakkafrost was lower in the first half of 2018 than last year, we had lower number of fish in the sea. And this is the main reason for lower feed sales internally. Due to the lower raw material prices on the market, this will, of course, affect feed prices used internally, so that they will come slightly down. Then, Gunnar will take us through the group financials.

[Gunnar Nielsen, Chief Financial Officer]

Good morning. First, we will look at profit and loss for the group, and numbers are in Danish kroner. We see that the revenues for the group is in a lower level in second quarter 2018. That is due to lower harvest volumes, as Regin has mentioned and lower activity in the VAP segment, whereas the revenues in the FOF segment was pretty much flat. Revenues for operational EBIT in second quarter decreased to DKK 408 million compared to DKK 459 million in the second quarter 2017. We see that the fair value of the biomass has increased and that is due to salmon prices being higher and an increase in the forward prices. We see that [ on those ] contracts has also increased or the provision for -- [ on those ] contracts has increased DKK 6 million. Due to the lower activity levels and lower revenues, we see that revenue taxes has decreased. It amounts to DKK 31 million compared to DKK 45 million, same quarter last year.Financial items amounted to DKK 9 million positive in this quarter compared to minus DKK 5 million same quarter last year. The profits after tax for second quarter 2018 was DKK 339 million compared to DKK 398 million same quarter last year. We have a combined operational EBIT in farming and VAP, a NOK of 37.41 and that is a record high operational EBIT per KG. Here, we see -- year-to-date, we see that the operational EBIT of the group is DKK 676 million, and earnings per share year-to-date is DKK 12.56.If we look at the balance sheet, we see that intangible assets are unchanged. Investments in property, plant and equipment has amounted to DKK 131 million in the second quarter 2018, and property, plant and equipment now amounts to DKK 2.7 billion. Financial items amount to DKK 79 million. The carrying amount of biological assets amount to DKK 1.1 billion compared to DKK 1.5 billion end of June 2017, and that is also due to lower biomass, as Regin has mentioned already. In the carrying amount of biological assets, a fair value adjustment of DKK 329 million is included. Inventory amounts to DKK 479 million at the end of second quarter compared to DKK 460 million second quarter in 2017, and that is also due to the seasonality in the FOF segment, in the raw material purchase. Changes in equity consist primarily of the positive results, and we also paid out a dividend in second quarter 2018 of DKK 513 million. And the equity ratio at the end of second quarter was 68%. Net interest-bearing debt was DKK 443 million compared to DKK 258 million at the end of 2017.Cash flow. We see that cash flow from operations in the quarter amounted to DKK 279 million. Net investments was DKK 108 million (sic) [ minus DKK 108 million ], and cash flow from financing was minus DKK 556 million and the majority of that is the dividend payment.If we look at the movement in the net interest-bearing debt, we see that cash flow from operation activity decreased the NIBD with DKK 421 million. And the dividend payments increased the net interest-bearing debt with DKK 511 million, and the net investments, change in working capital and other increased the NIBD with DKK 252 million. So we landed on net interest-bearing debt at the end of the quarter on DKK 443 million. I'll hand over to Regin for the outlook.

[Johan Regin Jacobsen, Chief Executive Officer]

This picture is from Hovsfjørður, where we have set up our new farm on a very exposed site. I was there with my boat 2 weeks ago and made this picture. 750,000 smolts are there at the moment. We will put 200-meter cages out there in 1 month's time for the winter. So this is part of the new area in Suðuroy, where we have made a new cluster and where we see new possibilities for Bakkafrost.The outlook. From the supply side, we expect a total growth in 2018 of 8%. As I mentioned earlier, a larger part of the growth is behind us. Meaning that the growth rate on the supply side will be lower in the next coming quarters. We see actually quite strong signs in the market and lower supply during the quarters ahead of us, which is -- means a strong price situation to be expected.On our farming numbers, we have taken down the estimates for 2018 by 2,000 tonnes. This is due to the fact, which I mentioned about Borðoyarvík where we took out the fish on lower average weight, 4.1 kilos in this site instead of 5 kilos as normal, and therefore, affecting our numbers with 2,000 tonnes. For this year, we expect to release 13.9 million smolts compared with 9.9 million last year and 11.7 million in 2016. We have, at the moment, our contract portfolio of 12% for the rest of the year but are in a period where we are signing some contracts at the moment. We expect to sell around 80,000 tonnes of feed, which is 5,000 tonnes lower than we had indicated earlier.The new plant for salmon oil and meal is now up running. We are in our investment program more or less as planned, of course, doing a lot of investments in factories, hatcheries. Some of this goes slightly slower than expected but we are up running now with first eggs in Strond -- the new Hatchery Strond. The first eggs were taken in there in June 18th of June, and that means that the first fish will come out from the hatchery on -- in second half of next year. We are always looking at the possibilities to make acquisitions but so far, we are mainly doing organic growth and investments. And therefore, we have now updated our investment plan, and we have announced how we see Bakkafrost could growth -- could have trade growth for the period until 2022. This will, of course, be due to the regulations and the licenses that we're able to gain during this period from the authorities but we have made our estimates on how we see it could progress. Therefore, to go deeper in these details, we will have our Capital Markets Day next year in the Faroe Islands where you are invited. Thank you very much. And if there are any questions?

[Vidar Kristoffer Strat, Lead Analyst]

Vidar Strat, ABG Sundal Collier. Regarding the investment plan, there is a substantial increase in the expected CapEx and from what I understand, there is not that much expected volume growth, now expecting around 76,000 tonnes versus earlier communicated around 70,000 tonnes. Could you elaborate a little bit more on the investment plan? And how this is -- or what kind of growth expectations you see relative to what you had before?

[Gunnar Nielsen, Chief Financial Officer]

Yes. When we had the updated investment plan in 2016, we had investment plan on DKK 2.2 billion for the period from '16 to '20. In that plan, we expected a growth up to 65,000 tonnes. And then we added the acquisition in Suðuroy on 5,000 tonnes, which adds to the 70,000 tonnes that you refer to. In this plan, we aim to -- as you see here, to create 15,000-tonnes growth from large smolt strategy, then the gain from Suðuroy will add around 10,000 tonnes combined with 7,000-tonnes growth and 3,000 from the large smolt strategy. But this period is within the investment program, there is a part of the gain from the investment program will be after '23 because some of these investments will create growth in '24 and '25. So we expect a similar growth beyond '23 per year as we see inside the period. Actually, we don't expect the full impact to be seen before 2026. It would be a similar growth each of the years after this period has finalized based on the investments, which are done inside this period. So that's the philosophy.

[Vidar Kristoffer Strat, Lead Analyst]

And then on this nonrecurring gain in the farming segment, can you elaborate a little bit more what is -- this is?

[Gunnar Nielsen, Chief Financial Officer]

This is sales of assets, which was at a book -- at a very lower book value.

[Kolbjørn Giskeødegård, Director & Sector Coordinator]

Kolbjørn Giskeødegård, Nordea Markets. You were mentioning your low contract share and that you aim to increase that one. And in that respect, you said that 6 months ago, you were not able to sort of find or agree on the prices. And you also said that it could be easier now. Does this means that you have been more pessimistic? Or does it mean that your customer has been more realistic?

[Gunnar Nielsen, Chief Financial Officer]

The outlook for salmon price had been quite stable in the market around NOK 60 to NOK 62 per kilo in the forward market price, and that's what we have aimed at. When you look at the contract market, it has been significantly lower. But I think, on the buy side, we see some trends that they are more realistic. Of course, there is a big deviation because there are many contracts out there in the market still, which are much lower prices and that has an effect. But we see possibilities to reach contracts, which are on the market price level as we see in the forward market at the moment.

[Kolbjørn Giskeødegård, Director & Sector Coordinator]

And also one more question. This early harvesting that you mentioned in Q2, can you elaborate a little bit about the general biological situation, sea lice, disease risk, et cetera, for the time being in the Faroe Islands?

[Gunnar Nielsen, Chief Financial Officer]

We think that we have a good biological situation. Normally, we harvest fish at around 5 kilos up to 5.3 kilos. And in this case, in Borðoyarvík, we had single site issue in Borðoyarvík. There were some bacterias in the fish. And the fish seem to be weaker than normal when we should treat with our normal methods. We have now developed different methods for treating fish. The first method is that we use [ lot ] fish. The second is that we could use freshwater. The third method is that we're using [ luke ] water. And the fourth method which we have taken into use within the last 2 months is by just seawater, which are cleaning the fish. This is a new method that we have developed locally, which seems to be effective and also less harmful for the fish. But, in Borðoyarvík because of these bacterias have BKD, it seems that the fish was not so happy with treatments, so we decided to harvest the fish rather than having high mortality. But in general, we don't have this bacteria in the other fields and biology is doing really good. So we don't expect to see similar issue in the third quarter.

[Stein Alexander Aukner, Senior Analyst]

Alexander Aukner, DNB Markets. Will you be implementing a net interest-bearing debt targets in combination with your CapEx program?

[Gunnar Nielsen, Chief Financial Officer]

We have not implemented debt target but you can say that our investment program is for 5 years. And as we have said -- as with previous investment programs, we think that it's important for us to make a plan on how we see the possibilities to grow. And of course, this plan will be due to the market situations and the margin that we are able to create. The cash flow that we will have from our operations, so that, let's say, around DKK 10 to DKK 12 per KG, if the margin is 25 to 30, could be allocated for investments. And that's what we show in this graph. If you look at the previous years, this is on Page 36 -- 35. If you look at previous years from 2015 to '17, the investments have been, as you see the black line there, on a level around DKK 11 to DKK 12 per KG harvested. The margin during this period was between 25 and 30. If you look at the periods from 2018 to '22, in average, you can say that there is an investment level of DKK 10 per KG. It's front-loaded average investment. So we're up to DKK 12 some years and down to DKK 6 to DKK 8 some years. And this will depend on how the cash flow will be generated. And with this investment level, we still have the ability to run the dividend policy that we have been running for many years.

[Johan Regin Jacobsen, Chief Executive Officer]

Thank you very much for coming this [Audio Gap]