P/F Bakkafrost

OSE:BAKKA

Earnings Call Transcript 2019-Q2

[Johan Regin Jacobsen, Chief Executive Officer]

Welcome to the Presentation of the Second Quarter of 2019 of Bakkafrost. We are first looking at the summary of the quarter, then the markets and the sales, segment information and group financials before finally the outlook.In the second quarter, Bakkafrost harvested 12,609 tonnes of salmon compared with 12,902 tonnes last year. The feed sales were 18,872 tonnes compared with 15,673 tonnes last year. The sourcing of raw materials for Havsbrún in this quarter was 110,000 tonnes compared with 118,000 tonnes last year. The group revenues were DKK 947 million compared with DKK 954 million. The operational EBIT came in at DKK 339 million compared with DKK 408 million last year. And the cash flow from operations were DKK 327 million compared with DKK 279 million last year. There were positive EBIT from the farming and FOF segment, and we were breakeven for the VAP segment.On next page, we have a summary of the quarter. Operational EBIT for the farming segment came down, and the operational EBIT for the VAP segment was 0, and higher EBITDA margin from the FOF segment. The farming and VAP combined decreased from NOK 37.41 down to NOK 31.31 in the second quarter 2019. And the margin in the VAP segment increased from minus 11% down to 0 and the pure farming margin from NOK 39.09 down to NOK 31.31. The FOF margin increased from 20.20% down -- up to 20.60%. And this, all in all, gave a group operational EBIT of DKK 339 million compared with DKK 408 million last year. So those were the numbers.If you look at the market and the sales, we see that the biggest change in this quarter is -- when we compare with last year was that volumes were moved from Eastern Europe to the EU and the U.S. The drop in Eastern Europe share of our sales in 2019 second quarter compared with last year was from 33% down to 7%, and EU increased from 27% last year up to 42% this year. The U.S. increased from 15% last year up to 25% this year. Therefore, we can say that we saw more or less an equal relative growth in Bakkafrost sales to the U.S. and the EU market in percentage. So the fish that were moved out of the Eastern European market were moved relatively same quantities to the EU and the U.S. market.The use of volumes to VAP in the second quarter was 32% compared with 15%, which was more than double up. And Bakkafrost has committed contracts on VAP products corresponding to 35% volumes harvested in 2019. When we look at the price development during the quarter on the markets, we can say that all in all, comparing with last year, there is a drop of NOK 6.15 from last year from NOK 70 down to NOK 64. So the market price dropped NOK 6 from last year. If you compare with the first quarter, then we see a development from NOK 63 up to NOK 64 price increase on NOK 1. There was in the quarter a supply increase into the markets on 8%, 42,000 tonnes. When we look at the -- on the next slide, we see the development from the regions. And this is also in relation to the previous page that we see that the supply development was stronger from Europe and from Americas. There is a higher supply increase in Europe than in Americas. This is also related to the price development where we see that the EU market is more price-sensitive and where -- when this supply increase in Europe is that strong, it has pressure on prices, especially with smaller fish.541,000 tonnes head on gutted of Atlantic salmon were harvested in the second quarter, which is 4% up compared with same quarter last year, 8% up totally; 4%, that's for the U.S.; 8% up totally. Supply from European regions were 335,000 tonnes, representing 10% increase compared with the second quarter. Supply from Norway increased 9%, and the average weight on this fish was 3.9 kilos compared with 4 kilos last year. Feed sales in Norway in the quarter was 70% up from last year. Supply from the U.K. increased 20% compared to same period last year. The Faroe Islands increased by 5% up to 16,000 tonnes. And head on gutted weight in the Faroe Islands was 5.2 kilo head on gutted. Chilean harvest increased 6% in the quarter compared with last year, up to 146,000 tonnes, and the average weight on the Chilean salmon in this quarter was 4.5 kilos compared with 4.7 kilos last year.On the next page, we have a breakdown on the markets where the distribution went to. We see that the EU consumption increased by 8% in the quarter compared with 7% last year. The EU market consumed 235,000 tonnes compared with 218,000 tonnes last year, which is an increase of 17,000 tonnes in the quarter compared to last year. The growth in the EU market is the same quantity as the whole exports to Russia in the quarter.The second largest market is the U.S., the growth was 3% in the quarter compared with 14% last year. The Russian market is the only market with negative growth. The import was 2,300 tonnes down, but the Chilean export to Russia in the quarter was 3,000 tonnes down, which means that other exporters increased their market share in the quarter. There has been an increase in domestic production of salmon in Russia in recent years. And this year, we expect the production to reach around 20,000 tonnes. Other markets had the highest relative growth in the second quarter with 14% growth. Israel increased their import of salmon with 1,500 tonnes compared with last year. Also, Canada and Norway had increased growth. On the next slide, we have an overview of the development that we expect going forward. When we compare this graph with the same graph in the last presentation, we see that there has been a change in the expected supply growth. This, if you look 3 months back, we see that the short-term supply outlook showed temporary increase in global supply, around 7% to 8% in the second half of the year. This number has now been reduced down to around 5% for the second half, from 7% down to 5%. So in the second quarter, we were up at around 9%, and we expect now that the third and fourth quarter will be at around 5%, and in the first and second quarter next year, we will drop down to a level of around 3%.The biggest change is in the first quarter of 2019, when we compared with the last presentation, where the expected growth in supply has come down from 9% down to 3%. After the first quarter next year, this is expected to grow up to around 3% to 5% for the rest of 2020. The main differences are because of the biological issues with algae and other things in Norway and Chile, which has taken volumes down, both as number of fish and average weight of harvested fish is reduced.On next page, we have a picture of the Strond facility. This new hatchery, where we, last week, reached a milestone when we released the first smolts into our farms. We released 0.5 million smolt into the farming site in Gøtuvík. The first smolts were released at an average weight between 200 and 350 gram, a little bit earlier than originally planned. The next batch will be already released in September, October, which will be more fish. And Strond is now expected to increase their production up to full capacity during the next couple of quarters. We plan an average weight of 350 gram in 2020 for all our smolt, which will be a great difference compared with today. On next slide, we have an overview of the volumes in the quarter. All in all, we expect to harvest 54,500 tonnes gutted weight this year. The harvest volume decreased 2% in this quarter compared with last year. From Region North, the breakdown was 62% of the total volumes and West at 38%. And the average weight of the fish was 600 gram larger this quarter compared with last year, 5.4 kilos this year compared with 4.8 kilos last year. And in this quarter, we transferred 3.6 million smolts compared with 2.8 million last year. And the plan is 13.5 million for the full year. On the next slide, there's an overview of the revenues and EBIT from the farming segment. We reduced the volumes slightly, which means that the revenue came down, also, of course, because of lower prices, NOK 6 on average per kilo in the marketplace. So the revenues came down from DKK 775 million to DKK 759 million in the quarter, and the EBIT decreased from DKK 393 million down to DKK 303 million in the quarter. And this is mainly because of lower prices and, of course, the volume. The EBIT margin was 40% in the quarter compared with 51% last year. The average weight in the West was 5.48 kilos and the North 5.4 kilos. The operations were quite good and the biology was good in the harvested fish. On the next slide, there's an overview of the performance in the quarter in the regions. The decrease from last year to this year is NOK 7.77 per kg from NOK 39 to NOK 31. The operational EBIT in the North was NOK 30.23 and in the West NOK 33.10. The fish from the West was harvested at Funningsfjørður A-71 with very good sizes and good operations. None of Bakkafrost's 19 farming sites in operation this quarter had any count of sea lice above limits compared with 5x in the same quarter last year.Sea lice are counted by external company every 14th day in all pens in Faroe Islands. Average number of adult sea lice in the quarter of all countings in Bakkafrost was 0.37. Bakkafrost has for the last 674 days not used any bath treatment with chemicals.On the next page, there's an overview of the VAP segment. We doubled the activity with volumes. We achieved higher prices in the quarter, and all in all, the revenues increased from DKK 94 million up to DKK 238 million. The raw material prices were higher, and the operational EBIT came in at 0 to breakeven. The higher ratio of harvested volumes to VAP increased from 15% to 32%, which is more or less the same as we expect to sell for the whole year, 35%.On the next page, we have the FOF segment, fishmeal, oil and feed, where we have a slightly better margin, 20.6% compared with 20.2%. The EBITDA came in at DKK 58 million compared with DKK 66 million last year. And the total feed sales increased by 20%, whereas external feed sales decreased by 53%. Around 1/3 of the raw materials that we source are used internally, and 2/3 are sold externally as fishmeal and oil.We have good raw material sourcing at the moment in the quarter. All in all, we have received 226,000 tonnes for the first half of the year compared with 248,000 tonnes last year. 2018 was the second largest raw material sourcing since Havsbrún became part of Bakkafrost Group.On the next page, there's an overview of the raw material situation and the price development on marine ingredients. The prices on raw materials continued to increase during the quarter and the quotas on pelagic fish are, of course, the main driver for this. Prices on salmon feed are based on actual expected raw material prices at the beginning of the respective quarter. And the use of local raw materials with own recipe of feed is one of the most important drivers to produce the unique and safe, high-quality salmon in Bakkafrost. For the last couple of years, all our feed contains only purified fish oil produced in-house and for nearly 2 years, we have not used any ethoxyquin in our fishmeal production. Despite higher cost summary in raw materials, we stick to our strategy and are not going to make changes in ingredients of Bakkafrost salmon.Now Høgni Jakobsen, CFO, will present the group financials.

[Høgni Dahl Jakobsen, Chief Financial Officer]

Good morning. As Regin already has explained to you, our operational revenue was slightly below the operational revenue in the second quarter of 2018 and amounted to DKK 947 million. Operational EBIT amounted to DKK 339 million, down from DKK 408 million in the second quarter of 2018. We had fair value adjustments of minus DKK 66 million in this quarter compared to plus DKK 35 million in the second quarter of 2018. And that's due to lower salmon prices.Onerous contracts were down to 0 from minus DKK 6 million in the quarter -- second quarter of 2018. And revenue taxes, which is recognized as cost, were on the same level as in the second quarter of 2018 and amounted to minus DKK 32 million. Net financial income, minus DKK 8 million; and taxes, minus DKK 41 million compared to minus DKK 74 million in the second quarter of 2018. And that leaves us with a profit of DKK 189 million this quarter compared to DKK 339 million in the second quarter of 2018. The EBITDA margin for the FOF segment increased from 20.2% to 20.6%. And the operational EBIT per kilo for the combined farming and VAP segment increased -- decreased from NOK 37.41 to NOK 31.31.If we look at the development in the operational EBIT and earnings per share for the past many quarters, we can see that we have a steady increasing operational EBIT for the last 4 quarters. And year-to-date, we have made DKK 607 million in operational EBIT. Earnings per share were DKK 3.88 in this quarter and year-to-date, that amounts to DKK 8.25. Moving on to the balance sheet. Intangible assets were DKK 390 million, same as in -- by the end of 2018. We made investments of DKK 157 million during this quarter. And property, plant and equipment now amounts to DKK 3.1 billion, roughly. Financial assets were DKK 111 million, and biological assets were down from -- compared to the end of 2018 and now amounts to DKK 1.2 billion roughly, including fair value adjustments of DKK 335 million.Inventory was up compared to year-end 2018 and now amounts to DKK 697 million compared to DKK 439 million, and receivables were also up to DKK 372 million compared to DKK 269 million in -- by the end of 2018. Other receivables and cash and cash equivalents were more or less on the same level. Small positive adjustment of DKK 7 million to the equity, and that's the result of the positive result from the first quarter and the dividend payment that we made in April. Our net interest-bearing debt by the end of this quarter was DKK 744 million compared to DKK 495 million by the end of 2018. And the equity ratio was 65%. Moving on to cash flow. Cash flow from operations, DKK 327 million compared to DKK 279 million in the second quarter of 2018, and cash flow from investments were minus DKK 157 million compared to minus DKK 106 million (sic) [ DKK 108 million ] in the second quarter of 2018. Cash flow from financing, minus DKK 189 million. If we look at the net interest-bearing debt and how that has evolved through the quarter, we left the first quarter of 2018 with a net interest-bearing debt of DKK 522 million. That was increased by our investments, DKK 157 million, and our dividend payment in April, DKK 402 million, and then the changes in working capital, which amounted to DKK 33 million. And then we have the positive cash flow from the operation, leaving us with a net interest-bearing debt by the end of this quarter of DKK 744 million. On the financing part, we have a bank facility of EUR 200 million, so corresponding to roughly DKK 1.5 billion, and it's approximately 50% utilized. So we have the net-bearing debt of DKK 744 million and undrawn facilities of DKK 742 million by the end of this quarter.

[Johan Regin Jacobsen, Chief Executive Officer]

At the outlook for Bakkafrost and the market for -- on salmon, we saw in this quarter an increase on 8% on the supply side. Going forward, we expect a lower supply increase in the third quarter on 5%, and for the next 4 quarters even lower. So there will be a tight market. At the moment, there seemed to be more pressure, which is probably due to other reasons in different farming sites.Global harvest in 2019 is expected to be around 5% to 6% growth compared with 4% in 2020. And so this is a lower growth compared with last year. We expect to harvest 54,500 tonnes in 2019, and we expect to release 13.5 million fish -- 13.5 million smolts in 2019 compared with 12.6 million smolts last year and 9.9 million smolts in 2017. The VAP contracts are 35% of the expected volume for 2019, and our strategy is to sell around 40% to 50% of the harvested volumes into VAP products at fixed-price contracts, normally 6 to 12 months. Fishmeal, oil and feed are expected -- we expect to sell around 85,000 tonnes of feed this year. On the business development and investment program, we had our Capital Market Day in Faroes in June, where we updated and gave insight to our investment program and organic growth program, where we are in the process to build the capacity for 100,000 tonnes in the company. This will be finalized in 2023, where we expect to reach 76,000 tonnes, with further growth beyond that period.We have the flexibility to look at M&A possibilities, as we have been doing for the last couple of years, and we look at all possibilities that we see. Thank you very much. And now we are open for questions, if there are any questions.

[Stein Alexander Aukner, Senior Analyst]

Alexander Aukner, DNB. Two questions, if I may. First, some comments on the cost in this quarter and also what to expect going forward. The second question, the sales to Russia or Eastern Europe is still quite low. Do you expect that to go back to sort of normal levels? And if so, how fast?

[Johan Regin Jacobsen, Chief Executive Officer]

On the cost, well, in this quarter, we harvested fish from Hvannasund in the North and Funningsfjørður in the West. The average cost in these 2 regions were quite normal. They were good, but not exceptional good. So all in all, there was a normal cost breakdown in these 2 region. There was very good feed conversion rates and good growth, but a bit too high mortality, especially in the beginning of the period. So all in all, our cost was around DKK 20 per kilo whole fish equivalent at cage site. Going forward, we have had very good biological development during the last 4 quarters, which has a positive impact on our operations. We have, however, some costs -- some extra costs in our operations that hampers us. One of them is that we don't utilize all our capacity. We are building a huge capacity that will be in operations in a couple of years and, of course, that gives some extra cost in a period. For example, in our harvesting operations, we have double capacity that we're not utilizing. But this is a purpose because we are scaling up our operations. And also, for example, the breeding program that we are investing in, this is a strategy that we want to have our own breed of salmon, the Faroese strain that Bakkafrost has a unique position, but it has a cost. And the cost is around DKK 24 million per year, which corresponds to DKK 50 per kilo, which has put us on expense and not related to the farming activity, but this is an investment that will gradually become an income later on, maybe from 2021-'22, where we increased our internal sales of eggs. At the moment, we have an expense without getting the eggs. So there are some expenses that are added to the costs because we are -- we have the strategy.On the market side with Russia, we are lower at our sales, at the moment, 7%, which is below our average. We have had very good market results in other markets. We see a very strong demand for our products in the U.S. market. And also, we see in the EU market that there seem to be a new development that we did not see 4 years ago on branded and high-end products. And these are markets that we target all over globally, both in Asia and China and in Europe and in the U.S. market. So -- well, the Russian market has not been that strong recently. So we have a flexible market approach, where we balance our sales where we see the biggest advantages.That said, I believe that the Russian market will slightly be higher in the next coming quarters. Of course, it's also a balance that needs to move on and to drop from 30% down to 0 was quite dramatic in the fourth quarter last year. And for us, it's important that we don't get into that same position again.

[Christian Olsen Nordby, Equity Research Analyst]

Christian Nordby, Kepler. Seems like biology has been quite good because of the higher harvest rates and lower sea lice. Do you feel that you're better at treatments and also prevention than before? And if so, what's now better on the, for example, mechanical treatments than for...

[Johan Regin Jacobsen, Chief Executive Officer]

Yes. On sea lice treatments, we have, as you know, invested heavily in this operation and, as mentioned, not used any chemical bath treatments for more than 660 days. And in the last quarter, we had not in -- any single count above the level of sea lice and an average 0.37 sea lice in all countings that we had. So we have been quite successful, and we feel quite confident that we have -- that we are on top of this problem with sea lice without using any chemicals. So it is a very strong commitment from our employees. It's a high knowledge that needs to be adopted. And as these people are working very committed on this area only -- in the service boats, the service vessels, there is a knowledge that is built up gradually over time.Also now, we have 3 systems that we use with freshwater with warm water and with this [Audio Gap] developed by us in Faroes last year, and now in full operation from March this year. So we have several methods. And the biggest advantage is that the stress level or mortality level in treatments is now at a much, much, much significantly lower level than before. So the total mortality out of treatments is now very, very low, and the efficiency is quite good. So we have seen a very, very positive development in 2019 in this area.

[Carl-Emil Kjølås Johannessen]

Carl-Emil Johannessen, Pareto. You write in the report that the price achievements have been actually stronger in Q2 '19 than in Q2 '18, and it seems like also the price premium has increased a lot compared to the previous quarters. Can you say something about what's driving this? Is it the same clients in U.S.-Asia that buys more fish? Or are you finding a lot of new clients, you mentioned in, for example, EU? And how do you see this price premium developing now when spot prices have come down quite significantly in the European market, especially?

[Johan Regin Jacobsen, Chief Executive Officer]

This is always a balance, so depending on how stressed the situation is. If farmers are stressed and they have to harvest a lot of fish in a few weeks, then it's difficult to achieve the right price. And that's what happens right now in the market. And that's, of course, also with ourselves. If we are in a stress situation, like in the Q4 last year. At the moment, we are quite comfortable with the situation, and we are able to move fish, if that's the case. And of course, at the moment, it's not good to harvest too much with the situation. But of course, we also need to service our -- have service for our clients. They need fish from us every week.One of the drivers in this quarter is that we have very big fish. And that's an advantage in the situation that we can distinct, at least, a part of our revenues. But also, as I mentioned, we see that we have been able to reach out to more high-end clients, and that will still be our strategy to penetrate the market further down in all markets to be able to reach those clients that are focusing on high quality and also focusing on the ingredients and the story that we have in the Faroes and in Bakkafrost with our fish. And that seemed to be -- we have been successful for the last 6 months, especially after the Q4 issues to reach out with our strategy. So as you said, we have been able to improve our margins and to sell at higher salmon prices. I believe also even with the lower prices that this will -- that this should be possible also with lower prices. It doesn't -- it's actually more difficult when you are at higher prices.

[Kolbjørn Giskeødegård, Director & Sector Coordinator]

Kolbjørn Giskeødegård, Nordea Markets. Two questions. First, do you have -- you're mentioning a positive effect on the sea lice. Is this something that you also see gradually coming through in your cost that you have now much lower sea lice level and consequently, probably less mortality and less problems? That's one question. And the second question goes more -- and other on the market. You're generally very positive on the demand side, but you're mentioning Greater China as a soft spot in the quarter. Can you say something about how you experience the Chinese or greater Chinese market?

[Johan Regin Jacobsen, Chief Executive Officer]

Yes. When it comes to the cost, our way of accounting is that the cost of inventory and especially the biomass is the actual cost of that pen. So that means that if we are harvesting an area where the mortality in these pens have been slightly higher than the cost of that fish is slightly higher. So when mortality is coming down, this will have a positive impact on coming quarters. So it's a gradual effect that cost comes down when mortality is lower. And actually, year-to-date, 2019 has been the lowest mortality in Bakkafrost for the last 6 years. So it's quite positive. When it comes to Greater China, we see an increasing competition from other sources of salmon. The market in China is open, and there is an increased competition in that market. However, as you saw in our numbers, we have maintained our share of export into Asia from 25% up to 26%. We did not see the same increase in Asia as we saw in Europe and U.S., which is a kind of a sign that we did not get the same opportunity for growth in that market. But that said, we are -- we see a very interesting market in China, which would be very, very important for the salmon market in the future. This is one of -- probably one of the biggest opportunities for the salmon market, it's a market that will grow in the future, and it's an open market, and there's a good distribution. There are hundreds of cities with above 1 million people, and that will be very important for Bakkafrost and all salmon producers. And of course, we want to have our position also in this market. But 26% of our sales in Asia is not bad, and that's mainly China.

[Unknown Analyst]

How are your freight costs...

[Johan Regin Jacobsen, Chief Executive Officer]

Adjust the microphone.

[Unknown Analyst]

Your freight costs from Faroe Islands compared to Norway. There is, of course, a big volume at Oslo airport. I don't know how your distribution system goes.

[Johan Regin Jacobsen, Chief Executive Officer]

Our distribution system from the Faroes compared with Norway, in some destinations, we have a disadvantage, especially the destinations which are closest to Norway, like Poland and so on, probably Denmark. But when we come further out, the distance is -- if they are bigger from Norway, then I think we are more or less the same. From Faroe Islands, we have very good connections by ship to Europe. And then, for example, from London Heathrow and Frankfurt, we have similar costs from Norway to destinations in the U.S. and China. And we can -- within 2 days, we can deliver in those destinations, and we have daily departure from Faroe Islands. We use all available capacity in the Faroese airplanes out of Faroes. But our demand for transport is maybe 500 tonnes of airborne salmon per week and the capacity out of Faroes with airborne is maybe 30 tonnes. So we take that 30 tonnes, but we need to balance out from London and Frankfurt then.So these 30 tonnes are then mainly used for high-end products that we do locally, and then we can deliver them in San Francisco or in Beijing or wherever the next day.Thank you very much.