P/F Bakkafrost
OSE:BAKKA
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Welcome to the presentation of the second quarter 2022 of Bakkafrost. We will look at the summary of the quarter. We will look into the markets, the segments, financials and then the markets and outlook.
In this quarter, Bakkafrost harvested in the Faroe Islands, 13,101 tonnes compared with 17,561 in the same quarter last year. In Scotland, we harvested 6,646 tonnes compared with 10,634 tonnes in the same quarter last year. The Feed segment had record high sales in the second quarter, 31,243 tonnes compared with 27,272 tonnes in the same quarter last year. The markets, especially the summer prices were exceptionally tight in this quarter, and there is a tight supply outlook for next quarter. In the feed and especially the fish meal and oil segment, we saw a good sourcing of raw materials of 97,600 tonnes compared with 59,290 tonnes last year.
The revenues were all-time high, DKK 1.684 billion compared with DKK 1.618 billion last year. Also all-time high operational EBIT in the quarter, DKK 587 million compared with DKK 407 million last year. The cash flow from operations amounted to DKK 542 million compared with DKK 532 million last year. There were positive EBIT -- operational EBIT in the farming cooperations in Faroes, Scotland and in the fish meal, oil and feed segment, but negative in the VAP due to the contracts. In this quarter, we paid out dividends of DKK 5.14 per share for 2021. The group EBIT was DKK 587 million compared with DKK 407 million. The farming margin in the Faores were NOK 63.38 for the first quarter versus NOK 26.52 last year. But the combined margin from Faroes from farming and VAP was NOK 52.28 versus NOK 26.92 last year. This is the second quarter in a row with record high combined margin for the 2 segments.
In Scotland, the farming of margin was NOK 8.29 versus NOK 6.75 in the same quarter last year. Adjusted for contracts, the margin could have been NOK 22. The VAP margin dropped to minus NOK 24.46 in Faroes from NOK 1.53 last year due to the exceptional high spot prices. EBITDA margin for our fish meal, oil and feed segment increased to 22.7% from 16.5% last year.
If you look into the markets, we see -- the salmon price increased -- the spot price increased around 70% in this quarter to NOK 107.46 per kg on average compared with NOK 63.1 per kg in the same quarter last year. The main drivers were reduced supply of more than 6% during the whole first half of the year. This is the first time we see that high drop for 2 quarters in a row since 2010. We saw also a record high volumes sold on contract in this quarter, leading to low availability of spot sales. And we also saw the Horeca segment coming with a high demand in this quarter post-COVID.
The price development in the first half was extraordinary and unexpected and that's why we had so many other companies to report extraordinary high losses on contract sales. Somehow this development have self-fueled development on the market spot price as the balance with high contract volumes and low supply created larger-than-expected gap into the spot sales market.
In the appendix in the presentation, Page 36, we have included an overview of the geographical breakdown of the sales of Bakkafrost. The EU is consistently buying the majority of all our salmon, but both the Asian and the U.S. market have increased our market shares during the 2022. Also in the appendix, Page 39, we have included a page showing the average price well below spot prices. And this is look into the SSB price compared with the NASDAQ price, which indicates an all-time high difference between the actual achieved price and the NASDAQ price.
And in the appendix on Page 40, we have included an overview of price movement, shown largely in line with other proteins. If you go to the operation, in the first quarter, the volumes in Faroes dropped 25% compared with last year, 17,500 tonnes compared with 13,000 tonnes this year. In Scotland, the volumes dropped from 10,600 tonnes to 6,600 tonnes this year. The group volume, therefore, dropped 30% from 28,000 tonnes to 19,700 tonnes this quarter. The harvest weight in Faroes dropped 3% from 4.9 to 4.7 kilos. The South Island in Faroes delivered 40% of the volume in this quarter with an average weight of about 5.2 kilos. North and West division lost the target and delivered only 4.5 to 4.6 kilo in average weight this quarter. So the combined is 4.7 kilos. Smolt transfer in Faroes was 3.3 million at 326 gram.
The focus in our hatcheries is on delivering robust, high-quality and healthy large smolt to our farms. With this focus, we see a positive development and optimizing the total biology for our farming operation. The experience the last year have shown us the need to prioritize robust, healthy smolt in front of larger smolt. This will take down the target size in '22 from 500 grams to somewhere between 350 grams and 400 grams on back of the strategy amendments into slower growth in the fresh water phase with new learnings and insights. We see clearly a positive impact with large, robust and healthy smolt viability growth and growth rates in our farms. Our target on 500-gram is still valid, but it takes a bit longer time to achieve the target.
In Scotland, the harvest was 6,600 versus 10,600 tonne last year, a drop of 38%. The South division in Scotland delivered 64% of the volume in the quarter with an average weight of 4.1 kilos. The North delivered 36% with average weight of 3.9 kilos. Early harvest of impacted fish in the quarter in the North division amounted to 500 tonnes with an average weight of 2 kilos. These fish were challenged during Q4 '21 prior to the implementation of our marine risk reduction strategy. There are accounted for extraordinary cost in this quarter of DKK 57 million related to this issue.
In the third quarter, up to this week, DKK 42 million had been accounted on exceptional mortality due to the same reason in the same area. However, the North also delivered the largest fish in this quarter from a single site. This was Porkeri, the north side of Skye -- the island of Skye, with an average rate of 4.8 kilos. Smolt transfer in the quarter increased to 2.8 million versus 2.1 million last year and also a slightly larger size, 101-gram compared with 77-gram last year. The results from the new hatchery at Applecross will gradually start to make more impact from next year.
The operational EBIT from the farming division in the Faroes increased 80% to DKK 607 million versus DKK 343 million last year. The margin in the Faroes increased 54% versus 36% -- the margin was 54% of the revenue versus 36% last year. One of the sites in Faroes, where we harvested, the site entity in this quarter was Froðba in the South Island. The KPE in Froðba this quarter was a growth rate of TGC 3.56, survivability of 94% and feed conversion rate of 1.07. This site was stocked in March-April '21 at 299-gram. The average weight of all fish was 5.1 kilo gutted weight, harvested 5,400 tonnes gutted weight.
The farming cost on this fish was NOK 33.6 per kilo gutted, whereof feed accounted for 58%; smolt, 15%; and all other costs 27%, that is salaries, maintenance, biology, overhead, depreciation, finance, et cetera. It took 400 days to grow this fish, 13 months. These costs did not include processing and distribution, of course.
In Scotland, the operational margin dropped 23% to DKK 41 million versus DKK 53 million in the second quarter of '21. The margin in the Scottish farming operation were 9%, flat from last year. We see on the graph here that temperature in the Scottish regions were slightly higher than last year. The strong margin in the Faroe Islands is on the back of very good biological development and all-time low sea lice numbers. Strong growth rates, low mortality and good price achievement are the main drivers in this quarter. In Scotland, we saw issues. The operation had huge issues in the second half of '21 and some sites were impacted into the beginning of the first quarter. In order to get back to track, we decided to hold harvest back in the first quarter and grow the fish to more optimize the harvest size and -- into the second quarter. This has paid off in some sites, but we saw some impacts in some other sites. Farming operation in Scotland have experienced regulatory impact from plankton, algae and jellyfish over previous summers. We strongly believe that robust healthy smolt will have a very positive impact and our new hatchery will start to deliver in the near future. We have all elements of our marine risk reduction and survivability strategy in place. This includes new resources to enable our salmon to grow better in the marine phase and the natural environment. For example, the freshwater treatment resources that has been upgraded with Kvaløy in March and Ronja Star arriving in September. The introduction of large healthy, robust smolt will have the largest impact on Scottish farming. Currently, most of the hatcheries are flow-through and small fish. All these larger smolts are stocked on -- in our farms. As these larger smolts are stocked in our farms, we will reduce the risk in the natural marine environment through shortening their marine cycle. And Applecross will start to deliver larger smolts in the first quarter next year.
Looking at the VAP segment, we sold 27% more volumes in the second quarter this year compared with last year. The revenues increased 61% from DKK 259 million to DKK 417 million. The operational EBIT dropped from DKK 5 million to minus DKK 108 million due to increased raw material costs as the internal buying price traded in line with spot price development from the farms. The EBIT per kilo dropped from NOK 1.53 to minus NOK 24.46. 48% of the volume in the quarter were used internally in our VAP operation from 28% in the second quarter last year.
The Feed operation in this quarter doubled the EBITDA from DKK 57 million to DKK 119 million. The margin also increased from 17% to 23%. Raw material sourcing was also good in this quarter and has also continued into the third quarter. 98,000 tonnes in this quarter compared with 59,000 tonnes last year, an increase of 65%. Fish feed sold in the quarter were also a record high at any second quarter. 31,243 tonnes, 15% up from last year and 97% of the feed is used internally. Fish meal and fish oil costs have increased on back of increased prices on marine raw materials in the second quarter of '22 compared with last year. Our inventories of raw materials have never been as high as they are at this moment at this time of the year because of the raw material intake. We produce all fish meal and most oil internally and source the pelagic fish from offcuts from local fishery and processing facilities. This is both a driver for our strong position using high-quality raw materials and differentiation on taste and good biology in our farms. And now Hogni will take us through the financials.
So as Regin mentioned, we had roughly DKK 1.7 billion in revenue in this quarter, same level as last year in this same quarter. Approximately 30% lower volume, but a strong tailwind on the price side makes up that revenue. Our operational EBIT increased significantly with -- 44% to DKK 587 million for the group in the quarter. Our fair value of the biomass has increased significantly as we have a stronger price on -- in the valuation of biomass, so by 228% (sic) [ 226% ]. As our revenue tax, which we pay in the Faores is linked to the same price, the spot price, we also paid more in revenue tax in this quarter, minus DKK 63 million. Profit after tax increased to DKK 845 million. We have accounted for onerous contracts of DKK 34 million in this quarter. And as Regin has mentioned, we had exceptional mortality costs in Scotland of DKK 57 million.
If we look in the development on the operational EBIT for the past 5 years. We have 2 very, very strong quarters now in a row where we have broken the record twice in regards to operational EBIT. So year-to-date or for the first 6 months, we had DKK 1.004 billion in operational EBIT in total and an adjusted earnings per share in this quarter of DKK 6.77 and DKK 11.58 in total.
On the balance sheet, our Property, Plant and Equipment has increased with some DKK 200 million, amounting at DKK 5.091 billion. Our biological assets have increased significantly to DKK 3.3 billion, whereof roughly DKK 1.3 billion are fair value adjustments. As Regin mentioned, we have built significant inventories in this quarter, primarily in the FOF segment with -- as a result of the intake of raw material, marine raw material. DKK 240 million, an increase in this quarter compared to the same quarter last year, and it amounts to DKK 923 million in total.
Receivables reduced by DKK 132 million amounted to DKK 692 million. And cash and cash equivalents were on the same level as last year. Equity has increased by DKK 931 million to DKK 10.279 billion, and the equity ratio have increased by 1 percentage point to 65%.
Looking at cash flow. Cash flow from operations, DKK 542 million, minus DKK 272 million from investments and minus DKK 206 million from financing. And net cash at -- no, sorry, net change in cash was DKK 63 million. Our interest-bearing debt is on the same level, has increased with some DKK 70 million during the quarter primarily driven by the net investments and also the dividend payment of DKK 304 million that was made in May, but counterweighted with the cash flow from operating activities of DKK 605 million. So by the end of the quarter, we had a net interest-bearing debt of DKK 2.267 billion and undrawn credit facilities of just short of DKK 3 billion. Back to you, Regin.
There was a 7% drop in the global supply in this quarter. This was driven both by movements of inventory, but also the reduction of supplies from primarily Norway, U.K. and Faroes. Chile actually increased our harvest in this quarter by 18,000 tonnes.
On the feed -- feeding off the fish we see in this quarter that, that was a flat development globally in feed, more or less no change. The harvest weight in all regions were slightly down. The available volumes to the market has dropped and there -- but we see that the value of the market increased somewhere between 30% and 40% taken into the consideration the price development. This is a clear sign of the positive food service dynamics following the release of the COVID-19 measures. The high contract share compared to other markets is a significant dis-cut to spot prices and have fueled to the spike in spot prices. The EU market dropped 4%. The U.S. market dropped 3%, which is lower -- less than the market in all, which is an indicator of strong markets in those areas.
If you look at the markets going forward, the short-term outlook, we expect a limited supply in the second half of '22. And these dotted lines indicate the expectations 3 months ago, and what we see is that there is a reduction of supply. The expected supply in Europe has been reduced 2% in the third quarter and the Chilean supply is now around 7% down in the fourth quarter. All in all, this takes the global supply down both in the third and in the fourth quarter compared with expectations 3 months ago. The new expectation is more or less no global growth in the third quarter and only a moderate growth of around 2% in the fourth quarter. In '23, we also see, in the first half of the year, down to 3% supply growth compared with 5% expected 3 months ago. So as it looks now, there is a tight situation in the market the next year ahead of us.
The market is tight, as we saw on the previous graph. And this will lead, especially on the contract side that contracts will be lifted on back of the recent development and also the outlook for the industry in general.
On the harvest side on our volume expectations, we maintain the same guidance. I admit that in Scotland, we are a bit more tight than we were a while ago. The stocking of smolt is also unchanged, in Faroes 14.9% and Scotland 10.8%. On contracts, we have signed contracts amounting to around 32% of the total expected harvest in the Faroes and Scotland. And we will normally, in the second half of the year, many contracts are signed for next year. We have revisited our strategy on contracts, especially in Scotland.
On the Fishmeal, Oil and Feed, we expect around 130,000 tonnes of feed sales this year unchanged. But due to the good sourcing of raw materials for the feed -- for the fish meal and oil, we have upscaled of course, this number because we already have passed the target.
On the business development investments in new freshwater capacity is the main in this area and is progressing according to plan in Glyvradal and Norðtoftir. And these 2 sites are expected to start operation during the fourth quarter, into the first quarter and will be scaled up in the first half of '23.
In Scotland, Applecross project is also progressing according to plan, and we will start operation by the end of this year in -- on Page 5 and 6, we'll start operation end of '23. So already early next year, we will see some contribution from Applecross. Applecross will have the same size of capacity when finished built as strong as in Faroes. Contracts have been signed for large expansions of our feed plant Havsbrún in Fuglafjørdur, to double the capacity in this new factory and that will be up running in '24. The investment strategy in Scotland is progressing and will deliver improved operations over time.
Our focus is to reduce the biological risk, to improve efficiency and to create organic growth. We believe that we can use a lot of things learned in Faroes to improve the operations in Scotland, but it takes time to upgrade the whole value chain, especially to build the new hatcheries. But we are confident that strong belief in the operations and that what we invest in will eventually give good results. Thank you very much. And now we open up for questions if you might have?
Yes, Christian Nordby, Kepler Cheuvreux.
And maybe, I think there's a microphone coming to you.
Christian Nordby, Kepler Cheuvreux. One question on your smolt strategy that you now grow it slower. What does this have an implication for the volume growth that you previously given on the Capital Markets Day out in time?
Yes. So with the small strategy, we have seen that, especially in the start when we started with Strond, that we were quite eager to get the results as fast as possible. And the fish has grown very well in these new hatcheries. The development has been very, very positive. And we have had no big impacts or no big issues at the start-up. But what we have learned over time is that growing smolt is -- it's important to build the fundament for a robust development when the fish arrives to the sea. And we have learned that especially the heart is -- it takes time to build a strong heart and the water temperature in our hatcheries needs to be right. The water quality, the environment in the hatchery needs to be maintained at a special circumstances, which means that it takes slightly longer time than we originally had calculated because it's also possible to grow out salmon much faster. And that has a negative impact on the biology of the operations in the farms.
So after we amended this 1.5 years ago, we now see a much, much stronger and robust smolt, which means that we use more time in the hatcheries and that takes somewhat down the capacity compared with the previous numbers. So that's why we need now the capacity from Glyvradal and Norðtoftir, which will start in the fourth quarter before we will reach our 500-gram. This compared with our expectations 1 year ago, these are slightly delayed, maybe 6 to 8 months compared with what we expected a year ago. And these are also relation to COVID. And that's why we are a bit delayed and will reach hopefully our 500 grams next year or at least we will be closer to 500-gram next year.
As I said earlier, we will focus more on robust smolt rather than on growth. As I mentioned with our numbers from Froðba, with robust smolt, we see a very strong development even with starting from 300, 400 grams. What impact it will have on our harvest volumes is a bit difficult to say, but I -- there will be some impacts. But eventually, we will reach to the same level as we have good capacity in the pipeline in our hatcheries in Faroes. So I still expect that we will come there, but may be a bit delayed, maybe a year delayed or something like that.
Very good. Another question on Scotland. Now that we're coming into the difficult autumn period. Do you see any signs or anything that should be better than last year?
In Scotland, we have built good capacity now with fresh water treatment. That's some protection on biology. But as we see here in the second quarter, and as I also mentioned already now in the third quarter, we have already reported some losses. These are mainly fish that were impacted already in the third -- in the fourth quarter and the first quarter. And it seems like if fish are impacted too often, there is kind of an accumulation taking place. So hopefully, with the fresh water, we can protect the fish better. That's our strategy. But we don't have a perfect operation as the fish is far too long time and the robustness of our smolt is too low. So there is increased risk this autumn. Next year, we will be even better because then we will start with some larger fish that will be only 1 summer in the sea. At the moment, we have too many fish 2 summers in the sea. But the risk this year, I am confident, is lower than last year, but it is not where we want it to be. That's why we still need to see results of the larger smolt.
We have made a lot of other improvements all across the operation with feeding, with water, with protection in the [ fence ], et cetera. But that is the final last thing with larger smolt, which we think is quite important, quite crucial actually in Scotland that we will hopefully see next year given the so impacts.
Wilhelm Dahl Røe, Danske Bank. Just a question on the development and the margin on Fishmeal, Fish Oil and Feed as you see a healthy development. Just curious to hear your thoughts on the development on -- in these margins going forward? And also if you see a push from a source raw material prices?
So your question was about the fish meal and fish oil operation development there, how we see that? And the margins -- And the price development and raw materials on fish feed.
Yes.
Well, as you indicated, we produce our fish meal and oil internally, and this year has been exceptionally good on raw material intake, which is good because, of course, when we produce internally, that helps total cost base in our operations, and as indicated with the numbers I gave on the details on Froðba, 58% on that calculation was feed. So feed is quite important. Raw materials have increased. Fish meal and fish oil costs have gone up. Raw materials in our sourcing is increasing because we need to buy from fishermen in competition with the market in general. So it also impacts us. And we see also that vegetable ingredients are increasing significantly. So all in all, the development over the last 12 months has been that feed raw materials have gone up considerably.
We have been buying now over the summer at all-time high raw material prices, which means that fish meal and fish oil will eventually increase. But as I mentioned earlier, we have all-time high inventories, which means that there is a time lag in when this will hit our salmon cost price. The margin in our Feed segment is an indication that the increases of prices, which are based on the actual raw material cost in this quarter, but we have bought them a number of quarters ago, that there is an increase on prices, but the time lag means that we are building up on our internal margin in our feed sales.
So there is a clear indication that prices will go up, cost prices will go up on feed. But I will emphasize that we think that producing internally for us gives us an advantage. And maybe marine ingredients have had less impact than vegetables you can see so far. Do you have any follow-up question or is that okay?
That is all.
Thank you.
Martin Kaland, ABG. Do you have any comment on demand and price premium in high-end segments, for example, already signs of consumers trading down or how are they reacting to now [indiscernible] higher prices?
It's a good question, difficult to answer. I think there is a strong demand also with premium products because all products have gone up in prices, as you will see in the appendix page, which I referred to earlier, and at the moment, we see also very good demand for large fish at premium prices. There is also signs that with better availability of cargo, that cargo prices might come somewhat down, which is also positive. So all in all, I think that there are -- the uncertainty is big at the moment, but there are good signs in some areas, for example, that the demand on salmon is very high. The demand for contracts is very high. And my strong belief is that we will see contracts coming up in prices going forward. So there will be both a driver from contracts going forward. Of course, the spot prices, they vary. And then we see prices really on the top. It might be difficult to get the extra premium sometimes. Sometimes it's easier when prices go a bit down. So consumers trading down, I really -- I don't think so. That's not my impression.
I see no more further questions. So thank you very much for coming. Thank you for your interest.