P/F Bakkafrost

OSE:BAKKA

Earnings Call Transcript 2021-Q3

[Johan Regin Jacobsen, Chief Executive Officer]

Good morning, and welcome to Bakkafrost presentation of third quarter 2021. We are going to look at the summary of the third quarter, the markets, segment information financial and ESG and the outlook for the company. Bakkafrost harvested in the Faroe Islands in the quarter, 14,937 tonnes compared with 11,135 tonnes last year. In Scotland, we harvested 6,914 tonnes compared with 10,476 last year. The feed sales in the quarter were 44,973 tonnes compared with 39,869 tonnes last year. The raw material purchases sourcing for Havsbrún was 17,224 tonnes compared with 24,101 tonnes last year. The revenues amounted to DKK 1.272 billion compared with DKK 1.123 billion last year. The operational EBIT in the quarter amounted to DKK 70.5 million compared with DKK 102.7 million last year. The cash flow from operation in the quarter were DKK 267 million compared with DKK 105 million last year. There were positive operational EBIT from the farming in the Faroe Islands, the value-added products, fishmeal, oil and feed, but negative operational EBIT from our farming operations in Scotland. If you look at the numbers in the quarter, we see a flat development in the farming segment in the Faroe Islands from NOK 12.43 per kilo last year to NOK 12.56 this year. In Scotland, the negative EBIT last year of NOK 3.89 dropped to NOK 16.32 million this year. The VAP segment in Faroese had a positive margin of NOK 2.89 compared with NOK 5.84 last year. The fishmeal, oil and feed segment had a positive of 20% compared with 14.4% last year. If we look at the EBIT year-to-date, we see that the operations in the Faroe Islands had NOK 21.07 per kilo year-to-date compared with NOK 18.36 last year.If we go to markets and sales, we see an increase of our sales to Western Europe markets. We see 65% of the total products in the quarter -- sorry, 65% of the products from Faroe Islands were sold in the Western European market, 71% from the group as a whole. This is an increase, especially with the breakdown of products, smaller sizes of fish, which caused this development. We see a significant drop in North America, 17% compared with 24% from Faroese. And in Asia, it was flat at 9%. In Eastern Europe, a drop from 11% to 9%. And the VAP segment had 35% in this quarter compared with 48% last year. The big change in the quarter is that of fresh salmon, if you look at the numbers from Faroese 64% in this quarter were sold to Western Europe compared with 29% last year, which is a big increase to Western Europe. And we see a significant drop in the U.S. market from 38% last year to 18% this year. That's a big change of product allocation to the markets where we see Western Europe taking products from the North American market.In general description on the market, I can say that there has been a good momentum in demand. We see healthy products are in high demand in the marketplace. We see also that COVID-19-fueled intentions with consumers to eat healthy diets that limits risks of lifestyle style diseases. We see consumers are more aware of buying products with less harm to environment. But we saw also in the quarter, logistics constraints hampering supply to some markets, continued issues with air transportation and higher pressure on both transport by ship and trucks, partly also apparently related to Brexit.On the market size, we see -- market side, we see that the average spot price increased year-on-year, but decreased quarter-on-quarter. Year-on-year, we see an increase from NOK 48.43, up to NOK 55.41, which is an increase on 14% compared with the same quarter last year. From the second quarter into the third quarter, we see a drop from NOK 63 to NOK 55, which is 12.5%. Overall, we can say that this is a strong development on prices. Demand for salmon is strong, leading to relatively high prices despite increased harvest and supply to the market. This year, there have been some months of double-digit supply growth and very high prices. Compared with 2020, especially March, we saw 30% demand growth. If we move to the harvested and sold quantity in the markets, we see European supply around 14% up, mainly contributed from Norwegian supply, which is 15% up in the quarter. Average weight of harvest from Norway was 4.3 kilo in the quarter compared with 4.1 kilo last year. And feed volumes in Norway was also 8% up. In Faroese, we see volumes 33% up. Average weight in Faroese was down 4.6 kilo for Faroe Islands as a whole compared with 5-kilo last year. Feed volumes in Faroese are up with 6%. In Scotland, numbers are unchanged both on average weight and also on the feed volume. In Americas, we see harvest volume down by 17% and, we see average weight from Chile down 4.6 kilo versus 4.9 kilo last year and the feed sales 3% down. In Canada, saw a 9% down on feed volume. So overall, the market had increased quantity sold of 5.7%. Looking at the market side. On the demand side, there is a 5% increase in the European market, which is lower compared with the growth of supply in from Europe, which means that more fish has been sold out of Europe. And if we break that down, we see that around 40,000 tonnes of products were sold from EU to the U.S. market in the third quarter. We also see an 11% increase on the demand from the U.S. market. So the U.S. and EU is the largest volume sold in the third quarter. They had strong development, 75% of global market growth was in EU and the U.S. in this quarter, indicating a very strong underlying demand for salmon in these markets, and especially a strong demand from food service segments, but also retail segment continued with a high demand. Retail sales on salmon increased from 19% to 21% of all seafood traded in retail in this quarter. In China, we see a growth of 35%, but this must be taken into consideration that it was very much impacted last year with the lockdown on the back of the COVID-19 issues on the fish market in Beijing in June last year. Russia and Japan dropped 5,600 tonnes, corresponding to 10% to 18% totally for these 2 markets, mainly related to reduced from Chile, probably also related to inventories of frozen products, which were consumed. If you go to the outlook for the supply side, we see that the numbers indicate a drop of the next quarters of supply. Chile, lower numbers of smolt transfer at the onset of the global pandemic early 2020. This impacts significant cut in Chilean supply, will drop their supply close to 30% in the fourth quarter 2021. From European suppliers, we expect 8% growth in harvest volume in the fourth quarter. Looking at the first half of 2020. Global supply is unchanged compared to this year, both Europe and Americas are unchanged. In the second quarter, there will be an inflection point when the correction of Chilean supply will stop. The low supply in the first half of '22 will lead to price impacts on products. In the second half of '22, global market supply is expected to increase around 9%. And this is split between the U.S. market with 15% of supply growth from Americas and around 7% from Europe. In '22, in general, supply growth drops 3% compared with 8% supply growth in '21. Norway is expected to slow growth to 3% next year from about 10% growth rate this year as the sector runs into license constraints that will limit expansion. U.K. will have stable production compared with high growth of around 17% this year. Chile will grow around 4%, which is unchanged -- sorry, which is compared with 4% drop in 2021. So Chile will grow 4% compared with 4% reduction in '21. Both Canada and U.S. will have reduced production in '22 compared with rather flat development, recent years. So going into the segment numbers. The harvest volume from our Farming segment increased in Faroese and decreased in Scotland. We see also an increased average of the smolt size here in the Faroe Islands. In Faroe Islands, in general, there are an increase of 34% of the volume, which is breaking down to a drop in the North division of 53% but an increase of 66% in the West. So mainly harvested from the West in this quarter, 52% of all harvested fish are from the west area. In Scotland, there was a big drop in quantity, 6,914 tonnes compared with 10,476, which is 34% down. The North part was 10% down and the south part in Scotland was 51% down compared with last year. The average weight in Faroese was 15% down from 5.4 last year to 4.6 this year. This is highly impacted by harvesting from Haraldssund A-72 at 3.7 kilo average in order to synchronize with A-73 Viðareiði. Stocking of these 2 sites will be now in December. In Scotland, the numbers are down, from the average weight from 4.2 to 3.8 kilos. The smolt transfer in Faroe Islands are 6% up, 3.8 million pieces compared to 3.6. And in Scotland, 27% up, 3.3 kilos compared with 2.6%. The average weight in Faroese is 13% up, 334 gram compared with 295 gram. And in Scotland, stocking tripled from [ 653 to 1.9 ] as many sites were furloughed in the south. The Applecross hatchery delivered its first batch of larger smolt in this quarter at 145 gram. This development will continue. But the big change will be in '23. Production in Applecross is so far matching the plan and the targets. On the next page, we see the operating EBIT in margin in kroner and especially, the Faroe Islands' margin is behind expectation. The premium on sold fish from Faroese dropped from DKK 15 last year to DKK 9 this year. The sales price in fish from Faroese is DKK 2 down compared with last year, but the costs are also DKK 2.5 down. Feed use is up from 26,000 to 30,000 tonnes. In Scotland, the premium increased from DKK 5.3 to DKK 8 per kilo. And the sales price also increased DKK 8, but the big issue is the cost, which in the quarter was DKK 20 up compared with last year. And the feed use 11% down from 17,000 to 15,000 tonnes. The revenue from the farming segment were DKK 759 million compared with DKK 530 million last year, and the EBIT DKK 135 million compared with DKK 97 million. On the next page, we continue with the farming segment. We see the margin in kroner per kilo, in Faroese flat and in Scotland, a significant drop. In Faroese, we deliberately harvested the small fish from A-72, which impacted the average weight of the fish, the markets to sell the fish and our ability to maximize the value of our products. And as mentioned earlier, we saw that a lot of the fish were -- had to be sold in the EU market instead of U.S. market and other markets where we have higher value. When we look at the KPIs in Faroese, we see stable development. FCR has improved 1%, which is feed conversion rate. TGC growth rate has also improved 1%. So stable development on that. Mortality is more or less unchanged, same number of fish, but the big issue is that the average weight drops, and we lose our ability to maximize the value of our products in the quarter. So that's the issue in Faroese. In Scotland, we see in this quarter, a higher mortality or a high mortality, especially on 3 sites where we had impacts from PD, AGD and micro-jellyfish. These 3 in combination is a very negative impact and had a negative impact on 4,000 tonnes of fish, 4,000 tonnes of fish lost because of this issues. On KPIs, in general, there is more or less a flat development. FCR is 5% worse, but TGC is 6% improved. But it's the mortality, which kills the numbers, 14% down in volume, but up in numbers. So if you look at the -- what it makes to the quarter is down in volume because of mortality. But we also because of these issues, 4,000 tonne of fish that should be harvested in the fourth quarter are moved into the first quarter, which means that 4,000 tonnes in addition are taken out of 2021. And in addition, we lose around 2,000 tonnes on average weight because of lower average weight than expected. So the 10,000 tonne of drop in guidance from 40,000 to 30,000 is these 4,000 tonnes, which are moved into '22, 4,000 tonnes on increased mortality and 2,000 tonnes with lower average weight of fish harvested in Scotland. For sure, we can say that there were rocks on the road, stumbling blocks and stepping stones in this quarter. And we are disappointed with the numbers and KPIs from the farming operation and will do better in the future. We must admit that progress is rarely a straight line. There are always bumps in the road, and we will need to keep looking ahead.Looking into the value-added products. We see a stable development, flat volume. Slight increase in revenue, a drop in operational EBIT, mainly due to the increased raw materials to the segment in this quarter, raw materials. The raw material cost is up by DKK 3.16 per kilo and -- or Danish kroner per kilo, and EBIT is down DKK 3.02 per kilo, so more or less the same. Demand for VAP products is very high. New contracts for next year have been landed with increased price levels in line with general price increases on the forward market. And all in all, we have secured around 21% of the volumes for next year on contracts.If you look into the fishmeal, oil and feed segment, we see a good development in the quarter with a strong margin, DKK 111 million, 20% external fishmeal sold is more or less flat, 2,800 compared with 2,700. And raw materials sourced are slightly down. If you look at the development on raw materials, we see that feed raw materials have increased lately or during 2021. When we compare raw material costs in this quarter compared with last year, we see around 20% increased cost. But if we break it down, we see that marine ingredients are now around 10% up compared with last year, but vegetable ingredients are 40% up compared with last year. So it's not the same for these 2 areas. Now Hogni Jakobsen, our CFO, will take us through the financials.

[Hogni Dahl Jakobsen, Chief Financial Officer]

Thank you, Regin. So if we look at our income statement for this -- or of profit and loss for this quarter. We see that our revenues have increased by 13% to DKK 1.272 billion. However, our operational EBITDA as Regin mentioned, has dropped significantly by 31% and amounted to DKK 71 million. And that's a mixed bag of goods, you could say. Our farming segment in the Faroese delivered DKK 135 million, a 40% increase last year. And our VAP segment delivered DKK 11 million, a 49% reduction compared to last year. The big disappointment is the Scottish farming segment, which delivered minus DKK 81 million in this quarter. We had DKK 69 million in incident-based mortality in this quarter in Scotland. So that's a significant factor in the results from Scotland. Our -- the sweetener is the FOF segment, which delivered really good results in this quarter with DKK 111 million. 95% of the volumes, the feed volume sold in the quarter was sold internally. If we move on and look at the fair value adjustments, they were slightly lower than the same quarter last year. And that's mainly due to lower biomass in the sea, and also slightly increase in the average time to harvest for the biomass. Revenue tax was increased. We paid 34% higher -- no, sorry, we paid 228% higher revenue tax in this quarter. That's mainly due to a combination of higher harvest volumes in the Faroese and also higher spot prices. Year-to-date, our operational EBIT amount to DKK 702 million. And as you can see from the graph on the top, this is the weakest quarter that we have delivered for 5 years. Adjusted earnings per share was DKK 0.64 in this quarter. And year-to-date, we have DKK 8.39 in adjusted earnings per share. If we look at the balance sheet, we still have a very strong balance sheet. Property, plant and equipment has increased by DKK 522 million in this quarter and amount to DKK 4.712 billion (sic) [ DKK 4.742 billion ]. Biological assets are up with DKK 586 million and amount to DKK 2.7 billion. Inventory have decreased by DKK 86 million. Receivables have increased by DKK 156 million and cash and cash equivalents by the end of the quarter have decreased by DKK 94 million and amounted to DKK 373 million. Equity is up by DKK 794 million and equity ratio has improved slightly to 70 -- 67%. And if we look at the cash flow, cash flow from operations in this quarter have improved compared to last -- same quarter last year by DKK 162 million and amounted to DKK 267 million in this quarter. Cash flow from investments were minus DKK 310 million and cash flow from financing were minus DKK 136 million. We have a lot of ongoing investments. We had capital commitments in this quarter, amounting to DKK 838 million. That's primarily linked to our expansions of hatcheries, both here in the Faroese with Glyvradal and Norðtoftir, which will be finalized during next year, but also the expansion of the Applecross hatchery in Scotland. And then, of course, our new 7,000-cubic-meter wellboat which will deliver to us next year.Our net interest-bearing debt increased slightly in this quarter by DKK 83 million and amounted to DKK 1.986 billion by the end of the quarter. And if we look at the bridge from last quarter, it is mainly the net investments of DKK 310 million, that have increased the net interest-bearing debt. And that's counterweighted by changes in working capital amounting to DKK 97 million and DKK 130 million cash from operating activities. Our bank facility or financing is unchanged, and we still have DKK 463 million bank facility and DKK 150 million accordion option. And undrawn credit facilities were DKK 1.439 billion by the end of the quarter. A short update on ESG, what has happened in this quarter. Earlier in this quarter, we announced our net 0 target, emission target for 2050. It's a necessary, but also a very challenging goal to set. We have from previous -- our previous healthy living and our sustainability plan announced a target to reduce our CO2 emission by 50% in 2030. That's of the Scope 1 and 2 emission. But we take the step further with net 0 commitment to 2050. Also in this quarter, we have deployed our new farming supply vessel, Bakkanes to Scotland, it's up and running in the operation in Scotland doing mechanical delousing there with the same kind of equipment that we installed on our supply vessel Martin here in the Faroese in December. And in the beginning of October, we learned that the Blue Whiting has been accepted into the Fishery Improvement Project with MarinTrust. And this is an important news to us because it paves the way for the Blue Whiting regaining its MSC certification. And that's, of course, of great importance to us with -- to ensure that we can produce ASC-certified fishmeal in the future.Back to you, Regin.

[Johan Regin Jacobsen, Chief Executive Officer]

If you look at the outlook for the company and the market, we see expectation of a low supply growth in the future. The supply is expected to decrease in the fourth quarter by 4% to be flat in the first half of '22 and to increase 9% in the second half next year. In our farming operations, we have had some bumps on the road in the third quarter. In the Faroe Islands, mainly related to the synchronizing of A-72 and A-73. But this will have positive impact on our operations going forward as these 2 areas have sometimes created issues for us. In the third quarter, we were also impacted by improved capabilities that we installed on Martin, our treatment boat. This installation was planned, all the equipment were ordered and the installation was contracted to be delivered in June. But due to COVID-19, there were delays in supplies, and we lost 2 months of critical period for our operations, which created issues for our operations in August and September with the result of some losses. Additional freshwater capacity is in the pipeline for Scotland, which means that we are capable to protect our operations better next year than this year in Scotland. We will also have additional capacity in the Faroe Islands next year with the new Bakkafoss that will be delivered next June. So all in all, we are not satisfied with the operations in this quarter, but we think that the action in place will create a better foundation for a more competitive environment next year for our operations. And that's why we, this year, need to reduce our volumes down to 96,000 tonnes compared with 106,000 due to the fact that Scotland is dropping from 40,000 to 30,000 tonnes. For next year, our guidance is 68,000 from Faroese, up from 66,000 this year, and in Scotland, 35,000 tonnes. The release of our transfer of smolt in Faroese is 14.5 this year, up to 15 million next year. The average weight is still good in Faroese and somewhat up next year. In Scotland, 11 this year, 10.8 next year. Average weight in Scotland will start to lift next year. But the big change will be in '23 or a bigger change. Looking at contracts, new contracts are signed for next year, around 21% of our volume at increased prices in line with the increase of forward prices in the market. Fish oil and feed, fishmeal fish oil and feed. We expect around same volume next year as this year, around 130,000 tonnes. We expect some lower production of fishmeal and oil next year than this year. However, there are good development with Blue Whiting. The FIP, which Hogni mentioned, is accepted, and it gives a maximum 3 years possibility to solve the issues on the Blue Whiting, which means that we can use Blue Whiting in our feed during this period and maintain our certification. It's revised regularly. And if -- it can't be lost if no improvement are made from authorities on catches. We at our Capital Markets Day on the 14th and 15th of September, where we announced our plans for the next 5 years, where we are building capacity across our value chain to reach 180,000 tonnes of capacity and an actual production of 150,000 tonne target in 2026. The key drivers in our Capital Markets Day and our strategy is large smolt, focused on biology, good capacity to keep the fish healthy. And as mentioned, 2 new vessels are in the pipeline for next year. One for Faroese, one for Scotland, which means that compared with last year, we are increasing this significantly. And we are building capacity in Havsbrún for next year to increase the feed capacity. Thank you very much. And now we are opening for questions. Please go ahead. Christian Nordby.

[Christian Olsen Nordby, Equity Research Analyst]

Christian Nordby, Kepler Cheuvreux. Yes. So my first question is, do you see any obvious read-across this on your costs for either Scotland or Faroese into Q4 as you see right now? We should [ think again ]?

[Johan Regin Jacobsen, Chief Executive Officer]

In Scotland, the issues in Scotland in the third quarter will also impact somewhat the fourth quarter especially the month of October. We expect that the main issues are solved in October. And prices are expected to be better also than in the third quarter and the -- so we expect that Scotland will not perform well in the fourth quarter, but hopefully better than in the third quarter. In Faroese, we are finished with the synchronization issue, and we will harvest larger fish in Faroese.

[Christian Olsen Nordby, Equity Research Analyst]

And then another question. [Technical Difficulty]

[Johan Regin Jacobsen, Chief Executive Officer]

The logic is that as we had a smaller fish we did not have access to the premium markets where we normally sell our larger fish, which is the key for us to secure better prices and have a better flexibility in our marketing and sales. So when we drop as we see in this quarter, down to 4.5 kilos, we lose that advantage. So that's -- of course, being able to transport to all markets is also a key for us. And there have been some constraints on transportation, but it seems that to be possible to transport fish to all markets now. Yes, Carl-Emil.

[Carl-Emil Kjølås Johannessen]

[Technical Difficulty] 2 questions from my side. One is related to the guiding for Scotland in 2022. [Technical Difficulty] And the second one is related to the elimination [Technical Difficulty]?

[Johan Regin Jacobsen, Chief Executive Officer]

Yes. [Foreign Language] On Scotland, the guidance on 35,000 tonne is lower than this year. That is, as you mentioned, we take down some of the numbers and so we try to be a bit more conservative on our guidance as we saw from this year that we were massively disappointing our own numbers. So we are a bit more conservative for the guidance for next year. That's right. On the elimination, this is related to feed margin, which are taken out of the external EBIT. That's only the feed. Martin Kaland?

[Martin Kaland, Analyst]

Could the higher pricing increases for vegetable proteins, the marine ingredients that you mentioned, could that be favorable for your feed costs relative to other farmers as you have the higher share of marine ingredients? What could impact the be or what impact do you expect on farming costs going forward from feed if it remains as around these levels?

[Johan Regin Jacobsen, Chief Executive Officer]

Bakkafrost, as you know, is using more marine ingredients than many other companies are. And as mentioned earlier, the cost of raw materials from vegetables increased 40% in this quarter compared with last year and the marine ingredients increased 10%. That -- all in all, that should be an advantage for us as it was a disadvantage when marine ingredients increased very much earlier. It should be an advantage now when this difference is reduced. We expect that the cost of marine ingredients will remain high in this quarter. Going into next year, it is likely that there will be more quotas on capelin as there is a new specie for fishmeal and oil coming and catches are expected to be good. So this will be very interesting to look for next year, which also could be a new source for our own operations. Of course, this is difficult to predict. It's also very much related to the quotas from Peru, which we don't know yet. So all in all, this should be positive. On the positive side, when we are on the positive side also, we can say that it is also an advantage for us on the currency side at the moment as the Norwegian -- the value of Norwegian kroner is increased. So that's, in general, positive also for our competitive position. Alex. Alex Jones?

[Alexander Jones, Analyst]

Two questions, if I can. First one on the Scottish issues. I guess it's difficult to give counterfactuals. But could you give a sense of how much better you think the performance would have been this quarter, if you've been using much larger smolts in the sense that would some of these issues still have been a problem? Or would they have been largely eliminated as a result of that? And then second question, just on the feed profitability if you could give us a sense of what's driving that and whether that's sustainable into future quarters?

[Johan Regin Jacobsen, Chief Executive Officer]

Our belief is that with larger smolt and with a good ability to protect our fish in water, we have a much better competitive position. We expect to achieve much better KPIs lower mortality and of course, much lower cost of operation. At the moment, you must remember that our operations at the moment are based on smolt, which are below 100 gram, even down to 50 gram. And we are even not self-sufficient with smolt. We have to source around 50% of our smolt externally. And what we get externally is not necessarily the best quality as this is sales from others, which they don't use themselves. And the fish have to stay in the water for 2 years. And we see in Scotland that there are issues with PD, with AGD and in this quarter also with blooms of Micro-Jellyfish. This is a killing combination for salmon. So we believe that as we are moving into an operation in the next 2 to 3 years, where the fish is going to stay 10 to 11 months in the water instead of 24 months, it will be a huge upside for our operations, giving us the opportunity to produce larger fish at a lower cost. So that is our strong belief. And we see that in Scotland, in general, the growth conditions are good in the winter, in the spring and in the summer. It is especially in the autumn when we need to have good capacity to protect the fish for these circumstances. And that's why freshwater is crucial for us. So we have a big belief that despite smaller fish, next year, we should also be better protected.On the second question, what drives the margin in the feed. This is -- the margin in the feed is driven by the difference between our ability to produce at low cost and the prices on these raw materials and feed on the market. So it's a combination of keeping an efficient operation in our feed operation with good sourcing and the average prices on the market. So I'm not sure if that answered your question, Alex? Good. Thanks. Any other question? No. Thank you very much for attending.