P/F Bakkafrost
OSE:BAKKA
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Good morning, and welcome to Bakkafrost presentation of fourth quarter 2018. We will first have a summary of the quarter; then market and sales; then we will go through the segment information before Gunnar will take us through the group financials; and finally, the outlook for the company and the sector.In the fourth quarter, Bakkafrost harvested 12,234 tonnes of salmon compared with 11,470 tonnes in the fourth quarter 2017. The feed sales in the quarter were 24,711 tonnes compared with 18,955 tonnes in the fourth quarter 2017. The raw material purchase for the feed operation amounted to 46,478 tonnes compared with 50,852 tonnes in 1 year before.The revenues in the quarter amounted to DKK 750 million compared with DKK 906 million in the earlier. The operational EBIT amounted to DKK 231 million compared with DKK 331 million the year before. The cash flow from operations were minus DKK 59 million compared with DKK 261 million the year before. There were positive margins in all segments for Bakkafrost in the quarter. The board will propose a dividend to the Annual General Meeting on DKK 8.25 per share. And that will be in April -- on the 4th of April -- 5th of April. Then the summary of the quarter. The operational EBIT for the farming segment decreased due to lower achieved prices. There were positive operations EBIT -- operational EBIT for the VAP segment, but lower EBITDA margin for the FOF segment. The combined farming and VAP margin decreased from NOK 29.88 last year to NOK 21.91 this year in the fourth quarter. The full year margin for the combined margin was NOK 27.24 combined -- compared with NOK 28.29 in 2017. The VAP had a positive margin of NOK 1.51 in the fourth quarter compared with NOK 9.54 the year before. The farming margin was NOK 21.56 compared with NOK 25.76 the year before. And the FOF margin came out at 21% compared with 25.5% 1 year earlier. And the group operational EBIT was DKK 231 million compared with DKK 331 million 1 year earlier. If we look at the market development on Page #7, we see a change in the sales distribution in this quarter compared with 1 year earlier, especially in the fresh salmon. Sales to Eastern Europe decreased significantly, and all other markets increased in the fresh salmon sales. And the VAP contracts were on a very low level. The EU market decreased from 45% to 44%; the U.S. increased from 17% to 26%; the Asian market, from 15% to 24%; and the Eastern Europe decreased their purchase from 23% to 6%. The harvested volumes in the VAP segment were 23% compared with 43% 1 year earlier.The market strategy for Bakkafrost in 2018 was primarily to have focus on fresh salmon to the high-end spot market. Consequently, the volumes of VAP contracts was exceptionally low throughout 2018. Therefore, Bakkafrost was temporary vulnerable for different unforeseen market disruptions in the quarter, and we had limited flexibility to mitigate the consequences of these disruptions. Bakkafrost harvesting plant in Glyvrar was in the fourth quarter closed out from supplying the Russian market and still is. In addition to this, there were a disruption on delivery to other high-end markets from the new plant in Suðuroy, which opened in October due to delay in issuance of certificates. This factory has not been able to supply Russian market and not the Chinese market. All these matters that Bakkafrost sees more or less temporarily as VAP contracts have now, from the beginning of January, increased to a level of 34% of the whole 2019 volumes compared with 14% 1 year ago.Now all certificates for the plant in Suðuroy are on place, and we expect the reopening of the Russian market shortly.If you look at the NASDAQ sales price for salmon 4 to 5 -- sized 4 to 5, we see that the price increased in the fourth quarter from NOK 50.16 1 year earlier from NOK 56.36, around NOK 6; and quarter-on-quarter, by NOK 1 from NOK 55 to NOK 56.36. In the quarter, there was an increased global supply of salmon on 4.7%, which corresponds to 27,500 tonnes. On the page, we -- there's an overview of the delivery from the different sources. The overview shows that Norway is more or less stable on 321,000 tonnes. However, there was a drop in supplies in the last months, and there was an increase on the supply in October by 5%. But all in all, it was a flat development. However, the development from Norway was that the size of the fish dropped in the quarter. Last year, the average size was 4.4 kilos gutted. And in this quarter, it was 4.1 kilos, which caused a pressure especially on industrial-sized salmon in Europe. Norway, as you know, has around 85% market share in Europe. And Chile, we saw a flat development in the size of the fish on 4.8 kilos compared with the third quarter, flat from 4.8 into the fourth quarter. 1 year earlier, the average weight of the harvested fish in Chile was 4.5, so they have had an increase in their productivity. In the Faroe Islands, the sizes of the fish in average in this quarter was 5 kilo gutted, which is flat from last year, also 5 kilos. And for the full year, the average sized fish in Faroe Islands was 4.9, which is also flat from the year before.On the next page, there is an overview on the markets, and we see a strong movement in most markets, 26,400 tonnes up. The EU grow -- grew -- growth is 2% higher than the harvest; solid U.S. growth at increased prices; declined growth in the Russia, mainly -- the growth in the Russian market, of course, is mainly supplied from the Chilean sources. Norway sells 73% of their fish into the EU market, and they have 85% market share in the EU. And the other markets which also show a very high growth on this chart are mainly coming from Canada, Norway and Middle East, which are so-called other markets. So overall, we see a strong development in the markets and a strong demand for salmon also into the coming year.On the next page, there is an overview on the short-term supply outlook. The expectations are a growth in 2019 between 4% and 6% each quarter. In the first quarter, we expect around 5% growth; and in second quarter, around 4%; and then we are flat around 6% in the third and fourth quarter. The changes in this forward view from last presentation are mainly originating from revised data from the [ autumn ] release of smolts in Norway. And also, the Chile have increased their release of smolts by around 12%. This 12% increase somehow increases a bit about the certainty about the volume growth in Chile for the future, which were expected to be only 3%. On the segment information, we have an overview of the harvest from the 2 regions of Bakkafrost, in the North and in the West. We see that the largest share of the supply comes from the North, 67%; 8,238 tonnes from the West region and 3,996 tonnes from North region, 33%. We moved 1,500 tonnes from the fourth quarter into the first quarter, and therefore, we lift the guidance up to 54,500 tonnes for this year. The average weight for the fish increased 0.2 kilo to 5.3 kg head on gutted from 5.1 kg in the quarter 1 year before. The cost price for these 2 regions differed in this quarter. The North region had a cost price on 34.30. And the West had cost price on 29.45. So there was a difference in these 2 regions in this quarter. The West harvested in this quarter from -- the main quantity from [ Archer ] and from [ Thropa. ] The smolt transfer in this quarter amounted to 3.3 million compared with 3.4 million 1 year earlier. And for 2019, we expect to release 13.5 million smolts. The seawater temperature in the Faroe Islands are stable; this quarter, around 0.26 degrees down compared with 1 year earlier. The blue line indicates the difference compared with the last 15 or the last 14 years.There was a challenging quarter from the market perspective, mainly due to the loss of flexibility in our operations. The -- this caused the operational EBIT to decrease to DKK 229 million. And the margin decreased to 30% compared with 40% 1 year earlier. The costs that I mentioned are stable, around 50 or up from the third quarter on average. The prices are negatively affected from a combination of various circumstances: number one, market access; number two, the new harvesting plant in Suðuroy, which delayed -- or where certificates were delayed, and therefore, market access was limited; and number three, the market strategy of Bakkafrost in 2018, which was mainly to operate on the spot market cost -- and when we saw disruptions, then flexibility was hampered.The farming operational EBIT decreased by NOK 4.2 per kilo from NOK 25.76 down to NOK 21.56 in a quarter where the sales price were up. The operational EBIT in the North region was NOK 14.90; and in the West, NOK 24.79.There's also a change in the revenue tax in the Faroe Islands from the 1st of January. There are 2 changes: one change is the tax itself which has been increased from 4.5% to 5%; on the other hand, the price -- the minimum price when this tax is applying has been lifted from around NOK 35 up to around NOK 47. So that means that if the price goes under NOK 47, then the price is reduced to 2.5%. And this was NOK 35 before. And then if the price goes below NOK 42, then there's -- if it goes below NOK 40, it's 0.5%. So it's a 2 -- 0.5%, 0.5; then 2.5% from NOK 42; and then 5% from NOK 47. So the risk of having a negative margin with a high revenue tax has been reduced significantly with this change. That's the positive side of it. And the value at this segment, we saw the same trend in as previous quarter with substantial decrease in the revenue to NOK 109 compared with DKK 288 million in 2017. The operational EBIT in the quarter was DKK 3 million compared with DKK 37 million. The low salmon spot price in fourth quarter affected the margin, of course, in this segment as we purchase raw materials on spot price, and we sell the final product on contracts. The operational EBIT was NOK 1.54 -- NOK 1.51 in the fourth quarter compared with NOK 9.54. And in 2019, we have initiated more contracts so that the contract level now is 33% of the whole volume in 2019 compared with 14% 1 year ago.In our FOF segment, we achieved an EBITDA on DKK 60 million compared with DKK 94 million 1 year earlier and a margin of 21% compared with 25.5% 1 year earlier. Feed sales increased by 30%, but external fishmeal sales decreased by 80% in the fourth quarter as we hold higher inventories. Good raw material sourcing in the quarter by -- we sourced 9% less raw material in the fourth quarter compared with 2017. But overall, the whole year, we sourced 302,000 tonnes compared with 342,000 tonnes the year before. 2018 is the second highest raw material sourcing for Havsbrún since it came -- became part of Bakkafrost Group. The raw materials are the main driver for the cost in the farming segment. And we see at the moment that fishmeal prices are -- have been flat or a bit down in the second quarter and then flat. And at the moment, they are a bit up. Oil prices were low by the end of the year -- or from mid of the year and are still on the low level. Quantities sold was 24,711 tonnes compared with 18,954 tonnes -- 18,955 tonnes in the fourth quarter 2017. And external feed sales are higher in this quarter compared with last year.And then Gunnar will take us through the group financials.
Good morning, ladies and gentlemen. We will take a look at the group's P&L first, and the numbers are in Danish kroner. The revenue is on the lower level in the fourth quarter this year due to lower prices and lower external sales in the FOF segment. It amounted to DKK 750 million compared to DKK 906 million last year. The group operational EBIT decreased from DKK 331 million last year fourth quarter to DKK 231 million this year. The fair value of the biomass decreased due to lower salmon prices compared to previous quarter, that means the third quarter of 2018. And the fair value was DKK 240 million minus in this quarter. Onerous contracts was DKK 17 million plus. On the plus side, we do not have any onerous contracts at the end of the quarter this year. The revenue tax, which is recognized as a cost, amounted to DKK 24 million in this quarter compared to DKK 20 million same quarter last year. And net financial items amounted to minus DKK 2 million this quarter compared to a plus of DKK 2 million same quarter last year. All in all, the profit after tax for the fourth quarter was minus DKK 7 million compared to minus DKK 22 million same quarter last year.If we take a look at the operational EBIT, we see that during the year, it has varied from DKK 168 million from the third quarter to DKK 408 million in the second quarter, and we landed at the last quarter with an operational EBIT in Danish kroner on DKK 231 million. For the full year, it was DKK 1,075,000,000. If we take a look at the earnings per share, it was DKK 19.74 per share; fourth quarter, it was minus DKK 0.14. If we take a look at the balance sheet, we see the intangible assets increased by DKK 13 million during the year and amounts now to DKK 390 million. Investments in property, plant and equipment amounted in the fourth quarter of DKK 147 million. And property, plant and equipment landed on DKK 2,884,000,000. Financial items amounts to DKK 113 million, and the carrying amount of the biological assets amounts to DKK 1,358,000,000, whereof DKK 383 million is fair value adjustments. Inventory is up compared to the same quarter last year and landed at the end of the year on DKK 439 million. The equity ratio at the end of the year is 70%. The NIBD is DKK 495 million compared to DKK 258 million at the end of 2017. The cash flow from operation amounts to minus DKK 59 million, and the cash flow from investments is 100 and -- minus DKK 147 million. And the changes in financing -- financing is DKK 216 million. And we had an undrawn loan facility at nearly DKK 1 billion at the end of the year, same as at the end of last year, DKK 998 million.Take a look at the same just with another view maybe. We -- if we take a look at the NIBD, the changes of the NIBD during the quarter, we see that the cash from operating activities had a positive effect or a decrease of the NIBD of DKK 256 million. But then we pay taxes in the quarter of nearly DKK 200 million, DKK 202 million, which increased the NIBD. And then on top of that, the investments, DKK 147 million, and we had also an increase in our working capital, which had a negative effect on NIBD of DKK 116 million.Thank you. I give the word back to Regin.
The outlook for the sector is that we see increase in the supply of salmon around 4% to 6% in 2018; in the fourth -- in the first quarter, around 5% and then down to 4% and then up to a level of 6% per quarter. We expect to harvest 54,500 tonnes in 2019. Around 23% of this will be in the first quarter as we see it at the moment, 22% in the second quarter, so that's 45% total. And then at the moment, it looks like 27% in the third quarter and 28% in the fourth quarter. That's how we see it at the moment. And we expect to release 13.5 million smolts in 2019 compared with 12.5 million this year. We will be uprunning and reducing smolts with the new smolt station in Strond by the end of the year. And then we will see a gradual increase of the size of the smolts. The VAP contracts going forward are on higher level than before, 33% now, which means that total sales on contract this year will be higher than last year, expected around 40%. We have a long-term strategy to sell between 40% and 50% on long-term prices. Fishmeal, oil and feed expected around 85,000 tonnes of feed in 2019. Business development, the focus is on the 5-year investment program, around DKK 3 billion, and we will, on our Capital Market Day on the 12th of June, give a deeper insight into that. Thank you very much. And if there are any questions?
Christian Nordby, Kepler Cheuvreux. Did your access to Russia change since your message was sent out in November? And second question, will this new harvesting plant have access? Or is it basically we're still lower? How does that work?
When we sent the message out in November, when was it, 20th of November, something like that, our expectations were that it will only -- it would only affect byproducts. That was the message that we had from authorities. But somehow, it showed up that we were not allowed to sell any products into Russia from that day. So yes, we had a significant change of our flexibility on the market as a big change of our daily operations during this quarter had to move volumes to other markets. And in this period, we had a lot of industrial site fish, which caused significant drop on our achievement in market prices. This came in a very bad timing for us as the new harvesting plant in Suðuroy did not have access either to Chinese market or to Russian market. And on the same time, we did not have long-term contracts, so we were a lot exposed on the spot market, where we expected in 2018, this would be a benefit -- beneficial for us. Overall, we can say that the overall margin for the full year is still fairly good, but especially in the third and fourth quarter, we are very disappointed with the results. Going forward, the new facility in Suðuroy has achieved all certificates and is now open to China. And we expect shortly to be open both by Glyvrar and Suðuroy to Russia. But we don't have any dates, so I don't know really what that means.
Kolbjørn Giskeødegård, Nordea Markets. You have seen some changes in the taxation regime over the past years. And now there is another notch up in the levels. You say that they are sweetening the bill by sort of changing the threshold for when it kicks in. But from an outside point of view, seems that there is political risk that every time the politicians are lacking some or have a bunch of deficits, they go to the fish farming sector. Do you feel that this is just the start, that you could end up at 10% or 12%? How do you view the political risk regard -- related to the taxation?
That's a very good question and difficult to answer. Our expectation is, at the moment, that this is where it's going to end, but of course, we don't know. This -- there is an election this year in the Faroe Islands. We have had a [ red wing ] government, and they started by 1st of January 2016, by applying this 4.5% tax -- revenue tax. Before, we had 0.5% revenue and 4.5% on taxable income, which they changed to 4.5% on the revenues. Our biggest concern have always been that if we had have very low salmon prices, this will affect us very negatively. By this change, we see that there's a much higher protection on the downside. Now we are allowed to have a fair margin, and then the revenue tax will decrease. The political signals that we see in the Faroe Islands at the moment is that the taxation on the industry should be compatible with other countries. We are in an international market, where we are competing. And farming as an industry is very important for the Faroe Islands. We contributed with half of the total export from the country. And it's very important that we are compatible. And the competitive advantage in the Faroe Islands is, of course, many things. One of them is taxation, which is -- which has been compatible because we have 18% corporate tax. So the DKK 200 million paid in the fourth quarter is a big part of that -- the main part of that is because the corporate tax is being paid in the fourth quarter for the full year the year before. But -- so the corporate tax is low. And then we got this revenue tax. And the level I think is -- if there will be a more difficult situation in the market, I think this will be up to discussion again, and I don't expect it to be changed upwards. That's my take, but I don't know.
And then one question on the market. How do you view the demand in your key markets for the time being? How do you experience that?
One year ago, we decided to change a bit on our market strategy and reduced our exposure on the contracts. We have been operating on this way for more than 25 years. And this year was really the first, the last 25 years where we have had this big exposure on the spot market. Now from 2019, we are back on old tracks with higher contracts. And we see that there is a high demand. But of course, the salmon price is fairly high. And when we do contracts on the FishPool forward prices, they are on the highest level ever at the moment. And -- but still, big volumes are taken out. Of course, supermarkets don't want to be priced higher than their -- or than other customers. But we see that if prices are stable on this level, big volumes can be sold. So if we have stable prices around 60, 65, you can sell all the volumes that you have. But of course, the risk for the customers is if somebody is lowering their price, and that's always the question. But as we see it at the moment, with quite stable supply outlooks for every quarter 2019 and also even in 2020, we see a high demand, and we see high demand from all geographies and also from all segments.
Carl-Emil Johannessen, Pareto. You said cost increased somewhat in Q4 versus Q3 but that the costs were quite different in the 2 regions. Can you say something about what we should expect going into 2019, how would costs on the biomass is developing?
Yes, I said that the costs increased in the fourth quarter by NOK 0.50 from the third quarter. And I said that the best cost is NOK 29.50 and overall -- and the internal cost price. And the North was NOK 34.30. So on average, Bakkafrost had a cost pressure around some NOK 30.50 or something like that. I expect that this cost level will remain. We don't see an upward risk at the moment. We hope to bring costs down. But because, actually, 2018 has been the worst year for us for the last 10 years, and so we hope that -- and I think also I see some signs in our biology that we are on the right path into 2019.
I have a question about de-licing. You seemed to be quite advanced in non-medicinal de-licing. You sell lumpfish. You sell freshwater, lukewarm water and so on. So if you could just point out where do you feel that you are ahead of competition when it comes to de-licing and what's the biggest remaining gap or worry for you when it comes to de-licing.
Yes, as you said, our strategy is, number one, to use lumpfish; number two, to use the nonchemical methods. And we are using freshwater. We are using luke water, and we also are just using saltwater to wash the fish. The biggest impact, I think, will come when we are rolling out the big smolt operations. The Strond facility will start to deliver by the end of this year, and I'm confident that this will have a very positive impact on the sea lice situation. For the last 1.5 years since October 2017, Bakkafrost has not had a single treatment -- bath treatment chemicals, not a single bath treatment with chemicals for 1.5 years. Before that, we had multiple treatments every month with chemicals. Of course, there is a price to pay by doing this, and this is biology. We have increased our mortality during this time, and that's what we are working on at the moment. That's what we are focusing on. And that's also where I see a competitive advantage because we have very, very skilled personnel with our farming service vessels, which are doing this as an operation on a continuous basis. And we are, at the moment, developing a new system, which we expect to reduce the stress level for the fish during the treatment. So that's the focus at the moment. The focus is to maintain what we are doing but to reduce the stress level for the fish. And we see signs that we are on the right path in doing so. One other thing on this area is take -- that we have taken out use of antifouling copper. That's also within the last 2 years, we are not using antifouling also to protect the environment. So this is also done by our service vessels. So these are all on the same path, as you are referring to.
And our last question, it's kind of about Bakkafrost working with the nature. In -- sometimes, you had bad storms, such as 2017, fish escaping. Last year, you had algae coming in suddenly killing off. So what do you need to do more when it comes to storms and algae or fish escaping and algae?
Right. Well, we are operating in a harsh environment. We are operating in an environment where the salmon is exposed to their natural circumstances, and of course, there is a risk in that. In 2018, luckily, we did not see any escape. For the last 10 years, we have had very low escapes, but 2017 was an exception. We have increased the strength of all our equipment since the 2017 accident. And we are operating on very exposed sites, and we are also moving operation into more exposed sites, which could increase the risk. But on the same time, we have increased the strength of our -- or the level of our equipment significantly. The algae incident last year, we think, are related very much to the release of manure from local farmers. We are, as you may know, building a biogas plant in the Faroe Islands that will deal with this issue for farmers because, at the moment, there is no more or less no -- there is a regulation, but it's very difficult for farmers to keep it. But with this new investment or this new plant, farmers will have another ability to get rid of their manure, and they will get a much better fertilizers for the ground in Faroe Islands with a lot of [ phosphoro-nitrium ], which are lacking for the Faroese farmers or the ground. So I think that will be taken care of. And the risk will reduce when this is in operation by the end of this year.
Mikkel Nyholt, Carnegie. You say that you have no exact date for when you expect the washer band to relieve. Is it possible then to say something about the amount of VAP or VAP contracts for Q1 and not only the full year given that the situation this quarter is the market could fair that it could last into Q1?
Yes. As I said, we have 34% of 2019 volumes contracted from 1st of January, and these supplies started 1st of January. So it is -- and I also said that in the first quarter, the total harvest is expected to be 23% of the total harvest for the full year. So that means that you could expect that there's a market share between 34% and 40% on contracts in the first quarter. That's a reasonable level to calculate. Of course, we don't know exactly when we are reopened to export fresh salmon into Russia again, but we have delivered all certificates and documentation. We needed to do 10 different tests. And actually, the last documentation was given to the Russian authorities by Sunday night, 2 days ago. So according to our information, there should be nothing missing to be open again, but I don't know how much time they need to do the paperworks.
Alexander Aukner, DNB. Does Chile's production of large fish put pressure on your premium price in the U.S. and Asian markets?
That's a good question. As I see it, there is an increased pressure from large fish from Chile. They are -- as we are at 5.3 kilo in this quarter, they were at -- I think it was 4.8 or something like that, yes. They are significantly larger than before, so there is more large fish coming from Chile. However, we have seen good price achievement in these markets still, but the fourth quarter was mainly disrupted by this change that we need some time to find stability in our sales distribution again. So I think that's the main thing to note from the fourth quarter. Thank you very much.