P/F Bakkafrost
OSE:BAKKA
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Good morning, ladies and gentlemen, and welcome to this presentation of the financial results for the fourth quarter 2019 for Bakkafrost Group.First, we will briefly go through the summary of the quarter. And then we will look into market and sales, segment information before Høgni Jakobsen, CFO, will present the financial -- the group financials and then finally outlook.In the fourth quarter, Bakkafrost harvested 17,930 tonnes in the Faroe Islands, which is record high compared with 12,234 tonnes in the same quarter 2018.In Scotland, The Scottish Salmon Company harvested 7,925 tonnes, and the feed sales were 28,398 tonnes compared with 24,711 tonnes. The sourcing of raw material were 35,180 tonnes compared with 46,478 tonnes. And the group revenues were DKK 1,605 million, which is also record high, compared with DKK 750 million the year before.The operational EBIT for the group was DKK 415 million, which is also record high, compared with DKK 231 million 1 year earlier. And the cash flow from operations amounted to minus DKK 150 million compared with minus DKK 50 million (sic) [ DKK 58.9 million ] before. And we had positive results, operational EBIT in all segments.On the next page, there is an overview on the quarter from the different segments. And we see that the combined margin from farming and VAP went up from NOK 21.91 per kilo up to NOK 28.25 for our operations in Faroes. For the full year, the margin was NOK 27. And for the last 4 years, for the full year, the margin has been NOK 27, NOK 28, NOK 29 and NOK 30 per kilo for the last 4 years.The pure farming margin alone was NOK 21.56 the year before and came up to NOK 25.49 per kilo. In Scotland, the margin in the fourth quarter was NOK 3.09. In this quarter, the VAP margin was NOK 11.72 compared with NOK 1.51 the year before. And the feed -- the fishmeal, oil and feed -- the fishmeal, oil and feed segment has dropped the margin from 21% down to 17% EBITDA margin.If you look into the markets and sales, we see that in this quarter, there is a drop of sales in the EU, the U.S. and Asian market and an increased sales in Eastern European market. If you look at the sales from the Faroe Islands alone, we see that 43% of the sales in the fourth quarter was to the EU. If you take the Scottish entity into the numbers, it is 59%. The 43% are compared with 44%, so it's more or less unchanged. The U.S. sales dropped slightly from 22% to 20%. The Asia dropped slightly from 24% to 23%, while Eastern Europe increased from 10% to 14%.The present situation with the coronavirus has practically stopped the sales in China for the time being. Normally, there is a slow period after the Chinese New Year. And this time, this year, it is a prolonged situation, which means that there is a very low operation to China at the moment. We, of course, hope and expect that this will normalize within the next couple of weeks. For the time being, we are in low season in Bakkafrost, so it is not a big influence on our operations, as we are low in our operations in this fourth quarter -- in this first quarter in 2020.The harvested volumes used in the VAP increased from 23% last year to 24% this year, and these are all on contracts.On the next page, we see the market developments. Especially in the fourth quarter, we saw an increasing price trend through the quarter, starting quite low. There was overflow of especially small salmon coming into the market from regions with biological issues around. And that had a high pressure on the market in the big -- in the first part of the quarter. So there is a significant price increase during the quarter from around beginning of the NOK 40s up to late NOK 70s by the end of the quarter.The prices in the quarter, year-on-year went up from NOK 56 to NOK 58 in average for the quarter, and from the previous quarter, from NOK 50 to NOK 58 average price. The volumes in this quarter compared with last year increased 3% corresponding to 17,700 tonnes.On the next page, there is an overview on the markets. And we see that the supply situation was an increased supply on 3.4% and then some inventory movements, so 3.3% was more or less the deliveries into the market, mainly Norway increased 14,000 tonnes from 321,000 to 335,000 tonnes. And this fish from Norway came in at 4.2 kilos compared with 4.1 last year. In U.K., the fish came in at 4.2 kilos. And in Faroe Islands, the 24,000 tonnes this year came in at 5.8 kilos. The average weight on the fish from Chile this quarter was 4.7 kilos. So this quarter has had very large fish from Faroe Islands, which has been positive for the price achievement.On the next page, there is an overview on the demand side in the markets. We see that there is 20,000 tonnes increased quantity sold, and especially the EU market is the largest market for salmon, increased from 273,000 to 280,000 tonnes. And for the full year, 1 million tonnes, 6% up for the full year. The U.S. market increased 9%, up to 120,000, and for the full year, 467,000 tonnes. So those 2 markets are significantly largest ones in the -- for the salmon.The Russian market increased significantly in the fourth quarter but dropped for the full year. This market was supplied very much from Chile, 11,000 tonnes in this quarter. The Chinese market increased 18% in the quarter, up to 37,000 tonnes, and 136,000 tonnes for the full year. The Chinese market is getting more and more important. The supply from Norway directly to the market was 13,000 tonnes. And we have big suppliers from all regions. Faroe Islands increased also a lot in this market. And we sold around 4,000 tonnes into the Chinese market in this quarter.On the next page, there is an overview on the expected supply development through the next 4 quarters. And no big changes from last time. We see that the expected growth from the supply side for the next 4 quarters are quite low, around 1% total supply increase in the first quarter, 5% in the second quarter, and 4% in the third quarter and 5.5% in the fourth quarter. More or less around 4% supply increase expected in 2020, overall. There is differences in the supply side from Europe and Americas. But this balance quite good out. While we see in Europe that there is a drop of supply in the first quarter, there is an increased supply from the Americas on around 7%, so that balances out.On the next page, in the farming overview. We see that the harvest in the Faroe Islands was 57,184 tonnes in 2019. The North region had 31.9%, the West 56.3%, and the South had 11.8%. In the fourth quarter, we had no harvest from the North region. Overall, through the year, the fish from the West was the largest ones, between 5.5 and 5.9 kilo on average. The harvest in the Faroe Islands increased by 46.6% in the fourth quarter compared with the year before. And then we harvested 7,925 tonnes from Scotland. So all in all, we harvested 25,855 tonnes for the full year. The average weight in the Faroe Islands increased 600 gram up to 5.9 compared with the year before.In the fourth quarter, we transferred 5 million smolts in the Faroe Islands compared with 3.3 million the year before. The average weight of the smolts was 195 gram. And in Scotland, we transferred 5.7 million smolts. The average weight of those were 103 gram. The temperatures in the waters are more or less unchanged with the year before at 8.5 degree Celsius.On the next page, we see the operational performance. Operational EBIT increased 66% in the quarter from DKK 204 million to DKK 338 million. Cost per kilo from the fourth quarter 2018 to the fourth quarter 2019 decreased close to DKK 2 per kilo. So there was a good cost development in the fourth quarter compared with the year before. The margin increased from 30% to 36%. And the revenue went up from DKK 682 million to DKK 945 million, an increase on 39%.There is a lower margin in Scotland. And this is, of course, our biggest focus for the time being, with this acquisition, to do the planned investments and to transform this operation. The biological operation in the Faroe Islands has been good. The growth rate has been good in the year with low mortality rate.On the next page, there is an overview of the operational performance, where we see the EBIT from NOK 21.56 increased NOK 3.93, up to NOK 25.49, and we see the operational EBIT in the Faroe Islands year-to-date 2019, and we see an overview of Scotland and the Faroe Islands. The average weight of harvest in Faroe Islands in the West was 5.9 kilos and in the South, which is South Island, was 6 kilos. In Scotland, the average weight was 3.6 kilos. And this is, of course, a driver for the margin, which came in, in the West, at NOK 24.47; and in the South, NOK 28.31, and in Scotland at NOK 3.09. The South actually had a slightly higher cost than the West, around NOK 1.5 per kilo. But of course, it's also a matter of when the fish was harvested because there is a big development in prices during the quarter.On the next page, there is an overview of the value-added operation. We see that the volumes increased from 2,845 tonnes up to 4,219 tonnes. This year is in the VAP characterized by quite stable operations. The revenue increased from DKK 109 million up to DKK 249 million, a significant increase. And everything is sold on long-term contracts. The operational EBIT increased from DKK 3 million up to DKK 37 million. The key performing indicators in our VAP operation is now more or less in line with the goals that we set for this new factory when we opened in 2017. The operational EBIT per kilo increased from NOK 1.51 up to NOK 11.72 per kilos. And percentage used internally for VAP increased from 23% to 24%.We have an increased focus on the development in the VAP operation and focus on product development with fresh products, smoked products, new products and also new markets.Fishmeal, oil and feed. This quarter is characterized by slightly less sourcing of raw materials. The EBITDA dropped from DKK 60 million to DKK 58 million, slight drop, and the EBITDA margin dropped from 21% to 17%. For the full year, we sourced 278,600 tonnes of raw materials, slightly down from 302,000 tonnes the year before. And so far, in 2020, we have had quite bad weather conditions in the North Atlantic, which has had a negative impact on the sourcing of raw materials. We have -- we are sourcing marine raw materials for our fleet, which is one of our differentiators in our strategy on our products. And all marine ingredients used in our production of feed for Bakkafrost, salmon originates from certified sustainable marine ingredients. These marine raw materials has a low food value and low market demand for human consumption and originates from well-managed fisheries. We have full transparency in the system to track the origin of raw materials. And we aim to maximize use of trimmings and off-cuts. Some of the meal is sold externally. And in this quarter, we increased that sale from 3,782 tonnes up to 4,123 tonnes, an increase of 9%.On the next page, there is an overview on the market development on feed and also on the raw materials, fishmeal and oil. The quantity of feed in this quarter was 28,398 tonnes compared with 24,711 tonnes the year before. We have increased our sales of feed significantly. The feed sales in this quarter was -- external feed sales was more than doubled in the fourth quarter this year compared with last year. There was a slight drop of internal feed sales of 871 tonnes from 21,650 to 20,800. This relates to reduced biomass by the end of the year from 39,000 tonnes down to 37,500. But the external feed sales increased 4,500 tonnes. And we expect that the feed sales next year will increase 23% up to 110,000 tonnes.When you look at the fishmeal and this market situation, we see that the catches in Peru are low, around 40% of the quota, and that has put some pressure on the marine raw material prices during the winter. The catches of capelin in Iceland seems also to fail this year as last year's. At the moment, we expect raw material sourcing in 2020 to be on the low side.So now we will have the presentation of the group financials from Høgni Jakobsen, CFO.
Thank you, Regin. So this has been a strong quarter for us, especially in our Faroese operation. Operating revenues were the highest for a long time, and amounted to DKK 1.6 billion for the entire group. If we exclude Scotland from this, we have an operating revenue of DKK 1,168 million. For the operational EBIT as well, we have had a significant increase from the fourth quarter of 2018, DKK 415 million for the quarter for the entire group, and DKK 397 million, excluding the Scottish operation. We have a negative value adjustment of DKK 103 million due to lower forward prices and higher expected costs. I'll come back to that in a moment. And in the quarter, we paid DKK 14 million in revenue taxes as opposed to DKK 24 million in the fourth quarter of 2018. And as you might recall from previous presentations, the revenue tax is recognized as a cost, and it's above EBIT.Financial items were minus DKK 31 million in this quarter and tax was 51 -- minus DKK 51 million. And profit after tax in this quarter was DKK 220 million for the entire group compared to minus DKK 6 million in Q4 2018.Looking at the history of operational EBIT. This quarter was the strongest fourth quarter ever for Bakkafrost. It is the second strongest quarter in history. And even if we exclude the operational EBIT from Scotland, it's among the top quarters that we have had. So far this year, the operational EBIT amounts to roughly DKK 1.3 billion.And earnings per share during this year has been quite stable, increased over the past 2 quarters, and also in -- reflecting that we have had a share dilution, we are quite satisfied with that being the case.A lot of things have been affected in this quarter by the acquisition of The Scottish Salmon Company, and the balance sheet is one of them. The intangible assets have increased significantly as a result of the acquisition and now amount to roughly DKK 4.4 billion. We have made investments for -- amounting to DKK 240 million in this quarter. And including the property, plant and equipment from the acquisition in Scotland, that now amounts to roughly DKK 3.8 billion in total. Financial amounts -- financial items amounts to DKK 119 million. And we also for -- I believe, the first time in our balance sheet have right-of-use assets that's leased assets, primarily in Scotland in our balance sheet, amounting to DKK 333 million.The carrying amount of the biomass was DKK 1.9 billion up from DKK 1,358 million by the end of 2018. And inventory amounts to DKK 549 million by the end of the quarter. Equity is up from DKK 4 billion to roughly DKK 8.5 billion, and that's mainly due to -- the difference is mainly due to the emission that we made earlier in -- or in the fall in 2019. Equity ratio by the end of 2019 was 65%. And the net interest-bearing debt was roughly DKK 1 billion, up from around DKK 500 million by the end of 2018.Some comments about the fair value. In Bakkafrost, we have, for the past years, been using a model that has been developed in the industry by the biggest company, so we use similar methods for adjusting fair value of the biomass. And for Bakkafrost that means that we are using a discount rate of 6% per month, which amounts to just about 100% a year.The Scottish Salmon Company has used a different method so far with a yearly discount rate of 4.7%. So that's a huge difference, which, of course, when we acquired the company, had an impact on the PPA that we made. But going forward, we use the same method for the biomass in Scotland and in the Faroe Islands, and that's based on the model that we use in the Faroe Islands. And as I said, it is a similar model that is used in the major or in most of the companies in the industry.In this quarter, we have a negative value fair adjustment of DKK 103 million. And that's a combination of a positive adjustment in the Faroe Islands and a negative adjustment in this -- in Scotland. So in the Faroe Islands due to higher price achievements and forward prices on the biomass or expected price achievement on the biomass by the end of the quarter and also increasing volumes, we had a positive biomass, the fair value adjustment of the biomass of DKK 139 million. In Scotland, we saw increasing costs and also a smaller average weight of the remaining biomass by the end of the quarter, leading to a longer remaining time at sea. And that results in a negative biomass reduction of -- or adjustments of DKK 238 million. So that's the reason why we have DKK 103 million in negative biomass adjustments in this quarter.Moving on to cash flow. Cash flow from operations was minus DKK 150 million in this quarter as opposed to minus DKK 59 million in the fourth quarter of 2018. And cash flow from investments were minus roughly DKK 3.8 billion, and that's primarily due to the acquisition of the SSC. And the same goes for cash flow from financing, which was DKK 2.6 billion roughly, up from DKK 260 million in the fourth quarter of 2018, and that is mainly due to the increased share capital that we made.Net interest-bearing debt. By the end of the third quarter, we had just raised capital -- issued more share of capital. So by the end of the third quarter, we had a negative interest-bearing debt of roughly DKK 1.3 billion. During the fourth quarter, we had the closing of the transaction of the majority of the shares with The Scottish Salmon Company. So net investments increased the net -- increased in net interest-bearing debt with roughly DKK 3.8 billion. We paid taxes of -- amounting to DKK 152 million, and we had DKK 570 million in changes in working capital. That all increased the net interest-bearing debt.Cash flow from operations amounting to DKK 157 million and the capital raise of roughly DKK 2 billion that was done in this quarter, reduced the net bearing -- interest-bearing debt. So we now have a net interest-bearing debt of roughly DKK 1 billion by the end of the quarter. In December, we refinanced the entire group, including The Scottish Salmon Company. So we have bank facilities amounting to EUR 352 million and GBP 100 million for The Scottish Salmon Company, and we have undrawn facilities of roughly DKK 2.5 billion at the end of the quarter.
The outlook for the market and for the sector and for Bakkafrost. We think that it looks like there is a tight market situation on salmon. The global supply increase in the fourth quarter was only 3%, but there was a big change in the beginning of the quarter and the end of the quarter, and this continues into the first quarter. And it seems like 2020 will be fairly stable with low supply increase. We expect this to be around 4% compared with the year before. And no big changes through the year.We harvested 57,184 tonnes last year and expect to harvest 57,000 tonnes this year, more or less unchanged, and 35,000 tonnes in Scotland. We expect to release 15 million smolt this year compared with 12.7 million smolt last year and 12.6 million in '18. The releases in Scotland of smolts are expected to be 10.7 million smolts this year compared with 12.4 million last year. And if you look at the VAP, contracted -- we have contracted around 40% of expected volumes in the first quarter and around 30% of the volume for the full year. And these are more or less at market prices, if you look at the forward prices.The long-term strategy for Bakkafrost is that around 40% to 50% of harvested volumes in Faroe Islands are sold at fixed-price contracts. In Scotland, we also have around 1/3 of the sales on fixed-price contracts. Feed sales are expected to be around 110,000 tonnes in 2020. Fishmeal and oil volumes are expected to be lower than in '19.Our business development. We have very high focus on pursuing sustainable organic growth in the Faroes, which is one of our goals in our investment program that we communicated on our Capital Market Day last year. And these commitments are unchanged. For the remaining period, until 2022, DKK 1.8 billion will be invested in the Faroe Islands. And on top of that, we are also investing in Scotland, around DKK 350 million per year.With the balance sheet after the acquisition and the equity raise, we have a strong balance sheet, which enables us with a good flexibility for M&A activity, like the recent acquisition of the SSC. We intend to acquire the remaining shares of the SSC within the first quarter this year.Thank you very much. If there are any questions, they are welcome.
Alex Aukner, DNB. Can you please give some comments on the development in Scotland for Q1 and what to expect there? I mean we saw very low harvest weights in Q4. Higher costs [indiscernible] to persist in 2020?
Yes. We took over and came into this organization in December, and we realized also the numbers that you see and especially low harvest weights and high cost. The biomass, of course, it's difficult to change in a few days. It takes time. And that's kind of the nature of this operation that it takes time. It takes 3 years to grow a salmon. And it takes a long time to change what you have in the sea. You have -- and of course, the initiatives that we are going to take will be to use our own feed over time to produce larger smolts and also to focus on upgrading some of the farming operations. And there are probably a lot of things that we still are unaware of. So it will take time for us to change these numbers. So I don't expect any big changes in the first quarter compared with the fourth quarter on costs and on average weights. But of course, this is the focus that we have, but it will take probably a longer time than you would like.
Fair enough. And just a brief follow-up question. I know you mentioned corona briefly in the interim. And any more comments on the latest developments? How are you dealing it? How are you able to ship volumes from [indiscernible]?
Yes. As I said, there was this Chinese New Year. And normally, at the Chinese New Year, there are more or less 2 weeks with no activity. So this was planned. But then these 2 weeks have been extended for more -- for another 2 weeks. So now it's more or less 4 weeks since everything shut down there. And we have started to do smaller volumes. But at the moment, it's very, very, very small. And we expect it to be at least 2 to 3 weeks before we can see any significant changes. But of course, nobody knows at the moment. We are a bit lucky, you can say that. We are in a low season for Bakkafrost. So the volumes that we have out of -- from Faroes in the first quarter are quite low. And we expected some impact of this. So we have been able to shift some volumes to Europe and to the U.S. And in these 2 markets, we have a very strong presence and a very strong distribution. So it has been more or less uncomplicated for us so far.
Carl-Emil Johannessen, Pareto. [indiscernible] in EU and U.S. and these volumes are going and then how do you see the Russian market going forward? Are you looking to [indiscernible]?
Yes. You are right that we were closed out of the Russian market on the 10th of February, again, as we were also in November 2018. And we expect that within a few weeks, authorities will deal with this issue. And we will, of course, cooperate with the local authorities to demonstrate that our -- we are in compliance with the Russian legislation, then we will reopen again. This is how we expect and hope that it will go. And hopefully, it will take a few weeks, and then we have business again. This is one of the risks, which is higher in the Russian market because the legislation and how things are done. So we have been able to shift the volumes to the EU market and to the U.S. market. So we expect this to be a normal business again within a -- in a few weeks. The fish that normally goes to the Russian market are fresh salmon. And normally, it is the industrial sizes, the smaller fish or the little fish. So -- and the same as with China. Luckily, this is in a low season for us. So it has been -- not been so complicated for us to offset these volumes in other markets.
Kolbjørn Giskeødegård, Nordea Markets. Two questions. One on the Faroes. Can you elaborate a little bit about the biological situation with sea lice pressure and cost development, et cetera? And also one follow-up question on Scotland. Are there any sort of [indiscernible]?
The biological situation in Faroe Islands developed quite good in 2019. Overall, we had very, very good growth rates. The lowest mortality rates for last around 5 years, good cost development, lower cost than the year before, around DKK 1.5. And this was similar in the second half and also in the fourth quarter. We had some biological issues in some of the fish, but it was not particularly affecting the cost price. We were able to handle this quite good. Of course, biological risk is the biggest in salmon farming. And we have seen some issues from time to time during the last couple of years, for example, BKD. We also saw some furunculosis, which is very unusual. But we were able to handle this quite good without any big issues. The sea lice situation is under control, you can say. We had lower numbers in average in the fourth quarter this year than the year before. We see, however, normally June, the autumn that the fish is weak, it's more difficult to handle sea lice, especially in the period of September to half -- mid-November. During that time, the fish needs to be handled very carefully. And that's the time of the year when there are issues. But I mean being able to harvest fish at 5.9 kilos shows that it has been a good operation for us in the fourth quarter.In Scotland, so far, we have been having our hands in the operation now for -- since mid-December, things are more or less as we expected. There are very professional people around. And it seems to be a lot of things that can be optimized, especially the sizes of the smolts. We also think that many of the sites can be upgraded, which can have a significant up or upside on the operations. We especially look forward to produce larger smolts, that, of course, will take time. So a lot of the things that we plan to do will take time. And of course, for Bakkafrost as a group, it will be important for us to use our own feed, which will give synergies. So all in all, things are more or less as expected. We see a very high level of personnel, which gives us confidence that it will be very good operation for us in a while. It takes time to change biomass because it takes 3 years to grow a salmon. So that's why we expect that it will take probably a bit longer time than many of the financial analysts would hope for.
[indiscernible]
Yes.
[indiscernible]
It was feed.
Yes, the feed, more specifically and the general costs level [indiscernible]
Yes, that's a good question, very good question and difficult to answer. The -- at the moment, we saw that the sourcing of industrial fish for fishmeal production has been more difficult in Peru and also North Atlantic. Also the weather in January and February has had a negative impact on the sourcing. However, we hope to have better weather conditions going forward. So hopefully, this balance will be better. Of course, the issues in China with African swine fever has a negative impact on the market for fishmeal, which works the other way around, which is also quite considerable impact on that market, which is, you can say, positive for salmon. And all in all, the cost of our salmon farming last year was positive, around DKK 1.5 down compared with the year before. So I would say that it is -- we are upgrading our operations in Faroes. So we are now right before an increased production that we will see in 2021. And of course, that will have a positive impact on cost when volumes are coming up because we have a lot of fixed cost in our operations. This year, the volumes harvested will be similar to last year. So this positive impact will not be this year, but more next year. For some of the costs -- of this fixed cost will be linked to the biomass, which will increase in the sea during this year. So all in all, I would say that I would expect a fairly flat cost development through -- for this year.
[indiscernible] 35,000 tonnes now in 2020, what kind of investment and regulatory requirement for approval [indiscernible]?
Yes. The Scottish Salmon Company has a lot of licenses. They have total licenses to have a biomass of 60,000 tonnes. So there are unused -- there are some unused licenses. And of course, we noticed that things takes time in Scotland. And to work with regulatory environment is different than in Faroes. But there is set for -- a target for growth in Scotland up to 50,000 tonnes. And this is the journey that we are on. And so far, for us, it's a bit difficult to give details. We are a bit too early in the process to go a lot in details, but it seems like things we saw when we did the acquisitions are more or less as we expected. And the details, we need to come back to many of the details. Hopefully, later this year, we can have more details, but we have communicated that we expect to have around GBP 40 million in investments every year, which is around DKK 350 million to take this growth. And this is both in hatcheries and also in farming sites. So this is, at least, some of the investments that we need to do in order to obtain the growth that we hope to see in Scotland. Also the government in Scotland has officially declared that they want to double the farming operation in volume in Scotland by 2030 compared with now. So this is more or less in line with the official statements from the regulatory authorities.We also see sites in Scotland where we think it's possible. But of course, we need to find out how to comply with the regulatory authorities and how to get access to those sites.Very good. Thank you very much.