P/F Bakkafrost

OSE:BAKKA

Earnings Call Transcript 2020-Q4

[Johan Regin Jacobsen, Chief Executive Officer]

Good morning, and welcome to the presentation of the fourth quarter 2020 for Bakkafrost's financial numbers.First, we will have a look at the summary of the fourth quarter, then we will go through market and sales, some segment information. Then Høgni Jakobsen CFO will take us through financial and ESG. And then finally, I will look at the outlook for the company and the sector as a whole.In the fourth quarter, Bakkafrost harvested in the Faroe Islands, 15,957 tonnes of salmon compared with 17,930 tonnes last year. In Scotland, we harvested 9,305 tonnes compared with 7,925 tonnes. The feed sales in the quarter were 30,885 tonnes compared with 28,398 tonnes the quarter the year before. The raw material sourcing were 71,887 tonnes compared with 35,180 tonnes. So in general, that it was in the feed and increase of operations and in the farming slight reduction. Yes, the feed itself was slightly up as well.The revenues were DKK 1,183 million compared with DKK 1,605 million in the fourth quarter 2019. The operational EBIT were DKK 89 million compared with DKK 415 million the year before. The cash flow from operations amounted to minus 105 -- DKK 107 million compared with minus DKK 150 million. Bakkafrost had positive operational EBIT for the Faroese segments, but negative for the Scottish segments.The Board of Directors will propose a dividend of DKK 3.65 per share for 2020 at the Annual General Meeting, that's upcoming.If you go to the summary of the quarter, the operational EBIT for the full year was DKK 621 million compared with DKK 1,325 million for the full year 2019; for the quarter, DKK 89 million compared with DKK 415 million.If you look at the margin, for the full year, the margin is 13.2% compared with 29%. And if you look at the farming operation, the margin came down from NOK 25 to NOK 12.69 for the full year. And when we do the combined Faroese operation in farming and VAP, the margin came down from NOK 27 to NOK 16.65 for the full year. If you look at the quarterly margins in the Faroe Islands from NOK 28 to NOK 13 or NOK 12.92 per kilo. And in Scotland, from NOK 3.09, down to minus NOK 8.41 per kilo. The VAP contributed purely with a margin on NOK 17.05 compared with NOK 11.72 per kilo. The FOF segment had a margin on 13.4% compared with 17.1% 1 year earlier.If you go to the market and sales, we see that in the fourth quarter, in general, there is a huge increase of sales to Europe. For the company as a whole, the increase is from 59% the year before to 74% this quarter. And if you look at the Faroese operation, the sales goes from 49% of the revenues up to 59% to the Western European market. North America is normally also a strong market for us. The combined sales in the fourth quarter for the group was 14% for the Faroe Islands, 20% compared with 23% the year before, slightly down. Asia had the biggest drop from -- on the Faroese operation from 22% to 8%, and for the combined sales from 15% down to 5%. So that's a huge drop in the quarter. For the full year, we see also a big drop from 21% to 7% or for the Faroese operation from 23% to 12%. There is an increased sale in Eastern Europe, again. For the Faroese operation, 12% of the sales in the quarter compared with 12% the year before as well. So it's steady. Year-to-date or for the full year, it was 8% compared with 9% the year before, more or less on the same level.If you look at the fresh sales, purely, we see that the majority of the sales is to Western Europe, but more or less, this is from Faroe Islands, and 32% is from North America. So those 2 markets are very important for the fresh sales from Faroese. From Scotland, we see that the majority of the fresh sales is to Western Europe, that is EU and U.K. combined. We see also increased VAP proportion of the sales in the fourth quarter, 42% compared with 24% the year before. And for the full year, 47% of the VAP of -- 47% of the volume was sold through VAP, value-added products.On the next page, we have an overview on the global markets, the salmon price. We see that in the fourth quarter, the salmon price stayed quite low. Actually, the starting point in the fourth quarter 2020 was more or less the same as the starting point the year before, but there was a very big difference in the development. There were more or less no Christmas sales or at least in the prices this year.Last year, we saw a huge increase in prices, but not this year. So on average, the price dropped NOK 14 per kilo in the quarter compared with the year before; NOK 58.28, the year before, down to NOK 44.23 in this quarter. Quarter-on-quarter, we see also a drop on NOK 4.20 from the third quarter into the fourth quarter. So the prices were low. But as we see on the graph below, there was a huge increase in the harvest, 11% more salmon sold in the fourth quarter 2020 compared with the year before. So that's a huge volume increase in a difficult market.On the next page, there's an overview on the written off of the salmon in the quarter. We see a big increase both from Norway and Chile, which are the main suppliers. A global increase of 11%. Europe has an increase of 9%. Americas grew 16%, whereof the majority of that is, of course, from Chile.I can say about the average weight of the fish, that Norway had an average weight of 4.3 or 4.27, which is more or less the same as the year before. The feed sales in Norway increased 16% in the quarter. In Scotland, the average weight was 4.4, which is from -- up from 4.3 last year. The feed quantity is 10% also up in the quarter. In the Faroe Islands, the average weight is 5.4 compared with 5.8 the year before. And the feed sales in Faroese was also 10% up. In Chile, the average weight was 5.3, big fish in Chile compared with 4.7 the year before. And feed sales in Chile was 9% down compared with the year before.If we go to the markets, there is much more fish sold in the quarter. Record high volume in the single quarter, 10% up, but there is a big variation, especially China is taking the dip. EU, combined with U.K., grew 13%. The U.S. market grew 10%. Greater China dropped 39% and Latin America grew 20%. If you look at the full year, we see similar development where China is dropping significantly. So the Chinese market contracted from 134,000 tonnes in 2019 to 102,000 tonnes in 2020.Everyone knows that the main reason in 2020 is the COVID-19 development, and that has been very difficult. We saw the first wave hitting us in the first and second quarter and the second wave in the third and fourth quarter. It seems to be more optimistic scenario in 2021, where we see good opportunities for the vaccine to make a significant game changer in 2021 compared with last year. So we see that the people are also optimistic when there is a revert of the situation that they are going out to eat. And we expect that with a lot of new customers in the market, this will be a positive scenario for the salmon market.When we look at the supply picture in -- the global supply picture in salmon, we see a stable growth around 8% during 2021 from Europe, around 8% in the first quarter, slightly up in the second and then down again in the third and fourth. So more or less stable scenario in Europe. In Americas, it's completely different. We are coming from an increase of 15% in the fourth quarter, dropping down to a level of minus 5% in the first and second quarter and then further down to minus 12% -- around 12% in the third and fourth quarter. Combined, this means that the harvest volume in the second half of the year will be more or less no growth. There are some inventories around. We believe that majority of those will be sold in the first half of the year. And therefore, we foresee a big gap on the supply side later in the year.Going to the segments. Our harvested volumes in the Faroe Islands dropped 11% from 17,930 tonnes down to 15,957. This is 41% from the north area, 44% from the west and 16% from the south. In the north, the fish came from Norðtoftir and [indiscernible] at around 5.6, 5.7 kilos an average. In west, the fish came from [indiscernible] great to work, an average weight of around 5.1. And the south from Froðba, an average weight of 6.6 kilo, very big fish from the south.The cost of the Faroese operation came slightly down to around DKK 20 per kilo whole fish at [indiscernible] versus DKK 18.33 in the fourth quarter 2019. In Scotland, the volumes increased from 7,925 to 9,305, 50-50 from the north and south region. The average weight around 3.7. The largest fish in the south was from [ East Harbert ], 4.5 kilos. And in north, the largest fish was from [ West Strond ], with an average rate of 4.8 kilos HOG. The cost of the farming in Scotland was flat from the third quarter to the fourth, slightly down from last year. This year, it came out at GBP 4.5 per kilo fish.So the overall average weight in Faroes was 5.4 and in Scotland, 3.7. We transferred 5.5 million smolt in the fourth quarter compared with 5 million the year before. And the Scotland, 3.9 million compared with 5.7 million. The average weight of smolts in Faroes increased up to 343-gram compared with 196-gram the year before, so a significant increase of smolt weights in Faroese. This development will continue in 2021 and also in 2022, where we hope to reach 500-gram. In Scotland, there is no lift of smolt weights yet, but this is expected gradually to come, hopefully, from next year, and then, of course, a further increase later, 96-gram this year or in this quarter. The average temperature in the water was slightly up in the fourth quarter, 8.9 degree Celsius.The farming revenues amounted to DKK 609 million and the operational EBIT from the pure farming margin was DKK 63 million compared with DKK 338 million. So a 10% margin compared with 36% the year before. Of course, the big driver here is the salmon price, which came in all-time low. I believe the price has not been at this level since 2015. So that is the main driver, both in Faroe Islands and Scotland. Compared to Faroe Islands, Scotland has a lower operational EBIT on the margin, mainly due to higher costs and lower productivity, which we hope to change over the coming years.On the next page, there is an overview of the operational EBIT per kilo, which came down from NOK 25.49 to NOK 5.66 in this quarter, so a drop on NOK 19.84 per kilo in Faroe Islands. And Scotland from NOK 3.09 down to minus NOK 8.41. And the spread of the EBIT in Faroes is north at NOK 8.81, west at NOK 2.43, south at NOK 6.51; and in Scotland, minus NOK 8.41. One of the drivers for the increased cost is also transportation, especially intercontinental transport cost. This development has, however, been slightly positive over last quarter, and we expect this drop of cost to continue during 2021.If we go to the value-added operation, the volumes increased from 4,219 tonnes up to 6,790. 2020 was the year so far with highest activity in VAP. And the margin increased from 15% in the fourth quarter '19 to 28% in this quarter. The revenue increased from DKK 249 million to DKK 287 million. And the operational EBIT from DKK 37 million to DKK 80 million. And per kilo, there is an increase from NOK 11.72 to NOK 17.05 on the volumes that went through the segment. The percentage of volumes that went through this segment increased from 24% up to 43% in this quarter.If we look at fishmeal, oil and feed, the EBITDA dropped from DKK 58 million to DKK 48 million. That is a big increase of inventories on around 17,000 tonnes, which is due to the situation with certification of blue whiting. The EBITDA margin dropped from 17% to 13%. And the external fishmeal sold dropped significantly from 4,100 down to 1,500 tonnes. And the sourcing of raw material was good, 71,800 compared with 35,000 the year before. So all in all, for the full year, we were slightly above the sourcing volume compared with the year before.The raw materials for fishmeal -- for fish feed are mainly fishmeal and oil, which are important for the cost of our operations as feed is half of the farming cost. In the fourth quarter, we see a slight increase on fishmeal price and a drop of fish oil price, which means that we expect more or less a stable development in the first quarter on prices.Now Høgni will take us through the financial and ESG numbers.

[Høgni Dahl Jakobsen, Chief Financial Officer]

Thank you, Regin. The operational -- operating revenue in this quarter was significantly lower than the same quarter last year and amounted to DKK 1,183 million, down from DKK 1,605 million in the same quarter last year. Operational EBIT dropped from DKK 450 million in Q4 last year to DKK 89 million in this quarter. Fair value adjustments were minus DKK 22 million. The main reason is changes in the harvest profile of the biomass at sea.Revenue tax was reduced to minus DKK 2 million. And this clearly also shows the effect of the downside protection that's built into the revenue tax scheme here in the Faroes where tax rates can vary from 5% if the salmon price is high to 0.5% if the salmon price is low. So that's the reason why the revenue tax is lower.Taxes in this quarter were minus DKK 78 million, and the profit after tax minus DKK 38 million, down from DKK 220 million in the same quarter last year.And if we see -- we move on to the next slide here, we can see that there is -- this year, 2020 has been very different from the years before. If we look at the operational EBIT, it has been falling throughout the quarters, a clear consequence of the COVID pandemic. So we end up with a combined -- our total operational EBIT of DKK 622 million in 2020 and adjusted earnings per share of DKK 6.20.If we look at the balance sheet, intangible assets were roughly DKK 4.5 billion by the end of this quarter. Property, plant and equipment increased with DKK 440 million and amounted to DKK 4.2 billion by the end of this quarter. Biological assets, up DKK 215 million, amount to DKK 2,117 million. And inventory increased significantly from DKK 549 million in -- by the end of 2019, an increase with DKK 227 million to DKK 766 million by the end of Q4. I will come back to inventories in a moment.Receivables dropped from DKK 626 million to DKK 490 million. And the cash equivalent were significantly lower than in Q4 2019 and amount to DKK 467 million in this quarter. However, it's important to bear in mind that by the end of the fourth quarter last year, we had recently issued new shares, the repair issue that we did in December. So that's part of the explanation why we had a significantly higher number in Q4 2019. Equity ratio by the end of this quarter was 66%.Back to the inventories. As mentioned, inventory increased by DKK 227 million during 2020, DKK 227 million. And in the fourth quarter alone, the increase is DKK 162 million. And then majority of that comes from the fishmeal, oil and feed segment, which has increased inventories by DKK 150 million during 2020 and DKK 122 million in this quarter alone. The VAP segment has also increased inventories in the full year 2020 by DKK 65 million and in the fourth quarter alone by DKK 42 million. And it's worth noting that volumes are one of the drivers in both segments. We have increased volumes in inventory. And also worth noting that the average cost price of our inventories has decreased during Q4 as well as during 2020.A short glimpse at the cash flow. Cash flow in this quarter was minus DKK 107 million compared to minus DKK 150 million in the same quarter last year. And cash flow from investments significantly lower than in Q4 last year and now amounted to minus DKK 343 million. Again, this has to do -- the large number last -- in Q4 2019 has to do with the acquisition of the Scottish Salmon Company. And the same goes for the cash flow from financing, which was also unusually high in Q4 2019, amounting to DKK 2.6 billion then. And in this quarter, cash flow from financing was DKK 471 million. Cash by the end of the period also looks to have dropped significantly from DKK 1.3 billion to DKK 467 million, and that's also part of the same explanation with the acquisition of the Scottish Salmon Company and the increased issuing the new shares that we did in December last year.We left the third quarter with a net interest-bearing debt of DKK 1,257 million. And during the fourth quarter, we have made net investments amounting to DKK 343 million and paid taxes amounted to DKK 189 million. Working capital has increased by DKK 118 million, and operating activities has brought down the net interest-bearing debt by DKK 154 million. So that leaves us by the end of the fourth quarter of 2020, with a net interest-bearing debt of DKK 1,753 million.Our bank facilities are unchanged. So we still have DKK 463 million in total in bank facilities. And we have undrawn facilities amounting to DKK 1,677 million. And in addition to that, we have access to an accordion auction of DKK 150 million.A short update on ESG in this quarter in relation to our healthy living plan and the 5 pillars that we have in the healthy living plan of the business, salmon communities, people and environment. In the fourth quarter, we were pleased to be announced as 1 of the top 3 producer of sustainable protein by the Coller FAIRR 2020 Protein Producer Index. And we're 1 of only 3 companies on that list to be ranked as low-risk for investors. We also had a huge celebration internally here in Bakkafrost when we were -- when we got our last farming sites in the Faroes ASC certified, so that we got to a 100% ASC certification in the Faroes. And in our healthy communities, we have continued contributing to local communities. And so far, in 2020, we have contributed with around DKK 3.5 million.Of course, during the pandemic, the health of our employees has been very much in focus. So we decided to also give all of our employees in the Faroes access to free influenza vaccines in this quarter. And in regards to our healthy environment, we are pleased to see that our biogas plant, FÖRKA is now ramping up the production. And during the fourth quarter, we have delivered 1.4 megawatt hours of electricity to the national grid and 0.9 megawatt hours of district heating. We just delivered to the citizens of Tórshavn. The energy production, the green energy production of FÖRKA in the fourth quarter corresponds to 355,000 liters of fuel oil, which is now saved. And a quick math in my head, that would correspond to approximately 1,100 tonnes of saved CO2. So that's very pleasing to see that we are increasing the activity in the biogas plant.And I will leave it over to you, Regin.

[Johan Regin Jacobsen, Chief Executive Officer]

And our next healthy living report will be shared shortly when we call into the Annual General Meeting. The market in 2020 had a global harvest increase in the fourth quarter of 10.8%. In January alone, I saw that in Norway, 25% more volume was harvested. We expect a 4% global harvest increase in the first quarter. And during the year, for the whole year, for the full year, we expect 2% to 3% global harvest increase. There are some inventories that will be sold. So that means that the supply increase is more likely to be around 5% to 6%, that will especially be in the first half of the year. So all in all, we expect a tight market, especially in the second half of the year.The biggest driver and game changer will, of course, be when restrictions will be lifted and the people will be allowed to go back to some kind of a new normal. In the Faroe Islands, we expect to harvest around 66,000 tonnes in this year, which is around 4,000 tonnes higher than previously guided. And in Scotland, we expect to harvest around 40,000 tonnes, which is around 4,000 tonnes lower than previously guided. In the Faroe Islands, we see a very big impact on the big smolts. And some of the fish that we have released over the last 3 months that was -- were not released at the previous quarterly presentation, will already be harvested before the end of this year. So this is a new world that is coming. Some of the fish staying less than 12 months in the sea. We expect to release around 14.5 million this year and at an average weight of around 400 gram. In Scotland, we expect to transfer around 11 million smolt this year.On the contracts, we have signed around 28% of the total volume for the year the contracts, and that price is more or less in line with previous contracts. Our strategy is to allocate around 40% of expected harvesting -- harvested volumes at commitments and contracts at any time. We expect feed sales to be around 120,000 tonnes this year. We expect slightly lower volumes in fishmeal and oil than last year.Our -- on the business development, our focus is on developing the sustainable growth program. And we are -- in that extent, we are going to have the Capital Market Day. We have postponed this slightly. So we hope to see a lot of people there in the Faroes. And we think it's more likely that, that will happen when we have delayed it into the 14th and 15th of September instead of June as previously guided. And at that event, we are going to go through the next 5-year investment plan and growth program, both in Faroe Islands and in Scotland.For the period 2020 to 2022, we have previously guided DKK 1.8 billion investments in the Faroe Islands. And we have also guided our investment level of around DKK 350 million to DKK 400 million per year in Scotland. We will come much more into that on the Capital Market Day.However, I have some updates on this presentation about the land-based farming, which I call it, this is largest malls. We have already in Glyvradalur and Norðtoftir signed contracts and have actually starting building process of these 2 factories, which will -- in Glyvradalur, have capacity of 1,900 tonnes which could be, for example, 3.8 million smolts at 500-gram and Norðtoftir 2,800 tonnes, which will be around 5.3 million at 500 gram. The Strond side is now in full operation. It's 10 unrelated departments, a building of 320 meters by 80. So it's a huge construction. Now in full operation. And we see a very good development of large smolt, as mentioned earlier, some of them are harvested within 10 to 11 months.In Applecross, we expect this operation to be in full operation in 2023, delivering 2,800 tonnes, which in the beginning, as we are scaling up in Scotland, we hope to reach 11 million smolt at this site 250 gram. And then at a later point, we will go up to 500 gram. So that -- we will come back to that much more in detail at the Capital Market Day.In Scotland, we have appointed Ian Laister as new Managing Director as of 1st of March. And the Board of Directors in Bakkafrost will take over or will step in there. In Scotland, we will roll out a fresh approach program, where we will focus very much on simplification, people and systems. We will focus on strengthening our operations with best practice, focus on cost control. We will also focus on growth. Of course, the sustainable growth program will be rolled out over the next 4 years. So that will be much more about that in -- on the Capital Market Day.So that's all for me now. If there are any questions, I am pleased to take these.

[Johan Regin Jacobsen, Chief Executive Officer]

Yes, please go ahead.

[Unknown Analyst]

[indiscernible]. Just a quick question on the volume potential beyond 2021. I think you have previously guided something like 16 million smolt at 500 grams in 2022. Is it -- it is in [indiscernible]. Is it natural to assume that this is probably will come a bit later, given what you said about these small facilities [indiscernible] and that 2023 maybe more, let's say, likely year for that higher smolts number and that 2022 would be more like 2021?

[Johan Regin Jacobsen, Chief Executive Officer]

We have not yet seen the full effects of the Strond facility. So there will be an ongoing increase of the smolt size, as mentioned, in 2021, 2022. This year, we hope to reach 400 gram. And next year, we hope to reach 500 gram. And that means that the production time in the sea will be reduced. We are -- we have -- so that means that in 2022, the size will be larger, and we will see the full effect of the smolts, and that will have an impact on -- both on 2022 and 2023. So there will be a gradual increase of volumes over the next coming years. And we have earlier mentioned a goal of 20 -- or 76,000 tonnes in 2020 -- 2023. So we are -- I think we are still on track to reach the goal that we put out in 2019 on our Capital Market Day. So those plants are still, I think, quite good.

[Unknown Analyst]

Okay. And then, of course, short 1 on the price achievement in Q4. Is it natural to assume that, that has been more in line with the Norwegian spot price, at least compared to the margin you have and what you said about costs, that seems like a fair assumption?

[Johan Regin Jacobsen, Chief Executive Officer]

Yes. I believe that Bakkafrost are -- have taken a hard hit on larger fish. And of course, also with high proportion of intercontinental transport cost. So our margin has reduced -- or our premium has reduced significantly on that account.Yes, please go ahead.

[Ola Trovatn, Research Analyst]

Ola from Carnegie in Oslo. Could you maybe say something about the split of volumes over 2021 and maybe especially with regard to the fact that biomass at sea is up 5%, 6% or so if I remember correctly?

[Johan Regin Jacobsen, Chief Executive Officer]

Yes. It will be back-end loaded. So that means that we will have significantly higher share of the volume in the second half of the year. I think just from the top of my head that we are -- in the Faroe Islands, we have something like 40 -- expected around 41,000 to 43,000 tonnes in the second half of the year.Yes. There's another one, please go ahead.

[Martin Kaland, Analyst]

This is Martin Kaland from ABG Sundal Collier. You mentioned that you also see risk of biological challenges in Scotland in the second half of the year until you see effect of the larger smolt. But do you continue to expect a significant cost improvement in Scotland in '21 compared to 2020? Or is that now more uncertain given the challenges you now have seen in the second half of 2020?

[Johan Regin Jacobsen, Chief Executive Officer]

Yes. We see that the risk is higher in the second half of the year and in the first half of the year. That has apparently been so for a very long time. 2020 was extraordinary difficult year. You remember the flooding and the big rain and the bad weather situation by the end of August. So we are now taking some precaution to avoid some of the risk and to minimize some of the risks that we have seen this year. So we are at least more focused on them. We have also implemented more freshwater bath capacity, which will be very much focused on this incidence, especially with the gill health of the fish.So we expect that this risk will come slightly down. The full protection or the bigger protection will be with a larger smolt that will come in some years, which will be a game changer to our business in Scotland. But with the precaution that we take now, with the measures that we take, we expect to take the risk down compared with last year.Okay. Any other question?

[Christian Olsen Nordby, Equity Research Analyst]

Christian Nordby from Kepler Cheuvreux. I have a question regarding contract share. And you say that you have around, I think, 28%, was it for 2021? Is that pretty evenly distributed between Scotland and the Faroes? Or is it very Faroe tilted? Or -- and how is the negotiations been so far?

[Johan Regin Jacobsen, Chief Executive Officer]

That is more or less even split between Faroes and Scotland. And that's mainly rolling over of existing contracts.Any other question? No. Thank you very much.