P/F Bakkafrost

OSE:BAKKA

Earnings Call Transcript 2022-Q4

[Hogni Jakobsen, Chief Financial Officer]

[Starts Abruptly] fourth quarter. My name is Hogni Jakobsen, I am CFO of Bakkafrost. Today I am joined by Odd Eliasen, Managing Director of Havsbrun. We are one person short this morning. Regin Jacobsen will not be joining us today. He had to cancel due to sudden illness in the family. So, he has chosen to stay at home, but I can assure you Regin is fine and the situation is also under control.

So that said, a short summary of the quarter. This quarter has been all-time high when it comes to revenues and also when it comes to operational EBIT per kilo. We had also an all-time high full year in [2020] (ph) with revenues exceeding DKK7.1 billion and an operational EBIT of DKK1.74 billion for the year. Operational EBIT in the fourth quarter was DKK376 million.

And if we look at the operation, we have had similar levels as we had in the same quarter the year before, similar volumes when it comes to harvest and also feed sales; however, higher volumes when it comes to sourcing of raw material where we sourced 46,000 tonne of material in the fourth quarter compared to 27,000 tonne the year before.

Cash flow from operations was positive with DKK382 million, and we had positive margins in the quarter for all segments except the Scottish farming segment.

The Board of Directors has proposed to the Annual General Meeting that DKK10.00 per share shall be paid as dividend and the Annual General Meeting is on the 28th of April.

Global markets in the fourth quarter were strong. We had significantly higher salmon prices than the same quarter last year, approximately 22% up and a roughly 5% price increase compared to the third quarter. There was a strong demand and a slight decrease in global supply of salmon.

Food inflation is probably also a cause of the higher prices. We know, in Bakkafrost, for instance, we have secured higher contract prices for this year. So, the outlook on the pricing side looks also good for the remaining part of the year.

If we look at harvest numbers, global harvest dropped around 2% and all producing regions had lower harvest weights this quarter compared to the quarter before.

Overall, Europe had unchanged global -- harvest volumes, whereas in the Americas, the supply reduced with around 6%. Norway was slightly up with 0.8%. We did not see significant effect from early tax-related harvest as we thought we might see in the fourth quarter. Harvest weights in Norway dropped around 5% to 4.2 kilo. In Scotland, supply reduced 3%. There were significant biological challenges in Scotland and harvest weights dropped 3% in Scotland. Iceland was the only region with a significant increase in production, 50% up, but however, also there we have a reduction of 4% in harvest weights. The Faroes was down 11% and 3% down on harvest weights. Chile, 3.8% down, also slightly lower harvest weights. Feed sales in Chile reduced by around 5% in this quarter. And US and Canada supply dropped with 18% and 16%, respectively. Feed sales down 14%.

Sales of salmon to Europe was stable in this quarter, but there was a strong growth in sales to the US market. Chilean supply was a main contributor to the increased sale to Chile in this quarter, but we also see growing volumes of fillets coming from Europe into the US market. Of course, the US consumers have benefited from a strong currency. So that helps on the sale to the US market. Russia and Ukraine were down 46% on volumes due to the sanctions and more. And Japan and Chile -- and China also were lower on volumes in this quarter, whereas sales to the ASEAN markets were up with 9%.

If we then look at the financials for Bakkafrost, as mentioned, roughly DKK1.9 billion in revenues in this quarter, an increase of 30% compared to the same quarter last year and an increase of 214% when it comes to operational EBIT to DKK376 million. Fair value of our biomass was minus DKK426 million, and profit after tax, minus DKK154 million.

Our margins improved across the line except the FOF segment, which had an EBITDA margin of 14%, down from 20.6%. Margins in the Faroes farming segment were NOK27.56 per kilo and the VAP segment had NOK16.67 in margin.

Farming margin in Scotland was minus NOK39.96, which is an improvement from the minus NOK50 -- almost NOK56 that we had in the same quarter the year before. In Scotland, we had exceptional mortality costs in this quarter of DKK81 million compared to DKK179 million in the same quarter the year before. We also had exceptional costs associated with the recovery operation of the sunken feed barge that we have in Scotland. We booked around DKK26 million in costs in the fourth quarter associated with that.

If we look at the operational EBIT and adjusted earnings per share on a historical perspective, it's the best fourth quarter since 2019 for Bakkafrost. Adjusted earnings in this quarter were DKK3.42 and DKK19.02 for the whole year.

And as mentioned, the Board has proposed to the AGM that we pay DKK10.00 to -- in dividend, which is a bit higher than the dividend policy that says 30% to 50% of adjusted earnings to be paid as dividends.

The balance sheet: property, plant and equipment increased with DKK758 million in this quarter to roughly DKK5.6 billion. Biological assets increased with DKK490 million, whereof around DKK1.3 billion are fair value adjustments. Inventory increased to almost DKK1.1 billion. And cash and cash equivalents also increased with DKK210 million and amounted to DKK720 million by the end of the quarter. Equity ratio dropped to 62% from 64%.

Cash flow from operations were positive with DKK382 million; from investments, minus DKK570 million; and from financing, DKK339 million.

During the quarter, we have increased our interest-bearing debt from DKK2.4 billion to DKK2.664 billion, and we had undrawn credit facilities of DKK2.5 billion at the end of the quarter. We have exercised extension option on our finance agreement so that we have extended that with one year. So, we still have five year ahead of us in -- on our financial agreement, for the bank finances.

Some headlines from -- related to ESG. In this quarter, December, we finally received our new large 10,000 cubic meter wellboat in the Faroes. It arrived just after New Year. We had a large reception there. Bakkafossur is equipped with freshwater treatment technology. This is a new capability that we have not had in the Faroes and would have a positive impact on fish health and will help us to reduce the biological risk and performance even more in the Faroes. It also will prepare us for offshore farming in the future due to the sheer size of the vessel. It is equipped with the hybrid technology, which means that it is around 20% more fuel efficient compared to traditional vessels.

We also had a Supplier Day in this quarter in the Faroes where we engaged with local suppliers. We have set ambitious targets to reduce our CO2 emissions and we cannot do that alone. So therefore, we have engaged with local suppliers in the Faroes, so that we can together build robust partnerships to reduce the carbon footprint.

And then the barge that I mentioned before, we have demonstrated in this quarter that we take our responsibility seriously when it comes to protecting the environment where we operate and make sure that we don't make -- do any harm to do that. So, in this quarter, we have performed a complicated rescue operation to lift the feed barge that sunk after the Storm Arwen last winter. We ensured that no oil or feed escaped from the barge, was lifted up. We have removed the 3,000 tonne of sludge and feed remains and brought that for biogas. And I think it was yesterday the barge was towed away again and will be refitted and repurposed.

And then, Odd Eliasen will go through the segments' performance.

[Odd Eliasen, Managing Director of Havsbrun]

Yeah, good morning. I'll take you through the segment. First, we have a nice picture of the wellboat Bakkafossur together with our -- some of our service vessels and ferries outside our factory in Glyvrar.

Harvest volume in the Faroes came down 7%, down to 19,276 tonne from 20,694. In Scotland, it was more or less the same, [almost 5,200] (ph) tonne compared with 5,122. The average weight in Faroe Islands dropped 4% from 4.9 to 4.7, and that was the opposite in Scotland that increased from 3 to 3.2 kilo. Smolt transfer in Faroes came at 5 million smolt compared with 5.1 million Q4 '21. And in Scotland, we had 3.5 million of smolt enter the sea compared with 4.2 million. The average weight of smolt in Faroe Islands was 304 gram compared with 371 gram. And in Scotland, it increased from 105 gram up to 115 gram.

We had a very strong performance in the farming sector in Faroe Islands. The operational EBIT went from DKK282 million up to DKK380 million, an increase of 34%, while in Scotland, it was negative. Q4 '21, it was minus DKK214 million, and this Q4 2022, it was minus DKK149 million. The operational EBIT in Faroes came at 32% compared with 25% last year. And in Scotland, it went from minus [88%] (ph) down to 50%. The operational revenue was more or less the same in Faroe Islands, DKK1.139 billion compared with DKK1.11 billion. And in Scotland, it increased from [DKK180 million] (ph) up to [DKK292 million] (ph).

We had improvements in both region. In Faroes, we had an operational EBIT of NOK27.56, an increase of NOK9.22. In Scotland, it was negative in Q4 '21, NOK55.95 and it was -- this quarter Q4 '22, it was NOK39.96. So actually, we had a very strong biological development in Faroe Islands. We had all-time low sea lice level in Faroes, and we have improved our biological KPIs in -- especially in H2 in Faroe Islands. And that goes for biological FCR, which for '22 ended at 1.06, and in Q4, the FCR was 1.03. So that is quite good.

We had a substantial increase in the TGC. So, we had very good growth. We had low mortality in the Faroe Islands also and also the economical FCR was decreasing, meaning that the gap is closing in and the performing is better. So, we had a very, very strong biological improvements in Faroes. And superior rates came also in higher in 2022.

In Scotland, it was a bit more challenging due to biological challenges. And especially in October and November, it was challenging while December was more in line with our expectation, even though we had low sea lice levels in Scotland, and that is due to freshwater treatment as well. We had also an increased harvest weight in Scotland.

When we look at our numbers in Scotland and historical numbers, we can see that the performance have not been that strong. We have had challenges with the mortality, but we have seen now and in 2020 that this proportion of mortality compared with our peers in Scotland, it has decreased. So, hopefully, we are on the right path.

We can also maybe explain it with this graph where we had our new freshwater dual treatment boat coming in action in September, October and November as well. And we can see a drop in the exceptional mortalities in Q4 and ending at the four weeks in December at quite low level, and we can see that this has continued here in the first six weeks in January as well.

So, what does this mean? On the upper graph here, we can see that typically in Q3 and also Q4, we have a low harvest weight. Although this year, in November and December, our harvest weight increased. And we can see for the first six week in January and February, the harvest weight is now over 5 kilo in Scotland. So that is quite important for us.

And on the lower graph here, we harvested the same amount of fish, 570,000 fish in the first six weeks in '22 versus '23. And that -- this year, in '23, it amounts for 1,000 tonne more of volume, and that is due to the harvest weight was 5 kilo compared with 3.3 kilo. And if we then look at the value, the sales value, it has increased from DKK110 million up to DKK280 million in '23. So, there is a substantial difference when we can harvest big fish -- big and healthy fish compared with small fish.

Another milestone is, of course, the freshwater and the big smolt. We are aiming for One Summer cycles, One Summer, One Loch, One Operator and One Generator -- Generation, meaning that we will aim for production cycles that is 12 months in the loch. And we have seen this materialize in the Faroes and it's working quite good. So, we strongly believe that this is the right way to deal with it in Scotland.

This is where we came from. There were 11 hatcheries when we took over SSC in Scotland, and there was a huge need of investment, as you can see. We have carried this on and invested a lot of money. Here, we can see some pictures of our new hatchery in Applecross. We will, within a short period, transfer smolt from AP 2, our hatchery in Applecross. Approximately 125 grams will be transferred into the new tanks, 60-meter tanks, and we will deliver the first large, high-quality smolt 200-300 gram in the end of Q2 to our farms in Scotland.

This -- yeah, I will -- this has been our journey in Faroe Islands. As you can see, we also had an average weight of 100 grams in the beginning -- in 2011 where we ended at 350 grams for 2020. And this year, we are aiming for 400 grams in Faroe Islands due to -- we will have -- Glyvradal will be ready for production, or is ready. We will have fish coming out for Glyvradal next quarter. Norotoftir has just delivered the first big smolt out of their new tanks and Vioareioi will also be ready. So, we believe that we will be around 400 grams in Faroe Islands in '23.

In Scotland, it will be back-end loaded. So, we hope that we can increase our smolt weight from 110 up to 175 gram starting with the new delivery from Applecross in end of June, I would say, at 200 to 300 gram. So, this will be a milestone for us, taking the production time down from 22 months, 20, 22 months, down to hopefully 14 and then lower again when we can reach the 400 grams in Scotland in two times -- two years from now.

Shortly, I will go to the value-added products as well. We increased the volume from 6,600 tonne up to 7,231 tonne. The revenue increased from DKK359 million up to [DKK443 million] (ph) in Q4 '22. The operational EBIT increased from DKK28 million up to DKK86 million. It was probably a bit back-end loaded with the new contract and new prices for the contracts. The EBIT per kilo increased also from NOK5.71 up to NOK16.67. In the Faroe Islands, 36% of the volume went for value-added products. And in Scotland, it was quite limited volumes that went for VAP.

Fishmeal oil and feed, the FOF segment, also had a good year. We had a quite substantial increase in the revenue from DKK1.66 billion up to DKK2.43 billion. We increased EBITDA from [DKK81 million] (ph) up to DKK110 million, even though the margin decreased from 21% to 14% in Q4 2022. We sold a lot of our goods and fish meal out of Faroe Islands, 12,000 tonne compared with -- 12,500 tonne compared with 3,400 tonne. And if we look at the volume for the whole year, we exported more than half of our -- the production of fishmeal mainly to our competitors in Norway, Scotland, and Denmark.

We had good sources of raw material. It increased up to 46,000 tonne. Mainly it was due to off-costs from the pelagic factories. Feed sales came in quite stable, 32,600 tonne. And our external sales increased with 300 tonne and that is -- it's not a big volume, but that is due to, we have a limitation of our production capacity in the feed plants. So, mainly we are selling in to Bakkafrost and to Bakkafrost Scotland.

That was my numbers.

[Hogni Jakobsen, Chief Financial Officer]

Moving onto the outlook for 2023, according to the latest data from Kontali, we saw that volumes in Q4, the supply from -- in Q4 was lower than originally expected. Especially in Norway, there was a drop in supply compared to what was expected.

For 2023, we believe there will be a flat supply development in the first half of the year, and then in the second half of the year, more volumes will come, 4% to 5% increase in the second half of the year, which sums up to approximately 2% increase for the whole year. Supplies next year also looks to be tight. So, overall, we have a tight market in front of us.

So, to sum up, global harvest in Q4 approximately 2% down; 2.3% supply increase for 2023 to be expected. We hold on to our volume guidance for 2023. We expect to harvest 98,000 tonne for the group; 68,000 tonne in the Faroes and 30,000 tonne in Scotland. And we will release around 25.6 million smolt across the group, 16 million in the Faroes and 9.6 million in Scotland. We have reduced the number of smolt in Scotland as we will focus more on stabilizing the operation, and therefore, the smolt numbers in Scotland are lower than they have been in the past.

We have secured 23% of the volume on fixed price contracts, VAP contracts. That's mainly out of the Faroes. Fishmeal and fish oil or feed sales will be approximately 130,000 tonne this year, and the volumes of fishmeal and oil are expected to be on the same level this year as they were in 2022.

And then we will have the Capital Markets Day on the 6th and 7th of June, this time in Scotland, and we will look into the tanks that Odd showed you pictures of before and hopefully see for ourselves that we have finally some large smolt in Scotland.

Thank you. And I think we will open up for questions.

[Christian Nordby, Kepler Cheuvreux]

Thank you. Christian Nordby, Kepler Cheuvreux. You have reported now a few quarters with exceptional mortalities in Scotland and then the feed barge this quarter, as well and then January now looks a lot better with higher weights. Can you comment a little bit on what that means for your price premium in Scotland, because Scottish salmon usually has a price premium, and on your underlying cost development on fish into Q1 now in Scotland?

[Hogni Jakobsen, Chief Financial Officer]

Having increased our average weight, as Odd showed you on the comparison of the first six weeks this year compared to last year clearly demonstrates the benefits of increasing the average weight. We tap into a higher price band in Scotland with larger fish. So that is a significant improvement.

So, in regards to the premium itself, we are integrating the brands. We are selling the fish as Bakkafrost Fish now, both in Scotland and in the Faroes. It's fed with the same feed. We are operating more and more alike. So, over time, the margins will also, we expect, develop more similar. We have customers that are willing to switch one for the other, if we don't have that particular size that they require in a week, and we can supply from the Faroes or vice versa. They are often willing to do that.

And in regards to costs, in general, there is an increased cost. We see that raw materials, for instance, for feed, both vegetables but also the marine content, have increased in costs. You also saw the price development of fishmeal and fish oil. And of course, that drives costs up in the industry as a whole. I would say if we look at especially the Faroese operations, most of the costs are relatively stable. However, the feed is increasing.

[Henrik Knutsen, Carnegie]

Henrik Knutsen, Carnegie. Could you comment on the lower average harvest weights in the Faroe Islands? Give some additional flavor to why it's decreasing year-over-year?

[Hogni Jakobsen, Chief Financial Officer]

Odd, will you comment on that?

[Odd Eliasen, Managing Director of Havsbrun]

Yeah. We have been harvesting from different sites in the Faroes. And in order to maximize and -- too much and to be ready to put fish out again, then we have harvested, you could say, some of the sites out. On some of the cages, there have been an increased level of lice. So, we have just harvested due to this, so -- but 0.2 kilo, it comes and goes. That's -- you will always have this fluctuation. And so, it's -- I would say it's a kind of in the level what we can expect going forward.

[Hogni Jakobsen, Chief Financial Officer]

Okay. Thank you very much.