Mowi ASA

OSE:MOWI

Earnings Call Transcript 2018-Q2

[Alf-Helge Aarskog]

Good morning and welcome to the presentation of the second quarter of 2018 for Marine Harvest. Together with me to present the numbers, I have Ivan Vindheim, our CFO. So then, we -- I think we just go right straight into it.The result for Marine Harvest in the second quarter was EUR 175 million in operational EBIT. This is a good result for the group, and I would come closer into the numbers and how they divide when we go down the line.What's really encouraging is high prices in all market. I think we see value growth almost in every single market in the world, so -- and volume growth in many. And we see China being up 48%, Greater China, 20% increased volume going in there. Interesting also to see Russia. Russia is up 50% in the quarter, a strong number. U.S., the same. So not 50% but up over 10% in volume. So really strong market in this quarter.Our Norwegian unit and our Chilean unit both reduced costs and had their best second quarter ever in this quarter. We issued a new unsecured bond of EUR 200 million in this quarter, and you can see the numbers there. 5 years at 2.15% coupon.Then on the slightly negative note here, we reduced the guidance of 28,000 tonne. That is a lot, and I will get into the numbers and why we are doing this when we come into the different operating units. The general factor is, I wouldn't say sea lice per se but following issues of sea lice treatment. That is the most important part for this reduction. In terms of dividend, NOK 2.6 per share to be paid out in the third quarter.Key financials. Sales, EUR 888 million, same level as last year. Operational EBIT already mentioned, EUR 175 million, slightly down from last year, EUR 197.9 million, and harvest volume were the same for the 2 years, about 78,000 tonnes. So this is on slightly reduced prices in Europe but prices are up in the U.S. and in Chile. And all in all, we see a reduction in costs in Norway and Chile but then slightly higher cost in Scotland and Canada offsetting these numbers but I will get back to that.Price development. Here, you can see the prices during the quarter. As I said, about even in Europe with the same quarter, second quarter of 2017. Slightly up on Chilean fish and up more than -- or actually 12% in Americas or North American salmon in the quarter.Our price achievement, Norway, 91%. So our contracts, and to a certain extent, our superior share took down our price achievement in this quarter. So very high spot prices in the quarter.In Scotland, the opposite is the case. Good contract is taking up our price achievement to 104%. Canada is a spot market for Marine Harvest, so it's really reduced quality and the size distribution that takes the price achievement down to 96% from this -- from the reference price. And Chile is 91%, so here, also, slightly lower superior share than what we expect in this quarter.This explains the operational EBIT development in the quarter for Marine Harvest. So we started with EUR 198 million. Feed, about the same as last year. Farming is down, and it's down because of price, for the most part but higher cost in Scotland and Canada is part of this and lower contribution from those 2 units. Markets, about even. And Consumer Products down EUR 6.1 million and due to Easter effect and then lower prices but also volatile spot market prices in this quarter for Consumer Products.But all in all, a good result, EUR 175 million is quite a bit of money.Norway. The Norwegian unit delivered EUR 126.7 million in operational EBIT against Q2 of 2017 of EUR 98.4 million. Our volumes are up from 29,000 to 49,000 tonne in the quarter. Operational EBIT per kilo is -- has increased from last year, from EUR 2.50 to EUR 2.56. So all in all, a good quarter. We see reduced cost almost in all areas with -- and on the back of higher volumes.What's a little bit concerning in the Norwegian operation, and this is kind of divided if you look at the country as a whole, Region North delivers fantastic results, we'll take a look at that later on. And then as you go south, problems increase. It's not -- we have good control on sea lice but a higher -- how do you say -- we see more of it, especially into July, August but also the following diseases from the treatment taking control of sea lice is an issue. And that's why we have reduced the harvest quite a bit, 14,500 tonnes in Norway, out of this, 80% in Region South. Region South is our smallest region, so this shows the impact in a specific geographical area.We also expect cost to continue to decrease in Q3 on the back of high volume, and we had lower cost in Q2 compared to Q2 1 year ago, and we expect this trend to continue.Norwegian sales contract portfolio, basically stable going forward. If you compare to Q3, Q4 last year, slightly up but not much. So stable contracts on good prices into the future.Here, you really see the division of the country. If you take a look at these numbers and look at the performance in the different operating units, you see Region South managed just barely above NOK 10 a kilo, EUR 1.12 per kilo in operational EBIT. Then Region Mid, which, for our case, goes from Sogn og Fjordane and all the way up to [ former ] Trøndelag, EUR 2.63. And then you have Region North with EUR 3.32, so this is a major, major difference and it's explained by biology and what I already mentioned.Scotland, EUR 21.3 million in operational EBIT, down from EUR 57.5 million, so substantially down. But this is on the back of close to 10,000 tonne lower volumes in Scotland this year.Lower volumes has 2 reasons. One is phasing of small stockings earlier on but also, no doubt that Scotland also has challenging biology and has had it both previous this year and continuing on. We see, though, better sea lice numbers in Scotland compared to what we have seen before, so there is hope for improving biology at least when we come into 2019 and on the fish we have. 5,000 tonne down in volume in the second half of 2018 on the back of what I said in terms of biology.Canada. Maybe -- this is Canada on the West Coast. We incorporate the Northern Harvest from Q3. So this is -- has been a challenging quarter for our Canadian operation.You can see we had operational EBIT at EUR 8 million, down from EUR 21.9 million. Volumes are slightly down, 1,300 tonne, from Q2 in '17. And operational EBIT is -- has dropped from EUR 2.34 to EUR 0.98. And the reason is not worse prices, the reason is higher cost in this operation.And on the back of that, it has been actually low oxygen levels, we have had jellyfish, we have had some algae issues and we have some gill issues on the fish. So a combined challenging biology in the Canadian operation.In terms of Northern Harvest, we estimate to harvest 18,000 tonne in the second half, so about 18,500 tonne for the whole year but consolidated in from the second half of 2018.Chile, a very good quarter in terms of result, EUR 18.3 million, compared to EUR 11.3 million, Q2 2017. And we see operational EBIT increasing to EUR 1.86 to EUR 1.46 that year and on slightly higher volumes, 9,800 tonne this quarter compared to 7,800 tonne.I think we can say what we see in Chile is good price realization but also improved cost in this quarter. And then we had one episode of escape that was really a big, big loss for Marine Harvest. This is something we do not accept. It was a new site, new cage system from 2017 in a site where, basically, the moorings held up, so everything was in place but the cages broke down so -- after strong wind. So we lost 650,000 fish, there were 900,000 fish on site. We managed to get in with well boats to save some of it but too late. So we have gone through quite a good investigation in this case to make sure that this does not happen again, absolutely.Yes, I think then we go into Ireland, Faroe Islands. Still good market for organic salmon, we make EUR 2.7 million in this quarter. It's down from last year but on lower, much more lower volumes. Island -- Faroe Islands, for us very small region, so they will go a little bit up and down in terms of volumes every quarter.See Faroe Islands an operational EBIT of EUR 2.3, down -- and we didn't harvest fish in the second quarter of 2017. But these 2 units bring quite a bit of money into Marine Harvest, overall and over time, which is very beneficial for us.Then into Consumer Products. Consumer Products had a decent result in the quarter, down from Q2 2017. You see the result was EUR 19.2 million in Q2 '17, down to EUR 13.1 million. But remember that Easter last year were in Q1. This year -- no, sorry, opposite, Easter last year was in Q2 and Easter last year -- Easter this year was in Q1 and obviously, that has an effect. But then again, we had quite volatile prices and quite high spot prices of salmon in Q2 '18. But what we see in general, which is very positive, is strong volume growth in the quarter. Even without Easter, we see that volumes are going up here from 36,000 tonne finished products to 39,000 tonne. And that is a very good signal about the strong market in terms of salmon.And then we have one incident in this quarter, was a major fire at our biggest smokehouse in Kritsen. Basically, the whole smokehouse burned down in about 1 hour. It was a tremendous fire.What was fortunate was that no people got hurt. Everybody were out of the building in, basically, record time. So we have drilled this, so that worked. And then, right now, we're evaluating what to do going forward. And for your information, obviously, the building and continuation of production was fully insured in this case. So we expect a limited cash effect from the fire.Feed. Fish feed is in fierce competition. EUR 88 million in operating revenue, up from EUR 65 million, so they are producing extremely well but the result is maybe on the low side from what we would expect. Bear in mind, we are continuing to invest into our new feed plant in Canada and that is taking the result slightly down for this quarter. But all in all, production-wise, very good.Then on to you, Ivan, and volumes and guidings of the different markets.

[Ivan Vindheim, Chief Financial Officer]

Yes, thank you, Alf-Helge and good morning, everyone. As usual, we start with the profit and loss and turnover, stable this quarter year-over-year, EUR 888 million on stable volumes, 78,000 tonnes. Operational EBIT, our second best quarter ever -- excuse me, not -- yes, it is, second-best quarter ever. Last year was the best, EUR 198 million, EUR 175 million this year, but still good -- a good result.Further down in the P&L, a big biomass adjustment this time, EUR 71 million on higher prices during the quarter and also an increase in biomass. Net financial items are quite normal this time, negative EUR 24 million, slightly impacted by the fair value adjustment of the last outstanding convertible bond. Underlying earnings per share this time, EUR 0.26, net cash flow per share, EUR 0.12.Then over to the balance sheet. Somewhat up this time year-over-year, approximately EUR 250 million, explained by higher inventory, more biomass at sea, higher biomass adjustments. Receivables are also somewhat up due to growth in Consumer Products. The [ credit takes ] in Consumer Products are somewhat higher than if you sell the volumes to other processors.Net interest-bearing debt at the end of the quarter, EUR 951 million and adjusted equity ratio of a healthy 49.7%. Please note that these numbers are ex Northern Harvest. Northern Harvest will be consolidated from the third quarter. The impact on the total balance sheet is approximately EUR 200 million. And on equity ratio like-for-like, approximately 3 percentage points.Then over to the cash flow statement. Good cash flow in the quarter adjusted for the tie-up in working capital. We increased our biomass in the quarter by 10,000 tonnes. We also have produced feed for inventory for the peak season in the third and, partly, fourth quarter.Net CapEx, in line with the forecast. Interest expenses paid, normal. Dividend declared after the first quarter was paid out, EUR 134 million, equivalent to NOK 2.6 per share. So from EUR 857 million in net interest-bearing debt to EUR 951 million, that is also ex the Northern Harvest acquisition.Cash flow guidance. The forecast for our working capital tie-up this year, unchanged, EUR 125 million -- EUR 120 million. CapEx, also unchanged, EUR 270 million. But we have bought Northern Harvest for EUR 250 million. We also have bought new farming capacity in Norway, equivalent to 5.7 [ license ], and yes, a total cost of EUR 70 million.Interest paid, adjusted somewhat up, to EUR 40 million, to reflect the change in the debt targets but also to reflect the change in mix of debt, from bank debt to euro debt, with regards to drawings but just -- but a minor amount. Taxes paid, EUR 10 million down, EUR 140 million. So apart from Northern Harvest and the acquisition of a capacity in Norway, the cash flow numbers are, broadly speaking, unchanged since last time we met.Then an overview of our financing. We have, as Alf-Helge said here initially, we have issued a EUR 200 million bond in the quarter at a very healthy rate, [ 2.15% ]. So we are obviously very happy about this issuance. We also think it's important with regard to the total mix of debt. We -- as you know, we had a NOK bond, which we paid back in the first quarter. So this, yes -- so again, this issuance was very satisfactory with regard to the mix of debt.The board has decided to change the debt target from EUR 1.2 billion to EUR 1.4 billion on the back of the Northern Harvest acquisition. So as we have been through, we bought Northern Harvest for EUR 250 million, so that explains it all.So much about the financial figures. Then over to the fundamentals. First, the supply development in the quarter, up 5% year-over-year, somewhat higher than what we expected, mainly caused by Chile. Norway in line.So when we then have a look at the price. As Alf-Helge said, stable in Europe, up in America, at least the blended price, quite impressive. If we put all the residual on demand, which we cannot, I think that's -- such a world is too easy but we're still very much in line with the demand figures we have dealt with previously. So I also think we have support in our numbers when we say that the demand in the second quarter was impressive.Consumption, impressive in all markets. 7% in EU and 9% in Europe, really good numbers. The U.S. stands out also this time, 40%, great on increasing prices year-over-year. Asia, particularly big China, fantastic 20% and this is just a start, we think. So again, a good demand, and we think the markets are in a very good shape.Then over to our industry supply outlook for '18, we are closing in now, approaching '19, so I guess, we also should say something about '19. The numbers are down, not only percentage-wise but also in absolute terms. So the way we see it, the supply outlook for next year looks favorable. And with, yes, continued good demand, we think we can have another good year for the industry.In '18, we have had very high growth in the first half year on low temperatures that has resulted in high numbers -- supply numbers out to the market, as we speak, which has put pressure on prices. We also think that the -- we will see volatility as we usually do, at least in September, October, November but when we look into '19, we think we have support in the numbers to say that fundamentals look favorable also for next year. But at the moment, pressure on prices driven by high supply and also our main market, Europe, on location.Then over to our own volume guidance, the proof of the pudding is in eating. Our numbers are down, although we are up in -- sorry, it's back again, I apologize. So yes, proof of the pudding is in eating, our own supply numbers are down. Although we have growth in Norway this year, the growth is lower than what we planned for and expected, driven by Region South and biological issues, sea lice and what I guess we can call ripple effects from the sea lice. Region North, great, great growth. Actually, bigger growth than what we planned for. So for Norway, the problems are connected to the South.We're also down in Scotland, from 47,000 to 42,000 tonnes, on more or less the same issues as we have in Region South.Canada is down. Bear in mind that the number here, 44,500 tonnes, includes Northern Harvest, 8,000 tonnes. So if we adjust for Northern Harvest, we are at 35,500 tonnes, which is a record low for Marine Harvest Canada.We have struggled with the biology since the fourth quarter, a low oxygen level. We also have struggled through the first half year, with the growth, in general, with jellyfish, algae, [ poor gills ], so Canada has been a struggle. And there's no quick fix here. So I think we must say that Canada West will continue to perform, cost-wise, poorer than what they normally do because of low volumes going forward. This is connected.Chile, a good quarter, apart from the unfortunate escape we had. Good costs, good results. So Chile has performed well biologically.Ireland, Faroes, unchanged numbers there. Good biology, I would say, relatively speaking. So all in all, 380,000 tonnes this time around, down from 400,000 tonnes but we also have help from Northern Harvest there, by 8,000 tonnes, so 400,000 to 372,000. So the supply numbers, we expected when we started this quarter is lower for our own sake. And we also think that this has taken its toll on the rest of the industry. So back to '19, we think it looks favorable. But estimating about the future is really hard, and, I guess, our volume forecast proves that.Then Alf-Helge, the floor is yours to wrap up.

[Alf-Helge Aarskog]

Thank you, Ivan. Okay, I think we will just take a quick look into the future. What we see is on the market side, I think we just have to underline that again, extremely strong market. Even though now we have seen months, like in July and August, with extreme harvest volume, obviously, it hasn't had an effect on the price but think about it. Europe is on holiday and it's like 45 degrees and still the salmon is going out there. So like, to me, it's almost unbelievable.And we see this in U.S., and we see this in Asia. And we see Asia growing, and it's very -- we are very happy about the development in China and opening up new regions in Norway. So a fantastic demand response. And then I think we have to look into 2019 and take a good hard look at the numbers there. And I expect that we will have a very good year also next year.Fish Pool forward prices, EUR 6.4, unchanged since May. Growth in China, I've already spoken about. We'll open a new factory there in October, so that's going to be interesting as well. Our supply outlook again for '19, favorable. I think we have to say that, and then the acquisition of Northern Harvest really adds a new dimension into Marine Harvest, yes. We know we are new on that side of the country in terms of producing salmon but we also know that they are very close to both U.S. and East Coast of Canada market-wise, and we can build on this, and it's really interesting. In combination with the Gray assets we bought a few years ago now, this can be a very good business for Marine Harvest in the years to come.Dividend, already said, NOK 2.6 per share, paid in Q3.And then last but not least, Capital Markets Day, 13th of November. You should show up. It's going to be exciting because we're going to show you things there you have never seen before. I can guarantee you that. So that is -- it's really going to be good. It's going to be held in Edinburgh. You will have, obviously, the availability -- or the possibility to see RAS site. I think maybe one of the most advanced value-added plants in Europe. And there are some other news there I cannot tell you now but I will tell you then. So that's going to be exciting. So I'll see you then.And now I think we'll open up for questions. So maybe we'll start in the front area this time and go with Alexander, first.

[Stein Alexander Aukner, Senior Analyst]

Alexander Aukner, DNB Markets. So once again, back to the growth. You haven't grown since 2016. You're the world's largest salmon farmer, by default, you should grow at least in line with the market. I know you claim biological issues, et cetera, but what are you doing differently than anyone else that causes this? Is it just pure unluck? It's been going on for 2 years. On my calculations, if you had grown in line with the market, you should have 430,000 tonnes this year, not 380,000. That's a whole [ buck ] of lost -- volume lost. So please, some more clarity on that.

[Alf-Helge Aarskog]

Yes. In terms of -- if you go into the growth in the different regions, I think we are all over the world, certainly then we should grow aligned with the world. We -- you will see that I think it's -- I think we should sum up this year when this year is finished. It's not finished yet, so let's cross that bridge when the year is over, Alexander. And then we see, obviously, I think we performed equally or better in Region North to any of our competitors. In Region Mid, we are in Norway now, we are a distributed bunch from northern part of Trøndelag South to Sogn og Fjordane. This is partly -- part of that difficult area. And I think if you compare then Region South to others in Region South, we do fine. So take a look at those numbers, I think that is fair. Then to Scotland. In Scotland, we had a fantastic year last year in terms of volumes. And then we knew that we were down this year. We also guided on that but we have taken this -- the guidance down in Scotland with 5,000 tonnes. I don't know if that is unfortunate or special for us but it is -- the answer in that is biology and nothing else. Chile. I think in terms of margin per kilo, we delivered in the top in Chile. Maybe we're not growing as aggressively as the others in Chile but production-wise, margin-wise and result-wise, it's okay. And then you have Canada, which drags us down this time, not all other operators are there. And that is an issue. In Faroe Islands, we guide up, others have guided down. So I guess we have our part of the growth there. And then we are -- have gone through the geography. I think what you see when you look at Marine Harvest is you will never get these peak results, which -- when you are only in one region and you're hitting home in that one region. But we have a very balanced portfolio, which will secure good results. And I think you will see biological issues being present in -- from time to time, also going forward in all regions with different magnitude. And then you can criticize us and say we are not so good. Then, to a certain extent, I agree. We are not satisfied with these numbers by any means. So we have a job to do. And obviously, we need to grow the business as well. So you have a point.Then I saw next one in line. I don't know, yes?

[Unknown Analyst]

Two questions. One following up Alexander. Can you say something about what you are doing about the issues in south of Norway and in Canada to improve it going forward?

[Alf-Helge Aarskog]

Yes. In Region South, what we are doing in Region South is, one, obviously, growing smolt size going forward is key. But two, also to try to -- right now, we are balancing portfolio in terms of harvesting out the weak fish and making sure that the fish that are growing, are growing. And we are still passive grading, taking out the large fish in those sites not affected to make sure that the result is -- the effect of the problem is as little as possible. Canada, as Ivan said, and he's correct, it's a complicated issue because Canada West Coast has biology with -- we've seen jellyfish that we've not seen before, to a certain extent, algae bloom, and the ripple effect of that is gill issues. That can change if water quality is better but we cannot change water quality. So we are working, continue to work on semi-closed or closed system in the sea. And maybe, you will see that -- I think, right now, we have pretty good control of sea lice and handling the sea lice issue but we do not have good control of the fish after that sea lice issue or the sea lice has been dealt with. So we need to get away from that, and we're working on systems to improve that as well.

[Unknown Analyst]

And one quick question about contracts. You have fairly high contract share in at least Q4 in Norway. Can you say something about the level of those contracts compared to same period last year and what you see in 2019? You say you're quite comfortable that prices will stay high. What are your customers saying on contracts going forward?

[Ivan Vindheim, Chief Financial Officer]

If you start with the price. The price for our contract, for the minor area are in line with the first half. So yes, so it's quite stable. And with regard to next year, they are, to a large extent, not contracted yet. So those contracts and negotiations are to come. So this is just what we believe, I guess, if you ask the customers, they may say something else. But I think we find support in the [ fermentals ]. We also see that the forward price is at an attractive level. So we are not giving away anything at the moment, although the spot prices are very, very low because we think this is temporary, the seasonal pressure we see every year. So yes, I don't know if I answered your question but yes, but at least I confirm the belief, yes.

[Tore A. Tønseth, Research Analyst]

Tore Tønseth, Sparebank 1 Markets. Just a question about biology. The problems we have seen in the southern part of Norway, is that something that has happened over the past few weeks or it has been a gradual problem from the end of the second quarter and throughout the summer? Is it something completely new?

[Alf-Helge Aarskog]

No. I think we've seen it. I think we see Region South actually tapering down from end of May, beginning of June. You see the feed side of things. And then we know when we are treating the fish, taking off the sea lice, then you are in a balancing game because, well, we have basically control in sea lice but then if you have weaker gills or weaker fish due to CMS, you can't handle them again and then you need to harvest. So I think we have seen this coming on already from end of May but then accelerating into July because of temperature, obviously, going up and also into August.

[Tore A. Tønseth, Research Analyst]

So for Marine Harvest, there has been lower harvest rates from southern part of Norway this year?

[Alf-Helge Aarskog]

Not so much in Q2 but this is more about the guiding going forward.

[Kolbjørn Giskeødegård, Director & Sector Coordinator]

Kolbjørn Giskeødegård, Nordea Markets. A different topic here. Earlier this year, you announced or at least relayed some long-term plans on expansion in China, opening up with a joint venture, numerous new restaurants in an 8-year period. Can you give us an update on your plans there? Because if you're going to roll out a couple of thousand restaurants, it should soon start somewhere. So just as a proxy for what you're saying about the demand growth in Asia.

[Alf-Helge Aarskog]

Yes. No, this was just not taken out of the air, this started 5 years ago. So -- but we have a -- and also, as stated in that presentation, clearly, in writing, this is a franchise concept. So what we have done, and we started in Taipei 5 years ago, to create restaurants which serves salmon all the way out there to create awareness of salmon in it by itself but also brand awareness and it's to Supreme Salmon. So what we have now is a concept that's making money of salmon restaurants in Taipei. And this -- the plan is to franchise this out over time. And now when we are -- and this was started in Taipei because China was closed. And as you remember, China was closed in 2010. And we can almost mimic because a lot of Chinese go on vacation to Taipei and it's called the great -- or the former China earlier on, so it's a lot of similarity to food culture. So this is ongoing and now it's about setting up agreements and getting this ready for franchise. We are not going to invest into this, we are not going to spend a lot of CapEx into restaurants. We're not going to run restaurants but we're going to sell the fish there. So back to your question, in terms of can this increase demand further in Asia? Absolutely. Think about it. It's a new species, for the most part into China. Salmon number 10 million, there is not a whole lot of salmon throughout eternity was exported into China in 2010 and then the border was closed. So we really think China and Asia, again, will grow. Again, it's not Europe yet and it's coming from lower volumes, and there is a freight disadvantage. But still, there is a huge potential market, both in terms of people eating out but also in terms of e-commerce and normal trading in China. So that was a little bit background in China, a little bit on the restaurants. And yes, 2025 is the target for the full roll-up. Any more questions? Alexander is at the back with another one.

[Stein Alexander Aukner, Senior Analyst]

Yes. On the Eastern Canadian operation, is it possible to give any indication of the size and timing?

[Alf-Helge Aarskog]

I think we have given the indication of size this year, 8,000 tonne in second half, 18,500 tonne in -- during the year, and then we will build it from there. And I think we will guide on Northern Harvest next year in the coming quarter when we guide on 2019. So we took over a month ago and we have been planning this for a longer time but I think it's fair to the organization and fair to the people working there to go with those numbers in -- when we do the Q3 presentation.

[Stein Alexander Aukner, Senior Analyst]

I'm thinking more the very long term, sort of the 5- to 10-year horizon. But...

[Alf-Helge Aarskog]

We certainly have clear goals but I would like to verify those before I communicate them to you. But we've got 45 new sites with Northern Harvest. We have 7 approved and I think 23 in total here from Gray Aquaculture. So quite a number of sites, we have gotten bay management agreements in this area with the government. So from also from sustainability point of view going forward, it's exciting. And then you can -- at least you know how many sites we have there.Done. I think we -- not you? No? No. With that, I think, I'd say thank you for coming, and welcome back when we come with Q3. That will be in Oslo.