SalMar ASA

OSE:SALM

Earnings Call Transcript 2020-Q2

[Gustav Magnar Witzoe, Co]

Hi, and welcome to the presentation of Second Quarter Results of 2020 for SalMar. My name is Gustav Witzøe, and I am the CEO of SalMar. Together with me today, I have our CFO, Trine Sæther Romuld. We will follow the same agenda as in previous presentations. As you can see behind me, we are presenting the results from InnovaMar on our main office and fantastic harvesting and processing facility. It is -- in this way, we get to show you where we belong. It is out here on the coastline of -- from Central to Northern Norway. SalMar produce 450 million healthy salmon meals to people all over the world. But before we dive into the results, I would like to give you a great thanks for the efforts our employees are doing every single day. Despite strict restrictions due to the corona pandemic, SalMar has been running as normal, making it possible to send millions of salmon meals across the globe. It is our employees throughout the entire organization that make it possible for SalMar to again deliver strong results.This is not a result of something extraordinary, but this is the result of long-term strategic and operational focus, give us the strong SalMar culture with great passion and ability to find solution in the challenging periods. I'm both humbled, proud and grateful for the efforts from our employees. We are a fantastic group of people that gives everything for each other and for the SalMar. But before we continue, there is something I want to show you. I know several of you who are watching, were planning to visit us during the Capital Markets Day in June. Unfortunately, we had to cancel the event. But to give you a little taste, we have made a short movie we want to show you now. [Presentation]

[Gustav Magnar Witzoe, Co]

As you saw from the movie, it's end right behind at the holding pen. The holding pen is currently filled with healthy and sustainable salmon from Ocean Farm 1. We are now harvesting from the second-generation production cycle, and we expect to finish the harvesting within a few weeks. It has taken 1 year since we released the 200 grams smolt in Ocean Farm 1 unit until we have received a salmon ready for harvesting around 5 kilo with a fantastic quality. This salmon will be locally processed here at Frøya before it's sent to our customers all over the world. The results from the 2 -- from the first 2 production cycles meet our expectation and the expectations the Norwegian authorities set when we present the groundbreaking project. Strong growth, good fish, welfare with low mortality and no need for sea lice treatments. Based on strong documentation of the project, the authorities gave approval for conversion of the development licenses for Ocean Farm 1 to ordinary licenses early in July. And I will promise -- and I promise, we will not stop here. Ocean Farm 1 will be continue to be an important unit in our total farming business and for the road ahead. More information on the Ocean Farm 1 can be found on our website. We at SalMar are proud to have completed a project that is groundbreaking in the work towards developing and increasingly sustainable aquaculture industry. It's a recognition of the job the authorities took the chance to let us do. Together with leading competence, environment and suppliers, a total of more than 3 million working hours have been spent on Ocean Farm 1. And it's now in fully operation on Frohavet. The good experience is both biologically and operationally with Ocean Farm 1 has strengthened our belief in offshore farming. We will build on the -- on this when we explore possibilities for construction of a new Ocean Farm units. And of course, we bring this with us in the work, with design and location for farming in the open ocean with Smart Fish Farm, where we expect an investment decision in 2021. It's -- it is not only within offshore farming, we have a strong faith in the future. We also have a strong faith in the future developing and even more sustainable aquaculture industry along the coast. This clearly come to show last week when we purchased growth at the auction of MAB capacity in green areas in the traffic light system. In total, we have purchased over 8,200 tonnes increased capacity. This represents a growth of 9%, where we have purchased growth in both Central and Northern Norway. This gives us a flexibility to optimize our biological production. As you know, it's the salmon that decides when it's ready for harvesting in SalMar, and everything we do has to be on the salmon terms. Going forward, we will utilize this increased capacity to optimize biology and consider to adapt our harvesting plans. This means that we can push some harvest volume later to ensure optimal utilization of the increased capacity. But maybe even more important -- but even more important, have to increase our earnings on the new MAB capacity as fast as possible. Our strategy directions are not a result of short-term strategy, but go together with our long-term industrial strategy and operational focus in the entire value chain. This strategy is based on 3 essential pillars in our industrial strategy. We shall be leading technologically, operationally and industrially. This means that SalMar in this -- in the years to come, will invest in industry facilities on land for smolt production and harvesting and processing. In total, this strategy will make us more robust and means that we will be even more innovative and competitive in the future. In May, the construction of Senja 2 started. This is an important part of our future growth. When a smolt facility will be finished in 2022, it will give us increased capacity to produce more smolt with the right quality, size and amount. Also on Senja, the construction of InnovaNor continues with full speed and in accordance with plans with expected start-up in summer of 2021. The investment on Senja will give us a complete value chain in the north. From smolt production -- from smolt processing, Senja will be a powerful industrial center for SalMar, and we strongly believe in Northern Norway. The corona pandemic has given us reminder of the importance of having a strong and flexible value chain. In the case, parts of the value chain is under pressure. Therefore, the situation of the pandemic has strengthened our belief in our investments in Northern Norway. In [ Okra ] through Vikenco and across the entire value chain to make us even more robust in the future. The pandemic has shaken the whole world therefore, we, at SalMar, have chosen to introduce strict disease prevention measures, like many other companies. It is safe to work in SalMar. And for us at SalMar, caring for each other is one of our most important postulates. In June, we saw the joint efforts to combat the spread of infection helped. But we are seeing an increase after the summer holidays. Therefore, it is important that all of us work together to limit the spread of the disease. But we cannot forget the opportunities that is ahead of us. In SalMar, we will come through this stronger and more powerful than ever before. And the results we are presenting today shows that we are robust and strong to handle challenging periods. But before we move on to the results for the quarter, I want to once again praise the efforts of our employees. The second quarter has been a special quarter where the working day for all of us has been more challenging than usual. Despite this, the employees have been working hard every single day and found solution where others see challenges. This has led to that COVID-19 has had limited effects on both our operational and financial results for SalMar in the second quarter. Highlights from the second quarter. In Norway, we harvested 39,200 tonnes in second quarter with an operational EBIT of NOK 912 million with an operational margin per kilo of NOK 23.24. Including Arnarlax, we're harvesting 40,900 tonnes with an operational EBIT of NOK 882,000 million -- NOK 882 million, with an operational margin per kilo of NOK 21.56. Both Central and Northern Norway delivered strong results through solid operation and strong biologic performance. Despite a demanding quarter with high market uncertainty and increased distribution cost, Sales and Processing delivers a good results. As signaled in the previous quarter, Arnarlax delivered weak margin. To give you more details, I will now give you the word of our CFO, Trine.

[Trine Sæther Romuld, COO & CFO]

Thank you, Gustav. As usual, I'll start with Farming Central Norway. We did harvest 27,200 tonnes in the quarter with an operational EBIT of NOK 679 million and EBIT per kilo NOK 24.92. This is a strong result where a strong biological performance, combined with solid operational focus has resulted in lower cost level. Autumn 2018 generation was finished early in the period with stable development from previous quarter. Spring 2019 generation accounted for 80% of the harvest volume in the period. This is from the location [ just at site ] Frøya, which again shows biological performance, which has resulted in lower cost level compared with prior -- previous generations. After a good price achievement in quarter 1, this quarter has given satisfactory price achievement in line with average NASDAQ spot price. In the third quarter, we will finish harvesting of spring 2019 and start with harvesting of 18 -- 2018 generation. Autumn 2018 has shown a good biologic performance in the last period. And in total, we expect cost at the same level as Q2 and slightly higher volume in Q3 compared to Q2. Guiding for the year is kept unchanged, 103,000 tonnes, but as Gustav already have mentioned, with the increased maximum biomass that we recently has bought, this also gives us some flexibility to optimize biological production. Therefore, we will continuously evaluate and adapt our harvest plan in the period to come. Farming Northern Norway. We did harvest 12,000 tonne in the quarter with operational EBIT of NOK 242 million and EBIT per kilo NOK 20.16. As for Central Norway, this is also a very good result, where strong biological performance, combined with strong operational focus, has given lower cost level. Nevertheless, the result is somewhat negatively affected by low price achievement due to 70% of the harvest volume came in the beginning of the period until mid-May, where the prices were at the lowest. Autumn 2018 generation has accounted for all of the harvest volume in the period and was finished in the period.Our last location that was affected by ISA were emptied early in the period, and the main part of the harvest volume comes from location who has shown significant improved performance and lower cost level than previous harvest location in Northern Norway. We stopped harvesting in July before we just started the last week in August, and then spring 2018 generation. Spring 2018 has shown good development the last month and with increased maximum biomass, we will also there continue evaluate harvest plan to optimize biology. We expect a low harvest volume in quarter 3 and slightly higher cost level compared to quarter 2.As for Central Norway, we kept unchanged the guiding for the year. But keep in mind what we just referred to with the flexibility of this new maximum biomass losses. Sales and Processing delivers an operational EBIT of NOK 70 million in the quarter. The quarter has been characterized by high market uncertainty due to COVID-19 with volatile prices and high freight expenses. Despite this, Sales and Processing delivers a good result in the period. And it's not 1 single factor that explains the figure, but I will mention 3 main factors. We have increased capacity utilization at the plant due to higher volume to the harvesting plant and this, combined with solid operation has given satisfactory margin from harvesting and processing activity. We had more than 33,000 tonne through this plant in quarter 2, which is 30% higher in last quarter. In addition, we have been succeeded quite well in allocation of spot sales in a challenging period. And in addition to lower spot prices has given positive contribution from the fixed-price contracts. And in the quarter, we had contract share of 30%. Contract share currently is 25% for both quarter 3, and we expect for the full year, 25%, with prices slightly up from the level in 2019. As mentioned by Gustav, the construction work on InnovaNor, our new processing -- harvesting processing facility in the Northern Norway is progressing according to plan. The start-up is scheduled for the summer of 2021, and we are currently recruiting personnel to key position. And we're happy to see that we have a lot of well-qualified people. When the facility is up and running, this will give us increased flexibility. And also, we expect lower cost throughout the entire value chain in addition to local processing. Then Arnarlax. We delivered weak results this quarter, and I will talk through this in more detail after. But first, I would like to put Arnarlax in a bigger picture, long term. We, in SalMar, had a great faith in the future for Arnarlax and also salmon farming on Iceland. Iceland has some unique biological conditions that make it attractive for aquaculture. Some examples. There is a unique access to water that is important for the smolt. And the sea temperatures are in line with Finnmark, the Northern part of Norway, that provides good biological conditions for farming. If you look at the period since SalMar invested in Arnarlax in 2016, and today, the harvest volume has increased significantly. And looking into both existing licenses but also application that is ongoing, there is a fantastic growth potential. And we are now taking steps to equip ourselves for this growth.Arnarlax is present in the entire value chain, smolt, farming, harvesting, sales. And therefore, we have full control of the value chain. It's therefore, a matter of exploiting this to equip ourselves for further growth. We have made investments to strengthen ourselves, especially on the smolt side at the same time as we invest in modern equipment with other parts of the value chain. But we must not forget that Iceland is a young farming nation and Arnarlax is a young company. Our focus is to therefore, not only to invest in equipment, but also to build culture and competence and bring some of what Gustav mentioned earlier, the strong culture in SalMar. Among other things, Arnarlax Academy has been started. This is based on an important meeting place we have developed in SalMar over time, which is referred to SalMar School. Culture and competence is something that takes time to build, but we at SalMar, contribute with competence and experience in all parts of the value chain and we'll, with this facilitate that we help the fantastic people who work in Iceland to utilize this potential. In sum, we are sure this will improve performance from Iceland over time and make it an attractive place for us to be present. But some comments to the figures. In the quarter, we harvested 1,700 tonne in the period, with operational EBIT of negative NOK 30 million. As we signaled in the previous quarter presentation, Iceland delivered a very weak result in the second quarter where the result is impacted by both the high cost but also weak breeze -- price achievement. Some comments to the cost first. The location, earlier this year experienced increased mortality due to winter wounds, was finished harvested in the period. This has given high cost where among around EUR 1.1 million is related to increased mortality cost and is expensed in the quarter that amounts to NOK 7 per kilo. The freight cost also increased in the period due to more challenging logistic out from Iceland. In addition, lower volume to the harvesting plant has given lower capacity utilization and thereby higher cost. Together, all of this has given a high cost in the period. Price achievement. Around 90% of the volume was sold in April and May, the period with the lowest price during the quarter. And also in this period, the price difference on large sized fish was lower than usual, and Arnarlax has not gotten the effect of higher average weight on the harvested fish. In addition, I will mention that Arnarlax also accounts in euro and haven't had a positive impact of the exchange rate. Looking forward, short term. Location with increased mortality is finished, harvested out. And in quarter 3, we will harvest from 2018 generation location, which has not been affected by high mortality. We will also start harvesting of the 2019 generation in quarter 3, which has shown improved biological performance and lower cost level compared with previous generation. But the period we are currently in with lower spot price will also affect the result from Arnarlax in quarter 3. Combined with just a slightly higher harvest volume in quarter 3, we expect a weak result also in quarter 3. We expect a slightly higher volume in the quarter and somewhat lower cost in quarter 3 compared to this quarter. We keep unchanged the guiding for the year, 12,000 tonne. And then Scottish Sea Farms. The Scottish Sea Farms harvested 6,500 tonnes in the quarter and delivered operation EBIT of NOK 89 million, which gives EBIT per kilo NOK 13.69. Harvest volume increased by 30% compared with the same quarter last year, and we have harvested from all 3 regions with good results in the quarter. The positive development is continuing with lower costs compared to quarter 1. The company reports a good biological performance with good growth and low mortality in all regions. The guiding for the year is unchanged, 26,000 tonnes. Then we move to the financial update. Starting with the EBIT bridge comparing to last quarter. We have reduced EBIT per kilo, NOK 5.98 compared to quarter 1. And this is related to lower sales price, but somewhat offset with lower cost in the value chain. For the group, this also includes Arnarlax. This is a smaller reduction EBIT NOK comparing to last quarter. This is a result that Arnarlax consist of a relatively smaller share than it did for the other quarter. P&L. Some comments to the P&L in the quarter where we compare the same period last year. We have stable revenue despite the lower spot price. This is a result of higher contract price combined also that some customers have been willing to cover some of the increased freight cost in the period. As you can see, we also have higher operational costs due to this freight cost. Both EBITDA and operational EBIT is down due to lower volume and lower spot price, but the effect is slightly reduced through lower cost in the value chain. At the end of quarter 1, there was a large movement in the currency rates between NOK and foreign currencies. But during quarter 2, the NOK has gradually strengthened itself, which leads to some negative changes last quarter, is to a large degree, reversed in this quarter.We have a fair value adjustment, which is positive due to unrealized change in currency and currency contracts, combined with biomass adjustment. Other financial items are positive this quarter due to realized and unrealized currency movements from loan in other currency than NOK. As from previous quarter, income from associates mainly relates to Scottish Sea Farms and is positive in quarter 2 due to improved result and lower negative fair value adjustment. So if you're comparing EBIT per kilo compared to same quarter last year, it has decreased due to lower spot price. The NASDAQ has reduced it, NOK 4.85. But we have compensated with NOK 2.98 lower cost in the value chain. It's also worth noting that if you're looking at the first half result for SalMar, operational EBIT, that is actually higher than first in 2019. Balance sheet. Here, we compare the balance sheet to the end of previous quarter. Investments are progressing according to plan and fixed assets has increased at the same time. As we also have combined, that we actually have taken into use, the first battery-hybrid wellboat, which increase what we call the right-to-use assets. The standing biomass is higher comparing year-to-year. We have more fish in sea, and we have a large release of smolt in the first half of 2020 compared with previous year. This gives a higher amount in the sea with a slightly lower average weight, which again gives us a good foundation for utilization of increased [ MAB ] capacity. Net interest-bearing debt is reduced with NOK 564 million in the quarter, and as of quarter 2, the net interest-bearing debt is NOK 1.7 billion. In total, we still have a very solid financial position with equity share of 59.7%, and we have a ratio between net interesting-bearing debt and EBITDA 0.42. As you know, we used some money recently on traffic light growth, NOK 1.8 billion. So therefore, the net interest-bearing debt will increase in quarter 3. But it is very satisfying that after this payment, that we still have significant available facilities and a robust financial position. Movement in net interest-bearing debt is really only 2 items, and that is the EBITDA that we have talked about, and then it's the investment. We have used NOK 520 million in various CapEx investment, and that is actually the highest CapEx figure in 1 quarter ever for SalMar. And also demonstrates clearly that we are investing in the future. And then I will give the word back to you, Gustav.

[Gustav Magnar Witzoe, Co]

Going forward, we will even have -- we will have even more focus on what we do today, we do better than yesterday. SalMar wish to cement our position as a technology leader in the aquaculture industry, to become an even larger contributor for sustainable growth in the future. We will continue to have focus on the things we can impact and do something with. Good financial results come from good biological conditions and operations, and the salmon always come first. The devil is in the details and we shall continue our optimization and cost improvement project. Combined with our strategic focus, this will make us even more robust in the future to handle challenging periods. At the moment, we are experienced good biological status in the sea, both in Central and Northern Norway and on Iceland. In total, we expect lower volume in Q3 2020 with cost at the same level, slightly higher volumes and cost at same level in Central Norway, low volume and slightly higher cost in Northern Norway, and as Trine mentioned, slightly higher volume and weak margin from Iceland. Contract share is at 25% in both in third quarter and the full year with prices slightly up from level of 2019. Guiding in both Norway and Iceland is kept unchanged but will utilize increased MAB capacity to optimize biological production. We still expect moderate supply growth in 2020, but COVID-19 has led to increased market uncertainties. SalMar is well positioned to handle as demand -- on a demanding market with strong operational and financial flexibility. We have a positive view on the future for salmon. But we have to acknowledge that the effects of the coronavirus are not over in a few months, but will likely last for longer periods of time. Our job is to implement the measures that strengthens us today and at same time will make us even stronger going forward. As I said, the postulate in SalMar, we focus on the solution, not on the problems. With this, we have come to the end of our presentation, and we would like to thank you all of you who have been watching. Our next quarter presentation will be in November. Until then, we hope all you stay safe and healthy and you have to eat a lot of salmon. Thank you for your attention.