SalMar ASA

OSE:SALM

Earnings Call Transcript 2017-Q4

[Trond Williksen, Chief Executive Officer and President]

Good morning to everyone, and welcome to the Q4 presentation for SalMar. My name is Trond Williksen, and I'm the CEO of the group. And as usual, I bring with me the CFO, Trond Tuvstein, and together we are going to give you the highlights of the quarter. We're going to go through the main segments, the financials and end up sharing our thoughts on the outlooks for the coming periods. Starting off with the highlights. Again, we are happy to present the quarter, which we consider being a strong quarter for SalMar, a quarter where we had made operational progress in all our main segments. We have chosen the headline in line because[Audio Gap]During the quarter is in line with our expectations moving into the quarter and largely in line with what we have been communicated as expectations for the quarter. We've also chosen the headline lowered cost. As you all know, SalMar, we focus on cost, that's part of our culture and we have targeted to reduce our production cost, particularly over the last year and we are glad to announce that we also this quarter -- in the fourth quarter in a row have been able to lower our production cost, which is a key for us.Entering into the numbers. Harvesting volumes are already announced in our trading update. We ended at 39,900 tonnes, which compared to the fourth quarter in 2016 is an increase of 13,400 tonnes. The number reflects the growth in the production that we announced at the end of Q3, and it ends around 1,000 tonnes higher than we guided at that time.The production. The harvest in biology together with activities in sales in the industry has generated a totality of revenues over NOK 2,781,000,000, that's NOK 300 million in as an increase compared to Q4 2016. It all comes down to the key number for any salmon farming company, which is the all-in-all operational EBIT, which for the quarter ended at NOK 17.70 per kilo. Behind that number is an improved performance in the farming segments as I said initially, largely in line with what we had as an expectation going into the quarter with higher volumes, a continuation of improved biology, which comes down to a contribution to lowering the cost.Q4 represent the end of the year. And if you sum up the year, we have been able to lower the cost with NOK 2.2 if you compare the production cost that we reported or had in Q4 2016 and compared that with what we achieved in Q4 2017. The operational EBIT per kilo is, of course, affected by the lowering of the spot prices in the market. If you compare Q4 2016 with what we achieved in Q4 2017, the reduction has been NOK 17.74 in the NASDAQ as reported spot prices and that, of course, affects our operational EBIT. Having said that, it's important to underline that we have had a very positive contribution, very strong performance from our sales industry segment in this quarter. This has been a development over the last quarters, gradually improved our performance and we are glad now that we see a positive contribution from all the parts of that segment in the group, from sales, from slaughtering and from processing. And of course, we have a positive contribution from our contract portfolio in the quarter. One of the main product in SalMar is the Ocean Farm, which is part of our Ocean strategy. Entering into the operational pilot phase in Q3 and having gone through, say, the critical first phase through Q4 and into 2018.I'm happy to announce that product progress well. It's still, of course, in an early phase but so far so good, and so far what we see confirms the thinking behind the project when it was initiated.Q4 represent the very end of the year. We are ending a year with a strong financial performance, the strongest ever. We're ending the year financially very strong and we have a positive outlooks on the future for us and this industry, and those 3 things combined is also our basis for the board when they had proposed the dividend on NOK 19 per kilo for 2017.As you all know, SalMar is an integrated salmon company. This is the value chain. No significant move in the value chain in the quarter. And as you also know, SalMar has a very defined concept that is the basis for our activities. We are strategically very focused company, focused on salmon and growing salmon as efficient and cost-effective as possible. We seek cost leadership as our guiding star strategically and we try to achieve that through operational excellence, through continuous improvement in our whole value chain, every day and we combine that with innovative leadership and that's for everybody to understand that's the core of SalMar.Moving into the segments, giving you an operational update for different segments starting with Farming Central Norway, which is our largest segment and also our largest farming segment.Numbers. Total revenues over NOK 1,362,000,000; operational EBIT, nominal NOK 358 billion. Those numbers are generated or harvest over 26,900 tonnes in that segment, which is an increase of 11,900 tonnes compared to Q4 in 2016. It comes down to an operational EBIT for the quarter over NOK 13.3 per kilo. Behind these figures continued biological improvement as we expected and as we guided, we now see a payback from long-term investments, that's SalMar has done in order to handle the situation especially related to sea lice but also other fish health issues and we have preparedness capacity and the knowledge that has brought us in different situation where we have moved from running out -- running after solving -- trying to solve the problem to being a more in control, which also shows in our numbers. I'm also very proud to say that SalMar is a company with very, very strong operational background in terms of our people and skills lot of skilled people and we also see effects that good relationship is part of the equation having brought us where we are.The capacities. We have 200 situationals going forward is there now, and we are confident on those capacities and our skills in terms of situation going forward. And the backside of that is that those capacities also brings me those -- brings with it structural cost that we keep on caring going forward. The movement in region Mid has been for the whole group in treating sea lice is going from using nonmedical treatment metrics towards more preventive metrics, more disciplined use of that. And we also see effect of that and we expect further effects if you look forward.Looking behind the numbers for Q4. 1/3 of the quantity of harvests in the quarter comes from the spring '16 generation, which is at the moment in this region, as in generation that has gone through the first journey in terms of biological challenges and that also affects cost in the quarter. The remaining part come from the '16 full generation. It had a better journey and has had a lower cost.In the quarter, organic salmon has contributed 6% of total volume. And for the organic salmon, we see different situation. If you compared to 1 year ago or more than 1 year ago, when we had a trade issues, those are solved and they are more in a normal situation and we experienced demand and higher margin for those products. When you look at the performance in region Mid in the quarter, we see a cost reduction for the fourth quarter in a row. This is also expected development that we expect will continue into Q1 in this year. Out of the 143,000 tonnes that we have been guiding for the group totally, which we uphold, they expect the harvest from region Mid on 96,000 tonnes in 2018.Moving into Farming Northern Norway. Figures -- revenues of NOK 629 million and an operational EBIT of NOK 228 million, out of a harvest over 13,100 tonnes, which is an increase of 1,500 tonnes compared to Q4 last year. It all comes down to the operational EBIT of NOK 17.50 per kilo. Behind the numbers, a good performance, high-performing segment had been over tonnes for SalMar, a good team there as we have in the mid and the rest of the group.During the quarter, we have seen higher sea lice levels in part of the region, which has affected us especially on the fall '16 generation. Outside [indiscernible] and in some southern part of the region North. The increased treatment has infected our cost or has had impact of our cost in Q4 and we expect that will also have some negative effect on our cost going forward into the quarter that we are in now. We are and I should underline that in a situation where we have the preparedness and we had the capacity to handle the situation and we expect that going forward. We will be able to do that in a good way.Looking more into the numbers for the quarter. We have also slaughtered fish at a lower average rate then we have been wishing. That has to do with MAB adjustment. We have to stay within the limits and that has affected the size of the fish and of course, the price achievement in the quarter. Due to the increased sea lice levels and the treatment on the full '16 generation that we are harvesting now and going forward. We expect higher cost -- somewhat higher cost into Q1, this year for this segment. And although 143,000 tonnes in total, 47,000 tonnes in 2018, we expect to come from the region Northern Norway.Sales and Processing. Initially, I said strong quarter for that part of our group. Operational revenues in total NOK 2,767,000,000 million and it ends up in operational EBIT of NOK 175.5 million. Positive development that is a continuation. Our path that we've seen over the quarters. Strong team dedicated and we are very glad to see that underlying this result is a positive contribution from all segments, from slaughtering, from processing and from sales. The contracture in the quarter has been 44%, that has been to about the average spot prices generating also an effect -- positive effect from the contract portfolio.Looking forward, entering into this year, especially on the InnovaMar, which is the main processing and slaughtering facility. We have lower quantities due to seasonality. It should be said also that we have a very dynamic team that seeks to optimize things all the time and seeks to minimize the effects of that all the time. But then again, seasonality is a seasonality. Contracture for Q1 2018 is 48% and for the totality of the year is 26%.Moving into over related company starting with Norskott Havbruk, Scottish Seafarms 50% owned by us and Lerøy operational, EBIT of NOK 485 million -- operational income of NOK 485 million. Operational EBIT of NOK 115.4 million.Coming now to our harvest for the period of 7,200 tonnes, which is an increase of 1,400 tonnes compared to fourth quarter 2016. It all comes down here to an operational EBIT per kilo, all in all for that segment of NOK 16 per kilo. Dedicated teams, strong performance also this quarter. We knew this as a satisfactory operational results. Good operation and good performance in terms of priority and the majority of the activities. However, as noted also after Q3, the results are negatively impacted by biological challenge with Gill health on a small number of sites, 1 in Shetland and 3 in Scotland. That affects the figures and the operational EBIT. This effect is related to accelerated harvest, which increases the cost per kilo. You harvest a smaller fish and you also reduces what you should harvest going forward since this fish would have been harvested in Q1 and Q2 this year and it's already been taken out.Contracture in the quarter is 44%. Our guidance for harvest in 2018 is 26,000 tonnes. Arnarlax, which is leading development of sustainable agriculture on Iceland. An operational income NOK 171.7 million, coming down to an operational EBIT of NOK 4.3 million. Operational EBIT per kilo NOK 1.35 out of volume of 3,200 tonnes , which is an increase of 1,200 tonnes compared to Q4 2016.Arnarlax is a company, it's a young company, it's in a buildup phase. It has unlimited production still, which means that result very easily get affected by occurrences on one sites and this has also been the fact in this quarter. One site has performed not optimal and we have had some one-offs that has been affecting the results. And of course, being a young company, in an early phase, the ongoing structuring and ongoing buildup of different partial company affects what is an operational result compared to what is an optimal for a more mature developed company. We expect harvest volume in Arnarlax to be 11,000 tonnes in 2018. An overview is unchanged from Arnarlax, we hold a very long-term view as supporting the company. We are very focused on a robust development on the company on developing it step-by-step doing the right things in the right order, and that's our focus and that's how we tried to back the company from SalMar.Ocean Farm. Mentioning initially, starting off in the operational pilot phase in Q3 going into Q4 and into '18 in the critical first phase. We have delivered according to our plan and I would say so far so good. The growth of the fish is good. It's now reached and passed 1 kilo. We have low mortalities and we see traces of sea lice but at a very, very low level and very stable, low level. So also that is as expected. And as I said initially, so far what we see confirms the thinking behind the project when it was initiated.Focus now is of course, to do this operational pilot phase as optimal as possible. We focused to gather information, to gain experience. We've also initiated a technical program together with Kongsberg to develop Ocean Farming going forward. And it should also be mentioned that we're financing now a professorate at NTNU in order to developed knowledge about how to conduct sustainable Ocean Farming in the future.That concludes my part. First part of the presentation, and I now give over to Trond Tuvstein to take you through the financials.

[Trond Tuvstein, Chief Financial Officer]

Thank you, Trond, and good morning to everyone. I will take you through the overall financial figures for the fourth quarter 2017. And we begin with an overall waterfall analyzing, explaining this quarter's EBIT per kilo compared to last quarter. Last quarter, we achieved in EBIT per kilo of NOK 23.6, during the fourth quarter the spot prices has dropped from NOK 56.5 to NOK 49.4, a reduction of NOK 7.1 per kilo. Lower spot prices means lower purchasing cost for the sales and industry segments. This has led to higher profit on sales under fixed-price contracts. This combined with solid operational performance explains why this segment has increased EBIT per kilo by NOK 3 per kilo.For the Farming segments, the cost of harvest biomass in this quarter has been lower that in the previous quarter. On the other hands, the price achievement compared to last quarter has weakened. Overall, this segment has reduced EBIT per kilo by NOK 1.22 compared to last quarter. In total, this builds up an EBIT per kilo over NOK 17.70, a reduction of NOK 5.2 from that previous quarter.Then over to the P&L. Operating revenues for the fourth quarter amounted to NOK 2.8 billion, an increase of just over NOK 300 million from the corresponding quarter in 2016. The growth is driven by higher volumes close to 40,000 tonnes in this quarter compared to 26,500 tonnes in 2016. 44% of the volume is sold on fixed-price contracts with high price achievement compared to the spot market. This combined with cost improvements in the farming segment has generated an operating EBIT of NOK 707 million in the fourth quarter, an increase of just over NOK 150 million from the same quarter last year.In the fourth quarter, we have recorded a negative fair value adjustment of NOK 370 million, mainly explained by lower future prices in the calculation of fair value of biomass. EBIT for the period ended close to NOK 337 million. This is NOK 757 million lower than the -- in the corresponding quarter last year. This is due to the mentioned fair value adjustment of biomass.Income from associated companies totals to NOK 90 million in the quarter, and is related to the share of profit in Norskott and Arnarlax. Interest expense amounts to NOK 36.6 million in the quarter, in addition to a negative effect of NOK 34.2 million. Profit before tax ended at NOK 295 million. The calculated tax effect for the period is positive at NOK 6.5 million, and this is due to a reduction in the tax rate from 24% to 23%. Net profit for the period then ended at NOK 301 million.So over to the balance sheet. During the quarter, we have reduced our total assets by NOK 512 million, down to NOK 12.9 billion. Our investment relating to smolt facilities and a maintenance CapEx programs are running as scheduled. The investment related to the Ocean Farm has now ended. And in total, we see that fixed assets has increased with NOK 25.8 million during the quarter. We also noticed that the current asset is reduced by NOK 563 million, mainly explained by our lower value of biomass NC. The volume of biomass is approximately up 2,300 tonnes, corresponding to just about 3% compared to last year. No major changes in accounts receivables and other short-term receivables, and the underlying credit risk is considered to be low. A slightly decrease in cash holdings and this will be explained when going through the cash flow statement.During the quarter, we've had an equity buildup of NOK 334 million due to retained earnings. We have reduced net interest-bearing debt by NOK 392 million during the quarter. At the end of the year, we have a solid financial position. We have an equity ratio close to 60%, net interest-bearing debt of NOK 1.2 billion and NOK 3.9 billion in undrawn credit facilities.And then, to the cash flow statement. On the back of solid operational performance, together we had positive changes in working capital. We have generated a strong operational cash flow of NOK 526 million in the fourth quarter. As mentioned our investments program, are running as scheduled with a total outflow of NOK 141 million in the quarter. In addition, we have received dividend of NOK 27.5 million from our operations in Scottish Sea Farm. All together, a net outflow from investment activities of NOK 130 million in the quarter. The free cash flow generated in the quarter have been allocated to reduce net interest-bearing debt by NOK 410 million. In addition, we have paid interest through our financial creditors of NOK 27 million. All together, this leaves us with a net change in cash of NOK 23 million, in the fourth quarter.At last, some comments relating to our financial situation. Yesterday, the Board of Directors approved a new loan agreement, which extend the existing credit facilities with [ DMV ], Nordea and Danske Bank. The agreement is for a period of 3 years with an option to extend for another 2 years. The secured facility compromise of a term loan of NOK 650 million with a maturity date of July, 2019. A new CapEx facility of NOK 2 billion, a new revolving credit facility of NOK 1.5 billion, an existing overdraft facility of NOK 500 million.The associated financial covenants are an equity ratio about 35% and an interest coverage ratio about 4%. The facility help to give SalMar the needed financial flexibility to create what we view as a long-term shareholder value.Thank you. And the floor is yours again, Trond.

[Trond Williksen, Chief Executive Officer and President]

Thank you. Finally some words on how we view the situation going forward in takes for the outlooks. A key thing is of course, how we view the operational performance going forward and how that will affect cost which is a key to SalMar. In the shorter rise, we expect a stable cost development. We have guided already in this presentation that we see lowering costs in the region Mid of our farming operations and somewhat higher cost, short term in region North. And we expect that, that in some will be stable cost development. Should, however, been understated that our focus on cost is always embedded that's part of SalMar and we continue our push to take down our production cost also going forward.We mentioned that in the written corporate report that we have participated in the growth regime, traffic light growth regime that has been offered by the government. We have said yes, to the 2% growth, 754 tonnes of MTB growth and in addition to that, we have applied for 212 tonnes, when it comes to growth due to the other opening that is in that regime at that point. The visibility of the regime when it comes to the auctioning part, it's still not there. And we will consider that when it comes and the decision is made when it comes to how we will participate in that. The growth that we now have taken out in the 2%, plus the 212 tonnes that we're applying for will, of course, over time neutralize in the increased production but no material impact on our harvest this year.Ocean Farming has been mentioned as a main product in SalMar at the moment, so far so far good and we expect that volumes from Ocean Farm will reach to market in the second half of 2018.Contract share for the totality of 2018 is currently at 26%. It seems to be a consensus in the industry that the global supply is expected to grow 6%, a considerable part of that will come from Norway. It take that into account at the same time as we see that they will take volumes from Norway as I think, being very high or higher than expected in the first part of the year, underlying our feeling of the situation, which is that we see a continuous strong demand for our products in, I would say most of the market segments and also that forms the basis for our positive view on the market going forward. And with these words, I conclude the presentation. Thank you.