SalMar ASA

OSE:SALM

Earnings Call Transcript 2018-Q4

[Olav-Andreas Ervik]

Good morning, and welcome, everyone, to 2018 Q4 SalMar Presentation. I'm Olav-Andreas Ervik; and as always, CFO, Trond Tuvstein with me today. We will follow the same agenda as in the previous quarterly presentations, starting with the highlights.Good operational performance from both biology and sales industry, strong demand and record-high harvest volumes. This has contributed to a satisfactory quarter, which gave us an operational EBIT over NOK 935 million and an EBIT per kilo of NOK 23.11. We maintained our guiding given in the last quarterly presentation at 145,000 tonnes for 2019. And we proposed a dividend of NOK 23 per share for 2018.Using the value chain in this period, we started the groundwork for the new harvesting plant at Senja in the Northern Norway. We expect the facility to be up and running in the second half of 2020. And we're also planning for expansion of our smolt facility on Senja.Over to operational updates, starting with Farming Central Norway. Operations in line with expectations with an EBIT per kilo of NOK 22.53 and a harvest volume of 28,200 tonnes. Volume from Ocean Farm 1 is included in the volume for Central Norway, parts of the volume with long -- low average weights and higher costs. This volume comes from the autumn '17 generation and large volumes from one site, which has experienced challenges with fish health, mostly CMS and gill health. This has led to forward harvest of small fish. We'll continue harvesting all autumn '17 generation at mentioned sites in Q1 '19, keeping costs at the same level as in Q4 '18. We expect to harvest 95,000 tonnes in Central Norway in 2019.Also, in the Northern Norway, the results were as expected with a higher volume and a lower cost than in previous quarters. We harvested a volume of 12,200 tonnes and an EBIT per kilo of NOK 23.86. We had a lower-than-expected growth in previous months, but this has improved significantly in Q4, something that has contributed to high average weights on the harvest volume, and thereby, also lower costs.Expect the cost level to remain stable in Q1 '19 as the volume will come from the completion of our spring '17 generation, representing 40% of the volume and 60% of the volume from start-up of autumn '17 generation.ISA suspicion at our site [indiscernible] has not been confirmed. So we're continuing production and harvesting according to plan. Expect harvest of 50,000 tonnes in 2019 in Northern Norway.Sales and Processing delivers an EBIT of NOK 79 million in the quarter, a result that is affected by lower average weights of the fish at the end of the period. The price in Q4 '17 was NOK 6.47 lower, which contributed to very good effect on the contracts in 2017. Hence, the reduction in margin. Expect lower volume in Q1 '19, at the same level as in Q1 '18.Lower contract share for 2019, 20% shares, somewhat down from earlier, but the price level is up. And we expect continued good price and demand also in 2019.Norskott Havbruk, or Scottish Sea Farms, good results from operations in the quarter, with improvements in cost compared to previous quarters and last year. The result was positively affected by good price achievement as a result of high average weights on harvested volume in the quarter. The new RAS facility is near completion according to plan and the first egg was received in November '18, with the first release of smolt in autumn 2019. Scottish Sea Farms expect to harvest 30,000 tonnes in 2019.Arnarlax, still ongoing structuring of the company and the organization. And we are still in early phase, which reflect -- is reflected in the harvest volume in the quarter of 2,000 tonnes and 6,700 tonnes for 2018. Arnarlax delivers a result of minus NOK 10 million, and this result is affected by higher fixed costs and lower -- low harvest volume. On the positive side, they've gotten one of the best operational managers from SalMar as CEO. Bjørn Hembre came from the position as Managing Director of SalMar Freshwater. Arnarlax expects to harvest 10,000 tonnes in 2019.SalMar increases its shareholding in Arnarlax to 54%. Reference is made to stock exchange notice regarding acquisition of additional shares in Arnarlax. Increase of ownership is a natural next step in Arnarlax to develop the company further. This increase in ownership triggers a takeover bid obligation and an offer we will make to remaining shareholders in the company in accordance with the provisions of the shareholder agreement.The first generation from Ocean Farm 1 was harvested during the quarter, and there were only 2 levels left in the cage when they passed the new year. We can look back on the production with good results from the smolt release until we started harvesting. We have experienced globalized levels and no treatments for lice, good quality and good growth. We should be cautious about summarizing before the final evaluation of the project has been completed, but we can say, so far, we have had some challenges along the way, but all of these are of such a nature that they are possible to correct and several actions have been implemented, and remaining adjustments will be carried out before the next smolt release. We have learned a lot from the project, both in good and bad terms. But the most important lessons and experience is that we see the production of salmon in the ocean in such an environment with this type of technology, first and foremost, is possible but it also provides very good results.In total, this strengthened our self-confidence and belief that the direction is correct as well as confidence to continue in this direction because now we will embark on a new project enabling production of salmon even further out in the open ocean.And the next step is the production of salmon in the open ocean. On the salmon terms and not on the limitations of the equipment, the development of a Smart Fish Farm will lead us to the next step in adopting new areas further offshore. The development[Foreign Language]Yes, and the next step in the production of salmon in the open ocean on the salmon terms and not on the limitations of the equipment, the development of Smart Fish Farm will lead us to the next step in adapting new areas further offshore. This unit has the capacity to produce 3 million salmon divided into 8 chambers. It has a central column that will make it possible to handle fish. This means grading and treating against sea lice, if necessary, without having to stress the fish by pumping it or having help from the outside.And then over to the financial update, and Trond?

[Trond Tuvstein, Chief Financial Officer]

Yes. Thank you, and good morning, everyone. I will take you through the overall financial figures for the fourth quarter of 2018. And as usual, we'll begin with an overall waterfall analysis, building a bridge from last quarter's EBIT per kilo over to this quarter. And the key takes here are a solid performance in the sales and industrial segment, an EBIT of NOK 79 million or NOK 1.96 per kilo, down marginally from the last quarter. The farming segment is coming from a strong third quarter, with high price achievement and low cost and a total margin of NOK 25.55. As mentioned, low harvest weight at the end of the period has softened the price achievement compared to the third quarter. As guided, the cost is around NOK 1 higher in this quarter. So in total and taking into the account the underlying increase in the NASDAQ price, the margin achievement is down 3.7% compared to the last quarter. And in total, this bridged the EBIT of NOK 23.11 in the fourth quarter.And then over to the profit and loss statement. Starting with the operational revenues, which amounted to NOK 3.1 billion, up NOK 320 million from the corresponding quarter in 2017. The increase is explained by higher prices year-over-year. Operational EBIT for the quarter ended at NOK 935 million, corresponding to our operational margin of 30%. This is approximately NOK 228 million higher than in the fourth quarter of 2017 and is explained by the higher prices, but also lower cost.As you can see, we have posted our positive fair value adjustment of NOK 430 million in the fourth quarter, mainly explained by increased value of biomass.Income from associated companies totals NOK 282.3 million and is mainly related to share of profit in Norskott Havbruk. Stable development in interest expense, total of NOK 28 million, and in addition, in this quarter, a negative effect from foreign exchange over NOK 37 million.And then over to our financial position. At the end of the year, as we can see, our total asset has increased with NOK 821 million; during the quarter, up to NOK 15.1 billion, driven by a higher value of current assets. Only minor changes in our total fixed assets. A seasonal buildup of the biomass together with implementation of a new fair value model explains the increase in value of inventory compared to last quarter.When it comes to volume, some comments on that. Both the number of individuals and the total volume of biomass in sea is up 3% compared to last year, underlying next year's harvest volumes. We also see an increase in account receivables and other short-term receivables explained by normal seasonal fluctuation, meaning that the volume in December, the harvesting volume, was higher than compared to the volume in September. The underlying credit risk is still at a low level. The decrease in cash holdings of NOK 250 million will be explained in the cash flow statement.Retained earnings explains the buildup of equity of NOK 1.2 billion during the quarter. We have also increased the net interest-bearing debt by NOK 200 million during the quarter, but we still have a solid financial position, with an equity ratio of 60% and a net interest-bearing debt of NOK 1.5 billion and NOK 3.5 billion in undrawn credit facilities.So at last, some comments on the cash flow statement. In the fourth quarter, we generated a negative cash flow from operations despite good earnings, and this can be explained by an outflow of tax payment, NOK 659 million, together with our seasonal buildup of working capital, which means a negative cash flow from operations.During the quarter, we have invested a total of NOK 119 million in operating assets. I could also mention that we have started up the initial phase of the MariCulture project and invested around NOK 20 million into that project during the fourth quarter.Altogether, our net outflow from investment activities of NOK 144 million. We have reduced our net -- our interest-bearing debt by NOK 49 million and also paid, as mentioned, interest to our financial creditors of NOK 28 million. Altogether, this leaves us with a negative change in cash of NOK 250 million in the fourth quarter.Thank you. And I pass the word on to you, again, Olav-Andreas.

[Olav-Andreas Ervik]

Thank you, Trond. And that's the outlook. We will continue to harvest from the same generations and expect costs to be at the same level in Q1. We do see challenges -- some challenges ahead, and they are that we are in a very cold period, with low temperatures. This can affect growth and lead to challenges, especially when -- with handling fish. We are currently at the same temperature level in mid-Norway as in 2013, which is the coldest we have experienced for the last 10 years. We continue our ongoing investment program to maintain and upgrade our existing infrastructure and expect to invest around NOK 272 million in 2019.Furthermore, we are investing in a strong platform for further growth across the entire value chain, with projects within Smolt and Hatchery Farming, Sales and Processing and MariCulture. In total, investments in 2019 are currently estimated to NOK 896 million. Contract share for the full year 2019 at 20%, somewhat down from earlier, but price level is up. Expect continued good price and demand also in 2019.That was the presentation of our Q4. Looking forward to see you in May. Thank you.