SalMar ASA

OSE:SALM

Earnings Call Transcript 2019-Q4

[Gustav Witzøe, executive]

Hi, and welcome to the quarterly presentation of the fourth quarter of 2019. We will follow the same agenda as in previous presentations. First, I will present the strategic and operational highlights. Then our CFO, Trine, will give us the operational and financial update. And I will return again with outlook.

The largest strategic move we currently make in SalMar is to divide the direction of salmon production into coastal and offshore. The coastal areas will continue to be the core of salmon production in the coming years. In this area, we will still be at the forefront with an uncompromising focus on cost and a desire to always do things a little better tomorrow than what we did today. We will also seek attractive growth opportunities based on the environment and climate, the green's gift, and which -- and wish to take part of the increased growth, which was announced earlier in February. A couple of days ago, we filled in application to buy 682 tonnes through the fixed price part, which will give us increased capacity in both Central and Northern Norway.

In addition, SalMar wants to lead the development of offshore farming, utilizing the fantastic ocean with production on the salmon terms, not the limitation of the equipment. This work, we will continue through a newly founded company SalMar Ocean.

As you are aware of, we achieved good biologic results on the first production cycle on Ocean Farm 1 and harvested fish of fantastic quality. For us, this was a major milestone and confirm that offshore farming truly is a sustainable production on the terms of the salmon. So far, in the second production cycle, the status look very promising. We have better growth comparing with the first generation. The sea lice level are stable at a low level despite increased sea lice pressure in Central Norway. Over nearly 1.5 production cycle, we have -- hadn't any sea lice treatment on Ocean Farm 1. The strength that our belief in the fantastic growth potential for the salmon industry and the direction we are heading is correct. This experience gives us a significant energy, which we take with us in the future development, Smart Fish Farm, where the project continues according to plan. There's a great potential for offshore farming in the open sea, out in the ocean current and outside of the negative implications of the current -- of the coastal current. SalMar aimed to lead this development and believe that most of our volume growth will come from this area in the years to come.

SalMar also gets many inquiries from all over the world, especially from Asia, Europe and North America, with opportunities to develop offshore farming. For us, these are exciting strategic opportunities that we will consider constantly, even though Norway is our primary focus area going forward. But in SalMar, we have strategic opportunities throughout the whole value chain. It doesn't help to have strategic opportunities if you can't do anything with them. To be able to realize them, you need talented people and a strong culture. In SalMar, we have reinforced the focus through the SalMar School, where we gather all employees to develop our fantastic people and strengthen our organization and cultural focus.

When I stood here last time, I mentioned that this should be even more hungry going forward. That is why we have taken a number of measures to reduce cost by fine-tuning details while also making significant investment in technology and capacity, especially within biology and industry at sales. A lot has already been done, and implement, which we know will improve biologically and economic results, both in the short and long term.

Last quarter, we committed to better results in the Northern Norway. And I'm very pleased that we have delivered on this as well. Cost leadership and being the best within biology is the DNA of SalMar and something we should be best on -- best-in-class at. This is important to us as an organization and something we need to work with every day to create the best results on the terms of the salmon. Today, I want to highlight a few areas, smolt. In year-end, Follafoss 2 was completed, which will give us increased capacity in Central Norway to deliver the right smolt with the right quality and the -- at the right time. The first row is now on its way through the facility, and we expect first delivery during this autumn. Follafoss is our largest small facility, and has become an important competence center for us within smolt. To build on this, we acquired a lot of land, a short distance from Follafoss in the fourth quarter, where we now are considering building a new smolt plant. After the start-up period of our smolt facility on Senja, the facility has performed very well. Therefore, we are now expanding the capacity through the development of Senja 2. Our goal is to create the same competence center as Senja as we have created in Follafoss. Leading competence center along with state art of the smolt facilities will provide us with the best smolt and are crucial for our biological and performance at cost -- and cost leadership.

Then I want to say something about the industry. It had not been -- if it had not been for the quarterly presentation today, I would have been in Frøya to participate in a large celebration at InnovaMar. We have now harvested 1 million tonne of gutted salmon at the facility since its beginning in 2010. To put this into perspective, the current spans to over 3.8 billion meals that we have delivered worldwide from a small island on the coast of Central Norway.

Despite the lack of understanding for this project in the early phase, InnovaMar has been a fantastic journey in terms of efficiency, quality, economy, generate jobs and know-how and other ripples effect. And now, we are well in the process of establishing a similar facility in Northern Norway, where all the experience from InnovaMar are including in the project. The construction of InnovaNor is going according to plan, and the building itself is now rising on Senja. This is an important strategic investment, not only for SalMar, but also for the entire value chain and the region. When the facility is ready in 2021, it will complete the value chain in Northern Norway and give us the possibility to harvest on the salmon terms, in addition to the secondary processing capacity, which will give us more flexibility to adjust the volumes to different products, the market demands.

Arnarlax. Production for Arnarlax in 2019 has gone according to plan and has given us experience and knowledge to future develop salmon production on Iceland. Importantly, the beginning of 2020 have given -- gave us an extra lesson in Arnarlax. We were hit by a bad winter storms on location with harvest-ready fish. A consequence of low temperature and small harvesting capacity, we have gotten significant mortality figures. The lesson is that we need to take out more harvest-ready fish before we enter the winter season with low temperature and the possibility of bad weather.

If you look into specifically the results for the fourth quarter of 2019, we deliver as expected on volume and cost. But the price achievement was affected by large harvesting volume early in the period. Harvesting volume of 40,300 tonnes with an operational EBIT of NOK 658 million for the group with a margin of NOK 17.12 per kilo. Norway harvested 37,700 tonnes with an operational EBIT of NOK 631 million with a margin of NOK 6.72 per kilo. After several demanding quarters for Northern Norway, the new deliver -- they now deliver significantly lower cost level and good results in the quarter.

The fourth quarter has been characterized by rising price and adjusted of large harvesting volume early in the period. Central Norway delivers a weak price achievement that effect on the profitability. Lower volume in InnovaMar has given lower capacity utilizations and the rising price during the quarter lead to lower contribution from the fixed-price contracts. We maintain our guiding of 152,000 tonnes for 2020 in Norway. However, we increased estimate in Iceland to 12,000 tonnes in 2020 as a result to receive harvesting profile during the autumn of 2020. When it comes to dividend, SalMar has a well-known ambition to provide its shareholders with a competitive return on investment capital. The return will be achieved through a combination of positive share development and divide payouts. For 2019, the Board of Directors proposed a dividend of NOK 20 per share.

Now to take us through the operational and financial update, I give the word to our CFO, Trine.

[Trine Romuld, executive]

Okay. Thank you, Gustav. Then I will start with some comments to the farming, Central Norway. We harvested out 24,400 tonnes in the quarter with operational EBIT of NOK 418 million, which gives EBIT per kilo of NOK 17.13.

As already mentioned previously by Gustav, the price achievement in the quarter is heavily affected by large harvest volume early in the period, where the prices were by far the lowest. So approximately 50% of the harvested volume in the quarter was harvested out in October. And for those of you that following the NASDAQ, you will see that the NASDAQ average price in October was 47 compared to -- sorry, 57 -- no, 70 in December.

In addition, one reason for harvesting out much of the volume beginning in the quarter was that we had some sea lice pressure in the area. And we choose to harvest the fish out earlier than planned, and that was part of the autumn 2018 generation to reduce the biological risk. So this affected, of course, the average weight of the fish and as such, also the cost for fish harvested, and also the prices achieved. That being said, we are satisfied with the way that we solved the issue and that we were able to do what was best for the fish.

In the quarter, we harvested about 50% of the autumn 2018 generation and 50% of the spring 2018 generation. And we will continue to harvest those generation in the first quarter of 2020 and also start harvesting in the spring 2019, which so far has shown a very good biological results. When it comes to first quarter 2020, we expect somewhat lower volume due to seasonality and -- but a stable cost in the quarter. For the total for the year, we expect to harvest 103,000 tonnes in Central Norway.

If you go to the northern part, the result is expected when it comes to costs. And as Gustav said, we are very pleased that we are able to reduce the cost significantly as we also promised in the last quarterly presentation. We harvested, about 50% of the volume is from the spring '18 generation, and the remaining is from the autumn '18 generation, which also has shown a good biological performance. We expect somewhat similar volume also in the quarter to come and the same cost level. We expect to harvest 49,000 tonnes for the total year.

Sales and processing. We had quite low harvesting volume is this quarter. And that, of course, impacted also the cost level that we have higher cost per kilo harvested. So that is the main explanation in addition to the fact that we had little result from the contract prices towards the spot prices in this quarter, in particular, since the kind of -- spot prices was increasing during the quarter. And in particular, if you compare to this to last quarter, that was the main explanation for the quarter-by-quarter difference.

Contract share currently expected for this quarter 1 is 30% comparing to 20% in quarter 4. And for the whole year, we expect 20%. Even though the results for quarter 4 was lower than maybe expected, we see that the result for the year that has significantly improved compared to last year, which we are pleased. Construction work on our new processing plant on Senja, InnovaNor, is progressing according to plan, both from a cost level, but also from a timing perspective. So we expect to start using that plant in the last part of quarter 2020.

Arnarlax, we have positive contribution also in this period from Arnarlax. We have stable production cost, and we also have a stable utilization of the capacity and the processing plant. We harvested out from both the 2017 generation and started on the '18 generation. We expect somewhat higher volume in quarter 1. And that is the cause of what Gustav already has explained, that we due to biological issues had to harvest out a lot of fish in February and that was a combination of winter wounds and also very tough weather condition the last weeks. So that means that we have a higher volume and also that we have some higher cost because we have some cost related to activity to be able to harvest the fish on short time. The guiding for next year is increased from 10,000 to 12,000 tonnes. And that is because we started to harvest out the spring 2019 generation before Christmas rather than after Christmas. And the reason will be that we see that we have better growth than expected on '18 generation.

Norskott. The results for the period are weak. We harvest -- the harvest volume is lower because of what we experienced in the beginning of the year with the biological challenges, both in Shetland and Mainland. The main harvesting volume this quarter is from Orkney and Mainland. We also see that the cost is impacted both due to low volume, but also that we had some mortality in this quarter. And the mortality cost itself amounts to approximately NOK 5 per kilo. In addition, you have the consequence that the harvest is out on lower rate, which also impacted by the cost. Talking about the cost, we expect improvement in quarter 1. I will also add that due to having lower volume, of course, we have some contract commitment.

And we have also harvested out some fish earlier, also to be able to fulfill the contracts we have. So that has also, of course, impacted the average size of the fish. What's good is that the company has now given us update of the biological situation for the fish in all 3 region and that is reported to be good. The growth is good and the feeding is good. Due to the fact that we had some biological issues this year, the harvested volume will not be higher in 2020 than we had this year. So that will be maintained at 26,000 tonnes.

So if we go over to some comments on the financial part, starting with comparing the operational EBIT for the quarter 3 to quarter 4, it's not a huge change. The EBIT per kilo last quarter for Norwegian operation was NOK 17.64 and now it was NOK 16.72. So it's 0.91 lower and that is mainly due to net sales price being lower, so even the NASDAQ prices has been higher comparing quarter-by-quarter. We haven't seen that impact, mostly due to that we're harvesting out a lot of fish in October with significantly lower price. The good thing is that we have lower cost in the value chain mostly driven by lower cost in the northern part, but somewhat offset that we have higher cost, for instance, capacity cost, as I already has explained. The next -- for the group is really -- the only difference is that we include Arnarlax. So they are contributing positive. They have somewhat higher EBIT this quarter compared to last quarter.

The group P&L. I would just like to mention some few comments. So it's easier to understand the figures. As you can see, for the quarter compared to last quarter, the volume is more or less the same, the harvest volume. Operating income is slightly higher, and that is due to slightly higher sales price. The increase in depreciation and interest cost is due to including Arnarlax and also due to implementation IFRS. And also, I would like to add 1 comment to the net interest -- all the financial items, which is positive for the year. And that is related to the fact that we changed Arnarlax from being a minority to be a group company. So if we look into the EBIT per kilo, NOK 16.31 compared to NOK 23.11, quarter 4 2018, the decrease of NOK 6.8 is mainly -- it's driven by that we actually have higher cost for this, but also that we have, of course, weaker price achievement compared to even the NASDAQ is slightly higher and that we have explained earlier and that is mainly related to mid Norway.

If we go to the group balance sheet, what I would like to highlight is that we still have a very strong balance sheet. We have equity ratio 54.2%. And if you're comparing the EBITDA and the EBIT, the ratio there we have 0.8, which is very good. If you're comparing the net interest-bearing debt, that is slightly increased in the quarter, and that is mainly due to the CapEx program ongoing.

If we look into more detail, we go to the next slide. So to the left, we're starting with the net interest-bearing debt start over this quarter. And then we take out the IFRS leasing adjustment. We can see EBITDA. Of course, we have paid taxes. We are spending on investments. That is net of the dividend we have received from Norskott. So that is the explanation for this quarter. If you're comparing the whole year and starting with the net interest-bearing debt at the beginning of 2019 and comparing to the end of 2019, we have an adjusting for IFRS, we have increased the net interest-bearing debt with NOK 1.7 billion. And to briefly explain that, NOK 0.8 billion is related to Arnarlax, and the remaining is related to CapEx and dividend, somewhat offset by higher cash flow from the operation during the year.

Then I will give the word back to Gustav.

[Gustav Witzøe, executive]

Thank you, Trine. Some comments to the outlook. We expect continued good demand in core markets and moderate increase in global supply. There is good biologic status on the fish in the sea. And so far, in 2020, we have experienced low mortality and good growth from the Norwegian operations. In total, the exact reduction in volume in Q1 and a stable cost level. Stable volume and cost in Northern Norway and a higher volume and cost in Iceland. The contract share is around 30% in Q1 and 20% in 2020, which prices slightly up from the level of 2019.

We are maintaining our guiding of 152,000 tonnes in Norway and increased to 12,000 tonnes in Iceland, Arnarlax. Scottish Sea Farm expected to harvest 26,000 tonnes in 2020. We see offshore fishing -- fish farming as a significant growth opportunity in the future and has strengthened our efforts through this establishment of SalMar Ocean. In 2020, we expect to invest around NOK 1.4 billion, where we have strategic investment throughout the value chain in order to create a strong foundation for future growth and to utilize the potential in this industry. In total, this provides us with a good starting point for sustainable growth on the salmon terms. But now, over to something exciting we are looking forward to.

[Presentation]

[Gustav Witzøe, executive]

Yes, we are looking forward to welcome you to Frøya on the 15th or 16th of June this year and show you some of the best we have to offer. As shown in the video, you will get the opportunity to visit both InnovaMar, traditional fish farm, and also Ocean Farm 1, the world's first offshore fish farm. In addition, the executive management will give you insight into the strategic ambition for the group in the years to come. Please visit our website for more practical information and to register. Also, as a result of reorganization internally, our former Head of Investor Relations Runar Sivertsen will take a new role as the Director of Strategic Projects in SalMar. Thank you, Runar, for 7 years. Therefore, I would like to introduce our new Head of Investor Relations, Håkon Husby.

[Håkon Husby, executive]

Thank you, Gustav. Unfortunately, Runar didn't have the opportunity to be here today, but he wanted me to convey our thank you to each and every one of you who follows the company and who have followed in the years before for the good cooperation he has had with all of you. And now he's moving on to a new and exciting role within the company. So he's looking forward to that. And now myself, Håkon Husby will take over his former role. I have been in SalMar since the summer of 2018. And in the short time I have been here, I gained insights into a fantastic organization that has all of the opportunities ahead of itself, a journey I really look forward to being a part of. Contact details, you can find on the screen and also from our web page from the first of 1st of March 2020. I look forward to get to know each and everyone of you better. And I hope to see several of you when we get to Frøya on June for our Capital Market Day.

With this, we have come to the end of the quarterly presentation for the Q4 2019. And from all of us who has been here today, we look forward to meet you again in May when we present the results for Q1. Thank you very much.