Earnings Call: Q4 2019

Feb 25, 2020

I would like to welcome you to the fourth quarter financial presentation for Austevoll Seafood. I will briefly take you through the highlights of the quarter and the year. Thereafter, I will go through segment by segment. Britt, our CFO, will take you through the numbers in more details, and then I will end by having a view on how we are looking at the different markets of the different segments we are operating within. Starting off with the quarter, I would say we are decently happy with the numbers. The salmon operation has been improving since the third quarter. I would say that the main season for pelagic has been during fourth quarter when it comes to the human consumption business, and they have performed quite well. I would say on the disappointing side, the performance on fishing in Peru has been lower than what we expected when we enter into the main season. I will come back to that. But looking at the numbers on the fourth quarter, we are delivering a revenue of just short of 6 billion NOK, an EBITDA of just below 1 billion NOK, and an EBIT of 650 million NOK. Pre-tax profit of 714 million NOK. If you also include the 50% share we have in Pelagia in our EBITDA numbers, you can see the following distribution between salmon activity and the remaining of Austevoll Seafood's activity outside Lerøy operation. Total EBITDA from Lerøy of just over 1 billion NOK, and on the pelagic side, it's 100 million NOK. We are delivering approximately 90 million NOK less in Q4 2019 versus 2018, and it has mainly to do with the slow performance or weak performance in Peru. Looking at the full year numbers, we have a revenue of 23.3 billion NOK, EBITDA of 4.2 billion NOK, EBIT of just short of 3 billion NOK and pre-tax profit of 3 billion NOK. We have a strong balance. Total assets of just short of 40 billion NOK and a net interest-bearing debt of 4 billion NOK. Doing the same exercise on a full year basis with the 50% shares of Pelagia, you see that the total revenue is just short of 4.7, no, the total EBITDA is just short of 4.7 billion NOK, whereas 3.7 billion NOK is coming from the salmon activity and just short of 1 billion NOK from Pelagia. On the pelagic side, I would say the difference from this year versus 2018, you can find in the result from Peru. We have 250,000 tons less raw material, and that is more or less 300 million NOK less in EBITDA. On the salmon side, we are slaughtering 4,000 tons less than we did last year. The EBIT per kilo is approximately 4 NOK less than it was in 2018. That if you also include a bit weaker performance on the white fish segments on the land-based operation, it more or less explain the difference from 2019 to 2018. The board will recommend to the annual general meeting in 2020 a dividend of NOK 4.50 per share, which is up 1 NOK compared with 2019. Then looking at our overview. If you look on the right-hand side there, we are aiming to catch between or just north of 400,000 tons on our own quotas for next year. Aiming to process between 1.8 million and 1.9 million tons of pelagic fish, 100,000 tons of white fish, including what we are catching and what we are going to produce onshore. We are also raising our slaughtering volume with 15,000 tons in 2020 versus 2019. Going back to the pelagic side, starting with the Austral Group, our Peruvian operation. It is fair to say that we are a bit disappointed of, I would say, the development of the fishing after the high quota, which was issued by the end of 2019. When they stopped the season, it was only 36% of the total quota which were caught, and that is around 1 million tons, which is half of the volume was caught same period last year. If you look at the full year quotas for 2019, were approximately 500,000 tons less than it was in 2018, but the total fishery were just about 3 million tons. I would say 2.5 million tons less fishery in 2019 versus 2018. I would say it was a challenging fishery, starting up quite well. Fishery was located in the north, and then during the season, I would say it was too high percentage of juveniles in the catch. What we experienced was that they were closing different areas along the coast. I think it was up to 63 areas which were closed during the period. I would say by the beginning of January, they decided to close the fishing season because it was too high percentage of juveniles in the catch. Only 36% of the quota was caught. We were catching 50,000 tons, purchasing 30,000 tons. Combined fish meal and oil was 27%, and 76% was high quality fish meal. Again, a disappointing season. Too high percentage of juveniles. Should make also a foundation for a better first season in 2020. Again, it is of course subject to the IMARPE cruise which started up last week. Looking at, I would say, the total expectation for next year, we are aiming to or hoping to process 140,000, 150,000 tons more raw material versus 2019 in Austevoll. There has also been catches for human consumption, mackerel and horse mackerel. Fishery is located in the south. Up to now we have been catching up to 14,000 tons versus 10,000 tons same period last year. Going to Chile. I would say the first two quarter is the main important quarters in Chile. That is where we are making the year. It has been limited operation in fourth quarter. Of course that has also impact on the number. This is seasonal, normal. I would say if you look at the full year basis, the difference from last year performance and 2018, was the absence of giant squid in our operation, which more or less explained the difference in our profits. Looking at the North Atlantic pelagic quota, more or less on the same level as it was last year. I would say raw material for fish meal and fish oil activity remains the same, and it is a bit up when it comes to raw material for frozen and filleting operation along the Norwegian coast. Pelagia had a very good fourth quarter also when it comes to the fish meal activity. Total volume of 180,000 tons, a bit higher than same quarter last year. If you look at volumes in 2019 versus 2018, it is approximately 50,000 tons less. Saying that, Pelagia has performed well also in this segment. I would say sale is a bit down this quarter compared with the same quarter last year, and we are also seeing that prices are increasing as a consequence of the lower volume coming from Peru. When it comes to the direct human consumption activity of Pelagia, I would say fourth quarter is the main important quarter, and approximately 50% of the annual volume of the year is harvested and produced in fourth quarter. I would say they have a good performance in the quarter. Mackerel and winter herring has been the most important raw material. I would say that although the prices has been very high on the raw material for mackerel, they have been able to achieve margins when they have sold the frozen products. Have also started up well in 2020 with mackerel and winter herring production. Looking at the result, you are seeing that the EBITDA is NOK 265, up from NOK 214 same period last year. EBIT NOK 206, up from NOK 163. On a full year basis, you also see that it is a good year. It is the best year ever for Pelagia since we established the company in 2014. Revenue of NOK 7 billion, EBITDA of NOK 871 million, and EBIT of NOK 650 million. It is also a gain of sales included in this number of NOK 105 million. Also, despite that, the result is the best ever. Coming to the salmon activity, I would suggest all of you, if you want a more detailed presentation on the salmon activity, you should go into the Lerøy webpage and look at the presentation of four quarters that Henning and Sjur were doing earlier today. Summing up, I would say that we have done investments now both on the salmon side, on the sales and distribution side, and also on the white fish side, rigging the company to grow for the next year, and is quite an interesting foundation going forward. Looking at the fourth quarter, the EBIT is approximately NOK 180 million lower than it was last year. I would say the performance is far better than it was from third quarter. The NOK 180 million from last year, you could explain by a slower growth and also, I would say, a lower slaughtering volume of 6,000 tons, and also a bit more challenging market situation for the land-based operation on the white fish operation. The harvested volume, 43,000 tons, 13,000 tons up north, 15,000 tons in the mid, and on the west coast, 15,000 tons. Spot price more or less on the same level it was same quarter last year. You can see the EBIT per kilo of Lerøy is NOK 17, down from NOK 18 same quarter last year. Big variation between the regions, 25 NOK EBIT in Lerøy Aurora, 11 NOK in Lerøy Midt, and approximately 7 NOK in Lerøy Sjøtroll. Maintaining a volume guidance of 172,000 tons in Norway. I would say it is fair to say that we are not happy with our performance in 2019 in terms of volumes. We are expecting now that the investments, particularly in the post-smolt plants, will increase our volume going forward. On the Wild Catch side, it has been a good journey also in terms of volumes, prices, and also development of the quota in the quarter. I would say it has been positive, everything for the fishing activity. Remaining it, of course, also more challenging when raw material prices going up from the land-based activity. Total volume for 2019, a bit less than 2018, 62,000 to 63,000 tons. We are expecting that on cod, haddock, and saithe, it is going to be a small increase compared with last year. Then I give the floor to Britt. We start with this table, and the table sums up the raw material intake in the quarter and in 2019 as a whole, and also our expectations for 2020. As you can see, there is a reduction in raw material, pelagic raw material, of 100,000 tons in the fourth quarter 2019 compared with the same quarter in 2018, and that is related to Peru, as Arne has mentioned earlier. Arne has also taken you through the key figures, so I will start with the EBIT line. The EBIT in the fourth quarter 2019 is 652 million. That is down from 955 million in Q4 2018. If we include our 50% share of Pelagia, the EBIT in the fourth quarter 2019 is 756 million. Income from associated companies is more or less at the same level as the same quarter in 2018, 130 million. Net finance in the quarter is minus 68 million, down from 118 million in the same quarter 2018. Pre-tax profit, and that is also ex the biomass adjustment, is 715 million in the quarter, down from 968 million in same quarter in 2018. That gives an earnings per share in the quarter of NOK 1.36, down from NOK 2.49. If we look at the total 2019, the revenue is 23.3 billion, and that is up from 22.8 billion in 2018. If we include 50% of Pelagia, our share, then the turnover in 2019 is almost 27 billion. EBITDA in 2019 is 4.3 million, down from 5.2. Including 50% of Pelagia, the EBITDA is 4.7 billion. Depreciation is 1.3 billion, up from 960 million. I have to inform you that from 1st of January 2019, we implemented the IFRS 16, and that means that all leases should be taken into the balance sheet and the operational lease cost, which was in 2018 and before that, operational cost is now a part of the depreciation and the net interest. Part of the increase in depreciation is related to the effect of IFRS 16, around NOK 213 million. The lines and the result is not comparable or directly comparable with 2018. EBIT in 2019 is NOK 2.9 billion, down from NOK 4.3 billion. If we include our 50% share of Pelagia, the EBIT is NOK 3.2 billion. Income from associated is also for the full year, more or less in line with 2018, NOK 469 million. The two largest associated companies are Pelagia and Norskott. You can find additional information of those two company as appendix to this presentation. Net finance in 2019 was minus NOK 312 million, down from minus NOK 356 million. But as mentioned, there is an IFRS effect included in the net finance in 2019, which was not included in 2018. Net interest is minus NOK 298 compared to minus NOK 277 in 2018. The pre-tax result, and that is ex biomass adjustment, is NOK 3.1 billion, down from NOK 4.4 billion in 2018. That gives an earnings per share of NOK 6.89, down from NOK 9.79. Arne has taken you through the key figures for the quarter in Lerøy, so I will give some comments to the quarter. Lerøy has slaughtered a little bit less than 43,000 tons, and that is down from 49,000 tons in same quarter in 2018. The EBIT per kilo is NOK 17, down one NOK from same quarter in 2018. The spot prices in the second half of 2019 has been very volatile, and the lowest has been down to NOK 40 and the highest up to NOK 80. Of course, timing of your sales in the period or in the quarter has a big impact on your total price achievement in the quarter. When you see the average spot price in fourth quarter, that is NOK 56, and that is up 1% compared to the same quarter in 2018. Lerøy has a contract share of 38%, and the contract prices has been higher than the spot prices. When it comes to release from stock cost, the cost is down from Q3 2019, but it's higher compared with Q4 2018. Wild Catch has an EBIT of NOK 42 million in the quarter, down from NOK 54 million in same quarter 2018. Looking into the biomass at sea, you see that that is up 1% compared with the end of 2018. Looking at the quarter, but also full year 2019, you can see that there is a substantial reduction in raw material intake, 100,000 tons down in raw material intake in Q4 2019 compared with 2018, and 250,000 tons down for the full year 2019 compared to 2018. Of course, that has a negative impact on the earnings in the company. We have also had lower prices for fish meal, around 6% in 2019 compared with 2018. We have had a higher price for fish oil, but that is also a lower volume, of course. Looking at the inventory by end 2019, we have approximately 15,000 tons of fish meal on stock compared to over 37,000 tons by the end of 2018, so going into 2020 with quite low inventory. I have to mention that we also have a contract of 13,000 tons of fish meal, which is not produced yet, which is contracted and priced at the Q4 price level. That is worth taking into consideration looking into Q1 and Q2 in 2020. The company has a net interest-bearing debt of NOK 944 million by the end of the year. In 2019, the company paid out a dividend equivalent to NOK 215 million. Fourth quarter has been as normal, a low season quarter for FoodCorp. They have the main season in first half of the year. They have caught a remaining quota of 3,600 tons. It will be a maintenance quarter when you have low activity, of course. If we look into the total year 2019, you can see they have approximately 10,000 tons of lower raw material intake compared to 2018. The earnings is also down, and that can be allocated to the reduction in giant squid volumes. That is down 7,000 tons in 2019 compared to 2018 and explains almost the whole reduction in earnings in 2019. Also, there has been some lower price achievement, and that is due to a little difference in the mix. The giant squid was a smaller size in 2019 than compared to 2018 and gave a lower sales price. Low inventory by the end of the year for frozen, 300 tons compared to 4,600 tons by the end of 2018. The company is net cash positive, have a cash of 40 million by the end of 2019. Brødrene Birkeland Farming, they have harvested almost 2,500 tons, up from 1,600 tons the same quarter in 2018. As I mentioned, very volatile prices in the quarter. Lowest prices in the beginning of the quarter and highest in December. They stored most of their volume in October and November with the lower prices. Release from stock cost is also up year-on-year. In the quarter, they have an EBIT per kilo of NOK 2.4, down from NOK 5.9 in the same quarter in 2018. Brødrene Birkeland, they have two pelagic vessels and one snow crab vessel. The pelagic vessels, they have caught the remaining quotas of mackerel and herring. It has been very good prices on mackerel in 2019, and prices are up almost 30% compared to 2018. The vessel catching snow crab, there was a ban, which was lifted September 15th, but the season was closed again on the end of October, so a very limited operation for that vessel in the quarter and only 28,000 kilos caught in that period. This company is also cash positive and have 200 million in cash by the end of 2019. The total assets in the group is close to 40 billion, 39.8 billion, and that is up from 38 billion by the end of 2018. The main reason for the increase in the balance sheet is the implementation of IFRS 16, which I've mentioned, and that all operational leases are now taken into the balance sheet. The net interest-bearing debt by the end of 2019 is 4.1 billion. If we include the right-of-use assets liabilities, the net interest-bearing debt is 5.3 billion. A strong balance sheet with an equity ratio of 59%. As we have ended 2019, I will look at the 2019 in total figures looking into the cash flow. We started the year with a cash position of NOK 4.4 billion. Cash from operation was almost NOK 3.2 billion in 2019. We have paid taxes total NOK 882 million in 2019. Cash from investing activities is minus NOK 1 billion. The net investment in CapEx is NOK 1.5 billion, but we have also received a dividend from the associated companies with almost NOK 400 million. The largest contributor there are Pelagia and Norskott Havbruk. Cash from financing activities is minus NOK 2.2 billion. As you can see, we have paid dividend out of the group with NOK 1.4 billion. The net change in cash in 2019 is minus NOK 142 million. We end 2019 with a cash position of NOK 4.2 billion. The board, they will recommend to the annual meeting in 2020 a dividend of NOK 4.5 per share. That is within the company's dividend policy. That is between 20% and 40% of net result. The biomass adjustment. This dividend is equivalent to 37% of the net result ex biomass adjustment. Okay, thank you. Then summing up the different markets, how we are viewing that on the different segments we are operating within, starting up with the fish meal market. Looking at the table on the left-hand side, you can see that the volumes in 2019 versus 2018 among the seven largest producers of fish meal is down by approximately 30%. It's mainly driven by the low fisheries second season in Peru, and also driven by a lack of volume on capelin, and also on a reduction in quota in blue whiting in the North Atlantic. As you can see, when the fishery were failing in mid-December in Peru, you can also see that the prices has been climbing and is now on a level of $1,500 per ton on standard fish meal. For high-quality fish meal, it's $200 more in premium. When it comes to the stock situation and the consumption in China, I would say also it's been a pleasant development the last six months of the year in terms of off take of the stock. If you look at the stock in China, now it's approximately 22% less than it was in the same period last year. In August, when we did the presentation, we were worried about a failing aquaculture production in China due to heavy weather. We were also fearing the African swine fever impact on the pig production or the swine production in China. What has happened is that the aquaculture production was recovering by the end of the year. We have also seen that it's been a higher inclusion rate of fish meal in the piglet feed, due to better prices on the end products of pigs in China. Prices on the fish meal at the moment in China is above the prices we are seeing in Peru, which is also stimulating a bit the trading of fish meal. The coronavirus has also slowed down the logistics as lower off takes on a short-term basis. The two last weeks after the Chinese New Year has been slower than it has been before in terms of activity in China. It is also going to be interesting to see the impact going forward. When it comes to fish oil, same development as fish meal, 24% down in production. We have also seen the impact on prices increasing after the lack of fishing in Peru. I would say the feed-grade oil now is on a very high level due to, I would say, low supply in Peru, $2,300 per ton and a premium of $300 per ton into the omega-3 industry. Going over to looking at salmon supply, I would say that 2019, it is a total growth of 9% in Europe. Americas, 4.4%, and all in total, 7.4%, which is on a historical high level for the last three years. Saying that, looking into 2020, we are expecting a lower growth, total of 4%, Norway up by 3%. I would say the supply fundamentals seems favorable also going into 2020, also comparing with 2019. If you look at the graph here, you can see that in the last three, four months of last year, the prices has been extremely volatile, from 40 NOK up to 80 NOK. Operating in this challenging environment is not easy. Trying to tune your production to where you are having the higher prices is a challenge for, I would say, the whole industry. Looking at average prices in 2016, 2017, 2018, and 2019, you can see that the price is quite stable around 60 NOK. A good start of 2020, average prices on 74 NOK, and I would say market is on a short term, and I would say also long term, quite interesting. Atlantic salmon consumption, EU is up from last year approximately 6%, other markets up by 7%, and the higher growth in percentage is the U.S. market with 8%. I would say it is a fine increase from year to year, also in the main market for salmon. Summing up, demand remains strong. We are expecting to increase our production considerably from next year, and I also have ambitions to pass the 200,000 ton in 2021. Whitefish, cod quota is up, haddock quota is up, and also the saithe quota north is up by 15%. We have received a new vessel in Havfisk, which is a fantastic vessels with the newest technology in terms of maintaining the highest quality in our white fish products. When it comes to the pelagic side, I would say again, the activity in the North Atlantic has been very good in 2019. We are very happy with the performance. We are disappointed by the achievements in Peru in the last season. We were hoping, of course, that the fishing should be better on a higher percentage than the 36% should be caught. But again, agree on stopping the season due to the presence of juveniles on the fishing zones. Positive development in quota in horse mackerel in Chile, up 50% versus 2019. All in all, I would say it is going to be an interesting years going forward for the group. Thank you.