Earnings Call: Q4 2017

Feb 27, 2018

Then it's a great pleasure for me to welcome you to Austevoll Seafood Q4 financial presentation. I will just briefly start taking you through the main numbers during the quarter and for the end of the year. Thereafter, I'll give a short view on what has been happening in our different subsidiaries during the quarter. Then Britt Kathrine Drivenes will take you in more detail through the Q4 numbers. I will be ending the presentation by giving a view on the different markets we are operating within. Starting off, we have had a fantastic year in Austevoll Seafood in 2017. It's by far the best year ever. However, looking at Q4 number in 2017, it's been a bit more challenging, I would say. We have a very good performance from the salmon activity, also based on the spot prices we are seeing now comparing with the spot prices, which was by the end of 2016. We have also had a very good operational performance in our activity in the North Atlantic. However, looking at our activity in South America, it has been contributing negative on the EBITDA level due to there has been no fishing activity, in particular, in Peru during Q4. So it has been a disappointing, I would say, quarter in Peru, which I will come back to in our presentation. Revenue, Q4, NOK 4.8 billion. EBITDA 818, EBIT 584, and pre-tax profit before biomass adjustment of NOK 650 million in the quarter. If you also consider the 50% contribution in Pelagia to our EBITDA, we are having an EBITDA in Q4 of just south of NOK 1 billion, whereof 921 is coming from the salmon segment and barely positive from the Pelagic segment. Looking at 2017 as a whole, you can see our revenue is just south of NOK 21 billion, EBITDA of NOK 4.7 billion, and EBIT of NOK 3.8 billion, which is almost NOK 900 million better than 2016, which until last year was the best performance we have had operationally ever. So 2017 has been a good year for us. If you also consider the 50% ownership in Pelagia, our EBITDA is turning NOK 5 billion level, whereas Salmon segment is contributing with NOK 4.3 billion, and the Pelagic segment is contributing with NOK 750 million, which is a bit less than 2016. We were hoping, based on our better season in Peru, that we would have surpassed the 2016 level also for the pelagic activity. But we didn't do it. Looking at our balance sheet, if you're looking at Austevoll Seafood, we are extremely focused in having a strong balance sheet, being positioned to do acquisition, but also being in position also to hold our position when we are going through challenging period. That's the reason why we are having such a strong balance sheet as we are having. NOK 35 billion in total assets. Net interest-bearing debt is down by approximately NOK 1 billion to NOK 4 billion. Then we have an equity ratio of 54%. The board is recommending to the annual general meeting a dividend of NOK 2.80, which is up from NOK 2.50 per share, in 2016. This table I'm showing every quarter, we have done some small changes compared with previous quarter. We have sold one of our pelagic fishing vessels in Norway. This we have done in January, and we have also taken delivery of one new build in Havfisk, increasing the total fleet now to 10 fishing vessels. If you look at the right-hand side, you see that we are catching between 400,000 and 500,000 tons of pelagic fish on our own quota on an annual basis. This year, we have been processing approximately 1,850,000 tons of pelagic fish on our factories in all regions we are operating, and we are aiming to surpass 2 million tons next year. We are slaughtering and harvesting between 180,000 and 190,000 tons on an annual basis of salmon. Also the acquisition of Havfisk and Norway Seafoods have also given Lerøy a quite interesting position as a complete seafood provider for the large retailers in particular in Europe. Going through the pelagic segment, we will start up with Austral. I would say 2017 turned out to be, once again, a challenging year for the Peruvian fishing industry. It's again following up three years from, I would say, unstable fisheries. So this is the fourth year in a row which we have had a challenging year. Going to the end of the season, the quota was set at 1.5 million tons, which was a bit under our expectation. Fishing started by the end of November. However, they closed it quite frequently after the opening, mainly due to the impact of small fishes and the high presence of juveniles in the fishing zones. What has been different this year has been that there has been a permanent zone closed along the coast in Peru during all fishing season. If you look from Lima and south, it has been closed due to the high presence of juveniles. This year we have not been able to catch inside up to the 5-mile zone. We have been pushed out of the 15-mile zone off the coast. The fish has been abundance, and where it has been strong fishing fields, there has also been a high incidence of juveniles, meaning also that has been temporary closed zones during the seasons as well. So by the first fourth quarter, there has been no fishing, and fishing started up again in the beginning of January, and it stopped by the end of January, mainly due to the anchovy starting spawning again. In the beginning of January, it established a zone in the north of our factory in Coishco, 120 nautical miles, meaning also that our factories have not been ideally located in terms of where the fish has been located for this season, meaning also that we are not that happy with our fish performance as well. Saying that, they have stopped the season, they have closed the zones to preserve fishing zones and preserve the small fish, meaning they are thinking for the future in terms of their monitoring of the biomass. We are expecting that the fishery will recover already in the first season. We are estimating that 2018 will have a quota between 4 and 5 million tons. Of course, this is subject to the IMARPE cruises, which is done in advance of every season. Again, I will not focus that much on fourth quarter since nothing has happened. It has been a quite challenging quarter for us because we have been maintaining our fleet. We have been 100% ready in order to meet the season to start up in fourth quarter. We have done some fishing effort without catching any fish because of the size. We have been having a lot of cost without income during that quarter. If you look at the summary of the fishing season, you are seeing that we have caught approximately 40% of our quota. It is a far lower volume than it was done last season, similar season in 2016. We have purchased a higher percentage but a lower volume. The percentage of the yields has been a bit lower this year compared with the same period last year, and we are more or less in line with the quality we have been producing. The majority of the volume we have been producing of fish meal is being sold in first quarter, however, at lower cost and now at lower prices than we are experiencing now, since we have been selling forward a lot of our volumes before the season start in November. A quota for fishing in south, 535,000 tons, has also been set. So far it has been caught approximately 80,000 tons, and we have got our fair share of that in our factory in Ilo. As you can see for the 2018 estimates, we are expecting that we will have a far better fishery, and we will have a higher share of purchasing in volumes compared with 2017. We hope that 2018 will be the year where fishing normalize in Peru. Going to Chile, again, seasonable low activity in the quarter. It is the same every four quarters. We are more or less finished with the seasons. I would say Chile has done a fantastic job this year in terms of turning and adapting to the raw material bases they have available. They have been able to purchase a similar volume as their quota, which has been caught by our own vessels and surpassed 100,000 tons of raw materials to our factories during 2017. We are aiming to do the same in 2018, in terms of the jack mackerel. Quota will be more or less the same, although it has increased with 16%. 15% has been auctioned, and the final outcome of that auction is not yet ready, but we are aiming to have some part of that auction as well. If you look at the 2018 estimates in terms of the horse mackerel catch, we are hoping to be on the same level in 2018 as in 2017. North Atlantic pelagic quotas, a bit less than 2017, which has been the best year ever. I would say raw material for fish meal, we think will be a bit higher this year compared with last year. Blue whiting is a bit up. Some of the capelin were going for fish meal. We are also expecting sandeel to be a very good season in 2018. Then we have a decrease in quota for direct human consumption. NVG herring is down by 33%, and mackerel is down by 20%, compensated a bit of capelin in the Barents Sea and also an increase in the North Sea herring quota. We had a good quarter in Pelagia for fish meal and fish oil. Also gaining from the fact that Peru has been down in volume in terms of increasing prices during the quarter for fish meal and oil in the North Atlantic. This we are also expecting coming into first quarter 2018 as well. Raw material, 150,000 tons. It is mainly trimmings from the herring season. It is up from last year. You can see 2017, in terms of volume, is approximately 100,000 up compared with 2017. We are also expecting that we will remain more or less the same level through our factories in 2018 as it was in 2017. Looking at direct human consumption, fourth quarter extremely important quarter for Pelagia. Approximately 50% of the raw material bases coming in in fourth quarter. This year has been particularly high due to a high concentrate of NVG fisheries happening during the end of the year. Going into the new year, stock situation on the high side, but I would say stock level and raw material cost is more aligned with the market prices this year when we are turning into 2018 and how it was when we were turning the date until 2017. Also interesting to notice that the capelin season just started up now, and it will compensate in our northernmost factories for some of the reduction in the NVG herring quota in 2018. Pelagia, another good quarter, another good year. We are more or less in line on an annual basis with last year's performance. Helped a bit on the increase in fish oil prices by the end of the year. But I would say in general, has ended very well in third quarter. Revenue of NOK 2.2 billion, EBITDA of 231 and an EBIT of 183, which is up from same quarter last year. More volume sold for the frozen products, however, to a bit lower margin than it was at the same period last year, but volume compensated for the drop in margins. Brødrene Birkeland has also had a good year in terms of, I would say, performance on salmon, but not as good as it was in 2017. I would say in the end of the year, we have had some biological challenges, and the spot prices has been far lower than it was by the end in 2016 and is also reflecting in the numbers coming from Brødrene Birkeland during the quarter. We have had on our pelagic fishing vessels, we have had more quota during 2017 comparing with 2016. However, the prices, and in particular in the fourth quarter, price achievement has been 40% less on the NVG herring and also 20% less on the mackerel landings, which is also affecting the profitability comparing with same period in 2016. Coming to Lerøy Seafood. Lerøy is delivering once again a very good quarter. If you want to have more detailed information, I suggest you go look at the webcast of Lerøy Seafood Group in terms of their fourth quarter presentation. Short summarize, EBIT, just below NOK 800 million. It is down from same quarter last year. However, at far lower salmon than the market prices. Havfisk and Lerøy Norway Seafoods is delivering more or less on the same level as they did in fourth quarter last year. Harvested volume is a bit up, 42,000 tons. 12,000 tons from the north, 12,000 tons from the south, and then approximately 18,000 tons in Lerøy Midt. EBIT per kilo, all inclusive, is NOK 16.5 per kilo. It's huge variances from region to region. I would say Lerøy Aurora is delivering EBIT per kilo of NOK 24 in fourth quarter, which is a fantastic achievement. Lerøy Midt is recovering, delivering NOK 13 per kilo. We have had some biological challenges in third and fourth quarter in Lerøy Sjøtroll, and they are delivering just below NOK 5 EBIT per kilo in fourth quarter. We are expecting that to improve also during 2018. The EBIT per kilo, all inclusive, by the end of the full year for Lerøy is approximately NOK 21 and is a very good achievement from Lerøy, and a good performance, if you disregard what has been happening by the end of the year in Lerøy Sjøtroll. Contract share 30%, contract prices is higher than spot prices during the quarter. Net interest-bearing debt is down NOK 2.2 billion. We are increasing our harvest guiding to approximately 182,000 tons, up 2,000 tons from our last guidance for 2018. 38,000 tons will come from Lerøy Aurora, 68,000 tons is coming from Lerøy Midt, and we are expecting 63,000 tons from Lerøy Sjøtroll. A bit down from our activity in Scotland, mainly due to they have had the same biological challenges by the end of 2017 in Scotland as we had in the west coast of Norway. Catches has been on the same level as last year, 8% down, but I would say the percentage of cod catches has been a bit higher this quarter compared with 2016 fourth quarter. Prices is up 7% for cod, 17% up from haddock, but saithe prices is down in the quarter. Still a lot to do in our onshore operation in Lerøy Norway Seafoods. It's not a quick fix to turn the operation there. However, we believe in the while that we are able to utilize the operational strength of both Havfisk, Lerøy Norway Seafoods, and match it with the market organization and the innovative operations of Lerøy in terms of bringing up values on the wild catch and whitefish segments here as well. It's making Lerøy a quite interesting company for our major customers, we believe. Then I will give the words to Britt. Thank you, Arne. We start by showing the total raw material intake in the quarter, and also for 2017 as a whole. As you can see, when we include the salmon volumes, we have had a raw material intake of well above 2 million tons into our companies in the group in 2017. To sum up fourth quarter, it has been a good quarter for the segments within salmon and whitefish, but lack of raw material in Peru has given a negative contribution from that company, and as such, a negative contribution into the pelagic segment. The revenue in fourth quarter is NOK 4.8 billion. If we include our share of Pelagia, the revenue in the quarter is NOK 5.9 billion. There has been an EBITDA of NOK 819 million, including Pelagia, NOK 934 million. Of course, as you can see, there is a decrease in both the revenue and EBITDA compared with the same quarter in 2016. The main reason for that is lower price on salmon. As you saw from our earlier slides in the presentation, the spot prices are down by 25%. Of course, the lack of raw material in Peru has impacted. The EBIT in the quarter is 584 million, and including Pelagia, 695 million. The associated companies have had a good quarter, and income from associated companies is 153 million in the quarter. That gives us a pre-tax result of 651 million, and the pre-tax result is also before this fair value adjustment of the biological assets. That gives an earnings per share, and also before the fair value adjustment of biological assets, of NOK 1.62. The group has had a very good year in 2017, and it's our best year, actually, excluding this adjustment on biological assets. This despite the disappointing second season in Peru, and also that we had some challenges within salmon in the west coast of Norway in the third quarter. Total revenue for 2017 is NOK 20.8 billion. If we include Pelagia, our share of Pelagia, the revenue is NOK 23.9 billion. The EBITDA in 2017 is NOK 4.7 billion, and including Pelagia, approximately NOK 5.1 billion. The reason for the better EBITDA is a higher volume of salmon sold during 2017, and also an average higher price achievement for salmon in 2017 as a whole compared to 2016. The EBIT in 2017 is NOK 3.8 billion, including Pelagia, it's NOK 4.1 billion. As I said, the associated companies have also had a very good year for 2017 as a whole, and the income from associated company in 2017 is 495 million. This gives us pre-tax in 2017, and this is before the fair value of biological assets, of a little bit above 4 billion, and earnings per share of NOK 8.62. Grieg has had their best year ever in 2017, and they have also had quite a good fourth quarter, despite the lower prices for salmon. They have slaughtered around 42,000 tons of salmon, a little bit or 8% more than the same quarter in 2016. The revenue has been NOK 4.5 billion, an EBITDA of 921 million, and an EBIT of 777 million. For the total year, revenue of NOK 18.6 billion, an EBITDA of NOK 4.3 billion, and an EBIT of NOK 3.7 billion. As I said, they have slaughtered higher volumes of salmon in 2017 compared to 2016. Also you can see that the earnings, the EBIT per kilo ex Havfisk is higher than 2016. The EBIT from Havfisk is 386 million in 2017. They have had a full year in the Grieg Group in 2017. In 2016, Havfisk was included only for the four last months of 2016. The net interest-bearing debt by the end of the year is NOK 2.3 billion, and that is down from NOK 3.4 billion by the end of 2016. Arne has told you about the fourth quarter and the second season in Peru, so it's not much more to say. It's been, of course, due to that close to zero activity in the quarter. We didn't have much inventory when we went into fourth quarter, so also low sales of fish meal and oil in the quarter. We have, of course, prepared our vessels and factories for the second season. The costs related to that and also the fixed costs are reflected in our result for fourth quarter. So we have a negative EBITDA of NOK 122 million and a negative EBIT of NOK 173 million. For the total year, Peru or Austral had quite a good first season, and also they went into 2017 with inventory from the second season in 2016. So for the total year, they have had a revenue of NOK 1.2 billion and EBITDA of NOK 137 million, but a negative EBIT of NOK 51 million. The company has a net interest-bearing debt by the end of the year of NOK 805 million. What I can mention as well is that Austral still have contracts from 2017, which they have to fulfill now in 2018 with the production in 2018. Those contracts are also priced in 2017. Foodcorp, as normal, low activity in fourth quarter, but we were able to buy additional 3,500 tons of jack mackerel from third party in fourth quarter, and we caught that with our own vessels. As we have mentioned before, we do most of our result actually in first half-year in Chile. You can see that we have had a raw material intake in 2017 as a whole of 102,000 tons, and that is up 56% compared to 2016. That gives us a revenue in 2017 of NOK 508 million, an EBITA of NOK 79 million, and an EBIT of NOK 46 million. You saw in 2016 we had quite a negative EBITA of NOK 187 million, but that included also impairment of NOK 149 million related to fixed asset, which we will not use in the coming years. The net interest-bearing debt by the end of 2017 is NOK 20 million. Br. Birkeland, that's both salmon and also pelagic fishing. We have sold a lower salmon volume in fourth quarter this 2017 compared to 2016 at 1,200 tons versus 2,500 tons in fourth quarter 2016. We have moved some of the volumes into 2018. The pelagic vessels, they have finalized the quotas within mackerel and herring. There have been low activity for the snow crab vessels. The revenue in fourth quarter is NOK 146 million, and the EBITA is NOK 50 million, and there is an EBIT of NOK 21 million. For the total year, the revenue is NOK 656 million, EBITA of NOK 220 million, and an EBIT of NOK 124 million. Net interest-bearing debt by the end of 2017, of NOK 375 million. The group has a strong balance sheet, and the total assets are a little bit over NOK 35 billion. That is approximately the same as by the end of 2016. But if we look into the details, we can see there are some movements within the total assets. Our financial non-current assets are increased, and that is because we have had a good result from our associated companies. You can see the biological assets at cost, that's more or less similar, but the volume by the end of 2017 is approximately 4% higher than the volumes were by the end of 2016. There's quite a big change in the fair value adjustment of biomass. You can see there is also a very good cash position by the end of the year, NOK 5.1 billion, up from NOK 3.7 billion by the end of 2016. The equity ratio is 54%, and we have a net interest-bearing debt by the end of 2017 of NOK 4.1 billion. That's down from NOK 5.5 billion in 2016. A very good year in 2017 has also given a good cash performance. Cash from operating activities is approximately NOK 4.2 billion in 2017. Net investment in CapEx is NOK 1.8 billion, and we have a program investing in industry and in small facilities going on. We've received a dividend from our associated companies, so the net cash from investing activities are approximately minus NOK 1.6 billion in 2017. Cash from financing activities is minus NOK 1.3 million. In addition to our ordinary installments and changes in short-term facilities, we have also paid dividend out of the group with NOK 950 million. We end the year with a cash position of NOK 5.1 billion, up from NOK 3.7 billion in 2016. I will end off this session with the view on the different markets we are operating within, starting off with the fish meal situation. As you can see on the production side, largest fish meal producers in the world has increased their production of approximately 31% from 2016 until 2017. It was a bit less than what we were expected, and we were aiming to have at least 1 million tons from the Peru production, which has ended up on 730,000 tons. However, expecting a good season ahead. As a consequence of the failure of the fishery in Peru, we are also seeing a dramatic increase in the fish meal prices, just south of $2,000 per ton for a high-quality fish meal. You can see also is a big gap between high quality and low quality fish meal. I would say that feed producers and end users have been building stocks in order to have stocks until the next season start up in April in Peru. It limits the stock available, and I would say more or less 10% of, or about 10% of the quota in Peru now has already been caught in the south. If you look at the main market, China has been buying, I would say, the majority of the fish meal produced in Peru during 2017. They are a bit higher on the stock level by the beginning of the year. However, if you compare on the 5 years average, they are lower. The domestic production remains limited, and we have also seen that the prices in China has also been increasing at the same level as we have seen in Peru. The fish meal and soya meal price rate is as high as just below 5, which is high compared with average. Looking at the fish oil, the same production for fish oil is 20% up, not 30% as it was in fish meal. Main reason for that is, I would say, lower yields in Peru during 2017, and the volume has been more or less similar as in 2016. We also see since the catches fell in Peru, we also seen a very high increase in prices. I would say it's relatively no difference if fish oil is going in for feed purpose than omega-3 grade purpose now on the few volume that's been traded now out of Peru. You can see on the model down or the graph on the bottom left side, its prices has been increasing a lot. Now looking at the Atlantic salmon supply, the newest update from Kontali, compared with last presentation we did in November, we have taken down the global production from 7% to 5%, mainly due to a reduction in volumes in 2018 in U.K., and also taking down a bit the volume second half from Chile. We are seeing a good demand at time being. Lower prices has also stimulated to the consumption. I would say the development now from the two last quarter in 2017 and also the first weeks of 2018, seeing that are now taking, I would say, prices back again and increasing the consumption. I would say that the first half of 2017, we saw a big drop in the consumption from E.U., but has been recovering at lower prices during the last two quarters of 2017. I would say the main drivers from the consumption during 2017 has been what we define as other market, which is mainly driven by China and Brazil. To sum up, we have been achieving now the spot prices has been far lower this quarter, they compare with Q4 2016, 25% down. We have seen a positive cost improvement comparing with Q3, which is of course important for us. We are also guiding up the volume expectation for 2018. Generally, I would say we have a positive outlook on the salmon industry also on short and long term. Whitefish segment, similar catch for the quarter we had last year. We are expecting to have more or less the same catches in 2018 compared with 2017, in terms of total volume, but it will be another composition of the split between the different species. Cod quota down 12%, haddock down 30%, and saithe quota is expected to be up during 2018. South America, again disappointing second season in Peru. However, the way they are monitoring the biomass, we are expecting it will have an effect on the first season, and we are expecting and hoping and aiming for a normal year during 2018. However, everything is of course subject to the cruises they have in advance of every season in terms of what the final quota will turn out to be. We are also seeing that the horse mackerel quota and horse mackerel biomass is in the process of being recovered in Chile, which also will have an effect on the catches also going forward. North Atlantic had another good year, another good quarter, and are expecting also based on the biomass estimates that in particularly for fish meal and fish oil, that will be a good year for volume, and a bit lower volume for human consumption segments during 2018. That's all. Thank you.