Earnings Call: Q2 2020

Aug 20, 2020

That is a great pleasure for me to invite you to Austevoll Seafood second quarter presentation. I would first start by giving you some inputs of the highlights of the quarter and the first half year. Thereafter, I will take you through the different subsidiaries and their performance in the quarter. Britt will take you through more in details around the numbers. Then we will end the presentation by giving our view on the different markets we are operating. Starting up with the highlights, talking about the quarter. We have to admit that it has been an extremely special quarter in terms of the COVID-19 situation. I would say also in terms of how it affect our operation of the subsidiaries, but also how it affect the market for our different products. I will, through this presentation, try to give you some insights in the different segments of our group. But before I start, I would say that we have had a very active quarter with the main season both in Peru, and we had a very good season in Chile. Also we have had, I would say, a better raw material season to the fish meal and fish oil activity in the North Atlantic compared with what we have experienced previously. Also we have slaughtered more or less the same volume we did same quarter last year when it comes to salmon. However, the price achievement has been far below the level we achieved last year. Also, I would say that the cost, in particular on farming, has been a bit up compared with the same quarter last year. Saying that, looking at second quarter numbers, you see the revenue was NOK 5.3 billion, EBITDA NOK 827 million, and EBIT on NOK 450 million, and pre-tax profit on NOK 433 million. If you include 50% share we hold in Pelagia, you can see that the total EBITDA in the group is around NOK 926 million. It is down approximately NOK 400 million compared with same quarter last year. It is mainly related to the fact I mentioned on salmon farming. We will come back to that later. Looking at first half figures. Revenue is more or less on the same level as was in first half 2019, north of NOK 11 billion. EBITDA on NOK 2 billion and EBIT on just short of NOK 1.3 billion. We have a strong balance sheet. We are, I would say, well prepared to meet cyclical times. We are, as I said, extremely focused on keeping our value chain operating in all our subsidiaries. Also having a balance sheet that also can survive periods like we are having now. In terms of the EBITDA on first half year including 50% share on Pelagia, it is approximately NOK 2.2 billion. Whereas salmon holds NOK 1.7 billion and pelagic is NOK 463 million. Then I will take you through the operational overview. I will focus on the right side. This year we are aiming to produce approximately 400,000 tonnes of pelagic fish on our own vessels. We are aiming to process approximately 1,850,000 tonnes of fish on our pelagic factories. We are aiming to catch more or less the same level on our whitefish quotas. However, it will be a different mix since cod quotas and haddock quotas is a bit different from the year before. We are also aiming to slaughter 192,000 tonnes as it looks today, which is also up from same period, just saying from 2019. Starting up on the pelagic business focusing on Austevoll. I would say that it has been a special season for us. The quota was set at 2.4 million tonnes, 300,000 tonnes up from same fishing season last year. In itself, it was not surprising since we came from a quite low season in the second end of 2019. However, it has been a challenging situation because of the COVID-19 situation. It has been a lot of restriction in order to keep the value chain open, keep the vessels running, keep the factories running, and it was quite early clear that we would run into our Olympic season as we have before. The focus needed to be to try to catch the quotas as fast as possible. I would say biomass is healthy, gives us expectation also for the next fishing season starting up in November. Of course, we have to wait what IMARPE is finding on the cruise, but at least the conditions, both in the ocean and weather conditions seems favorable for a normal season in 2020 in the end. Going back to the first season, I would say that the quota was higher. For our vessel, it was a total catch of 168,000 tons. By the end of the quarter, we had caught approximately 67% of the quota, and we were finishing with the quota the 22 of July. I would say we also purchased a higher volume than we did last year, but I would say the special thing this year was that we sold a much higher volume to third-party factories than we have done before. The main reason for that was, again, we started the season off late. It was restriction of the number of vessels we had, and I would say most of the fish was located in the north, so north of our factories. The sailing distance was a bit longer than normal, and with the number of fleet we had, we started to deliver closer to the fishing zones. Restrictions started to smoothly up, I would say, in terms of on the fleet in the beginning of June. So started up outside the north factory, and I would say that the fishes are moving during the season up north. Otherwise, quality-wise, yield-wise, and performance-wise, it was a good season for us. But it has been a challenging seasons to have during the quarter for sure. In Chile also, it has been a high number of COVID-19. I would say that despite that it was a high presence of COVID-19, it has done a very good job keeping the value chain open, avoiding to have COVID-19 in our factories and in our boats. They have performed a very good fishing season, production season, and also they have sold a lot of products. So I would say the value chain has been working, and you will also see that when you are looking at the number Britt is presenting later on. The North Atlantic pelagic quotas is more or less the same as we presented last quarter. However, it is a change, and that is at the sandeel quota, which is an important species for the meal and oil activity, has been increased, and currently it is almost 100% of last year quota. That has led into a higher volume take for Pelagia, 261,000 tons versus 188,000 tons of fish going directly for fish meal and fish oil. You would also see on a yearly basis that the raw material intake first half has been, I would say, substantially higher than it was first half last year. Sales volume has been more or less in line with how it was the last quarter. However, we have to say that the relative currency and fulfillment of quota in Peru has impact on the prices, and also the pressure on margins for Pelagia going forward. It is not much to report on the direct human consumption of the frozen activity and filleting activity in Pelagia. What I can say is that the main season here is late third quarter, beginning of fourth quarter where Pelagia is more or less handling 50%-60% of their raw material during that period. I would say that in terms of product wise, it has been so far less affected on the COVID-19 situation. In terms of the figures, you can see that the underlying operation is better this quarter compared with last quarter. Although if you take out the gain of sales we had on a factory we sold during second quarter last year. EBITDA just short of 200 and EBIT on 138. Going to Salmon, Whitefish, and the Lerøy's second quarter result. I would say if you want to have a detailed walk through Lerøy's presentation, I suggest you go and look at the webcast of Lerøy. The highlights was that the EBIT for the quarter was down from NOK 774 million down to NOK 322 million. We also see that the fishing activity, also the Whitefish processing activity is contributing negative on an EBIT level this year. I will come back to that also later in the presentation. In terms of harvesting, I would say that 50% of the volume we harvested was from the west coast of Norway, Lerøy Midt-Norge, and it had a negative EBIT per kilo on NOK 1.6. We are happy with the performance in mid Norway. Slaughtered approximately 60,000 tonnes and EBIT per kilo NOK 14.1 per kilo. I would say in the north, we have not been where we should be and are aiming to do a far better second half year in Lerøy Aurora compared with the first half year, both in terms of cost and volume. Hopefully by the end of the year, Lerøy Aurora is where it should be when it comes to that cost level. In terms of volumes, I would say we are maintaining our guidance in volume 172,000 tonnes in Norway. It is considerably up from 2019. We should, I would say by the end of this year start harvesting of the investments we have done in terms of smolt capacity and aiming to increase our volume both in 2021, 2022, 2023 when the different post-smolt facilities are starting operating. When it comes to the wild catch, I would say we had a fantastic first quarter. We caught a lot of cod during that quarter and that was also the main reason why the result was as it is. What we have experienced now is that we have a higher inclusion of low paid species as saithe, shrimps and also some wild redfish where demands are lower than I would say the main species. Shrimp prices is a bit down, has been challenging both finding the shrimp and also market-wise. We are into a shrimp season now which looks better than it was during second quarter. Also it's been challenging the processing side mainly due to market prices on fresh products has been also challenging due to the COVID-19 situation. That's I would say the main reason why we are also delivering a bit lower margins from the wild catch during second quarter. Now I will give the floor up to Britt. Thank you, Ole. We start as usual to sum up the raw material intake in the quarter. This also sums up Ole's presentation of each company in the group. As you can see, the total raw material intake of pelagic and whitefish raw material is 576,000 tonnes in the quarter, up from 508,000 tonnes in the same quarter last year. The reason for that is increasing quotas in the North Atlantic. The harvested volumes of salmon and trout is approximately at the same level as last year. This quarter has been significantly impacted by the restrictions related to COVID-19 and has also affected the demand and the pattern of demand for our products. The most significant factors behind the fall in earnings in the second quarter compared with the second quarter last year is lower margin per kilo harvested salmon and trout caused by significantly lower prices but also higher cost per harvested kilo. The earnings from pelagic operations have increased compared to the same quarter in 2019, and the increase is mainly attributed to the operation in Chile, where the company have had very good raw material access and good production activity and also higher sales volumes. The revenue in the second quarter of this year is NOK 5.3 billion. It's down 13% from NOK 6.1 billion in the same quarter last year. The EBITDA is NOK 827 million, down with 31.5% from NOK 1.2 billion. EBIT in the quarter is NOK 446 million and down from NOK 874 million same quarter last year. Pre-tax profit in the quarter is NOK 433 million. It's down from NOK 955 million same quarter last year. This gives earnings per share of NOK 1.23, down from NOK 2.20 same quarter last year. Looking into first half year, we had a revenue of almost NOK 11.2 billion. It's a little bit lower than the first half year in 2019, where the revenue was NOK 11.6 billion. If we include our 50% share of Pelagia, the revenue is NOK 13.2 billion, and that is exactly the same level as first half year in 2019. EBITDA is NOK 2 billion, down from NOK 2.4 billion, and the EBIT is NOK 1.3 billion, down from NOK 1.7 billion same first half year 2019. Pre-tax in first half year is NOK 1.1 billion, down from NOK 1.9 billion, and that gives earnings per share of NOK 2.39, down from NOK 4.4. As already mentioned, the salmon segments has been impacted by lower margins per kilo harvested salmon and trout. That have led to lower earnings this quarter and is a combination of the lower price achievement and the higher costs. You can see that spot prices are down 7%. The company have had a contract share of 30%, and the contract prices has been higher than the spot prices. However, the prices has been volatile also in the second quarter, so of course, timing of sales impacted the total price achievement for the company. We have also had some downgrades due to winter sores, especially up in the north. When it comes to the wild catch operation, they have harvested 19,700 tonnes, and that is up with 34% compared to same quarter in 2019. But we have harvested more saithe and redfish with lower value compared to cod and haddock. So that has given lower earnings in second quarter this year compared to same quarter last year. To sum up, the revenue is NOK 4.7 billion, the EBITDA NOK 606 million, and the EBIT is NOK 332 million. As Arne has mentioned, first season in Peru started up in the middle of May, and Austevoll has caught 67% of their first quota by the end of June. In addition, they have purchased the raw material from third party. So the total raw material intake in the quarter is almost 152,000 tonnes, down from 188,000 tonnes the same quarter last year. By the end of June 2019, they had caught 94% of their quota for first season. Due to lower inventory going into the quarter and also a late start of the season, the sales volume has been significantly lower this quarter compared to same quarter last year. Even the lower sales volume, the prices has been a little bit higher for fish meal, 4%, and also higher for fish oil. Revenue in the quarter is NOK 187 million, and the EBITDA is NOK 60 million, and the EBIT is NOK 3 million. As mentioned, FoodCorp has had a really good quarter. They have had good access to raw material, a good production activity, and also high sales volumes. The raw material intake has been almost 47,000 tonnes, up from 25,000 tonnes in the same quarter last year. By the end of June, the company has caught over 56,000 tonnes of horse mackerel. The main season for FoodCorp is first half of the year. So their remaining quota is around 6,000 tonnes. So there will be lower activity in third and fourth quarter for the company. As you can see from the graph here for the quarterly results, they do their year result actually in first half of the year. The revenue in the second quarter has been NOK 301 million and the EBITDA NOK 130 million and the EBIT NOK 119 million. Looking into the salmon activity in Brødrene Birkeland, the harvest volume is significantly down compared to the same quarter last year. A little bit above 1,200 tonnes, down from 1,900 tonnes in the second quarter of 2019. The company sell all their fish in the spot market, all the salmon in the spot market. Due to the lower prices for salmon this quarter compared to the same quarter last year, they have had a negative margin, and that is also impacted by higher costs. So the EBIT per kilo in the quarter is -6.3, down from a positive 16.3 in the same quarter last year. Revenue in the quarter is NOK 57 million and the EBITDA is NOK 4 million and the EBIT is minus NOK 8 million. The vessels belonging to Brødrene Birkeland, the pelagic vessel, they have been fishing blue whiting and North Sea herring in the quarter. It is a low activity quarter for the fleet. The vessel fishing snow crab has increased their catches compared to the first quarter in 2020, but it is lower volume compared to Q2 in 2019. It is still challenging conditions for the snow crab vessel. As normal, there is a fishing ban starting up from the summer due to the molting season, and this year it started 15th of July. Last year it started 1st of July. When this fishing ban started this year on 15th of July, the vessel had caught in total first half year 263 tonne, and that is down from 369 tonnes in the same period last year. The total financial positions of the group by the end of June was NOK 40.5 billion, and that is up from NOK 38.8 billion by the end of June 2019. Of course, investment in smolt facilities and a new fishing vessel has increased our balance sheet and also some currency effects from converting USD into Norwegian kroner. We have a net interest-bearing debt by the end of June of NOK 5.1 billion, and that is at the same level as by the end of June 2019. The balance sheet is strong, and we have a very good cash position. As you can see from the cash flow, we have been releasing some working capital in the quarter. Also we have paid a dividend. In total, NOK 779 million. NOK 507 million is paid to the shareholders of Austevoll, and the remaining is paid to minority shareholders in our daughter companies. We have had a cash flow from operation of NOK 950 million. The cash flow from investing activities is minus NOK 241 million, and the cash from financing activities is minus NOK 474 million, of course, impacted by the dividend paid out. The net change in cash in the second quarter is positive NOK 223 million. Our cash position by the end of June is almost NOK 4.5 billion, up from NOK 3.3 billion in the same quarter last year. The board of directors has got an additional authorization from the annual general meeting in May 2020 to pay out up to NOK 2 per share as dividend before the end of year 2020. Okay. With that over to you, Jan Gunnar. I will end the presentation by giving our view in the different markets we are operating in. Starting off with the fishmeal market. On the table on the right-hand side, you see an overview of the production of the largest fishmeal producers in the world. You can see that it is more or less produced the same level of fishmeal this year than it was in 2019. Looking at the price development in the graph below, you can see that after the, I would say, bad season we had by the end of last year, you have seen that the prices has been on a quite high level. The prices were good, I would say, until the market realized that Peru were able to catch their complete quota and you see that prices has come down again, I would say by mid-June, beginning of July. You see prices now are stabilized on $1,450 per tonne on super prime, a bit lower, $200 discount on low-quality lean. Sales has been well committed and it's limited stock available. Still Chile is the main market. We are also seeing now that the industry in Peru is starting to commit some volumes for the next season coming up. Looking at the stock level in Chile, there is a mixed development. You see that volume-wise, the stock in Chile is far below what it was same period last year. We also see that the offtakes on a weekly basis is a bit down compared with the same period last year, and has to do a bit with flooding and also reduced activity due to COVID-19. On the other hand, we are also seeing that the pig farms has increased their profitability and also increased their inclusion rate of fish meal in the diet. So downfall in volume is somehow replaced by a higher consumption from pigs in Chile. You see the prices they are selling for in Chile is far over the prices that the Peruvian players are selling their fish meal for. So it's also stimulating to more trade. Fish oil situation. We see this year that volume is a bit more down compared to fish meal. 5% down. Has to do with a bit lower fish oil yield in Peru compared with the same season last year. However, what we have experienced this year is that the omega-3 grade fish oil is higher than it was the same period last year. So the profile is more suitable for omega-3. Prices we have seen are giving approximately $150 to $200 premium for the omega-3 grade. The same with the stocks available. Looking at the Atlantic salmon supply. On a normal year, it will be very favorable growth in terms of price expectation. You can see in 2020, we are expecting our total growth of 3.6%. 2.5% up in Norway, 5% up in Chile. If you also look into 2021, you're seeing that it's more or less a zero growth year in total. 3.4% growth out of Norway. That's the latest estimates from Kontali. So the underlying supply should support a very strong market. However, there's insecurity in terms of how COVID-19 will affect the demand market. You can see it here reflected in the price development. Also only during the quarter, we are seeing prices going well below NOK 50 and up to NOK 70 in the quarter, and also down again. So it's a big variation. It is more challenging now to sell at the right time than how it was before. However, looking at the consumption, we are seeing that the main market, EU, still maintaining the same consumption. The U.S. is up by 4%, and there is a reduction the first half year from other markets as mainly driven by lower consumption and lower demand from Chile. So all in all, I would say that we have been through a challenging quarter. We have been able to keep our operation up running. We have committed the season. We have been able to slaughter the volumes we were supposed to slaughter. We are seeing that the COVID-19 remains unpredictable still. In particular also when it comes to the effect it will have on the market. However, I would say that long-term parameters remain sound. We have done a lot of investment when it comes to our salmon activity the last 4-5 years. We are aiming now to harvest the fruits from these investments by the end of the year and going forward. Aiming to increase our production for the next 3-4 years. Increase the harvesting and also reduce our cost. On the whitefish side, we are seeing that the biomass situation is looking good. There is suggested from ICES increase in quota for cod with 20%, haddock up with 8%. An increase in the north and a decrease in the south, in the North Sea when it comes to saithe. First season in South America. The quota which is the main target. We had a very good quarter in Chile. Aiming that the season will start up again early November in Peru. In Chile, the main season has been committed in first half year. North Atlantic also. The next big activity there is going to be when we are starting up our frozen plants by end of August and onwards. That was what we were planning to present. Thank you for listening.