Earnings Call: Q1 2020

May 14, 2020

Then it is a great pleasure for me to welcome you all to Austevoll Seafood first quarter financial presentation. I will start off by giving you the highlights from the quarter, followed by going more in detail through the different segments. Britt is going to take you through the numbers, and then I will end by giving our view on the different markets we are operating within. Starting off with the highlights, I would say that operationally, we have had quite good executions of the seasons for both the pelagic segments and also for the white fish wild catch segments in Lerøy. We have harvested a higher volume than we did same quarter last year in terms of salmon and trout. I would say first quarter was also marked by the lower season and a lower performance we had from Peru by the end of 2019 in terms of our result into Q1 with a lower sales of good. Revenue NOK 5.8 billion and EBITDA of NOK 1.2 billion and EBIT of NOK 834 million and pretax profit on NOK 660 million. We have a strong balance sheet. Total balance just north of NOK 41 billion. Net interest bearing debt of NOK 4.5 billion and an equity ratio of 60%. If you also take into account 50% of our earnings in Pelagia, our EBITDA is in total more or less in same level as same quarter last year, just north of NOK 1 billion, 240 million. The difference from last year is that Lerøy is contributing with NOK 160 million more and the performance from the pelagic segment is NOK 180 million less. Main reason for that is Peru, which is down NOK 120 million and Pelagia, which is down NOK 60 million versus same quarter last year. I will take you through the reason later on. The board has proposed a dividend of NOK 2.50 per share to the annual general meeting and will also request an authorization from the annual general meeting to pay up to additional NOK 2 more in dividends before the end of the year. Then looking at the operational overview, looking at the volumes. After the new quota was set in Peru, we are aiming to catch north of 400,000 tonnes on our pelagic vessel this year. We are going to process a volume just north of 1.8 million tonnes in our pelagic factories. In terms of white fish, we are aiming to catch 65,000 tonnes and with the volumes we are producing in our white fish factories, we are aiming to pass 100,000 tonnes of white fish during 2020. We are also aiming to produce 193,000 tonnes in our last guidance when it comes to salmon volumes. Then starting off with the pelagic segments. I will first start taking you to the new quota announced last week on Friday in Peru. As you can see on the dotted line both the biomass and the quota set was on a higher level than it was the same season last year. Quota on 2.4 million tonnes versus 2.1 million tonnes. As you can see, the biomass estimated is 3 million tonnes up to 10 million tonnes on the last survey. I would say we have experienced a special situation in Peru. I would say for 2 months ago, the whole country was in lockdown and there has been a challenge, I would say, executing the maintenance both on the fleet and on our factories on shore during this period in advance of the season. But the fleet and the plants are ready in front of the season. I would say the situation of COVID-19 is still in the first phase in Peru. We were defined as a critical supplier, so we are now able to start the season. But we have to start the season also with limited capacity on the fleet. Only 12 of our 20 vessels are now in the start of the season able to go out for catching. I think the majority of the fishery would be in the region north of Peru, as it looks from the data from IMARPE. But I would say we are looking forward to start the season, start the activity in Peru again. And there has been done a fantastic job, I would say, by our employee down in Peru to be able to prepare for the season and also be able to start executing the fishery. I would say also in Chile, we have had limited effect of the COVID-19. So far, the production has been executed in a very professional manner. We have been catching 28,000 tons in first quarter. And up to now we have passed 42,000 tons. We have approximately 14,000 tons based on what we have acquired lately to go before we are ending the quota. Again, precaution is taken into our factory, into our fleet, in order to avoid the COVID-19 virus. When it comes to the North Atlantic pelagic quotas, we got an increase on the sand eel quota from 70,000 tons to 110,000 tons for Norwegian vessels. And we are waiting to have another increase, which we expect to be higher than the last increase we got. It seems like the shape of the sand eel resources is very good. And we might have more volume in for our fishmeal plants compared with what we expected in the beginning of the year. In terms of the execution of the fishmeal and fish oil season, I would say that we have been not impacted by the COVID-19 situation yet. The performance has been quite strong, I would say, in terms of securing raw material better than last year. And the main raw material for the fishmeal factory has been blue whiting. I would say also that it's a bit less sold volumes in this quarter versus last quarter, but it's also not this quarter which is the seasonable lowest consumption quarter in particular for the aquaculture here in the North Atlantic. When it comes to the human consumption, I would say also the performance is also very strong. We have been able to secure over 50% of both mackerel and herring, which has been landed in Norway during the season. And we have also had good sales also during the quarter. Stock level is acceptable and the unsold position is low. When it comes to the result, it's important to mention also that the underlying operation has been, as I said, very good both in fishmeal and the human consumption segments. But we have had some unrealized losses due to the weakening of NOK, which we had to take into account during this quarter. This unrealized loss will be reversed as soon as we are shipping the goods out to our customer in the next quarters to come. Then coming to Lerøy. Lerøy is, I would say, delivering on a better base than they did last year, mainly based on a higher salmon volume versus first quarter last year. I would say we started the year quite good and ended the quarter marked by the effect the COVID-19 had on, in particular, the fresh market of salmon. Starting off with salmon prices over NOK 80 and ended the quarter by Salmon prices, NSI prices on NOK 50. So a tremendous effect, I would say, on the COVID-19 during the quarter. Looking at the volume, just below 40,000 tons, 8,500 tons in Lerøy Aurora, approximately 14,500 tons in Lerøy Midt, and 16,500 tons in Lerøy Sjøtroll. In Lerøy Aurora, we had some problems with winter wounds on the salmon. So we have also not achieved the best prices on our salmon in Lerøy Aurora during the quarter. EBIT per kilo, NOK 50, down from NOK 17.7. So a bit lower performance on EBIT per kilo on salmon farming. But also worth to mention that the contribution from the VAP and sales distribution segment is also a bit down versus same period last year due to the challenging situation with COVID-19. In terms of volumes, we remain our guidance, 172,000 tons in Norway, 185,000 tons in total after our 50% share in Norskott. I would say that the wild catch segments of Lerøy have had a fantastic performance in first quarter. But also we have acquired the highest stake of the cod quota during the quarter, but the result is also marked by increase of prices both on cod, haddock and saithe. We are delivering now NOK 100 million better than last quarter last year. Then I give the floor to Britt. Thank you, Arne. As usual, we start with a summary of raw material, and this is actually a summary of Arne's presentation of the operational review in first quarter. Total raw material for the quarter is in line with same period last year. However, it is a change between the regions. We had lower volumes in Peru and higher volumes in the North Atlantic. Total revenue for the quarter was NOK 5.8 billion, up from NOK 5.6 billion in the same period last year. If we include our 50% share of Pelagia, the revenue was NOK 6.9 billion. The EBITDA was NOK 1.2 billion, up 3.8% compared with last year. The increase in revenue and EBITDA is explained by a higher harvest volume for salmon and trout, and also higher catch volume for white fish compared to the same period last year. However, the disappointing fishing season in Peru in Q4 and no anchovy catch in January resulted in a reduction in revenue and EBITDA for the pelagic segment in this quarter compared to same quarter in 2009. Looking at the EBIT, that was 834 million, and that was in line with the same period last year, but sat with higher earnings from salmon and lower earnings from the pelagic segment. Income from associated company was negative in the quarter and was minus 21 million. The two largest associated companies are Norskott and Pelagia. The harvest volumes in Norskott in the quarter was impacted by biological challenges the company had in first half of 2019. The harvest volume was 2,900 tons, down from 4,800 tons in first quarter 2019. When it comes to Pelagia, the underlying operation in the quarter have been very good, with high sales volumes and good access to raw materials. However, unrealized foreign exchange losses linked to the extraordinary depreciation of the Norwegian kroner in the quarter had a significantly negative impact on the earnings. Accounting policies specify that we have to take the unrealized losses on forward contracts right away. This accounting impact is expected to be reversed as the goods are shipped to the customers going forward or in the next quarters. Net finance in the period is minus 154 million, and of course, again, significantly impacted by unrealized disagio. Out of the 154 million, the disagio is around 80 million. In the same period last year, this currency effect was positive with 8 million included in the net finance of minus 50 million. Pre-tax profit, and that is also ex this biomass adjustment, was in the quarter 659 million, down from 939 million in the same quarter last year. The earnings per share in the quarter was NOK 1.15, down from NOK 2.20 same period last year. Lerøy reported a revenue of 5.3 million, up from 4.7, and an EBITDA of 1.1 billion, up from 934 million. The EBIT was 816 million, up from 691 million first quarter last year. The increase, as you can see from the lines below, we have increased our harvest volume of salmon and trout with 22%. The increased catch volume is actually 22% up from same period last year. The prices for salmon has been volatile in the quarter, started with NOK 80 and ended by NOK 50 by the end of the quarter, and of course, strongly impacted by the outbreak of COVID-19. For Lerøy, the price realization has been significantly impacted by downgrades as well as timing of sales. A high volume was sold in March. Costs are up from Q4 and it is also up from same quarter in 2019. When it comes to the wild catch part of the group, the average prices for white fish was up with 13% in the quarter. Austevoll Seafood Group, as we said, they had a disappointing fourth quarter season and that has, of course, substantially impacted earnings in first quarter as well. Lower earnings is a combination of low sales volume. It is lower price achievement for the fishmeal and also lower supply of raw material in the quarter. As you can see, 15,000 tons down from 66,000 tons in same quarter last year. As Arne already said, it has been low activity in the quarter. When we look at their inventory going into second quarter this year, they only have 2,400 tons of inventory compared to 18,400 tons going into second quarter last year. As stated here, the company still have a backlog of 13,000 tons from last season to be covered by new production from this season. FoodCorp, they have had a good start of the year with good catch volumes. The late start of the anchovy season has impacted the purchase volume of anchovy, as you can see from the total raw material intake. The sales volume of frozen products are more or less in line with same quarter last year, but they have had lower prices of frozen products into their main market. The total revenue in the quarter is NOK 138 million and the EBITDA is NOK 40 million and it's an EBIT of NOK 33 million. But of course, again, earnings impacted by lower prices for frozen products. Looking at Br. Birkeland Farming, they had an increase in their harvested volume of 21% and harvested 1,441 tons in the quarter. As mentioned earlier, the price achievement in the spot market, and they sell all their volumes in the spot market, has been from NOK 80 to NOK 50. Of course, timing impacts the total price achievement a lot in the quarter. However, Br. Birkeland Farming had a higher price realization this year compared with last year, but their costs are up compared to last year. But the EBIT per kilo in the quarter was NOK 12.3, up from NOK 11.2. Br. Birkeland AS, the fishing operation of Br. Birkeland, the two pelagic vessels, they started their blue whiting season in first quarter. One of the vessels started in February and finalized their quota by the end of the quarter, and the second vessel started in March and finalized their blue whiting quota in April. They have had a good price realization of the blue whiting this year compared with last year. The vessel fishing snow crab have had still a challenging winter, a lot of ice, which have impacted the operation and their catch volume are almost half of what they had in the same quarter last year. The revenue and earnings are more or less in line with the same quarter last year. The group's balance sheet by the end of March is NOK 40.9 billion, and that is up from NOK 39.8 billion by the end of 2019. We have some group companies with a functional currency other than NOK, and you can see the US dollar had a closing rate by end March, which was 20% higher than by end 2019. So the conversion of the US dollar balance sheets into the total group had an effect of approximately NOK 700 million, and that is the main reason for the increase in the balance sheet. We have a strong balance sheet. We have an equity ratio of 59%, and net interest-bearing debt is approximately NOK 4.6 billion by the end of the quarter. The cash from operating activities in the first quarter was NOK 421 million. The paid taxes is NOK 237 million. Looking at the cash from investing activities, it's minus NOK 629 million. In this quarter, the new trawler Kongsfjord was delivered early in the quarter, and the final payment for that vessel has impacted the cash from investing activities in the quarter. Looking at the cash from financing activity, that is positive with NOK 188 million, and the net change in cash in the quarter was NOK 7 million. We ended the quarter with approximately the same cash position as when we entered into the quarter, in total, NOK 4.2 billion. The board has recommended to the annual general meeting in 2020 a dividend of NOK 2.5 per share, and if approved by the annual general meeting, the dividend will be paid on June 12. Thank you. I give the words to you again, Arne. I begin by giving our view on the different markets we are operating within. Starting up with the fishmeal market and with a focus on what is happening in Peru. What I will say, up to now, the total production among the largest producer of fishmeal has been 33% less up to week 16 versus the same period last year. I would say Peru by far is one of the contributor to the drop, but also it is a bit slower start in the North Atlantic versus same period last year as well. I would say since the low fishing season, second quarter last year, we have seen an increase in prices up to $1,500 per ton on low-quality meal and with a premium of $200 per ton on high-quality meal. I think the major sales will be to the feed producers looking to cover the demands in third quarter. In Peru, it is limited stock available for the moment and as Britt mentioned, there is still sales backlog from last season in Peru to be covered by the new production. Looking at the other big influencer on fishmeal prices, the market in China, I would say that the market also is quite strong. Stock level is lower than it was same period last year, 134,000 tons. Offtake is a bit up versus last year and I would also say that the domestic fishmeal production in China has been lower up to now versus same period last year. We also see that the pig industry is gradually recovering from the African swine fever, and high consumption of piglet feed is continued. Summing up, I would say prices we are seeing now in China is on a higher level than what is being sold in Peru, stimulating for also trading. As it looks now, I would say that China is more or less back to normal when it comes to consumption. We are looking forward now for the execution of the first season in Peru. Fish oil has shown the same development. Production has decreased approximately 25%, and we have seen that affected the prices. Now you are buying Peru fish oil to up to $2,300 per ton, and with a premium of $300 per ton when it comes to the omega-3 industry. I would say also looking at the Atlantic salmon supply, we are expecting on a worldwide basis a modest growth between 3% to 4%, 3% from Europe and 5% from Americas during 2020, which in a normal situation is a growth which we could live with. Then looking at the development in prices during 2020, as I started with, we have seen that salmon prices has been dropping from up to NOK 80 down to NOK 50 per kilo during the start to the end of the quarter. It's been lying quite firm the last four weeks now on around the NOK 50 level. What we are seeing now is that it seems like it's a turning point this week, where we are experiencing higher prices with expectation also with higher prices for next week. I would say although we have had COVID-19 affecting the consumption during the end of the quarter, you can see that EU and U.S. has increased their consumption during the first quarter. Where we have seen the effect on consumption has been the other market, which is traditionally the Asian markets, which of course, started earlier with the COVID-19 effect. Ending up the presentation, I would say that uncertainties is a bit higher now than it normally is. What we have seen is that the impact of COVID-19 has affected, in particular the fresh market and in particular the HORECA market. We are also looking forward that this market will start up again. It's also, I would say, uncertainty related to the executions of the fishing seasons, but I would say up to now, it's done a fantastic job, I would say all across our system in terms of preparing for the season and executing the seasons, and keeping the wheels running, I would say, throughout all value chain in our company. I would also like to use this occasion to give a huge thanks for all the efforts our employee has been putting in terms of keeping the wheels turning in this situation. On a long-term, I would say, we still feel that the demand for salmon is going to be sound for seafood. We are maintaining our harvest guidance, have had a very good year in my quarter on the white fish segment this quarter. We are entering into seasonable lower catching period, during second and third quarter. I would say that disappointing season in 2019, again affected the Q1 result. We are happy with the quota which were put on 2.4 million tons now, and looking forward to start the season. But again, it's going to be a more challenging season than normal but we are prepared and doing our utmost to catch the quota, during first half year this year. I would also say that so far we have executed the fishing season in Peru on a very acceptable level and we are also seeing that the value chain is working quite good. We are able to catch, produce and also to ship goods during the period. North Atlantic had a very good underlying production in first quarter. As Britt were mentioning also, the unrealized loss on currency will be reversed during the next two quarter when we are shipping our goods to the end customers. Thank you.