Earnings Call: Q2 2019

Aug 21, 2019

It's a pleasure for me to invite you to the second quarter presentation for Austevoll Seafood. I would start by giving a short introduction to the performance of the different companies during second quarter. Thereafter, the CFO, Britt Kathrine Drivenes, will take you more in detail through the numbers, and I will end the presentation by giving our short view on the different markets we are operating within. Starting up, we have a somehow weaker result for second quarter 2019 compared with the same quarter last year. It's mainly due to reducing quotas in the main regions we are operating within, and also it's a lower price achievement on the salmon activity and a bit higher cost on the salmon farming for second quarter compared with the same quarter last year. Revenue, NOK 6 billion, and EBITDA on NOK 1.2 billion, and EBIT of NOK 874 million. Pre-tax profit, NOK 955 million. If you look at the first half 2019, you will also see the same situation, a bit lower than the same period last year. The revenue is more or less in line with last year, but due to the lower quotas and lower price achievement during the first half, we have also seen that the EBITDA is a bit lower and EBIT as well. EBITDA NOK 2.3 billion and EBIT of NOK 1.7 billion. Pre-tax profits is just south of NOK 1.9 billion. Looking at our balance sheet, we have a strong balance. The total asset is just south of NOK 39 billion, and the net interest-bearing debt has increased during this quarter, mainly due to the dividend payout and also we have paid tax in the period of second quarter. So net interest-bearing debt is NOK 5.1 billion. Strong balance sheet, strong balance equity ratio of 58%, and it's fit to meet the future of the industry and also in a size that we also can grow the company through acquisition or through develop the different companies internally. If you also take into account the 50% ownership of Pelagia, you can see the split on EBITDA between salmon and the pelagic activity. You see in total is NOK 1.3 billion in EBITDA, whereof approximately NOK 1 billion is coming from salmon and approximately NOK 308 million in the quarter from the pelagic side. Austevoll, it's a fully integrated seafood company involved in different fishing, production, and also commercialization of different types of species. If you look at the right-hand side of the table, you can see that we are catching between 400,000 and 500,000 tons of pelagic fish on our own vessels on an annual basis. Last year, we were producing in our plants approximately 2,150,000 tons of pelagic fish. This year, we are aiming to produce approximately 1.8 million tons, so down with approximately 350,000 tons. So the raw material basis is much less on the pelagic side compared with 2018, if you look at the expectation for 2019. White fish, we are processing, catching around 100,000 tons in our system through our ownership in Lerøy, and this year, we are aiming to harvest approximately just north of 190,000 tons, up with 10,000 tons compared with last year. Then starting up with the pelagic segment, I will start up by giving a view on the activity in Peru, the Austral Group company. Summing up the quota and the biomass in first half year this year, you can see that if you see the red dots, you can also see that the total biomass and also the quota has been considerably lower this year compared with first half last year. The main reason for that is it's mainly because of the size of the fish were very small at the start of the season and biomass was lower, and quota was also set as a consequence of that the fish were far below the 12 centimeter, which is the minimum catch size that we have to comply with. It's been a challenging season, I would say, and the season has been mostly located up north. But summing up, the total quota was 2.1 million tonnes, down from 3.3 million tonnes. Also, if you look at the expectation for the quota second half, we're also basing that, we believe it's going to be a bit higher due to a lot of small fish in the biomass during the first half. So in total, we are guiding on a volume for Peru in 2019, close to 4.5 million tonnes, which is, I would say, all in all down with 1.5 million tonnes compared with the same period in 2019. So summing up, the fishing started up much later this season. We transferred some of our quota to third quarter, a small part. Our quota were 146,000 tonnes. It's all caught by now. But it's down with approximately 40% from the same period last year. Third-party purchases are also down approximately 45%, 42%-43% compared with the same period last year. We are also seeing that the combined yield of fish meal and fish oil has been a bit lower than it was same period last year. On the upper side, you can see that the percentage of high-quality fish meal is higher in this season compared with the same quarter last year. If you look at the end of the year, we are expecting a quota of 2.5 million tonnes. Of course, that's subject to the IMARPE research, and approximately that we're going to catch 80% of that quota during the fourth quarter. But all in all, we are guiding on a volume which is approximately 130,000 ton less in Peru compared with 2018. Then going over to our activity in Chile. We have caught our own quota. It's a bit smaller volume in the second quarter compared with the second quarter in 2018. Main reason behind that is that the authorization to catch the quota we purchased outside the 200 miles was not given before the end of June. The quota is now mainly all caught in third quarter. It's been a very good fishery. We have had also an improvement in the fish going directly in for frozen, where the margins has been better. So I would say operationally has been, both on terms of fishing and also production has been very good for us. It's a bit pressure on margins. Market is a bit weaker than it was same period last year. The big difference between this year and last year or this quarter compared with last quarter has been mainly that the squid fishery has been more or less absent in the first half compared with last half, which more or less explain the difference in our P&L in the second quarter. Looking at the North Atlantic pelagic quotas, as you can see in 2019, it's approximately 100 million tonnes less quotas in the North Atlantic compared with 2018. We have a positive side on the winter herring. It's up 35%, which is an important species for the Norwegian fishing vessels. Looking at the other species, the capelin has been absent. It's approximately 500,000 tonnes gone compared with last year. You see the mackerel quota is down by 20%. The North Sea herring quota is down by 36%, blue whiting 18%, and sandeel is 7%. I would say, most importantly, this is volumes, or the main proportion of the loss of volume is affecting the fish meal and fish oil volumes. But of course, has an effect on the human consumption side and also on our fishing vessels catching in the Norwegian seas. Summing up the fish meal and fish oil operation of pelagic second quarter, I would say, taking into account that sandeel quota has been a bit down. The sandeel quota for the Norwegian vessels has been a bit up, which has been offsetting the effect for the Norwegian producers and also taking into account the loss of 250,000 tonnes of blue whiting, I would say we should be satisfied with the volume we turn out or turn through the fish meal plants during second quarter. Also we have received respective shares taking into account the drop of the quota during first half year. So I would say it's a good achievement from the fish meal and fish oil company or plants. I would say first half, compared with the volumes we have seen first half in 2018, although the volume is, of course, lower. When it comes to the direct human consumption department or facilities in Pelagia, it's a seasonable low production quarter, and it's been considerably lower this season compared with the same season last year. That's mainly because it has been a slow production of herring in June. The catches which has been caught of herring has also gone directly in for fish meal and fish oil due to the prices they have achieved there. Also, it's been a more limited catch on the mackerel in the north of Norway compared with 2018. Now we are entering into the period which is the most important for this segment. Herring roe production will start late August. The mackerel production is expected to start in the middle of September, and the winter herring production will start early October. Looking at the P&L of Pelagia, you see that the revenue is up compared with same quarter last year. EBITDA is up also and also the same for the EBIT, respective at NOK 251 million and EBIT NOK 198 million, just sort of NOK 200 million. Bear in mind that it's a gain of sales here on a factory that we are not using of approximately NOK 105 million included in this number. So operationally, it's a bit weaker than the same quarter last year. Then going to Salmon Whitefish, I suggest that if you want a more detailed introduction to the Lerøy figures, you go in and look at the Lerøy webcast, which will be available on the homepage of Lerøy. Starting up, EBIT is down from NOK 1 billion to NOK 774 million. It's mainly related to a lower spot price achievement. You can see spot prices is down by 9%. If you compare with the same quarter last year, which sum up to be NOK 6 per kilo. It's also a bit higher cost on the farming regions we are operating within. Volume is 37,000 tonnes. Majority of the volume is in mid Norway for the quarter, and then the Lerøy Sjøtroll ended up with a production of a harvest of 5,000 tonnes in Lerøy Aurora. EBIT per kilo down from NOK 23.4 to NOK 19. Of course, there is potential by far to increase our performance, both in Lerøy Aurora and in Lerøy Sjøtroll for the quarter. Net interest-bearing debt is up, and that's mainly due to that we have paid dividend and tax in the quarter. Also looking at the farming volumes, we have had two situations in Lerøy Aurora. There was fire in our smolt facility, which affected the cost for the first half. It's also been an algae bloom in the north of Norway, which has led into that we have stopped feeding the fish for a period to be prepared if we had to take out some fish. Luckily, the algae bloom was not affecting our farms in terms of mortality. But in terms of the growth of the salmon, we had to step down and we are guiding down now with 2,000 tonnes and are expecting to produce or harvest 34,000 tonnes in 2019. Maintaining the guidance on Lerøy Midt, and we are also taking down our expecting harvest in Lerøy Sjøtroll with approximately 3,000 tonnes in the period. So in total, 168,000 tonnes from Norway and including the 50% share of Scottish Sea Farms, it's 183,000 tonnes for 2019. Looking at the wild catch segments, you can also see that the volume is down compared with the same quarter last year. It's less cod. It's a bit up on haddock, but main deviation between the different species is shrimp, which has been more or less doubling or compensating the reduction of quota in particular on cod for the second quarter compared with the same quarter last year. It's been a successful, I would say, operation on the squid business. We have also seen that prices have more or less compensated the drop in the quota, and we have experienced a 14% increase in the major species that we are handling. It's 7% up on cod, haddock 4% up, and also saithe is up by 24% compared with the same quarter last year. It's been an increasing, I would say, prices on the white fish, and in particular on the cod being the most important species for us since we acquired Havfisk and Lerøy Seafood in 2016. Which has been very good for our fishing vessels, but I would say also been challenging for the industry part of the group in terms of pressure on margins in the period. I would say we are committed to really create value also on the industry part of the group. But of course, this will be taking some time in order to achieve that. I will give the words to Britt. This slide sums up the total raw material intake in the group in the second quarter this year compared to the same quarter last year. As you can see from the pelagic and white fish part of the group, the raw material intake in the second quarter this year was 500,000 tonnes, down from 700,000 tonnes in the same quarter last year. The main reason for that is, of course, the lower first season quota in Peru this year, at 2.1 million tonne, down from 3.3 million tonne for the same season last year. The revenue in the second quarter was almost NOK 6.1 billion, a little bit higher than NOK 6 billion in the same quarter last year. The EBITDA was NOK 1.2 billion, down from NOK 1.6 billion. The EBIT in the second quarter this year was NOK 874 million, down from NOK 1.3 billion. Lower price realized and higher release from stock cost from farming and the lower raw material volume and sales volume in the Austral Group in Peru represents the most significant reason behind the fall in earnings in the quarter, compared with the same quarter last year. Income from associated is up from last year, NOK 142 million up from NOK 111 million, and there is a gain of sales included in the second quarter this year, and that is the main reason behind the increase in income from associates. Net finance is minus NOK 62 million, down from NOK 102 million in the same period last year. This gives the pre-tax result, and that is also excluding this fair value adjustment related to biomass of NOK 955 million, down from NOK 1.3 million. The earnings per share in the second quarter this year, excluded biomass adjustment, is NOK 2.20, down from NOK 2.86. Looking into the first half, the revenue was NOK 11.6 billion, down from NOK 11.7 billion, and the EBITDA is almost NOK 2.4 billion, down from NOK 3 billion. EBIT of NOK 1.7 billion, down from NOK 2.55 billion. The reason behind the fall in earnings was explained actually when we talked about the second quarter. In addition, we had a gain from sale of NOK 157 million in the first half of 2018. The income from associated is up. It is NOK 294 million up from NOK 217 million, and as explained, gain from sale is the reason behind the increase in income from associated. Net finance first half year, a minus NOK 111 million, down from NOK 152 million in the same period last year. The pre-tax profit is NOK 1.9 billion, down from almost NOK 2.7 billion in the first half of 2018. This gives an earnings per share of NOK 4.4, down from NOK 5.44. Lerøy Seafood Group had a revenue of NOK 5.3 billion, and that's a little bit higher than the same quarter last year. Then the revenue was NOK 5.1 billion. The EBITDA is NOK 1 billion, down from NOK 1.2 billion, and the EBIT is NOK 774 million, down from NOK 1 billion. As for the group in total, lower prices realized and higher release from stock costs represent the most significant reason behind the fall in earnings in the second quarter this year compared with last year. What I would like to mention is that the biomass at sea by the end of June is 12% higher than by end of June last year, and that gives us a good position going into the second half of the year. The wild catch in the quarter was a little bit less than 16,000 tonnes, down 13% year-on-year. There is a different mix in the species, a larger catch of shrimps in Q2 this year compared with last year. The average prices are up 14% year-on-year, cod up 7%, and haddock 4%, and saithe up 24%. Looking into Peru and Austral Group. Austral Group had a revenue of NOK 368 million in Q2 this year, and that is quite lower than the revenue in Q2 last year of NOK 635 million. The EBITDA is NOK 95 million, down from NOK 322 million, and the EBIT is NOK 48 million, down from NOK 283 million. The main reason for the fall in earning are explained by the lower quota in the first season this year, 2.1 million tonnes, down from 3.3 million tonnes in first season in 2018. This gave a quota to Austral of 147,000 tonnes, down from 232,000 tonnes in same period last year. The sales volumes are almost 24,000 tonnes, down from close to 43,000 tonnes in Q2 2018. We have had or achieved lower prices for fish meal and fish oil, 5% lower price on fish meal and 8% lower prices on fish oil. We are going into Q3 with an inventory of fish meal of almost 38,000 tonnes and fish oil of 7,000 tonnes. What I would like to say is that in 2018, we really had a good year in Austral. It was a very good first season and it was a good second season, and this gave room for a dividend payment. So in Q2 now in 2019, the company has paid out a dividend equivalent to NOK 250 million. There was zero dividend paid in 2018. In FoodCorp Chile, the revenue was exactly the same as last year, NOK 212 million. The EBITDA was NOK 33 million, and the EBIT was NOK 24 million. The reason why the earnings are lower this year is mainly explained by the very challenging giant squid season we have seen this year, and no raw material available in Q1, and low raw material available in Q2 compared with last year. So the fall in earnings here are mainly explained by the lower volume of giant squid and also lower price achievement on the product. Looking into Brødrene Birkeland farming, they have harvested 1,900 tonnes in Q2 this year. In Q2 last year, there was zero harvest. The company sell all their salmon in the spot market, and the revenue in Q2 this year was NOK 117 million and the EBITDA NOK 40 million and the EBIT NOK 31 million. I would also like to mention here that the biomass at sea are 43% higher by the end of June this year compared with same period last year. Brødrene Birkeland AS, they have two pelagic fishing vessels and one vessel fishing snow crab. The pelagic vessel have had a low season, a very low catch, and the vessel catching snow crab had been catching 269 tonnes, and that is up from 151 tonnes in the same season last year. The revenue in Q2 this year was NOK 41 million and the EBITDA NOK 10 million and the EBIT is minus NOK 1 million. The main season for the pelagic vessels are starting now in Q3. Looking into the balance sheet of the group, the total assets are NOK 38.8 billion, and the equity ratio are 58%. Net interest-bearing debt by the end of June is NOK 5.1 billion. We've had a change in this IFRS 16 was implemented 1st of January 2019, and that gave us additional line in the balance sheet called right-of-use assets. By end of June, that was NOK 1.4 billion. That is the change comparing the balance sheet with the end of the year 2018. In addition, you can see that our cash position are lower than by end of the year, and we have paid out the dividend, quite a substantial amount of dividend in Q2 this year. The group has a strong balance sheet, and we should be in a position to actually support both organic growth and also acquisition if something interesting turns up. Cash flow. Looking into Q2, the cash from operating activities is NOK 838 million. You can see we have paid taxes of NOK 200 million. Looking into the taxes paid in first half, it's over NOK 800 million. Cash from investing activities was actually positive at NOK 3 million, and the main reason for that is because we have received dividend from the associated company of NOK 250 million. Cash from financing activities is minus NOK 1.7 billion, and the main reason for that is the paid-out dividend of over NOK 1.4 billion from the group companies in second quarter this year. This gives us a net change in cash in second quarter of almost minus NOK 900 million, and a cash position by the end of June of NOK 3.3 billion. Then I give the words to you, Arne. I will end the presentation by giving our view on the different markets we are operating within. Starting with the fish meal market, as you can see from the table, you can see that the total production among the largest producer of fish meal is down by just short of 30% by week 32, 2019, compared with the same period last year. You can see Peru is down by 41%, and here in the North Atlantic, Denmark and Norway is down by 12%, and Iceland and the rest of the North Atlantic is down by 25%. It's substantially down, which has led into quite strong prices, in particular in the North Atlantic region for fish meal. Looking into the Peruvian development in prices, you can see that it's been quite stable. Currently now you see it's a short drop in prices, and that has mainly to do with the situation in China, which I will cover on the next slide. As you can see, last prices was $1,540 per ton on high-quality fish meal, and has a reduction or discount on the quality of approximately $220 per ton to low-quality fish meal. Production in particular in Peru is down, but we also see that the consumption in China is also down compared with the same period last year. It has mainly to do with two aspects, maybe three aspects. It's been bad weather and typhoons in China, which has affected the consumption in the aquafeed sector. We also seen a reduced live pig population in China, which is then you cover the most important consumer of fish meal in China. We also see that the trade war is also devaluating the Chinese currency, which makes it more expensive for them to buy the fish meal as well. The stock has been increasing, and I think we need to see a shortage of the stock in China in order to have a positive view on the prices going forward. Looking at the fish oil, it's been stable prices during all season. Yield has been a bit lower than last year, in particular in Peru. If you also take into account the, it's been far lower than last year in Peru. It's about 25%, taking into account the other producers well down. We have seen prices has been a bit up since the season started, and also in particular on the fish oil from Peru, where the omega-3 content is quite high. You see that we have reached quite high on prices on the fish oil, and quite stable prices as well during the season. It seems it remain on this kind of level with a premium of $400 to $500 per ton into the omega-3 industry. Looking into the Atlantic salmon supply. Looking at the 2019 expectation, you see that there is an expectation of a growth of 4.3% in Norway. In Europe, in total, it's 6.6% up. In Americas, it's 4.7% up. We are expecting, I would say, in 2019, an equal growth that we have seen both in 2017 and 2018. Looking out to 2020 with the knowledge we have today, we are expecting a lower growth in harvesting of salmon during 2020 compared with the last three years. Looking at the prices, considering that we have had a growth of 5%-6% on an annual basis the last three years, you can see it's a big fluctuation between the different periods. If you look at year by year, you see that it's been quite stable prices since 2016 and up to 2018. In second quarter, the prices was, this is the spot prices were around 62 NOK per kilo, and that's quite interesting if you look at the Atlantic salmon consumption, which was very good, although prices were high at 8% in EU, 3% up in U.S., and in the other markets, it's up by 10%. All in all, an increase of 6%, which is very good considering the good prices we achieved through the quarter. Summing up, with the long glasses, we are bullish on the demand. It remains strong. Also, I would say the fundamentals in the salmon market remains positive. We are guiding on an harvest of 183,000 tonnes during 2019, and we are also expecting lower release from stock cost in the second half compared with the first half year. Approximately 25%-30% of the volume is on contract in Q3 2019. We also see a great potential in the whitefish sector. The quota advice is more or less on the same level as it was in 2019 for 2020. We have seen for us, the shrimp fishery has increased in importance and, I would say, prices has been compensating for the drop of the quotas, I would say, for the last 2 to 3 years. Of course, the increase in prices in raw material has also made it more challenges for the land-based industry to create margins. Looking at the pelagic side, again, the season started up later. The quota were down with approximately 40%, and we are expecting that the second season will be a bit higher than it was the first season and, of course, it's yet to see the result from the IMARPE research cruise. North Atlantic pelagic activity are now entering into the most important season for the human consumption business, and we are expecting to have a busy season starting up from next week, I would say, until late November this year. It's approximately 500,000 tonnes, which is going to come up from the Norwegian vessels from now and to the end of the year. Thank you.