Earnings Call: Q1 2019

May 14, 2019

Okay. Then it's a pleasure for me to welcome you to first quarter presentation of Austevoll Seafood. I will first start by giving you a short introduction to the highlights of the company for this quarter. Thereafter, I will take you to the group's different segments in the different regions we are operating within. Britt will take you more in detail through the numbers. I will end the presentation by giving a view on the different markets we are operating within. Looking at our first quarter numbers, we have had an acceptable quarter. Shortly, we are delivering slightly below last year's performance in salmon. If you adjust for the gain on sale we did first quarter 2018, we are delivering better on the pelagic activity in first quarter compared with same quarter last year. Revenue of NOK 5.5 billion and EBITDA just north of NOK 1.1 billion and an EBIT just north of NOK 837 million. Looking at our balance sheets, it's increased to NOK 39.5 billion. Net interest-bearing debt is NOK 4.3 billion and an equity ratio of 58%. If you also include the 50% shares we have in Pelagia, our total EBITDA for the quarter is NOK 1,250,000,000, which is approximately NOK 300 million down from last year. From salmon, it's down NOK 180 million. It's basically because we are slaughtering less, cost has increased, and also the price achievement on particular trout has been lower this quarter compared with last quarter, same quarter last year. If you look at the pelagic activity, and also remove the gain on sale we had on a vessel we sold in first quarter 2018, we are delivering approximately NOK 50 million better this quarter compared with last quarter. That's mainly due to the performance from Peru. Otherwise, it's quite similar as the achievements as we had in first quarter last year. Looking at our operation overview, and the figures in tons we are handling through our system, you can see that last year we were catching with our own fleet approximately 580,000 tons. This year we expect this volume to drop to approximately 100,000 tons. We processed in our factories 2.1 million tons in 2018. We also expect that this year it will be less by approximately 300,000 tons, mainly due to the reduced quota both in Peru and in the North Atlantic. In terms of white fish, we are expecting a similar volume this year as last year. We are aiming to increase our volume from 181,000 tons to 195,000 tons of slaughtering during 2019. Starting off with the pelagic activity, and first going to give you an insight of what's been happening during first quarter in Peru. IMARPE has been on a cruise and determine the total biomass and also the quota for first season 2019. In summary, you can say that the biomass detected was approximately 7 million tons. The quota based on that was 2.1 million tons. It was a lot of juveniles when they ended the cruise by the end of March. We had some expectation that it would be a challenging season in terms of juveniles, but so far it's been very good catches. Biomasses do not compare with the first season last year considerably. That is also due to smaller fish compared with last season as well. We expect based on the small fish we had on the first cruise that the volume might be higher and the quota will be higher in second half year in 2019 compared with what we saw in end of 2018. In general, we are guiding on volume from Peru on the 4.5 million tons in the two seasons of last year. As I said, season started up in late April, 2.1 million tons quota. Biomass 7 million tons, down from 11 million tons. We have caught approximately just north of 40,000 tons so far. The fishery has been good, and the size of the fish has been okay. The fish oil yield has been between 4% and 4.5%. We have also been catching in the south, in the Ilo area, and has been landed approximately the similar volume as we did same period last year. Horse mackerel fishery has also been quite good. Also, I would say better than we have experienced the last three years. The start has been okay, and we have also been able to freeze a higher volume through our factory up in Coishco compared with previously. Current fishing grounds in the anchovy season now is around Callao area and also in Pisco area, just north of Pisco area, which is the main fishery happening just right now. Have also had a great start in Chile. We are finishing with our own quota. Fishing ground has been very close to our factories. Maximum steaming hours has been approximately 12 hours. There has been a different size of the fish, which is of course good for the recruitments, but also has been a big challenge to sell the smaller size fish during the quarter. We have been able to secure approximately 17,000 tons of fish from trawlers outside the 200-mile zone, which we are supposed to catch with our own vessels. We are awaiting the approval from the Chilean authority in order to start catching that fish. Down to the North Atlantic pelagic quota. As you can see from the table here, you can see that in 2019, quota is substantially down compared with 2018. The only increase we had on the main important species in 2019 has been on the herring in the north, which is up with approximately 25%. Capelin is down with approximately 500,000 tons compared with 2018. Mackerel is down with 20%. North Sea herring is down with 35%, and blue whiting quota is down with approximately 16%-17% compared with last year. Meaning that it is a higher competition in order to for the raw material and for our North Atlantic pelagic factories, and also for the vessels. Saying that, I would say that it has been a good first quarter for pelagic on the fish meal and fish oil factories. The volume is of course down as a consequences of, in particular capelin has been removed from the equation both in the Barents Sea, but also on the Icelandic side. Also the blue whiting quota is also down compared with last year. Sales has been good, 20% more than same period last year, and we have seen prices also increasing during the quarter. We are awaiting the final sandeel quota to be set on the 15th of May, and that could also have an impact on the fish meal activity during May, June. Also for the direct human consumption, production has been okay. Approximately 100,000 tons, down from 125,000 tons last year. Main species has been mackerel and also herring. I would say that the raw material prices we have paid is more or less in line with the market expectation. Stock situation a bit high but manageable in the quarter. As you can see, Pelagia is delivering more or less the same numbers as they did same quarter last year. 200 million NOK in EBITDA and 145 million NOK in EBIT in the quarter. Looking at Br. Birkeland which is doing both salmon and fishing. You can see that the volume is down compared with last year. Cost is up and the price achievement also is a bit less than it was the same period last year. EBIT per kilo is 11 NOK compared with 19 NOK same period last year. However, if you look at volume guidance, we are expecting to produce more in 2019 and slaughtering more in 2019 compared with 2018. We have been catching herring in one of our pelagic fishing vessels and also blue whiting on both our pelagic fishing vessels. To Lerøy Seafood Group and their performance in the quarter. I suggest that if you want to have a more detailed run through the numbers, you should go into the webcast of Lerøy Seafood Group and listening to Henning and Sjur. Summing up EBIT just below 700 million NOK, which is down from 960 million NOK last year. We are slaughtering approximately 5,000 tons less than same period last year. The distribution of the slaughtering is 5,000 tons in Lerøy Aurora, approximately 12,000 tons in Lerøy Midt, and 15,000 tons in Lerøy Sjøtroll. EBIT per kilo is 17.70 NOK per kilo, and it's huge difference between the different area we are producing, where EBIT per kilo is 25 NOK in the north region, approximately 19 NOK in the mid region, and 10 NOK in the west coast of Norway. Contract share is 41%, and it's up from 22%. The net interest-bearing debt is just below 2.9 billion NOK. We have also reduced the EBIT with 51 million NOK. That's mainly related to intercompany elimination, meaning that it's delayed realization of profits. We have sold some white fish internally to Lerøy Seafood Group, and it's still not sold off to third parties yet. That's the reason why you have the 51 million, which is reduced from the EBIT. In addition to that, Havfisk and Lerøy Norway Seafoods is delivering more or less on the same level as before. I will come back to that. We are maintaining more or less the same volume as we did last quarter, is 1,000 tons less in Lerøy Aurora. Otherwise, Norway will slaughter 173,000 tons, and we will slaughter 15,000 tons, which is our share of the company in Scotland. So in total, 188,000 tons. Looking at the wild catch performance of Lerøy, we have experienced lower quota, lower volumes for 2019 compared with 2018. However, it's compensated by increasing prices, in particular on cod and haddock during the quarter. In terms of volumes, we have been catching a bit less volumes this quarter compared with last quarter. However, it is compensated by increased price. We will also have more time catching in the free fisheries, mainly shrimp during 2019 compared with 2018. We will try to compensate the drop of the volumes and the quota we had in 2018. The increase of prices has also made it more challenging doing industry-related production onshore. The increase of prices has been challenging to make profit in these land-based areas. All in all, we are delivering more or less the same EBIT than we did the same quarter last year. Britt will take you through the financials. Thank you, Arne. We start with this table. This sums up the operational factors that Arne has been going through now. As you can see, there is a little bit lower volume this quarter from the pelagic side compared with same period last year. Also, we have the estimate for the full year 2019 included here. Arne has gone through the key figures for the group in the quarter. However, I would like to say that the most important factors behind the lower operating result this quarter compared to last quarter are lower harvest volumes from the salmon segment. In addition, we had a one-off gain from sale of vessels and licenses in first quarter 2018. The group has implemented the IFRS 16 regarding lease agreements from the 1st of January this year. That means lease cost is now presented as depreciation and interest. The 2018 figures will therefore not be directly comparable with the corresponding figures from previous period, or the 2019 figures, I mean. The EBIT in first quarter is NOK 837 million. If we include our part of Pelagia, the EBIT is NOK 910 million in first quarter this year. We have income from associated companies of NOK 152 million. It is more or less in line with last year. We have a little bit less result from Norskott. That is because they have a lower slaughter volume this quarter compared to last quarter. However, one of our associated company has sold a vessel, so there is a gain from that sale, so that more or less compensate for the loss of results. So more or less in line with the same quarter last year. Net financing is minus NOK 50 million, also in line with same quarter last year. However, currency effects are also included in that figure. So the net interest in the period is minus NOK 58 million, a little bit down from minus NOK 62 million in the same quarter last year. In first quarter, we have an earnings per share, and that is excluding this biomass adjustment of NOK 2.2. That is down from NOK 2.6 same period last year. If we look into Lerøy Seafood Group, the revenue in the quarter is NOK 4.7 billion. The EBITDA is NOK 934 million. The EBIT is NOK 691 million. As mentioned, there is a lower slaughtered volume of salmon in the quarter compared to last year, 32,000 tons, down from 37,600 tons in the same quarter last year. There is also an intercompany elimination this quarter of NOK 51 million. Spot prices are up 3% compared to same quarter last year, but the release from stock cost is also up compared to fourth quarter 2018. Still, we have had lower prices on the trout compared to salmon, NOK 9 this quarter. The trout prices has been lower than the salmon prices. Wild catch, that has been a good quarter. The catch volume are a little bit lower compared to last year, down 8%, but there has been an average price increase of 6% for all volumes. Of course, increased prices are very positive for the fleet. But of course, it's quite challenging for the onshore industry. Austral Group in Peru, there has been, as normal, lower activity in first quarter. That's normal for first quarter. We finalized the second fishing season early in January. There has been some raw material intake in the south to our factory in Ilo, and of course, there has also been quite a good fishery for direct human consumption this quarter, almost 17,000 tons. Last year, first quarter, it was 4,000 tons. The revenue in the quarter is NOK 557 million. The EBITDA is NOK 140 million, and the EBIT is NOK 93 million. As you can see from the table here, the sales volumes are almost 38,000 tons, up from 18,000 tons in the same quarter last year. That is explained by we went into 2019 with very high inventory of fish meal and fish oil. We had a very good fishing in fourth quarter 2018. Last year, in January 2018, we almost had no inventory when we went into 2018. The fish meal prices has been 6% higher in this quarter compared to first quarter 2018, but the fish oil prices has been 29% lower first quarter this year compared to same quarter last year. FoodCorp in Chile, they started their season in January. They have had a good start of the season, and they have caught 25,000 tons of horse mackerel. That's up from same quarter last year, where they caught around a little bit less than 21,000 tons. The mix of the fish, it's a little bit smaller sizes for a bigger part of the volume in first quarter this year, especially in the beginning of the quarter, compared to same quarter last year. That gives a slower rotation of the inventory and also lower prices. There has been no giant squid fishing in first quarter, so we haven't had any raw material from giant squid. The sales volume in first quarter this year is a little bit over 9,000 tons, down from 15,000 tons in same quarter last year. The revenue in the quarter is NOK 147 million, and the EBITDA is NOK 51 million, and the EBIT is NOK 43 million. Looking into Brødrene Birkeland and the farming part of Brødrene Birkeland, they have slaughtered a very low volume compared with first quarter 2018, only 1,200 tons, down from 2,800 tons in the same period in 2018. The EBIT per kilo is NOK 11, down from NOK 19. They have had a lower price and also a higher release from stock cost. The revenue is NOK 68 million, and the EBITDA is NOK 18 million, and the EBIT is NOK 13 million. Looking into the fishing side of Brødrene Birkeland, they have had a revenue of NOK 46 million, an EBITDA of NOK 9 million, and a negative EBIT of minus NOK 2 million. First quarter last year, they had this gain on sale from a vessel they sold and licenses. If you take that out of the results in first quarter last year, you can see that they have improved their operating result this first quarter 2019 compared to last year. The pelagic vessel has been fishing blue whiting in the quarter. They started up their blue whiting fishing in March. There has, as normal, been low volumes for the vessel that has been fishing snow crab. The company has a cash position, and it is a cash position of NOK 188 million by the end of first quarter. As I mentioned in the start, we have implemented this IFRS 16 regarding lease agreement from 1st of January. That means that all lease agreements need to be put up in the balance sheet as right of use assets. Of course, there will also be long-term debt and short-term debt connected to the right of use assets. You can see that this is one line in our balance sheet. The effect is NOK 1.4 billion. Our total assets by the end of March was NOK 39.4 billion, up from NOK 38 billion. The increase in the total assets are related to this right of use assets implementation. The net interest-bearing debt by the end of first quarter is NOK 4.3 billion, and that is comparable to the net interest-bearing debt by the end of March last year and also by the end of 2018. If you include the right of use assets liabilities, the net interest-bearing debt is NOK 5.7 billion. The group has an equity ratio of 58%. Cash flow. Looking at the cash flow from operation in the first quarter, it is NOK 261 million. We have paid taxes of NOK 432 million, which gives a negative impact on the cash flow from operation. Also, we have more tied up in working capital by the end of March, which is also negative on the cash performance. Cash from investing activities are minus NOK 450 million. Investment in CapEx is NOK 438 million, and you can see it is down from same quarter last year. We are now starting to finalize the large project we have within the salmon smolt facilities. Also last year in first quarter, we took over a new trawler for Havfisk. You can see also last year we sold a vessel and licenses, which also impacted the investing activities. The cash from financing activities is minus NOK 84 million. Not much to comment on that. We end the quarter with a cash position of almost NOK 4.2 billion. Then I will end the presentation by giving our view on the different markets we are operating within, starting up with the fish meal market. As you can see in the table on the left-hand side, you see that by the end of week 18, there is a drop of approximately 45% of fish meal production amongst the six largest producer in the world. The main driver behind that is the Peruvian production, which not only is down in quota, but it was also a delayed startup. As a consequence of the Peruvian quota, we are also seeing that market prices has been increasing during the last, I would say, four to five weeks. Current prices now, according to IFFO, is around $1,650 per ton for high-quality fish meal and a $200 discount on low-quality fish meal. Looking at, let's say, the quota estimations both in Peru and also in the North Atlantic, we expect supply this year to be lower than it was last year. Going over to China, which is the main market for fish meal, you can see that stock situation is higher than it was previous years and also higher than it has been on the five years average. Saying that, we have seen prices also increasing and also the demand has been good for fish meal and the consumption per day has been up to 2,500 ton, which is up from 1,700 ton same period last year. We are estimating and expecting that it's going to be the aquaculture season starting up now in April and May, which will drive the consumption for the fish meal in China through the periods we are going through. Jumping over to fish oil, we see also the same effect. It's a reduction in volume. Main driver behind that is Peru. I would say the total global reduction by the end of week 18 among the largest producer is approximately 36% down. We are seeing prices now just below $1,800 per ton for feed-grade in Peru. Bear in mind that the EPA and DHA ratio are quite high in Peru compared with other regions, and it's a premium on the omega-3 grade of up to $400 to $500 per ton. Looking into the Atlantic salmon supply, you can see that an expectation of an increase in production of 6.6% globally. Norway is up 5.5%, Chile is up approximately 5%, and the growth in the global level is more or less in line with what we have seen in both 2018 and also in 2017. We have seen that we have experienced quite good prices both during 2017 and 2018. We are also seeing that 2019 is also starting well in terms of price achievement, although that volume is a bit up compared with the same period last year. Looking at the consumption so far, EU is up 4%, U.S. is up 4%, and what we defined as other markets is up 7%. So the consumption is there on high prices. Summing up, the demand remains strong for salmon, outlook remains positive. We are increasing our guidance compared with last year in terms of volume in Lerøy, and we also expect lower costs coming into second half in 2019. Contract share for second half is approximately between 35%-40%. Looking into the whitefish, quota is down both on cod and haddock. However, we have seen that the price has been compensating the drop in volumes. We will also have more time looking into free fisheries. Going over for the pelagic, what we can say, first quarter is normally seasonably low activity for fish meal and fish oil. We have committed higher sales in first quarter 2019 compared with 2018, and have started okay in the first season in Peru. North Atlantic is a seasonal high activity. First quarter and fourth quarter is the most important quarter for this activity. In this period, we have been focusing catching mackerel, herring, and blue whiting, and also produced that in our factory. The reduced quota mainly leads into a higher competition on raw material. That's it. Thank you.