Earnings Call: Q3 2018

Nov 8, 2018

Okay. Then it is a great pleasure for me to welcome you to this third quarter financial presentation. I will first start by giving you a short insight to the highlights of our figures for third quarter and year-to-date. Thereafter, I will take you through each segment in the group. Britt will take you more in detail through the numbers. I will end this session by giving you a short introduction to how we are viewing the market within fish meal and fish oil, salmon, and the other segments we are working within. Starting off with the highlights, we have had a good quarter, a good financial performance. I would say third quarter for us is a seasonal low production quarter when it comes to the fishing activity. Also if you look at the result from the salmon segment this quarter, you also see it is giving us lower numbers, and that is mainly due to, we have been harvesting 9,000 tons lower this quarter compared with the same quarter last year. Looking at the revenue for third quarter, we have 5.3 billion NOK and EBITDA just north of 1 billion NOK, an EBIT of 707 million NOK and pre-tax profit on just below 760 million NOK. If you also consider the 50% share we have in Pelagia, our total EBITDA for the quarter is 1,035,000, and as you can see, the contribution, the EBITDA from Lerøy is 820, approximately 190 million NOK lower than last year and is mainly due to lower harvest volumes. But if you look at the contribution from the pelagic segment, you are seeing also we are delivering approximately 110 million NOK more, and this is basically due to a good sales quarter, in particular coming from Peru, due to the very good season we had in second quarter. If you look at year-to-date figures, you see the revenue is 17 billion NOK, EBITDA just above last year's performance, 4 billion NOK, EBIT 3.3 billion NOK and pre-tax profit on 3.4 billion NOK. You can also see that the total balance has increased during this period, up from 35 billion NOK up to 37.5 billion NOK. The main drivers for that is mainly due to a CapEx program we have had in particular here in Norway, consisting of 1.3 billion NOK, but also the total biomass has increased with approximately 1.3 billion NOK as well. Net interest-bearing debt more or less in line with the same quarter last year, 4.4 billion NOK, and the equity ratio has increased from 54% to 58%. Looking at the contribution from the pelagic business and salmon business, including 50% share in Pelagia year-to-date, you also see that the total EBITDA for the first three quarters is 4.2 billion NOK, whereas 3 billion NOK is coming from the salmon activity. We also passed the 1 billion NOK limit on the rest, or the pelagic activity, showing a number in the three first quarter on 1.1 billion NOK. I normally show this graph, gives us a short introduction to the company. Looking at the right-hand side, you are seeing we are catching between 400,000 and 500,000 tons of volumes from our own fishing vessels in both Chile, Peru, and in the North Atlantic. We are processing this year close to 1.9 million tons in our factories, meaning that we are also purchasing a lot of fish from third parties fishermen as well. Among the largest white fish producer in the world through our ownership in Havfisk and Lerøy Seafood. Next year we are also guiding on a volume very close to 200,000 tons of salmon. As I said when I started, the pelagic activity has had a seasonal low production quarter in third quarter, so I rather focus this quarter based on history and what we also expect in the future when I am talking about both Austral, FoodCorp, Pelagia, and Brødrene Birkeland. Starting off by focusing on the past. As you can see from this graph, both the biomass and the quota set for the last four years has been quite volatile. In addition to that, there has been some years that the industry has not been able to catch the quota as well. It turned, I would say, the last season in second quarter where we had a very high biomass. You have to go back to 2012 to have a similar biomass, and you have to go back to 2011 to have a similar quota as we had first half year. It was a very good quota and also the fishing performance was very good. So we caught and produced mainly everything in second quarter. We have this year guided on our total volume from Peru, somewhere between 5.3 and 6 million tons, meaning that we are expecting that the quota for second season will be between 2 million tons and 2.5 million tons. But of course, this is yet to be seen. I think in some of the next day we will know the result from the map cruise and the quota will be set, and the season will start up. But just to start off giving you a short teaser, you can here see the result of the egg and larvae cruise from September last year compared with September this year. As you can see on the right-hand picture, there is a much higher concentration of fish this year in the map cruise than it was same period last year. However, we still don't know the sizes of the fish, but this map is showing that at least the biomass is there. So we are waiting for the result. Of course, if we have a good second season as well, we also expect that the volume will be not double, but not far away from double compared with 2017. Another pleasant thing is that it's been a quite good fishery in the south of Peru. So our factory in Ilo has also had a lot of raw material during 2018. Chile, also a quiet quarter. We have caught 10,000 tons, still remain approximately 5,000 tons of our quota left to be caught in December. If you look at the total volumes we have been running through the plant this year is a bit lower than last year. However, we have been able to had a quite good activity level also in 2018. Our total quota in 2018 for our own vessel was 29, just below 30,000 tons. We also been able to acquire or purchase 23,000 tons of third-party quota, which we have caught with our own vessels to have an economy of scales both on our factory and on our vessel. In addition to that, we have also purchased some fish from other fishing vessels, which we have been freezing in our factory. So this year we have had a record volume through our frozen plant. This is a year with, I would say, a lower quota than it was in the high days from 2006 when we started the frozen plant and up to 2010. So there are some positive signs in Chile. Next year quota of 2019 is expected to be 3% up versus 16% up this year. So it is a slower recovery next year than this year. If you look at the North Atlantic pelagic quota, you could also see that our estimates is a bit down compared with 2018. It is mainly driven by that there will be no capelin fishing in next year. Mackerel quota, North Sea herring quota, and blue whiting quota is down. Still yet to be set, but the recommendation from ICES is down in 2019 compared with 2018. It will be less volume for our fishing vessel and higher competition to buy raw material for our factories, both within fish meal and oil and within human consumption. Starting off with the Pelagia business, the performance in the quarter is a bit better than last quarter in terms of volume into the plants, 100,000 tons versus 79,000 tons. If you look at the total volumes for 2018, it is just sort of what we did in 2017. So I would say it is also going to be a very good raw material year for our fish meal plants in 2018. We have seen that prices has been increasing. We have sold less volume in third quarter compared with the same quarter last year. Also the margins has been a bit lower due to higher competition on the raw material. But we also see that prices has been increasing during fourth quarter when it comes to fish meal. It is, of course, yet to be see how prices will be after the new quota in Peru will be announced. For human consumption, we are now entering the fourth quarter, which is the main activity quarter for this segment. Approximately 40% of the production we are going to do in fourth quarter. Its main driver behind that is the winter herring and the mackerel season. So it is a full activity on the plant now all along the coast, and it is going to be interesting to see how we will come out of this season in fourth quarter. We also expect lower volumes in 2019 compared with 2018. Looking at the result from Pelagia, lower EBITDA this year compared with last year, mainly due to sale of volumes for fish meal and fish oil. Also the margin has been more pressured this quarter compared with last quarter. But if you look at year-to-date figures, we are surpassing year to date 2017 with approximately 40 million NOK. When it comes to the Brødrene Birkeland activity, we have been harvesting 1,200 tons. We have been harvesting on the spring 2017 smolt, which has been a challenging generation and the EBIT is, of course, reflecting the biological challenge. You can also see the numbers, compare it with same quarter 2017. Fishing vessels has been mainly laid up waiting for the season to start in fourth quarter. Looking at the result from Lerøy, had an EBIT of NOK 660 million, down from NOK 868 million same quarter last year. Again, 9,000 tons less volume. The white fish activity is also contributing less in the quarter. However, we have been entering the fourth quarter with a higher stock situation than we had in the same quarter last year. The result is mainly lower because the sale has been pushed out to fourth quarter. Harvest volume 37,000 tons. It's approximately 6,500 tons in north, 18,500 tons in the mid and 11,000 tons in the south. EBIT per kilo NOK 16.6, a bit down from third quarter last year, NOK 17.4. Achieved prices is down, but also cost is down. It's more or less in line with the same quarter last year. Looking at the volume guidance, we are aiming to produce in Norway 166,000 tons during 2018, meaning that we're going to have a volume over 50,000 tons in fourth quarter coming from quite even 37,000 tons the last three quarters. It's an exciting period for us and it's a lot of activity. If you look at 2019 volume, Lerøy Aurora and Lerøy Midt is more or less delivering the same volumes. But we are expecting that Lerøy Sjøtroll will recover their biological performance and produce a higher volume in 2019. I would say all in all, in Norway, 174,000 tons. If you include our shares in Norskott, it's additionally 16,000 tons and we're going to deliver 190,000 tons all in all. Slow quarter also for the wild catch, 14,000 tons, compared with 17,000 tons the year before. If you look at the full year volumes and the full year performance, you can also see that the reduction in quota in 2018 for cod 12%, haddock 13%, has been compensated by increased prices. You see average prices for cod is up 23% and haddock up 38%, while saithe is down 5%. A reduced volume has also increased the possibility of catching shrimp, and we have had a season with 6,700 tons more shrimp than we did in 2017. If you look at the activity on land, the processing activity is still challenging, high competition of buying raw material. But we have invested, I would say, in a lot of processing facility and we are aiming to do it much better in the coming years than we have had in the previous two years. I will give the floor to Britt. Thank you. As Arne has already mentioned, there has been a low activity in the third quarter within the pelagic segment, both in South America and here in the North Atlantic. As you can see, the raw material intake for wild catch has been 252,000 tons, a little bit down from the 266,000 tons in the same quarter last year. There has also been harvested a lower volume of salmon and trout in the quarter compared with the same quarter last year. Arne has been through the key financial figures, so I will give some comments and go down to the line from income from associated. We have had a good quarter in the salmon segment, but as we have announced and expected, there has been a lower volume harvested compared with the same quarter last year. Within the pelagic segment, there has been a low production, but we had a very good first season in Q2. We have had quite high sales volumes of fish meal and oil in Q3 this year compared with the same quarter last year. Going down to the income from associated company, that was NOK 74 million in the quarter, down from NOK 122 million in the same quarter last year. Within Norskott Havbruk, we have harvested a lower volume of salmon compared with last year, and of course, that gave a lower result. For Pelagia, there has been some lower production, and there has been approximately 20% lower sales volume in Q3 compared with the same quarter last year. Pretax profit before biomass adjustment is NOK 758 million in the quarter, down from NOK 873 million in the same quarter last year. That gives an earnings per share ex biomass adjustment of NOK 1.44. Looking at the figures year-to-date, we have had a revenue of NOK 17 billion, and that is up from NOK 16 billion same period last year. If we include Austevoll's 50% share of Pelagia, then revenue is NOK 19.1 billion. EBITDA is NOK 4 billion, up from NOK 3.9 billion, and including Pelagia, NOK 4.2 billion. EBIT year-to-date is NOK 3.3 billion, up from NOK 3.2, and including our share of Pelagia, almost NOK 3.5 billion. Income from associated you can see is at the same level as last year, NOK 344 million year-to-date. Pretax year-to-date is NOK 3.4 billion, and that gives an earnings per share ex biomass adjustment of NOK 6.88. I would recommend that you go into Lerøy's webpage and look at their full presentation. They have had good earnings in the quarter, but as you can see, they have harvested a substantially lower volume in Q3 this year compared to last year, 37,000 tons, down from 46,000 tons. The prices have been volatile also in Q3, but a little bit less volatile than Q2 this year. The spot prices are down by 2%. The price achievement for Lerøy is also influenced by the trout prices, and the trout prices in the quarter has been NOK 7 lower than the salmon prices. The contract share in the quarter has been 25%, and the contract prices have been above the spot prices. Cost is down, both compared to Q2 this year and also Q3 last year. There has been a very good production in Q3 and so far in Q4. Biomass at sea is, by the end of September, 4% higher than by the end of September last year. Bycatch, some lower volumes this quarter, but higher prices. The revenue in the quarter is almost NOK 4.5 billion, and the EBITDA is NOK 820 million, and the EBIT is NOK 660 million. Arne has mentioned, low activity in Peru in the quarter, but we had a very good first season, and we have sold 42,000 tons of fish meal and oil in the quarter, up from 27,000 tons in same quarter last year. We have had higher prices, 15% for fish oil and 40% higher for fish meal compared to same quarter last year. We have very low volumes at stock by the end of September. The revenue in the quarter has been NOK 578 million, the EBITDA NOK 157 million, and the EBIT NOK 115 million. Looking into the year-to-date figures, you can see that we have had a very good production and a very good development this year. Of course, a good first season has given us high raw material volumes and also good production. So revenue year-to-date is almost NOK 1.5 billion and the EBITDA NOK 542 million and an EBIT of NOK 421 million. The main season for horse mackerel in Chile ended in Q3. So we have caught 90% of our quota of almost 53,000 tons. The remaining volume is expected to be taken in December. The demand for the product has been good, and also there has been stable prices, and we have had a little bit higher prices this quarter compared to same quarter last year. The revenue in the quarter is NOK 152 million, and the EBITDA is NOK 13 million, and the EBIT is NOK 5 million. As we also announced in our last presentation, we have some higher raw material cost this year compared to last year. The fee for our own quota has increased, and also there has been some competition of the raw material that we buy. So our margin is lower this year compared to last year. Brødrene Birkeland Farming, they have harvested almost 1,300 tons in the quarter. Of course, not high volume, but substantially higher than last year when they harvested 543 tons. The revenue in the quarter is NOK 67 million, the EBITDA is NOK 12 million, and the EBIT is NOK 7 million. The lower earnings in the quarter, the spot prices has been below last year, but the weak profitability is also on the back of the final harvesting of the Spring '17 generation, which have had high cost. Brødrene Birkeland AS, as also mentioned earlier, there has been, as normal, low season for the two vessel in the pelagic fishing. They have been fishing North Sea herring in the quarter, and the mackerel season started up late September. There has been stop in the fishing for snow crab in the quarter. So the vessel within this segment, they have had quite a challenging year, I would say, and they have contributed negatively to the result in the quarter and also in the result year-to-date, and we don't expect any positive result from them in fourth quarter either. The revenue in the quarter has been NOK 63 million, the EBITDA NOK 16 million, and the EBIT minus NOK 2 million. The total asset by the end of September is at NOK 37.6 billion, up from almost NOK 35 billion in the same quarter last year. There are especially two lines in the balance sheet that we should look into, and that is tangible fixed asset. As we have communicated earlier, we have quite a large CapEx program going on in our core business that we have taken over a new fishing vessel for the whitefish segment this year, and we are also building new smolt facilities and also production facilities both in Norway, the Netherlands, and in Spain. Biomass at sea are 4% higher when it comes to volume compared to last year, but the cost for the biological assets at sea have increased more than 4%. The reason for that is we have more numbers of fish in the sea, but they have a lower average weight. The equity share by the end of September is 58%, and the net interest-bearing debt is NOK 4.4 billion and is on the same level as by the end of September last year. Cash flow from operating activities are almost NOK 700 million in the quarter. The good production in third quarter of salmon gives us increased working capital. But in the pelagic segment, we are decreasing the working capital. But the higher biomass at sea gives a negative impact on the cash from operating activities in the quarter. The cash from investing activities are minus NOK 394 million. We have received a dividend from associated companies of NOK 80 million, and as mentioned, we have a CapEx program going on and also, of course, the normal maintenance CapEx. The cash from financing activities are minus NOK 685 million. We have changed a long-term loan into a long-term credit facility, and that impacts the cash from financing activities in the period. We have cash by the end of the period of almost NOK 4.5 billion, a little bit lower than last year than the cash was almost NOK 4.6 billion. Thank you. I will end this session by giving a view on the different markets we are operating within. Starting off with the fish meal market, looking at the supply side. Obviously, the main driver for fish meal prices on the supply side is the volume coming from Peru. However, if you look at the six largest producers in the world of fish meal, you can see that it's an increase of 18%, whereas Peru has an increase out week 42 of approximately 32%. I would say prices came down when the quota was announced before second quarter. However, it's been quite stable, I would say, and increasing during the fishing season. I would say we have experienced quite strong prices during second and third quarter considering the volume coming in from Peru. Approximately 140,000 to 150,000 tons is already committed for next year or next season's production, which is approximately 30%-32% if the quota will be 2 million tons. Of course, this percentage is lower if the quota is higher. Looking at the market, have to look to China. Stock level is more or less on the same level as it was same period last year. Offtake is a bit lower time being compared with last year. However, the consumption and the demand has been extremely good in China during 2018, and I think they have been acquiring over 80% of the Peruvian production. Saying that, I think has also something to do with that the Chinese government has imposed quite strict environmental regulation, which has also limited domestic production. I think we should expect that next year, the Chinese producers will be more in line with the regulation than it was this year. Fish oil. Fish meal was up 18%. Fish oil is up 30%, mainly due to higher volume in Peru, but also a better yield than the previous years in Peru as well. Prices have been coming down. Currently, feed grade prices is $1,400, and that is a premium for the omega-3 industry of $300-$400 per ton. I would say the market is balanced, limited stock available for new offers, and, of course, we are awaiting the quota on the fisheries and the production for next season in Peru. Looking at the salmon supply. Seems like we're going to have a growth of 5% in 2018. We also had a similar growth in 2017, and we're also expecting a similar growth for 2019. Mainly driven this year by increase in Chile, but also in Norway, and other main region has been down in volumes, mainly due to biological challenges. I would say, for the two last year, 5% increase, and the market is coping quite well with this increase. Looking at the prices quarter for quarter, you can see that we have had volatile prices between NOK 80 and down to just below NOK 50 per kilo during the period in 2018. Saying that, if you also look at the stable increase we have had the two last year, you see that the average prices is also quite stable on NOK 60 per kilo, which is also an interesting observation. The consumption in the quarter has been good. If you look at the numbers, you see it's a small increase in the E.U. U.S. is driving also the consumption, and you have the other markets coming up, consuming a lot in third quarter. If we look at the year-to-date numbers, we will also see that all markets has been up during 2018, which is also quite good when you had a increase of 5%-6%. To sum up, strong salmon prices also in third quarter. A bit lower than it was same quarter last year. Costs down from third quarter, and also costs down from second quarter. We are maintaining our harvest guidings on 179,000 tons and increasing for 2019 of 190,000 tons. I would say lower catch in the quarter. If you look at the year-to-date numbers, volume is more or less in line, compensated the reduction in quota for cod and haddock by catching more shrimp. Prices have also been increasing a lot during the year as a result of reducing quotas. We are expecting for next year that the cod quota will continue down with 6.5%, haddock quota down with 50%, and the saithe will be down in north of the 62 degrees, and it will be up in the North Sea. Interesting to follow what the quota will be in Peru. Biomass next year will be 3% up in 2019. Seems like condition is normalizing in Peru, and if you look at the North Atlantic, we are expecting that the competition of buying more raw material will be higher in 2019 compared with 2018 as a result of probably lower quota available. It is going to be interesting and also challenging quarter, fourth quarter. Hopefully with good fishing activity in Peru. We know that it is the main season in the North Atlantic, and also we are having a quite good ambition of having a quite high volume in salmon for fourth quarter. So that is it. Thank you.