Earnings Call: Q2 2018

Aug 22, 2018

It is a pleasure for me to welcome you to the second quarter financial presentation for Austevoll Seafood. I would first take you through the financial highlights. I will then continue by going through different segments more in detail in the quarter. Thereafter, the CFO, Britt Kathrine Drivenes, will take you through more in details the financial numbers. I would end this session by giving our view on the different markets we are operating within. Starting off with the highlights, I would say we have had the best financial performance ever in our history since the listing in 2006 for the quarter and also for the first half year. It has been a good period for the group. What I can say is that we have had good operations, catches have been recovering, and also we have had tailwind when it comes to the markets in our different segments. Starting off looking at the second quarter numbers, we had a revenue of NOK 6 billion in the quarter, an EBITDA of just below NOK 1.7 billion, EBIT of just about NOK 1.3 billion, and a pre-tax profit of NOK 1.3 billion in the quarter. Earnings per share 2.86, and the performance is well above the last year performance. Moving on to first half year, we have a revenue of NOK 11.7 billion in first half year, an EBITDA of NOK 3 billion and an EBIT of NOK 2.5 billion, pre-tax profit on NOK 2.6 billion and earnings per share of approximately 5.44. The group has a strong balance, and we are focusing of having a strong balance sheet, mainly to be in position to do acquisition if the opportunities occurs, but also enabling us to go through, let us say, difficult periods in down cycles in the different segments we are operating within. Total assets of NOK 37.5 billion, net interest-bearing debt of NOK 4.6 billion, down from NOK 5.1 billion same period last year, and the equity ratio is 57%. If you also include our pelagic production company, the 50% share we have in Pelagia in the EBITDA, you see that the total EBITDA in the quarter for the group is just above NOK 1.6 billion, whereas NOK 1.5 billion is coming from salmon and the whitefish operation and just below NOK 500 million is coming from the pelagic operations. Also, if you look at the first half year, you see that the total EBITDA is up from last first half year, NOK 3.2 billion in total. EBITDA from salmon is NOK 2.2 billion, and we are just below NOK 1 billion first half year in the contribution on EBITDA from the pelagic business. For us, it has been a milestone to surpass the NOK 1 billion on the pelagic segments, and we are aiming to achieve that this year. Looking at the operational overview, you can see that we are doing operation both in the west side of South America and mainly in the North Atlantic. We are doing pelagic fisheries both in Peru and Chile and also pelagic fishing and processing in the North Atlantic, and our salmon activity and whitefish activity is mainly related to the North Atlantic Basin. If you look at the right-hand side, you see that this year we are aiming to pass approximately 500,000 tons of pelagic fish on our own fishing vessels during 2018. If you include what we are running through our factories, we are aiming to have a volume around 2 million tons during 2018. We will produce an approximately 100,000 tons of whitefish if you include what we are doing on our trawlers and what we are doing onshore, and we are aiming to slaughter between 180 and 190,000 tons of salmon during the year. Taking you through the different subsidiaries, I will start off with Austral. First start off by showing a biomass and quota evolution for the latest 15 years. There is two fishing seasons in Peru, and I would say last fishing season, which started up 7th of April, was one of the best measurements in terms of biomass on this 15 years. Also the quota, you have to go back to the same period in 2011, before we have had a similar quota as we are having, or a higher quota than we're having first season in Peru. The execution of the fishery has been good. The size of the fish has also been good. Mainly all the fishery has occurred from Lima and north, and the conditions for catching now, I would say, is normalized, and we also expect a good season also second half of the year. In 2018, we are guiding for a quota between 5.3 to 6 million tonnes, meaning that we are guiding on a quota between 2 and 2.7 million tonnes. Of course, this is subject to the IMARPE cruise, which is done before every season. Hopefully this year it will be the first year since 2011 that we will have two very good season, and that's quite pleasant. If you go in details, looking at the operation in the quarter, as I said, season started up in the 7th of April. Quota was set at 3.3 million tonne, giving us a quota of 231,000 tonnes, which were executed before the end of the quarter. If you look at similar volume last year, the quota was 2.8 million tonnes, but at that time, the industry were only catching approximately 85%, meaning that the total catch in first, second quarter 2017 was 2.4 million tonnes. We have also purchased 56,000 tonnes from third-party fishermens. Also the yield and the quality has also been very good during the quarter. In addition to the catches in the center north, the activity has also been quite good in our plant down in the south. So far, to the end of June, we have been purchasing approximately 54,000 tonnes, which is considerably up from same quarter last year. I would also use the occasion to give credit to our employees and management in Peru, which has done, I would say, a fantastic job meeting this high volume coming from five years with a tough period. The, I would say, the human capital in the company in Peru can never be underestimated for us. Moving to Chile, FoodCorp Chile has also done a fantastic job in second quarter, having been catching 21,000 tonnes up from same quarter last year. Also, if you look at the first half year, the operation has been very good compared with the first half year 2017. Both when it comes to fishing of their own quota, they were able to get more fish into our fishing fleet, into our plants by buying it from third parties, catching outside the 200 miles, which has been given a quite good utilization of our asset in Peru based on the low quota which has been there. Again, looking at the situation in the North Atlantic and the pelagic quotas, we also see that in total for 2018, the quota is a bit down compared with 2017. It's mainly driven by a 33% drop in the NVG herring, 20% drop in mackerel quota, and also approximately just above 40% drop in the sandeel quota. It's a bit compensated by capelin quota, which was introduced now by first half year in the Barents Sea, and the blue whiting quota is also marginally up compared with last year. But overall, I would say that the raw material intake is marginally down for our factories in 2018 compared with 2017. Saying that, I would say we have committed a quite good quarter for our fishmeal and fish oil operation, and also the first two quarters of the year has also been quite good with the volume more or less in line with the last year volume. Saying that, volume a bit down on sandeel which impacted the volume for the quarter, but overall, I would say it's a good commitment for the two first quarters. The remaining of the year, I would say that the raw material intake for pelagic, the fishmeal and fish oil operation, is going to be trimmings from the human consumption industry. Moving to the direct human consumption, raw material intake marginally down in the quarter, a bit above first half year. We're also estimating by the end of the year that the raw material intake in 2018 will be a bit lower in 2017. The main important season for this industry is in the fourth quarter when the main efforts on the mackerel and the NVG herring fishery is occurring. Overall, a good performance in Pelagia. Revenue in the quarter of 1.2 million tonnes, EBITDA of 172 and EBIT of 122. It's up from last quarter in 2017, or the similar quarter, 2017. Looking at the first half-year numbers, the revenue is NOK 2.7 billion, EBITDA, NOK 377 million, and EBIT of 275. Then moving to Brødrene Birkeland, which are having seven salmon licenses and four fishing vessels here in the North Atlantic. Just summarizing by saying that in terms of salmon, there has been no harvesting volume in the quarter, so marginal impact on the numbers. For the fishing activity, the North Sea herring season has been ended in the quarter and also the blue whiting fishery has also been occurring in the quarter. When it comes to snow crab fishery, that's still been challenging during the first half year, and there's also been implemented a new regulation that is stopped on the fishery between the 15th of June to the 15th of September due to molting seasons of the crab. Then moving to Salmon Whitefish, I suggest that if you want to have a more detailed overview of the salmon activity, you go in and look at the webcast Henning Aspegren is doing on the webpage of Lerøy Seafood. But to summarize, it's been another good quarter in Lerøy. All in all, EBIT up from last year, approximately NOK 1 billion, whereas the whitefish segment is delivering better than last year, but it's mainly driven by the increase of harvesting volume, up to 37,000 tonnes from 26,000 tonnes similar quarter last year. We are operating in three regions when it comes to salmon activity. Lerøy Aurora is doing fantastic with high EBIT margin per kilo. Lerøy Midt is recovering from biological challenges back in 2015 and 2016 and are delivering both on volumes and margins in this quarter. What's worth mentioning as well is that main volume slaughter from Lerøy Midt in second quarter occurs in June, where the prices has been lower than the previous months in the quarter as well. EBIT per kilo, a bit down from NOK 23 per kilo, down from NOK 27 per kilo. Main reason for that is, I would say is price achievement. The trout prices is lower. The slaughtering profile is a bit negative compared with the development in prices. Also, it's been a challenging period for the VAP and sales and distribution units of Lerøy due to the extremely volatile prices during second quarter. We have had changes of NOK 30 in prices for salmon during the quarter. From one week to another, it's been as high as NOK 50 difference. So it's been, I would say, extremely challenging for the industry to cope with the volatile prices during the quarter. Net interest-bearing debt, NOK 3 billion, and it's down from NOK 3.2 billion same quarter last year. Looking at the volumes, we are maintaining the slaughtering, the harvesting volume in the group, a bit changes between the regions, a bit down in Lerøy Aurora, a bit up in Lerøy Midt, and also a bit down in Lerøy Sjøtroll. But all in all, 166,000 tonnes of slaughtering in Norway and our 50% share in Scotland gives us in total 179,000 tonnes for the group to slaughter or harvest in 2018. It's also been a quite interesting period for the whitefish operation or the catches operation in Havfisk. Second quarter harvest volume approximately 18,000 tonnes, a bit up from same quarter last year but the distribution between the species has been a bit different. We are more or less in line on the cod, a bit down on haddock, but it's mainly compensated by a better fishery on shrimp. Shrimp, both the fishery and the market has also been quite good during the quarter. By the end of the year, we are remaining approximately 23,000 tonnes of quota, and we are aiming, by the end of the year, to produce approximately, or harvest or catch, approximately 65,000 tonnes, down from 68,000 tonnes in 2017. Then I give the words to Britt. Thank you, Arne. We start with this table, and the table sums up the raw material intake in the quarter. The most important change in Q2 this year compared to Q2 last year is the substantially higher volumes in Peru, of course, because of the large quota in the first seasons down there. Looking into the first quarter, we have yet again a good quarter with important improvement in the pelagic segment. Total revenue in the quarter was NOK 6 billion, and the EBITDA was NOK 1.6 billion. This is the highest quarterly EBITDA ever achieved by the group. The EBIT, and that is before the biomass adjustment, was NOK 1.3 billion, up from NOK 1.1 billion in the same quarter last year. If we include Pelagia, or 50% of Pelagia, in the figures, the revenue in the quarter was NOK 6.6 billion. The EBITDA, NOK 1.65 billion and the EBIT NOK 1.4 billion. The increase in revenue and result was generated by an increase in the sales volume, both for Atlantic salmon but also for fishmeal and fish oil and for the frozen pelagic products. Income from associated company in the quarter is NOK 111 million, and the largest associates are Norskott Havbruk and Pelagia. The group's associates are generating positive results, and they represent substantial value for the group. The pre-tax result, and that is excluding biomass adjustment, is NOK 1.3 billion in the quarter, up from NOK 1.1 billion. Earnings per share, excluding biomass adjustment, is NOK 2.86, up from NOK 2.09 in the same period in 2017. Looking into the first half-year, the total revenue is a little bit less than NOK 11.8 billion. If we include 50% of Pelagia, the revenue is NOK 13.1 billion. The EBITDA in the first half of the year is NOK 3 billion, including 50% of Pelagia, the EBITDA is NOK 3.2 billion. EBIT in the first half is NOK 2.55 billion, including 50% of Pelagia, it's NOK 2.7 billion, up from NOK 2.5 billion in the first half year 2017. Income from associated companies are NOK 270 million in the quarter, and the pre-tax result before the biomass adjustment is almost NOK 2.7 billion, up from NOK 2.5 billion in the first half of 2017. Earnings per share, and that is excluding the biomass adjustment, is NOK 5.44, up from NOK 5.03 in the first half of 2017. I would like to start to say that you should go into the Lerøy Seafood Group's homepage and look at their webcast for second quarter and first half year. In addition, Arne has also talked a lot about the quarter already. They have had a good quarter. They have had revenue of NOK 5.1 billion and an EBITDA of almost NOK 1.2 billion, and EBIT is NOK 1 billion in the quarter, up from NOK 800 million in the same quarter last year. The increase in EBIT in the quarter, that is mainly attributed to a higher harvest volume. As Arne mentioned, the spot prices in the quarter have been really volatile. Of course, that is challenging for the VAP sales and distribution segment and has impacted negatively their results. When we look into Havfisk, they have had yet another good quarter. They have caught over 18,000 tons of fish, and they have an increased portion of that is shrimp in Q2 this year compared to last year. Havfisk sold their fishing vessel, Kongsfjord, and it was delivered in Q2 this year, and there is a gain from that sale of NOK 35 million, which is included in the EBIT of NOK 116 million. Looking into Austral Group in Peru, they have had a very good quarter. Of course, there was a high quota in the first season this year. The season started early, the 7th of April. So Austral had a quota of almost 232,000 tons, and they caught everything in Q2 this year. Of course, because of the early start of the season, they were also able to sell around 56% of the fishmeal production from the first season quota in Q2. As you can see, they have a raw material intake of 313,000 tons, up almost 100,000 tons compared to the same quarter last year. They have also purchased a good volume in the region in the south and, of course, purchased volumes from the season in the center north. Their revenue in the quarter is NOK 635 million, and they have EBITDA of NOK 322 million and an EBIT of NOK 283 million, which is up from the NOK 135 million in second quarter last year. As they took the quota in second quarter, they will have a low activity now in third quarter. Just to mention that. FoodCorp Chile, the main season for horse mackerel fishing is in the first half year. You can see we have had a good result also in second quarter and in first half in total. The revenue in the second quarter was NOK 212 million, and the EBITDA was NOK 53 million, and the EBIT NOK 46 million, down from NOK 61 million in same quarter last year. The explanation for the increase in revenue is higher sales volumes in the quarter. The decrease in EBIT margin has two factors. We have had to pay a higher price for the quota we have purchased in 2018, and there has also been an increase in the fishing tax on our own quota in 2018 compared with 2017. As the season is now ending, there will be low activity in third quarter and second quarter for FoodCorp. We have de-merged Brønnøysund Fisk. So the fishing part of the company and the salmon part of the company will be reported as a separated segment going forward. Within fishing, we had revenue of NOK 73 million and an EBITDA of NOK 29 million and an EBIT of NOK 11 million, up from a negative EBIT of NOK 8 million in same quarter last year. The pelagic vessels have been fishing blue whiting and North Sea herring. The blue whiting fishery was also taking part in second quarter this year because we had a quota of capelin in first quarter. The increase in revenue and result comes from a higher fishing volume in second quarter this year compared to the same quarter last year. We have the two vessel fishing snow crab. One of the vessels started fishing shrimps in second quarter. As Arne mentioned, snow crab fishing was stopped between 15th of June and until the 15th of September because of the molting of the snow crab. Within farming, it is not much to say this quarter. As we announced when we presented our first quarter results, we did not expect any harvesting in second quarter. We have started harvesting again now in third quarter. The group has a total asset of NOK 37.5 billion, and that is up from NOK 35.1 billion by the end of June in 2017. I would like to mention some of the changes. As you can see, the tangible fixed asset has increased from the same period last year, and we are having quite a large investment program, both in smolt and also within industry, and also within the fleet. We received the new trawler Nortind in January this year. You can also see that the other inventory are higher than same period last year. That is because we are now in the middle of a season in Chile. Also we had a season in Peru, so we have a higher working capital than we had the same period last year. In addition to this, the cash has increased by NOK 800 million compared to June 2017. Net interest-bearing debt is NOK 4.7 billion, and we have an equity ratio of 57%. Cash from operating activities are NOK 312 million in the quarter. As mentioned, the working capital are higher. We are, as mentioned, in a season in Chile, and also we had quite a heavy fishery and large volumes in Peru. We have also paid NOK 625 million in tax in the period. As you can see, for the first half year, we have already paid NOK 888 million in taxes. For the Norwegian entity, we are more or less finished with the tax payment. It is a little bit different with the entities abroad. The cash from investing activities are minus NOK 96 million in the quarter. You can see we have invested in CapEx NOK 511 million, and we have received NOK 312 million in dividend from the associated companies. Cash from financing activity are minus NOK 1.1 billion, and the largest part of that is dividend payment, almost NOK 1.1 billion in the quarter. Austevoll Seafood paid a dividend of NOK 2.80 per share, in total NOK 568 million. We started the quarter with NOK 5.7 billion in cash, and we ended the quarter with cash of NOK 4.8 billion. Then, Arne, it is your turn. Then I will sum up by giving the market view in the different segments we are operating within. Starting up with the fishmeal market, and if you look at the statistics up to week 31, you can see that the global production of fishmeal has an 18% increase this year compared with similar period last year. The main driver behind increase is the catches and production, which has been in Peru, which is up 33% from last year. I would say although the volume has been a bit higher than expected in terms of production in Peru, prices has been quite firm during the fishing seasons, where we have seen prices on super prime quality just below $1,600 per ton and a $200 discount in low-quality fishmeal. Demand has been quite good, and I would say China, by far the most important consumer of fishmeal, has been taking approximately 80% of the production in Peru. We have also seen now that there is limited volume left in Peru, and the players have started now selling forward approximately 15,000 to 20,000 tons of their future production, more or less in line with the prices we are seeing now. So stable prices from what we are seeing now in the market. Looking at the consumption, the demand. Looking in China, you see that at the time, the stock level is 138,000 tons, a bit down from same period last year. However, a bit higher than the five years average. Saying that, the daily consumption is very good, with offtakes of just 5,000 tons a day, which is mainly driven by the aquaculture consumption. So it has been a good season. Chinese prices is also currently higher than the prices traded in Peru as well, which has also stimulated more trading. Summing up the fishmeal market, I would say it is more or less in balance if you also look at the production from the largest producer, Peru, and the consumption in China. Looking at the fish oil, you also see a similar development and increase in production. However, this increase is higher than we have seen on fishmeal. Approximately 34% among the largest producer of fish oil as well, and it is also driven by Peru. But in addition to a higher volume, we have also had a much better fish oil yield in the production this year, meaning that volume has gone up. Prices which we are seeing to feed grade at $1,350 per ton is a premium of approximately $300 to $400 per ton if you are delivering it for omega-3 industry, and it is approximately 20,000 to 30,000 tons left from the production from last season. We are expecting the sales to be executed before the new season starts up, hopefully in the beginning of November. Looking at the salmon markets, it has been a lot of speculations in Norway now how the 2018 volume will end up. Since last presentation, the volume in Norway is a bit scaled down, 7.5% growth in 2018, and the expectation for 2019 is 4.4%. If you look at the global market, we have an increase just short of 6% by the latest estimates from Kontali and just short of 5% for 2019. Which is, I would say, volume which easily should be absorbed out in the market for 2019 as well. We have been talking about it previously, but prices, I would say, in the quarter has been extremely volatile. Started off with very high prices. If you look at the spot prices in second quarter, the average spot prices you see is NOK 68 per kilo, a bit up from same quarter 2017. But also you can see that there's a huge variation from the beginning of the quarter to the end of the quarter as well. So it has made it a bit challenging for the industry in order to work with the constantly changing prices. But although prices has been NOK 68 in average during the quarter, the consumption of salmon in the main important market has been extremely good. 7% up in EU, 13% up in the U.S. market, and also for other market, which is a combination of new developing market, has been extremely good as well. Summing up, obviously, the development in supply, the development in consumptions gives us a very positive outlook also for the rest of the year during 2019. Looking at the quarter, strong salmon prices. Extremely volatile. Cost has been developing quite well in the North and Mid-Norway, but still has been challenging in the region West. In terms of whitefish, has been good catches in the quarter, higher volume of shrimp, and we also have seen a positive development for cod and haddock in terms of prices, and has also to do that the quota has been dropped for these two species during 2018. We are expecting to catch approximately 65,000 tonnes in 2018, which is down from approximately 68,000 tonnes in 2017. Looking at the pelagic business starting up in South America, it's been a pleasant quarter for us in Peru, and I think the industry needed to have a successful fishery on a high quota. The execution has been very good and gives us also expectation for a very good seasons in the second half year. Good recovery also of the fishery in Chile, and the activity also has been more or less on a similar level in Norway in terms of volume. Third quarter is normally a seasonable low production quarter for us. No activity in Chile, very low activity in Peru, and also low activity in the North Atlantic. However, we expect the catches to recover in fourth quarter with a new season in Peru, and also fourth quarter is the main season for the direct human consumption production here in the North Atlantic. That's all. Thank you for following.