Earnings Call: Q3 2017

Nov 9, 2017

Okay, then it's a great pleasure for me to welcome you all to Austevoll's third quarter presentation. I will first start by giving our view on the performance of this quarter and year-to-date. Then I will take you in detail through the different segments and our performance in the quarter and our expectations for the remaining of the years. Then Britt Kathrine Drivenes will take you more in detail through the numbers, and I will finalize this presentation by giving a view on the different market in the different segments we are operating within. Starting off with the quarter is the best third quarter in the company's history and is, of course, mainly driven by high performance and in particular, high prices and good volumes from Lerøy Seafood Group. When it comes to the pelagic segment, this has been a seasonable low production quarter, and it's been mainly low activity both in Peru and also here in North Atlantic, both for our fish meal, human consumption, and also our fishing activity here in the North Atlantic. But summing up the quarter, we are just below NOK 5 billion in revenue, an EBITDA of NOK 1 billion and 50 million, an EBIT of NOK 822 million. Pretax profit NOK 873 million, and earnings per share of just below NOK 2. If you look at our EBITDA and add our 50% shareholding of Pelagia, we have the following split between salmon and whitefish and the pelagic operations, a total of approximately NOK 1.1 billion and NOK 1 billion of that is coming from the salmon activity in the quarter, and the remaining is coming from the pelagic activity. Then looking at year-to-date numbers, we have already surpassed last year's performance full year. If you look at our result, revenue of just below NOK 16 billion, NOK 3.9 billion in EBITDA and NOK 3.2 billion in EBIT, and pretax profit of approximately NOK 3.3 billion. Our balance sheet has also increased compared with last quarter in 2016 or the same quarter 2016, and is now just below NOK 35 billion. Net interest-bearing debt of approximately NOK 4.4 billion and an equity ratio of 55%. Then continuing looking at the operational overview of Austevoll Seafood. We are now a fully integrated seafood company operating in different segments, both within salmon operation in the North Atlantic, pelagic operation in North Atlantic, and whitefish operation in North Atlantic, and pelagic operation also in South America and Peru and Chile. If you look at the right-hand side, we are catching between 400,000 and 500,000 tonnes of pelagic fish on an annual basis. We are processing and aiming to process this year close to 2 million tonnes of pelagic fish. In addition to that, we are aiming to catch and process between 100,000 and 120,000 tonnes of whitefish and are aiming to slaughter around 180,000 tonnes this year. Starting off with the pelagic operation first, and I will start off by looking into our Peruvian operation. Normally, when I'm doing the third quarter presentation, I can talk about the quota, which has already been set for the second season. What I can say about that is that the quota is not set yet, and they finished the research two days ago, and they are now evaluating the data before they are setting the quota. We are expecting to have the information on the new season pretty soon. What I can say is that in terms of El Niño, which has been a problem for us the last three years, seems like has changed. We are into a colder period and also the forecast going forward into 2018 as well shows that it's a high probability that it's going to be a normal or a neutral ocean temperatures outside the coast of Peru, meaning that we will have a normal season probably in terms of fishing during 2018 and also the last season of 2017 as well. Another issue which we are paying attention to a lot is also to look at the salt content or the salinity of the ocean outside Peru, which somehow affected the fishery by the end of the last season for us. The salt content outside the coast of Peru were too high in the end of the season, but seems now that it's also in a way of normalizing as well. Just to give you a history of how the quota or the biomass in Peru has developed. You see in the gray shadow area here, it's also a quota set and the biomass development during the El Niño period, and you can see it's one good season and one bad season, I would say, the last three years. We are sticking to our guidance we gave last quarter in terms of full year quota in Peru, meaning that it will be approximately plus minus 2 million tons for the next season starting up probably in the middle of November. Of course, this is subject to the data which IMARPE now is evaluating. There's not much to say about the performance in Peru during this quarter. We finalized approximately 7,000 tons, which is far lower than the volume we had last year. But last year we were catching the main portion of our quota in July. This year, the main portion was caught in April and May and June. Expect the seasons to start in the middle of November, continue until January 2018. It's a bit later start of second season than we expected when we did the last forecast. We are expecting that some of the volume will be transferred over to January. We are estimating by the end of 2017 that we're going to catch less fish in 2017 and transfer the remaining of the quota over to January 2018. It has some impact on fishing volumes, and we also might have some impacts in the sales that could also be transferred over for first quarter. Talking about Chile. Chile has a quite good recovery this year, both in terms of market efforts, in terms of fishing efforts, and also profitability if you compare the first three quarters this year compared with last year. We had a quota of just below 22,000 tons of horse mackerel. We caught that, I would say, until June. I've also in third quarter been able to purchase approximately 18,000 tons, which has been caught during third quarter, which has also have given us a better utilization of both our factories and also of our fleet. There's also some positive signs in terms of quota development or the biomass development seems like it's on its way to recover. We are estimating a higher increase in the quota during 2018 compared with what we have seen the last four or five years, which is also extremely positive. Also as a consequence of the biomass has recovered, the government has the opportunity to auction approximately up to 15% of the horse mackerel quota. That could also happen in 2018. Anchovy and sardine fishery has been good. They are now starting up anew on the last season, and we will have to see how that fishing has recovered. I also say that the giant squid production and also sales has been good during 2017, but it's a lower volume compared with the 2016 volumes we produced. Moving over to the North Atlantic and looking at the quota estimates both for 2017 and 2018. As you can see, in 2016 and up to 2017, there is approximately 1.2 million tons more of raw material available. A main part of that raw material is going in for fish meal and fish oil. You also add that both Peru and Chile has also increased their production a lot for fish meal. It has had an impact on the fish meal and fish oil prices during 2017, and that's been a challenging period when prices has been falling throughout the years, and we are doing our position in particular in the North Atlantic, purchasing the raw material in the first half year and selling the raw material in the second half year. However, I would say it's been an okay year. Going over to 2018 and the expectation there, you're also seeing that quota is down approximately 600,000 tonnes, whereas mackerel is down 200,000 tonnes and herring is down approximately 300,000 tonnes. The capelin and blue whiting is up compared with last year. I would say we will have more or less the same raw material in for fish meal and fish oil in 2018 compared with 2017. It's not much to say about the activity in pelagic, both for fish meal and oil and for human consumption during third quarter. Volume has been lower compared with the same quarter last year, mainly due to less sprat coming into our factories. But still it's a low activity quarter. If you look at year to date figures, you also see that volume is up by approximately 100,000 tonnes following the increase of the raw material coming in for fish meal and oil of the different species, which I presented in the last slide. Looking at the human consumption, you're seeing that we are more or less in line in the volume coming in quarter to quarter this year compared with last year. Also the three first months in terms of volume is more or less similar as the three first months last year. This quarter we have been receiving mackerel and North Sea herring. It's been different this year in terms of the mackerel coming in from the north. That mackerel has been. There has been no catching in north, and the mackerel has been transfer catching in the south or in the mid Norway for fourth and late third quarter as well. What is important to know is that we are in the main raw material season for the human consumption factories. They are doing their main seasonal mackerel in fourth quarter and herring in fourth quarter is giving a tremendous increase in volume. As you can see, we are guiding on a higher volume by the end of the year and what we received last year. Some of it is also challenging because the main market for us for herring products is closed for us, Russian. However, we have been able to transfer our herring to different market. But of course it is a challenging period and due to the high volume, also prices have come down. As you can see on our third quarter revenue, more or less on the same line. EBITDA is a bit lower than last year, NOK 125 million and EBIT NOK 80 million compared with NOK 177 million last quarter and NOK 137 million in EBIT last quarter or third quarter 2016. Frozen volume is more or less the same but we have sold a higher volume in the quarter in terms of fishmeal and oil. However, you can see that the EBITDA margin is going down as a pressure on margins for finished products. Looking at year to date figures, you also see that revenue is up close to NOK 4 billion, EBITDA of NOK 382 million and EBIT of NOK 263 million, which is approximately NOK 40 million lower this year than the three first quarter last year. Brødrene Birkeland, we have harvested approximately 500 tonnes, is down from 1,500 tonnes same quarter last year. Still EBIT per kilo is good, NOK 20 per kilo, more or less the same level as last year. If you look at the year to date figures, we have harvested approximately 5,500 tonnes, which is more or less on the same level as last year, and EBIT per kilo is approximately NOK 26. Looking at the fishing activity, it started off with pelagic fishing mackerel late September, and the snow crab fishery has been, I would say, in general, quite challenging this year due to ice condition and also that we have only been restricted to catch in the Norwegian area. At time being now it is seasonably low fishing activity, and we are expecting that the fishing will recover in late December for the crab. Looking at salmon we have also had a very good performance and good numbers from Lerøy. They are delivering their best quarter ever. If you want to have more detailed information about the Lerøy's third quarter presentation, you should go into Lerøy Seafood webpage and follow Henning and Sjur at that. But have an EBIT of NOK 861 million is the best third quarter ever. Havfisk, the whitefish company, has had a very good quarter in catching, and the factories onshore have been through a challenging period with very low and limited activity onshore. If you are looking at the drivers for the good result, comparing with last year, you will see that it is mainly due to the higher harvest volume of salmon and trout is up approximately 15,000 tonnes compared with same quarter last year. If you look at the regions, approximately 14,000 tonnes is produced in Lerøy Aurora, 18,000 tonnes is produced in Lerøy Midt, and approximately just about 13,000 tonnes in Lerøy Sjøtroll. Looking at the EBIT per kilo is NOK 70.40 per kilo, compared with NOK 14.80 last quarter last year or third quarter last year. This is also in a period where the spot prices is NOK 4 lower than last year. We have a good performance from Lerøy Aurora, good performance from Lerøy Midt, but has been a challenging period in Lerøy Sjøtroll with some biological issue which has impacted the EBIT per kilo in Lerøy Sjøtroll during third quarter. Contract share is 30%. This quarter contract prices has been higher than the spot prices. Net interest-bearing debt, NOK 2.7 million at the end of the year. More or less, on the same level it was last year. Looking at the harvest guidance for 2017, we are maintaining our 160,000 tonnes slaughtering in Norway, and increased approximately 1,000 tonne in Scotland and the U.K. Total 176,000 tonnes production in Norway. We are aiming to increase that with approximately 4% on a total basis in Lerøy next year. Going into details on the whitefish operation or the wild catch operation of Lerøy, we have had three very good quarters for Havfisk. I would say they have done a fantastic performance. During this quarter, we have a catch volume more or less on the same line as the third quarter in 2016, 17,000 tonnes. What I can say is that it's a higher share of haddock in this quarter. We have also experienced prices on cod up with 2% and haddock up 26%. But the challenge has been the saithe, which has been small sizes compared with last year, which also have dragged the prices down. Remaining quota of 2017 is approximately 15,000 tonnes, which is up from 12,000 tonnes same time last year. This will bring us approximately close to 70,000 tonnes if we manage to catch that quota, which is quite good volumes from Havfisk. I will give the words to Britt. Thank you, Arne. We start with this table, and it sums up actually the volumes and the presentation that Arne have done previously for the different segments within the group. As mentioned by Arne, a low season within the pelagic fisheries in third quarter compared to, or as normal in third quarter. We had a total intake of 245,000 tonnes of raw material compared to 315,000 tonnes of raw material in the same quarter last year. I will start to say that in Q3 2016, we did the transaction with Havfisk and Norway Seafoods by the end of August. So the two companies were consolidated into the group from September on. That means in third quarter last year, the two companies are only in with the turnover and result for one month. In third quarter this year, we have a revenue of NOK 4.9 billion. That's up from NOK 4.6 billion in the same quarter last year. If we look out to the right, if we include our proportional share of Pelagia, the turnover in the third quarter is NOK 5.5 billion. We have an EBITDA of well above NOK 1 billion in third quarter this year, up from NOK 709 million in the same quarter last year. Included our share of Pelagia, the EBITDA is NOK 1.1 billion. EBIT is NOK 822 million, up from NOK 496 million, and including Pelagia, NOK 847 million. The main reason for the increase in EBIT is coming from a higher harvested volume, salmon and trout in this quarter compared to same quarter last year. The EBIT from the pelagic segments are down this quarter compared to same quarter last year. Because we have seasons within wild catch I would like to say that this year, the first season in Peru started very early. It started already in April, and we took most of the catch already in the second quarter and also sold a large part of the production in the second quarter. That was opposite to the first season last year. Then it started very late. It started at the end of June, and the catch volume came in the third quarter, and also the sales of finished products were done in the third and fourth quarter. Because of this, there will be a variance in the quarterly results within the year, but also from year to year. The income from associated companies in the quarter is NOK 122 million. The two largest associated companies are Norskott, which owns the Scottish salmon company Scottish Sea Farms, and also Pelagia. Norskott has had a good result in the quarter, but have been a little bit negatively influenced by some biological problems on a few sites. Then they had to have an early slaughter, and that gives average weights, which is lower compared to previous periods. Looking into the pre-tax profit this year, and that is before the fair value adjustment of biological assets, that is NOK 873 million, up almost 60% from NOK 546 million in the same period last year. Earnings per share in the third quarter is NOK 1.95, up from NOK 0.99 in the same quarter last year. Year-to-date, the total revenue is almost NOK 16 billion, an increase from NOK 13.6 billion in the same period last year. If we include our share of Pelagia, the revenue is almost NOK 18 million. The increase in revenue comes from all the segments within the group. The EBITDA year-to-date is NOK 3.9 billion, including Pelagia, up NOK 4.1 billion and an increase of 52% compared to the nine first months of 2016. EBIT year-to-date is NOK 3.2 billion, up from NOK 2 billion the same period last year, and including Pelagia, almost NOK 3.4 billion. Income from associated is NOK 342 million, up from NOK 279 million the same period last year. Again, Norskott have had a really good performance this year, and that comes from high prices on salmon. The pre-tax profit year-to-date is NOK 3.4 billion, up from NOK 2 billion the same period last year, and earnings per share is NOK 6.99, up from NOK 3.87 in the same period in 2016. I would recommend that you also go into Lerøy's webpage and look at their presentation for the third quarter in addition to the presentation we give here. Lerøy have had a very good quarter. They have had good earnings based on higher harvested volume of salmon and trout compared to the same quarter last year. The revenue is NOK 4.4 billion, up from NOK 4.3 billion in the same period last year, and the EBITDA is a little bit above NOK 1 billion, up from NOK 612 million. The EBIT in the period, third quarter, is NOK 861 million, up from NOK 481 million, and as mentioned, because of higher harvested volume of salmon and trout. The spot prices have been a little bit lower this year compared to the same quarter last year, minus 7%. We see that trout prices are now in line with salmon prices. The contract share for the company has been 30% in the third quarter, and the contract prices are now above the spot prices. The cost released from stock is in line with Q2. However, negatively influenced by biological problems in Hordaland in the end of third quarter this year. Looking at the wild catch segment in Lerøy, they have been catching 17,000 tons in the quarter. We have seen some price increase for cod and haddock, 2% and 26% for haddock. There has been a price reduction for saithe with minus 26% in the quarter. Lerøy Norway Seafoods, they have a low season in the third quarter, and that has negatively influenced the operating results for these combined operations in the third quarter. In total, Havfisk and Lerøy Norway Seafoods contributed with an operating or an EBIT of NOK 62 million in the third quarter this year. As Arne has already mentioned, there has been a low activity in Peru in the third quarter, and we only had a raw material intake of 9,000 tons compared to 65,000 tons in the same quarter last year. As mentioned, early start-up of the first season. Last year, we had a very late start-up of first season. So a totally different first season this year compared to last year. The company has sold almost all its production from the first season by the end of September. The prices for fish meal and fish oil has been lower in third quarter this year compared to last year, a reduction in price of 17% for fish meal and almost half the price for fish oil. Since we have sold the total production from first season now in second and third quarter, we have to look at the two quarters combined to see what we have made of EBITDA and EBIT for the first season this year. In second quarter, we had an EBITDA of NOK 181 million. This quarter, we have a negative EBITDA of NOK 10 million. So you can say that the EBITDA from first season this year is NOK 171 million. As Arne has mentioned, we expect to have the announcement for second season quite soon. Our vessels and factories or processing facilities are all ready for the season. Looking into Chile, I am glad to note that we see a substantial increase in earnings this year compared to last year, and that is subject to the higher volume for this operation compared to last year. We were able to buy 18,000 tonnes of horse mackerel from third party, and we have been catching on that quota in the third quarter. The revenue in the third quarter was NOK 145 million, up from NOK 90 million in same quarter last year. EBITDA is almost NOK 28 million, up from a negative EBITDA in third quarter in 2016 of minus NOK 5 million. EBIT in third quarter is NOK 19 million, up from minus NOK 22 million in same quarter last year. What I have to mention is that we now have finalized our quotas for the year, so we expect a relatively low fourth quarter and not much result contributing from Chile in that quarter. That said, it has been a substantial improvement in earnings this year compared to the full year 2016. As you can see, the EBITDA of the nine first months is NOK 109 million, compared to the NOK 31 million for the full year 2016. The EBIT is NOK 81 million, compared to the minus NOK 40 million in full year 2016. Brødrene Birkeland, they have salmon farms, and they are within wild catch. For the salmon operation, there has been a low harvested volume, only a little bit above 500 tonnes compared to 1,500 tonnes in the same period last year. The EBIT per kilo is NOK 20.7 in the third quarter this year, compared to NOK 21.1 in same quarter last year. The company sell all their production in the spot market, and the volume in third quarter was all sold in July. There has been low activity for the vessels in the quarter, and the vessels catching snow crab has had a difficult year in 2017. It's several reasons for that. The Norwegian vessels that are catching on snow crab could not fish in the so-called Smutthullet from 2017 and onwards. The catching has been going on around Svalbard, and it has been really difficult conditions with ice this year, and that has made the catching conditions tough for the vessels. Third quarter is normally a low quarter within this catch, but the year in total has been difficult. The pelagic vessels started their season in the end of September. They started up fishing mackerel, and they have had a good fishing operation now in October and so far in November, and we expect them to take all the quotas by the end of the year. The revenue in third quarter has been NOK 81 million, down from NOK 131 million in same quarter last year. The EBITDA is NOK 21 million, down from NOK 27 million. The EBIT is minus NOK 4 million, down from NOK 9 million in same quarter last year. What I have to mention is that we got the second vessel for snow crab ready now in March this year. Of course, our depreciation has increased subject to that. The total assets in the group is NOK 35 billion, and the equity share is 55%. Net interest-bearing debt by the end of September is NOK 4.4 billion. If you look at the net interest-bearing debt by the end of September last year, it was NOK 4.8 billion. At that time, we had an obligation to pay an additional NOK 1 billion to finalize the transaction for Havfisk and Norway Seafoods, and that was done in October. So you can say the net interest-bearing debt by the end of September last year was actually NOK 5.8 billion. We have had a reduction in net interest-bearing debt this year for NOK 1.4 billion. We have a strong balance sheet, and that is also in accordance with our strategy to have financial flexibility. We would like to support organic growth. We would like to be able to do strategic purchases within the segments we are operating within, and not least, to be able to keep our payment of dividend in accordance with our policy. We have had a good cash flow from operating activities in the quarter, NOK 1.2 billion. What I can mention here is that in the third quarter, we seasonally build down the working capital within the pelagic activities, and there is a seasonal buildup of working capital within the salmon whitefish segments. The cash flow from investing activities are minus NOK 413 million in the quarter. In addition to maintenance CapEx, we also have large projects within our processing facilities and also within new smolt facilities. Cash flow from financing is minus NOK 232, not much to say about that. To sum up, in short, we started the quarter with a cash position of a little bit over NOK 4 billion in the beginning of the quarter, and we ended with a cash position of NOK 4.6 billion in the end of the quarter. I will end the presentation by giving our view on the market in the different segments we are operating within. Starting off with the fish meal market, which I would say excited us a bit in the beginning of the year. We had a situation where we had three years of dropping supply, total supply or global production of fish meal in 2016 was just north of 4 million tons of fish meal. The expectation for 2017 is around 5 million tons. As you can see on the left-hand side here on the table, you can see that among the largest producers so far, production is up approximately 85%. Peru is up 140% versus the same time in 2016. If you look at the graph on the bottom, you can also see that prices were flattening out in the spring period in 2017, and we have seen prices coming up again and now prices continue increasing, and super prime prices for Peru has been moving from the $1,300 level per ton up to $1,500 per ton. You also see as a price premium over standard fish meal of approximately 220,000 tons. Traders taking positions, feed producers taking position to secure their fish meal needs for the Q1 season. We have also seen that it's been done future sales in Peru between 140,000 and 170,000 tons. If the quota is going to be 2 million tons, this is approximately 35% of the production. If you look at the consumption, it's no secret that China is the large consumer in fish meal in 2017. They have been taking approximately 90% of the total production of Peru during 2017. If you look to China, you see also that stock level is a bit higher than it was same period last year. However, the consumption is by far much better than it was in the same period. If you look to that the domestic production also has been lower, meaning that they have been imported much more this year compared with previous year, also due to a very good consumption both to the piglets and also to the aquaculture. Going over for fish oil, you also see that the production has been far better this year compared with last year among the largest producers. Peru is up 123% versus 2016. From the beginning of the year up to now, prices have a quite steep reduction, and it's been half the price it was by the end of the last year, I would say, until the middle of this year. Prices has now recovered and is for feed-grade approximately $1,550 per ton. For omega-3 grade, it's a premium of $350-$400 per ton. Main driver now for fish oil is the omega-3 market now trying to secure themselves from good profiles or good EPA and DHA levels for coming seasons. Looking in the short term Atlantic salmon supply on a global basis, you see we have an increase in 2017 of approximately 5.3% on a global basis. Has not recovered a drop from last year of 6.7%. Norway is up at 3% and in 2018 is expected to be approximately 7%, on a global basis around 2018 is also around 6%-7% volume increase. Looking at spot prices, we have had very pleasant journeys, I would say the three first quarter of the year. Going into four quarter as well, you also see prices has come lower than the 52 level, which is priced in here in four quarter, and it's been two weeks now with prices on the 40, 35 NOK level. But into this week, we are seeing prices are recover, and we are expecting that prices will also increase through the end of the year. Also looking at the supply from Norway and Europe in the first quarter, seems like it's quite similar volume as first quarter this year, and where we have had fantastic prices. Consumption is also a bit up the three first month of the year, and we also see that other markets mentioned in this graph is the one really taking the volume, in particular when prices is coming down. So in third quarter, they have also had a much higher increase, compared with third quarter last year, and has to do with lower salmon prices. So to conclude, strong salmon prices in third quarter as well. We have had a very good harvest volume coming in from third quarter. We are maintaining our volume of 160,000 tons out of Norway. We have a continuously positive outlook in the salmon market going forward. Whitefish is fantastic catches, I would say, the first three quarters. Expected to have volumes of 70,000 tons in 2017. Somehow quota is going down on cod and haddock for 2018, but there is huge potential in value creation on the whitefish going forward. Looking at pelagic, it has been a month or a quarter which has lower activity both in Peru and in the North Atlantic. Big thing here is that we are expecting or waiting for the second season, and hopefully that will come in as soon as possible so we can start fishing, and we are ready to start off with the second season. The start-up date and the fishing pace will, of course, also determine how our performance will be both in terms of volume and also in terms of if we have to move profits from fourth quarter over to first quarter. Looking at the North Atlantic, we are entering into fourth quarter with highest activity for the year, and so far it's been okay performance in the quarter. That was what we was aiming to say in this presentation.