Earnings Call: Q2 2017

Aug 24, 2017

It's a great pleasure for me to invite you to Austevoll's second quarter financial presentation. I will start by taking you through our performance in the different segments, giving you the highlights during the quarter. Britt will take you more detail through the numbers, and I will end by giving our view on the different markets we are operating within. Starting up, we have had a very good second quarter. It's been marked by pelagic performance has been improved, and particularly from South America. In terms of our salmon activity, the harvest volume has been much lower than a similar quarter last year. But if you look at EBIT per kilo performance, we have had a record result also for this quarter. In terms of the half year's numbers also is all-time high for the Austevoll group. Starting off with the second quarter numbers, looking at the revenue, 5 billion NOK and EBITDA of just north of 1.3 billion NOK and an EBIT of 1.1 billion NOK and pre-tax profit, 1.1 billion NOK. Looking at our balance sheets, it has been increasing since same quarter last year. That has to do with the acquisition of Havfisk and Norway Seafoods. Both balance sheet and net debt bearing debt has been increasing since second quarter 2016. Total assets of 35 billion NOK and net debt bearing debt of 5 billion NOK and an equity ratio on 54%. If you also take into account the 50% ownership we have in our North Atlantic pelagic activity, Pelagia, our EBITDA for the quarter is in total 1.368 billion NOK whereas 950 million NOK comes from the salmon and whitefish segments and from the pelagic segment around 421. We also did a bond issue in June. It was six years bond, 500 million NOK and the margin was 2.35 over three months NIBOR. Austevoll is a fully integrated seafood company with important activity both within the pelagic salmon and whitefish segments. If you look at the right-hand side, you can see we are catching between 400 and 500 thousand tons of pelagic fish with our own vessels. We are processing on our plants aiming to do over 2 million tons this year. We are also now after the acquisition of Havfisk and Norway Seafoods having approximately 100 to 120 thousand tons of whitefish into the group. Slaughtering on an annual basis between 180 and 190 thousand tons. We are holding market and sales and distribution units in the most important markets for our different segments. Going into details from looking at our pelagic performance first, starting up in Peru. We have been, let's say in the latest three, four years, been extremely focused on the weather forecast, looking at, in particular, the El Niño, which has been affecting the fishery and the biomass in Peru, from 2014, until, I would say the end of 2016. What we have experienced now during the first fishing season in Peru has been that it's been quite good temperatures in the sea. That's also one of the reason why the quota was at on a 2.8 million ton level. Saying that, we also saw that in the end of the season, the fish was moving inside five-mile zone and where it's forbidden for us to catch. Neither the industry or ourselves were able to catch the total quota and in total the industry in Peru was leaving 400,000 tons in the sea from the first season. Here is a good example with a long track record where you can see and follow the development both in the biomass post every fishing season, the percentage of the quota set off the biomass from every season. You can also see in the gray area here where you see the variation in particular on the quota due to the El Niño period. Now it seems like the quota for first season was good and the temperature levels also forecasted for the second season is also favorable for fishing in the end of the year. Looking at our performance, you can see in total that the quota was 2.8 million versus 1.8 million same season last year. Season started earlier up. However, we were not able to catch all the quota in Peru, and the total catch was 2.4 million. If you compare the 1.8 million from last year, they were only catching half of that quota, 900,000 tons. We caught 83% of the quota, 160,000 tons, and it is far better than last year. However, we are not proud when we are not catching our quota. Although it has been a fantastic contribution from Austral this year, we are never happy when we are not able to catch our full quota. That is always our main focus when we start the fishing season. I purchased also a good volume, 53,000 tons, as opposed to 70,000 tons last year. The yield has been more or less on the same level as it was last year as well. We have been focusing on producing more and more fish for high quality fish meal and have increased our participation there compared with last year. We also have been selling and are aiming to sell the volumes during second and third quarter. Approximately 58% of our volume has been sold in second quarter as well. We have had a quarter with good production activity and also good sales activity which you also can find when Britt is presenting the numbers. We are aiming to produce 350,000 tons of raw material this year. That is based on a quota of 2 million tons second half of the years. We are aiming, of course, to catch that quota by the end of December. Our operation in Chile, I have to say and admit that it has been pleasant to follow how the team has been working in Chile during first half year this year. Quota is still low but they also been able to attract and buy quota from third parties, approximately 18,000 tons, meaning that they are utilizing the economy of scales in the factories which is rigged to take in much more fish than the quota we are having this year. Chile again is not the segment in the group which is contributing most to the Austevoll system. But again, they are extremely focused in trying to secure raw materials from third party and trying to adapt the activity level based on the raw material they are having. Meaning also that they are able to improve some of the result as well. We have also seen that the market has been recovered for the frozen products and also the fishing for the anchovy and sardine in 2017, second quarter, has been far much better than similar period last year. If you look at the North Atlantic pelagic quotas, you can also see that this is a year in North Atlantic of the raw material. It's all-time high for a long period of times. In particular for fish meal and fish oil, it is an excess of 1 million tons of raw material in for fish meal and fish oil compared with last year. Other thing to mention here is that we are also seeing that the Atlanto-Scandian herring is doubling from 2016 to 2017, meaning also that there's more raw material for our factories and for human consumption. However, more raw material is also putting pressure on prices and also putting pressure on margins which we also have seen, I would say, during second quarter. If you look at the fish meal and fish oil operations in pelagic, you can see that the raw material has been far better this year than last year. It has to do with increase of quota for blue whiting, but also an increase of the Norwegian quota for sandeel compared with similar period last year. What we can say, and just mention again, is that although we have sold a much higher level of fish meal or volume of fish meal and fish oil in the quarter we have not been able to keep the same result or profit based on that. So it's a bit pressure on margins. If you look at the direct human consumption activity, low volume in this period, 47,000 tons compared with 51,000 tons on quarterly basis and more or less the same volume for first half. We are aiming to have a higher volume by the end of the year. Again, that's a result of a higher quota on the herring. We have also done an acquisition which we finalized in the beginning of August. We bought back in Pelagia, a company called Epax. Factory is located in Ålesund. Epax is one of the most well-known omega-3 producers and has also been in the ownership of Austevoll before. Main incentives here for the group is to see if we are able to increase the value of the products and the raw materials here in the North Atlantic. But we also admit that it's an opportunity to increase value, but they're also operating and maneuvering in an extremely, let's say, difficult business where the margins are under pressure. Looking at the second quarter result and first half result, you're seeing second quarter is lower than second quarter last year, but you also see on first half margins and the results are more or less in line with the same period last year. We have sold a far higher volumes of fish meal and fish oil, and a bit lower on frozen products. Brødrene Birkeland is a company holding seven salmon licenses and five fishing vessels, three pelagic fishing vessels, and two snow crab vessels catching snow crab in the Barents Sea. This is a company we are holding approximately 50% in. During second quarter, we slaughter 3,600 tonnes, up from 2,300 tonnes last year. The volume also on first half level is a bit higher than last year. But also the slot, the average weight during the quarter was a bit lower than the average weight during the quarter last year. We are not able to maintain the high EBIT per kilo we had second quarter 2016, now in the second quarter 2017. Pelagic fishing vessels has been catching blue whiting and North Sea herring in the period. It was lower prices due to higher volumes compared with 2016. Also the crab fishing has been more challenging during 2017 comparing with 2016. Now back to Lerøy and Lerøy's performance. Had an EBIT of 800 million NOK, up from 760 million NOK. That's quite a performance when you're looking at the harvest volume of 26,000 tonnes compared with 41,000 tonnes of gutted weight second quarter 2016. The proportion of the EBIT this year of Havfisk and Lerøy Norway Seafoods is approximately 86 million tonnes. The reason why they are able to maintain the same result is due to profitability per kilo, EBIT per kilo on 27.3 NOK which is quite good performance in our view. Contract share is 45%, and net interest-bearing debt is approximately 3.2 billion NOK by the end of the year. It is up from same quarter last year, mainly due to the investments we have done in the whitefish segments. We're also seeing that the biomass by the end of the quarter now has moved from, in the beginning of quarter minus 9% up to 18%. We are also, in addition to slaughtering in this quarter, we have been building biomass, and the performance has been good during the summer. If you look at the guidances on volumes during 2017, it's a total of 160,000 tonnes, down from 165,000 tonne last quarter. However, that's mainly related to volumes coming from Lerøy Sjøtroll. So a total of 175,000 tonne is the aim to harvest in Lerøy during 2017. A bit on the whitefish segments. They had a very good performance both in first half 2017 but also in the quarter. Catch volume in the quarter has been more or less on the same level as the same quarter last year. It's a higher proportion of saithe compared with last year. We have also seen that the saithe has been more challenging mainly due to the market prices has been dropping and the price is now is 11 NOK per kilo which is extremely low. There will be put a lot of attention in order to drive these prices up again. If you look at the cod prices and the haddock prices, has a very good development during the year. The remaining quota for 2017 is approximately 25,000 tonne, which is more or less on the same level as last year. We are also expecting now that the regulation that was challenged by the government now has been withdrawn, and we are now focusing in order to increase the value of both our production on shore and also on sea, and trying to utilize the synergies between, and the knowledge we are having on redfish to increase value on the whitefish. Then I give the word to Britt. Yes. We start with this table, and the table sums up what Arne has been presenting regarding our segments in the quarter. As you can see, we have had quite a high activity in 2Q 2017, and the total raw material intake was 663,000 tons, substantially higher than the 361,000 tons in the same quarter last year. That comes in Peru. It was a higher quota in Peru, and it was an early start-up of the first fishing season there. Also there was a delay in the blue whiting fishing here in the North Atlantic, and that fishery also took place in the second quarter. There has been an increase in the quota for sand eel in 2017 compared with 2016. The revenue in the quarter was NOK 5 billion, up from NOK 4.6 billion in the same quarter last year. If we include our share of Pelagia in the so-called proportional consolidation method, the revenue was NOK 5.6 billion in the quarter. The increase in revenue comes from the pelagic segment, and it comes as a consequence of the higher quota in Peru and early start-up of the season there, and that made it possible for us to also sell a higher volume of fish meal in the quarter compared with the same quarter last year. The EBITDA in the quarter was NOK 1.3 billion, up from NOK 985 million in the same quarter last year. Including our share of Pelagia, the EBITDA is NOK 1.4 billion. The increase in EBITDA comes as a consequence of very good prices for salmon and trout, but also as a consequence of higher sales volumes of fish meal in the quarter. The EBIT for the group is NOK 1.1 billion in the quarter, up from NOK 790 million in the same quarter last year. Including our share of Pelagia, the EBIT is a little bit over NOK 1.1 billion. I would also like to mention that we have had a good performance from our associated companies, and income from associated companies in the quarter is NOK 106 million, up from NOK 70 million in the same quarter last year. That is the Norskott Havbruk, which owns the Scottish salmon company, Scottish Sea Farms. They have had a good operation and also good prices for salmon. The pre-tax result ex biomass adjustment in the quarter is NOK 1.1 billion, up from NOK 810 million, and the net profit is NOK 1.4 billion, up from NOK 500 million in the same quarter last year. That gives us an earnings per share of NOK 3.52. If we exclude the biomass adjustment, the earnings per share is NOK 2.09. Looking at the first half year of 2017, the revenue was up almost 24% to NOK 11.1 billion from NOK 9 billion in first half of 2016. I would like to mention that the acquisition of the whitefish business, Havfisk and Lerøy Norway Seafoods, took place late August 2016, so the figures are not included in the first half figures of 2016. The EBITDA in first half was almost NOK 2.9 billion, up NOK 1 billion from NOK 1.9 billion in first half year of 2016. If we include our share of Pelagia, first half year, we have had an EBITDA of over NOK 3 billion. The EBIT in first half year is NOK 2.4 billion, up from NOK 1.5 billion first half year 2016, and it is NOK 2.5 billion, including our share of EBIT of Pelagia. Income from associated companies in first half year is NOK 220 million, up from NOK 146 million in same period last year. It is Norskott Havbruk, and they have had a very good operation, and they have very good prices for their product, salmon. Pre-tax, NOK 2.5 billion in first half year, up from NOK 1.5 billion first half year last year, and the net profit is NOK 1.7 billion, up from NOK 1.2 billion in first half year of 2016. That gives an earnings per share of NOK 4.54. If we exclude the biomass adjustment, the earnings per share is NOK 5.03. We look into each segment. For Lerøy Seafood Group, I would also recommend that you take a look at the webcast, which you can find on the company's homepage. As we communicated when we presented our first quarter result, we have slaughtered a lower volume now in Q2 compared to Q1 this year, but also lower compared to Q2 last year. The EBIT per kilo is NOK 27.3, which is substantially up from the NOK 18.5 in second quarter last year, and that is a consequence of very good prices. We have also had a very positive price development in trout prices, which in this quarter has been on the level and even higher than the salmon prices. A lower sales volume also increases our contract share. So the contract share in the period has been 45%, and the contract prices are still below the spot prices. We have had some cost increase from Q1, and in addition, of course, to the feed cost and also cost related to prevention and treatment of sea lice, low volume also have some influence on the cost in the quarter. The revenue in the second quarter was NOK 4.2 billion. The EBITDA was NOK 948 million, and the EBIT was NOK 801 million. The EBIT from Havfisk in the quarter was NOK 86 million. As I mentioned, Havfisk was not included in the first half or the second quarter figures of 2016. That acquisition was done late August and consolidated into the group from 1st of September. Austevoll Group has had a high activity in the quarter. The first season started 22nd of April, and the quota was set at 2.8 million tonnes. Austevoll had caught 80% of the quota by the end of June. The early startup of the season also made it possible to sell quite a high volume of the fish meal produced in the quarter. So we have sold 58% of the fish meal that was produced in second quarter in second quarter. We have had lower prices in second quarter this year compared to last year, and that, of course, is the consequences of the higher quotas, both in South America but also in North Atlantic. The revenue in the quarter was NOK 490 million, and the EBITDA was NOK 181 million, and the EBIT was NOK 134 million. We also have had a good activity in Chile. FoodCorp, they finalized their own quota of horse mackerel by the end of June. The quota was a little bit less than 22,000 tonnes. They have also been able to make an agreement to buy additional 18,000 tonnes of horse mackerel from third party, and that volume will be caught by our own vessels. By the end of June, they had caught around 3,000 tonnes of that 18,000 tonnes, and the fishing has been going on both in July and are still going on now in August. The market for frozen horse mackerel has improved, and that means that we have a higher turnover of our production compared to 2016. The coastal fleet in Chile who catches sardine and anchovy have had a very good season first half year. Last year, the fishing was harmed by the El Niño, and they had a very difficult season. So we have had a good raw material intake from that fleet. The revenue in the quarter was NOK 163 million, the EBITDA was NOK 71 million, and the EBIT was NOK 61 million in second quarter 2017. Brødrene Birkeland, they have operation within the salmon, within the pelagic. They have pelagic vessels, but they also have two vessels fishing snow crab. They have harvested quite a high volume in the quarter, almost 3,700 tonnes compared to 2,300 tonnes in the same quarter last year. The average harvest weight has been lower compared to same quarter last year, but the prices has been better. Due to the lower harvest weight, the EBIT is almost NOK 28 per kilo, down from NOK 32 in the same quarter last year. There has been low activity within the pelagic vessel segment, and they have been fishing the remaining quotas of blue whiting and herring. The prices for blue whiting and herring has been lower this year compared to last year, and that is due to the higher quotas, especially for blue whiting and lower fish meal prices. The snow crab boats have caught 257 tonnes in the quarter, down from 410 tonnes in the same quarter last year. As Arne mentioned, there has been quite a challenging operation for those vessels in first half year of 2017. The revenue in the quarter is NOK 305 million, the EBITDA NOK 118 million, and the EBIT NOK 94 million. Looking at our balance sheet, we have a strong balance sheet, and we have total assets of NOK 35 billion. That is substantially higher than by the end of June last year when the total assets were NOK 28 billion. The increase in total assets compared to last year comes as a consequence of the acquisition of the wild catch business within Whitefish, Havfisk and Norway Seafoods. As you can see, we have had increase in our intangible assets, also the fixed assets because of the vessels from that operations and also the onshore plants. That is actually explaining most of the increase in the balance sheet. The equity ratio by the end of June is 54%, and the net interest-bearing debt is NOK 5.2 billion. You can see last year it was NOK 1.9 billion, but last year in June we made a capital increase in Lerøy of NOK 2.1 billion, and that cash was used when we did the transaction with Havfisk and Norway Seafoods. By the end of June, we still had that cash in the bank and of course that took down our net interest-bearing debt. Austevoll Seafood, the mother company, issued a new unsecured bond in June this year of NOK 500 million. The loan terms are 3 months NIBOR plus a margin of 2.35%, and it has a duration of 6 years. Looking at the cash flow for second quarter, we build up biomass in second quarter and we are also within season for the pelagic fisheries in South America. The cash from operating activities of 269 million are of course heavily influenced by the increased working capital. We have also paid taxes in the quarter of 351 million. Looking at the cash from investing activities, that is minus 311 million. We have made net investments in CapEx of almost 470 million, but we have also received dividends from our associated companies of 210 million. The cash from financing is minus 338 million, and as mentioned, we have issued a new unsecured bond of NOK 500 million in second quarter. We have also paid dividends out of the group, and that is minus 947 million. To sum up this, we end our cash position by the end of June with cash of a little bit north of 4 billion. Thank you. I will end this presentation by giving our view on the different markets we are operating within. I am going to start with the fish meal market and look at the supply side before I am taking you over to the consumption. Starting up on the supply side, if you look at the table, you can see the largest fish meal producers in the world. If you compare the volume by week 30 in 2017 to 2016, you can see that the volume has been doubling since last year. It has been a steep increase in production as expected when you saw the quotas put in North Atlantic and Chile and Peru was announced. But we also saw that it was 400,000 tonnes left in the ocean when they closed the seas at Peru, and we have also seen a recovery in prices from the bottom. Prices we are seeing now in Peru is $1,470 per tonne on high-quality meal, and on low-quality meal $1,250. I would say on the consumption side, feed producers are well covered both in, let us say, third quarter and fourth quarter. We are seeing that on the supply side that there is only 30,000 tonnes left on sold from the last season in Peru, which is also a low level. There is also done some new future sales at $1,450 level for super prime, and that is more or less based on an expectation of 2 million tonnes and at least give you a view on how market will develop. Taking over to China, main market consuming an average approximately 25% of the fish meal produced. You see that the volume is considerably higher compared with the same period last year. However, if you look at the table on the left side, you see that on comparing with the five years average, the stock is more or less in line with the five years average stock. Off takes over 3,600 tonnes a day. It is also up. Consumption is better, and the importation is also higher due to a lower fishery in China. Other important factor is that the fish meal prices in China is also higher than fish meal prices in Peru, which is also stimulating more trading from Peru to China. Looking at the fish oil, more or less the same development, volume up 75% in the same countries. We have seen prices has been coming down and also recovering again after the season in Peru. Now at the level for feed grade around $1,450 per ton, and it is also a premium between $400 and $500 per ton into the omega-3 market. I would say it is limited of oil available now from the last season in Peru, which is also probably one of the reason why prices also has recovered. Looking into the salmon supply, on the top-hand side, right-hand side, you can see that we are expecting an increase from 2016 to 2017 in Norway of 2.5%, which is a very small increase. And in reality, if you look at the volume in Norway from 2012 to 2017, there has been no growth. And that is, of course, one of the reason why we are seeing the prices, but we are not able to develop the market when we are not more growth. So that is a challenge, I would say, for the industry. Prices has been fantastic, I would say through all the year and so far in this quarter, we are having our prices on 61 NOK per kilo. The NSC prices, which is also is a drop but still good prices. Consumption is coming a bit down in the mature markets, in particular in E.U. and in the U.S. Interesting part there, observation here is that the other markets, which is a group of small markets, has been keeping their position in terms of consumption. And this market is also mainly buying on the spot market. To sum up, we have had a good year, good quarter, good half year, good prices in second quarter. Harvest has been lower, but we are expecting harvest to come up considerably in third quarter and fourth quarter. We are still of the opinion that the cost is too high. It is mainly due to sea lice treatments. But we have a strong view, a strong belief that we are going to have also good years in the salmon industry going forward in the years to come. Whitefish is also extremely interesting. We have a good catches in the quarter and a good first half year. Positive price development on cod and on haddock. And we have more challenging pricing on the saithe. Quota left is more or less on the same level that we had last year, and we really are looking forward to continue developing the whitefish segments further. Pelagic business, South America is back during the quarter and had a good contribution both in Chile and I would also say in particular in Austevoll. We are expecting that the second season will start during November. It also seems like the temperature is favorable for also a good biomass coming up. The North Atlantic activity also main season will start up by the end of September and continue out to the beginning of December. That is going to be the main season for the frozen business for Pelagia Group. So third quarter is going to be, I would say, operationally seasonable low when it comes to pelagic, and the activity will definitely recover during third quarter. Thank you.