M&A announcement

Feb 7, 2020

Summary

The acquisition adds Newfoundland capacity to support the 2025 harvest ambition and strengthen North American supply. First harvest was targeted for late 2022 or early 2023, with 15,000 tonnes annual capacity planned by 2025.

Hello, and welcome to the Grieg Seafood conference call. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Please note you will need to dial in in order to ask a question. Today, I am pleased to present Andreas Kvame, CEO, and Atle Harald Sandtorv, CFO. Please begin your meeting. Hello, everyone, and good morning for those that is just awake, and welcome to our conference here. We will spend now a half an hour to 45 minutes to go through exciting part of development of Grieg Seafood. We have just enter into an agreement where we acquire the Grieg Newfoundland company, based in Newfoundland, of course. My name is Andreas Kvame, and I will go through this presentation, which I hope you are able to see from where you are. I will refer to the slides and the number on the slide so you can follow by the phone. I will then go over to slide number 2 in the presentation sent out. This give you a summary of the acquisition, taking the next step for our journey. The acquisition is in line also with the strategy that we have. We want to grow our volume. As we have stated in our Q3 presentation, we have ambitions to grow above 150,000 tons harvest and reposition ourself in the value chain. Secondly, this acquisition will also give us synergies to the existing operation and for the North American operation. Especially this is related to sales and our marketing activity in a fast-growing market, as you will see in point number 3. It is very close to the U.S. market. It is the world's largest and fastest-growing market. Consume significant above 500,000 tons per annum, and it is growing at a rate of 5%-10% per year. In the area, we believe there is good biological environment, and it is a bit beneficial for farming conditions. Very similar to the operation that we have in Norway. It is a virgin area where we can start the state-of-the-art onshore and offshore facilities. We have strong focus on sustainability, fish welfare, and responsible farming practices where we are and so also in Newfoundland. I will come back to this, but first go through the facts on this transition. Slide number 3. The target is Grieg Newfoundland AS, which is owned by Grieg Kapital, Kvassheim Holding AS, 39%, Ocean Choice International, 19.5%, and Knut Skjefstad hold 2.5%. The ownership after the acquisition, we have an agreement to acquire 99% of the shares of Grieg Newfoundland AS. Grieg Seafood has an option agreement to acquire the remaining 1% of the share, which our local partner, OCI, is holding. Upfront payment to the seller. NOK 620 million for this. Total 264 million NOK of this amount is for the work that Grieg Newfoundland has done in their project so far, including the licenses which have a capacity of harvest volume of 15,000 tons, which give us a capacity cost of 17 NOK 60. Remaining price is related to conducted investment. We will come back to that. Financing of the upfront 250 million NOK will be settled through issuance on new Grieg Seafood shares to the seller of Grieg Newfoundland. The rest of the transaction will be financed through increased debt facilities. The closing conditions are that it has to be approved by our extraordinary general meeting, and necessary regulatory approvals. Beyond the 15,000 tons, we will pay in milestone 43 NOK for a capacity from 15,000-20,000 tons, and we will have to pay 55 NOK for an annual capacity between 20,000 and 33,000 tons. Beyond 33,000 tons, there is no extraordinary milestones. In this project and acquisition, we have had SpareBank 1 SR-Bank and SpareBank 1 Markets as a financial advisor, and we have had the lawyer company Schjødt as a legal advisor. To do the fairness opinion, Deloitte has taken that part. Then we move over to slide number 4. These are some maps that you see where Newfoundland is. If you go down left, you see a ring there. That is the area which name is Placentia Bay. On the right side, you see where the licenses are placed in Placentia Bay. It is a huge area with no salmon farming at the moment. We then move over to slide number 5, Newfoundland in brief. It is located quite near Marystown in Newfoundland. We have now a long-term exclusivity for farming in Placentia Bay, which has a huge area. It is larger than Faroe Islands, just to put it a bit in dimension. The total distance in Placentia Bay, it is 125 kilometer long. The project currently comprises a memorandum of understanding with local authorities and licenses for 11 sea farm sites. Three licenses are approved. When we are talking about licenses in Newfoundland, you have to be aware of that a license is not the same in all countries. In Newfoundland, one license can hold 1 million smolt in the first cycle. In the second cycle, you can increase that to 2 million fish per site. That is a bit comparable also to Norway and the concessions or licenses you get in Norway. Then in the first cycle, you get a lower volume, and then if everything is okay, you can step it up to the capacity given in the license. So we have 3 of them approved. There are 3 expected to be approved within 2020. The rest is in different stage of application to the authorities. As the first one in Newfoundland, and I believe in Canada for fish farming in general, we received an environmental impact statement, we get this approved in August 2018 for the whole Placentia Bay area. The plan is a large RAS facility with hatchery, nursery, and post-smolt modules. There are schedule 3 post-smolt modules. We will focused on one in the beginning. The construction was started in April in 2019. Looking at the sea and the temperature in the sea, the temperature profile in Placentia Bay is very similar to our Norwegian operation. Colder in the winter and warmer in the summer. In Placentia Bay, we have the exclusive right to farm salmon, and there will be no interconnectivity. It's isolated from other farmers, and that means that we can steer it also when it comes to biology. It's really important that we have this exclusivity. One requirement from the authorities is that the salmon that we use has to be sterile. If we then move over to the next page, that's the production plan in slide 6. We have divided it into different phases. Phase 1, that will give us annual harvest volume of 15,000 tonnes by 2025. We expect the first harvest to be in year end 2022 and in beginning of 2023. Phase 2, that we aim to reach a target of 33,000 tonnes. Even longer-term harvest potential in Placentia Bay of 45,000 tonnes will depend upon prudent risk management, approvals according to the EIS plan, and sustainability and a profitable production. Investment per kilo, we expect to be similar to new sites, like if you should build a new site in Norway. This will become much more back also in our Q4 presentation when it comes to guiding on CapEx. We strongly believe that this has a cost potential similar to the Norwegian operation. To then move over to slide 7. Why are we doing this acquisition? Well, first of all, it is in line with Grieg Seafood's 2025 strategy. We talked about that in our Q3 presentation. We want to reach a harvest volume of about 150,000 tonnes by 2025. This will give us a good contribution to reach that volume. We have said that we want to grow organically. We will use new technology and M&A. Cost leadership and also we strongly believe that this can be a part of reposition the company in the market when it comes to coming closer to the market in the East Coast, and combine that with our activity in British Columbia in the West Coast. All of this will have to be based on the sustainable farming. Then we move over to page 8. Synergy with the existing North American operation. Citing sales and marketing presence through Ocean Quality in North America. We have our own sales offices that add volume by this. We have a brand which this also will support, the Skuna Bay. The increased volume will strengthen the potential for partnership, category development, and brand cultivation in the U.S.A. market. The good thing is also that when there is less fish in BC, according to our plans, there will be more in Newfoundland. As such it will complement the production plan for Grieg BC, making Grieg Seafood a more stable supplier of higher volume to the North American market. Then we move over to page 9. That's about the market and how that looks. It's very close to the market. There is no air freight. It's truck transport, both on truck transport to go into this market, meaning that also you have a lower logistic cost to come into this market from Newfoundland compared to, for instance, Europe, where quite a lot of fish is coming at the moment. The market is well above 500,000 tonnes per year going into this. It has a CAGR of 6.2 the last year since 2016. In last quarter, the growth in the U.S. market was actually between 8% and 10%. Looking at the bars on the right side on this slide 9. What you see on the pink color, the growth in the North American production has been zero. It has been non-growth in production since 2016. This can also lift the local supply to that market quite significant. Moving along to slide number 10. Good biological environment and beneficial farming conditions. Looking into Placentia Bay, the conditions are very similar to a Norwegian operation. Either you compare it with our operation in Finnmark or compare it to Rogaland. The temperature profile is similar, and also there it can fluctuate. It will be low water temperature with the risk of super-chill that has happened occasionally. We also saw in Newfoundland, in 2019, warm temperature in other parts of the island. We never measure temperature above 18 degrees in Placentia Bay when the temperature was high on the western fjords. Another thing is that it is a rough area. It is exposed for high seas. All sites are located very well. The depth on all of them is minimum 100 meter. There is good current and there is a good oxygen level. Another good thing with this area, if we get something in, we cannot accuse anyone than ourselves because there is nobody else that can contaminate what we are doing since we are alone in this area with long distance to neighbor farmers. We do not see the same situation in Newfoundland as we have seen in the west coast of Canada with algae. At least no known algae issues in this area. There is the fjord, Placentia Bay or the Bay. There is no threshold, which is also good. Moving on to slide 11. We have the opportunity now to learn from all mistakes, all experience that we have got from other regions. We are starting up with state-of-the-art technology. Everything will be new in this area. There is already started to develop a post-smolt facility, which increase the. We will follow the same strategy as we have in Norway and other regions with the post-smolt to reduce the time in sea, and also avoid one winter in the sea, only have one winter in the sea. The supplier of the post-smolt technology and the smolt facility as a whole is AquaMaof. We will also have state of the art when it comes to the cages in the sea. It will also be very deep. It will be 40-meter deep pens, which allows us also to do underwater feeding, allow the fish to stay below layer if there is super-chill or if there is potential warm water, which we do not believe. This is just a small brief. We will come much more in depth back to that when we have a Capital Markets Day in June. We can move over to the last slide number 12. This is taking Grieg Seafood to our next step on our growth journey. For the past five years, we have focused very much on utilizing our existing licenses in all region with success. This has been a very good strategy for Grieg Seafood. This year, we will reach our target of 100,000 tonnes. The focus we have had has created good shareholder values during these years. In our 2025 strategy, we have stated ambition to harvest at least 150,000 tonnes of Atlantic salmon to achieve cost leadership, and reposition ourselves in the value chain from a pure commodity supplier to a customer innovation partner. This acquisition of Grieg Newfoundland strongly supports our strategy. More detail on the Newfoundland will be provided at the Capital Markets Day in Finnmark on June 10, 2022. This is just a short brief on the project as a whole. If there are any questions, we can take them now, either to me or to Atle Harald. Thank you. Thank you. Thank you. Ladies and gents, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw that question, you do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. Our first question comes from Carl Johansen from Pareto Securities. Please go ahead. Your line is now open. Good morning, guys. Just a short question on remaining CapEx to reach the phase one. It is stated that around NOK 360 million have been invested so far. Can you say something about what that covers and then what to expect in further CapEx to reach the first phase? Yes, we can have a comment on that one. We have started up with the smolt facility. What we are saying is that in order to produce one kilo in this area, you have to invest more or less the same as you are doing in Norway in new sites. We had one figure that we were using at the Capital Markets Day we had two years ago, and that was that we needed to invest approximately NOK 45 per kilo. In addition to that, you also have to have the biomass in the sea, which is close to NOK 25 per kilo. So totally NOK 70 per kilo is the figures that we have been using before, and we see this area lies within that figure. This smolt facility that we have started to invest in is the first step on that one. I think you just have to assume that when we are building up this capacity, you just have to assume that we have to invest approximately totally NOK 70 per kilo capacity. In addition to that is, of course, what we are paying for the opportunity to come into this area, which is more defined as the license cost, which we have stated in the press release as NOK 264 in total for 15,000 tons. That is approximately NOK 17.6 per kilo. Thank you. Sorry. We will also come back to more concrete guiding on the total investment figures for 2020 on the Q4 presentation next week. Okay, any more questions? As another reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. As there appear to be no further questions, I will return the conference to you. Okay. Thank you very much to attend this conference call. That is all for now, and we will, of course, be back with more in Q4 presentation Thursday next week. Also remind you that we will be very much in detail when we come to our Capital Markets Day in June up in Finnmark. Thank you very much for attending. Thank you.