Good day, ladies and gentlemen. Welcome to the quarterly report international conference, fourth quarter 2017 conference call. Today's call is being recorded. I would now like to turn the conference over to today's speakers. Please go ahead.
Welcome. This is Alf-Helge Aarskog. I'm CEO of Marine Harvest. I will now go through the fourth quarter report of 2017. Start on page three. Quickly go through the highlights of the quarter. The result was an operational EBIT of EUR 181 million in the quarter. This is down from EUR 259 million in the corresponding quarter of 2016. Reason for that is, in majority, decreasing prices in main markets in this quarter. I will come back to that. Cost-wise, the Norwegian operation had a stable cost compared to the third quarter of 2017. We have initiated a restructuring of Marine Harvest Norway. That is to comply and to adapt the organization better to the new regulations in Norway, at the same time, make it more efficient. I have a slide on that later in the presentation. We know cost has increased in this business.
During Q4, we have gone through all entities in the operation. All entities have submitted potential for cost savings. We have, based on this, initiated a cost savings program for EUR 50 million. Also another slide on that later in the presentation. Good performance in markets, the sales division, and also in consumer products, the value-added division in Marine Harvest. We entered into a conditional agreement to purchase Northern Harvest. That's a fish farming operation on the east coast of Canada. Right now, this is in for approval for the Canadian competition authorities. The board resolved a dividend at NOK 2.6 per share. This is to be paid out in Q1 in 2018. If we turn to page four, quickly onto the financial numbers. The revenue for the quarter was about the same as the revenue in Q4 2016, around EUR 1 billion.
The operational EBIT was down, as I said, from EUR 259 million- EUR 181 million, so down 30%. If you look at the harvest volume, that was up 13% from Q4 2016. Quickly on to page five, and this is the development of the prices, maybe where we missed a little bit on the supply side here. The prices in the quarter went down, developed positively towards Christmas as expected, but maybe not to the levels we thought when we presented Q3 forecast and Q3 report. This has to do with increased supply, especially from the Chilean operations. In total, the supply increased with 36%, and the global supply increase in salmon in this quarter was 16%.
In hindsight, we predicted and have got pretty good within our predictions in all other countries except of Chile, and to a certain extent, Faroe Islands that produce a little bit less than we thought. All in all, 16% growth and more than 600,000 tons harvested in the quarter, which is record high quarter for the salmon industry. We turn quickly on to price achievement on page six. Here you will see that we are making money on contracts in this quarter, both in Norway and especially in Scotland, in business with not being contracted or less so contracted in Chile and Canada. We see a lower price achievement in and around the spot price in those two production areas. Page seven breaks down the operational EBIT between Q4 in 2016 on to Q4 in 2017. Fish feed had a poor quarter in this quarter.
I'll come back to that when I comment on fish feed. That explains EUR 13 million reduced result compared to the same quarter in 2016. Farming is down. This is because the price of salmon in reality is down. Cost is pretty stable during the quarter. You see consumer products and markets improving their performance compared to the same operations in Q4. We ended at EUR 181 million. On to page eight and the Norwegian operation. We are satisfied with the earnings here, and we had good and high contract prices on 39 or quite a big part of the volume. Still, price came down, volume about the same. Other saltwater cost and non-seawater cost up in this quarter. All in all, about the same cost as we had in the corresponding quarter or in Q3 in 2017. The cost is up compared to Q4 2016.
In this quarter, we harvest from the 2016 generation. We will continue to do so during Q1 and into Q2 in 2018. What we see on biology is lower sea lice levels in all the regions in Norway, and improved growth on the 2017 G that will come to harvest. I think we'll start at the first sites already early in Q2, the majority then will be harvested during Q3, Q4 and into 2019. We know cost has been an issue in Norway as well as in the rest of the industry. Much is linked to the sea lice situation and to a certain extent, feed raw material prices over time. Saying that, we need to also look at the structure of our business. We have restructured Norway from four to three regions.
This is to do or to have more flexibility regarding the farming operation because in the new regulations we have flexible MAB between three regions. The regions showed on the map on slide nine, shows the region one start in the southern part of Norway and then two and three. These have inter-regional biomass numbers, so you can flex on the MAB. That gives you better flexibility in terms of using the MAB in that region. Region mid, which is from the Bergen area north consist of production zone four, five and six. Then you see Marine Harvest is in seven, eight and nine, and then in 11. We are not part in region 10 and 12 and 13.
To really get the effect into the organization, because you need to plan regional wise, this has to do with processing, smolt output, wellboats and logistics and the like. It's more efficient for Marine Harvest to go from two to three regions. Same time, we save money on overhead. The potential saving directly on overhead is NOK 3 million. Long-term also operational benefits. As you can see on the map on slide nine, we have 225 licenses. We harvested in 2017, 210,000 tons. That number should be in an optimal year around 1,200 tons per license, at least. In region north, we were at 1,300 in even in 2017. It means that it is possible to get even more cost reductions there going forward. Now onto the sales and contract portfolio.
It's on page 10. We see that Q1 and Q2, it's about the same, around slightly north of 20,000 tons. Q1 represents 39% of the fish from Norway contracted on decent prices going forward. The Norwegian operation on slide 11 here broken down into four regions that was reported on in 2017. This will be three regions as of from Q1 2018. We see a big variance in the result. Region South struggles somewhat with both low volume due to some gill issues, some PD and some CMS. That's the diseases. Region West is doing okay, but not fantastic. The same goes for Region Mid. No Region North. In Region Mid, I think we will see the biggest improvement going forward, especially into Q2, Q3 when we get into the next generation fish. That looks very promising in this area. If we go on to Scotland.
Very good price achievement on decent contracts in this quarter. Price actually was positive contributor. Volume up slightly. Production, we had issues. That's why you see for example, non-saltwater cost being up. We had to harvest out some sites at low weights. Had some issues also in terms of some disease described in the report. This is one of the new disease to the Scottish area, but we think we have the solution for at least one of them. Onto the Canadian operation. Reduced spot prices here in Canada. This is a region or operation where we are basically all in spot. The price has pretty much a negative effect there. Somewhat higher cost because we had not the best growth conditions in this region.
We had low sea lice levels, but we had some issues really linked to jellyfish, some plankton in the ocean and low oxygen during the quarter that actually drove costs higher than what we like to see from the Canadian operation. We opened a new value-added plant in Surrey, just outside of Vancouver in this quarter, and that will supply the West Coast of the U.S. and Vancouver area and surroundings with new products and better products for the consumer. We entered into a conditional agreement to acquire Northern Harvest on the East Coast. As said, this is under the process of being approved from the Canadian competition authorities. Can open up, if approved, a new region on the east side of Canada. Chile, higher volumes.
This is when we compare to the fourth quarter of 2016, which had, as you can see here, had the impact of the algal bloom that happened in March 2016. Pretty much a full recovery volume-wise for Marine Harvest in this quarter. Cost satisfactory, prices were quite a bit down in the quarter. Somewhat challenging situation in regards to sea lice, we expect actually the cost to increase somewhat in the first quarter in Chile. Faroe Islands, go quickly here. Very good operations for Marine Harvest. Small yields good profits. Both islands had a good quarter especially Faroe Islands with very good salmon pricings during the quarter for Faroe fish. Going forward, low volumes in the next quarter. It's small operations, not continuous supply in the Faroe Islands for Marine Harvest. Onto consumer products.
This is a unit that consists of all the value-added processing plants in Europe. We see that operating revenue was up. We see operating EBIT up to 5.5%. We had a good year in many of these factories. In Morpol, that's the biggest smokehouse and value-added processor in Marine Harvest, had their best year ever. The same went for Pieters.
It's a MAP producer in Bruges, serving the Dutch market for the most part. Boulogn, a French fresh portion factory. Rosyth is a combination factory, do both smoked and portions and the like in Edinburgh and for the U.K. market. Also Sterk is a whitefish plant in Holland for Marine Harvest, all with record good years. What we see on demand, especially on fresh fish, we see a growing demand towards the end of the quarter on lower prices.
We saw France was up 20% in consumption of salmon of fresh origin, or in the fresh category. The same went for the German market. Promising numbers in the consumer. When they are getting lower prices, they respond with buying more products. We have seen this continue into January with at least volumes from Norway being quite high on better prices than what we saw in December. Fish feed. Our operation in fish feed in Marine Harvest had a tough quarter. This is obviously explained by somewhat declining quarterly feed prices. We benchmark. We still buy fish feed in Europe. We benchmark the prices here in Norway on feed we buy. Timing of raw material purchases.
We bought early in the year, and you can say that the timing there, that was feed or raw material should have been used before, but because of the lack of production, we did only 210,000 tons in Norway in 2017. We were stuck with higher raw material prices than what we would like to see on our feed in this part. We also are in the middle of construction in Scotland. This is a site. You see the picture on the lower side here. This is a factory that will have 170,000-ton capacity in Scotland. Some of the costs there like training, for example, training of new employees that's already started, has been expensed and cannot be activated into the project. That has a direct impact on the feed result in Marine Harvest fish feed in this quarter.
We go to cost savings. As I already said, cost has gone up in Marine Harvest, I guess in the industry as a whole. I think it's room to reduce cost. We have during the fourth quarter, gone through all the units and looked at potential savings related to our production. This is specific costs we have identified. We had many cost lines, but we have just grouped them here into three. Some of them that was identified, we have not taken into this project at all because they couldn't be quantified good enough. All the cost is broken down that we see we can save with timelines and responsible persons. All in all, I think we can do this in 2018.
I think the 50% will be realized in 2018, and a full year effect of all the NOK 50 million will happen in 2019 as we gradually implement the changes around in the organization. This is a continuous effort, I think also structurally we have not really taken the advantage here. It's something we will continue to look at to see the possibility of expanding this program as we go further. I will just go quickly through financial profit and loss. We have been through the major numbers. The balance sheet, the so-called financial position on slide 21, shows an equity ratio of 51.7%. We are relatively solid. In cash flow, net interest-bearing debt, well, you see the numbers, and I think we just go quick here now. On to page 23, cash flow guidance.
Here we will continue to build biomass, and we have put aside EUR 120 million for working capital. We have a CapEx program of EUR 290 million, and the expansion in this part is into freshwater projects. That is one in Region North in Norway. Sande is a new hatchery to produce big smolt for the northern part of our operation. It's Nordheim in Region Mid, also to increase the size of smolt going into our operation, and Inchmore in Scotland that will produce both larger smolt and fry for other facilities in that operation. We have seawater expansion. We got a new site in Scotland during the quarter that needs to be equipped and start production. The same goes for Canada, and we also start up two new sites in Chile during 2018. This explains the EUR 30 million on expansion into farming.
We bought 2% increased MAB capacity in Norway into the operation where we could buy it. The Norwegian production system now is a traffic light system. About 50% of Marine Harvest production sites could buy this 2%. That's meaning they are in the green areas. Being in the green areas means that the control of sea lice, to put it simply, is under control. New feed plant Scotland, as I said, EUR 60 million in 2018. The total project is EUR 110 million, which means that EUR 50 million spent in 2017. Consumer products continue to build organically. What we will do here is we are relocating in Miami into an almost three times the size plant. This is because we have filled and are over the capacity in our current plant, so we need a bigger area. We double the capacity in Ducktrap again.
We did so also in 2013 or 2014. This is to produce more smoked salmon for the U.S. market because the demand is high for this product. Interest paid, EUR 35 million. Taxes paid, approximately EUR 150 million. The dividend for the quarter, already said NOK 2.6 per share. There is a notice there, at least for some shareholders, this has relevance. It's ordinary dividend and not repayment of paid-in capital as it has been up till now. Financing. I don't think I go through a detailed overview of the financing. We have solid financing in Marine Harvest at good terms. More interesting on slide 25 is the supply development. I think for the first quarter in history, we are above 600,000 tons. This took us a little bit by surprise, especially the growth in Chile that we actually grew by 36.6% in the quarter.
In a total, as I mentioned, of 16% globally. This put pressure on prices, and as we know, and I think we'll see on the next slide is the price development on slide 26. 30% down in Europe in the spot prices and about 15% in the North American markets. If you put in a contract there into the European markets, you will see the achieved price probably be around the same drop as on Chilean, on North American, Canadian fish. On to page 27, global volume by market, and what market is growing and what's not. We see if you take the markets that kind of stands out a little bit in this quarter, Russia is turning around a little bit. The first quarter in a long time, we have actually seen growth in Russia. From low level. Still it's positive signal that Russia is growing.
You see on the 12-month rolling comparison, it is down, in Q4 it's up. The U.S. continues strong growth, 17% growth in the U.S. market. Brazil is also okay in this market. China, Hong Kong is really to a certain extent taking off and 36% growth in this market. Partly driven by Norway being now approved for the Chinese market again, at least for a part of the Norwegian fish farming operation. All in all, you see estimated volume at 578,500 tons, so there's a difference of about 25,000 tons between harvested volume and sold volume or exported volume out of the production countries. We think that this is inventory build-up, or we know that. It's in storage at least in some of the production countries. Europe, I think that speaks for itself.
If you go up into page 28, supply growth 2018 and what we estimate the growth will be for 2018. Somewhere between 3%-8% for the year. You see the different markets and the growth we expect for the year. Q1, high percentage growth here between 8%-14%. Here you will see that Chile is substantially up, still recovering from the algal bloom they had in 2016. Other than that, it's also Norway at a higher rate in the first quarter. For the year, now for the remaining three quarters of the year, slower growth percentage-wise in volume. 2019, we don't guide on 2019, we believe that, or Kontali believes that there will be a 5% global growth in 2019. Really none of these numbers scares us. I think it's good that this industry gets some growth.
These are numbers that are good for developing new products, developing new markets in the salmon category. Our volumes are on page 29. We believe or we stand by our guiding from Q3 that we can do 249,000 tons in Norway, 47,000 somewhat down in Scotland. That has to do with the stocking pattern and to a certain extent, we harvested out somewhat more fish towards the end of the year, so a drop there. Slight increase in Canada from 39- 46. Chile up to 53 from 45. Other units that for us, Faroe Islands and Ireland fairly stable at 60. Just to take the last or the outlook going forward. Marine Harvest has a strong financial position, well-financed as we speak, and several important organic growth initiatives. I've been through a few of them.
New feed plant in Scotland, farming and potential for growth in Scotland and Canada and in Chile and also in Norway if we can utilize our licenses better. Also organic growth initiatives in consumer products and then especially in the U.S. marketplace. Global cost saving EUR 50 million. We've been through the program or at least part of it. Conditional agreement acquired Northern Harvest on the East Coast. We don't have a definitive date for when we get them, so you don't get that from the competition authorities in Canada, but we will hope we get it soon. Then what we see in the marketplace is supported by the numbers we see in January with higher prices in January than in December and this on especially in both actually on North American fish but also in Europe.
We see a positive market response in the European fresh segment which I mentioned earlier in this presentation. Just to state again, a dividend this quarter, NOK 2.6 per share, linked to our earning per share in this quarter. The important note is I said before, but ordinary dividend and no prepayment or paid in capital as it has been up to now. With that, I think I will open up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you're on a speakerphone, please pick up your handset and make sure your mute function has been turned off to allow your signal to reach our equipment. Once again, that's star one for questions. We'll hear from James Law with HSBC.
Hi. Thank you for taking my question. I was wondering if you would comment a bit on contracts, on the willingness of both of your retail customers and yourself to enter into contracts this quarter so far versus last year. Specifically, I want to ask also where you product slide page 10 showing your Norway sales contract portfolio. I think the volume, including prospects for Q1, has gone a bit lower. It used to be 24,000 or so in the last quarter's slide. This quarter is close to 20,000. Could you talk a bit about that, please? Thank you.
Yeah. Marine Harvest does contract basically all year. That is an ongoing process, in terms of entering into contracts. Our major partners or contract partners there are the major big retail chains globally. The interest for entering into contracts will always be there, and this is ongoing negotiation continuously. I think the interest for having contracts, at least with our strategic partner, is good continue. In terms of the volume, as you ask, the slightly north of 20,000 tons in Q1 is corresponding to 39% of the Norwegian harvest volume.
The contract policy for Marine Harvest is stated in this document, back in I can see if we can find the slide. Just give me two seconds. It's on slide 33. Well within the range hedging rate in Norway, where I think zero is unlikely. We should try to stay below 50% for more practical purposes. 39% is within that span. This is on decent prices going forward. Hope that answered your question.
Could I ask a quick follow-up?
Yeah, absolutely.
I was just curious because the amount that is contracted obviously changes from year to year, and I was wondering whether there's any part of the customer base that might just be seeing salmon prices falling over last year and therefore deferring any contracts being signed, any sign that people might be waiting for salmon prices to fall further. Thank you.
What we have seen so far in 2017 is actually salmon prices increasing. This is a contract between two parties. I think we would be kind of reluctant, as we were in Q4 with the lowest prices. Then, as I said, I won't go into specifics, but for us, obviously, on strategic partners, we will negotiate when the contract comes up for negotiation and continue on. I do not see specifically that people are waiting for lower prices as we speak. In fact, prices, as I already said, has gone up in January. We see also a demand response in many markets being actually positive for salmon prices, at least so far this year.
Great. Thank you.
Once again, that's star star for questions. We have no additional Oh, I beg your pardon. We do. We'll go to Sam Glover with Tideway Investment.
Hi there. Thank you for taking my questions. Two, if I may. Firstly, the guidance on supply growth for 2018 at the industry level, I believe that's come down since your Q3 guidance. Could you just outline why that's the case? A follow-up to that question is, you've talked in the past about Marine Harvest having significant excess capacity in your farming operations. Can you give us an idea or an estimate on the current utilization rates across the industry as a whole, and how you expect them to trend through 2018? Thank you.
Guidance on supply growth. I do not have the Q3 numbers in front of me, but I am a little bit uncertain if they actually have come down. I think they are pretty stable to what was guided on in Q3 for maybe slightly down, maybe it was 7% in the.
Yes, I think Q3, you were guiding between, well, low case 4%, high case 9%.
Yeah. An average of 7% . I think what we have seen in U.K. biologically is dragging this down somewhat, and then it's the uncertainty in my numbers. What we saw in Chile in Q4 was that they harvested about 4 million fish more and on slightly higher average weights. I think our prediction is that average weight, there's not much room to grow there, and what we see from the situation in Chile is issues around somewhat algal blooms, maybe not so serious so far, but also a little bit on the sea lice and SRS side. Also by harvesting more. The big uncertainty in these numbers, as I see it, is Chile, where we maybe lack somewhat numbers. Other than that, I don't think there are big changes from Q3. You ask about farming capacity and what's Marine Harvest farming capacity.
I think in Norway, we dropped more than our fair share in 2017. If you take 210,000 tons we harvested and divide it on 225 licenses, we are below 1,000 tons, 900 and some tons in harvested volume per license. That is low, and that has to do with biological issues on 2016 generation. I think for our case, a partial recovery in 2018, the capacity in Marine Harvest, we know in Region North in 2017, we did about 1,300 tons per license. Maybe it's hard to copy that throughout Norway. The reason for that is that the license way up north is slightly bigger than the licenses in the south. But around 1,200 tons, or maybe 270,000 tons-280,000 tons is the capacity with current MAB regulations in Norway. Scotland, we have organic growth opportunities in Scotland going forward.
2018 will drop down, I think in. We're not guiding on 2019, but that we are back to 2017 volumes and maybe above that because we are getting new sites in Scotland. It's an opportunity. Canada, this is only West Coast, and I think around 46,000 tons-50,000 tons is in line with our capacity. We're getting some new sites there, so maybe we can stretch it somewhat. In Chile, we have ample room to grow more if we would like to do it. We will not, and we will try to stick around 50,000 tons-55,000 tons in our Chilean operations also going forward. The reason why we're not utilizing the assets in Chile is that we are not satisfied with the regulatory framework, and we think that before we really can grow in Chile, still there needs to be a substantial change in the regulatory framework.
We have 187 licenses in Chile. Today we're utilizing about 30 of them, so obviously we could grow more if we wanted to. Also the price realization on Chilean salmon has been poorer, and historically we have not been able to make the same level of profitability in that unit. We would rather grow when we have excess capacity in other units. We can grow slightly in the Faroe Islands because of higher smolt weight. Ireland is more difficult to get new sites, but stick around the same volumes there. That is the long-term perspective or medium-term perspective in Marine Harvest on growth. Farming-wise, as of today, I didn't mention the east coast of Canada. Marine Harvest has potential to grow there going forward, but we'll cross that bridge when we have the final verdict of the Canadian competition authorities.
For the industry as a whole, I think the growth potential in Norway is depending on the new MAB being sold. This year, the government will sell up to 6% growth. About only 50% of the production areas are within yellow or within the green light zones, so meaning around 3% MAB growth in Norway. Some producers have some room for growth, most producers are closing to utilizing their MAB than Marine Harvest. In terms of the rest of the world, certainly there's potential to grow in Chile for those who dare to do so. There are 1,200 licenses in Chile. New regulations will make growth more expensive. You have to start on a new license with 8 kg/m³ so the first generation will be more expensive, there's still no total limit in Chile with today's regulations.
There is a potential, but normally the structure of the industry as it is today in Chile, and also taking a look at smolt stocking in 2017, was off somewhat. It is hard to see a big growth in Chile either in the next few years. I think that answers the question, at least to a certain extent.
Understood. Very clear. Thank you.
Thank you. Again, that's star one for questions. We have a follow-up from James Law with HSBC.
Sorry, this will be our last question on this call. Thank you for taking my question again. Just coming back to cash flow and dividend policy. Obviously, I can see the slide laying out your parameters and so on. I was just wondering how important is it for you and for the board to have a stable or progressive dividend, especially in years where salmon prices and therefore your earnings will be volatile?
Well, the dividend policy, as you can see, is kind of outlined on page 32. The dividend levels will reflect the present and expected future cash flow generation of the company. To this, a target level for net interest-bearing debt is determined. We have upped that somewhat from EUR 1.050 billion- EUR 1.2 billion. The reason for upping the net interest-bearing debt target is really twofold. It's the new feed factory in Scotland, so we think the feed division can take somewhat more debt because of increased capacity. We have increased the net interest-bearing debt target per kilo of salmon from 1.8 - 2. It's a long time since we have revised this number. The reason for changing it is we have seen, over a long time, higher earnings in the sector.
We think that the farming side of the business can take a little bit more debt. Then, as you said, in the dividend policy, when this target is met, at least 75% of annual free cash flow, I guess quarterly free cash flow, since we are dealing out every quarter, is distributed as dividend. This quarter, we are pretty much in line with the underlying earnings per share. We are about at 100% of what we earn. I guess there are different views on this.
Some companies, they would like to pay a steadily increasing dividend every single quarter. We are more at the line that we take a look at how much money we make, take a look at the future perspective of the sector, and try to adapt dividend to our policy as far as we can. This quarter, as I said, the dividend is according to the earnings of the company, which I think is much more healthy than to try to give you out more than you earn. Long term, at least that's not sustainable.
That sounds very fair. Thank you.
Thank you. We have no additional questions in the queue. I'll turn the floor back over to our speakers.
Okay. I would like to thank all the participants for taking your time to be part of this call, and I hope at least some of it has been clarifying for you all. Thank you and have a good day.
Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.