Good day. Welcome to the MHG fourth quarter 2014 international conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marine Harvest Management. Please go ahead.
Thank you, welcome to the presentation of the fourth quarter 2014 for Marine Harvest. To present today is myself, CEO in Marine Harvest, Alf-Helge Aarskog, and CFO, Ivan Vindheim. I will just go right into it, and I might jump a little quick on some slides, but just take notes and ask question after when we open up for questions. Slide two is just to state that there might be forward-looking statements, and this is a requirement when we are listed on the New York Stock Exchange. We turn on to slide three, which shows the operational highlights or the highlights in this quarter. An operational EBIT of a little bit north of NOK 1 billion in the quarter. What recognized the quarter was weak prices in Americas and some higher costs due to biological issues in Europe.
We entered into a conditional agreement to merge Marine Harvest Chile with AquaChile during the quarter. We also realized that our fish feed production unit or fish feed plant is even more efficient than we thought and recognized before. We can see that we can produce 80% of the fish feed need in Norway from this one plant, which will result in that we will not do a second investment in the near future in Norway. The quarterly dividend, the board has decided will be NOK 120 per share, and this to be paid in form of repayment of paid-in capital. On to slide four, key financials, just a few numbers there. Record high operational revenue in this quarter at NOK 6.863 billion compared to NOK 6.743 billion in Q4 2013.
If we look at the top line for 2014 as a whole, close to NOK 25.5 billion compared to 2013 at NOK 19.23 billion. Quite a significant top-line growth of the company. The same is the case for the operational EBIT in the quarter about the same number as Q4 2013 but in the year as a whole NOK 4.2 billion compared to NOK 3.2 billion in 2013. Harvest volume, we grew from 343,000 tons in 2013 to 418 close to 419,000 tons in 2014. If you go to slide five, there you'll see the development in the market and the market prices in Norway, in Chile with reference price in Miami and in North America with reference price in Seattle. What we saw in the fourth quarter was a massive Chilean supply growth of close to 20%. Also a supply growth from the North American producer at 10.6%.
This led to weak prices in Americas as a whole. In Norway or in Europe, the prices held up well, but maybe was a little bit weaker than what we expected. This we explain partly at least to the weakening of the Russian ruble and the weakening of the Russian market as a whole. Price achievement on slide six. Basically, good price achievement in the regions we operate in this quarter and relatively good superior share. We then go to page seven which explains the way we go from operational EBIT in Q4 2013 at NOK 1,037 million to this quarter or the quarter Q4 2014, NOK 1,032 million. You can see the change in results in the different divisions we are operating in. In the feed division, the operational EBIT for feed was NOK 61 million.
We posted a loss there in the fourth quarter of 2013 at NOK 23 million loss, thus the difference of NOK 84 million in the quarter or between the two quarters. The big negative here is the farming operation and the majority of the explanation of the NOK 231 million negative number here. It's 65% explained by the reduction in prices in Americas and 35% by increased cost in Europe. Most of the increased cost in farming in Europe is due to extraordinary sea lice treatments cost and health cost in general. Morpol increased their operational EBIT with NOK 49 million quarter-on-quarter. The VAP operation turned a negative number of NOK 36 million into a positive number of NOK 37 million, then the deviation of NOK 73 million. Morpol improved the result from the fourth quarter of 2013 with NOK 19 million.
This is how we end up at the result in Q4 of 2014 explained over the value chain. Slide eight just shows the Norwegian operation. Good result for the combined regions in Norway at NOK 12.59 per kilo and operational EBIT NOK 881 million compared to NOK 825 million last year. Good price achievement overall, somewhat increased cost here due to biological issues like sea lice, AGD, and the like. If we take a look at the contract portfolio, we have 35% on contracts in Q1 and 32% on contract of the Norwegian volume in Q2 2015. The different regions appear on slide 10. Region South in Norway, with an operational EBITDA at NOK 8.86 in the fourth quarter 2014, and you can compare them to Region West, NOK 14.02 per kilo, Region Mid, NOK 10.52 per kilo and Region North, NOK 15.01 per kilo.
All in all, NOK 12.59 as mentioned. In terms of the different regions and challenges in the different regions, sea lice, CMS, PD, is the challenge in Region South, as well as we are harvesting spring smolt there, and they had somewhat higher cost on the different sites we harvested this quarter. Region West, good result, but also there we see some sea lice challenges and treatment challenges and losses when we treat for sea lice. That is the same picture in Region Mid, but even more severe. Region North, we harvested from good low-cost sites this quarter and had a very good result. We go to Scotland. It's maybe the negative news in this report, negative NOK 3.42 per kilo, explained by a very low volume, a little bit north of 6,000 tons in the quarter, down from 11,700 tons in the same quarter in 2013.
This results in higher non-seawater costs like processing and the like, but also the result there is heavily impacted by biological issues. Looking forward, we expect the first half, and we know that the biomass that we'll be harvesting in the first half will have high cost as well. The Canadian operation, a good quarter operationally-wise, but the prices dropped tremendously. As you can see in the waterfall there, you see the price explained the reduction in result, and remaining operations corrected part of it. That is the same on page 13 for the Chilean operation. Fairly good operation and a relatively strong cost performance at $4.5 per kilo HOG. You see the same picture here, and this is obviously because of the increased supply from Chile and the reduction resulting in a very low price.
One point that is important to mention is that from Q1, the result in Marine Harvest Chile will be reported as discontinued operations. This is because of the merger that is going on with AquaChile, all the process leading up to the merger, and technical requirements due to this. Ireland, Faroe Islands, we made some in Ireland, NOK 4.49 per kilo, a little bit more in Faroe Islands. These are both small regions, important for Marine Harvest. One point to notice there that there is no volume in Faroe Islands until Q4 2015. The value-added operation improved its results compared to Q4 2013. We see some positive effect from the restructuring program. We also had a little bit improved raw material prices because of the pricing in euros and the weakening of the NOK.
The value-added operation will be integrated into Marine Harvest Consumer Products from Q1 2015. That is a division that consists of VAP Europe and Morpol and will be broken down into a smoked segment and a fresh and frozen segment, market their fish in the European market for the most part. If we go to slide 17 and look at the feed result, as already mentioned, a good result, 9.53% operational EBITDA. We see a good utilization of this plant and improved utilization over the quarter. That's why we have said that we increase the self-sufficiency expectation from 60% to 80%, and we will postpone the next expansion step in Norway and not build a second plant in Norway and rather build it outside of Norway going forward. No decision is made on this topic as we speak.
I will turn the microphone over to Ivan Vindheim that will go through the financials.
Thank you, Alf-Helge . We skip slide 19 since Alf-Helge has walked us through the profit numbers thoroughly. Slide 20, the financial position or the balance sheet. The total balance sheet year-end amounts to approximately NOK 37 billion. This is up from NOK 34 billion from year-end last year as a result of the growth we have been subjected to. Net interest-bearing debt NOK 9.3 billion, and equity ratio 40%. Over to slide 21 and the breakdown of the change in net interest-bearing debt. We started the quarter at NOK 7.2 billion, made an operational EBITDA of NOK 1.3 billion. We tied up working capital of approximately NOK 700 million, paid taxes of approximately NOK 100 million, which gave a cash flow from operations of approximately NOK 0.5 billion.
We also had extensive investments in the fourth quarter, NOK 447 million in ordinary CapEx, plus the cash effect of the Acuinova acquisition of NOK 727 million. Once again, in total, NOK 1.2 billion in investments. Net interest paid NOK 150 million in the quarter, which is quite normal. Dividend distributed NOK 471 million. The FX effect on the net interest-bearing debt of as much as NOK 845 million. All in all, that gave us a net interest-bearing debt of NOK 9.3 billion. Sorry, the FX hit is related to the weakening of the NOK versus the euro and somewhat the dollar. 70% of our debt is in euros, 40% is in dollars, and we are reporting in Norwegian kroner. Consequently, in Norwegian kroner, our debt increased substantially. That being said, we are managing our cash flow in euros.
We're also managing our financial risk in euros. In euro terms, the net interest-bearing debt was stable, disregarded the tie-up of working capital and the extensive investments we made. Over to slide 22 and the cash flow guidance for 2015. We expect a working capital tie-up of NOK 900 million for the year. A CapEx of NOK 1.7 billion, of which NOK 1 billion approximately is maintenance, which is more or less in line with depreciations. Structural investments of NOK 0.5 billion, which is smolt and cleaner fish. Approximately NOK 400 million is smolt. The rest is cleaner fish, wrasse, lumpsuckers, et cetera. Other investments on CapEx is seawater sites, but also some on processing. Interest expenses NOK 300 million and tax payables NOK 650 million. The quarterly dividend Alf-Helge Aarskog has already commented on, so I will not repeat it now.
Over to slide 23, our dividend policy. We are changing it from previously. We are going from a net interest-bearing debt over equity below 0.5 to a net interest-bearing debt target measured in euros. I emphasize that it is in euros. We are managing our cash flow in euros. It's also natural and consistent to give the target in euros. The number is EUR 1.1 billion, which corresponds to EUR 1.85 per kilo of farming harvest volumes. We have allocated debt to value-added, Morpol and feed. Plus the Acuinova acquisition is 100% leveraged. The latter amounts to $125 million. The farming part of the EUR 1.1 billion debt is EUR 814 million. The rest is, as said, Morpol, value-added, feed and $125 million to the Acuinova acquisition. The reason why we leverage it is to make it accretive. Over time, we will take down that leverage.
Overview of financing on slide 24. Nothing has happened since last time we spoke. We go directly to slide 25 on supply development. Total supply in the fourth quarter was up 3.9% year-on-year. That is in line with what we forecasted when we released our third-quarter results. It was a reduction in Europe and a strong growth in Americas, in particular Chile. The growth in Americas, if you go to slide 26, led to very poor prices in Americas. The supply for the year as a whole is actually up by more than 20%. The prices have been heavily impacted by that negatively. In Europe, the price was down year-on-year despite the reduction in volume because of, first and foremost, the depreciation of the Russian ruble. We saw that the Russian import of Atlantic salmon was down as much as 50% in December.
For the quarter, it was down. We haven't come to these numbers, so I anticipate in advance. It was down by 20% for the quarter, as much as 50% for December. We go to slide 27, which I have already started to comment on. Underlying demand is good in all markets apart from already mentioned Russia, plus France. France is struggling with the economic recession. China here is down in the fourth quarter somewhat due to trouble with the Norwegian exports to China. There is some volatility related to this. If you look at China, including Hong Kong, South Korea, and Taiwan for 2014 full year, we will see that the growth is actually as high as 70%. Hopefully this growth can continue going forward. In the fourth quarter, we saw some hiccups of the trade, especially from Norway.
Japan is down, but that's due to a substantial inventory buildup in the fourth quarter of 2013 of frozen fish. If you look at the import or export to Japan for the full year, it's actually up by 10%. Also in Japan, the underlying demand has been good in 2014. All in all, a good development in demand in the fourth quarter, adjusted for the comments on Russia and France and hopefully the temporary hiccups with China. Over to slide 28 and the total supply outlook for the industry. We foresee a total global supply increase in range of 1%-5%. Consensus is between 2%-3%, so our range is more or less in line with consensus. If you look at the first quarter, we have 1%-5% growth. That's somewhat above the consensus.
For the year as a whole, we are more or less in line with consensus at this part of the year or at this moment. If you go back to the total global supply numbers, we can see that Norway is up between 2%-6%. Chile is actually down compared to the huge supply growth last year, which bodes well for the prices in Americas going forward, at least normally. Bear in mind that we are starting at a very low level. The prices in Americas in the fourth quarter were really poor. The global supply growth in 2014 was actually as high as 9%, so the range 1%-5% normally bodes well for the salmon price going forward, although we are struggling a little bit with the Russian market due to the weak ruble. That was the industry supply outlook.
Over to slide 29 and our own volume guidance, 440,000 tonnes. It is down by 5,000 tonnes since last time due to the biological issues in Scotland. In Scotland, we are down from 63,000 to 56,000 tonnes as a result of what Alf-Helge thoroughly described previously. For the first quarter, we forecast 101,000 tonnes. So i.e., a little bit down compared to the 4th quarter, but quite stable after all. We are on slide 30 and the merger, and then I give the word to Alf-Helge again. Thank you.
Thank you, Ivan. I will go through just the rationale and the structure of the proposed transaction here with the merger of Marine Harvest Chile with Salmones Chile. First of all, this will form a leading player in Chile. It is not only a leading player in Chile, it is the second-largest salmon farming company in the world with 165,000 tons production of salmonids in 2014 and with a capacity of 260,000 tons. This has a great infrastructure both in Region X and Region XI. In addition to that, this company will have 19,000 tons of tilapia, mostly produced in Costa Rica. In terms of why do this is really what we have been talking about all along, creating a company that can start to work even more on making a sustainable operation in Chile, both from a biological point of view and from other point of views.
In the beginning, Marine Harvest will own 42.8% if the merger goes through, and other shareholders will be at around 57%. The company will remain listed on the Santiago Stock Exchange, there is an option from Marine Harvest to buy up to 55% starting as of 15th of June 2016. Closing of the due diligence period and closing of the merger is expected to be in Q3 2015. One point that I mentioned, just to underline it, that the Marine Harvest Chile will be reported as discontinued operation from Q1 2015. Slide 31 just shows you the need of consolidation in Chile. A lot of companies, we've just listed down to letter P, it's a fragmented industry. We really need consolidation to improve the biology in this country. Over to outlook.
What we see going forward is a very favorable market, the supply is limited into the marketplace. This bodes for okay prices. If you look at the future prices, they're stated at NOK 41 for Q1 2015 and NOK 41, in fact, for the entire year. AquaChile merger we expect to be a catalyst for improvements in Chile. High emphasis on controlling biological cost is essential in most production unit. A very good story around the feed factory with increased self-sufficiency and that we can manage with only one good plant in Norway. Quarterly dividend already said, NOK 1.2 per share. With that, we would like to open up for questions. Please state your name and ask. Or maybe it's the moderator that takes all the questions and read it. I don't know.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your phone is switched off to allow the signal to reach our system. Again, please press star one to ask a question. We will pause for a moment to allow everyone to signal.
Two up to minute, Ambra.
We will now take our first question from Gianm arco Bonacina from Equita. Please go ahead. Your line is open.
Yes, good afternoon. A few more question. The first one is about the performance in Scotland and Canada. In Q4, it was quite disappointing or was quite weak. What shall we expect at least for the first half of the year? Do you expect performance to be more in line with Norway or still to be, say, significantly worse? The other question is about the Forex, because I guess most of your raw material are in USD. If you can remind us, for the group, the percentage of the revenues which are in USD and in EUR, and the percentage of the total cost of the company which are in USD and in EUR, because I think that probably you may have, let's say, headwind from a strong USD. The last one is about the CapEx for feed.
When you will decide on new investment, and what kind of CapEx could we expect for, let's say, new investment in feed capacity? Thank you.
Okay, I will answer question one. The question was about the performance in Scotland and Canada. First, Scotland. Scotland, the reason for the weak performance in Q4 in Scotland was low volume harvested in that quarter but also biological issues. As we write in the presentation, we expect a weak result also in the first half of 2015. In terms of Canada, it is not driven by cost. It is only basically driven by price and reduction in price. We have seen a slight increase in price so far in this quarter, and we expect the prices maybe to continue to go, at least based on the supply in Q1. It is a different situation in Canada and Scotland. Your question was also on the result compared to Norway. At this moment, we doubt that it will. The next question was on FX, Ivan, if you can
Yes. The FX question is actually quite extensive, so I will try to keep it on an easy and overall level. If you're not satisfied with the answer, just continue to ask.
Total revenues for Marine Harvest, FX-wise, as we have said many times, euro is definitely the predominant currency. 60% approximately is in euros, 20% US dollars. The rest is pounds, Norwegian krone, and the other currencies. In terms of cost for farming, feed accounts for approximately 50% of the cost. If you divide the feed into the separate input factors, US dollar accounts for approximately 60%, euros 35%, and Norwegian krone 10%-15%. For the other costs, they are more or less in line with the local currency. In order to add all this up, you just look at the geographical placements of the divisions, you have the rest of the calculation. We are managing our cash flow in euros, Marine Harvest is a euro company. At some point, we will most likely start to report in euro.
Today, we report in Norwegian krone. Once again, euro is the predominant currency for Marine Harvest, not the Norwegian krone or U.S. dollars. Thank you.
Okay. Just a follow-up question. Am I right that, given the strong appreciation of the dollar in 2015, you will have some headwinds or some negative impact in the P&L or not very much?
That's correct. The net effect of the US dollar is not positive for us. The strong euro is expected or is supposed to be good for us.
The euro is more important than the US dollar for Marine Harvest. I'm talking about the short-term effect. We have our financing in euros, so the change in the value of that, at least measured in Norwegian krone, will offset some of it. Hopefully, the total over time comprises a hedge.
Okay.
The ordinary Norwegian farmers, they are much more exposed to the change in Norwegian krone than we are because we have much of our operations outside Norway.
Take Mowi for the value-added business, for instance, which accounts for approximately NOK 9 billion of total turnover of NOK 25 billion. Almost all of it is in Europe.
Mm-hmm. Okay.
The third question was on CapEx on feed and eventually when the decision like that will be made. We've not stated anything about that, but the focus now will be to merge the AquaChile, Marine Harvest Chile organizations, and then we will look into if maybe Chile or Scotland will be the next feed. Not stated anything about when this decision will be taken, but it will not be in 2015, more likely towards the end of 2016 or 2017.
Okay. Sorry, just another small follow-up I forgot to ask before. In the report, you mentioned that your convertible bond, they are anti-dilutive. Can you, if it's possible, just very briefly explain how it's possible that convertible is not dilutive for earnings per share? Thank you.
Just please hang on a minute. Yes, you find the answer in note nine in the disclosures. I guess you're referring to it. Hello?
Okay. Yes, sorry. Yeah, I was reading note nine where they say basically that the bonds are in the money. The EPS were anti-dilutive. The effect on the EPS is anti.
Accounting-wise, you cannot add on a gain because of the increase in share price. This is accounting rules.
Okay.
It doesn't have any cash flow effect or a real effect. This is the accounting rules.
Mm-hmm. Okay. Thank you.
It's a little bit technical.
Yes, okay. No.
We are not allowed to book a gain.
If we did that, it would have increased our earnings per share, and we're not allowed to do that.
Okay. Thank you.
You're welcome.
Thank you. As a reminder, to ask a question, press star one on your telephone keypad. Again, please ensure the mute function on your phone is switched off to allow the signal to reach our system. As an additional reminder, to ask a question, press star one on your telephone keypad. There appear to be no further questions in the queue at this time.
Okay, we will just thank everybody for participating in the phone conference, and we will be back with the first quarter of 2015 in April. Thank you.
Thank you.
Bye-bye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.