Q2 2017 for Marine Harvest. To present together with me, I have the CFO, Ivan Vindheim, that will go through the numbers later on in the presentation. First of all, this is the best second quarter so far in Marine Harvest's history on the back of high salmon prices within all markets. We had really good performance in Scotland and Ireland and also good improvement in most of our Consumer Products factories, especially down in Europe. We have reduced harvest volume in Norway. This is related to sea lice and connected biological issues. That means that we do not reach the average weight when we want to harvest the fish because we have treated so many times. It also means higher mortality.
That is an issue that covers basically not the entire coast of Marine Harvest because we are up in Kvænangen, which is good, and we are in Agder, which is good, but basically the remainder of the coast. This is an issue going forward. Net interest-bearing debt is EUR 551 million, and we've had a really strong cash flow in the quarter. That's natural when you release biomass, but also due to a conversion of the convertible bond of EUR 375 million. Dividend NOK 3.2 per share, decided by the board yesterday. Over to the key figures. As you can see here, the top line grows with 6% up to EUR 884 million in the quarter.
The operational EBIT is up 33% to EUR 198 million. This on the back of a reduction in biomass from 87,000 tons in the second quarter 2016 to 78,000 tons, 79,000 tons in this quarter. Really what this shows you is that the market is strong, basically in all markets, paying more for salmon even though they get less volume. I'll get back to the result on each operating unit as we go. Prices slightly down from Q1 2017, but the highest second quarter prices ever and high salmon prices basically in all markets. This shows strength into the product. The consumers are willing to pay for the product. We also see, as expected, a drop towards the end of the quarter, and this even shows a little bit into the third quarter. That is normally what happens in the salmon world.
Most of the supply comes on, the price drops in the third and then starts usually to pick up again in the fourth quarter. If you look at the contract share and the quality of the fish and the price achievement, you can see here that in Norway, we had the 95% price achievement, but we had very high contract share. That is because of the low volume. We harvested only 39,000 tons, 39,400 tons in Norway in this quarter, the contract share is correspondingly up. Quality is good, price achievement is not where we want it to be. In Scotland, however, high volume, 18,000 tons + and 97% superior, very good quality fish, lower contract share this quarter because of high volume. Canada, price achievement around spot where it should be, 90% quality or superior quality.
We have Chile, and this was also guided on in the first quarter presentation. Lower superior share than expected because of maturity on some fish in region 11. 28% contract share in this region. We have, as you see, 92% price achievement for the Chilean salmon. If we bridge the operational EBIT we had in Q2 2016, 149 million EUR in operational EBIT. You see feed is slightly lower. It's low season for feed, so not a big variation there. Farming is making more money because of higher prices. Unfortunately, it's offset somewhat by higher cost. Markets slightly down because of they're trading less volume because we harvested less fish, but Consumer Products are increasing prices and even more comforting, they are producing more efficiently than ever before. All in all, this bridge, they result up to EUR 198 million .
If you go into the different units, and we can start with the Norwegian operations, no doubt it's strong earnings. EUR 98.4 million is a lot of money, but it should have been more. We are down at historically low volumes, 39,300 tons of fish harvested in the Norwegian operation, and that gives us higher cost because we have fixed costs there, but this is unprecedented. Hopefully, the lowest quarter ever volume-wise for Marine Harvest Norway. Why is it so? Well, the reason is already explained, but it has to do with sea lice, and we're not in control of our production in Norway. We have to harvest smaller fish than we want because of the sea lice challenge. That is the explanation. It's also because of the mechanical treatments, and we treat a lot.
In terms of sea lice numbers, we are okay, and we can say we are in control in terms of sea lice. This has a cost, both in terms of the treatments but also in terms of the following mortality and the disease pressure you see in the industry. I think this is something we have to struggle with until we come up with a final, I don't know if I should say final solution for sea lice, but improved solution for sea lice. It's no doubt. On the other hand, we see higher volumes going forward, and we expect costs to come down in the second half of 2017. Norwegian sales contracts basically stable around 25,000 tons, slightly down in Q3, 23, 000 tons and then up again in Q4 to 27, 000 tons . This is basically where we usually are.
Contract pricing going forward is around forward pricing that we'll get back to later on. Look at the Norwegian regions, and we divide it into four different production regions. The result is improved in all regions, but that is on the back of higher prices. Cost is up, and we're not satisfied really with any of the regions in this quarter. EUR 2.43 per kilo in Region South, EUR 2.44 in Region West, EUR 2.17 in Region Mid, and Region Mid is really where we struggle the most. Region North is performing better than other regions, but even Region North can do better. There's plenty of room on the cost side if we had the solution for sea lice. This is something we are working on and hopefully something that will see its solution going forward, but it's not nearby.
It's still a distance away. A totally different picture. The Scottish operation had its best quarter in history. Harvested 18,500 tons, made EUR 57.5 million in one quarter. As you can see from the graph, obviously price is driving this, but volume is helping on cost. Feed cost is down. All the other costs are down as well on the back of high volumes. A really good performance ending up at EUR 3.10 per kilo compared to EUR 0.47 per kilo in the second quarter of 2016. Good operations. Saying that, this is an operation where it's not nearly as big as Norway, it depends also on which site you're in. Going forward, in the second half, we are lower on volume, we go from really 18,500 tons to around 11,000 tons in the two next quarters.
Obviously, cost will increase, and it also has to do with very good sites in the second quarter. Canada as well, doing good. EUR 2.34 per kilo, EUR 21.9 million in result. Slightly down, on the back of lower volumes. All in all, I would say that Canada has control with the sea lice situation. Obviously, Canada always has this issue, overall, our Canadian operation does well and does well now also in an area where there is a little pressure on prices from the Chilean salmon. Very satisfied with our Canadian operation. Chile, the same, really. Improved the result quite a bit on basically the same volume. They up it to EUR 11.3 million in contribute in this quarter. Price does something, as you can see, feed cost is down. All the saltwater cost, non-seawater cost is down. Performance-wise, Chile does well.
We have had, and you can see that from the superior share, as I already mentioned, 86% superior share. We expect that also to be low in the third quarter. We have guided here on a negative impact in the third quarter of $2.5 million related to mature fish. It means that you sell it for a lower price. Ireland and the Faroe Islands, really not so much to comment on Faroe Islands because Faroe Islands, we do not harvest fish in this quarter. We come back with fish in the second half. Does well. What is really good is the Irish operation, EUR 3.35 per kilo. It's not fantastic cost in Ireland, never has been, but they have reduced it significantly and the price achievement is really good. They produce organic fish for the European market and for U.S. and even some for Asia.
They have a price achievement that really shows that you can differentiate some. To Consumer Products. As you can see here, revenues are up from EUR 344 million to EUR 405 million. We are selling basically slightly less fish in the second quarter of 2017 for a lot more money. Somebody is willing to pay, there's no doubt about it. The operational EBIT has changed. That has to do with better price achievement. That's one thing. Also quite the turnaround compare heavily compared to the second quarter of 2016 in our operations. Morpol is more efficient. Rosyth, our operation in Edinburgh is making good money. Pieters, our operation in Belgium, delivering mostly into Holland and Belgium is really going well, and the same goes for Boulogne in France. All of these four factories have really improved the way they perform.
As we state there, values of salmon sold continue to rise across all key markets. That is also an important point to bring in. This is not only about volume, it's also about how much money and how much you're able to sell the fish for. Feed. Low season for feed on the back of what you saw, and they deliver basically to the Norwegian operations. We are managing to supply 88% of our own operations. We see lower raw material cost, and we see lower feed cost, both in this quarter and going forward. That will help also on production cost of salmon as we progress. Feed plant in Scotland is well underway, and it's going according to plan and really an exciting project.
I think this will change the industry much more than what the Norwegian plant did, and this has to do really with where we place it in the geography in Scotland and logistic cost. Ivan you are on, it's all up to you on financials and markets and harvest volumes.
Yes. Thank you, Alf-Helge. Good morning, everyone. As usual, we start with the P&L, EUR 884 million in revenues in the second quarter. That's up 6% year-over-year, driven by price. Farming volumes are down 10%. Volumes in Consumer Products and feed are stable. Once again, price driven. Operational EBIT, our best second quarter ever, EUR 198 million, which is, of course, very satisfactory, driven by great prices. Unfortunately, somewhat higher cost. Further down in the P&L, negative biomass adjustment this time, EUR 30 million, led by a drop in salmon prices due to seasonality. We always see that the prices drops towards the second half. Net financial items negative EUR 84 million this time, because of fair value adjustment of our remaining convertible bond plus a change in FX. Underlying interest expenses are normal. Underlying earning per share, EUR 0.31 this time.
Net EPS per share, EUR 0.24. Dividend distributed during the quarter, NOK 3 per share. Volumes 79,000 tons, record low this time. Annualized return on capital employed this quarter, 31%. Over to the balance sheet. No substantial changes this time apart from the conversion of the EUR 375 million convertible bond, which took equity ratio to 58%. Net interest-bearing debt, EUR 551 million. From a cash flow point of view, we have never been stronger, and I also think we can say the same about the balance sheet. We started the quarter at EUR 842 million in net interest-bearing debt. We made EUR 235 million on EBITDA. Taxes paid, EUR 71 million. Change in working capital, stable this quarter. All in all, EUR 162 million from operations. Net CapEx, EUR 64 million, in line with our budget and forecast.
Other investments here, EUR 25 million, is more or less dividend from Nova Sea. Nova Sea had a great year in 2016, and on back of that, the company distributed NOK 500 million in total to its shareholders, and we hold directly and indirectly 48% of Nova Sea. Net financial items paid, i.e. interest, around EUR 8 million. The bond we have already been through, also the dividend. All in all, EUR 551 million in net interest-bearing debt at the end of the quarter. Cash flow guidance. Working capital build-up, still EUR 120 million. Consequently, we have to tie up EUR 170 million in the second half. If you look at our historical figures, you will see that that's in the high end. I guess the risk is on the downside here. It depends on how much can we, in practice, grow our biomass during the five next months to come.
Capital expenditures EUR 250 million, unchanged. Interest paid, EUR 25 million, unchanged. Taxes paid increased from EUR 150 million to EUR 180 million because of prepayments of tax in Scotland and Canada. This is just phasing. Excuse me. In the end, we had to pay those taxes anyway. Once again, phasings. For the quarter, our board has resolved a dividend of NOK 3.20 per share. Our highest dividend, or I should say our highest ordinary dividend to date. We are happy with that. Overview of our financing. As we already have mentioned twice, we converted one of our two outstanding convertible bonds in the quarter. In connection with that, we refinanced our bank debt. We increased our consortium from four to six banks and increased the facility from EUR 805 million to EUR 1.2 billion, plus an accordion option of EUR 200 million.
Our financing is still rock solid. We're also very happy with increasing our consortium with very solid banks. The remainder of our financing we have been through many times, I will not repeat it here. Our long-term net interest-bearing debt target is still unchanged. Much about the financial figures. Over to fundamentals. We start with the supply development in the quarter. On a global basis, up by approximately 4%, in line with our expectations. However, Europe was less than we thought, and Americas, and with that, Chile higher than expected. This drove prices to a record level year-over-year. They increased in all markets, although we have seen a drop since start of the year. Overall, the prices in the second quarter were extremely good, and it shows that the underlying demand is very strong for our products.
Over to demand and the consumption in the second quarter. Consumption was down in total of 3%, and you could ask, how can that be when supply was up 4%? That's because of the movements in inventory. Europe was down 9% in volume terms, Americas quite stable, and Asia up 8%. If you convert this table to euro or Norwegian krone, all the arrows are green. Our main market, Europe, was up by 5%. The underlying demand, once again, is really strong as far as we can see, although you see some seasonality also this year, but that is as expected, at least for us. Over to our industry supply outlook for 2017. We still believe in a modest growth for this year from 3%-5%. If something, we believe in lower volumes from Norway and higher volumes from Chile.
We saw a trend in the first half. This may continue into the second half. Let's see. Overall, this is our best guess. Over to our internal volumes. I already said that we think if something, volumes in Europe may be lower than what we and the market thinks at the moment. I think our own numbers support that comment to the full. Unfortunately, we have to reduce our volumes by 26,000 tons from the second quarter. Now we have 217,000 tons for mainland Norway, and that's low. Only two years ago, we had 255,000 tons in August. I think this illustrates very well the sea lice issues and other connected issues we are struggling with in this region. Scotland, record high volume, 59,000 tons. Biology is great in Scotland, although volumes are dropping into the second half, which will also drive to high costs.
Canada is doing well, 41,000 tons. They remain at their target for the year. Chile, stable, 44,000 tons. Others also do great, 16,000 tons, of which 6,000 tons are the Faroes and 10,000 tons roughly is Ireland. The Faroes will start to harvest at the end of the second quarter.
Alf-Helge again, I yield the word to you so you can walk us through the outlook.
Thank you, Ivan. Overall, modest global supply growth, as Ivan just explained. Future prices still stay strong at EUR 6.7 per kilo going forward. For Marine Harvest, we have several projects now to kick off growth. We have started, obviously as I explained, the feed factory in Scotland, and that will be up and running hopefully June, July, August next year. That is the track, always a little bit when you start up a new factory, but that is the aim. That will take us to 170, that's the capacity in Scotland, 170,000 tons of feed. It will change the game on feed in that region, there's no doubt. We have on the farming side. We have started to employ people on the east coast of Canada. We have a hatchery in place.
We are researching places to build new hatcheries in that region, and we have already approved seven sites, one million fish per site, and we aim to stock it in 2019 and then harvest the first fish out of there in 2020. This is just to show that salmon farming is not like a quick business, but steady going, and it's a good place to be, we believe, right onto the East Coast market of U.S. Combined with our West Coast operation, this will give us a strong entity in Canada. Other than that, we continue to build hatcheries. That's kind of the safest solution in Norway to larger smolt quicker turnover in sea to combat sea lice that way. That works.
If you put out 3, 400 grams smolt, manage to harvest it before the second summer in sea, for example, when you put out spring smolt in April, May, take it out April, May next year, after 12 months, that helps. This is a slow-going process. We just opened one in Åkrafjorden in Etne, a big research hatchery, and we continue to build hatcheries as we have guided on earlier. Into Consumer Products, continue to build on that, continue in all units. We have decent capacity there, but we can take out even more efficiency gains in most factories. All in all, Marine Harvest also on the back of, if you see, if we manage to solve the sea lice issue in Norway or improve it at least, we have ample room for growth also in the Norwegian operation.
In addition to that, we have got new sites in Canada, two new sites earlier on the West Coast that is to be stocked, is equipped as we speak. The same in Scotland, there's room for long-term organic growth. What we see, the latest news in terms of China, we hope China should be open really quick after the big meeting in Beijing a few months ago. The latest news is that the certificates now kind of are approved and it's getting through the system. I think we're closer to opening China than ever before. That is important for Marine Harvest and important for the industry to get the fish into China the right way. Quarterly dividend, already said, NOK 3.2 per share. With that, I think we'll end it now and open up for questions.
Ivan if you can come up and we'll take it from there. When Kim is fixing the microphone there, this might happen.
Okay. We have the first question from the webcast from Fredrik Ivarsson at Kepler . He has two questions. First, on the cost reductions in Norway. Is this mainly an effect of higher volumes or can you give some color on what is driving this? Secondly, on contracts, do you see increasing contract prices sequentially during the second half of 2017 or more level with what we have seen in Q1 or Q2?
Should I start with the last one on contracts? I think we'll say that on contract prices we see more level with what we have seen. That is the right answer to that. I don't know if you want to comment on the cost side. I can do it and you can fill in, Ivan. On cost side, obviously increased volume helps if you look at our guiding, that dilutes fixed cost. Also another point is that feed cost gradually has been reduced through this year and will kick in as we harvest fish going forward. Slightly, but surely.
Another question from Carl-Emil Johannessen at Pareto. He's asking also about contracts. Have you done contracts for 2018? Are the prices in line with the current forward curve?
Yeah. We don't like to be too specific about contract prices. We are negotiating every day, so the details, I think, we have to keep to ourselves. When we do contracts, they are at favorable terms, and we do not contract below market prices. It's very much about timing. He's referring to the forward curve. Giving the contract prices to the market, I don't think is the right thing to do. I think we shall keep it with that. Yeah. May we also say that, obviously, our contracts go into 2030. Some of them, that is part of the game. We've done contracts that go into 2030.
Kolbjørn Giskeødegård with Nordea Markets. Just reverting to the guidance in Norway and biological issues. There is one question raising in my head, at least, and that is if the price to keep sea lice down is starting to get too high now. We see from the data provided that there is an encouraging development in terms of number of sites reaching the 0.5 level. There is also lower general sea lice levels than we have seen in many years. Despite that, you and other companies are driving down, probably because of higher mortality and lower weights. I know you are 20% below where you were two years ago. What are your reflections on this? Should we expect that Norway will just continue down the drain volume-wise in the years to come?
No, I don't think we will continue down the drain, but it's a serious situation. To me, this is our main focus. We have a lot of efforts in terms of optimizing the mechanical equipment, optimizing the use of wrasse in feed ingredients that increase the slime layer on the fish, if you can put it that way. There's a lot of things going on. At the same time, you're touching upon an important point, and that is the cost of this is high, especially mechanical solutions is stressful for the fish. I've said it before, so I might as well say it again. I don't think there's room for five times more fish in Norway before we have another technology producing salmon.
Hopefully, when we are here next time in October, that we have the final answer on the development license, and we can start with those projects. It's going to take time, but at least that will move it in the right direction. If we can show that we are reducing costs significantly with new production methods and also taking care of the environment and are more sustainable in that way, that is the solution as I see. I know there's a lot of work going on in terms of new medicines, vaccines, and so on, and a lot of projects that we will not write off. Everything can bring us in the right direction. It is serious anyway, the sea lice, no doubt about it. It seems like now we are able to keep the threshold.
We can stay under 0.5, but as you say, it has a cost. This quarter, we really see it. It hits us in Norway because of the low volume as well. It's kind of a double effect. I don't think it will take us down the drain. Solutions will come.
[inaudible] with DNB. As you mentioned, you have a very strong balance sheet at the moment. You have EUR 500 million of excess capacity up to your net interest-bearing debt target. Can you give us some color on what you're going to spend that money on?
Right. We have just been talking about volume reduction. A friend over here said something about down the drain. All those lost volumes have reduced working capital substantially. We hope that we can recover, that we can put more or keep more fish alive in sea, keep it to higher harvest weights. This will cost money. You have a seasonality, but also because of this, our net interest-bearing debt is artificially low. The number you are referring to is unfortunately to a large extent, the wrong reasons. We also have an extensive CapEx budget. We are building a feed factory in Scotland. The expenditures, the lion's share is to come. In total, EUR 110 million, it's close to NOK 1 billion. We are also building smolt facilities. We are planning to build a new farming company in East Canada.
That costs money, that costs CapEx, that costs investments. We think that this situation is just temporary. In just a few months, I think you will see a completely different number there. At the end of the first half, it was artificially low. You're right, the cash flow is super strong. If you compare the dividend we distribute with the cash flow we generate, you will conclude that we distribute all the money we generate. This is, once again, to a large extent, for the wrong reasons. I'm afraid. We have taken money out of the bank. I think in order to recover volumes, in order to grow this company, we have to put the money back again, figuratively speaking.
Okay. A follow-up question on the volume guidance in 2017 in Norway. You're cutting it quite substantially, I would say. Is it based on the same harvest weights as you did last year in the second half? Is that a fair assumption?
It's based on our best estimate, in terms of number and harvest weight for what we can do going forward. That's what it's based on. We don't compare exactly what we made last year or the year before, but we do the best estimate we can going forward, and it's a combination of a reduction in number and a reduction in average weight.
[inaudible] . Just a follow-up on the guidance in Norway. It's quite a substantial drop in guidance. How much is related to the 2015 generation, and how much is on the 2016? You're probably under 2015 now.
2015 is done and dealt with. It's zero 2015 there. We get them out before really July, mid-July. This is spring smolt of 2016, what we are harvesting on now. They will continue out until we start on the zero 2016 fish that came into the sea in the fall of 2016, and we start on the largest of those in October, so to speak, but they overlap certainly. This is about the 2016 spring smolt, to be honest.
Isn't that a little bit early to conclude on? You probably had 2016 fish for just a couple of months, but still so early you are seeing the same problems we have had on the 2015 generation.
I think you mixed up the numbers. 2016 May. 2016 is mode.
2016 generation is coming up now. Yes. They're under the 2015 generation.
No.
No?
No. 2017 spring has just come into the ocean.
Yeah.
2016 spring came into the ocean spring of 2016. It's been in the ocean well over a year.
Okay. We can discuss after.
Yeah, I think I'm right. Sorry. The 2017 generation, the spring 2017, will start to harvest in 2018.
Yes. Okay.
At the earliest, if we have big smolt, we can start in March. Maybe then.
Okay. Thank you.
Yeah.
[inaudible]. Forgive me if you have answered this question already, but it's also on the volume guidance. We see from both the sea lice statistics and harvest size statistics that sea lice levels are lower now than it was one year ago, and harvest sizes, at least in the spot market, have been higher year-over-year. Still you're taking down the volume guidance significantly. Is there something we're not seeing in the statistics, or is this specifically for Marine Harvest and not for the other guys? Could you just provide some comments on that?
I think we can only comment on Marine Harvest. You have to pay attention to what the other companies do in terms of guidance. Really, from what we see, if we want to keep the sea lice under the limit, we need to treat. That is many mechanical treatments. I think it's fair to say you can really look at our numbers and you can see the problems. You can see it being the biggest in region mid, and then it kind of spreads out in all directions. Marine Harvest has most of its activity from Lofoten and to Rogaland, really. We have some outliers a little bit in Kvinnherad and a little bit in Agder, which goes fantastic.
In that area, we struggle because we treat and it works in a way, keeps the lice off the fish, which is good, but it is tough on the fish. That's why sometimes you have to go in and harvest early. You can't take the next treatment because you're going to kill the fish. We monitor this really closely. For the rest of the industry, I don't know. You have to pay attention to the guidance from the other companies.
A follow-up on that. Could you say that for Marine Harvest that the sea lice situation is slightly better now than one year ago? Is it as worse than last year?
No. It is better. It's in line with what you see in BarentsWatch. We have, in a way, control over sea lice, but it has a cost.
A follow-up on that. You say that the cost level is probably going to decrease in the second half of 2017. Is that related mainly to the feed or is it also related to the sea lice issues that the season will progress?
It's related really to increased volumes because Q2 was very specifically low. It was 39,400 tons, unprecedented low. When you increase volumes, you lower all the other costs and then a slight effect of lower feed cost on the fish that we produce because that kind of comes gradually.
Finally, for 2018, although you rarely comment on 2018 figures, of course, but can you say something about the sentiment to go into fixed price contracts for 2018 and if you have done some of that already and kind of indicate what kind of price level you might be looking at?
Yeah. I think this is the second time I had that question. We are negotiating every day, so we don't want to give too much details. People are looking at the fish spot forward curve. They have done that for many years. That's a reference. When prices are down, the purchaser, they are always more eager to contract than when the price is record high. Consequently, I guess it's the opposite of what you may think, but the interest for contracts from our buyers are very high, but that's because prices have dropped as expected. It's not particular for this quarter, but you see the same trend every year. There are some patterns there. Once again, we are working on this. We are negotiating as we speak. We don't give too much details. We don't want to.
This is also about keeping something to ourselves, I'm afraid. Apologize. Okay, I don't see any more questions. If you don't have one, Kim, just like a really hard one. Well, thank you very much for coming and good luck with the rest of the day.