Good day welcome to the Marine Harvest Q1 Results Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Alf-Helge Aarskog. Please go ahead, sir.
Thank you. Again, welcome to the presentation of the Q1 results for Marine Harvest. I will start with the highlights on page three. The first quarter from Marine Harvest was another record quarter. It's the best first quarter we've ever had in this company. Operational EBIT ended at EUR 220 million. This was on the back of record high salmon prices really in all markets, driven by the combination of strong demand and 4.3% decline in supply. Maybe one of the special highlights is very strong performance and improvement in Marine Harvest Scotland in this quarter, closing in making an EBIT of EUR 55 million. We also finalized an acquisition for the Gray Aqua Group, this is an operation that we will enter into on the East Coast of Canada over time.
The dividend was proposed by the board to be NOK 3 per share. This is subject to approval by the AGM that will be held on the 1st of June this year. I go on to some key financial numbers on page four. Operational revenue was up 10% compared to the corresponding quarter in 2016. Operational EBIT almost doubled, up 96% at close to EUR 220 million in this quarter. Harvest volume was down. Volume in total down 13% from 96,000 ton Q1 2016, down to 83,000 ton in Q1 2017. We go on to take a quick look at the salmon prices and the development of salmon prices during the quarter. We see it's in fact record high prices in all markets. This goes for Europe and Americas and Asia. I will come back to these numbers and the changes here later in the presentation.
If you then go to page six on presentation, that covers the contract share and the quality, here measuring superior share of the salmon harvested. We see that the contract share in Norway was at 55% in this quarter. We also can see the price achievement here on this graph, showing the price achievement compared to the spot price index. For Norwegian salmon, we achieved 93% of the spot price, meaning that we lost money on contracts compared to the spot price in the quarter. The Scottish salmon fetched 97% in total, a contract share of 41%, so higher spot sales there than a normal first quarter for the Scottish operation. In Canada, they are all spot, so there we are close to 100% compared to the index we compared to. Then we have the Chilean operation, which is contracted at 25% and giving 91% price achievement.
The quality in terms of superior share was great in Norway at 94%, even better in Scotland at 96%, and then at 89% and 88% for Canada and Chile correspondingly. If you go on to page seven i n this presentation, you will see the bridge in terms of operational EBIT from Q1 2016 until the end result this quarter. You will see feed is slightly below what we achieved in the first quarter of 2016, down EUR 1.5 million. Farming, and this is price-driven, is up EUR 114.4 million. Markets, which is the organization that deal with spot sales and volumes, is down, and this is because of lower volumes. Consumer products, that makes value-added products, increased operational EBIT EUR 10.2 million compared to the corresponding quarter last year. All in all, that explains all those remote spot translation effect between the different operations.
If you continue on to page eight, you see the Norwegian result. Overall, a good result, EUR 123.6 million in operational EBIT compared to EUR 100 million in the same quarter the year before. Volumes are down to 49,000 tons compared to 53,000 tons. You can see on the waterfall on the right side there on this page, the explanation. Price up, volume has a negative effect, lower volume gives an effect in terms of the earnings. Feed cost on fish harvest was up. Really because of higher economical feed conversion ratio, that has to do with losses of fish. You have less fish to divide the feed use on. Other costs, non-seawater cost is also up in this quarter and in general, the Norwegian operation has high cost in the first quarter of 2017.
You go on to look at contracts portfolio for the Norwegian operation, you will see that we had approximately in total volumes 25,000 tons in contract in Q1 2017. Going forward with fairly stable volumes around 25,000 tons for the next two quarters to come. You enter into a little more details on different regions in the Norwegian operation, we can see how they developed. Marine Harvest Norway stood for a little more than 50% of the operational EBIT. Obviously Norway is an important region, though less important in terms of total numbers than before. The Norwegian operation is divided into four regions. This is geographically divided in. Region south, going from the far south in Norway up to a fjord called Sognefjorden. It's the region west that goes from this fjord up to another piece of ocean called Hustadvika.
It is the region Mid, goes from Hustadvika north of Trondheim up there part. It is the northern part of Norway, which goes from area called Folda up to the northern part of Troms. To comment on these figures, Region South has a good improvement and a good result and is in fact the best region for the first time in at least many years, and performing well in this quarter. The other regions can improve. Region West is below what we expect. Same with Region Mid. Region North, we can explain with very low volumes in this quarter and thus not that high of a profit in total. All in all, EUR 2.52 per kilo, maybe slightly on the downside of what we expect for the Norwegian operation. There we have absolutely room for improvement going forward.
On the next page 11, our Scottish operation, tremendous improvement quarter-on-quarter. Went from EUR 8.5 million in operational EBIT to EUR 55 million in operation. This is on the back of high volumes, lower cost and better price achievement. All in all, a very good cost performance but also biologically a good operation. We harvested out from some very low-cost sites. Just to give a heads up, we don't expect the cost to be at the same level going forward, but we expect good operations in Scotland also in the continuous quarters to come. Go to page 12 and take a look at the Canadian operation. Still a very good performance, EUR 3.42 per kilo harvested in profit. Operational EBIT up from EUR 22.8- EUR 30.2 in this quarter.
That on the back of significantly lower volumes from 11,500 tons in Q1 2016 down to 8,800 tons in Q1 2017. Again, if you follow the waterfall, we see a better price achievement, effect from volumes, slightly higher cost on especially other seawater cost and non-seawater cost. That is partly influenced by the lower volumes, especially the non-seawater cost, which is the processing part of the business. The cost tends to go up when you lower volumes in processing. Again, good market. We have also, as already said, finalized the acquisition of Gray Aqua in this quarter. On to page 13, which shows the details from the Chilean operation. Here we went from an operational EBIT of negative EUR 24 million up to close to EUR 12 million in operational EBIT for this quarter. That is on the basis of a much lower harvest volume.
We went down from 15,300 tons in Q1 2016 to 6,300 tons in Q1 2017. This is mainly explained by the algae bloom that happened in March 2016, that many operators, including Marine Harvest, lost fish. Record high prices there on the back of reduced supply and then improved cost also, even on this low volumes, we've been able to improve cost in Chile, which is good. Just a heads up for the next quarter, we will have a one-off there in regards to mature fish that will amount to about $4 million. This is in fact an operational error that should not have happened but will not happen again. In terms of this has to do with using lights, some regulatory changes there that we think will increase cost for industry, at least for the long term.
Page 14 shows two of our smaller operations in farming, Ireland and Faroe Islands. Good contribution from Marine Harvest Ireland, mostly an organic farming operation, and good improvement from Q1 2016. Faroe Islands has tremendous results, EUR 4.51 per kilo. As you see, Marine Harvest volume 1,100 tons. If we continue on to page 15, we see the consumer products. This is the division that takes the salmon into ready-to-eat meals in various proportions, in various forms, like smoked salmon, marinated salmon, fresh portions, sushi, and the like. Good improvements. Q1 is not the best quarter for this operation. Still, we had good operation improvements in most of our factories. We had somewhat of a negative volume development driven by both late Easter effects this year. Easter is high season for salmon in many markets.
Also higher prices to the customers, which have an effect in the UK market. We are building a new value-added plant in Canada on the west coast, just outside of Vancouver, meant for supplying west coast of U.S. and Canada with salmon, we expect it to open in Q3 2017. On to our feed division, page 15. The result, this is low season for fish feed, this is especially in Norway, was slightly down. Volumes are slightly down as well. You could see here is high cycle feed division. We supply only Norway with this factory. As we speak, we're building a feed factory in Scotland. There's a picture of the start of that project down on this page. We expect the feed plant in Scotland to open in the second half of 2018.
The Marine Harvest Scotland operation will supply Marine Harvest Ireland with feed, Faroe Islands with feed, Scotland, then it will supply all freshwater feed for smolt and like throughout Europe. The next few slides will be on financials. We have pretty much been through the number on page 18. I will not repeat the key numbers there, just turn directly over to the financial position on page 19. Here you see no really major changes in the financial position. Company is still solid. The total budget here is the net interest-bearing debt being at EUR 842 million compared to year-end at EUR 890 million. Indicates good cash flow also through the quarter. That keeps us turning on to page 20, which really shows the cash flow for the operation.
This takes the net interest-bearing debt in the period start with the beginning, which is the end of 2016, then it explains the different phases of cash flow. As you can see here, cash flow from operation is great and about EUR 7.8 million. CapEx is in line with budget for the quarter, EUR 57 million. You have the following items going down. Dividend distributed amount of EUR 342 million in the quarter. Overall, we came up at the end, as already said, at EUR 842 million as net interest-bearing debt. Because Marine Harvest operates after a net interest-bearing debt target, that is unchanged at EUR 1,050 million, which is where we manage the business around. Cash flow guidance. Well, not a lot of changes here. Slight change to the CapEx up to EUR 250 million.
Here, the lion's share of the changes are freshwater connections in Scotland, which has progressed quicker than budgeted. Instead of waiting until 2018 to finalize this, we have forwarded EUR 10 million and complete the project quicker than anticipated. New feed plant in Scotland, at EUR 35 million, in total, EUR 110 million in line with expectations. Consumer product expectation, among them the plant in Dallas and the new one in Canada, plus a few other issues there is EUR 25 million. Interest paid, EUR 25 million. Taxes paid in quarter, EUR 150 million. The quarterly dividend already said in the Q2 2017 will be paid after the AGM on 1st of June at NOK 3 per share. On page 22, there's an overview on the financing. We have the convertible bond at EUR 370 million. How many euros that is now converting into shares.
As you have seen over the day, we have entered into a term sheet agreement with our original banks plus two new banks, DNB Bank and SEB, at the facility of EUR 1.2 billion as a bank loan, which occurs NIBD covenant, only one covenant, 35% equity ratio. There's also a call option in this instrument. In this way we will have a very solid financing together with the other instruments in and of Marine Harvest. Turn on to page 23 that shows the supply development of salmon from the producing countries in this quarter compared to the same quarter in 2016. We see that Norway increased supply with 6,000 tons, up 2.5%. The other, Chile, was down with 24,700 tons, 17%, and that is the result again of the algae bloom that happened in March 2016.
All in all, 4.2% reduction from 491,000 tons in 2016 to 471,000 tons in Q1 2017. To come back to the prices, we took a quick look at that earlier on. The Norwegian price Q1 2017 was at EUR 7.27, up 18.2% compared to the Q1 2016. That is on the back of increased supply from Norway and in fact increased supply at 1.5% in Europe. Even strongly so on Chilean fish and North American fish, meaning Canadian fish, into the U.S. market. We see there a range from really 37% North American fish up to 59% on Chilean fish into the U.S. market. Exceptionally strong quarter price-wise. That is on the back of reduced supply. Still, in value terms, this indicates a very strong demand for the product. If you then turn to page 25, global volumes by market.
They are obviously in volume terms and ton terms down. You can see the different markets there both into Europe and Europe being down 8.1%. That is not quite 50% of the salmon market, but total Europe is close and actually over 50%, including Russia and other Europe. We see there a reduction of 8.7%. U.S. is down 4.8% and most markets here being down. If you look at volume-wise, Russia is a lot down in this quarter. This is a consequence of obviously lower supply as well. I think in terms of value, as already said, demand is high and that is shown in the graph before where we showed the price development on the product. We go to supply outlook and the guidance in terms of what's going to happen to supply in 2017.
For the year, we see a low supply growth between 1% or 5%. We run a range here, so if you add this up, average will be around 3% growth in total for 2017. In the table on page 26, you will see also the second quarter which is the quarter we're in right now. We expect slight growth in the second quarter between 0% and 4% then in the second half of the year between 4% and 10% growth. You see here Chile coming back with higher volumes is the main explanation of the growth in the second half. We go on to Marine Harvest volumes and take a look at that. We have unchanged guidance of 403,000 ton on gutted weight for the year. We change a little bit or we reduce Norway with 8,000 ton.
We increase Marine Harvest Scotland by 5,000 tons due to good growth and we increase Faroe Islands again also due to good growth and higher smolt size with 2,500 tons. Basically at the same level but maybe we have changed the growth there somewhat that should be favorable in terms of earnings and we earn more on the growth of Marine Harvest Scotland and Faroe Islands than we do in Marine Harvest Norway at the time. To the last page. Overall, low global supply in 2017. You will see a variability in supply growth between Europe and Americas. More so fish to come from Chile as we already looked at. Look at future prices for the next 12 months. They are EUR 6.5 per kilo or in NOK terms, NOK 62 per kilo.
China is an interesting market and a potential big market for Norwegian salmon. What has happened in this quarter is that the Norwegian relationship to China that has been hampered since the Nobel Peace Prize was given in 2010, has normalized. What's left to do there is to normalize also the veterinarian regulations on salmon, which we believe will be done shortly. This has an upside for Norwegian salmon into China, and we have the potential to develop also this market based on the biggest producing country, which is Norway. Again, we hired a new MD for our East Canada operation, and this is a person that comes from internal sources and known the industry on the East Coast very well. We've started production planning, and we'll continue to gradually build a region on the East Coast of Canada, mainly in Newfoundland.
Again, quarterly dividend, maybe not said already, but again, big payment of paid-in capital, but this time subject to approval of an Annual General Meeting on 1st of June 2017. With that, I will turn this over to the operator and open up for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will go to our first question from Fredrik Ivarsson, the Kepler Cheuvreux.
Yes. Hi thanks. Two questions from my side, if I may first. Starting in China and the talks you are having with Alibaba. Wondering if you can give some color on that cooperation and what it might imply in terms of distribution into China. The second on the price level on the contracts you're signing towards the end of this year and maybe beginning of 2018, if you can give a ballpark figure on what to expect there. Thank you.
Well, in terms of China, I would not comment directly on individual customers. It is more to open up for trade with China on Norwegian salmon that we think have high potential. Obviously, individual customers are important to sell the fish and internet sales in China is absolutely of interest for us. This is a work in progress and nothing we comment on officially in terms of details of the transactions. to the second question, which are contract prices. We expect contract prices to stay at high levels. Slight increase over the next year is what we see, but more stabilized than what we have seen and not so high increases like we have seen previous. again, this is ongoing discussions and ongoing contracts that might change as we go forward. Okay next question.
We do not have any questions in queue. Again, that's star one on your telephone keypad if you'd like to queue for a question. We'll pause for a moment to allow any questions to come into queue. At this time, there are no questions.
I will just say thank you very much for listening in.
Pardon the interruption, but we do have a question from Sam Glover with Tideway Investment Partner.
Okay.
Please go ahead. Sam Glover your line is open. Please go ahead.
Hi there. You talked about supply in Chile picking up in H2 this year. I just wonder if you could give us a bit more guidance on supply outlook going forward there over the medium-term horizon, what we can expect versus historically, given the regulatory hurdles there.
In terms of the year, as you see in the table, we expect Chile to grow between 1%-7%. This is sort of skewed. Having a huge drop in supply in the first quarter, then just a slight growth or between 7% in the second quarter is our expectations. A higher growth in the second half. Chile alone, our estimate is somewhere in between 13% and 23% high range, which gives some uncertainty, obviously, that indicates somewhat uncertainty into these numbers. In terms of the regulations in Chile, if you look at them, you would expect that over time it will be very hard to grow production in Chile. I think this is coming back from the algal bloom if the regulations that are in place will be enforced, I don't think we would see anything like this going forward.
That, again, is dependent upon that the regulations are enforced. In fact, what you would believe would be the case if regulations are enforced in Chile is probably a slight reduction of production in 2018 compared to 2017. These are complicated regulations, and it's dependent on the mortality level in the operations in Chile, how this pans out. It's uncertain. We expect it to be, in fact, a lower production in 2018 based on what we see in fish health, which is the basis for the regulation in Chile. Hope that was some help.
Very helpful. Thank you.
Again hit star one to ask a question. There are no questions in queue.
Okay then.
Oh, I'm sorry to interrupt again. We did just get another question. Did you want to take it?
Yeah absolutely.
Okay. It's Henrik Olsen with NBIM. Please go ahead.
Hi good afternoon. Just would like to hear your thoughts on what you expect from the harvest weight in Norway, because there's some sell side analysts pointing out that it's been a very low level and expecting some kind of normalization. What's your thoughts on that topic for 2017, and if you have any comments for 2018 as well?
Yeah. It's the harvest weight in Norway. It's a little bit early to give an answer on that completely because of currently sea lice situation is more or less, or I would say more under control. If you go back 1 year and take a look at sea lice situation in beginning of May in 2016, I would've said the same. Low levels of sea lice, operations seems to be under good control. All those companies have invested in more equipment, more methods to deal with this issue. Then again, last year, we had the issues on sea lice, and big issues in terms of especially August, September, and October. That was really what dragged the harvest weight down. There is no certainty if we succeed with all the measurements we put in place in terms of combating sea lice.
We might see an increased average harvest weight. This estimate that you see here and a growth in Norway from 1%-3% in the second half from 1%-5% is our best estimate currently, also taking into account the expected average weight.
Okay. A comment you made on Chile just a few minutes ago. Did you say that you expect a lower total supply in 2018 than in 2017?
Yes. Be aware that this is based that the regulation that are in place are enforced.
Yeah. Okay.
Yeah. If the regulations are not enforced, well, then I guess Chile is what Chile always has been, unpredictable. The government has put a lot of resources in to come up with new regulations on density. Just to explain it, if you have mortality on a site over a certain threshold, you have to drop the density at harvest from 17 kg per cu m to 8 kg per cu m. With the same number of cages, that means half of the production on that site. Not all sites in Chile are perfect, right? I think it's more likely if regulations are enforced, that production will come down rather than up from what we see now.
That's very helpful. Thank you.
We'll take our next question from Patrick Mortensen with Kepler. Please go ahead.
Thanks very much. Just a quick one on alternative farming methods. What do you detect from the development of onshore farming methods, the scale that they can be built up at these particular prices? I would imagine that they'll be quite profitable now and it's just a matter of scaling it up, or is that a bit too fast a conclusion?
Well, there are a few projects ongoing. There are many prospects. There's obviously the operation that's going to come online in the U.S. At least a lot of talk about that. I don't know that project in detail. The same we see in terms of ideas and projects around farming on land in China. It's early days. I would have to say that the only land-based system of any size today is Langsand Laks, which is a company in Denmark. I don't think they have harvested 1,000 tons yet. Maybe this year they will go to 1,500 tons. Then they have had their fair part of challenges with diseases and the like in the land-based system. I think we will see more challenges before this is solved, then the question is really on energy cost.
Also the fact that in some of these areas, you need to chill down the water, you need to obviously refrigerate and have a good effect on that. You have to access the egg supply as well, which might be an issue, at least to some countries. Saying that, more than ever, we are following these projects quite closely, so far we have decided to focus on our own operation and try to improve that. I think there's still quite a few years before we see any significant supply from these projects.
Okay. Thank you.
Again, that's star one if you'd like to queue for a question. We'll take our next question from Henrik Olsen.
Can you please update us on any signs of demand destruction in markets where the retailers have increased the prices substantially during the spring? For example in England, Germany, and U.K.
In Germany, we saw a reduction in sales just after New Year's, after prices was increased quite substantially. It's leveled out somewhat over the quarter. U.K., we have not seen anything in our operation signalizing this. In fact, quite good demand there, as you can see partly from our Scottish result. It's the question of demand destruction. What we see is obviously volumes going down 4.2%, but resulting in increased price in Europe of 18% quarter-on-quarter and in the area of 40%-50% in the Americas market. I would say demand has to be strong for salmon if you take volume into account. Obviously, we cannot sell more fish than produced, as a chef once said. I would say demand is strong. There will always be this question around how high can you go in price? When will demand destruction kick in?
If you think about it, if you go back really only five years, salmon was sold at EUR 3, EUR 3.50. The prices has over the years increased. We've always had that question. I don't see a demand destruction that's coming on now. That's been the prediction when the price surpassed EUR 4, when the price surpassed EUR 5, and when the price surpassed EUR 6, and when the price surpassed EUR 7. I think it's very much linked to the development of new products, convenience, and obviously, the supply situation. It's hard from the numbers to read any demand destruction based on a reduction in supply of 12% and increase in prices with the numbers I mentioned before.
I agree with that, but you also said previously, pointing out Russia and France, where you said yourself on a conference call a few quarters back that you had seen that.
Yeah. No, if you look at the numbers, Russia obviously is a special market. If you take a look at global volume by market, it shows Russia in our last 12 months rolling at 62,500 tons. That doesn't necessarily have to do with demand destruction. That has to do with the war in Ukraine. Norway, that was a big supplier into Russia, cannot sell salmon into Russia because of the embargo, the financial situation in Russia, the economy. Russia is a complex situation. In France, again, different market. We see a resistance in the smoked market in France, and we see sort of a drop in volume into that market in the overall picture. That is correct.
We always have markets like this when prices move up that we've seen before, but then this develops over time, and we can, in fact, do something about it too, both in terms of product development and also developing new markets going forward.
Thank you.
We'll go to our next question from Marcos Hernández with SIA Funds.
Yes. Hello. A couple of questions if I may. The first one on Chile. Is it fair to assume that the Chilean increase in production will move more to the U.S. and maybe in the frozen, which will affect less European prices? Is it fair, or it can affect all the prices in the second half? The second question would be on the egg concept. Maybe you can give us an update on how the egg concept is developing and maybe only in theory, if the project goes well, how much production it can bring and when?
Yeah. First, the question on Chile and the increase in supply there. Normally Chilean fish obviously sells to the closest market into U.S. and into Brazil. What we have seen if we look at the second quarter, no, the first quarter of this year or the quarter we're commenting on, we're seeing Chilean prices basically being at the same level as prices for European fish in terms of the recent lack of supply of Chilean fish. I think you will see first an effect on prices for Chilean salmon in U.S. market, in Brazil, when supply comes back on, and then this will be adapted over time. Certainly, there can also go somewhat frozen production into Europe, and that happens today. As you can see from the numbers on page 20, it goes dramatically down in quarter on quarter in Q1 2017 and Q1 2016.
With coming on production and more harvest from Chile, that will also be very sharp. This is tied together, but in the beginning, the effect obviously will be highest in the closer markets. Again, potential there to do something in terms of sales, in terms of value add, in terms of more and better distribution and better products to combat this. Over to the Egg concept. That's one of the development projects Marine Harvest has applied for, and this is in process, and this is something we need a license to put in place. Marine Harvest is still waiting for the Norwegian government to make up their mind. They haven't given a signal that we can expect to start on four licenses. Four licenses is really too small to start a project like this.
We need more licenses to prove this concept on a complete site. We think in terms of supply and scale coming on if we can produce, if we get the licenses we have applied for, we will be able to produce in the area of 14,000 tons on one site. This project will be step by step. First a pilot, then a prototype, and then a whole site. These fish will come onto market. If we got the license awarded today fish would not be in the marketplace before 2020, and only 10,000-15,000 tons in the 1st round. If you can industrialize this, it has potential, and if it brings cost to the levels we want.
Everything is easy on a spreadsheet, but if it holds its promises, it will significantly reduce production cost, even with the higher depreciation, because it will take away the sea lice problem and also the problem of escaped fish. At least, no guarantee if a supertanker runs into the system it will break, but still. To answer your question it is still many years until you get significant volume from these projects.
Okay thanks.
At this time, there are no questions in queue.
Okay. I say thank you very much for listening in, and have a nice afternoon or day continuing. Thanks.
Ladies and gentlemen, this does conclude today's call. Thank you for your participation, you may disconnect.