Good morning. Welcome to the presentation of the third quarter of 2016 for Marine Harvest. Together with me today, I have our CFO, Ivan Vindheim, that will take us through the numbers a little bit later on in the presentation. First of all, this quarter is the best quarter ever for Marine Harvest. We're proud of that. We had an operational EBIT of EUR 180 million. That is on the back of very good prices in a quarter that seasonally is usually challenging. The third quarter is usually the quarter with the lowest salmon prices because of high volumes. This quarter we've seen a drop in volume of close to 8%, but there is also a very strong demand for the product in different markets, which I will come back to.
On the downside, the reason for the reduction in volumes is biological issues and to be specific, sea lice, especially in Norway and to a certain extent, also Scotland. What's good here is that Chile is back in black or in profitable numbers for the first time since 2014, that is very encouraging for us, to be fair. In terms of production and operational results, our feed operation is going very well, that is even in a market which has not been the strongest for feed, that has to do with the volume out to the farms. Anyhow, they are doing very well. The board has decided a quarterly dividend of NOK 2.3 per share to be paid out later on in this quarter. Some key financials.
If you look at the turnover or sales, it's up 13% this quarter at EUR 850 million compared to EUR 751 million or EUR 752 million last year. Operational EBIT is up 131% from EUR 77.9 million last year to close to EUR 180 million this year. Exceptionally good quarter. Volume wise, we are down compared to the third quarter of 2013 with 8% from 105,000 tons down to 97,000 tons in this quarter. Prices has been extremely good especially in Europe than Asia, but also improving and continuously improving prices in Americas. If you look at this specifically for the season, it's a new record both for Europe and Asia, and we've never seen higher prices in a third quarter ever before. On our price achievement, well, it has been better. This time we are dragged down by contracts.
If you look at the Norwegian operation, it's 91% compared to the spot price. The same for Scottish salmon, we are performing below, and that has to do with that the salmon price in the spot market are increasing more than what our contract prices are doing, so we are lagging behind. On the quality of the fish, on the superior share, you will see it's acceptable in all regions, maybe with the exception of Canada, where we had some mature fish during the quarter. Obviously, that should not happen, but it has. If we build a bridge from Q3 2015 on the operational EBIT, you will see that feed is doing better than the third quarter in 2015. Farming, obviously a lot better and mostly explained by price. Cost-wise, we are up. Markets, consumer products. Markets are doing slightly better.
Consumer products, slightly worse than last quarter in 2015, ending up at EUR 180 in this quarter, EUR 180 million. Consumer products struggling a little bit with the higher raw material prices throughout the quarter, other than that, doing quite well operationally. The Norwegian operation again, a record quarter for this operation on the back of all-time high prices. You will see if you look at the graph here, price accounts for almost everything in terms of gains. A little bit gain on volume. We have a slightly higher volume this quarter than last quarter in 2015 in the Norwegian operation. You see feed costs being up, seawater costs being up on the back of several things, mostly linked to sea lice. More treatments, taking out the fish earlier. Obviously, when you take out the fish at 3 kilo compared to 5 kilo, cost is up per kilo.
Early harvest, high mortality due to frequent lice treatments reduced the harvest volumes for Q4 2016 as a result of the harvest in Q3 2016 or the harvest this quarter. Also just a guide on this, because when we take down our takeout fish early now, we see that the contract share for the first half next year and some of the fish that we have harvested out in the third quarter should have been harvested out in the first quarter and second quarter of 2017. This will give us a high contract share in the first quarter of 2017. We do expect high cost also in Q4. We know that because we know what the fish that we're going to harvest going forward has been through. In terms of the contract portfolio, well, in this quarter we had approximately 25,000 ton contracted.
That is higher and up to close to 33,000, 34,000 ton in Q4, then down again in Q1 2017, but on high level both in Q4 and Q1 compared to the volumes that's going to be harvested in these quarters. Saying that, it's also important to say that the prices here are gradually increasing on contracts. Contract prices these days, they are something quite different than they were one year ago. Looking at the different Norwegian units and business units and regions, we divide Norway into four regions geographically. We see quite a spread in result. Region South, approximately EUR 2 per kilo. In Region South, we've had areas which are operating and producing very well, but also sites where we are struggling with sea lice. It's a little mixed picture. EUR 2 is okay, but it's not fantastic.
I have to say that none of these results in our regions are brilliant because we are struggling with harvesting out too small fish, as already said, and treating a lot for sea lice in the warm period in the sea. Region West, EUR 2.34 per kilo as operational EBIT. The best region, but also here, a lot of work has gone in some areas to make sure that the fish are without sea lice and the like. Region Mid is the region where we have had the toughest quarter, EUR 1.67 for this region. We had to harvest out quite a bit of sites on the outside of Frøya very early and too early. There was basically no other way around it. A tough quarter for the people and for the fish in this quarter. A lot of hard work.
Region North had an impact of one ISA site in this quarter that has dragged this down. Still some fish that was harvested out in October here that will impact the result for the fourth quarter with approximately EUR 4 million for Region North. Scotland, a little bit of the same story. Much lower volume here in this quarter compared to the Q3 2015. They're also working hard on their sea lice treatment strategy and getting things in shape. Have a result that we are not satisfied with at all, EUR 0.60 per kilo in EBIT margin. What we are doing now here is to change the total layout a little bit like we did in Canada in 2011, and the way we put smolt into the ocean and the way we deal with our sites in this region. I think this will come around and it is on track.
It will improve but it's not going to happen in Q4. Next year you will see quite a bit of improvement in our Scottish operation. To an operation that actually does very well. Our Canadian operation yielded EUR 27 million in this quarter, EUR 2.63 per kilo in EBIT margin. You see prices way up in Canada, too, but all cost bars are also positive, so slightly positive. The cost is actually going down in Canada in a world where cost in fish farming basically in all other regions are going up. Good biology, a very good financial result. It's all one thing to say to our Canadian operation, congratulations, they're doing extremely well. Chile, a different picture than Canada. They are operating more or less in the same market. On a positive note, we're making a decent profit, EUR 1.44 per kilo in the Chile operation.
I think it is the first quarter since Q4 2014 that they actually made money. Shows a little bit around the strategy of being geographically spread out. Sometimes it's good in one region, sometimes it's bad in another, and this can change. Good prices on reduced supply. That's part of the explanation. Also we see at least tendencies to improvement in the biological operations in Chile. The new vaccine against rickettsia has promising features. It's early days so far, but we have it on six sites and so far it looks very good. Maybe we can come back from Chile without using antibiotics in not so distant future. That would be fantastic. They have proposed and are imposing new regulations.
Maybe not the smartest regulations in the world, but I'm sure it's a good starting point to take regulations in Chile further from what's suggested now, and it's not finalized yet. Maybe Chile can come back. That would be very good if that is the case. Two other regions for us, Ireland, Faroe Islands. Ireland is an organic operation. They have high cost, but they also have high price, and they make decent money. Faroe Islands is the record money maker in our operation this quarter. They have an EBIT of EUR 3.37 for the quarter. Faroe Islands is going very well for Marine Harvest, and I think we'll see the same in Q4 and maybe even Q1 in next year from this region. Over to consumer products.
Obviously, consumer products is in a tough world when salmon prices are increasing with, I think, 43%, 44% in Europe this quarter. All the same, we are increasing volume, going from 25,000 tons of product weight produced in Q3 2016 to 29,000, close to 30,000 tons this year. We are making money, although not much. A lot is going in the right direction. We are developing new products. We are putting more contracts into the marketplace, and we are creating demand. That's also important for us. We have to build this sector for the future, and this is part of the success story in the salmon sector. You cannot sell everything as whole fish. New and better products, and we see good growth still in Germany, in Benelux, in Southern European markets. We are lagging a little bit in France. That is fair to say.
We have improved our operation in Rosyth to break even as we predicted the last quarter. That is the U.K. operation. It looks good going forward also in U.K. We will continue with new products development and more innovative packaging. These guys are really making a dent into making salmon even more convenient than what you find in Norwegian shops, at least. Our feed operations, a good quarter, EUR 12.4 million as operational EBIT compared to EUR 8.2 last year. 114,000 ton sold, 95,000 ton produced. We had some in stock and released into the marketplace in this quarter. 87% self-sufficiency, pretty good, and the plant is doing good. The feed is performing very well in our trials compared to any other feeds. We are very happy with this division. We will continue.
The plan is to build in Scotland next year and finalize the plant in Scotland in 2018, taking on Ireland, Faroe Islands, and obviously Scotland and part of Norway, the freshwater side of our Norwegian operation as customers. This is good. Ivan, then it's the financials and some volumes.
Thank you, Alf-Helge, and good morning, everyone. As usual, we start with the P&L. Notwithstanding the drop in volumes in the third quarter, we had a top-line growth of 30%, i.e., EUR 850 million in turnover. Operational EBIT, EUR 180 million, all-time high, up 131% quarter-over-quarter. Further down in the P&L, just take the major items, a positive biomass adjustment of almost EUR 100 million this time due to a seasonal increase in biomass in sea, mostly because of the record high prices we see in both Europe and in Americas. Income from associated companies, EUR 50 million, more or less related to our 48% ownership in Nova Sea. They made as much as EUR 3.41 per kilogram this quarter on 13,000 tons, which is impressive. Net financial items, highly impacted by our fair valuation of our two convertible bonds, negative EUR 45 million in total.
Underlying interest expenses, that's very normal. Underlying earnings per share this quarter, also a record high, EUR 0.29, of which EUR 0.26 was net cash flow. Distributable dividend last quarter, NOK 3.20 per share. I repeat, NOK per share, of which NOK 2.10 was ordinary dividend. The rest was related to our divestment of our Grieg Seafood shares. Volumes, 97,000 tons, as already mentioned, down 8% quarter-over-quarter. Operational EBIT per kilo for the entire group, EUR 1.85, which is also record high. Our return on capital employed, close to 30%. Over to the balance sheet, EUR 4.4 billion at the end of the quarter, up approximately 10% quarter-over-quarter, mainly explained by a positive biomass adjustment. The other items are quite stable, somewhat up. Net interest-bearing debt at the end of the quarter, EUR 877 million, and an equity ratio of 44.3%. Over to cash flow.
Strong cash flow in the quarter, although we tied up the working capital. Cash flow from operations, EUR 167 million, out of an EBITA of EUR 215 million. Cash flow from investments, EUR 50 million, which is in line with the forecast, and also in accordance with our budgets and plans. Net interests paid, minus EUR 5 million, and dividend distributed, EUR 155 million. All in all, from EUR 832 million in net interest-bearing debt at the start of the quarter to EUR 877 million at the end of the quarter. Over to cash flow guidance. Not many changes since last time. We are sticking to our working capital buildup for full year of EUR 30 million. Capital expenditures also unchanged, EUR 190 million. Interest expenses, somewhat down since last time because of lower net interest-bearing debt, EUR 25 million on full-year basis.
Tax payables, somewhat up, EUR 85 million because of higher earnings than expected. The long-term net interest-bearing debt target is still the same, EUR 1.05 billion. Our board has decided a quarterly dividend of NOK 2.3 per share this time, based upon strong prices, but also on a favorable outlook. Over to our financing. No changes since last time, apart from the quarterly adjustments of the conversion price of our convertible bonds. We will not spend more time on this slide. Are there any questions, just address them afterwards. Much about financial figures. Over to the fundamentals, supply, demand. First supply, down -8% in the quarter, as expected. At least to us, no surprises related to the supply in the quarter.
The prices were, as Alf-Helge has already said a couple of times, a record high, adjusted for seasonality, both in Europe and Americas. Really impressive. Up 40%, 50%, 60% like the second quarter. A really impressive price development this year, unprecedented, and at least internally higher than what we foresaw. That indicates that there is a very strong underlying demand in the market. This demand slide has a lot of red arrows because this is volume, so our consumers cannot eat more than what we produce, and the supply is, as we have already seen, down 8%. If we convert these numbers to euros or NOK, which this audience is familiar with, we would have seen green arrows for all markets apart from Russia and Brazil. The two last mentioned is down because of a shortage of Chilean fish at the moment.
Rough algae bloom we had in March. There is a shortage of fish in the market. That drives the prices through the roof, but there is also a strong underlying demand. Over to our supply outlook for the fourth quarter and for next year. For the fourth quarter, we think we will continue as we did in the third quarter, down 8%-12% on a global basis. We see that the prices in October are a record high. Normally, we see the seasonal change in the prices in mid-November, but this time it's actually started one month before. I think also that shows how strong this market is, and also that there is a shortage of fish in the market.
I also would like to add, unfortunately, we want to build this industry, we want to build a company, we want to produce the products that is demanded out there, and at the moment, we are not capable of doing that. For next year, according to numbers, a modest growth. We think that the likelihood here is on the downside. If the development in the biology in the main areas continue, these numbers may be lower. At the moment, this is our best guess. Over to our internal volumes. 381 this year, down 9% year-over-year. It's quite similar to what we see for the entire industry. For next year, we are guiding for 403,000 tons up 5%, 6%. That is also in line with the industry output we have just been through.
At least when we look at our internal numbers there is some support to find there and that means that the growth next year will be at best modest. There are some challenges out there which Alf-Helge Aarskog has duly commented on and I think the proof of the pudding is in the eating and in this example in the numbers. We make more money than ever but unfortunately we are not building the industry. With that I would like to say thank you and pass the word to Alf-Helge Aarskog and then he can wrap up this session. Thank you.
Thank you Ivan. Just before we open up for question and just what we see going ahead. Well, no surprise there on the back of the number Ivan just showed you that we expect a tight market also in 2017 and this is supported by future prices at EUR 7.4 per kilo for the next 12 months. I don't think I've seen anything like it before. In terms of challenges for Marine Harvest especially sea lice challenge in Norway is a headache. Scotland is on the paper there with more or less the same challenge and this is something that is going to take more R&D, more best practice, more cooperation between farmers to solve and new technology.
Hopefully we can get some speed into the Directorate of Fisheries too so we can get new technology out there and start to use it to actually grow this business because it's highly needed and the consumer are there and they want our products. We don't have anybody to blame but ourself why we cannot grow because there has been given out growth opportunities in Norway this year that nobody has utilized. On the demand side, the sky is the limit. This is about building fantastic good products and continues to get the channels into retail chains and we have a healthy and a tasty and a good product out there. There we have loads of opportunities both in Europe, in Asia but also in the U.S. Chile, well, we've got some new regulations.
They're going to require if you're going to grow in Chile more sites. Well, Marine Harvest has sites but it's going to take investments into cages and then it's down to doing the mathematics between the density you can have in the operation and the CapEx whether this is smart to do or not. There's no cap on increasing Chilean production today. You have to do that math yourself and then decide if you're going to grow or not. Saying that, I think this is the first step. I think the Chilean regulations will already this year be amended and then there's election in Chile in November next year and it will be changed over again. Just that they have come to that conclusion that it's about time to regulate this industry is actually a step in the right direction for Chile.
Again, quarterly dividend said many times now 2.3 NOK per share. We'll open up for questions. Ivan, if you can come up and help me here, we'll try to answer. State your name and employer, and Kolbjørn, you have the honor to start.
Yes. Kolbjørn Giskeødegård, Nordea Markets. Few questions. First of all the guiding you are presenting for 2017. To my calculation you are guiding to grow close to 6% while you are guiding industry to grow in the range 0% to 6%. As Ivan mentioned maybe a risk on the downside. You are growing basically twice as much as the industry. Comment on that. Also on the future prices that you mentioned mid-sixties in NOK terms. Can you say something about how we should expect Marine Harvest level at least in the first two, three quarters ahead compared to those mid-sixties that we are seeing in the market? How far will you catch up to that? I'm not asking specific figures but just an indication. What's the gap between you and the future prices? Thanks.
I can start with the volumes. As I said we are down 9% year-over-year 2016 and according to our guidance the rest of industry is down 6% to 8%. We have a lower baseline, less algae bloom in Chile. If you are combining those two years percentage wise I think it's pretty much zero.
I think that answers your first question. That would be the same for the rest of the industry, because the rest of industry global supply is also down 7%. Still, if the total industry is down from 6%-8% and you're down 9%, we are more down than the rest of the industry. A lower baseline. We can do the math afterwards, Kolbjorn. Get that out. You very well know, Kolbjorn, we don't comment on future prices or share prices. Just to add on comment to that, you see the future price be at EUR 7.4. I think the general comment is that contracts is gradually catching up. Obviously, the change in the Fish Pool or the NASDAQ price, the future price has been rapid lately.
This takes time. We renew contracts and renew contracts and renew contracts and at higher and higher prices. Bad answer. That's the best you get.
Hi. Alexandra Rokne, DNB. Just a follow-up question on the contract coverage. For the next quarter, you're at 54%, was it? Contract coverage. Which is above your guided maximum range, so you can't sign any more contracts for the fourth quarter. I'm guessing your contract coverage for the start of 2017 as well is pretty close to your max, which means you can't really sign any more contracts at these levels. Be more at the mercy of the stock market. Is that the way to view it?
That is correct. That is because of you're seeing the drop in or increased harvest in Q3 that leads to lower volumes in Q4 and also lower volumes in Q1. That obviously gives a higher contract share when you divide on less tons. You're right to say that we do not do a lot of contracts in this period going forward.
Thanks.
Tori Samsak in SpareBank 1 Markets. There are some promising results from the SRS vaccine coming out now. Could you give us an approximate or estimate for your costs related to antibiotics and SRS in Chile? Cost regards to mortality is certainly there, but cost antibiotics is down. We used a lot less antibiotics this quarter compared to the same quarter last year. It's in the report, you'll find it there. Certainly mortality related to SRS is important to clean up. I don't have a specific number on that right now. It's been the biggest mortality cause in Chile over the last few years if you disregard algae bloom, which obviously is a one-time incident. If this vaccine works, still too early to tell, but promising results. It's a big step forward for Chilean farming.
Just a quick question, another one on Chile. In terms of regulations, do you get any support from the regulators when it comes to the density and the problems related to cost being dragged up further? Do you get any support for your view?
The Chilean regulations, it's a very complex game. The fact is that there has come some regulations. Some came in May, some came in August, and there will come another amendment later this year, which none of them are perfect. I guess there are no such thing as perfect regulations. There are regulations that are better than others in different operating countries. If you combine the Canadian, Faroe Islands, Scotland, Norway regulations, and with the best from Chile, you would think you could come up with something that was really good. What do you really want the regulations to do? Well, you want it to make sure that your environment stays in good shape, that your fish health stays in good shape, that there are some predictability for production growth.
If you have production growth going high wire, well, it goes out and kills your biology by default. I think the suggestions now are not perfect. It can be built on going forward, but I don't think, as already said earlier, we will see some real changes before or after the election in 2017. That has to do with the structure in Chile that you have actually to change the law to really change the regulation into something that will benefit the industry and the environment and the employees and the marketplace in Chile.
Knut Rygh Staal, Berenberg Finance. To come back to the volume guidance and Chile. If you look at the global or the supply outlook for the industry in Chile, the guidance seems to be rather cautious while you are guiding internal growth of some 20% or something. Does that have to do with the same as you explained earlier that you sort of have a lower base to grow from, that you were more affected than the rest of the industry there? You will grow much more in 2017 than the rest of the industry in Chile?
Partly, yes.
The other part?
You're not interested in the first part. Recall that when we started this year, we guided for 64,000 tonnes. I'm talking about 2016. 64,000 tonnes in Chile, and we ended up at 36. We actually were down almost half our volume. The Chile industry wasn't that. This was a really big hit for Marine Harvest. Partly that because we have continued our smolt stockings according to our original plans. Also in addition to what Alf- Helge is referring to here, that's the other part. We have better biology internally now than what we had prior to the algae bloom. The lion's share is that we got a bigger hit than the average. You say 20%, but bear in mind that's 10,000 tonnes. In absolute terms, we are not talking about huge volumes.
If you have a very low denominator, the percentage calculation is not always very informative. I think this is one example.
If I can ask about also the biological situation in Norway and related to sea lice. I'm sure the industry and yourself are much better prepared this year to deal with the issue than you were last year. At the same time, the problem seems to be equally big or if not larger, this year compared to last year. Would you say that you have it now under control or is this a bit out of hand in a way and you don't really know exactly how to tackle it in an appropriate manner?
It's obviously not out of hand because this is regulated by the Food Authority or Mattilsynet. The problem is that in some areas, there are so much sea lice that you have to harvest out the fish. In that regard, you can say to a certain extent, you cannot control the fish until 5 kilo. You control the situation, but you have to take out the fish before you should. I shouldn't use too hard words, but it's certainly a real big challenge, and it's going to take a lot, both learning these new tools, the mechanical removals of sea lice to get out all the things that doesn't work there and get it to work is important. It's also highly important to be very coordinated there.
You can do that in some areas, in some areas there are too many actors. You don't get it right. This is a challenge for Marine Harvest and for the industry as such. As I already said, there's no opportunity to grow in Norway this year. You could grow 5%, you could buy 5%, we have done that in some areas where we don't have sea lice. For the nation as a whole, the industry cannot manage to grow. That is a serious problem. To me, that has to be taken really seriously going forward. We have to work even harder, both through the winter and next year to solve this issue, to get back on the growth track.
Also I think if you talk about five times as much salmon being produced in Norway in the future or maybe 10 times, we need new technology, and we cannot continue like we are doing today. I don't think that is possible, to be honest.
Just a last question. Has there been any talks with the authorities about the fish welfare in terms of the mechanical treatment? Because it seems to stress the fish quite a lot in a way. Is that a method that could be banned altogether by the authorities because it's creating too much stress for the fish?
Well, salmon is used to stress. It's jumping up rivers all the time, so it's a tough fish. Certainly fish welfare is something that's taken into consideration every time you treat the fish. When a veterinarian writes us prescriptions or recommend a treatment, they have to take into account the environment. They have to take into account the effect on the environment. They have to take into account the effect on the fish, the welfare of the fish, and the like. Sometimes the veterinarian will say, "Well, do not treat. Harvest out the fish because the fish are too weak to be treated." This is taken into account already. There might be some of these methods that maybe are too tough, but we will not use them anyway.
Again, there are new methods or it's not new methods, but freshwater professionalized done in the right way seems promising. This is I think a battle we have not won that needs to be planned out and with good strategy you can have a chance. I think new technology is also in this battle plan.
Marius Goya in SEB. You're saying that you expect a significant improvement in performance in U.K. next year. Can you try to quantify that a little bit? What we are doing and in EBIT terms, what does it mean?
I can say a little bit about what we're doing. We are obviously changing our smolt stocking pattern, making sure that we put the smolt in the right site at the right time. Increasing the smolt size slightly, increasing our capacity around dealing with sea lice and AGD quite a bit. All in all, I think we will see improvement in Scotland. We'll not quantify the numbers, and I also said that we will not expect to see huge improvement in Q4, but next year.
Dag Sletmo from DNB Bank. You said if we're going to increase the production in Norway by 5 or 10 times, which is the vision of, I guess, at least the politicians, we need technological change. Do you see this as a lot of incremental technological improvements, or could you say that the existing paradigm has been pushed to the limit and we need to do this in radically new ways?
Well, it's tough to say. To answer that, obviously, let's imagine if there was a vaccine against sea lice tomorrow, so sea lice was no problem. You could probably grow in your current technology, but that is not the case. I think we would have to see some radical new technology, which is kind of, in a way, having a shield against the open environment both in terms of lice or bacteria or viruses, compared to what we do today in a total open situation. I really hope that some of these, I don't know how many projects that is applied for, 30, 40?
Close to 41, I think.
Forty-one?
Yeah.
One of these are actually succeeding. To make sure that some of this is succeeding, we need to start to try them. That is highly important for the industry. I think we are about all done. Thank you very much for coming, and have a great day.