Good day, and welcome to the MHG Q2 2014 international conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alf-Helge Aarskog, CEO. Please go ahead, sir.
Thank you, and welcome to the presentation of the second quarter of 2014 for Marine Harvest and results. I think we turn to page three with the highlights this quarter. What we see in general was a very good result for Marine Harvest. In fact, a record high profit in the quarter and also a record high volume. We had a quarter-on-quarter growth from the second quarter of 2013, a 44% increase in harvest volume. In terms of divestment, we sold off and completed the divestment of Meridian. Meridian was Morpol's farming unit or part of Morpol's farming unit we sold in Scotland and Shetland. This was sold out for a little bit more than NOK 1.1 billion. We initiated the building of a feed factory in 2013. That was completed in June. We started production late June.
We will report on the feed production results from the feed production at the end of Q3. The board decided to pay out a quarterly dividend based on the result of this quarter at NOK 1 per share. If we turn to page four and look at the key financial, you will see a quite good top-line growth, up almost NOK 2 billion from NOK 4.4 billion in Q2 2013 to NOK 6.5 billion in 2014, second quarter. Cash flow was good in this quarter, up to NOK 1.3 billion, the net interest-bearing debt there ended at NOK 7 billion, south of our target at NOK 7.5 billion for the company.
I will turn to page five where you can see the development in prices or salmon prices in Norway, the blue line, or the reference price in Chile, the red line, and in reference price in North America, which is the green line. What you see here on the back of 16% the supply growth, expected reduction in the European market. You see fairly stable prices and surprisingly stable prices in the U.S. market and on Chilean fish into the U.S.. This is surprising and really shows a strong market in this quarter, knowing that, as I said, 16% supply growth came onto the market compared to Q2 2013. If we go to page six and look at the price achievement, here we look upon what price we achieve, measured against the different reference prices in the marketplace.
It takes into account the quality of the fish and the contract share. We see on Norwegian salmon, close to 100% for achieving the reference price for the entire volume. The contracts started to be close to giving us margin in this quarter. They were not quite up to spot price, but close in, and the superior share in Norway in this quarter was quite good. We don't have to subtract so much in regards to the spot price, which does not take into account quality. The Scottish achieved price was very good in this quarter. We have good contract and good contract coverage. There's also element of quite a lot of fish being harvested in this market, putting a pressure on the Scottish spot price. If you see the small print on the presentation, it's now NOK 1.48 above the Norwegian standard price.
Usually, this number is higher, the Scottish spot price has been under pressure because of high volumes in Scotland. Our contract looks even better in this content. The Canadian and the Chilean fish, as you can see, we don't have any contracts in Chile. Some issues in quality and achieved below the reference price both in Canada and in Chile. The reason for not being able to compare in Chile is that we did not harvest fish in Chile in the second quarter of 2013. We go into the Norwegian operation, which is the main operation in Marine Harvest. If you look at the volume harvested, 114,000 tons, 68,600 tons came from the Norwegian operation. Good increase in volume and price achievement has been close to what the market is. Slightly increased costs compared to Q2 2013, but a reduction in cost from Q1 in 2014.
What's special with the Norwegian operation this summer over Q2 has been high water temperatures. It's been very warm on the Norwegian west coast, and we've seen high sea water temperatures, which is not optimal for salmon. The optimal salmon temperature for growing salmon in the ocean is between 12 and 14 degrees. This summer we've seen as far as up to 18 and 19 degrees in the ocean. One other area of concern in the Norwegian operation is the sea lice issue, and the fact is that we are spending more and more money and time on solving this issue, staying below the Norwegian regulation. If you look at exceptional items at NOK 1.63 in the table compared to NOK 0.63 in 2013, a lot of this has to do with exceptional costs in regards to sea lice.
If you go into the contract portfolio, as you can see that we touched base upon it was 35% in Q2. It will increase in Q3 to close to 47% of the fish contracted, it's also good levels in Q4 and Q1 2015. This is obviously a rolling forecast, we enter into contract, maybe not as we speak, but continuously in this period. If you go to page nine and look at the different regions in Norway and their performance. Region South has historically been, at least for the last few years, been the region with the lowest margin. The margin at 11.66% this quarter is decent. It's down from the second quarter in 2013. Comparatively speaking, we are fairly satisfied with the performance in Region South in this quarter.
Going forward in Region South, we expect higher costs in the second half of the year due to the warm summer, as I spoke about before, but also due to some PD cases and some sea lice issues where we have to harvest out fish early. Region West is performing very well at a good cost level and very good quality on the fish in that region. We expect this to continue going forward. Region Mid and Region North, both regions where we expect better results in the coming quarter, comparably speaking to what we see here. A slight cost reduction is expected in both these regions. All in all, we achieved NOK 12.16 per kilo in the Norwegian operation. If you then go to page 10 and take a look into the Scottish operation.
Operational EBIT here at NOK 223 million in the quarter on very good harvest volumes, 18,200 tons harvested. A significant growth in volume, 37% to be precise. This business has a lot of contracts with major clients and also have good contracts going forward and has been a stable performer over the last years. Biology is good in the region where we operate, and we expect good results also going forward. In Canada, we reduced the harvest this quarter compared to the second quarter in 2013, down from 8,900 tons- 6,400 tons. This has to do with the restructuring we did in Canada in 2012, going away from sites with Kudoa and will have a lower production. The expected production in Canada this year is 29,000 tons. In normal utilization of our Canadian operation, we would be at 40,000 tons.
There is obviously a volume effect in terms of cost in this region. On to Chile. A positive result in Chile at NOK 5.5 per kilo. Harvest volume 16,400 tons. There's nothing to compare to because we didn't harvest fish in the second quarter, as previously said. Cost is still high in this region, NOK 4.7 in head-on gutted in box calculated back to that. We see a temporary improvement. There has been changes into regulations in Chile. There is better coordination in the Chilean operation between the Chilean producers these days. Also it's been helped by a sea lice drug called Salmosan that has been approved for the Chilean operations that has relieved some of the pressure on the biology.
We still think that to get Chile up to the NOK 11, NOK 12 area where the other farming areas are in terms of NOK per kilo produced, we need improved costs. To really get the structural solutions in Chile, consolidations will be required. Ireland, Faroe Islands, not spend too much time on that. The Irish operation is an organic operation for most of the fish. That's organic salmon farmed in a special way. Achieved a very high price. They also have a much higher cost than the other regions. Faroe Islands has a little bit weak quarter compared to what we usually expect from the Faroe Islands. This is a very small operation. It has to do with what sites they are harvesting from. Page 14. We are into the Value-Added Products and our division of that's called VAP Europe.
Struggling in a tough quarter. We finalized the restructuring in June and closed down our last smokehouse, or our not last, but our last plant in the restructuring plan. We have closed down five out of 13 plants and are left with eight, amongst them one smokehouse. Most of the market for this division is in France. In the France market, we have seen challenging conditions. This has to do with both the financial situation in France and consumers going towards cheaper protein. It has also to do with some campaigns against salmon in France, actually backed from Norwegian NGOs. We've decided to reorganize VAP and Morpol into Marine Harvest Consumer Products with three divisions, fresh, chilled, and frozen. Fresh being MAP packed and fresh salmon, chilled being the smoked business, and frozen being frozen portions and frozen products for that market.
The chilled division here, which is the smoke business, will be led and headed up by the Morpol management or the Morpol team in smoked. That is to really take out the strength of the Morpol organization and also not to be in a marketplace with two smoked operations, very important. The same is for the frozen business that will be first produced in Poland and headed up by the former or the Morpol management team. We think this in combination will make a very strong unit in Europe and with the restructured VAP division and the combination of the Morpol factories, we have a really good division to head into the future with in Europe. In Morpol, positive results in this quarter and just slightly above market price. The spot price for the quarter was 40 NOK per kilo, and they still made money.
I think the break-even cost there were around 42 NOK per kilo. We see that Morpol has a very positive or in a positive situation with today's salmon prices, and we expect them to have a much better second half than the first half this year. On to page 16 and the feed operation. As already said, we decided to go into fish feed in early 2013. We have completed our first factory. The capacity here is 220,000 tons. Currently, we started production late June, and in July, we managed to get up to third capacity utilization. We will start reporting this in the third quarter, and we expect this division to break even in Q3 in 2014.
We have obviously had startup issues, but all in all, being able to build this factory, start it up on time, actually a little bit ahead of time, and commence production, and we produced 16,000 ton of feed in July, is a success story. It's a very modern factory, LNG run, and very efficient in terms of the way it produces fish feed. We go in onto page 18. We've been through the main numbers, and I'm not going very much deeper here, but just comment on a few numbers on page 18.
Turnover already said the operating profit is NOK 1.2 billion up from NOK 901 million in Q2 2013. We are reporting according to IFRS, which is the main lion's share, the adjustment and the fair value adjustment of biological assets that actually goes up and down with the salmon price and the fish you have in the ocean towards the end of each quarter. When the salmon price goes down, this is a big part of that picture. It, in reality, does not have any cash effect, but this is the way it's technically accounted for. Non-operational items, there is a negative NOK 168 million in this quarter. That is the provision taken for a fine that was given us by the EU in regards to competition.
It's not a ruling, this will be appealed and taken into the court system to get the final saying or final sentence on this fine. We have made provision for it in the accounts. Underlying earnings per share here at NOK 2.05 per share compared to NOK 151 in 2013. Net cash flow per share at NOK 5 compared to NOK 164 in Q2 2013. The return on capital employed at 23.9% for this quarter, and our target there is 12% over a cycle. We are achieving well above our target in this quarter. We go into our financial position and look at the balance sheet on our short-term of the balance sheet on page 19. Total assets are up from NOK 26 million to NOK 31 million in this quarter.
Down a little bit from the end of the year, and that has to do with that we are down in terms of biomass in a normal cycle in this quarter. The increase in the balance sheet, the big line of the increase is because of the inclusion of Morpol into the balance sheet. If you look at the net interest-bearing debt over equity, we are at 48.3% and less than our target of 50%. Shortly into cash flow on page 20. In the beginning of the period, we had a net interest-bearing debt of NOK 7.5 billion. Provisional EBITDA was at NOK 1.4+ billion , and I will not go into all the posts here, but we ended the period here at close to NOK 7 billion in net interest-bearing debt, short of our target of interest-bearing debt is NOK 7.5 billion.
That also have an impact in terms of dividend. As already stated, we will pay out NOK 1 per share or NOK 410 million in dividend for this quarter, which will bring us back up to the targeted net interest-bearing debt level. Cash flow guidance going forward. We, as I said, are now at a low level in biomass, especially that's in the Norwegian- Scottish operation. There will be requirements for the seasonal buildup. Some organic growth in farming in Scotland and Canada, and some requirements in terms of starting the operation in the feed plant, meaning that we are going away from 60 days' feed credit among external feed producers and also buying some raw materials, and that has an effect on the working capital buildup in this period. CapEx is guided at NOK 1.7 billion, NOK 1 billion in maintenance, NOK 500 million into structural investments.
That is for the most part hatcheries and smolt plants, then NOK 200 million into the feed plant. Most of the feed plant was taken last year and so far this year. In terms of interest expense is around NOK 360 million, we have new finances in place, we see a cut here and a run rate of NOK 300 million in terms of interest cost going forward. I've been into the quarterly dividends, no point in repeating that. We have a new finance in place and very flexible and good financing for the company. A new loan agreement with DNB, Nordea, Rabobank, and ABN AMRO that has a maturity in Q4 2019, the facility is EUR 425 million. There is basically only one covenant there, that's a 35% equity ratio.
In addition to that, we have agreed to have an option to increase the facility by EUR 425 million if there are needs and we see good potential acquisition candidates, we can react quickly. In terms of the total financing package of Marine Harvest, we have two convertible bonds in addition, and one straight bond issued in February 2013. You can see the different sets of both the interest rate and the conversion price in regards to these in this slide. We go into the supply development in Q2 2014. As already stated, 16% increase in supply, and you can see Norway increasing with 15%, Chile with 26.9% compared to Q2 2013. Scotland is up to 18.4%, somewhat down in supply from North America, meaning the West Coast and East Coast of Canada and East Coast, there's some in Canada and some in U.S..
Faroe Islands up 9.3% and then the rest are smaller changes in terms of absolute volume. This is basically a result from an optimal winter production cycle in Norway and somewhat better conditions in Chile in terms of biology. We see also improved growth in yield per smolt in our Chilean operations. In terms of the reference price and the development, we've been into that to a certain extent. If you look at the table there, you will see that the Norwegian volume in euros sold in the European market was down 12%. The fish into the U.S. market from Chile, - 1.3%, and the North American volume down 2.5%. This is on the back of 16% global supply growth.
I think that speaks for itself, and we can talk about the very strong demand for salmon, basically globally, stronger here in U.S. than in other markets, but still strong demand worldwide. We look at where the fish has been sold and how the different markets are developing. We see that EU grew by 12.5%. We see strong growth numbers in Brazil and in Asia in general, and the markets going down in this quarter, and this is before the ban was Russia with a slight decrease and Ukraine with their problematic situation now also being quite a lot down this market. Other than that, pretty strong markets for salmon. To go into the Russian ban and the Russian sanction on salmon from Norway, Scotland and Canada, we have a few comments to that on page 26.
There you can see the Russian market from second half of 2013 until the first half of 2014, so one-year period and where the fish came from and their origins. We can see a total market there of 139,000 tons, 7% of the world market in that period, 100,000 tons supplied from Norway, 22,000 tons from Chile, which are obviously the main suppliers here. They have a small operation in Russia, in Murmansk, that is yielding around 10,000 tons in this period. The short term here, we have seen a price decrease on Norwegian salmon. It fell significant when the ban was imposed, and then it stabilized and slightly gone up since that. The spot level is in the area of around NOK 30-NOK 31 per kilo. This will lead to a redistribution of how the fish flows in the marketplace.
Faroe Islands and Chile not being impacted of the ban are expected to sell more fish into Russia, leaving open other markets for Norwegian, Scottish and Canadian salmon. We think there will be short-term turbulence, and we've seen that the first few weeks, but it's already stabilizing and we are finding routes and logistic ways from Chile and Faroe Islands into the Russian market, making sure that the Russian customers get salmon. I think this is going on in a good way and in the medium and long term, this will not be a major problem for the salmon market. If you then look at the industry supply outlook on page 27. We expect that we will see a growth in 2014 compared to 2013 in the range of 7%-10%. All in all, this should give a lower price in 2014 compared to 2013.
We've seen very strong demand and so far this year have achieved good prices. Obviously the future will speak for itself, and we will not predict prices going forward, but we can see a short-term turbulence in the Russian situation then stabilizing, and the market will continue to function more in a normal way going forward. In the very near future, in Q3, we see a pressure in the marketplace, a growth between 6% and 12%, a high and low range. This should lead to somewhat pressure on prices as we speak. A lower growth in Q4 between 1% and 7%, which should indicate better market conditions in the fourth quarter for salmon.
Kontali has expected a growth of 3% in 2015. This includes the change in regulations made by the Norwegian government, where they have put in place a rule in average MAB in a short period of time from date until the 1st of April to give some flexibility in regards to the Russian situation. Our own volume guidance, we are guiding down Norway by 10,000 ton from 264,000 ton- 254,000 ton. We are increasing our guiding in Chile by 7,000 ton, in total going down from previous guidance 417,000 ton- 414,000 ton. Not a major change in the total volume from Marine Harvest.
If we then go into the outlook session, already stated, there will be a tight market balance now in the medium and in the long term, and some uncertainty in regards to market turbulence in regards to the Russia situation and sanctions there in the near future. We are fairly well-protected with very good contract coverage in the second half of 2014, which is on the positive side based on the previous note. We are very happy for the Norwegian government that has stated that they will link future growth to sustainability targets or biological indicators. That is the right signal to send because if we can improve on the biology, we will be allowed to grow the production. That, for the long term, is very much needed to have a sustainable operation going forward.
We expect stronger performance in the new unit, Marine Harvest Consumer Products, the combination of VAP and Morpol, especially Morpol, we will see a better result for in the second half. Marine Harvest is continuously working on trying to get a more consolidated industry both in Norway and Chile. As stated before, the dividend will be paid out and equals NOK 1 per share for this quarter. Moderator, I think then I will say thank you for this presentation and open up for questions.
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 systems. Again, please press star one to ask a question. We're going to take our first question from Gianmarco Bonacina from EQUITA . Please go ahead. Your line is open.
Yes, good afternoon. A few questions, if I may. The first one is about cost. You mentioned in your report that you expect an increase in the cost going forward because of the challenging biology, especially in Norway. At the same time, you mentioned this is true for the sector, but while for your company, you expect actually the cost to improve a little bit. If you can explain how this, let's say, more difficult biological situation will actually impact your own company. Second question is what will be the impact or how you will manage this temporary increase in the biomass, which the government gave to the sector until early next year, if I understood correctly. If you will basically use it to just postpone the harvest, or you will actually grow more the biomass. The last one is about the feed plant.
I understand that you are looking at new areas to basically start a new factory. What will be the trigger not to go ahead with the decision? What will make you, let's say, stop this process? Thank you.
In regards to the report, as you mentioned, there is a section that says that the biological situation will lead to cost increase. We expect the cost for Marine Harvest to go down second half compared to first half. We had quite high cost in the first half. There is a slight cost increase compared to what we saw in 2013. To be frank, we had expected even a better cost improvement in the second half. We will see a slight cost reduction compared to today's level, and that has to do with the biological situation and the temperature profile we've seen in mostly the southern part of Norway in the summer of 2014. The next question was the question on the new regulation and how we will handle that.
In Marine Harvest, we might use the flexibilities to some extent, but we don't see many areas where we can use it because the biological situation is not in such a stage that it is defendable to prolong the cycle. The fish needs to get out of the ocean and get harvested because of the sea lice situation, and we will not keep it longer in the ocean than necessary. However, there are small few areas in Norway where we have good biological condition. We do not have sea lice, and we might there, if needed, use some flexibility. The main rule in Marine Harvest will be to continue as before, follow our plans, and get the fish into the market as planned. In terms of the third question, the feed plant in new areas. That is correct.
We have been looking at new areas, and we'll be looking at new areas this fall. The first priority is to get the first plant up and working to capacity and really find or figure out all the quirks in that plant first and then start measuring and see how well we are in fact performing in this division. We will earliest discuss a second plant in the first half of 2015, and I expect the decision to be made somewhere around towards the end of the first half, beginning of the second half of 2013. What would trigger a decision not to do this, obviously, if we fail completely and just not get the first plant to work, we will postpone and make sure that the first plant is working good and the feed is working well before we decide to build a second plant.
I guess, in short, that answers your question.
Thank you.
Thank you. As a reminder, if you would like 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 signals to reach our system. As a reminder, if you wish to ask a question, please press star one on your telephone keypad. There are no further questions at this time.
Okay. Thank you very much for listening in to the presentation, and we will be back in October with a third quarter presentation. Thank you.
Thank you. That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.