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Edited Transcript of BAKKA.OL earnings conference call or presentation 5-May-20 6:00am GMT

Q1 2020 P/F Bakkafrost Earnings Presentation

Oslo May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of P/F Bakkafrost earnings conference call or presentation Tuesday, May 5, 2020 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Høgni Dahl Jakobsen

P/F Bakkafrost - CFO

* Johan Regin Jacobsen

P/F Bakkafrost - CEO

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Conference Call Participants

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* Carl-Emil Kjølås Johannessen

Pareto Securities, Research Division - Analyst

* Christian Olsen Nordby

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Kolbjørn Giskeødegård

Nordea Markets, Research Division - Director & Sector Coordinator

* Lars Konrad Johnsen

Carnegie Investment Bank AB, Research Division - Research Analyst

* Martin Kaland

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Stein Alexander Aukner

DNB Markets, Research Division - Senior Analyst

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Presentation

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [1]

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Good morning, ladies and gentlemen, and welcome to this presentation of the financial results for the first quarter of 2020 for Bakkafrost. And welcome also to the analysts on Teams.

And if you please can turn on your microphone during the presentation, and then at a question, you can turn the microphone on again. This is the first time we have the presentation directly from our headquarters here in Faroes. Normally we will be in Oslo. This has been the case for the last 10 years, but due to the situation at these times, we do the presentation this way this year -- or today.

The agenda for this morning's presentation is, first, summary of the quarter; and then secondly, the financials -- secondly, the segment information and the financials and ESG; and then finally, the outlook (inaudible).

First, a small update on the corona situation. The situation has been very serious for the industry and also for Bakkafrost, but we are in a good position to handle it. Our operations in the Faroe Islands have been up running with full capacity during the whole period. In Scotland, we have all operations running. However, processing have been running with lower capacity.

None of our employees in the Faroe Islands or Scotland have been confirmed positive. However, some have been in quarantine due to family and other relationships. All of our Faroese employees have been screened for COVID-19, and none have been found positive. We will continue the screening program, as the society reopens, to mitigate the risk during this process.

In this quarter, Bakkafrost harvested 10,667 tonnes in the Faroe Islands compared with 13,707 the same period last year. The harvest in Scotland in this quarter amounted to 7,268 tonnes. And the feed sales in this quarter was 19,123 tonnes compared with 16,264 last year. The sourcing of raw material this quarter was 64,807 tonnes compared with 115,530 tonnes last year.

The revenues for the company was DKK 1.255 billion compared with DKK 964 million last year. And the operational EBIT amounted to DKK 248 million compared with DKK 268 million last year. The cash flow from operations amounted to DKK 365 million in the quarter compared with DKK 77 million last year. There were positive operational EBIT for the farming segment in the Faroe Islands, Scotland and for the FOF segment; and negative operational EBIT for the VAP segment.

Now then the summary, a brief summary for the financial numbers in the first quarter. The margin increased from NOK 21.99 up to NOK 25.10 in this quarter compared with last year. The farming -- the clean farming margin was increased from NOK 21.86, up to NOK 26.51 for the quarter. In Scotland, we had a farming margin of NOK 5.7.

Last year, it was not a part of our operations. The clean VAP margin went down from NOK 0.37 per kilo, down to minus NOK 2.78 per kilo. And the FOF margin was reduced from 23% down to 13%.

Then a brief look into the markets and sales in this quarter. The interruptions in the salmon market during the first quarter because of the COVID-19 pandemic are very clear in our numbers. Sales to Western Europe from Faroe Islands increased from 50% to 52%, and 91% of the sales from our Scottish operations went to Western Europe. The sales were very highly driven by a strong retail market. Consumers seem to have switched from Horeca to retail. The supermarkets in many regions reported a record-high sale in March, the biggest month of take-home grocery shopping ever seen, even bigger than Christmas.

In North America, sales of salmon from Bakkafrost Faroe Islands increased from 23% to 28% of total sales in the first quarter, and from 31% of fresh to 48% of fresh salmon. This makes U.S.A. the biggest market for fresh salmon from Bakkafrost in this quarter.

The food service share of the U.S. market for salmon is estimated to be around 50%, and some say 60%. This segment has been very hard hit globally by the pandemic. However, many have now converted their operations to takeaway delivery and slowly increasing volumes again.

The markets in Asia were the first to take the hit by the COVID-19 pandemic. The Chinese market were already affected by the end of January. And after the Chinese New Year, which was expected to last until 2nd of February, the lockdown was prolonged for weeks and the markets were closed. The Chinese markets reopened in March, and then they were hit by a tsunami of salmon as markets in Europe and U.S. were closed down. From Bakkafrost Faroe Islands, sales to the Chinese market dropped from a share of 24% in the first quarter 2019 down to 14% in this quarter. Of the fresh sales, the drop was from 37% down to 21%.

The share of VAP operations in this quarter accounted for 51% of the quantity of salmon in Faroese operations. This is up from 34% last year. In times like these, we see the strength in our integrated value chain and in particular, having significant production capacity and flexibility in our VAP segment.

Swiftly, we have been able to shift volumes from the spot-oriented market towards the VAP segment for the retail market and hereby maintained a high production. Of the sales in this quarter, 51% were in the VAP, and in Scotland that number was 25%. For the rest of the year, we expect at the moment for around 40% to be sold in the VAP segment, and in Scotland around 25%.

If we look at the global markets, we see that during the quarter, there has been a reduced salmon price, from around NOK 80 by the beginning of the quarter down to a level of around NOK 55. The average spot price increased compared with the same period last year, at least when we calculate in Norwegian kroner. There is, however, a significant FX effect, as the markets don't pay in Norwegian kroner but in euro and U.S. dollars.

So measured in Norwegian kroner, the increase is 11% year-on-year, NOK 6.91, and 20% measured quarter-on-quarter, but as the graph in left side below shows, the FX effect has an effect during the quarter of around 25%.

The impact from the Horeca segment is very clear, especially from mid of the quarter, during -- up to the end of the quarter. This segment normally accounts for around 45% of the global market and has been closed for a long time and big uncertainties are still when it reopens.

Therefore, many channels have been closed for product flow to consumers. In China, they have partly reopened after 2 months close, and the capacity is, however, lower than pre corona. In Europe, they are -- have been closed since early March. And in U.S. they have been shut down since mid-March.

The retail segment is booming since early March, and Bakkafrost has been able to redirect volumes to the segment from our operations with the high capacity available. Consumers seem to have shifted from Horeca to retail. Challenge is -- for the industry is to shift supply from food service to retail capacity of -- and packaging material, setting up new product lines specifications, et cetera.

So there have been a limited flow of products to the consumers during this period. It will be very interesting to see if the huge number of new customers, new consumers buying salmon from supermarkets will be part of the increased demand for salmon when the Horeca segment reopens during the next coming weeks or months.

If we look at the development on the supply side. We see a global increase in this quarter on 2.3% on the supply side. Europe, however, reduced their supply volumes by 1.9%. Americas increased their supply on 8.2%. And this is the growth is mainly from Chile and from Norway. The Chilean harvest weight in this quarter ended 4.55 kilos compared with 4.6 last year.

The Norwegian harvest weight in this quarter ended 4.39 compared with 4.36 last year. In Scotland, the average harvest weight was 3.8 compared with 4.1 last year. In Faroe Islands, the average harvest weight for whole Faroe Islands was 5.2 compared with 5.3 last year.

If you look at the demand side, we see that the global demand increased 0.4% in this quarter, some 2,300 tonnes and the difference between those 2 sites are inventories and movements. The biggest changes, as we see here, is in China and Asia, where the drop is evident, related to the COVID-19 epidemic.

The issues in China was both the closed markets but also the availability of commercial airline transport, low availability and we saw that commercial passenger air traffic was reduced by around 80%. So there is obviously much lower availability, but there's also a huge cost impact by the situation on global transport by air. The prices during this period have doubled and tripled in some markets.

So the changes in this period is that the European market increased 2%, 4,700 tonnes; and the U.S. market increased 5%, 6,000 tonnes. And the drop was then mainly in the Chinese market, with 8,500 tonnes reduced supply and demand.

If we you look at the supply situation for the next quarters. There is a clear trend for the next quarters, with an increased supply from the European site. From a drop in the first quarter on 2%, we see now an increase of around 2% in the second quarter, which rises up to around 5% to 6% in the third quarter.

And then this takes off again by the end of the year, in the fourth quarter, and into the first quarter next year, where we are close to 0 again. This can, of course, change according to the pattern in the market where suppliers see an improved market later on or earlier, depending on how they see the market situation.

In the Americas there is, however, a more flat development where the first quarter was -- where we saw a growth on around 7%. And this drops down to more or less a very low growth, 2% to 3%, during the next coming quarters and down to minus 3%, 4% in the first quarter next year. So the global supply is expected to be in the very low single-digit growth terms for the next quarters, up to maximum 4% to 5% during the summer and the autumn and then dropping down to 0 in the first quarter next year.

So then our segments. Faroe Islands. We reduced our volumes compared with last year. The split between our areas here is that, in this quarter, we started in January by harvesting in Suduroy and all the fish in the South region was harvested in January, and all the fish in the West region was harvested also in January. All the fish from the North region was harvested in February and March.

The average weight of our harvested fish was 4 -- 5.2 kilos, which is good and in line with last year, 600 gram ahead of the first quarter 2018; significant improved growth rates on the harvested fish, both measured in SGR and TGC. FCR, also very strong, average [1.08] compared with [1.18] last year.

In Scotland, the harvest is 61% from North and 39% from South. There is high cost on the fish, and this will also continue in the second quarter. However, we expect the cost to come down in the second half of this year. Average weight of this fish is 4.0, down from 4.4 in the first quarter last year.

We transferred 2.3 million smolts in Faroes at 309 gram in average compared with 1.7 million last year at 211 gram, last year. Our hatcheries have doubled the production volume in the first quarter this year compared with 2 years ago. 2 years ago, we transferred 536 tonnes and this first quarter, this is 1,042 tonnes. In Scotland, 1 million were transferred at an average weight of 99 gram. This is down from 2.5 million last year.

The operational performance in the Faroe Islands in this quarter was an EBIT of DKK 203 million from the farming segment, down from DKK 230 million last year. However, the EBITDA (sic) [EBIT] margin increased from 30% to 32% and the operational revenues came down from DKK 755 million to DKK 633 million. In Scotland, we have a much lower margin, which is mainly due to the higher costs of the production, which will continue in the second quarter but come down in the second half of this year.

In Faroe Islands, the loss of fish in the severe storm that hit the Faroe Islands late February caused a financial loss that has been accounted for in the first quarter. So this took the EBIT down from NOK 29.58, down to NOK 26.51 per kilo. The cost of this, which was not covered by the insurance, is DKK 23.5 million, which has been accounted for in this quarter.

The West and South accounted for 41% of the total volume, and this was harvested in January. We see that the margin in South was NOK 38.47 per kilo, and in the West, NOK 38.85 and this is mainly due to the timing of the harvest. The North in Faroes had a margin of NOK 17.94, and this fish was harvested in February and March.

In Scotland, the margin is NOK 5.7 per kilo for the whole segment. The average weight in South was 6.5 kilos, head on gutted. In West, it was 5.26. In North, it was 4.9, and in Scotland, the average harvest weight was 4 kilos.

The Scottish operations are on track with our plans. The integration is going as expected. We expect costs to be stable for the first half year and gradually decrease during the second half. The mortality numbers have improved, are stable, still relatively high. There have been nonmaterial events in the operations. However, we have improved our growth rates in the quarter, and the FCR is stable.

We are investing in people, Provenance and [freight]. We are upgrading facilities. We are in the process now to increase our investments in hatcheries. And the first one on the agenda is Applecross, the Applecross hatchery, where an investment is undergoing and will be expanded significantly to improve and to increase the capacity. We also improved the IT feed systems to secure better connectivity.

There are also other investments this year, especially in the processing, to secure the capacity needed for the year. On the operations, high focus is on biology and to improve the KPI on operations. We are about to start feeding the fish with our own feed these days.

The integration between leadership group have been successful and very positive so far. In order to mitigate the issues with COVID-19, there are frequent meeting activity on teams across of the leadership groups and through the organizations.

The value-added segment increased operations from 4,689 tonnes to 5,408 tonnes raw material, head on gutted equivalents. The revenue increased from DKK 261 million to DKK 274 million in the quarter compared with last year. Spot prices in January and February were very high, and this dominates the numbers for the quarter.

The EBIT fell from DKK 1 million, down to minus DKK 11 million, which is equivalent to minus NOK 2.78 per kilo. The share of harvested salmon in Faroes increased from 34%, up to 51% and we have signed contracts for around 40% of the expected harvested volume in 2020.

From mid-March and onwards, there has been an explosion in demand on vacuum-packed and skin-packed ready meals in salmon from the retail segment. In these corona times, consumers seem to have switched to sourced food from supermarkets, from Horeca to retail. This change in consumer habit have brought challenges to the industry to find the capacity for a shift in the supply chain.

It is a huge logistical operation to move volumes from Horeca segment to the retail segment; to set up more capacity when -- with packaging material, new product specifications, et cetera. The constraint has limited the flow of products to consumers somehow and created big market disruptions.

At Bakkafrost, we have had good capacity in our new factory here in Glyvrar, where we have been able to redirect big volumes to the retail segment from mid-March and boosted production significantly. The retail segment accounts normally for around 55% of global sales, whereof part is finished wrapped products in consumer packs.

Retailers have reported sales in the latest months above the record high ever. The operations in Havsbrún in this quarter had a reduction in raw material intake, which is the main reason for the drop in our margins.

The margin dropped from 23% down to 19% -- down to 13%. The EBITDA came down from DKK 65 million, down to DKK 40 million. The revenues increased, however, from DKK 283 million down -- up to DKK 310 million, mainly due to the increased volumes of feed, which increased from 16,264 up to 19,123.

The share of feed sold externally doubled. The increase of feed sold internally increased slightly. Mainly due to the bad weather in January and February, we were not able to source the volumes that we normally do. We expect the season here in the second quarter to improve slightly these numbers, so that the blue whiting, that normally is catched early in the year, will be catched later in the year.

Looking at the feed sales, we see that these increased 18% in the quarter, which was mainly due to the external feed sale and the external feed sales went up from 2,300, up to 4,800 tonnes. There were also an increased sale of fishmeal in this quarter. The prices of fishmeal and oil have been increasing during all last year but went down in the second half of last year. Still the fishmeal price is rather low when -- but the fish oil price is -- has been increased.

And now Høgni will take us through the financials.

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Høgni Dahl Jakobsen, P/F Bakkafrost - CFO [2]

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Thank you, Regin. Yes, I will give you a short update on the financial development in the group and also a brief update on our ESG agenda.

So looking at the P&L first and foremost. As Regin mentioned, we have had an increase in revenue in this quarter, so that we are up at -- we had total revenue for the group at DKK 1.3 billion, roughly speaking, but we need to have in mind that in this quarter, we have contribution from the Scottish operation, which we did not have in the first quarter of 2019.

So if we only look at the Faroese numbers, our revenue in the Faroe Islands were DKK 843 million, which is less than the DKK 964 million we had in the first quarter of last year. The same goes for the operational EBIT, which was DKK 248 million in this quarter, whereof DKK 218 million is out of the Faroese operation.

As Regin also mentioned, spot prices dropped radically towards the end of the quarter, so we have in this quarter, quite significant negative fair value adjustment of the biomass, amounting to DKK 411 million.

Revenue tax, we paid less revenue tax in this quarter, amounting to 19 -- minus DKK 19 million and taxes were positive at DKK 33 million in this quarter. And that leaves us with our profit after tax of -- or rather a loss after tax of DKK 148 million in this quarter. And the operational EBIT margin for the group as a whole is 19.8% in this quarter.

And if we compare this quarter to previous quarters in regards to operational EBIT, in this quarter, we are at DKK 248 million. That's slightly below the 2 first quarters of the 2 previous years in 2019 and 2018, where we were at DKK 268 million. And looking at the adjusted EPS, in this quarter, we had adjusted EPS of DKK 3.19, which is lower than the previous quarters that we have had.

Moving on to the balance sheet. So comparing to the year-end 2019, our intangible assets were more or less unchanged, amounting to roughly DKK 4.4 billion. During this quarter, we made investments in property, plant and equipment amounting to DKK 101 million, leaving the balance at the end of the quarter at roughly DKK 3.8 billion.

And the biological assets amounted to roughly DKK 1.5 billion, significantly reduced by the fair value adjustment and inventories were down with DKK 25 million during this quarter. Receivables, more or less unchanged, amounting to DKK 629 million; and a cash and cash equivalent amounting to DKK 801 million.

Equity in this quarter amounts -- by the end of this quarter amounts to 8.4 billion (sic) [DKK 8.1 billion]. And our net interest-bearing debt was slightly improved by DKK 30 million and now amounts to DKK 988 million. And the equity ratio out of this quarter was 66%, and total assets amounting to roughly DKK 12.3 billion.

Looking at the cash flow. In this quarter, we had a positive cash flow of DKK 365 million from operations. And we made -- and then we have a negative cash flow from investments amounting to 106 million (sic) [DKK 101 million] and cash flow from financing amounting to DKK 772 million. In regards to the cash flow from financing, we acquired the last remaining shares of The Scottish Salmon Company in this quarter as well, and that amounted to DKK 168 million.

Looking at liquidity and net interest-bearing debt, how that has evolved during this quarter. We left last quarter with a net interest-bearing debt of DKK 1.018 billion and made investments amounting to DKK 101 million and acquired the minorities of The Scottish Salmon Company's amounting to DKK 168 million, so that increased our net interest-bearing debt throughout the quarter. And then we have had a reduction caused by the cash flow from operations and the cash -- and the working capital reductions.

And financing, in December last year, we refinanced the entire group and ensured bank facilities amounting to EUR 352 million, and GBP 100 million for the operation in Scotland. And at the end of this quarter, we have undrawn credit facilities of roughly DKK 2.5 billion, which is on the same level as in the last quarter.

Sustainability and ESG is very important for us at Bakkafrost, so -- and we just want to give you a brief update on the progress that we have made throughout this quarter.

In this quarter, we released our third annual sustainability report and in that -- that's available on our website. And there you can see a more detailed explanation of the progress that we have made but also some new commitments that we have made in this quarter in regards to sustainability. Worth mentioning is our very ambitious and also science-based targets that we have set for reducing CO2 emissions.

And speaking of energy and CO2 emission, we are also happy to see that the biogas plant is now in operation. We have in -- by the end of this quarter, we have received 5,000 tonne of manure for the biogas plant. It's still not producing energy, but we expect that to happen during the summer months, so in next quarter, we will probably be able to tell you how much CO2 we have saved and how much energy we have produced out of the biogas plant.

We also made progress on our ASC certification. So we have now -- 15 of our farming sites in the Faroe Islands are now ASC certified. We also made progress in regards to increasing our salmon -- or the average weight of the smolts that we release. So in -- of the 2.3 million smolts that we released in the Faroe Islands during this quarter, the average weight was 309 gram. And comparing to last year, first quarter of last year, that was 211 gram, so we are almost 100 gram up. And the year before, the average weight was 152 grams. So we are definitely moving in the right direction in that regards.

And as Regin also mentioned, we have initiated this screening program for our employees in the Faroe Islands in order to ensure their health and safety. So all our employees in the Faroe Islands are offered free screening for COVID-19, the COVID-19 virus. And the week before last week, we completed over 800 tests and all being negative.

Okay, thank you.

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [3]

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Going to the outlook for Bakkafrost and the market as a whole. The most important is the market situation, which is quite stable on volumes. The growth in 2020 is around 2% to 4%, and with European suppliers, it's maybe up to around 4%. Of -- in the Americas, the growth is coming down and will be now only between 0% and 2% for the coming quarters from 10% last quarter.

The guidance for our farming is now for 2020 total 89,000 tonnes, whereof 50,000 are from Faroes and 39,000 from Scotland. The Faroese guidance has been taken down due to the storm accident in February. And we expect to release 15 million smolts in the Faroe Islands this year and 10.7 million smolts in Scotland. We expect the size of smolt in Faroe Islands to be somewhat around 300 gram or somewhere -- below 300 gram for the whole year in average.

The VAP. The present situation with the global pandemic and the huge market disruptions has once again showed the importance of a multi-market strategy, based on a long value chain. I believe the retail market will be strong for the next months and quarters, as demand is extremely strong. Our long-term strategy is to sell around 40% to 50% of the harvested volume in the Faroe Islands at fixed-price contracts from value-added products.

The fishmeal, oil and feed will this year produce more feed. We expect to source some of our own feed in Scotland, but the raw material situation is more difficult this year, both as we saw the storm in January and February and the bad weather, but also with less availability of fish. So we expect slightly lower raw materials for that operation.

Farmed salmon's widespread and year-around availability means that more people than ever before are enjoying salmon. While we have had to deal with unexpected challenges, for example, adapting to changing markets, moving from food service to retail, this event reminds us that we are offering a product which is playing a central role in many diets around the world. And we have continued responsibility to ensure that products are farmed sustainably.

In this spirit, we are continuing to pursue the growth case to build a capacity to farm 100,000 tonnes in the Faroe Islands and to create a similar sustainable growth case in Scotland. The construction of the new hatchery in Nordtoftir, and with an additional capacity of 12,000 cubic meters, has now started and will be in operation in 2 years' time from now.

A similar project will start later this year in Glyvradalur, around 13,000 cubic meters; and an additional project in Applecross, Scotland, around 15,000 cubic meters. Both of these will also be in operation around 2 years after construction start. These 2 are post-smolt facilities to grow large smolts. Bakkafrost has also signed a contract with Sefine yard in Turkey to build a new 7,000-cubic-meter wellboat to be able to be in our operations 2 years from now.

All these investments are within the plan that has been communicated to the market and are described further on Page 37 in the presentation. The investments in the Faroe Islands are expected to be around DKK 1.8 billion in the period 2020 to '22 and around DKK 350 million per year in Scotland for the next 4 years.

And now I'm ready to take any questions you might have.

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Questions and Answers

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Stein Alexander Aukner, DNB Markets, Research Division - Senior Analyst [1]

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So it's Alex Aukner from DNB. Should we expect realized price closer to the spot price, as long as the COVID-19 situation lasts? Or are you able to achieve the same price premium in retail as we did in the Horeca market?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [2]

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That's a good question. That's a very good question. There is a big -- there has been a big market disruption during this period and the market and sales are planned, more or less, day by day, so it's very important to have flexibility, which is exactly what the VAP operations gives us. So I guess that the answer is very much related on how the markets will reopen over the next coming weeks and months.

There are signs in the markets that they are reopening and that also the Horeca segment has been adapting to the situation, especially by changing some of their operations to takeaway instead of serving in house. That has already had some positive effect, but there is a very narrow balance in the market. So the difference between 3% too much salmon and 2% less availability is very important. The price seems to be very sensitive on volumes.

So I guess that, at least for a couple of months ahead of us, there will still be a pressure in the market, which will also affect our availability to achieve premium on those volumes. Was that okay, Alexander?

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Stein Alexander Aukner, DNB Markets, Research Division - Senior Analyst [3]

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Yes. I think that's as much as I can hope for.

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [4]

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Yes, yes. You can not get everything. Yes, anyone else?

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Kolbjørn Giskeødegård, Nordea Markets, Research Division - Director & Sector Coordinator [5]

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Kolbjørn Giskeødegård, Nordea Markets. A question on you're guiding for 40% contract share this year. Does that mean that -- is it 40% of your production which will be allocated to frozen portion and retail? Or is there any sales above those contracted volumes also going into frozen portions and the retail segments?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [6]

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Yes, exactly, yes. That's one of the development that has been quite clear in this -- during the last couple of weeks and the last 2 months, that there is a more -- there's a bigger flexibility in the market to take volumes with short notice. So there's a bigger share of shorter contracts, not for 6 months but adding on volumes.

So I mean to go 50% up in production from 1 week to next weeks is, of course, a result of very big increase in the demand from the segment. And this is the majority of this is, for our case, with the clients that we already have, meaning that their operations have increased significantly. So -- and that's both with existing products but also with new products. So that's -- I will say that's the positive side of this situation.

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Kolbjørn Giskeødegård, Nordea Markets, Research Division - Director & Sector Coordinator [7]

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Yes, but I think, when you say 40% -- let's say that's the sort of allocation right now, but does that mean that you are selling right now 60% in the -- as fresh fish in the spot market? Or are you selling more than the 40% as frozen also?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [8]

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At the moment, it is more. It is more because we are adding on, at the moment, every week. So that means that at the moment, we don't hold that number, but we expect -- at the moment, we hold around 40% and that -- but we add on something, at the moment, to this area, meaning that we could end even higher.

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Kolbjørn Giskeødegård, Nordea Markets, Research Division - Director & Sector Coordinator [9]

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Yes. Can you say something about the contract price levels? Are you so far able to maintain your previous levels, or do you see a pressure also downwards in accordance with the movements in the forward prices recently?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [10]

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As you know, there is, of course, a relationship between those 2 segments on the markets. There is -- however, there's a time lag. There's a time lag in the prices so that, when we see big spikes in the spot prices upwards and downwards, there is a time lag in the contracts and in the VAP prices. And we normally don't see the peak prices in the contracts either way, so -- but the trend follows normally with a time lag, yes. Anyone else...

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Lars Konrad Johnsen, Carnegie Investment Bank AB, Research Division - Research Analyst [11]

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Lars Johnsen from Carnegie. Just a quick question on the costs in Faroe Island, according to my estimates, around EUR 4.5 this quarter. And you said that operation was running good, I mean, in line with expectations. Is that a level we should kind of put into our estimates going into 2020, the rest of 2020 and into '21 as well? Or how do you think around that?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [12]

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Yes, that's a good question. There is -- for 2019, our cost development was quite stable. From quarter to quarter, there was up and down DKK 1 to DKK 2, and this is the same at the moment. Our costs are quite stable, at the same levels as before, also for this quarter.

And now I am talking about the operational costs in our operations. What has a big impact right now is the air transport. We have seen a significant rise of those costs here in March and even some in February, which has -- which is going -- which is continuing.

So the airborne fish at the moment is struggling with very, very high transport costs because of the reduced availability and, thereby, the higher costs, but I expect that our operations here in the Faroe Islands will continue with a stable development on the costs side. The -- we are building up capacity of 100,000 tonnes.

And some, a part of our value chain has already a significant extra capacity; for example, our VAP operations. I mean, last week, we did something like 660 tonnes of head on gutted into portions which is 50% higher than our average. So there is a big capacity available in some and parts of our value chain, which of course, has to be accounted for on the costs side.

And as long as we are running with reduced capacity utilization, there are some costs involved that is paid by a lower volume. And eventually, as we are increasing our operations, this will be even more efficient, but that's more on the long term as we, hopefully, will increase our volumes over next coming years. Was that okay, Lars?

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Lars Konrad Johnsen, Carnegie Investment Bank AB, Research Division - Research Analyst [13]

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Yes.

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [14]

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Very good. Anyone else?

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Christian Olsen Nordby, Kepler Cheuvreux, Research Division - Equity Research Analyst [15]

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Yes. Christian Nordby, Kepler Cheuvreux. I have a question for you regarding the bigger fish market that we're seeing right now. We're seeing that big fish premium is quite negative. And from before, we've seen that you have -- the biggest premium that Bakkafrost gets is, of course, from the brand and from the healthier fish and all that, but in right now, where the market is now in Q2, do you still see that you net get a premium to the Norwegian salmon price? That's question one. And question two is how much cost reduction do you think is fair to assume for Scotland in the second half.

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [16]

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Yes, well, when it comes to the premium, yes, we still obtain a premium on large fish. So the issue is more that the share of large fish has been reduced, and the cost of air transport is very high. So those are the big issues right now, but we still get a premium in the market where the fish is sold. And those -- that premium is still in line with normal -- has been normal.

The second question, about the costs in Scotland, well, I will guess that in the next year or so we hope to get a reduction, at least for GBP 1, in the cost price per kilo.

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Carl-Emil Kjølås Johannessen, Pareto Securities, Research Division - Analyst [17]

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Carl-Emil Johannessen, Pareto. Just one short question again on the VAP segment. With the spot prices we see now during Q2 and the contracts you have entered into with the retailers, what should we think about the margins that you will be able to obtain in the VAP segment? I guess, at least compared to Q1, you hope for some improvements?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [18]

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Yes. As you know, when we calculate our VAP segment, we always use the spot price as the cost base for the raw material intake. And on the revenue side, we use the contract price, so therefore, sometimes it's difficult to calculate, but we will normally use the forward price as the baseline for our calculations and add on 10% margin. So that's how we calculate it.

So depending on the development in spot price compared with the development on the forward price, that will have the impact on the results. I expect that the VAP segment will be positive for Bakkafrost for the next coming months and quarters. The most difficult thing to estimate at the moment is how the customers' behavior will be in the future.

Will the customers' behavior be exactly as it was pre corona, or will there be a new type of behavior after this corona? Will people still buy more in supermarkets? And will they still prefer fish which are prepacked, closed for bacterias and virus, which seems to be the case at the moment, driving a big demand? So those are the questions which will also have a big impact in the future and will be drivers for this question. Anyone else?

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Martin Kaland, ABG Sundal Collier Holding ASA, Research Division - Analyst [19]

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Martin Kaland, ABG Sundal Collier. I have a couple of questions related to volumes, harvest volumes. Number one, what is the main driver by the increased guidance for Scotland? And for the Faroes, could the storm in February have an impact on the planned harvest for 2021?

And in more general terms, are you looking at changing the harvest profile throughout the year now after the COVID-19? And yes, in general, are you're able -- looking at possibilities to hold back volumes, for example?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [20]

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Okay, so the main driver in Scotland is actually that we want to produce larger fish. So we want to grow the fish more. And we see that, for example, in the first quarter, we have been successful in that strategy. So that's why we believe that we can increase the volume.

The storm in February had an impact on fish, which had the weight of 2.3, 2.4 kilos, and was expected to be sold in the second half of this year, in the third quarter and the fourth quarter. So the impact will mainly be -- is mainly in that period and not for 2021.

Changing profile harvest in general, holding back, of course, we always try to be flexible, as compared with the market development and the market situation, but in general, you cannot hold back for many, many weeks. You can hold back for a couple of weeks. So you can move some volumes over the New Year, for example, but not a big -- and we don't have a strategy at the moment to do so.

So at the moment, we follow the strategy and the plan on harvest that we have for the full year. We have a quite stable plan -- volumes. Originally, we had much more volumes in the third and fourth quarter, and now, with this setback, it's quite stable over the year, for the whole year, yes.

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Stein Alexander Aukner, DNB Markets, Research Division - Senior Analyst [21]

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Alexander at DNB again. Just you mentioned there's a surge in your retail customers. Is it possible to quantify this?

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Johan Regin Jacobsen, P/F Bakkafrost - CEO [22]

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No, it's not -- it's difficult, but I can just say, from our perspective, with our customer base, we see a significant surge in vacuum for more products. And I believe that, even if we could double our operations, we would have been able to do so for the last couple of -- for the last 2 months, but I think most retailers expect this to take off. But of course, this is probably new territory for all of us.

So if this is the same case for everyone, I guess that it's a proof that, if you say that 50% of the consumption of salmon is in retail normally and 50% will be from the Horeca segment, then it shows that the 50% from the Horeca has now been moved to retail. So people are buying from retail, but there is also studies and questionnaires that have been in the market showing that 50% of the clients in supermarkets or the customers buying salmon are buying for the first time.

So it means that somehow there are also new customers there, and it shows that salmon is a strong product. And this situation might also increase or expand the market going forward, but to quantify it, from our perspective, I can say that the base that we have seems to be -- have increased considerably.

Thank you very much.