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Edited Transcript of BAKKA.OL earnings conference call or presentation 5-Nov-19 7:00am GMT

Q3 2019 P/F Bakkafrost Earnings Presentation

Oslo Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of P/F Bakkafrost earnings conference call or presentation Tuesday, November 5, 2019 at 7:00:00am 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

* 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

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Presentation

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

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Good morning, everyone, and welcome to the Third Quarter 2019 Presentation of Bakkafrost Group. We will first look at the summary of the quarter, then the market and sales, segment information, group financials, and finally, some outlook for the company on the sector as a whole.

First, some highlights from the quarter. Bakkafrost harvested 12,934 tonnes (sic) [12,938 tonnes] in the third quarter compared with 7,217 tonnes last year, which was exceptionally low. Feed sales in the quarter were 33,874 tonnes compared with 23,468 tonnes last year. And raw material sourcing for Havsbrún was 17,845 tonnes compared with 7,496 tonnes last year. The revenues for the group in the quarter amounted to DKK 996 million compared with DKK 622 million last year. The operational EBIT for the group was DKK 303 million compared with DKK 168 million last year. The cash flow from operation amounted to DKK 779 million compared with DKK 324 million last year. Bakkafrost had positive margins from all segments in this quarter.

And if you look at the overview from the segments and the group, we saw -- we see a margin from the combined farming and VAP segment on NOK 26.25 compared with NOK 25.34 last year. The VAP margin increased to NOK 9.23 in the third quarter 2019 compared with NOK 2.49 in the third quarter 2018. The clean farming margin was NOK 23.61 compared with NOK 24.85. And the feed, oil and fishmeal margin decreased from 19.5% -- sorry, increased to 19.5% compared with 11.7% last year. The group operational EBIT was DKK 303 million compared with DKK 168 million. So this was an overview on the 3 segments in Bakkafrost in the third quarter. Year-to-date, the operational EBIT for the group is DKK 910 million.

If we go to the markets and the sales in this quarter, we see strong development, especially in the U.S. market. Sales to U.S. have from Bakkafrost increased very much in this quarter up to 23% of the total sales and 33 -- 32% of fresh salmon. So of the total sales, we have seen year-to-date 50% growth, and in the quarter, an 80% growth in the sales in the U.S. market.

Bakkafrost USA has had a good development during 2019, which is the first full year operations since the acquisition last year. We see this move to be important for our sales in the U.S. We see also in this quarter that sales to the Eastern European market has been 8% compared with 32% in the same quarter last year. And year-to-date, the total sales of salmon into Eastern Europe from Bakkafrost is only 5% compared with 32% in the first 9 months last year. So especially the U.S. market, which has had a good development, but we see also a good development in the EU market compared with last year. On the VAP segment on contract, we sold 29% in this quarter of the quantity. And we are starting to make contracts for next year.

The global markets for salmon have been, in this quarter, especially soft because of very high supply growth. During the quarter, there had been, a drop downward trend during the whole quarter. We started off in the third quarter around NOK 60 on an increasing trend and price up to NOK 65, and then we saw prices dropping down to some NOK 40 per kilo. So year-on-year, the drop on prices in average was from 55.31 down to 50.35, which is a drop of 4.96, nearly NOK 5 per kilo. Quarter-on-quarter, we see a drop on 13.67 from 64, down to 50 in average. So a significant drop in average prices for the quarter.

Looking at the growth in supply, which is indicated on the graph below. We see a very strong supply growth, especially in the month of September, where the growth of supply was very high. It was 26% growth on global supplies in September, which is also the explanation of the soft market in this month. The total growth in the third quarter was 70,000 tonnes of salmon coming out to the markets.

If you look at the supply side, we see that the growth from European suppliers was 15% from 340,000 up to 390,000 tonnes. In Norway, the average weight of harvested salmon was 4.2 kilo head on gutted, which is 1% down from last year. In U.K., the average weight of harvested fish was 4.5 kilo, which is up from 4.1 kilo last year. Seems like the operations in the U.K. have gone into the right direction in this quarter, less mortality and better performance. In Faroe Islands, the average weight for the region as a whole went up to 4 -- 5.3 kilos from 5.1 last year, slightly up. In Americas, mainly Chile, there was a growth on -- around 10%. The average weight in Chile was 4.9 kilos, up from 4.8 last year. And relatively good performance also on the supply side from Chile.

If you look at the market breakdown, we see a strong development in the European market and also in the U.S. market. Growth between 12% and 13% in the quarter and year-to-date between 5% and 6%. In Russia, there has been a stable development. In China, we see also a strong market. This week, there was a market seafood show in China, and we see great opportunities in China going forward. Overall, our growth on 13%. And as I mentioned earlier, 26% in September only, 26% is far too much in growth in the single month and is also the explanation on the soft market, especially during September. And this is, of course, related to biological issues and also the biomass cost range.

If you look at the market's outlook, we see that in the third quarter, the growth came much higher than expected. At my last presentation in August, we expected a growth in the third quarter around 6%, which also should be the level, if we look at the fish in the sea. But in the third quarter, we see that the growth came out at 13%. And that's also the reason why the growth in the fourth quarter should be even lower than anticipated earlier. So we have downscaled the growth in the fourth quarter, down to 3%. Of course, it depends on the development in the biology. But with the fish in the sea, this should be the outlook around 3% in the fourth quarter. And if you look into next year, it seems to be somewhere between 2% and up to 6% in the fourth quarter like next year. So the main changes this -- from August and now is that the third quarter was more supply. And the third quarter next year is scaled down from 4% down to 1%. Especially in Norway, there has been higher harvest take out in the third quarter. And that's also why we saw a downtrend in the average weight of harvested fish in Norway.

If we go to the segment information from Bakkafrost, we see that the harvested volumes from the North region was 3,651 tonnes and from the West region, 9,287 tonnes, combined 12,938 tonnes for the quarter. We expect to harvest 54,500 tonnes for the full year, which means that in the fourth quarter, we are harvesting 15,300 tonnes of salmon. The harvest in the third quarter increased significantly mainly because it was low last year because of the issues that we had 1 year earlier in biology in (inaudible), that was especially low last year. The average weight of harvested fish increased for Bakkafrost from 5.2 kilos last year to 5.3 -- 5.5 kilo this year, which is quite high -- higher than normal. We transferred 2.4 million smolts in the third quarter compared with 3.3 million last year. The temperatures in the sea are quite normal, 0.1 degree above last year. So no big changes there.

When we look at the operational performance from the farming division, we see a good development this year compared with last year and especially the large fish has been a big driver for this. The operational EBIT is 65% up from DKK 140 million to DKK 231 million. And the operational margin was 33% compared with 31% last year. The revenues increased from DKK 445 million, up to DKK 693 million in this quarter.

The operational EBIT decreased by NOK 1.24 from NOK 24.85 to NOK 23.61. The average weight for the West region was 5.79, so 5.8 kilos and from North 4.9. So the good development was, in this quarter, mainly driven by the West region and the West region harvested 5.8 kilos in average. But from Fuglafjørður 8.57. In Fuglafjørður, we harvested actually 5,000 tonnes at 6.3 kilos gutted weight. So this was very, very good. Very good operational performance, low mortality, good feed conversion rate, good growth and half of this site is strong into the fourth quarter as well to be harvested in October. 2,500 tonnes came from (inaudible) 8.71, and that was 4 point -- 5.4 kilos and a 19 Vágur came with 5.3 kilos. So all in all, the West region had a very, very good performance. North in this quarter had slightly lower operational performance. This came from (inaudible) 8.73, with an average weight of 4.9 kilos. There were some biological issues on this site during this quarter -- during this production, which resulted in less performance than the normal.

So all in all, it was a good -- a very good quarter. And the sea lice counts in this quarter on average came out at 0.28, 0.28 adult sea lice an average for all counts in the quarter compared with 0.4 last year. So significantly down. And there have been 0 chemical bath treatments in the quarter from Bakkafrost and also for the last 2 years.

Looking at the value-added products. We were also quite satisfied with the operations in this quarter increased revenues and also good operational performance. The EBIT was DKK 26 million compared with DKK 3 million last year. And the operational EBIT came out at NOK 9.23 per kilo compared with NOK 2.49 last year. Of course, this is a result of contracts compared with raw material sourcing at spot prices. Spot prices are low in the quarter. We think that value-added is good for Bakkafrost as a whole because it gives some stability in the operations and also usage of the smaller fish at contracts.

The fishmeal, oil and feed, FOF segment, had a strong quarter. We increased revenues from DKK 354 million to DKK 484 million. And the EBITDA increased from DKK 41 million to DKK 94 million. The margin went up from 12% to 19.5%. And the external sales, which are the lowest part of our sales increased. We sold more externally. And we see a good possibility to grow our feed operations going forward. We have good raw material availability in the Faroes for fishmeal and oil, for usage of our -- for our own feed with our own recipe. And this is also a significant part of our branding and the production of high-quality salmon. And we have at least 3x as much raw material available that we need for our own feed operation.

When we look at the raw material development, which is the graph below, we see that, that price trends have been slightly downwards during the last couple of months. And that means, of course, that the raw material sourcing is also -- prices are going slightly down, which is good for cost. On the feed, we see on the graph above that the quantities increased up to 33,874 tonnes, which is a big, big increase compared with last year and a very big increase also in the external sales. So that's good.

So now Høgni will present the group financials.

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

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Good morning, everyone. I will go through the group financials for you. As Regin mentioned earlier, revenues in this quarter were up around 60% and operational EBIT around 80% compared to the third quarter of 2018. So revenue operational revenue at DKK 996 million, and operational EBIT at DKK 303 million in this quarter.

Fair value adjustments were minus DKK 70 million due to lower salmon prices compared to plus DKK 293 million in the same quarter last year. We paid DKK 21 million in revenue tax, which is recognized as a cost, and DKK 42 million in corporate tax compared to DKK 78 million in the same quarter last year. Profit for the period was DKK 181 million compared to DKK 356 million in the same quarter last year. And the operational EBIT margin increased from 27.1% to 30.5% in this quarter. And operational EBIT per kilo for the combined farming and VAP segment increased from NOK 25.34 per kilo to NOK 26.25. And the operational -- now the EBITDA margin for the FOF segment increased from 11.7% to 19.5% in this quarter.

The development of operational EBIT on a quarterly basis for the past 5 years looks like this. We have -- this year, we have -- had a relatively stable operational EBIT for each quarter averaging DKK 303 million per quarter. So year-to-date totals are DKK 910 million for -- in regards to operational EBIT. And earnings per share year-to-date is at DKK 11.82.

Moving on to the balance sheet. Intangible assets were unchanged compared to the end year 2018 and amounted to DKK 390 million. In this quarter, we made investments of DKK 173 million in property, plant and equipment, which now amount to DKK 3.2 billion. Financial assets were DKK 494 million in this quarter compared to DKK 130 million at end of 2018 and that's primarily due to the acquisition of 9.2% of the shares in The Scottish Salmon Company, which we completed just before the end of the quarter.

Financial assets. Now the carrying amount of the biological assets were DKK 1.269 billion compared to DKK 1.358 billion by the end of 2018. Cash and cash equivalents were DKK 2.6 billion in this quarter, and that's primarily due to the capital raise that we did just before the end of the quarter. Equity were at DKK 6 billion roughly compared to DKK 4 billion in -- by the end of 2018. And long-term interest-bearing debt was at DKK 1.3 billion compared to DKK 812 billion (sic) [DKK 812 million]. Net interest-bearing debt at the end of the quarter was positive or a negative bearing -- net interest-bearing debt at DKK 1.271 billion.

The cash flow in this quarter from operations were DKK 779 million compared to DKK 324 million in the same quarter of 2018. The cash flow from investments minus DKK 544 million. As mentioned earlier, that is partly due to the acquisition of the 9.2% of The Scottish Salmon Company. And the cash flow from financing were DKK 2 billion compared to minus DKK 138 million in the same quarter last year. Net change in cash DKK 2.2 billion, and cash at the end of the period was at DKK 2.6 billion. And if we look at how the net interest-bearing debt has evolved through the quarter, we laid out from last quarter with a net interest-bearing debt of DKK 741 million. Net investments have added on to that with DKK 544 million, and then changes in working capital and changing -- changes in the cash flow from the operations have reduced the net interest-bearing debt with DKK 421 million and DKK 422 million, respectively. And then we have the proceeds from the capital increase of roughly DKK 1.7 billion, which has reduced the net interest-bearing debt further on, leaving us with a negative net interest-bearing debt of DKK 1.3 billion roughly by the end of this quarter. Our bank facilities are still at EUR 200 million, and we have undrawn loan facilities of roughly 1.5 billion.

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

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If we look at the outlook for the industry as a whole, we see -- we are coming from a quarter with 13% growth and 26% here in September, which is exceptional high, even higher than the 22% growth that we had in 2012 after the Chilean crisis. So we are coming from a very dramatic market situation into a more total different situation where there will be lack of salmon. We expect in the fourth quarter a growth around 3%. And for 2020, we expect a growth on around 4% of supply.

For Bakkafrost, we expect to harvest 54,500 tonnes this year, which means that 15,300 tonnes will be harvested in the fourth quarter. For next year, we guide on 57,000 tonnes. The breakdown between the quarters next year is that, as it looks at the moment, around 20% will be in the first quarter, around 30% in the second quarter, and then the third and fourth quarter will be around 25% each. That's the approximate split between the quarters next year. We postponed 800,000 tonnes -- 800,000 smolts, which were supposed to be stocked in (inaudible) in December. We have postponed them until end of February mainly because we have very good capacities now in our hatchery in Strond. And the growth in January because of bad weather conditions normally are very low. So in this case, it will be a better operational performance for us to have them in the land until end of February, and then stock them with the total stocking in February and March. So with -- this will give a better performance of our operations. So that's the reason why we made this move. And next year, we plan to stock 15 million smolts, all in all, for the full year.

For the VAP segment, we have around 40% of the sales in the fourth quarter contracted of the total volumes that Bakkafrost harvests. And for 2020, we have contracted 26% of our expected harvest volumes for the full year. Our strategy is that around 40% to 50% are on contracts, and this is then mainly from the VAP segments at fixed prices with end consumers or end customers. The feed sales are expected to reach 98,000 tonnes for this year, which is up from the guided quantity. And we expect 110,000 tonnes next year.

We are continuously focusing on developing the company with the growth plans that we have and the communicated investment plan that we had on our Capital Market Day in June, which has the goal to reach a capacity of 100,000 tonnes by 2023. So we are -- and we have a lot of projects on the line at the moment, starting up for big operations in hatcheries and broodstock that will start operations -- the first will start operations in 2 years from now.

This is our total investment program of DKK 2.5 billion that are invested for the years 2019 to '22, which means that we are maintaining more or less the same level of investments that we have been doing for the last couple of years. So we are investing approximately DKK 10 per kilo salmon that we are producing, so on a similar level as previous years. And we have good financial flexibility, and we recently did the acquisition of shares of The Scottish Salmon Company, which means that we now have 80 -- close to 81% of the shares. And hopefully, on Friday, we are making the mandatory offer for the rest of the shares. And hopefully, that will give us the rest of the shares within a short period. Thank you very much.

And if there are any questions, you are welcome. (inaudible) will give you. Kolbjørn, over here.

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Questions and Answers

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Kolbjørn Giskeødegård, Nordea Markets, Research Division - Director & Sector Coordinator [1]

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Kolbjørn Giskeødegård, Nordea Markets. One question on the contract level, you have already contracted 26% of the 2020 planned volume. Can you say anything about the level of the contracts you're -- I guess, you're negotiating right now in the market? As the recent fluctuation and rest in the market made it more challenging, do you see change in levels of contracts which you have to -- which you're entering into? And also, a question related to markets. You have a strong decline in Russia, which you also shown in previous presentations. Is it EU, which is sort of the main substitute for Russia now building up a similar segments there?

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

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Yes. First, the contract levels, I think the markets are already appreciating that there will be less salmon coming forward. So the market prices on contracts are on similar level as before. There will be less availability and that's -- I think, the market has appreciated that. So it's same -- similar levels as before. Regarding Russia, as you saw on the graph, the sales to Russia have declined significantly. Eastern Europe has only 5% of the total sales for the first 9 months of 2019 compared with 32% last year. In this quarter, it's 8% of the total sales compared with 32%. So yes, there is a significant drop in this market. And you see there's a slight growth in the EU, a big growth in U.S. and a slight growth in Asia.

So I think it's fair to say that it's a combination of growth in EU and the U.S. market. But you must also remember that last year, at this time, we had very low contract levels. And the contracts are -- a bigger share of the contracts are in the EU submarkets. And this year, we are much higher in contracts. So that's also the reason why you see -- if you look at the fresh only, you see that the growth in the EU is from 19 to 24, but if you see the total sales is from 27 to 45. That's because of the contracts. So I think it's fair to say that the answer to the question is that the substitute is EU combined with the U.S. market.

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Carl-Emil Kjølås Johannessen, Pareto Securities, Research Division - Analyst [3]

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Carl-Emil Johannessen, Pareto. Two questions. First on the quarter, it seems like your price shipments have been very good, which I expected with a very, very high average weights. But can you say something about how the costs have developed compared to Q2 and also compared to Q3 last year? And second question is regarding the smolt release for next year. Can you say something about the average weight on that smolt and also how it will be distributed throughout the year, and then kind of when will the big numbers be or will it be quite evenly spread out?

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

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Yes. Yes, you are right. The price achievement were fantastic in the quarter. And the reason was that we were very lucky with big size and very good operations from the best segment in the quarter. So we were protected from this part of the market. And the smaller fish we had on contracts with our (inaudible). So that's, I see -- I'm quite happy with the numbers because I see that we have been protected from the the biggest storms in the market in the quarter. The average weight of the fish was big. So the fish that we had to sell in the spot market was mainly big fish. 6.7, 7.8, 8.9 and 9 plus, and that's been a total different market. And we have a very good diversification of our sales globally, which means that -- plus that's been a competitive advantage in the quarter. Well, you'd see -- look at the costs in the quarter, we see there's a spread. (inaudible) was slightly higher than the average DKK 3 maybe. And for example, Fuglafjørður was 3 kroner lower than the average and Vágur had also low cost. So all in all, the average cost is slightly down, but especially Fuglafjørður and Vágur had very, very low cost compared with the average.

And if you look at the trend, you also mentioned last year. If you look at the trend on cost, the cost of the 2018 generation that we are harvesting now is lower than the 2017 generation and also slightly lower than the 2016 generation. So there has been a falling trend of costs June this year, and this trend seem to continue at the moment. Of course, feed is important. But year-to-date, our mortality rate is the lowest for the last 5 years, around 5% to 6%. And the growth rate is the best. For 2018 generation, the growth rate is the best ever. When it comes to smolt next year, we guide on 15 million. And we expect -- this year, we expect the average rate to be around 220 gram. Next year, we hope to reach above 300 gram. I can't remember if it was 320 or something like that.

And then you asked about the distribution. Now you asked for a lot of details. I'm not quite sure about the distribution at the moment. But I expect it to be slightly lower in the first quarter. But in March, there will be a high smolt weight and then probably a bit even for the rest of the year.

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Carl-Emil Kjølås Johannessen, Pareto Securities, Research Division - Analyst [5]

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And for the fish that you has postponed now from Q4 to Q1 next year. What are you kind of fish -- hoping to achieve an average weight when you put that fish into the sea?

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

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Yes, that's a natural question. Of course, when they are longer in the hatchery, they will be larger. And now we have better capacity to grow the fish bigger because now Strond is close to full operation. And there has been a scale-up of the production there. And there will, of course, also be a scale-up during next year. But hopefully, this fish will reach 300 gram at least.

Yes, any other?

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Lars Konrad Johnsen, Carnegie Investment Bank AB, Research Division - Research Analyst [7]

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Lars Johnsen, Carnegie. When you look at (inaudible) and U.S. right now, you have a couple of -- let's put it that way, some tensions. And also, you say that price achievements for the larger-sized fish was high in the third quarter. If you look into fourth quarter now, could you say something about your expectations for your price achievement and how the market develops in terms of how do you actually see volumes going over the fourth quarter now.

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

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Yes, we expect lower volumes in the fourth quarter from the supply side. Of course, this is always driven -- or when there are unexpected supplies, it's driven by biology challenges. And especially here in October that have in the beginning of -- or June or October, there have been still ongoing operational challenges with biology. And now we have seen some issues in Chile. So there have been, on one side, constraint in supplies from Chile. On the other side, high supplies from Norway. So there are different market reactions from the different areas.

For example, in the U.S., we have seen some markets not being supplied and that's not good. On the other hand, in Europe, and the markets close to Norway, there have been very high supplies. So it has been a difficult market also in October. We expect that there should be a drop of the supplies, as there are less and less fish available. This has not been the case yet. But we expect that this period will come to an end with too many fish in the market because less will be available going forward.

We have also seen that there have been more big fish available in the market now. There have been very good growth conditions also in Norway. So the extra margin on bigger fish have diminished during October. But still, it's much, much better than the smaller fish. Expectations on prices for the fourth quarter is, of course, difficult to predict. It's always difficult to predict prices. So normally, we tend to look at the forward market and stick to that. And that's the best guidance we can give. But as it's, of course, the drivers for this is the availability of fish in the market. On the ability of farmers to supply stable, good quality fish into the market. That's what grows the market, a reliable, good supplier of salmon every week in the year. So that's what we try to do all the time and produce good, healthy fish.

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Martin Kaland, ABG Sundal Collier Holding ASA, Research Division - Analyst [9]

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Martin Kaland, ABG. What is the main driver for the strong feed sales guidance? And I guess, your own volume growth could explain parts of this, but have you entered into more external contracts, for example?

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

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Yes. Of course, as we are growing our own operations, we are using more feed. And that's a part of the growth, but we have also obtained some external sales around Faroes. And of course, next year, we hope that our internal usage in Scotland will also contribute. So that's also part of the growth expected for next year. Not the full quantity because there are contracts to be respected.

Anything else? No? Then thank you very much for coming.