Q3 2019 SalMar ASA Earnings Presentation
Oslo Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of SalMar ASA earnings conference call or presentation Thursday, November 14, 2019 at 9:00:00am GMT
TEXT version of Transcript
* Gustav Magnar Witzøe
SalMar ASA - Co-Founder, President & CEO
* Trine Sæther Romuld
SalMar ASA - COO & CFO
Gustav Magnar Witzøe, SalMar ASA - Co-Founder, President & CEO 
On behalf of Trine and myself, welcome to the third quarter presentation of SalMar.
The agenda. Highlights, I will take that. Operational update and financial update, it will be done by Trine. And in the end, I'll take the outlook.
First, my name is Gustav Witzøe, and I have been a part of the management in SalMar since 1991. And through this, I have had the honor to be a part of an incredible journey. And together with wonderful colleagues, we have built a unique company with a strong winning culture.
The period since I took over the role of CEO, 21st of October this year, has been challenging but also inspiring. Because of this culture, we want to be better. It has been a lot to look into. But with 1,600 employees, fantastic employees, which do most of the work, I don't have much to complain about. But every day I think of the important postulate within SalMar: What we do today, we do better than yesterday.
In SalMar, we should be a little different. We shall dare a little more, move faster and get up a little earlier in the morning. We shall dare to challenge the status quo and find better solutions, and leading such a company fills me with motivation and energy.
There are a lot of good things in SalMar, but we have the potential to be much better. Having been in SalMar since 1991, I know where we can improve. There are fantastic opportunities ahead. But the industry has become more complicated since 1991 when I start, and there is other action that need to be taken now than before.
The largest strategic move we currently made in SalMar is to divide direction of salmon production in the sea. We have the coastal areas that will continue to be the core of SalMar production in the coming years, in the areas we will still be at the forefront with a strong focus on cost and desire to always do things a little better than tomorrow.
We will also seek attractive growth opportunities based on the environment and climate, the green's gift and which to take part of the increased growth that has been announced in green areas in the spring of 2020, provide that I can -- it can happen in a commercial, acceptable terms.
In addition, SalMar wants to lead the development of offshore farming, utilizing the fantastic ocean with production on the salmon's terms, not the limitation of the equipment. We will strengthen the work through the newly founded company, SalMar Ocean. We achieved good biologic results at the Ocean Farm 1 and harvest the fish of fantastic quality. For us, this was a major milestone, and it was confirmed that offshore farming truly is a sustainable production on the terms of the salmon.
Through our experience with Ocean Farm 1, we are ready for the next step, Smart Fish Farm, where the project continue according to plan. SalMar believes that there are a great potential for offshore salmon farming along the Norwegian coast, out in the ocean current and outside the negative implication of the coastal current where there are large areas, which provide great opportunities for significant substantial growth for the Norwegian aquaculture industry. SalMar aim to lead this development and believe that most of our volume growth will come from this area in the time ahead.
But in SalMar, we have strength opportunities -- strategic opportunities throughout the value chain. As mentioned, SalMar will be even more hungry going forward. Therefore, we have taken a number of steps to decrease costs by fine-tuning details while also making significant investments in technology and capacity, especially within biology and sales at industry.
I want to start with a very weak results in Northern Norway, with the EBIT per kilo of NOK 1.08. Reason, fish that should never have been released in the sea, but due to the challenge with some stock on our small facilities, the fish was put in the sea too urgently. And when it was put in the sea, the fish should have been harvested out much earlier. And we will also optimize the organization in respect of production volumes.
The similar list is the reason we get a very weak result this quarter in Northern Norway. The results from Northern Norway is something we are extremely unhappy with. Cost leadership and being the best on biologic production is in the DNA of SalMar and something we shall be best-in-class at. The sites we have had challenge with or no harvesting out, and we will in the future harvest from the site that have better biological performance and significantly lower cost levels.
We are also well underway with several improvement projects to reverse the trend. A lot has already been implemented, which we know will improve the biological and economic results, both in the short and long term.
The investment we make within smolt, for example, Senja 2 will give us the best possible start point for our biological production with the right smolt, with the right quality at the right time, precisely to avoid such results we got in Northern Norway in the third quarter. Furthermore, in Northern Norway, we will work for new sites, better zone structure and get the organization adapted to the production volumes.
In Central Norway, we will look for continuous improvements, do things on the site-manager terms. And in addition, with the completion of Follafoss 2, we will have a much bigger weight. They have their right smolt to the right time. This will also reduce the need of external smolt that has not delivered results up to our standards.
In offshore farming, we have established ocean farming. There are other challenging with going offshore, and we need to build a specialized and focused organization to handle these new challenges. Within industry and sales, we will strengthen our focus to find the right salmon to the right customer. We will also increase our capacity on InnovaMar, Vikenco and complete InnovaNor. This will also better our distribution and bring better results. In addition, we are continuing to develop Arnarlax on Iceland.
In total, these are important strategic measures that will ensure that SalMar keeps its leading position within this industry with the aim of being most cost-effective and to ensure the best possible results, both in short, medium and long term.
If we look more directly on the third quarter 2019 results, we see that we have -- there was a mixed result for SalMar. Harvesting volume was 35,800 tonnes with an operational EBIT of NOK 614 million for the group, with a margin of NOK 17.12 per kilo. Norway harvested 33,500 tonnes with an operational EBIT of NOK 592 million, with a margin all in all of 16 point -- NOK 17.64 per kilo.
Operational performance, as expected in Central Norway. As mentioned, very weak results in Northern Norway, but sales and processing achieved good results on the back of the efficient operation and good allocation of volume in a challenging period with declining prices.
The guiding for 2019 is maintained at 155,000 tonnes, including contribution from Iceland, Arnarlax. Expect to harvest 152,000 tonnes in Norway and 10,000 tonnes in Iceland for 2020.
To give you more details on the results in the third quarter, I will now let Trine present the operational and financial update.
Trine Sæther Romuld, SalMar ASA - COO & CFO 
Thank you, Gustav. And then I will start to give you some comments to operational performance, starting with Farming Central Norway.
As you can see, we have harvested 28,100 tonnes in the period with an operational EBIT of NOK 544 million and EBIT per kilo, NOK 19.35. Result in the period is as expected, taking into account that we have a significant portion of the volume harvested in the late part of the quarter with a lower spot price. We have harvested most from the spring '18 generation. More or less 80% of the volume in the quarter is from the spring '18 generation, where we had stable biological performance and also production cost and in line with the previous quarter.
We also started to harvest from the '18 -- autumn '18 generation in the period at the end due to some sea lice challenges, which also resulted at a lower harvest weight, which again increased production cost and also the price in the market.
In quarter 4, we will continue to harvest from the spring '18 generation and also autumn '18 and expect in total somewhat lower volume and slightly higher cost due to another mix of what -- the spring and autumn '18 generation. For the 2019, we maintain the guiding for the year, which is 97,000 tonnes.
If we continue to the northern part of Norway. We did harvest 5,400 tonnes in the quarter with operational EBIT of NOK 6 million and EBIT per kilo of NOK 1.08. And this is very weak result, as Gustav also already have explained. And as communicated in the last quarterly presentation, we also told about the biological challenges due to CMS in the spring 2018 generation, and this has led to -- that we have harvested out at a lower harvest weight, down to maybe 3 kilos per -- as an average and also, again, reflecting in lower sales price in the market.
This, we also have a negative impact due to lower volume, harvested in volume, meaning that we have a fixed cost per kilo is higher. And also as mentioned earlier, also from this region, we have, of course, consequence of a big portion of the volume in the last part of the quarter with lower spot price in the market.
What's important here is really that we have harvested out everything from the sites with the biological challenges that was emptied out in September. And going forward, we will harvest from sites, which have significantly improved biological performance and significantly lower production cost. So therefore, in quarter 4, we expect higher volume and significantly lower production cost. And also for this region, we maintained the guiding for the year, which is unchanged there.
Sales and processing. We have EBIT NOK 102 million in the quarter, which is a strong result, and this is mainly driven by 3 factors. The price achievement during the quarter has been good due to good allocation of the volume. We had stable result from the harvesting and processing activities due to continued efficient operation. And the third, we also have a benefit from the contract share of 25% in the quarter.
The contract share for quarter 4 is about 20%, with the prices at the same level as previous -- this year. And again, as Gustav mentioned earlier, we are very happy that the construction work on this InnovaNor in -- up the north is on track and started the construction work in September and will be finished and start to be -- start in use in 2021.
Iceland. We did harvest 2,300 tonnes in the quarter with operational EBIT of NOK 22 million and EBIT per kilo NOK 9.64 (sic) [NOK 9.54]. Arnarlax continued its positive trend with stable results. We have had good price achievement during the period due to high average share weight, higher than 6 kilos, and also stable production cost of the '17 generation, which is harvested out in this quarter. We also -- a positive impact of the improved capacity utilization at the harvesting plant.
Smolt release in 2019 has been significantly better than previous years with lower mortality, and even more important, with no [BCD] issues. In quarter 4, we will continue to harvest from 17 generation, which we finalized during the period. And at the same time, we will start to harvest from the '18 generation.
We expect both cost and volume in the fourth quarter to be more or less at the same level, and guiding for 2019 is kept unchanged. It's still 10,000 tonnes. Also for next year, we expect to harvest about 10,000 tonnes. In Iceland, it's a bit longer production cycle, so we will need some more time to build biomass. We will continue to build biomass in 2020, and we will increase harvesting from 2021.
As you may have seen from a press release earlier today from Arnarlax, it's also -- it will be listed at the OTC starting tomorrow, November 15, which is a part of a shareholder agreement.
Finally, Norskott. Scottish Sea Farm harvest 10,000 tonnes in the quarter, where most of the volume come from Scotland. We had operational EBIT of NOK 27 million and EBIT per kilo, NOK 2.69. It's a very weak result from Scottish Sea Farm this quarter, and that is due to biological challenges on both Shetland and Scotland due to CMS, which has led to higher mortality harvested out on lower weights and also lower price achievements. On the Orkney, which is the third segment they have, they have performed well.
All sites with those biological issues, CMS, I mentioned, has been emptied and harvested out in September. And therefore, we expect lower cost, of course, in quarter 4. Due to the challenges we have had, we also reduced guiding for the year and reducing from 30,000 tonnes to 27,000 tonnes.
Then some comments of the financial performance this quarter. I will start with a high-level comparison from the previous quarter. If you only look into the Norwegian operation, we have a decrease in EBIT per kilo for NOK 7.30 in the quarter, and that is mainly due to the significant lower prices in the spot price in the quarter. It's actually down more or less NOK 12 quarter-to-quarter.
On the other side, lower prices has given increased margin on contracts. And that, together with good allocation of the volume as I mentioned earlier, has netted out some of the decrease in spot prices. We also have a contract share, as mentioned earlier, for this quarter, which has been positive. The cost in value chain slightly increased. That is related to -- mostly to the increased cost in Northern Norway, as explained earlier.
And if you look into total group, that is Norway plus Arnarlax, we see there more or less the same picture. The change is due to significantly lower spot price in the quarter compared to last quarter.
So comments to the P&L as well, where we compare this quarter to the same period last year. We see that we have a slightly lower volume, but revenue is stable even the spot prices has been lower. And that is due to, of course, increased marginal contracts, but also that we have included Arnarlax in this quarter. That was not included there in the last year, and that amounts to NOK 152 million in this quarter and NOK 462 million if you're comparing year-to-date.
If you're comparing to last quarter, quarter 3 last year, we also have very good -- very low production costs. So that is a natural explanation of the rationale from this year in combination with Arnarlax included this quarter versus last. Depreciation has increased, and that is due to Arnarlax, but also due to implementation of IFRS 16. So those are the 2 factors.
We have a fair value adjustment, as you can see from the table, and that is mostly due to lower prices, spot prices, forward prices. Contribution from associates, that's Scottish Sea Farm both years. And interest cost, also just mentioned that the increase is related to this IFRS 16. So if you're comparing group EBIT per kilo from same quarter last year, the main reduction is due to lower prices, as mentioned and, of course, the higher production cost.
Some few comments to the balance sheet. I'll compare the balance sheet to quarter 2. Investments, they are in line with the plan. We have some higher standing biomass, both in the number but also weight. That has increased current assets. However, the fair value adjustment have offset some of that increase. Interest-bearing debt is reduced with NOK 342 million in the quarter, and we end up with a net interest-bearing NOK 2.7 billion.
So to summarize, our balance sheet is very strong. We have solid balance sheet with equity 51.8%, and we have a net interest-bearing debt versus EBITDA lower than 1, actually at 0.7.
And also a high-level comparison explaining the change in net interest-bearing debt in the quarter, starting with quarter 2, and we are starting with the -- not to take into account the IFRS 16 adjustments. And the main elements for this quarter is, of course, the EBITDA, but also you see that we have increase in working capital. That's mostly related to building biomass. And we have spent some money on investment. And as also you can see from the comments, this is the net investment as we also have received from dividends from Norskott.
And then I will give the word back to Gustav.
Gustav Magnar Witzøe, SalMar ASA - Co-Founder, President & CEO 
So then we're back to the future and the outlook. In the fourth quarter, we expect a slightly -- a slight increase in volume and a cost as expected at the same level. We expect slightly lower volume and somewhat higher costs in Central Norway. But in the north part, it's a much higher volume and significantly lower cost level in the north part and cost and volume at the same level on Iceland.
Our contract share is around 20% for fourth quarter 2019. Investments program continues according to plan. And we see a significant potential in offshore fish farming where we have strengthened our activities through SalMar Ocean.
Guiding for 2019 is kept unchanging, and we accept 152,000 tonnes in Norway and 10,000 tonnes on Iceland, Arnarlax in 2020.
We still see good demand going forward and SalMar will be in position to offer sustainable, healthy protein to our customers in need.
And also is -- from my side, especially from my side, glad that I will invite you or host you at our CMD in 2020 at the company headquarter in Frøya, my home island. And more details and invitation will come during first quarter 2020.
Thank you very much.