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Edited Transcript of SALM.OL earnings conference call or presentation 23-Aug-19 8:00am GMT

Q2 2019 SalMar ASA Earnings Presentation

OSlo Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of SalMar ASA earnings conference call or presentation Friday, August 23, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Olav-Andreas Ervik

SalMar ASA - President & CEO

* Trine Sæther Romuld

SalMar ASA - COO & CFO

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Presentation

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Olav-Andreas Ervik, SalMar ASA - President & CEO [1]

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Good morning, everyone, and welcome to SalMar Q2 '19 Presentation. With me today, I have our new, CFO and COO, Trine Sæther Romuld, which will give us the financial update later on in the presentation. And I think she will start with presentation in more details herself when she's entering the podium.

We will follow the same agenda as in previous quarterly presentations.

Starting with highlights. We harvested 41,000 tonnes in the quarter, with a total operational EBIT of NOK 990 million for the group, with an EBIT of NOK 23.90.

Harvest volume from the Norwegian operation came in at 38,600 tonnes with an operational EBIT of NOK 964 million and a margin of NOK 24.94 per kilo. Strong operational performance in Central Norway, but somewhat weaker-than-expected in Northern Norway.

Sales and processing profitability has been affected by lower average weights or harvesting fish in Northern Norway. Full year guiding is maintained at 155,000 tonnes, including contribution from Iceland. No major changes during the period for our supply chain investment. We have started with the -- they continues according to plan.

And then the operational update, starting with Farming Central Norway. Harvest volume of 24,600 tonnes with an operational EBIT of NOK 730 million, and EBIT per kilo of NOK 29.73. Strong biological performance from the spring '18 generation in the period has given us strong results with lower costs and good price achievement.

As mentioned in the previous quarterly presentation, harvesting from autumn '17, generation was completed in April, and the main contribution to harvest volume comes from the spring '18 generation. We will continue harvesting of spring '18 generation in the third quarter and expect a slight increase in the volume with costs at the same level. Full year guiding has been increased to 97,000 tonnes. This is an increase of 2,000 tonnes compared to the level we communicated in the previous quarter. Northern Norway harvested 14,100 tonnes during the quarter with an operational EBIT of a NOK 307 million and NOK 21.80 per kilo. The result is weaker than expected, but this is due to preventive measures. We choose to take to reduce biological risk.

End of autumn 2017 generation was harvested somewhat earlier than planned as a preventive measure with regards to the algae bloom we experienced in late May. We have also had challenges on mainly one site with spring '18 generations, where we had a biological challenge due to CMS. The whole site has been greatly affected by this. And due to fish welfare, the site has been harvested out in June and July. Therefore, this will also affect the results in Q3.

In the short term, these actions we have taken will give us some negative economic effects by leading to lower average weights, either resulting in higher costs and weaker price achievement. But in the longer term, these are risk-mitigating actions we have chosen to implement to -- or in order to reduce biological risk.

In the third quarter, we expect a significantly lower volume and therefore also higher costs. But for the fourth quarter, we see a clear improvement with an increase in volume and reduced costs. Due to mentioned challenges, the full year guiding has been decreased to 48,000 tonnes, a reduction of 2,000 tonnes from the level we have communicated in the previous quarter.

Sales and processing, they delivered an operational EBIT over NOK 400,000 this quarter. As mentioned, from Northern Norway, low average weights has resulted in lower price achievements in the market. At the same time, the large volume came in, in a short period, which made it challenging to optimally place the fish in the market.

On the positive side, there are good results from the harvesting and processing activity. And compared to last year, there is a significant improvement since the contracts now have a higher price point, which has given positive margin in this quarter as well. The contract share for the rest of the year is similar levels as in the second quarter, and the price are up from the level in 2018. The construction of our new harvesting and processing facility in Northern Norway, InnovaNor, continues as planned. Groundwork finished during the summer, and construction will start next month.

Iceland, Arnarlax, they harvested 2,800 tonnes in the quarter with an operational EBIT of NOK 26 million and an EBIT per kilo of NOK 9.43. Positive contribution in the period, but the results are negatively affected by no harvest in June, resulting in higher fixed cost per kilo.

Compared to last year, we see improved biological performance on the '17 generation that was harvested in the quarter with lower mortality. The smolt release in 2019 has been better than last year with low mortality, and the status on future harvesting generations are good. We will continue harvesting of the '17 generation in the third quarter and expect somewhat lower volume and costs at the same level. Guiding on 10,000 tonnes is kept unchanged.

Norskott and Scottish Sea Farms harvested 5,800 tonnes in the quarter, where most of the harvest volumes came from Mainland Scotland. They delivered an operational EBIT of NOK 106 million with an EBIT per kilo of NOK 18.37. Results from Scottish Sea Farms are negatively affected by high costs related to mortality and lower average weights since fish were taken out earlier than planned. This has affected costs and the price achievement in the quarter. Guiding of 30,000 tonnes is kept unchanged.

Offshore farming, we have now started a second production cycle at Ocean Farm 1, where new smolt is released this week. The salmon from this production cycle is expected to reach the market in the autumn next year. As previously mentioned, we were awarded 8 development licenses for the concept Smart Fish Farm, which will enable open Ocean Farming and the planning of this new insulation continues as planned.

Now it's the financial update, and Trine will take us through that, starting with an introduction, I think.

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Trine Sæther Romuld, SalMar ASA - COO & CFO [2]

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Hello. My name is Trine Sæther Romuld. I joined SalMar, July 1. I have to say that I'm happy to be back in the industry. And I feel also a bit proud and humble to work for such an exciting industry and SalMar, in particular, a company that has delivered strong results over many years but also a company being in forefront in many areas.

So to comments to the figures.

I will start with some highlights comparing the EBIT per kilo this quarter compared to last quarter. And starting with the Norwegian operation, meaning that that's excluding our operation in Iceland, Arnarlax, that is consolidated from February 1 this year.

But as you can see from the net sales price, we are more or less the same as last quarter. And even the spot price has been -- spot NASDAQ price has been a bit higher this period, NOK 0.55 higher, but due to the fact that Olav-Andreas explained earlier that we actively choose to harvest fish out earlier in Northern Norway, about 0.5 kilo lower than what was planned. We also realized somewhat lower prices on that fish. So that is the main explanation.

On the positive side, we have also, this quarter, had a positive impact of the contract sales. Looking on the cost side, we have lowered our cost with NOK 1.57 compared to last quarter. And the main explanation is, of course, the good development in Mid-Norway, but also due to quite high-volume in the harvesting and processing facilities we have. We also see a positive impact on the cost per kilo due to better utilization of the capacity.

Looking at the EBIT per group. I mean that we also include Arnarlax. We see that we also have a positive development from last quarter but somewhat lower, NOK 1.19, and that is the cause Arnarlax has lower EBIT per kilo this quarter compared to last quarter. Also, as explained by Olav-Andreas, due to lower volume in harvesting, particular in June.

And then so on the comments to our P&L this quarter, and then we're comparing to the same quarter last year. We have, as you can see, higher operating income, and that is due to higher harvesting volume that more than offset the fact that actually, the spot price in the same period is more than NOK 6 lower this quarter compared to last quarter. Another factor is, of course, that we have included Arnarlax this quarter that was not included the last year. And for this quarter, that is NOK 177 million and year-to-date, it's NOK 310 million.

And also, for this quarter, we have a positive impact on the contract sales, hence, it was negative same quarter last year. Just one comment also to the fair value adjustment on biomass. That is due to -- we have a positive impact and that is because they have higher biomass in the calculation. And also there, it's not comparable to same quarter last year because we changed the principle we're using -- we're actually calculating this fair value adjustment that was done for quarter last year.

We also have some figures in the income in associated companies line, and that is mainly contribution from Norskott, both for this year and last year. I can also mention that of the interest expense, NOK 35 million, NOK 13 million of that is related to leasing, so that is not a cash thing. And also, if you're looking on the other financial items year-to-date, you have to remember that we have a positive gain from the position of Arnarlax there of NOK 225 million.

So taking everything this together. We have a group EBIT per kilo that is slightly down compared to same period last year. Half of that is related to, of course, consolidation of Arnarlax that was not in last year's figures. If you're looking on to the Norwegian operation only, it's only NOK 0.77 lower compared to same quarter last year, and comparing to sales price being more than NOK 6 lower in the same period.

If you go to the balance sheet, some highlights here as well as it was commented by Olav-Andreas, investments are ongoing as planned. Standing biomass is more or less at the same level compared to same quarter last year. However, somewhat lower than end of quarter 1 due to harvesting out more earlier in the Northern Norway.

We paid out some significant dividend in June, NOK 2.6 billion, which actually is 73% of total earnings per share in 2018. And that is, of course, the main reason that we have increased the net interest-bearing debt quite significantly this quarter. I also mentioned that we have a new financing or term loan in place. Some of you probably know, we had a previous term loan of NOK 500 million that matured in June. So we have a new term loan in place for NOK 1 billion. That's 8.5 years installment profile, it's a 3 plus 1 plus 1 year with more or less the same financial covenants as previously. And this is signed with group of banks and also GAC.

So here to summarize our balance sheet at the end of quarter 2. We have a solid equity rate with more than 50%. And also looking on to the net interesting bearing debt to EBITDA, it's less than 1, it's actually 0.7.

We also included a quite-detailed reconciliation of the movement in net interest-bearing debt. I'm not planning to go through all those components, but highlight some of them. And the one is change in working capital. We have a positive impact of NOK 182 million and that is related to somewhat lower biomass [MC] compared to end of quarter 1, but also that we have higher supplier depth in that period. And then we have investment, that's a net investment, NOK 343 million. And it's all detailed out to the right of the slide, but it's also include the increased ownership in Arnarlax. And also it's include the dividend received from associated companies, which is Norskott.

So that is -- and of course, dividend, that is the big items there, which we already have touched and also see that we have been very precise what is IFRS 16 implication and not.

That was the main comments I had planned to say about both P&L and balance sheet. And then I give the word back to Olav-Andreas to have some summary comments.

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Olav-Andreas Ervik, SalMar ASA - President & CEO [3]

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Thank you, Trine. The outlook for the group, we expect a slight decrease in volume in the third quarter and a slight increase in costs where we expect a slightly higher volume and cost at the same level in Central Norway, significantly lower volume and higher costs in Northern Norway and somewhat lower volume and costs at the same level in Iceland.

The contract share is around 27% in the third quarter. Investments continues, as earlier said, according to plan. Full year guiding of 145,000 tonnes in Norway and 10,000 tonnes in Iceland is kept unchanged. But as mentioned, Central Norway is adjusted 2,000 tonnes up and similar down in Northern Norway.

That was what we had for you this time. Thank you for your attention.