U.S. Markets closed

Edited Transcript of SALM.OL earnings conference call or presentation 22-May-19 11:00am GMT

Q1 2019 SalMar ASA Earnings Presentation

N-7266 Kverva Jun 1, 2019 (Thomson StreetEvents) -- Edited Transcript of SalMar ASA earnings conference call or presentation Wednesday, May 22, 2019 at 11:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Olav-Andreas Ervik

SalMar ASA - President & CEO

* Trond Tuvstein

SalMar ASA - CFO




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


Good morning, everyone, and welcome to our presentation of the first quarter of 2019. We will follow the same agenda as in the previous presentations, starting with the highlights. We delivered okay financial results in the first quarter on NOK 806 million and NOK 22.71 in EBIT per kilo. And for Norway, this means an operational EBIT of NOK 781 million and NOK 23.41 in EBIT per kilo. This is, for us, somewhat lower than the expected by the end of last quarter.

Harvest volume has been 35,500 tonnes, where 33,400 tonnes has been from Norway and in accordance with our forecasts. Additional volumes come from -- comes from our increased ownership on Iceland, where we have increased our stake to 54% in the quarter and further to 62% at the end of April. This is a natural step in our growth strategy. We have a great faith in the future of Arnarlax. And as an industrial owner, we will contribute to a sustainable development of salmon farming on Iceland. We maintained harvest guiding in both Norway and Iceland.

News from the value chain is within sales, harvesting and value-added production. First, from InnovaNor. All the time, we have focused that design should be future-oriented and facilitate a new harvesting and processing plant adapted to the opportunities we see in Northern Norway. Based on this, we have spent some more time on the design and the planning phase, and we have deemed it necessary to expand the plant. So there is increased capacity for processing, and the machine park can be scaled up over time. By doing so, we will have a state-of-the-art facility that ensures optimal utilization of the raw material and contribute to increased value creation in the region. Based on these adoptions, the expected startup has been moved to 2021.

Also, news within sales. During the quarter, we have invested in a sales company located in Singapore, YuFish. This means that we now have 45% ownership. Singapore will become an important hub for us when the Chinese market also has been opened for our main processing plant, InnovaMar.

Then the operational updates. Starting with Central Norway. After several consecutive quarters of strong biological performance and a significant reduction in production costs, Farming Central Norway delivered a result in the first quarter 2019 which is characterized by higher production costs compared with previous quarters. Operational EBIT came at NOK 475 million, with EBIT per kilo of NOK 25.91 and the harvest volume of 18,200 tonnes.

Disease outbreaks at some locations as commented at the fourth quarter presentation had larger consequences than we anticipated. This led to a premature harvest, leading to higher production costs. As previously mentioned, autumn '17 has been a generation that has had a large spread in performance. The good sites are still good, but the weakest sites made it worse than we anticipated while, at the same time, they accounted for the largest volume in the quarter.

In the second quarter 2019, SalMar expects a higher volume and a small reduction in costs. The main reason of the reduction is that we finished harvest of autumn '17 in April before we start harvesting our spring '18 generation. Overall, this will give us a reduction in costs, and we maintain guiding for 2019.

Northern Norway. Results from Northern Norway are also somewhat weaker than expected. Operational EBIT of NOK 348 million and NOK 23.05 per kilo, with a harvest volume of 15,000 tonnes, which is mainly driven by high harvesting costs due to sanitary harvesting of 1 site in an ISA zone. In addition, we had a negative effect due to unfavorable distribution of the harvest volume in the period. We finished harvesting of spring '17 in the quarter, which accounted for 40% of the volume. And at the same time, we started up with autumn '17 generation with biological performance, as expected. We will continue harvesting of '17, and this will give us a slight reduction in costs in the second quarter despite a lower volume. Guiding for 2019 is maintained.

Sales and processing. Operational EBIT at NOK 14 million, a result which is expected, with positive contribution from all business areas. We are pleased with this in the quarter where we have had a lower volume and less activity. The contract share has been 26% in the period and has given a positive contribution. The contract share is currently at 25% for second quarter and 20% for the rest of the year at prices slightly higher than in 2018.

Arnarlax delivered an operational EBIT of NOK 25 million and NOK 11.77 in EBIT per kilo on a harvest volume at 2,100 tonnes. As previously mentioned, we have increased our ownership in Arnarlax, and this means that the result has been consolidated from February 2019. We are pleased to see an improvement in the operational performance despite the fact that we have -- that we are affected during the quarter by higher mortality due to winter wounds. We maintain guiding for 2019.

Norskott and Scottish Sea Farms delivered NOK 109 million in operational EBIT and NOK 22.78 per kilo on a harvest volume a 4,800 tonnes. The main part of the volume has been from the Orkney islands, with good biological performance. In addition, we also harvested from mainland Scotland. The results from Scottish Sea Farms are negatively affected by increased mortality costs. We maintain guiding for 2019.

Offshore fish farming, starting with Ocean Farm 1. As mentioned in previously quarterly presentation, the first production cycle at Ocean Farm 1 ended early in the first quarter. The good biological results this production has shown to us have strengthened our belief in our ocean strategy. We are now working with evaluation report, which will be sent to the directory of fisheries when it's finished. Once we have confirmed that all the measurement criteria are met and the final report is approved, we will apply for a conversion of the licenses.

Operational experiences from the first phase have been implemented, and we plan to release new smolts in August this year.

Smart Fish Farm. In February, we were awarded 8 development licenses for the Smart Fish Farm project, a project we have in collaboration with MariCulture. Design and planning of this unit will -- which will be specifically designed for fish farming in the open ocean, goes ahead as planned.

And then is the financial update. Trond?


Trond Tuvstein, SalMar ASA - CFO [2]


Thank you, Olav, and good morning, everyone. I will take you through the overall financial figures for the first quarter of 2019. As usual, we begin with an overall waterfall analysis, explaining the movement in EBIT per kilo from last quarter over to this quarter. As mentioned, we have consolidated the numbers from Arnarlax as of 1st of February 2019. Therefore, we start with explaining the movement for the Norwegian activity. The key takes there are: price achievement in line with the movement in the Nasdaq Salmon Index, up NOK 5.45 compared to last quarter; 26% of the volume was sold on fixed-price contracts, with positive contributions.

As mentioned in terms of cost, we see that the total cost level through the value chain has increased, is up NOK 5.16 per kilo. This is mainly explained by higher cost in the farming division. The fixed cost level per kilo is higher due to lower activity in the first quarter compared to the fourth quarter and accounts for NOK 1.4 per kilo. Cost released from stock is up to NOK 23 per kilo. As mentioned, we have had some biological issues with the autumn '17 generation, driving the cost level up. In addition, higher harvesting costs due to ISA handling in farming lot. The industry and the overhead costs are up NOK 0.8 per kilo, mainly due to lower activities. In total, this bridged EBIT of NOK 23.41 in Q1 for the Norwegian operations. Due to lower operational EBIT per kilo in Arnarlax, NOK 11.8, compared to the Norwegian operations, group EBIT per kilo is lowered down to NOK 22.71 for the quarter.

And then over to the P&L. Operating revenues in the first quarter was close to NOK 3 billion, up 17% from the corresponding quarter in 2018. The increase is explained both by higher volumes and higher price achievement. Operational EBIT for the quarter ended at NOK 806 million, corresponding to our operational margin of 27%. And this is approximately NOK 98 million higher than in the first quarter of 2018. The implementation of IFRS 16, new accounting for lease agreement, is explained in details in the accounts for the first quarter. The main effect on the P&L is that operational lease is divided into depreciation and interest cost, therefore, the increase in both depreciation and interest cost in this quarter. The effects on the operational EBIT is marginal in this quarter.

And then over to some comments on the fair value adjustment. In the first quarter, we have posted a negative fair value adjustment of NOK 173 million, mainly explained by lower volume or biomass in sea compared to the end of the fourth quarter. EBIT for the quarter ended at NOK 633 million. Income from associated companies totaled to NOK 28.7 million and is mainly related to the share of profits from Norskott. Interest expense amounted to NOK 37.1 million, including the effect of implementing IFRS 16 and the consolidation of Arnarlax.

In addition, we have the effect of accounting the acquisition of Arnarlax in accordance with IFRS 3, meaning that all assets and liabilities is measured at fair value and the surplus value compared to the value treated as associated company is recognized as income, in total, NOK 226 million, giving us a profit before tax at NOK 851 million. The calculated tax cost in the quarter is NOK 139 million and net profit NOK 712 million.

And then over to the balance sheet and our financial position. As we can see, our total asset has increased with NOK 1.5 billion during the quarter up to NOK 16.6 billion, driven by consolidation of Arnarlax and, of course, implementing of IFRS 16. In terms of biomass in sea, we recognized a seasonal build down. Compared year-over-year, we see a higher biomass both in Norway and on Iceland. The increase in equity is explained by retained earnings and an increase in minority shareholding due to the consolidation of Arnarlax.

At the end of the quarter, SalMar have a solid financial position with an equity ratio of 63%. And a decrease in interest-bearing debt will be further commented going through the cash flow movement.

And then over to the cash flow movement in net interest-bearing debt. Due to the implementation of IFRS 16 and the consolidation of Arnarlax in this quarter, we have given a more detailed insight in the movement in net interest-bearing debt in this quarter. Going into 2019, SalMar had a net interest-bearing debt of just above NOK 1.5 billion, and this number includes leasing liability of NOK 343 million. When implementing both IFRS 16 liabilities and the consolidation of net interest-bearing debt from Arnarlax has increased the debt level by NOK 745 million. Free cash flow from operations amounted to NOK 800 million in the quarter, where we see increase in net working capital, and this is due to reduction in short-term payables, more precisely feed credits.

Outflow from investment activities are NOK 372 million, where NOK 175 million are explained by the acquisition of shares in Arnarlax. As mentioned, we have also invested NOK 17 million acquiring a 45% shareholdings in YuFish, a Singapore-based trading company. Investment in operating assets totaled NOK to 245 million -- NOK 241 million, excuse me, and this is in line with the guided CapEx program. The MariCulture project is proceeding as planned, NOK 21 million in project costs in the quarter. And in addition, we have received NOK 83 million in dividend from Norskott during the quarter. Interest costs of NOK 37 million is paid in the quarter, and all together, this explains the increase of NOK 346 million in interest-bearing debt during the quarter.

Going forward, we tend to present debt through financial institutions separate from the leasing liabilities. Total leasing liabilities at the end of the quarter is NOK 679 million, and net debt through financial institutions are close to NOK 1.2 billion, whereas NOK 420 million is related to net interest-bearing debt in Arnarlax.

Thank you, and I pass the word on to you, Olav-Andreas.


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


Thanks, Trond. Then it's finally the outlook. We expect a slight reduction in costs in the second quarter of 2019. As mentioned earlier, the reduction is small, mainly due to the final harvest of autumn '17 generation. Contract share is at 25% for the second quarter. We continue groundwork of InnovaNor, and start of construction is in the autumn, and we maintain guiding in both Norway and Iceland. And when I started today, I forgot to introduce Trond. But as you saw, he was here. Before ending, I would also use this time to thank Trond to stand for his effort in SalMar over many years. This is his last quarterly presentation of several he had held for SalMar. And he has been a very important contributor in a period where SalMar has taken big steps to become one of the world's largest and most effective salmon farmers. So thanks, Trond. And thank you for watching us today.