P/F Bakkafrost (OTCPK:BKFKF) Q2 2020 Earnings Conference Call August 25, 2020 2:00 AM ET

Company Participants

Regin Jacobsen – CEO

Høgni Jakobsen – CFO

Conference Call Participants

Carl-Emil Kjølas Johannessen – Pareto Securities

Lars Konrad Johnsen – Carnegie

Christian Olsen Nordby – Kepler Cheuvreux

Alexander Aukner – DNB Markets

Regin Jacobsen

[Abrupt Start] — second quarter 2020.

Again this quarter, we are presenting our numbers here from our head office in Glyvrar. The agenda for this morning’s presentation is first a summary of the quarter, then a look into the markets and sales in the quarter, then we will go through the three different segments in Bakkafrost, then group financials, and finally we shall have a look at the outlook for the company and the industry in general, and there will be room for questions.

In the second quarter, we harvested from the Faroe Islands 12,941 tonnes gutted weight, and that’s slightly up from last year when it was 12,609 tonnes. In Scotland, we harvested 7,937 tonnes. The feed sales in the quarter were 22,121 tonnes compared with 18,872 tonnes last year. We sourced 122,512 tonnes raw material for Havsbrún in the quarter compared with 110,109 tonnes last year.

The revenues for the group amounted to DKK 1,134 million in the quarter compared with DKK 947 million last year. The operational EBIT for the group amounted to DKK 182 million compared with DKK 339 million last year. The cash flow from operation was DKK 111 million compared with DKK 327 last year. We had positive EBIT from all segments.

If you look into a brief summary of the financial numbers in the quarter, the farming and the VAP combined in Faroe Islands amounted to NOK 15.34. That is down from NOK 31.31 in the same quarter last year. When we compare the segments in Scotland and Faroe Islands, in Scotland we are including VAP in the Farming segment, and here in the Faroe Islands, we have divided these two. So, the pure farming margin in Faroe Islands was NOK 9.79 compared with NOK 31.31 last year as last year did not contribute any margin from the VAP operations. So that’s the reason between difference from NOK 9.79 and NOK 15.34 in Faroese.

In Scotland, the margin was NOK 5.36, which is a number that should be compared with NOK 15.34 in Faroese. The VAP margin in Faroese which was [technical difficulty] last year in second quarter was NOK 11.19 this year, and the margin from our feed, oil, and fishmeal operation was 18.6% EBITDA margin compared with 20.6% last year.

When we look into the markets and sales in this quarter, we have to say that the interruptions in the summer markets from the COVID-19 pandemic continued in the summer markets into the second quarter. In Bakkafrost Western European market increased from 43% up to 64%, which is the largest market in the world. For Bakkafrost, this is also the case in the second quarter. The share of the total sales to Western Europe for Faroe Islands increased from 43% to 64%, and 82% from Scotland. Fresh salmon mainly from Faroe Islands is, however, more or less equal direct to Asia, Northern America and the Western Europe with 37%, 32%, and 30% of the volume. Of total sales for the group, Western Europe, however, accounts for 73% for the second quarter of 2020. European demand is relatively healthy, and worst case in this market is a shutdown again.

If you look at North America, sales from Bakkafrost in Faroe Islands dropped from 25% to 16% of total sales in the quarter, but were stable on fresh on the part of fresh salmon on 32%. The U.S. demand is on the rise. Retailers report that never anytime has so many new customers or consumers and shoppers been buying seafood. From Bakkafrost Faroe Islands, 32% of all fresh salmon is sold in the U.S. market, which therefore is a strategic and very important market for us, and I have quite positive feeling about the development in the U.S. market, where we have a very good position in our marketing and branding, and we see a high demand in this market.

In Asia, this market accounts for 10% of total sales from Bakkafrost Group, 19% from Faroese, and 37% of all fresh salmon from Faroese, and therefore, this market is also very important for us. The Chinese demand has been almost eradicated after the rumors that a recent coronavirus outbreak was caused by an infected salmon chopping board in a seafood market in Beijing on June the 10th. The Chinese government have confirmed that the salmon had not been brought to China with — the salmon did not bring the virus to China, but nevertheless, the incident had a clear impact on demand. There are still today lockdown of food markets in Beijing, which has a negative impact on the demand. Also, significant testing of imported foods has a negative impact, because it causes a big delay of deliveries. We expect that Chinese demand will return sometime in the second-half of 2020, depending on when lockdown measures will ease up.

In the second quarter, the Eastern European market dropped to 1%. Bakkafrost has again been made green for export to Russia, which has been an issue from time to time. For Bakkafrost, it is important to have full flexibility to export to all markets. In the second quarter, harvested volumes to VAP increased to 50% of the volumes in Faroese from 32% last year. Around 37% of the volume of salmon from the group is sold on contracts, where most of it is VAP products. This is related to very good and high demand on consumer-packed goods, where there’s a trend of retail consumers buying more of these goods during this pandemic. This is convenient, safe, and efficient way of getting supply for consumers, which swiftly have been shifting volumes between the channels, and hereby, we can maintain a good flow of products to our customers.

When we look at the price development in the quarter, and we look in to the global markets, we see that the average spot price dropped in the second quarter compared with last year from 64.02 to 59.36. That is however a significant effect, because this is around 10% to 15% in this quarter, because the real drop in salmon price in the market is much higher than what we see in Norwegian kroner. The drop from the first quarter 2020 into the second quarter was 10.56 Norwegian kroner per kilo corresponding to 15%. The drop relates to the weak demand, which is again is caused by the COVID-19 pandemic. It is however interesting to see that during the COVID-19 pandemic period, despite the biggest supply growth was in June, the relatively price change in June was positive compared with negative price development earlier in the period.

When we look at the supply side on the market, the global harvest increased 2.4% in the second quarter, the European supply was flat, Americas increased volume 6,000 tonnes which is around 8% and that growth originates from Chile primarily. Norway reduced 6,000 tonnes. The harvest weight was 4.3 kilo head on gutted, which is flat from last year. Feed sales in the quarter are flat compared with 17% increase last year in Norway. The biomass is up from 700,000 to 730,000 tonnes.

In Scotland, we see also flat supply in the second quarter. The average weight was 4.1 kilo versus 4.3 kilo last year. Feed sales were flat versus down 10% last year. In Faroe Islands, there is an increase in harvest volume 4,000 tonnes corresponding to 23%. The harvest size in Faroe Islands was 5.3 kilo head on gutted which is unchanged from last year. The feed sales are unchanged from last year, however, biomass is down in Faroe Islands by 10%. In Iceland, the volumes are up 1,000 tonnes corresponding to 14%. What we hear generally from Iceland is a good development. However, there were some issues earlier in the year with low temperature when handling fish which caused some mortalities.

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In Chile, we see increased supply on 10%, 14,000 tonnes harvested rate of 4.7 kilo head on gutted versus 4.4 kilo in the same quarter last year. Feed sales are 4%, up

in Chile, there is however a drop in Chile in the first-half of this year on 21% of stock smolts. So 21% less smolts released during the first-half of 2020 in Chile.

Of other, I will mention that Tasmania increased their supply 4,000 tonnes in the first — in the second quarter, which is 20% of their quantity. Normally they had the biggest harvest in the fourth quarter and the first quarter. Russia is expected to harvest around 16,000 tonnes this year which is mostly smaller fish and they also have a lot of drought. There have been some rumors about inventory built-up in Chile. Our sources indicate that there are some increase in Chile which is normal in Chile to have some frozen inventories because lot of their products are frozen and at the moment this is around to 30,000 to 50,000 tonnes which is slightly up, but not any big concerned.

Going to the demand side in the market, we see our global growth on 1.3% in the second quarter. The biggest markets are EU and U.S. which both had a growth on 3% in the quarter. The main suppliers for the U.S. market are Chile and Canada, imported salmon from Europe dropped 6,000 tonnes to the U.S. in this quarter, which is mainly driven by issues with reduced capacity of air transport and thus significantly higher transport costs to the U.S. market.

Greater China increased 3,700 tonnes, which is 12% in the second quarter, but for the first-half 2020 there is a drop of 8% as the first quarter was heavily impacted by the lockdown measures after the COVID-19. Russia and Latin America had both a drop of 18% in the quarter. In Russia, the reason is not totally clear, but in Latin America, the drop is a result of the serious COVID-19 development. The biggest hit of the COVID-19 has been because of lockdown in different activities around the world. This has impacted the food service segment significantly.

Food service normally accounts for around 45% of the global market for Atlantic salmon, and has for the last 25 years had a growth faster than food retail, especially the last five years around double growth of food retail. The foodservice landscape has been severely impacted in probably all countries. The recovery will gradually strengthen, but it will take some time to return to pre-COVID-19 levels as restaurants adapt to new social gathering norms and spending patterns.

Restaurant sales have begun to improve sequentially, but it’s still too early to identify COVID-19 lasting impact on social gathering norms and consumer spending and behavior. The retail segment around the world normally accounts for around 55% of Atlantic salmon sales, and has seen a very high demand on salmon during the COVID-19 pandemic. There’s a substantial increase in promotion activity in this market. Being able to provide the right products at the right time has been key to take advantage of the possibilities in the market, and the lack of the same ability has also been one of the main drivers for crowded markets on the supply side. Increased conversion to consumer packaging retailers allowing increased shelf space for salmon has been one of the drivers for the growth. Consumers have increased their awareness of safe, healthy and sustainably sourced products.

Going to the market balance on the supply side in the market, the short-term supply outlook shows a moderate supply growth over the next six quarters. There’s a moderate European supply, which is expected in 2020 for the next two quarters around 5% and then up to 8% in the first quarter of 2021 before we will see a drop off the growth down to close to zero in the second-half of 2021. In Americas, we see a significant drop of the supply. Close to zero growth, the next three quarters, are then dropping down to minus 10% in second-half of 2021. The expected global supply growth has been taken down due to less stocked fish losses and higher biological issues in many of the salmon producing countries. This will resolved in close to zero growth on supply of salmon next year.

Now, we will look at the segments and the performance. The harvested volumes from the Faroe Islands increased 3% in the quarter from 12,609 tonnes to 12,941 tonnes in this quarter. All harvested volumes from the North division are from the sites Kunoyarnes, Borðoyarvík and Hvannasund, which each amounts to around 30%. Those were emptied and then we started to harvest from Lambavík, which had 8% of volume in the quarter. Lambavík continues then into the third quarter.

In Scotland, we harvested 41% from the North division and 59% from the South division. Costs in Scotland are slightly down in the quarter and in Faroese they are slightly up. The average weight in the Faroese is 5.4 unchanged from last year and the average weight in Scotland is 4.5, head ungutted, which has also unchanged from last year. In Faroe Islands, the small size increased to 286 gram from 242 gram last year. In Scotland, we transferred 2.8 million smolt at 76 gram, which is up from 2.6 million last year. The temperature in the Faroe Islands in the waters are more or less unchanged.

Looking at the farming operation in the Faroe Islands, the revenues decreased from DKK 759 million to DKK 574 million, the EBIT dropped from DKK 300 million down to DKK 86 million, the margin dropped from 40% down to 15%, and in Scotland, the revenue amounted to DKK 377 million and the EBIT DKK 29 million, which is 7.6%, slightly up from 7.2% in the first quarter.

On the next page, farming operational performance, the operational EBIT in Faroe Islands dropped from NOK 31.31, down to NOK 9.79, but as mentioned earlier in Faroe Islands, the VAP activity is not included in the operational EBIT margin, which it is in Scotland. So, therefore, the correct combination here would be to compare NOK 15.34 with NOK 5.36 and as explained earlier the cost in Scotland is slightly down and the cost in Faroe Islands is slightly up. The main drivers for the increased cost in operations are of course related with the COVID-19 and especially air transport.

The cost of freight per kilo sold fresh salmon is nearly 50% up compared with the second quarter 2019, and this is especially driven by low capacity of airplanes during the COVID-19 pandemic. The cost side, therefore, is severely impacted by these extra costs. On the currency side, there are also impacts on the top-line as the drop in market currency is impacting around 10% negatively. We expect costs to be stable in third quarter and to decrease further in the fourth quarter.

In Scotland, my feeling is that we are on track with our projects and we are committed and have a very high focus on improving the main KPIs for our operation, which is to reduce the feed conversion rate, to improve the TGC, which is the growth rate, to reduce mortality, to increase the size of fish and to have focus on branding. The staff is very committed, highly skilled, and my feeling is very positive about the development so far despite I had hoped for different circumstances in the first year after the acquisition.

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On the investment side, we invest in people, proudness and pride in Scotland. We are already in process to scale up the hatchery division significantly and improving other parts of the operation. We also started to use own feet some time ago and it seems to be working well, and we have already had very positive feedback from the fish.

Value-added products, the activity level in this department has increased significantly in the quarter compared with last year. Volumes increased from 4,088 tonnes up to 6,420 tonnes raw material head ungutted equivalence. The revenue increased from DKK 238 million to DKK 308 million in the quarter. The operational EBIT increased from zero in the second quarter last year to DKK 49 million this year, which corresponds to NOK 11.19 per kilo.

This year of harvest of salmon in Faroe Islands (tgw) increased from 32% harvest volume to 50%. The demand for consumer-packaged goods is higher than ever before. The ability and flexibility to meet needs in the market for safe, healthy, and sustainably we produced products has been vital for us during this difficult time. We see that retailers have increased the shelf space for consumer packed goods like our salmon portions. Bakkafrost has the flexibility to adapt to changes demand picture, and to swap between these options we feel, however, that our strategy with high-quality fish for the high-quality end markets together with our ability to serve the CBG market is a good and strategic important combination for ourselves.

Looking at the fishmeal oil and feed segment, we see in this quarter, higher raw material sourcing, but lower external sales of fishmeal. The EBITDA dropped from DKK 58 million to DKK 50 million, the margin from 26% to 18.6%. The external fishmeal sold dropped from 7,371 tonnes to 2,702 tonnes and raw material sourced increased from 110,000 to 122,000 tonnes.

The market conditions for feed, we see that the prices for fish oil dropped and the prices for fishmeal have increased. The volumes of feed sold increased from 18,872 tonnes by 17% up to 22,121 tonnes. The external feed sales increased from 3,100 tonnes to 5,916 tonnes. We expect to this year to source to source less raw material than last year, but on the other side we expect to increase our feed operations up to around 110,000 tonnes compared with last year.

Now, Høgni Jakobsen will take us through the group financials.

Høgni Jakobsen

Thank you, Regin. Yes, I will give you a brief update on the financials and also quick update on our ESG progress this quarter. Starting by the P&L, all the numbers by the way that I mentioned are in Danish Kroner, which is our reporting currency, and in this quarter, we had as a group, a higher revenue compared to the same quarter last year.

However, our lower operational EBIT and the revenue this quarter was DKK 1,134 million compared to DKK 947 million the same quarter last year. DKK 757 million of those came from the Faroese operation. Our operational EBIT was DKK 182 million in this quarter, which is down from DKK 339 million in the same quarter last year, and DKK 153 million of those came out of the Faroese operation. The fair value adjustments in this quarter amounted to DKK 427 million that’s primarily driven by higher food prices by the end of the quarter.

Revenue tax was minus DKK 23 million, and taxes were minus DKK 100 million in this quarter, and we had in this quarter no onerous contracts. Profit after tax in this quarter amounted to DKK 472 million, which is up from DKK 189 million in the same quarter last year, and the operational EBIT margin in this quarter was 16% compared to 35.8% in the same quarter last year, and for the first-half of this year, the EBIT margin was 18%.

If we look at the relevant operational EBIT and earnings per share in this quarter and this year, this half of the year compared to previous years, we can see that we are somewhat lower on operational EBIT. This so far this year and the first-half of this year, we have a total of DKK 430 million in operational EBIT and that compares to DKK 606 million in this first-half of 2019, and the same goes for the adjusted EPS, which is also lower than previous years, for the first-half of the year. So far, we have reached to DKK 5.25 per share in adjusted EPS.

Moving on to the balance sheet, we still have a strong balance sheet and the group’s intangible assets are more or less unchanged and amount to roughly DKK 4.4 billion by the end of this quarter. Property plant and equipment is slightly up and amount to roughly DKK 3.9 billion.

Inventories increased in this quarter by DKK 172 million, and amount to DKK 721 million, whereas receivables reduced by DKK 63 million and amount to DKK 563 million. Biological assets were more or less unchanged and amount to DKK 1.9 billion and cash and cash equivalents comparing to year-end 2019 reduced from where it was DKK 1.3 billion reduced to DKK 454 million in this quarter. Equity is DKK 8.6 billion, roughly, and equity ratio is up to 69%. If you look at the cash flow in this quarter, we had positive cash flow from operations with DKK 111 million, and negative cash flow from the investments amounting to minus DKK 196 million cash flow from financing amounts to minus DKK 262 million, leaving us with a net change in cash flow amounting to minus DKK 347 million.

And we then look at the development of our next interest-bearing depth throughout the quarter. We left the last quarter with a net debt of DKK 988 million, and during this quarter we have increased that with the changes in net investments amounting to DKK 186 million, and changes in working capital amounting to DKK 187 million. The cash flow from operating activities has decreased the net interest-bearing depth with DKK 255 million in this quarter, leaving us with a net debt by the end of this quarter of one point — roughly DKK 1.1 billion.

Our bank facilities are unchanged, so we still have bank facilities amounting to EUR 352 million and GBP 100 million for the Scottish operation, and we have undrawn credit facilities of roughly DKK 2.3 billion by the end of this quarter, and in addition to that we have an accordion option of EUR 1.5 billion available.

A brief update on our progress against our sustainability plan, which we call our Healthy Living Plan; in this quarter, we have chosen to sign up to be a TCFD supporter. Regin has been appointed Co-Chair of the Global Salmon Initiative, where we work on promoting and developing salmon farming to be even more sustainable in the future. We have engaged with our suppliers of marine ingredients for our feeds, and our fishmeal, and fish oil and feed production in order to engage in reducing their CO2 emissions from our feed production, and we have worked hard on keeping our employees healthy during the COVID-19 pandemic. So, we have been offering in this quarter free and regular screening for COVID-19.

So far, we have done over 5,600 tests in Bakkafrost for our employees. And so far, zero positives. We marked also the World Environment Day by giving our employees trees to plant at home. And that resulted in 2000 new trees planted in the Faroe Islands. Okay, then to the outlook for Bakkafrost under to the market. We expect global supply growth of around 4% in the second-half of 2020. Going into ’21, there will be a drop of the supply.

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The total harvest is expected to increase around 2%. But, we expect that the global supply into the market will be less than 1%. The harvest guidance for Bakkafrost is for next year 62,500 tonnes in the Faroe Islands and 44,000 tonnes for Scotland. For this year, we remain unchanged on volumes harvested from our farming operations both in Scotland and the Faroe Islands. We expect to release around 15 million smolts this year in the Faroe Islands and in Scotland around 10.7 million smolts.

The contracts account for 33% of the expected harvest for the second-half of this year for the group as a whole. And our long-term strategy is to sell around 40% of our volumes into fixed price contracts mainly as value added products. From the fishmeal oil and feed, we expect to increase our sales this year up to 110,000 tonnes and hopefully further next year. On the business development side, we are focusing at the moment very much on our organic growth program.

The world needs more high quality healthy and sustainably produced food and we want to take responsibility in this area. So, we are building the Faroese operations with the capacity all through the value chain to produce 100,000 tonnes within the next five years. In the Scotland, we also invest in the value chain to reduce risk, increase efficiency, and to create growth, and we expect from this program to see a significant improve also over the next coming years.

That was all from here. If there are any questions from the analysts, you are welcome.

Question-and-Answer Session


A – Regin Jacobsen

Hi, Emil.

Carl-Emil Kjølas Johannessen

Hi. Yes, question from me, and related to the markets that you are saying now that Russia has been open for you, how would you expect that to impact your sales going forward, and also, related to the freight cost, how was that developed now in July and August compared to what you indicated in June and May?

Regin Jacobsen

Yes. Well, first, Russia, as you mentioned we are green again for Russia about two weeks ago I think. We are gradually starting to send fish to that market. So, we will be active. It’s important for us to have good access to all markets and also for Russia, and especially during these times, it’s very important to have full flexibility. So, we will have to market fish also for that market.

When it comes to cost of transportation, we have especially for China seen a significant improvement in capacity of air transport with a drop in those prices, but so far there has been no relief or about no relief for the transports to the U.S. market. So, I expect that it will last some time more for the U.S. market depending on when capacity is again available, more capacity. So, that will take some time unfortunately.

Carl-Emil Kjølas Johannessen

Thank you.

Regin Jacobsen

Lars Konrad?

Lars Konrad Johnsen

Yes, good morning, Regin. Thank you for the presentation [indiscernible]. Just two questions, first on Scotland, could you say something about the underlying farming EBIT kilo in the quarter, and what’s the contribution from the value-added side in terms of figures, and also, if you could share some details on the level going forward on the value-added side? That’s the first one. We can take the second one after you answer that.

Regin Jacobsen

Well, in Scotland, as I mentioned earlier, we have the value-added combined with the Farming segment, and as in the Faroe Islands, there is similar activity, which is mainly with [indiscernible] into the markets, creating good value in the quarter. So, I would say that there’s a similar picture also in Scotland, where we see that contracts are contributing to the numbers. So, the best I can say is that there’s a similar breakdown without giving you more details about that.

On the cost side, in Scotland, as I mentioned, there is a small drop on the cost, and we expect a further drop also going forward both in the fourth quarter and third and fourth quarter and into next year in line with what we had said earlier.

Was there anything else about Scotland?

Lars Konrad Johnsen

I think that answers well. The second question is regarding the price achievement and the price premium in Faroe Islands, could you share something on how that is developing into Europe, and now that you are forced to push more volumes into retail?

Regin Jacobsen

Well, we have also seen during this period that sometimes, especially when there are big changes and fluctuations and lockdowns in one market and shifting volumes between markets, that has an impact on our operations. So, it often takes a couple of weeks to reestablish the balance, but we have over this period seen good margins on premium on our products. I think especially from July and onwards into August, there is a better balance for ourselves. So, we have balanced very well out after the changes in the markets, so — but the unfortunate thing is that the freight cost is going the other direction, but especially the bigger sized fish are expensive these days, that’s in all markets.

Lars Konrad Johnsen

Okay, thank you.

Regin Jacobsen

Any other question?

Christian Olsen Nordby

Christian Nordby, Kepler Cheuvreux. And you say that the cost has dropped a little bit in Scotland Q-over-Q, but if you look at just the EBIT cost, it’s down almost 10 kroners per kilo, is that more a VAP-driven or what is — since it’s a little, it seems like relatively big development work, can you just give a bit of flavor on what’s been the driver from the last two quarters?

Regin Jacobsen

Of course. There is a combination of timing in the quarter, because the price differences in the quarter are relatively big from one period to another. So, that’s one of the things. And then there is a drop of cost price which is a couple of kroner, and then there is a slightly bigger VAP activity, which have had steady margins with fixed prices. So, that is a combination of these three drivers.

It’s okay, Christian, or…

Christian Olsen Nordby

Yes, thank you very much.

Regin Jacobsen

Any other questions?

Alexander Aukner

Alexander, DNB Markets. Could you make some comments on your decision to not pay out 2019 dividends? Obviously, there’s uncertainty due to COVID-19, but your financial position is very strong, and we see a reasonably good picture in the medium to long-term.

Regin Jacobsen

Yes, you’re absolutely right, Alexander. The balance sheet is healthy, and we have a good position in the market, but the Board decided to not call for an annual general meeting. I think that there is still a very big uncertainty in the market, and the big uncertainty is I think the driver why the Board thinks that we should look into 2021, and then take the decision on the year 2020, whether or not — whether or not they will increase the dividend at that time, we have not changed our dividend policy, the dividend policy is unchanged for Bakkafrost, which is to pay out 30% to 50%, and normally will stay closer to the 50% of the earnings to shareholders, and — but I think that to pay out a small dividend now is — could be — maybe not the ideal solution. So, therefore we wait for — or the Board has decided not to call for an extra ordinary general meeting to pay a small dividend, and to wait out next year. We feel that we have a healthy balance sheet and we have a good financing position, but the uncertainty is the driver in this decision.

Any other question?

Well, thank you very much for this morning. Thank you.

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