SalMar ASA (OTCPK:SALRF) Q2 2020 Results Conference Call August 27, 2020 9:30 AM ET
Gustav Witzøe – President & CEO
Trine Romuld – COO & CFO
Hakon Husby – Head of IR
Conference Call Participants
Hi, and welcome to the Presentation of the Results in the Second Quarter Results of 2020 for SalMar. My name is Gustav Witzøe, and I’m the CEO in SalMar. Together with me today I have our CFO, Trine Romuld. We will follow the same agenda as in previous presentation.
As you can see behind me, we are presenting the results from InnovaMar on our main office and fantastic harvesting and processing facility. It is, in this way, we get to show you very belong. It is out here on the coastline of from central to Northern Norway, some of these 450 million healthy salmon meals to people all over the world.
But before we dive into the results, I would like to give you a great thank for the efforts our employees are doing every single day. Despite strict restrictions due to the corona pandemic, SalMar has been running as normal, making it possible to send millions of salmon meals across the globe.
It is over employees throughout the entire organization that make it possible for SalMar to again deliver strong results. This operational are something extraordinary, but this service is a long-term strategic and operational focus. Give us a strong SalMar literature with great passion and ability to find solution in the challenging periods.
I’m both humbled proud and grateful for efforts from our employees. We are a fantastic group of people. That gives everything for each other and for SalMar. But before we continue, there is something I want to show you. I know several of you, who are watching or planning to visit us during the Capital Markets Day in June. Unfortunately, we had to come there and but to give you a little taste, we have made a short movie. We want to show you now.
[Audio Video Presentation]
I just saw from the movie, it ends right behind me, as a holding pan. The holding pan is currently filled with the healthy and sustainable salmon from Ocean Farm 1. We are now harvesting from the second generation production cycle and we expect to finish the harvesting within a few weeks. It has taken one year since we released the NOK200,000 in Ocean Farm 1 unit, until we have received a salmon ready for harvesting around 5 kilo with a fantastic quality. This salmon will be locally processed here Frøya before it sent through our customers, all over the world.
The rest is from the first two production cycles, meet our expectation, and the expectations the Norwegian authorities set when we present the groundbreaking project, strong growth, good fish, welfare with low mortality and no need for sea lice treatment. Based on strong documentation of the project, the authorities gave approval for conversion of their development licenses for Ocean Farm 1 to ordinary licenses early in July.
And I promise, we will not stop here. Ocean Farm 1 will be continued to be an important unit in our total farming business and for the road ahead. More information on the Ocean Farm 1 can be found on our website. We at SalMar are proud to have completed a project that is groundbreaking in the work towards developing an increasingly sustainable agriculture industry. It’s recognition of the job alternatives took the chance to let us do.
Together with leading competent environment and suppliers, a total of more than 3 million working hours have been spent on Ocean Farm 1 and it’s no in slowly operation on through of it. The good experience is both biologically and operationally with Ocean Farm 1 has strengthened our beliefs in offshore farming. The real deal on this when we explore possibilities for construction of new Ocean Farm units. And of course, it bring this video in the work the design and location for farming in the open ocean, it’s more fish for where we expect an investment decision in 2021.
It’s not only within offshore farming. We have a strong faith in the future. We also have a strong faith in the future developing an even more sustainable aquaculture industry along the coast. This clearly came to show last week, when we processed growth at the ocean or that might be capacity in green areas, in the traffic light system.
In total, we have purchased over 8,200 tons increased capacity. This represents a growth on 9%, where we have purchased growth in both Central and Northern Norway. This gives us a flexibility to optimize our biological production. As you know, it’s the SalMar that decides when it’s ready for harvesting in SalMar and everything we do has to be on the SalMar terms.
Going forward, we will utilize this increased capacity to optimize biology and consider to adapt our harvesting plants. This means that we can push from harvest volume later to ensure optimal installation of the increased capacity. But maybe even more important, but even more important has increased our earnings on the new and the maybe the capacity as fast as possible.
Our strategy directions are not that is the short-term strategy, but go together with over long-term industrial strategy and operational focus in the entire value chain. This strategy is based on few essential pillars in our industry and strategy. We shall be leading technology operationally and in this area. This means that SalMar in the years to come will invest in industrial facilities own land for smolt production and harvesting and processing. In total, this strategy will make us more robust and means that we will be even more innovative and competitive in the future.
In May, the construction of Senja 2 started. This is an important part of our future growth. When a small facility will be finished in 2022, it will give us increased capacity to produce more smolt with the right quality, size and amount. Also on Senja, the construction of InnovaNor continues, with full speed and in accordance with the plan. We expect it to start-up in 2021.
The investment on Senja will give us a complete value chain in the North from smolt to processing. Senja will be a powerful industrial center for SalMar and we believe in Northern Norway. There, the corona pandemic has given us a reminder of the importance of having a strong and flexible value chain.
In the case, part of the value chain is under pressure. Therefore, the situational pandemic has strengthened our belief in our investments in Northern Norway. In Orkney through Vikenco and across the entire value chain to make us even more robust in the future. The pandemic has shaken the whole therefore we at SalMar have chosen to introduce strict disease prevention measures like many other companies.
It shall be safe to work in SalMar and for us at SalMar caring for each other is one of the most important postulates. In June, we saw the joint efforts to combat the spread of infection helped, but we are seeing an increase after December holidays. Therefore, it is important that, all of us work to get there to limit the spread of the disease. But we cannot forget the opportunities that are ahead of us, and SalMar we will come through this stronger and more powerful than ever before.
And the results we are presenting today shows that we are robust and strong to handle challenging periods. But before we move on to the results for the quarter, I want to once again praise the efforts of our employees. The second quarter has been a specific quarter, but working there for all our us has been more challenging than usual. Despite this, the employees have been working hard every single day and found solution for others to see challenges. This has led to that COVID-19 has had limited effects on both our operational and financial results for SalMar in the second quarter.
Highlights from the second quarter. In Norway, we harvested 39,200 tones in the second quarter with an operations EBIT of NOK910 million with an operational margin per kilo of 23.24, including Arnarlax we harvested 40,900 tons with the operation EBIT of NOK882 million with an operational margin per kilo of NOK21.66.
Both in Central and Northern Norway delivered strong results through solid operation and strong biologic performance. Despite and demanding quarter with high market uncertainty and increased distribution cost sales and processing delivered a good results. In the previous quarter, Arnarlax delivered weak margin.
To give you more detail, I will now give the word to our CFO, Trine.
Thank you, Gustav. As usual, I’ll start with farming Central Norway. We did harvest 27,300 tons in the quarter with operational EBIT of NOK679 million and EBIT per kilo NOK24.92. This is a strong result very strong segment performance combined with solid operational focus has resulted in lower cost levels.
2018 generation was finished early in the period with stable development from previous quarter. Spring 2019 generation accounted for 80% or the harvest volume in the period. This is from locations just as high trade, which again shows biological performance which has resulted in lower cost level compared with prior simulation.
After a good price achievement in quarter one, this quarter has given satisfactory price achievement in line with average NASDAQ spot price. In the third quarter, we will finish harvesting of spring 2019 and start with harvesting of 18/2018 generation. Autumn 2018, has strong a good biological performance in the last period and in total expected cost of the same level as Q2 and slightly higher volume in Q3 compared to Q2.
Guiding for the year is kept unchanged 103,000 tons, but as Gustav already have mentioned with increased the maximum biomass that we recently have bought. This also gives us some flexibility to optimize the biological production. Therefore, we will continuously evaluate and adapt our harvest and periods to come.
Farming Northern Norway, we did harvest 12,000 tons in the quarter with operational EBIT of 242 million and EBIT per kilo 2016. As for Central Norway, this is also a very good result, where strong biological performance combined with strong operational focus, has given lower costs level. Nevertheless, the result is somewhat negatively affected by low price achievements due to 70% of the harvest volume came in the beginning of the period until mid-May where the price were at the lowest.
Autumn 2018 generation has accounted for all of the harvest volume in the period and we’re finished in the period. Our last location that was affected by ISA were and still early in the period and the main part of the harvest volume comes from location was full of significant improved in poor performance and lower costs lower than previous harvest location in Northern Norway.
We stopped harvesting in July and before we just started the last week in August around spring 2018 generation. Spring 2019 has shown us development, the last month and we increased maximum biomass. We will also there continually harvest plant optimized biology. We expect a low harvest volume in quarter three and slightly higher cost level compared to quarter two. As for Central Norway, we kept and change the guiding for the year. But keep in mind I was just deferred with the flexibility with the new maximum biomass allowances.
Sales and processing delivers operation of EBIT of 70 million in the quarter. The quarter has been characterized by high market uncertainty due to COVID-19 with a volatile prices and high freight expenses. Despite this sales and processing delivers a good refers in the period and it’s not one thing and factor that explains the figure, but I will mention three main factors.
We have increased capacity utilization at the plant due to higher volume to the harvesting plant and this combined with full operation as give as satisfactory margin from harvesting and processing activities. We have then more than 33,000 tons to this plant in quarter two, which is 30% higher in last quarter. In addition, we has been succeed quite well in allocation of success in challenging period and in addition to lower foot prices have given positive contribution from the fixed price contracts. And in the quarter we had contract shared was 30%.
Contract share currently is 25% for both quarter two and we expect for the full year 25%, bit price is slightly up from 11%, 2019. As mentioned by this Arnarlax the construction work on in one word our new processing, harvesting processing facility and in on Northern Norway is progressing according to plan. The startup is schedule for December 2021 and we are currently recruiting personnel to key positions, and we are happy to see that we have looked over well qualified people. When the facilities are up and running, this will give us increased flexibility and also we expect lower costs throughout the entire value chain in addition to local processing.
Then Arnarlax, we delivered week results to this quarter and I will talk to this in more detail after, but first I would like to put Arnarlax in the bigger picture long-term. We in SalMar have great faith in the future for our Arnarlax and also salmon farming on Iceland. Iceland has some unique biological conditions that make it attractive for aquaculture. For example, there is a unique access to water that is important for the smolt, and the sea temperatures are in line with Finnmark, the Northern part of Norway, that provides good biological conditions for farming.
If you look at the period since SalMar invested in Arnarlax in 2016 and today, the harvest volume has increased significantly. And looking into both existing licenses but also application that is ongoing, there is a fantastic growth potential and we are now taking steps to equip ourselves for this growth.
Arnarlax is present in the entire value chain, smolt, farming, harvesting, sales, and therefore we are full control of the value chain. It’s therefore a matter of exploiting this to equip ourselves for further growth. We have made investments to strengthen ourselves, especially on the smolt side at the same time as we invest in modern equipment with other part of the value chain, but we must not forget that Iceland is a young farming nation and Arnarlax is a young company.
Our focus is therefore not only to invest in equipment, but also to build culture and competence and bring some of what Gustav I mentioned earlier the strong culture in SalMar. Among other things, Arnarlax Academy has been started. This is based on an important meeting place we have developed in SalMar over time, which is referred to SalMar school.
Culture competence is something that takes time to build, but we at SalMar contribute with competence and experience in all parts of the value chain and with this facilitate that we help the fantastic people, who work in Iceland to utilize this potential. In sum, we are sure this will improve performance from Iceland over time and make it attractive place for us to be present.
Some comments to that, to the figures. In the quarter, we harvested the 1,700 ton in the period and operational EBIT was NOK13 million. As we signaled in the previous quarter presentation, Iceland delivered a very weak result in the second quarter where the result impacted by both the high costs, but also weak price achievement.
Some comments to the cost first. The allocation earlier this year experienced increased mortality due to winter once was finished harvest in the period. This has given high cost where among around EUR1.1 million is related to increased mortality cost and is expense in the quarter and that amounts to NOK7 per kilo. The freight cost also increased in the period due to more challenging logistic out from Iceland.
In addition, lower volume to the harvesting plant has given lower capacity utilization and thereby higher cost. Together, all of this has given the high cost in the period. Price achievements, around 90% of the volume was sold in April and May, the period, with a lowest price during the quarter. And also in this period, the price difference on larger size fish was lower than usual and Arnarlax has not gotten the effect of higher average rate on the harvested fish.
In addition, I will have mentioned that Arnarlax also accounts in euro and haven’t had that posted impacts of the exchange rate. Looking forward, short-term, location will increase mortality is finished, harvested out. And in quarter three, we will harvest from 2018 generation location which has been not affected by high mortality.
We will also start harvesting on the 2019 generation in quarter three with a strong improved performance and lower cost level compared to with previous generations. But the period, we are currently with lower spot price and also effective first from Arnarlax in quarter three. Combined, with just a slightly higher harvest volume in quarter three, we expect the week results also in quarter three. We expect the slightly higher volume in the quarter and somewhat lower costing quarter three compared to this quarter. We keep unchanged the guidance for the year 12,000 tons.
And then, Scottish Sea Farm, the Scottish Sea Farm harvested 6,500 ton in the quarter and delivered the operational EBIT of NOK89 million, which gives EBIT per kilo of NOK13.69. Harvest volumes increased by 30% compared with the same quarter last year, and we have harvested from with good results in the quarter. The positive development is continuing with lower cost compared to quarter one. The Company reported good performance with good growth and low mortality in all regions. The guiding for the year is unchanged 26,000 tons.
Then, we move to the financial update. Starting with the EBIT bridge comparing to last quarter, we have reduced EBIT per kilo NOK598 compared to quarter one, and this is related to lower sales price, but somewhat offset with the lower costs in the value chain. For the group, this also includes the Arnarlax. This is a smaller reductions EBIT look comparing to last quarter. This is a result of Arnarlax consists of a relatively smaller share than it did for the quarter.
P&L, some comments to the P&L in the quarter, where we compare with the same period last year. We have stable revenue despite the lower spot price. This is a result of higher contract price combined also that same customer has been really to cover some of the increase the freight costs in the period. As you can see, we also have higher operational costs due to these freight costs.
Both EBITDA and operational EBIT is down due to lower volumes and lower spot price that effect is slightly reduced to lower costs in the value chain. At the end of the quarter one, there was large movement in the currency rates between NOK and foreign currencies. But during the quarter two, the NOK has gradually strengthen itself, which leads to some negative changes last quarter is to a large degree diverse in this quarter.
We have a fair value adjustment, which is positive due to annualize change in currency and currency contracts combined with biomass adjustment. Other financial items are positive this quarter due to realize and unrealized currency movement from loan in other currency than NOK. As from previous quarter, income from associated mainly relates to Scottish Sea Farms and its positive in quarter two due to improved results and lower negative fair value adjustments.
So if you’re comparing EBIT per kilo compared to same quarter last year, it has decreased due to lower spot price. The NASDAQ is reduced with 4.85 that we have compensated with two points 98 lower costs in the value chain. It’s also worth noted that if you look in the first half results for SalMar operational EBIT that is actually higher than first half in 2019.
Balance sheet, we compare the balance sheet to the end over period quarter. Investments are progressing according to plan and fixed asset has increased at the same time. As we also have combined that we actually have taken into use, the first battery-hybrid wellboat, which increase what we call the right use assets.
The standing biomass is higher comparing it to you. We have more fish in sea, and we have a loss release of smolt so smooth in the first half of 2020, compared with previous year. This gives a higher amount in the sea with a slightly lower average weight, which again gives the good conditions for utilization or increase to their capacity.
Net interest bearing debt is reduced with NOK564 million in the quarter and as the quarter two the net interesting bearing debt is NOK1.7 billion. In total, we still have a very solid financial position, the equity shares of 59.7% and we have a ratio between net interesting-bearing debt and EBITDA 0.32.
As you know, we use SalMar recently on traffic light growth, NOK1.8 billion. So, therefore the net interesting-bearing debt will increase in quarter three, but it’s very satisfying that after this payment that we still have significant available facilities and a robust financial position.
Movement in net interesting-bearing debt is really only two items and that is the EBITDA that we’ll talk about and then its investment. We have used NOK520 million in various CapEx investments and that is actually the highest CapEx figure in one quarter error for SalMar, and also demonstrates clearly that we are investing in the future.
And then, I will give the word back to you, Gustav.
Going forward, we’ll have even more focus on what we do today. We do better than yesterday. SalMar is to cement over position as a technical leader in the aquaculture industry to become an even larger contributor for sustainable growth in the future. We would continue to have focus on the things we can impact and do something with.
Good financial results come from good biological conditions and operations, and the SalMar always come first. The deal is in the details, and we shall continue our optimization and cost improvement project.
Combined with our static focus, this will make us even more robust in the future to have these challenging videos. At the moment, we’re experienced good biological status in the sea both in Central and Northern Norway and on Iceland. In total, we expect lower volume in Q3 2020, with costs at the same level, slightly higher volumes and costs at same level in central Norway, low volume and slightly higher costs in Northern Norway.
And as Trine mentioned, slightly higher volume and weak margin from Iceland. Contracts share is that 35% in both in third quarter and then full year. The price is slightly up from level of 2019. Guiding in both Norway and Iceland is kept unchanged, but we’ll utilize increased and maybe capacity to optimize biological production.
We still accept moderate supply growth in 2020, but COVID-19 has led to increase market uncertainties. Summer is well positioned to handle as demand on a demanding market, with strong operational and financial flexibility.
We have positive year and the future for SalMar, but we have to acknowledge that the effects of coronavirus are not over in a few months, but will likely last for a longer period of time. Our job is to implement the measures that strengthens us today and the same time will make us even stronger going forward. At you say in the SalMar, we are focused on solution not on the problems.
We definitely have a come to the end of our presentation, and we would like to thank you all of you have been watching. Our next corporate presentation will be in November. And till then, we hope we’ll of you stay safe and healthy. You have to eat a lot of salmon.
Thank you for your attention.
End of Q&A