SalMar ASA

OSE:SALM

Earnings Call Transcript 2021-Q2

[Gustav Magnar Witzoe, Co]

Hello, and good afternoon, and welcome to the second quarter report presentation from SalMar. This morning, I wake up with the flu and that hit my voice. Therefore, I need -- I got help from Runar to do the presentation. So Runar?

[Runar Sivertsen, Director of Strategic Projects]

My name is Runar Sivertsen, and I'm the Director of Strategic Projects here in SalMar, and I will be assisting with the presentation today. We will be keeping to the same procedure as before. I will kick off and give you the highlights before our CFO, Trine Sæther Romuld, takes you through the details. Then I will come back with an update on the steps we are taking throughout the value chain to strengthen ourselves for further sustainable growth, followed by a review of our future outlook. Finally, we will take a closer look at the company that will lead the development of offshore fish farming, SalMar Aker Ocean. SalMar has a 30-year history of continuous growth, a growth built on 2 fundamental operating principles. First, as small a footprint as possible on the [ comments ] we make use of; and second, as much local value creation as possible from the salmon we harvest. We are, therefore, investing millions of kroner in our value chain to secure sustainable growth and operations always on the salmon's terms. In the area of smolts, we have 2 major construction projects underway in Northern Norway and in Central Norway, all of which is intended to facilitate more optimal and cost-efficient production. We have increased our production capacity through investments in Nekton Havbruk and Refsnes, 2 transactions that together will give SalMar an additional 5,500 tonnes of maximum allowable biomass in Central Norway. As always, local processing is important for us. With the start-up of Vikenco, the new processing facility, in the second quarter and InnovaNor's immediate start-up, we are boosting our ability to offer the right product to the right customer even further. And at the same time, as we secure increased local value creation in the areas where we operate. Our friends at Icelandic Salmon are making their very first quarterly presentation where they will be launching an entirely new brand for these salmon products. At the same time, the company has bought 2 hatcheries, which will provide the platform for further growth. In Scotland, we have taken major steps to -- with the acquisition of Grieg Hjaltland, which further strengthens our presence in that region. SalMar has also made a voluntary cash offer to purchase all outstanding shares in Norway Royal Salmon. We have a number of commercial activities that overlap those of NRS, that make it possible to realize substantial synergies, and we will come back to that a little bit later in the presentation. And at the very end of today's session, we will provide further information about SalMar Aker Ocean. So with that, I will move on to our performance in the second quarter. Good craftsmanship leading to strong biological performance has been the key to strong second quarter results for our fish farming segments in Norway. Fish Farming Central Norway posted an EBIT of [indiscernible] per kilo, while fish Farming Northern Norway posted in the EBIT of NOK 26.02. This is a very good performance from Central Norway and a particularly impressive one from Northern Norway. Unfortunately, we had a soft EBIT from sales and processing that affected our results. At the start of the year, we had a far gloomier view of the market and the price of salmon than turned out to be the case. The fact that we underestimated the market and the price is the reason for the segment's weak results. And the main reason why we are overall positive of second quarter results, that is on the soft side. The negative impact of fixed-price contracts on EBIT in the quarter has hit us hard. In addition, start-up costs at Vikenco and InnovaNor have had a negative effect on the results. Overall, therefore, the segment posted a negative EBIT of NOK 136 million in the quarter. On the positive side, the recent period has shown us how robust the salmon market is, and we are optimistic with regards to continued strong market development going forward. All in all, this means that we are posting a slightly mixed result for the second quarter. Our Norwegian operation harvested a total of 34,300 tonnes in the quarter and posted an operational EBIT of NOK 633 million. This gives an EBIT of NOK 18.44 per kilo. Including Icelandic Salmon, we harvested 36,600 tonnes in the second quarter and made a total operational EBIT of NOK 661 million. This gives an EBIT of NOK 18.05 per kilo. Icelandic Salmon continues its positive trend with another rise in profits. Stable operations and better price achievements helped to lift profits in the second quarter. SalMar still expects to harvest 163,000 tonnes in Norway and 14,000 tonnes in Iceland in 2021, but with the upside potential due to the condition of the standing biomass and the latest acquisitions. The upgrade to our Vikenco plant was completed and put into operation in the second quarter. And we aim to start up the InnovaNor plant in the fourth quarter, slightly later than previously advertised. This is due to the COVID situation. As you know, we have put in place a green financing package and completed a share issue in 2021. Together, this gives us financial capacity and flexibility as well as strategic opportunities. I will come back with further details on this a little later. But first, I would like to hand the word over to our CFO, Trine, who will take you through the operational and financial positions of this presentation. So Trine?

[Trine Sæther Romuld, COO & CFO]

Thank you, Runar. As usual, I will start with some comments to the segment, Farming Central Norway. In the quarter, we harvested 21,000 tonnes with an operational EBIT of NOK 520 million and thus, EBIT per kilo NOK 24.75. Central Norway continues the trend by delivering solid results. We have harvested mostly from the spring 2020 generation in the quarter, accounting for about 85% of the volume with a stable biological performance and a cost level which is slightly higher compared to previous generations. At the same time, we also finished harvesting from the autumn 2019 generation. In this quarter, quarter 3, we expect significantly higher volume and cost at the same level. We will continue to harvest from the spring 2020 generation. And as already mentioned, the biological status of the fish and sea is good with a strong growth in the last period. As already mentioned, we keep the volume guiding for the year. And for Farming Central Norway, that is 107,000 tonnes. Farming Northern Norway. We harvested 13,300 tonnes in the quarter. Operational EBIT of NOK 347 million, which gives EBIT per kilo NOK 26.02. The segment continues to deliver strong results over autumn 2019, accounted for the main part of the volume in the period, about 80%. At the same time, we finished the autumn 2019 generation. We have increased average weight of the fish harvested, which positively affect the price achievement in the quarter. We have started harvesting of the spring 2020 generation at the end of the period, a generation which has shown good biological performance. As mentioned also in previous quarters, the cost level is still affected by relatively high harvest and well boat cost. This cost will be reduced when InnovaNor is up and running in quarter 4. As in Central Norway, Northern Norway has shown a very good growth and the status of the biomass is good. We, therefore, expect somewhat lower cost level in quarter 3 with volume at the same level where we will harvest from spring 2020. Sales and industry delivered operational EBIT of negative NOK 136 million in the quarter. As already mentioned, the result is negatively affected by the contract where the contract share was 28% in the quarter and relatively high compared to other quarters. At the same time, we had some costs related to the start-up of Vikenco after the upgrade and also preparing for InnovaNor. And also, in addition, lower capacity utilization due to lower volume to our harvesting plan, which also weakens the result. The contract share for this quarter, quarter 3, is expected to be around 25% and also for the year in total. Despite a weak result in the quarter, our strategic belief on local processing stays for COVID-19 has shown us how important this flexibility is by making it possible to quickly adapt ourselves and offer the market the products they ask for. And as you know, we are close to completion of InnovaNor in Northern Norway. Unfortunately, the start-up is delayed due to quarantine restrictions on the labor force due to COVID-19, but we are now planning for operation in quarter 4. We look forward to the quarter 4 where we can use this facility and process our own fish locally on Senja. Iceland. On Iceland, we harvested 2,300 tonnes in the quarter with an operational EBIT of NOK 28 million, which gives NOK 12.22 per kilo. Iceland continues the positive trend after some challenging quarters in 2020. Good operational performance and increased price achievements strengthens the results. In the period, we harvested from the autumn 2019 generation, a generation which has shown significantly improved biological performance compared to previous generations. This generation accounted for the entire volume in the quarter and we will also continue to harvest from this generation in quarter 3. In quarter 3, we expect somewhat higher volume and similar cost level. And guiding for the whole year is unchanged. I will also mention that we have made the acquisition of 2 small facilities on Iceland in this quarter. This increase or further capacity for growth in the value chain and the acquisition will give the company access to approximately 1.5 million more smolt from 2003 with the flexibility to produce the size that is the right to optimize utilization of existing licenses. In addition, the company has launched a new brand earlier today. And for those of you that didn't get a chance to see the quarter presentation, we recommend you that you look into the company's web page. Scottish Sea Farms. The company harvested 11,400 tonnes in the quarter with operational EBIT of NOK 119 million, which gives EBIT per kilo of NOK 10.46. The volume is the highest ever in a single quarter for the company. The result is somewhat affected by higher costs compared to previous quarter, but the biological status of the efficiency is good and the company expects lower cost in quarter 3. Volume guiding is -- for the year is kept unchanged. And as already mentioned previous, we have agreed to purchase Grieg Seafood's U.K. operation. That was informed the market in June, and the process of having all the approvals necessary is according to plan. And then some comments on the financial side, I will start with the overall comparison from the previous quarter. First only Norway then the top of the slide, which has an increase of EBIT per kilo of NOK 0.26 compared to the previous quarter. And as already commented, the salmon prices increased in the period, but due to a negative effect from the contracts, the net sales price is not increased on the level as the spot price. And together with slightly higher cost in the value chain, this explains the change from the previous quarters. If also including the Icelandic operation, the group, the EBIT per kilo is increased slightly more, that is NOK 1.03. And the main reason is, of course, increased margin from the Icelandic operation. The group P&L. Some comments on the P&L and comparing this quarter to the same quarter last year. We have a low revenue due to lower volume. And at the same time, also operational EBIT is reduced due to the same reason, lower volume and slightly higher cost in the value chain. As you can see, we also have a separate line referred to as production tax, and that is the new tax that was implemented starting January 1 this year, which is NOK 0.4 per kilo harvested in Norway, and we also have some resource tax from the Icelandic operation, included in that line. Fair value adjustment is positive due to higher forward prices and higher volume in the calculation, income from associates -- that's mainly Scottish Sea Farms, and is positive due to improved results and also positive fair value adjustment. On the interest expense, the NOK 41 million interest related to leasing accounts for NOK 14 million out of this NOK 41 million. Over to the balance sheet, where we compare the balance sheet, quarter 2 compared to quarter 1. The investments are progressing according to plan. Standing biomass is at the same level as in quarter 1, but significantly the higher comparing to the same quarter last year. Net interest-bearing debt, including leasing, has increased with NOK 822 million. In total, as you can see from the figures, we have a very solid financial position with an equity share of 53.8% and the ratio in NIBD versus EBITDA, including leasing, is 1.70. If we exclude the leasing, the ratio is 1.39. And also, we paid out dividend in June, NOK 20 per share. And also, we have the private placement, NOK 2.7 billion, that also was completed in June. That, of course, also impact the figures. Some few comments when comparing what is happening in the quarter in the net interest-bearing debt and starting with the net interest-bearing debt to the left on this figure. The main component is EBITDA and the cash flow from operation is positively affected by release of working capital, where change in accounts payable is the main reason. Investments are progressing as planned, and the largest investment in the quarter are construction of InnovaNor and Senja 2 and Tjiun, which is the freshwater projects. And during the period, NOK 2.3 billion was paid in dividend and private placement was completed at NOK 2.7 million. We end the quarter with NOK 5.4 billion in net interest-bearing debt, including leasing. In April, we received our credit rating from Nordic Credit Rating, we receive our rating, A-, with stable outlook. For further details, you can go into our website. In the first half of 2021, we have strengthened our financial flexibility, which give a robust platform to complete all the growth initiatives we have in the value chain. And in 2021, we have entered into new agreements of in total NOK 7.5 billion in green financing. In this way, most of financing is green, which clearly express our commitment to move our industry in an even more sustainable direction. Some more details. In April, a successful issue, our first green bond was completed. This is the largest green bond in NOK and was at NOK 3.5 billion and was priced at NIBD plus 135 points and has a duration until January 2027. The green bond was listed on Oslo Stock Exchange in July. And we also said in our quarter 1 -- quarter 4 presentation that we have received existing credit facilities -- refinanced existing credit facilities, where we'll enter into 5-year sustainability linked ourself with a limit of NOK 4 billion. This financing has 4 sustainable KPIs linked to where we get a higher interest margin if we do not succeed and a lower interest margin if we succeed. We have chosen to focus on 4 of our most important KPIs where everyone pulls us in an even more sustainable direction. At the same time, we also have increased the limit on an overdraft facility to NOK 1 billion. Together with the private placement in June of NOK 2.7 billion, we have secured the financial flexibility. Then this was what I had planned to say today, and then I will leave the word back to Runar.

[Runar Sivertsen, Director of Strategic Projects]

Thank you, Trine. SalMar aims to be a leading actor in both traditional aquaculture and in offshore aquaculture. For SalMar, they are equally important. As a sustainable marine protein, SalMar is -- salmon is a key aspect of the green shift. This has also been the main reason why SalMar has invested over NOK 12 billion in growth and industrial expansion in Norway over the past 10 years. Today, I would like to give you a brief look at the strategic steps we are taking and have completed so far in 2021, and I would like to start with the smolt. Good smolt of the right quality, the right size and transferred to sea at the right time, adapted to each individual site. That is our mantra when it comes to smolt. And that is why we are currently investing substantial sums to pave the way for further growth. In May this year, we decided to invest in our new smolt facility at Tjiun in Central Norway. Seen together with the expansion, we are well underway with in Senja. This will give us an access to 13 million smolt. Fish farming along the Norwegian coast is fundamental for both SalMar and Norwegian aquaculture industry. Access to biomass, MAB, capacity is crucial if we are to continue to grow. Through the acquisitions of shareholdings and the consolidations of Refsnes Laks and Nekton Havbruk [ and Tjiun ], we are going to increase our production capacity in Norway by 5,500 tonnes MAB. This gives us an annual increase in harvestable volume of 8,000 tonnes. Over the past 12 months, we have increased our MAB capacity with 15% through acquisitions and the purchase of MAB capacity under Norway's traffic light system. This corresponds to a total increase in production capacity of almost 14,000 tonnes MAB, which gives a total increase in harvestable volume of 20,000 tonnes per year. This clearly shows that we are continuing to pave the way for further growth in summer. For SalMar, it has always been important to secure local value creation. The upgrade of Vikenco, our harvesting and secondary processing plant [indiscernible] went into operation in the second quarter of 2021. The plant has a 40,000 tonnes annual production capacity. Both the harvesting and processing facilities are packed with the latest technology, which will create a better and more cost-efficient operation. In addition, we are now in the home stretch with the construction of our new harvesting and processing plant in Senja, called InnovaNor. The plant will give us significant efficiency gains from the very beginning. InnovaNor will have the harvesting capacity of 75,000 tonnes per shift per year and a secondary processing capacity of 30,000 tonnes per year. It will also offer a substantial potential for increased capacity on both the harvesting and secondary processing sites within the existing building structure. With both Vikenco and InnovaNor up and running, and including InnovaMar in Frøya, SalMar will have a significant harvesting and processing capacity going forward. As communicated in a stock notification last week, SalMar will make a voluntary offer to buy all outstanding shares in Norway Royal Salmon. For NOK 30 -- I'm sorry, for NOK 270 per share. Together with NRS, SalMar has a number of overlapping industrial activities, both in Northern Norway, in the Westfjords in the Iceland and offshore. All in all, this constitutes a fantastic starting point for being able to build something even stronger together and, at the same time, realize significant synergies in all parts of the value chain from smolt to sales. The acceptance period for the offer will be 4 weeks with the possibility of extension, and will begin as soon as the offer document has been approved by the Oslo Stock Exchange. For 20 years, SalMar has jointly owned Scottish Sea Farms in partnership with Lerøy. This shareholding has taken us on a fantastic journey where step-by-step, the company has grown into one of the largest aquaculture enterprises in the U.K. Scottish Sea Farms acquisition of Grieg Seafood -- Grieg Hjaltland represents a major step in the company's further expansion. We can extract substantial synergies, both biological and operational, which together with Scottish Sea Farms' very competent management team, we will have a significant use for. The strategic and biological control will now have -- we now have in Hjaltland is particularly important in this respect. The acquisition will increase the annual volume harvested by around 15,000 tonnes, half of which will fall to SalMar. The transaction is subjected to certain customary closing conditions, and it's expected to close within the fourth quarter of this year, depending on processing time, with the relevant authorities. So to conclude this review of the quarter, I would like to look forward to the outlook. At SalMar, we will continue to focus on the things we can influence and do something about. Good financial results come from good biological conditions and farming on the salmons' terms as well as a strong strategic and operational focus along the value chain. That is why we are continuing to make strategic investments for further sustainable growth on land, along the coast and far out at sea. We still expect to harvest 163,000 tonnes in Norway and 14,000 tonnes in Iceland in 2021 as a whole, but with upside potential due to the latest acquisitions. Overall, we expect a higher volume in the third quarter with a slightly lower cost. Fixed price contracts will account for around 25% of the sales volume in both the third quarter and in 2021 as a whole. We expect low to moderate growth in the supply of Atlantic salmon in 2021, but the heightened market uncertainty caused by COVID-19 remains in place. At SalMar, we take an optimistic view on the future. In fact, the recent period has shown us how robust the salmon market is. Our job is to take the steps necessary to strengthen our position today while enabling us to perform even better in the future. In SalMar, we will continue to focus on the solution, not the problems. So it's a exciting new chapter. SalMar's business is based on farming salmon on the salmons' terms. Since SalMar's very beginning, we have been on the lookout for the most environmental sustainable sites for the production of salmon. In the past, we have only had the equipment to make use of a tiny fraction of the vast ocean space in the Norwegian economic zone. SalMar decided to challenge this restriction when we started our offshore fish farming concept back in 2012. There could be nothing more natural than making use of even more of the Norwegian coast, further out to sea in the salmon's natural habitat. For SalMar, offshore fish farming is a chapter that began back in 2012. The first key milestone was a feasibility study carried out in 2012-2013, which showed us that moving further out offered a huge potential, particularly with regards to space and optimal biological conditions. The second major milestone was the completion of the engineering and design of Ocean Farm 1, and Ocean Farm 1 was the first step towards opening up vast new areas. It provided a stepping stone on the journey from in-shore to more exposed waters. But there was no regulatory framework that would allow us to realize it. We must therefore pay tribute to the Norwegian authorities, which in 2015 established a development license scheme. Development licenses have given the industry and Norwegian R&D a substantial boost. The fact that SalMar had the opportunity to apply and was granted such licenses was a determining factor in realizing our Ocean Farm 1 project. The construction of the Ocean Farm 1 installation got underway immediately after we were granted licenses, and it was finally towed into place in September 2017. We have now completed 2 production cycles with fantastic biological results; good growth, low mortality and no delousing sums up the production so far. More recently, we have entered the Smart Fish Farm project. This is a concept that will allow us to cross the threshold and operate right out in the open ocean. Along the way, we have learned many lessons and has amassed a huge amount of data, which gives us a completely new foundation and insight into what is needed to operate in these harsh and exposed conditions. And the way it often goes is that the more you learn, the more you realize how many issues are yet to be resolved. Producing salmon in exposed areas of open ocean places immense demands on the production authorities and the technology concerned to make it happen. This has led us in SalMar to a realization that we need a strategic partner who can help us plug the gaps in our knowledge, and we realized that we lacked the expertise we needed to commercialize and fully exploit the potential of offshore fish farming. It is, therefore, my great pleasure to announce that together with Aker, we have now established the company SalMar Aker Ocean. This company will be the very spearhead for the development in offshore fish farming. Aker and SalMar will join forces to give an even more powerful boost to an accelerated development of offshore fish farming. This is a unique partnership with each party bringing complementary competencies, which are world-leading in their respective fields: expertise in aquaculture, biology, sustainability, technology and the know-how of working offshore are all areas, which together are crucial for our common success. We are incredibly pleased and proud that Aker and SalMar now has joined forces to make offshore fish farming a reality through the newly established company, SalMar Aker Ocean, where the ambition is to make a global offshore aquaculture company with the highest standards of fish welfare. Together with Aker, we will have the strength to realize the potential that exists in the open ocean for the sustainable production of food to a ever-growing global population. It's all about being willing to invest and willing to share knowledge and challenges across disciplines, and having the ability and the will to stay true to the course through a lengthy development process. I can promise on behalf of SalMar that, we, in partnership with Aker, will contribute all the competence and resources necessary to succeed on this journey. Our new commercial success story is on the starting blocks. We look forward to the next chapters in the story of fish farming, which will be written by SalMar Aker Ocean. And so with that, we have come to the end of the presentation on behalf of SalMar. Thank you.