P/F Bakkafrost (BAKKA) Earnings Call Transcript

My name is Hogni Jakobsen. I'm CFO of Bakkafrost. Today I'm joined by Odd Eliasen, Managing Director of Havsbrún. We are 1 person short. Regin Jacobsen will not be joining us today, he had to cancel due to a sudden illness in the family, so he has chosen to stay at home. But I can assure you, Regin is fine and the situation is also under control. So that said, a short summary of the quarter. This quarter has been all-time high when it comes to revenues. And also when it comes to operational EBIT per kilo. We had also an all-time high full year in 2020, with revenues exceeding DKK 7.1 billion. and an operational EBIT of 1.7 for the year. Operational EBIT in the fourth quarter was 376 million. And if we look at the operation, we have had similar levels as we had in the same quarter the year before. Similar volumes when it comes to harvest and also feed sales, however higher volumes when it comes to sourcing of raw material where we sourced 46,000 tonnes of material in the fourth quarter compared to 27,000 tonnes the year before. Cash flow from operations was positive with DKK 382 million. We had positive margins in the quarter for all segments, except the Scottish farming segment. The Board of Directors has proposed to the Annual General Meeting that DKK 10 per share shall be paid as dividend. And the Annual General Meeting is on the 28th of April. Global Markets in the fourth quarters were strong. We had significantly higher summer prices than the same quarter last year, approximately 22% up and roughly 5% price increase compared to the third quarter. It was a strong demand and a slight decrease in global supply of salmon. Food inflation is probably also a cause of the higher prices. We know in Bakkafrost, for instance, we have secured higher contract prices for this year. So the outlook on the pricing side looks also good for the remaining part of the year. If we look at harvest numbers, overharvest dropped around 2%, and all producing regions had lower harvest weights this quarter compared to the quarter before. Overall, Europe had unchanged global harvest volumes, whereas in the Americas, the supply reduced with around 6%. Norway was slight up at 0.8%. We did not see a significant effect from early tax-related harvest as we thought we might see in the fourth quarter. Harvest weights in Norway dropped around 5% to 4.2 kilo. In Scotland, supply reduced 3%. There were significant biological challenges in Scotland and harvest weights dropped 3% in Scotland. Iceland was the only region with a significant increase in production, 50% up. But however, also there, we have a reduction of 4% in harvest weights. The Faroes was down 11% and 3% down on harvest weights. Chile, 3.8% down, also slightly lower harvest weights. Feed sales in Chile reduced by around 5% in this quarter. And U.S. and Canada supply dropped with 18% and 16%, respectively, feed sales down 14%. Sales of salmon to Europe was stable in this quarter, but there was a strong growth in sales to the U.S. market. Chilean supply was a main contributor to the increased sale to Chile in this quarter, but we also see growing volumes of fillets coming from Europe into the U.S. market. Of course, the U.S. consumers have benefited from a strong currency so that helps on the sale to the U.S. market. Russia and Ukraine were down 46% of volumes due to the sanctions and war. And Japan and Chile and China also were lower on volumes in this quarter, whereas sales to the ASEAN markets were up with 9%. If we then look at the financials for Bakkafrost, as mentioned, roughly 1.9 billion in revenues in this quarter, an increase of 30% compared to the same quarter last year, and an increase of 214% when it comes to operational EBIT to DKK 376 million. Fair value of our biomass was minus DKK 426 million, and profit after tax minus DKK 154 million. Our margins improved across the line, except the FOF segment, which had an EBITDA margin of 14%, down from 20.6%. Margins in the Faroes Farming segment were NOK 27.56 per kilo, and the VAP segment had NOK 16.67 in margin. Farming margin in Scotland was minus NOK 39.96, which is an improvement from the minus 50 -- almost NOK 56 that we had in the same quarter the year before. In Scotland, we had exceptional mortality costs in this quarter of DKK 81 million compared to DKK 179 million in the same quarter the year before. We also had exceptional costs associated with the recovery operation of the sunken feed barge that we have in Scotland. And we booked around DKK 26 million in costs in the fourth quarter associated with that. If we look at the operational EBIT and adjusted earnings per share on a historical perspective, it's the best fourth quarter since 2019 for Bakkafrost. Adjusted earnings in this quarter were DKK 3.42 and DKK 19.02 for the whole year. And as mentioned, the Board has proposed to the AGM that we pay DKK 10 in dividends, which is a bit higher than dividend policy that says 30% to 50% of adjusted earnings to be paid as dividends. The balance sheet. Property, plant and equipment increased with DKK 758 million in this quarter to roughly DKK 5.6 billion. Biological assets increased to DKK 490 million, whereof around DKK 1.3 billion are fair value adjustments. Inventory increased to almost DKK 1.1 billion. And cash and cash equivalents also increased with DKK 210 million and amounted to DKK 720 million by the end of the quarter. Equity ratio dropped to 62% from 64%. Cash flow from operations were positive with DKK 382 million, from investments minus DKK 570 million and from financing DKK 339 million. During the quarter, we have increased our net interest-bearing debt from DKK 2.4 billion to DKK 2.664 million and we had undrawn credit facilities of DKK 2.5 billion at the end of the quarter. We have exercised extension option on our finance agreements so that we have extended that with 1 year. So we still have 5 years ahead of us in -- on our financial agreement, for the bank finances. Some headlines from -- related to ESG. In this quarter, in December, we finally received our new large 10,000 cubic meter well boat in the Faroes. It arrived just after new year. We had a large reception there. Bakkafossur is equipped with fresh water treatment technology. This is a new capability that we have not had in the Faroes and will have a positive impact on fish health and will help us to reduce the biological risk and performance even more in the Faroes. It also will prepare us for offshore farming in the future due to the sheer size of the vessel. It is equipped with the hybrid technology, which means that it is around 20% more fuel efficient compared to traditional vessels. We also had a Supplier Day in this quarter in the Faroes where we engage with local suppliers. We have set ambitious targets to reduce our CO2 emissions, and we cannot do that alone. So therefore, we have engaged with local suppliers in the Faroes so that we can together build robust partnerships to reduce the carbon footprint. And then the barge that I mentioned before, we have demonstrated in this quarter that we take our responsibility seriously when it comes to protecting the environment where we operate and make sure that we don't make -- do any harm to that. So in this quarter, we have performed a complicated rescue operation to lift the feed barge after the storm Arwen last winter. We ensure that no oil or feed escaped from the barge. It was lifted up, and we have removed the 3,000 tonne of sludge and feed remains and brought that for biogas. And I think it was yesterday, the barge was towed away again and will be refitted, repurposed. And then Odd Eliasen will go through the segment's performance.

Yes, good morning. I'll take you through the segment. First, we have a nice picture of the well boat, Bakkafossur, together with our -- some of our service vessels in Faroes outside our factory in Glyvrar. Harvest volume in the Faroese came down 7%, down to 90,276 tonne from 20,694. In Scotland, it was more or less the same, almost 5,200 tonnes compared with 5,122. The average weight in Faroe Islands dropped 4% from 4.9 to 4.7, and that was the opposite in Scotland. It increased from 3 to 3.2 kilos. Small transfer in Faroes came at 5 million smolt compared with 5.1 million Q4 '21. And in Scotland, we had 3.5 million of smolt enter the sea compared with 4.2. The average weight of smolt in Faroe Islands was 304 grams compared with 371 grams and in Scotland increased from 105 grams up to 115 grams. We had a very strong performance in the farming sector in Faroe Islands. The operational EBIT went from DKK 282 up to DKK 380, an increase of 34%. And while in Scotland, it was negative. Q4 '21, it was minus DKK 214, and this Q4 2022, it was minus DKK 149. The operational EBIT in Faroese came at 33% compared with 25% last year. And in Scotland, it went from minus 88% down to 50%. The operational revenue was more or less the same in Faroe Islands, DKK 1.139 compared with DKK 1.11 billion, and in Scotland decreased from [ DKK 180 million ] up to [ DKK 292 million ]. We had improvements in both region. In Faroes, we had an operational EBIT of NOK 27.56, an increase of NOK 9.22. In Scotland, it was negative in Q4 '21, NOK 55.95, and it was this quarter Q4 2022, it was NOK 39.96. So actually, we had a very strong biological development in Faroe Islands. We had all-time low sea lice level in Faroe. And we have improved our biological KPIs in -- especially in H2 in Faroe Islands. And that goes for biological FCR, which for 2022 ended at 1.06. And in Q4, the FCR was 1.03, so that is quite good. We had a substantial increase in the TGC. So we had very good growth. We had low mortality in the Faroe Islands also. And also the economical FCR was decreasing, meaning that the gap is closing in, and the performing is better. So we had a very, very strong biological improvement in the Faroes. And superior rates came also higher in 2022. In Scotland, it was a bit more challenging due to biological challenges and especially in October and November it was challenging, while December was more in line with our expectation. Even though we had low sea lice levels in Scotland, but that is due to fresh water treatment as well. We had also an increased harvest weight in Scotland. When we look at our numbers in Scotland and historical numbers, we can see that the performance have not been that strong. We have had challenges with the mortality, but we have seen it now. And in 2020, this proportion of mortality compared with our peers in Scotland, it has decreased. So hopefully, we are in the right path. We can also maybe explain it with this graph where we had our new freshwater dual treatment boat coming in action in September, October and November as well, and we can see a drop in the exceptional mortalities in Q4 and ending at the 4 weeks in December at quite low level, and we can see that this has continued here in the first 6 weeks in January as well. So what does this mean? On the upper graph here, we can see that typically in Q3 and also Q4, we have a low harvest weight, although this year in November and December, our harvest weight increased. And we can see for the first 6 weeks in January and February, the harvest weight is now over 5 kilo in Scotland. So that is quite important for us. And on the lower graph here, we harvest the same amount of fish, 570,000 fish in the first 6 weeks in '22 versus '23. And that -- this year in '23 it amounts for 1,000 tonnes more of volume, and that is due to the harvest weight was 5 kilo compared with 3.3 kilo. And if we then look at the value, the sales value, it has increased from DKK 110 up to DKK 280 million in '23. So there's a substantial difference when we can harvest big and healthy fish compared with small fish. Another milestone is, of course, the freshwater and the big smolt. We are aiming for One Summer cycles, One Summer, One Loch, One Operator and One Generation, meaning that we will aim for a production cycles that is 12 months in the Loch. And we have seen this materialize in the Faroes and it's working quite good. So we strongly believe that this is the right way to deal with it in Scotland. This is where we came from. There were 11 hatcheries when we took over SSC in Scotland, and there was a huge need of investment, as you can see. We have carried this on and invested a lot of money. Here, we can see some pictures of our new factory in Applecross. We will, within a short period, to transfer smolt from AP2, our hatchery in Applecross. Approximately, 125 grams will be transferred into the new tanks, 60-meter tanks, and we will deliver the first large, high-quality smolt to 300 gram in the end of Q2 to our farms in Scotland. This has been our journey in Faroe Islands. As you can see, we also had an average weight of 100 grams in the beginning in 2011 where we ended up at 350 grams for 2020. And this year, we are aiming for 400 grams in Faroe Islands due to -- we will have Glyvradal will be ready for production, or is ready. We will have fish coming out from Glyvradal next quarter. Norðtoftir has just delivered the first big smolt out of their new tanks and Viðareiði will also be ready. So we believe that we will be around 400 grams in Faroe Islands in '23. In Scotland, it will be back-end loaded, so we hope that we can increase our smolt weight from 110 up to 175 gram starting with the new delivery from Applecross in end of June, I would say, at 200 to 300 gram. So this will be a milestone for us, taking the production time down from 22 months, 20, 22 months down to hopefully 14 and then lower again when we can reach the 400 grams in Scotland in 2x -- 2 years from now. Shortly, I will go to the value-added products as well. We increased the volume from 6,600 up to 7,231. The revenue increased from DKK 359 million up to DKK 443 million in Q4 '22. The operational EBIT increased from DKK 28 million up to DKK 86 million. It was probably a bit back-end loaded with the new contract and new prices for the contracts. The EBIT per kilo increased also from NOK 5.71 up to NOK 67. In the Faroe Islands, 36% of the volume went for value-added products. And in Scotland, it was quite limited volumes that went for VAP. Fishmeal oil and feed, the FOF segment, also had a good year. We had quite a substantial increase in the revenue from DKK 1.66 billion up to DKK 2.43 billion. We increased EBITDA from DKK 81 million up to DKK 110 million, even though the margin decreased from 21% to 14% in Q4 2022. We sold a lot of our goods and fishmeal out of Faroe Islands, 12,000 tonnes compared with 12,500 tonnes compared with 3,400 tonnes. And if we look at volume for the whole year, we exported more than half of our production of fishmeal, mainly to our competitors in Norway, Scotland, and Denmark. We had good sources of raw material. It increased up to 46,000 tonnes, mainly it was due to off-costs from the Pelagic factories. Feed sales came in quite stable, 32,600 tonne. And our external sales increased with 300 tonnes, and it's not a big volume, but that is due to, we have a limitation of our production capacity in the feed plant. So mainly, we are selling into Bakkafrost and to Bakkafrost Scotland. That was my numbers.

Moving on to the outlook for 2023. According to the latest data from Kontali, we saw that volumes in Q4, supply in Q4 was lower than originally expected. Especially in Norway, there was a drop in supply compared to what was expected. For 2023, we believe there will be a flat supply development in the first half of the year. And then in the second half of the year, more volumes will come, 4% to 5% increase in the second half of the year which sums up to approximately 2% increase for the whole year. Supplies next year also looks to be tight. So overall, we have a tight market in front of us. So to sum up, global harvest in Q4 approximately 2% down. 2.3% supply increase for 2023 to be expected. We hold on to our volume guidance for 2023. We expect to harvest 98,000 tonnes for the group, 68,000 tonnes in the Faroes and 30,000 tonnes in Scotland. And we will release around 25.6 million smolt across the group, 16 million in the Faroes and 9.6 million in Scotland. We have reduced the number of smolt in Scotland as we will focus more on stabilizing the operation, and therefore, the smolt numbers in Scotland are lower than they have been in the past. We have secured 23% of the volume on fixed price contracts, VAP contracts. That's mainly out of the Faroes. Fishmeal and fish oil, our feed sales will be approximately 130,000 tonnes this year, and the volumes of fishmeal and oil are expected to be on the same level this year as they were in 2022. And then we will have the Capital Markets Day on the 6th and 7th of June, this time in Scotland, and we will look into the tanks that I showed you pictures of before, and hopefully see for ourselves that we have finally some large smolt in Scotland. Thank you. And I think we will open up for questions.

Christian Nordby, Kepler Cheuvreux. You have reported now a few quarters with exceptional mortalities in Scotland and then the feed barge this quarter as well and then January now looks a lot better with higher weights. Can you comment a little bit on what that means for your price premium in Scotland because Scottish salmon usually has a price premium, and on your underlying cost development on fish into Q1 now in Scotland.

Having increased our average weight, as Odd showed you on the comparison of the first 6 weeks this year compared to last year clearly demonstrates the benefits of increasing the average weight. We tap into a higher price band in Scotland with larger fish. So that is a significant improvement. So in regards to the premium itself, we are integrating the brands. We are selling the fish as Bakkafrost fish now, both in Scotland and in the Faroes. It's fed with the same feed. We are operating more and more alike. So over time, the margins will also we expect to develop more similar. We have customers that are willing to switch one for the other if we don't have that particular size that they require in a week, and we can supply from the Faroes or vice versa, they are often willing to do that. And in regards to costs, in general, there is an increased cost. We see that raw materials, for instance, for feed, both vegetables but also the marine content have increasing costs. You also saw the price development of fishmeal and fish oil, and of course, that drives costs up in the industry as a whole. I would say if we look at especially the Faroese operations, most of the costs are relatively stable. However, the feed is increasing.