Grieg Seafood ASA (GSF) Earnings Call Transcript & Summary

Hello, and welcome to the Grieg Seafood Conference Call. [Operator Instructions] Today, I'm pleased to present Andreas Kvame, CEO; and Atle Sandtorv, CFO. Please begin your meeting.

Hello, everyone, and good morning to those just awake, and welcome to our conference here. We will spend now 0.5 hour to 45 minutes to go through an exciting part of the development of Grieg Seafood. We have just entered into an agreement where we acquired the Grieg Newfoundland company based in Newfoundland, of course. I will -- my name is Andreas Kvame, and I will go through this presentation, which I hope you are able to see from where you are. And I will refer to the slides and the number on the slide, so you can follow by the phone. I will then go over to Slide #2 in the presentation sent out. This gives you a summary of the acquisition, taking the next step for our journey. This is in line -- the acquisition is in line also with the strategy that we have. We want to grow our volume as we have stated in our Q3 presentation. We have ambitions to grow above 150,000 tonnes harvest and reposition ourselves in the value chain. Secondly, this acquisition will also give us synergies to the existing operation and for the North American operations. Especially, this is related to sales and our marketing activity in a fast-growing market, as you will see in #3 -- point #3. It's very close to the U.S. market. It's the world's largest and fastest-growing market, consume above -- significant above 500,000 tonnes per annum, and it's growing in the rate of 5% to 10% per year. In the area, we believe we're a good biologic environment, and it's a big benefit for farming -- benefit in farming condition, very similar to the operation that we have in Norway. It's an area that's a virgin area where we can start the state-of-art onshore and offshore facilities. We have a strong focus on sustainability, fish welfare and responsible farming practices where we are and so also in Newfoundland. I will come back to this, but first go through the facts on this transition. Slide #3. The target is Grieg Newfoundland, which is hold or owned by Grieg Kapital; Kvasshøgdi AS, 39%; Ocean Choice International, 19.5%; and Knut Skeidsvoll hold 2.5%. The ownership of this after the acquisition, we have an agreement to acquire 99% of the of Grieg Newfoundland. And Grieg Seafood has an option agreement to acquire the remaining 1% of the share, which our local partner, OCI, is holding. Upfront payment to seller, NOK 620 million for this. Total NOK 264 million of this amount is for the work that Grieg Newfoundland has done in their project so far, including the licenses, which have a capacity of harvest volume of 15,000 tonnes, which give us a capacity cost of NOK 17.60. Remaining price is related to conducted investment. We'll come back to that. Financing of the upfront, NOK 250 million will be settled through issuance of new Grieg Seafood shares to the seller of Grieg Newfoundland. The rest of the transaction will be financed through increased debt facilities. This has close -- the closing conditions are that it has to be approved by an extraordinary general meeting and necessary regulation approvals -- regulatory approvals. Beyond the 15,000 tonnes, we will pay in milestone NOK 43 for our capacity from 15,000 tonnes to 20,000 tonnes. And we will have to pay NOK 55 for an annual capacity between 20,000 tonnes and 33,000 tonnes. Beyond 33,000 tonnes, there is no extraordinary milestones. In this project and acquisition, we have had Sparebank 1 Market as a financial adviser, and we have had lawyer company, Schjødt, as a legal adviser. To do the fairness opinion, Deloitte has take that part. Then we move over to Slide #4. This is some maps that you see where Newfoundland are. And if you're going down left, you see a ring there. That is the area which is -- name is Placentia Bay. And on the right side, you will see where the licenses are placed in Placentia Bay.. It's a huge area with no salmon farming at the moment. We then move over to Slide #5 in Newfoundland in brief. It's located -- it's quite near in Marystown in Newfoundland. We have now an exclusive -- long-term exclusivity for farming in Placentia Bay, which have a huge area. It's larger than Faroe Islands just to put it a bit in dimension. The total distance in Placentia Bay, it's 125-kilometer long. The project currently comprises a memorandum of understanding with local authorities and licenses for 11 seafarm sites. Three licenses are approved. When we are talking about licenses in Newfoundland, you have to be aware of that it's -- a license is not the same in all countries. In Newfoundland, one license can hold 1 million smolt in the first cycle. In the second cycle, you can increase that to 2 million sites. It's where -- 2 million fish per site. That's a bit comparable also to Norway and concessionaire or licenses you get in Norway. Then you have in the first cycle, you have got a lower volume. And then if everything is okay, you can step it up to the capacity given in the license. So we have 3 of them approved. There is 3 expected to be approved within 2020, and the rest is in different stages of application to the authorities. As the first one in Newfoundland and, I believe, in Canada for fish farming in general, we received an environmental impact study approved in -- we got this approved in August 2018 for the whole Placentia Bay area. The plan, it's a large RAS facility with hatchery, nursery and post-smolt modules. There is a schedule 3 post-smolt module. We'll focus on one in the beginning. The construction was started in April in 2019. Looking at the sea -- the temperature in the sea, the temperature profile in Placentia Bay is very similar to our Norwegian operation. Colder in the winter and warmer in the summer. In Placentia Bay, we have the exclusive right to farm salmon, and there will be no interconnectivity. It's isolated from other farmers, and that means that we can steer it. Also when it comes to biology, it's really important that we have this exclusivity. One requirement from the authorities is that the salmon that we use has to be sterile. If we then move over to next page, that's the production plan in Slide #6. We have divided it into different phases. And Phase 1, that will give us annual harvest volume of 15,000 tonnes by 2025. We expect the first harvest to be in year-end 2022 and in 2023, beginning of 2023. Phase 2, that we aim to reach a target of 33,000 tonnes. Even longer-term harvest potential in Placentia Bay of 45,000 tonnes will depend upon prudent risk management, approvals according to the EIS plan and sustainability and a profitable production. Investment per kilo, we expect to be similar to new sites in -- like in -- if you should build a new site in Norway. This will come much more back also in our Q4 presentation when it comes to guiding on CapEx. We strongly believe that this has a cost potential similar to the Norwegian operation. We then move over to Slide #7. Why are we doing this acquisition? Well, first of all, it is in line with Grieg Seafood's 2025 strategy. We talked about that in our Q3 presentation. We want to reach a harvest volume of above 150,000 tonnes by 2025. This will give us a good contribution to reach that volume. We have said that we want to grow organically. We will use new technology and M&A cost leadership. And also, we strongly believe that this will -- can be a part of reposition the company in the market when it comes to coming closer to the market in the east coast and combine that with our activity in British Columbia in the west coast. And all of this will have to be based on the sustainable farming. Then we move over to Page #8, synergy with the existing North American operations. Existing sales and marketing presence through ocean quality in North America, we have our own sales offices that add volume by this. We have a brand, which this also will support the Skuna Bay. The increased volume will strengthen the potential for partnership, category development and brand cultivation in the U.S.A. market. The good thing is also that when there is less fish in BC, according to our plans, there will be more in Newfoundland so -- and such to complement the production plan for Grieg BC, making Grieg Seafood the cheapest and more stable supplier of higher volume to the North American market. Then we move over to Page #9. That's about the market and how that looks. It's very close to the market. There is no air freight. It's truck transport, both on truck transport to go into this market, meaning that also we have lower logistic costs to come into this market from Newfoundland compared to, for instance, Europe, where quite a lot of issue is coming at the moment. The market is well above 500,000 tonnes per year going into this. It has a CAGR of 6.2% the last year since 2016. So -- and in the last quarter, the growth in the U.S. market was actually between 8% and 10%. Looking at the bars on the right side on this Slide #9, what you see on the pink color that the growth in the North American production has been 0. There has been nongrowth in production since 2016. So this can also lift the local supply to that market quite significant. Moving along to Slide #10, good biologic environment -- biological environment and benefit with farming conditions. Looking into Placentia Bay, the conditions are very similar to our Norwegian operation, either you compare it with our operation in Finnmark or compare it to Rogaland. The temperature profile is similar. And also there, it can fluctuate. It could be low water temperature with the risk of super chill that has happened occasionally, and we also saw in Newfoundland in 2019 warm temperature in other parts of the island. We never measure temperature above 18 degrees in Placentia Bay when the temperature was high in the western fjords. One other thing is that it is a rough area. It's exposed for high sea, but all sites are located very well. The depth on all of them is minimum 100 meter. There is good current, and there is a good oxygen level. Not a good thing with this area, if we get something in, we can't accuse anyone than ourselves because there is nobody else that can contaminate what we are doing since we are alone in this area with long distance to neighbors, neighbor farmers. We don't see the same situation in Newfoundland as we have seen in the west coast of Canada with the algae. Known -- at least, no known algae issues in this area. And there is -- the fjords, Placentia Bay or the bay, there is no threshold, which is also good. Moving on to Slide 11. We have the opportunity now to learn from all mistakes, all experience that we have got from other regions. So we are starting up with state-of-the-art technology. Everything will be new in this area. There is always a start to develop a post-smolt facility, which increase the -- we will follow the same strategy as we have in Norway and other region with the post-smolt to reduce the time in sea and also avoid -- one winter in the sea, only have one winter in sea. The supplier of the post-smolt technology and the smolt facility as a whole is AquaMaof. And we will also have state-of-the-art when it comes to the cages in the sea. It will also be very deep. It will be 40-meter deep pens, where allows -- also to do underwater feeding, allow the fish to stay below a layer if there is super chill or if there is potential warm water, which we don't believe. This is just a small brief. We will become much more in depth back to that when we have a Capital Markets Day in June. Then we can move over to the last slide, Slide #12. This is taking Grieg Seafood to our next step on our growth journey. For the past 5 years, we have focused very much on utilizing our existing licenses in all region with success. This has been a very good strategy for Grieg Seafood. This year, we will reach our target of 100,000 tonnes, and the focus we have had has created good shareholder values during this year. In our 2025 strategy, we have stated ambition to harvest at least 150,000 tonnes of Atlantic salmon to achieve leadership and reposition ourselves in the value chain from a pure commodity supplier to a customer innovation partner. This acquisition of Grieg Newfoundland strongly supports our strategy. More detail on the Newfoundland will be provided at the Capital Markets Day in Finnmark in June 10, 2020. This is just short brief on the project as a whole. If there is any questions, we can take them now either to me or to a Atle. So thank you.

[Operator Instructions] And our first question comes from Carl Johannessen from Pareto Securities.

Just a short question on remaining CapEx to reach the Phase 1, and it's stated that around NOK 360 million have been invested so far. Can you say something about what that cover and then what you expect in further CapEx to reach the first phase?

Yes, we can have a comment on that one. We have started up with a smolt facility. And what we are saying is that in order to produce 1 kilo in this area, you have to invest more or less the same as we are doing in Norway in new site. And we had one figure that we were using at the Capital Market Day we had 2 years ago, and that's what that we needed to invest approximately NOK 45 per kilo. In addition to that, you also have to have the biomass in the sea, which is close to NOK 25 per kilo. So totally NOK 70 per kilo is the figure that we have been using before, and we see this area lies within that figure. So this smolt facility that we have started to invest in is the first step on that one. So I think you just have to assume that when we are building up this capacity and you just have to assume that you -- we have to invest approximately totally NOK 70 per kilo capacity. And in addition to that is, of course, what we are paying for the opportunity to come into this area, which is more defined as the license cost, which we have stated in the press release as NOK 264 in total for 15,000 tonnes. That's approximately 17.6 per kilo. And we will -- sorry, we will also come back to more concrete guiding on the total investment figures for 2020 on the Q4 presentation next week.