P/F Bakkafrost (BAKKA) Earnings Call Transcript & Summary

[Audio Gap] of the financial results for Bakkafrost in the first quarter of 2023. My name is Hogni Dahl Jakobsen, CFO of Bakkafrost,, and I will be presenting this morning together with Regin Jacobsen, our CEO. We have prepared a short agenda as you usual, starting with a short summary of the quarter following up by a glimpse at the market and sales in the quarter. And then we take a closer look at the financials for the group. And then Regin take over and give us a deeper look into the segment performance before closing off with items of the outlook. So some highlights. This quarter, we have had all-time high revenues of DKK 2 billion, more than DKK 2 billion. And it is our second highest quarter in terms of operational EBIT. We made an EBIT of DKK 565 million in this quarter. In the first, we had quite low volumes, harvest volumes, 11,000 tonnes compared to 7,500 tonnes in the first quarter last year. So that, of course, has affected the results in the Faroes. In Scotland, on the other hand, we have doubled the harvest volumes to more than 8,000 tonnes in the quarter. Feed sales have been slightly lower, 22,287 tonnes compared to more than 26,000 tonnes in the same quarter last year. Raw material intake has more than doubled. So we have had more than 156,000 tonnes of marine raw material intake in this quarter. All our segments have had positive margins. And we had positive cash flow from operations of DKK 573 million. On the AGM, that was on 28th of February, it was decided to pay out a dividend of DKK 10 per share, and that will be paid out around the 22nd of May. So markets have been good in terms of price in this quarter. We have had all-time high prices, especially in the second half of the quarter. The first half was significantly weaker, but on average, NOK 104.83 per kilo, which is an increase of 31% year-on-year and 42% compared to the fourth quarter. And the weak Norwegian kroner has helped on the salmon price. We increased the salmon price. But even measured in euro, we have a price increase of around 16%. Last year, at this time of the year, the contract share was very high in the industry, which, in combination with a shortage of supply, increased prices significantly. In this quarter, we have not had the same level of contract share for the industry has been much, much lower. If we look at the market, the flows to the different markets and according to the latest data from Kontali, Global shares -- now global sales to all markets were down by 4.9% in this quarter. EU was down 11%, and the retail market in EU has been softer than previously. Russia is down 5% due to sanctions. Russia is primarily supplied from Chile but also from own production. China has come back after COVID and are now at levels close to -- or around the peak levels in 2019, had a 25% increase in this quarter. Volumes to the U.S. have been stable, especially strong in the beginning of the quarter, January and February and weaker in March and helped by a relatively strong U.S. dollar. Sales to Japan dropped 21%. The problem there is high air freight costs. If we look at global harvest, it dropped by 4.1% in the quarter. Taking into account inventory movements, the drop was 4.9%. European harvest is down 6%, a 7% reduction in Norway, where we also saw a 5% reduction in average harvest weights. In the Faroes, harvest dropped 18%, 22% drop in Iceland. And these areas, Faroes and Iceland, we also had slightly lower harvest weights than in the same quarter last year. In U.K., harvest increased by 15.5%. In the Americas, as a whole, harvest was down 1%, a 28% reduction in Canada, especially on the West Coast, and the phasing out of the Discovery Island is playing a role in this regard. Chile had good biological performance in this quarter. Harvest was up 3.3%, a 1% higher average weights on harvests, averaging around 4.37%. However, a drop in March to 4.2%, where the volumes also increased in Chile. If we look across the regions, Norway, Chile, Faroes and Iceland, they were strong feed sales in the quarter. Feed sales were up around 8% to 11% in these regions, whereas in Scotland, we had a reduction in feed sales. If we then move into the group profit and loss. Our revenue had an increase of 25% to just an excess of DKK 2 billion, and operational EBIT increased by 35% to DKK 565 million. Revenue tax was down in the Faroes from DKK 58 million in the first quarter last year to DKK 38 million in this quarter, and that is linked to the lower harvest volumes in the Faroes. Fair value adjustments down from DKK 177 million to DKK 54 million due to a change in the profile of the biomass, production cost and forward prices. And profit after tax was DKK 467 million in this quarter. As mentioned, all our segments have positive margins. We had an increase in the Faroes from NOK 36.03 to NOK 42.14. Scotland had a significantly higher increase by almost NOK 46, and it came out positive with a margin of NOK 28.23 in the quarter, which is the best ever in Scotland. Our VAP segment was also positive, at positive margins in despite of having relatively high raw material prices in the quarter and came out with an EBIT margin of 1.95%. The EBITDA margin in the FOF segment dropped from 19.6% to 17.6%. As mentioned, best -- second best operational EBIT in the quarter was only surpassed -- beaten by the results that we had in the second quarter last year. But if we look at adjusted earnings per share, this is our highest ever at DKK 7.19 per share. Looking at the balance sheet, there are smaller changes to the balance sheet this quarter. Cash and cash equivalents reduced DKK 150 million to DKK 570 million. Equity increased by DKK 488 million to DKK 10.9 billion, and our equity ratio increased by 2% from 62% to 64% in the quarter. Cash flow from operations improved by DKK 421 million, amounted to DKK 573 million in the quarter. And as we usually have a lot of ongoing investments, of course, that's also the case in this quarter, cash flow from investments was minus DKK 203 million. And we had capital commitments of DKK 812 million by the end of the first quarter, primarily the expansion of our feed capacity at Havsbrun, but also the ongoing expansions of our hatcheries in Scotland at Applecross and a cargo plane is also on our commitments this quarter. Cash flow from financing was minus DKK 590 million and cash at the end of the period was DKK 570 million. Our net interest-bearing debt has decreased by DKK 307 million in the quarter and was DKK 2.4 billion at the end of the quarter. Our bank facilities are unchanged. We still have EUR 700 million and EUR 150 million accordion option available. Undrawn credit facilities amounted to just short of DKK 2.9 billion. And then a short ESG update. We have recently released our sixth Healthy Living Sustainability Report. I also introduced an ESG index to make it easier for everyone to find all the facts and numbers. And alongside, for those who don't want to read the thick volume, we also have a shorter summary report, which is available on our website. And then in regards to TCFD, we have also made some progress in this quarter. We have been working for a number of years now to align and get consistency with the TCFD reporting recommendations. And one of the last steps was to perform the climate related scenario analysis, and that has been done and is also documented now in our sustainability report. And then finally, on SBTi, we submitted our targets last June. And in this quarter, the validation process has started with SBTi. So hopefully, we can conclude that process shortly. And then I will hand it over to Regin Jacobsen, who will go through the segments.

Good morning, everyone. Let me go through the segments. First, the farming segment. The volumes in the Faroes dropped 37% from 17,500 tonnes to 11,000 tonnes. The harvest weight dropped 7% from 4.8 to 4.4 kilos in this quarter. Half of all the volumes in Faroes was actually harvested in January. The breakdown from the Faroes was 37% from the North, 35% from the West and 28% from the South area. The smolt transfer in Faroes was 2.1 million smolt, and size was 20% up from 353 grams last year to 424 grams this year. In Scotland, the harvest was 5.3 kilos versus 3.7 kilos last year -- sorry, it was 8,000 tonnes this year versus 3,900 tonnes last year. So doubled. The harvest weight was 45% up, 5.3 kilos versus 3.7 kilos last year. And all areas in Scotland were consistent from 4.8 kilos to 5.5 kilos on average. So good development in all areas in Scotland in this quarter. The smolt transfer in Scotland was also in the right direction. The size was 111 grams versus 102 grams, 1.7 million versus 2.3 million last year. The new hatchery in Applecross will gradually start operation over the summer. However, slightly delayed around 2 months, the AP-4 will be started up in 2 phases. One phase will start up now in May and one phase will start up in August. We believe that short-term marine cycles in Scotland will also be again changing difference versus today's operation. The operational EBIT from the Farming division in Faroes was DKK 314 million versus DKK 471 million last year. The margin dropped to 29% versus 39% last year. In Scotland, the operational EBIT was DKK 155 million versus minus DKK 53 million in the first quarter last year. Through this quarter and so far this year, we have maintained strong operations in Scotland with premium quality salmon and our One Company strategy has materialized and our sales and branding have created extra value and our customers have recognized the high-quality of the fish, whether it's farmed in Scotland or in Faroes. On the cost side, I just mentioned some numbers. We have seen over the last years, there is an increase in cost, especially with larger smolts. In the old days, smolt used to be around NOK 3 per kilo. Now smolt cost is -- for 2023, so far, it is NOK 5.73, so it's up. We expect in the future that larger smolt cost because the fish is longer onshore, will gradually be reducing the cost in the marine phase as shorter cycles will be less costly. However, we also see an impact of the feed inflation of raw materials which has our -- especially the last 12 months had an impact. And so far this year, the feed cost is around NOK 3 higher on per kilo fish compared with last year. So there is an impact both on smolt and feed. So if you look at the Faroes again, we had expected a lower volume in the first half of '23 due to the transfer of smolt 1.5 years ago. We have much lower in the first half of the year and higher in the second half of the year. The biological performance in Faroes have performed good, strong growth rates, low mortalities and good feed conversion ratio, has been exceptionally strong also in this quarter. We had lower average weight in the quarter, and this is due to the very strong focus on low mortality. So we have prioritized some harvest early in the quarter versus treatments. With the new Bakkafossur, we have good capabilities to have good fish welfare also with treatments. In Scotland, we saw early signs of improvements in the fourth quarter last year, where application of best practices have significantly improved the operations. Through this quarter and so far, also in the second quarter, we have maintained strong operations in Scotland. Our customers have recognized the high-quality of fish and also, of course, the large size of fish and enabled us to access good value. This is an overview of the development in the Faroes islands where we see the growth rate, all-time good growth rate in Faroes, also all-time low feed conversion ratio in the Faroes. On the survival area, we also see that it is all-time high, which is, of course, very important. Sea lice numbers are all-time low. And with our capabilities with Bakkafossur with dual combat system on freshwater, we will have even more sustainable solutions in our toolbox to combat sea lice with a high fish welfare. The average smolt size has increased in Scotland. Now we are back in Scotland. And we expect that the start-up of Applecross during the summer will give us further increase during the second half of this year. However, the full start-up of Applecross will be during the next 12 months. So therefore, this will be a gradual improvement. As said, the start-up is delayed 2 months, we had expected the fish to be in the system a month ago or 2. The first fish will go in around the 20th of May, so sometime next week. So hopefully, we can see some fish when we come there on our Capital Market Day in 2 weeks. The average weight is the biggest change, as you see in this graph, where the harvest in this quarter has been driven by good growth and healthy fish and not as many other earlier quarters, biologically driven. So the strategy is to hold fish for growth while health of fish is good and mortality is low, which gives us much better value. We also see in Scotland that the farming KPIs have improved with good TGC, good growth and also better feed conversion than last year. Still, somewhere to go or some improvements to achieve, but things goes in the right direction. Also on the mortality, we see reduced mortality, which is the biggest change and most important, change in Scotland. The mortality for Bakkafrost versus the industry is significantly lower in this quarter compared with last years. We actually have the lowest mortality in the last 4 years in our operation in Scotland. This overview shows the mortality ratio. The sea lice control is excellent now with the addition of dual freshwater systems last year, which works very, very well. Lowest first quarter mortality, as said, the recent 5 years and now good capacity to handle ill health and general health which has improved our KPIs over the last 6 months and good growth and low mortality and a bit good feed conversion ratio. So moving to the FOF segment. The value-added products have performed well in this quarter with positive margins despite higher salmon prices. For many years, Bakkafrost has had the strategy to use around 40% of the harvest volume for value-added products in the VAP segment. We started this operation in the mid-90s around 30 years ago, and it has been a good strategy and has been good for us over these years. This strategy, however, will be revised depending on the outcome of the Faroese government's proposal to adjust the revenue tax, which probably will be concluded within the next few weeks. This also applies to our announced 5 years investment plan, which will be revised depending on this outcome and hopefully can be communicated on our Capital Market Day in a few weeks. The numbers for our VAP segment in the first quarter are actually around DKK 80 million improved compared with the first quarter last year. If you look at the 5,000 tonnes that we have produced in the quarter and look at the increased value compared with the increased raw material prices, we have actually increased the value of DKK 80 million. So that is the strongest change from one quarter ever in this area. We had to admire the market change over this difficult period that it has been possible to increase the prices this much and that the demand is still very high. Moving to the FOF segment, fishmeal, oil and feed. The EBITDA increased 47% from DKK 86 million last year to DKK 126 million this year. The EBITDA margin was 18% versus 20% last year. The external fishmeal sold increased 41% from 9,797 tonnes first quarter last year to 13,775 tonnes this year. Total feed sales, however, dropped 15% from 26,000 tonnes to 22,300 tonnes. The raw material sourcing has been the key for the good development, where we saw a doubling of our sourcing of raw materials. And actually, to date, we have sourced 235,000 tonnes. So the good trend has continued into the second quarter. If you look at the market development, it is quite interesting to see that as you see the red graph compared to the first quarter's earlier years, this is the strongest first quarter for our feed segment ever. And this is in a time where the -- as you see on the graph below the dotted lines, the blue dotted line is the marine oil. The green dotted line is [ rapeseed ], which is a vegetables, vegetable sourced -- vegetable sources compared with marine sources. So we see that there is -- the prices are going in different directions. And we know that Bakkafrost competitive advantage is actually in the availability of marine raw materials. And this is a very interesting development where our sourcing and availability in Bakkafrost is quite good in a difficult time where marine oils are scarce. So coming to the outlook. We, as Hogni mentioned, we expect a low single-digit global growth in 2023 on supply side. However, '23 is as '22, a year of 2 halves. The first half of the year where there's a negative supply growth and the second half of the year where there is a low 1-digit number supply growth. The bigger supply growth is driven from Americas in this fourth quarter, especially. In Europe, it is quite stable, quite flat, which also has impact. But this year also the dotted line indicates that the supply growth has been taken a bit down from last quarter. So we expect a tight market over the next couple of months and also generally over the last -- over the next few years. Of our own operation, we expect 98,000 tonnes to be harvested this year, 68,000 tonnes from Faroes and 30,000 tonnes from Scotland. We expect that the market in general will be tight. And that the low supply will have still a strong price development for salmon. We have lower contracts here. And as I said before, depending on the results from the government tax proposal in Parliament in Faroes, we will have to revise our strategy both on contracts and investments. On feed sales, we expect around 120,000 tonnes of feed this year, fishmeal and oil, as said the volume has been strong so far. We expect at least to achieve the same sourcing as last year. And now we look forward to welcome to our Capital Market Day in Scotland on the 6th of June where we'll talk more about these numbers and these investment plans for the next 5 years for the period from '24 to '28, how we can develop the company further. I think we will have a good message there. And I believe that we have a great company, and we -- no matter what, we will have a good message in Scotland. So thank you very much. And if there are any questions, please feel free.

Christian Nordby, Kepler Cheuvreux. You have 12% lower biomass year-on-year. Can you give some indications on the split between Faroes and Scotland and how that has for implications for harvest profile for this year?

Yes. So as -- correctly, as you have realized that we have lower biomass, and that is also affecting the share between the first half of the year and the second half of the year. So we have higher harvest in, especially in Faroe Islands in the second half of the year, whereas Scotland is more even for the first and the second half of the year. So that is the main takeaway from that. Probably 60% to 65% of the harvest this year, unfortunately, in Faroes is for second half of the year.