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Executives

Ivan Vindheim – Chief Financial Officer

Analysts

Patrick Roquas – Rabobank

Gianmarco Bonacina – Equita Sim SpA

Marine Harvest Asa (OTCQB:MNHVF) Q4 2013 Earnings Call February 5, 2014 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the MHG Q3 2013 International Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Ivan Vindheim, the CFO. Please go ahead.

Ivan Vindheim

Good morning and good afternoon everybody. Welcome to this walk through of Marine Harvest’s fourth quarter presentation. My name is Ivan Vindheim and I am the CFO of the company.

After the walk through, we will have a separate Q&A session. As you saw we will start at page 3, highlights. All time high revenues for the fourth quarter and for 2013 as a whole on the back of record high salmon prices.

Strong markets, operational EBITs NOK 1.034 billion which is the second best quarterly results ever and if you look at the full year earnings, all time high.

We got listed on the New York Stock Exchange the 28th of January 2014 and another highlight, the Board has decided to distribute a quarterly dividend of NOK 1.2 per share for the fourth quarter.

The Board already asked the proxy from the General Assembly. So this dividend will be distributed as soon as possible.

Then over to page 4, key financials. Turnover for the fourth quarter, NOK 6.7 billion, full year 2013, NOK 19.2 billion. This is 24% growth year-on-year.

Operation EBITs as already mentioned NOK 1.434 billion for the fourth quarter and NOK 3.2 billion for 2013 as a whole.

Net interest-bearing debt, NOK 7.8 billion. Underlying earnings per share after the reverse splits, NOK 1.83 per share.

Return on capital employed for the quarter, 20.3% and for 2013, full year 18.2%. Operational EBIT per kilo for the various regions, in Norway, NOK12.03, Scotland, NOK 10.23, Canada, NOK 10.20 and Chile, NOK 2.48.

Then over to page 4 and prices already mentioned, an extremely good demand in the fourth quarter as it led to record high prices. In Norway, a news of NOK 41. In Chile, NOK 55 for c-trim fillets which corresponds to NOK 33 per kilo to the farmer and North America, the Canadian salmon, NOK 45 per kilo.

If we look at price achievements by region, on page 6, we can see it was fairly good. The contracts have hampered the total achievement somewhat. But, all in all, an okay quarter price achievement-wise.

The share, very good in this quarter, 92% for Norway, 90% for Scotland and 88% for Canada and 91% for Chile, which is very satisfactory.

Page 7, Norway, an extremely good quarter for the Norwegian operations and operation EBIT of NOK 825 million. So consequently, Norway is by far the most important part of our business still. The main operational EBIT of NOK 12.3 million which is satisfactory.

However, that said, we see that cost has increased in Norway although we are very cost-efficient compared to our peers. We see that the underlying cost is increasing on the back of higher costs for our input factors.

In addition, we see that the level of sea lice treatment in Norway in certain areas is at high level, which is a concern to us.

Then over to page 8 on the sales contract portfolio for Norway. The contract share for Norway in the fourth quarter was 36% which corresponds to almost 25,000 tons. In absolute terms, this number is down in the first quarter 2014. But in relative terms, it’s up to 42% due to a seasonal drop in volumes.

Then over to page 9 and the operation EBIT per kilo, per region. We see that, once again, the best region was the north region with an operational EBIT per kilo NOK 15. The poorest one was the south at NOK 7.22.

This spreads has been more or less the same for this year and shows the cost efficiency for the various regions in Norway in a good manner. We do not foresee that this difference will change substantially in the quarter to come.

Then over to Scotland, NOK 10 per kilo for the quarter. Scotland full year, record high results, but the fourth quarter was challenging due to AGD. But, all in all, an extremely good year for our Scottish operation and we are very satisfied with that.

Then over to Canada, EBIT per kilo ton. The Canadian production in the fourth quarter was okay. Fantastic prices, Canada is a challenging area to form Atlantic salmon, but the nearness to the attractive North American markets is a crucial part of the net earnings. So all in all, NOK 10 in EBIT per kilo is very satisfactory and Canada like Scotland has had its best year profit-wise.

Then over to Chile, page 12. The second quarter in a row with black numbers, NOK 2.5 in EBIT per kilo. We can see that it’s substantially lower than Canada, although they are selling into the same markets, the U.S.

The reason why is the production cost increase in Chile. Over the past few years, production cost in the fourth quarter was $5.0, in box which is somewhat down compared to the third quarter, but still at a high level.

Our biological concerns remain. We are treating against sea lice heavily down there as we speak and we cannot see that the biological issues are resolved although the regulation is somewhat more severe than what’s that used to be.

Then over to page 13, Ireland and France, a very difficult quarter for the Irish operation and a very difficult year for the Irish operation. They have struggled with high seawater temperatures and a lot of biological issues in that regards. That said, this is the first year of loss in Ireland, also for the Irish operation in many years. And we hope that when we close the books next year, this situation will be improved.

France, once again an extremely good quarter. They have almost 100% of the fish in the spot markets. High yield, very good price achievement in the quarter, but also for the production cost we saw quite good numbers and EBIT per kilo of above NOK 14 which is satisfactory.

Then over to our value-added business, negative NOK 37 billion, another quarter. We have seen strikes on the back of the restructuring process we have started down there and we are to close down two factories, one in the first quarter and one in the second quarter in addition to the three factories we have already closed down and this may lead to or may give rise to poor productivity also going forward.

And so far in the first quarter this year, spot prices in Europe are extremely high and also NOK 48 that doesn’t help and we foresee negative figures – for our value-added business, also for the first quarter of 2014.

Then over to morpol processing, an operation EBIT of NOK 64 million in the fourth quarter of 2013 which corresponds to a return on sales of 4.7%. Our breakeven price of approximately NOK 44, so with the current spot prices in the first quarter, also morpol processing is losing money and will mostly likely do so for the quarter as a whole.

That said, a very good fourth quarter on the back of high volumes and high production efficiency.

Then over to page 16, the feed factory. This project is progressing well. It will be up and running as from the second half of 2014 and it will produce approximately 60% of our feed meat in Norway.

Then over to our financials, harvest volumes are more I guess on page 18. We have the P&L we have already been through it. So I won’t spend time on it now. So I just go to page 19 and the balance sheet.

Total balance sheet at the end of the fourth quarter amounts to almost NOK 34 which is substantially up compared to the second quarter 2012 and the main explanation here is the consolidation of morpol in addition to an organic growth.

Bear in mind that we are increasing harvesting volumes from 343,000 tons in 2013 to 405,000 tons in 2014. That biomass, we already have in the year. And net interest-bearing debt, as already mentioned, NOK 7.8 billion. Net interest-bearing debt/equity 47.6%. So now we are below our target of 50% and equity ratio of 48.7%.

Then over to page 20 and the cash flow statement. Opening balance for the fourth quarter was NOK 7.9 billion, we made an operation EBITDA of NOK 1.3 billion. We saw substantial increase in working capital due to peak season for our processing units but also feed purchases and a late refund of VAT.

The latter amounts approximately NOK 200 million and it was supposed to be paid in December, it’s turning in January. So adjusted to that we are talking about NOK 1 billion which is more or less is related to the higher working capital for the processing units and feed purchases.

This working capital will be released in the first and second quarter of this year to a large extent, because of a trough season for the processing units and a seasonal lower growth for our farming units.

CapEx amounted to NOK 590 million, of which NOK 150 million is related to the feed factory. So, in total for – in 2013, we have spent NOK 600 million out of the total NOK 800 million budgets for the feed factory.

Of our investments of NOK 202 million is more or less related to the rest purchase of the Morpol shares 12.9% of the shares and the effect amount is NOK 256 million.

Net interest, NOK 158 million, other items, NOK 164 million. We convert – our convertible bond in November and the effect on net interest-bearing debt was NOK 1.8 billion. The distribution of the third quarter dividend of NOK 0.75 per share amounts to NOK 277 million.

In the fourth quarter, we also saw a strange strength on the euro versus the NOK which had a negative impact on net interest-bearing debt of NOK 187 billion.

All in all, this resulted in net interest-bearing debt of NOK 7.8 billion at the end of the fourth quarter.

Then over to the cash flow guidance, on page 21. We think or believe that the working capital build-up for 2014 as a whole will amount to NOK 800 million. The increase is due to the opening of the feed factory which will lead to working capital tie-ups. In addition, we also want to grow our farming business organically mainly in Scotland and Canada which also will tie-up some working capital.

Our total capital NOK 1.7 billion, of which NOK 1 billion is maintenance and which is more or less in line with the depreciation. NOK 500 million is related to structural investments. Organic growth and strengthening of assets and the rest NOK 300 million is related to the feed plant and the completion.

Interest expenses, NOK 400 million and tax payables NOK 280 million. As already mentioned, the Board has reserved a dividend for the fourth quarter of NOK 1.2 per share. The net interest-bearing debt target for 2014 will be set in connection with the release of the first quarter report in May or later in April.

Bank facilities, our current bank financing expires in the first quarter of 2015 and is to be refinanced in the first half of this year i.e. 2014, there is a typo there 2013, but it’s supposed to be 2014.

Then over to supply developments, total supply in the fourth quarter was 528,000 tons which was in line with the forecast we submitted in the third quarter. A 2% growth in Europe and 8% increase in Americas.

If you look at the prices at page 23, we saw prices in Europe north of NOK 41, also in North America for the Canadian salmon we had a fantastic price of NOK 45. Not that good for the Chilean salmon for c-trims, NOK 55 per kilo, but if you convert it to in box to the farm in Chile we are down at NOK 32, NOK 33.

So consequently not the same price development for the Chilean salmon – not for the Canadian salmon and the demand explanation is that, the supply in Chile increased substantially in the fourth quarter and in 2013 as a whole whereas the Canadian supply was more or less stable.

Then over to the demand and the consumption on page 24. EU growth was more or less in line with the European supply growth. In the U.S. we saw very strong demand we also saw that imports from Europe increased for the first time in several quarters.

It was a shortage of Canadian salmon in the North American markets which led to demand for European and the Scottish and France as a whole picture, introductory part of the American market.

In general, good demand in South America and Asia. The Brazilian market continues to grow extremely well.

Then over to the industry supply outlook on page 25, global supply increased next year, is not according ourselves around 5% if we include the uncertainty we are talking about 2% to 8% and this growth will take place in Norway. For the other regions, we think the development will be more or less stable.

And the winter temperature in Norway so far this year has been high which has led to a good growth so far. And normally, this also leads to high supply volumes when you add up the year with the full year.

And the first quarter supply outlook is very good at best zero – excuse me, at best zero plus in the first quarter maybe a decline. So far, the export for Norway has been below previous year figures and this has led to extremely high prices in Europe, actually record high prices and the – so far this year is that NOK 48 which is extremely high.

When we start from new generation in May June, the supply increased year-on-year with start. That said, 2016 looks very good with respect to the supply side. So will that we foresee some more volatility related to December in 2014. We also expect that the prices for 2015 will be strong and we are still optimistic when it comes to the price achievement in the near term.

So much about the supply side, then over to our own harvesting volumes. As we guided in 2014, 405,000 tons for 2014 as a whole for Marine Harvest. This is up from 325,000 tons for the first quarter 2014.

We expect a total harvest of 80,000 tons of which 47,000 tons is in the Norway. These numbers are exactly the same as for the first quarter of 2013. So also for Marine Harvest the supply growth will take place as from the second quarter, but mostly for the second half.

And outlook on page 27 some markets, poses attractive 2014 net cash flow opportunities. The forward price for the second quarter until the fourth quarter 2014 is at NOK 38.5 as we speak. And that said, we think that the salmon price in 2014 – for the second half 2014 will be affected by the supply growth year-on-year.

At the moment, you can contract the second half of the year at around 36, 37 on fish growth. So that’s the consensus in the market. So consequently down compared to the current level at 34.45 this week and 48 year-to-date 2014.

Furthermore, relatively high – in 2014 to catch this organic growth. Strategic-wise we are opening the feed factory in the second half this year. We also are considering M&A possibilities in Norway and Chile and we focus on the progression of the Morpol.

The sea lice level in Norway is a concern in some areas and in Chile, we are concerned not only for the area we are present in regions but also in regions where we are not present.

So this is an issue and it’s –yes, one of the most important factors in terms of cost going forward, both in terms of what’s a sustainable growth for the industry, both in Norway and in Chile.

In Norway, there is an ongoing debate on the production framework which called the maximum live biomass. There is a proposal for average maximum live biomass which we are against, there are values used outer and the debate is still ongoing. So what will happen and what the final conclusion will be, we don’t know yet.

But this will be an important factor when it comes to the production throughout the year in the years to come. We think on average, maximum live biomass will make the production even more skewer than what it is today. So, consequently we do not want to implement it. But the final outcome of that debate, we don’t know yet.

Yes, the quarterly dividends, I already mentioned twice, NOK 1.2 per share and it’s to be distributed as soon as possible. Okay, that was the walk through of the presentation. Then, we open up for a Q&A session.

Question-and-Answer Session

Operator

Okay, thank you. (Operator Instructions) We will now take our first question from Patrick Roquas from Rabobank. Please go ahead.

Patrick Roquas – Rabobank

Yes, good afternoon, Ivan. It’s Patrick Roquas from Rabobank. I’ve got two questions on your initiatives on feed. Firstly, do you have an idea what kind of volumes you will be producing this year and next year and secondly, could you give some more flavor on your considerations with regard to building a second one in Norway? Thank you.

Ivan Vindheim

Yes, well this factory is up and running. The output will be 220,000 tons which accounts for approximately 60% of the feed need from marine harvest in Norway. This is at full speed and the hope is that we will see that already in 2015. Our guidance for the second half of 2014 is a little bit hard to give.

At best, 50% of the volume, but the experience is that when we open up a factory, it takes sometime for its 100% utilization. Okay. This is the first factory. This is the first step for Marine Harvest in feed. We want to grow this segment and the next step is the second factory. We haven’t decided where to build it or when. But when the first factory is up and running, and when the feeds are ready for the second step we will do it.

Patrick Roquas – Rabobank

And final question, would you be willing to produce for third-parties as well or is it only for your internal demand?

Ivan Vindheim

The first factory is for internal demand and then the second factory will – at least for the lion share be for internal demand, but once again, this segment we want to grow. So at some point, we may look at also external customer sales.

Patrick Roquas – Rabobank

Okay, thank you very much.

Ivan Vindheim

Welcome.

Operator

Thank you. (Operator Instructions) We will now take our next question from Gianmarco Bonacina from EQUITA. Please go ahead.

Gianmarco Bonacina – Equita Sim SpA

Yes, good afternoon. A question about your margin for 2014. It came out strong in 2013 you had some negative impact from rising input cost, but during 2013, the commodity cost declined quite dramatically. So shall we expect for 2014 positive margin contribution from the lower commodity cost which normally I think, they go into – I don’t know maybe six to 12 months delay.

And the second question is on your feed initiative. Just understand in terms your vertical integration, so your plan is to become vertically integrated with regard to all your needs or this factory will be mainly just producing the basic feed for your salmon production. Thank you.

Ivan Vindheim

Yes, to start with our cost and consequently our margins. Our production costs were substantially up in 2013 due to rising input factors but also due to our troubles on the production due to weather, et cetera. So, you are right, the input factors for the feed is decreasing.

But we still have high cost on our opening balance. So, decreasing input factors will lead to somewhat cheaper feed which will lead to a lower production cost. But it will take some time. You mentioned some lag, you are completely right.

So, the business in general, in Chile, we think that the production cost will drop because of the higher volumes this year. We are increasing the volumes from 28,000 tons to 56,000 or 58,000 tons.

That will of course lead to economies of scale, all else would be equal. So, but, so I think you are right, but, to start with, I do not think we will see any production cost reductions because of the high cost on the opening balance due to troublesome 2013 production-wise, but also because of the rising input factors which we have put on the balance sheet.

But – so maybe stable, maybe somewhat down. It depends on further development in 2014 and the biological development is extremely important and we don’t know that yet. We have just started it. Then if we – you asked about the vertical integration and the feed segment we have established.

The first factory will produce standard feed, the functional or more sophisticated feed we will buy from others. The standard feed accounts for 60% of the feed needs for Norway. When I mentioned the consideration about the second factory, I was also talking about Norway. So, for Scotland we will continue to buy from others and in the case for Canada and Chile. So, I don’t know if that answered your question.

Gianmarco Bonacina – Equita Sim SpA

Yes, thank you very much.

Ivan Vindheim

You are welcome.

Operator

Thank you. There are no further questions in the queue at this time.

Ivan Vindheim

Okay, thank you very much everybody for listening to me.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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