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Executives

Alf-Helge Aarskog - CEO

Ivan Vindheim - CFO

Analysts

Kolbjørn Giskeødegård - Nordea Markets

Patrick Roquas - Rabobank International

Marine Harvest ASA (OTCQB:MNHVF) Q2 2014 Earnings Conference Call August 27, 2014 2:00 AM ET

Alf-Helge Aarskog

Good morning and welcome to the presentation of the Second Quarter 2014 for Marine Harvest. To present today I have our CFO, Ivan Vindheim. He will help me with the details on the numbers and myself, Alf-Helge Aarskog. Now you ready to memorize it, then we can go continue on to the presentation.

First of all this quarter I guess was a surprise to Marine Harvest. We expected a price decrease. The price decrease came but when we see a supply of -- a global supply increase of 16% in this quarter and the prices holding as good as they did, it really speaks for a very, very strong summer market. This has resulted in the highest operational EBIT result ever for Marine Harvest, north of NOK1.2 billion and also on the back of large harvest volume, 114,000 tons. I’ll get back to the increase regards to the harvest volume.

We completed the Meridian sale that was divested to gut [ph] Aquaculture. We started up the feed factory before plan. I’ll come back to the details on that. And the board has stated that the dividend of NOK 1 will be paid out in this quarter per share.

Some key financial figures, if you look at turnover here, NOK 6.5 billion, nearly 50% up from Q2 2013 on lower prices. It’s tremendous top line growth in the company. In terms of the EBIT number, as I said NOK 1.2 million and NOK 1.20 million and 114,000 ton in harvest volumes.

The EBIT per kilo in the different farming regions -- it’s fairly similar NOK 12.16 in Norway and NOK 12.19 in Scotland, NOK 11.01 in Canada and then Chile at NOK 5.5, outstanding out on the lower end. But the Chilean performance is good compared to what we have seen before. This really shows the development in the price given the supply growth. As I said 16% increase globally, the price has been trending down but not as strong as you would expect with the 16% supply growth. The quarterly price has been fairly stable in Americas, compared to Q2 2013 was down compared to Q2 2013 in Europe with 12% in local currency. If you look back and see into Q1, you see a significant price drop in both regions, both Americas and in Europe.

The price achievement from Marine Harvest this quarter back to origin here. We see that we had the decent price achievement in Norway, 35% contract share, 92% superior share is -- the superior share we are satisfied with, the contract share is strong and it speaks for fairly strong contracts in Norway.

The same is the case for Scotland, very good quality of the fish in Scotland, less so in Canada and Chile, some quality problems in Chile in terms of superior or mature fish and in Canada some rules and some downgraded fish as well. Price achievement in both regions is below what we expect but still quite good.

The Norwegian operation, strong volume growth in Norway 28%. Remember this is on the back -- we compare to Q2 2013, which was hampered by lower small transfers in the fall of 2011 and spring of 2012. So we are basically taking back where we should be in terms of production. Costs slightly up compared to the second quarter of 2013 but down compared to the first quarter of 2014. What we have seen in Norway this quarter and over the summer as well is very high sea water temperatures, especially in the Southern part of Norway. We see temperature at 16, 17, 18 degrees down deep into the water column and that has an affect both on biology, but also on growth and feed conversion rate. We also have issues in Norway, with sea lice we spend too much money treating for sea lice and keeping the official limit in terms of government control. And this is an issue for the entire industry and something we work hard on and try to figure out solutions for. But up to now, there are no silver bullets. We have regions where we do not [indiscernible] but that’s usually where we have a loan and where we can apply our own strategy. If you go Agder and to northern part of [indiscernible], northern part of Norway, there are pockets in the Norwegian operation that is very good. But overall, the sea lice challenge is high.

This is the contract portfolio, 35% in the second quarter, a higher percentage in Q3 2014. We are closing in on 30,000 ton on contracts. And then it proportionately drops going forward as it usually does. But we are very well covered, both in Q3 and Q4 compared to the harvest volume we are looking into for the next quarters. And this is on good prices, slightly below the fish pool price, even though it keeps on changing every day.

In terms of the different regions, I think we can say that there are different challenges in the different regions in Norway in terms of farming. In the region south, which for Marine Harvest goes from Agder in the south to [indiscernible] in the north. There are although challenges in regards to PD and also sea lice is the fact.

This region as Cirrus usually performs the best and the performance at NOK 11.6 per kilo in the south is good, but we will, in this region, seed the EBIT per kilo and the cost level slightly increase over to four. That is we are changing into the next generation and we do not expect as good numbers in the third and fourth quarter for region south. Regions west goes from [indiscernible] and up to [indiscernible] to natural barriers in terms of growing fish. We have good control in big areas in this region and we have been performing well over time. We expect that to continue.

Region Mid and region North did not perform as expected in the second quarter. We expect the cost in both regions to slightly go down and the performance to improve in both these regions going forward. All in all, maybe there is no top region here, like everything went perfectly well, but the average performance in Norway is good. In terms of quality of the fish, it’s good in most regions.

Scotland, we have been performing well in Scotland for long time. This continues. We have harvested 18,000 tons in this quarter in Scotland and that’s 37% volume increase. That on the back of 44% contract share. Obviously the contract share goes down when the volume increases to this extent. The reason for harvesting out quite a bit of fish in the second quarter is twofold. We believe we had good growth and good size fish and good prices in the second quarter and also we had some issues there in regards to sea lice, better to take out the fish before it became a problem, same with AGD that has been a risk factor in Scotland.

Other than that, the status of the biology in Scotland is very good currently and we expect that we have higher contract share going forward, closing in on 67% that we can -- you have to correct me there if I'm wrong but closer to 87% in the third quarter and closer to 80% in the fourth quarter on good prices. So stable and very good business.

The Canadian operation have reduced their harvest volume. This is -- also we have to go back quite a bit because the grower time in Scotland, now in Canada is the longest in our operation. And we cut small transfers on sites with canola. This has a result in a lower harvest volume at this time and going forward this year. The 6,500 ton is down from close to 9,000 ton in Q2 2013, descent performance but some issues here with mature fish and higher feed raw material cost we see in this area, not the same improvement in feed conversion rate that we see in Scotland especially in Norway and Chile as well.

And then obviously we have the effect on lower volume, that you have it. This fixed cost is not diluted or not cost enough in regards to the volume in harvest. In Chile, we see a positive development in the Chilean operation and especially I think in our operation we’re not using many of our 154 sites and we’ve selected the best ones and have good biology, good in the area. The cost is still high on the back of continuous treatment of sea lice. I think we still treat over one time per month per site and that obviously drives cost here as well.

There is a new drug in Chile that is approved for treating sea lice, Salmosan. That has been used in Norway previously and that has given relief to the situation in Chile. There we see also better coordination in the region but finally this will only sold by consolidation in the Chilean industry and stronger players, call it fewer sites and fewer owners and big distance between sites and even better control symptoms of zoning. Both we believe in Chile and we continue and we will do our very best to take part in the consolidation and be a driving force in the Chilean industry.

Ireland and Faroe Islands, good results in both regions. The Irish operation is organic operation, almost solely. They achieve a higher price, have a decent margin but also had some biological issues in the history. Faroe Islands down from NOK 20 in the quarter and below in Q1 per kilo. It’s okay but not fantastic.

Our value added operations has had a challenging quarter in the second quarter as expected. We have finalized the restructuring in this division in terms of closing down factories but what we see at the same time is that the main market for this division, France is dropping, 15% year-to-date, down on smoked salmon, 20% year-to-date down on fresh salmon or the total import into France. So that is significant when that market drops away the way it does. It's quite large salmon market. We have divided this into three divisions, fresh, chilled and frozen; fresh being MAP packed salmon ready to consume into super markets, chilled being smoked and frozen obviously being frozen portions, exported also to other countries than Europe.

But where we’re struggling is in the smoked business, is price pressure and our French operation are not efficient enough. So that is really where we are losing market. We will be continue -- we’re continuing to change this division. We have combined the Morpol smoked management with the management in our smoked operation in VAP and this will be led by the Morpol smoked management going forward, which are by far operators than it has proven that overtime than what we have managed to do. I think that will clean up the marketplace and hope it will also give efficiency in production in the one smokehouse we have left in France.

Morpol, 2.3% profit. This is basically spot driven operation and they made money on the spot price at 40. 10% volume reduction here and they also export into France. We’ve seen some pressure in the German market on smoked fish as well but in the German markets been compensated with increased consumption of fresh salmon, which is obviously positive.

What we see for the second half in Morpol, seeing the prices that has come down now to around NOK 13 in spot is a very positive second half. They operate very well in that price range. So we will -- we’ll see better results there in the third and fourth quarter, if the smoked prices continue at the level we see today.

Then back to the feed factory. We open that in June. Our plan was in July. We started to run it. Obviously we’ve seen startup problems. If not that would be strength. On the other hand we reached in July two thirds capacity utilization. We got the logistic boats in a little bit late, some delays in the shipyard but they started to transport towards the end of July. And in this factory we have very efficient both, an LNG run that has maybe the highest loading capacity of raw material online but compared to any other feed factory in the world and the same for general [ph] transport of fish feed out into the bulk process. So we expect to breakeven in Q3. We are in July at two thirds capacity and ramping up. And we see day by day improvement in operations. So, to me this has been big positive surprise, that we manage to get it right so quick to be honest with you.

Then we will move on to the financials and harvest volumes and Ivan will take that.

Ivan Vindheim

Thank you, Alf-Helge and good morning everybody. As usual we start with the P&L. As Alf-Helge already has said one or two times, an all-time high with respect to profit and turnover. Turnover NOK6.56 billion as against NOK4.44 billion in the second quarter last year. That is equivalent to a growth of 47%. The lion share is related to the increase in harvest volumes but the effect of consolidation movement in this quarter, which was not the case in the same quarter last year, that’s also an effect.

Operating profit NOK1.22 billion. Further down in the P&L we had some substantial mark to market valuations this time. Please note that this is accounting adjustments, they have no cash flow effect. But its worthwhile mention it’s -- still the biomass adjustment this time was almost NOK1 billion, NOK0.9 billion which is a result of the dropping spot prices in the quarter, plus a seasonal drop in the biomass. In addition on the net financial items, we also have a big mark to market valuation on the convertible bonds, somewhat above NOK400 billion.

In addition I also would like to mention income loss from -- income/loss from associated companies which is an income that is Nova Sea. They had the great quarter also this time, NOK14.3 in EBIT per kilo on somewhat about 8,000 tons so once again a very good results in Nova Sea. The underlying earnings per share this time, NOK2.05 per share, cash flow per share NOK5, which is the same amount as distributed in the second quarter. Harvesting volumes, 114,000 tons this time as against 79,000 tons last time that’s a growth of about 40% which is very satisfactory. EBIT per kilo for the entire operation, NOK11.1, return on capital employed 24%.

So much about the P&L. Turn over to the balance sheet. The balance sheet amounts to NOK32.7 billion, that’s up from NOK26.2 billion in the same quarter last year. This is mainly explained by the consolidation of Morpol. Equity ratio 46% and net interest bearing debt or equity at 48%. Net interest bearing debt at the end of the quarter was NOK7.0 billion, which is NOK0.5 billion below where our net interest bearing debt target. Then over to the cash flow statement, we started the quarter at NOK7.5 billion in net interest bearing debts. We made an operational EBITDA of NOK1.44 billion. Adjusted for working capital and other provisions the cash flow from operation was NOK1.3 billion. We had a CapEx of NOK334 billion which is in line with the expectations we have and still have.

We got the money from our Meridian divestment, NOK1.2 billion. Other investments here is mainly dividend from Nova Sea, approximately NOK70 billion, which is good and payable interest, NOK112 billion. Other items here is the recognition of the convertible bond we did, minus or less amortizations. Dividend distributed almost NOK2 billion, i.e. NOK5 per share. The translation effect this time as a result of the strengthening of the euro versus the NOK126 billion in minus, all in all NOK7 billion which is below our target, but bear in mind that the working capital is at its lowest at this part of the year. So this is also as it should be.

Then over to our cash flow guidance, I mentioned the CapEx, already we are in line with the forecast for this year. So it’s still stands. In terms of working capital, the same guidance and this we will try up in the third quarter but the lion's share is in the fourth quarter. We also have to adjust for the release in the first half of the year. Interest expense with stable run rate NOK300 million after the refinancing, tax payable this year NOK250 million and as Alf-Helge already has said, the quarter dividend is set at NOK 1 per share this time. Net interest-bearing target NOK7.5 billion, which is equivalent to NOK15 per kilo for Faroe but there always be some variations due to seasonality. This time we’re below.

Then over to our financing, we have refinanced our bank facilities this quarter at extremely satisfactory terms, both with respect to covenants and interest. We do not have any unit ratio comments anymore, only equity ratio, 35% which really gives us flexibility, both with respect to the cycle but also with respect to take part in the consolidation we think will take place going forward, particularly in Chile. We also have an accordion option of EUR425 million in that bank facility which give us the flexibility that I already have touched based on.

At convertible bond, we have two now. I will not go into the details we have presented before. We also have a high yield bond. So all-in-all fantastic financing and I think we have raised almost NOK11 billion over the 18 last months, which we are really satisfied with.

So much about the financial figures, turn over to supply and demand. We start the supply as usual. The supply for the second quarter was high, 60% worldwide, 15% in Europe and 16% in Americas. All the prices were down compared to the first quarter they were at fairly decent levels. So it really on the lines that demand in the first half of the 2014 and particularly in the second quarter was extremely good.

The harvesting volumes were so much above what we thought when we started the year due to a warm winter in Norway and which has shorter production cycle. The biological issues in Chile at the moment are also satisfactory, due to among other things Salmosan, which has led to due to higher yields and higher harvesting volumes, both for Marine Harvest and for the industry as a whole.

The reference process, this is year-on-year, quite stable if you compare it to the NOK. If you compare it to the local currency you will see that it’s down in Europe and quite stable in Americas, although that the price dropped in first half here in Americas. So at the moment the price in Americas are lower than what we saw in the second and not to mention in the first quarter.

Turn over to demand consumption, a very good development in all markets apart from Russia/Ukraine. They are price sensitive and if you look at Asia here and combine all the figures, you will see that they have a growth of almost 30% which is great. We also see a fantastic growth in Brazil and U.S. is okay, so all-in-all the demand is very satisfactory.

Talking about supply and demand, I've not mentioned the Russian ban these days is not possible. This is thoroughly commented on by the industry so far. We share more or less the same [indiscernible] as the rest with respect to the effect. It definitely affects the short term salmon price. We have seen turbulence as expected but we think that we will see a redistribution, we already see it has started and we are a part of it. In addition the underlying demand we think will absorb the rest. So some short on turbulence but in medium and long-term we think this will be -- I don’t know whether I should use the word noise but at least that we can deal with it in a proper way. We also think that we will see -- that the prices will start to pick up towards the end of this year and we also think that 2015 will be a good year all in all.

Industry supply outlook the 230 [ph] figures in total are not changed much. We are down in Norway due to the 6% regulation by the government but we are up in Chile due to the biological conditions down there, high yields, low mortality, but we see that the growth we saw in the second quarter will drop year-on-year. When we look at 2015, this is controlling [ph] figures. We see that the supply growth is quite low, 3% worldwide and 4% in Europe. So in terms of going forward, we are still very confident that demand will be good and the salmon will be sold at fairly good levels. Then over to our own volumes, we have guided down in Norway, from 264 to 254 and we are up in Chile from 60,000 to 67,000 tons. In total 414,000 tons for 2013 as against 417,000 when we started this year. So just a minor change.

So that was it all. So then I would like to pass the word on to Alf-Helge.

Alf-Helge Aarskog

Thank you very much Ivan. Just to reinforce, the last points Ivan commented on, I think with the Russian sanctions we’ll see some turbulence and we’ve seen it already. The price dropped almost immediately after the sanction were put in place. So short term nice and then we see the efficiency in the sales organization, in our own sales organization rerouting fish from Chile, from the Faroe Islands, coming up with solutions. So long term this -- and medium term this is not a big issue. In terms of what we’re really happy about is that the Norwegian government has stated that they will link future growth to sustainability targets. They also stated that they will take away this average MAB April 1. I think both decisions are very smart.

In terms of performance here in what we call consumer products, the combination of VAP and Morpol, we expect that in the next quarter and the next half of the year to strengthen. We also are committed and we work hard in regards to come up with consolidation solutions, both in Norway and in Chile. Especially in Chile this is the key to restructure the industry. There are some very weak players there that this is no news to, there are bankrupt companies and the like. So it will be very good for the Chilean operation to have fewer and stronger companies in that area. Strong contract coverage going forward the next half year and also into 2014 and now into 2015 and the decision on distribute NOK1 this quarter and we pay quarterly dividend has been -- it has been decided. We don’t -- the Board doesn’t need AGM now to distribute dividend. They have the proxy to do it.

With that I think we can open up for questions. And we have person here with Mike and Kolbjørn has already put his hand up. So please state your name and employer when you ask the question for the record.

Question-and-Answer Session

Kolbjørn Giskeødegård - Nordea Markets

Kolbjørn Giskeødegård, Nordea Markets. One comment on the effect of the Russian sanctions. You are one of few companies that are able to actually replace volume from Norway with the volumes from Chile and to some part also Faroe Islands. Can you give us some details into what your strategy might be the next months in that situation?

Alf-Helge Aarskog

Yes, obviously, we would like our Russian customers to achieve as much fish as absolutely possible. We know that the Russian consumption of Salmon -- a lot of it is halted salmon and so they can use to a large extent frozen salmon as the raw material. We have already shipped containers that started the same week as this happened. We don’t [indiscernible] too long, from Chile into the market. It takes a few weeks before it arrives. And then we have not finalized solution on air freight logistics into Europe, maybe trucking into Russia from Europe of Chile and salmon. That might be too expensive but frozen obviously is one option for us in Chile. With our close to 70,000 salmon in Chile, we can do that. Faroe Islands, our production is small. So that doesn’t make a big impact. But one thing we will not do is to sell fish from Norway into other countries and then into Russia. That is absolutely no. But we follow the official politically rules and do what we can to make the best out of our business.

Unidentified Analyst

The question is related to the new MAB or Maximum Allowed Biomass regulation. You have been against the flexible MAB but now the government has implemented a flexible MAB, are you going to take advantage of that opportunity? And second -- the 10,000 ton reduction in Norway, is that linked to that 6% increase in MAB so that we push volumes from Q4 to Q1?

Alf-Helge Aarskog

Yes, good question. In terms of MAB and use of MAB and flexibility and so forth, driving force in Marine Harvest will always be sustainability. We will not push forward in areas where we have issues in regards to sea lice and in regards to diseases. We have some areas where we do not re-fertilize. We have not done in four or five years. Obviously that can be areas where we can utilize this a little bit. In terms of the volume reduction, it is a combination of those areas where we can do flexibility and move some fish if that is necessary but is also a result of very warm temperatures, high harvest in the first half than planned and then in fact because of high temperatures and lower growth that we expect going forward, especially region south, to a certain extent also region west, which are important.

Unidentified Analyst

[Indiscernible]. In terms listing selling prices out your customers from your VAP units, I guess right now it doesn’t matter of pushing them up a lot I’d say up recently before the price dropped, have you seen any indications that we they are able to absorb and willing to absorb the higher selling prices for salmon?

Alf-Helge Aarskog

Yes, it’s a good question. Depends little bit about what market you are looking into. We have seen -- related to increased prices over time is no doubt. Then if you look at the French market, it's a combination of maybe the French economy and also TV document, theories or TV programs being negative in regards to salmon in France. In France it will be hard now to lift prices obviously at this stage -- I would say almost impossible. In other markets I would say anything is possible, maybe not exactly in this moment but we've seen -- we’ve been lifting prices in most of the markets over some time span.

More questions?

Patrick Roquas - Rabobank International

Patrick Roquas from Rabobank International. Question on your feed production. You’re hitting on your targets here, when you expect to be running at full capacity and what is holding you back to build your second plant?

Alf-Helge Aarskog

Excellent question. In terms of reaching what’s holding in fact from reaching full capacity, we fine-tuned this. This is a brand new plant. We are at -- we did 16,000 ton fish feed in July and as I said two third of expected capacity. And then this is fine tuning to get it right in terms of all the components to go together and it has to do with the dryer working perfectly, the way we would like it to work and also we have had some smaller issues. But all-in-all I think if you compare to stock of any new fish feed factory being at that capacity in that short time is quite good and the last question was -- ?

Patrick Roquas - Rabobank International

[Indiscernible]

Alf-Helge Aarskog

Yes, yes. Now first of all, we would like to fine tune this one and we’ve said that. We also stated that we will look into building a second plant after this is fine-tuned and operational. It is great to have the competence and be completed have this plant flowing the way we wanted to flow before we add on our second plant. So that is something we will look into first half of 2015 but we already started to try to find locations for the second plant.

More questions? If not, thank you very much for coming. And we will be back with the third quarter in October.

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