Marine Harvest ASA (OTCPK:MHGVY) Q3 2018 Earnings Conference Call October 31, 2018 11:00 AM ET
Alf Helge Aarskog - CEO
Good day, and welcome to the MHG Quarterly Report Q3 2018 International Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to Mr. Alf Aarskog. Please go ahead, sir.
Alf Helge Aarskog
Thank you, and welcome to the third quarter presentation for Marine Harvest. I will go quickly go through the presentation and try to remember to tell you what page I am on as I go ahead there. The third quarter for Marine Harvest was so far the best third quarter in the history of the company and the third quarter is often a challenging quarter market wise, but this quarter we had achieved good prices and we had at least decent cost on our production.
So, all in all that resulted in EBIT of EUR207 million in the quarter. What we saw compared seasonality of the third quarter was in reality high prices in oil market driven by strong demand for salmon.
Our harvest volumes for us this quarter were high and actually the highest in the history of the company in terms of this season. We added on Northern Harvest into reporting as of this quarter. So this is the first quarter, the Northern Harvest number is into the Canada numbers because the acquisition of Northern Harvest was completed in the beginning of this quarter. What we see is strong earnings in consumer products and we get back to that when we when we get into that slide. The board has decided that the quarterly dividend of NOK2.60 per share will be paid out in Q4 of 2018.
Then we go on to Slide 4, and just sum up the highlights there. Operational revenue grew by 14% in this quarter compared to the same quarter in 2017. Operational EBIT was up 7% this quarter compared to the same quarter last year. Harvest volume grew by 15% in this quarter from 95,000 ton - close to 110,000 tons. So all in all, basically fairly stable prices, fairly stable cost volume growth grew and increased profits.
If you then look at the slide five in the presentation basically describes the prices; we will get more back to the details on that, but all in all I think the conclusion has to be that there were good prices in all market-- taken the season into account. If you go over to slide six which describes the contract portfolio price achievement and the quality of the fish, and price achievement really is the sum of contract sale both size and superior share quality.
We see that Norway achieved a price slightly above the spot price at 102%. The Scottish salmon was at 114% in this quarter compared to 113% last quarter. So good contracts and very good quality of the fish in Scotland. Canada is basically a spot price market and we achieved price on and in line with the spot market, and dip on the Chilean side we achieved 100%, so, here the pricing slightly lower bit. So, all in all good price achievement in all markets.
Slice 7 bridges the operational EBIT from Q3 2017 to Q3 2018 and what you see there is basically a confirmation what I said earlier; not a lot of difference but the volume-wise farming makes a little bit more money. The other fairly stable. We then go on to Slide 8 and the Norwegian operation; Very good results for Norway in this quarter, EUR160 million against EUR124 million. Good spot prices, fairly low contract share, high harvest volume. We see improved biology in region north and then within mid region and south we have had challenges with sea lice and diseases following sea lice really which is PD and CMS.
If you look at the waterfall in on this slide you will see that the cost is reduced partly volume driven but also other costs are reduced in this quarter and that is the third quarter in a row where we actually are reducing costs in our Norwegian operation. We will have somewhat lower volumes in Q4 and so we will-- we think we will be seeing somewhat higher cost in Q4 compared to Q3.
In terms of contracts and contracts going forward in for Q4, 26,000 ton; same as for Q4 2017 and Q1 around 23,000 tons contracted for contracts in negotiation for the future. Onto to the different regions just-- there is a huge variation between regions in Norway. I think this goes for many farmers but it's certainly-- Marine Harvest is maybe-- we are in all areas in Norway and you can see the huge deviation in operational EBIT from EUR1.13 in region South to EUR2.67 in region north. The reason for this is higher harvest volumes in region north, good production in region South lower volumes. We've had to take out fish at lower average weight which results in both higher costs and lower price for the product.
Region mid is a little bit in between here and obviously delivers about the same result as last year. We then go to Scotland; Scotland has had a challenging year. This is Slide 11 in 2018. Good price achievement, but increased cost due biology in the quarter and for the year as a whole we will have to see or what-- is the fact.
We expect this cost to come down in 2019 due to higher stocking and also due to new sites with farming in Scotland, and you will see when we come to the volume guidance we expect Scotland to increase with about 20,000 tons, coming back to the volume we harvested in 2017. Then we go on to the Canadian operation and this now consists of both Northern Harvest which is on the east coast and old Marine Harvest come around the west coast. EBITDA down it's-- it has to do with high mortality on the west coast especially due to gill issues and low oxygen on-- on those sites that combination is actually deadly for the fish and that means higher cost, and as you can see from the waterfall.
We have integrated-- and are in the way of integrating northern harvest into Canadian operation and we expect good numbers from them going forward. Over to Slide 13, where we see the Chilean operation. Chilean had a good quarter with operational EBIT on same levels last year, but on fairly okay prices and stable production. Good biological performance in Chile at the moment. We have reduced medicine use and also less sea lice on our farms. And we expect volumes there to increase in 2019 and getting back to where we were before the algal bloom.
Ireland and Faroes Islands, small operations in Marine Harvest but delivering good results in terms of EBIT per kilo. Island is the record holder so far this year and it's not because of low costs, but because of good sales performance and sales of organic salmon at very good prices.
Surveillance, something new there. We invested in a processing plant this quarter and that will give us the possibility to select our harvest base which is especially important for the Russian market. So we believe that will give payback rather quickly. Then go to Slide 15, look at consumer products. Strong growth in revenue and volume, 27% volume increase of finished products in this quarter. Operating revenue grew from to EUR447 million to EUR518 million and we see good consumption and good growth in consumption basically in all markets.
What we see in Europe is pretty strong competition in this segment because of new players coming into the market and also players going into the market to make a profit going forward. Impairment loss, we lost one processing plant in the third quarter in Kritsen due to fire in France and we have taken into account EUR9 million as a result for that. This was fully covered by insurance and what we do going forward in France is not decided yet.
We then go to the feed slide on Slide 16. Record high volume in this quarter. So the factory produced almost 100,000 tons and that is a new record for the facility. If you remember for those of you that has been shareholders in Marine Harvest, is processing plant was designed for 220,000 tons. So we really utilized it well when you can do 99,000 tons in one quarter. In a tough market in fish feed at the moment, at the same time, this results is burdened with some expenses linked to the Scottish plant. And going on to the Scottish plant somewhat delayed construction in regards to Scotland.
This has to do with power coming onto the site and the way it's-- the power supply companies are structured in Scotland that has been headache for us, and also somewhat higher pier construction in Scotland due to regulations especially on dredging.
Somewhat delayed-- we expect the plant to start trial production in Q1 and that we are-- into full production in the second half of 2019. Then going into the third quarter financials, little bit on supply and demand, I would run rather quick over there-- over the number slides. You can ask question later on if you have any. The profit and loss, we've basically been through at least the headlines on that. If we then go on to the financial position on Slide 19, you see the equity ratio is down from the same comparable quarter to 44% this quarter compared to 54.3% in the quarter of 2017.
We still well financed company, and talking about financing, first cash flow. If we look at the cash flow you will you see net interest bearing debt in the beginning of the quarter at EUR950 million, operational EBITDA at EUR246 million. Change in working capital 2018 actually we would have liked to see that even higher; that has to do with the volume of biomass in sea. Taxes paid EUR11 million and other adjustments EUR7 million. So cash flow from operation at EUR209.1 million.
Net CapEx is high in this quarter, EUR118.9 million; has to do with the feed plant because this is the final construction part of the feed operation but also other investments here are much higher than in these major component areas, the Northern Harvest acquisition. And, if we then go to then at least the net interest bearing at the end of the period at EUR1.2 billion.
Looking at cash flow guidance on Page 21, working capital build-up EUR120 million. This is to support for organic growth going forward. CapEx for the year revised up to EUR295 million from EUR270 million, explained by EUR20 million extra into this-- to the key factor in Scotland and processing plant bought, purchase and equipment-- new equipment and therefore EUR5 million.
Going to Harvest as I mentioned EUR250 million, we have bought Norwegian farming capacity growth, EUR70 million, 5.7 unit licenses. Interest paid is EUR40 million, taxes paid EUR130 million and down from EUR140 million similar quarter last year, and dividend we have mentioned before.
On the finance, overview of the financing slide on Page 22, I guess it's the five-year convert that was issued in November 2015. There is a soft call on that in November 218. Some of this share has been converted-- been converted into shares during the quarter. The outstanding amount is EUR215 million. Other than that five-year bond is unchanged and the long-term net interesting bearing debt target is unchanged at EUR1.4 billion.
On to supply development in the quarter, Norway was up with 4.1%, Scotland down by 19.5%; Faroe Islands down by 12%, maybe a little bit higher than we expected; Ireland down by 22%. All in all, Europe was up only 400 tons in this quarter; a little bit on the low end compared to what we expected. Chile, a little bit on the high end due to good growth and higher average weight of the fish harvested in Chile in this quarter.
All in all, 2% growth in the quarter of competitor-- of 2018 compared to quarter of 2017. In terms of price development on Slide 24, you can see the different markets. In euros the price is down with 4.7% and for Norwegian salmon into Europe. And then we have increase in price of Chilean salmon around 5% to 6% and stable prices in the quarter for fish from Northwest and northeast of US.
All in all, I would say that compared to last quarter which we-- at Q3 of 2017 which were-- it has well-- this was another good quarter price-wise for Marine Harvest and for the industry. If you look at the supply side on Page 25, I am sorry on the demand side, the global volume by market, you can see-- we had a modest growth of 1.3%, Russia 29.8%, all in all in Europe 3.4%. Remarkably strong growth in the US and in Brazil, 11.1% in the Americas and Asia slightly down 2.6%. China, Hong Kong grew by 11% but other Asia was down. Explanation is probably that more fish is going directly to China and not so much going via Vietnam that it-- that happened last year.
All in all, supply growth of 4.9%-- volume growth by market at 4.9% in this quarter. Now we now look at the industry supply growth; we expect modest growth in 20-- the rest of 2018 and in 2019. Actually a reduction in 2018 to 45% from 5% to 7% and a global growth in 2019 in the area of 1% to 6%. This is on the back of what we know around small numbers, what we know about feed sales in-- and also what we know around regulations in the different countries. So, I think it's fair to say that there is not room for big chunk of growth in the salmon sector in 2019.
In regards to Marine Harvest the picture is the same in Norway, very modest growth from 229,000 tons to 236,000 in 2010. In terms of Scotland, we are fairly confident that we can grow back at the volumes to what we had in 2017. So back to 60,000 tons. This has to do with small stocking, new sites in Scotland and what we see from biology as we speak.
Canada is basically add-on of Northern Harvest onto our volume. So for 42,000 tons this year to 55,000 tons next year. Chile, from 54.3000 tons to 60.5000 tons on the bank of good biology and the small stocking we have done in 2018. Other countries rather limited increase. All in all from to 380,000 to 430,000 tons for Marine Harvest in 2019.
If we then look at the outlook, last slide in this presentation what we see and have seen throughout this quarter and remember third quarter is not the strongest quarter demand wise, but we see going forward strong demand for our product, fish pool is up from last time we spoke at from - EUR6.4 to EUR6.8 per kilo on the 12 month forward price.
We believe there are room for further growth in China if - with the removal of export --further removal of export restriction from Norway. The supply outlook they've been through and it's supporting a good price environment also in 2019. Organic growth in Marine Harvest continues on the feed side with building of a new feed factory on the farming side with expanding into eastern part of Canada especially, but also growing slightly in Scotland and Chile. On the processing side, we continue to expand the business. We will --we are open a factory and just as we speak in Shanghai.
The next factory in line is in Miami and we continue to build processing capability around the world, and in the marketplace where we sell our fish. Dividend just to take that one more time NOK2.6 per share to paid out in q4 as ordinary dividend. And then if you have not signed up for the Capital Markets Day in Edinburgh, there still room I believe. And so that is on the 13th of November.
With that I will end this conference call and open up for the operator to take questions.
Sir, we don't seem to have any questions over the telephone today. I'll hand back over to you for any closing remarks.
Alf Helge Aarskog
Thank you very much. Then it must have been crystal clear. And thank you for listening in and any question we'll be around for the next quarter. Thanks a lot.
Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation today. You may now disconnect.