BAKKAFROST: Operational EBIT of DKK 255 million for the third quarter of 2016
The Bakkafrost Group delivered a total operating EBIT of DKK 254.7 million in Q3 2016. Harvested volumes were 10.7 thousand tonnes gutted weight. The combined farming and VAP segments made an operational EBIT of DKK 247.6 million. The farming segment made an operational EBIT of DKK 294.3 million, and the high salmon spot prices had a positive effect on the farming segment. The high salmon spot prices affected the VAP segment negatively, and the VAP Segment made an operational EBIT of DKK -46.7 million. The EBITDA for the FOF segment was DKK 62.4 million.
The total volumes harvested in Q3 2016 were 10.7 thousand tonnes gutted weight. Bakkafrost transferred 3.8 million smolts in Q3 2016. In Q3 2016, Havsbrún sourced 11.0 thousand tonnes of raw material.
The farming segment made an operational EBIT of DKK 294.3 million for Q3 2016, which corresponds to NOK 34.44 per kg. The VAP segment made an operational EBIT of DKK -46.7 million for Q3 2016. As in the previous quarter, the high spot prices had a negative effect on the operational EBIT in the VAP segment. The combined farming and VAP segments made an operational EBIT of DKK 247.6 million for Q3 2016, which corresponds to NOK 28.97 per kg. The FOF segment (fishmeal, oil and feed) made an operational EBITDA of DKK 62.4 million for Q3 2016.
Commenting on the result, CEO Regin Jacobsen said:
“Bakkafrost delivered a satisfying result for Q3 2016. The salmon spot price continues to be high, although marginally down from previous quarter and our farming segment delivered a very good margin. The VAP segment is struggling when spot prices are this high, but some positive amendments were made in the quarter. The fishmeal, fish oil and fish feed segment continues to deliver strong results. The future is exciting with the farming operations in Suðuroy now being a part of Bakkafrost Group, giving us new opportunities.”
In July 2016, a routine surveillance test detected a possible pathogenic ISA-virus at a Bakkafrost farming site, A-73 Hvannasund Norður. After the suspicion, extensive tests have been carried out at the farming site with the purpose of confirming the suspicion. None of the results from these tests proved the presence of a pathogenic ISA virus. The Veterinary Authority has increased surveillance for at least six months after the suspicion at the farming site and performs extra tests on neighbouring farming sites as well. The ISA suspicion has not affected Bakkafrost’s financial performance in Q3 2016.
Bakkafrost acquired the remaining outstanding shares (51%) in P/F Faroe Farming on the 1st of July 2016. Simultaneously, Bakkafrost relinquished two farming licenses to the Faroese Authorities in order to comply with Faroese law. The relinquished farming licenses are A-03 Svínáir and A-17/18 Hovsfjørður. P/F Faroe Farming is a salmon farming company and operates in the southern part of the Faroe Islands. From the 1st of July 2016, the farming operation of P/F Faroe Farming is part of Bakkafrost Farming West.
The Bakkafrost Group’s net interest bearing debt amounted to DKK 503.9 million at the end of Q3 2016. Bakkafrost had undrawn credit facilities of approximately DKK 766.7 million at the end of Q3 2016 and the equity ratio was 63% at 30th September 2016.
OUTLOOK
Market
The salmon prices have been historically high in 2016, due to a decrease in supply in 2016. The total supply in 2016 is expected to decrease approx. 4%, compared to 2015. Together with a continually strong demand for salmon in nearly all markets, this has resulted in a significant increase in salmon prices during 2016. The global supply of Atlantic salmon is expected to increase only around 1% in 2017, compared to 2016.
The market place is one of Bakkafrost’s most significant risk areas. Bakkafrost has a geographical and a market price approach. These approaches reduce the exposure to the market risk. To diversify the geographical market risk, Bakkafrost sells its products to all of the largest salmon markets in the world, USA, the Far East, Europe and Russia.
Farming
The outlook for the farming segment is good. The estimates for harvesting volumes and smolt releases are dependent on the biological development. The investments in producing larger smolts will gradually reduce the time needed in the fjords to farm the salmon. This is expected to reduce biological risk and increase the capacity. The capacity growth from this investment program will appear in harvested volumes gradually until 2021.
Bakkafrost’s expected harvest for 2016 is reduced from 49,000 tonnes gutted weight to 47,500 tonnes gutted weight. Bakkafrost has postponed the planned harvested volumes in order to optimize the size of harvested fish. Bakkafrost expects to harvest 56,000 tonnes gutted weight in 2017.
The number of smolts released is one key element of predicting Bakkafrost’s future production. Bakkafrost expects to release 11.5 million smolts in 2016 and 11.5 million in 2017, compared with 11.3 million smolts released in 2015 and 10.4 million smolts released in 2014.
The biological situation is Bakkafrost’s most important risk area. The suspicion of possible pathogenic ISA virus at one of Bakkafrost’s farming sites in July 2016 draws the attention to the importance of good animal welfare and biology, reducing the biological risk. Bakkafrost focuses on biological risk continuously and has made several new investments and procedures to diminish this risk.
Sea lice is an area, which has demanded more effort and is a part of the biological risk. Bakkafrost focuses on using non-chemical methods in treatments against sea lice.
VAP (Value added products)
Bakkafrost has signed contracts covering 100% of the goal for the VAP production for the rest of 2016. This corresponds to around 43% of the expected harvested volumes for the rest of 2016. Bakkafrost has already signed contracts covering approximately 50% of the goal for the VAP production for 2017.
The VAP contracts are at fixed prices, based on the salmon forward prices at the time they are agreed and the expectations for the salmon spot price for the contract period.
The long-term strategy is selling around 40-50% of the harvested volumes of salmon as VAP products on fixed price contracts. Selling the products at fixed prices reduces the financial risk with fluctuating salmon prices. The market price for contracted VAP products follows a more stable pattern instead of short-term fluctuations as in the spot market.
FOF (Fishmeal, -oil and feed)
The outlook for the production of fishmeal and fish oil is dependent on the availability of raw material. The ICES 2017 recommendation for blue whiting is 1,342 thousand tonnes and their recommendation for herring and mackerel quotas has increased as well. The forecast for production of fishmeal and fish oil is positive and will most likely increase, due to higher quotas and better availability.
The major market for Havsbrún´s fish feed is the local Faroese market including Bakkafrost’s internal use of fish feed.
Havsbrún’s sales of fish feed in 2016 are expected to be at 80,000 tonnes. Depending on external sales, the sales of fish feed in 2017 is expected to be 85,000 tonnes.
Investments
In June 2016, Bakkafrost announced a five-year investment plan from 2016 to 2020. The total investments for the period is DKK 2.2 billion, including maintenance CAPEX.
The purpose of the investment plan is to continue to have one of the most cost conscious value chains in the farming industry, carry out organic growth, increase flexibility and reduce the biological risk to meet the future consumers’ trends and to be more end-customer orientated.
Bakkafrost has a goal to be self-supplied with smolts at a size of 500g each. The benefits are a shorter production time at sea as well as reduced biological risk. To reach this goal, approximately half of Bakkafrost’s total investments over the next five years will be in hatcheries.
The investment of the new harvest/-VAP factory is in the final stages. The harvest operation started in the summer 2016 and ramped up during Q3 2016. The VAP operation was expected to start in Q4 2016, but has been postponed to Q1 2017 in order to avoid seasonal production peek during start-up of the VAP operation. There will be some extra costs during the start-up period, but the investment is expected to result in operational savings of DKK 70-90 million per year with gradual effect from 2017.
Bakkafrost plans to increase value of offcuts from salmon harvested and processed in the new harvest/VAP factory. Bakkafrost will invest in a new salmon meal and salmon oil plant, located in Fuglafjørður and operated by Havsbrún. The FOF segment will also invest in a new feed line, which will increase the capacity of the feed production.
Free cash flow from operations, existing financing facilities and partly new financing if advantageous will finance the investments. The dividend policy will be unchanged.
Financial
Improved market balances in the world market for salmon products and cost conscious production will likely improve the financial flexibility going forward. A high equity ratio together with Bakkafrost’s bank financing and the issuance of bonds makes Bakkafrost’s financial situation strong. This enables Bakkafrost to carry out its investment plans to further focus on strengthening the Group, M&A’s, organic growth opportunities and fulfil its dividend policy in the future.
Please find enclosed the Company’s Q3 2016 report and presentation.
Contacts:
Regin Jacobsen, CEO of P/F Bakkafrost: +298 235001 (mobile)
Gunnar Nielsen, CFO of P/F Bakkafrost: +298 235060 (mobile)
This information is subject of the disclosure requirements pursuant to section 5-12 of the Norwegian Securities Trading Act.
About Bakkafrost:
Bakkafrost is the largest salmon farmer in the Faroe Islands. The Group is fully integrated from feed production to smolt, farming, VAP and sales. The Group has production of fishmeal, fish oil and salmon feed in Fuglafjørður. The Group has primary processing in Glyvrar, Kollafjørður, Vágur, and secondary processing (VAP) in Glyvrar and Fuglafjørður. The Group has farming operations in Norðoyggjar, Eysturoy, Streymoy and Suðuroy. The headquarter is located in Glyvrar, and the company has 765 fulltime employees.
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