BAKKAFROST: Operational EBIT of DKK 252 Million for the Third Quarter of 2017
The Bakkafrost Group delivered a total operating EBIT of DKK 251.8 million in Q3 2017. Harvested volumes were 11.6 thousand tonnes gutted weight. The combined farming and VAP segments made an operational EBIT of DKK 212.2 million. The farming segment made an operational EBIT of DKK 216.7 million. The salmon spot prices decreased in Q3 2017, compared to the previous quarter. The price decrease had a negative effect on the operational EBIT in the farming segment. The VAP segment made an operational EBIT of DKK -4.5 million, which is an improvement due to the decrease in the salmon spot prices in Q3 2017. The EBITDA for the FOF segment was DKK 79.5 million.
The total volumes harvested in Q3 2017 were 11.6 thousand tonnes gutted weight. Bakkafrost transferred 3.2 million smolts, and Havsbrún sourced 21.9 thousand tonnes of raw material in Q3 2017.
The farming segment made an operational EBIT of DKK 216.7 million for Q3 2017, which corresponds to NOK 23.51 per kg. The VAP segment made an operational EBIT of DKK -4.5 million for Q3 2017. The VAP segment has had a loss since the first quarter of 2016, and although the salmon spot price has decreased in Q3 2017, the VAP segment had a negative margin. At the end of Q3 2017, the margins were positive. The combined farming and VAP segments made an operational EBIT of DKK 212.2 million for Q3 2017, which corresponds to NOK 23.02 per kg. The FOF segment (fishmeal, oil and feed) made an operational EBITDA of DKK 79.5 million for Q3 2017.
Commenting on the result, CEO Regin Jacobsen said:
“Although the price of salmon decreased in the quarter, Bakkafrost had a satisfactory result. The salmon spot price in the third quarter this year was significantly lower than in the same quarter last year. We still have a good outlook for the salmon market, but there is a risk for lower salmon prices in the future. The farming service vessel, M/S Róland, started operation in this quarter, and Bakkafrost is well equipped to combat sea lice with good solutions. Another positive trend in the quarter was the improvement in the VAP operation, after having experienced start-up issues in the first half of 2017.”
In September 2017, farming site A-57 Fuglafjørður was ASC certified. Bakkafrost has been in the process of getting its farming sites ASC certified since 2014. The goal is to get all farming sites ASC certified by 2020.
The Bakkafrost Group’s net interest bearing debt amounted to DKK 355.6 million at the end of Q3 2017. Bakkafrost had undrawn credit facilities of DKK 932.6 million at the end of Q3 2017 and the equity ratio was 68% at 30 September 2017.
OUTLOOK
Market
The salmon prices have been on record high levels since 2016, but as expected, the salmon price de-creased in Q3 2017 as supply of salmon increased. The latest update from Kontali Analyse estimates the global supply of Atlantic salmon to increase around 2% in 2017 and 7-8% in 2018, compared to -6% in 2016.
The market place is one of Bakkafrost’s most significant risk areas. To diversify the geographical market risk, Bakkafrost sells its products to all 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 number of sea lice has demanded more effort in Q3 2017 than in Q3 2016 and has caused reduction of growth in the quarter, which will most likely postpone some harvest quantity from Q4 2017 to Q1 2018. Bakkafrost focuses on using non-chemical methods in treatments against sea lice. Bakkafrost has now two service vessels, M/S Martin and M/S Róland, which use lukewarm seawater treatment against sea lice. In addition, M/S Hans á Bakka – whose primary operation is transportation of live fish – can be used in treatment against sea lice with freshwater treatment. Bakkafrost will increase the use of lumpfish in farming in 2018.
The confirmed presence of pathogenic ISA-virus at farming site A-73 in March draws attention to the importance of a high quality veterinary system to reduce the biological risk. The harvest of the fish at farming site A-73 was finished on 12th April 2017, and the site has been fallowed for a period of 6 months. Bakkafrost focuses on biological risk continuously and has made several new investments and procedures to diminish this risk.
Bakkafrost’s guidance for harvest in 2017 is increased by 1,000 tonnes gutted weight, from 53,500 to 54,500 tonnes gutted weight. In 2018, Bakkafrost expects to harvest 51,000 tonnes gutted weight.
Bakkafrost expects to release 10.5 million smolts in 2017, compared with 11.7 million smolts in 2016 and 11.3 million smolts released in 2015. In 2018, Bakkafrost expects to release 13.0 million smolts. The number of smolts released is a key element of predicting Bakkafrost’s future production.
The construction of the new hatchery at Strond, Klaksvík, progresses according to plan. The hatchery is expected to be in operation during 2018 and deliver full capacity from 2020. 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.
VAP (Value added products)
Bakkafrost has signed contracts covering around 53% of the expected harvested volumes for the rest of 2017 and is presently negotiating new contracts for 2018.
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 contracts last for 6 to 12 months.
The long-term strategy is selling around 40-50% of the harvested volumes of salmon as VAP products at 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 2018 recommendation for blue whiting is 1,388 thousand tonnes, compared with 1,342 thousand tonnes in 2017. The production of fishmeal and fish oil in 2018 will most likely be at the same level as in 2017.
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 2017 are expected to be at 80,000 tonnes, which is a reduction of 5,000 tonnes from previous expectation for fish feed sales in 2017. The reduction is related to lower growth in Q3 2017, as mentioned under Farming. Depending on external sales, the sales of fish feed in 2018 is expected to be at 85,000 tonnes.
Investments
In June 2016, Bakkafrost announced a five-year investment plan from 2016 to 2020. The total invest-ments for the period are DKK 2.2 billion, including maintenance CAPEX. Investments of around DKK 100 million in the two service vessels, M/S Martin and M/S Róland during 2017, are not included in the investment plan.
The purpose of the investment plan is to continue to have one of the most cost-conscious value chains in the farming industry, to 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 aims at being 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 from 2016 to 2020 will be in hatcheries.
Bakkafrost has started upgrading the harvest operation in Vágur, Suðuroy. The upgrading cost is expected to be around DKK 40 million.
Bakkafrost plans to increase the value of offcuts from salmon harvested and processed in the new harvest/VAP factory. The new salmon meal and salmon oil plant, located in Fuglafjørður and operated by Havsbrún, is expected to start operation in the beginning of 2018. 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
Favourable market balances in the world market for salmon products and cost-conscious production will likely maintain the financial flexibility going forward. A high equity ratio together with Bakkafrost’s bank and bond financing 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 the Company’s Q3 2017 report and the Q3 presentation enclosed.
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 and Vágur, and secondary processing (VAP) in Glyvrar. The Group operates sea farming in Norðoyggjar, Eysturoy, Streymoy and Suðuroy. The headquarter is located in Glyvrar, and the company has 820 fulltime employees.
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