BAKKAFROST: Operational EBIT of DKK 459 Million for the Second Quarter of 2017
The Bakkafrost Group delivered a total operating EBIT of DKK 459.2 million in Q2 2017. Harvested volumes were 18.4 thousand tonnes gutted weight. The combined farming and VAP segments made an operational EBIT of DKK 435.0 million. The farming segment made an operational EBIT of DKK 489.5 million. The salmon spot prices have been on record high levels since 2016, and this continued in Q2 2017. The high salmon spot price is positive for the farming segment. As in previous quarters, when the salmon spot prices are high, the VAP segment had negative margins in Q2 2017. The VAP segment made an operational EBIT of DKK -54.5 million. The EBITDA for the FOF segment was DKK 47.8 million.
The total volumes harvested in Q2 2017 were 18.4 thousand tonnes gutted weight. Bakkafrost transferred 1.9 million smolts in Q2 2017. In Q2 2017, Havsbrún sourced 163.1 thousand tonnes of raw material.
The farming segment made an operational EBIT of DKK 489.5 million for Q2 2017, which corresponds to NOK 33.50 per kg. The VAP segment made an operational EBIT of DKK -54.5 million for Q2 2017. The salmon spot prices have been on record high levels since 2016 and this continued in Q2 2017. The high salmon spot price is positive for the farming segment. As in previous quarters, when the salmon spot prices are high, the VAP segment had negative margins in Q2 2017. The combined farming and VAP segments made an operational EBIT of DKK 435.0 million for Q2 2017, which corresponds to NOK 29.77 per kg. The FOF segment (fishmeal, oil and feed) made an operational EBITDA of DKK 47.8 million for Q2 2017.
Commenting on the result, CEO Regin Jacobsen said:
“Bakkafrost’s three segments had all a very high activity level in the second quarter of 2017. Havsbrún received a record high volume of 163.1 thousand tonnes of raw material. The Farming segment harvested a record high volume of 18.4 thousand tonnes gutted weight, and the VAP segment produced 5.3 thousand tonnes gutted weight. Bakkafrost focuses on raising a sustainable premium quality salmon with emphasis on animal welfare and on preserving the environment. In May 2017, farming site A-71 Funningsfjørður was ASC certified, and Bakkafrost aims to have all its farming sites ASC certified in 2020.”
In accordance with Bakkafrost’s dividend policy and the resolution of the Annual General Meeting 2017, Bakkafrost paid out DKK 8.70 (NOK 10.69) per share in April 2017. The total dividend payment was DKK 425.1 million (NOK 522.5 million).
In Q2 2017, Bakkafrost’s full-time employees from 2016, still employed at Bakkafrost, have received bonus shares with a total value of 2% of their salary in 2016. In total, Bakkafrost has allocated 19,631 shares to its employees. The total allocation amounted to 4.7 million and was based on the closing share price on the allocation day, 29 May 2017.
The Bakkafrost Group’s net interest bearing debt amounted to DKK 559.7 million at the end of Q2 2017. Bakkafrost had undrawn credit facilities of DKK 718.5 million at the end of Q2 2017 and the equity ratio was 64% at 30 June 2017.
OUTLOOK
Market
For the last year or so, the salmon market has been affected by a decline in supply. The main factors behind this are the harmful algal bloom in Chile in February 2016 and the biological issues in Norway. The negative effect of the Chilean algal bloom on supply of salmon continued into H1 2017. Expectations are that global supply of Atlantic salmon will rebound from decline in H1 2017 to an increase of around 8-10% in H2 2017. The latest update from Kontali Analyse estimates the global supply of Atlantic salmon to increase around 2% in 2017, 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 biological situation is Bakkafrost’s most important risk area. 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. Harvest of the fish at farming site A-73 was finished on 12th April 2017, and the site is now in fallow for a period of minimum 6 months. Bakkafrost focuses on biological risk continuously and has made several new investments and procedures to diminish this risk.
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 expects to harvest 53,500 tonnes gutted weight in 2017.
Bakkafrost expects to release 11.5 million smolts in 2017, compared with 11.7 million smolts in 2016 and 11.3 million smolts released in 2015 – smolts released by Faroe Farming before becoming part of the Bakkafrost Group are included. The number of smolts released is a key element of predicting Bakkafrost’s future production.
Sea lice is an area, which has demanded much effort and is a part of the biological risk. Bakkafrost focuses on using non-chemical methods in treatments against sea lice. In Q4 2016, Bakkafrost invested in a service vessel, M/S Martin, which uses lukewarm seawater treatment against sea lice. M/S Martin started operation in Q1 2017. In addition to M/S Martin, Bakkafrost invested in another service vessel, M/S Róland, in Q1 2017. M/S Róland is equipped with the same system as M/S Martin and is expected to start operation in September 2017. Furthermore, Bakkafrost will increase the use of lumpfish in farming in 2017.
VAP (Value added products)
Bakkafrost has signed contracts covering around 58% of the expected harvested volumes for the rest of 2017. This corresponds to an expected contract coverage of around 40% for the full year 2017.
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.
The price level on long-term contracts are on a higher level than ever before, there are, however, no indications that this price level should decrease significantly.
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, compared with 776 thousand tonnes in 2016. Recommendations for herring and mackerel quotas have increased as well. The production of fishmeal and fish oil 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 2017 are expected to be at 85,000 tonnes.
Investments
In June 2016, Bakkafrost announced a five-year investment plan from 2016 to 2020. The total investments 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.
Both the harvest operation and the VAP production in the new harvest/VAP factory at Glyvrar have started operation. The harvest operation started in the summer of 2016, and the VAP production started in Q1 2017. The old harvest factories in Klaksvík and Strendur are closed, as well as the old VAP factories in Fuglafjørður and Glyvrar. There are 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 has started upgrading the harvest operation in Vágur, Suðuroy. The upgrading cost is expected to be around DKK 35 million.
Bakkafrost plans to increase the value of offcuts from salmon harvested and processed in the new harvest/VAP factory. In 2017, Bakkafrost will invest in a new salmon meal and salmon oil plant, located in Fuglafjørður and operated by Havsbrún. The new salmon meal and salmon oil plant is expected to start operation in late 2017 and is expected to have positive margins in 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 Q2 2017 report and the Q2 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 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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