Mowi ASA

Alf-Helge Aarskog - CEO

Gaurav Nigam - Catamaran Sam Glover - Tideway Investment Partners

Thank you, and welcome to the presentation of the Q2 results for 2018 for Marine Harvest. I will go through the report and open up for questions after we have gone through the presentation.

Highlights for this quarter was operational EBIT of €175 million in the quarter. What we see that is positive in terms of the market development is very strong demand in most markets and value growth in terms of sale of salmon almost in other markets where we operate.

The result in Norway and Chile was very good, the best second quarter we've ever had, and that is for both units on improved costs, obviously also on high prices, and this compare year-over-year result Q2 2017. In terms of financing, we issued a euro bond at €200 million with tenure of 2.15 -- or a coupon of 2.15%.

So we see this as good and cheap financing for the company. In this quarter, we also had to reduce our volume guidance with 28,000 tonnes.

I will come back to the details of that when I go through the different units and the reasons -- reasoning behind it. This is excluded -- excluding Northern Harvest.

The dividend for the quarter, the board decided to pay out NOK2.6 per share, and this will be paid out in Q3 2018. If we're then going to key financials, we see on the top line side, about the same revenue as Q2 2017 at €888 million.

Operational EBIT improved, but it's down from €197.9 million to €175.2 million in this quarter and harvest volume is about the same, around 78,000 tonnes for both quarters. If you then go to the price development in the quarter, we have the slight price increase in Europe -- or about stable prices in Europe.

And I'll come back to details on a later slide. Slight increase in Chile and 13% -- close to 14% increase in North American prices for salmon compared to the same quarter in '17.

Then go to price achievement. That's a function of the contract share.

We have the spot price and the quality of the fish. In Norway, we achieved 91% of the reference price or the spot price on the back of 48% contracts.

So contracts took the price achievement down somewhat because of the higher spot prices. And the superior share was slightly below what we expect.

We would like to stay above 90% in that -- in the quality of the fish. Scotland, 104% price achievement compared to 97% in 2017 in the second quarter.

High contract share here, 69%, and high superior share at 95%. Canadian salmon is basically in the spot market and we achieved a slightly lower than the reference price here because of lower quality than expected.

In terms of Chile, there, we have a 91% price achievement compared to 97% in 2017 Q2. This is on the back of 29% contracts and 86% superior share, so below our expectation on -- in superior share.

Then going to the development of operational EBIT for the company. It was close to €198 million in Q2 2017.

We see that Feed is about the same as Q2 last year. Farming is reduced to €12.9 million, mostly, the reason for that is Scotland and Canada performing at a lower level than what they did in Q2 '17.

It's also driven somewhat by volume reduction in harvest in Scotland this quarter in '18. Markets approximately the same and Consumer Products slightly down.

This has to do with what they say as the Easter effect of salmon and the demand before Easter. Easter was in Q1 this year compared to last year when it was in Q2.

Also, our explanation here is very volatile spot prices in some of our raw material going into Consumer Products is spot based and then you run the risk of not making as much money on this when these prices are changing. That takes us to this year's result, €175.2 million.

Then over to Norway. As already stated, a good quarter for the Norwegian operation, €126.7 million as a result compared to €98.4 million.

Harvest volume was up, closing in on 50,000 tonnes compared to 39,000 tonnes last year. But this year also, per kilo, we made more money, and this is on the back of volume obviously, but reduced feed cost on fish harvested and also the scale effect in terms of higher volume in this quarter.

And then we have on the negative and that is the development towards the end of Q2 and a little bit into Q3 and in July and August where we see especially Region South being hampered with some diseases. And this can be -- or it's most likely a ripple effect of treatment of sea lice that makes the fish weaker and then you have to harvest out earlier, and that gives you lower harvest weight.

And we see going forward that we have to reduce our harvest weight for the Norwegian operation. In total, with 14,500 tones, 80% of this is in the Region South, in the southern part of Norway.

We still, because of Region North and Region Mid, expect the cost to continue to decrease also in the third quarter compared to what we saw in Q2 of '18. We then look at the contract portfolio.

We see the contract portfolio is slightly above where there was the same contracts going forward in -- over the same quarters, in Q3, a little bit above 25,000 tonnes in Q3 and a little bit about -- or around 27,000 tonnes in Q4 '18, but not as stable and on good prices -- or corresponding prices to what we got in Q2 of '18. Then if you look at -- into the Norwegian operation, these are a lot of big units producing more than 50,000 tonnes each.

And we see Region South here in terms of operational EBIT per kilo lags quite a bit behind the other regions. I would say Region North is really performing very well.

Region Mid in the middle of Norway and we see the southern part of Region Mid not as good as northern part of Region Mid this time around, and then we see Region South being -- about one third of the result in Region North. This is linked back to what I spoke about in terms of biological issues in Region South.

All in all, the result is slightly better than what it was last year. Then we -- if you go into the Scottish operation, what's kind of standing out here is the reduced volume in this quarter, down to 9,000 tonnes from close to 19,000 in Q2 2017.

And on the back of this result -- a reduction in result, both specifically per kilo from €3.10 to €2.38, but also in absolutely money from €57.5 million to €21.3 million. I think the result is good that is driven by higher prices.

The cost is up because of lower volumes, and you can see also solid quarter and also, the fixed cost linked to that also being up. We do not think there would be huge improvement in the third quarter in Scotland in terms of costs, but we see room for growth here in 2019.

The reduced harvest volume halved to 5,000 tonnes in the second half. And this is on the back of a little bit low smolt stocking in '17 -- or '16 and '17 and then biological issues in this region.

Canada also had a challenging quarter, somewhat reduced volume from 9,300 tonnes to 8,000 tonnes, but more so reduced operational EBIT even though we had good price achievement or good prices in this region for the quarter. We have struggled with somewhat -- with jellyfish, some low O2, some gill issues on the fish in this region, and we do not see any improvement in Q3 for Canada directly.

Then we have invested on the other side from not in B.C., but in East Canada or New Brunswick and Newfoundland to be specific, and we estimate this unit to harvest 8,000 tonnes for the second half, about 18,000 tonnes for the year, 18,500, and that will give us another region to raise our money, which we think has great potential combined with the assets we had there from before and we -- that was great aquaculture which we bought three years ago. Chile, on the other side, had a very good second quarter, actually the best in the history of Marine Harvest.

This is on high prices and also on reduced costs. We think and we know because we decided we're harvest from -- and Q3 will have slightly higher cost than what we did in Q2.

And we still -- that we still think that the third quarter will be okay for Chile. Recent consolidation where Agrosuper was -- is buying -- was -- or bought or is about to buy AquaChile, I think it's posted for the long-term development of the industry in Chile.

We had one negative incident in Chile in July. We had a rather large escape, and this happened because of strong winds and waves on one side where the structure of the cages based.

We're working to find that -- what really happened there. We know that the moorings held up.

So it's the structure of the cages, and the cages were not old. They were put in place in 2017 and should withstand the weather that we face there.

But this is investigation ongoing to find the final solution and hopefully see that this never happens again. There were 900,000 fish at site when the storm happened.

We were able to rescue 250,000 fish and move them to another site. And we have fish -- about 45,000 fish with the gill nets after escape that there are still approximately 600,000 fish missing and some of them, we will catch, but absolutely no problem.

Ireland and Faroe Islands, strong market conditions. We had low volumes in both these smaller units, but okay results, I would say, and a really positive market for organic salmon, which we produced in Ireland.

We then go on to Consumer Products. Consumer Products had good volumes and good growth in revenue, but the earnings was down from €19.2 million to €13.1 million.

This is on the back of the raw material prices described before, but also the Easter effect, as I also mentioned earlier in conversation. What I think is really good is the strong consumption of salmon in the segment, and we see that basically in all markets where we are in.

We had one incident in France or we have a -- we had a smokehouse in France called Kritsen that burned down in July. It is fully insured both in terms of the buildings and -- but also may continue with the insurance for this.

So we expect limited cash effect for this incident. We have been able to route some of the production into our Scottish unit, into our unit in Holland and some into Poland.

And now we are relating our structure in France and how we will rebuild this market back. Feed.

Feed is in a high competition area in Norway as we speak. We had good production in the quarter and seasonally a record high.

Higher feed prices year-over-year, but the offset of raw material prices being -- raw material used in this quarter. While pressures in the margin -- in the market on margins, and this result is also slightly hampered by the construction of new feed plant in Scotland, and some of the expenses is booked directly into the feed operation as we speak -- or in this quarter.

Then going to take a look at financials, a little bit around the markets and the harvest volumes going forward. We have been through the numbers on -- in profit and loss, at least the big numbers.

And I think I'll just move on to the financial position. You see that the total asset is up by €300 million, approximately €300 million.

Still, their adjusted equity ratio now is 49.7%, down from 58.1% in the same quarter or same time last year, but -- and down from 51.7% at yearend. In terms of cash flow and interest-bearing debt, the net -- bearing debt in the period was €856 million -- or started the period with €856 million.

Basically, there are -- we are growing the business in terms of volumes, so -- and there are some inventory delays in value-added, but the change in working capital was €43 million. CapEx, about in line with same period last year and in line with budget.

And all in all, we ended net interest-bearing debt at €950 million towards the end of the quarter. We also bought 5.7 licenses in this quarter in Norway, and that's also accounted for in this data.

In terms of cash flow guidance, working capital buildup of €120 million still supports further organic growth. I think we'll see -- we have more biomass in sea, and I think we'll see this materialize in 2019.

CapEx, I think the number is about the same as it was in last quarter. What we're focusing on in CapEx is continued freshwater expansion and growing the smoked slightly bigger to avoid and to reduce biological impact in the sea.

So we have one freshwater facility being built now in Northern Norway and one in Region Mid and we have completed one in Scotland in Inchmore. We also do seawater expansion projects both in Scotland into new sites and Canada and in Chile.

And then we have the major investment in Scotland, the feed plant, and we had €60 million in this overview. Consumer Products, we're moving out of our plant in Miami and moving into a bigger plant.

And also, we are rebuilding and opening up the second facility and doubling capacity of Ducktrap, and Ducktrap is a smokehouse in Maine. And this is on the back of higher demand for our products, and we are basically growing out of our facilities.

Northern Harvest, €215 million, farming capacity mentioned and interest paid was €40 million and taxes paid in the quarter was €140 million and then the dividend we inventoried before. Financing.

I think new thing here is that the €200 million bond issued in June 2018. The remaining is the same as it was before.

If you then go into the supply development, the supply in the quarter was up globally, 5.2% compared to the same quarter in 2017. Norway was up 8%, then Scotland, Faroe Islands and Ireland were down.

And Chile, maybe where we missed a little bit on the guidance, were up 19%, that was more than we expected. All in all, 5.2% growth on the back of stable or increasing prices is telling us that the demand in the marketplace is good.

Look at prices. Norwegian salmon price in euros was slightly down 0.8% in NOK because of exchange rate up 1.1%.

Chilean salmon, up slightly between 2.5% in U.S. dollar or 2.5%.

And then North American salmon, up 12% to 14% in the -- currency sold in the U.S. So stable or increasing price development in the quarter on the back of higher volumes.

Then look at where the segment ended up in the marketplace. We see Europe is growing at 6.9% or EU is going 6.9%.

Russia is up 50% in the quarter and 26% on a rolling 12 months compared to the past 12 months. So it seems like Russia gradually is coming back.

This is fish from Chile and fish from the Faroe Islands. And then you have other Europe also being up.

In total, Europe is up 9.1%. So really strong development in the European market.

Same goes for U.S., up 14.3% this quarter compared to the same quarter last year on good prices. The sale is up and all in all, total Americas, some -- slight reduction there in other countries, in Middle America.

But in South -- in Latin America, but still, very good numbers, close to 10% increase in volume in the Americas. Then China opened up to Norwegian salmon and has continued to open up for more regions in Norway.

And this has led to increased export to -- in China and Hong Kong with 48% in the quarter. Japan is one of the few markets that's down and other Asia is -- that some salmon that went into China before went to Vietnam, I think that has stopped with the opening of China in -- as a buyer of Norwegian salmon, but strong development also there.

So total increase of 8.1% in the quarter into the different markets. If you look at the supply outlook for 2018, I think we will see some both more harvesting now than few months to come, especially in Norway and to a certain extent in Chile.

And then Kontali, where these numbers are derived from, expect about 5% to 7% increase in 2018. But Kontali has revised down its 2019 estimate and we agree with that.

On a global scale, we're down to 4%, 5% growth in Europe and 2% in Americas. This is because we believe that more fish will be taken out on lower weights in 2018 and does not reach the market in 2019.

Our guidance, just to be specific on that, we took down the volume from 400,000 tonnes to 380,000 tonnes, including 8,000 tonnes from Northern Harvest. Norway, already been [Indiscernible] with 14,500 tonnes down; Scotland, 5,000 tonnes down; Canada reduced by 6,500 tonnes; and then Chile, down 2,500 tonnes, that has to do with escape incident and the fish lost there; and then Ireland is slightly down; and Faroe Islands is increased by 1,500 tonnes for the remaining of the year.

If you then look at the outlook going forward here, it's clear that the demand for salmon is a strong in most markets, I would say. Fish price going forward is at €6.4 for the next 12 months.

Growth in China supported by the removal of export restriction from Norway is clearly helping. Supply outlook, again, is favorable for 2019.

For us, the acquisition of Northern Harvest, combined with the Gray assets that we -- or the Gray aquaculture company that we bought earlier give us a new dimension on the East Coast of Canada. And then dividend, I mentioned, but I will repeat it, it's NOK2.6 per share.

We paid out as ordinary dividend during Q3. A little bit marketing at the end.

Marine Harvest will have a Capital Market Day, 13th of November in Edinburgh, Scotland, and I hope to see many of you there. With that, I will turn this over to the conference host and open up for questions.

My question is on the Chile operations of Marine Harvest. As I understand from the press release and in your comment that the problem was there on the big cages that we had installed in 2017.

I want to specifically understand, is it because of the quality of the cages or the net that we are using? And if that was the case, what are we doing about it so that it doesn't happen in future?

Yes, this was about the escape incident in Chile, what happened and what are we doing about it. I'll try to describe it.

This was a site called Punta Redonda, it's south of Puerto Montt. The site experienced relatively strong wind.

And in Chile, we are not allowed to go out to the site when the storm is ongoing and because of all these navy regulations. But what happened was that the mooring system, which holds the cages in place, held up.

We use the same system as in Norway there. What broke was the cages itself.

The cages itself were new, they were both put in place 2017, so not even a year old. They should, according to specification, hold up, but they broke in the connection or -- the steel cages are connected to each other.

When this happens, the mooring system holds up. They will have the opportunity to break the net.

What we are doing, we reviewed obviously specification from the vendor or from the supplier here and certainly, we have already enforced all our other cages from the supplier with the change in all corners, in all lengths. But so far, our finding is that the cages in this case should have held this weather and this episode should not have happened.

But there is still investigation ongoing. But the question again, what are we doing about it immediately?

We reinforced all similar types of cages with chains in all junctions to make sure that they're not falling apart. For the nets here, we're in jeopardy not because they were all -- they were new nets, but when the steel structure breaks, they will towards the end break and that is not possible to avoid if as in this case, unfortunately.

So we're done a short time -- short term to secure that it is doesn't happen again. And we have also started to invest or have third-party engineers in place to make sure that -- to find out what was wrong with the structure because it -- to be honest with you, it should have taken this weather.

Three for me. So firstly, just looking at the supply or lack of supply growth this year, I note that at the start of the year, 2018, I believe, you're guiding for around 410,000 tonnes that was low double-digit supply growth, so growing significantly ahead of the industry.

Unfortunately, it looks like you're going to now be below the industry growth. Why is this happening and what are you doing to turn that around into 2019?

That's the first question. Second question, can you update us please on the outstanding convertible, what the situation is there going into H2?

And finally, just to clarify on the Chile situation, the escape, I noticed that you flagged a €35 million hit to EBIT in your report. Can you just clarify, is that the total cost you're anticipating?

Or can we expect an additional provision for regulatory fines, et cetera, on top of that?

Yes. In terms of supply growth, you're correct.

It was around 41,000 when we started the year. Excluding Northern Harvest, we are now at 372,000.

And there -- why is this happening? It's -- specifically, the reason is one or -- not all of it, but the major reason is one region in Norway, which is -- which has its issues biologically.

And I think you've seen other companies guide on as well in this region today. We have also reduced our volume in Canada and in Scotland.

I think Scotland is on the right track for '19. What we are doing there is new sites, even more focus on sea lice issues.

In terms of Canada, there's no quick fix. The reason for the reduction in Canada is the combination of -- and this is on the West Coast of Canada, combination of low oxygen water and [gill health], which gill is -- the gills are what takes up oxygen from the water.

And in combination with jellyfish in the area that has hurt the gill of the fish make us harvest them out earlier, and thus lower volume going forward. And there's no quick fix in Canada.

That's more nature that happens from time to time on the West Coast. But again, that can come back and do better in '19.

In terms of the outstanding convertible bond, it's currently beaten the money. The first potential to convert this into equities in November and every -- the board has not decided what to do when that time comes around.

And then the escape. I think if you refer to NOK35 million, that is correct.

That is €3.5 million, just to be specific on the number. I think -- and that is losses due to that.

Obviously, the fish are not there to be harvested and lost income. In terms of fines from the government or potential fines, that is not in that amount and we have yet to see any numbers from the government, whether they're going to fine us or not.

The issue in Chile is that there is no standard we are using, Norwegian standard for the moorings and that part of the equipment, that there is no ISO standard or no -- something called 9415, NS 94 -- or Norwegian Standard 9416 for all components. The government does not have that in place in Chile.

No matter what, we would look at all angles there and also the supplier of these cages have other responsibility. So -- but the -- any fines are not in this number or any potential fines is correct to say.

Does it answer your questions?

Okay. Then I would thank you all for attending the conference, and we will be back with Q3 in October of 2018.

Thanks a lot.