The Bakkafrost Group delivered a total operating EBIT of DKK 349.6 million in Q4 2016.
Harvested volumes were 12.9 thousand tonnes gutted weight. The combined farming and VAP segments made an operational EBIT of DKK 340.9 million. The farming segment made an operational EBIT of DKK 401.6 million. The salmon spot prices increased in the quarter and had a positive effect on the farming segment. The VAP segment realized higher prices, but the increase did not match the increase in the spot prices, thus the VAP segment still had negative margins. The VAP segment made an operational EBIT of DKK -60.8 million. The EBITDA for the FOF segment was DKK 71.1 million.
The total volumes harvested in Q4 2016 were 12.9 thousand tonnes gutted weight. Bakkafrost transferred 3.3 million smolts in Q4 2016. In Q4 2016, Havsbrún sourced 34.7 thousand tonnes of raw material.
The farming segment made an operational EBIT of DKK 401.6 million for Q4 2016, which corresponds to NOK 37.70 per kg. The VAP segment made an operational EBIT of DKK -60.8 million for Q4 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 340.9 million for Q4 2016, which corresponds to NOK 32.00 per kg. The FOF segment (fishmeal, oil and feed) made an operational EBITDA of DKK 71.1 million for Q4 2016.
Commenting on the result, CEO Regin Jacobsen said:
“The good development on the market had a positive influence on Bakkafrost’s result in 2016, although the harvested volumes decreased in 2016, compared to 2015. Bakkafrost delivered a record high result for 2016. The Farming and FOF segments had very good results, while the VAP segment had difficult circumstances in 2016. In 2016, the harvest operation started in the new harvest/VAP factory at Glyvrar, and we expect to see operational savings, when the VAP processing at the same factory will be up and running.”
Bakkafrost aims at giving the shareholders a competitive return on their investment, both through payments of dividends and by securing an increase in the value of the equity through positive operations. The long-term goal of the Board of Directors is that 30-50% of the earnings per share shall be paid out as dividend. Bakkafrost’s financial position is strong with a solid balance sheet, a competitive operation and available credit facilities. Therefore, the Board of Directors proposes to the Annual General Meeting that DKK 8.70 (NOK 10.36*) per share shall be paid out as dividend. The proposed dividend corresponds to 49.8% of adjusted earnings for 2016. The Annual General Meeting will be convened on the 7th of April 2017.
In July 2016, a routine surveillance test detected a possible pathogenic ISA-virus at Bakkafrost’s 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. Tests taken by the Veterinary Authority at the farming site in January 2017 resulted again in suspicion of a pathogenic ISA virus. The suspicion related to two cages at the farming site, whereof one was the same cage that was under suspicion in July 2016. Bakkafrost decided to take immediate action after the new suspicion in January 2017 and harvested all the fish in these two cages. The suspicion of a pathogenic ISA virus at farming site A-73 Hvannasund Norður has not been confirmed, and the farming site is still under increased surveillance.
The Bakkafrost Group’s net interest bearing debt amounted to DKK 635.3 million at the end of Q4 2016. Bakkafrost had undrawn credit facilities of approximately DKK 654.5 million at the end of Q4 2016 and the equity ratio was 66% at 31 December 2016.
The salmon prices have increased to record levels in 2016. The increase is due to strong demands in nearly all markets combined with a decrease in supply in 2016. The estimated decrease in total supply in 2016 is approximately 4%, compared to 2015.
2016 was special because of unusual circumstances in Chile, as a harmful algal bloom hit the Chilean salmon industry and resulted in around 25 million fish being taken out, corresponding to 100,000 tonnes of harvested fish. In a matter of days, the supply picture for 2016 changed from an expected increase to a decrease. Such force majeure circumstances cannot be assumed in future expectations. The latest update from Kontali still estimates a global supply of Atlantic salmon to increase around 2% 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 the largest salmon markets in the world, USA, the Far East, Europe and Russia.
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.
To reduce risk, Bakkafrost decided in January 2017 to harvest 190,000 fish earlier than anticipated and not at optimal harvest weight. The harvest was a precautionary action as the fish was under suspicion of having pathogenic ISA. Reference is made to Bakkafrost’s market announcement on the 20 th of January 2017. Bakkafrost expects to harvest 55,500 tonnes gutted weight in 2017. This is 500 tonnes less than the previous forecast and relates to the precautionary harvest.
Bakkafrost expects to release 11.5 million smolts in 2017, compared with 11.7 million smolts in 2016 and 11.3 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.
The biological situation is Bakkafrost’s most important risk area. The suspicion of a possible pathogenic ISA virus at one of Bakkafrost’s farming sites in July 2016 and again in January 2017 – although the suspicion has not been confirmed – draws 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 much effort and is a part of the biological risk. The new Faroese regulations on sea lice control in salmon farming are expected to increase the operational costs for farming salmon in the Faroe Islands.
Bakkafrost focuses on using non-chemical methods in treatments against sea lice. Bakkafrost’s live fish carrier M/S Hans á Bakka has carried out freshwater treatment against sea lice since Q4 2015. In Q4 2016, Bakkafrost invested in a service vessel, M/S Martin, which will primarily use warm seawater treatment against sea lice. M/S Martin is expected to start operation in Q1 2017, which will increase the treatment capacity against sea lice significantly. Furthermore, Bakkafrost will increase the use of lumpfish in farming significantly in 2017.
VAP (Value added products)
Bakkafrost has signed contracts covering around 36% of the expected harvested volumes for 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. At present, there are 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 forecast for production of fishmeal and fish oil are 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 2017 are expected to be at 85,000 tonnes.
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, 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 over the next five years will be in hatcheries.
The investment of the new harvest/VAP factory at Glyvrar is in its final stages. The harvest operation started in the summer of 2016 and ramped up during the second half of 2016. The harvest factory at Kollafjørður will be closed in Q1 2017. The VAP production in the new harvest/VAP factory will start operation in Q1 2017. The old VAP production factory at Glyvrar was closed in Q4 2016, and the VAP production at Fuglafjørður will be closed in Q1 2017. 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 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.
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 Q4 2016 report and presentation.
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.
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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