The Bakkafrost Group delivered a total operating EBIT of DKK 335.5 million in Q1 2017. Harvested volumes were 13.2 thousand tonnes gutted weight. The combined farming and VAP segments made an operational EBIT of DKK 320.2 million. The farming segment made an operational EBIT of DKK 373.2 million. The salmon spot prices continued in Q1 2017 on a high level from 2016, which was positive for the farming segment. The VAP segment realized higher prices, but is not matched by the high spot prices, and therefore the VAP segment had negative margins in Q1 2017. The VAP segment made an operational EBIT of DKK -53.0 million. The EBITDA for the FOF segment was DKK 45.1 million.
The total volumes harvested in Q1 2017 were 13.2 thousand tonnes gutted weight. Bakkafrost transferred 1.4 million smolts in Q1 2017. In Q1 2017, Havsbrún sourced 106.6 thousand tonnes of raw material.
The farming segment made an operational EBIT of DKK 373.2 million for Q1 2017, which corresponds to NOK 34.27 per kg. The VAP segment made an operational EBIT of DKK -53.0 million for Q1 2017. Although the sales prices in the VAP segment have increased, the VAP segment continued to have negative results, primarily due to the high salmon spot prices. The new VAP factory at Glyvrar started production in January 2017, and Q1 2017 was the first quarter when both the harvest operation and the VAP production operated in the combined VAP/harvest factory at Glyvrar. Simultaneously, the old VAP factories were closed. The combined farming and VAP segments made an operational EBIT of DKK 320.2 million for Q1 2017, which corresponds to NOK 29.40 per kg. The FOF segment (fishmeal, oil and feed) made an operational EBITDA of DKK 45.1 million for Q1 2017.
Commenting on the result, CEO Regin Jacobsen said:
“ The first quarter of 2017 was an eventful quarter for Bakkafrost in many ways. In January, Bakkafrost started the VAP production in the new combined harvest/VAP factory at Glyvrar, which was the last of three operations to start up at the premises at Glyvrar since 2014. The two previous are the packaging operation and the harvest operation, which started up in 2014 and 2016 respectively. There were challenges in the farming operation in this quarter, as ISA-virus was confirmed on one farming site. Since ISA suspicion arose in July 2016, Bakkafrost has monitored the development at the farming site closely together with the authorities. Timely action has been taken and all fish harvested immediately. ”
Bakkafrost’s farming site A-73 Hvannasund Norður has been under suspicion of pathogenic ISA-virus since July 2016. The suspicion rose anew in January 2017, and Bakkafrost decided to harvest the two cages, related to the suspicion. Medio March 2017, Bakkafrost decided to harvest the whole site early as a precautionary action. At the end of March 2017, pathogenic ISA-virus at farming site A-73 Hvanna-sund Norður was confirmed. Bakkafrost decided to accelerate the already started harvest. The harvest of farming site A-73 Hvannasund Norður ended on 12 April 2017, and the average size of the harvested fish was just below 3 kg gutted weight.
The Bakkafrost Group’s net interest bearing debt amounted to DKK 458.6 million at the end of Q1 2017. Bakkafrost had undrawn credit facilities of approximately DKK 826.4 million at the end of Q1 2017 and the equity ratio was 65% at 31 March 2017.
The salmon market has for the last year or so been affected by decline in supply. The main factors behind this were 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 Q1 2017. Expectations are that global supply of Atlantic salmon will shift from reduced supply into growth of supply in Q2 2017. The latest update from Kontali Analyse estimates a 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. 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 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. 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. The new Faroese regulations on sea lice control, which aim at reducing the number of sea lice even further, is 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 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 June/July 2017. Furthermore, Bakkafrost will increase the use of lumpfish in farming significantly in 2017.
VAP (Value added products)
Bakkafrost has signed contracts covering around 39% of the expected harvested volumes for the rest of 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 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 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 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 over the next five years will be in hatcheries.
Both the harvest operation and the VAP production in the new harvest/VAP factory at Glyvrar are operating. The harvest operation started in the summer of 2016, and the VAP production started in Q1 2017. The old harvest factories in Klaksvík, Kollafjørður 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 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 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 enclosed the Company’s Q1 2017 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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