the new “normal” in salmon farming - intrafish...
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The new “normal” in salmon farming
IntraFish & DNB Seafood Investor Forum
London, 30 November 2016
Dag Sletmo, [email protected], tel: (+47) 95286134
A Cluster Partner
DNB Foods & Seafood
DNB is global within ocean industries
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DNB Bank is a global seafood player
DNB Foods & Seafood
Agenda
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The new normal
• The new normal
• What is the normal salmon price
• What does the future hold?
DNB Foods & Seafood
Famous last words: «this time is different»
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The new normal
But sometimes things actually are different:
A super cycle or a paradigm shift?
DNB Foods & Seafood
“Seafood is the new oil” Oil price collapse reinforced Norway’s focus on the seafood industry
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The new normal
Seafood is the stock market winner
Source: OSE, DNB
Seafood share of exports doubled
Source: SSB, DNB, OSE
Energy
Seafood
Materials
DNB Foods & Seafood
The “new normal”: high margins & high multiples
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The new normal
Higher margins/profits Higher valuation multiples
Source: Fiskeridir, companies, DNB, Factset
DNB Foods & Seafood
A farewell to the traditional cyclical pattern
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The new normal
A new dynamic and an end to the traditional cycle
DNB Foods & Seafood
A closer look at the cycles
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The new normal
Up cycles Down cycles
Source: Fiskeridir, DNB
DNB Foods & Seafood
No growth = no «pork cycle»
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The new normal
CAGR 1992-2011: 10% CAGR 2012-16: 2%
Global supply of Atlantic salmon
Source: Kontali, DNB
DNB Foods & Seafood
What created the new normal? Full global capacity utilization
The sea lice – initially a blessing in disguise for investors..?
Restricts growth
Boosts prices
Boosts cost
Industry reputation at risk with regulators and consumers
Positive price impact may erode since long term and short term price elasticities are very different
The new normal
DNB Foods & Seafood
Is the “new normal” a good thing? Why growth is important
Feed the world Grow or stagnate It’s in our DNA! To make more money!
The new normal has created some 60% excess shareholder value in 4 years. But the same
could have been done in 10 years of 5% growth p.a. – with the option of continued growth*
*Based on «old normal» peak valuation and assuming market could absorb 5% p.a. volume growth without impacting prices
The new normal
DNB Foods & Seafood
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• High growth in demand is a key
feature of the salmon market driven
by
- Growing middle class in emerging
markets
- Growing health awareness
• But if these trends are not matched
with product to sell, the demand
remains potential, not real.
Consumers don’t demand a product
they don’t know
• And then the positive price and profit
impact of the limited supply becomes
an illusion
No volume growth boosts profits – what’s the problem? The problem is that the impact long term is different from short term
Positive price impact of low supply weakens over time
The new normal
DNB Foods & Seafood
Agenda
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• The new normal
• What is the normal salmon price
• What does the future hold?
DNB Foods & Seafood
The salmon price has sky rocketed… Current level ~100% above average
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Price trends
Source: SSB, DNB
Norwegian salmon price reaching new highs
DNB Foods & Seafood
Are these record prices sustainable? ..it’s a long way down..
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Price trends
Source: Bloomberg, FactSet, DNB
Other raw material prices have collapsed, is salmon a cliff hanger?
DNB Foods & Seafood
New «normal» salmon price = NOK/kg 40+ To get 8% return on invested capital after tax, a Norwegian farmer needs
NOK/kg 10+ EBIT-margin. Given cost of ~30+, the price must be 40+
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Norwegian salmon price, NOK/kg
Source: Kontali, DNB
Salmon price
New «normal» salmon price?
(NOK/kg 40)
10-year average
(NOK/kg 33)
Price trends
DNB Foods & Seafood
What sets the global price long term? Norwegian cost plus return on capital
18 Source: Directorate of Fisheries, DNB
Cost drives price longer term
As the industry
has approached
full capacity the
last few years, the
industry has
moved from
covering cost of
capital to earning
super profits
Price trends
DNB Foods & Seafood
We assume NOKm 60 for naked license in our
NOK/kg 40+ normal salmon price calculation
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Bids for naked licenses in 2014, NOKm
Source: Fiskeridir, DNB
We need to make assumptions.. ..even if they are somewhat circular (license
value depends on the normal price)
Price trends
DNB Foods & Seafood
But demand is also a factor, the consumer has
other choices
Source: Index Mundi, DNB
• Salmon high in the trading range vs pork and chicken, ok vs beef
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100
150
200
250
300
Beef
Chicken
Salmon
Pork
Salmon price not out of whack yet. Indexed, USD
Price trends
DNB Foods & Seafood
..nothing new under the sun - declining supply
drives the high prices. So far..
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Price trends
Source: Kontali, DNB
1%-p drop in global supply growth lifts salmon price by ~3% (and vice versa)
DNB Foods & Seafood
Vertical supply curve makes supply less responsive
to changes in price
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MAB utilization in Norway A steeper supply curve
Source: Kontali
Price trends
DNB Foods & Seafood
Demand to become more important in forecasting prices A challenge, we know way more about supply than demand
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Price trends
Supply; we
drown in
data
Demand;
the dark side of
the moon
But overall price volatility should become lower due to lower supply volatility
and more integrated value chains
Lower volatility could paradoxically lead to more salmon price hedging as it
reduces the risk of having a different strategy than your competitors
DNB Foods & Seafood
Cost ticks up every year..
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Cost trends
Source: Directorate of Fisheries, DNB Markets
Cost is trending upwards, NOK/kg HOG, Norway
DNB Foods & Seafood
And every year we believe cost will turn down ..but it doesn’t
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Cost trends
Source: Holberg Fondene, DNB
Economists always believe interest rates will
“normalize” and increase Salmon farmers always believe cost will
“normalize” and decline
DNB Foods & Seafood
Global salmon supply curve
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Cost trends
Source: Kontali, Nofima, DNB
Global supply, cost in NOK/kg (HOG) & volume in ktons (WFE), 2015
In 2016e Norway will jump to NOK/kg 35+
DNB Foods & Seafood
Not obvious that cost will improve High cost could squeeze margins & lead to “salmon fracking”
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Cost trends
• Negative factors (i.e. higher cost)
- Strong negative trend, underlying cost pressure
- Full biological capacity utilization increases biological risk and cost
- High profitability in Norway may make companies less cost focused and Gov’t more likely to not consider cost implications of regulations
• Positive factors (i.e. lower cost)
- Chile should benefit from FX effects working through the feed value chain in other regions, improving Chile’s relative position
- Improved health situation could make significant improvements
• SRS in Chile
• Sea lice in Norway
- Chile, UK, Canada could benefit from larger sites ala Faroes and Norway
- High technological innovation rate related to development licenses in Norway
Do we need a paradigm shift because current operating models are pushed to the
limit or can incremental changes solve the cost problem?
DNB Foods & Seafood
FX a major noise factor in global salmon market
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FX issues
( Price - Cost ) x Volume = EBIT
Very large
impact,
short time
lag
Large
impact,
long time
lag
Very large
impact, hits
soon and
lasts long
..and don’t forget about debt..
3 value drivers; price, cost, and volume. Plus FX
DNB Foods & Seafood
NOK – where are we now? The Norwegian party is over! (which is good for Norwegian seafood exporters)
FX issues
Source: Norges Bank, DNB 29
Norway surfs on a commodity
super-cycle fueled by Chinese
demand. Strong NOK.
The party is
over! Weak
NOK. NOK index
DNB Foods & Seafood
Agenda
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• The new normal
• What is the normal salmon price
• What does the future hold?
DNB Foods & Seafood
The road ahead
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1) Volume growth will be brought back by innovation
2) Sustainability is key
3) Bigger and more integrated corporations
4) Retailer relationship and brand focus
5) Leveraging salmon farming know-how into other species
6) Super cycle or a new paradigm?
DNB Foods & Seafood
Houston, we have a problem!
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Revenue growth is super, but
volumes are flat!
Sales measured in NOK
Sales measured in tons
Source: SSB,, DNB
Growth is driven by price, not volume
The road ahead, #1
Our hope: new sustainable production growth with growth marginally lower than
demand such that prices and profitability remains good
Norwegian export of salmon by weight, indexed, 1996 = 100
DNB Foods & Seafood
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• Development licenses
• Offshore
• Closed systems
• Land based
• New players
• Genetics/CRISPR
Regulatory and technological innovation will solve
the growth problem
The road ahead, #1
DNB Foods & Seafood
Genetics hugely important to food economics Salmon has a catch up potential vs other animal production
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The road ahead, #1
Source: AquaGen
Chicken 1960 vs 2015 Chicken 1960 vs 2015
Eggs per hen annually Milk per cow annually
DNB Foods & Seafood
Sustainability is not optional
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The road ahead, #2
DNB Foods & Seafood
Fish farming is good for you and for the planet
36 Source: EAT, DNB
Aquaculture
scores high both
on sustainability
and health Sustainability and health
The road ahead, #2
DNB Foods & Seafood
Optimal size of corporations External transaction costs > internal transaction costs = growing companies
Ergo, consolidation will continue
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External
transaction
costs
Company A Company B Market
Driving force for larger and more integrated corporations • Biological control
• Quality control throughout the whole value chain
The road ahead, #3
Source: DNB
DNB Foods & Seafood
Retailer relationships & brand focus
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The road ahead, #4
Source: MHG, AquaChile, Bremnses, Sainsbury, Bakkafrost/Kontali
DNB Foods & Seafood
Atlantic salmon – small but leading within aquaculture
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The road ahead, #5
High level of industrialization, low risk
Source: MHG/Kontali
• Aquaculture production has outpaced all other food-producing systems the last two decades
- FAO, SOFIA 2016
• Aquaculture will continue to be one of the fastest growing food sectors
- OECD-FAO Agricultural Outlook 2016-2025
DNB Foods & Seafood
New industries
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We have had 80% fisheries
and 20% aquaculture. Now
we want 50/50 and then we
need help from Norwegian
companies. You are pioneers
and very good at technology
Iran’s agri- and seafood minister,
quoted in VG in Sept ‘16
Metals smelter Finnfjord wants to produce salmon feed
from excess CO2
The road ahead, #5
DNB Foods & Seafood
The force is with us! “All” the mega-trends in favor of the fish farming industry
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An increasing
world
population
needs food
Low feed
conversion rate
vs other animal
production
Limited CO2
waste and
water
consumption
vs other animal
production
Ageing
population eats
more fish
Higher
educated
population eats
healthier
Growing
middle class in
emerging
markets
demands more
protein
Limited volume
potential in
fishing, growth
has to come from
fish farming
The road ahead, #1
Better grocery
retail supply
chains in
emerging
markets
Source: DNB
DNB Foods & Seafood
Super cycle or new paradigm? Stock market valuation implies new paradigm
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The road ahead, #6
Pork cycle is history as long as capacity remains constrained
- Stock market assumes a normal margin of NOK/kg 13-19
• 3% volume growth p.a. implies NOK/kg 13, zero growth implies NOK/kg 19,
EBIT/kg vs EV/kg at ROCE 7% post tax
Current OSE
valuation
2016e
Source: DNB
DNB Foods & Seafood
New technology needs high prices At least right now..
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The road ahead, #6
Source: Nofima, Kontali, DNB
Potential global supply curve
Hence new technology will not be built out on a large scale unless prices stay strong.
Large expensive structures with long life spans but not requiring licenses could lead to
long investment driven cycles ala shipping
DNB Foods & Seafood
Offshore expands potential acreage
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The road ahead, #6
Land based farming relevant in air freight markets such as US and Asia
Global ocean temperatures
DNB Foods & Seafood
A road map for growth
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Atlantic salmon harvest; growth, no growth – and eventually innovation will trigger new growth
A few years
with very
limited or no
growth due
to
restrictions in
Norway and
Chile?
Industry and governments
lift biological capacity
through technological and
regulatory innovation, but
still supply growth below
growth in demand?
Source: Kontali, DNB
The road ahead, #6
DNB Foods & Seafood
Thank you for your attention
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