Marine Harvest ASA - 2010 Annual Report
MARKET
Global harvest volume of Atlantic salmon was approximately 1.3 million tonnes gutted weight in 2010, which constituted a drop of 1.7% compared to 2009, reports www.megafishnet.com with reference to Marine Harvest.
The drop in global harvest volume was driven by a 46% decrease in Chilean volumes relative to 2009. The reduction in Chilean output was a result of the depletion of biomass during 2008 and 2009 due to the ISA disease. During 2010 Chile started to harvest volumes from generations of Atlantic Salmon released according to new stricter operating standards and in areas that had been fallowed for an extended period, which contributed to good biological results. Harvest volumes in Chile are expected to grow in the coming years.
Harvest volume in Norway increased by 10.4% compared to 2009. The Norwegian salmon farming industry is approaching capacity under the current license structure and Norwegian authorities are not expected to review a capacity expansion until 2012. As a consequence, growth in harvest volumes in Norway is expected to be moderate in the coming years.
Due to strong demand and a tight global supply situation, prices in the market currencies (EUR and USD) increased sharply relative to 2009. As a result of currency movements, the prices translated into NOK increased at a lower rate. The reference price for Norwegian Atlantic salmon increased by 35% in EUR and by 24% in NOK. The reference prices for Chilean and Canadian Atlantic Salmon increased by 28% and 16% respectively in USD and 23% and 11% respectively in NOK.
When including movements in inventories, volume distributed to the markets totalled 1.3 million tons gutted weight in 2010, which constituted a drop of 4.1% relative to 2009. The reason for the drop was high sale from inventory in Chile during 2009 whilst supply to the markets was in line with harvest volumes in 2010.
With the exception of the Russian market, where consumption increased by 26.5%, consumption in all major markets was impacted by the global drop in supply from 2009 to 2010. The EU, (51% of the market for Atlantic salmon in 2010), experienced a drop of 3.7% and the US (18% of the market) experienced a drop of 8.8%. The US market has been particularly impacted by the shortfall in volumes from Chile as it historically has been the core market for Chilean producers. Increased export from European producers to the US market has, however, partly compensated for this shortfall. Brazil, which historically also has been supplied from Chile, experienced the most substantial drop with 31%. The Brazilian market is generally viewed as promising, and is expected to take a large share of Chile's incremental volumes going forward.
Other markets showed good price competitiveness during 2010 and dropped by a lower percentage than the overall market.
Marine Harvest Norway
Marine Harvest Norway's performance in 2010 was strong. Operating revenues amounted to NOK 8 081 million in 2010 (NOK 6 856 million). The increase was due to high prices. The global reduction in harvest volumes as a result of the ISA challenges in Chile, combined with strong demand, contributed to a tight market for Atlantic salmon and substantial price increases during the year. Marine Harvest Norway achieved an average sales price FCA Oslo for all sizes and grades of NOK 33.84 in 2010, which was NOK 2.85 lower than the weighted NOS Superior spot price for the year. NOK 2.17 of this difference was due to lower prices on contract sales and NOK 0.94 was due to quality downgrades. Sales in the spot market had a positive effect on the average price achieved in 2010. The share of volume sold on external contracts in 2010 was 33%. The observed spot market price (NOS - Marine Harvest size distribution) was NOK 36.69 per kilo gutted weight in 2010 compared to NOK 30.22 per kilo gutted weight in 2009. The 2010 superior share was 90% (93%), due to some quality challenges related to winter wounds in the first half of the year. The total harvest volume in 2010 was 202 456 tonnes gutted weight (201 676 tonnes).
The export of fillets to the US market was high in the first half of 2010, when supply from Chile was very limited. In the second half of the year, increased harvest in Chile and strong European and Asian markets, shifted some of the Norwegian volume away from the US market.
Operational EBIT was NOK 2 338 million in 2010 (NOK 1 257 million). The main contributing factor was higher prices. Operational costs were NOK 0.14 per kilo gutted weight above 2009 due to additional lice mitigation costs of NOK 0.39 per kilo (NOK 0.09). Operational EBIT per kilo was NOK 11.55 in 2010 (NOK 6.23).
Marine Harvest Norway initiated a substantial upgrade and expansion plan for the freshwater and processing areas in 2010. The target for the freshwater investments is to reduce cost, secure the required capacity and optimize the stocking pattern. On the processing side, substantial investments have been made to increase the filleting capacity, in order to grow with the customer base.
Marine Harvest Norway has, within the existing license capacity, a potential to grow. Smolt stocking was therefore increased by 10% between 2009 and 2010. This will contribute to a significant increase in harvest volumes and improved efficiency in the operations in 2011.
At year end 2010, the sea lice count was lower than at year end 2009. Industry wide and company specific mitigation efforts, contributed to the improvement.
In December 2010, the Norwegian Research Council announced the establishment of a Sea Lice Research Centre at the University of Bergen.
Marine Harvest is one of the initiators behind the establishment of this centre and one of a few select industry players financing it.
PD mitigation efforts prevented spreading of this disease to new regions in 2010, and PD-related mortality was maintained at a low level during the year. The improved PD situation combined with other cost reduction efforts, have contributed to region West closing the gap in operational EBIT per kilo, compared to the best performing region in Marine Harvest Norway.
The average monthly mortality rate was 0.71% in 2010 (0.74%). Low seawater temperatures contributed to slower seawater production in the first half of the year, compared to 2009. Seawater growth picked up in the fall and contributed to a full-year average growth rate in line with the 2009 level.
Marine Harvest Chile
Marine Harvest Chile successfully adapted to a lower activity level during 2010, after years of challenges due to the effects of the Infectious Salmon Anemia virus (ISAv). Marine Harvest early recognised the detrimental effects the ISA situation had on the local community and put effort into helping former employees in their pursuit of new employment. As recognition for this effort, Marine Harvest Chile received a Corporate Social Responsibility Award. Several key employees were also trained in Marine Harvest's global organisation to prepare for the rebuilding of Marine Harvest Chile.
8 million smolt were stocked in Chile in 2010, and the company will follow the communicated plan of stocking another 8 million smolt in 2011. Until the biology is under control, only a limited number of the company's available seawater sites will be in operation. Substantial investments in increased land-based freshwater capacity have been initiated in 2010, in order to reduce the operational risks and create a more predictable operational regime going forward.
Operating revenues in Marine Harvest Chile were NOK 2 296 million in 2010 (NOK 2 293 million) due to significantly higher prices and partial compensation of lower volumes from Chile through sales of Norwegian and Scottish salmon via the business unit's sales offices in the US market. The prices in
the Brazilian as well as the US markets were strong in 2010. Good quality and favourable harvest weights contributed to very high prices achieved. The superior share was 91% (76%). Marine Harvest sold 10 570 tonnes gutted weight of its own Chilean produced salmon in 2010 (36 204 tonnes).
Operational EBIT amounted to NOK 110 million in 2010 (NOK -466 million) driven by high prices, favourable cost development and very good seawater growth, contributing to higher than expected sales volumes. The 2009 figure include NOK 236 million in write-downs related to freshwater culling and costs above the realisable value. Of the 2010 operational EBIT, NOK 63 million was generated by the farming operations, while the sales and processing units in the US and Chile contributed with NOK 47 million. Operational EBIT per kilo for Marine Harvest Chile farming was NOK 5.94.
The average monthly mortality rate was 0.54% in 2010 (2.53%). Seawater growth was very good and the average size of fish harvested during the year was 5.08 kilo gutted weight (2.91). There were no outbreaks of ISA in Marine Harvest Chile in 2010.
Marine Harvest Scotland
For Marine Harvest Scotland, 2010 was a satisfactory year, despite profitability being negatively affected by lower harvest volumes and a high share of fixed price contracts. Operating revenues were NOK 1 179 million (NOK 1 219 million). The average price achieved, in local currency and in NOK, increased by 16% and 11% respectively between 2009 and 2010. The high contract share of 74% (67%) prevented the unit from fully capitalizing on the market price increases during the year. Although prices in the spot market were significantly higher than the average contract prices in 2010, the strong relationship with contract customers continues to secure good and predictable return for Marine Harvest Scotland, and contracts with the main customers have been renewed at high prices for 2011.
The volume harvested in 2010 was 33 136 tonnes gutted weight, a reduction of 12% compared to 2009, due to lower smolt stocking in 2008 compared to 2007. The stocking increased by 28% between 2008 and 2009 and as a result, the harvest volume is expected to increase substantially in 2011. This is a step in the direction of bringing Marine Harvest Scotland to a level of 50 000 tonnes gutted weight harvested per year. The quality of harvested fish was good, with a superior share 92% (94%).
Operational EBIT in 2010 was NOK 296 million (NOK 273 million). Operational EBIT per kilo gutted weight ended at NOK 8.94 (NOK 7.23). The improvement improvement was a result of more favourable prices. Operating costs increased between 2009 and 2010 mainly due to higher feed cost. Limited flexibility in the composition of feed raw materials, as a result of end product contract specifications combined with increasing feed raw material prices in general, are the main contributing factors to the cost increase.
Investments in a recirculation hatchery, enabling production of 5 million smolt and 5.8 million fry, has been approved to facilitate the planned production growth in Marine Harvest Scotland. The hatchery will be completed during 2012.
The average monthly mortality rate was 0.49% (0.64%). Seawater growth was very good in 2010.
Marine Harvest Canada
Marine Harvest Canada benefitted from favourable prices in the US market, although the strengthening of the CAD towards the USD and a low superior share negatively impacted the price achievement in 2010. Operating revenues were NOK 1 370 million in 2010 (NOK 1 272 million). The average price achieved in CAD was 9% higher than in 2009. During 2010, Marine Harvest Canada partly harvested fish from the Campbell River area, an area that has been negatively affected by soft flesh caused by the parasite Kudoa thyrsites. Total costs related to discards and claims as a result of soft flesh, amounted to NOK 24 million/NOK 0.72 per kilo harvested in 2010 (NOK 63 million/1.72 per kilo harvested). The harvested volume was 33 547 tonnes gutted weight (36 537 tonnes). The superior share was low at 80% due to maturation/reduced flesh colour and bruises (78%).
Operational EBIT was NOK 223 million in 2010 (NOK 207 million). More favourable prices had a positive impact, while operating costs increased due to slow growth during 2009. Operational EBIT per kilo harvested was NOK6.65 per kilo gutted weight (NOK 5.67).
During 2009 and 2010, Marine Harvest Canada invested in recirculation freshwater capacity to facilitate production of smolt at a lower cost, under stable and predictable conditions. The site will be fully operational in 2011.
The average monthly mortality rate was 0.41% in 2010 (0.51%). Seawater growth improved compared to 2009, but the unit still faces challenges in periods of low dissolved oxygen levels in the water. Changes in operating procedures have been initiated to improve growth.
Marine Harvest VAP Europe
Marine Harvest VAP Europe experienced a challenging year in 2010 due to the substantial increases in raw material prices. Operating revenues were NOK 4 496 million (NOK 4 192 million). The increase from 2009 is explained by a 9% increase in volume sold combined with an 8% increase in the average end prices achieved in EUR. Substitution towards less value added products (mix effect), negatively influenced the price achievement. Volumes sold in 2010 ended at 63 446 tonnes (58 159 tonnes).
The prices for salmon based end products increased by 19% from 2009 to 2010. The price increases were most pronounced in the modified atmosphere packaging (MAP) and fresh bulk categories, while frozen product prices took more time to adjust due to long-term, fixed price contracts. Sales prices for smoked salmon were the most challenging to increase, and as a result, the margin on smoked products fell substantially, compared to 2009.
Despite high prices, sales of salmon based products increased 16% compared to 2009. Sales of salmon accounted for 69% of the total sales value in 2010 (63%).
Operational EBIT was NOK 155 million in 2010 (NOK 288 million). The raw material costs increased significantly during the year, especially for salmon, and Marine Harvest VAP Europe was only partially able to increase end product prices to compensate for the increase in raw material prices. Unlike 2009, the unit did not benefit from favourable fixed price contracts on salmon purchases in 2010. Other operating expenses in per kilo terms decreased compared to 2009, as the unit continued to increase operational efficiency and reduce the number of stock keeping units. Overall, the 2010 results for Marine Harvest VAP Europe were satisfactory, but Marine Harvest Poland experienced a very difficult year due to sales on long term contracts not meeting raw material market price increases. The 2010 operational EBIT margin for Marine Harvest VAP Europe was 3.4% (6.9%).
In order to support customer growth in the MAP category, investment in a new MAP processing facility in Boulogne has been approved. The new plant will be completed during 2012 and enable Marine Harvest to capitalize on the customer portfolio and grow in a category where the company has a strong track record.