Morpol reports financial results 3Q 2010
Morpol's operating revenues in the third quarter were well above prior year at EUR 93.3 million (EUR 67.7 million). The revenue increase was due to a combina-tion of volume growth and also higher sales prices. Overall sales volumes were 23 percent higher than prior year, reports http://www.megafishnet.com/ with reference to Morpol.
EBIT
EBIT for the quarter decreased from prior year with a break even result (profit of EUR 2.9 million). One off exceptional costs related to acquisitions totalling EUR 2.6 million were included in the results, meaning the operational EBIT was EUR 2.6 million in third quarter.
Though raw material costs of salmon dropped from quarter two levels, the price still remained higher than prior year levels and impacted on the processing mar-gins.
Financing
There was a net financial income in the third quarter of EUR 2.6 million compared to an income of EUR 1.8 million prior year. These figures include currency gains and losses.
The Group had net interest bearing debt (NIBD) of EUR 156.0 million at the end of third quarter. The NIBD in-creased sharply from the second quarter due to acqui-sitions. NIBD at the end of the second quarter 2010 was a net positive cash balance of EUR 58.4 million.
Net result
The Group had a net profit of EUR 0.9 million (EUR 3.9 million) in the third quarter. The lower profitability in the quarter reflected the higher prices paid for raw material in 2010.
Exchange rates impacts against last year
Certain costs such as administration and overhead costs as well as labour cost (salaries and other) are mainly Polish Zloty (PLN) denominated. Over the last year the Euro has weakened versus the PLN. The rate at end of the third quarter 2010 was 0.25 EUR per PLN compared to 0.24 at the same date prior year. Ex-change rate impacts on the results are minimal when compared to prior year.
Acquisitions
During the quarter, the Group has acquired Mainstream Scotland (now Northern Isles Salmon), Marine Farms ASA, Brookside Products Limited and assets of Westray Salmon Limited and Rysa Salmon Limited.
Northern Isles Salmon are included in the consolidated Group financial statements as from 1 August 2010. The other acquired companies will not be included in the Group's income statement until the fourth quarter. How-ever all acquired companies are included in the balance sheet at third quarter end. Please refer to note 2 for details on accounting effects and pro forma information.
Processing
Record high raw material prices
Raw material prices of salmon were the highest ever recorded during a third quarter. The global supply of salmon has been impacted by the decline in Chilean salmon production due to disease. Though Norway, the leading producer, has had growth in volumes in 2010, this has not offset the reduction from Chile on a global basis. During the period, EU imports of salmon were down 6.7 percent versus the same period last year. The prevailing record high price of gutted salmon exported from Norway has impacted negatively on margins for Morpol during the period.
Depending on the client and product mix, final product prices are agreed ad hoc or fixed for a longer period. Significant changes in raw material prices allow for ad-justments in fixed contract prices. It takes Morpol 4 to 8 weeks to adjust final product prices to raw material pric-es. However as was the case during the previous peri-od, Morpol's final product prices during the third quarter were always lagging behind the constantly high raw material prices.
However, it was challenging to pass through further price increases to all customers during the third quarter, with high volatility in raw material prices on a weekly basis making it difficult to set a benchmark price for the negotiations.
Continued strong sales growth
Though the short term pressure on margins is impacting on profitability, Morpol experienced strong sales growth during the period, total sales volume grew by 23 percent versus the third quarter 2009. There was good volume development versus 2009 in all categories with the ex-ception of Cold smoked salmon and Specialities.
Cold smoked salmon sales fell slightly compared to the same period last year, being primarily due to Morpol's continued restructuring of sales channels to more direct sales by ceasing supply via traders. Demand for Cold smoked salmon was affected in the third quarter as a consequence of price increases. Specialities sales were down by 5 percent versus prior year mainly due to later phasing of product introduction by the retailers for the winter sales period. Other product sales grew by 46 percent versus third quarter 2009, continuing the trend experienced earlier this year. This is mainly driven by new frozen portion product sales.
By-product sales grew rapidly by 35 percent compared to prior year, partly due to the implementation of a pro-duction technology (earlier in the year) designed to pro-vide better quality core products and enhance full value realisation per kg of fish processed, referred to as the by-product sales programme.
Investment programs
Morpol continued to invest during the third quarter of 2010 in innovative new processing technologies to fur-ther improving yields and allowing the production of attractive products and packaging. The focus of Morpol remains on producing stable, good quality products designed to satisfy customer needs.
Closure of Plattling (distribution center in southern Ger-many) took place during the third quarter, with related closure costs of EUR 60 thousand expensed in the quarter. The closure will result in 36 redundancies. This closure finalizes the restructuring of Morpol's distribution structure in Germany. A further cost of approximately EUR 200 thousand will be expensed in fourth quarter.
Product development
Morpol's market shares in smoked salmon in the large and high priced markets of France, the UK and Italy remain well behind the current market share in Germa-ny. Morpol continued to pursue the expansion of market share in these "new" markets during the third quarter. The acquisition of Brookside Products Limited in UK increases Morpol's market share in this market signifi-cantly, bringing the total marketshare to 20 percent.
During the third quarter Morpol introduced a new line of smoked salmon products to the French and Spanish markets. These products have been introduced in major retailers and utilise an innovative "skin pack" packaging format which allows better product presentation. The concept will be gradually rolled out further during the next year.
Morpol is rapidly increasing the utilisation and sales of other products extracted from the manufacture of the cold smoked salmon. By-product volumes have in-creased faster than cold smoked salmon in both volume and percentage terms compared to prior year as illus-trated below.
Farming
Northern Isles Salmon, formerly Mainstream Scotland, was consolidated in the Group accounts from 1 August 2010. For the two months August and September, Northern Isles generated an EBIT pre fair value of EUR 1.4 million. Sales volumes in the quarter were 1,604 metric tonnes gutted fish equivalent returning an EBIT/kg of EUR 0.88. Sales prices dropped through the
quarter from the second quarter levels. In general, there are no major disease issues on the fish at the quarter end, though costs of production were around 10 cents higher than the second quarter costs due to poor-er growth in some batches.
The company opened a new license on Shetland with a biomass consent of 1,500 tonnes with a view to increas-ing the overall production levels in the coming years. The company will be merged with Lakeland, the other salmon farmed purchased as part of the Marine Farms transaction in September.
Operational Costs
The cost of sales increased in the quarter to EUR 82.3 million (EUR 60.6 million) mainly due to the higher cost of raw material purchased, the higher volume and also to the inclusion of farming operations in 2010 costs. Distribution costs in the quarter were higher at EUR 5.5 million (EUR 2.8 million) principally due to certain cus-tomers being charged on a delivered basis rather than collecting ex-plant as was the case prior years. Admin-istration costs also were higher in the third quarter than prior year at EUR 4.1 million (EUR 1.6 million) due to various factors including increased resources worldwide to handle higher volumes and more markets as well as extra office costs in certain countries to support growth in future years. Additional staff has also been recruited in Norway to increase resource as a listed company.