Dag Sletmo, DNB Foods & Seafood

Aqua Nor, 19. August 2015

Perspectives on growth in salmon farming

dag.sletmo@dnb.no, tel +47 95286134

Growth has been

fantastic…

…but it’s slowing

Global harvest, Atlantic salmon

3-year average growth rate, global harvest Atlantics

Source: Kontali

Source: Kontali, DNB

Why is growth important?

Feed the world Grow or stagnate It’s in our DNA! Make more money!

Growth is not always profitable A common misconception among investors and companies

Source: World Bank

..but have been catastrophic for the owners Airlines have grown tremendously..

Source: Bloomberg

Salmon farming is still a young industry Development in investor perceptions over time

Chaotic growth

(pre 2008)

Cyclical growth

(2008-2014)

New Dawn

(2014-)

Low & stable growth:

Better margins + lower volatility =

higher company valuations

Source: Fiskeridirektoratet, SSB, DNB

high low

hig

h hydro power,

downtown hotelsairlines, shipping

low salmon farming

now

salmon farming

beforeEX

IT B

AR

RIE

RS

ENTRY BARRIERS

Increasing barriers to entry Value grabbing vs value creation

Higher cost for marginal production A more attractive market structure

Is a blessing in disguise turning into a curse..? Sea lice issues helped curb growth

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

Why has growth slowed? Sustainability is the key issue

• Full capacity utilization in

• Norway, Chile, UK, Canada

• Governments reluctant to issue new licenses

due to sustainability issues

• Not opening up «new» provinces

• Increasing density within each province

• Less debottlenecking potential

• Base effect

Average annual growth 85 thousand tons

Reaching full capacity utilization

Source: Marine Harvest, Kontali

Source: Kontali, DNB

Sustainability challenges

•Sea lice threat to wild salmon

•Escapee threat to wild salmon

Sanitary challenges

•SRS and sea lice

•High production cost

Political and capacity challenges

•Lack of good unused sites

•Difficult regulatory and political processes

Political challenges

•Perceived as environmental threat

•But fresh Gov’t report recommends new legislation and

growth

Supply restrictions Governments in all main regions are restrictive

«License to grow»:

The industry must find

ways to operate

sustainably, and

convince authorities

and consumers it can

do so, in order to be

permitted to grow

Demand has not slowed down A lost opportunity

• Growth in demand has increased

• Emerging markets a larger share of mix

• New packaging has opened new distribution

channels

• Extremely few industries have more attractive

long- term demand fundamentals than salmon

farming

• The main potential «restriction» on

demand will be a lack of supply; markets

are not developed in a vacuum

Demand growth yoy, Atlantic salmon

Source: NMBU

Global middle class, billion people

Source: OECD

How to fix the problem: pushing the envelope Biological capacity isn’t an absolute; it’s a function of regulation and technology

Sustainability

It has been done

before:

Faroe Islands’ new

veterinary system

following its ISA

crisis helped create

new harvest peaks

in combination

with superior

biological

performance.

New technology can lift biological capacity Combining cutting-edge research and industrial know-how Existing and potential technologies:

• Offshore

• Closed cage

• Submerged cage

• Large smolt

• New vaccines

• Genetics

• Sterile fish

• Oceanographic studies and optimal site locations

• Lice treatment

• Omega 3; optimize use and new sources

• Etc..

New technologies

Production cost (including capital cost)

Source: Nofima, DNB

Source: Nofima, DNB

New regulations (& industry cooperation) Doing the right things, it’s not just about technology

• Focus on sustainability and effectiveness

• Regulate what they should and nothing else

• Linking capacity growth to sustainability

• Large zones

• Individual company basis

• Encouraging technology development

through market mechanisms

• “One company one fjord” & fire gates

• Industry coordination (GSI, ASC)

• Etc..

Source: DNB

Sustainability Do the right things and let the world know about it

• Planet

• Farmed salmon performs well in terms of key

parameters such as water consumption and

carbon footprint

• Biodiversity

• Threat to wild salmon in Norway (escapes, sea

lice)

• Sea bottom, herring, cod, sea mammals

• Economics

• Disease in Chile impacts cost very negatively

• Antibiotics use in Chile a market risk

• Access to marine ingredients for feed

Key sustainability parameters in protein production

Source: Marine Harvest, Aftenposten

Why does salmon farming get so much attention? It’s a very young and very successful industry

Aquaculture production has in <100 years reached the level

beef spent 8 000 years achieving

8 000 years

Agricultural history time line

Source: Wikipedia, DNB

Source: iLaks

There are real sustainability issues in salmon farming

Production cost NOK/kg

Source: SINTEF, Kontali Source: FHI

Multi resistant sea lice Public opinion

Source: Aftenposten Innsikt

Optimal growth: not too fast, not to slow…

Growing too quickly

puts downward

pressure on prices due

to weaker market

balance

Growing too quickly

puts pressure on

biology and

increases cost

$

Growing too slowly

is a missed

opportunity for

value creation & for

feeding the world

Salmon is good for both you and for the planet

DNB’s perspective..

• We believe in growth

• But it has to be sustainable!

• We support consolidation

• We are proud to be the only

financial partner in the NCE

Seafood Innovation Cluster

Source: Seafood Innovation Cluster

…and we are optimistic!

• Collaboration between companies

• Publicly funded research available to all

• Sharing best practice

• Egalitarian work ethos

• Workers apply their skills and are

autonomous

• Workers solve problems without instructions

and help make many small innovations all

the time

-Findings by social anthropologist Marianne E. Lien

Factors behind Norwegian salmon farmers’ success Norway’s cultural traits vs global average

Source: Hofstede Center

• We focus on helping the group rather than ourselves

• We are not hierarchical and we communicate directly

• We dare to state our opinion and defend it

…and we have a high level of trust

Salmon farming is built on innovation

A road map for growth

Farmed Atlantic salmon harvest

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

Thank you for your attention