Covid-19 impact and mitigation
The Covid-19 pandemic has disrupted the salmon market with a significant shift in demand and lower prices in core markets. The priorities for Grieg Seafood are protecting our people, the local communities where we operate, our partners and business operations, and to secure liquidity and financial solidity. Despite the challenging circumstances, demand for Atlantic salmon remains strong and Grieg Seafood has been able to maintain efficient operations throughout the quarter.
Taking care of employees
Since the outbreak of Covid-19, employee well-being has been the number one priority for Grieg Seafood. Crisis management teams were quickly established at the head office and in each region. We follow the advice of the authorities in the regions where we operate. We have implemented measures to lower the risk of contamination to ensure business continuity, including strict routines at production sites and harvest facilities to limit physical contact and encourage social distancing. Remote work has been endorsed whenever possible, and business travel have been restricted.
During the pandemic, the salmon farming industry has been recognized as an essential function in Norway, Canada and the UK, and despite the challenging circumstances, we have been able to maintain efficient operations. Grieg Seafood maintains a constructive dialogue with the authorities in the regions we operate in through industry organizations, continuously monitoring and discussing possible arrangements to safeguard our salmon farming operations in various scenarios.
Since the outbreak of Covid-19, employee wellbeing has been the number one priority for Grieg Seafood.
Challenging and volatile markets
Covid-19 has disrupted the salmon market, with a significant shift in demand, away from hotels, restaurants and catering (HoReCa) and to a greater extent towards the retail segment. Covid-19 continued to impact both consumption patterns and overall demand during the third quarter. Sales to HoReCa were already at a low level and experienced another drop as the second wave of restrictions was enforced in some European countries. Our sales have remained good, however, but with supply growth and volumes to the market at a higher level than the first lockdown, salmon prices have suffered, particularly in the USA, which has a higher HoReCa market share compared to Europe.
The retail segment and home consumption have been boosted. The shift from HoReCa to retail is expected at some point to be reversed, but the current market situation may also lead to permanent changes in consumer behavior. With an increasing share of people preparing food at home, combined with a growing preference for healthy food and the current low prices, the demand for salmon may increase in the retail segment going forward.
Supply lines remained for the most part open during the quarter, and airfreight remains expensive. Most of our salmon is shipped by truck from Norway or the UK to European markets, or from Canada to the North American markets. Our diversified geographical presence provides some flexibility and reduces logistical challenges.
With an increasing share of people preparing food at home, combined with a growing preference for healthy food and the current low prices, the demand for salmon may increase in the retail segment going forward.
Ensuring financial stability
Following the outbreak of Covid-19, market uncertainty increased, and prices have come down in all core markets, impacting the Group's earnings negatively. Grieg Seafood was in compliance with its financial covenants according to the loan agreements as of 30 September 2020, as the NIBD/EBITDA ratio was 4.2 and equity-ratio according to covenants was 45% (equity-ratio of the Group according to IFRS, was 42%). However, with the outlook for lower earnings short to mid-term, results of performed stress tests on key financial indicators indicated that we could breach the financial covenants outlined in the loan agreements. Following negotiations with the banks, Grieg Seafood has been granted an amendment to the covenants through the third quarter of 2021. See Note 6 for more information on loan agreements and the related financial covenants.
Due to higher market uncertainty, the risk of losses on customer receivables has increased. Grieg Seafood has good routines for collecting and managing receivables, and we have an open dialogue with our customers. Countries highly dependent on tourism have been hit hard, and the US market has been impacted significantly due to their high share of HoReCa. The increased risk of loss is reflected in our accruals at the end of the quarter, with accruals increasing by 6% compared to Q3 2019. 90% of outstanding receivables at the end of Q3 2020 are credit insured.
We have earlier communicated planned investments of NOK 1 664 million in 2020. In the current market climate with increased uncertainty, we continuously evaluate our investment projects. Low salmon prices and reduced market visibility, in addition to increased complexity of the project, has changed the basis for the development of Grieg Seafood Newfoundland, and the pace of investments will be slowed down. This will not affect our on-growth capacity or our harvest ambitions.
The Company´s long-term dividend strategy states that the average dividend should correspond to 30%-40% of profit after tax, before fair value adjustment of biological assets. Dividends are evaluated twice a year. Due to the increased volatility and uncertainty caused by the Covid-19 situation, combined with an extensive investment plan, the Board has decided to postpone the ordinary dividend during the second half of 2020.