Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2018-Q1

[Henning Kolbjørn Beltestad]

Welcome to Lerøy Seafood Group's first quarter 2018 presentation. My name is Henning Beltestad. With me today, I have CFO, Sjur Malm.First of all, I will take you through the highlights of the quarter, then Sjur will take you through the key financial figures. And then I will come back and talk about the outlook for supply and demand.First of all, highlights. EBIT in the quarter is NOK 960 million. We harvested 37,000 tonne. We had an EBIT per kilo all inclusive of NOK 20.8, contract share of 22%, which is in line with what we guided. We guided 25% in the last presentation. The net interest-bearing debt of -- is about NOK 2.3 million, and we have a harvest guidance of 166,000 tonne in 2018 in Norway, and this is reduced by 3,000 tonne.First quarter '18 is the third best quarter ever in EBIT, all-in EBIT of NOK 960 million and is the fourth best quarter in EBIT per kilo. So a good quarter in historic perspective.Lerøy Seafood Group is reporting in 3 different segments: Farming, Wild Catch and VAP, Sales and Distribution. I will start with the Farming highlights. The price in the quarter in spot is NOK 6 lower than same quarter last year but is significantly higher than fourth quarter and is up NOK 10. The trout prices in the quarter is lower than the salmon prices, and this is normal for the trout when we have a significant increase in the prices of salmon. The trout prices is more stable than the salmon prices in general.The contract prices is marginally above spot. The cost is down compared to fourth quarter '17. The biomass in sea is 11% higher than same quarter last year, up to 99,000 tonne from 89,000 tonne in 2017.If we look at the Farming volumes, as I said, the expected volumes for this year is 3,000 tonne down, 266,000 tonne. And we keep our estimates for Scotland, which is 13,000 tonne, which is our share of Norskott Havbruk or Scottish Sea Farm. So in total, 179,000 tonne.If we look at the Wild Catch, a very good quarter, harvested 8% more than first quarter 2017. This is the highest catch volume in a quarter ever so very good fishery. The prices is also up and averaged 11%. The cod is up 12%; haddock, 20%; and -- but the saithe is down 1%. It's still challenging on the factory side in Lerøy Norway seafood. And also with the increased price level, it makes a pressure on this segment, and it's hard to increase the market prices in the same speed as the raw material price increase.If we look at the volumes in different species. We harvested 9,200 tonne of cod; 6,500 tonne, haddock; 3,600 tonne, saithe; 1,300 tonne, shrimps; and 1,400 tonne, others. So a total of 22,000 tonne. In the remaining quarter is 31 -- about 32,000 tonne: 15,000 tonne, cod; 2,500 tonne, haddock; and 14,000 tonne, saithe.For the sales and distribution, it's been a very challenging quarter. It's been higher volatility in the prices and with the increased prices in the -- extreme increase in prices end of the quarter, which have made a very challenging quarter for the VAP, Sales and Distribution and -- but the underlying performance or activity is good. So -- and the EBIT in the quarter is NOK 65 million compared to NOK 86 million in first quarter of 2017.Then Sjur will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. I think the one thing to highlight, basically, from our first -- the first quarter of 2018 is the strong demand we continued to see for seafood. This has impacted price development both in redfish and whitefish. It's positive for upstream segments, while it takes time for downstream segments to transfer the higher prices to end consumers. So we're seeing high profitability upstream with some pressure in some of our downstream assets.If you look at Turkey financial figures. The key drivers are highlighted on the lateral lines. We've harvested 13% less fish first quarter this year compared to last year. And the profitability EBIT per kilo in the redfish is NOK 20.80 compared to NOK 25.80 last year. So there's a fall in profitability per kilo. This is driven by price and its lower harvest volume. And this is the drivers, key drivers behind our EBIT. First quarter this year of NOK 960 million compared to almost NOK 1.3 billion last year. We're still satisfied with our results, and the result first quarter of last year was the best in company's history. And we have a slightly different harvest profile this year, with higher volumes, Q2 and less in Q1.Looking on the other result lines. We can see income from associated companies is a significant source of income for us. This includes particular in Norskott sea farm, Norskott Havbruk, which I will return to, but it's a positive development, and it's a significant contribution. Net finance is down. One part of this is effects on currency. Overall, pretax profit before biomass adjustments is just NOK 1 billion, a reduction from last year. EPS, NOK 1.30. But as I said, we are satisfied with this quarter's result.Looking into our balance sheet number. Just like to highlight the key changes. As we have announced and as we have carried out, we have invested significantly in our core activities over the last 18, 12 months and will continue to do so. This is the key reason for the increase in tangible fixed asset. Key investments include a new trawler in Havfisk, a whitefish trawler; include a new processing facility in Central Norway; new small facilities in Hordaland; and a new facility for processing in -- to the Dutch market. So significant investments have been made, and we are strong in the belief that this will strengthen Lerøy's position in the years to come. Other changes, Henning has already highlighted that we had 11% more fish in the sea end of Q1. Here, I'm showing that the cost of that fish is 7% higher than last year. So cost per kilo is lower this year compared to last year. And we are indicating that we will see a falling cost curve during 2018 when it comes to redfish.You can see that receivables is on par with last year. It's a high number comparing to the fact that our revenue is down. Reason for that is the exceptional price development, particularly late quarter, which impacted receivables end of quarter. We have a good cash position, strong balance sheet, equity position of 58% and net interest-bearing debt of NOK 2.3 billion. This is just highlighting our amortization schedule. We do everything we can to keep it as flat as possible, and we are well within our governance. No major refinancing coming up.Looking into our cash flow, starting with EBITDA. We made a significant contribution when it comes to paying tax this quarter. We made a small acquisition in our Sales and Distribution segment here in Norway. But I think the key line here is the CapEx of NOK 831 million, which relates to the investments I already highlighted in which the new trawler in Havfisk is the most important.Other than that, there are smaller changes. But we have good profits, which we are able to convert to cash as we always are. But those earnings have been spent on tax and on significant investments, which we believe positions Lerøy for further growth and stronger position in the future.Looking at the different segments. And Henning has already been through this, but you can see the key change from last year is profits in Farming that relates to lower harvest volume and lower price realization. When it comes to Havfisk, it's a good first quarter, up from last year. It's being helped by high price realization, while higher price realization in raw material also is a challenge for processing as it is in the Sales and Distribution segment.Looking into different companies. Lerøy Aurora, the most northern part of Norway, reporting about NOK 28 this year. And we are very proud of that result. It's a very strong result. Lerøy Aurora is in a growing pattern. We have made and we continue to make investments in largest smolts, starting up a new add-on to the small facility this year. So we expect to see growth in Aurora in the coming years, and we expect cost to stay at the lower level, which we believe is industry-leading in our industry today. So a good quarter and our outlook is strong.Looking into Lerøy Midt, which is in Central Norway. There has been some challenging years behind us, particularly in 2015 and 2016. We highlighted throughout last year that production, biological production, was improving, and it was good. But there's quite long lead times. So gradually, we are starting to see those operational improvements in cost figures. So we are seeing declining cost, and we expect to see declining cost quarter-on-quarter through the year and particularly in second half. There's a significant growth from '16 to '17, and we expect further growth now in 2018. So a very positive development in Lerøy Midt. And as of today, we expect that to continue.Looking into our southernmost farming operation, Lerøy Sjøtroll. We are a bit disappointed on profitability level this quarter. As you can see, it's down NOK 9 compared to last year. This is mainly related to price achievement. This quarter, we have 30% of the volume is trout. And trout has been sold at a discount to salmon, so that's impacting. But also on the salmon volumes, we are seeing a higher share of downgrades than what we normally see, which is impacting price realization. So both price and cost is not at the level we are totally pleased with. We have made, and we are making significant steps to improve, particularly there in the cost situation. And the most biggest one in terms of investment is an investment in the new recycling facilities in Hordaland. We are putting in eggs now in the second quarter. We get first fish out 2019. And as I said, there are long lead times. But we strongly believe, based on our own experience with this technology that, that would put us in a much better position in the coming years, both when it comes to cost but also when it comes to capacity utilization over licenses. Looking into the Wild Catch segment. We are seeing strong demand. We are seeing higher prices for cod and for haddock. We have had very good catch efficiency in this quarter. It's a high volume being caught. And we see particularly strong earnings in the catching part, but the processing part is challenging. It do take time to transfer price to the end consumer. But development is positive, and development is, I would say, as expected and as what we believed in when we made this acquisition, namely that the demand for whitefish would continue to be okay but also even strengthen. We are seeing that happening in the markets today. So we believe we have a good position for the future. It will take time before we see the improvement in processing, but we're taking significant steps in that respect.Looking into our U.K. operation, which we own together with SalMar. This 2017 was partly challenging on some sites, in particular with the accelerated harvesting, which impacted the volume in 2018. But I would say beyond that, the performance now in 2018 is very good. We had good biological performance in all regions. Development is positive, and the result this quarter is excellent. And we are investing in a new recycling facility, which will take this company even further. And we do expect to see significant growth also in volume looking in a 3 -- 2 to 5 years horizon. So excellent company, impressive profitability and also positioned for growth in the coming years.Looking into Sales and Distribution segment. We are seeing positive impact from the fact that we are offering today even broader palette of seafood. Lerøy today is not only a redfish company, we never were, but now it's very evident. We are 100,000 tonnes of whitefish. So that position is giving us -- making us even more interesting supplier to our key customers. And there are gradually more of our customers who appreciate what we can offer when it comes to product portfolio, price ability and accuracy when it comes to delivery. So underlying positive development, but we are seeing some impact on -- from the volatile prices. And Henning will show you in a couple of minutes how volatile the prices actually were.So then I'll give it over back to you, Henning.

[Henning Kolbjørn Beltestad]

Yes. And first of all, we start on the updated supply side, and this is fresh numbers from Kontali from last Friday. We see that the total guided volumes is -- what the estimate is going down. We see now that Norway is down to 5.9%, and I think the last update that we had was over -- between 7% and 8%. So the volumes -- volume estimates in Norway is going down. And also the global volume is going down, and now it's 3.7% volume expectations for 2018, which is not really scary for us.If we look at the prices, like Sjur said, it's been extremely volatile in the first quarter -- maybe not volatile, it's not much up and down, it's mainly up. And you see it, from the fourth quarter, we see that the prices in the bottom of fourth quarter, it's been down to NOK 43, and the highest prices in the quarter is NOK 80. So it's almost doubling. And we also see that into second quarter, we see a high price level and per week 17, it's about NOK 70. And we also know that week 18 and 19 also is extremely high price level, especially in Norway. And of course, this situation with this volatile prices is extremely challenging for the Sales and Distribution part of the company and the value-added processing units.If we look at the estimates from Norway for -- on a monthly level, we see that in April, May, June and July, it's both stable level between 90,000 and 100,000 tonne. And we see that in May, there is a 7% increase compared to last year and 11% increase in June. And for the second half, we see we have a higher volumes coming out of Norway compared to last year. But if we look at the total of Europe, including Faroe Island, Iceland and Scotland, we see that it's more stable. It's not a huge growth second half. And so we expect a okay market from Europe in -- based on these numbers for the rest of the year.If we look at Chile, it's higher increase in volume the first quarter, and then it's a negative growth the last 3 quarter in total. So -- and if we look at the worldwide numbers, we see that it's about the same level as last year. And we believe that we are continuously developing new markets, doing increasing demand in established markets. And so we believe this growth is achievable.If we look at the markets, we see EU is up 7% first quarter, U.S.A. up 10%. We also see that Russia is coming a little bit back. And we see that others or new markets is increasing by 15%. And we'd have to say, we had a spot level of around NOK 60, also the contract's prices has been around NOK 60. And so it's really a strength to see that the EU market is increasing by 7% at NOK 60 level. So -- and then you see other markets is double growth than EU, and I think the other markets will continuously increasing their market share of Atlantic salmon in a global picture.If we look at the other markets, we see good growth in China with 18%, Brazil with 20%. And we see a lot of markets here with huge growth potential, and this is at a NOK 60 price level. So the demand for salmon is extremely strong. And also if we [ still ] look at the smaller markets, there's also a good growth in the smaller markets. So the potentials are huge.If we look at the conclusions or the outlook, we believe that the demand for seafood is remaining strong. And the outlook remains positive, even though we will also see a lot of fluctuations going forward. But in general, a strong market view.The harvest guidance is taken down by 3,000 tonne and a total of 179,000 tonne. We expect also that second half is there, that there will be a lower cost going forward. We expect the contract share for second quarter of 25%, and we see a significant potential in whitefish. And we expect 65,000 tonne in total fishery from Havfisk. And we also -- yes, we see an increase in catch volume of shrimps, but a very positive outlook for also the whitefish.Even though we have -- still have a long way to go on the factory side and -- with that process, we are doing major investments in Nordland in 2 factories: [ Thompson ] and [ Melbur ], in second half of this year, which will make us even more in a better situation handling these facilities for next years.That was what we have, and thank you very much.