Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to First Quarter Presentation of Lerøy Seafood Group 2019. My name is Henning Beltestad, CEO in Lerøy. And with me today, I have CFO, Sjur Malm. First of all, I will take you through the highlights in the quarter, then Sjur will take you through the key financial figures. And then I will come back and have a view on the future for both supply and demand and some outlooks from Lerøy. First of all, highlights of first quarter. We had an EBIT before fair value adjustment of NOK 691 million. The EBIT in this quarter is reduced by NOK 51 million related to intercompany elimination, which is a delay of realization of profits for the whitefish. The harvest volume in the quarter is 32,000 tonne, which is down about 5,000 tonne from last year. The EBIT all-inclusive, exclusive Wild Catch, is of NOK 7.7 (sic) [ NOK 17.7 ]. The contract share for Salmon is 41%, which is in line with what we guided with the last presentation. We have a net interest-bearing debt of NOK 2.9 billion. Harvest guidance of 173,000 tonnes in 2019 in Norway. If we look at quarterly historic figures, we see that the total result is below first quarter last year, also below what we had in fourth quarter, mainly because of the volume and a little bit higher cost. We -- if we look at the EBIT all-inclusive per kilo, we see that we are in line with the fourth quarter, but some lower than first quarter 2017. We report in 3 different segment, the Farming segment, Wild Catch and VAP, Sales and Distribution. Lerøy is a fully integrated company, both for redfish and whitefish. And after the investment in -- 3 years ago, we have had 3 years building up a unique value chain also for the whitefish all the way to the end consumer. And we believe that we have a very strong position into building efficient and sustainable value chain both -- for both segments. First of all, we start with the Farming highlights. And spot prices is slightly above last year, NOK 61.30 compared to NOK 59.50, which is 3% up, and the price is 6% up compared to the fourth quarter. The trout prices is well below the salmon in this quarter. One of the reasons is downgrade on the trout because of matured trout. The contract prices is marginally above the spot. The cost is up from fourth quarter, also guided in last presentation. And biomass in sea is 6% up. So we are close to 105,000 tonne end of the quarter compared to 99,000 tonne in first quarter 2007(sic)[ 2017 ]. So the underlying production is good. Regarding the volumes, we expect Lerøy Aurora to be at 36,000 tonne, Lerøy Midt 71,000 tonne, Lerøy Sj?troll about 66,000 tonne, and the total volume in Norway of 173,000 tonne. And in Scotland, the volume will be around 30,000 tonne, and our 50% share of the company gives of 15,000 tonne. So a total of 188,000 tonne. For the Wild Catch, in the first quarter, we harvested 20,000 -- about 20,000 tonne, down 8% compared to same period last year, mainly because of lower quota for cod and haddock. The average prices of the whitefish is up 6%. The prices of cod is up 40%, haddock 13% and saithe up by 1%. It's been a quarter with some challenges for -- of course, for the land industry because of increased prices and a hard fight for the raw material in this quarter. If we look at the remaining quarters for Havfisk, we catched 8,800 tonne of cod. Remaining quota is 13,500 tonne. Haddock, we catched the 5,200 tonne, and remaining quota is 3,800 tonne. And for saithe, 3,200 tonne, and the remaining quota is about 14,000 tonne. And we started also the fishery of shrimps in the first quarter and continue this fishery of shrimps into second quarter, and we expect good volumes of shrimp this year to compensate for the lower volume of other species because of the reduced quota. VAP, Sales and Distribution had a good quarter. So the result in Q1 is NOK 79 million compared to NOK 65 million in the first quarter 2018. So then Sjur will take the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. I think the key elements in this quarter on redfish is that we've harvested, as Henning has pointed out, low volume, which is impacting the cost situation in the quarter. So costs are a bit above normal. And as expected in the whitefish segment, there's a lower quota with the lower volume available in markets and higher demand given high prices. So it's been a good quarter for the trawling fleet and a challenging quarter for the land-based industry. Downstream, we've seen positive development in this quarter. Another point to highlight is the internal elimination between segments, and that is that our figures this quarter is impacted by a NOK 51 million elimination, which is related to the fact that our Wild Catch segment is selling a higher degree and is actually up double amount first quarter this year compared to last year. Not all of that fish is sold out of the group, which is giving that the elimination of NOK 51 million. Meaning that excluding that elimination, we had kind of like the historic trade pattern and sold to market price externally instead of internally, the operating result would be NOK 51 million higher this quarter, and that would be realized later. So it's sort of a delay in realization. Looking then into the P&L revenues down. There's lower redfish harvest volume explaining that. Looking at the EBITDA, that is significantly impacted by the new IFRS 16, and please see our note 1 and 3 for a detailed explanation. But in short, all our rental obligations are entering the balance sheet, and instead of being OpEx, that obligation is then described as a depreciation, amortization and as a finance cost. So not really shows really exact figures, but in short, our EBITDA has a positive impact and is not fully comparable with last year's figures. D&A is higher than last year's figures due to this. There's marginal impact on EBIT, and there's a impact on net finance. Looking at the EBIT key drivers. The redfish business has a low volume and lower margin. Lower margin comes from the lower price realization derived from trout and also a higher cost figure. So overall, these are the figures. Not too far from what we believe -- we guided for lower volume, we guided for higher costs. So the difference from expectations are not that large. But obviously, given low volume, the actual figure is low compared to last year. Looking into our balance sheet. This is, again, impacted by IFRS 16, and we have the new asset class, right-of-use assets, which is the sum of both financial and operational leases. Other than that, there's not that big changes comparing to last year. The strategy of selling whitefish internally is increasing inventories, and we believe we have a strong balance sheet. And looking then on changes in net interest-bearing debt. As said, the EBITDA is positively impacted by IFRS 16. That is -- that positive effect is by far readjusted then in financing activity installments on leasing liability, which is shown down there. Paid tax, repair tax mostly, first of. And then you have changes in working capital, which is a high figure this quarter. That relates to the fact that we have harvested less, meaning that there's lower biomass release this quarter than comparable quarters historically, and is also much related to some specific items. One is the fire in the smolt facility in Lerøy Aurora, which I will return to, but there was a fire at the smolt facility. We lost 2.6 million fish and restarted rebuilding the site. Those costs are still not covered by insurance claim, meaning that is one item impacting here. Also impacting the fact that we have highest smolt production onshore. And there are some other short-term debt, which are more kind of like time adjustment costs, which will -- this will be normal during the year as a whole with some impact from the fact that the more whitefish we do, there will be a higher inventory. CapEx is significantly down from last year on -- based on the fact that we finalized the building of the new site at Jøsnøya, and also, we've come far in finalizing the site -- large smolt site in Hordaland. Net finance, that line much impacted by IFRS 16. And in sum, this is not the quarter we generate the highest cash flow, but everything is kind of like expected. So we are not worried on this development. This shows the different segments. Here, you can see the elimination of NOK 51 million, which wasn't there basically last year. Following that, you can see that the segment where profitability is down as in the Farming segment. That's derived by low volume, slightly lower price and a higher cost. Starting then with Lerøy Aurora, our operation furthest north. This operation, we saw a fire in its one and only smolt facility in January 2019. 2.6 million smolt were lost, and also, site needed to be rebuilt. And there's been a lot of work on this matter in the quarter, obviously, some acute matters and then planning for rebuilding and then planning for getting the smolt necessary to continue production, and we believe we've done that well. So rebuilding is well underway, getting new smolt is done. So it's been a very hectic quarter maybe of not the reason we had expected first quarter. This matter is impacting, as I said, the cash flow. It is also impacting with some costs, giving a higher cost per kilo this quarter. And this, together with also 1 site not performing as good as normal in Lerøy Aurora, will impact cost negatively with a higher cost in Q2 compared to Q1. Second half, we expect to be back to the normal cost level in Lerøy Aurora. And also following then a different stocking plan on smolts, we, as of today, expect that we are lowering the volume guidance this year by 1,000 tonnes to utilize maybe in a better way. Central Norway. We said in our previous report that we had some growth constraints in fourth quarter which would impact costs Q1, Q2 this year. That has, as expected, materialized. On a positive note, we are seeing very good growth of new generation and a good growth this quarter. And actually, one of the matters impacting cost negatively this quarter is the fact that we are at or close to [ MAB ] -- the [ MAB ] roof and we have lower harvest weights than what we normally have. We expect the again then to -- cost figures to be lower second half than what we will see first half. Lerøy Sj?troll is our operation in Hordaland. We stated the last quarter that the challenges seen on majority of trout would continue into the first quarter, and they have. And realized price in trout is some SEK 9 below salmon, which is impacting the margin in the quarter with trout at 36% of volume. On the positive side, the decision made in 2016 to build a new smolt facility is coming to an end in construction phase first half 2019. We have used the facility alongside building it. So we released the first smolts out of the facility at 160 gram in April this year. Smolt has performed well in this site and well in sea so far. And also, this facility will deliver both 160-grams and 500-grams smolts. And during the year and in coming years, we will have a significant share of smolt going to sea as larger smolts, which we believe will positively both impact our operating costs but also then the production volume. Wild Catch. Henning has already covered the volumes. You can also see the prices. There's lower quota this year. That, and giving lower volume in the market together with the good demand, has given an increase in prices, meaning that the volume decreases is much offset by prices in the catching side. Land side. The higher prices and lower volume is a challenge as it's always challenging to transfer higher prices to end consumers. That's been a challenging quarter. But in sum, profitability is about the same level as last year. Going forward, Henning has shown the remaining quota. And with less quota of the regulated fisheries, the shrimp fisheries -- or free fisheries for shrimps will be more important this year. This is our associated company in U.K. Also a low volume than last year, but decently good performance. It's a satisfactory result due to historic smolts stocking. We have not harvested at Shetland this quarter, but good performance. And also here is the construction of a new smolt facility well underway with first release of smolt in the autumn of 2019. Value-added Processing, Sales and Distribution. As Henning already has highlighted, it's a better performance this year compared to last year, and yes, underlying positive development in most markets. And we expect to see better profitability for remainder of the year than what we saw last year. So with that, I give the word back to you, Henning, to talk a bit about outlook.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you. We will start with the supply side. This is first figures from 10th of May. There's no big changes since last report from Kontali. We see that Norwegian production is up 5.4% this year; U.K. is up close to 17%; Faroe Islands, 12%; Ireland up 18%; and Iceland up 67%, but with a very small volume. Europe is up 7.5% in total. If we look at Chile, so up 5% this year compared to up 20% last year. And yes, the estimate for this year is around the 700,000 tonnes, so huge volume in Chile this year and a global growth of 6.6%. We also see last year, we had a growth of 5.5%, and year before, 6%. And this is at stable average price level. If we look at the numbers, we see that in 2016, NOK 62; 2017, NOK 59; and in 2018, NOK 59; and so far this year, around NOK 63 but with a lot of fluctuation from month-to-month and week-to-week, so yes. But a high price level the last 3 years with a growth of 5% to 6%, so that's basically good. If we look at Norwegian numbers, we see that we had a 2% growth in January, 8% growth in February, and minus 3% in March. And that's -- the main reason for that is that the Easter is later this year. And we see increase of volume in April to up 7%, and we expect 2% in May. And the rest of the year, it will vary from 2% to 11% from the different months. If we look at Europe, it's very much the same picture. If we look at Americas, we see -- I'm impressed about the stable volumes that we see in Chile at the moment. They've really done a good performance building a stable production through the year. So yes, that's really good from the Chilean side, and it will vary from about 70,000 tonne up to 90,000 tonne, depends on the lowest month and the highest month. And worldwide also relatively stable over the year from 200,000 tonne and up. Top months in October, November, December, up to maybe 250,000 tonne per month. If we look at market side, we see a growth in consumption of 4% worldwide in first quarter. We see EU is up 4%., so they are keeping their market share. U.S.A. 4%, so the same for them. And we see that other markets is taking some market share and is increasing the consumption by 7%. If we look at the other markets, we see that China is the still growing. It's fantastic development in China in the last -- yes, last 10 years actually, it's up 12%. We also see that we have Canada and Norway. And South Korea up more than 10%. 12% in Canada, 15% in Norway, which are really good. And we see South Korea is really increasing the volumes and is becoming a more and more important market for Atlantic salmon, and especially from Norway. But there's also some really small markets, which is interesting, and we also have to take care of these small markets to develop the future global market for Atlantic salmon, which has a huge potential. Then at the end, some outlook. Lerøy believe in seafood, of course. We are a seafood company. The demand for seafood remains strong, and the outlook remains very positive, both for whitefish and for redfish, like salmon and trout. The harvest guidance for 2019 is 188,000 tonne in Norway and a total 100 -- yes, in Norway and in Scotland. And we expect share -- contract share of 35% to 40% in this quarter. And we see a significant potential in building the value chain for whitefish. That was all for now, and thank you very much.