Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2021-Q1

[Henning Kolbjørn Beltestad, Group CEO]

Good morning, and welcome to Lerøy Seafood Group's First Quarter Presentation 2021. My name is Henning Beltestad, and I am the CEO in Lerøy Seafood Group. Together with me today, I have Sjur Malm, CFO.First of all, I want to again talk a little bit about our fantastic value chain. We have done huge investments the last 20 years to create this value chain, integrated in both redfish and whitefish. Our goal is to create the world's most efficient and sustainable value chain for seafood. We are not there yet, but we are sure we have the organization, the people and the value chain through our investments to reach this goal.First of all, I will take us through the highlights of the quarter, and then Sjur Malm will take us through the key financial figures. And then I will come back and talk a little bit about the outlook for the rest of this year.Yes, Lerøy Seafood Group reports in 3 segments: Farming, Wild Catch and VAP Sales and Distribution. First quarter, we had a EBIT pre-fair value adjustment of NOK 455 million. The result is reduced by NOK 43 million by intercompany elimination. But this will come back when we sell this stock out of the value chain the coming quarters, second quarter and third quarter.We had an EBIT per kilo all-inclusive of NOK 7.40. And we have a net interest-bearing debt of NOK 3 billion, and the proposed dividend is NOK 2 per share. This quarter also, we have had some challenges with the winter wounds and which is the same as we had in -- especially in Lerøy Aurora last year, but we also see that we are affected in some of the other regions. We expect volume for this year to be around 205,000 to 210,000 tonne, and we expect further -- we estimate further growth beyond this.The expected whitefish volume is 73,000 tonne for 2021. And if we look down to the right, we see that we harvested 42,000 tonne salmon and trout, catched close to 26,000 tonne of whitefish, had a turnover of NOK 4.9 billion and EBIT of NOK 455 million.If we look into the Farming, we have fairly okay quarter. And if we look at the prices, which was NOK 68.50 last year. It's NOK 52.10 this year. So the price is down by NOK 16. The trout market is so far this year, more in balance, and the prices of trout is more in line with the prices of salmon. The contract share in this quarter is 25%, and price realization of the contracts is higher than the spot prices.The cost is increased from the fourth quarter and in line with first quarter last year. And EBIT in Farming is NOK 10 -- NOK 6 per kilo compared to NOK 14.3 in first quarter of '20.If we look at the Farming volumes and now our guiding, we keep our guidance at the same level as we reported last quarter, and we have 47,000 tonne in Lerøy Aurora, 70,000 tonne in Lerøy Midt and 75,000 tonne in Lerøy Sjøtroll, and a total of 192,000 tonne in Norway. And we have -- and our share in Norskott Havbruk is 18,000 tonne, so a total of 210,000 tonne. So a very good growth compared to 2020. And as I said, we also expect further growth into 2022. So we have that in the right direction in the salmon farming.The Wild Catch highlights. Also, like I mentioned, the price realization in whitefish is much lower than the same period last year. The catch -- the Wild Catch volume is 25,700 tonnes, and the quotas situation for the remainder of the year is very good. I'll come back to that. The seasonal coast fishery was delayed this year, and that has affected a little bit the land industry, but the performance in land industry has been approved a lot compared to first quarter last year. The EBIT in this segment is NOK 185 million compared to NOK 270 million in 2020.For the Catch volumes, we have catched 11,000 tonne of cod, 4,000 tonne of saithe, 6,000 tonne of haddock and a total of 25,700 tonne. And the remaining quota is 16,600 tonne for cod, 11,000 tonne for saithe and 6,200 tonne for haddock. And especially the remaining quota for cod is very good, where we have 6 -- more than 6,000 tonne more than what we had last year, and that will affect the results, especially second half of the year when we take the remaining quota if we compare to last year. So a good situation going forward for Lerøy Havfisk. VAP and Sales and Distribution, a good quarter. We see improvements in many of our operations where we utilize the capacity better than what we did last year. And the results this year is NOK 101 million compared to NOK 54 million last year. But also for some of the facilities, it's been challenging, especially the factories specialized in HoReCA distribution have had a very tough period, first quarter this year. But we see some improvements going forward now and see that the HoReCA segment is step-by-step opening up in many parts of Europe. So we expect, especially for second half of the year that these factories, which are specialized in this segment, will come back at a normal level. Then Sjur will take us through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. So last year has been obviously a lot impacted by restrictions from the COVID-19 pandemic, and the key question has been how will demand for seafood develop? And at least a key learning before looking into our numbers is that the demand development through first quarter has been fantastic, driven a lot by Europe, driven a lot by retail. And we believe that with our integrated value chain and with our significant downstream operation that we have excellent position for the future.Looking into the numbers and looking on the key drivers on the latter lines, we can see that the harvested volume of salmon and trout is up from last year. As we have reported previously, we had a good production in 2020, given growth in 2020 and further growth in 2021, and this is seen in the harvested figures.Looking at the profitability per kilo, there's new production tax in Norway at NOK 0.40 per kilo, which is included in this figure. Excluding that tax, our release from stock cost is down. Including, it's about the same. So we have the cost levels around last year. And then the reason for lower profitability is lower price realization. But spot prices are down NOK 16 from the last year. So on a relative basis, performance is better this quarter compared to same quarter last year.Looking into whitefish. It's the same dynamics. The key driver here is lower price realization, as Henning as already commented on the call, and that drives a lower profitability on our whitefish operations.Looking then on the financial figures themselves. We see revenues down. That is driven by price fix and underlying activity has been very strong. We've talked through key reasons to why EBIT operating result is down from just over NOK 700 million last year to around NOK 450 million this year. In associates, we will turn to our U.K. operation and Scottish Sea Farm, it's the most important asset. Net finance was much impacted last year from volatility in the currency markets. And in sum, our earnings per share is NOK 0.58, which is down from NOK 0.91 last year.Looking then at the balance sheet. There's a lot of numbers. On intangible assets, we bought some license capacity from Norwegian state. A right-of-use asset is impact from bringing on balance, all rental lease agreements, and we've added some new wellboat contracts. Tangible fixed asset, the biggest investments ongoing is in the build-out of a new post smolt facility in Central Norway.Looking at biological assets and efficiency and on land. We can see that the number is up 2%. Looking into the notes following this report, we can see that the biomass is up 4%, so there's some indication of the lower cost point. Other inventory is down, indication that we are not building inventory. Demand is good. Receivable is down due to lower price realization. And in that, we see the working capital release, which we will look into in the cash flow. We believe we have a strong balance sheet, and we have reduced net interest-bearing debt significantly in first quarter. That's shown here on the cash flow. We've already commented the key drivers behind kind of seasonal build down in working capital.Investments for CapEx is lower this year compared to last year, as last year, we had a new boat in the first quarter. And beyond that, there are no big changes. Net interest-bearing debt is down from NOK 3.5 billion to NOK 3.1 billion in the quarter. Going forward, we expect CapEx today to be around NOK 1.3 billion. On top of that, might be the new planned investment in [ Ørskog ], which is more possible capacity related to Lerøy Sjøtroll. When it comes to working capital, we expect to rebuild the biomass going forward. And when it comes to receivables, that will obviously be much impacted on view on prices.Then looking at profitability per segment. What we can see here compared to last year is that profits in Farming and Whitefish, Wildcatch is down, that is price driven. We see that we have a substantial improvement in downstream operation, VAP, Sales and Distribution, almost doubling, which is positive and which is highlighting the increased activity level and increased utilization rate of several of the investments we've done over the recent years. It's a positive development there.Looking then at Lerøy Aurora, which is our farming operation in Northern Norway. We had a challenging start of 2020 with significant downgrades due to winter wounds. Post that, we have done a lot of analysis. We have done a lot of measures. But unfortunately, we have not been able to solve this puzzle yet. That is then impacting our operation in first quarter and will impact operation in the first half.Again, looking at 2020, we had a significant improvement in second half with high harvest volumes at much lower cost point. And that is what we expect also in 2021. So what we've done this quarter is to harvest fish sooner than what we had planned for. That gives higher cost with the winter wounds and downgrades that gives low price realization and low profitability. We will have limited volume in the second quarter, building the biomass, and we expect to see a completely different performance in the second half, which will be 70% of the annual volume. However, this challenge is obviously a key challenge for our Lerøy Aurora and [indiscernible] and it has the highest priority. So we will see a weak first half. We expect to see a substantially improvement in performance in second half.Looking at Lerøy Midt, which is operation in Central Norway. This quarter has been impacted by, among others, a very cold winter. That is impacting growth, but we see we have overall performance, basically in line with what we have planned for. This quarter, costs are down compared to similar quarter last year, but up from fourth quarter. We expect to see about the same cost level in Q2 with a lower cost base in second half.Looking at the investments that is currently ongoing here, it's a new post smolt facility, which we expect will substantially increase harvest volumes basically then from 2023. And with that increase, that we will see a scaling of the cost base. So overall, quarter basically in line with expectations. We will see also here in over costs second half.Lerøy Sjøtroll, which is operation in Western Norway, has been challenging for many years. But as we have commented on through 2020, we are starting to see improvements. We have started to see effect from operational focus from investment in post smolt's from vaccine strategies and a lot of measures and efforts made to improve the operation. And it's positive to see that this is continuing into Q1. Obviously, no improvement. This is straight line, but the trend remains very clear. And also, on positive side, is the balance of the trout market. Looking at the trout market, it was oversupplied basically with a big increase in volumes last year. This much more balanced, which gives a price point much more equal to salmon. And we see that with the NOK 16 lower spot price for salmon earnings per share, now EBIT per kilo here is only down NOK 3.5. And that is also supported by a significant reduction in cost.For the year, we continue to expect to see continued growth and harvest volume guidance for this harvest is 75,000 tonnes. And there is growth potential beyond that following the post smolt investment in Kjærelva, which is already in place.On Wild Catch, Henning has already commented upon key drivers. Last year, we did not fully catch the potential on haddock. So we have focused on haddock in the start of this year, which gives slightly different catch mix than what we saw last year. And also with the higher quota on cod, we have a significant potential for cod than -- more than Q1. So we have much more remaining quotas in cod at this point in time this year compared to last year. So it's a different seasonality in the harvest mix, and in light of the price reductions this is a decent quarter.On the land-based industry, we have seen challenges. And that industry has been challenges for decades. We are focusing on operational improvements, making the right product at the right place, better cooperation between sales production and the value chain. And we are starting to see small improvements. So a more positive profit level in land-based industry first quarter this year compared to last year, which is positive.Our downstream operations, we have some, which is -- have a high share of sales historically to retail, which have had a challenging quarter. And we had some which -- we just focused on retail, which have had a fantastic quarter. And in sum, we believe that we are starting to see the investments we've done in capacity in recent years yielding growth and yielding profit with the high-capacity utilization. And we believe we have a very strong position for the coming decade in -- with our downstream focus and with the integrated value chain. So first quarter this year, almost a doubling of operating profit, and we expect for the year to see higher profits than what we saw last year.U.K., Scottish Sea Farms. It looks almost like a Swiss clock when you look at profit per kilo. But we also know prices are down, and albeit price realization in general in U.K. is less than in Norway. This chart also shows a significant cost reduction this quarter compared to the same period last year. Smolt investments have been done also in Scottish Sea Farm, they're yielding good results. This is a decent and a good quarter, and we are on track to reach the guidance for 36,000 tonnes in 2021, which is substantial growth from recent years.Then Henning, I give the word back to you.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you, Sjur. Then I will look into the outlook for markets and Lerøy Seafood Group going forward. First of all, we take up the supply side of Atlantic salmon. We also have numbers from -- for 2022 here. But if we look at 2021, we see growth -- a global growth of 2.2%; Europe of close to 10%; Norway, 8%; and we see increase of 14% in U.K., 23% in Faroe Island and 47% in Iceland. But in Americas, we see a reduction in volumes of 10%. And especially, Chile is reducing the volume drastically in this year with 15% reduction.Yes. If we look at spot prices from quarter-to-quarter, it's going up and down like normal. We had a very tough fourth quarter this year with NOK 43, and then we see first quarter of NOK 52, so a good increase of NOK 9. And we see -- going into second quarter, we see that the price is increasing a lot. We had a huge volume in the first quarter. And I will say that the demand with a price level of NOK 52 is surprisingly good for first quarter. And -- yes, and the start in second quarter is very, very good, mainly because of lower supply, but also because the HoReCA market is starting to open up again. So it looks promising for the second half of the year.If we look at the monthly harvest volumes for Norway, we see that we will have an increase of -- the rest of the year of -- to 10%. And yes, we expect, when the HoReCA segment open up again, it will take this growth in a good way and demand will increase for second half. Same pictures for Europe. And if we look at the consumption side in first quarter, huge growth of 14% with a price level of NOK 52, so it seems like the market for Atlantic salmon is extremely strong. And we had a 90% growth in EU, 11% growth in other markets and 8% growth in U.S.A.Then we are the world's largest producer of trout. So we also need to take up the supply side of growth. And like we mentioned earlier, the price level relatively to salmon has improved a lot for trout. The main reason for that is lower volume this year. And globally, we expect a 12% reduction in the volume; and in Norway, we expect a 15% reduction. But also the second largest producer of trout globally is Chile, which is down close to 40% in 2021. So we believe that we will have a much better situation for the trout going forward than what we had in 2020 and 2019, where we had a significant growth, especially in Norway of 22% in 2019 and 18% in 2020.So I will say, good, we believe that trout will -- it's more a niche product compared to the salmon, but a fantastic product that we really believe that we can continuously develop a good market for.Then if we look at the COVID-19 restriction that are making everything more unpredictable than before, even though I think the situation was worse 1 year ago regarding predictability, of course, now we know more about how to handle this. We know more about how the market has reacted. And we know that the markets will open up step by step. We see it in Italy, we see it in France, and we see it in other European countries, and we also see it in Norway.And we see that for our distribution company in Oslo focusing on the HoReCA segment, it's been a very challenging period going back. But now we see also Oslo restaurants are opening up again and that we start to increase the sales, again, into this segment, and that's very positive. And we expect that maybe not back to normal for second half, but closer to normal from -- for second half of this year, which might affect our performance in the downstream activities and also a hope of good prices for both whitefish and salmon and trout in second half.And we keep our guidance for 2,000 -- 210,000 tonne totally of Atlantic salmon and trout. We expect a contract share of 30% in the second quarter. And the harvest volume in second quarter will be below the harvest volume in second quarter '20. And we continuously see a significant potential in the whitefish, both -- we believe in the demand side for the whitefish, and we believe that our operation and performance in this part of the value chain will improve going forward. We have now trained for 3 years, and we will get -- step-by-step, get better and making also this part of the value chain more efficient and sustainable. So -- and we see a significant potential for the further development in the downstream value chain.And I will -- and if we look at that part of the value chain, we have developed a fantastic distribution network in all major markets all over Europe. This is done over the last 20 years and especially the last 10 years. And I think we are very well positioned in the most important market for Lerøy, of course. 55% of our activities is in Europe. And all these facilities will help us have a better service level, have -- being able to deliver higher quality for the customer, and more stability for the customer and doing a better job working together with strategic customers, and to add value to their part of the value chain and to make growth for our strategic customer, and by being a specialist in seafood and a specialist in the category development and product development and to understand the trends in each market.Then some news. We have Seafood Danmark, where we owned 33%. We now took over, so we have 78% of the share in this company. Fantastic, well driven company with local management. We are in Hirtshals, in Hanstholm and in Copenhagen, and covering a wide range of seafood categories; fresh product, fresh pack products, value-added products, like bread products and whitefish, and also handing a lot of local auctions in the Hanstholm region, doing distribution of local Danish fantastic seafood. And this company performed very well, turnover of DKK 1.2 billion and operating result around DKK 70 million. So a very good performance in Seafood Danmark, and we believe that we can continue the positive development in this market with the position that we have today.Then we have a new fantastic factory in Madrid, just finished. We are starting to move into this factory. We invested the first time in Madrid in 2011. And this old facility that we had was -- became too small for us, and we had to invest in a bigger facility. And it's so good to see the picture of this factory. It's too bad that I can't go down and visit right now, but I'm really looking forward to come down and meet the people, the organization and to see this modern factory. I think this is probably the most modern seafood center, specialized in products with short shelf life, like sushi, ready-meals, but we have -- can do filleting, frozen and fresh packed product, and gives us a very strong position in the Spanish market with the facility in Barcelona, Valencia and Alicante, and the new factory in Madrid, and Lisbon and Las Palmas.And the key here is to have the Madrid factory will be the motor in this area and delivering to also the other facilities, and the head office will be in Madrid. So I'm extremely happy with what we have done in this market the last 10 years. We have an organization, which believe in this market, which believe in the people, believe in the ability and what we can do together. And so we are really, really proud of having this new factory in the center of Iberia, being a good logistic hub for also the other sites.Then, 10 years after we start up in Spain, we also do the same in Italy. And this also has been a dream or a goal, and now we are there. We, from outside, maybe not the most beautiful facility, but internally, in the factory, it's totally renovated. We have built up a good organization in Italy, and we have the equipments to do a very good job for our key customers and especially the specialized in fresh pack consumer products. And I will say that the Italian market for these kind of products is underdeveloped. It's not like it's in France or in Spain or in Norway where this is -- this trend started much earlier.But here, we can be a key partner with the tools, the know-how in category development, product development and good know-how from other markets and to be a good partner, giving extra value to our key partners in the Italian market. And I'm really looking forward to the challenge and -- that we have in developing the Italian market for fresh and fresh packed seafood, with sustainable value chain behind, giving predictability, high service level and giving traceability all the way back to the fishing boat or to our farming operation. So to the Italian team, good luck in the work that we have to do now. Now we can't claim that we don't have the facility. It's here. Now we have to take out the potential.So back to the first slide. Again, you know our fantastic value chain, integrated -- fully integrated in whitefish and redfish. The good thing of having the value chain is that we can control all steps and to take out the potential, make improvements in all steps and -- so the customers get a value from working with Lerøy Seafood Group, a fully integrated seafood company. And our goal is to create the world's most efficient and sustainable value chain for seafood. We are not yet there, but we will be there, hopefully, very soon. Thank you very much.