Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2023-Q1

[Henning Beltestad, executive]

Welcome to the first quarter presentation of Lerøy Seafood Group 2023. My name is Henning Beltestad. I'm the CEO of Lerøy Seafood Group. And with me today, I have CFO, Sjur Malm. First of all, I want to start with our fully integrated value chain. And our goal is to create the world's most efficient and sustainable value chain for seafood.

We have higher ambitions and some of them are we want to -- we have a goal of having more than NOK 50 billion in turnover in 2030, being the #1 Farming, VAP, Sales & Distribution company. And we have a target of achieving NOK 1.25 billion in EBIT for VAP, Sales & distribution in 2025; reducing the total GHG emission by 2030 by 46%; achieving a Wild Catch EBIT of more than NOK 500 million; and total Farming volume in 2025 of 205,000 tonnes in Norway.

First of all, we start with the highlights of the quarter. And it's been a quarter with record revenue, up by 26%. We have an operational EBIT of NOK 26.60 per kilo, all-inclusive. Farming volumes are impacted by some challenges in biological situation in H2. And we expect the harvest volume to be around 193,500 tonnes in 2023. We have seen a positive development in VAP, Sales & Distribution. And there is an overall strong demand for seafood. And there has been a very strong seasonal quarter in Wild Catch. And the total EBIT for the quarter is of NOK 989 million.

We report in the three segments: Farming, Wild Catch and VAP, Sales & Distribution. And we start with the Farming part. This has been a quarter with low harvest volume, some price realization well below spot prices, driven by 18% contract share. And we also have some impact from winter wounds and not optimal harvest profile, taking out the high prices in the end of the quarter. We have an operational EBIT of NOK 26 compared to NOK 15 in fourth quarter 2022. We have seen -- we have a healthy performance in Lerøy Aurora with more challenging biological in Lerøy Sjøtroll. And in this quarter, 50% of harvest volume in quarter from Lerøy Sjøtroll.

Yes. If we look at the different regions, we have, first, Lerøy Aurora, harvested volume of 5,700 tonnes. We see a strong improvement in biological performance. But this quarter is impacted by harvesting of low volume with low harvest weight and not optimal harvest profile. And that means that we have more volume in the beginning of the quarter and less volume end of quarter, when the price is at the highest. As in 2022, there will be a significant seasonality in the harvest volume, slightly higher harvest volume expected in second quarter '23. And we expect total harvest volume in Lerøy Aurora to be around 47,000 tonnes, up from 40,000 tonnes last year, so a significant increase in volume. And if we look at EBIT per kilo, we achieved in the first quarter, NOK 23.8.

If we look at the Lerøy Midt, this is the best region in this quarter, harvested 8,700 tonnes, had a harvest weight of 4.2 kilos. It's been a quarter where we have built a biomass and also some challenges into this quarter after a challenging biological situation second half of 2022. Increase in costs year-on-year, driven by higher feed cost as the most dominant factor, slightly higher cost expected in coming quarters. And we expect 64,000 tonnes gutted weight in 2023 as it looks today. And the operational EBIT per kilo in this quarter is NOK 35.7. So a fairly good result in Lerøy Midt.

If we look at Lerøy Sjøtroll, also impacted by challenging biological situation in H2 '22. Also here, price realization is impacted by not optimal harvest profile. The harvest volume in second quarter expect to be lower at a slightly higher cost. Significant improvement initiatives in all parts of the value chain initiated and expect to yield gradually positive development, including improved sea lice treatment capability. So going into this summer, we will have a much higher capability than what we had last year. And the expected harvest volume also here is 64,000 tonnes for 2023. And the EBIT per kilo is around NOK 21. And we harvested fish of 3.7 kilos, so a low weight compared to last year.

And Norskott Havbruk has also had a very challenging second half of 2022, which gives low harvest volume in this quarter and harvest of fish with high cost base. The contract level has been 61% in this quarter. And there is still a challenging biological status. And the expected harvest volume in 2023 is of 37,000 tonnes.

If we look at the total Farming volumes in 2023, 47,000 tonnes in Lerøy Aurora; 64,000 tonnes in Lerøy Sjøtroll; total in Norway of 175,000 tonnes is equal to 2022 total volume. And we expect to be up 20,000 tonnes for 2024 to 195,000 tonnes and a further increase into 2025 to 205,000 tonnes.

If we look at the Wild Catch, it's been a very strong quarter with strong catch efficiency and positive development in prices with the expectations -- with the exception of haddock. Higher prices are challenging for the land-based industry but signs of underlying operational improvements in the land industry. So we see a lot of improvement in the different facilities. Lower fuel consumption driven by fewer operating days but also less consumption per operating day. The fuel prices is up 40% year-on-year and the cost of fuel, NOK 24 million above first quarter 2022. But a very strong quarter, a total EBIT of NOK 229 million in this quarter. And we also see that we have a price increase for cod, the haddock is down and the saithe is more stable.

And Wild Catch, if we look at first quarter total volume, 8,000 tones compared to 10,000 tonnes last quarter last year; saithe, up to 5,000 tonnes from 3,500 tonnes; haddock, same volume as last year; shrimps, 1,500 tonnes; and other, 2,099 tonnes, so -- and a total of 25,000 tonnes compared to 25,000 tonnes last year. And that's a good performance, taking into consideration that the quotas are down, especially for the cod. And we see also for the total year 2022, we achieved the same volume as in 2021. So good performance in the catch.

VAP, Sales & Distribution. High prices, weakening NOK are key drivers for significant year-on-year increase in revenue. We see a significant improvement of profitability year-on-year with an operational EBIT of NOK 96 million compared to NOK 26 million same period last year. And we expect significant improvement in earnings in 2023 compared to 2022. Demand decreased in some markets, but the overall demand for seafood remains very strong. And this shows our VAP, Sales & Distribution segment. We have a distribution network in Europe. And in addition to that, we have a sales office in Japan, China and America.

So then Sjur will take us through the key financial highlights.

[Sjur Malm, executive]

Thank you, Henning. So we have historically reported EBIT before biomass adjustments as a key operating variable. Following inputs from investors and all the stakeholders, we are from this quarter moving to the so-called operational EBIT, which is basically the standard of reporting in this industry. There are no big changes. And this is highlighted in our notes. And there's an appendix at the end of this presentation showing the change per quarter last year. One significant change is that while we historically have included production tax before EBIT and now it's after.

So then looking at the financials for first quarter. Henning has already talked through key drivers. We see that the harvested volume of salmon and trout is down 11%. This is following a challenging situation second half 2022 and a low standing biomass going into the year. And through the quarter, our focus has been on rebuilding biomass.

Looking then on the margin of this volume, it's up from last year. This is driven by higher price realization because costs are also up. Looking on price realization, it's significantly higher than last year but also significantly lower than spot prices in the quarter, driven by contract share, timing of sales and quality.

Looking on cost. We see that the inflationary drivers, which also helps price realization, including a weakening Norwegian kroner also impact costs. So costs are significantly up from first quarter last year. And the biggest development is within feed cost. In sum then, the margin in -- of salmon and trout is up just above NOK 6 a kilo.

Looking into Wild Catch segment. We see volumes are the same. Henning has shown that the mix of catch volumes are basically lower-value species because there is more saithe and less cod. But we see that we are able to keep the same margin as last year. In sum, this gives operational EBIT of NOK 989 million compared to NOK 889 million last year.

Looking then on earnings per share. I will return and comment upon the resource tax proposal. But that is not included in first quarter as it is not approved by the Norwegian Parliament. If it is approved before summer, it will have an impact on our Q2 reporting obviously on tax rate but also on balance sheet.

Looking then to our balance sheet. We saw on the last slide that our revenue was up just shy of 30%, which is a huge increase. That increase with the long value chain impacts working capital. So the biggest change in our balance sheet this year compared to last year is the increase in balance sheet items following inflationary trends within fish in sea, here shown as biological assets at cost.

Feed price is up. And that means inventory value efficiency is up. And that is then building working capital. We also see that inventory is up and receivable is up. So the big change from last year is building working capital. In our view, we have a strong balance sheet and we are rated investment grade. And we did issuance of green bonds in Q2 of this year of NOK 1.5 billion.

Then looking at change in net interest-bearing debt and the cash flow items this quarter. We see the impact from working capital build. So we built NOK 600 million in the first quarter. And our best estimate today is that, that figure will be in the range of NOK 1 billion to NOK 1.5 billion for 2023. Obviously, that development will be hugely dependent on price development.

On CapEx, the resource tax obviously will impact our ability to do investments going forward. Still, investments in 2023 are mostly investment decisions made before the resource tax proposal. Our best estimate today is CapEx in 2023 of around NOK 1.3 billion. Included in larger investment is the upgrade of the white -- the Wild Catch facility in Båtsfjord.

Then some comments on the resource tax proposal. So firstly, on the process, initially the Finance Committee of the Parliament was supposed to give -- come out with something today. This is postponed. But it's likely that we will see something in the coming week. The timetable after that is likely that there will be a voting in the Norwegian Storting end May. That's the best indication today.

The proposal itself is to increase the tax in the sea phase by 35% on top of normal corporate tax of 22%. The sea phase is not the full operational EBIT in Farming because the sea phase is only one part of the process of making a salmon. So what is outside is, for example, smolt, harvesting, transportation and value-added processing.

And the key question obviously is what will be the efficient tax rate with -- if this proposal is approved? And that tax rate will be dependent on many things. But the two key drivers are what is the operating or what is the profitability level in the sea phase? And secondly, how large are the investments in the sea phase? Because those investments are tax-deductible.

When it comes to the first point on how big is profitability in the sea phase, that is too early to say. Historically, we have been selling the salmon in the production process basically at cost. And that is not possible going forward because that would mean that we could never ever do an investment again outside the sea phase. So we need to make new agreements based on market terms, so -- but it's clear that obviously compared to the operating profit in Farming, it's not 100% of that, that is going to see the increased tax, it's a share. And we will get back to our best estimate of that share in the Q2 report.

When it comes to the investment incentive, what we and industry have said in close to 400 hearing notes to the Storting is that this tax is not investment-neutral, which is what Norwegian politicians tend to say. And that belief and that view has just been strengthening the more we work with this topic.

And if you look on the total assets of Lerøy, which is only a part of it that is Farming obviously. And within Farming, it's only a small part that is in the sea phase. So if you look at the Farming asset base, if we take out fish and licenses, which are the two biggest items, and look at the tangible assets, our estimate is only that around 10% to 20% of that is within the tax regime. And that means that there are very, very few tax incentives for making investments following this new tax regime.

So in sum, we strongly believe that this will not be tax- or investment-neutral. And it's, in our view, kind of like obvious that if we reduce operating tax and operating cash flow after tax, there are no investments for -- incentives for making investments, then we will see fewer investments. And that, in turn, will impact the development of this industry in Norway.

And on that, there is a debate in Norway, do our industry contribute today? And these are some figures from 2022. So we have around 3,600 employees in 60 municipalities, and mostly along the Norwegian coastline. We paid last year around NOK 2 billion in taxes and fees. So it's obviously that we already today contribute significantly.

And then the big question is obviously if you reduce investments in the industry, what will happen to the ripple effects? So what this slide shows is that last year, we bought goods, services from 5,100 suppliers of about NOK 19 billion. So the ripple effect of this industry are huge. And we see from the dots, where our own activities and where our suppliers are based. And obviously, this is mostly along the Norwegian coastline.

And in our view, it's obvious that this tax will not be good for Norway because the ripple effects -- the risk of producing ripple effects is probably larger than the income from taxes. And that is why we strongly oppose it and also why we believe it's imperative that how this tax decision will have a big impact on the development of this industry in Norway.

So then Henning, I give the word back to you to look at the outlook.

[Henning Beltestad, executive]

Thank you, Sjur. Then we start to look at the last updated numbers from Kontali on the supply side. And we see there is not much change for 2023. It's basically no growth globally. Norway is up 1.4%. And we see United Kingdom is up 8%. But in the rest, there is no significant changes. And if we look into 2024, still very early and it depends on how the industry manage to cope with this summer and also the fall, but it looks like it will -- on the positive side, we'll get a 5% increase. But it's still a long way to go.

But more challenging part is to look at the market side. Of course, the prices has been fantastic. The demand for salmon has been good and with extremely high prices. But we see also some dark shadows, and especially in EU, where you see the last quarters has been going down. And from first quarter last year to this quarter, it's down 11%. So that's not that positive. And it remains to see what the effect of the extremely high prices are towards the consumption in this market. If we look at other markets and the U.S. market, it's basically keep the same volumes and at a very high price level. So that's impressive by those regions.

And this is showing the extreme increase in prices. And you see the start of second quarter starts around NOK 80 and it ends over NOK 120. So you see it's really volatile. And so -- and that also is an explanation why when we time the volume, not as it should be. And when you look at the prices, you know that have a large effect on our price achievement in this quarter. But -- and so -- but we've never seen a price increase like this. If we go back to third, fourth quarter, we have a price level under NOK 60 and over double the price now in end of second quarter -- first quarter. So that's challenging to operate in the markets with these extreme fluctuations.

And -- but if we look in our segments, as Sjur said, we're waiting to get the conclusion on the resource tax. We expect a harvest volume of 193,500 tonnes in 2023. And the second quarter harvest volume will be in line with the first quarter harvest volume. It's been an inflationary trend, fueled by a weakening NOK, will give a higher cost in 2023, counterbalanced by operational improvements. And we have a lot of initiatives, improvement initiatives on the Farming side that we are sure that will show some improvements going forward.

If we look at the Wild Catch, demand development varies across species. And the price of cod is up, the prices of saithe is stable, but the price of haddock has been a little bit down and -- but we expect with a 15% quota -- reduced quota for cod, we expect a good price for cod. Haddock is up 8%. And we see that the price of haddock is going down. And saithe north, plus 11%, and saithe south of plus 90% will give good available quantities for these pieces going forward but also might be a reduction in price of haddock and saithe.

If we look at VAP, Sales & Distribution, we expect improved earnings in 2023. Resource tax, of course, adds uncertainty. But hopefully, now we get a conclusion and that we know what to pay in tax. So it's easier for -- and having clear guidelines on how we're going to price our products, that will help our customers to take position in more long term. And weakening demand in some market segments, but overall demand for seafood remains very, very strong.

So we have a positive view on the market. But we are not satisfied with the resource tax, of course. And we are not satisfied with industry that are not growing. So we really need to work hard to change that. Thank you very much.