Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2018-Q2

[Henning Kolbjørn Beltestad, Group CEO]

Welcome to Lerøy Seafood Group's Second Quarter Presentation of 2018. First of all, I will take you through the highlights of the quarter, then Sjur Malm will take you through the key financial figures. And then I will come back and take you through the supply and demand side of Atlantic salmon.First of all, we look at the highlights. Second quarter 2018 has been a good quarter, with EBIT before fair value adjustment of NOK 1 billion. Harvested volume is close to 38,000 tonnes. We have an EBIT per kilo all-inclusive of 23.4. Contract share in the quarter of 23%, in line with what we guided in last presentation. And we keep our house guidance of 166,000 tonnes for the full year. The expected cash volume for the fisheries is 65,000 tonnes.Yes, this has been a good quarter. Actually, it's the third best quarter in the history and definitely the best second quarter ever for Lerøy Seafood Group. And we see also that per kilo -- EBIT per kilo is the fourth best quarter in the history.Lerøy Seafood Group is reporting at 3 different segments. We have the Farming segment, the Wild Catch segment and the VAP, Sales and Distribution. We'll start with the Farming. We have seen a very strong price development in Q2 even though it's a little bit higher than Q2, second quarter last year. It's up NOK 9 compared to first quarter. And so it's been a quarter with very high prices. The price achievement of trout is below the salmon in this quarter. We see that when the prices of salmon increase a lot, we see that the trout is not following the growth in salmon prices. The contract prices is below the spot prices in this quarter.We've had a cost increase compared to the first quarter, mainly driven by poor performance in Lerøy Sjøtroll.For biomass, we -- end of the quarter, we have 6% lower biomass compared to second quarter 2017. The volumes, as I said, we keep our guidance at 166,000 tonnes in Norway. We have 36,000 tonnes in the Lerøy Aurora, 72,000 tonnes in Lerøy Midt and 58,000 tonnes in Lerøy Sjøtroll. And then we have our share in Norskott Havbruk, it's 50%. So we -- and the total volume in Norskott Havbruk is estimated to 26,000 tonnes and our share is then 13,000 tonnes. So total volume of 179,000 tonnes. So the same as we reported in the first quarter presentation.If we look at the Wild Catch, it's been a very good quarter, harvested volume of 18,000 tonnes and we, in this quarter, we see a significant increase in particularly shrimp catches, which has been very positive for us in this quarter.We see price is improving, going up, average up of 8%. And for the cod, we see a 15% increase, and for the haddock, 48% increase, while the saithe is down by 6%. We have also entered agreement for delivery of a new combination trawler based on a Nordtind design, which we're -- which we started fishery with earlier this year. The schedule for the new trawler is first quarter 2020.On the land side or the factory side of the whitefish, we still are facing a challenging situation, with increased raw material prices and also doing a lot of investments into the different sites to improve our performance in this segment. There's still a long way to go. If we look at Havfisk, we catched 3,800 tonnes, cod; 400 tonnes of haddock; 5,400 tonnes of saithe; and about 3,300 tonnes, shrimp. A total of 18,000 tonnes. If we look at the remaining quarter, we have 11,000 tonnes of cod, 2,000 tonnes of haddock, and 10,000 tonnes of saithe, and a total of 23,000 tonnes. But the estimate of the total volume that we will fish -- harvest this year will be around 65,000 tonnes.For VAP, Sales and Distribution, it's been a very difficult quarter. Also, first quarter was on the low side for us this year. We faced extremely volatile prices in the second quarter and it's been a challenge to follow the fluctuation week by week, but also it's hard for the industry side, yes, to work with this kind of fluctuation.We also have some start-up facilities in both Netherlands and in other markets that also have some impact on profit in this quarter, but we see that we will have an improvement in fourth quarter 2018 or expect improvement in fourth quarter 2018. Yes, so the EBIT in second quarter '18 was NOK 62 million compared to NOK 115 million same quarter last year.Then, Sjur will take you through the financial figures.

[Sjur S. Malm, Chief Financial Officer]

Thank you, Henning. I think in the second quarter, we've had some operation which have run very well. Some operations, which are showing strong improvement like Lerøy Midt but we also have a challenging situation in Lerøy Sjøtroll, which is not performing to our expectation this quarter. But in sum, we are happy with the result. It is our second best -- it is our best second quarter at any point in time. And the fact that we are performing these numbers, despite not everything going 100% to expectation, is showing the robustness of the business model of Lerøy Seafood Group.So looking into the details. The main drivers for our profitability is shown on the 3 lateral lines. We can see harvested volume, which is up 45% compared to last year. That's back to normal. That's showing that Lerøy Midt, our farming performing operation in Central Norway is back on track. Looking on profit per kilo, EBIT all-inclusive, this number is down compared to last year. Our cost is actually down as well, but this is showing lower price realization in farming and also low profitability in our downstream unit. And overall, harvest volume is a key driver for higher revenue. And we see that on our operational EBIT before value adjustments. The number's up 25% compared to last year, where volumes are impacted positively and margins negatively. We have significant operation in terms of associated companies, our return to Norskott, which is our operation in U.K. We also have 50% of a well boat company and a significant operation in Denmark, to mention some of our associates. Also this quarter, they make a significant contribution.In sum, our pretax profit before value adjustment was just about NOK 1 billion compared to NOK 840 million, same in Q2 last year.Looking into our year-to-date figures, again, looking at the main drivers. Our harvest volume is up 9% compared to last year. Again, margin is down, not because of cost but because of price achievement in farming and lower profitability downstream.In sum, we have just about NOK 10 billion in revenue, which is the highest figure for any first half in our history. We have EBIT of just below NOK 2 billion compared to just above NOK 2 billion last year, strong profits from associated companies and reduction in net finance. And in sum, the profit or earnings per share is basically on par with what we performed first half of 2017.This is our balance sheet. I think the most interesting is to look at what's changing. And if you look at bigger changes, we are making significant investment in our core activities. We can see the tangible fixed asset is up significantly compared to last year. These are investments, which have been announced and which includes a new industry facility in Central Norway, which is in startup phase in Q2. It includes the construction of one of the world's largest smolt facilities in Hordaland, where construction is going according to plan. It includes further development of small facilities in Aurora. It includes a new trawler in Havfisk. It includes several factories in Spain and in Netherlands and also, investments in our land industry on whitefish.And we've made significant investments, and we have not started harvesting profit from these investments yet. So we believe over the last year, we have made significant investments for further growth of the company, both in terms of volumes, in terms of a more efficient value chain and also in terms of a broader product portfolio. So we believe we are well positioned for the future.One slide on funding, just showing that we have balanced amortization schedule on our debt, that we are well within covenants. Looking into cash flow. It's probably more meaningful to look in first half compared to the first half last year, and we can see that EBITDA is around NOK 2.3 billion first half compared to NOK 2.4 billion last year. Tax level is up due to -- this is tax paid on results in 2017, and the result in 2017 was higher than in 2016. And with this payment, basically, we paid the tax we should pay -- we will pay for 2018.There are minor changes in working capital. We made a small acquisition in sales and distribution. And here again, we can see the significant investments we are making, NOK 1.2 billion in our year-to-date. We have received NOK 160 million about from associated companies and we paid close to NOK 1 billion in dividend.In sum then, our net interest bearing debt is up by NOK 750 million compared to the start of the year. But for second half, there won't be tax. Second half CapEx will be lower than first half and also second half, there won't be a dividend. So the second half, we expect a significant reduction in net interest-bearing debt.This is showing the profitability per segment. Henning has already touched upon the key drivers.And then looking into the different operations. This is Lerøy Aurora, our operations in the northernmost part of Norway. The graph is showing the development in EBIT per kilo. It's showing a steady high-level. And this is another strong quarter from Lerøy Aurora. Cost remains at the low level, and we expect that for the remainder of the year. There's been slightly lower temperatures than what we expected going into the year. So we have a slight reduction in expected harvest volumes. But overall, our expectations is for continued very strong development and performance in Lerøy Aurora. And looking into Lerøy Midt, we can see that margins in Midt is moving closer to that of Aurora, although not at the same level. We've seen challenging years behind us in 2015 and 2016. There are very long lead times in the production of salmon, as it takes 3 years time. So the improvements we have been talking about and seen since 2017 is gradually coming into the figures of the fish being harvested.So this is a strong quarter for Lerøy Midt. The positive development continues. And we have some cost related to the startup of a new facility. And also, the profitability is impacted by timing of sales. So half of the volume in the quarter was sold in June, a month with lower spot price.Costs continue to decline, and we expect that trend to continue going into second half. And in sum, Lerøy Midt is, in many ways, back on track where it used to be before the challenging period before 2015 and 2016. So we are very pleased with the development here.Moving in to Hordaland, we are not satisfied with development in this quarter and not satisfied with development over the recent years. As you see from the graph, the margin level here is far beneath what we see in our other regions. This is a complex picture, driven by both price realization and cost spot. Looking at price realization, 40% of the volume is trout. And for trout, our group realized NOK 5 lower price. Also, we have seen, as we saw in Q1, challenges with downgrades in the second quarter, which impact price significantly negative.Also on cost, the picture is complex, but I'm trying to make as good explanation as possible. We have seen challenges in Hordaland with the growth phase from -- the fish ratio is 3 kilos to 4.5 kilos. That doesn't mean that the challenges arise at 3 kilos. It means that the challenges accumulated up until 3 kilos make that the growth in the last phase is not as efficient than the other regions. That is the very last growth phase of the fish. It's very important in terms of profitability, but it also means that the visibility when it comes to cost guidance is more challenging here compared to other regions.This quarter and also in July and August, we are harvesting the spring of 2017 generation, a generation which has not performed as well as we thought it would be and at a level we are not satisfied with. Looking then on the third quarter, we will see best indication today, lower cost than what we saw in Q2. But particularly from Q4, there is cost a reduction potentially in new generation. But also here, it's important to mention that this is what we believe today. And if we see the same challenges in the end of the autumn [ 2017 ] generation, of course, it could be higher than what we expect today. But as is, development is good on the coming generation, and we have seen challenges on the generation we're currently harvesting, which measures are we're taking. And obviously, we are taking a lot of measures. But to mention maybe the most important is the construction of the new small facility in Hordaland that will bring better, more robust smolt and biggest smolt, which have been reduced the time in sea. So we are hoping to see significant improvements from this in relation to other measures taken. That facility is going according to plan. We put in the second batch of eggs, and we will see smolt release from the facility in 2019. So production cycles are quite long.In Wild Catch, our whitefish operations, Henning has already touch upon key drivers. In this quarter, we have a gain of NOK 35 million due to sale of a trawler. So underlying profitability is not too far from last year. We'll see, and Henning has already touched on catch volumes, there is a quota reduction on cod and haddock, which improved prices together with a strong market. And due to investment in our fleet, we've been able to increase the capacity for shrimp fisheries. So the trawler side is performing very well in Q1 in first half and Q2 in first half, as a whole. And on the other side, the land-based industry, is seeing less fish available due to reduction in quota and higher prices. And so the land-based industry has been challenging first half of 2018, but obviously, the sum of this is most important, and in sum, it's going according to plan with better profitability in trawlers and lower profitability in the land-based operations.We are making significant investment and significant changes to the land-based operations in terms of what we are producing. We are trying to optimize each factory. And we're also investing heavily in improving how we do our operations. So this is a long journey and a lot of work, but we believe we are moving in the right direction also in land-based industry.Business operation in U.K. We own it 50% together with SalMar. It's been another good quarter. And as you can see, Norskott is a steady performer with strong margins. There are some impacted on harvest volumes of 2018 due to challenges last year. The contract share is 45%, but there is potential for further growth going into 2019 and beyond. We're also constructing a new recycling facility, with first eggs in Q4 this year, first release of smolt in 2019. So a very well-run company, good operations and potential for further growth.Henning has already touched upon the challenges seen in our downstream unit, and this is very easy to see on the chart down to the left. You can see from revenue that there's some good activity level. We can see from margins that we've -- are realizing much lower margins in 2018 than what we did in 2017. We're not satisfied with this, and it's been an extremely challenging quarter for downstream operations, with extremely volatile prices and second quarter price difference is up towards NOK 30, which makes this kind of business challenging. And also, we have cost in connection with startup of new facilities in several European countries.Third quarter, we'll also not see the margins we saw last year, but we are expecting significant improvements from the fourth quarter. With that, I'll give it back to you, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Okay, then we're going to look at the supply and demand first, and then look at the consumption side of Atlantic salmon. And we'll start with the supply side. And if we look at the volumes or the change from '17 to '18, we see that Norway is up 7.5% totally this year. We see that Scotland -- or U.K. is down 10%. Also Chile is going up in volumes, 12% up. And the global increase, the growth will be around 6%.If we look into 2019, we see we estimated a small increase of 4% in Norway. We see U.K. is back on track again. We see a small increase in Chile and a global growth of close to 5%, which is lower than the growth that we have this year. As we mentioned, both Sjur and I, it's been an extremely volatile price situation week by week, and yes, this is probably the -- or should I say the most volatile price on a weekly level that I have seen in my history. It's close to NOK 15 from one week to another, so it's extremely challenging for the industry and also the customer and, of course, for us to handle these kinds of fluctuations.We see that into this quarter, third quarter, the price level is around NOK 54 so far compared to NOK 68 in the second quarter.If we look at the supply in Norway, on a monthly level going forward, we see that we will be between 6% and 8% increase month by month compared to last year, and we believe that this is possible to handle for the market. If we go back and look at June and July, we see an extreme increase, 14% in June and 17% in July. And so it will be interesting to see how the market reacts on a decreased price level in the spot market right now and we believe that we will see okay prices going forward the next 3, 4 months.If we look in total Europe, harvest quantities, we see that the growth is lower than it is from Norway. And then in September, it's only 2%; 5% in October; 4% in November; and 8% in December compared to last year. And it's -- yes.If we look at Chile, also here, it's been strong growth in volumes, first 6 months, and then we see lower growth in the last 6 months. And if we look at worldwide totally, it's, yes, stable growth between 1% to 6% per month.If we look at the consumption side, we see that in second quarter, there's a growth of 8% globally. We see that EU is very strong growing at 7%. U.S.A. has the strongest growth at the moment with 13%. Russia, of course, in percentage, we see Russia is coming back a little bit with the 51% growth and other markets, 4%. If we look at year-to-date, so first half of 2018, we have a total growth of 9%; and EU, 6%; U.S.A., 11%; and other markets, 11%. And with the price level that we've seen in the first half, yes, we have to conclude that with the 9% growth in volume, it's really good demand for Atlantic salmon globally.If we look into the other markets, so we see here the main drivers of the growth. And as we expected, the China market is growing very fast at 23%. There is a normalization between Norway and China in this quarter, and we see the there is more and more volume going directly from Norway into China, and we also believe that this market will grow a lot going forward, yes. And also, there is smaller markets that has very high growth level.To conclude, I would say that the demand for seafood remains very strong and the outlook here is positive. We keep our guidance of 179,000 tonnes for full year 2018. We expect the contract share for salmon and trout in the third quarter around this -- the level that we had in second quarter of 25%, and we see a significant potential in whitefish, expect the catch volume around 65,000 tonnes in 2018 totally. And, yes. So that was all that we had this time, and thank you very much.