Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2019-Q2

[Henning Kolbjørn Beltestad, Group CEO]

Welcome to Lerøy Seafood Group's Second Quarter Presentation 2019. My name is Henning Beltestad, CEO in Lerøy, and with me today, I have 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 have a look at supply and demand of salmon and also outlook from the company perspective. First of all, highlights, second quarter. We achieved EBIT before fair value adjustment of NOK 774 million. A harvest volume of 37,000 tonnes. EBIT per kilo, all-inclusive, of NOK 19, and the contract share for salmon of 38% in the quarter. And net interest-bearing debt, end of the quarter, of NOK 3,745,000,000, so NOK 3.7 billion. Harvest guidance of 168,000 tonnes for full year. This quarter is a little bit better than the first quarter in total EBIT. And as you know, NOK 19 per kilo is a little bit -- is also a little bit better than first quarter and also third and fourth quarter last year, but a bit lower than the second quarter last year. Main reason for that is the lower prices of salmon and some higher cost in the production of the salmon. Lerøy Seafood Group reports in 3 segments: Farming, Wild Catch and VAP, Sales and Distribution. And I will start with some highlights from the Farming. And as I said, the spot price this quarter compared to last year, it is -- this year, the price -- or NSI price is NOK 62 compared to NOK 68.50 second quarter last year. And this quarter, it's up NOK 1 compared to first quarter this year. The trout prices is below the salmon also in this quarter, but we feel that the quality of the trout and also the growth and performance in sea has been very good compared to first quarter and fourth quarter earlier this year and end of last year. And the contract prices is in line with the spot price realization. Cost prices at the same level as first quarter '19. The biomass in sea is up 12% from 90,000 tonnes to 101,000 tonnes. So we have good performance in sea and yes, good biomass into second half of this year and also first half of next year. So we are positive in the biomass that we have going forward. If we look at the Farming volumes, we have taken down the guiding from Lerøy Aurora from 36,000 to 34,000 tonnes, and the main reason for that is the algae outbreak that we had in north of Norway in May and June. And we didn't have a high mortality, but we had to starve the fish for a period, and we lost some growth of the fish. So we have taken down the guiding from Lerøy Aurora. Lerøy Midt is 71,000 tonnes; and Lerøy Sjøtroll, we have also taken down the guidance by 3,000 tonnes. And main reason for that is lower smolt yield. If we look at the Wild Catch, we have harvested 13% lower volume compared to second quarter last year, so around -- close to 16,000 tonnes. We have prioritized the catch of the shrimps in this quarter with higher values. The prices is up by 14% and cod up 7%, haddock up by 4% and saithe is up by 24%. So very good development for the saithe. For the industry side, on land, it's been -- still it's challenging. We are doing a lot to improve the situation for whitefish factories, but increase of the raw material prices is delaying this improvement a bit. If we look at the remaining quarters for harvest, we see that for the cod, we have about 10,000 tonnes left compared to 11,000 tonnes last year. 600 tonnes, 700 tonnes lower. For haddock, we have 3,000 tonnes remaining compared to 2,000 tonnes last year. And for saithe, we have close to 17,000 tonnes compared to 10,000 tonnes last year. And so it's positive. For the saithe, the price are increasing with the quotas that we have left. So a total remaining quota of 30,000 tonnes. If we look at VAP, Sales and Distribution segment, it's been a very good quarter. I think this is probably the best second quarter in history with NOK 130 million in EBIT compared to NOK 62 million in EBIT second quarter last year. Okay. Then Sjur will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. I'm going to walk us through key highlights of our financial figures for the second quarter of 2019. Looking into the figures, we can see that activity is up, that's mainly downstream, and our revenues are up by 6% compared to last year. Currently, our redfish business is key to profitability and the main driver. And looking into the drivers of that, we can see that the harvested volume of redfish is in line with what we did last year, down 2%. We can see that the profitability per kilo is down from NOK 23 to NOK 19, which is NOK 4 per kilo. Half of this is price realization, half of it is cost. That brings us to our EBIT operating result of NOK 774 million compared to NOK 1 billion in the same quarter last year. Looking into associates. This includes our Farming operation in U.K, which is a joint venture. I think it's a well-bought company. And also operation in Denmark, is another good quarter, although slightly lower profitability in U.K. I will return to that. Pretax profit, NOK 776 million compared to just over NOK 1 billion last year. In sum, I will say that profitability in this quarter is much as we expected going into the quarter, but we believe that potential in our business model is higher than what we are showing in current quarter. Year-to-date key figures. We see that we have harvested lower volume of whitefish. We have a slightly lower profitability per kilo, again, price and cost, and EBIT of close to NOK 1 billion compared to close to NOK 2 billion last year. Balance sheet is much impacted by implementation of IFRS 16, and we'll refer to our report for the details. This brings a new asset class, which is right-of-use-assets, and you can see that the total noncurrent assets is quite up from last year. This is partly driven from those operational leases, but is also much driven by investment in our core activities. Those includes investments, which Henning will touch upon later, but much in larger smolt and Farming. Biological asset is up compared to last year, driven by higher biomass and also the composition of the biomass where -- in which region it's situated. Looking to other inventories, it's flat with last year, and we have higher receivable with higher activity. In sum, we believe, we have a strong balance sheet and equity ratio of 59%. And looking into change in net interest-bearing debt, I will focus on numbers for first half year. We see that our EBITDA is down. We've paid a lower tax bill this year compared to last year. There is some growth in working capital, partially from higher biomass and partially also from the fact that whitefish is -- the whitefish value chain includes more frozen materials than the redfish, which means also typically more inventories. So operating -- or change in net interest-bearing debt from operating activities is down some NOK 400 million compared to last year. We have invested less, so net interest-bearing debt from investment activities is significantly down from last year. And last year, we invested in total just above NOK 2 billion, and this year, the figure will be lower. And we have maintenance CapEx of some NOK 800 million, and we are doing some more than that this year, finalizing some projects. And there are some projects up for decision, most important is the new and larger smolt facility in Central Norway farming region. We will return to that on a later stage. We paid a high dividend for 2018 than for 2017. And in sum, our net interest-bearing debt is NOK 3.7 billion, and our expectations are today that we will reduce that level going forward. This shows operating results in different segments. And we can see that Farming is down and whitefish is down, while sales and distribution is up. And now I will go into more details. Our Farming operation in Norway consists of 3 regions and this is the northernmost, which is Lerøy Aurora. We had a fantastic second quarter last year. This year has been more challenging, and this relates firstly to fire at our smolt facility, which gave us quite some extra work and some extra costs. That is now rebuilt and we've able to buy the necessary smolt. Then in second quarter, there was an impact of toxic algae in parts of the region Lerøy Aurora is operating, and that also led to higher cost and has also led to less feeding of the fish. So we lost some 2,000 tonnes of growth in that period. And one way we could say we were unlucky, and we can also say we were lucky because there were massive mortalities at sites around us, which we were able to avoid. Following, we have lowered the production guidance in Aurora to 34,000 tonnes, but that gives us a good biomass exiting the year and a good basis for growth into the coming year. Also, we have higher cost base in first half than what is normal in this region, and we expect it to fall in second half and fall into 2020. Production right now in Aurora is very good. Lerøy Midt operation in Central Norway has been faring as expected in the quarter. There are no big changes. There are no big investments in smolts, which will change the picture going into next year, but we expect to see gradually a lower cost also in second half -- or lower cost on average in second half than the first half. Hordaland has been -- or Lerøy Sjøtroll, which is the operation in the west, it has been a challenge for some years. It remains a challenge. We -- this is where we farm trout in addition to salmon. The trout production has fared decent in this quarter and well, we have seen some challenges on salmon. And we are reducing the expected yield for smolt, which means that we will reduce our production this year from 66,000 to 63,000 tonnes. We have now been kind of like stable at the profit levels, which is inferior compared to other operations. That's not at all taking out the potential of the business in this region. So in 2016, we made the decision to build one of, if not the largest, one of the largest smolt facilities in the world. Construction is coming to an end, and we've already released first fish at 160 grams. We will release the first fish at around 500 grams these days. And that fish, we expect, will give us better performance gradually during 2020. So it's a very interesting year ahead in Lerøy Sjøtroll, and we are very eager to see the results of the new smolt. Wild Catch is already touched upon by Henning. This quarter, you'll see that there's lower catches of cod compared to same quarter last year, which is the highest value catch. We have prioritized catching of the shrimps and less saithe, so catch volumes are down. These drivers will also then impact the quarter result in second quarter compared to last year. Also last year, included asset sale of boat with the impact of NOK 35 million. And underlying prices have been good, there's been great prices during second quarter. So it's a good quarter for the trawling business. We have good access to quota for the remainder of the year, so performance should be good. On the land side and the land-based industry, the increased prices is a challenge, which leads to pressure on gross margins and a pressure on profitability, so it's a weak quarter for the land-based industries. We are doing several investments here to add new activity, which is less seasonal and more stable. And we expect that to gradually show impact on the figures from this segment during 2020. Norskott Havbruk, our Scottish seafarm, is our joint venture in U.K. It was a great quarter last year. There's been some more challenges this year, in particular with CMS, which is causing some increased mortality and causing slightly lower harvest weights. Also here, we are building a new smolt facility, which we have expectations for. And also in this operation, there is room for growth. So we will continue our guidance of 30,000 tonnes and the potential in the future is higher than that. Our downstream business, last year was -- we were not pleased at all with last year. And this year, we've been able to have better capacity utilization, more stable operations, and we also see impact from investments in new downstream units. So that is a good quarter and there are some seasonal effects and that second quarter normally is better than the third quarter. But on average, we believe for a good performance in this segment during this year, and there is further potential going into 2020. Yes. And with that, I give the word back to Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Okay. Then I will take you through the outlook. First of all, the supply and demand and also outlook for some main projects that we have in Lerøy. If we look at the supply side and look at the 2019 numbers, we see that Europe is -- there is expected growth of 6.6%, we see Norway is 4.3% and U.K. is 16.6%. And if we look at the Americas, the growth -- expected growth for this year is 4.7% and Chile is about 4.4%. And global increase in the growth of close to 6% compared to 5.5% last year. So, yes. If we look at '20, the expectations for '20, we see European growth of 3.6% and Norway is about 3.3%. We see Americas 4.2% and a global growth next year of 3.8%. For the pricing, we see it's still fluctuating. But if we look at the yearly prices from '16, '17, '18 and '19, we see '16 was NOK 62; '17, NOK 55 -- NOK 59; and '18, NOK 59; and so far this year, NOK 60. So in a way, the 4 years is really a stable level, even though the price is fluctuating week by week. If we look at the harvest volumes from Norway, we see that the change from last year so far, it's up 5.3%, so a total harvest of 604,000 tonnes. We see July is up 5%, August up 1% and September is up 2%. And if we look at September, we see its much lower volume in September than in August, and we also expect the industry and the market to be back on track from September. So we expect a better situation for pricing in September compared to August. And then in October, November and December, it's a growth between 3% to 6%. If we look at Europe, it's pretty same -- the same picture. If we look at the Americas, we see September up 10%, October down 1% and November and December of 8% growth. Worldwide, we see a stable volume through the year, 9 first months of stable volume around 200,000 tonnes and then we have a peak in the last 3 months fluctuating between 225,000 to 250,000 tonnes on a monthly basis. So yes, if we look at the consumption side, second quarter, we see a very strong growth in EU, up by 8%. Global consumption is up by 6%. So EU in this quarter is already taking the market share. We also see that the other markets is up 10% and also increasing their market share. And the USA is up 3% and Russia is down 11% and Japan up 3%. But both EU and other markets is really performing well in the second quarter at high price level. If we look at year-to-date, EU is up 6%, other markets up 7% and USA up 5%. So the first half, USA is keeping the position and the EU is taking a share and also other markets. If we look at other markets, year-to-date, in the first half, we see China is continuously growing and is -- yes, for the first time, over 60,000 tonnes the first half year, so it's really strong. Also Brazil, it's over 50,000 tonnes and taking market share in the global market. We expect, especially, that China with normalization of the situation with Norway, we expect good growth in China in the period to come. Outlook. We see a strong demand for seafood, in general. We have a guiding of 183,000 tonnes for 2019. We have -- we will have a good biomass situation into 2020, and we expect lower release from stock cost in second half of '19 and also going into 2020. We expect the contract share for salmon in Q3 of 25% to 30%, and we still have a significant potential in the whitefish. We see increased demand for whitefish. We focus a lot on improvements in the factories in north of Norway. And yes, so I think we are on a good track with the whitefish, both fisheries and on the land side. Lerøy is a fully integrated company of both redfish and whitefish. This gives us a huge potential and also it is kind of complex, working with this full value chain, but still it's -- we see a huge potential of improvements and are working and focusing to improve every step of this value chain. Some examples for this, we start with new smolt facility in Hordaland, among the largest and most modern smolt facilities in the world. Just this picture is from last week. We are now ready to put the large smolt, 500 grams, into sea. The total biomass is 4,500 tonnes. First output of 160 grams was in April 2019, and we expect harvest of this in the first quarter 2020, so we are getting close. And first output of 500 gram will be in August 2019. And so far, everything looks fine. New factory of Lerøy Midt opened last year. Highly automized slaughtering and filleting factory. A huge capacity of 70,000 tonnes on yearly capacity per shift. In this factory, we are focused on sustainability, quality and efficiency. And there is a full flow factory, where fish is swimming from the whaleboat into the factory and has, yes, a good flow towards the factory, and we have a huge capacity of fillet. 70% of the fish in this factory can be filleted, so -- and yes. And at the moment, we are running at 1.5 shift in the factory, and that's been -- it's really running well at the moment and it's a really nice factory. We have Norway's largest trawling fleet, 9 trawlers running now, and we have one on the way and that's this one. This one will be ready in mid-January, based on the same concept as Nordtind, but we have done some improvements. This will be the first demersal trawler with live fish tanks prior to slaughtering, which will improve -- we believe, will improve the quality of the whitefish. And it's also the first demersal trawler built with a battery hybrid solution. And we also have a triple trawl for shrimp and delivery mid-May, and really looking forward to get this out fishing. Then Lerøy Norway Seafoods. We have done large investments across the factories. We are specializing products and production in each factory. Strong focus on product and the category development and strong focus on utilizing the whole fish, like the fish burgers and the fish cakes that you see on the right side. And we opened a new factory in Stamsund April 2019, specializing in production of ready-to-eat products. So we will be one of the largest producer of fish cakes and fish burgers and these kind of products in Norway in the next year. Strong European distribution. We have invested a lot in the last 10 to 15 years. We now feel that we have a very good base with all our distributions facilities. And as we saw, we had good results in this segment, second quarter, and we have a huge potential to take out of all these facilities going forward, we still have high capacity available. And this is some other products. We do at our facilities and out in Europe. This is from Spain. We also started with the same products in Portugal. We do it Norway, in Finland and in also some other markets. Then at the end, I will show a short film from our factory in Stamsund, just to give you a look into what we are doing in one of our whitefish factories. Thank you very much.[Presentation]