Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2020-Q2

[Henning Kolbjørn Beltestad, Group CEO]

Welcome to Lerøy Seafood Group's second quarter presentation. My name is Henning Beltestad, CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, CFO.First of all, I will take you through the highlights in the quarter, then Sjur will take us through the key financial figures, and then I will come back and go through the outlook of supply and demand, especially of salmon and trout.Lerøy Seafood is a fully integrated company, both in redfish and whitefish. We have invested heavily in this value chain [ for ] 20 years. And our goal is to create the world's most efficient and sustainable value chain for seafood. We are not there yet, but we believe that we have the organization, we have the structure, and the value chain that we have invested in gives us the opportunity to reach our gold -- goal. We are reporting in 3 segments: Farming; Wild Catch; VAP, Sales and Distribution. Second quarter, yes, what should I say? Challenging quarter. A significant impact of COVID-19. But we see some positive signs end of the quarter and into third quarter. The EBIT, pre-fair value adjustment, was NOK 322 million. Main reason for the lower result this quarter is lower price throughout the quarter. We have a strong quarterly operational cash flow. We paid out NOK 1.5 per share for 2019, in the quarter. The Board has additional authorization to pay out NOK 0.8 per share before end of 2020. And the net interest-bearing debt end of the quarter is NOK 3.5 billion, which is about same level as last year.And the growth for post smolt investments is on track. We expect a harvest volume this year of 183,000 tonne to 188,000 tonne. And for next year, 200,000 tonne to 210,000 tonne. So we have good growth going forward. And we expect whitefish volume to be around 65,000 tonne. And in this quarter, we harvested 39,000 tonne salmon and trout compared to 37,000 tonne last year. And first half, close to 80,000 tonne compared to about 70,000 tonne 2019. So increased volume of 10,000 tonne so far. And -- yes.On the farming side, it's been a challenging quarter. And some -- one of the reasons is, of course, the price and price fluctuations. The price -- NSI price is about NOK 58 compared to NOK 62 same quarter last year, and NOK 11 down compared to first quarter. So -- and we harvested about 8,000 tonne of trout in this quarter, and the prices of trout has been extremely low compared to the salmon, and maybe the highest difference in price comparison ever. So that's been challenging, especially for Lerøy Sjøtroll.The contract share is about 30%. The cost is up from the first quarter. And the EBIT in this segment was NOK 5.5 per kilo compared to NOK 16 last year. And EBIT all-inclusive is about NOK 780 million, yes.If we look at the volumes. We keep our volume guidance that we gave last presentation. Aurora, 37,000 tonne; Lerøy Midt, 68,000 tonne; Lerøy Sjøtroll, 67,000 tonne. So a total of 172,000 tonne, which is up 14,000 tonne compared to 2019. And we will also have a high-growth in 2021, both in Norway and also in Scotland.The Wild Catch has been a challenging quarter after a fantastic first quarter. I think the best first quarter ever with NOK 270 million. We have minus NOK 5 million in second quarter mainly because of lower prices, lower price trend, because of the COVID-19 situation and also that we have changed the -- over to other species with lower value for the fisheries.If we look at the catch volumes in the quarter, we harvest -- catched 2,300 tonne, cod; 6,200 tonne, saithe; 1,000 tonne, haddock; 1,900 tonne, shrimps. And we stopped the shrimps fishery because of unpredictable price situation and start the fishing of shrimps again into third quarter. A total catch volume of close to 20,000 tonne. Remaining quota is 8,000 -- close to 9,000 tonne, cod; 5,800 tonne, saithe; and 3,800 tonne of haddock.When it comes to VAP, Sales and Distribution, I will say it's been a very good quarter, a challenging quarter, but a very good performance of all our operations in this segment. And I have to say that the job that all the people in this part of the value chain has done is really fantastic, and we achieved EBIT margin of 2.5% and EBIT of NOK 114 million compared to NOK 130 million last year but still, it's really a good performance and especially also compared to the first quarter, which was very challenging. But we feel that this segment really is back on track and will perform good results and development going forward. With that, Sjur will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. So second quarter has undoubtedly been very impacted by COVID-19 and restriction related to COVID-19. Start of the quarter was, I would say, very challenging with the weak HoReCa markets, weak demand in particularly in March, and April, May, I mean. Then in June, it's been improving, but there's no doubt that people, globally, and some has been spending a little bit less money on seafood in the second quarter than a year ago.Beyond that -- which is impacting price realization, we've seen a significant impact in trout, harvest and export volumes from Norway. So price realization on trout this quarter is about NOK 12 below salmon. We have around 8,000 tonnes of trout, so that's NOK 100 million in effect in the quarter. We have harvested or catched less shrimp, less cod, which has an impact on average price realized in whitefish. So in sum, there are some clear COVID-19 effects, and particularly then impacting trout and also whitefish.So in sum, we can see here key drivers through our financial numbers on the latter lines. And we have harvested a higher volume than last year in redfish on a lower margin. Lower margin is due to -- and the most important factor is lower price realization due to lower salmon price, but even including then the impact from lower trout prices. And trout has a significant impact. Whitefish is the same picture on volume and margins. It's different species being caught with a low average price, which are basically breakeven this quarter, and it will vary from quarter-to-quarter, dependent on when we decide to utilize our quota. So on the whitefish, it's important to look on a longer time horizon than only 3 months. But in sum then, we can see that the revenue, lower prices, a little bit lower activity, is down around 12%. We talked through the margin effects. Our operating result is down significantly more. And we see that translate also down to earnings per share. So not -- the profitability this quarter, significantly below what we had expected going into the year. Still, we must say that this has been a challenging quarter, and people have been working very hard in Lerøy. We're very grateful for that, and we will come back stronger when it comes to profitability in the future.First half, and we can see that we harvested more redfish. Growth in sea is going according to plan. We are on track to increase our harvested volumes this year and into next year. We see that, as Henning highlighted, we had a very good first quarter. And in sum, with second quarter, we have a margin in whitefish about where we were last year. And revenue year-to-date is the same level as last year. We have lower profitability due to lower price realization, a little bit higher cost. And we see that our EPS is down around 1/3 compared to last year. So not what we expected going into the year, but still we are making quite good money in a challenging market.In recent years, we have invested a lot in our value chain trying to utilize our bottlenecks, particularly the licenses in Farming, investing in larger smolts. We have invested in whitefish to improve those operations. And we have increased both our geographic and our product reach downstream. And that is visible then in tangible fixed asset, which is the key change from last year. From last year, we have invested particularly in smolt as said, and we also received 1 new trawler in Havfisk. Other balance sheet items. It's worth mentioning the receivable is down with lower activity. That is expected. So cash flow this quarter is positively impacted by that. We have a good cash position also post our dividend payment, and we believe we have a strong balance sheet into the future, and it's flexible. And yes, looking also on cash flow, this is looking at change in net interest-bearing debt. This quarter, we can see that we have released the working capital. We see that we invested a bit more than last year, and we'll invest more for the year than this year. And we paid out the dividend. And we have a net interest-bearing debt that increased to around NOK 3.5 billion. That is still less than last year. And if you look at the year-to-date numbers, we see that we -- yes, we have a lower profitability on EBITDA this year than last year. We also paid less in payable tax. We've done better in working capital. So you can see that operating cash is actually better than last year.We have invested a bit more, and we paid a little bit less dividend. But in sum, the total change in net interest-bearing debt year-to-date is less than it was last year. So we believe we'll handle, when it comes to cash, the COVID-19 situation in a good manner. We believe we have a strong and flexible balance sheet.We already talked through key drivers, and this is to highlight that key changes in profitability to the same quarter last year is in Farming. That's not volume. It's due to price and also some effects on higher cost. Wild Catch, the effect is basically changing harvest pattern and catching pattern. In Value-added, Sales and Distribution, we have the same margin level with lower revenue. So I would say, after a challenging April and May, it was better in June, and it's a good quarter. But the big changes from last year is in Farming. Then looking into Farming, starting in the northernmost region in Lerøy Aurora, which has been performing very well historically. This first half has not been up to the standards we expect. And that relates to challenges with winter ulcers this spring. That impacts downgrades. It impacts volume production. And the results in first quarter and second quarter, we are not happy with. It's positive -- and also in second quarter, there's been very cold sea temperatures, which has been kind of like delaying the pickup in growth. Positive is that recent months its growth has been back to expected. We see good growth. We see good development on generation which we are harvesting now. So second half, we will see a significant decline in cost in Aurora, and Aurora will be a bigger share of our harvested volumes. On smolt side, we are finalizing the third step of the build-out in Laksefjord. It's going now according to plan. And we are releasing much larger smolt this year than last year. It will further grow into 2021. And Aurora is set for substantial growth in the coming years at a low cost base. Looking then on Lerøy Midt, the operation in Central Norway. I would say this quarter has been quite good. We are seeing good growth, good performance. Costs are lower this quarter than last quarter. With the development now, we expect a further cost decline into second half. We remember that last Q3, particularly September, October, we had a challenging situation in Lerøy Midt with a lot of treatments and lower growth. So core to what we have to do is -- for rest of the year is basically to perform much better than we did last year and more in line with what we've done historically. And as long as we're able to do that, we will see a further cost decline and a good performance from Lerøy Midt.Looking at our operation in Vestlandet and Lerøy Sjøtroll, this has not been a good quarter. We are not happy with losing money. And obviously, we have to improve that. Looking at drivers for such loss, it's twofold. Trout is performing well in sea, but we had a market challenge. Prices are too low to make it profitable at the level we would like it to be profitable. Henning will get more back to outlook for the trout market. Looking on salmon. The generation we're currently harvesting, the spring of '19, has not been good. It's high cost, and we will harvest on the same generation in Q3. But in Q2, we will also start harvesting the autumn '18 generation, which looks much better. So we do expect to see lower cost, particularly from Q4. And it is positive that the overall growth is going according to plan. We expect to see a good growth this -- in volume this year compared to last year and even more into 2021.In short haul, the investments in Kjærelva is finalized. We have been putting 0.5 kilo or close to 0.5 kilo smolt into sea from March, and we do expect to see positive effect from that starting particularly from 2021. Wild Catch has already been touched upon. I'm just highlighting, and looking at the shrimp volumes, they are substantially down in Q2 as compared to last year due to a challenging market. That has improved into Q3. And again, we are catching shrimp. Also, we've chosen to do less cod. So that means that on the trawling fleet, the average price realization is substantially down due to basically priorities we've been making due to the market situation.For the year, we still believe markets looks okay and good, basically. And they are improving from the situation we saw in March or in particularly April and May. On the land side, the Norwegian land processing industry has been changing for decades. There has been a challenge recent years also with smaller quotas and more competition for the catches and higher prices. So framework conditions for both political framework conditions was also there. The overall picture with lower volumes available at the higher price have been very challenging for the land industry. We've been making investments in trying to make our factories operate less seasonal, trying to specialize them, trying to add new products. And we were seeing good progress up until COVID-19. April and May were challenging months with a significant decline in demand for fresh products and conventional products, which impacts profitability for the land industry in this quarter.But it is positive to see that there are some clear signs of improvement in the land processing industry with the quota outlook for 2021 and the outlook for land industry significantly improved into 2021. So that's positive. And year-to-date, the profitability in this segment is good.Then to U.K. operations here, which we own together with SalMar, operating company in Scottish Farm, which had a challenging second half of last year, which has been impacting the start of 2020 also. There are obviously some impact from price realization here also from less demand. But we are seeing improvements in their operations, and sea has been performing well. That poses as well for second half of this year. And to 2021, we will also see the effects from the new smolt facility that is finalized. So underlying operations this quarter has been good. And outlook for second half and into 2021 indicates further growth and a good performance. Then value-added sales and processing. The tail of Q1 was very challenging due to COVID-19. And the start of Q2 was very challenging due to COVID-19. And through a lot of hard work from our sales and people employed in our processing, we have been able to gradually adapt to COVID-19. The market has improved, kind of like the direction during Q2 has been positive. And we are quite pleased to see that the operating margin at 2.5%, the same level as last year, albeit at a lower revenue. We think that we are moving in the right direction. We have several factories across Europe, which is now post the start-up phase. And with more demand and with better operations, we are looking forward to a potentially higher profit level in the coming years. So a decent quarter and good prospects for the coming years. Then to talk more about the future, I'll give the word back to you, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you. Then we -- I will take you through the final update on the supply and demand. And this is really fresh numbers, consolidated numbers from 17th of August. And if we first look at 2020, there has been done some small adjustments compared to the last update, but not big ones. We see that Europe is -- will have a growth of 2.5%; Americas, 5.6%. If we look at Europe first, we see Norway, 2.5%; U.K., about same level as last year; and Faroe Islands, about the same; and Iceland is growing 32%, so up to 32,000 tonne. For Americas, Chile is the largest one with a growth of 5%. And then we have Australia, up 11%; and Others, up 50,000 tonnes. So a global growth of 3.6%. And last year, we had a growth of 7.1%. But if we look into 2021, we expect Europe to be at 3.8%; Norway, up 3.4%; U.K., about the same level; Faroe Islands, 14% up; and Ireland, up -- no, I said, Faroe Islands, up about 10%, Iceland, up 13%; and Ireland, up 11%. And for Americas, down 4.1%, and where Chile is reducing the volumes by 8.2%, which is -- yes, it's a higher decrease in the total volume from there. And yes, 0 growth in '21 globally. So -- and that could indicate that price levels for '21 will be fairly good.If we look at the prices on -- we see the volatility, and it's the same in last quarter. In -- we had prices under 50. And on the top, it was over 70. And that was happening in a couple of weeks. It was going from 50 to 70, and then down again to -- into this quarter where we have been in the mid-40s. And -- but right now, we see a small increase in the prices into August, but we will see how it ends. If we look at the supply in Norway going forward, we see there has been close to a 0 growth in the first half of the year, but we expect a growth in August of 2%, 8% in September, 5% in October, 2% in November and 5% in December. And we will be on top in September, October, close to around 140,000 tonne. So it will be interesting to see how the market will react to this growth in volume. But as I said, so far in August, it seems -- the market situations seems fairly okay. But -- and -- but it's hard to say. But I think this volume is what we will need to handle. And Europe, not a big change. Americas, we are 0 growth in August, and now we expect, yes, 3%, 5%, 3% and minus 2% in December. But we will see a trend and reduced volumes going into 2021. So yes, it will be interesting to see how the markets will react to that. Yes. And the worldwide volumes, up to 6% in September and then 5%, 3% and 4% growth in -- at the end of the year. If we look at the market side in second quarter, we see a 3% growth in EU, 3% growth in the U.S., minus 18% in Russia, 20% up in Japan and down 1% in other markets. And other market was very challenging first quarter, but it has improved a little bit into second quarter. So we see that the other markets is coming back again after a very difficult period in the first quarter because of COVID-19.And if we look at year-to-date, we see 1% growth in EU, 4% in U.S. and minus 3% in other markets. If we look at the other markets, we see it's -- most of the reduction we see in China. And China was the first market to react on COVID-19. So in February, the supply to Chile was 0 overnight. So -- but then in second quarter, it started to come back again, the supply to China when the other markets closed down. So -- but okay, I think we -- in the long term, I think China will recover and come back to normal volumes or normal consumption. Then like we have said, it's been a very challenging quarter in -- for trout. And so here is the last update of the supply numbers for trout. We see Americas is up to 162,000 tonne this year, up 2%. And we see Europe is up 5.5% and 146,000 tonne. If we look at Norway this year -- or look at last year, we had a 22% increase in volume, so extremely high growth for the trout last year. And also, so far this year, I think we have had a growth in export volumes of trout to be around 25%. So it's been a change in the volume that's really affected the price -- our price achievement of trout, which has affected Lerøy Sjøtroll's numbers very negatively. But okay, 9%, 10% growth this year. We see next year, we will have a negative growth in Norway, down to 81,000 tonne from 86,000 tonne. And we also expect a negative growth going forward the rest of this year because we have taken out so much volume at the first 6, 7 months.And this is the harvest volume per month in Norway, and we see it has been extremely high volumes, and especially in June and July. And we have had very low prices. But then if we look forward, we see that the volumes are going down 17% in October, 27% in November, and we are going down towards 6,000 -- 6,000, 7,000 tonne in the monthly volume. So this might, at least, give relatively better prices to the salmon, and we hope that we will recover and have increased prices of trout the next coming months because the supply go down with more than 1,000 tonne per month.And if we look into 2021, we see that we have more stability in the volumes. We will have volumes from 6,000 to 7,000 tonne on a monthly level. And we see that this year, we have had a fluctuation between 6,000 to 9,000 tonne in volumes. So -- and that makes it easy to have stability in the market and to develop the -- this kind of -- develop the channel in a good way. So for me, it looks like we can have -- we see some light in the tunnel for the trout. And it's a fantastic product with a huge potential, and we don't give up. We will, step-by-step, have the trout back on track going forward. And the consumption, we see that other markets is the largest share here with -- yes, up 8% to 65,000 tonne. And we have Japan, it's a big market for trout at 35,000 tonne, up 15%; and EU, close to 35,000 tonne, up 19%; and Russia down 6%; and U.S. down 10%. And the main reason for U.S. is the situation with COVID, extremely difficult with the air freights and -- yes.Then at the end, to summarize. It's been a challenging quarter with COVID-19 as for first quarter. But in the long term, the demand for seafood remains good. We expect very good growth in harvest volume going forward and lower costs from the investments in the smolt facilities for second half of the year and into 2021. And the expected contract share for salmon is about 25% to 30%. And we still see a significant potential in the whitefish, especially on the industry side. And for the industry side, it's good to see that the advice for quota is up 20% for cod, 8% for haddock and 15% for saithe. So yes, we are facing some challenges, but we are getting through it, and we believe that we have a bright future. Thank you very much.