Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2021-Q2

[Henning Kolbjørn Beltestad, Group CEO]

Good morning, and welcome to Lerøy Seafood Group's Second Quarter Presentation of 2021. My name is Henning Beltestad. I'm CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, CFO of Lerøy Seafood Group. First of all, I want to show you our fantastic value shape. Our goal is to create the world's most efficient and sustainable value chain for seafood. And the large extensive investments we have made over a long period of time are now starting to yield results. But we still have a way to go to achieve our goal. And -- but we believe with our employees, and the focus in all parts of the segments, will take us going forward, and we are -- we believe that we will reach this goal in some years ahead. But our goal is to be the leading in -- within fishery, to be the best within industry of whitefish, to be the best in small production, to be the best in farming, to be the best in processing, to be the best in value-added products production like smoke and sushi and widespread of these kind of products, and to be the best in sales and distribution. And if we manage to do that, we will also be the preferred supplier by our customers and the leading customers all over the world. But first of all, this quarter, I will take you through the highlights, then Sjur Malm will take through the key financial figures, and then I will come back and talk about the outlook and what we expect going forward. First of all, let us see the group report in 3 segments, Farming, Wild Catch and VAP, Sales and Distribution. And second quarter highlights. We achieved EBIT before fair value adjustments of NOK 583 million. We had an EBIT kilo all inclusive of 13.8%. And in this quarter, we have a net interest-bearing debt of NOK 4.2 million, and we paid NOK 2 per share in dividend in the quarter. And we are on track to achieve our guidance from earlier this year. And we believe that we will reach about 210,000 tonnes gutted weight for 2021. And we believe we have a potential for further growth beyond this. It's been a very strong quarter for downstream and also for whitefish. And we estimate to fish about 72,000 tonnes for 2021. If we look at Farming, the prices in second quarter has been higher than same period last year, so up about close to NOK 5, up 8%, and NOK 10 higher compared to first quarter. The first half, and also in the second quarter, the trout market has been in a good balance. So also the price achievement for trout has been at a good level. And -- but our price realization are impacted by quality downgrades also in second quarter, as we also had in the first quarter. The cost has increased from first quarter but lower than second quarter last year. And this quarter, we have had a satisfactory production, and expect lower costs going forward and for second half of '21. And we expect that fourth quarter will be a lower cost than third quarter. The EBIT in Farming is NOK 10.6 compared to NOK 5.5 in second quarter '20. The guided volumes, the Farming volumes, it's -- for Lerøy Aurora in North, we expect 47,000 tonnes, up from 35,000 tonnes 2020. Lerøy Midt, 70,000 tonnes, up from 68,000 tonnes. And Lerøy Sjøtroll was 75,000 tonnes, up from 68,000 tonnes. And the total volume in Norway of 192,000 tonnes. And then Norskott Havbruk, our share, 50% of Norskott Havbruk is 18,000 tonnes, which brings us to estimate of 210,000 tonnes in 2021. For Wild Catch and whitefish, we have had a good quarter, especially compared to last year. So I think we have a NOK 70 million improvement. The price realization in second quarter is still impacted by a restriction from COVID-19, but we see that the prices now are increasing compared to first quarter. And also, we see a continuously, price improvement, going into second half of this year for whitefish. We have a very favorable quota situation for the remainder of this year, good volumes of especially corn. And we see significant improvements in the land-based industry. And it's really good to see that we step-by-step improve our activity and -- in this part of the value chain. And we believe that we also will see these improvements going forward even though that we also need to handle increased raw material prices if that's the situation. But we feel that we have the right organization, the right structure and the right cooperation in our value chain to improve this part going forward. Yes. Like I said, we have a very good situation regarding the remaining of our quarter. So close to 14,000 tonne of cod compared to 8,800 tonnes last year, say it, 8,500 tonne. haddock, 7,000 tonne compared to 3,700 tonnes last year. So a remaining total of 29,000 tonnes. And in addition to that, we continue to fish shrimps going into third quarter and -- which also will lift this volume, yes. Then we have the VAP, Sales and Distribution, very good quarter. We see gradually positive impact from less restrictions in the market related to COVID. And we also feel that the underlying demand from seafood remains very, very strong, and it's improving going forward. In this quarter, we have especially 2 start-ups, in Spain, in Madrid and also in Italy. And we all know that with these kind of start-ups, it's also some cost involved and some focus that can -- that will be a potential of improvement going forward when we get these activities up and running like we want to have. But for VAP, Sales and Distribution, now we really feel that we have a very good setup, a good base with good capacity and are ready to develop the seafood category together with our partners in all major markets all over the world. But this quarter, EBIT of NOK 161 million compared to NOK 114 million second quarter '20. Thanks. Sjur will take us through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. Some small technical issue. So in this quarter, which basically is to report on where we're heading compared to our goals. There are some things we are happy about. And obviously, some things we are not 100% happy about. Look into the Farming operation. In 2019, our harvest volume was 158,000 tonnes. This year, we're heading towards 192,000 tonne. Obviously, that's not already harvested. And as always, there is risk involved in the autumn period. But our report today is that we are currently heading towards that target. That would imply a significant growth over the last years following an organic growth following investments in our own value chain, but at least we are happy on development and production volume in the farming recent years, and we believe that we have potential to grow further. If we look into the whitefish business. Henning has already commented upon the fact that we have done good choices when it comes to utilizing our quota. And also, we are seeing operational improvement in the land industry, which is helping profitability. That's positive. Looking into the downstream operations, combining for last quarters, our run rate in operating result is close to NOK 600 million. And in 2018 -- that's basically doubled since 2018. So we believe that the long-term trends, and what we are heading towards is kind of like confirmed in this quarter. That doesn't mean that everything was perfect. And obviously, our core challenge this quarter has been related to downgrades on redfish, which again is related to winter wounds, which brings a lower price realization, and also impact harvest -- time of harvest and production volume, but price realization is the most obvious factor. That is a key challenge to improve, and that's obviously one of our absolute focuses for the years to come. Then looking into the numbers themselves. On redfish we see we harvested 6% less volume this quarter compared to last year. Our profitability per kilo is significantly up compared to the period last year. Our cost is down and price realization is up, and also contribution from downstream is up. So a significant improvement in redfish profitability, but the potential would obviously have been even higher with less downgrades. In whitefish, we have a lower catch volume. Those catches have still higher value, and we have significant improvement in the land-based industry. So you can see there's a significant lift in the profitability per kilo in whitefish. And in sum, this brings our operating result, or EBIT, from NOK 322 million to NOK 583 million this year, a significant improvement. Key driver in associate is Norskott Havbruk Scottish Seafarms, which I will return to. But we see that pretax profit is up 91% from last year.Looking at the same for year-to-date, we can see that harvest volume of redfish, meaning salmon and trout, is basically the same. Our profitability per kilo is lower. Our cost is lower, so that's related to price realization. In whitefish, you can see profitability is exactly the same, and lower volume. We have excellent quota situation for second half. And what also worth mentioning in the comparison number is Q1 2020 because we were perhaps lucky in that we sold significant volume of the quarter last year before COVID start impacting the price in the market. So it's a tough comparison. This brings EBIT year-to-date at just above NOK 1 billion, which is down NOK 100 million from last year. There's a significant improvement in associates. Net finance is down. One reason is that we had significant impact from basically market turmoil connected to COVID, and changes in -- among other currency rates last year. And you see the pretax is at the same level as last year. Looking at the balance sheet. On the asset side, we have made 1 acquisition in Denmark. We have also continued to invest in our value chain. The more significant investment currently is the new small facility in Central Norway, which is according to plan. And our noncurrent asset is up 7% from last year. Looking at the biological asset, or then redfish and sea. You see that number is up 7%. You look into the notes of the report, you'll find that the standing biomass and weight has increased even more. So the current cost of biomass is lower per kilo than 1 year ago. No big changes in other inventory, revenues up, receivables up. But in general, we believe we have a very strong balance sheet, high equity ratio, net interest-bearing debt at around NOK 4.2 billion. And looking at the cash flow have shown as changes in net interest-bearing debt. I think the most interesting is looking at year-to-date figures. But the 2 key factors in the second quarter is the acquisition in Denmark, and it's the dividend payment. And that's the reason to why net interest-bearing debt has increased. If you look on numbers year-to-date, we can see that year-to-date, the EBITDA is about the same level, taxes is a little bit down, a big change in operating cash is a release of cash flow this year compared to your opposite last year, which brings a better operating cash. Cash and investment is not that changed. But you can see our CapEx is lower. And the reason to why it's the same level as the acquisition in Denmark as the core driver. When you look at CapEx for the year, we are currently heading towards 1.3-ish -- NOK 1.4 billion. Dividends are up from last year. And you can see overall net interest-bearing debt increased close to NOK 900 million last year and close to NOK 700 million this year, reduction is -- or the increase is less this year despite the higher dividend and the key -- and core driver there is the development in working capital. Then this slide, we have included to show the development in the different segments. And kind of like what we see is that Farming is up, Wild Catch is up and Sales and Distribution is up. So we get into underlying assets between -- behind this development. In Aurora, as we've highlighted since basically Q4, we would see significant challenges, with downgrades in first half of 2021. That impact price realization, it also impact harvest volume. And this quarter was a quarter with a very low harvest volume, high share of downgrades and basically a poor quarter. Still margins is higher than last year, and cost is lower than last year, but also Q2 last year was a weak quarter. What happened last year was we saw a significant improvement in quality into second half where the majority of biomass was harvested, and we see much of the same development this year. So if the volume, we are going to harvest in 2021, 70% is going to be in the second half. It will be at a significant lower cost point than what we've seen year-to-date, with Q4 as the lowest quarter. And we will see a significant improvement in quality. So at least the company at recent market conditions is set for a substantial increase in profitability in the second half. In Central Norway, we've had a good production. So in this region, it was very cold in Q1, and we caught up when it comes to production in Q2. Also here, we had significant impact of downwards in the quarter, which is impacting profitability. Cost development is down. So price development is the reason why we do not see the same kind of increase in EBIT kilo as we see in spot price development. Core investment there is the new smolt facility, which is on route to be finished around New Year, and that will give room for organic growth for the years to come. In Lerøy Sjøtroll, we've had several challenging years before. And the underlying theme here, which we have communicated is that there is an ongoing improvement. It's driven by investment in smolt, in wellboats, in vaccines across the value chain and better operation, and we see that, that trend is continuing, and it's very visible in that margin chart. This quarter, cost is down. But also here, we are seeing impacts from downgrades, which is impacting the margin level, and is a key reason to why there's not a bigger increase from Q1 to Q2, where there was a price increase. Also worth mentioning is that the trout prices did not develop as positively as the salmon prices. We are on route to the 75,000 tonnes we've guided, which implies a significant growth over recent years. And we are on route to see lower costs, particularly in Q4, and step-wise a little bit in Q3. Within Wild Catch segment -- this has basically already been covered. Our catches are down in some species, and the prioritized catches have been shrimps and haddock, which has a higher value. And that brings a higher catch value, higher profitability in the trolling fleet, and we are seeing improvement in the land-based industry. So this is still challenging, but it's still a significant improvement from last year. In our downstream operations, there is 1 effect from the acquisition of -- and consolidation of Seafood Denmark. But also looking away from that, we are seeing very -- and that company is consolidated from 1st of April. We are seeing very positive development in many of our assets. In this segment, we've started a lot of activities and new factories over recent years. We have continuously been seeing some start-up costs. Currently, those are related to Spain and Italy. But we are -- we believe we are on route to grow this part of our business. There's a substantial potential. And as I said, the last 4 quarters is not too far from NOK 600 million, which indicates -- not the potential, but indicates a good growth from what we saw some years ago. Then Scottish Seafarms is owned by Norskott Havbruk, which is, again, is owned 50% by us and 50% by SalMar. This quarter, very high harvest volume, and actually the highest harvest volume recorded in the company. So we are on route to reaching the guidance of 36,000 tonnes. Cost development is impacted, among others, by harvest volumes out of Shetland. We expect a cost reduction in the coming quarter. Also growth -- Scottish Seafarms entered an agreement with Grieg Seafood to buy Grieg Seafood's U.K. asset during the second quarter, and the likely transaction will materialize in Q4, and then we will be in a position to give more indication of that potential. At least it is an indication that Scottish Seafarms has intentions to grow. Then the outlook, yes, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Yes. Then we're going to look into the future. I will start with the supply side, the demand side and what we expect from going forward. And we start with the supply side. If we look at 2021 first, we see Europe is expected, up 10%; Norway, up 8%; and Americas, up 9 -- down 9.5%; and we have Chile, down 15%. So a global growth of close to 3%. If we look at 2022, we see slower growth in Europe, 2.5%. Norway is up 3%. And we see a higher growth in Americas, and -- with 7.1%, and a global growth of 4%. So 3% this year, 4% next year. It's not a dramatic growth in supply. And we believe that the market is coming more and more back especially in the HoReCa segment, and -- which will increase the demand for seafood and especially in salmon and trout going forward. And if we look at the price development, we see it's bumpy like always. But we see that this year, we started with 50 -- in the first quarter, NOK 52; second quarter, NOK 63; and so far in third quarter, NOK 60. And if we compare the second quarter last year -- with second quarter this year, we see it's up -- no, third quarter this year and third quarter last year, we see an increase of NOK 30. So that's a kind of explanation of -- a reason why we can claim that the market is increasing again, and we are seeing the end of the COVID-19 impact on the demand of seafood. So we have a positive view on the future. And also, if you look at fourth quarter last year, 2020, it was down to NOK 43. So yes, we believe that we will have much higher prices, second half year 2021 compared to 2020. If we look at the supply side in Norway on a monthly basis, we see we had a very good growth in the first quarter. And we had -- in second quarter, especially the June, where we had a good growth of 17%. And then we will see the rest of the year. We have a growth of between 3% and 8%. So -- yes, and we believe that the market will increase the demand step -- month-by-month, going to the end of this year and also into 2022. And salmon, if we look at the worldwide good increase -- good growth first half and a negative growth second half, which also will affect the price level in combination with higher demand. If we look at consumption, second quarter, EU up 2%. USA, up 24% and a really, really good increase in the U.S. And so it's very positive to see that the market with this size is growing with these numbers. So that's very positive. And then we also have the other markets up 6%. And we also -- in this market, we also believe that the demand will be good going forward with good availability of right sizes. And if we look at the other markets, we -- Brazil is up 51%. China is down 21 -- 25%. And I think the main reason for that reduction is availability of fish from Chile, but we also see that the Norway's position in the Chinese market is stronger now than what we have seen historically, the last 10, 12 years. And so -- and we think that the China market will also come back. There is some restrictions, some difficulties at the airports that make it special at the moment. But we believe that this will be solved in short term. And we believe, like I said, again, that the -- we will see a gradual lift of restriction related to COVID-19, and positive demand development. And we expect a significant growth in harvest volume and lower costs from the improvements efforts and investment in small facilities. We keep our guiding of 210,000 tonnes including associates, Scottish Seafarms, our share of associate, Scottish Seafarms. And we expect the contract share of 20% in the quarter. And we have a significant potential in whitefish. The quota situation for us, and the remaining quota is very positive, especially for the cod, where we have 14,000 tonnes left on the quota for second half. And also going into 2022, we see that the quotas is coming down. And we should expect that the prices -- second half, and going into 2022, we will see a higher price level for whitefish. And we see a significant potential for further development of our downstream value chain, yes. And then it's -- we report a lot on finance and growth and cost and prices and demand and supply. And I think -- now it's -- we really feel the focus from consumers, from the world in general, and from investors. And the focus now is increasing a lot on sustainability. We have said that we want to create the world's most efficient and sustainable value chain for seafood. And so we also need to perform on sustainability. And we have set ambitious targets for the reduction of -- in emission of climate gases, the science-based target. So we commit ourselves to go for a goal of reduction of 46% by 2030 compared to base year of 2019. And this target is in accordance the 1.5-degree goal in Paris Agreement. And yes -- and our target was approved by science-based target the sixth of May. And -- but this is a HoReCa. We believe that with our organization, with our focus, we believe that we can manage to do this, and we will do our best in all parts of the value chain to reach this. And overview of Lerøy emissions in Scope 1, 2 and 3 and projection for reduction. We see that some areas will make a stronger impact than other areas. But for us, of course, all areas, Scope 1, 2, 3 will be important. So we will work with a good plan to reduce in all parts. But if we look at the most important scope, we have the Scope 3, which is fish feed. So that means that we really need to work out together with our suppliers in achieving our goal. So -- and also Scope 3 downstream transportation, where we have a huge potential of improvement. We believe that we need to -- the new raw material need to be more fillets, not whole fish, sending all over the world. And we believe reducing that. We -- and more and more to value-added products in Norway, more affiliates will help us going forward, achieving this goal. And we have good capacities of filleting in all our regions. And we will focus a lot on that going forward to achieve this 2030 goal. So we have to come up with smart solution. And we work hard together with our customers and to work very hard together with our suppliers and especially within transportation. Yes. So that's what we had for this quarter. And thank you very much for watching.