Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2022-Q2

[Henning Beltestad, executive]

Good morning. Welcome to Lerøy Seafood Group's Second Quarter Presentation. My name is Henning Beltestad. I'm the CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, CFO.

First of all, you've seen this value chain before that Lerøy as a fully integrated company of both whitefish and redfish, and our goal is to create the world's most efficient and sustainable value chain for seafood. And the large and extensive investments we have made over a long period of time are now starting to yield results.

First of all, some highlights in the quarter. This is a record high quarterly revenue with NOK 6.5 billion in turnover. It's a quarter with extreme price development and which has, of course, been positive for the upstream assets but also a challenging quarter for our downstream operation. The EBIT is NOK 923 million compared to NOK 583 million same quarter last year. In this quarter, we paid out NOK 2.5 per share in dividend, and the net interest-bearing debt end of the quarter is NOK 4.9 billion. And yes, it's been, what should I say, a challenging quarter for some of our activities, but our long-term outlook is unchanged and positive.

So second quarter, we harvested 33,000 tonnes of salmon and trout. We have a catch volume of close to 19,000 tonnes, revenue of NOK 6.5 billion and an EBIT of NOK 923 million and a ROCE of close to 18%, which is our long-term target.

Lerøy Seafood Group, we are reporting in 3 segments, Farming; Wild Catch; VAP, Sales and Distribution. And I will take you through some highlights for each of these segments. First of all, Farming. It's been an extreme quarter when it comes to price. So -- but for Lerøy as an integrated company -- fully integrated company, also with our VAP and sales and distribution facilities, it's been a quarter where -- which is affected of 46% contract share.

The biomass growth is expected in -- the biomass growth has, as expected in Q2, has been good, but we have seen somewhat lower growth than expected so far in Q3. So we take down our guiding for the total 2022 volume is then slightly reduced. Compared to the same quarter last year, we see increase in cost. Main reason for that is low volume but also inflationary trends. But excluding inflation, we see clear operational improvements across farming units. The EBIT in Farming is NOK 29 compared to NOK 10 in second quarter 2021.

Farming volumes, we see last year, we had in Norway, 186,000 tonnes. This year, we have a guiding of 185,000 tonnes in Norway, 40,000 tonnes in the North, Lerøy Aurora and 68,000 tonnes in Lerøy Midt and 72,000 tonnes in Lerøy Sjøtroll. And we expect in Norskott Havbruk that we have 46,000 tonne and our share, 50%, is then 23,000 tonne, so a total of 203,000 tonnes for this year, which is at the same level as we had last year.

When it comes to Wild Catch, the fishery and also the industry part of the whitefish value chain, it's been a record profitable for first half year, NOK 93 million in second quarter compared to NOK 65 million in second quarter 2021. It's been a strong price development. It's, of course, positive for the profitability on catching while challenging for the processing activity. But we see improvement in the processing activity, and -- but it takes time to -- for the value-added products to increase the prices at the level of the spot prices.

It's an efficient operation in trawling fleet and gradually more signs of operational improvements for the land-based industry. And of course, we also see a significant increase in fuel cost, and that's up NOK 60 million compared to same quarter last year.

The catch volumes, I think we take the half year volumes, close to 14,000 tonne cod, where we have a remaining quota of 10,000 tonnes; saithe, 7,400 tonnes, remaining quota 8,800 tonnes; and haddock, 8,700 tonnes and the remaining quota of 1,000 tonnes. And shrimps, we have fished 6,200 tonnes, and we expect that in the third quarter that we will have about 3,000 tonnes, so approximately around 9,500 tonnes of shrimp totally this year.

VAP, Sales and Distribution, it's been a very challenging quarter, extreme price development on all input factors take time to transfer through the value chain. And it's challenging to grow volume in start-up facilities and especially, we have start-up facility in Spain, in Italy and also in Sweden.

We see a significant negative impact on earnings short-term, while the long-term outlook is not changed. We have a record-high EBIT last year, and that's more about our performance and where we are. And we believe that the -- this segment will improve going forward with -- when the price is stabilizing.

So our vertical integrated valuing and being a reliable supplier has strengthened our long-term position in the market. And it's -- we have had spot prices of NOK 62.50 in second quarter '21. And this quarter, there has been a spot price average in the quarter of NOK 105. So that's a NOK 40 increase, and that's hard for this segment to handle. The EBIT is, for the first time, negative in this segment with NOK 64 million in negative and compared to NOK 160 million second quarter last year.

And this is our setup. We have a significant network of processing facilities all over Europe, global reach and sales to more than 70 countries, significant industrial activity within trading, processing, sales and distribution of fish, including white species. And like we said, it takes time to adjust prices through the value chain Okay.

Okay. Then I give the word to Sjur.

[Sjur Malm, executive]

Yes. Thank you, Henning. So now Henning has already touched upon the key drivers. Obviously, if you look on absolute level, profitability in this quarter is strong in historic context. Also, we know that particularly, the salmon prices have been at all-time high. So had we had all volume on spot, obviously, the result would be higher. But those contracts are a reflection of the strategy of building the world's most efficient and sustainable value chain. And those contracts were entered in 2021 and has a significant impact on price realization in the quarter.

And on this slide, we see key drivers for profitability. We've harvested 10% less volume of salmon and trout, and we see the margin is up in that. Cost is also up. We are up around NOK 2 per kilo due to feed. We're up NOK 2 a kilo approximately due to basically energy costs, fuel costs and electricity, which are key cost drivers. Still margin is up due to higher price realization, although that is much impacted by contracts.

Within catching activity, good catch volume also increased both in cost and price, but we see that the increase in price is bigger than increase in costs and an increase in margin. In sum, operating result up 58% and return of almost 18% annualized in the quarter, which we believe is a healthy profitability.

On the balance sheet, key changes from last year is Norskott Havbruk, our joint ventures, acquisition in -- asset in the U.K., which is the increase in financial on current asset. I will turn with some comments on that. And the other key factor is the increase in working capital items.

Higher feed cost is the key driver for the increase in biological asset or the value of the inventory at sea or fish. Other inventory is up because we have more goods, but because prices of that good is up, receivable is up, and it's a big impact of the general inflation trends we are seeing.

That is very visible and also in the cash flow, I will focus on the year-to-date numbers. We have healthy and good profitability, around NOK 2.2 billion in EBITDA. We see the impact of working capital where we have NOK 1.1 billion almost in buildup this year. And we see that last year, we released NOK 400 million, and that was then related to lower prices. So -- but that working capital buildup will not continue for quarter [ and ] quarter. So for the year, we don't foresee -- obviously, dependent on price development. We don't foresee big changes going forward and that profitability will be reflected in reductions of net interest-bearing debt going forward.

CapEx, around NOK 600 million, of which NOK 123 million is related to acquisitions of licenses. Best estimate today is that we will reach some -- around NOK 1.4 billion for the year. It will be a bit dependent on project starts but in that range. And we have distributed NOK 1.5 billion in dividends, and then net interest-bearing debt is close to NOK 5 billion end quarter.

This slide shows a bit of the stability in our business model. We are not only in farming. We are also in whitefish and downstream. And we see that in farming driven by prices, we have substantially higher profitability, while also we see the challenge of moving those prices to the end consumer and the result in a value-added processing operation. So that gives us less upside short term when prices move up. It gives us also less downside when prices go down, but it's an indication of the stability. And overall, we see that the inflationary trend basically so far is both positive for our profitability. That is also our expectations going forward.

Looking then at the operating segments in each region, Lerøy Aurora is far north. And we see that there is a limited increase in margin despite spot prices going higher. There are several drivers behind this. The most important one is the fact that the harvested volume is very low, and this is approx 10% of the annual volume. So cost level this quarter and contract share this quarter is not a reflection of the level we will see for the full year.

This quarter, we have some cost increase. But as this chart show, we do not see a massive uptick in price realization as we see in the spot market due to contract shares. Still given the basically minor volume, obviously, this quarter, I would -- at least our key takeaway from Aurora is the development, we have seen some years with challenges with winter ulcers. We are seeing significant improvements this year. And as of today, our expectation is that those improvements will continue and that we will see lower cost level, obviously a higher harvest volume going forward and a positive development for Aurora.

Central Norway, this operation is, I would say, developing quite steady. It's a steady performance, and we are gradually getting a bit better, but also, we are seeing the inflationary trend, which is a key driver for cost increase as expected in second quarter compared to first quarter. And as of today, our best estimate is that we will be at this -- around this cost level for coming quarters.

When it comes to operations, we had strong growth in second quarter; but in July and also start of August, we've seen slightly lower growth than what we had forecasted. So there's a minor adjustment to guidance there to reflect that.

Also, we are -- we have built a new post-smolt facility in Central Norway. We started it first quarter. We see there is a need of some rebuilds. Those have been carried out. And we have expectations that this site will deliver according to our expectations, but that will take half year extra before we start seeing the impact on harvest volume for the group or for this company.

On Lerøy Sjøtroll, this is a healthy quarter. We are seeing gradual improvements in Lerøy Sjøtroll following investments in post-smolts following a lot of operational efforts, and we are gradually getting better. This quarter, we have a healthy profitability. But still when we look at cost level in this region compared to the other regions, there is a potential for improvements, and we are working hard every day to take advantage of those to utilize those. As of today, we expect slightly lower costs second half than what we see this quarter. But also in Lerøy Sjøtroll, we have seen slightly lower growth than we expected so far in Q3, and that is the reason why to the minor adjustment in guiding from 74,000 to 72,000 tonnes.

Within whitefish and Wild Catch, we have a good catch efficiency, positive price development. So the earnings in trawling fleet is significantly up, while somewhat muted by the increase in fuel cost. For the land industry, it also takes time to adjust prices. But still, we have invested a lot of money when it comes to CapEx and also in our organizational development in the land-based industry in the last 5 years. And it is positive that we are starting to see such improvements not in profitability but in operating KPIs, and that poses well for the future. Record profitability year-to-date and a good first half and a good quarter.

We've already touched upon the key drivers within our downstream operation. It's important here that according and following our strategy, we are not selling whole fish in the capital of Oslo. We are selling a lot of processed goods in the end market, and that means that, in addition to increases in the spot price of salmon, which is a challenge, we are impacted by increases in energy cost, transportation cost, et cetera. And it's been an extremely challenging quarter.

For us, still, we have supplied on all our contracts. We have been a reliable supplier, and we believe our position in turbulent times like we've seen so far this year. In general, we strengthened our position. We expect as of today to see a gradual improvement in coming quarters. Q3 will also be impacted; but gradually, we will see improvements through Q3 and into Q4.

When it comes to our joint operation in U.K., there's still a lot of work and efforts on integrating the acquired asset, Grieg Seafood Hjaltland into operation. That is going according to plan. And we continue to expect to see positive synergies going forward.

This quarter is impacted by the fact that there were biological challenges in this region second half of last year, which is impacting harvest volume and cost in the quarter. In Q3, we expect a slight reduction in costs and further decrease in Q4. Guidance is unchanged at 46,000 tonnes, and we are positive on realizing synergies and operational efficiencies in this region going forward.

Then, Henning, I'll give the word back to you.

[Henning Beltestad, executive]

Thank you. And I will go through some supply and demand, and our expectations of the future. First of all, we start with this slide showing the supply side, the global supply, and we can start with 2022 and expectations. We see that, in Europe, we expect minus 2% -- almost minus 2% reduction in volume. Norway is down 1.3%, and it's taken down a little bit since the last reporting from Kontali. And we see Americas is down almost 1% and a global reduction in -- of 1.4%.

And if we look at next year, we see a global growth of 4.4% and Europe, 5.5% and Americas 2.4%, so not a dramatic growth in the short term or in the long-term supply. And we also believe that the expected volumes from Kontali is a little bit high compared to our expectation, and we believe that we will have a reduction in volume in Norway between 2% to 4%.

Then we -- normally, we show you this price trend and the extreme fluctuations that we normally have between NOK 80 to NOK 40. Now we are at a new level, and we need to expand the scale here and up to over NOK 120. And we see that in second quarter, we had FCA Oslo price of NSI of NOK 105 compared to NOK 63 same quarter last year, so extreme development. And of course, this has been extremely challenging for our downstream activities and our processing factories. And then we see that the prices are coming down into third quarter. And so far this quarter is NOK 80 and the trend is that it's going a little bit further down and more normalizing prices again.

If we look at the harvest volumes in Norway, there is no big growth. We see a negative growth in July and also in -- yes. In Norway, it's been a growth of minus 5% so far this year and no significant growth demands to come, and we believe that it probably will be a little bit lower also than the growth that you see on this graph.

If we look at worldwide, it's the same picture, no growth for the second half. And of course, if we look at the first half, it's been a global reduction in the supply, which has caused -- which is the main cause of this very high salmon prices that we have seen in the first half and especially in second quarter.

If you look at the consumption side, we see that EU is down 3%; others, 8%; and U.S.A., 3%. And we see that U.S. is still taking a bigger market share of the salmon, and we expect also that U.S. will have -- there will be a growing demand going forward in this market.

So to summarize, if we look at Farming, we expect 203,000 tonne salmon, which is at the same level as 2022. Our contract share for salmon in second -- third quarter is 35%, and we expect lower cost in second half compared to first half 2022.

For the Wild Catch, we expect a reduction in the quota for cod and haddock of 20%, saithe of plus 15% and saithe south of plus 19%. And the final decision will be made in fourth quarter 2022.

For VAP, Sales and Distribution, we expect gradually that this segment will improve again and be back to normal results, and I will say that it's not about performance, the operational performance. This is all about extremely high price level that's caused the result in both first quarter and second quarter. So we believe that VAP, Sales and Distribution will soon be back on the normal track.

Okay. That was all we had. Thank you very much.