Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2023-Q2

[Henning Beltestad, executive]

Good morning, and welcome to Lerøy Seafood Group's second quarter presentation 2023. My name is Henning Beltestad, I'm CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, which will take you through the financials for this quarter.

I will start with this one. I normally talk a lot about our value chain. And our goal is to create the world's most efficient and sustainable value chain for seafood. And this is what we do every day going towards this goal. This value chain is unique, both for salmon and trout and also for whitefish. From roe to final product in the shop and from our trawlers a final product in the shop or in the restaurants.

We set some targets for 2025 and beyond last year. And this is what's going to drive us going forward. We still believe that it's possible to achieve all these goals and it's in front of us in the everyday operations. When it comes to this quarter, it's been a record revenue and healthy earnings. We had an operational EBIT of NOK 28.7 per kilo, all-inclusive and 25 -- NOK 20 last year. This quarter, we also had a situation where the resource tax was adopted by Norwegian Storting in May 2023. We expect harvest volume of 181,000 tonnes lowered compared to earlier guidance because of challenging situation in Lerøy Sjøtroll and also Scottish Sea Farm. It's been a quarter with positive development in VAP, Sales & Distribution and a much better result than the same quarter last year.

And also a very good development in the whitefish, given lower quarter, positive development in this segment. When it comes to the result, we had an operational EBIT of NOK 950 million in second quarter 2023.

Lerøy Seafood Group reports in 3 segments, Farming, Wild Catch and VAP, Sales & Distribution. We start with the Farming part. It's been a strong biological development in Lerøy Aurora and Lerøy Midt, while challenging in Lerøy Sjøtroll. We had an operational EBIT per kilo in Farming of NOK 25.9 compared to NOK 29.3 same quarter last year. Development in second half '22 impacts through low harvest volume and low average harvest rate in this quarter and a contract share of 17% in this quarter. We see a significant increase in costs year-on-year with higher feed cost as a key driver. If we look at the operational EBIT for the Farming, we had NOK 767 million and EBIT per kilo of NOK 25.90 in the quarter.

If we go into the different regions or the companies within this segment, we start with Lerøy Aurora. We see a strong improvement in the biological performance continues. And -- but this quarter is impacted by harvesting of relatively low volume, but a much higher volume than same quarter last year. If we look right there, we see that the volume in the quarter is 8,300 tonnes this year compared to 4,400 tonnes. And we had operational EBIT per kilo of NOK 33 compared to NOK 20 in 2022. So improved performance in Lerøy Aurora and the underlying biological situation is very good. So and we'll continue going forward, delivering good results and also lower costs.

If we see Lerøy Midt is also a strong biological performance through this quarter. There has been a cost increase quarter-on-quarter, impacted by the challenges that we faced in second half last year. But we will see also here with increasing volume in second half 2023, a significant fall in cost is expected. We expect to harvest volume of 64,000 tonnes in total. And we harvested close to 10,000 tonnes compared to 14,000 tonnes last year. And EBIT per kilo of close to NOK 28 compared to NOK 34 last year, same quarter.

Lerøy Sjøtroll, good performance and good development for the trout, but somewhere most challenging situation for the salmon. But we have seen improved sea lice situation following a number of initiatives, and there is a good potential for higher net growth second half '23. And we see the last couple of months that the treatment is down compared to last summer and also the sea lice level is definitely much lower same the summer last year. So a good improvement there.

Fortunately, we had one incident in this quarter in the third quarter. Two sites confirmed with the ISA. And so we had to force harvest with a low average rates, will have a significant impact on the cost and price realization in second quarter. And the best estimate today is a negative result impact of around NOK 200 million in Lerøy Sjøtroll. The harvest volumes in the quarter is 11,400 tonnes compared to 14,500 tonnes and EBIT per kilo of NOK 19.1.

When it comes to Norskott Havbruk or Scottish Sea Farms, there has been a weak second quarter, low harvest volume and harvesting from biological challenge sites affecting average harvest size, cost and price achievement. High-cost base affected by sites with challenges in second half and continue into 2023. Incident-based mortality in the quarter of GBP 13.5 million or GBP 2.1 per kilo. 60% of the volume is sold on contracts. We see still some biological challenges going into Q3, but improvements in the fish size and cost base is seen. And we expect that we will have a much better results going forward. And we also believe that we know the cause of the performance in Scottish Sea Farms and in these sites, still challenges with some groups of fish, which didn't perform well in Shetland and Mainland. But we strongly believe that this is -- will be much better going forward. When it comes to the result, we had an operational EBIT of NOK 144 million and operational EBIT of close to NOK 23 per kilo and a harvest volume of NOK 6,300 kilo.

When we look at our Farming volumes, we see that in Norway, Lerøy Aurora, 47,000 tonne, Lerøy Midt 64,000 tonnes and Lerøy Sjøtroll 57,000 tonne and this volume is reduced from last guiding because of the situation with ISA. And Scottish Sea Farm is reduced to 27,000 tonnes, and our share is 13,500 tonnes, so a total of 181,500 tonnes.

The Wild Catch has been a good -- very good quarter on basis of lower cod quota, a strong development in quarter with catches of alternative species, high volume and lower prices. And we see an impact from implementing Lerøy Way in land-based industry, year-on-year improvement in overall profitability is from improvement in the land-based industry. So that's really positive. And we also see cost reductions from the operational view. Lower fuel consumption from using fleet trawl for more species. And here, we had operational EBIT of NOK 99 million compared to compared to NOK 93 million last year. And we see development on prices. We see that -- there's been a strong increase from third quarter '21 to what we see in today for record. And we see the last quarters for haddock is going down and saithe is pretty stable.

If we look at the cash volumes, second quarter, 3,000 tonne cod, 2,100 tonne saithe, 2,300 tonnes haddock, 4,600 shrimps and others 11,600 tonnes. And a large part of that is redfish. So a total of 23,700 tonnes compared to 18,000 tonnes last year. So a very good performance from Lerøy Havfisk.

If we look at the VAP, Sales & Distribution, record revenue in basis of, of course, higher prices. Significant improvement in profitability year-on-year with operational EBIT of NOK 113 million compared to minus NOK 64 million in the second quarter last year. So we have been handling the fluctuation in prices in a much better way this year. While market demand measured in value remains healthy. The higher prices are seen in lower volume and capacity utilization. With seasonality in salmon volume expectation are for improved capacity utilization and profitability in second half.

And this shows where we have operation in all central markets in Europe and sales branches in North America and Asia. So then I give the word to Sjur Malm.

[Sjur Malm, executive]

Yes. Thanks Henning. This has been especial year for us. It's now about one year since the Norwegian government launched the proposal to implement the resource tax in our industry. And that proposal was voted for in the Norwegian Storting on 31st of May. That means that this is the quarter where we have to implement the impact from the resource tax.

I think the best place to look for more details is in Note 10 of our published report. Then we will give an insight in more depth than what I'm -- we'll do now on the consequences and our consideration. But shortly, there are two impacts in the P&L. One is the implementation effect, which is one-off in connection with implementing the new tax regime. And one is the estimate of how large will the running tax cost be under the resource tax.

In this report, we have implemented the implementation effect, and we have not given any estimates to running tax rate, and I will return to why. When it comes to the implementation effect, that is NOK 1.7 billion, which is a very, very high number. This tax impact is much related to -- it's 100% related to the biomass and the change in the taxation on deferred tax on biomass. If our tax value of the biomass is the same 1 year from now, that tax will not have to be paid, it will be put forward year-on-year.

And on that implementation effect, there's been a big debate in Norway. We and the industry believe that there is a massive lack of symmetry between cost and revenue. And basically, in the proposal from the government they are saying that the cost of our biomass going into 2023 and what we can withdraw from the tax is zero. And we do not think that is fair, but that is what we have implemented in our result.

Looking then on the key drivers, highlighting key value drivers on the lateral lines. We see that we have harvested 10% less salmon. And through the value chain, the margin on that salmon and trout is higher than last year. The key driver for that difference is a better performance in our downstream unit, which Henning already had described.

Furthermore, we see the increase in catch volumes of Wild Catch, and those catch volumes are on lower value species, which impacts then a lower margin. In sum, this gives operational EBIT of NOK 950 million, which is an improvement compared to the same quarter last year. Looking into the EPS, we see that the implementation effect of NOK 1.7 billion. I already commented upon results in a negative EPS of NOK 2.11. Without the implementation effect, the EPS would be NOK 0.77. And again, please refer to Note 10 in the report for more details.

Another key factor in this report is the significant revenue growth, which is much up by higher prices and thus, inflation. And as Henning showed initially, we have a very long value chain, which means that we own the fish for a very long time, which means also then that the business model required a lot of working capital. So that increase in revenue also impacts working capital. And those are basically the key changes when looking at the balance sheet this year compared to same quarter last year. We've seen biological assets at cost is up NOK 700 million. The key driver there is higher fee cost. We see inventories up because the value of the goods is higher. Accounts receivable is up. So there is a significant working capital build in this industry.

And this is also a point that in the proposal for resource tax in Norway, it was said that this industry is not capital intensive. And from our point of view, this balance sheet shows that there's no substantiality in such claims. This is a very capital-intensive industry. The implementation effect impact the equity ratio, which this quarter is 49%, and net interest-bearing debt around NOK 6 billion.

And then showing the change through a quarter in net interest-bearing debt. We see the EBITDA of around NOK 1.3 billion. Change in working capital is derived from the higher revenue and higher prices of our goods and higher feed cost, CapEx, it's around 50%, which is related to our acquisition of the operating company at -- in Lerøy Sjøtroll harvesting facility, and the 50% which is related to more running CapEx. We paid NOK 2.5 in dividend in this quarter, and you can see the impact of net finance and taxes paid. And in sum, our net interest-bearing debt is close to NOK 6 billion in the quarter.

Then some comments on why have we not given an estimate on running tax or resource tax share of profit so far this year. And obviously, we would like to do that, but it's also important for us that when we give an estimate, this needs to be a valid estimate. And at the current time, we believe it's too early to give such estimate. What's shown on the picture to the right is part of the value chain, which Henning started on. The black box is showing what is the Farming segment. The red box is the part of the Farming segment, which is seeing an increase in taxation to -- by 25% to 47%.

Historically, we have always measured profitability in the farming segment as a whole. We have moved the goods and services through the value chain at cost. And we have not focused too much on what is the value creation on each step. The work we are currently doing is to update all the internal agreements to create a [ thorough pass ] for pricing documentation and be able to measure the correct value creation at each step in the balance sheet.

Before we have finalized that work and a challenge here is that for many of the goods and services, there is no open market. So there's a lot of work in the documentation. That means at the current point in time, we do not have a valid estimate on the tax rate in the Farming segment because we need to calculate the value creation at each step. We will get back to that as soon as we believe we have a valid and good estimate.

Then there is a debate, maybe particularly in Norway related to the contributions from this industry. This slide is from 2022 numbers. It is then before any resource tax. It shows a map of Norway, the blue dot -- red dots are where we're operating today. And the black dots are suppliers where we have made acquisitions of goods or services. And obviously, the impact when it comes to ripple effect from Lerøy buying goods and services from NOK 20 billion from 5,000 suppliers all over Norway, that is substantial ripple effects.

And core of the discussion on resource taxes, obviously, it doesn't make sense to withdraw investment fund from the coastal industries and transfer them into the central government. And we fear that the long-term consequences will be negative when it comes to value creation. We also believe it's important to highlight that already were paying NOK 2 billion in fees and taxes in 2022 and that we have more than 3,500 employees all over the Norwegian, of course line.

Second point is how does this industry fear in the global comparison. And particularly in Norway, we get some negative news on our environmental impact. And obviously, we work very hard to reduce it, and we believe we can improve. But it's important for us also to highlight that in a global comparison, this industry requires a very low amount of water, a very low amount of energy and that the GHG emissions are very low. And in such international comparison like Coller Fairr, you'll find Lerøy rated as 1 of the world's three most sustainable protein producers. And you find the industry in general on top of that list.

Knowing that around 1/3 of global GHG emissions comes from the food value chain. We strongly believe that we are part of the solution. And we hope that Norwegian politicians will start making framework conditions for this industry to continue its growth. And we can't significantly impact the GHG impact from feed production. We have a good starting point, but we are also working to improve -- and it's positive for us that in PwC's annual review of large Norwegian companies, Lerøy was 1 of 9 companies on root o reach the Paris agreement. That is the second year in a row, and we are on that list, and we're proud of that, and it shows we're working very hard to reduce our footprint.

Then Henning, I give the word back to you.

[Henning Beltestad, executive]

Yes. Then I will take you through the outlook. We start with the supply side. Now we see for 2023 globally, there will be 0 growth. If we look at last year, there is minus 1.2% growth. And so for the last 2 years, there's not been any growth at all. And the expectations for 2024 is 4.2%. But that's still early to say it. It depends how -- the biology will be there in the second half of this year.

If we look at the consumption year-to-date June, we see that EU is going down by 7%. A lot of the business in EU is connected to retail and the fluctuation in prices that we have seen is making it difficult to make a stability for the retail segment. If you look at other markets, it's up 3%, and that's Asian markets in general, and they are more flexible in taking out the fluctuation in prices and for the first half with extremely high prices, they are actually increasing. So a very positive trend in that market. And U.S. is stable. Also strong performance with extremely high prices for 2023 so far.

And I talk about the fluctuations. And here we see the last couple of years, the prices has fluctuated from under NOK 60 to over towards NOK 130. So of course, it's hard for our customers, our partners to scale up business when we have this kind of fluctuations. So it's been challenging for our customers, for our own operations. But I have to say that this year, we've been much better in handling this fluctuation than last year where we had a negative result in the second quarter.

And so for the outlook for Farming yes, like we said, proposed resource tax adds a lot of uncertainty. We expect 181,000 tonnes of salmon and trout, a contract share of 15%. And yes, and I will come back to the last one, that's about technology development in our Farming sites.

Wild Catch demand development varies across the species, positive development in land-based industry. Quota advise for 2024 is cod down 20%, haddock down 25% and the saithe south up 25%. For Sales & Distribution, we expect improved earnings in 2023 versus 2022 with further potential in the years to come. Resource tax also here adds uncertainty and challenges to value-added processing activity, in particular in Norway. Weakening demand in some market segments, but overall, a very good demand for seafood remains strong.

Then I will talk a little bit about investments and green investments in new technology, protecting the salmon from sea lice. Sea lice is one of the biggest biological and cost challenge facing Norwegian aquaculture and but also in other regions. The increasing lice pressure is a main challenge, reducing fish welfare, drives up production costs and reduce growth. Reaching our goal for 2025 require us to find solutions to reduce the number of sea slice treatments.

And if you look at Norway on the right side, we see there has been -- yes, I would say a negative development in reported lice treatments in Norway. And the highest year is 2022. And we need to find a way to solve this situation. And the technology team in Lerøy have over years worked with new technologies, looking at alternatives, more than 70 alternatives. And we have come up with some solution for our operations to solve the most challenging sites.

And -- then I will show you some of them. And like I said, we are investing in new production technology to protecting in sea lice. We had submerged cage, sinking the containment for our exposed and our deep sites down to 30 meters. That's one example. And then we have semi-closed containment, and we have different solutions for that, that we are started to implement at the moment. And this is the -- two ways of doing it. We have the submerged cases, and we have the semi-close containments.

And within this year, we will have 51 units of submerged case in 5 sites within end of this year. and we started the implementation in second quarter '23. And so far, it shows really good results. And then from the semi closed, we have chosen 3 different semi-closed solutions and started to implement that also on the locations, and we will have 13 units at 4 sites beginning of -- in first quarter 2024.

And 20% of our salmon stock to be protected. That's our target to be protected by first quarter 2024. And we really means that this is the way to go, and this is a good solution for us to produce in -- near to the coast and in our slots in a sustainable way.

And we need to act if we're going to achieve our targets for 2025, which is 205,000 tonne harvest volume, 93% superior quality, 4.5 average harvest weight and 1.19 economic feed conversion rate and cost reduction of close to NOK 5.

And then we will show you a video of these kind of technologies.

[Presentation]