Leroy Seafood Group ASA

OSE:LSG

Earnings Call Analysis

Lerøy Seafood Achieves Volume Growth Amidst Challenging Quota Reductions

Lerøy Seafood Group reported a robust operational EBIT of NOK 906 million for Q2 2024, driven by a 24% increase in farming harvest volumes and strong biological performance in Norway and Scotland. However, the company faces challenges in its Wild Catch segment due to a 25% quota reduction, impacting earnings. A NOK 2.5 per share dividend was paid. Lerøy maintains its 2024 guidance with a total harvest target of 193,500 tonnes and aims for 200,000 tonnes in Norway by 2025. Expectations are set for continued positive profitability in VAP Sales and Distribution, with a target of NOK 1.25 billion EBIT in 2025.

A Strong Quarter with Positive Developments

Lerøy Seafood Group reported an operational EBIT of NOK 906 million for Q2 2024, marking continued strength in their farming segment, which showed significant biological improvements. The company achieved a 24% increase in harvest volume compared to the previous year, signaling robust growth driven by improved farming practices. The average harvest weight per fish rose from 3.9 kg in Q2 2023 to 4.7 kg in Q2 2024, contributing to an optimistic outlook.

Challenges in the Wild Catch Segment

In stark contrast, the Wild Catch segment faced a significant downturn due to reduced quotas, which fell approximately 34% for cod and 43% for haddock year-over-year. Catch volumes decreased from 23,700 tonnes in Q2 2023 to 17,800 tonnes in Q2 2024. This decline has diminished profitability in this segment, underscoring ongoing challenges in maintaining sufficient raw material supply at fair price levels. The outlook for 2025 indicates further reductions in quotas, marking a challenging future for this segment.

Value-Added Processing Insights

Despite hurdles in the Wild Catch division, the Value-Added Processing (VAP) segment exhibited positive momentum, with operational improvements translating into higher profits compared to last year. The segment's EBIT for the rolling twelve months rose to NOK 827 million from NOK 400 million, with expectations for it to reach NOK 1.25 billion by 2025, reflecting 55% growth. The company aims to leverage higher processing capacity and enhance market reach across Europe, North America, and Asia.

Strategic Growth Targets and Investments

Lerøy Seafood has set ambitious targets for 2025, with plans to achieve a total harvest of 200,000 tonnes in Norway—an increase of 25,000 tonnes from 2024. Key drivers for this growth include advancements in genetics, smolt production, and the implementation of innovative farming technologies like shielding technology, which has shown an impressive 96% reduction in lice treatment. Investments in these areas are expected to continue, with an anticipated capital expenditure of NOK 1.6 billion in 2024.

Sustainability and Environmental Commitments

The company is not only focusing on financial growth but also committing to sustainability with an aim to reduce total greenhouse gas emissions by 46% by 2030. This strategic focus aligns with trends favoring environmentally responsible practices in the seafood industry. Their operational footprint in Norway is substantial, positively impacting local economies and emphasizing their role as a responsible corporate citizen.

Outlook and Guidance

Looking ahead, Lerøy Seafood is maintaining its guidance for 2024 with expected harvest volumes of 175,000 tonnes in Norway and 58,000 tonnes in Lerøy Sjötroll. The company anticipates challenges but remains driven to capitalize on its integrated business model to navigate market fluctuations, particularly in light of reduced quotas and potential regulatory changes affecting the fishing industry. Despite current challenges, the overall outlook remains optimistic for long-term growth and profitability.

Earnings Call Transcript 2024-Q2

[Henning Beltestad, executive]

Welcome to Lerøy Seafood Group's Second Quarter Presentation 2024. My name is Henning Beltestad, CEO in 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 Malm will take you through the key financial highlights, and then I will come back again and talk about the outlook for the company and also the industry.

First of all, we start, as always, with our main goal is to create the world's most efficient and sustainable value chain for seafood. We have invested through the last 20 years, going from sales and export company to be a fully integrated company on redfish and on whitefish all the way to our own brands in shops and products in HoReCa and Distribution segment.

And we are proud that -- of what we have done. But also, we see a huge potential of improvements in the whole value chain. The quarter, we had an operational EBIT of NOK 906 million. It's been a quarter with strong biological development from farming in Norway. And also, we see a strong improvement in biology and earnings in Scottish Sea Farms. Really good to see after some challenging years behind us.

Continued positive development for VAP, Sales and Distribution segment, significant year-on-year reduction in Wild Catch earnings due to lower quotas. And we see that we are affected especially in this quarter. Guidance and targets is maintained. And in the second quarter, we paid a dividend of NOK 2.5 per share. Lerøy Seafood Group reports in 3 segments, Farming, Wild Catch, VAP Sales and Distribution.

And we start with the Farming highlights. As I said, a strong biological development in first half 2024. We have increased the harvest weights to 4.7 kilo in second quarter compared to 3.9 kilo second quarter 2023. Shielding technology remain promising. Quarterly harvest volume increased by 24%, and we see -- and there has been a quarter where we see substantial spot price decline in second half of the quarter. So this quarter is -- timing has never been more important. But cost increase year-on-year, but adjusted for inflation, costs are down.

Lerøy Aurora, in North of Norway, very strong biological performance with high survival rate. Price achievement positively impacted by high share of harvest early in the quarter. Low harvest volume, driving as expected quarter-on-quarter increase in cost. And we see a large increase in the harvest volume in third quarter '24 at significantly lower cost. Estimated harvest volume is 47,000 tonnes for 2024. And if we look at the EBIT performance, it's a strong performance NOK 37 per kilo through the value chain.

Lerøy Midt, also a strong quarter, continued strong biological development, increased harvest volume going from 10,000 tonnes to close to 16,000 tonnes. Increased harvest weights also here from 3.9 kilo to 4.6 kilo, reduced cost. And we keep our harvest guidance of 70,000 tonne. For the third quarter, we see somewhat higher harvest level at about same cost level and successful first harvest of submerged salmon at Fugloya in August 2024 was harvested last week with good results.

Lerøy Sjøtroll continued in improvement in key biological KPIs, increased harvest volume, increased harvest weights, significantly increase in survival rate. And -- but some issues with ISA accelerated harvest, and a high harvest volume in June at low prices end of the quarter. And we will start first harvest of submerged and shielded production in third quarter 2024. Harvest guidance unchanged at 58,000 tonnes. And we had an operational EBIT per kilo value chain of NOK 13.5 in this quarter.

Norskott Havbruk, 50% owned by Lerøy and 50% owned by SalMar. Really good to see the improvements that is done in Scotland. Strong biological development in the quarter and the next generation of fish is performing well. Significant year-on-year increase in harvest volume, harvest weights and growth while reducing mortality. And if we look at the harvest weight, it's going from 3.5 kilo to 5.3 kilo in second quarter 2024.

So that's really good to see. And we see a significant potential for growth beyond 2024. So good performance by Norskott Havbruk, and we are really happy to see this development.

Farming volumes, the guiding. We keep the guiding at 175,000 tonnes in Norway, 47,000 tonnes in Lerøy Aurora, 70,000 tonne in Lerøy Midt and 58,000 tonnes in Lerøy Sjøtroll. And over 50% share in Scottish Seafarms is 18,500. So a total of 193,500 tonne. And we keep our target for 2025 at 200,000 tonnes in Norway. So that means an increase of 25,000 tonnes going into next year.

Wild Catch highlights this quarter. A significant quota reduction, catch volumes down 25% year-on-year and reduced profitability, positive price development. I think this is the highest cod prices I have ever seen as long as I have been involved in Lerøy Havfisk, reduce costs, significant decline in catch value. The challenging outlook for remainder of 2024 and 2025, quota advice for '25 indicates lower quotas and new regulations will allocate quota from the trawling fleet to the coastal fleet.

So yes, it will be ups and downs in this segment going forward. And -- but we keep improving, especially on the industry side and also on the fishing side, catching other species that can keep the volumes and the income on as high as possible.

Wild [ catch ] quota for second quarter, catch volumes is 17,800 tonne in second quarter '24 compared to 23,700 tonnes. And the remaining quota in total is 12,600 tonnes compared to 28,000 tonne. So yes, and which will be challenging, especially for the industry to have enough raw material at a fair price level.

Sales and processing operation in 14 countries. We have a good base now in developing in all the major markets in -- especially in Europe, but also good branch offices in Japan, China and North America, which gives us a good spread in more than 80 countries. And we really believe that being fully integrated also on the market side is the way to go in the future.

Highlights this quarter, continued positive development in the segment, higher profit compared to second quarter '23 driven by operational improvements, high utilization in processing capacity in Norway, production prices better reflecting raw material prices. And the expectations for continued positive profitability trend in second half, based on a belief on higher volume development in the key markets out there.

And we see that we lift the 12-month rolling EBIT step by step. So -- and believe that we will continue this development going into 2025. So then I give the word to Sjur.

[Sjur Malm, executive]

Yes. Thank you, Henning. Then I'm going to go through our financial statements, which basically is summing up what Henning has just presented. So starting with the profit and loss statement. You can see the key value drivers on the lateral lines. On harvest volumes, harvest volume is up 24% compared to last year. That is driven by improved biological performance, which is positive. It's also partially driven by some ISA-related accelerated harvest in the end of the quarter in Lerøy Sjøtroll, but good biological development overall and a high volume.

Looking at the margin of that volume, we see that it's down around NOK 4 a kilo compared to last year. Those NOK 4 can be divided in price realization and cost and it's roughly equally divided. So price realization is NOK 2 lower in this quarter despite the significant weakening of the Norwegian kroner. So that is a reflection of, firstly, the fact that salmon prices fell quite substantially during the quarter. And secondly, also that we harvested a bit more towards the end of the quarter in Lerøy Sjøtroll due to this ISA accelerated harvest.

On costs, our costs are up basically on inflation driven by feed cost, which is up alone NOK 3 a kilo. Adjusting for feed cost alone as inflation factor, our cost is down. And compared to overall inflation, our cost position is down. I would say, overall, a healthy quarter in the redfish value chain.

Looking into whitefish, as highlighted, quotas are significantly reduced. That is the basis for operation and both on the trawling fleet and also on the land-based industry. Lower quota means low catch volume means a different -- there's less cod and more lower-value species. It does lower cost. But as you see, there's a substantial fall in profitability.

And this year, in the whitefish value chain is down NOK 100 million compared to last year. And looking then on our operational EBIT, which is down from NOK 950 million to NOK 906 million, knowing that whitefish Wild Catch is down NOK 100 million. We know the other constitutes value-added processing and farming, they are both up.

If we look beyond this operation, as Henning highlighted, there is -- it's very positive. The development in U.K. and our Scottish operation, the joint venture with SalMar, substantial improvement compared to last year, and that is impacting, obviously, both our EPS and it's also impacting return on capital employed, which we see is up to close to 16% this quarter compared to 14% in the same quarter last year.

Looking at the balance sheet. That's quite a lot of data point. I think the core highlights is obviously there. The fact that it's a strong balance sheet. It's 50% equity share. We are an investment-grade company and it's also a quite big balance. This is a capital-intensive industry. So we've done a lot of investments, which I will return to on -- next slide, where investments more recently is towards more fish welfare, particularly on the smolt side and on shielding technology.

And if you look on working capital, it's quite working capital-intensive industry and our balance sheet has a substantial positive working capital item in sum. And that is due to the fact that it takes the time, it takes to grow the [ sum ]. But a strong balance sheet, no big changes compared to last year.

Looking at development in net interest-bearing debt. We had a positive profitability, which reduces net debt. We have increased working capital, which is basically driven by cost of biomass, which again is driven by feed cost. CapEx and also a change in working capital is also related slightly to the fact that we have a higher share of the biomass in Lerøy Sjøtroll than what we've had recently.

On CapEx, I'll turn to that on the next slide. We have paid a dividend to NOK 2.50 per share. Net finance is up slightly from last year due to higher interest costs and net debt end of quarter is NOK 6.8 billion. Looking at the CapEx, we would say that -- we have a maintenance CapEx around NOK 900 million to NOK 1 billion with today's weak Norwegian kroner, perhaps NOK 1 billion is the better estimate.

On top of that, we are investing, in particularly, the factors Henning has highlighted and will return to, which relates to smolt quality, roe quality, shielding technology. And this year, we are investing significantly into particular smolt quality and shielding technology.

If you compare this slide to the similar slide. Previous quarter, the investment estimated in shielding technology was then NOK 500 million, now it's NOK 350 million. And that is related to the fact that one of the suppliers of the semiclosed system is not able to supply 4 out of 5 units.

We still believe we will be able to reach the overall target of on shielding, which Henning will return to. Estimated CapEx then around NOK 1.6 billion. In addition to this, we have bought MTB estimated close to 1,000 tonnes at around NOK 150 million.

Then there is a lot of discussions in Norway relating to what is the footprint of this industry. This obviously relates to resource tax and a lot of the political discussions. But -- and there are some claimants saying that this industry does not make a footprint. And we have taken this slide to answer that and the best answer is basically just showing the facts.

So this slide is showing the -- some of the footprint of Lerøy's operation. As you can see, it's a footprint along complete overall of Norway. We are buying goods from 60 different municipalities. Now we have employees in 60 and we buy goods from 250 municipalities. We have close to 4,000 employees. And including indirect jobs, it's around 10,000 person in jobs related to our operation.

Last year, we paid NOK 2.1 billion in taxes in total. So yes, we believe we have a substantial footprint which is positive for also Norway. Henning?

[Henning Beltestad, executive]

Yes. Thank you. Then I will take you through the outlook of what we do. Start with our strategic -- some of our strategic targets, and we believe that these targets still are achievable. Being a #1 Farming company, including VAP Sales and Distribution in 2025, NOK 1.25 billion EBIT in VAP Sales and Distribution in 2025. Reduction of 46% in total GHG emission by 2030 and achieve 200,000 tonne harvest in 2025 in Norway.

For VAP Sales and Distribution, we see continued strong progress and it's a promising outlook. We see on the left the rolling 12 months, same quarter. Last year, we were at NOK 400 million in second quarter '24. We are up at NOK 827 million. And then we have yes, 55% lift for 2025 going up to NOK 1.25 billion in EBIT.

And we believe with the investments that's done, all the dedicated work in improving all activity in this segment will take us to this goal. And that's true short-term actions and long-term actions. Short-term actions, higher utilization of VAP factories through volume growth, achieving an economy of scale. Improvement of VAP factories in certain European markets with expected substantial uplift in 2024. And Lerøy way principles implemented with clear targets, roles and responsibility, action plan, market plans and a culture for continuous improvements in the whole segment, in the whole -- in each company and each department and all the way to all our employees in the segment.

And the long-term actions, we have a consequence products in our own value chain, sustainable logistics, implementing Lerøy way and increased flexibility and price achievement. And we see step-by-step that we improve also on long-term goals.

For Farming, 2025 harvest, we targeted 200,000 tonnes. So that's a lift of 40,000 tonnes from 2023. We're guiding -- we guided 175,000 tonnes this year, so a step of -- yes, up 25,000 tonne compared to 2024. And this will be done through operational efficiency through roe, smolt production and technology development.

And where are we? And this picture is showing the effects on different initiatives that's done the last years. And when it will give effect on harvested fish. And if we start with the genetics, the genetics improvements that has been done the last couple of years, will step-by-step give effect, not that much on this year, but we will see a large improvement in first half next year and second half next year.

When it comes to improvement in roe production, we already see that we have effect on the fish that we harvest first half, same second half, and then we will see a high increase in the effect on first half and second half of 2025. For the smolt, it's the same. And then we added also the results on shielding technology.

So we had the first harvest of shielding technology last week, and we will now start to take out some fish with this technology, and we will see the result of this at end of this quarter and last quarter of the year. And then we will see a larger effect step by step going into 2025. So this plan will take us [ 2,000 to 200,000 tonnes ] in production through improvements on these 4 areas.

If we look at the first half of the year, we had a strong biological performance. And if we compare it to the 5-year low treatment -- if you look at -- compare it to the last 5 years average, we see that we improved the net growth rate by 8% in first half of 2024. Reduction in mortality of 21% and 44% less lice treatment.

So it's a continued positive development in key biological drivers explained by improved roe, smolt, genetics and new technology. Quality downgrades gradually less of an issue during H1 '24 due to winter wounds and string jellyfish. And less winter wounds Moritella expected next winter. Shielding because of shielding technology and less treatment. Vaccination against in Moritella in process also for loss share of our fish put into sea and a 5-year low for lice treatment year-to-date second quarter.

And if we look at the shielding technology, compare it to the traditional farming and we look at the fish put into the sea fall '23 and spring '24. We have a reduction in lice treatment of 96%, which is really promising. The new shielding technology that we started, we put the first into sea in July last year. But this has been a development of 4 to 5 years. And so it's not a quick fix to start this, but we feel that we are on the right track. Results so far, shielding technology shows exceptional results, rapid learning curve in the organization, low level of lice treatment, improved fish welfare with a higher survival rates and also increase quality.

Investment. Additional CapEx in '24 of NOK 350 million to reach target. Current situation, we have 30% of our salmon in numbers, shielded as of start of August 2024. And so we have a good speed on this development and implemented into our operation at a high speed.

Shielding technology on 7 sites in Lerøy Midt and 5 sites in Lerøy Sjøtroll. And we -- end of the year, we expect to have 35% of all the salmon in new technology. First harvest of shielded salmon, last week, and we will speed up the harvest going forward. And it will be really interesting to see the results that we can achieve from this.

As I started with, we are creating the world's most efficient and sustainable value chain for seafood. All what we do to improve is integrated, implemented in a good structure in the whole organization and all people are involved in to take us towards this goal. And then, of course, it's really exciting to harvest the first fish of the farming -- the deep sea farming and we will now step-by-step see the results. And last week, we made a film from the first harvest of the fish. So enjoy.

[Presentation]

[Henning Beltestad, executive]

Then to sum up, on the Farming side, strong biological development in first half 2024. Contracts share 2024 currently around 30%. Expect to see significant improvements from roe and smolt quality, new farming technology, process improvement and implementing Lerøy way.

For the Wild Catch, challenging quota situation in 2024 and 2025. Quotas for 2024 is down 34% from cod and 43% haddock and quite quota advice for '25 indicates substantially further reduction.

For VAP Sales and Distribution, increased demand for integrated, sustainable value chain, improved market share in some key markets, utilizing the potential of our value chain and large variation in profitability in different units and clear potential for continued growth in profitability in 2024.

So I will say that the future looks bright. Thank you.