Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2019-Q3

[Henning Kolbjørn Beltestad, Group CEO]

Good morning, and welcome to third quarter presentation of Lerøy Seafood Group 2019. With me today, I have Sjur Malm, CFO of Lerøy Seafood Group. First of all, I will take you through some highlights in the quarter, then Sjur will take you through the key financial figures. And then I will come back and talk a little bit about the outlook and supply and demand of salmon and also the whitefish. Third quarter, we achieved EBIT before fair value adjustment of NOK 500 million. We harvested about 46,000 tonne. We have a catch volume of whitefish of 13,000 tonne. We have EBIT all-in inclusive of NOK 10. The contract share in the quarter is about 32%. The net interest-bearing debt is NOK 2.8 million. The harvest guidance of 2019 is in Norway 158,000 to 162,000 tonne, depending on price development in the last 5, 6 weeks. For 2020, we have a guidance of 170,000 to 175,000 tonne in Norway. And including associates, we expect 172,000 to 175,000 tonne, and for 2020 about 183,000 to 188,000 tonne.If we look at the historic figures per quarter, we see that this is on the weak side compared to the earlier quarters, and we have to go back all the way to third quarter '16 to be at the same level as today. So in a way, we are not 100% satisfied with the results in this quarter. Lerøy Seafood Group is reporting in 3 segments, Farming, Wild Catch and VAP, Sales and Distribution. We start with the Farming. And the price in this quarter is about 11% lower than the same quarter last year, and it's down by NOK 6.2 and NOK 13.5 compared to second quarter this year, so much lower prices in this quarter. The trout prices is below the salmon. But still looking at the volumes that is harvested of trout in this quarter, 11% price reduction is not that bad. So we feel that the market expansion and development for trout is very strong at the moment, and we'll give some results in price achievement going forward. The contract prices in this quarter is higher than the spot prices. The cost is marginally -- marginal down from second quarter '19 and the biomass is 2% lower than same time last year. Then for the Farming volumes and the guidance for 2019 and split per region, we see -- Lerøy Aurora in 2019, we expect 33,000 tonne; Lerøy Midt, 66,000 tonne; Lerøy Sjøtroll, 61,000 tonne. And for 2020, we see a strong increase in volume in Lerøy Aurora from 33,000 to 40,000. And Lerøy Midt we expect to be at the same level and Lerøy Sjøtroll to increase to 66,000 tonne and total Norwegian production of 172,000 tonne. And then our share, 50% share in Norskott of 13,000 tonne and a total of 185,000 tonne in Norway next year. If we look at the Wild Catch, we -- the catch volume of 13,000 tonne is 8% down compared to the last year. It has been a higher share of shrimp and saithe than the corresponding quarter, but this mix will change again in the fourth quarter. The average price is down by 3% mainly because of the composition of the catch. If we look at the cod, it's -- the price is up 6% and haddock is up 4% and saithe is up by 33%. So we feel very good -- or we see a very good demand for saithe at the moment. And that's good. On the industry side, we see it's challenging -- still challenging with the increase in raw material prices, but we expect improvement in this segment going forward. If we look at the remaining quarters, we have 7,200 tonne quota of cod this year compared to 6,500 tonne last year; the haddock, 2,300 tonne; and the saithe, 1,600 tonne. So a total quota of 11,000 tonne for fourth quarter, and we expect to take the quota that we have. Yes. Then VAP, Sales and Distribution, a very strong quarter, also Q3. So far this year, it's been really a good development in this segment, and we had EBIT of NOK 109 million compared to NOK 72 million in the third quarter '18. And there is still room for improvement within this segment. Then Sjur will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. There's particularly 2 factors impacting our quarterly performance and also performance in the start of the fourth quarter. One is obviously price, which Henning has highlighted, and the price drop which was higher than we expected. Secondly, we have -- there's been a high sea lice pressure in Central Norway. We've been able to keep our sea lice levels low, but it's been done through a high number of treatments which impact growth. So those, I would say, are the 2 key factors which are different from what we expected going into the quarter. Looking into the financial in detail. We are a seafood company, but still the salmon part of operations is a key determination or the biggest driver for changes in our profitability. And looking into the drivers for salmon profitability, we can see that we have harvested 24% more volume in 2018 -- 2019 third quarter compared to the same quarter last year. And we also see that we have a lower profitability per kilo. That is driven much by price, but also by a cost increase. Those factors are kind of like the key reason to why our -- and then the lower profitability per kilo is the key reason to why our operating result is down third quarter this year compared to last year, yes. And also, as I will return on income to -- from associates, we've had some challenges in U.K., which impact profitability, but I will get back to that. But overall, lower profitability due to lower profits per kilo of salmon, driven a lot by a decline in prices. Year-to-date, we've harvested about the same volume as last year. Again, profitability per kilo is down. It's price, and it's also cost increase. And in sum, our operating result then before fair value adjustment is down 25% from last year. Income from associates is also down again due to a weak development in Q3 in U.K. Yes. And those are the key factors. On a -- looking into our balance sheet, it's worth highlighting that the implementation of IFRS 16, which is well described in our note, impact the balance sheet. And I would look then rather on key factors, obviously, is that we have invested a lot in new smolt facilities and new boats in the whitefish business and tangible assets is -- are up. Given lower growth than expected in the quarter, the average weight of fish going out of the quarter is a bit below our expectation and is a driver for high cost -- higher cost of the biomass when looking at kilo because our biomass in volume is down 2% and cost is up 5%. Other factors in the quarter is a very positive working capital development. We have reduced inventories and also, we have -- and that working capital impact, I will highlight on the following slide. We see our net interest-bearing debt is reduced significantly from last year, and we believe we have a strong and flexible balance sheet. Looking then into the cash flow. And the key point here is the impact from changes in working capital. And this quarter, we released NOK 560 million in working capital. I think the one is lower inventories, but also we this quarter paid our feed bills at 30 days rather than 10 days. So it's still a lower level, but that's part of the reason for the working capital release. We have invested NOK 280 million this quarter, which is less than last year, and you can see that we've invested NOK 1 billion year-to-date compared to NOK 1.7 billion last year. And obviously, the number for the full year will be significantly below 2018. But as I will return to, we're also being granted a new or the necessary licenses to build a NOK 600 million smolt facility in Central Norway, so we expect CapEx to be higher again in 2020. And this is the key factors. But overall, good working capital development and a significant reduction in net interest-bearing debt in the quarter. Looking then at the different segments. This clearly highlights where the change is from last year. It is in the Farming business. There's been about the same development in whitefish, and there's been a very positive development downstream. But due to lower price and higher costs, our profitability in Farming is lower. So then looking into the different segments. It's fair to say that we've had more more-than-normal number of unforeseen events in Lerøy Aurora, unforeseen events in 2019. So at the start of 2019, the smolt facility in Lerøy Aurora burnt down, a part of it burnt down. Then there was more toxic algaes in parts of this region in Q2. So it's not been an easy year in Aurora. As we said last time we met at the quarter presentation, the growth going into Q3 was back to normal, and that is the picture we have seen also in this quarter. So a good development. That will lead to, as we already have said, the lower cost this quarter than previous quarter, and we continue to expect a lower cost figure for the fourth quarter. Also, given a disappointing price development, we've held -- are holding back volume, having a higher inventory going into 2020 and expect then to see a significant growth in production volume in 2020. Looking beyond 2020 in growth potential. We are investing and have invested in a 3-stage smolt facility CapEx plan in Aurora. The average smolt size in 2020 will be double of what it was in 2019 and also the final stage of this smolt facility will be finalized in December 2020. So we expect to see growth in volumes also beyond 2020. Looking at Lerøy Midt. I would say performance year-to-date by the time we met last time was good. So we had a good start of the year. September and October, particularly October, has been very challenging. And the challenge has been a high sea lice pressure in the region, which has given a higher number of treatments in our operation. Treatments means less feeding, means less growth. I would say we have had good control, but it costs us a lot in terms of growth. Still, I would say we've done a very good job. We have had low mortalities on these treatments, and it's been a, yes, more challenging quarter than expected for this region. And I would thank everyone working there for all their strong efforts. So we were expecting and what's been impacting is the spring of 2018 generation, which is harvesting then a little bit Q3, more Q4 and Q1. And we were expecting a significant cost decline on that generation with a loss of 7,000 tonnes, which is a significant share of it, that will not materialize. So we have a higher cost figure this quarter than last quarter, and we expect the same or slightly less next quarter. So we will not see the cost decline we expected going into the quarter. Beyond that, there's a lot of -- yes, you need a lot of papers from government to be allowed to build things in Norway. And finally, we've been allowed to start the building of our new smolt facility in Lerøy Midt. It is a NOK 600 million investment. It has already commenced, and we expect to make good progress over the coming year. This will have an impact on production figures particularly from 2022. So it's still some years ahead, but we are very happy in that we have started the building, and that will give room for growth and cost reductions in Central Norway going forward. Looking then into Lerøy Sjøtroll, our operation in Hordaland. Obviously, it's impacted by a lower price, and this is the highest cost region. So this is also then, obviously, where the impact of the price decline is the biggest. We have slightly lower cost this quarter than last quarter, but it's still at a high level. As Henning said, the price realization on trout, which was 54% of the volume this quarter, is lower than salmon. It's also important to mention that the cost development on trout has been better than for salmon. We have built -- as one of the key initiatives to improve this region, we have built a new smolt facility, which is about finished at [ Chilwa ] in Hordaland. That facility delivered its first large smolt in August, but we see that some rebuilds are necessary to get to the results we would like. So that means that there are some delays of the finalization of some 6 months, which, obviously, we would like not to be seen or shouldn't have happened. But in reality, what this means is that it's about 1.4 million fishes which were supposed to be put into sea in October and January, December, which was put into sea at 170 grams in August instead. So the number of fish is not impacted, and the growth of that fish has been good. So kind of like so far on growth, we haven't lost anything. But obviously, this -- part of what we are going to gain on this investment is risk reductions, and it will take longer time before we see the full impact of that. Also -- and so next release here will be in March, and that's on winter temperature. So that's a very important release for us to be able to do that in March and that is our expectation as of today. We expect this investment, together with new harvesting boat, to be participators in increasing smolt yield. We also expect some of the choices we've done on genetics to help us into 2020. And also in 2019, we have been impacted, particularly on growth due to the ISA situation close to our sites and a very strict zone structure and the fact that we've not been allowed to move fish. And that means that we haven't had enough concessions basically on 2 sites to do the feeding like we would like to do it. So we expect to see improvements here in 2020 and even more from 2021. On our whitefish Wild Catch segment, growing fleet is performing well. There's a good price development on key species. In the land industry, it's been a challenging quarter, and it is normally because it's a bit off-season. So quarter in sum is about the same level as last year, which is a decent and healthy result. We are doing significant investment also in the land industry to improve profitability. And we expect to see not in Q4 but from next year, there is a volume buildup in some of these new investments, which we believe will help profitability going into 2020. Looking at our U.K. operations, Scottish Sea Farm, which has been stable and good performer over recent years. Q3, start of Q4 has been more challenging than expected. And it's been a challenging quarter with earlier harvest, some mortalities which is impacting the results significantly this quarter. We expect some improvements into Q4 and on positive side, the new smolt facility is just about to be finalized and the first smolt is going to sea about these days. And obviously, we have expectations for Norskott to get back to where they normally are. And we also expect to see improvements on smolts, but this has been a tough quarter. Value-added processing, sales and distribution, Henning has highlighted the key points. There's a growth in activity, which is very positive. It's a significant growth in the key business units this year compared to last year, which is helping our results significantly. There's a good growth, good development and still some challenges in some markets. So we would say, a good quarter, but there's still plenty of room for improvement, which is, obviously, our aim to utilize in the coming years. So with that, I'll give the word back to you, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you, Sjur. Then we will look at first the supply side. And I will not go in details in all the numbers, but we see the volumes for 2019 will be around 9% growth in volume, for Americas about 4.3% and a global growth of 7.2% for 2019. If you look at 2020, we expect 4% growth in Europe, about 4% growth in Americas and a total of 4%. So very stable in all regions. The price development last quarter was affected by a much higher volume. So we had in third quarter price shipment -- price of NOK 49 and -- which is NOK 30 down from second quarter. And so we see that we have a huge volatility in price level. And especially September and October was very low. If we look at the volumes per month in Norway, we see the reason for the price decrease in September is that the volumes went up 23%; and also October, up by 8%. If we look at Europe, we see it's up 26% in September and 10% in October. So also U.K. have had a large volume in this period. And then if we look at November and December, we see that the volume is going down, and there will be 0 growth in November and 3% growth in December compared to last year. For Americas, we see stable volumes through the years, some -- a large increase in some months, but in a way, stable, good volumes, around 80,000 tonne on a monthly level for the whole year. Worldwide volumes, also we see that it's been a huge growth in especially the third quarter. If we look at 2020, we will have a total growth of 4%, about -- yes, and we see we will have a stable growth from month-to-month. And so we see this first half of the year, we will have between 3% and 6% growth. If we look at U.K., we see the same. We won't have any growth before end of the year. And then the total Europe, we also see that we will have some growth in the summertime and then at the end of the year, we will have 10% to 8% monthly growth. Americas, also very stable volumes, as I said. And worldwide, yes, stable growth for each month. If we look at the consumption side, we see that for third quarter, 11% growth in the market. We see EUs is holding the share of 11%, the same with U.S., and other markets is taking some market share with the 15% growth. And if we look at the year-to-date numbers, we see EU is up 8%; U.S., 7%; and other markets, up 10%. And the total growth is about 7%, yes. And we see in the other markets is -- the huge markets in this category is China and Brazil, which is about 8% growth. But we see all small markets are increasing a lot, and there is a huge demand for salmon. And this is for the really small markets. Then at the end, we see the demand for seafood remaining strong, and we have a positive market outlook. Harvest guidance for 2019 is about 172,000 to 175,000 tonne; 2020, 183,000 to 188,000 tonne. We expect a contract share of 35% in the fourth quarter. And yes -- and we have a significant potential in the whitefish. And the quarter is set for -- the quota set for 2020 is 2% -- 1.8% up for cod, 25% for the haddock and 15% for the saithe. So yes, that was all we had. Thank you very much.