Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2020-Q3

[Henning Kolbjørn Beltestad, Group CEO]

Hello, welcome to Lerøy Seafood Group's Third Quarter Presentation 2020. My name is Henning Beltestad, I'm CEO of Lerøy Seafood Group. And with me today I have our CFO, Sjur Malm. First of all, Lerøy Seafood Group is a fully integrated company of both redfish and whitefish. You just saw our value chain for fish. And our goal is to create the world's most efficient and sustainable value chain for seafood. The large, extensive investments we have made over a long period of time are now starting to yield results. First of all, I will take you through the highlights in the quarter, then Sjur will take you through the key financial figures. And then I will come back and look at supply and demand and also outlook for next year. Yes, Lerøy Seafood Group is reporting in 3 different segments: Farming, Wild Catch, VAP, Sales and Distribution. And first of all, I will go through the overall highlights in the quarter. This is a fairly relatively good quarter with the EBIT of NOK 370 million. And it's a little bit lower than what we had last year, where we had around NOK 500 million. The main reason for that is lower earnings in the whitefish and -- which has been -- yes, it's been a more difficult period the last 2 quarter because of COVID. And so very -- yes, tough situation for the whitefish the last 6 months. Also for the salmon, but more for the whitefish than for salmon. If we look at the growth from post smolt investments. We are on track, and we expect significant growth going into 2021. For this year, we expect harvest, including associates, around 183,000 tonne for 2020, and we expect a harvest of 205,000 to 210,000 tonne for 2021. And we have further potential to grow beyond this. And we expect for this year to have around 70,000 tonne of whitefish from the Lerøy harvest. In this quarter, we harvested 44 -- about 44,000 tonne compared to 46,000 tonne last year. And we had a catch-up volume of whitefish of 11,000 tonne compared to 13,000 tonnes last year. And the EBIT before fair value adjustment of NOK 370 million compared to NOK 500 million in same quarter last year. Farming highlights. First of all, if we look at the prices in the quarter, it's -- yes, it's about the same as same quarter last year, a little bit down by NOK 1. However this is reduced a lot compared to second quarter, where we see -- we have seen prices which is NOK 10 lower. And this is -- of course, it's normal for the season or for this period that we see lower prices compared to the first half. Yes, high export volumes continuing to impact trout price, but we see improvements going into -- yes, going into this quarter and also late third quarter. The contract share is about 31%, and the price realization for the contracts is higher than the spot prices in this quarter. And we also mentioned with the last presentation that we expected significantly lower cost in Q3 compared to Q2, and this has also happened. And so we have significantly reduced the cost in Q3 compared to Q2. And the EBIT in farming is NOK 7 compared to NOK 7.9 in 2019. Then if we look at the farming volumes, the guiding for 2020 and also 2021. If we look at 2020 first, we are on line with what we have estimated earlier. So in Norway, a total of around 170,000 tonne: 36,000 tonne in the north, in Lerøy Aurora; 67,000 tonne in Lerøy Midt; and 67,000 tonne in Lerøy Sjøtroll. And it's good to see that we are improving and growing from 160,000 to 170,000 tonne. And then we have Norskott Havbruk, where we have 50% ownership. Our share there is 13,000 tonne, so a total of 183,000 tonne. And then if we look into 2020 (sic) [ 2021 ] tonne, we expect 47,000 tonne in Lerøy Aurora, so 11,000 tonne increase; 70,000 tonne in Lerøy Midt; and 75,000 tonne in Lerøy Sjøtroll. So a total of 192,000 tonne. And our part of Norskott Havbruk, 18,000 tonne. So a total of 210,000 tonne, so an increase of 27,000 tonne. Like I said, we have had a challenging quarter for Wild Catch, significantly impacted by COVID-19, with lower prices and also low catch rates. And yes, like I said, the catch volume is 11,000 tonne, which is 16% down, and the significant share of catch of cod in Q1 '20 and low catches in Q3. And yes, so that's one of the main reasons. EBIT of NOK 215 million -- year-to-date EBIT is about NOK 215 million compared to NOK 252 million in 2019. And we will see and we expect the improvements going into fourth quarter for the whitefish catch and also the catch -- speed the species that we're going to catch. And this is showing our remaining quarter for 2020. So as you see, we have 7,100 tonnes of cod to catch compared -- yes, compared to last year, it's about the same level. And we have saithe, 5,300 tonne. And haddock, 8,400 tonne. And we expect to catch about 70,000 tonne in total for this year. If we look at VAP, Sales and Distribution, it's been a very good quarter. It shows that our investments and our -- in downstream activities all over Europe and in major markets is really showing improvements. And we had an EBIT margin in this quarter of close to 3% compared to 2.3% in the same quarter last year, and an EBIT of NOK 131 million compared to NOK 109 million last year. So I'm very happy to see the development in this segment, and we still have a lot of potential improvements to do going forward and available capacities. So that's good. Then Sjur will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. So we've been in some -- through some quarters, both the second half in '19 and start of 2020, where we have not performed according to our own expectations. We may have seen challenges, particularly in our farming operations. And we're very glad to see that we are seeing significant improvements in production in sea and also significant improvements in profitability. Whitefish is challenging, with less demand from the COVID restrictions. Downstream and in [ catch ], we have a good development. And then looking at this quarter and the main drivers in the latter lines, you can see that harvested volume is down 4% or basically in line with last year. We have a slightly lower profitability per kilo, which is driven by a lower price achievement. Our costs are also down, but price achievement is more down. And to whitefish, it's difficult to view on one quarter alone, but there's no doubt that the profitability is very weak this quarter. In sum, this gives us an EBIT of NOK 370 million compared to NOK 501 million last year. We have a significant improvement in associated companies. Our operation in U.K. is a key driver. I will return to that. Net finance, about the same level as last year, and earnings per share, then down 11%. Looking at year-to-date numbers, our revenue is down not so much. This is not due to activity, it's due to general price level. Our depreciation and amortizations are up. We've made significant investment recent years in all parts of the value chain, including trawler, including smolts, including industrial facilities. We have not fully utilized this as of today. But we will utilize maybe more 2021, as our guiding indicates. That gives us an EBIT of NOK 508 million (sic) [ NOK 1,508 million ], which is down 23% from last year. Again, looking at key drivers. We have harvested more fish. We also have a higher biomass in sea. So in sum, we had better production this year than last year. Our profitability per kilo is down. That is due to the fact that we have higher costs year-to-date and we have also a lower price realization. On whitefish, the picture is different looking year-to-date compared to the quarter alone. And that is due to good -- a very good first quarter, and we were lucky in timing of our catches. So year-to-date, it is not that big fall in profitability. In sum, our EPS is down 27%. Return on capital employed is around 11%, which is below our target. And we do expect that investment recent years should give a basis, obviously dependent on how prices develop, to see increased profitability in coming years. Looking at the balance sheet. Noncurrent asset is up. We've invested in licenses, coming from Norwegian state. That's then the increase in intangibles. We have received a new trawler in our Havfisk segment. We are currently building smolt facilities in Northern Norway in Laksefjord and Central Norway in Belsvik, which are key drivers for the increase in tangible fixed assets. Biological assets are up, and we built quite a lot of biomass this quarter. This number is up 7%. So value of -- the biomass is up 7%, and the biomass itself is up 2%. So the value per kilo is higher, which is -- just don't correspond typically with the growing costs. What's important to know is that we have a lower average size deficiency, so we have more fish. Also an effect following the investment in larger smolt, just that each smolt is more expensive. And our ability to utilize that size through [ catching ] fish is larger, but also our ability to scale our cost base in here that will give us higher production. Hence, it makes us expect that we will see a continued decline in cost into next year. Other working capital items. We had slightly higher whitefish inventories. We have slight higher redfish than finished goods inventories. And we have lower receivables, but nothing dramatic. Net interest bearing debt is around NOK 3.5 billion. We believe we have a strong balance sheet. Then looking at changes in net interest bearing debt, it is our soon return to developments year-to-date, just looking at this quarter, due to the changes in payment schedules. Paid taxes later this year than last year. We have invested a lot, including NOK 80 million in licenses from Norwegian government. And then looking more on year-to-date figures, we know that our profitability is down from the factors already covered. We are paying slightly less tax. With the significant buildup of biomass, we have built also working capital. So cash from operations is NOK 1.8 billion compared to NOK 2.2 billion last year. We are investing heavily in facilities already mentioned and also buying licenses, which is then the reason for the increase in investments, having paid slightly less dividend. I think in sum, cash development this year has been, despite the challenging market situation, satisfactory. We have kept our focus on long-term investments and building biomass, which we expect will give us growth then into 2021. This slide is just to show you not a lot of changes from last year. And as already commented, the big change you can see is the whitefish segment, which is down NOK 90 million compared to same value last year. Looking then into farming, Lerøy Aurora sits on some challenges. We had a fire in a smolt facility early '19. We had algaes in '19. Then we had challenges with winter wounds first half this year. So it's a challenging period of time. What we said at the second quarter presentation was that we are seeing vast improvements, and Lerøy Aurora has historically delivered very strong performances. And it's very comforting to see that we are on a recovery back to that. So there's a significant cost cut compared to previous quarter, significantly improvement in quality. And also in prices down NOK 10 per kilo, you can see our profitability has doubled. So we've chosen to call that a recovery. We expect lower costs in Q4, and we expect a significant growth in harvest volume into 2021. Looking at Lerøy Midt. Last year second half, we saw challenges with our growth basically in the farming operation. We lost growth -- a significant number of thousands tonnes lost last second half. We saw some challenges also in September of this year. Luckily, with focus, good operations, we relatively quickly returned to normal and back to our expectations. We are seeing a reduction in cost this quarter. We expect costs same level in Q4, and we expect to see improvements, a little bit more production next year. And then the new smolt facility, which is currently being built, which will be finalized during 2021, close to 2022, give a potential for significant growth going forward. Then Lerøy Sjøtroll. We are losing money, which is not good and it's not satisfactory. And we asked, in this quarter, also harvesting the high-cost V19 generation, which has had a high cost point, which we've been harvesting in recent quarters. On product, we are seeing much better rise in costs, but we still are hampered by a quite massive volume growth in the market, 25% up year-to-date. And when you are losing money, there is no alternative to getting better. And therefore, it is very positive to see that recent years efforts are starting to work. We are now seeing the best production these days that we ever seen in this region. And we feel we are on a path to an improvement. It's not going to be 100% where we'd like it to be next year, but the important thing is that we believe we are moving in the right direction following investment in smolt, better larger smolts, following investments in [indiscernible] getting more facilities, following investments in people and focus, following investment in genetics. So we believe we are moving in the right direction, and that we should see better numbers from Lerøy Sjøtroll going forward. Then Wild Catch is already well covered. It's been a very challenging quarter, both on trolling side and on the land-based industry due to demand, not where we expected it to be going into the year. So we have catched a low volume. We are seeing lower prices. But as highlighted, year-to-date figures are much better. For the land industry, there are some underlying improvements, which are all very positive. Unfortunately, those are not visible in the financial numbers due to the fact that the conventional [ growing ] market is not performing as well as during the COVID-19 restrictions. This value-added processing, sales and distribution is already covered by Henning. We think it's very positive that we see in some of our downstream factories significant underlying improvements, which, yes, gives us -- which very much makes a positive potential into 2021. Then Norskott Havbruk, our joint operations in associated company in U.K. Also here, we saw a challenging second half of '19, which has impacted us also in Norskott. And a smolt facility is in place, it's positive to see that releases from these facility is going according to plan. And we expect to see significant growth into 2021. And it is positive also that, obviously, that the financial performance is much better than what it was 1 year ago. And with that, I give the room back to you, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you very much, Sjur. Then we will look into the supply and demand side. I'll start with this slide, a lot of numbers, but it's a lot of information in it. First of all, if we look at 2021, we see that, in Europe, there is about 0% growth in Europe this year. In Americas, it's about 10.4% increase. And a global growth of 4.2%. And I think this is the highest global volume of Atlantic salmon ever. If we look into 2021, the global volume is flat. So it's about the same level. Europe is up 4.6%. Americas, up -- yes, down 7%. And it's mainly Chile, which is reducing the volume in 2021 because of biological challenges. If we look at the spot prices, it's fluctuating. And normally, the prices, as I mentioned, is going a little bit down second half compared to first half of the year. And we see in 2020, we had NOK 68 in first quarter, NOK 58 in the second quarter and NOK 47 in third quarter. And so far, in the fourth quarter, it's about NOK 44. And -- but normally, end of this quarter, the price is starting to hike up. But we will see what's happening this year. Of course, we are in the middle of a very special situation with the COVID-19. So it will -- but we hopefully will see trend going up towards Christmas. One reason for that is that we see that the volume in October, we had the highest volume ever in Norway, so 140,000 tonne. About 130,000 tonne in November. And we will go about 155,000 tonne in December, which is highest demand month for Atlantic salmon. So hopefully, we will see a trend going upward for the prices. Also, if we look at Europe, it's the same picture. It's a little bit higher volume in U.K. in December. If we look at Americas, we have seen months with a very high increase growth. And -- but we see at the end of the year and going into December, the growth is not there anymore. And yes, and we see also -- for the worldwide, we see that we have had a growth -- yes, a growth up to 10% in the [ top months ].If we look at consumption, we see a growth of 4% in the end of third quarter. And we see a 7.% increase in EU. EU has been very strong, and it's basically the retail segments that is pulling the market up. A lot of the sales of Atlantic salmon is in the retail at the moment. In U.S.A., broadly the same, up 9%. But there, you probably will see a lower value of -- than what we had in the year. And we see a 8% decrease in other markets. And the main reason for the decrease in other markets is China in this quarter, and we see that China is down by 52%. If we look at year-to-date. September, we have a growth of 1% globally for Atlantic salmon, and 3% up in EU, 6% up in the U.S., and 4% down in other markets. And you also see that it is China that is the most challenging market within this other market segment. And we hope to see a more stable development again in China going forward. If we look at the trout, Lerøy is one of the largest producer of trout in the world. And definitely, the largest producer of trout in Norway. As we have said earlier, it's been difficult for trout. Also in third quarter, we had a challenging situation with the prices, with much lower prices compared to salmon. But we also mentioned that we expect to see that the trout will come -- will be closer to salmon price level going forward. And we've seen end of the third quarter and into fourth quarter that the prices of trout has been increasing, while the prices of salmon has been increasing. So it's more on a stable level relatively. And we also expect lower volumes going forward into 2021. And the main reason for the low prices in Europe this year is that where we had 10% increase in Europe and a 17% increase in Norway, which has affected the price level of trout dramatically. But we are positive with a global reduction of 2%, and a reduction in Europe of 6% and a reduction in Norway of 12% in the supply of trout. And this picture in this slide is showing the monthly growth for trout. And we see, so far for this year, it's been a growth of 24%. And you'll see that in some months, it's been up to 50% and 60% growth. And then it's hard to go in and out and to develop new markets and -- yes, so a more stable production would be better. And if we look into next year, we see a higher stability. We see that until October, we will have a huge reduction in the supply. And we expect that the market, the supply and the demand, will be more in balance for next year compared to what we have seen in the last couple of years. So we have a very positive view on trout going forward. Then outlook for Lerøy, fourth quarter. Like we have said, the COVID-19 is unpredictable. We have seen large improvements during Q3 and also expect that these improvements will go into fourth quarter. We expect the contract share for salmon of 30% to 35%. And we expect a decrease of costs in farming. And yes, and we have a total harvest volume of 183,000 tonne for this year. And yes, and if we look into next year, 2021, we expect significant growth in Lerøy. In Norway, we will harvest about 192,000 tonne. And -- including associates like Norskott Havbruk in Scotland and our share, we expect a total of 205,000 to 210,000 tonne, yes. And we still see a significant potential in whitefish even though we've had some challenging quarters. Of course, first quarter was fantastic, the best quarter ever for the whitefish. And the second quarter and third quarter has been difficult. It will be some improvements going into to fourth quarter, and we expect that 2021 will be -- we will do improvements on the industry side on land, and also expect that we will have efficient good fishery and increased quotas for the whitefish. So, yes. So to summarize, we feel that we have a good operation at the moment. We are taking out improvements through the whole value chain. And we believe that we will continuously make improvements going forward and into 2021 and 2022. Thank you very much.