Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2017-Q4

[Henning Kolbjørn Beltestad]

Good morning, and welcome to fourth quarter presentation of Lerøy Seafood Group.With me today, I have Sjur Malm, which will take you through the key financial figures. First of all, I will take you through the highlights in the quarter. And then I will go through the outlook for supply and demand.First of all, fourth quarter, a good quarter with EBIT before fair value adjustment of NOK 777 million; a harvest volume of 42,000 tonne; EBIT all inclusive, exclusive EBIT of Havfisk and Lerøy Norway seafood of NOK 16.5; a contract share of 30%; net interest-bearing debt of NOK 2.2 billion; a harvest guidance of 169,000 tonnes, which is increased by 2,000 tonne compared to the guidance that we gave in last presentation; proposed dividend of NOK 1.5 per share.As you can see from this graph, we have still increasing the total turnover of the group, almost up to NOK 20 billion, NOK 18.6 billion in 2017. If we look at the quarterly historic figures, also we see the last couple of years, with very good total EBIT every quarter; and also the same for the EBIT per kilo all-inclusive, and last quarter of NOK 16.5.I will then go shortly through the different segments, the Farming, the Wild Catch, and VAP and sales and distribution before Sjur takes you through the key financial figures.If we look at Farming highlights. We have seen lower prices this quarter than what we normally have seen the last quarters and the last 2 years. We see a decrease of 25% in fourth quarter of '17 compared to fourth quarter of '16. And it -- and that's down NOK 16. Compared to third quarter, we see a NOK 7 reduction in price.The trout achievement is below the salmon in this quarter mainly due to quality downgrade in -- for the trout in this quarter with some maturing of the trout. The contract prices are above the spot prices. The cost is down compared to third quarter. And we see an increase in biomass compared to the end of 2016, of 4%, so more fish available in the sea. And the total biomass end of the year is 112,000 tonne.If we look at the Farming volumes. The guidance for 2018, we see a smaller decrease in Lerøy Aurora down to 38,000 tonne. We see increase of 3,500 tonne in Lerøy Midt from 64,500 to 68,000 tonne. And we see Lerøy Sjøtroll with a large increase from 54,000 tonne to 63,000 tonne. And the total volume from Norway is up to 169,000 tonne from about 158,000 tonne in 2016. And Norskott Havbruk is -- it's a little bit down. Total volume is 26,000 tonne in 2018, and our share is 13%.So a total of 182,000 tonne.The Wild Catch. The fishery has been good even though it's a little bit down in the fourth quarter compared to 2016, but the total volume in the year is up 5%. The prices for cod is up 7% in this quarter, and the haddock is up 17%. And the saithe is down by 14%. We see improvement in Lerøy Norway seafood compared to third quarter, but profitability remains at an unsatisfactory level still. But we are working to -- a lot to improve the situation in -- on the factory side.VAP and sales and distribution, good quarter. We have a strong position as a full-fledged integrated seafood supplier and are building our downstream activities step by step, close cooperation with strategic customers all over Europe and also in Asia and the U.S. And we see that this is improving step by step even though that fourth quarter is a little bit lower results than in same quarter in 2016. But the whole year as -- we see improved result in this segment.And Sjur will come back to that now. So Sjur?

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning.I'll walk us through the key highlights of the financial results for fourth quarter and for 2017.We are pleased with -- quite pleased with our performance in the fourth quarter. You can see the main drivers on the lateral lines. We've harvested 8% more volume, but the EBIT per kilo is less than last year due to lower salmon prices. In sum, this means that our EBIT is down 34% compared to last year -- sorry, 24% compared to last year at NOK 777 million. Associates, same level as last year. This includes our operations in the U.K. as well as our operations in -- now in Denmark as the key contributors.Earnings per share, at NOK 1.12 compared to NOK 1.45 (sic) [ NOK 1.43 ] last year. I'll get more back to the details, but in sum, we would say it's a fairly good quarter for the group.Looking at the annual numbers. This is the best year for our company ever. We have the highest revenue, highest EBITDA, highest EBIT, highest pretax profit, highest EPS in the group's history, and we are pleased with that. I think it's interesting to note that obviously, price is part of the factor. As you can see, our EBIT per kilo is up from NOK 18.30 to NOK 21.10, but you can also see that volume growth is quite important, explaining the increase in the operating result.So NOK 3.7 billion in operating result, we are pleased with.Looking to our balance sheet. This now compares with the quarter last year, where our whitefish acquisition was already consolidated. So you can see there are no changes in intangible assets. We have invested a lot in smolt facilities as well as harvesting and processing facilities on redfish. That's why tangible fixed asset is up. You can see biological asset. Henning has already commented that biological asset is 4% higher than last year. Cost-wise, they're at same cost point, meaning that the cost per kilo at efficiency is less than last year, indicating potential for cost reductions into next year. Inventory is a bit up. And we have more inventory with our acquired whitefish business than we used to have. Receivables, lower than last year due to less volume in December and lower price.A good cash position and equity ratio of 56%. Net interest-bearing debt is NOK 2.2 billion, and we are pleased with the cash flow generation of 2017.Just showing this slide to show that we have a balanced amortization schedule. We are well within our covenants.I think, on cash flow, focusing on the year is the most representative. We have NOK 4.3 billion in EBITDA. We paid tax based on results in 2016. We built some working capital, where inventory is part of the picture, but we have cash from operating activities of close to NOK 3.7 billion.We have invested NOK 1.5 billion in what already is mentioned; and received dividends, particularly from Norskott Havbruk operation in Scotland. We made an acquisition in Denmark, part of a transaction, which is part of the NOK 104 million in change, all in noncurrent assets. But in sum, we paid a dividend of above NOK 800 million, but after NOK 500 million in tax, after NOK 1.5 million in CapEx, after NOK 800 million in dividends, we have still reduced our net interest-bearing debt by NOK 1.2 billion. So a very strong cash flow in 2017.Lerøy was listed in 2002. The aim was to have an 18% return on capital employed. Since then, interest levels have -- are at a completely different level, but we're still able to be at that level. And the average in this time period shown here is above 18% in 2016, '17. This includes the largest acquisition ever into whitefish, which is not currently generating the return on capital employed at these levels, but we hope it will get there.Some comment on dividend. This slide to the left is showing absolute dividend payments, and everyone, you can see that there is a stability and an increase in dividends. Lerøy has in modern times always paid a dividend and will always pay a dividend. Dividend policy is staying at 30%, 40%, but continuity is also very important. So in some downward years historically, dividend ratio has been about 100%.This shows development in market cap and development in volumes of salmon and trout and now also whitefish. And we are with own catch, own harvest close to 240,000 tonnes in 2018. And beyond this, we buy significant volumes of third-party fish in Lerøy Norway Seafoods of whitefish as well as other producers of salmon and trout and other species. And in 2018, Lerøy will sell probably around 350,000 tonnes of seafood equivalent tonnes. That makes us the largest seafood exporter out of Norway. We are among the larger in Europe and also in the world. And as this slide is starting to show, we are much, much more than just a salmon and cod producer today.This shows segments compared to last year. Key change is profits in Farming, which is down due to price.Some comments on different regions. Aurora is -- I think, is the lowest-cost producer of salmon in the world today. If it's not the lowest, at least it's among the lowest. We are very pleased. We have been able to grow volumes by 10,000 tonnes in 2017. Costs are down in the last 2 quarters and we expect to continue the industry-leading cost for 2018. We made investments to invest NOK 230 million in larger smolts and are -- and then [ recircling site ] of around 2,000 tonnes biomass production. Good performance, strong results. Very happy with the operations.Lerøy Midt has seen some challenging years, particularly 2015, 2016. 2017 has been quite a turnaround year in operations. We have long lead times in production, so it takes time to see the results, but gradually over the last 2 quarters there's been a significant fall in release-from-stock costs. The trend is falling. We expect significantly lower costs into 2018. And production is good. That's also shown in a 12,000 tonnes increase in production compared to last year.So 2 good regions and then 1 region with challenges. This is Hordaland. This is where we have seen challenges for many years. And also this quarter, we had a quite acute challenge in Q3 at some sites. That's impacted the volume in Q4, amount of fixed costs Q4. And we're not pleased at all with the results second half in Lerøy Sjøtroll. I think the potential in Hordaland is huge both when it comes to volumes and when it comes to costs, but we've not still been able to utilize it. We are seeing that larger smolts, that investment in where we contain the fish in the earlier phase is giving good success stories. So we have high expectations for our new smolt facility, which will be finalized first in 2019 but we will put in the first eggs in -- now in May. And we will see first release in '19. We think that will give us a good improvement in this region.Wild Catch, Henning has already touched upon. Havfisk, strong performance, high catch efficiencies, a little bit lower volumes than last year, higher prices but good profitability. The land-based industry Lerøy Norway Seafoods is a challenge. It's been a challenge for the previous owner and every owner the last 10 years. And there isn't much fill at the end -- industry in Norway at all on whitefish due to the fact that it's challenging. We're doing everything we can. We are taking significant measures. And we believe, step by step, this will improve in the coming years.Scottish sea farm, our joint venture in the U.K., excellent 2017; with some challenge toward the end of the year with gill health issues at some sites that led to accelerated harvesting, lower average harvest weight, higher costs and higher volume than in 2017. And this will bring lower volume in 2018 down to 26,000 tonnes and a net interest-bearing debt of NOK 181 million in 2017. 2017 was a great year for this operation.Henning has already touched upon value-added processing, sales and distribution. I think this has been kind of like a -- this has been a very important year for Lerøy in this segment. We have truly repositioned the company as an integrated player in whitefish as well as redfish. We have good -- and we believe we are in a unique position to solve many of our key customers and strategic customers, their needs. And we have taken clear steps with larger strategic customers in 2017, at least in my view, than any year before. So the future for this segment is very interesting. We have a unique position, and we look forward to continuing to grow that in the future.Outlook, Henning?

[Henning Kolbjørn Beltestad]

Thank you very much.Then first of all, we're going to look at the supply side for 2018. And what we'll see now, it's that the global growth will be around 5%, Norway up 7.5%, U.K. down 9%. And Chile is up about 5%. And this estimate is lower than what we saw in January. This estimate is updated 16th of February.If we look at quarterly prices, we see that fourth quarter 2017 was at NOK 49. We see that first half of first quarter, we have a price achievement of -- the NSI price achievement of NOK 54. And we see in the spot market the weekly price is -- now is improving a lot. And this week, we see prices between NOK 65 and NOK 70, so a strong increase in the prices week by week the last couple of weeks. And also, we now have the period going forward up against Easter. We also expect that the price level will be above what we have seen so far in the quarter.If we look at the volumes last year. This is the weekly volumes. And we also -- this is one of the reasons for the price decrease in the end of the year and with extremely high growth in the last -- the month of December 2017. And we also see that the trend continues into January, where we also had a huge volume increase, up 21% in Norway. We see 9% in February and then 0 growth in March. And we also see that the volume then -- the first 7 months is very stable level around -- between 90,000 and 100,000 tonne in Norway, yes, on a monthly level, which will give about -- the export volumes out of Norway between 20,000 to 23,000 tonne on weekly numbers. So -- and we see that the second quarter estimate is taken down compared to earlier reports from Kontali. So we see that we have an expectation that second quarter also we will see fairly good prices.If we look at Europe, it's a very similar picture. Chile, it's increased the first 6, 7 months. And then we will see a flat growth or 0 growth in end of the year. And if we look at worldwide, the picture: So in total, this is up 5%. The highest growth is behind us, and that was January. And the second highest month is February, which is -- yes. Now we are in -- already in a couple of days, we are into March. So we have taken the highest growth month is -- yes. That's behind us now.If we look at consumption of Atlantic salmon, we see the total consumption numbers from the year -- for the year. We see that EU is down 2%. The U.S. is up 4%. Other markets is up 5 -- 8%. So at a high price level, we see that the other markets is the markets that is really driving the demand for salmon.If we look at the third quarter, we see then the prices is down. I think, in this quarter, we had a price level of about NOK 57. We see, when the price comes down, we see that the EU is now flat, 0% growth; the U.S. up 8%. And we see that other markets is increasing by 16%. And if you look at the fourth quarter, where the prices is down to NOK 49, we see that demand in the EU is increasing, up 7%; the U.S. up 17%. And you see other markets up 19%. So you see that the markets is really reacting on the lower pricing -- price levels.If we look at other markets. It's -- the largest market in other markets is China -- or a combination of China, Hong Kong and Vietnam. Most of this fish from Vietnam is going into China. We see Brazil is down. And we see a lot of other immediate-size [ medium-sized ] markets is increasing a lot.This one is the smaller markets, but we also see a very positive growth in all the smaller markets.If you look at fourth quarter, we see a very strong growth in China. We see also a strong growth in Brazil. And especially, Brazil is reacting on the lower price level, especially from Chile. But the good thing is the situation with China also, we see more and more direct export from Norway directly into China now. And I think, in January, we had about 2,500-tonne exports to China. And we see that the volumes is -- on weekly volumes between 400,000 to 700,000 tonne is stabilizing the export to China. So this will be positive going forward and we think that China will be one of the major markets for Atlantic salmon going forward.Then to summarize. We see we have a positive outlook for both whitefish prices. We also see that the salmon prices will be at a strong level even though it will be some fluctuations. And at least, the first 6, 7 months, it will be a good price level. We expect a contract share of 25% in first quarter. And we see a significant potential in whitefish. We -- 2017 was the first year. And we are improving all steps in the value chain also for the whitefish and step-by-step improving this operation going forward. It's been an exciting year with the whitefish but also a lot of new challenges for us within this area, but we are positive on the things going forward.And from this quarter, we will also change, yes, start reporting volumes for both catch volumes and the harvest volume of salmon and trout, beginning in the start -- in the quarter right after each quarter.So that's what we have today. Thank you very much.