Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2019-Q4

[Henning Kolbjørn Beltestad, Group CEO]

Welcome to the Fourth Quarter Presentation 2019 for Lerøy Seafood Group. My name is Henning Beltestad. I'm the CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, CFO.First of all, I will take you through the highlights in the fourth quarter, then Sjur will take you through the key financial figures, and then I will come back and talk a little bit about the supply and demand and also outlook for Lerøy. Yes. First of all, fourth quarter EBIT before fair value adjustment of NOK 770 million, harvested volume of 43,000 tonne, catch volume whitefish of 13,000 tonne, EBIT all-inclusive of NOK 17 excluded Wild Catch, contract share for salmon of 38%, net interest-bearing debt of NOK 2.6 billion. We keep the harvest guidance 2020 of 170,000 to NOK 175,000 tonne and 183,000 to 188,000 tonne, including associates. Proposed dividend at NOK 2.30 per share, which is up compared to 2018.If we look at the turnover, we break the NOK 20 billion target, and we are happy with that and continued the positive development in turnover of Lerøy. But if we look at the quarterly historic figures, the EBIT, we see NOK 770 in fourth quarter, which is improvement compared to third quarter '19. And EBIT per kilo, all-inclusive, NOK 17 compared to around NOK 10 in the third quarter. In Lerøy Seafood Group, we report in the 3 segments: Farming; Wild Catch; VAP, Sales and Distribution. And I will start with the Farming highlights for this quarter. We see a smaller increase in spot prices of NOK 56 compared to NOK 55.40 and up 1%, and NOK 7.60 up compared to third quarter. Trout price achievement is below the salmon, but we see also that we have had a significant improvement in quality compared to same period last year. So that's on a positive side.Contract prices is higher than the spot prices. As we expected, with last presentation, the cost is down compared to third quarter. The biomass at sea is 1% higher than same period last year. As we said, we keep the same guidance as we presented last quarter, and we are around 40,000 tonne in Lerøy Aurora, 67,000 tonnes in Lerøy Midt and 66,000 tonne in Lerøy Sjøtroll, so total in Norway of 172,000 tonne. And our share in Scotland will be 13,000 tonne for this year, which is the same level as for 2019. Scotland will have a total volume of 26,000 tonne, total of 185,000 tonne for Lerøy Seafood Group is the guidance of 2020. For the Wild Catch, we catched the 13,000 tonne, up 12% compared to same period last year. We see that the average price is up 11% and the price for cod is up 10% and haddock up 14% and saithe up 10%. On the industry side, we see that it's still challenging, especially because of increased raw material prices, which take time to increase in the end markets. If we look at the total volumes, for 2019, we catched 22,000 tonne cod; 9,700 (sic) [ 8,700 ] tonne haddock; 11,500 tonne saithe; almost 10,000 tonne of shrimps; and 9,800 tonne of others. So a total of 62,500 tonne compared to 66,000 tonne in 2018. For VAP, Sales and Distribution. We have had an extremely good quarter. We really see that we -- in most of the activities, we take out the full potential of not the full, but more of the potential in all the activities that we have in all the major markets. So we had an EBIT of NOK 162 million compared to NOK 134 million same quarter last year. Then Sjur will take you through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes, thank you, Henning. This quarter marks the end of 2019. A year, which has not fully met our expectation when it comes to earnings. Looking into our segments, there has been in the whitefish, a good year for the trawling business, the ocean-going fleet. While the land-based industry has been challenging. There is too much capacity, basically in that industry and with lower quarters, it's been a very, very challenging year for land-based industry in Norway, which has impacted in whitefish in 2019 and also in this quarter. Looking at the Farming operation, Q4 has developed much as expected. However, we've had challenges in Aurora in second quarter, particularly with Laksefjord. And we've seen lack of growth in connection with keeping sales figures low in Central Norway. So we lost some 3,000, 4,000 tonnes in Aurora in the second quarter and some 8,000, 10,000 tonnes in Lerøy Midt, particularly in Q3, start of Q4, which we already have stated in previous quarterly reports, but which is impacting then both Q4 and 2019 as a whole. With less growth, there is less volume also to divide costs, that has a negative impact both on sold volume and cost per unit. When comes to downstream, this has been a good year, very strong development from 2018, good development in many markets, not all yet. So there's still significant potential, but the end of a good year. And in some this is what is impacting this quarter and here showing our Q4 numbers. We are a seafood company, not only a redfish company, that is why, despite that, you can see that harvested volume of redfish is down 13%, the revenue is about the same level as last year. There's been good activity in the quarter. Still redfish is currently the key driver of profitability. You can see that on EBIT per kilo, operating margin per kilo, we're down about NOK 1 from last year. So with lower volume and lower profit per kilo, those are key reasons to the decline in EBIT before value adjustment. When it comes to reduction per kilo in margin, as Henning has pointed out, we have a slightly higher spot price this year compared to last year, and we also have a slightly higher price realization, but we have also had a negative development in cost, which is the reason for the year-over-year decline in profit per kilo. Also associates, which I will return to, particularly Norskott. Has a challenging second half, and that is why income from associate is down. In total, EPS is NOK 0.94 earlier this year compared to NOK 1.41 last year. And then key drivers in the quarter is related to both volume and to profitability per kilo. Looking then at the year as a whole, you see that the harvested volume of redfish is about unchanged. You can see that our EBIT per kilo is substantially down. This is related much to cost. It's related partially to the price realization, perhaps about 1/3 and then 2/3 related to cost. That cost development is what we are not pleased with for the year, and it's related to lower volumes to divide cost upon. And these are the key factors to why our EBIT is down from around NOK 3.6 billion to NOK 2.7 billion in 2019, and also then key drivers for the reduction in earnings per share from NOK 4.90 to NOK 3.50. Our balance sheet is obviously impacted by changes in IFRS, and then IFRS 16, which demands us to put in all rental agreements on our balance sheet. So you can here see the right-of-use asset, which is a new asset class of around NOK 2.4 billion, which is a key driver then for a higher total noncurrent asset this year compared to last year. But also, in addition to this, we have invested heavily, particularly in the smolt facilities. Looking more at the current assets, you can see that our biomasses, it's a little bit larger. As Henning has already pointed out, cost level is a little bit higher. So it's kind of like balanced. We've been able to manage to have lower inventory as a group and '19 compared to '18, which is good for working capital. Prices at the end of 2019 were very, very high, and which is impacting receivables. And we have a good cash position. In total, we would say we have a strong balance sheet. It appears equity ratio is down from 60.4% to 58.8%, but much of this is related to IFRS 16 adjustment. And if we hadn't had IFRS 16, our equity ratio would have been higher than last year. Key points for us is that we have a strong balance sheet. We have a pretty stable development then in net interest-bearing debt. And then looking more at development in net interest-bearing debt and cash flow. In the fourth quarter, I think the key point is on building working capital. This relates to receivables, relates to some growth in biomass, also relates to some increases in debt to suppliers. But I think on annual basis, it's more interesting to look at the cash flow on an annual basis. EBITDA is impacted by IFRS 16. So we can see further down, there is a line called installments paid on lease liabilities, which last year was included in EBITDA. So EBITDA development like-for-like is some NOK 4.2 billion to NOK 3.5 billion, which is then reflecting what we touched earlier -- touched upon earlier. We see that we paid less taxes, but we also see that we had a more positive working capital development in 2019. And thus underlying the cash from operation is not that much changed compared to last year. We have invested less. We paid a higher dividend. And in some, you can see there is an impact from IFRS 16, and if it hadn't been for that, the debt level would have been basically unchanged. The Board has communicated in our target and objective is to reach 18% return on capital employed. That is heavy target. At this period, we actually have reached above that, we have been above the last 3 years. This year, we are slightly below. Key reason is the lower production and harvest volume in Farming, combined with the fact that we have invested heavily for the growth of our business in coming years. So in the years to come, we believe there is potential to have a higher production out of the assets. That is in our balance sheet at the end of 2019. Yes, Lerøy has paid a dividend for many, many years. So we are a stable dividend provider. You can see that on the left-hand side here is the absolute level of dividend. It's been, I would say, growing and quite stable. This year, it's -- the Board proposes NOK 2.30, which is an increase from last year, represents about 2/3 of earnings per share. And that represents the 4% dividend yield. And Henning has already touched upon the profitability in different segments. Just to highlight that, as you can see, lower profits in Farming is a key reason for lower result -- operating result this year compared to last year. In Aurora, we've had the development we have expected for Q4. We had some growth challenges, as highlighted in the start of the year, it's returned to normal second half. Good growth gives a good development in cost and development in this quarter, as expected. Unfortunately, start of this year in January, we are seeing some challenges with the winter ulcers, which will impact then both our production. So we don't currently have the full production we had expected. And also, it will impact the quality and the price realization. So that will impact profitability, EBIT per kilo in the first quarter. For the year, we continue to believe in good numbers from Aurora, and we have also invested quite a lot in smolt here. And average size this year will be around 300 grams, which should give good growth opportunities for the years to come. As already highlighted in Lerøy Midt, operations in Central Norway, we had some challenges, Q3, early Q4, as highlighted in our previous quarterly presentation. Following, we have a lower production, particularly on one generation, which is impacting cost this quarter and will also impact cost in first quarter, but we expect lower cost level in the first quarter than this -- in Q4, and there is a potential for lower cost in 2020 compared to 2019. Looking at our operation in Vestlandet, and previously Hordaland in Lerøy Sjøtroll, development has been much as expected this quarter, a good lift in profit levels from Q3. The interesting -- particular interesting part here is development at the new smolt facility. We will again release post-smolts in March, and we have high expectations that, that will start impacting our results from late 2020 and even more in 2021. I think we already touched upon key points from Henning on Wild Catch. You can see there is a positive development in prices. There is a good development in volume. The trawling business, the sea -- the ocean-going fleet has had a good quarter. While it's been a very challenging quarter and a very challenging year for the land-based industry. And basically, the change from '18 to '19 is a change in profit level in the land-based industry. Also, including then increases in depreciation, amortization, as we have invested quite a lot for developing the land-based industry. We expect to see results from those investments in this year. And then a more positive development. This is Norskott Havbruk, Scottish Sea Farm, which is operation, we jointly own together with SalMar in a 50-50 joint venture. As highlighted in the previous quarter as well, second half of 2019 did not develop as expected and challenges early in the year is impacting volume and thus impacting cost. And those cost level in the second half of '19 is higher than what we had aimed for and what we had expected. We expect now a lower cost level in first quarter 2020. But also harvest volume in 2020 will be impacted. We expect to see significant growth in 2021 and get back to kind of like the growth pattern than we had -- have been planning for. And part of what's going to support that, there's a new smolt facility with the first smolts delivered in this quarter. Yes. Henning has already touched upon our downstream operation. It's one of the best quarters we have ever seen. It's a good margin development. There's still potential in several markets to lift the profitability level. And we are doing everything we can to make the positive development seen in 2019 to continue into 2020. And with that, I give the word back to you, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Then I will take you through the outlook and supply and demand. First, if we look at the supply side, we see that in Europe, we expect 3.5% increase in volumes compared to 9% in 2019. And for the Americas, 4.8% and a global growth of only 3.9% compared to 7.4% in 2019. If we look at the prices, we see a very volatile prices in the last months of the year. And we see from September NOK 40 and then end of December up to NOK 80. So doubling price within 2 months' time. So volatile price level this quarter, but also shows the good demand that we see for the Atlantic salmon and the willingness to pay for a fantastic product. If we look at the harvest volumes in Norway, we see its negative numbers in the first quarter, and we will have 2% to 7% growth per month for the rest of the year, which should be possible to handle in a good way. If we look at Europe, we see a more negative growth in first quarter, we see that the U.K. is down, the Faroe Island is down in January, February and March, and the total is down 3%, 4% and 3%. And then we will have 2% to 10% growth per month the rest of the year. If we look at Americas, the production is -- the slaughtering is high at the moment, up 6% in January, 10% in February, 7% in March. And also the -- especially in the [ chilling ] countries, it's facing some challenges with the key markets that they sell to. So it can be a challenging price situation from these production areas in the start of this year. In total, we see a stable growth month-by-month and the lowest growth in first quarter, which also is reflected in the price levels that we are facing in the spot market at the moment. If we look at the Atlantic salmon consumption. We see EU is up -- for our fourth quarter, we see EU is up 3%, other markets is up 2%. USA, up 9%. And the year as a total, 2019, 6% in EU, 7% in other markets and 8% in the U.S. If we look at the outlook. For us, we believe that the seafood market will remain strong, both for redfish and also from -- for whitefish. We keep our guidance for salmon and trout this year of 183,000 to 188,000 tonnes. And we increase the guidance for next year from 200,000 tonnes to 210,000 tonnes. And we expect the contract share for salmon of 40% in first quarter. And we see a significant potential in whitefish and further development of integrated value chain. And this is our value chain. We invested heavily in the last 20 years to build this fantastic value chain. And our target is to create the world's most efficient and sustainable value chain for seafood. And we have a good start. And as I said, we have invested strongly into whitefish and redfish and also all the downstream activities with -- in all the central markets in Europe and also in other regions. One of the largest investments that we're doing at the moment is the post-smolt facilities. And we just started to build Belsvik 2, and where we -- which will be one of the biggest smolt facilities in the world with a biomass of 5,000 tonne. And this factory is expected to be the step 2 of this Belsvik will -- is expected to be ready in third quarter 2021, and the first output in March 2022. If we look at the Laksefjord, we had an accident last year, which delayed this project a little bit, but we are now seeing the end of the production, on -- the building production, and it will be finished around fourth quarter. And this will give us a larger smolt, and we will see increased volume this year, but especially for 2020, we will see a large increase in volumes coming from this facility. So -- and then this new smolt facility in Vestlandet is finalized, 4,000 tonnes biomass capacity. We will have a new release of post-smolt, 500 gram in March 2020. And the average size of released salmon smolts in Lerøy Sjøtroll will be around 300 gram this year. And this will impact fourth quarter 2020 and with a major potential for '20 and volumes for 2021. In this quarter, we also got a new trawler, and which we had the first trial in February. This is adding capacity as a substitute for the smaller older vessels. It's development of Nordtind design. It's the world's first demersal trawler built with the live fish tanks prior to sedation and slaughtering to improve quality. It's the world's first demersal trawler built with battery hybrid solution. It's triple trawl for shrimps. It's -- the first catch, we had a catch period of 17 fishing days. We had harvested 890 tonnes headed/gutted fish and also 300 tonne silage. And so a very good start with a total value, catch value of NOK 38 million. So a tremendous start for this new vessel. And we're really proud of that. And, yes, all the people that have been involved in this project and the fishermen have done a fantastic job in the development of a world-class vessel, I will say. Then we have built a strong European distribution in Lerøy over the 20 last years. We now have a good fundament, a good position in all the major markets in Europe, and it gives a huge potential to develop the seafood category going forward. And the latest will be in Italy, where we will open a fish cut Lerøy distribution center later this year. Then at the end, we will have -- we'll host a Capital Markets Day in May/June 2020, and we will come back with further information about -- and invitation about this Markets Day. That was all. Thank you very much.