Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2020-Q4

[Henning Kolbjørn Beltestad, Group CEO]

Hello. Welcome to Lerøy Seafood Group's Fourth Quarter Presentation 2020. My name is Henning Beltestad. I'm the CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, CEO -- CFO. Yes.First of all, I want to show this fantastic value chain that Lerøy represent today. A fully integrated company of redfish and whitefish. This gives us a unique opportunity. And it's not many companies like Lerøy in the world today. For 20 years, we invested heavily in the whole value chain, in farming, in fisheries, in processing, building smolts facilities, building VAP activities, distribution centers and fish cuts and delivering our products all the way to the end customer. And our goal is to create the world's most efficient and sustainable value chain for seafood. And we will make it happen. I promise. We have a huge potential of improvements that I'm sure with our 5,000 employees, we will reach this goal. Then, 2020, a challenging year, but still only a small dip in the turnover. So close to NOK 20 billion compared to a little bit lower than 2019. And we see, going all the way back to 1990, we see that we have had a very, very good development in the group. Then, we will go to fourth quarter. First of all, I will take you through the highlights, then Sjur will take us through the key financial figures, and then I will come back to talk a little bit about the outlook, supply and demand of seafood. Yes. Let me start with the highlights. Lerøy Seafood Group, we report in 3 segments: Farming, Wild Catch, VAP, Sales and Distribution. On the quarter, we had an EBIT before fair value adjustment of NOK 441 million. We have an EBIT per kilo all-inclusive, that excluded Wild Catch of 9.3%. Of course, this quarter, we've been affected by prices of both whitefish and redfish because of the very special situation that we have had in 2020. We have not had ability to sell through one of our channels, the HoReCa, which has been very difficult for the whole industry, of course. Yes. If we look a little bit forward and going forward, we expect to harvest about 205,000 to 210,000 tonnes of salmon and trout in 2021, including our 50% share of Scottish Sea Farms, and we have potential for further growth beyond this going forward. And we expect the whitefish volume of around 73,000 tonne. If we look at the volumes in fourth quarter, we had 48,300 tonnes. We catched 12,600 tonnes, and we had a revenue of NOK 5.2 billion. Farming. Like I said, it's been challenging. And the prices this quarter is the lowest price in the quarter that we have seen since, I think, 2015. Compared to fourth quarter last year, it's NOK 13 down. Then we had a price of NOK 56. And it's NOK 4 down compared to third quarter. So for us to have a good result, even though with extremely low prices, is good to see. And we also see that the trout market is more imbalanced than earlier quarters, and this trend is also continuing into 2021, and we now face prices for trout that is higher than the salmon. That's good.We expect the contract share -- now, we had a contract share of 32% in fourth quarter. And the cost is down, like we also indicated with our last -- in our last presentation. And the EBIT per kilo in Farming is NOK 6.1 million compared to NOK 14 million in 2019. For the Farming volumes, the guiding, yes. 2020, we achieved 35,000 tonne in Lerøy Aurora, 67,900 in Lerøy Midt and 68,000 tonne in Lerøy Sjøtroll, and a total of close to 171,000 tonnes. And when we presented a guiding for 2020, in November 2019, we guided 172,000 tonnes. So we are very close to what we said all the way back in November 2019. And Norskott achieved 24,000 tonne, and our share is 12,000 tonne. So a total of 182,900 tonne. For this year, we see 47,000 tonne in Lerøy Aurora, 70,000 tonne Lerøy Midt, 75,000 tonne in Lerøy Sjøtroll and a total of 192,000 tonne in Norway. And we also see Scottish Sea Farms is increasing their volume up to 36,000 tonne and our share, the 18,000 tonne. So a total of 210,000 tonne, which is close to 30,000 tonne increase in volume for 2021. Yes. If we look at the Wild Catch, challenging quarter. We have a very good start in 2020, but the last 3 quarters has been very difficult for the whitefish. One of the main reasons is that a large share of our volumes in whitefish is going into the HoReCA channel. And so the prices is also affected in whitefish. But if we look at total, we have NOK 205 million in EBIT compared to NOK 293 million EBIT in 2019. And I will say, in total, this is acceptable. And I will say that we have performed relatively good in a very, very difficult year. If we look at the volumes in Havfisk and split on volumes, we're 7,000 tonne, cod; 2,000, saithe; 1,000, haddock and a total of 12,600 tonne. Then we have VAP, Sales and Distribution. And it's been very good to see the way that we -- this part of the value chain has handled a very difficult situation, holding the value chain open and being -- and keeping its very high service level towards our customers all over the world and delivering high-quality and stable volumes the whole year. And the result of this segment is very good, NOK 176 million compared to NOK 162 million in fourth quarter 2019. But we still have a lot of potential to take out of this part of the value chain, a lot of capacities, and we think that we are able to take of this potential going forward. Now Sjur, he will take us through the key financial figures.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. So we've invested a lot downstream over the recent decades. And this year has been a demanding year in any respect. But we believe that those long-term investments in the vertical integrated value chain and a high customer focus is proving profitable in such a demanding year as 2020 has been. And we believe this supports our business model and our strategy.Looking into the numbers. Henning has already talked us through the key figures. Here, you can see key drivers when looking at salmon and trout. We harvested a larger volume this year compared to last year. The profitability per kilo is reduced. And cost is also reduced, so that profitability per kilo is reduced due to price achievement. Looking into the Wild Catch segment. Debt reduction in profitability per kilo is also related to price realization. So in sum then, our operating number, our operating profit is NOK 441 million, down from last year, driven by price effects. In light of those price effects, it's positive to see that revenue is only down 1%, and that indicates a very high activity level through the value chain, but also in this quarter. Income from associates is a little bit up, return to the largest asset. And we have a profitability per share of NOK 0.62 down from last year. Looking at 2020 as a whole, we find many of the same drivers in Q4. We have seen a substantial increase in harvested volume in redfish. And beyond that, the standing biomass in amount of live fish in sea is higher in 2020 than it was 2019, meaning that 2020 is our best production year in terms of volume ever in our farming operation. Profitability is down, and this is related to price achievement.Looking into the Wild Catch segment, it has been a demanding year. We have seen lower prices on the total portfolio of products and those lower prices impact profitability. And in sum then, our operating profit for the year is down 29% from last year, driven basically by price effects. And again, you would see that underlying activity is high, given the relatively minor reduction in revenue. Earnings per share for the year is NOK 2.46, down 29% from last year. Looking into the balance sheet. Our intangible assets [ stir up ], that's due to acquisitions of licenses in Norway from the Norwegian government. We have invested a lot in assets. Key assets include a new floor in the whitefish segment. That includes further build-out of the smolt facilities both in Central Norway and Northern Norway. And those are the key drivers beyond -- for the increase in tangible or of total noncurrent asset. Looking at biological asset here measured at cost, we see that, that figure is up. But it's comforting to know that the amount of biomass has grown more. So the cost per kilo going into 2021 of our live inventory is lower than it was going into 2020. Inventories. There are no larger changes on receivables. I would like to use this opportunity to give -- there's been a fantastic drop down in the credit department and we've seen only very, very minor losses in that challenging year. In sum, we have a very strong balance sheet, in our view, net interest-bearing debt of NOK 3.5 billion.Looking on changes in net interest-bearing debt or cash flow. We focus on what's happened on the year as a whole. Our EBITDA or profitability has been less than last year and has been less than what we expected coming into the year. Those changes and expectations are related to price achievement. We paid a little bit less tax as our profitability in '19 was lower than '18. And we built a little bit of working capital due to building high biomass. We have invested and continue to invest heavily in our own value chain. And those investments are already covered. It's the trawlers and smolt facilities. And we paid a dividend of NOK 1.50. And in sum, our net interest-bearing debt is up by just below NOK 900 million. We believe we have a strong balance sheet and a good position going forward. Looking then on return on capital employed. The long-term objective for Lerøy is reaching 18%, and that is a tough objective. And we are not there in 2020. And key drivers for the reduction from 18% is lower prices. But we do believe that the investments we're making, both in assets and also in our organization, it gives us a good potential also going forward. Not saying that we will reach 18%, but we will do our best. In this period from 1993 up to and including 2020, Lerøy's average return on capital employed is just about at 18%. On dividend, the Board has proposed to the general assembly a dividend of NOK 2 per share. That is higher than the normal stated dividend policy between 30% and 40%. And is also then a reflection of the dividend paid out last year, which was reduced from NOK 2.30 to NOK 1.50. We see that the trend of paying dividends and also a stable increase in dividends is continuing and dividend yield based on market cap and 2020 is around 3%. Looking into the segment, that's already been covered by Henning. We see the price effects in Farming and Wild Catch, and I get more into the following slides. Looking into our operation in Northern Norway, Lerøy Aurora, we had a good performance, Q3 and Q4, good development in costs. But we are seeing some increased challenges on the development of winter rules also in 2021. That will impact price realization in the coming months. But we do believe we are much better prepared to handle the situation now in 2021 than what we was in 2020. We continue to expect harvest volume this year of 47,000 tonnes. Also, and the smolt facility in Laksefjord is now finalized and will be fully utilized in 2021. Central Norway. We had a good production here. And production continue to be good. Among choices we have to make is which fish to harvest, and we're harvesting the fish that is not performing as good as we have expected. And this quarter, we've harvested smaller-sized fish at the lower average harvest weight, which is negatively taking both price and cost. But there's no change to the underlying development in Central Norway. And our expectation is despite no growth in 2021 or basically no growth in 2021, we are in a position to lower our cost slightly. And for future growth potential, we are currently building a new smolt facility, which will be finalized late this year, early 2022, which will give growth potential for the years following. At our operation in Western Norway, this has been challenging for many years. And we are very proud and very happy to present these numbers. It's a lot of effort and a lot of investments, and it's very positive to see that, that is bearing fruits. Among investments, our smolt facility in Kjærelva seems to be giving the impact we have been hoping for. And we believe that the focus, the work in the organization is also developed in this region. And the numbers this quarter are strong compared to previous numbers. And it's comforting to see, looking forward that we expect this trend to continue. So in 2021, we expect higher harvest volume and lower cost than what we saw in 2020. Still, our expectations are that costs in this region are higher than other key regions. So there is still potential that can be taken out. Looking into Wild Catch. Henning has already covered that the catches of haddock was a little bit below expectations in Q4. Other than that, there are no -- cash volumes were in line with last year. And what we are seeing in profitability is an impact from lower price realization. Looking at the year, as a whole, profitability for the year is down due to lower price realization. And looking into 2021, we know there will be a high quarter, which is positive for asset utilization. And the big uncertainty is, obviously, price. Downstream, we are seeing improvements. And we see that our focus on working through the value chain is working well. We have improvement projects in many of our factories, and those are working also well. And we see that the focus on a very strong customer focus is also working well. So positive development increasing profitability from last year. And we do expect that there is a higher potential in this segments for the year to come. And to our associated company in U.K. in Norskott Havbruk, which is the owner of Scottish Sea Farms. This is a good quarter with cost reduction -- expectations for further cost reductions. Also, here, there's been done investments in improving the size and quality of smolts. And also, here, those investments are working in terms of potential volume growth and potential cost reductions. So a good quarter, and we continue to expect to harvest 36,000 tonnes in 2021. So with that, I hand the word back to you, Henning, to tell us more of where the seafood market is heading.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you, Sjur. Okay. Then, we will, first of all, have a look at the supply side. If we look at 2020, we see a global growth of 5.1% and split it down on a growth of 1.6% in Europe and 11.4% in Americas. If we look at the estimates for this year, we see that we expect a growth of 8.4% in Norway and a negative growth of 7.3% in Americas. And it's mainly Chile that is driving down that volumes. In Europe, it's -- of course, Norway is the largest one, increase of 7.3% -- 7.1%. U.K., in percentage, is up 12.3% and Faroe Island, up 21% and Iceland up -- further up, 23%. So we expect a good growth in Europe this year. And at the same time, we are facing extremely low price -- extremely low temperatures in Norway at the moment that might affect the total volume of the years, but it's probably too early to say what effect it will have. If we look at the prices, we see that the fourth quarter is the lowest quarter that we had all the way back to 2000 and -- yes, second quarter -- no, third quarter 2015, we had NOK 41. So and the main reason for that is, of course, 2020 has been extremely challenging for everyone in the world. And also, it has affected the Atlantic salmon. And we also see that into 2021, we also see low price level around NOK 45. But we think that looking at February, the price is a little bit higher than that. And we are facing extremely high volumes.This is not shown here because this is controlling numbers from 27th of January. And I think that the volumes in -- the volumes in January is much higher than this. And also, in February, we are seeing very high volumes on a weekly level. And I think last week was up to export of 28%, [ 9,000 tonne ] compared to 22,000 tonne last year. So every week, the volume is much higher than what total estimated. So we are taking out more biomass than what we expected. So that might change this picture. So it will be interesting to see next week when we get all new updates from Kontali.And then we see we have stable volumes all the way until July. We will have a volume around 110,000 tonne. We believe that the -- all the channels, the HoReCa, and in all markets will step-by-step open up, and we believe that the demand will slowly come back, which might give us positive price development going forward. And we also believe that the volumes in the second quarter might be lower than what we expect because we take out more fish now, that we will see a high price level, second quarter this year. And when you come to second half of the year, we expect that then even more will have open up, hopefully, and the market will not be back to normal, but close to normal. And then we expect that the low prices for a long time into retail now, reach new consumers that also will stay there when the HoReCa is back, which will increase the demand for us. So we believe in a positive trend going forward, and we hope that we are at the bottom level at the moment. Yes. Europe, same -- total Europe the same picture. If we look at Americas, we saw that we will have a reduction of 7.1%. And a lot of this reduction will come from May until end of the year. And this is -- fits good with the volume from Europe. And we see that we have a very stable supply situation for some through the year in total. And that's good. That makes us in a better position to have stability, volume into the market and -- which is good for the growth of the demand. So that's positive.If we look at the markets. Fourth quarter, we see EU is up 15%. Other markets, up 2%; U.S.A., 5%; and then Russia, 13%; and Japan is growing fast now and is up 26%. And if we look at other markets, I will especially put my attention to China, which is down 50%. And -- but we see now going into first quarter that the volumes in China is increasing step by step. So that's on a positive side for this year. Also, if we look at the full year, we see that EU is up 6%; others, down 3%; U.S.A., up 6%; and Russia, stable; and Japan, up 20%. And I think as we see, we have never consumed more salmon in Europe ever, 1.2 million tonnes. Now that's an impressive. And we still believe that the market for Europe can grow even further when the HoReCa is opening up again.If we look at the consumption in other markets, full year, we see China is down 33%; Brazil, stable. But there, we still have some heavy growth in a lot of these other markets, which is positive.Then, the trout, of course, the trout is very, very important for Lerøy and especially for Lerøy Sjøtroll. We are one of the largest producer of trout, and we have been affected heavily by volume growth last year and also the difficulties with the market access, especially to Russia. And so the 4 or 5 last years has been difficult and with a low price achievement for us and for other trout producers. But now, as I said, it looks more positive going into the first quarter. And right now, we are facing higher prices for the trout than salmon, but at very low volumes. In total, Americas, we see down 11%; Chile is down 26%; Europe is down 8%; and Norway is down 15% and a global reduction of 9.5%. So we believe that we have grown a lot of markets because of a high supply, the last year, up 12%, 2019, up 4.5% 2020 globally, and up 20% in Norway last year. And now, going down. We've built up a lot of channels for this trout, and we believe that the price situation will be favorable for the trout in 2021 and going forward. Also, on a monthly level, we see we are at very low volumes in January, in February and March, in April, May and June. And then step-by-step, it will come up. And this is normal for the season. And it's at the same last 6 months at the same, yes -- same level, maybe a little bit lower than last year. So also, for the second half, we expect okay prices for trout. Then, for the outlook. We see light in the tunnel regarding -- to open up the channel, especially for the HoReCa segment. We expect 205,000 to 210,000 tonne harvest, including 50% of Scottish Sea Farms. We expect a contract share of 20% to 25%. We see a significant potential in the whitefish and especially on the land side. We have been facing increasing prices every year after we can enter to the whitefish and it's been challenging for the industry on land. And now we see that the quotas is up, the coastal -- the coastal fisheries are up a lot, and we are right in the season right now, and we see that the power prices is falling, which hopefully will affect the industry on the positive side.Then, we have new Farming -- a new management group in Farming, Stig Nilsen, which was the CEO for Farming is now going into a new position in the group and also Sven Amund Fjeldvaer, which were the General Manager in Lerøy Midt is also going into new position in group as a Project Manager. This has been the plan for a long time. We've built up a good organization with management to be ready to take over their positions. And Bjarne Reinert, 38 years old, is the new CEO for Farming, starting from January 2021. He came from a position as a fish health manager in Lerøy Seafood Group. Has a master in fish health from Norwegian School of Fisheries and a master in strategy and management from Norwegian School of Economics, NHH. And Nina Møgster has been General Manager in Lerøy Sjøtroll since 2018. Has developed in a very positive way, taking Lerøy Sjøtroll into new good performance, and she came from the position as CFO in Lerøy Sjøtroll. She has a master of fisheries and aquaculture science from Norwegian School of Fisheries. MBA in seafood management from Norwegian School of Economics. And, yes, a very, very good -- has been a fantastic manager for Lerøy Sjøtroll the last 3 years and will do a fantastic job going forward.And Harald Larssen, General Man now from February, new General Manager at Lerøy Midt. He came from position as a Production Manager in Lerøy Midt - Nord-Møre. He has a master in biology in marine resources and aquaculture from NTNU and Bachelor in Marine Biology and Economics from Ålesund University College. And then Kurt-Einar Karlsen has been in the company for many, many years also. He was head of industry and R&D in Lerøy Aurora until 2016, and then he took over the general manager position from 2016. Also, coming from fisheries and aquaculture science in Norwegian School of Fisheries, and has a 1-year studies in innovation management. And a long, long experience, both in industry and in farming and aquaculture. And so a very good background. And this team is -- we believe a lot of this team, and we really have a good feeling that they will take out the potential of the future growth in this segment. So good luck to this fantastic team.Then, we have some new investments coming up. We are in the final negotiations for further RAS capacity in Region West. We have, on the top picture there, we have Kjærelva, which we built and it's full operation, and we are very happy with the development in this facility. And we see that we are taking a lot of improvements in our farming activities having this facility in the first stage of -- before we put the fish into the sea. And now, we have decided to invest in Kjærelva II, new facility, a last module that we have built now -- that we have developed. Each module up around 2,000 tonne biomass. We are considering to build 3 such modules at Årskog in Fitjar, close to the other operation, but not next to it. Module 1 will have 6 million smolts going from 160 gram up to 500 gram and Module 2 will go from 500 gram up to 1,200 gram. And the third module can also be used for growing fish to fill harvest if we feel that the timing is right for that. But this is a strategic direction for us. It's to learn more to build their organization to handle these kind of facilities. We are doing RAS. We have done RAS investments in all regions, and we feel that we have a good know-how and a very good team, organized to operate these facilities in a good way. The total CapEx for this investment will be close to NOK 1 billion. And we'll increase the production in Lerøy Sjøtroll of 10,000 tonne in total -- and yes. And the decision will be made shortly. And construction can be finalized in 2023.Then, at the end, again, I take up the -- our value chain. Like I said, we see improvements in all parts of the value chain, small improvements, and we believe that we can take out a lot of the potential that we see in this value chain. And to work towards every part of the value chain and to educate our people, better understanding how to work and how to work together to take out the full potential because we need to work together through the whole value chain in the best way. And everyone needs to understand that all we do in this value chain, to create the most efficient and sustainable value chain is because we care about the customer and to deliver our customer ability to have sustainable and cost-efficient product and to grow the category together with our key strategic customers all over the world. Thank you very much.