Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2021-Q4

[Henning Kolbjørn Beltestad, Group CEO]

Good morning, and welcome to Lerøy Seafood Group's Fourth Quarter Presentation 2021. My name is Henning Beltestad, I'm the CEO of Lerøy Seafood Group; and with me today, I have Sjur Malm, CFO. First, I will start with our fantastic value chain for seafood. Lerøy has [ endeavored ], our task going forward is to improve all steps of the value chain and take all the potential of all our investments. Lerøy has a long history and are growing year by year, and 2021 is the highest year with turnover of NOK 23 billion. Then I will go through some highlights, and then Sjur will take us through the key financial figures, and then I will come back and talk a little bit about the markets and the supply side of seafood. Lerøy reports in 3 segments, Farming, Wild Catch and VAP, Sales and Distribution. First of all, highlights from this quarter. It's been a very good quarter with a strong demand and good development in the whole value chain. And we see a positive development in all segments. And EBIT this quarter is NOK 902 million. And EBIT all-inclusive, farming at NOK 16.1 compared to NOK 9.3 same year -- same quarter last year. The proposed dividend is, for year 2021, is NOK 2.5 per share. And at the end of the quarter, we have a net interest-bearing debt of NOK 3.3 billion. If we look down at the right side, we see fourth quarter we harvested 51,000 tonne of salmon and trout, catch volume of 17,000 tonnes, a revenue of NOK 6.5 billion and an EBIT before fair value adjustment of NOK 902 million and ROCE of 16.7%. For the full year, we were close to 187,000 tonnes of salmon and trout, catch volume whitefish of 71,000 tonnes and NOK 23 billion in revenue and NOK 2.5 billion in EBIT before fair value adjustment and a ROCE of 12.4%, which is up from 2020. If we look at the farming, good quarter for the farming, a record harvest volume. The last 12 months of close to 187,000 tonnes compared to 171,000 tonnes in 2020. The spot prices is well above last year. in 2020. The contract share for salmon is about 30%. And the contract prices is higher than realized prices for spot. And the EBIT per kilo in Farming segment is NOK 13.7 compared to NOK 6.1 in same quarter 2020, so a good improvement.If we look at the guiding, first of all, the volume split in 2021. We had 44,000 tonnes in Lerøy Aurora, 20 -- 72,600 tonnes in Lerøy Midt and 70,000 in Lerøy Sjotroll and a total of close to 187,000 tonnes compared to 171,000 tonnes in 2020. And we see all the way back from 2016, we had 150,000 tonnes, so 37,000 tonne increase the last 4, 5 years. If we look at the guiding for 2022, we estimate Lerøy Aurora to be at 40,000 tonnes, Lerøy Midt 71,000 tonnes and Lerøy Sjotroll 74,000 tonnes, so a total of 185,000 tonne total for the year, which is about the same as 2021.If we look at the Norskott Havbruk, where we have our share, 50% share of Norskott Havbruk is 23,000 tonnes for next year and a total of 208,000 tonne. If we look at the Wild Catch, it's been a very positive development in the results. High catch volume and also, we have transferred 5% of cod quota to 2022. We achieved high prices and a good profitability on our raw material. But of course, with the increasing prices, we also some challenges for the processing industry. Fourth quarter, NOK 73 million compared to minus EUR 10 million in the same quarter of 2020. So a very good improvement, both for the year and the quarter. Cash volumes, whitefish, 8,800 tonne of cod; 3,300 tonnes of saithe; 1,500 tonne haddock, a total of 17,000 tonne; and for the full year, 71,000 tonnes. And we have a remaining quarter for cod, which we transferred into 2022 of 1,350 tonne. If we look at VAP, Sales & Distribution highlights, a very good quarter, very good performance, good development in this segment. And we achieved EBIT of NOK 202 million compared to NOK 176 million in same quarter last year. And for the first time, we passed the NOK 600 million in EBIT for the total year. And we see a good development, and we expect good development also going forward with taking out the potential of new investments that's done in several markets in Europe.Then, Sjur.

[Sjur S. Malm, Chief Financial Officer]

Yes. Thank you, Henning. I will now run through our key financial figures for the quarter and also for the year of 2021. I think if you look on key drivers, Henning has already touched upon high activity level and high price level, gives a lift in revenues. If you look on core value drivers, we see that we have harvested 6% more fish Q4 this year compared to last year, and our margins are up. On that margin, our cost is up, and thus meaning that price is up more than the margin is up. So the key reason for higher profitability here is higher volume and also higher price realization.In the Whitefish segment, we're happy with timing of catches. So we've had a high catch volume in Q4. We've been waiting for the price response, and we started then to see it late Q4, and that has a significant positive impact on profitability. So a high volume, substantially higher margin, gives a substantially higher profitability in our whitefish segment. In sum then, our EBIT is more than double, up to NOK 902 million. Return to income from associates where Norskott Havbruk is the key asset. And then in Norskott Havbruk or Scottish Sea Farms, there has been some biological challenges, but also, there's been substantial cost related to the acquisition of Grieg Hjaltland in the U.K. In sum, our EPS this quarter is just over NOK 1, up 64% from last year. Return on capital employed is close to 17%, which is not too far from our stated objective of 18%. If you look on the year, we are happy with the activity level, which is then seen both in volume increases in redfish, whitefish, but also in capacity utilizations downstream. So record activity level, revenue is up 16%, which is kind of like confirming the long growth trend of our company. Looking at redfish margin through value chain, which also then includes margins in VAP and Sales. Our margin for the year is almost NOK 12, which is up from just above NOK 10 the year before. Our ambition going into the year was for a cost decrease in the farming unit. On that we have not fully succeeded. If we subtract the NOK 0.4 production tax, our cost is up around NOK 1 in 2021 compared to 2020. That cost increase is driven much by higher feed costs and higher costs on different raw material. For 2022, we will also be impacted by higher feed costs. We do not know how long the feed cost level we are currently seeing will last. But assuming this will be the level for the year, we will, for the year, probably be up around NOK 3 in cost compared to, on feed, on the harvested cost in 2021 compared to 2020. And in Q4, that impact was 1. So there's still -- we will see higher feed costs in 2022. But also, we expect to see operational improvements in different companies, meaning that we will see a cost [ increase ], which is less than the inflation in raw materials. Harvest volume, up 9%. This is the second year of substantial growth. We will have best estimate today around a flat volume in 2022. But there is growth potential beyond that from a new investment in larger smolt in Belsvik. Looking at whitefish, quotas are up. We believe we have timed quotas good and the substantial improvements in the land-based industry, which gives a lift in -- both in volumes and in profitability. And in sum, EBIT is NOK 2.5 billion, up just shy of NOK 2 billion last year. And earnings per share is just over NOK 1. Return on capital employed, 12.4%, which is an increase from 10.5% a year before. Looking then on our balance sheet, I'll just highlight the key reason for changes. On intangibles, we made an acquisition, increasing our ownership in a Danish downstream company. We have been investing particularly in larger smolt in the Belsvik facility in Lerøy Midt, which is a key investment, driving tangible fixed asset. And our subsidiary, Norskott -- not subsidiary, our joint venture in U.K.. Scottish Sea Farms has made an acquisition of Grieg Hjaltland asset. And that's the reason for the increase in financial and current assets. Biological assets is down. We have a lower standing biomass now. And we see that we have, as expected, some increases with activity in inventory and receivables. We are very pleased on our performance on receivables. We have now been through a global crisis, and we have basically seen no losses on receivables recent years. And that we are proud of and a clear indication that we have good processes on this part. In sum, equity share of 57%, a net interest-bearing debt of NOK 3.3 billion, down from last year. Explaining then the changes in net interest-bearing debt or cash flow, we'll focus on 2020 or full year figures, but I'll highlight 1 effect in Q4, which is the -- our participation in the share issue in Norskott Havbruk, the owning company of Scottish Sea Farms, where we participated with 306 million, which is the other changes in noncurrent assets. If we look on the full year, we see we have had a good EBITDA, an increase, paid taxes a little bit down. We have freed some working capital. For 2022, we expect to build some working capital, among others, due to continued increase in activity level. We have invested for around 1.2 billion, which is less than 2020. The biggest project is Belsvik. We made 2 acquisitions of size, one is Denmark, which is the business combination, that change. And one is change, the acquisition in U.K. We distributed NOK 1.2 billion in dividends. And we see that despite 2 relatively large -- participated in acquisition despite the dividend, we have reduced the net interest-bearing debt in 2021.Henning has already touched upon the profitability level in different segments. In all segments, they are up. Looking then on the different farming segments, here is Lerøy Aurora, has a good profitability in this quarter, NOK 6.90 per kilo. We also see from the year that there's a substantial increase in harvest volume. And on harvest volumes, we have not yet fully realized the potential. They will not -- we have guided for 40,000 tonnes in 2022, but beyond that, we see potential for significant growth in 2023. Key challenge in Lerøy Aurora in recent years has been winter wounds which has substantially impacted our profitability, mostly in terms of downgrades of fish and price realized, but also through earlier harvest and higher cost. We have implemented numerous measures to handle and improve the situation, and even more measures will be seen on the fish harvested in 2023. But our best knowledge today, we are tracking the situation very, very closely, is that the impact in 2022 in terms of share of downgrades will be substantially lower than what we saw last year and the year before that. So that's a positive development. Looking then on harvest volumes. We expect volumes to be quite back-end loaded. Those low volumes will impact cost. Those low volumes and high contract share, and also not 100% superior quality, but much better than last year will impact price realization. So first half, we'll see low volumes from Lerøy Aurora. Lerøy Midt, profitability level of close to NOK 16 a kilo, record harvest volume. We believe we are moving in the right direction, making a lot of operational improvements. And this quarter, we harvested some very good performing sites. We will harvest from some of the same sites in first quarter. But looking at the year, we expect the feed cost increases if cost levels stay where it is today, that we will see a higher cost in Lerøy Midt in 2022 compared to 2021.In our West Coast operation, Lerøy Sjotroll, we saw slightly lower growth late year than expected, driven mostly by lower temperatures. And that has a negative impact on cost. But still, we see a substantial increase in profitability in 2021 compared to 2020. And we believe that we are improving this operation, and we have been steadily improving it particularly last year's and such improvements are never a straight line. But step by step, we are getting better in Lerøy Sjotroll. And for 2022, yes, there will be cost increases due to feed, but we expect the overall cost level to increase less than raw material prices due to operational improvements.Henning has already touched upon key factors in Whitefish. Higher prices gives higher catch volumes together with -- [ not ] high prices. High catch volumes give higher catch values, which is a key positive driver for profitability in this quarter. Also, there is cost increases on energy seen here in the bunkers costs, which is up NOK 28 million this quarter compared to last year. That increase is driven both by higher price, but also by the fact that there were less planned maintenance Q4 this year than last year. So there are more operating days. And that was part of the planning due to our view on price and timing of quarters. Downstream operation, it's been a good quarter. We are impacted by late December closedowns due to COVID. But in light of that, we are happy with activity level and happy with development. Higher capacity utilization gives an increase in margins on the annual basis, and we believe there is still substantial opportunities to improve this in years to come. Then to Norskott Havbruk, which is owned 50% by us and 50% by SalMar and Norskott Havbruk is the owning company of Scottish Sea Farms. Scottish Sea Farms' acquisition of Grieg's. U.K. asset was completed late 2021. And that acquisition has substantial cost and has a substantial negative impact on operation -- operating -- or on the EBIT per kilo this quarter. So looking away from that, operations are basically breakeven, a little bit above. And we are impacted by gill health issues, and there will be low volumes start of next year in U.K., looking at market statistics. But we -- and the key focus now is obviously to integrate these 2 companies. And we believe there are substantial synergies in all parts of the value chain. Realization of these synergies will take time, but we expect, over time, to see clear improvements of the combined company. Outlook, Henning.

[Henning Kolbjørn Beltestad, Group CEO]

Thank you, Sjur. Then we look at supply and demand and a bit on the market side and our expectations going forward. First of all, we start with this one, the supply side. We see to the right, 2022 estimated volumes. We see a global 0 growth, both, actually, in Europe and also, in Americas. So compared to last year where we had a growth of 6.7%. If we look at the price levels, we see the volatility in the prices. Year 2021, there was a total price of NOK 57, and we see going into 2022, the first quarter. So per -- this is a number per -- as of week 5, we see that the prices is increasing compared to last year, and is up to NOK 71. And we also know that the prices in the short term this week and last week, that the prices is even much higher as the NOK 71. So the low supply compared to same period last year in combination with the markets that's opened up, especially the HoReCa segment is boosting the demand, not only for salmon, but also for seafood in general. If we look at the supply for 2022 per month, we see there is, first 7 months, there is a negative growth. And then we will see we'll get 2% to 5% growth for the second half of the year. This was Norway. If we look at the U.K., we see a very negative situation for the supply side with a negative growth also going all the way for the several first months and -- which also is affecting the price level, especially in the U.K. market. And globally, it's the same picture. So first half, negative growth. And second half growth from 3% to 7%, 8%, 9% from month-to-month compared to last year. So that was the supply side. If we look at the salmon consumption, we -- for fourth quarter, in the markets, we see a 4% growth in EU, 5% growth in U.S. and 1% growth in other markets. If we look at full year, we see Europe which is the #1 market segment, I would say, it's 8% up. If we look at the U.S.A., a tremendous growth in the U.S. market with 13%. And that's also with a very special situation in Chile. So the U.S. market is the fastest-growing market globally, and it seems like this also will continue going forward. So a huge potential in the U.S. market for Atlantic salmon. And we have other markets at 7%, so total growth of 9%. And then from our side, we expect that it's a very positive outlook for the month. Like I said, we see, globally, a huge demand for Atlantic salmon and trout and whitefish. And due to low supply and the opening up of the HoReCa segments. We've, yes, been closed down in some period of last year's, and it's been very challenging for the -- especially the restaurant segment. So we see now that the demand in this segment is extremely strong. And then we will see going forward when we get into second half of the year with positive supply again, how this will -- this first year, half year will affect the second half year. If you look at the contract share, it's -- for first quarter, we have 40% contract share. We expect total volume for farming of 208,000 tonnes for the wild catch. The quotas will go down, which also might affect the price levels of whitefish this year. The quota for cod is estimated down 20%, haddock 23%, and saithe north of 62 degrees unchanged. For VAP, Sales & Distribution, we have a huge potential in all the investments that we have done. And we will -- going forward, we will see that we utilize our capacities in these facilities in a better way than -- so far, we have done a lot of investments and have huge capacities available, which will give opportunity of growth and positive development in this segment.Thank you very much.