Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2022-Q4

[Henning Beltestad, executive]

Welcome to Lerøy Seafood Group's Fourth Quarter Presentation of 2022. My name is Henning Beltestad, I'm the CEO in Lerøy Seafood Group. And with me today I have Sjur Malm.

First of all, I will start showing our fantastic value chain of redfish and whitefish. Our goal is to create the world's most efficient and sustainable value chain for seafood. The last 20 years, we have done huge investments going from being one company, one exporter out of Norway with seafood, to be a fully integrated company from ROE all the way out to consumer packs out in the shops, in Lerøy brand and also the same from the fishing boats, fishing vessels, all the way out to their consumers.

Last fall we set some targets for 2025 and beyond. We set the target of NOK 50 billion by -- in revenue by 2030. We have a goal of a reduction in total emission by 2030 of 46%. We have a target to be #1 pharma company, all-inclusive -- including VAP, Sales and Distribution. And we have a target of NOK 500 million EBIT for Wild Catch in 2025 and a NOK 1.25 billion EBIT for VAP, Sales and Distribution segment and a volume in farming for Norway of 205,000 tonnes.

But last quarter, we got some challenge, and -- with the resource tax proposal, and I will say that this is a dramatic change for our company and also the whole industry, the farming industry in Norway. Lerøy has invested significantly also in human capital, to build an integrated value chain for seafood, a value chain that meet customer need and drive demand for salmon. The proposal is challenging for integrated business models, and has a significant risk of lower the demand for Norwegian salmon. So we are concerned that this proposal will delay the development of Norwegian salmon in the global industry.

But okay. Then I will go through the highlights of fourth quarter. It's been a record revenue for the year. We achieved EBIT all-inclusive of NOK 15.2 per kilo. We have seen a positive development in VAP, Sales and Distribution, and further improvement is expected for 2023. It's been challenging biological situation for some of the farming assets, expected harvest volume included a joint venture of 193,500 tonnes. We see some signs in lower demand in some market segments, but overall, a very strong demand for seafood. The proposed dividend by the Board is NOK 2.5 per share. And we see the EBIT in the quarter is of NOK 800 million compared to NOK 902 million same quarter last year.

Lerøy report in 3 segments: Farming, Wild Catch and VAP, Sales and Distribution. I will then go through the highlights for each segment. We start with the Farming. It's been a fairly okay quarter with EBIT of NOK 14.5 per kilo compared to NOK 13.7, same quarter last year. It's been a healthy performance in Lerøy Aurora, but more challenging biology in Lerøy Sjøtroll and in Lerøy Midt. The contract share in the quarter is of 36%, and the contract prices in the quarter is well below spot prices. We've seen an inflationary trend brings higher price realization, but also significant year-on-year cost increase. Overall, the cost in box is up NOK 6 from '21 to '22 and at current feed price, another NOK 5 lift is expected in 2023.

If we look at Lerøy Aurora first, it's been a good biological performance in the quarter. Still, we see some cost increase year-on-year with feed cost as a key driver. As in 2022, there will be a significant seasonality in harvest volume, so low volume first half and a high volume second half, with the one situation is much improved, but not completely eliminated, but much better than the last couple of years. The expected harvest volume is of 47,000 tonne gutted weight in 2023, up from 40,000 tonne in 2022. So a good outlook for Lerøy Aurora and they are really on the way back to top performance in the industry.

When it comes to Lerøy Midt, some more challenging situation in the second half, and this has impact of growth and quality of harvest. We see a significant year-on-year increase in costs, where higher feed cost is the most dominant factor. Expected harvest volume for 2023 is of 64,000 tonne compared to 68,000 tonne this year. So 4,000 tonne down and EBIT per kilo of NOK 14.3.

Lerøy Sjøtroll, challenging biological quarter. High number of treatment impacts growth. And we see that Sjøtroll is outperforming salmon in EBIT per kilo. So good biological situation for the Sjøtroll and a good performance on quality and also on price achievement. Cost increase year-on-year, again with feed as the key driver. Expected harvest volume of 64,000 tonnes for 2023 compared to -- close to 66,000 tonne in 2022.

And then we have the Norskott Havbruk, our Scottish Sea Farm. It's been an extremely challenging situation in Scotland in general and also for Scottish Sea Farms. Result is negatively impacted with the issue with micro-jellyfish and AGD, and very high mortality cost in fourth quarter 2022. And there has been a low average harvest weight of fish and a contract level have been as high as 59%. This also will affect the harvest volume for this year and especially for the first half of the year. The total volume expected is 37,000 tonnes compared to 36,000 tonnes in 2022. But the situation is improving. The biomass in sea now is of good quality and good growth. And we believe that we will come out of this situation in a good way.

When it looks -- when we look at the Farming volumes in total. I repeat the volumes for the different regions, Lerøy Aurora, 48,000 tonnes. Now, for next year, 47,000 tonnes. Lerøy Midt, 64,000 tonnes; Lerøy Sjøtroll, 64,000 tonnes and a total of 175,000 tonnes. And including Scottish Sea Farms, 50% share, is 18,500 tonnes as a total of 193,000 tonnes.

If we look at the Wild Catch, it's been a challenging quarter. Most of -- yes, the rest of quarters is down compared to same quarter last year, which gives a negative impact on profitability. It's been -- the total year for 2022 has been on the positive side, good price realization for the trawling fleet, but more challenging for the land-based in the industry.

The volume in the fourth quarter, we have fished 5,700 tonne Cod; 2,700 tonne on Saithe; 1,400 tonne Haddock; and 3,300 tonne other. And we see, especially the volume of Cod is down by 3,000 tonnes compared to fourth quarter 2021. In total, we keep the same volume in 2022 as for 2021.

For VAP, Sales and Distribution, it's been a challenging year, but it's been a year with an all-time high revenue for the total year. The first half has been challenging, but the second half and especially the fourth quarter, we see we are back on track with an improved profitability. And we hope and we believe that we are going into 2023 with a normal performance in this segment.

Our sales and processing operation now span 14 countries. We have developed this segment over the 20 last years. And our strategy is to build facilities close to customers and to develop the categories together with customers to grow the demand for seafood in general. Thank you.

[Sjur Malm, executive]

Yes. Thank you, Henning. So beyond the resource tax key team in 2022 has been inflation. And inflation obviously impacts our price realization is also more and more impacting our cost. This is also impacting our balance sheet as we will see.

So if you look on our profit/loss statement, we see that we have a higher revenue, 9% higher this quarter compared to last year. This is mainly price-driven. Looking at the drivers for the operating result or EBIT, in the redfish value chain, we can see that the farming EBIT is up as compared to last year, meaning that the price realization is up more than the cost is up. But still we see a significant cost increase Q4 this year compared to last year. And our price realization is significantly impacted by 36% contracts. Further, the operating profitability downstream, as Henning has pointed out, is lower than last year. So in sum, our EBIT all-inclusive is a little bit down compared to last year.

If we look on whitefish, this is where we see the biggest deviation. And this is much driven basically by lower catches as Henning has highlighted. We had a lower cut quarter that gives lower catch volume this quarter. And it will also be mentioned that the value of inventory is higher in 2022. So if we had the same level of inventory in 2022 as end 2021 of whitefish, our EBIT would have been NOK 23 million higher within the whitefish segment and in total. But in some then, healthy profitability in redfish, weaker profitability in Wild Catch gives the EBIT of NOK 800 million.

Income from associates has been a very, very challenging quarter for Norskott Havbruk and in some these factors drive -- sorry, EPS down 26% from last year. There's a lot of talk in particular Norwegian newspaper about super profitability in this industry. And I think this figure, which is not a great quarterly result, but it's not a bad quarter result in a historic perspective, either shows EBIT margin which is lower than many industries and no clear indication of super profitability. And we also see a return level showed us return on capital employed of just about 12%, which is no obvious super profitability.

And we think that, among other things, what is not thoroughly understood among policymakers in Norway are the significant investments needed to run a value chain like Lerøy. We can see that at the end of 2022, we had total assets of NOK 37 billion, which is a high number. So obviously, if you compare our quarterly EBIT to that number, it's not very high. And it's no clear super profitability. And this is what we try to communicate to policymakers because in this balance sheet, we clearly see the capital need, both in tangible assets, but also in working capital items. And we see inventories significantly up. We see also receivables significantly up, and there's a huge working capital build in 2022 compared to 2021, which also highlights that this industry needs access to capital to be able to operate as we would like to operate.

Our balance sheet is strong. We have investment grade credit rating and a net interest-bearing debt of NOK 4.3 billion. Slide also then on changes in net interest-bearing debt this quarter. It's basically the factors already commented upon. We see the EBITDA, we see the working capital build, we see CapEx, which is not much more than normal. There's a finance cost, net finance, including IFRS 16 effects, and we see that in some net interest-bearing debt has not changed this quarter. Then another key point discussed among Norwegian policymakers and Norwegian media is whether or not this industry contributes to the society.

And this slide -- and here we will also point to our hearing response to the ground or resource tax, which has much more detail, but some key points is obviously -- here the red dots is where we operate. The black dots is where we have suppliers. So we have in our own company, 3,500 employees and 60 municipalities. And these companies, where they work, they buy goods for NOK 13 billion from 4,500 suppliers in 300 municipalities and that generates around 13,000 -- 13,000 jobs in Norway.

On top of that, we have paid more than NOK 1.5 billion in taxes and fees. And to some extent, this map also shows a little bit on the discussions because if you put this map close to a population map of Norway, that population map wouldn't show that most people in Norway live close to the capital. And we can see that most of our investments are along the coast line. So to a big extent, what this discussion is about is, should we take capital from the coastline to central neighborhoods? Or should we keep it as investments along the coast line? And that is, I would say, a pretty harsh debate these days in Norway because investments is obviously important for growth and investment comes also with knowledge.

So if you see in our company and if you see in this industry in recent years, there's been significant investments that has driven significant knowledge. And Norway today is world leading when it comes to knowledge in this industry. That had not been possible if we hadn't done the investments and if we hadn't seen all the learning. And here we can see that we have a maintenance CapEx need at current inflation -- with inflation is probably in NOK 900 million range. And with the resource tax, it will be challenging to do investments beyond that going forward. And if you don't see those kind of growth investments, we will not see the same kind of knowledge need or knowledge build. And over time, that will build out this industry. It will not take 1 or 2 years, but in 5 to 10 years, it will make all the difference in the world for where this industry is positioned.

And today, it's NOK 40 billion of investments that are stopped post resource tax proposal, which is a big number. And kind of like the -- what will be extremely interesting to see when we see the final suggestion closer to summer is, if the policymakers are able to make framework conditions, which makes those NOK 40 billion investment return, because those are imperative to see continued growth and position of this industry in Norway.

For our company, we had already before the resource tax proposal decided to reallocate for one harvesting site in Lerøy Sjøtroll that will lower our cost and give some investments around NOK 400 million in 2023 and that was already decided and the billing process will come so far. It was not possible to stop. And we will bid a new factory in Båtsfjord, which is a CapEx around NOK 200 million, and that is in the whitefish. We had also planned to build a value-added processing facility in Skjervøy, in Lerøy Aurora, that was stopped due to the resource tax proposal. Those investments when it comes to processing facilities are important for efficiency gains. They are also important when it comes to the ability to efficiently utilize all raw material of all quality, and they lower our GHG emission footprint when it comes to transportation. So we are terribly sad we had to stop this investment in Skjervøy.

So with that, Henning, I'll give the word back to you for some outlook.

[Henning Beltestad, executive]

Thank you. Let me start with the supply side. And we see that for 2022, there was a global negative supply of 1%. And if we look into 2023, we see in Europe up 2.8%, and Americas is up 1.2%, and a global growth of 2.3%. And that is updated in Kontali numbers from 13th of February.

If we look at the consumption side, in fourth quarter, we see that actually, though, only a growing market, that's the U.S. and we see a strong growth every year now from U.S. and also it looks very promising going forward. And so we believe that this development will continue in the U.S. market. In the EU, we see a more challenging. There is a zero growth situation where the retail is very strong in this market, and there is indication in fourth quarter that the retail volumes are stepping up and not increasing anymore. So that is a key challenge going forward, we believe.

If we look at the prices, we see last year, we had prices, NSI prices of the top week of more than NOK 120, and then falling down during the last 2 quarters. And then we see into the first quarter that the prices are increasing again. And so far this year, we see prices of NOK 91 in average. And we also see that the last couple of weeks, we see -- we face a high increase in prices again. So it seems like we have to live with these kind of fluctuations going forward also. And -- but of course, it's more challenging now to handle these fluctuations when the contract levels are much lower than normal.

If we look at outlook for the different segments for the Farming, of course, there is a lot of uncertainty when it comes to resource tax. We focus operationally to handle the situation as good as possible together with our customers and our partners in the value chain. And to keep the stability and as good as possible to be able to grow the category, even though the circumstances are really difficult. We expect harvest volume for this year of 193,500 tonnes. And we also see that -- we see higher costs also going into 2023, but we have a strong focus on cost cutting and also operational improvements in all parts of the value chain to cope with the increased cost.

When it comes to Wild Catch, it's been a healthy profitability in 2022. We also expect high prices and a good profitability on the fishery side for this year. If we look at the Cod, we see that the Cod is down by 20%, Haddock down by 5%, Saithe north up by 15% and Saithe south up by 19%.

And if we look at VAP, Sales and Distribution, we expect improved earnings this year compared to 2022, which were a very challenging year, especially the first 2 quarters. Also in this segment, the uncertainty around the resource taxes, it's not optimal and it's hard to handle, and we're trying our best to cope with this together with our customers in a good way. And we see demand impact from lack of contract is difficult to evaluate so far, but we believe that it will be a challenging situation going forward, but we need to cope with that.

When it comes to operational efficiency, we have a target to develop the most efficient and sustainable value chain for seafood. We see that we are working very well and in a structural way, with strategic initiatives to increase operational efficiency and profitability in the Farming segment. We have a lot of initiatives that is ongoing and also a lot of initiatives that where effect realization phase is on track. And we will have continuously work to improve all parts of the value chain in the Farming segment going forward. And we believe that this will make us able to reach our goal in 2025.

But to make the world's most efficient and sustainable value chain, a sustainable part, it's important to also have on top of mind in the daily operations. We are working on reducing our environmental impact in the daily operation across our value chain. This describes our value chain and also where we can do the most impact. And it's extremely important that all people working in Lerøy is working in a structural way with continuously improvement also for the sustainability part. And we are on a good way in this. So -- and we will continue to focus a lot on that going forward.

So our goal is to create the world's most efficient and sustainable value chain for seafood. And we are not there yet, but we are underway, and we believe that we will be there in 2025. Thank you very much.