Leroy Seafood Group ASA
OSE:LSG
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Leroy Seafood Group ASA
Earnings Call Analysis
Q4-2023 Analysis
Leroy Seafood Group ASA
Lerøy Seafood Group, led by CEO Henning Beltestad, reported a positive fourth quarter in 2023 with an EBIT (Earnings Before Interest and Taxes) of NOK 765 million, marking the company's first venture past NOK 30 billion in revenue. The promising biological developments and advancements in strategic targets suggest an encouraging start to 2024. Particularly noteworthy was the impressive earnings growth in Value-Added Products (VAP), Sales & Distribution, prompting the proposal of a NOK 2.50 per share dividend.
The Farming segment faced certain challenges such as string jellyfish affecting Lerøy Aurora, yet managed to reduce costs in the second half significantly due partly to higher volumes. The northern region, despite a dip in harvest volume, showed resilience with a total of 43,000 tonnes in 2023. Lerøy Midt also encountered downgrades affecting price realization but anticipates improved performance due to better smolt quality and technological advances. The company expects to sustain and enhance this upward trajectory with a projected harvest volume of 58,000 tonnes for 2024 and is very positive about continuing improvements.
Lerøy Seafood remains consistent with its previous guidance, aiming for total volumes of 193,000 tonnes, including their share from Scottish Sea Farms. The fourth quarter saw high volumes and turnover, alongside a notable increase in EBIT margins to 2.2%, up from 0.6% in 2022, with further expected earnings increment in 2024. However, operational EBIT was down by 7%, mainly due to reduced redfish harvesting volumes.
The company has prioritized investment in new farming technology, forecasting CapEx (Capital Expenditure) of NOK 1.8 billion for 2024, including NOK 500 million in new farming technology and NOK 200 million to enhance smolt quality. These investments align with Norway's new resource tax in-farming, which imposes a higher tax level of 47% in specific operations, anticipated to be a NOK 2 billion effect, with Lerøy preparing internal pricing policies to navigate this change.
Looking ahead towards a target of NOK 50 billion by 2030, Lerøy is on course, having achieved close to NOK 31 billion in 2023. The company is also on track with its goal to reduce total emissions by 2030, achieving a yearly reduction of around 7-8%. While the whitefish segment's goal of NOK 500 million may be challenging due primarily to decreasing quotas, steps are being taken to reach strategic targets across the board. The Farming segment aims to improve its number one position, and VAP, Sales & Distribution strives for an ambitious EBIT goal of NOK 1.2 billion by 2025, from NOK 643 million in 2023.
Lerøy is focusing on strategic areas such as roe, smolt production, and sea-based technology to enhance operational efficiency. Genetics improvements are expected to influence harvested fish positively from the first half of 2024. Furthermore, Lerøy is expanding trout production, which has shown high performance and lower costs than salmon, with the aim to increase their market share in this category from 38% to 50% by 2025. The recently implemented shielding technology has led to improved fish welfare and nearly zero lice treatments.
Lerøy’s efforts to improve roe and smolt quality, implement new farming technology, and adopt the Lerøy Way are expected to significantly enhance operational performance in 2024. Despite challenging quota situations for Wild Catch, improvements are on the horizon in land-based processing. With an increased demand for a sustainable value chain, improved market share, and a focus on profitability growth, Lerøy anticipates clear potential for profit growth in 2024.
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Welcome to Lerøy Seafood Group's Fourth Quarter Presentation of 2023. My name is Henning Beltestad, I'm the CEO in Lerøy Seafood Group. And with me today, I have Sjur Malm, which is CFO.
First of all, like always, I start with our fantastic and unique value chain. Our goal is to create the world's most efficient and sustainable value chain for seafood. We control everything from roe and all the way to consumer products in the shops and all the way from all our own trawlers all the way to shops. And we believe that this is a unique position for us as a seafood company to control the seafood value chain that we have built and invested for in the last 20 years.
Then fourth quarter, it's been a pretty good quarter, EBIT of NOK 765 million. For the first time in the history, we exceeded NOK 30 billion. It's been a year where we have made progress towards 2025 in strategic targets. We see a good biological development into 2024. So a good, good start of the year.
And we have seen last year and especially in fourth quarter, a significant improvement in earnings from VAP, Sales & Distribution. And the board proposes a dividend of NOK 2.50 per share.
Let us see for group reports in 3 segments: Farming; Wild Catch; VAP, Sales & Distribution.
We start with the Farming part. It's been a satisfactory development with some challenges related to string jellyfish in fourth quarter. This have caused loss of feeding days in Lerøy Aurora at the end of quarter and accelerated harvest at some sites in Lerøy Sjøtroll.
The cost level in second half of the year is significantly below first half of the year, mainly driven by higher volumes. Low harvest volume in first quarter '24 will give some higher cost in Farming segment for the first quarter compared to fourth quarter '23.
Like I said, we see a positive biological development in start of 2024, partially due to investments in new technology, which I will come back to later in the presentation. Fourth quarter, we harvested 47,500 tonnes and had a yearly volume of 160,000 tonnes.
For the different regions, we have -- we're starting in north, we have Lerøy Aurora. Like I said, some string jellyfish giving loss in feeding days, and thus a lower biomass production in the quarter. We produced about 12,000 -- we harvested about 12,500 tonnes in fourth quarter '23 compared to 15,000 tonnes same quarter last year. We harvested a total volume of 43,000 tonnes in 2023 compared to 40,000 tonnes in 2022, and I will say, a good performance and development in Lerøy Aurora in 2023.
We expect volume -- the expected volumes for 2024 is 47,000 tonnes. And we expect the cost level in first quarter '24, somewhat higher in lower harvest volume. So as of today, cost level for '24 expect to be about same level as 2024. (sic) [ 2023. ]
In the fourth quarter, we had an EBIT per kilo of NOK 21 compared to NOK 27 same quarter last year.
If we look at Lerøy Midt, a very good performance this year, we will say, even though the volume is down compared to 2022. 2023, 61,000 tonnes compared to 68,000 tonnes in 2022. But if we look at the fourth quarter, we had 20,000 tonnes compared to 20,000 tonnes in the same quarter 2022, and we had operational EBIT of NOK 26.5, which is a good performance in this last quarter.
We see going into the biomass in end of 2023 and into 2024 is significantly above end of 2022. So we have a good base, a good biomass that will drive us towards a higher volume in 2024, which will give us about 70,000 tonnes compared to 61,000 tonnes in '23.
Some challenges with downgrades will impact price realization in first quarter. We expect to see improvement in coming year from higher biomass going into 2024, a better smolt quality and also impacted by new farming technology.
If we look at Lerøy Sjøtroll, some more challenging situation in Lerøy Sjøtroll. Impact of string jellyfish resulted in accelerated harvest on lower average harvest weights in the quarter and which -- Yes. I will see -- I would say that this was the most challenging region for us in the fourth quarter, especially when it comes to the string jellyfish.
The trout has been performing well. It's -- we will have a low harvest volume in first quarter '24, building biomass with strong growth start of 2024. We expect harvest volume of 58,000 tonnes in '24, with a significantly higher average harvest weights in the year.
Positive start in '24, with expectation of clear improvements also from smolt quality, new farming technology, and increased production of trout.
In fourth quarter, total volume of 14,600 tonnes, a breakeven result per kilo, and we had an average weight in the quarter of 4 kilo and a total volume in 2023 of 55,000 tonnes, down from 65,000 in 2022. And yes, and yes, it's been a challenging year for Lerøy Sjøtroll, but we are very positive going forward with the improvements that has been done and will give us results going forward.
When we come to Norskott Havbruk, it's good to see from. It's been a challenging year, both '22 and also in '23. We see great improvement going into first quarter, and we will see a positive development going forward with higher volumes. To expect volumes, it will be around 37,000 tonnes compared to 25,000 tonnes last year and also a great improvement in the results. So they are working in a structural way in doing improvements, and we really believe that, that the management and the organization is on the right track to turn around this challenging situation. So we have a positive view on Scottish Sea Farm.
If we look at total volumes, we have the same guiding as we had in -- when we presented the third quarter presentation, 175,000 tonnes in Norway and our share, 50% share of Scottish Sea Farm of 18,500 tonnes, so a total of 193,000 tonnes.
If we look at the whitefish, it's been -- if you know, normally, the fourth quarter is not a strong quarter. It's in line with the fourth quarter last year, minus NOK 13 million. It's been a high catch volume in -- but with a lower value species than the same period last year. Prices has been softening a little bit in the fourth quarter, but a very positive development in price for whitefish in first quarter.
The reduced quarter will impact '24 earnings. New regulations on quotas we have proposed in January 2024. And so we will see what will be the -- and the quotas going into 2025.
And the positive thing in Lerøy Havfisk is that we managed to fish 76,000 tonnes compared to 72,000 tonnes in 2022. And this is a good performance when we look at -- see that the quarters for both especially for the cod is continuously going down. But a very good dynamic and flexibility in the fisheries and a good fleet that we have that are able to fish for different species. So that's very good.
Sales and Processing. That's our operations in 14 countries. It's been a strong development through 2023 and especially for the fourth quarter with high volumes, higher turnover, and high utilization of our capacity. EBIT margin full year, '23 of 2.2%. It's still low. We have ambitions higher than that, but it's up from 0.6% in 2022, but down from '21 where we had 2.9% EBIT margin.
High profitability compared to 2022, driven by operational improvements, increased capacity utilization, and the product prices better reflecting raw material cost. And earnings for 2024 expected to increase compared to 2023, with a normal seasonal pattern. And total EBIT -- total EBIT in the segment is NOK 643 million.
So then, Sjur, take us through the key financial highlights.
Yes. Thank you, Henning. Henning has already touched upon the key developments. Summing up, this shows the aggregated financial results in the fourth quarter. If you look at the value drivers, we can see that the margin per kilo is marginally up in the redfish value chain this year compared to last year. This is driven by better performance in our downstream operation.
Within Farming, we know prices are up, but we also know costs are up. And the key driver in this is the fact that the Norwegian kroner has weakened significantly compared to other currencies, meaning that the price realization is up, but also we have significant share of our cost base in euro and also U.S. dollar.
Looking at whitefish, we see profitability is basically on par on margin with last year. And then looking at the operational EBIT, it is down 7%, and the key driver for that is then, and the fact that we are harvesting lower volumes in redfish. On revenue, we have good activity, but we're also helped by a weak Norwegian krone.
Looking then at our balance sheet. Our view is that we have a strong and flexible balance sheet. I will return to investments and then development in tangible fixed asset. The other key point there is that the higher price trend, inflationary trend impacts the working capital items, including the value of inventory, the value of receivables, et cetera. So in 2023, in total, we have more working capital than we had the year before.
This one shows the development in net interest-bearing debt. The EBITDA is reducing debt. We see that in Q4, and we have reduced working capital. We've made investments and you see the effect from payable tax and net finance effect in some net interest-bearing debt of NOK 5.2 billion going out of 2023.
Some comments on CapEx. We have a long value chain. We are investing through the value chain in the different segments with inflationary trends. A good estimate of our maintenance CapEx and smaller project is around NOK 1 billion. In 2023, you will see that we have invested quite significantly in new farming technology, as highlighted before, and which Henning will touch more up on later.
And also then in 2024, we are expecting, as of today, to invest another NOK 500 million into new farming technology and also NOK 200 million in better smolt quality. And best estimate of CapEx as of today is NOK 1.8 billion for 2024.
A lot could be said about resource tax, and it was improved by Storting in Norway in mid-2023, with effect from 1st of January 2023. This is a tax, which is in the sea phase, not the full value chain of Farming, and that is highlighted here by the red box. So basically, the new tax is increased tax of 25% in the red box, while the tax in the black box is 22%. So in the red box, the tax level is 47%. In rest of Farming, it's 25%.
To be aligned with this, we have implemented a new internal pricing policies where we previously to hide the reused cost as measurement of value, when we moved goods and services through the value chain, we are now using what is the correct and close as we can to a market price. With these effects implemented, our best estimate today is that the total resource tax in the red box is NOK 2 billion, of which NOK 1.7 billion is implementation effect.
When it comes to making estimates going forward, this is a very complex system. It is challenging, and the actual effective tax level in the Farming segments will be dependent on profitability level. It will be dependent on the amount of investments, shown here in the red box, and it will be dependent on development and the cost of biomass.
Yes. And with that, I'll give the word back to you, Henning.
Okay. Then we're going to look at what's happening going forward and the initiatives that we are doing to improve our business in general. First of all, I will start with strategic targets that was communicated in the Capital Market Day in September 2022 as 1.5 years ago. So it's a long way back. And where are we? If we look at the target for NOK 50 billion within 2030, I think we are on track for that. I think we are close to NOK 31 billion in 2023.
When it comes to reduction in total emission by 2030, with a baseline of 2019, we are on track. I think we all have a yearly cut now of around 7%, 8%. And we believe that it's -- the focus that we have in operational, in the operational work that we do for this reduction is crucial, and we really believe that we are in the right direction to achieve this goal within 2030.
When it comes to the whitefish, the Wild Catch, we had a goal of NOK 500 million that is not within reach like it looks today. The main reason for that is the quarter situation which is year-by-year now going down. When it comes to #1 position as a Farming company, we still have a way to go. We see that in some regions, we are very close. And in some region, we have a longer way to go. But we believe that this also with all the strategic initiatives that we have going forward, and that's been -- that we have been working with the last couple of years will drive us in the right direction for this target also even though it requires focus and a very hard work going forward.
When it comes to VAP, Sales & Distribution of an EBIT of NOK 1.250 billion -- NOK 1.2 billion, it's a stretch goal. We are at NOK 643 million in 2023. And -- but we really believe with the setup that we have, the way that we work today that this is also reachable within 2025.
And when it comes to the harvest volumes of 205,000 tonnes, it seems like really hairy goal, yes, it's a hairy goal and especially when we look at our performance in 2023, we are on 160,000 tonnes. But we believe that with the plan that we have, with the changes that we've done and we'll do going forward, this is also achievable with the capacity in licenses and the facilities that we have.
Well, I think, first of all, we touched upon VAP, sales & Distribution, substantial earnings growth through targeted initiatives, both short terms and long terms. For the short terms, improvement of VAP factories in certain European markets to -- markets too will substantially improve earnings for 2024, which is amending unprofitable business lines, products and factories, tight follow-up of low-performing units, precise product profitability calculations and gross margin expansion, and ongoing Lerøy Way implementation, which is our method of how we drive continuously improvements.
Further improvements from volume growth, resulting in higher utilization of our VAP factories and also higher volumes from the Farming segment will give us better results in the short terms.
In the long terms, strong focus on consequence products in our own value chain, increased flexibility and price achievement, implementing Lerøy Way with improvements downstream, and we have a target of being fully implemented within 2025 in this segment. And we focus a lot on sustainable logistics, both on looking at the transport on sea, and but also reducing the emissions on logistics for the overseas market by buyer. And this is some of the projects from strategic portfolio.
And we have a planned, strategic projects, further increasing value creation towards 2040. (sic) [ 2030. ] This is the 4 different areas: consequence products, it's about utilizing 100% of raw material. We have a way to go here. And -- but with the value of the fish or the seafood that it is today, it's crucial to utilize 100% of the fantastic fish that we produce and we fish.
And we -- yes, implementing Lerøy Way, like I said, we are on track. We will have 100% of the facilities implemented within 2025. Sustainability, sustainable logistics, yearly improvements in transport of product between units and to customers, target the yearly reduction of 35,000 tonnes of CO2 equivalent and we will also contribute to higher earnings, CapEx, some CapEx required.
And increased flexibility and price achievement, increasing the pre-defined flexibility in our contracts, giving higher price achievement on products. And, yes.
If we look at the Wild catch, it's a more challenging situation, especially because of the quota situation. The expected volume this year for cod is 13,500 tonnes, which is, it's drastically lower than last year. But there has been a strong focus on higher catches of alternative species, shrimps, redfish and saithe.
So the flexibility within the fleet is a unique position to have and -- but also here, increase the utilization of the raw material, 100% fish, alternative products for onshore industry. And as of today, even lower cod quota indicate for 2025, but we need to focus on what we can, where we can make a difference. So we need to be smarter in everything we do in this segment.
If we look at the onshore facility and all the improvements that has been done there, Båtsfjord factory started Monday this week, a rebuilt factory with fully automated lines of cod and other haddock and other kind of whitefish will improve productivity, handling higher volumes with no increase in staff.
For Stamsund, it used to be a filleting factory. Today, it's seafood, what should I say, ready-to-eat factory. It's fish burgers, it's fish gratin, and which we recently launched and making stable production for the full year every day possible. So a fantastic move in Stamsund.
For Melbu, significant improvement with the Lerøy Way implementation and activities and also a strong improvement in the profit the last year. And then when it comes to operational improvements within the Farming, we are especially focusing on, of course, the operational efficiency that goes on a daily level.
And -- but the main areas to improvements that we focus on a strategic perspective is the roe, the smolt production, and technology in the sea. And if we start with improvements in roe and smolt, which we believe that we expect to yield results from harvest in 2025, but also before that. And this illustration is when will the initiatives that we have done in genetics, roe and smolt and when will it give effect on the harvested fish.
And as we see for genetics, we see -- we will see improvements first half '24 for roe, 25% improvement affected in first half and the smolt part. And then we will see for every second half, we will see that the fish that we harvest will have better results because of the improvements that is done in the different areas. And this give us belief that we will have a good direction going towards the 2025 goal.
It takes time to improve this part of the value chain, and it's small adjustment and extremely focused on the details in the daily operation and getting the right standard to go forward. So a good job done there.
Then it's -- we are expanding the volume in the trout shifting production towards high-performing trout and utilization of shielding technology. For the trout, we see that the trout is performing very good at almost all locations that we have in West Norway, where we have Lerøy Sjøtroll. It's performing much better than the salmon in some locations, and we will shift the production from salmon to trout, where we have the biggest challenges today for the salmon production.
And this will give us a unique position as a trout producer, and we are going from a 38% share in '23 to 50% share in target in 2025. We see that for the trout it's 10% points higher superior share. It's 15% higher survival rate and also a much lower harvest cost per kilo, yes, of NOK 12 average the last 5 years.
And a higher base volume of trout will improve ability to serve more markets with stable volumes going forward. And of course, it will be a great task for our organization or sales -- VAP, Sales & Distribution segment to take this challenge and bring the trout out to further markets and also into our own value chain.
When it comes to shielding technology, we started many years ago, focusing or investigating opportunities of different new farming technology, and we landed on 4 different types that we really believe can bring us to the next level when it comes to farming salmon. And the results so far, it's showing very good -- exceptional good results. It's been a higher learning curve, we -- in the facilities that we have, it's close to 0 lice treatments, improved fish-welfare, with a high survival rates.
The remaining CapEx for this year is about NOK 500 million, and that is to reach 30% to 35% of our salmon will be shielded by end of 2024.
Current situation, end of fourth quarter is 12%. First quarter -- fourth quarter is 12%, end of fourth quarter 20% and then targeting 30% to 35% by end of 2024.
Yes. And then we have a film that we will show showing some of these technologies.
[Presentation]
Contracts share of 20% for total of 2024, expect to see significant improvement, roe and smolt quality, new farming technology, and process improvements, implementing Lerøy Way.
The Wild Catch, challenging a quota situation into 2024. Quotas for '24, cod down 30%, haddock down 20%, and improvements in land-based industry expected.
VAP, Sales & Distribution increased demand for integrated, sustainable, value chain, improved market share in some key markets, utilizing the potential of our value chain and large variation in profitability in different unit, and clear potential growth in profitability in 2024.
And that was all. And thank you very much.