Earnings Call: Q1 2024

May 15, 2024

Summary

Operational EBIT was NOK 842m, down 15% YoY, while EPS fell 22%. Improved farming biology and VAP earnings supported results, but lower fishery quotas and farming price pressures weigh on the outlook.

Welcome to Lerøy Seafood Group's first quarter presentation, 2024. My name is Henning Beltestad. I am CEO of Lerøy Seafood Group, and with me today I have Sjur Malm, CFO. First of all, I will take you through some of the key highlights in the quarter. Sjur Malm will take you through the key financial highlights. I will come back and talk a little bit about the outlook for the different segments in Lerøy. First of all, our goal is creating the world's most efficient and sustainable value chain for seafood. We are step-by-step improving the value chain and working continuously with that work. We see in this quarter some improvements in a lot of improvements in different parts of our value chain. I will come back to that. When we look at the highlights of the quarter, we had an operational EBIT of NOK 842 million. We had a quarter with good biological development, but we had low temperatures that has impacted the growth somewhat. Biological earnings in Scottish Seafarms is improving a lot. Also, the underlying improvements in biology is really good. We are really satisfied seeing that development. I will come back to that afterwards. Significant improvements in earnings from VAP Sales and Distribution. Healthy earnings in Wild Catch. Harvest targets for 2025 is reduced by 5,000 tons as license capacity is reduced following a traffic light system. The board has proposed a dividend of NOK 2.5 per share. I will come back to the different segments. We are reporting in three segments: farming, Wild Catch, and VAP Sales and Distribution. For the farming, like I said, a strong biological development in start of 2024. Low sea temperature can be positive and can be negative. Some negative for lower growth, but also some positive things by having lower temperatures. We see sea lice technology remain promising. Minimal need for lice treatments. We had a quarter with a seasonally low harvest, and that has impacted the cost per kilo harvested. It has been a quarter with high spot prices, but price achievement is impacted by contracts and some quality downgrades. If we go into the different regions. First of all, we have Lerøy Aurora, a very strong biological performance, and biomass growth is affected by very low sea temperatures. We see a quarter with substantial increase in harvest weights versus same quarter last year, which is lifting the price realization. If we look at the harvest rates in first quarter is 4.6 kilo, compared to 3.7 kilo same quarter last year. So, a good improvement. We are also expecting good harvest weights going forward. The cost level for 2024 expected slightly higher than for 2023. Operational EBIT per kilo of NOK 44, which is at a very high level. We see compared to last year where we had NOK 27. Lerøy Midt. Higher biomass growth in first quarter compared to same quarter last year. We also had a higher biomass going into the quarter. A significant increase in harvest volumes in first quarter compared to first quarter 2023, to 13,700 tons compared to 8,600 tons. The harvest weights is in line with last year, 4.1 kilo compared to 4.2 kilo, and we expect higher harvest weights going forward. We have a good biomass with good weights in the sea at the moment. Cost level for 2024 is expected slightly higher than 2024, and we achieved the operational EBIT of 31 NOK. Lerøy Sjøtroll. This is the region where we really see strong biological development. Some affected by string jellyfish from fourth quarter, which affected early harvest in January and some low price realization. It has been underlying performance. It has been a very positive start of 2024, with expectation of clear improvements from smolt quality, new farming technology, and increased production of trout also going forward. Cost level for 2024 expected at the same level as 2023, but with significant year-on-year reduction second half of 2024. On the negative side, the production area 3 and 4 is color red in traffic light with 6% license capacity reduction as a consequence. Harvest target for 2025 reduced by 5,000 tons because of that. Low volume in the quarter, 6,700 tons compared to 14,000 tons in 2023. The main reason for that is that we are building biomass, as we have a strong biological situation. We will have a much higher volume going forward the next quarters of 2024. For Scottish Seafarms, we are really satisfied to see the performance and the improved biological status in all regions. We also see that the EBIT is going from negative to +19 NOK per kilo. We also expect that we will see improvements going forward with higher average weights, better quality, and much better fish health situation. It has really been a turnaround case for the organization in Scottish, and we are really satisfied and happy to see the positive development and that Scottish Seafarms is back on track. 45% of the volumes sold on contracts with a negative impact on price realization, lower cost level expected in Q2 2024, and harvest guidance for 2024 remains at 37,000 tons. The guidance for the different regions. We keep our guidance of 2024 for 175,000 tons. I will say where we have some downside risk is in Lerøy Aurora, where we have had extremely low temperatures so far. But we expect that we will manage to be at the 47,000 tons end of the year, 70,000 tons in Lerøy Midt, and 58,000 tons in Lerøy Sjøtroll. We adjusted the target for 2024 to 200,000 tons. For 2024, our share of Scottish Seafarms is 18,500 tons, so a total of 193,000 tons. We have Wild Catch. It has been a good quarter, 187 million NOK in EBIT. It has been good catch volumes, but of course, we are impacted by lower quotas, and we have seen historical high cod prices in first quarter 2024, close to 60 NOK. As we said, the cod quota is down 34% on cod and for haddock, 43%, compared to 2023. Of course, that will impact the profitability in the rest of the year in 2024. The volumes in Wild Catch, we caught 6,700 tons cod, 7,000 tons saithe, 5,000 tons haddock, and 1,400 tons shrimps. Now we are into the second quarter, we start with the main fishery for shrimps and other 4,000 tons. So a total of 24,000 tons compared to 25,000 tons in 2023. Sales and processing. We have operation in 14 countries. Invested strongly into the different main markets in Europe to be close to our customers and be a, what should I say, a partner in the category development of especially fresh seafood, but also smoked products and frozen products. We see strong improvements in this segment. If we look at the trend on 12 months rolling, EBIT, it's going up and a very positive trend after some challenging year with COVID and also some startup problems in some of the markets. It's very good to see the operational improvements in a lot of these downstreams facilities that we have. We still have a huge potential of improving that going forward also. I will give the word to Sjur Malm, and he will take us through the key financial highlights. Thank you very much. Yes. Thank you, Henning. Summing up some of the key trends in this quarter, we've had good growth. In the quarter, that good growth has been a key highlight. Following, we've seen some downgrades of our fish, but we've been able to value create on that fish in our downstream segment. How has this affected the first quarter results? It has affected us in terms of harvest volume in red fish. We've harvested and there's still this low volume impact cost, but the value creation in downstream has been visible. Looking at our financial figures and key drivers. We see the key value drivers on the lateral lines. Harvest volume is down 8% this quarter. We have built a significant amount of biomass, and the standing biomass in Q1 is above 5,000 tons higher than it was the same quarter last year. The margin in farming is down, but the margin in value-added processing is up, and in sum, the margin through the value chain is marginally down. In whitefish, we have catch volumes which are 5% lower, slightly lower margin, and in sum, this sums up to operational EBIT of NOK 842 million, which is 15% below last year. There's a good performance in Scottish Sea Farms, but still EPS is down 22%. Looking then at our balance sheet. If we start with tangible fixed asset, I will show a slide soon, showing key investments. Key investments include investments in new technology in farming and also opening a new factory in Båtsfjord in the whitefish segment. Those are key drivers for the higher tangible fixed asset. I think the other key point is the biological assets at cost, which is basically the efficiency. We see that is up above NOK 800 million. Key drivers for that is the fact that there's above 5,000 tons more biomass in the sea this year compared to last year. Also that the average size of that biomass is around 15% higher than the same period last year. So it's a better biomass. It's more costly, but it's also larger and better than last year. That promises well for the remainder of the year. Other working capital items, there's no big changes, and I return to that on coming slide. We believe we have a strong balance sheet. Net interest-bearing debt of NOK 5.5 billion and equity ratio of 50%. Here is the indication of cash flow development, shown as change in net interest-bearing debt. You recognize the EBITDA. The change in working capital is driven by biomass development as the key driver. CapEx, I will return to on coming slide. Finance cost is up following the fact that interest rates are higher and we are paying a tax. Net interest bearing debt in quarter of NOK 5.5 billion. Looking at CapEx, this shows the historical development. Maintenance CapEx, we see was up in 2023. The key driver here is the weakening Norwegian kroner. We expect about the same level in 2024. Last year, we invested in whitefish processing capacity and new technology in farming. Looking into this year, we will enhance investments in chilling technology in farming. Results so far are good, and Henning will comment more upon them later. We are investing in improving smolt quality to get the more robust fish that we put into the sea. Best estimate today is a CapEx of around NOK 1.8 billion. Particularly in Norwegian media, there is a discussion on value creation from this industry. We can only show the facts. What this slide shows is the footprint of Lerøy's operations in Norway and also from the suppliers we acquire from. As we see, it's a significant footprint all over the country and particularly along the coastline. We made purchases last year of around NOK 20 billion. We bought from close to 5,500 suppliers in 250 municipalities in Norway. We have employees in 60 municipalities. That activity leads to substantial value creation in Norway. Here shown as number of employees, both our own and indirect, summing to 10,000. Also, estimate of value creation, which is substantial, including indirect value creation, close to NOK 15 billion. There's a significant tax contribution of around NOK 2 billion in sum. We create significant values in Norway. Yes, Henning, then I give the word back to you. Thank you, Øyvind. Okay, then we want to look a little bit what's happening going forward and our forward targets, to give you some short update on that. We see we have a target in 2030 of more than NOK 50 billion. We had NOK 30 billion in 2023, and we see that we are on track to achieve this goal. When it comes to reduction in total emissions, we also are on track here on reducing the emission by 46% within 2030. On the targets for tons harvested in 2025, we are on track with all the initiatives that we are doing step by step. It's up 40,000 tons from the level that we had in 2023, but also 2023, we had, I will say, not the best performance. That is not where we should be. Also for VAP Sales and Distribution, it's a hairy goal to double in EBIT in 2 years. We see a very good development in this quarter. We also expect a good development quarter by quarter going forward, especially second half of this year and into 2025. We strongly believe that the organization has the right motivation to take us towards this goal. Then it's being number 1 farming companies in EBIT per kilo in achievement in 2025. We see that we are on track in north region, in Lerøy Midt. We also believe that with the initiatives that we're doing in new technologies and also on the smolt, the roe, and the genetic side will give us a good development towards also this goal. It's getting close, so we really feel on that. But the organization in all regions believe that this is achievable. We can start with our emissions. We reduced that from 2019 by 15.5% until 2023. Our ambition, as I said, is reducing it of 46%. Our main focus areas to achieve this goal is sustainable fish feed. We work on the ingredient side together with a strategic partner on feed. We work a lot with airborne transport and also working a lot with alternative fuel to our fishing fleets. That is more a long-term focus. We believe that it is possible to achieve this goal, and we have implemented this into daily operation in the whole value chain. When it comes to Wild Catch, of course, the reduced quotas make it difficult for us going forward. Also, we believe there might be some downsides on the quota for 2025. For VAP Sales and Distribution, as I said, it is a promising outlook. We invested in all major markets in Europe to get close to the customer, to give a high service level, to give a stability, and to be a leader within category development within seafood in all main markets. We have huge capacities, and there is still a huge potential of improvements in all the markets. We see step by step that these improvements have been taking out the potential of. For the short-term actions, of course, higher utilization of our VAP factories through volume growth, achieving economy of scale, improving VAP factories in certain European markets with expected substantial uplift in 2024. We see, like in one key market, there can be up to 100 million NOK improvements to be done going forward and that we also see that we are on track on these improvements. Lerøy Way principles is implemented with clear targets, roles and responsibility, action plans, market plans, and culture for continuous improvement. For the long-term actions, it is to focus a lot on the convenience products in our own value chain. Use 100% of the fish, increase flexibility and price achievement, implementing Lerøy Way and sustainable logistics. A lot of areas where we can improve, both in short-terms and in long-term to achieve the goal of 2025. One example of using the fish, the 100% of the fish, Lerøy is the first farming company to take out the salmon blood and to make products out of the blood. Earlier this quarter, we launched SalmoFer, which is iron tablets with a good quality, and this is a way how to take care of all the parts of the fish. 2% of the fish is blood, so if we produce 200,000 ton, it will be 4,000 ton with potential blood to make a higher value out of. Reaching 2024 harvest targets through operational improvements. We focus a lot on roe, smolt production, and new technologies. To give an update on where we are and when will this give effect, first, the genetics, we see it will give some effects on first half of 2024. Roe also giving effect on first half, and we see some improvement from that and also from the smolt. Then we will see step by step, we will take out the effects on harvested fish going forward. If we look at the first quarter, we see strong biological performance. First quarter compared to the average of last five years, we see improved net growth rate of 9%, we see a reduction in mortality of 24%, and we see a reduction in lice treatments of 56%. So exceptional improvements in these key drivers for improving better fish health going forward. We are on track with our implementation of shielding technology, and results so far has been really good. We see that in submerged cages, there is zero lice treatment, and we had the first location put in sea in July last year. It will be exciting to see how this will go when we go into the main season with higher sea temperatures and see the performance of the new technology. The current situation is that we are on target, like I said, close to 20% of salmon in number of fish shielded as of April 2024, and targeting 30%-35% by end of 2024. So far, everything is going well, and we really believe in the implementation of the new technology for the farming segment to achieve our goals for 2025. Like I said, we see a huge reduction in lice treatments for the different technology. Like I said, for the deep-sea farming, there has been no treatments. We have had some treatments on the other technologies, but compared to same generation going back, we see that there is huge improvements in all what we do in new technology and with a reduction of 82%. At the time, it looks promising. The last outlook, farming, positive start of 2024. Contract share 2024, currently around 25%. Expect to see significant improvements from roe and smolt quality, new farming technology, and process improvements through implementation of Lerøy Way. For Wild Catch, challenging quota situation. Cod down 34%, haddock down 43%, and outlook for quota 2025, it seems like we will get a further reduction. For VAP Sales & Distribution, increased demand for integrated sustainable value chain. We see improved market share in some key markets utilizing the potential of our value chain. We have a huge potential of improvement in some key markets, which will take us to the goals in 2024. So that's what we have, and thank you very much.