Earnings Call: Q1 2022

May 13, 2022

Summary

Q1 revenue and EBIT increased on strong prices, lifting farming and catching results, while extreme volatility pressured downstream profitability. Harvest guidance was unchanged, with H2 improvement expected in downstream operations.

Good morning, and welcome to first quarter presentation of Lerøy Seafood Group. My name is Henning Beltestad, CEO in Lerøy, and with me today I have Sjur Malm, CFO. First of all, I will start with our unique value chain, a fully integrated company in both red fish and white fish. Our goal is to create the world's most efficient and sustainable value chain for seafood. First of all, I will go through the highlights in the quarter, and then Sjur will take us through the key financial figures, then I will come back, talk a little bit about supply and demand and the outlook for Lerøy and the market in general. Highlights in the quarter. We have had a quarter with extremely strong prices, both for our products, but also we see increased price of raw material and input cost in our value chain. In this quarter, it has been challenging for our downstream activities due to extremely high prices. We achieved EBIT of NOK 852 million compared to NOK 455 million same quarter last year. EBIT all-inclusive of NOK 20, and we keep our volume guidance for farming unchanged, and we have a proposed dividend at NOK 2.5 per share, and we have a net interest-bearing debt end of the quarter of NOK 3.3 billion. In this quarter, the harvest volume is about 32,000 tons, down from 42,000 tons same quarter last year. The catch volume is about the same volume, 25,000 tons. The revenue increased from about NOK 5 billion to NOK 5.5 billion, and the EBIT is increased to 852 from 455. So, relatively okay quarter totally for Lerøy Seafood Group. We report in three segments, farming, wild catch, and VAP, Sales and Distribution. First of all, I will give some highlights from the farming. As I said, it has been lower volume this quarter compared to same quarter last year, and almost 50% of the harvest in this quarter is from Lerøy Sjøtroll in the southwest region. The contract share is 43%, and the price realization from the contracts is well below the realized prices that we have seen in spot. Share of downgrades is reduced in this quarter compared to earlier, so we have a positive development there, but still, there is a discount to spot price for the downgraded volumes. The EBIT in farming is 19.4 compared to NOK 6 per kilo same quarter last year. As we said, the farming volumes, we keep the guidance as we reported with the last presentation. So, 40,000 tons for Lerøy Aurora, 71,000 tons for Lerøy Midt, and 74,000 tons for Lerøy Sjøtroll. So, total in Norway of 185,000 tons, about the same level as we had for 2021. For Norskott Havbruk, Scottish operation, where we have 50% share of that company, our share is 23,000 tons compared to 16,000 tons last year. So, a total of 208,000 tons, up from 203,000 tons. If we look at wild catch, we have also seen a very strong price development due to strong demand, but also because of lower quotas for white fish. The high prices is positive, very positive for the catching, but also challenging for our industry segment on the land side. We see a significant increase in the fuel costs, so up NOK 27 million year-on-year. We have a good EBIT of NOK 236 million compared to NOK 185 million same quarter last year. So, a good improvements in the results. If we look a little bit on the prices, we see 41 NOK for the cod. The haddock is up to 31, and we see saithe prices at 21 NOK. The catch volume in the quarter is 10,000 tons cod, 3,500 tons saithe, and 7,400 tons haddock, and a total of 25,000 tons, compared to 25,000 tons catch last year. Remaining quota for cod is about 14,000 tons, compared to 16,000 tons same period last year, and 11,000 tons saithe, and 2,500 tons haddock. VAP, Sales and Distribution segment, of course, with extremely fluctuation in prices and increased price levels, it has been a challenging quarter for this segment, and will also be challenging in second quarter. But we have a strong position in the segment and in the long term, the performance will continuously also be good in the long term, but challenging in the short term with extreme fluctuation and extreme high prices. But still, we are on the positive side, 26 million NOK compared to 100 million NOK same quarter last year. Then, Sjur, he will take us through the key financial figures. Yes. Thank you, Henning. The key factors in this first quarter has obviously been the increase in prices, which are positive for our farming and catching operation, while it takes time to transfer prices through the value chain, and it is negative for the downstream operation. Those are the key drivers behind the results this quarter. If you look on first quarter, key drivers are shown on the lateral lines here. We came into 2022 with the low standing biomass of salmon and trout. We have had growth as expected in first quarter, but as planned, we have a low harvesting volume this quarter, and we see it is down 24% compared to last year. That low volume impacts contract share. It also impacts harvesting cost, which is higher with low industrial utilization. We see that the EBIT per kilo is up from 7.40 kroner last year to 20 kroner this year. In this, costs are up. I can say that per harvested kilo, feed cost is up around 2 kroner. Industry cost is up just about 1 kroner. We have some operational improvements, but there is a cost increase from last year. But we also see that the price realization is vastly more up, so a substantial margin expansion. Looking into whitefish business, it is positive with the higher prices for the catching activity, but we also see increase in bunker or fuel cost, and it is also challenging for the land-based processing industry to transfer higher prices to the consumers. But in sum, we see that the margin per kilo is up in the whitefish activity. Looking then at top line, we see that revenue is up, and it is price that is the key driver. We see that operating profit before value adjustments are up almost to double level of last year. Income from associates, I will return to as Scottish Sea Farms or Norskott Havbruk is the key point there. Our earnings per share is NOK 1.02 this year, compared to NOK 0.58 last year, and we had a return on capital employed just about 16% compared to 9.5% last year. Looking at the balance sheet, these higher prices is also the key driver causing higher working capital binding. Looking at working capital items, higher feed cost impact the inventory cost of live fish. Higher product cost impact value of inventory. Higher prices impact receivables. We have a significant working capital build in this first quarter. If you look on more tangible investments, key changes from last year is our investment through Norskott Havbruk acquiring Grieg's UK asset. We also made an acquisition in Denmark, and we have invested in our own operation. In sum, our assets are up around NOK 4 billion in total asset Q1 this year compared to last year. We believe we have a strong and flexible balance sheet and a healthy net interest-bearing debt position. On our cash flow, EBITDA is up with higher profitability. We also here see then the impact of those working capital items already mentioned, which is a key contributor or key factor in overall liquidity development in this quarter. Investments is basically in line a little bit down from last year. We see that the change in net interest-bearing debt is less this year than it was last year, although operational results are better this year, and that is due to that working capital build. Henning has already touched upon key items in these segments. We see the point that upstream activities are up in profitability, while downstream activities are down. Looking then at Lerøy Aurora, we have had significant challenges in 2020 and 2021 related to winter wounds, and we are happy to report that the development when it comes to winter wounds has vastly improved in 2022 compared to 2021. That leads to the potential for significant operational improvements, and we will gradually see them also in the numbers later, particularly second half this year and into 2023. This quarter, despite the fact that it is a high feed cost, a high industrial cost, costs are marginally down compared to last year. We expect a volume of 40,000 tons in 2022, and we believe there is potential beyond this in 2023. Looking at the operation in Central Norway, Lerøy Midt, this has been a stable performer, and we saw good development in Q4 and also this continuing into Q1. We are seeing a marginal increase in cost in Q1 compared to Q4 due to lower utilization of the industrial activity, meaning a higher harvest cost. There is less room for operational improvement in this operation compared to Lerøy Aurora and Lerøy Sjøtroll, and we expect costs to increase in coming quarters as feed costs increase. Guidance this year at 71,000 tons. Then looking at the operation in West Coast Norway in Lerøy Sjøtroll, we have and we continue to implement a number of improvement initiatives. Such improvements are never a straight line, but we are seeing gradual improvements in this operation. Costs are up this quarter compared to both Q4 last year and first quarter last year, but we do believe that there is room for substantial operational improvements through the year, meaning that those operational improvements could outweigh the expected increase in feed costs. Expected volume this year of 74,000 tons, and the key for us to achieve that is to have better growth over the summer this year compared to what we had last year. Henning has already touched upon wild catch. Key factors is obviously higher prices and a healthy volume, which is positive for catching activity, while it's challenging for the land-based activity. Fuel costs are up NOK 27 million this quarter, and they will be up also in coming quarters. But as we see in this quarter, in sum, these factors are positive. Looking then on our downstream operation, this has been a very challenging quarter. We do not have back-to-back contracts on everything we do downstream. We have back-to-back contracts on a lot, but not all, meaning that we have contracts with end customers which are not fully covered. That is part of the operation, and as long as prices develop in a band, so to say, according to our expectation, we are well-equipped to handle that risk. As the graph Henning soon will show on price development on salmon in the first quarter, and also into second quarter, that has been far beyond our expectation, which gives a negative impact on profitability this quarter. However, we also believe that we have been a stable, reliable supplier through first quarter, and we will continue to be that. And we believe that our relative competitive position have rather strengthened than weakened, and that the long-term outlook is not changed. We will see negative impact from the same factors in Q2, and we expect significant improvement in profitability in second half of 2022. Looking into our operation in U.K., which is a joint venture where we own 50%, key item in second half 2021 was basically two. We and the industry saw biological challenges in Q3 and Q4 of 2021. That is impacting cost point in Q1 and Q2. We expect to see significant improvements in cost in second half. The other key point from last year was the acquisition of Grieg's UK activity, where integration are going according to plan. Organizations are now integrated, systems are being integrated. We are realizing synergies, and we believe there is a significant potential from this acquisition in the years to come. Harvest guidance is not changed, 46,000 tons, and the potential in 2023 is higher than this. Then I give the word back to you, Henning. Thank you, Sjur. Then I will go into supply and demand to look at what we expect going forward. First of all, I will take you through the supply side and the development there and the expectations for 2022. We saw globally 2021 increase of 6.7%. in 2022, we see a global reduction of 1.2%, and in Europe, 1.1%, and in Americas, 1.5%. The first half of the year, we have seen a negative growth so far, and this has affected the prices. Like you see, we go back to 2008, we have never seen a price increase that we have seen the last quarter, and also into this quarter, with the prices going from 60 level and up to close to 130 levels. So, extreme price increase so far for this year. That's, if we go back all the way to 2016, when we had the last huge increase in price level. 2015, we had NOK 41 in prices, then we had an increase to NOK 62. After that, it's been very stable all the way to 2021. Now, so far this year, it's average of NOK 85. So, we are seeing a shift in the price level for the salmon, and we also see that it's the same for other proteins and also other raw material costs that is coming up. So, we will probably see a shift also totally for this year, not only the four or five first months, but I think we also will see a huge shift on the price level for the whole year as a total, and probably also going into 2023. If we look at the monthly volumes, we see a negative. In Norway, we see a negative growth the first six months, and then we have modest growth from 1%-4% per month the second half. So, we also believe that the second half, we will have a good position. We see that the market is growing more than the supply, and especially we see that in the Horeca segments that is coming back after the situation that we have been facing the last two years. We also expect that we will see a positive growth in demand for the second half of the year. Worldwide, we see a very similar situation, negative growth the first six, seven months, and then modest growth the last five, six months. If we look at the consumption side, we see that the EU is down 7%, others down 4%, and we see the U.S. market, it was the strongest growth market in 2021, and it seems like it's going to continue, and we have a positive growth in the U.S. also so far this year at extremely high prices. We see a huge further potential for growth in the U.S. market going forward. Japan is down 17%, and Russia is down 40%. If we look at the outlook for 2022, we believe that we will continuously have a good price development. It will be fluctuating. We expect good prices also second half, but probably not at the same level as we are facing right now. We see a trend that the cost of input and raw material is going up, and will probably do that also in the time to come. We will have a contract share, second quarter, between 40% and 45%. This quarter, we had 43%. We keep our guiding for total volume for the year, and, of course, second half of the year, we will have good availability in volumes. The wild catch quotas for cod is down 18%, haddock down 20%, saithe plus 3%. VAP sales and distribution in the long term, it will be a positive development there going forward. But for the first and second quarter, we are, of course, seeing a situation with extreme fluctuation in prices, which is hard to handle. But in the long term, this segment will grow and be a positive development to our value chain. We also decided to have a Capital Markets Day, planned 22nd of September 2022, and hope to see you there. We will then give you a more detailed presentation of how we work and how we think, and going forward to improve our value chain, and how we want to reach our goal of creating the world's most efficient and sustainable value chain for seafood. Thank you very much.