Earnings Call: Q3 2021

Nov 11, 2021

Summary

Record Q3 turnover and harvest lifted EBIT before fair value adjustments, but lower harvest weights, biological issues and inflation held back margins. Strong demand, new capacity and growth investments supported the outlook.

Morning, and welcome to Lerøy Seafood Group's third quarter presentation, 2021. My name is Henning Beltestad, CEO in Lerøy Seafood Group. Together with me today, I have Sjur Malm, CFO. First of all, I will start with our value chain. 20 years with extensive investments we have made over a long period of time are now starting to yield results. Our goal is to create the world's most efficient and sustainable value chain for seafood. First of all, I will take you through the highlights. Sjur will take us through the key financial figures. I will come back and go through supply and demand and talk a little bit about how we expect things to be going forward. Lerøy Seafood Group reports in three segments: Farming, Wild Catch, VAP, Sales and Distribution. We will step by step take you through the performance in the different segments. First of all, the highlight for this quarter, I will start to say that it's been a quarter with extremely high turnover, the highest turnover ever in a quarter of NOK 6.3 billion. It's been the highest production quarter or harvest quarter in volume of salmon and trout of more than 56,000 tons. We achieved EBIT before fair value adjustments of NOK 580 million compared to NOK 370 million same quarter last year. We have an EBIT all-inclusive of NOK 9.6 compared to NOK 9.2 last year. It's been a quarter with some biological challenges, especially in Aurora and Lerøy Sjøtroll. The expected harvest volume for including associated is around 204,000 tons for 2021. The net interest-bearing debt end of the quarter is NOK 3.5 billion, approximately the same as same quarter last year. Then Farming side, like I said, it's been a record harvest volume in the quarter. Also the last 12 months, we see that our investments, especially in the new smolt facilities, gives us higher volume step by step. The contract share in the quarter is 23% compared to 31% last year. We have had some challenges in north of Norway, unexpected challenges. We had to take out some fish with the smaller size, which has affected the cost and also the price achievement in Lerøy Aurora and in Lerøy Sjøtroll. The EBIT per kilo in Farming is NOK 7.6 compared to NOK 7 in third quarter 2020. If we look at the guidance, for 2021, we have Lerøy Aurora with 44,000 tons, Lerøy Midt 72,000 tons, Lerøy Sjøtroll 71,000 tons, and a total of 187,000 tons. We have had growth going back to 2019. We had 158,000 tons, 2020, 171,000 tons, and this year then 187,000 tons. We expect 190,000 tons for year 2022. Including our share of Norskott Havbruk in U.K., our share is 16,500 tons this year. We expect the same volume for next year. So around 204,000 tons in 2021 and 207,000 tons then in 2022. If we look at the Wild Catch, it's been a fairly good quarter compared to last year. We had an EBIT of NOK 17 million compared to NOK 50 million last year. We see that our operation in the land-based industry is improving a lot, and we expect also that we will have further improvement going forward in that part of the value chain. If we look at the catch volumes, I think the most interesting thing here is to see the remaining quarter for 2021, and especially for the cod, where we have close to 11,000 tons remaining quarter, in fourth quarter, compared to 7,000 tons last year. I think that will give a good result for the fishery side in fourth quarter. If we look at the VAP, Sales and Distribution, very good quarter. We see that the market is really coming back, the demand for seafood. The HoReCa segment is opening up again, and we see a very good activity in all markets where we have downstream activities. But we still have a huge potential to improve, especially with the new operations, where we have new capacity, and it takes some time to fill up that capacity and to take out the potential. But we see the trend is going up, and the four quarter rolling EBIT now is up to NOK 600 million. We hope and believe that the potential going forward is higher than this. Sjur, you will take us through the figures. Yes. Thank you, Henning. As Henning has already touched upon, we have the highest activity level in any quarter of the group's history. Strong revenue, high harvest volume, but also we do not realize the margins we had expected in this quarter. Looking at the core drivers of profitability, we see that the harvest volume of redfish, salmon, and trout is up 28% from last year, and that is indicating good growth this year compared to last year, underpinning the increases in harvest volumes we have seen over recent years. But we also see that the EBIT per kilo through our value chain is only up from 9.20 to 9.60, despite the fact that spot price is up NOK 7 a kilo from the same quarter last year. If you look in development on price and cost from last year, our price realization is up by around NOK 3 per kilo, and our cost is up by around NOK 3 per kilo in the redfish. What is impacting the deviation from the NOK 7 spot price increase? One point is average harvest sizes. We have taken out sites, particularly in Northern Norway, also West Coast Norway, on lower average weights than we had originally planned for. Also, we have a lower contract share at the lower contract price this year compared to last year, and we had 40% of the harvest volume in September. Looking at cost, much is related to early harvest on some sites, and low average harvest weight gives a higher cost. That is explaining much of the lack of increase in margin, where we had expected a higher increase. In our Wild Catch segment, Henning has already touched upon key drivers. The core difference here is that we were losing money last year. This year, we are earning a healthy margin, NOK 3 a kilo. That is driven by improvement in the land-based operation, as well as a higher catch value in the trawling fleet. With these drivers, we see that, first of all, revenue is up 33%. Operating result is up 56%. Some decreases in net finance, and EPS is up 45% from last year. The return on capital employed is just above 11%. Looking at the same year to date, we see that we have harvested a higher volume of redfish. Margin is about the same, and the biggest change actually in that margin is the introduction of the production tax at NOK 0.40 per kilo. Price and cost has not changed that much. Looking at whitefish, we have an improvement in profitability, much driven by improvements in the land industry, and in total, our operating result is up 7% from year to date compared to last year. EPS is up 12%. Return on capital employed, just above 11%. Looking at our balance sheet, again, the core drivers is equity up 4%. You can see that net interest-bearing debt is basically unchanged. We would say we have a healthy and good cash flow generation this quarter. Looking at the capital employed, we are up around NOK 1 billion compared to last year. If you look on the drivers behind that, starting with fixed asset, right-of-use asset is basically then rental lease contracts with well boats, which is the big difference. The largest investment is our investment in Belsvik, which we will return to a bit later, which is the new smolt facility in Central Norway. Those factors are the biggest factors behind the increase in non-current asset. When looking at current asset, with increased revenue, there is an increase in receivables, but we are also seeing a significant increase in feed prices, and that gives an increase in debt to suppliers. The working capital development is actually positive this quarter, which I will return to. Overall, we believe we have a healthy and strong balance sheet. We have good cash flow generation. Also, looking at the cash position, we did in Q3, we were assigned investment grade credit rating in Q2. We did our first bond loan in the Green Finance Framework in Q3. There was a huge interest among investors, and the bond was successfully launched, and we raised NOK 1.5 billion, which is a key reason to the increase in cash. Looking at cash flow, I think year-to-date figures are the more interesting. We see that the EBITDA is a little bit up from last year. It is a lower tax bill due to lower earnings in 2020 compared to 2019. Working capital is positive due to receivables actually start of the year, and now debt to suppliers in this quarter. I do not foresee that change to be the same size and year, particularly if we see higher prices ahead of Christmas, and continued high feed bills. In investments, we are investing less this year than last year. We expect that difference of around half a billion NOK to be the same when comparing year-end 2021 with year-end 2020. We have done some small acquisition. The larger one is the acquisition of Seafood Danmark, which we are happy with, which is an asset that is performing well. We paid a high dividend this year compared to last year. We see that the debt level is about the same level as last year, and we see that the development in this quarter is substantially better than what it was in Q3 last year. Henning has already touched upon the different segments. Basically, earnings is better in every segment. We are more pleased with development in downstream and the Wild Catch segment than in Farming. Now, to comment on Farming. Lerøy Aurora is our operation in Northern Norway. We see that in this quarter and year-to-date, we have a significantly higher harvest volume than last year. We have done an improved when it comes to production. We had the first half this year, challenges with winter wounds, which impacted price realization. This quarter, we have seen with one batch from a smolt facility, we have seen lack of growth due to CMS on fish on several sites. We did late quarter decide to harvest that fish at the smaller size and leaving other fish to grow, which means that in this quarter, we have harvested fish with low average harvest weight than planned and than last year, which impact price realization and also cost. Actually, the price realization in Lerøy Aurora in Q3 this year is basically in line with last year. Then you can also see given the EBITDA per kilo that there is some increase in cost. We expect into Q4 cost improvement, but it is also fair to mention that there is cost inflation on so many or basically everything we buy. Feed is the most evident. Feed prices is up around NOK 1.5 per kilo in Q4 compared to first quarter this year. This impacts cost level already in Q4 and obviously also in 2022, dependent on how long those inflationary trends will last. We do not have the answer to that. We see that costs in general on our input is on the rise. That gives some less potential in cost reduction in Aurora Q4 than what we believed three to six months ago. But costs will come down in Q4, and we will have larger average harvest weights. Also, on winter wounds, it is fair to mention that we are entering in the period with lower temperatures. We saw those challenges in both 2020 and 2021. Going into the winter 2022, that risk is still evident. That is also then reflecting our lower guidance for next year. We might have to harvest some fish sooner than originally planned, but we do not know yet. There is a risk also this year, and we have implemented several measures, and we are improving year by year. We believe particularly from next winter, when it comes to time of release of smolt and a lot of other action taken, we will be better suited in winter 2023 with less risk than winter 2022. Lerøy Midt, development basically according to plan. We are seeing good growth. We have also here taken out fish at slightly lower average harvest weight than expected. That means price realization is up only 2 kroner from last year, and then you can see cost is also up. A key trend here is that the smolt facility is not finished yet. It will be finished, and we will release smolt in week 3, which means that the first smolt of the new facility will be released in 2022, but will impact growth from 2023 and give growth in harvest volume from 2023. Lerøy Sjøtroll, I think a key point there is obviously the big improvement in profitability. Performance year-to-date is vastly improved from last year. Also, if you look on production volumes from 2018, 2019 up until today, we are seeing substantial improvements. Lerøy Sjøtroll is improving. It has, the last 18 months, improved at a pretty high rate. Late Q3, start of Q4, we are seeing some slower growth, not than last year, but slower than we had expected, given what we have experienced earlier this year. We are reducing our guidance somewhat and then expect less growth this year compared to 2020. But we do believe that Lerøy Seafood will continue to grow, and we are in a good position for the coming years. Wild Catch, Henning has already touched upon the key drivers. Higher catch value from more cod and a continued high catch of shrimp. There is some increase in fuel cost, and there is improvement in land-based industry. In sum, profitability is substantially increased from last year, but this is also off-season quarter, so Q4 will be a different seasonal dynamics than Q3. Downstream, good profitability level, good revenue level, increased activity level. Good development and the potential for further growth into 2022. Then to operation in U.K., which we hold 50% together with SalMar. Q3 or late Q3 showed a challenging development at some sites with gill health. That meant loss of fish, earlier harvest of fish, and increase in cost, and that is impacting the profitability level this quarter. We also see that guided volume at 33,000 ton, 27,500 ton is already harvested, so there is not so much left for Q4, which will be a low harvest volume quarter with probably then also lower profitability. Looking into next year, we are guiding 33,000 tons. We showed our belief in Farming in U.K. through the planned acquisition of Grieg Seafood Hjaltland. The competition authority will return on that likely in Q4. We have strong belief in the future development of this operation. With that, Henning, I give the word back to you. Thank you. We will look into supply and demand first. We start with the supply side, and we can start with 2021. We see the production in Europe is expected to be up 12.2% this year. We see Norway is up 10%, U.K. is up 17%. Might be a little bit lower than this because of some challenges in U.K., which probably is not taken into these numbers. We have Faroe Islands up 27% and Iceland up 42%. If we look at Americas, it is down 9.2%, and it is especially Chile that is going down 14% in 2021. So a global growth of 4% this year. If we look into next year, the expectation is 4% in Europe. Norway is up 4.7%. U.K. is expected a little bit down. Faroe Island at the same level. Iceland up 10%. Americas, it is expected up 7%, and it is Chile that is expected to come back on track again and will increase by 8.6%. A global growth of 5%, which is in line with the growth that we had this year. We see the fluctuation in prices. It is hard to operate markets with this volatility. We see, if we look at the quarters, this year we had NOK 52 in beginning of the year. Very challenging quarter with, what should I say, a closed channel to the HoReCa segment, which now we have seen been opening up again into Q2 and Q3 and Q4. Third quarter, we had a price of NOK 55, and so far in fourth quarter, around NOK 56. You also see that there is a huge fluctuation within the quarter. Third quarter, on the top, it was NOK 65, and then on the bottom, it was down to NOK 50. If you look at monthly volume, we see we had an extremely high volume in September out of Norway, an increase of 21%, and this is the highest month ever in the salmon history in Norway. So extremely high volume. Still, even though the prices, we saw that in September, we had prices down to NOK 50, but still at a higher level than what we had last year with a 21% increase in the volume. So, the demand is very good at the moment, and we see that the market is opening more up. The channels to HoReCa is opening up, which is boosting the demand for salmon and seafood, I will say. Now we expect only 3% growth in December. Hopefully we will see a trend that the prices towards Christmas will increase from the level that we see today. Worldwide, we see fourth quarter, it is decreasing volumes in fourth quarter. If we look at the consumption side, for third quarter, I will say that especially U.S.A. is extremely strong, up 13%. Other markets is up 10%, and EU is up 6%. If we look at the year-to-date numbers, we see that the U.S. is up 18%, which is, it is a fantastic growth in the U.S., and it is a further potential in this market going forward, and which we will follow very closely. We believe that this trend will continue. Other markets is 9%, and EU is also very strong this year with a 10% growth. Then our outlook for 2021, we see a strong demand for seafood in general at the end of the last quarter. We see that there is general cost inflation, which will impact our cost in our operation, in our value chain, which we have to handle, and we will do that. On the Farming side, we have estimate guiding around 204,000 tons, and we expect the contract share of 25%. We have a very good quota situation for the whitefish, and also on increased prices, which will have a good impact on our result, and especially on the fishery of Wild Catch. VAP, Sales & Distribution, we have a huge potential. We invested heavily the last 10 years, and we have good capacity, which we will take step by step, we will take out in the months to come, and also towards Christmas. We expect a good quarter for VAP, Sales & Distribution segment in 2021, or the fourth quarter in 2021. For next year, still a very positive outlook for demand. I showed you the supply side, it is up 4%-5%, so that is possible to handle that increased volumes, and we expect a good market in next year. On the Farming, we expect 207,000 tons. The Wild Catch, in total, we see a quota for cod going down 20%, haddock at 23%, and for saithe, down 24%. We also expect that the prices of Wild Catch and whitefish will increase for next year. Then we have the VAP, Sales & Distribution. We, like I said, we have a huge potential. We have a strong focus and customer-oriented focus in developing the seafood category in our downstream activities. We believe that, the outlook for 2021 should be strong for Lerøy. Then we, like Sjur mentioned, is the Belsvik II, the last expansion. It is ready in January, and we are really looking forward to putting the fish in this part of the operation, and this will give us growth from 2023. So, we are still focusing on growth, developing our business, and we will have, like I said, a stable volume from this year to next year, and then we expect further growth in 2023. So, we continuously work on improving our value chains in all steps in the value chain, and we believe that we have a good base. We have a good organization and the right organization to move us towards our goal, to create the world's most efficient and sustainable value chain for seafood. Thank you very much.