Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript 2022-Q3

[Henning Beltestad, executive]

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

First of all, I will start with presenting our fantastic value chain. Our goal is to create the world's most efficient and sustainable value chain for seafood. In the last 20 years, we have done huge investments to build this value chain both for redfish and whitefish. Two months ago, we had a Capital Market Day in Norway. I think it was 22nd of September, where we presented ambitions goal for Lerøy Seafood Group. We have a target of 2030 of NOK 50 billion, and we have ambitious goal for emission of reducing the emission of 46% within 2030.

For us, it's important to have the best framework available to go in this direction. One week after the presentation, we got a shock from the Norwegian government that proposed to implement a new resource tax with an additional 40% tax on profits generated in the open sea phase of Farming. The proposal has immediate and long-term negative effects from the industry, which includes significant reduction in investment as well as making it basically impossible to do contracts. Hearing on a proposal until the 4th of January, with tax concluded in Parliament, probably before summer 2023. The tax will take effect from 1st of January. The process adds significant uncertainty.

Lerøy has invested significantly, also in human capital, to build an integrated value chain that you saw earlier, a value chain that meets customer needs and drive demand for salmon. The proposal is challenging for integrated business models and has a significant risk of lowering the demand for Norwegian seafood -- for Norwegian salmon. We mean that this tax is extremely destroying for the industry for Lerøy. And we are today presenting this also in Norwegian to the authorities to better understand what the consequences of this tax will be for the whole industry and also for Lerøy.

To show this fantastic value chain, I will show you a movie, it lasts for 3 minutes, which I think is probably the most efficient and sustainable value chain for salmon. This is an example, starting in a shop in Bergen and go all the way back to Europe. This shows the unique value chain and also the investments needed to develop these kind of value chains to secure the customers out there in the markets of both competitiveness and also the best sustainable solutions. Enjoy. [Presentation]

[Henning Beltestad, executive]

Highlights in the quarter. You've just seen our fantastic value chain, and now we will go in and look at the results for the Lerøy Seafood Group and also the different segments that you see in the value chain. First of all, it's been a record high turnover this quarter. The EBIT also is up 44% compared to same quarter last year. EBIT all exclusive on salmon and trout of NOK 14 per kilo. We see, after a difficult period for VAP, Sales and Distribution in the first half of the year with the extreme price developments, it's been challenging for this segment. But we see now that with lower prices, we see good improvement in this segment.

The total harvest volume is estimated to be 202,000 tonnes for 2023. We see a very positive development in Wild Catch. And as I mentioned, we got the resource tax proposed by the Norwegian government on 28th of September. If we look at the EBIT totally, we had an EBIT of NOK 831 million, and it's been on a stable level for the last 4 quarters.

Yes, as you know, we report in 3 segments: Farming, Wild Catch, VAP, Sales and Distribution. First of all, we take the Farming highlights. We have had a quarter with volatile prices, with a significant reduction compared to third quarter 2022. I will come back to that afterwards. We also see in this quarter that there has been a huge price difference from beginning of the quarter to the end of the quarter. So that can affect different regions when they took out volume in the quarter.

The EBIT in Farming increased from NOK 7.6 to NOK 14.1 per kilo in third quarter. Contract share of 37% and contract prices is below the spot prices in the quarter. We see a strong development in Lerøy Aurora, while some challenges, in particular in the Lerøy Sjøtroll. And we expect the volume for 2022 of 175,000 tonnes. Inflationary trends brings yet another cost increase, but more cost reduction quarter-on-quarter. If we look at the EBITA Farming, also, it's been NOK 791 million EBIT in third quarter, which is down compared to second quarter 2022. If we look at the different operations, we have Lerøy Aurora. We have seen a strong biological performance, significant quarter-on-quarter decrease in cost. Cost is higher than last year, but lower than inflationary trends. So a very good development in Lerøy Aurora, and they are really back on track. We expect for this year, 40,000 tonnes, and for next year, we expect 46,000 tonnes and achieve EBIT per kilo in this quarter is NOK 17.3 and we slaughtered 15,600 tonne.

If we look at Lerøy Midt, we have had a fairly okay quarter, but some challenges, quarter-on-quarter reduction in cost, but increase in costs compared to last year, but lower than inflationary trend. More challenging biological situation impacts harvest volume in 2022 and also 2023. We had to take out some batches at a lower average rate than what were expected. We expect volume of 68,000 tonnes in 2022 and 66,000 tonne in 2023. We had an EBIT per kilo of NOK 19. So it's a fairly good performance in this quarter. But of course, much lower than second quarter 2022 of NOK 33. Harvested volume is 22,000 tonnes in this quarter.

If we look at Lerøy Sjøtroll, it's been a challenging biological quarter, high number of treatment impacts the growth of the fish. And also in some areas, we had to take out the fish with a lower average weight. There's been, unfortunately, a cost increase, quarter-on-quarter, and there's also been some challenges into the fourth quarter. We expect harvest volume of 66,000 tonnes for this year and 2022. We expect -- no, 2023, it's 68,000 tonne. The harvested volume in the quarter is 18,600 tonnes, and we had an EBIT per kilo of NOK 5.70, which is well below the second quarter EBIT of NOK 27. But we have seen the last couple of years, we've seen operational improvements in Lerøy Sjøtroll, but unfortunately, this quarter, we have had more biological issues that made this quarter below our expectation, but we will be back on track.

Then in Norskott Havbruk, we owned 50% by Lerøy and SalMar. We had a challenging quarter in third quarter. The result is negatively impacted by environmental issues related to micro-jellyfish and gill health, low average harvest weight of fish and a contract level of 44%. We expect harvest volumes to be of 38,000 tonnes, which is reduced by 8,000 tonnes due to the biological challenges that we had in third quarter, and that will also affect the volumes in 2023, and we expect the harvest volume of 43,000 tonnes in Scotland.

Yes -- and we harvested 11,290 tonnes in the quarter, had an EBIT of NOK 4.2 compared to NOK 20 in second quarter 2022. Then if we look at the Farming volumes for the group, we see about 175,000 tonnes in Norway and 90,000 tonne, our share of Scottish Sea Farms gives us 194,000 tonne totally, which is lower than 2021. The expectations for next year is 180,000-tonne, 46,000 tonnes in Lerøy Seafood Aurora, which is up close to 6,000 tonnes; 66,000 tonne in Lerøy Midt; and 68,000 tonnes in Lerøy Sjøtroll, and then we have the plan for 2024 and 2025, up to 205,000 tonnes. And the main contributor to that volume will be Lerøy Midt, which opened the Belsvik 2 facility for post-smolt salmon, which is meant to give us the majority of the extra volume going forward.

Then if we look at the highlights for whitefish. It's been a good -- year-to-date, we have had -- year-to-date EBIT of NOK 357 million compared to NOK 267 million last year and a good improvement in the catching and also now we see good improvements on the industry side, on the land side. And we are very happy with the operational improvements that is still both on the boats and also on -- in the factories. We have had record high catch values driven by higher price, but partly offset by increased bunker and crude oil, and gradually more signs of improvement in the land-based industry, remaining quarters below last year.

For the Wild Catch, this is the volume in the quarter. We had a total volume of about 15,000 tonnes compared to 12,000 tonne third quarter last year, and year-to-date, we had 58,000 tonnes compared to 54,000 tonnes last year, and we have a remaining quarter of 15,000 tonnes, and compared to [ 29 ] remaining quarter 2021.

Then on VAP, Sales and Distribution, as we said, it's been a challenging first half with extreme volatile prices and also high prices that affected this segment. And we also see into this quarter, we had volatile prices, which negatively impacted this segment, also partly in third quarter, but we see a margin improvement and that we are back on track in this segment again, going out of third quarter and into fourth quarter. And we really believe that our operational improvements in all facilities will continually go better step-by-step going forward. And this shows our sales and processing operation, now span more than 14 countries.

So then Sjur will take us through the key financial highlights for the quarter.

[Sjur Malm, executive]

Thank you, Henning. So key driver these days is obviously inflation, which we see in higher prices, but we've also seen higher costs and higher working capital build. And if you look into our profit and loss statement, we can see that we have the highest revenue of all time, which is up 18% from last year, that is driven by higher prices. And if you look into the contributors of the operating result, starting with the salmon/trout integrated value chain, so the EBIT all-inclusive here is NOK 14 compared to NOK 9.60 last year, and we see that, that margin is on a similar harvest volume.

The drivers in the margin is that we see higher costs, so this includes the result downstream. Downstream, we have a lower result per kilo than last year. We also see a significant cost increase in our Farming operation, around NOK 3.5 per kilo due to feed around NOK 1 per kilo due to cost after the sea phase, which is driven by higher energy costs, both in terms of electricity but also in terms of bunkers cost for the wellboats. But despite the higher costs and the lower result per kilo downstream, we see that the margin is up, and that is a reflection of higher price realization.

In the Wild Catch, Q3 is seasonal low, but we had a good catching quarter. Prices remains high, and we see that we have a slightly higher margin than last year and then a slightly better result. In some, these drivers give us the operating result or EBIT of NOK 831 million, which is up 44% from last year. Income from associates is down, and Henning has already explained the key asset there, Norskott Havbruk. And we see that we have earnings per share, before value adjustment, of just shy of a kroner compared to NOK 0.74 earlier last year.

Key discussion in Norwegian media these days is obviously related to the resource taxation and the fact that Lerøy has sent out warnings that we made temporary layoff, close to 350 employees in the value-added business due to the fact that we lack contracts, and those contracts are impossible to enter into due to the new tax proposal. In relation to that, we get a lot of questions then from Norwegian media on how we can make quarterly profits like this and still do temporary layoffs. And I think it's important for us to highlight the amount of investments that was well highlighted in the video Henning or we showed, and we can see that total assets today in Lerøy is just shy of NOK 37 billion.

So obviously, firstly, we have to compare the operating results to also investments. And we have made significant investments in the last 20 years in creating the world's most efficient value chain. And if you compare operating profit compared to that, it's difficult to see a massive evidence of super profit. We believe this quarter shows we have a decent profitability and that profitability must obviously be seen with investments.

When it comes to contracts, Henning has already -- will comment upon that later. Other key items in this balance sheet is the impact of inflation and higher prices, and we see that very clearly in the working capital items. We can see that feed cost is a key driver to why the inventory efficiency is significantly higher in cost this year when compared to last year. We see our inventories are up. We see customer receivable is up.

So in sum, we have a massive, actually, working capital build this year. And year-to-date, it amounts to close to NOK 1.3 billion, and that shows -- and this balance sheet, it shows the high capital need of this industry. We believe we have a strong balance sheet. Net interest-bearing debt of NOK 4.4 billion and an equity ratio of 56%. On cash flow, here, it has shown as changes in net interest-bearing debt in the quarter. The key item this year is the build of working capital, which year-to-date amounts to NOK 1.3 billion. In that, it's important to remember that last year, we released more than NOK 500 million in working capital. So this is partially a catch-up year from post-COVID and partially effect of higher prices and activity.

We have already commented upon key drivers for the EBITDA. If you look on changes in working capital, it's less this quarter than the average quarter year-to-date, but it's still a working capital build. If you look on CapEx, CapEx is close to last year, and this is investments needed to run our whitefish and redfish operations and do smaller improvements. Then you see the net finance impact. So we have reduced our net interest-bearing debt slightly this quarter, and we expect a bigger reduction in the fourth quarter. Then a key topic in Norway these days is obviously the resource tax. And not -- obviously, not from anyone, but from some -- and in media, we get the impression that this industry is not paying tax. That is obviously wrong. So this tax -- this industry is paying a normal corporate tax in Norway. But in addition to that, we pay significantly more. So the discussion on the resource tax is not if we should pay tax, it's how much more than a normal industry we should pay in tax.

Today, we pay an addition to normal corporate tax, obviously, property tax. We have the production fee. We have export fee and -- we also have the option for new licenses, which is basically a resource tax on new capacity. So if you look on the last 3, 4 years, the additional tax beyond corporate tax out of this industry is more than NOK 14 billion. So we're already paying more than average Norwegian company. And from there, there is a discussion on what other ripple effects do we see beyond tax. And this slide gives some numbers on that, obviously, we have a high number of owned employees in Norway, and this was 2021, just over 3,000 employees. But our operation also interacts then -- in total, in 16 (sic) [ 60 ] municipalities we operate directly.

And today, we buy goods from -- or in 2021, we bought goods from 4,500 suppliers, worth NOK 13 billion. And the ripple effects when it comes to number of employees of our footprint in Norway is estimated around 13,000 employees and value creation estimated by [indiscernible] Economics is close to NOK 16 billion from our operations. So obviously, the idea behind any taxes to reduce corporate availability of cash and increased government availability of cash, but we think it's important to remember that this industry has huge ripple effects in Norway and that this taxation gives increased risk to those ripple effects.

And with that, Henning, I give the word back to you.

[Henning Beltestad, executive]

Thank you, Sjur. Then we will go to look into our outlook and what we expect going forward. And I can say that it's not that easy now to predict what the future is going to be with the situation that we are facing right now. But if we look at the 2022 supply, we see that there will be 0 growth in Norway this year. We believe that the situation will be a little bit lower than that, especially in United Kingdom. We believe that this volume is higher. It's not taking in the situation that we've been facing -- the industry that has been facing in the last couple of months in 2022.

And then we look into 2023, we see a small increase of 1.3% in supply. Norway is up 2%. U.K. is up 8%, and we don't believe that this will happen with the situation that we've seen lately in Mainland, and we see that also Chile is a little bit down. And yes, so a total of 1.3%. If we look at the price, we see a year behind us now, that's been with extreme prices. Now the prices in the last quarter is more normalized. So we see in third quarter, it was NOK 69, and so far, in the fourth quarter, it is also NOK 69 and after extremely -- the highest price level ever in the quarter, in second quarter of NOK 105.

But we see that it's challenging now with the levels of pricing for next year, a lot of uncertainty because of the proposed tax that might come, but still, there is nothing decided. There will be a hearing process until 4th of January, the proposed access from 1st of January, but it will be concluded back in next year's summer. So it's really challenging for us to predict what to do and to get orders for next year.

If we look at the volumes in Norway, you see it's, yes, pretty flat compared to the volumes that we are facing this year. Worldwide, it's also a similar picture. And if we look at the markets in third quarter, we see EU up 5%, U.S. 3% and other markets is up 6%. And yes -- and we believe and going forward, it's really challenging when it comes to farming. It's the discussions around the proposed resource tax, the fact that tax that is complicated to everything. We have a contract share in fourth quarter -- expect a contract share in fourth quarter of 38% and a contract share of 2023 of 1%. And we expect the harvest volume, including share of associate of 202,000 tonnes next year. And we believe that the inflationary trend will give higher costs in 2023, counterbalanced by operational improvements.

For Wild Catch, a healthy profitability in 2022, likely development in 2023. The quotas -- the cod is down. The proposed is 20% down, ahead of 5%, saithe of 15% and -- saithe north 15% up and saithe south of 19% up. We believe improved EBIT margin expected from fourth quarter 2022 for VAP, Sales and Distribution. Resource tax is a challenge for us and gives us less predictability going forward. And it will be interesting to see how the demand impact will be and lack of contracts is still difficult to evaluate. But we need to work hard together with our customers to find the best solution for both parties in the way to go forward.

So in short term, to manage the implication of the proposed resource tax is ahead of our agenda at the moment. And again, our fantastic value chain, we are building step-by-step improving, and we'll also invest for the future in the whole value chain.

Thank you very much.