Leroy Seafood Group ASA
OSE:LSG
Earnings Call Analysis
Q3-2023 Analysis
Leroy Seafood Group ASA
Lerøy Seafood Group aims to achieve NOK 50 billion in turnover by 2030 and cut emissions by 46% by the same year, leading to their #2 ranking in the Coller FAIRR sustainability ranking. Through careful scrutiny of operations, they work to reduce their environmental impact and advance toward their EBIT goals across the value chain.
Biological challenges have led to an operational EBIT of NOK 12.4 million, down from NOK 14.3 million in the same quarter last year. Gill issues and a forced early harvest resulted in lower average weights and reduced future harvest volumes for 2023 and 2024. Despite this, significant improvements are expected, thanks to better smolt quality and farming technology.
Lerøy Seafood Group's operational EBIT fell to NOK 630 million from NOK 833 million the previous year due to increased feed costs and the impact of disease. The ISA outbreak alone contributed around NOK 200 million in losses. However, these results mask underlying improvements in cost management and efficiency gains from new investments.
Throughout 2023, the company has invested in trawling fleets, upgraded factories, and new farming technologies that promise increased efficiency and better results in the coming years. Their balance sheet remains strong, with significant tangible assets and a reduction in net interest-bearing debt this quarter to NOK 5.5 billion.
Implementing the new resource tax has introduced challenges, given its retroactive effect from January, applied only in May. The company has included both the resource tax and production costs in their financial reports, estimating the impact on earnings to be around NOK 300 million for the year.
Supply growth is estimated at 5.1% with significant increases expected in various regions. A shift in consumer demand shows a contraction in Europe but growth in the US market. Looking ahead, technological advancements in farming are expected to account for 20% of stock protection by the first quarter of 2024, driving improvements in sea performance and addressing threats such as sea lice without treatments.
The company expects farming costs to remain stable, with a notable increase in harvest volume expected in 2024. Earnings per share year-to-date without the resource tax implementation effect stands at NOK 1.91, and capital expenditures are estimated between NOK 1.3 and NOK 1.5 billion for 2023. Notably, profitability in the fourth quarter of 2022 is anticipated to be in line with or exceed the same quarter's performance from the previous year.
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Welcome to Lerøy Seafood Group's Third Quarter Presentation 2023. My name is Henning Beltestad, CEO of Lerøy Seafood Group. And with me today, I have CFO, Sjur Malm. First of all, I will repeat, our goal is to create the world's most efficient and sustainable value chain for seafood. We are both fully integrated in redfish and whitefish, and have a unique position to develop the value chain and develop the markets in different regions. Our target for 2025 is to increase and beyond is to increase the turnover by -- to NOK 50 billion in 2030, reduce our total emission of 46% within 2030. To be the #1 company in EBIT of the value chain of salmon and Wild Catch EBIT of NOK 500 million and to have EBIT of NOK 1.25 billion within 2025 in VAP Sales and Distribution and a farming volume of 205,000 tonnes. If we talk a little bit about sustainability to create the world's most sustainable value chain for seafood. It's extremely important for us as a company. And if we look at the Coller FAIRR sustainability ranking among 60 producers of protein in the world, we see that we are ranked now as #2 after Mowi. And also, we see that there are 4 companies from Norway in the top 10 ranking. And that really means that this industry are doing the right things and developing the industry in a sustainable way. And we can also see that we are the company that has the largest improvements from last year, and we are very satisfied by that. Also, cutting CO2 emission, we also see in Norway that we are among the 9 companies that are cutting emissions in line with the Paris agreement. And we will continue to work hard to keep this development also going forward. Also here, we see that there are 4 seafood company in top 9. We have Lerøy, Mowi, SalMar and [indiscernible]. And so I will say that this industry is really going in the good direction in these issues. And how do we work with our part to have a climate reduction as on an operational level on a daily operation in the company, we work very detailed through our value chain. Trying to spot the areas where it's most important to cut and we have that as high on our agenda internally in Lerøy Seafood Group. Then the Third Quarter, it's been a record revenue. Earnings is impacted by previously announced ISA outbreak. We have an operational EBIT of 12.4 compared to 14.3 same quarter 2022. It's been some challenges in biology late Third Quarter and also into -- early into Fourth Quarter. We have seen a positive development of VAP sales and distribution, and there's been a little bit more challenging with lower profitability on lower quota in Wild Catch. The EBIT in the quarter is NOK 631 million. We report in 3 segments, Farming, Wild Catch, VAP Sales and Distribution. We start with Farming. There's been a loss under operation from Lerøy Seafood, driven by ISA of around NOK 200 million. We see a significant quarter-on-quarter reduction in costs driven by Lerøy Aurora and Lerøy Midt. Challenging biology in the Third Quarter and start of Fourth Quarter because of some gill health issue in Lerøy Fjord Trout and Lerøy Midt. That caused harvesting of fish sooner than planned, so with a lower average weight. And this will also impact the harvest volume in 2023 and 2024. We expect cost in the Farming segment to be at the same level as Third Quarter. For Lerøy Aurora, it's been a very positive development in 2023. But a little bit lower growth rates than expected in Third Quarter and the start of Fourth Quarter. We -- cost is significant down and we expect the same level in Fourth Quarter as in Third Quarter. The expected volumes is 43,000 tonnes in 2023 and 47,000 tonnes in 2024, and we see a significant lift in the harvest rates expected in 2024. If we look at the operational EBIT per kilo, we achieved NOK 25.9 in Third Quarter compared to NOK 36.8 in Second Quarter, but we see a good development in Lerøy Aurora and a very good performance. Lerøy Midt, also, positive biological development in '23, but we have had some gill health issues late Third Quarter and beginning of Fourth Quarter also here, which has accelerated harvest of some fish with lower average weight. We see a significant cost decrease quarter-on-quarter, and we expect same level in Fourth Quarter '23. Expected harvest volume is 61,000 tonnes in 2023 and 70,000 tonnes in 2024. And we expect to see improvement in coming years from higher, better quality biomass going into 2024. Improvement in small quantity and an improvement impacted by new farming technology. We'll come back to that a little bit later. Per kilo, EBIT is NOK 18.1. Lerøy Sjøtroll it's been a challenging quarter, forced harvest of 2 salmon sites with ISA. Trout is performing very well. Fish groups with the same characteristics as Lerøy Midt gill health harvested early and harvest volume in 2023 and '24 is reduced to 53,000 tonnes in 2023 and 58,000 tonnes in 2024. And also here, we expect clear improvements from small quality, new farming technology and increased production of trout. And we have a negative result in the quarter of NOK 7.1. Norskott Havbruk, still a biological challenge impacted harvest volume, average over was cost and price achievement in this quarter. Incident-based mortality in the quarter of NOK 13.1 million, and so a very challenging quarter for Scottish sea farm. And we had a contract level of 49%. We see improved biological situation at the moment and going forward. So we will increase the volume compared to last year -- to this year. To this year, we expect 25,000 tonnes. And for next year, we target 37,000 tonnes in 2024. If we look at the total farming volumes, 2023, 157,000 tonnes in Norway, and expect to increase the volumes next year to 175,000 tonnes. For the Wild Catch, it's been also more challenging than the normal in the Third Quarter. The main reason for that is lower catch values on lower quarters and weakening price on key species such as haddock, saithe and shrimps. Also on an operational level and efficiency in the fishery is lower compared to other quarters, mainly because of lower volumes on cod and more fisheries of shrimps in this quarter. If we look at the catching in the quarter, a total of 14,400 tonnes compared to 14,900 tonnes in Second Quarter -- Third Quarter last year. Year-to-date, we see we have catched a higher volume, 63,400 tonnes compared to 58,000 tonnes last year. So I will say that we really did a good performance year-to-date catching other volumes when the quotas of cod is going down. So that's on a positive side. VAP, Sales and Distribution, strong improvement compared to last year. Operational EBIT of NOK 163 million compared to NOK 63 million same -- Second Quarter. As of today, expecting profitability in the Fourth Quarter in line or higher than Fourth Quarter 2022. And we see a significant potential for improvement in some regions. And yes. And this is showing our segment, and we have distribution and processing facilities, in all the central markets in Europe and sales branches in Asia and in North America. And then Sjur will take us through the key financial highlights.
Yes. Thank you, Henning. Now Henning talked us through the key drivers and they are summing up to these financial results. And if you look at the key drivers of our profitability, those include the volume within redfish and whitefish. So looking at the redfish volume, meaning harvested volume of salmon and trout, that volume is, as we can see, 4% lower than last year. We see that the margin at that volume is lower, down from just about NOK 14 last year to NOK 12 this year. That margin reduction indicates then that the cost increase is higher than the price realization. If you look at the cost initially, costs are higher this quarter than the same quarter last year. The key driver is feed cost and feed cost on harvest and volume is up around NOK 7. If you look on price and price realization, we have had very low average harvest weight this quarter. And if you look at a press realization, given the harvest size is close to benchmark NSI prices, but the low average harvest weight has a significant impact still as the prices for larger fish have been higher. On top of this, we have the ISA impact in Lerøy Sjøtroll, around NOK 200 million, which divided on the volume is around NOK 4, so if we add those NOK 4, we would see that without the ISA outbreak, we would be higher this year than last year on redfish. Looking at whitefish, volume is the same. As Henning has pointed out, we have used more fishing days. It's a lower share of cod. It's a higher share of shrimp, which is more energy consuming fishery and time-consuming fishery also. And we see that even though the volume is the same, the catch values are not the same, and we see in some then that the profitability through the value chain is lower than last year. In sum, this brings operational EBIT of 630 million compared to 833 million last year. And again, we had that 200 million ISA impact. So without that, we would be pretty close to where we were last year. We also see revenues up 8%. Key driver for that is basically the weakening of the Norwegian kroner and the fact that prices are going up, and that is also impacting our working capital, which I will highlight in the coming slide. And if you look on the earnings per share this quarter, we have implemented the year-to-date effect, meaning the 3 1st quarter best estimate on a resource tax on running earnings. I'll get back to that. If you look on EPS year-to-date without the implementation effect on the resource tax, just the resource taxes a bit on running profitability. We get to EPS of NOK 1.91 this year, a comparable figure last year, 2.84. Balance sheet. If you look initially on tangible asset. We have invested also in 2023 in our value chain. That includes in the trawling fleet for a more efficient operation. It includes the land industry, upgrading the land industry factories. And it includes investment in new technology in farming. And those are the key drivers for the increase in tangible fixed assets. If you look then on working capital items, field cost is a key driver for higher cost of biological asset efficiency. Higher prices is also a key drive for value of inventory and receivable. We see compared to last year, we have an increase in working capital items. Still, we believe we have a strong balance sheet. And looking at working capital items, it is somewhat comforting that working capital is down this quarter, NOK 185 million. For the rest of the year, development in working capital, we expect to build some biomass in Q4. also receivable, et cetera, will be dependent on price level towards end of the year. CapEx, NOK 300 million this year. Best estimate today is NOK 1.3 billion, NOk 1.5 billion in 2023. A little bit dependent on when technology in -- coastal production technology to farming is delivered. But we see this quarter a reduction in net interest-bearing debt from around NOK 6 billion to NOK 5.5 billion. Then some comments on resource tax. we can understand some believe that we've been a little bit late on reporting resource tax. The key challenge on resource tax is that it was implemented late May with the effect from first of January. So it was impossible for us, obviously, to report in Q1. In Q2, we did the best we could, implementing the implementation effect. And now in Q3, we have done the best estimate possible on what is the resource tax on running earnings. And those 2 figures in total is around just above 2 billion. And the best estimate year-to-date on resource tax on running earnings is around 300 million. That includes then both the resource tax and the production cost. In note 10, we see the split. When it comes to future statements on resource tax, it's difficult to give a guidance on what will be the effective tax rate in the farming segment. The reason for that is that there is several steps in the farming value chain, and it's only the time in sea, which has increased tax rate to 47% and the other phases only have 22%, which means that dependent on how profitability moves up and down in the resource tax segment, the farming segment, the tax rate will vary. So -- but we will probably update our -- how we report in this segment, Q4 or Q1 to give the best possible data on how to calculate resource tax, but as of today, year-to-date, best estimate is NOK 300 million. Yes. With that ending, I'll give the word back to you.
Yes. Then we will look -- start with supply. And we can start with the 2 last years, '22 and '23. It's been very stable volumes, no growth. Exactly 1.2% negative growth in both years and also into 2024, we see an increase of 5.1%. The drivers in the growth we see in Norway, 5.1%. We see United Kingdom is coming back with 10%, Faroe Islands, 18% after a year with a negative growth. The same with Iceland, a negative growth in 2023 and expect a growth of 31% in 2024. But overall, 5% is it's good that we have growth if we're going to grow this industry, grow the market. It's important to also have volume growth stable every year. If you look at the consumptions in the Fourth Quarter. We see that there is a strong negative volume -- negative growth in Europe of 5%. Other markets 3% and U.S. is a little bit up, and it seems like the U.S. market will continue to be take market share globally in the coming quarters and also the coming years. So we really believe that the U.S. market will be a driver in the demand of salmon and also seafood going forward. The prices in the quarter so far, in Third Quarter. It's around NOK 80 and the average so far this year is NOK 89 and we expect, like normally that the prices in the last month of the year will have a positive trend upward. If outlook within our farming segments, our segment. We start with the farming like we said, there's been some challenging biology, late Third Quarter and early Fourth Quarter. The situation right now is much better. We have made significant measures implemented, particularly within small quality, improved genetics selection, improving procedures at hatchery, lower temperatures in the early stage. And we really believe that this will give us a more robust smolt of higher quality and also to have a better survival rate in the sea in the time to come, and we will see this in improvements in the sea step by step going forward. And then we have the new farming technology that we have been focusing on for the last 3 to 4 years, developing good methods in new technology and started in this summer with the first deep location with deep cages. And we see that this is -- so far, it's showing a very positive development and especially if we look at our largest problems, which is the sea lice, we see we have no treatments on the cases that we have been using this new technology. So that's very positive. And then we work hard with the process improvements and implementing of Lerøy Way in the farming segment. The Wild Catch, we see that there is a weaker development in prices, which impacted Fourth Quarter. If we look at the quotas for 2024, it's further down. So for cod it's 20%, haddock 17%. Of course, this is not what we hope for, but we need to be good and to go for other species, covering up from the volumes that is down on cod and haddock. We expect improved profitability over time, realizing the potential of the value chain, and we have a new facility in Båtsfjord completed in January 2024. VAP Sales and Distribution, increased demand for integrated sustainable value chains. We really feel that we -- there is a good demand from customers, where this is important to have the full traceability to have the stability and also to secure sustainable value chain for seafood for our customers. And we see strong focus from both our regular customers, but also on -- from new customers. And we expect profitability in the Fourth Quarter in line or higher than Fourth Quarter 2022. And we see a large variation in profitability in different unit, and we have a clear potential that we need to take out in all these units for 2024, and we have a good plan for improvement, also implementing Lerøy Way in these facilities. Yes. And back to the new technology and our -- we expect to have 20% of our stock to be protected within First Quarter 2024. So -- and we really believe that this will make a good change for our performance in sea going forward. So that's what I had today. And yes, thank you very much from Sjur and me.