Leroy Seafood Group ASA

OSE:LSG

Earnings Call Transcript

[Henning Beltestad, executive]

Welcome to Lerøy Seafood Group's Third Quarter Presentation 2024. My name is Henning Beltestad, and I'm CEO of Lerøy Seafood Group. And with me today, I have Sjur Malm, CFO.

First of all, I will take you through some highlights in the quarter, then Sjur Malm will take you through the key financial highlights, and then, I will come back and talk a little bit about the outlook for what we do. Lerøy is creating the world's most efficient and sustainable value chain for seafood. We are fully integrated in both whitefish and redfish and have a unique competitive advantage. Why is that? Yes, we believe that the customers are seeking sustainability and health, quality and traceability, stability and availability and convenience. Our value position is speed and cost efficiency, reliability and trust, product and category innovation, traceability and quality assurance and clear ESG commitments.

Then highlights of this quarter. It's been a quarter with weak price development for salmon and trout, more challenging biology in third quarter, but we are back on track on fourth quarter. We see strong improvement in biology and earnings at Scottish Sea Farms. We have had record earnings in the VAP, Sales and Distribution segment on a 12 months rolling basis, while cash earnings significantly down in -- compared to same quarter last year. And the main reason for that is lower quotas.

Harvest volume guidance for 2025 is 211,000 tonnes gutted weight, including share of Scottish Sea Farms. The EBIT in the quarter is NOK 412 million compared to NOK 631 million. And the main reason for that is lower price in the quota compared to last year.

For the segments, we are reporting Farming, Wild Catch and VAP, Sales and Distribution, and we start with the Farming. As I said, weak price development with trout prices well below salmon. It's the main reason for the fall in results. But we see improvement in biology, low mortality, but a challenging quarter with high sea lice pressure.

On a positive side, we have had increased harvest weights up to 4.2 kilo from 3.7 kilo. And that's positive, of course. But at the backside, we have had a quarter with a high number of treatments, which has impacted cost, especially in the North and mid-region. As I said, it's been a quarter with positive biological development, and that's also into fourth quarter 2024. I will come back to that when we talk about the outlook for 2025. Shielding technology remain promising, cost increase year-on-year driven by higher feed cost.

Then we go into each region, and we start the north with Lerøy Aurora, historic high seawater temperatures resulting in high sea lice pressure. It's -- we haven't seen that the last year, the same pressure as we have seen this year. The temperature has been 3 to 4 degrees higher in August and September, higher than normal. So that's been a challenge, but underlying good biological development, high survival rates, strong growth rates from late September, a significant fall in cost quarter-on-quarter and with higher costs expected in fourth quarter '24.

The estimated harvest volume is 45,000 tonnes in 2024 and 50,000 tonnes in 2025. And in this quarter, we had a harvest volume of close to 18,000 tonnes, average weight of 4.8 compared to 16,500 tonnes at an average rate of 4.1 and EBIT per kilo of NOK 19, which is a good performance in total.

Lerøy Midt, also as I mentioned, sea lice pressure, giving more treatments and a negative impact on the growth in this quarter, but submerge technology is put on test, and we see clear evidence that the technology reduces number of treatments. A quarter with high survival rates, quarter-on-quarter increase in cost, and we expect a marginal increase in fourth quarter.

The estimated harvest volume is 67,000 tonnes, which is down 3,000 tonnes from earlier guiding, and for 2025, 75,000 tonnes. The harvested volume in the quarter is 17,000 tonnes with an average weight of 4 kilo compared to 22,500 tonnes with an average weight of 3.7 and EBIT per kilo of close to NOK 13, which also is a good performance.

In Lerøy Sjøtroll, it's been -- the results are more challenging, but we see continued biological improvements. 40% harvest volume was trout, impacting price realization negatively. The price of trout is NOK 5 lower than the salmon. So that's been a high influence. But we also see that at the end of the quarter, we see that the trout prices is coming above the salmon pricing, and also, this is the situation into fourth quarter and especially October.

Cost is a flat quarter-on-quarter. I expect slightly lower cost in Q4 and a potential of significant cost reduction in 2025. And the estimated harvest volume is 58,000 tonnes for 2024 and 70,000 tonnes for 2025. And the harvest volume is close to 70,000 tonnes -- 17,000 tonnes with an average weight of 4 kilo compared to 15,000 tonnes with average weight of 3.3 kilos and a negative EBIT of about NOK 1, but a strong improvement compared to third quarter '23, where we had NOK 7. So the improvements is going the right direction here.

And if we look at Scottish Sea Farms, 50% owned by Lerøy Seafood Group. I would say a real turnaround case, a significant increase in harvest volume with good harvest weights in the quarter, strong biological development with next generation of fish farming well in all regions. Significant increase in profitability. Volume in 2025 impacted by reorganizing site structure. Long-term potential significantly higher. So estimate for '24 is 40,000 tonnes, and 2025, 32,000 tonnes.

And harvested volume in the quarter is close to 12,000 tonnes, operational EBIT of NOK 7.6 compared to minus NOK 14 in third quarter 2023. So a strong improvement in Scotland. So that's really good to see, and they really deserve this turnaround performance.

For the Farming volumes, in total, we see Lerøy Aurora, 45,000 tonnes; Lerøy Midt, 67,000; Lerøy Sjøtroll, 58,000, a total of 170,000 tonnes this year. And Scottish Sea Farms, our share is 20,000 tonnes. So a total of 190,000 tonnes in 2024. And 2025, we have a guiding of 50,000 tonnes in Lerøy Aurora; 75,000 in Lerøy Midt; and 70,000 tonnes in Lerøy Sjøtroll. So a total of 195,000 tonnes, so then we are close to a 40,000 tonnes increase from 2023. And guiding for Scottish Sea Farms next year is 16,000 tonnes, our share. So a total of that is 32,000, and the total for us is 211,000 tonnes.

And then we have the Wild Catch segment. It's been a challenging situation for the whitefish. And the main reason for that is the reduction in quotas. And we see that catch volume, of course, because of that is going down. Raw material price and volumes is challenging. For the land industry, we see now the cod is over NOK 60, and that's a big challenge for our land industry.

The quota in 2025 is further down, 32%. 25% stems from overall industry quota reduction, and the 7% is due to reallocation from the trawler fleet to the coastal fleet under new regulations. Haddock quota is down 8%, 2025. And so it's still a challenging outlook next year for the Whitefish segment, but quota is going up and down, and we believe in the long term that this is a good potential and a good value for Lerøy.

If we look at the quotas and the cash volumes, third quarter, we catched 13,000 tonnes compared to 14,000 tonnes in 2023, and the remaining quota is 9,000 tonnes compared to 15,000 tonnes. And for the cod, we have the remaining of 3,300 tonnes in fourth quarter.

And then we have the sales and processing operation in 14 countries. We have invested heavily into this segment for a long, long time. And it's good to see that we are really now performing better. It's been a continued positive development in this segment, higher profitability compared to third quarter 2023, driven by operational improvements and improved capacity utilization. And the expectation is for continued positive profitability trend in fourth quarter and 2025.

And if we look at the revenue and operational EBIT in the segment, we see in EBIT margin, we now are around 3% level, which is fairly good. And we also see that the 12 months rolling EBIT is going up and third quarter is to NOK 884 million in EBIT. So good development in this segment.

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

[Sjur Malm, executive]

Yes. Thank you, Henning. So this quarter is about long lead times. So Henning will, in the outlook section next, talk about the initiatives that have started and are ongoing in Lerøy and when they will impact the financial results. And many of them will impact more in 2025 than what we've seen in this quarter.

Looking at this quarter, if you look on the key value drivers, starting with salmon and trout, we see that we have harvested 5% less fish and the margin is around NOK 3 a kilo lower. Starting with margin. We know that spot prices are down NOK 7 compared to last year this quarter and the cost for feed of the fish harvested is up around NOK 2.5. So in that light, the margin reduction indicates underlying improvement. Still we obviously believe that our business has the potential for higher profits than this.

Looking at the reduction, around half is derived from price realization, around half is derived from cost. On the harvest volume, the license regime in Norway is such that it makes all the sense in the world to be at the license limit in terms of standing biomass. So a key focus in this area has been to utilize that license as much as possible. That means that we basically harvested close to the net growth in the quarter. And the harvest volume is a bit lower than what we expected going into the quarter, and that is a reflection of lower net growth, but also that we have good control going into fourth quarter and into 2025.

On Whitefish, we see profitability is lower and volumes are lower, and that is driven by the fact that quotas are down. And we have some assets in terms of access to quota on rolling fleet. Then, they have some obligations in terms of the land industry. And what we are seeing an effect of recent years is that rights or assets when it comes to quotas are going down while the obligations are more stable in value or cost, which means that margins are going down. This also is then for a challenging situation in 2025.

In sum, this sums up to operational EBIT of NOK 412 million. EPS is significantly up from last year. Key driver for that is the improvement in Scottish Sea Farms.

On the balance sheet, I just like to highlight on intangible assets. We have bought so far around 600 tonnes of MTB, MAB, license capacity in Norway. By year-end, we expect to have bought around close to 1,000 tonnes at a price of NOK 160 million. On tangible fixed asset, we are investing in new technology, and I'll get back to that soon. Overall, we believe we have a strong balance sheet and an investment-grade rating.

This shows development in net interest-bearing debt, an indication of our cash flow. We see that working -- this quarter, we had a working capital release of NOK 150 million. We have now a full capacity utilization of our licenses in terms of live fish in the ocean. So there isn't much more working capital build there. And we believe it could be at the peak, so to say, second half this year when it comes to working capital. With lower feed price, there is a potential for working capital release into 2025.

This shows our CapEx excluding intangible assets. Norwegian kroner has weakened quite significantly over the recent years. That has an impact also on CapEx. Estimated maintenance CapEx is around NOK 1 billion. This year, we have also invested NOK 400 million in Shielding technology, around NOK 200 million in improving smolt quality and also NOK 200 million in the land industry both for redfish and for whitefish.

And for next year, given the results we are seeing so far, which Henning will return to shortly, the Board has decided to invest another NOK 350 million in Shielding technology for 2025 in the first half.

This slide relates to Norway, and there is a discussion in Norway to which degree this industry is generating values for the society. So this slide shows the facts. And in 2023, last year, we bought goods for NOK 20 billion in -- from 5,400 suppliers in 250 municipalities all across Norway. So we make a significant impact, a positive impact on society, both through our around 4,000 own employees and the indirect effect in around 10,000 jobs in Norway. Value creation is estimated at around NOK 14.5 billion, and the employees generated around NOK 2 billion in taxes in 2023.

So then back to you, Henning, for the outlook.

[Henning Beltestad, executive]

Thank you very much, Sjur. Then we will go through the outlook for Lerøy. And we also always start with our targets, which we believe that are in reach and the special targets, the special interest -- there is probably a special interest for the target of 200,000 tonnes of harvest in 2025. This target was set 3 years back, and we had made a strategy going until now to -- until 2025 on how we're going to reach it. We believe that we are on track. It's not -- even though we -- our prognose or guiding volume for 2025 is 195,000 tonnes. That's our best prognosis right now. But we and the organization believe that it's possible to reach the 200,000 tonnes target for 2025, and that's what we work for every day to meet that target.

If we start with the VAP, Sales and Distribution segment. It's a continuous strong progress and promising outlook. We have, as I said, invested heavily in the last 10 years in this segment in all key markets, in Europe especially. And like I also said, there is strong improvements in the result, and the rolling 12 months result is now up to NOK 884 million. And for the 2025 target, we are targeting NOK 1.2 billion. And we believe that this is possible with the organization that we have, with the focus that we have and the way that we work with short-term and long-term action.

I will not go in details into these. But I think one of the most important thing is to utilize all the capacity that we have in our operations. And also, we work hard with the implementation of Lerøy Way in all factories in this segment. For the long-term actions, we work a lot with a consequence products and to use 100% of the fish. Sustainability -- sustainable logistics implementing Lerøy Way, as I said, and increased flexibility and price achievement.

And then our target for the salmon and trout of 200,000 tonnes, up 40,000 tonnes from 160,000 tonnes. So it's a huge improvement to be done here. We strongly believe that we are on the right track and with a focus on the value chain -- the salmon value chain, focusing on genetics, roe, smolt production and new technology in sea. And this is our -- what should I say, our roadmap from -- for where we expect to have the result of all the initiatives and the changes that we have done in the last couple of years to improve and to take us towards the goal of 200,000 tonnes, for the genetics, roe, smolt, Shielding technology and the implementation of Lerøy Way into this segment, where we have a good status and are really improving in this work. And we also see that we will have effect of this now going into 2020 -- first half 2025 and second half 2025.

So this is all these initiatives, and also that we see the results on harvested fish is the main reason to why we believe that we can reach our target. And where are we? So every quarter, we will give you some update of where we are and what is the fact. Have we improved? Yes, so far, year-to-date third quarter compared to last 5 years' average year-to-date, third quarter. We see improvement in net growth rate of 6%. We see a reduction in mortality of 24%. And we see a reduction in lice treatment of 13%. So yes, so far this year we are taking out the improvement as we expected to do it.

And if we look at Lerøy Sjøtroll where -- which is the region where we have the highest potential of improvement, we see here we have done good improvement year-to-date, 10% net growth rate. Mortality is down 35% and the lice treatment is reduced by 28%. And the main reason for that is the new technology in sea, which reduced the treatment levels and the lice -- sea lice levels.

And if we look into the performance in fourth quarter, so far in this quarter, we have a net growth rate of 18%. Mortality is down 41%, and then, lice treatment is down 27%. So we see that the improvements is kind of accelerating in the end of the second half of the year. So that's a good sign that our initiatives are working.

And if we look at the lice treatment, we compare fall '23 and spring '24. Now we don't compare them, but fall '23 and spring '24, if we look at what's not shielded and what is shielded, we see a 90% reduction in the farms with new technology. So -- and that's -- yes, that's where we are at the moment. And we really believe, and that's why we also invest more, in this technology going forward.

We see good results, as I said. End of this year, we are -- around 35% of all the salmon will be in new technology. And we continuously now -- continuing now with a new investment of NOK 350 million for first half 2025 to reach 45% of our salmon in new technology. And so we really believe in what we are doing here. We see good results, and we are learning every day, and we have an organization which really is motivated and believe that this is the right direction to go to produce a more sustainable salmon and trout with a higher fish welfare.

And then, if we look at the prices going forward, we see that we have had the first quarter, NOK 109; second quarter, NOK 102; and then, we have had some pressure on the prices in the third quarter as we mentioned earlier. And also we see into fourth quarter, so far, it's at NOK 69. So then we will see. We are in the middle of the quarter now, but we believe that we will have a significantly increase in the price for the rest of the quarter and into 2025. And the main reason for that is the large volumes with low average weights of the salmon in -- especially in September and October, which will give a lower supply in December and the start of next year.

So to summarize the Farming, biological development in 2024 is promising, and it's promising for 2025. Contract share for salmon in 2024, currently around 30% including downgrades. Lower average harvest weights in fourth quarter, keeping a better performing site and high survival rates. Expect to see significant improvement from roe, genetics and smolt quality, new farming technology, process improvements and implementation of Lerøy Way going into 2025.

The Wild Catch, in short, it will be a challenging year as also 2024 has been. But we believe that the quotas are going up and down. And in the long term, we believe in this segment. VAP, Sales and Distribution, expect improved profitability in 2025 compared to '24 and increased demand for integrated sustainable value chain will -- yes, it will be more and more important. We see that it's important for our key customers and strategic customers. And so we believe that our value chain will be more demanded going forward. And we expect improved market share in some key markets, utilizing the potential of our value chain.

So that's what I have, and thank you very much.