Earnings Transcript for LSG.OL - Q3 Fiscal Year 2023

Henning Beltestad: Welcome to Lerøy Seafood Group's third quarter presentation, 2023. And 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, and beyond, is to increase the turnover to NOK 50 billion in 2030, reduce our total emission of 46% within 2030, to be the number one 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 start a little bit about sustainability, to create the world's most sustainable value chain for seafood is extremely important for us as a company. And if we look at the Coller FAIRR sustainability ranking, among 60 producer of protein in the world, we see that we are ranked now as number two as Mowi. And also, we see that there are four 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 emissions, we also see, in Norway, we are among the nine 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 four seafood companies in top nine. We have Lerøy, Mowi, Salmar, and Skretting. 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 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 record revenue. Earnings is impacted by previously announced ISA outbreak. We have an operational EBIT of 12.4 per compared to 14.3 same quarter, 2022. It's been some challenges in biology late third quarter and also early into fourth quarter. We have seen a positive development of in VAP, Sales and Distribution. And it's been a little bit more challenging with lower profitability and -- on lower quota in Wild Catch. The EBIT in the quarter is NOK 631 million. We report in three segments, Farming, Wild Catch, VAP, Sales and Distribution. We start with Farming. There's been a loss under operation from Lerøy Sjøtroll 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 third quarter and start of fourth quarter because of some gill health issues in Lerøy Sjøtroll 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 very positive development in 2023, but a little bit lower growth rates than expected in third quarter and the start of fourth quarter. Cost is significantly 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 harvest weights expected in 2024. If we look at 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 a 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 the 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, '24. Expected harvest volume is 61,000 tonnes in 2023 and 70,000 tonnes in 2024. And we expect to see improvement in coming year from higher, better quality biomass going into 2024, improvement in smolt quality, and 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 two 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 smolt 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 biological challenge impacted harvest volume, average harvest weights 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 tonne, and for next year we target 37,000 tonne in 2024. If we look at the total farming volumes 2023, 157,000 tonne in Norway, and expect to increase the volumes next year to 175,000 tonne. For the Wild Catch, it's been also more challenging than the normal in third quarter. The main reason for that is lower catch values on lower quarter and weakening price on key species such as haddock, saithe, and shrimps. Also, on operational level and efficiency in the fishery is a 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 tonne compared to 14,900 tonne in second quarter -- no, third quarter last year. Year-to- date, we see we have a catch higher volume 63,400 tonne compared to 58,000 tonne last year. So, I would say that we really did a good performance year-to-date, catching other volumes when the quarters of cod is going down. So, that's on the 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 a profitability in fourth quarter in line or higher than fourth quarter 2022. And, we see a significant potential for improvement in some regions. And, this is showing over segment and we have distribution and processing facilities in all the central markets in Europe and sales branches in Asia and in North America. Then, Sjur will take us through the key financial highlights.

Sjur Malm: Yes, thank you, Henning. I'm now running -- just talk us through the key drivers. They are summing up to these financial results. And if we look at the key drivers of profitability, those include the volume within redfish and whitefish. Looking that the redfish volume, meaning harvested volume of salmon and trout, that volume as we can see 4% lower than last year, we see that 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 higher than the price realization. If we look at the cost initially, the costs are higher this quarter than the same quarter last year. The key driver is feed cost and feed cost on harvesting volume is up around NOK 7. If we look at price realization, we have had very low average harvest rates this quarter, and if you look at -- and the price realization, given the harvest size, it's close to benchmark NSI prices. But the low average harvest rate 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 you 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 sum then that the profitability through the value chain is lower than last year. In sum, this brings operationally a bit of NOK 630 million compared to NOK 833 million last year. And again, we had that NOK 200 million ISA impact. So, without that, we would be pretty close to where we were last year. You 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 three first quarter, best estimate on 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 tax estimate on running profitability, we get to EPS of NOK 1.91 this year, comparable figure last year, NOK 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 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 asset. If you looked at the working capital items, feed cost is a key driver for higher cost of biological asset efficiency, higher prices is also a key driver for value of inventory and receivable and 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 of working capital we expect to build some biomass Q4 also receivable et cetera will be dependent on price level toward the 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 technology -- production technology to farming is delivered, to 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 have been a little bit late on reporting resource tax. The key challenge on resource tax is that, it was implemented late May with effects from 1st of January. So, it was impossible for us obviously to report in Q1 and I think 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 two figures in total is around just about 2 billion and the best estimate year-to-date on resource tax on running earnings is around NOK 300 million. That includes then both the resource tax and the production cost and NOK 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. But we will probably update 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, Henning, I give the word back to you.

Henning Beltestad: Yes, then we will start with supply. And we can start with the two last years, '22 and '23. It's been very stable volumes, no growth, so 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 Norway 5.1%, we see United Kingdom is coming back with 10%, Faroe Islands 18% after a year with negative growth. The same with Iceland, a negative growth in 2023 and expect a growth of 31% in 2024. But overall 5% is good that we have growth. If we're going to grow this industry, grow the market, it's important to also have volume growth, a stable area. If we look at the consumptions in the fourth quarter, we see that there is a strong negative growth in Europe of 5%, other markets 3% and the U.S. is a little bit up, and it seems like the U.S. market will continue to 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, it's in the third quarter, it's around NOK 80. And the average so far this year is NOK 89. And we expect normally that the prices in the last month of the year will have a positive trend upward. If we look 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 more robust small way of higher quality and also to have a better survival rate in the time to come. And we will see this in improvements in sea step by step going forward. And then, we have the new farming technology that we have been focusing on for the last three to four 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 very positive development and especially if we look at our largest problems which is the sea lives, we have no treatments on the cages 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 in the Farming segment. The Wild Catch we see that there is weaker development in prices which impacted four quarters. If we look at the quarters for 2024, it's further down, so for cod, it's 20%, haddock 17%. Of course this is not what we hoped for but we need to be good and to go for other species covering up from the volumes that is done 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. For VAP's, sales and distribution increased demand for integrated sustainable value chains. We really feel that there is a good demand from customers where this is important to have the full traceability, to have the stability and also to secure a sustainable value chain for seafood for our customers. And we see a strong focus from both our regular customers but also 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 units. 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 in these facilities and back to the new technology, we expect to have 20% of our stock to be protected within the first quarter of 2024. So, we really believe that this will make a good change for our performance in NCE going forward. So, that's what I had today. And thank you very much from Sjur and me.

End of Q&A: