Lerøy Seafood Group ASA (OTCPK:LYSFF) Q3 2022 Earnings Conference Call November 15, 2022 6:00 AM ET
Company Participants
Henning Beltestad – Chief Executive Officer
Sjur Malm – Chief Financial Officer
Conference Call Participants
Henning Beltestad
Good morning and 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. The last 20 years we have done huge investments to build this value chain both for redfish and whitefish. Two months ago, we had capital market day in [indiscernible] it was 22 of September, where we presented [indiscernible] for Lerøy Seafood Group. We have a target of 2030 of NOK50 billion, and we have an ambitious goals for emission of reducing the emission of 46% within 2030.
For us, it is 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 the resource text with additional 40% tax on profits generated in the open sea face of farming. The proposal has immediate long-term negative effects from the industry, which includes significant reduction in the investment as well as making it basically impossible to do contracts.
Hearing on a proposal until 4th of January with tax concluded in parliament probably before summer 2023. The tax will take effect from 1st of January. The process adds significantly, for significant uncertainty. Lerøy has investors significantly also [indiscernible] to build an integrated value chain that you saw earlier. A value chain that meets customer need 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 in 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 that will last for 3 minutes, which I think is probably the most efficient and sustainable value chain for SalMar. This is an example starting in a shop in [Burgen] [ph] and go all the way back to [indiscernible]. 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.
[Video Presentation]
Then highlights in the quarter. You just seen our fantastic value chain and now we will go in and look at the results for 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 inclusive on salmon and trout of [NOK14 per kilo] [ph]. We see after a difficult period for VAP sales and distribution, the first half of the year with 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 2,000 ton 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 28 of September. If we look at the EBIT totally, we had an EBIT of NOK831 million and it’s been on a stable level for the last four quarters.
Yes. As you know, we report in three segments Framing, Wild Catch, VAP sales, and Distribution. First of all, we take the Farming highlights. We have had a quarter with volatile prices and 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 different from beginning of the quarter to the end of the quarter.
So that can affect different regions with when they took out volume in the quarters. The EBIT Farming increased from NOK7.6 to NOK14.1 per kilo in third quarter. Contract share of 37% and the contract prices is below the spot prices in the quarter. We see a strong development in Lerøy, while some challenges in-particular in [indiscernible] and we expect the volume for 2022 of 175,000 ton.
Inflationary trend brings [year-to-year] [ph] cost increase, but small cost reduction quarter-on-quarter. If we look at the EBITDA Farming also, it’s been 791 EBIT in third quarter, which is down compared to second quarter 2022. Yes. If you look at the different operations, we have Lerøy Aurora. We have seen a strong biological performance, a 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 ton. And for next year, we expect 46,000 ton. And achieved EBIT per kilo in this quarter is 17.3 and we slaughtered [indiscernible]. 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 cost 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 the lower average rate than what were expected. We expect volume of 68,000 ton in 2022 and 66,000 ton in 2023. We had an EBIT per kilo of [NOK19] [ph], so it’s a fairly good performance in this quarter, but of course, much lower than second quarter 2022 of [NOK33] [ph]. Harvested volume is 22,000 ton in this quarter.
If we look at leverage at all, it’s been challenging biological quarter, high number of treatments 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 to the fourth quarter.
We expect harvest volume of 66,000 ton for this year and 2022, we expect [68,000] [ph] [indiscernible] 2023 is 68,000 ton. The harvested volume in the quarter is 18,600 and we had an EBIT per kilo of [5.70] [ph], which is well below the second quarter EBIT of 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 a quarter below our expectation, but we will be back on track.
Then Norskott Havbruk owned 50% by Lerøy and SalMar. 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 ton, which is reduced by 8,000 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 ton in Scotland.
Four, yes. And we harvested 11,290 ton in the quarter. Had an EBIT of NOK4.2 compared to NOK20 in second quarter 2022. Then if we look at the farming volumes for the group, we see about 175,000 ton in Norway and 90,000 ton over share of Scottish Sea Farms gives us 194,000 ton totally, which is lower than 2021. The expectations for next year is 180,000 ton, 46,000 ton in Lerøy Aurora, which is up close to 6,000 ton, 66,000 ton in Lerøy Midt and 68,000 ton in Lerøy Sjøtroll.
And then we have the plan for 2024 and 2025, up to 205,000 tom. 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 a year to date EBIT of NOK 357 million compared to NOK267 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 done 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 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 ton, compared to 12,000 third quarter last year. And year to date, we had 58,000 ton, compared to 54,000 last year. And we have a remaining quarter of 15,000 ton and compared to [29] [ph] remaining quarter 2021.
Then on VAP sales and distribution. As we said, it’s been 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 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. Yes. And this shows our sales and processing operation. Now, it’s been more than 14 countries.
So then, Sjur will take us through the key financial highlights for the quarter.
Sjur Malm
Yes. Thank you, Henning. So, key driver in these days is obviously inflation, which we see in higher prices, but we also see in higher cost 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 and trout integrated value chain.
So, the EBIT all inclusive here is [NOK14] [ph] compared to [NOK9.60] [ph] 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. So, in downstream, we have a lower result per kilo than last year.
We also see a significant cost increase in our farming operation, around [NOK3.5] [ph] per kilo due to feed, around [NOK1] [ph] per kilo due to cost after the [indiscernible], which is driven by high energy cost both in terms of electricity, but also in terms of bunkers cost for the well boats. But despite then, the higher cost 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 a season low, but we had a good catch in quarter. Prices remains high and we see that we have a slightly higher margin than last year and then a slightly better result. In sum, these drivers give us the operating result or EBIT of 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 an earnings per share and before value adjustment of just shy of a kroner, compared to [74 million] [ph] 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 may temporarily layoff close to 350 employees in the value-added business due to the fact that we lack contracts. 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 showed, or we showed, and we can see that total assets today in Lerøy is just shy of 37 billion.
So, obviously, firstly, we have to compare the operating results to also investments. And we have made significant investments the last 20 years into creating the world’s most efficient value chain. And if you compare operating profit, compared to that, it’s difficult to see 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 you come to contracts and I guess already and we’ll 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, compared to last year. We see our inventory is up. We see customers [indiscernible] up. So, in sum, we have a massive working capital build this year. And year-to-date, amounts to close to 1.3 billion, and that shows – and this balance sheet shows the high capital need of this industry.
We believe we have a strong balance sheet net interest bearing debt of 4.4 billion and equity ratio of 56%. On cash flow and has shown has 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 1.3 billion. In that, it’s important to remember that last year, we released more than 500 million in working capital. So, this is partially a catch up here 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, and that is obviously wrong. So, this tax – this industry is paying normal corporate tax in [Norway] [ph], 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 normal industry we should pay in tax. Today, we pay in 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 resource tax on new capacity. So if you look on the last three, four years, the additional tax beyond corporate tax out of this industry is more than 14 billion. So, we already paid more than average Norwegian company.
And from there, there is a discussion on what other ripple effects do we see beyond tax? And these slides give some numbers on that. Obviously, we have 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 municipalities we operate directly.
And today, we buy goods from – or in 2021, we bought goods from 4,500 suppliers worth 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 16 billion from our operation.
So, obviously, the idea behind the net tax is to reduce corporate availability of cash and increase government availability of cash, but we think it’s important to remember that this industry has huge triple effects in Norway, and at this taxation gives increased risk to those ripple effects.
And with that Henning, I’ll give the word back to you.
Henning Beltestad
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 a situation that we are facing right now. But if we look at the 2022 supply, we see that there will be zero growth in Norway this year.
We believe that the situation will be a little bit lower than that – this, especially in United Kingdom. We believe that this volume is higher. It’s not taken in the situation that we’ve been facing the industry that has been facing 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%. UK 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 the extreme prices. No, the prices in the last quarter is more normalized. So, we see in third quarter, it was NOK69 and so far in the fourth quarter, it’s also NOK69. And after extremely the highest price level ever in a quarter in second quarter of NOK105. 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 fourth of January.
The proposed taxes from first of January, but it would conclude it in back next year’s summer. So, it’s really challenging for us to predict what to do and to get to 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%, in U.S. 3%, and other markets up 6%.
And we believe and going forward, it’s really challenging when it comes to farming, it’s the discussions around the proposed resource tax that is complicated and everything. We have a contract share in fourth quarter, expect a contract share in fourth quarter of 38% and a contract share of [2023] [ph] of 1%. And we expect the harvest volume, including share of associate of 202,000 ton next year. And we believe that the inflationary trend will give higher costs in 2023 counter balanced by operational improvements.
For the Wild Catch, healthy profitability in 2022, likely development in 2023. [Indiscernible] the proposed is 20% down ahead of [indiscernible] up 15% up and [indiscernible] 90% up. We believe in the improved EBIT margin expected from fourth quarter 2022 for both sales and distribution.
Resource tax is challenged for us and gives us less predictability going forward. And it will be interesting to see how the demand impact will be lack or in lack of contract is still difficult to evaluate. But we need to work hard together with the customers to find the best solution for both parties in the way to go forward.
So, in short-term, to manage the implication or to propose resource taxes 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.
Question-and-Answer Session
Q –
Be the first to comment