Lerøy Seafood Group ASA: Q1 2017 Results
RECORD PRICES GENERATE RECORD OPERATING PROFIT
In Q1 2017 Lerøy Seafood Group (LSG) reported operating profit before fair value adjustments related to biological assets of NOK 1,277 million, compared with NOK 584 million in Q1 2016.
- CEO Henning Beltestad confirms: "For the first quarter of 2017, Lerøy Seafood Group can report their highest revenue and best operating profit of any quarter throughout the Group's history. The salmon and trout prices have remained very high throughout the first quarter and are the most significant driver behind the record result reported by the Group. However, release from stock costs remain at a high level and we are working hard to reduce these costs," confirms Henning Beltestad.
- "With the acquisitions of Havfisk and Norway Seafoods, LSG is now Norway's largest corporation within whitefish and has a major position within whitefish on a global scale. I am truly impressed by how the Group's employees have adapted to the new organisational structure while continuing to achieve record-high sales," continues Henning Beltestad. "2017 has gotten off to a great start, and the outlook is very promising. We very much look forward to further developing the market for whitefish," confirms the CEO.
Lerøy Seafood Group's revenue increased from NOK 3,815 million in Q1 2016 to NOK 5,459 million in Q1 2017. Compared with Q1 2016, the Group's slaughter volumes of salmon and trout increased by 13%. The Group's profit before tax and before fair value adjustments related to biological assets was NOK 1,294 million in Q1 2017, compared with NOK 592 million in Q1 2016.
At 31 March 2017, net interest-bearing debt was NOK 2,327 million and the equity ratio was 55%.
With effect from 1 January 2017, the Group has divided its reporting into three segments. A description of the three segments - Wild Catch, Farming and VAP, Sales & Distribution - is provided below.
In the autumn of 2016, Lerøy Seafood Group obtained 100% ownership of both Havfisk ASA (Havfisk) and Norway Seafoods Group AS (renamed to Lerøy Norway Seafoods AS). Both companies were consolidated into Lerøy Seafood Group as of 1 September 2016 and make up the new Wild Catch segment.
Havfisk's primary business is wild catches of whitefish. Havfisk has license rights to harvest just above 10% of the total cod quotas in the zone north of 62 degrees latitude, corresponding to more than 30% of the total quota allocated to the trawler fleet.
Havfisk's total catch volume in Q1 2017 was 20,586 tonnes, compared with 16,169 tonnes in Q1 2016. The total harvest volume in Q1 2017 comprised 9,425 tonnes of cod, 7,380 tonnes of haddock and 2,841 tonnes of saithe. On comparison with Q1 2016, prices for cod were up 9%, prices for haddock were up 29% while prices for saithe were down 24%. The remaining quotas as of Q1 2017 are approximately 43,000 tonnes, on par with the remaining quotas at the same time last year.
Lerøy Norway Seafoods' (LNWS) primary business is processing wild caught whitefish. The company has eight processing plants, five of which are leased from Havfisk. LNWS is the largest purchaser of cod from the coastal fishing fleet in Norway.
The total contribution to operating profit made by these two companies in Q1 2017 was NOK 158 million.
FARMING - HIGH HARVEST VOLUME
Operating profit before fair value adjustments related to biological assets reported by the Farming segment increased from NOK 522 million in Q1 2016 to NOK 1,047 million in Q1 2017. The Farming segment harvested a total of 43,307 GWT salmon and trout in Q1 2017, up 13% from the same period in 2016. EBIT/kg increased from NOK 13.7 per kg in Q1 2016 to NOK 24.2 per kg in Q1 2017.
In Q1 2017, Lerøy Aurora achieved operational EBIT per kg of NOK 29.8. Lerøy Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 24.1 and NOK 22.1 respectively for the same period.
- "It is good to finally confirm that trout prices, after almost three very difficult years, have seen a substantial improvement. At the time of writing, the spot price for trout is higher than for salmon, although the prices realised for trout in Q1 2017 are marginally lower than for salmon due to contracts," explains CEO Henning Beltestad in a comment. "During the first quarter, the Group increased its volume of salmon and trout by 13% when compared to the same period last year. The contract share in the first quarter was 32%," he continues.
"From an historical perspective, the release from stock costs for salmon and trout are extremely high, and there is in particular a considerable potential to reduce costs related to compliance with statutory limits for salmon lice. The Group has implemented a number of measures and investments to realise this potential, and developments to date in 2017 are positive," confirms CEO Henning Beltestad in a comment.
VAP, SALES AND DISTRIBUTION (VAPS&D)
The VAPS&D segment reported revenue in Q1 2017 of NOK 4,992 million, up 34% when compared with the same period last year. The operating profit before fair value adjustments related to biological assets was up from NOK 71 million in Q1 2016 to NOK 86 million in Q1 2017. This constitutes an operating margin before fair value adjustments related to biological assets of 1.7% in Q1 2017.
- "The downstream segment has reported a historically high level of activity in Q1 2017," confirms CEO Henning Beltestad. "The Group is already able to identify the positive results of the acquisition of whitefish operations on its marketing activities.
- Lerøy Seafood Group has a clearly defined ambition to drive a continuous process of market and product development. The Group has in-depth knowledge of the end market, and we believe that the strong growth in demand for seafood in general, and fresh seafood in a consumer-friendly format in particular, gives grounds for optimism for operations in the future," concludes Henning Beltestad.
MARKET AND OUTLOOK
The Group is in a transitional phase within production of salmon and trout, with extraordinarily high direct and indirect treatment costs, combined with increasing costs for prevention. Prevention costs are expected to increase in 2017, while costs related to treatment are expected to fall.
There is significant potential for reductions in treatment costs, and the Group has a clearly defined strategy and goal to realise this potential, while acknowledging that it remains difficult to specify a time line for such a development.
For a number of years now, the Board of Directors and management have clearly stated their views on the need for changes to regulations in Norway. The Board of Directors is of the opinion that a growth in demand over time is perhaps the most important driver for global competitiveness and increased value generation. From a long-term market perspective, the Norwegian fish farming industry is in a challenging situation at the start of 2017, as lack of growth in volume has resulted in very high prices. The Norwegian fish farming industry will only be able to retain its global competitiveness over a time frame of the next five to ten years if framework conditions facilitate growth in production in Norway. Framework conditions of this nature must be based on an understanding of environmental sustainability and value generation.
The White Paper on the "cod trawler fleet land-lock obligation system" has recommended substantial changes to the Group's framework conditions within whitefish. The Board of Directors and management are relieved to see that the Norwegian government has understood the need to modernise the framework conditions for the whitefish industry in Norway, but are not happy with the recommendation to reduce the Group's basic quota by 20%. It is essential for the Group to sustain its raw material basis in order to substantiate the Group's long-term industrial investments both at sea and on land. The Norwegian Parliament is expected to reach a decision on the White Paper during the second quarter of 2017.
The Group currently estimates a total harvest volume of 180,000 GWT salmon and trout for 2017, including LSG's volume from associates and a wild catch volume in excess of 60,000 tonnes.
The Group's harvested volume of salmon and trout will be significantly lower in Q2 2017 when compared with both Q1 2017 and Q2 2016. The Board of Directors therefore expects results before fair value adjustments in Q2 2017 to be substantially lower than in Q1 2017, but at the same time that the results before fair value adjustments for 2017 to be higher than in 2016.
Questions and comments may be addressed to the company's CEO, Henning Beltestad, or to the CFO, Sjur S. Malm.