Lerøy Seafood Group ASA : Q3 2018 Results

GOOD BIOLOGICAL DEVELOPMENT IN FARMING  

In Q3 2018, Lerøy Seafood Group (LSG) reported revenue of NOK 4,456 million, compared with NOK 4,373 million in the same period in 2017. Operating profit before fair value adjustment related to biological assets was NOK 660 million in Q3 2018 compared to NOK 861 in the same period in 2017.  The decline in harvest volume of salmon and trout is the main reason for the fall in profit in Q3 2018. The Group's production in the third quarter, and to date in the fourth quarter, reflects a good biological situation. The Group's standing biomass has in the third quarter gone from being 6% lower at 30 June 2018 than on the same date last year, to being 4% higher at 30 September 2018 compared with 30 September 2017.

The Group reports revenue of NOK 14,498 million for the first three quarters of 2018, up 3% on the equivalent period last year. Operating profit before fair value adjustment related to biological assets for the first three quarters of 2018 was NOK 2,620 million, compared with NOK 2,939 million for the same period last year. Profit before tax and fair value adjustment related to biological assets for the first three quarters of 2018 was NOK 2,729 million, compared with NOK 3,033 million for the same period last year.

• "The biological production in the third quarter has been good," says CEO Henning Beltestad. "Our harvest volume was low but we've capitalised on the good level of production with a significant increase in the biomass for subsequent harvesting. As previously communicated, the low volume means lower earnings for the quarter. However, we've paved the way for good earnings and a continuing positive development in release from stock costs going forward. We're experiencing high demand for our high-quality seafood, the market is strong, and we maintain our outlook for a harvest volume in Norway of 166,000 tonnes this year."

At 30 September 2018, net interest-bearing debt was NOK 3,111 million and the equity ratio was 60%.

THE WILD CATCH SEGMENT 

Havfisk's primary business is wild catches of whitefish. Total catch volume in Q3 2018 was 14,282 tonnes, compared with 17,029 tonnes in Q3 2017. Catch volumes for the main species in Q3 2018 were 4,714 tonnes of cod, 3,908 tonnes of saithe and 1,008 tonnes of haddock. The catch distribution in Q3 2017 was 7,662 tonnes of cod, 3,436 tonnes of saithe and 2,464 tonnes of haddock. Moreover, catches of shrimp increased from 165 tonnes in Q3 2017 to 2,703 tonnes in Q3 2018. Compared with Q3 2017, the average price realised for all species increased by 23% in Q3 2018. The prices for cod and haddock increased by 23% and 38% respectively in the quarter, while the price for saithe fell by 5%.

LNWS's primary business is processing wild-caught whitefish. The company has use of 12 processing and purchasing plants in Norway, five of which are leased from Havfisk. The processing of whitefish in Norway has been extremely challenging for many years. As a result of high demand for seafood and lower quotas, the raw material prices increased throughout the first half of 2018, representing a challenge for processing operations.

The quarter was impacted by an increase in inventories of NOK 33 million within fishing operations, with the segment contributing operating profit of NOK 41 million, compared with NOK 62 million in Q3 2017.

• "There is strong demand for white fish," says Henning Beltestad. "There was a lower catch volume in the third quarter, but the average price realised for all species was up 23% on the same quarter last year. However, conditions remain challenging for the shore-based industry. The Group has implemented a large number of measures within both production and marketing to improve earnings, but these are long-term initiatives and it will take time before significant improvements are evident," he says.

THE FARMING SEGMENT

The Farming segment reported operating profit before fair value adjustment related to biological assets of NOK 569 million in Q3 2018, compared with NOK 715 million in Q3 2017. The Farming segment harvested 37,000 tonnes gutted weight of salmon and trout in Q3 2018, compared with 46,000 tonnes in Q3 2017. EBIT/kg of NOK 15.3 for Q3 2018 is roughly unchanged from NOK 15.5 in Q3 2017.

In Q3 2018, Lerøy Aurora achieved operational EBIT per kg of NOK 24.5. Lerøy Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 18.5 and NOK 4.5 respectively for the same period.

• "Significant investments are currently being made in the Farming segment," says CEO Henning Beltestad. "The new industrial facility in Lerøy Midt is now operational, and we have high hopes that this will strengthen the Group's competitiveness throughout its integrated value chain. The building of RAS facilities for larger high-quality smolt in both Lerøy Aurora and Lerøy Sjøtroll is also proceeding according to plan," he adds.
• "The release from stock costs are lower in the third than the second quarter, but remain at a level the Group considers unsatisfactory. Based, among other things, on the positive development in the third quarter, we now expect falling release from stock costs over the coming quarters," says Beltestad.

THE VAP, SALES & DISTRIBUTION SEGMENT (VAPS&D)

The VAPS&D segment reported revenue in Q3 2018 of NOK 4,408 million, up 3% compared with the same period last year. Operating profit before fair value adjustment related to biological assets fell from NOK 111 million in Q3 2017 to NOK 72 million in Q3 2018.

• "Despite lower earnings in VAP, Sales & Distribution in the third quarter of 2018 than the same period last year, the Group can report a positive underlying development in the segment," says CEO Henning Beltestad. "The volatile spot prices for salmon remain challenging for processing operations, but we expect our new factories in Spain and the Netherlands to help make the Group's production and distribution even more efficient. The Group is proud to be a preferred partner for demanding, high-calibre partners, not just internationally but also in the Norwegian grocery market," he says.

MARKET AND OUTLOOK

The development in prices for Atlantic salmon to date in 2018 has been highly volatile. This complicates industrial development and reduces the willingness of market actors to assume positions and develop the seafood market. At the same time, the Group has close links with the end market and observes very positive underlying growth in demand for both Atlantic salmon and other seafood.

The Group remains dissatisfied with the 2018 results for Lerøy Sjøtroll but is pleased that things are moving in the right direction. The Group is confident that the initiatives it has implemented will generate substantial improvements in the next few years. The investment in the RAS facility is crucial to the development of Lerøy Sjøtroll. The Group expects the larger, higher-quality smolt produced by the facility to improve productivity when the smolt are released to sea.

The current estimate for harvest volume in 2018, including the share of LSG's volume from associates, is 179,000 GWT. The harvest volume may, for numerous reasons including biology and market evaluations, differ from estimates. However, the Group does not expect the difference to be major in 2018. 

The current estimate for harvest volume in 2019, including the share of LSG's volume from associates, is 190,000 GWT.

On 18 October 2018, the Norwegian-Russian fisheries commission stipulated total quotas for cod, haddock, Greenland halibut and redfish for 2019. The total quotas for cod and haddock are down 6.5% and 15% respectively, while the quota for Greenland halibut is unchanged and that for redfish is up 64%. Moreover, the advice from the International Council for the Exploration of the Sea (ICES) is that the quota for saithe in the zone north of 62 degrees latitude should be reduced by 13%, while the advice for fishing for saithe in the North Sea implies an increase of 21%. The final quotas per vessel will be stipulated in November/December 2018.

Developments within whitefish in 2018 have been positive, even though industrial development and processing of fish in Norway remain difficult. This situation is impacted by political framework conditions, but the Group has a clear ambition to increase competitiveness and earnings for whitefish, with the prevailing conditions and by means of improved marketing and improvements to operational efficiency in this part of the organisation also. The process of industrial development for whitefish requires patience, a long-term perspective and considerable investments. Such investments require framework conditions that are predictable, and the Group and its employees fervently hope to be able to carry out such work without any obstacles in the years to come. Developments in fishing operations to date in 2018 have been positive. The Group maintains its best estimates for 2018 catch volumes at approx. 65,000 tonnes.

The Board of Directors maintains its outlook for strong earnings for 2018, and currently expects the profit for the year to be higher than 2017.

Questions and comments may be addressed to the company's CEO, Henning Beltestad, or to the CFO, Sjur S. Malm.

This information is subject of the disclosure requirements pursuant to section 5-12 of the Norwegian Securities Trading Act.

Q3 2018 Report
Q3 2018 Presentation

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Source: Lerøy Seafood Group ASA via Globenewswire