SECOND QUARTER AND FIRST HALF OF THE YEAR
In Q2 2019, Lerøy Seafood Group (LSG) reported revenue of NOK 5,340 million, compared with NOK 5,042 million in the same period in 2018. Operating profit before fair value adjustment related to biological assets was NOK 774 million in Q2 2019, compared with NOK 1,000 million in Q2 2018. Lower earnings for Farming, attributed to lower prices realised and higher release from stock costs, represent the most significant reason behind the fall in earnings in Q2 2019 when compared with Q2 2018. Exclusive of earnings from the Wild Catch segment, this corresponds to an EBIT per kilo before value adjustment related to biological asset in Q2 2019 of NOK 19.0 compared to NOK 23.4 for the same period in 2018.
The Group reports revenue of NOK 10,086 million for the first half of 2019, compared with NOK 10,042 million in the first half of 2018. Operating profit before fair value adjustment related to biological assets for the first half of 2019 was NOK 1,465 million compared with NOK 1,960 million for the first half of 2018. The profit before tax and fair value adjustment related to biological assets for the first half of 2019 was NOK 1,524 million compared with NOK 2,038 million for the first half of 2018.
- “In terms of earnings, the second quarter figures are in line with the expectations we had going into the quarter. However, we know that we have the potential to do better and that our skilled employees are doing their utmost to exploit this potential to the full,” confirms CEO Henning Beltestad. “We have made several major investments in Farming in recent years. The results of these, however, are not immediately obvious as the projects have long lead times,” explains Henning Beltestad. “Release from stock costs are too high in the second quarter, but we expect to see an improvement in the second half of the year and into 2020.” “Our trawler fleet for whitefish has been successful in the quarter, while our onshore facilities in this segment have had a challenging quarter. We have made a number of investments in this area also, and expect these to provide lasting improvements by 2020. Downstream, in the VAPS&D segment, we are now observing the results of investments made in recent years and can report a strong quarter.
At 30 June 2019, net interest-bearing debt was NOK 3,745 million and the equity ratio was 58.7%.
The Group currently expects to harvest 168,000 tonnes in 2019 in Norway, compared with 162,000 tonnes in 2018.
THE WILD CATCH SEGMENT
The wholly-owned subsidiary Havfisk's primary business is wild catches of white fish. Total catch volume in Q2 2019 was 15,860 tonnes, compared with 18,190 tonnes in Q2 2018. Catch volumes for the main species in Q2 2019 were 6,332 tonnes of shrimp, 3,009 tonnes of cod, 2,250 tonnes of saithe and 928 tonnes of haddock. The catch distribution in Q2 2018 was 3,279 tonnes of shrimp, 3,817 tonnes of cod, 5,401 tonnes of saithe and 441 tonnes of haddock. Compared with Q2 2018, the average price realised for all species was up 14% in Q2 2019. The prices for cod, haddock and saithe increased by 7%, 4% and 24% respectively in the quarter. The average increase in price compared with the same quarter last year is impacted by the composition in catches, but the price increase is also attributed to lower quotas and the growing demand for products.
Lerøy Norway Seafoods’ 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 2018 and early 2019. In the short term, this always represents a challenge for processing operations.
High raw material prices in the quarter have generated satisfactory earnings for the trawler fleet, but have presented challenges for LNWS.
In total, the segment contributed EBIT of NOK 40 million in Q2 2019, compared with NOK 116 million in Q2 2018, when the interim result was affected positively by the sale of a vessel, generating an accounting gain of NOK 35 million.
- The Group has initiated numerous measures within production and marketing to improve earnings from our whitefish operations based on land,” says CEO Henning Beltestad. “One of these is a substantial upgrade to the fish processing plant in Stamsund, where new production started in the second quarter. We have high expectations for this facility in the future,” confirms Henning Beltestad.
THE FARMING SEGMENT
The Farming segment reported operating profit before fair value adjustment related to biological assets of NOK 595 million in Q2 2019, compared with NOK 833 million in Q2 2018. During the quarter, the Farming segment harvested 37,000 tonnes – in line with the figures reported for Q2 2018.
In total, EBIT/kg for the segment was down from NOK 22.0 in Q2 2018 to NOK 16.1 in Q2 2019.
In Q2 2019, Lerøy Aurora achieved operational EBIT per kg of NOK 17.7. Lerøy Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 20.6 and NOK 9.2 respectively for the same period.
- “For Lerøy Aurora, the fire in the smolt plant in the winter and an unforeseen outbreak of toxic algae have impacted the results both for the second quarter and the first half of the year,” explains CEO Henning Beltestad. “Now that this difficult period is behind us, we are confident that we have a strong position moving forward into the second half of the year and into 2020. For our Farming segment the results of the investments we made in smolt will gradually materialise, and we expect to gain potential in terms of both increased volume and lower costs per kilogram of fish produced,” confirms Henning Beltestad.
THE VAP, SALES & DISTRIBUTION SEGMENT (VAPS&D)
The VAPS&D segment reported revenue in Q2 2019 of NOK 5,099 million, up 6% compared with the same period in 2018. Operating profit before fair value adjustment related to biological assets was up from NOK 62 million in Q2 2018 to NOK 130 million in Q2 2019.
- We are satisfied with the developments in the VAPS&D segment this quarter,” says CEO Henning Beltestad. “Some areas remain challenging, but good growth in activities targeting strategic customers gives grounds for an optimistic outlook to the future development of the segment,” confirms Henning Beltestad.
MARKET AND OUTLOOK
The Group can report a good underlying demand for seafood. The Group expects to see a sustained volatility but nonetheless satisfactory market conditions in the near future.
The Group's harvest volume in the first half of 2019 was, as expected, lower than in the first half of 2018. The lower harvest volume in combination with several unforeseen incidents for Lerøy Aurora have contributed to the high release from stock costs for salmon and trout for the Group during the period. The Board of Directors and management are not satisfied with the Group’s release from stock costs in the quarter, but are confident that the Group's investments and continuous improvement measures shall result in reduced costs. At the end of the first half of 2019, biomass in the sea is 12% higher than at the same time last year, and it is expected that the higher volume, including higher average weight, will produce lower release from stock costs in the second half of 2019 when compared with the first half of 2019.
The Group has in recent years implemented and is continuing its long-term investment plan for larger smolt, including so-called “post-smolt”. The Group expects these investments to generate increased harvest volumes and lower release from stock costs. The initial significant results are expected to emerge in 2020.
The Group's contract share for salmon in Q3 2019 is estimated to be around 25-30%. The final harvest volume for the year will continuously be impacted by biological conditions and market assessments. Estimated harvest volume for red fish in 2019, including the share from associates, is currently around 183,000 tonnes.
The Group has made substantial investments in recent years in the Whitefish, with new vessels and investments in several facilities. Whitefish has a much more evident seasonal pattern than with redfish, and this is challenging for industrial activities and marketing. The efforts to increase the competitive strengths of the Norwegian whitefish industry are painstaking, but the Group is confident that the measures conducted will gradually produce improvements for those parts of the Group's value chain that currently do not yield a satisfactory return.
The quota recommendations from ICES (the International Council for the Exploration of the Sea) for 2020 are to reduce the cod quota by 5% and to increase the haddock quota by 25%. ICES also recommends increasing the quota for saithe north of 62 degrees by 15% and to reduce the quota for saithe in the North Sea by 15%. In total, this will most probably have a somewhat positive effect on catch values.
The development for the VAPS&D segment has been positive in the quarter, with factories opened in 2018 making a contribution to increased earnings. There still remain some areas that are challenging, but the Board of Directors and management currently expect the level of activity to remain good in the near future and to see a substantial boost to earnings in this segment in 2019 when compared with 2018.
At the time of writing, the Board of Directors expects earnings in the second half of 2019 to be slightly higher than those achieved by the Group in the first half of 2019.
Questions and comments may be addressed to the company’s CEO, Henning Beltestad, or to the CFO, Sjur S. Malm.
This information is subject to the disclosure requirements pursuant to Section 5-12 the Norwegian Securities Trading Act
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