Leroy Seafood Group — Earnings Release 2017

Aug 24, 2017

Lerøy Seafood Group ASA: Q2 2017 Results

Lerøy Seafood Group ASA: Q2 2017 Results

GOOD EARNINGS FROM LOW HARVEST VOLUME

In Q2 2017 Lerøy Seafood Group (LSG) reported operating profit before fair value

adjustment related to biological assets of NOK 801 million in Q2 2017, compared

with NOK 760 million in Q2 2016. This corresponds to operating profit before

fair value adjustment related to biological assets for Q2 2017 of NOK 27.3 per

kg against NOK 18.5 per kg in Q2 2016.

The Group reported revenue of NOK 4,224 million, compared with NOK 4,262 million

in the same period in 2016. The harvest volume of salmon and the volume in Q2

2017 are down 36% when compared with Q2 2016, but these figures must be viewed

in light of the high harvest volume in Q1 2017. For 2017 as a whole, the harvest

volume is expected to be higher than in 2016.

For the first half of 2017 the Group reports revenue of NOK 9,684 million, up

20% on the equivalent period last year. The operating profit before fair value

adjustment related to biological assets for the first half of 2017 was NOK

2,078 million compared with NOK 1,345 million for the first half of 2016. The

profit before tax and fair value adjustment related to biological assets for the

first half of 2017 was NOK 2,134 million compared with NOK 1,367 million for the

first half of 2016.

* "Salmon and trout prices remain at a high level, and with such prices as the

main factor, Lerøy Seafood Group can report its highest revenue and highest

operating profit in any half-year period in the Group's history," confirms

CEO Henning Beltestad. "As previously reported, the harvest volume for

salmon and trout is down from the same quarter last year, but for the year

as a whole however, the harvest volume is expected to be higher than in

2016," explains Henning Beltestad.

THE WILD CATCH AND WHITEFISH SEGMENT

In the autumn of 2016, Lerøy Seafood Group obtained 100% ownership of both

Havfisk ASA (Havfisk) and Norway Seafoods Group AS (now Lerøy Norway Seafoods

AS). As a result of this transaction, both companies were consolidated into

Lerøy Seafood Group as of 1 September 2016 and comprise the Wild Catch and

Whitefish segment.

Havfisk's primary business is wild catches of whitefish. Havfisk has licence

rights to harvest just above 10% of the total Norwegian 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 Q2 2017 was 16,769 tonnes, compared with 17,020

tonnes in Q2 2016. The ratio of saithe in Q2 2017 was significantly higher than

in Q2 2016. The harvest volume in Q2 2017 comprised 4,067 tonnes of cod, 6,585

tonnes of saithe and 2,050 tonnes of haddock. The distribution in Q2 2016 was

6,057 tonnes of cod, 1,820 tonnes of saithe and 4,181 tonnes of haddock. On

comparison with Q2 2016, prices for cod were up 9%, prices for haddock were up

30% while prices for saithe were down 28%. The remaining quotas for cod, haddock

and saithe as of Q2 2017 are approximately 25,000 tonnes, on par with the

remaining quotas at the same time last year.

LNWS's primary business is processing wild caught whitefish. The company has

eight processing plants in Norway, 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 Q2

2017 was NOK 86 million.

* "Havfisk and Lerøy Norway Seafoods are important companies and support the

Group's long-term industrial strategy. We look forward to generating lasting

value by developing the companies by means of long-term industrial planning,

and are confident we will succeed in this together with our employees at sea

and on shore. The recent tabloid debate on regulatory factors has

unfortunately been dominated by a short-term mentality, fear of change and a

lack of understanding of what is required to achieve industrial development.

I have faith in the Norwegian authorities and trust that they will now allow

us to develop our business without interruption in the years to come. Good

framework conditions based on an understanding of what is required to

sustain and create jobs and value afford more potential for future success,"

explains CEO Henning Beltestad.

FARMING SEGMENT - HIGH PRICES FOR SALMON, INCREASE IN PRICES FOR TROUT

The Farming segment reported operating profit before fair value adjustment

related to biological assets of NOK 613 million in Q2 2017, down from NOK 674

million in Q2 2016. As previously reported, the harvest volume in Q2 2017 was

significantly lower than in Q1 2017. The segment harvested a total of 26,156 GWT

salmon and trout in Q2 2017, down 36% from the same period in 2016. The harvest

volume for the first half of 2017 is 12% lower than in the corresponding period

in 2016. Nonetheless, the Group currently expects to report a higher harvest

volume for 2017 as a whole than in 2016. EBIT/kg increased from NOK 16.4 per kg

in Q2 2016 to NOK 23.4 per kg in Q2 2017.

In Q2 2017, Lerøy Aurora achieved operational EBIT per kg of NOK 30.8. Lerøy

Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 18.5 and NOK 20.7

respectively for the same period.

* "It is positive for the Group that trout prices, after three difficult

years, have now seen a substantial improvement and are marginally higher

than salmon prices in Q2 2017," confirms Henning Beltestad. "The sustained

high price level for salmon is, however, strongly affected by the fact that

the Norwegian fish farming industry has not increased production since

2012. In the near future, it will be of decisive importance for the long

term competitiveness of this industry that Norway gradually starts to

increase production," highlights Henning Beltestad.

* "The Group's release from stock costs in Q2 2017 are impacted by the low

harvest volume, the higher feed costs and very high direct and indirect

costs incurred to comply with statutory salmon lice limits, have resulted in

release from stock costs that we consider to be higher than normal,"

explains Henning Beltestad. He goes on to add: "We are beginning to see the

outline of positive results from the measures implemented by the Group and

expect these to provide cost reductions in time."

VAP, SALES & DISTRIBUTION (VAPS&D)

The VAPS&D segment reported revenue in Q2 2017 of NOK 4,043 million, down 3%

when compared with the same period last year. Operating profit before fair value

adjustment related to biological assets was up from NOK 97 million in Q2 2016 to

NOK 115 million in Q2 2017. This provides an operating margin before fair value

adjustment related to biological assets of 2.9% in Q2 2017.

* "A low harvest volume in Q2 2017 has had an impact on the level of activity

for salmon and trout, but the Group is very happy to have identified

positive synergy effects within marketing as a result of the acquisitions

made within whitefish," confirms 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. One central element in the Group's strategy is

to minimise the number of treatments. Since 2013/2014, the Group has made

substantial investments in their own production of cleaner fish. The Group is

also investing in other tools to optimise production. These include a

significant increase in capacity for mechanical cleaning and fresh-water

treatment in well boats.

Prevention costs are expected to increase in 2017, while costs related to

treatment are expected to fall. There is high potential to reduce treatment

costs and the Group has a clear strategy and goal to realise this potential.

Developments to date in 2017 have been positive, and the Group currently expects

to see a fall in release from stock costs in the next quarters. Nonetheless, the

Board of Directors acknowledges that it will still take some time to realise the

full potential of the measures implemented.

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 in 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.

In 2017, the Group expects to harvest 175,000 GWT of salmon and trout, including

their share of LSG's volume from associates and a catch volume of more than

60,000 tonnes.

The Board of Directors is positive to the market outlook, and currently expects

to see an improvement in result in Q3 2017 when compared with Q2 2017, and a

significantly better result for 2017 than in 2016.

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 of the Norwegian Securities Trading Act.