Leroy Seafood Group — Earnings Release 2018

Aug 22, 2018

Lerøy Seafood Group ASA : Q2 2018 Results

Lerøy Seafood Group ASA : Q2 2018 Results

STRONG EARNINGS FOR THE FIRST HALF OF THE YEAR

In Q2 2018, Lerøy Seafood Group (LSG) reported revenue of NOK 5,042 million,

compared with NOK 4,224 million in the same period in 2017. Operating profit

before fair value adjustment related to biological assets was NOK 1,000 million

in Q2 2018, compared with NOK 801 million in Q2 2017. The increase in profit in

Q2 2018 when compared with the same quarter in 2017 is mainly attributed to a

higher harvest volume for salmon and trout. Exclusive of earnings from the Wild

Catch segment, this corresponds to an EBIT per kilo before value adjustment

related to biological asset in Q2 2018 of NOK 23.4 compared to NOK 27.3 for the

same period in 2017.

The Group reports revenue of NOK 10,042 million for the first half of 2018, up

4% on the equivalent period last year. This is the highest turnover ever

reported by the Group for a first half year. The operating profit before fair

value adjustment related to biological assets for the first half of 2018 was NOK

1,960 million compared with NOK 2,078 million for the first half of 2017. The

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

first half of 2018 was NOK 2,038 million compared with NOK 2,134 million for the

first half of 2017.

"The salmon and trout prices in Q2 2018 were extremely volatile and remain at a

high level. The high prices and increased harvest volume in the quarter are the

main factors behind the highest second quarter operating profit in the Lerøy

Seafood Group's history," explains CEO Henning Beltestad. "However, the prices

realised in total by the Group have been impaired by a number of aspects: the

realised prices for trout are lower than those for salmon; the Group had a

harvesting profile in June with high release from stock at lower prices; and the

downgrading of quality in one of the Group's regions," continues Henning

Beltestad.

"The Group's release from stock costs are up from Q1 2018 to Q2 2018, with a

significant difference in costs between the different regions," explains CEO

Henning Beltestad. "Despite this, the Group expects to see a positive

development in release from stock costs in the second half of the year."

At 30 June 2018, net interest-bearing debt was NOK 3,013 million and the equity

ratio was 59%.

The Group currently expects to harvest 166,000 tonnes in 2018 in Norway,

compared with 158,000 tonnes in 2017.

THE WILD CATCH SEGMENT

Havfisk's primary business is wild catches of whitefish. After delivery of the

new trawler, Nordtind, in January 2018, Havfisk had a fleet of 10 trawlers in

operation up to May, when Kongsfjord was handed over to a new owner. The sale of

Kongsfjord generated an accounting gain for the Group of NOK 35 million in the

quarter. In April 2018, the Group signed an agreement with Vard for the

construction of a new vessel. This will be based on the same design as Nordtind

and is a combination trawler (fresh and frozen fish) with unique equipment

installed for handling catches that will provide optimal quality and utilisation

of the whole fish. The vessel is scheduled for delivery in Q1 2020.

Havfisk's total catch volume in Q2 2018 was 18,190 tonnes, compared with 16,769

tonnes in Q2 2017. Catch volumes for the main species in Q2 2018 were 3,817

tonnes of cod, 5,401 tonnes of saithe and 441 tonnes of haddock. The catch

distribution in Q2 2017 was 4,067 tonnes of cod, 6,585 tonnes of saithe and

2,050 tonnes of haddock. Moreover, catches of shrimp increased from 996 tonnes

in Q2 2017 to 3,279 tonnes in Q2 2018.  In comparison with Q2 2017, the average

price for all species increased by 8% in Q2 2018. The prices for cod and haddock

increased by 15% and 48% respectively in the quarter, while prices for saithe

fell by 6%.

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.

In total, the segment reported operating profit of NOK 116 million in Q2 2018,

compared with NOK 86 million in the same period of 2017.

"There is also strong and rising demand for whitefish, and the Wild Catch and

Whitefish segment can report a positive development with increased catch volumes

and higher average prices for catches. The situation is challenging for shore-

based industrial operations, but the Group has implemented a number of

initiatives and is investing in both production and marketing to boost earnings.

These are, however, long-term initiatives and it will take time before

significant improvements are evident," explains Henning Beltestad.

THE FARMING SEGMENT

The Farming segment reported operating profit before fair value adjustment

related to biological assets of NOK 833 million in Q2 2018, up from NOK 613

million in Q2 2017. The Farming segment harvested a total of 38,000 tonnes

gutted weight of salmon and trout in Q2 2018, up 45% from the same period in

2017. EBIT/kg fell from NOK 23.4 per kg in Q2 2017 to NOK 22.0 per kg in Q2

In Q2 2018, Lerøy Aurora achieved operational EBIT per kg of NOK 32.1. Lerøy

Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 26.4 and NOK 12.7

respectively for the same period.

"The Group achieved a 9% increase in harvest volume when comparing the first

half of 2017 with the first half of 2018," confirms CEO Henning Beltestad.

"Release from stock costs in Q2 2018 were marginally lower than in Q2 2017. For

the Farming segment, the lower prices realised caused the decline in EBIT/kg

from Q2 2017 to Q2 2018," explains Henning Beltestad.

"The Farming segment is currently making substantial investments in new

industrial facilities to improve productivity throughout the value chain,

including investments in several regions to gain access to larger high-quality

smolt," confirms Henning Beltestad. "We are very confident that the new

facilities will produce more robust smolt that will in turn gradually allow

substantial organic growth in our annual harvest volume," he continues.

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

The VAPS&D segment reported revenue in Q2 2018 of NOK 4,807 million, up 19% when

compared with the same period last year. Operating profit for the quarter has

been impaired by the extremely volatile spot prices for salmon, which have made

marketing difficult, and the start-up costs for the new plants in the

Netherlands and Spain. Operating profit before fair value adjustment related to

biological assets was down from NOK 115 million in Q2 2017 to NOK 62 million in

Q2 2018.

"The fall in earnings for the VAPS&D segment when comparing Q2 2018 against Q2

2017 can principally be explained by the extremely volatile spot prices for

salmon and the start-up of several new factories," confirms CEO Henning

Beltestad. "However, thanks to the Group's wide product range, delivery

reliability, product development, traceability and efficient logistics, we are

increasingly a preferred supplier, and this will produce a positive development

in earnings in the long term".

MARKED AND OUTLOOK

The development in prices for Atlantic salmon to date in 2018 has been extremely

volatile. This obstructs industrial development and has an impact on the

willingness among market actors to assume positions and take risk. At the same

time, the Group has close links with the end market and observes a very positive

underlying growth in demand for both Atlantic salmon and other seafood.

The Group is not satisfied with the developments reported by Lerøy Sjøtroll in

2018 but feels confident that the initiatives taken will generate substantial

improvements in the next few years. In this context, the investment in the RAS

facility is important. The Group expects the facility to produce larger smolt of

higher quality, in turn improving 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. The Group does not expect the difference to be major in 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 of 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. The Group can report a

positive development in catches to date in 2018, and its best estimate remains a

catch volume of whitefish and shrimp in 2018 of approximately 65,000 tonnes.

The Board of Directors has not changed its estimates for strong earnings in

2018 as a whole, but currently expects a weaker result in Q3 than that reported

in Q2.

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.