Leroy Seafood Group — Earnings Release 2021

Aug 19, 2021

Lerøy Seafood Group ASA: Results for Q2 and first half 2021

Lerøy Seafood Group ASA: Results for Q2 and first half 2021

SECOND QUARTER 2021

In Q2 2021, Lerøy Seafood Group (LSG) reported revenue of NOK 5,304 million,

compared with NOK 4,712 million in the same period in 2020. Operating profit

before fair value adjustment related to biological assets was NOK 583 million in

Q2 2021, compared with NOK 303 million in Q2 2020. The gradual easing of

restrictions linked to the COVID-19 pandemic in a number of key markets means

stronger demand and higher prices realised. Higher prices realised, and improved

productivity in the whitefish industry, are the key drivers of the improvement

in earnings compared with the same period in 2020.

* "There has been a good development in demand for seafood in 2021. Demand in

retail was strong in the first quarter. This continued in the second

quarter, when we also saw demand gradually picking up in the hospitality and

catering segments further to the easing of COVID-19-related restrictions.

We're seeing a very strong position for seafood in the markets," says CEO

Henning Beltestad.

* "Lerøy is a full-service seafood provider with a vertically integrated value

chain for both red and white fish. In the second quarter, we've seen a

significant improvement on last year within Wild Catch and good progress in

downstream activities, although we're not exploiting the full potential of

our Farming segment. We can and will improve, and the last quarter shows

that we have a robust business model with significant potential," Beltestad

continues.

WILD CATCH

The wholly owned subsidiary Lerøy Havfisk's primary business is wild catches of

whitefish. Lerøy 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 around 30% of the total quota allocated to the trawler fleet.

Lerøy Havfisk also owns several processing plants, which are mainly leased out

to its sister company Lerøy Norway Seafoods (LNWS) on long-term contracts. Lerøy

Havfisk's trawler licences stipulate an operational obligation for these

processing plants.

Lerøy Havfisk had 10 trawlers in operation in Q2 2021. The catch volume of

16,345 tonnes in Q2 2021 is lower than the 19,708 tonnes caught in the same

period of 2020, but a change in catch composition means the value is higher.

Catches of shrimp and haddock have been prioritised in Q2 2021, while catches of

redfish are significantly down on the same period in 2020. With a substantial

cod quota remaining, Lerøy Havfisk is well positioned for the remainder of the

year.

As described in the Group's recent interim reports, demand for seafood has been

negatively impacted by the restrictions introduced to combat the spread of

COVID-19, and this situation continued in Q2 2021. Compared with Q2 2020, prices

for cod, which is the most important species, are down 12%, while prices for

haddock and saithe have risen 3% and 13% respectively. Current expectations are

that further easing of the COVID-19-related restrictions could result in a

positive price development for the remainder of 2021, including for cod.

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

of 12 processing plants and purchasing stations in Norway, five of which are

leased from Lerøy Havfisk. Processing of whitefish has been extremely

challenging for many years - with Q2 2021 no exception - but it is pleasing to

note a substantial improvement in underlying operations, which has also led to

an improvement in the financial results for Q2 2021 compared with the same

period of 2020.

The Group's focus on boosting the competitiveness of the whitefish industry is a

long-term process and will continue undiminished, despite what the Group hopes

is temporary market-related challenges brought about by the pandemic. Over time,

a number of organisational changes have been introduced, which, in combination

with significant investments in facilities and in developing the organisations,

we consider will deliver sustainable earnings.

In total, the segment contributed EBIT of NOK 65 million in Q2 2021, compared

with NOK -5 million in the same period of 2020. Please note that Havfisk has

opted to leave a higher share of the cod quota for the second half of the year

compared with 2020.

* "Earnings in the Wild Catch segment have improved significantly in the

second quarter compared with 2020. Several factors have played a part in

this, but it's very encouraging that the underlying improvements in land-

based operations are gradually delivering increased earnings in this part of

the business," says CEO Henning Beltestad.

FARMING

The Farming segment comprises the Group's three farming regions in Norway: Lerøy

Aurora located in Troms and Finnmark, Lerøy Midt located in Nordmøre and

Trøndelag, and Lerøy Sjøtroll located in Vestland.

Operating profit for the Farming segment before fair value adjustment related to

biological assets was NOK 388 million in Q2 2021, compared with NOK 216 million

in Q2 2020. A total of 37,000 tonnes was harvested during the quarter, compared

with 39,000 tonnes in Q2 2020.

In Q2 2021, the EBIT/kg figure was NOK 8.70 for Lerøy Aurora, NOK 13.70 for

Lerøy Midt and NOK 8.30 for Lerøy Sjøtroll. In total, EBIT/kg for the segment

was up from NOK 5.5 in Q2 2020 to NOK 10.6 in Q2 2021. Compared with the same

quarter in 2020, costs per kilo are down, but the improvement in prices realised

is the main factor in the higher earnings.

* "As mentioned in the first quarter, the Farming segment was facing more

downgrades in quality than normal in the second quarter. This has had a

significantly negative impact on earnings in the quarter, and is an obvious

top-priority area of improvement for us," says CEO Henning Beltestad.

* "Growth in the second quarter has been good, and we're maintaining our

guidance, with our Norwegian business expected to harvest around 192,000

tonnes this year. This will be a substantial increase over the last two

years, up from 158,000 tonnes in 2019. This growth is organic, and makes us

one of the fastest-growing companies in Norway in this period - and we have

the potential for further organic growth in the years ahead," he continues.

VAP, Sales & Distribution (VAPS&D)

With its fully integrated, cost-efficient value chain for salmon, trout,

whitefish and shellfish, Lerøy Seafood Group shall be able to supply products

that are best suited to the consumers' preferences. Proximity to key markets and

knowledge of the customer's needs are therefore of decisive importance if the

Group is to develop demand for its main products. In the course of a calendar

year, Lerøy distributes a wide range of seafood products from Norway to more

than 80 different markets. In addition, the Group processes and distributes a

number of market-specific seafood products in their respective local markets

where Lerøy has operations. Lerøy Seafood Group's value chain shall be developed

further in order to satisfy and increase the consumers' total demand for

seafood.

In 2020, seafood markets were negatively impacted by the COVID-19 pandemic. The

impact was seen first in markets in Asia, spreading globally through Q2 2020.

The pandemic has affected the pattern of demand. The grocery market now

represents a larger volume of consumption, while the hospitality and catering

segment in many core markets has practically been closed down for long periods

over the last year. The pandemic has also had an impact on logistics,

particularly for overseas markets, with a reduction in cargo capacity resulting

in increased costs during the period.

Demand for seafood in the grocery market remained strong in Q2 2021, and we have

also seen a gradual improvement in the hospitality and catering market as,

little by little, COVID-19 restrictions have been lifted.

The seafood group Seafood Danmark A/S was consolidated from 1 April. Seafood

Danmark A/S occupies a particularly strong position on the Danish seafood market

but also within other international seafood markets. The segment has posted

positive one-time effects of NOK 38 million in connection with the

consolidation, including valuation of the shares Lerøy already owned. Seafood

Danmark has consistently enjoyed a positive development in recent years,

contributing to the year-on-year improvement in operating profit.

The segment's development has been impacted positively by improvement measures

taken, but also negativly by start-up costs in connection with new plants in

Spain and Italy. In total, operating profit before fair value adjustment of

biomass reported by the segment amounted to NOK 161 million, up from NOK 114

million in the same period in 2020.

* "We've made substantial investments in our downstream activities in recent

years, also incurring a high level of start-up costs. The business is

developing well this year. We're seeing the impact of new activities and the

improvement measures we've put in place, but are still absorbing start-up

costs for the new factories in Italy and Spain. We believe we're well

positioned to continue our earnings growth in this part of the business,"

says Henning Beltestad.

MARKET AND OUTLOOK

Price developments for Atlantic salmon have remained highly volatile at the

start of 2021, substantially influenced by the repercussions of the COVID-19

pandemic. It is not possible for the management and Board of Directors to form

any precise opinion on the duration or consequences of the pandemic, but

developments in 2021 provide grounds for optimism. There are indications that

seafood is gaining in popularity with consumers, and we are therefore optimistic

with a view to the underlying future trend in demand for seafood, and

consequently for the Group's operations and value creation.

The Group's production of red fish currently takes place mainly in Norway.

Norwegian and global salmon and trout production are experiencing relatively

modest growth, which - combined with a weaker Norwegian krone - has resulted in

very high prices. This provides an incentive to start production of salmon in

new areas and using new, alternative technologies. These incentives have existed

for several years now, but with long lead times for developing the industry,

sea-based production in Norway has remained dominant. The harvest volume from

land-based production of salmon remains insignificant on the end markets. The

market share for Norwegian Atlantic salmon may, in the long term, be affected by

production of salmon and trout in new regions and locations. Through business

development, investments and a clear operational focus on competitiveness, the

Group shall ensure that its value chain stands strong in the face of competition

in the years to come. As well as developing existing farming operations, the

Group is accumulating knowledge and/or expertise within both land-based and

offshore salmon production.

In recent years, Lerøy has made significant investments in several parts of the

value chain, including the construction of facilities for smolt/post-smolt

capacity in all the Group's regions. Lerøy Sjøtroll's Kjærelva facility has now

been completed, producing around 4,000 tonnes of biomass per year. Lerøy Aurora

completed the final construction stage of its new smolt facility in Laksefjord

in Q4 2020, and the facility is expected to reach full utilisation in 2021.

Lerøy Midt can report that the second stage of development of the Belsvik

facility is on schedule. It should be complete by the start of 2022, and the

facility will produce around 5,000 tonnes of biomass per year. The Group's

investments in improved smolt production and post-smolt production, combined

with a number of other initiatives, will support the Group's ambition for

continued growth in volume and improved competitiveness by means of lower

production costs.

The Group's substantial investments in post-smolt facilities have not only

increased its annual harvest volume by means of improved exploitation of

existing assets, but also provided significant learnings in RAS technology. This

is basically the same technology used in full-scale land-based production of

salmon. The Group is in negotiations on a possible further development of a new

RAS facility in Vestland county. The plans are initially to develop the facility

in three stages. The first and second stages will allow further increases in the

Group's post-smolt production. The final stage will also provide facilities for

post-smolt production, but could be used for salmon production up to harvest

size. The newly acquired industrial site, including the links to the Group's

farming operations in West Norway, could improve interaction between land and

sea. The lessons learned may potentially be exploited to realise land-based

projects in other regions in the future. The development will take place in

stages, but initial estimates suggest a cost framework of around NOK 1 billion

for the first stages. The development is projected to provide an annual increase

in production in the sea of 8,000-10,000 GWT. Construction work is scheduled for

completion in 2023.

The Group achieved significant improvements in production in the sea in 2020.

The harvest volume was up from approx. 158,000 tonnes in 2019 to 171,000 tonnes

in 2020. Moreover, standing biomass increased from 111,000 tonnes at year-end

2019 to 119,000 tonnes at year-end 2020. The first months of 2021 were cold,

negatively affecting growth conditions, but growth in Q2 has been satisfactory

and the Group maintains its forecast of a harvest volume for 2021, including

associates, of 205,000-210,000 tonnes. Ongoing investments and additional

improvement initiatives will provide further growth in the years to come.

We are convinced that this growth, combined with other improvement measures,

will reduce the Group's release from stock costs for salmon and trout in 2021

and going forward.

The previous interim report explained that the consequences of winter wounds

would impair prices realised in Q2 2021. This proved to be the case, but a

significant improvement is expected in the second half of the year.

The Group has made substantial investments in whitefish in recent years. One new

vessel was added to the fleet in 2018 - Nordtind - and another in early 2020 -

Kongsfjord. Further improvements to fish quality were important design criteria

for Kongsfjord. Consumers' expectations and quality requirements continue to

increase, making high quality and competitiveness key factors for success when

competing to attract consumers.

The whitefish industry, also including land-based operations, has suffered

significantly from the impact of COVID-19 on demand at the start of 2021. It is

naturally not possible for the Group to know how long the restrictions will

last, but Lerøy's long-term plans remain the same. The work on and investments

in making the factories less seasonally dependent continue, along with

structured and meticulous work on making improvements to each unit. We believe

that this process will gradually generate results.

The Group's quotas for 2021 are up 17% for cod, 22% for haddock and 16% for

saithe north of 62 degrees latitude, and down 43% for saithe south of 62

degrees. In June, ICES (the International Council for the Exploration of the

Sea) published its recommendations for the total quotas of cod, haddock and

saithe in 2022. These recommendations entail reductions in the cod and haddock

quotas of 20% and 23% respectively. For saithe north of 62 degrees latitude, a

quota roughly equivalent to 2021 is recommended, while a 24% reduction is

recommended in the total quota for the North Sea. The final quotas will be set

by the Norwegian authorities in the autumn.

Lerøy works to develop an efficient and sustainable value chain for seafood.

This not only provides cost-efficient solutions, but also quality, availability,

a high level of service, traceability, and competitive climate-related and

environmental solutions. Investments in recent years, e.g. in a new industrial

facility for Lerøy Midt, a new factory in Stamsund and new factories in Spain

and the Netherlands, now commissioned, will make a positive contribution in the

years to come. The management and Board of Directors are confident that Lerøy

has a good starting point for continued profitable growth and development of

Group operations.

In Q2 2021, the Group increased its shareholding in Seafood Danmark from 33% to

78%, and the company has been consolidated from Q2. This is the result of a

long-term relationship between the parties, and Lerøy looks forward to having

this company as an integrated part of the Group. Seafood Danmark's collaboration

with demanding customers has afforded them a strong position on the Danish

seafood market, but the company is also active on other core markets. Thanks to

its well-established organisation, Seafood Danmark will strengthen Lerøy's

downstream operations. The company has strong local management who have

demonstrated solid operations and good earnings over several years. The company

reported operating profit of approx. DKK 70 million in 2020.

On 29 June 2021, Scottish Sea Farms Ltd. (SSF), a joint venture between Lerøy

Seafood Group ASA and SalMar ASA, entered into an agreement to purchase 100% of

the shares in Grieg Seafood Hjaltland (GSHU) from Grieg Seafood ASA. The debt-

free, cash-free purchase price has been set at GBP 164 million.

GSHU is a vertically integrated Scotland-based producer of salmon with

operations in Shetland and the Isle of Skye. The company has 21 active sea

locations, a smolt facility and a harvesting plant. GSHU harvested approx.

16,000 tonnes (HOG) Atlantic salmon in 2020. SSF is one of the largest producers

in Scotland, with operations in the Orkneys and Shetland and on the Scottish

mainland. SSF harvested approx. 24,000 tonnes (HOG) Atlantic salmon in 2020. The

management of SSF looks forward to getting started on the work required to

improve GSHU's biological and operational performance. SSF's organisation sees

significant potential for increased earnings through sound operational

understanding, improved biological control and realising synergies by

integrating the two companies. The acquisition will be financed by new equity

from shareholders and external capital. The transaction is expected to be

completed by the end of Q4 2021, assuming approval is obtained from the relevant

authorities and the standard terms and conditions.

The Group's products are healthy and good. Production is sustainable from a

financial, climate and environmental perspective. The management and Board of

Directors continue to expect good underlying growth in demand in the years

ahead. It is not possible for the management and Board of Directors to estimate

how long the COVID-19 pandemic will last, but we are confident in assuming that

demand will with time return to historic levels and continue to develop from

there.

The Board of Directors underlines that uncertainties related to assessments of

future developments remain higher than normal, but current estimates are that

earnings could be negatively impacted by COVID-19 restrictions for some time to

come. At the same time, it is noted that the Group's underlying development is

good, something that we consider - in the current circumstances - provides a

basis for a significant uptick in profitability this year compared with 2020.

The Group will harvest around 60% of the volume for 2021 in the second half of

the year, and the market development, including price developments for salmon,

will of course have a significant impact on earnings. The current forecast is

for earnings in Q3 2021 to show a significant improvement on the second quarter.

The Board of Directors and corporate management would like to thank all the

Group's employees for their valuable work to date during the COVID-19 pandemic.

ABOUT LERØY SEAFOOD GROUP

Lerøy Seafood Group ASA is a global seafood corporation with its head office in

Bergen. The Group's approx. 5,000 employees process between 350,000 and 400,000

tonnes of seafood every year via our value chain, corresponding to around 5

million meals every day. The Group has a vertically integrated value chain for

red fish and whitefish, and significant activities using third-party products.

The Group's values - open, honest, responsible and creative - shall underpin

everything we do, and we work hard to achieve our goal of creating the world's

most efficient and sustainable value chain for seafood. The target for return on

capital employed (ROCE) is 18%. The Group has set a number of targets within

sustainability, including cutting greenhouse gas emissions by 46% by 2030.