STRONG DEVELOPMENT IN DEMAND
The first quarter has been dominated by a very strong development in the prices
for seafood, including salmon and trout. This price development has resulted in
improved earnings from the farming of salmon and trout and from whitefish
catches, but at the same time is a significant challenge for the Group's
downstream operations. The Group reported revenue of NOK 5,524 million in the
quarter, up 12% on Q1 2021. Operating profit before fair value adjustment in Q1
2022 was NOK 852 million, a significant improvement on the figure of NOK 455
million in Q1 2021. Strong demand for seafood, including a substantial
improvement in prices realised for the Group's main products, is the most
important factor behind the improved earnings, when compared with the same
period last year.
* "We have seen an extreme development in prices for seafood in the first
quarter, in particular for salmon and trout. This development has been
positive for earnings from farming and whitefish catches, but is a temporary
challenge for earnings from the Group's downstream operations," says CEO
Henning Beltestad.
WILDCATCH
The wholly owned subsidiary Lerøy Havfisk carries out the Group's wild catch
operations. 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 has had 10 trawlers in operation in Q1 2022. The catch volume in
Q1 2022 totalled 25,116 tonnes, compared with 25,721 tonnes in Q1 2021. The
company has prioritised haddock catches. Remaining quotas at the end of the
first quarter are slightly lower than at the same time last year.
The prices that were negatively impacted over the past two years due to COVID-
19 restrictions have seen a significant improvement in Q1 2022. Prices for cod
were up around 46% on Q1 2021, while prices for haddock and saithe increased by
24% and 37% respectively. This development in prices is a clear indication of
strong demand for seafood products, although the price volatility is also
challenging, and evidence of the complexity of the Group's daily operations.
Significantly higher prices realised for the main species are the drivers behind
the increase in catch value from Q1 2021 to Q1 2022. Profitability is negatively
impacted by higher costs, including increased costs for crew and fuel. When
compared with Q1 2021, total fuel consumption remained the same, but fuel prices
were around 50% higher. As a result, bunker costs were up by NOK 27 million from
Q1 2021 to Q1 2022.
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. The Group's focus on improving the competitiveness of
the whitefish industry is a long-term project and continues undiminished, with
earnings improving significantly in 2021. However, as mentioned in the Group's
report for Q4 2021, the price level for raw materials at the start of 2022 would
present an increased challenge for the landbased processing industry. Throughout
the first quarter of 2022, the prices for end products have not shown the same
development as the prices for raw materials. This results in significant
pressure on the margins for the onshore industry. The Group expects it to take
time before the higher raw material prices will be fully reflected in the prices
for end products.
Total earnings for the segment are showing a very positive development, and the
segment reported EBIT of NOK 236 million in Q1 2022, compared with NOK 185
million in the same period of 2021.
* "High demand and lower quotas are key factors behind the positive
development in whitefish prices. This provides a boost for earnings from the
trawler fleet, but is a challenge for earnings from the land-based
industry," he says.
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 621 million in Q1 2022, compared with NOK 251 million
in Q1 2021. During the quarter, the Farming segment harvested 32,000 tonnes,
compared with 42,000 tonnes in Q4 2021.
In Q1 2022, EBIT/kg was NOK 18.90 for Lerøy Aurora, NOK 24.30 for Lerøy Midt and
NOK 15.70 for Lerøy Sjøtroll. In total, EBIT/kg for the segment was up from NOK
6.00 in Q1 2021 to NOK 19.40 in Q1 2022.
* "We are witnessing a very strong increase in costs for practically all input
factors, with the price increases for feed the most evident. This will
result in higher costs in 2022 when compared with previous years. At the
same time, it appears so far that the increase in prices realised will be
higher than the increase in costs," says CEO Henning Beltestad.
VAP, SALES & DISTRIBUTION
With its fully integrated, cost-efficient value chain for salmon, trout,
whitefish and shellfish, Lerøy Seafood Group shall 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 its 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.
Demand for seafood has been significantly impaired by COVID-related restrictions
over the past two years. Since Q4 2021, demand has shown a positive upturn.
Demand in Q1 2022 has been excellent, resulting in an extreme development in
prices due to the low volume of salmon and trout.
On 24 February 2022, Russia launched military operations against its
neighbouring country of Ukraine. This is an escalation of the invasion that
started in 2014. In the main, the Group has not had any major direct losses as a
result of these tragic events.
Volatile prices and an extreme development in prices on the spot market are
causing changes in margins throughout the value chain. It will take time for the
various parties in the different parts of the value chain to adapt to the new
price level. It is likely that the high prices for practically all raw materials
have not as yet been fully passed on to the consumer. The Group therefore
expects to see a significant increase in food prices, including for seafood, in
the near future. The price development for salmon and trout at the start of
2022 has been much stronger than expected, and this has had a negative impact on
earnings in Q1 2022, and will continue to do so in Q2 2022. The general level of
cost inflation, in transport costs for example, will have a negative effect on
the segment's profitability.
The segment's earnings in the first half of 2022 are temporarily under pressure.
At the same time, the Group is experiencing a gradual improvement in market
position, and the long-term outlook for this segment is not changed. In total,
operating profit reported by the segment in Q1 2022 was NOK 26 million, down
from NOK 101 million in the same period in 2021.
* "The increase in prices for seafood and transport costs in the first quarter
was much higher than expected. This puts temporary pressure on margins for
the Group's downstream operations, and will affect us in the second
quarter," he says.
* "At the same time, we have developed a strong and integrated value chain for
seafood, and this remains stable with a good position for gaining new market
shares during turbulent times. The long-term outlook for own downstream
operations has not changed," he continues.
MARKET AND OUTLOOK
The start of 2022 has been affected by significant price increases for input
factors/inflationary pressure, global political uncertainties and more
uncertainty than normal regarding future outlook.
Over the past 30 years, the Group has built a vertically integrated value chain
for seafood. This value chain is now strong and well positioned for further
development, with the potential to gain market shares during turbulent times. In
the short term, higher prices for seafood generate higher earnings for the
Group's farming operations and whitefish catches, but put pressure on margins
for the Group's downstream operations. This situation will, in our assessment,
prevail for the second quarter of 2022.
The cost inflation will gradually result in increased bunker prices and energy
costs, but not least in higher feed costs. The uncertainty concerning future
cost levels for the Group's input factors is high, and the Group currently
expects, for example, feed prices to continue to increase in the coming
quarters. Increasing prices will with time have an impact on release from stock
costs for the Group's farming operations. It is likely that the feed cost per
kilogram harvested fish will increase by approx. NOK 3-4 per kg in 2022 when
compared with 2021. The prices of other input factors are also increasing, and
this inflationary pressure is a clear indication of the importance of
operational improvements.
In May 2022, the spot price for salmon is at an historic high, partly due to
good demand but also the small volume available on the spot market. The Group's
harvest profile in 2022 implies that the Group will have a high contract share
again in the second quarter. The so-called forward prices have seen a
substantial increase at the start of 2022 as a whole, including for the second
half of 2022. Lerøy's management and Board of Directors believe the sustained
strong development in demand for seafood gives grounds for optimism about the
Group's activities and lasting value creation.
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. These investments in the Group's smolt
production have been an important driver for the growth in the Group's harvest
volume in Norway from 158,000 tonnes in 2019 to 187,000 tonnes in 2021. At the
same time, the new smolt facilities enable significant changes in our operations
that we assess will help us realise improvements in the years ahead.
For its consolidated operations, Lerøy Seafood Group currently estimates a
harvest volume of around 185,000 tonnes in 2022. The Group's share from
associates is forecast to be approx. 23,000 tonnes. This includes the projected
volume from Scottish Sea Farms Ltd's new acquisition, Grieg Seafood UK. LSG's
total harvest volume in 2022 is thus estimated to be in the region of 208,000
tonnes.
The Group has made significant investments in catching and processing 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
priority design criteria for Kongsfjord. Consumers have ever-increasing demands
and expectations where quality is concerned. High quality and competitiveness
are essential for success in the competition for consumers' favour. The Group's
target of significantly reducing greenhouse gas emissions makes new demands of
technology within the fleet. The Group is monitoring developments closely.
Within the whitefish segment, the increase in raw material prices generates
higher earnings from catches, but is challenging for the onshore industry. A
substantial increase in raw material prices takes time to recoup in the market,
so this factor will negatively impact earnings in the onshore industry for much
of 2022. Efforts and investments to make the factories less seasonally dependent
continue. Together with structured and meticulous improvement initiatives in
each unit, we believe that this process will generate results.
The quotas for cod and haddock are lower in 2022. The cod quota is down 18% and
the haddock quota down 20% compared with 2021. For saithe caught north of 62
degrees, the quota has been increased by 3%, while the quota for saithe in the
North Sea is down 13%. As well as the quota changes, Havfisk's catch volumes
will be impacted by approximately 1,350 tonnes of the 2021 cod quota having been
transferred to 2022. The fact that the coastal fleet, too, transferred quota
from 2021 to 2022 is also positive for the onshore industry.
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, including in a new
industrial facility for Lerøy Midt, a new factory in Stamsund and new factories
in Spain, the Netherlands and Italy that are close to being 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. Earnings in this part of
the value chain are under pressure at the start of 2022, but the Group has a
clear ambition for earnings in VAPS&D segment to continue to grow in the years
to come.
The Group's products are healthy and tasty. 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. At the same time, the Group is experiencing rising prices for key input
factors, and inflation will impact cost developments in 2022. Nonetheless, the
Board of Directors is confident that the Group is well positioned for the years
ahead. The Board of Directors currently expects earnings in Q2 2022 to be
substantially higher than in Q2 2021, with a corresponding significant
improvement in earnings for full-year 2022 compared with 2021.
Questions and comments may be addressed to the company's CEO, Henning Beltestad,
or to the CFO, Sjur S. Malm.