Lerøy Seafood Group ASA: All-time high revenue in 2021
LSG experienced record-high activity in Q4 2021. The Group reported revenue of NOK 6,519 million in the quarter, up 26% on Q4 2020. Operating profit before fair value adjustment more than doubled to NOK 902 million in Q4 2021 from NOK 441 million in Q4 2020. Strong demand for seafood, better prices realised for the Group’s main products and an improvement in underlying operations were important factors driving the significant earnings improvement in all segments compared with the same period in 2020.
“The demand for seafood is strong, giving grounds for optimism about the future. There is a positive development in activity level and prices realised. Compared with Q4 2020, earnings have increased in all segments,” says CEO Henning Beltestad.
“We are reporting an all-time high revenue of NOK 23 billion for full-year 2021. Our vertically integrated value chain has proved resilient, and the development is in line with the Group’s growth strategy” Beltestad continues.
THE WILD CATCH AND WHITEFISH SEGMENT
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 had 10 trawlers in operation in Q4 2021. The catch volume in Q4 2021 totalled 17,119 tonnes, compared with 12,619 tonnes in Q4 2020. The increased catch for the quarter was partly driven by higher quotas for 2021 than 2020 but also by the fact that the company had planned a different catch pattern through the year.
In 2021, the authorities made it possible to transfer up to 15% of the cod quota to 2022, measured by vessel. The prices for haddock and saithe continue to show good development, rising significantly in the fourth quarter. The company prioritised catches of these species in the quarter. Approximately 5% of Lerøy Havfisk’s cod quota – around 1,350 tonnes – was therefore transferred to 2022. The coastal fleet also transferred quota from 2021 to 2022, making it likely that the decrease in the volumes of cod caught in Norway in 2022 will be smaller than the reduction in the quota.
The price level, and variations therein, in 2020 and 2021 were impacted by restrictions linked to the COVID-19 pandemic. Prices for cod were slightly lower in 2021 than in 2020, but improved significantly in Q4 2021. Prices for cod were up around 16% on Q4 2020, while prices for haddock and saithe increased by 22% and 32% respectively.
Higher catch volumes and higher prices realised for the main species are the main drivers for the higher catch value in Q4 2021 compared with Q4 2020. At the same time, profitability is being negatively affected by higher costs, particularly bunker costs. The higher bunker costs are linked to more working days in Q4 2021 than in Q4 2020 and higher bunker prices. Bunker prices were 34% higher in Q4 2021 than in Q4 2020. In total, bunker costs increased by NOK 28 million compared with the same quarter of 2020.
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 whitefish in Norway has been extremely challenging for several years. Earnings came under severe pressure in the fourth quarter from the rising raw material prices for cod and other whitefish. Nevertheless, earnings in Q4 2021 were up on Q4 2020, and earnings for full-year 2021 were substantially higher than for 2020. This can be explained by operational improvements and significantly better access to raw materials than in 2020.
The Group will continue its long-term efforts to improve the competitiveness of the whitefish industry but, other things equal, the price level at the start of 2022 makes conditions more challenging for the onshore industry. Over time, the Group has implemented organisational changes and made significant investments in facilities, which we believe will deliver sustainable earnings for the onshore industry.
In total, the segment reported EBIT of NOK 73 million in Q4 2021, compared with NOK -10 million in the same period of 2020.
“Earnings in Wild Catch in the fourth quarter improved significantly on the same quarter in 2020, driven by high catches and higher prices. We’ve seen significant operational improvements in the onshore industry in 2021. There is still substantial potential in developing the demand for whitefish,” says CEO Henning Beltestad.
THE FARMING SEGMENT
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 702 million in Q4 2021, compared with NOK 296 million in Q4 2020. During the quarter, the Farming segment harvested 51,000 tonnes, compared with 48,000 tonnes in Q4 2020.
In Q4 2021, Lerøy Aurora reported EBIT/kg of NOK 16.90, Lerøy Midt reported NOK 15.90 and Lerøy Sjøtroll reported NOK 9.20. In total, EBIT/kg for the segment increased from NOK 6.10 in Q4 2020 to NOK 13.70 in Q4 2021.
“The Farming segment posted satisfactory results for the quarter. At the same time, growth in recent months has been slightly lower than expected, and we’re reducing our harvest guidance for 2022 for the Farming segment in Norway from 190,000 GWT to 185,000 GWT,” Beltestad continues.
VAPS&D
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 to 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.
Since 2020, seafood markets have been negatively impacted by the COVID-19 pandemic. The impact was seen first in markets in Asia, spreading globally through the second and third quarters of 2020. The COVID-19 pandemic has affected demand patterns. A higher share of consumption shifted to the retail sector, while the HoReCa segment in many core markets was practically closed down for long spells. The pandemic has impacted logistics for overseas markets, with reduced cargo capacity resulting in increased costs during the period.
In the second half of 2021, demand for seafood returned to historically high levels, driven in particular by strong demand in the retail sector but also by the gradual positive development in the HoReCa segment as COVID-related restrictions were lifted. The Group can ascertain there is very strong growth in demand for seafood. Revenue in the segment grew by 25% in Q4 2021 compared with the same period of 2020. The growth was driven by high prices and a good level of activity.
The segment’s underlying development is good, but continues to be impacted by start-up costs for the Group's new factories in Spain and Italy. In total, operating profit before fair value adjustment of biomass reported by the segment in Q4 2021 was NOK 202 million, up from NOK 176 million in the same period in 2020. For the first time, VAPS&D is reporting revenue over NOK 20 billion for the year. Operating profit before fair value adjustment increased from NOK 475 million in 2020 to NOK 630 million in 2021.
“Recent years have been impacted by restrictions linked to the COVID-19 pandemic. We have continued to develop, and are proud of reporting the highest level of activity and earnings in the segment’s history. Our vertically integrated value chain and proximity to end customers have served us well under challenging market conditions,” says Beltestad.
MARKET AND OUTLOOK
The Board and Management believe the development in demand for seafood, including in the second half of 2021, gives grounds for continued optimism about future development, and hence about the Group’s operations and value creation.
The Group’s production of red fish 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 been in place for a few years now but, for many reasons, Norwegian sea-based production has maintained its global dominance. 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. By means of business development, investments and a clear focus on competitiveness, the Group shall ensure that its value chain continues to stand 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. At Lerøy Midt, the first smolt will be released into the new facility on schedule in Q1 2022. This facility represents the final stage of the extension of the plant and will generate growth in Lerøy Midt’s harvest volumes from 2023. The investments were made to raise the quality of the company’s smolt, increase production by means of better licence utilisation and reduce costs. These investments in the Group’s smolt production were an important driver in 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.
In common with the industry as a whole, the Group’s costs per kilo of salmon and trout produced have increased significantly over the last 10 years. There are several reasons for this, but the global cost inflation the world is currently experiencing will not make things any easier. In these circumstances, operational efficiency is more important than ever, which is why it has top priority in the work under way within the Group’s farming operations.
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 23,000 tonnes. This includes expected volume from Scottish Sea Farms Ltd’s new acquisition, Grieg Seafood Hjaltland 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 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 are making ever-increasing demands and expectations on quality. High quality and competitiveness are essential for success when competing for consumers’ preferences. The Group’s target of significantly reducing greenhouse gas emissions makes new demands of technology within the fleet. The Group is monitoring developments closely.
Developments in the Whitefish segment in 2021 were positive. The development in demand gradually led to higher sales prices at the same time as we successfully implemented a number of operational improvements in the onshore industry. Prices for relevant whitefish species were significantly higher at the start of 2022 than a year ago. This is positive overall, but a challenging situation 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 will be somewhat lower in 2022. Work to finalise statistics and transfers from 2021 means that quotas have not yet been set for individual vessels. A reduction in cod quotas of around 20% is expected for the trawler fleet compared with 2021. The reduction for haddock is around 23%, while no change is expected in the quota for saithe fished in the zone north of 62 degrees latitude. 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, moved 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, e.g., in a new industrial facility for Lerøy Midt, a new factory in Stamsund and new factories in Spain, the Netherlands and Italy, 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. The Board of Directors believes developments in VAPS&D in 2021 show great promise: the higher activity level means higher capacity utilisation and thus better operating margins. The Group has a clear ambition for earnings in this segment to continue to increase through 2022 and in the years to come.
Scottish Sea Farms (SSF)’s notified acquisition of Grieg Seafood Hjaltland UK was finally completed in December 2021. The company operates in a region that SSF knows very well and, although it will take time, SSF is expected to realise significant synergies by integrating the two companies.
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, which will impact cost developments in 2022. Nonetheless, the Board of Directors is confident that the Group has a strong position for the years to come. The Board of Directors currently expects earnings in Q1 2022 to be substantially higher than in Q1 2021, with a corresponding earnings improvement for full-year 2022 compared with full-year 2021.
The Board of Directors and group management would like to thank all the Group’s employees for their valuable work in 2021.
Questions and comments may be addressed to the company’s CEO, Henning Beltestad, or to the CFO, Sjur S. Malm.
ABOUT LERØY SEAFOOD GROUP ASA
Lerøy Seafood Group ASA is a global seafood corporation with its head office in Bergen. The Group’s approx. 5,500 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.
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