TRANSCRIPT

Grieg Seafood Q2 2021 Results

18 August 2021

Highlights

Kristina Furnes, Global Communications Manager:

I would like to give you a large welcome to the presentation of second quarter 2021 for Grieg Seafood. We will start by going through the quarter with CEO Andreas Kvame, and CFO Atle Harald Sandtorv before we open for questions from the audience. The question function has already been turned on, so it is possible to send in questions during the presentation. Welcome, Andreas.

Andreas Kvame, CEO:

Thank you, Kristina. Then I will go through the second quarter for Grieg Seafood. The agenda is simple, we will go through the highlights of the quarter, look at our various operating units, and Atle Harald will come after me and cover financials, and then I will go through the outlook. The earnings for Grieg Seafood were a positive NOK 44 million this quarter. That is a result we are absolutely not satisfied with, but it is the truth. It is NOK 3 million below what we had last year.

If we look at what caused this, it is primarily price achievement in Finnmark, where our price achievement was too weak, a little too low average weights, and too many downgraded fish, which has led to NOK 41 million lower earnings in this region, due to this. In addition to this, the operating costs in Newfoundland, including write-downs which we took in conjunction with removing smolt, totalled NOK 45 million. Had it not been for these things, our result would have been NOK 120-125 million, rather than the NOK 44 where it ended up.

Having said that, production was very good in British Columbia, the development is positive. In addition, we sold Shetland during this period, for GBP 164 million, to Scottish Sea Farms. And there is a reason that we achieved this price, that is because we, through several years of restructuring and operational improvements in this region, saw that the second quarter showed an EBITDA of NOK 56 million for Shetland, which does not get included in the EBIT calculation because it is being held for sale.

In addition, looking forward, there are significant improvements, operational improvements, which will materialize during the second half of 2022; we expect a decline in costs for the entire company.

This period is also the first period in which our sales organization has sold 100% of the volume, and we have done that with success.

Now, let's take a closer look at Shetland and what we have done there. As said, we have reached an agreement with Scottish Sea Farms for the sale of Shetland for GBP 164 million. The region has achieved a good performance during this quarter, and we expect that the UK competition authorities will approve this, approve this at the latest during the fourth quarter. And the EU, the EU authorities, the competition authorities have already said they won't interfere with this. So we expect this to be concluded during the fourth quarter.

In Shetland, it's been the Achilles heel of Grieg Seafood for many years, and we must admit that the last (smolt) release we had at Skye, mainland Scotland, well, we would have preferred that we had not done that, it led to large losses for us. But when we see now what is happening on mainland Scotland, there is both improving profitability up there, and good financial results.

We will now focus on Norway and Canada, in line with our new strategy. We will improve profitability in the company, that is goal number one. We shall assure that we achieve sustainable growth in the regions where we operate, and we shall reposition ourselves in the value chain as we implement more partnerships when it comes to further processing of products in the marketplace or in Norway. And we shall do this within a sound and good balance.

If we go in and look at our areas for improvement, we have listed a very few items, but which are very important for us. In Rogaland, the focus is on post-smolt, and reducing the time in the sea. We are focusing on coming under 12 months, which will have very much significance for the utilization of MAB (Maximum Allowed Biomass), and not least regarding sickness. And we see clear signs that if a fish spends a long time in the sea, and is exposed to various kinds of bacteria, viruses, whatever, algae, amoeba, then we get challenges.

In the second quarter, the Tytlandsvik construction project, the second phase of 1 500 tonnes, was actually completed. So we have 1 500 tonnes more post-smolt capacity in this region than we had when the year started. For costs in Rogaland, the goal is to come under NOK 40/kg by the end of next year, and as I said in the introduction, costs in Norway are moving in the right direction down towards our goal.

Finnmark is the biological risk and is and has been rather challenging. This is first of all about a challenge which is common for our industry these days, and that has to do with ISA (Infectious Salmon Anaemia), but also winter ulcers and winter ulcer issues.

We have implemented significant changes this year. We have changed the vaccination strategy that we had, using a slightly different vaccine than we used previously. We have made changes in when we release the fish to the sea, that have to do with the size of the fish, but also at what time of the year we release the smolt. But the most important strategy, also in Finnmark, to get below two winters in the sea, is that we need to have more post-smolt available. There is planning, that we are working on as of today, to arrange this.

In addition to that, we want to increase VAP (Value-Added Processing) capacity specifically in Finnmark, both in Finnmark and Rogaland, because if you now get winter ulcers on the salmon, the next step is to do something about it, by upgrading it through processing, which is important, and having partnerships to do this, since we don't have in-house capacity for this today. This will be arranged by the next winter, if it should be needed.

The goal there is to come below NOK 40/kg as well.

In British Columbia, the challenges we have had there have been algae, low oxygen content and things like that. Over several years we have implemented digitalization and the use of sensor technology, which gives us a much better surveillance and better countermeasures when things happen. In addition to that, we have increased smolt capacity in Gold River. It will be completed in October for inputs.

We are also working on developing our business and growing in British Columbia. We are doing that with an agreement with First Nations which is in those areas. The goals are unchanged, we shall have costs below CAD 7/kg by 2022. Then we have our new region, which is Newfoundland, which will be the region with the possibility of the most growth. The goal is to achieve 15 000 tonnes by 2025. We are doing this because we are big believers in the North American market. We think that it is important that we supply the North American market both from the west side and the east side. And that will give us significant synergies in sales if we also achieve a good production on the east side.

Having said that, we are going to have a gradual development of Newfoundland, things will move forward in a controlled manner, and that is something we put a lot of emphasis on. We have three million smolt planned for release to sea in 2022 and expect the first harvest to be 9-10 months delayed relative to original plans because of the destruction of the first input at the Newfoundland site, and I will revert to that when I cover Newfoundland in more detail.

Since we have put in place our own marketing organization, we would also like to say a bit more about what is happening in the market and the development that we see in the market.

On that slide, you see that there are some markets developing very positively, demand has been strong in the second quarter and in the first half, but especially the US, with market growth of 15%, which is the world's largest single market, has grown by 15%. Brazil, which is the home market to Chile, has grown by 50%. Russia has grown by 63%, a significantly smaller market, but still a large market, and that shows domestic production which is consumed, in addition to imports, which mainly come from Chile.

You can also note that in Asia, other Asia is up 21%, so there are many exciting markets in that region showing significant growth, one that we can mention specifically is South Korea, which is showing very positive growth.

The total market grew by 8% and this is mainly driven by demand from supermarkets, the retail sector and large households. We see stable demand in Europe and Asia, but it is North America representing most of the growth.

If we look at prices that were achieved, I refer to Nasdaq, which is the only price we have, not directly a market price, but an indicator for the spot market, and how it has performed. And prices have been good during the second quarter, and the same applies to the Urner-Barry prices in the USA, where the development has been very strong. There have been some challenges right now, in the middle of August, which is completely normal for this time of year, with high harvesting in Norway and vacation in Europe.

Going forward, we believe that the development will depend very much on supply, how much supply enters the market and there are some other things which can influence the market, when volumes in Norway get very high, especially at this time of year, it can be challenging enough to arrange transportation, because when imports aren't so high, there is less transport capacity available. In addition, availability of air freight is also a factor going forward.

If we look at estimated volumes for the year, since supply is a big determinant of prices, we estimated last quarter that supply growth would be about 2% higher, while we now estimate it to be a little higher, at 3% growth, given strong salmon feeding during the summer in Norway. This represents roughly 75 000 tonnes, and most of that growth has already occurred. If you look at supply to the market in the third quarter, we actually expect a year-over-year decline of 4% versus last year and a decline of about 1% in

the fourth quarter. So, in total for the second half, we are expecting a supply decline of 2% compared to last year.

Nevertheless, we expect Norway to grow by 8% for the year, while Chile should offset that with a decline of 15% in total. So, things look very good, marketwise.

As we said, we are also working on our downstream activities. We have our own organization, which is fully operative, all the positions have been filled, most recently, we established our own VAP division, Value-Added Processing division, which will focus on establishing longer-term contracts, partnerships with processors, etc. to improve our processing capacity and the possibilities we have there.

The goal with this sales organization is to improve the internal supply chain, it has improved, reduce transaction costs in everything we do, improve our utilization of raw materials, as I mentioned earlier, we need to ensure downstream capacity in case we get winter ulcers in the future so that we can upgrade that fish to a well-paid product such as portions.

The focus in our sales organization will be supermarkets and service partnerships. We will develop a business-to-business brand, based on the Grieg name, in towards retail, food service and towards the HoReCa (hotel, restaurant, catering) segment.

Now over to operations in the various regions. We can start with Rogaland. Rogaland harvested 7 780 tonnes in this period, which is somewhat up compared to one year earlier, with an EBIT of NOK 10.20/kg and a total EBIT of NOK 79 mill. for this region. In Rogaland there was also some impact from both fixed contracts, downgraded fish, we also had winter ulcers here which impacted price achievement, with a 76% superior share, but we had a very high and good average weight in this region, which offset that somewhat, and, in addition, we also harvested some broodstock in this period.

We had somewhat higher production costs in the second quarter than we had in the same quarter of 2020, largely due to harvesting from some poorer locations than we had at the same time last year. We expect a harvest volume of 7 000 tonnes in Q3, with costs stable to slightly lower in this region. Harvest volume estimates for the year 2021 are maintained at 28 000 tonnes.

Then over to Finnmark. We have had a harvest volume of 4 780 tonnes, which was somewhat lower than a year earlier. We achieved an EBIT which was minus NOK 2.2/kg, which was very weak. We had earnings of minus NOK 10 mill. in this region. That can be explained by two things. One is price achievement, which was negatively influenced by price contracts, which were 31% of volumes. In addition, we didn't harvest in May, when prices were high, but in April and June, so the harvest profile affected price achievement. The third factor is that we had low average weights, 3.4 kg in this region, and in addition to that, downgrades due to winter ulcer problems during the winter and spring.

The other thing is costs, which are high, due partly to lower volumes, downgraded products in the form of winter ulcers, and all fish has been processed externally in this region due to ISA (Infectious Salmon Anaemia), and the upgrades we have done to our processing site that we reported in the first quarter results.

Then, in addition to that, wellboat costs have been significant due to operating closed (rather than open) due to ISA harvesting rules.

We have adopted significant measure during this quarter to reduce winter ulcers and the risk of winter ulcers, especially when it comes to vaccines and the timing of smolt releases. We expect to harvest 10 000 tonnes in the third quarter, and costs will decline this quarter in Finnmark. Harvest volume guidance is maintained at 37 000 tonnes for 2021.

In British Columbia, we are very satisfied with the development. We harvested 5 249 tonnes in this region. EBIT was NOK 8.4/kg and a total EBIT for British Columbia of NOK 44 million. This was achieved because we had good realized prices and had a high superior share, at 89%. The biological performance in this area in British Columbia has been very good during this period. We expect to harvest 4 700 tonnes in the third quarter with stable costs, and cost improvements in the longer term. Harvest volume guidance for 2021 is maintained at 15 000 tonnes.

Then I would like to comment a bit more about the Newfoundland project. What you see on this slide

(slide 16) is that the picture shows the site the way it looks today. The red building is the roe hall and has broodstock feeding, and the blue hall is the smolt building.

We have a fully operative smolt and juvenile fish unit in Newfoundland and it is functioning well. Eight licenses are in place, including the Placentia license which you see a picture of here, and we have more now going through the approval process with the authorities.

We have run one cycle through this site, where we have tested both the biology and the fish, and that the production facilities work in a satisfactory way, and we have to say that we are very satisfied with the development that we have seen at the site.

However, we have delayed the smolt release, and that is because we had one test performed by the local authorities which showed a suspicion of ISA at our site. 295 follow-up tests have been taken afterwards, by us and the authorities, which have given negative results. But due to that one case being found, we have of course gone through everything which could have caused it, for instance that we could have had ISA in our site, by checking all the water at the site, and checking all inputs to the site. The site uses groundwater, so with all likelihood it hasn't come from there. We have looked at feed, at the vaccines, we have looked at the total hygiene, and the zone system at the site. We have looked closed at roe, and we have looked at the possibility of cross-contamination which can occur in a laboratory, which has occurred in other countries, for instance, in Norway.

But as of today, we have not reached a conclusion about what it is that caused that one suspicion of ISA, or the confirmation of the one test. So, after a total evaluation, we decided not to release the smolt. There are several reasons for that. One is that we do not want to introduce it to Placentia Bay, a virgin area, if it is ISA. The other is that we have a significant control regime around this in Placentia Bay, so if we do get ISA from wild fish, it is very difficult to detect where it comes from, and then the suspicion would fall on ourselves.

So, using risk management, if we should call it that, we just have to take this hit by not releasing this smolt. We have already destroyed that smolt, and that is part of our results, which is negative for Newfoundland, but for the long-term, it is better to move forward gradually, than to go forward too fast. This means too that we give ourselves more time when it comes to developing Newfoundland.

But as I said, the plan is to release 3 million fish to the sea in 2022, with the first harvest in 2023. After that, I would like to give the word to Atle Harald, who will go through the financials.

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Grieg Seafood ASA published this content on 25 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 August 2021 07:23:08 UTC.