Q3 2021 English transcript

TRANSCRIPT

Grieg Seafood Q3 2021 Results

3 November 2021

Highlights

Andreas Kvame, CEO:

Good morning, and welcome to the third quarter presentation of Grieg Seafood. As usual, there is Atle Harald Sandtorv, the CFO in the company, and me, Andreas Kvamme, the CEO, who will go through this. It is very nice to have a physical presentation after such a long time, and with many present. It was almost as if I wondered if my suit would fit when I headed here this time.

Today we will go through what has happened during the quarter, we will look a bit at the market and the market situation, go through our operating units, of course, and Atle Harald will go through the financials, and we will conclude with a summary.

The third quarter for Grieg Seafood has been one of the best third quarter results that we have had in Grieg Seafood. We have an operating EBIT of NOK 149 million, much driven by good prices in BC, but also by declining costs in the company.

Performance in Shetland has been good, in addition. We had an EBITDA of NOK 53 million in this region, which we are very pleased with that. We expect that the competition authorities in the UK will reach a conclusion about this transaction by 15 December. Our underlying operations are running well, with good improvements in all regions, improved survival rates for our fish, and we expect costs to continue to decline in the next quarter, which we will get back to.

In addition, we have had one of our areas of key focus, downstream activities, where we have obtained some capacity, which I will also talk about later. That's a start. We expect to harvest 25 100 tonnes in the fourth quarter and 77 000 tonnes for whole year, and 90 000 for 2022.

There was a result of NOK 7.30/kg for the quarter. This hasn't come entirely by itself. We are working intensively on operational improvements in all regions. The main points on this are on this slide.

But in Rogaland we have put significant efforts into post-smolt, which we will also come back to. And the goal is to avoid too much time in the sea, avoid treatments, avoid too many treatments, avoid pancreas disease (PD) which has been a challenge in this area, and which still is. We are working in all regions to improve our ability to deliver value-added products in order to become a different kind of supplier for our customers now and in the future.

In Finnmark it is reducing the biological risk, there have been challenges there for us when it comes to ISA (Infectious Salmon Anaemia) and winter ulcers. We have made many changes, both with vaccines and vaccine strategy, when we have released the fish to the sea - we release them earlier than we used to, basically to avoid two winters in the sea. And we have made changes to feed, to our feed recipes, so we can hopefully avoid them. We can't ever guarantee 100% avoidance of winter ulcers, but at least avoid having as much as we have had in recent years. Our goal there is to increase the number, rather the volumes of post-smolt.

An area where we are also working hard in Finnmark has to do with guidance for this year, we are working hard to increase the utilization of MAB (Mass Allowable Biomass), which has been a bit lower in Finnmark, but as it happens, the fish we have in the sea now have enough MAB, and we hope to keep them there as long as at all possible in this area.

In British Columbia, the main focus is algae. Algae and plankton are a challenge in British Columbia, but we have done a tremendous job there with digitalization. I would claim that there isn't anyone in aquaculture in Norway at the same level of digitalization as we have there in British Columbia. And we see very clear results when it comes to the occurrence of algae, rather the occurrence of algae is higher than it has ever been, but our survival rate has been higher than it ever has been.

We are also improving the smolt capacity in British Columbia, from 500 tonnes to 900 tonnes - Gold River is nearing completion. We are working intensely to develop our business together with First Nation, I'll get back to that later. That has to do with a win-win situation, we create jobs for First Nation, and we want to operate in regions where we are desired in British Columbia.

Our cost targets are unchanged, which I will get back to later. When it comes to … to post-smolt, that is something we have worked with for many years, but it takes time, and it costs money to reach our targets. But you see here, the curve to the right (slide 5), the development in tonnage, and the share of post-smolt released to the sea in Rogaland. Our goal, as I have said, is to get below 12 months in the sea, preferably ten. That will improve the biological performance in the area, increase fish welfare and improve survival. That also gives us more flexibility to achieve an even more effective production in this area.

If we look at the numbers, when it comes to MAB utilization, it is very high in Rogaland compared to many other regions. Having high MAB utilization has been our focus, our utilization of our production sites. Rogaland has been early in this, and we have a lot of experience, for better or worse. When you are first or among the earliest, there are many things you discover, it has been an education for us, and for others, as we move forward now.

The reason it came down a bit 2021 (points to graph of % share post-smolt), is that we released more smolt than expected. In Rogaland, we have about 7.5 million smolt a year that are released, roughly, and it will be at that level, or a bit higher, going forward. As an example, we released fish in April, and they weighed 4.5 kg by the end of September. So post-smolt works and the fish definitely come out of the water before a year has passed.

So, a little about the market. The market has been very strong, I would claim. You always have to keep in mind that the kroner (NOK) exchange rate is significant for what you achieve in NOK, and we have had a significantly stronger kroner during this quarter, and record high volumes have been exported from Norway, but nevertheless, prices are at a nice level compared to many earlier years, where this normally would not have happened in the third quarter, when you normally have the lowest prices.

This year, we expect production growth of about 4%, roughly that level, and for 2022, somewhere between 3 and 5%. For this year, the driver of production growth has been Norway and the UK, and others. Others here means Tasmania, Iceland and Faroe Islands, that have had a combined increase of 50 000 tonnes. So we are starting to get a significant increase, also in other areas.

If we look at the different market areas, the EU is a big locomotive, the EU is a big market at 835 000 tonnes (incl. UK) so far this year, or through the third quarter, and has grown by 10% during the quarter. Even though the retail sector has had good demand, the HoReCa segment has opened more and more, even though it has been a mixed bag during this quarter with open and shut restaurants in the various countries we export to.

It is especially nice to see the demand growth that we have had in the US, combined with the price increases and the price level we have seen in that market. There has actually been an increase (in demand) of 18%. Brazil has little by little become a very big market. It is a "home market" for Chile, but nevertheless, significant volumes have gone to this market, even if it was a little down in the third quarter - so far this year there has been a 17% increase there also.

So, the market is looking very strong, with strong demand from the retail market in Europe, but also from Asia. China and Hong Kong are one thing, but there are other markets like South Korea, etc. that are actually increasing significantly. It has mainly been retail and grocery that have driven this demand, strong demand in the retail sector, but in addition the HoReCa segment has opened up more, and been increasingly active during this quarter, so that we look positively at the development going forward.

As mentioned, prices have been relatively good during the quarter. We haven't had the deep dip we normally get in Q3 with high harvest pressure and large supplies. It just happens that 33 to 34 000 tonnes have been sent out each week. A few years ago, you wouldn't think that could even happen at Christmas, but now it has happened in the third quarter, for 10 weeks in a row, and those are significant volumes, as I said the kroner has strengthened, meaning that products are more expensive for consumers in the market, but nonetheless the volumes have been shipped out.

The USA has had a very special development, and this, of course, is due to less supply from Chile, but nevertheless prices have been historically high during this quarter.

We also said at our previous presentation that we have been working on obtaining VAP (Value-Added Processing) capacity at Grieg Seafood. We have signed a letter of intent with Isfjord in Trøndelag. And that is our first attempt or step to be able to offer more valued-added products in the market. We have established a department in our sales unit which is now working with VAP, which now have their first sales and their first deliveries, which we see as very positive. And we have a sales department, very forward leaning, both when it comes to selling whole fish but also very positive to developing this VAP segment for us. And we want to do this mainly for quality, high-quality fish, but if we were to get some downgraded fish, etc., we now have the possibility to fix this through a VAP product. We are renting production capacity there as a first step.

Then I will say a bit more about operations. We will start off with Rogaland first. We have had an EBIT during the quarter of NOK 30.6 million, that is somewhat down vs last quarter and the previous quarter, with NOK 4.9/kg. This is mainly due to two things. First, costs are too high as a result of PD (pancreas disease), lower survival due to this and lower average weights for the fish, which means in the next round you also get a lower price, so that hits twice, both on prices and costs. That is negative, but having said that, we had three sites that were affected.

And what we also see now, of the fish we have in the sea, less than 50-55% of our fish are post-smolt, so it is the smaller fish that have gotten PD or have it. We are working intensely to get more (post-smolt). We have Tytlandsvik Aqua where three modules are set up, together with Bremnes, with 4 500 tonnes

there, and we have decided to build the fourth module, we will have 6 000 tonnes next year, oh, excuse me, to be released in 2023, in the beginning of '23.

Some challenges in Rogaland due to the temperature, which was very high, and especially affected production in August and somewhat going into September. But now production has normalized in Rogaland and production is going well in this area. We expect to harvest 7 100 tonnes in the fourth quarter, somewhat lower costs than we have had in this quarter. The harvest volume in Rogaland for 2021, is 26 500 tonnes, somewhat down. That is because of PD which gave us some challenges during the summer. This is, by the way, the highest volume we have ever had in Rogaland.

When it comes to Finnmark, we achieved revenue of NOK 53.6/kg, compared to NOK 54 last year and NOK 48.4/kg last quarter. That gave us an EBIT/kg of NOK 8.10 in that region. We had okay, satisfactory price achievement there. A little impact there too from the superior share being too low. The measures we are working on are increasing the superior share, but it is still too low. That has to do with consequential damages, if we want to use that term, or rather scars after winter sores. We don't have them now, so things look very positive.

In Q3, costs rose a tad. In the big picture, production is doing well. We have had very good production, especially in September, and into October in this area. We have increased the survival ability of our fish and done a lot to prevent ISA with vaccination and so on, but also regarding winter ulcers as we mentioned earlier. We expect to harvest 13 400 tonnes in the fourth quarter with lower costs because we have good biological production, and it has been good during the autumn. We are reducing volumes here as well, by 1 500 tonnes to 35 500 in 2021. That is due to MAB, which we hope to utilize better, and have a good start in 2022, even up from 35 500 tonnes in 2021. We have never produced as much in this region as we are guiding for in 2021 or for next year.

So, then we have British Columbia where we had an EBIT of NOK 88 million in the quarter, and so far this year NOK 134 mill. As mentioned, very much driven by good prices, good quality and the right size for the fish in a market that functioned well in the third quarter. So that was very positive. Stable costs compared to Q2, even though we had lower harvest volumes. We have a good biological production in this area, with good, or rather rising survival rates. As we mentioned earlier regarding high mortality related to algae, we have done a lot with digitalization and the way we act based on the data we now obtain. So, compared to 2019 when we had a loss of 3.4% just because of algae, we are now down to 0.4%; last year we had 0.9%, so things are moving gradually in the right direction, but I think this was a very good result. With the right focus, you achieve results.

We expect to harvest 4 600 tonnes in Q4 with somewhat higher costs than we had in the last quarter, and this is linked somewhat to changing the composition of where we are harvesting - smaller sites are coming in, which gives us somewhat higher costs. Guidance the whole year has been for 15 000 tonnes, which we are maintaining.

We achieved NOK 20.6/kg in Canada as the best region, something we are very happy about and proud of. That was a good quarter.

So, there is Newfoundland. The main focus is unchanged, ensuring good biosecurity at our production site, fish health, and focus on profitability. We have built a site down there which we have completed, the last nail has been hammered in the smolt facility, the capacity is 600 tonnes at this site. The fish

there, in the hatchery and feeding start section are doing very, very well, and some of the fish are already in the smolt unit, those to be released to Placentia Bay in May 2022, that is next year.

Right now, we are working a lot on sea production. We already have equipment out today - nets are there, moorings, etc. are in place. That is to be able to test it through the winter. We just had a hurricane, it flew over our site, described as very powerful, passed directly over our site at Red Island in Placentia Bay, and everything stood just as nicely afterwards. So that was a very positive thing to take notice of. It was alright to test the equipment that we have chosen in rough conditions. The pens were strong, the barges were good, and so on, but it was alright to have it tested before we release the fish in May next year.

Costs there were NOK 37 million and will go somewhat down in Q4 compared to the third quarter, costs will decline.

We now see that the US market is very strong, and I think it is going to stay relatively strong in the US. That is because this ties in with many megatrends in this market. We still believe in strong growth there, and it is an advantage to be close to this market. We will have an advantage being on both the west coast and the east coast, and we don't use air freight to ship fish to this market. That will be more important in the future than it has been.

So, there is Shetland. Sorry to say, a bit sad to say it has been sold, we have had a lot of challenges in Shetland, and worked a lot on the Shetland turnaround, and when things finally improve, we sell it. But done is done. But it is my firm belief that Shetland has come to a good home, biologically it will have a completely different setting for a new owner, by not having more than one actor splashing in the same waters, they can guide this in a good way by themselves. We had a result, an EBITDA of NOK 53 mill., showing that the turnaround work that was done has worked. We expect that the competition authorities in the UK to resolve this by 15 December, that's what has been said.

I think I will stop there, and give the word to you, Atle Harald.

Financial Review

Atle Harald Sandtorv, CFO:

Thank you, Andreas. First, I must say that I see we have had some technical problems with the sound on the net and we are working on fixing that, and of course the whole presentation will be published on the web after we are finished.

Then we will go to the P&L, revenues first. They increased compared to the quarter we compare it to, to NOK 1.3 bn in sales now. Much was driven by higher volumes and by a good US market where we have managed to achieve good prices during the quarter.

We had an EBIT of NOK 150 mill., as Andreas mentioned. Then we have the production fee of NOK 6.5 mill., as a separate line item this quarter. The fair value adjustment of the biomass was NOK 121 mill., positive, based on expectations of a stronger market going forward. Financial items showed costs of NOK 55 mill. and there are foreign exchange elements involved. They go a bit up and down depending on foreign exchange rates from quarter to quarter, and this quarter they went a bit down, and thus costs