RECORD PRICES GENERATE RECORD PROFIT
In Q2 2016, Lerøy Seafood Group (LSG) posted an operating profit before fair value adjustment of biomass of NOK 760 million, compared with NOK 370 million in Q2 2015. This is equivalent to operating profit before biomass adjustment of NOK 18.5 per kg compared with NOK 9.2 per kg in the same period last year.
- "The price of Atlantic salmon reached a record high in the second quarter, which was the key driver in Lerøy Seafood Group achieving its highest revenue and operating profit in any quarter in the Group's history," says CEO Henning Beltestad. "We're pleased to be able to announce record profits, but there is still considerable potential for improvement and this is where we're concentrating our efforts," he continues.
In Q2 2016, Lerøy Seafood Group reported revenue of NOK 4,262 million, compared with NOK 3,324 million in the same period in 2015.Compared with Q2 2015, the Group's volume of harvested salmon and trout rose by 2%. The Group's profit before tax and fair value adjustment of biomass was NOK 775 million in Q2 2016, compared with NOK 364 million in Q2 2015.
The Group is reporting revenue of NOK 8,077 million for the first half of 2016, an increase of 23% on the equivalent period last year. Operating profit before fair value adjustment of biomass was NOK 1,345 million in the first half of 2016, compared with NOK 774 million in the same period last year. Profit before tax and fair value adjustment of biomass was NOK 1,367 million in the first half of 2016, compared with NOK 754 million in the same period last year.
At 30 June 2016, net interest bearing debt was NOK -7 million and the equity ratio was 61%.
FISH FARMING SEGMENT - HIGH PRICES GENERATE HIGH EARNINGS
Operating profit before fair value adjustment of biomass reported by the Farming segment increased from NOK 266 million in Q2 2015 to NOK 674 million in Q2 2016. The segment harvested a total of 41,132 GWT salmon and trout in Q2 2016, up 2% from the same period in 2015. EBIT/kg increased from NOK 6.6 per kg in Q2 2015 to NOK 16.4 per kg in Q2 2016.
In Q2 2016, Lerøy Aurora achieved operational EBIT per kg of NOK 22.4. Lerøy Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 17.5 and NOK 14.1 respectively for the same period.
- "As previously communicated, the Group has implemented a number of measures that aim to reduce production costs for salmon and trout," says CEO Henning Beltestad. "In that respect, it's pleasing to report that the number of treatments was significantly down in the first half of 2016 compared with the first half of 2015, and that the treatments carried out in the second quarter were largely mechanical treatments," Beltestad explains. "At the same time, release from stock costs were significantly higher in the second quarter of 2016 than in the same period last year, with higher feed costs as the key driver. We expect release from stock costs to fall through the year, and to be lower for the second half of 2016 than for the first half," says CEO Henning Beltestad.
- "We've seen a positive price trend for trout in the second quarter, but prices realised for trout remain significantly lower than those for salmon," says CEO Henning Beltestad. "The trout market has been extremely challenging in the wake of Russia's ban on imports introduced in autumn 2014, but we're now seeing our long-term efforts to develop new markets for trout starting to bear fruit," he explains.
VAP SEGMENT - HIGH PRICES A CHALLENGE
Revenue in the segment is up 23%, from NOK 468 million in Q2 2015 to NOK 574 million in Q2 2016. Operating profit for the segment has increased from NOK 18 million to NOK 23 million in the same period. The operating margin in Q2 2016 was 4.1%, compared with 3.8% in Q2 2015.
- "High raw material prices have been and remain a challenge for processing activities in the VAP segment," comments CEO Henning Beltestad. "The Group is continuing its efforts to adapt to the expectation of permanently high raw material prices and is pleased that the operating margin shows an upward trend in the second quarter compared with the first quarter this year," he adds.
SALES & DISTRIBUTION SEGMENT - GOOD LEVEL OF ACTIVITY, BUT HIGH PRICES A CHALLENGE
Revenue for the Sale & distribution segment totalled NOK 4,062 million in Q2 2016, up 27% on Q2 2015. The segment's operating profit for Q2 2016 was NOK 74 million, up from NOK 67 million in Q2 2015, but the operating margin fell from 2.1% to 1.8% in the same period.
- "The Sales & Distribution segment increased its revenue again in the second quarter of 2016," says CEO Henning Beltestad. "However, high prices are putting pressure on the operating margin, which is down compared with the same period last year. But," he adds, "there is still extensive unutilised capacity in several of the Group's 'fish-cuts', and we see great potential to increase activities and earnings within this part of the value chain in the years ahead."
AGREEMENT TO ACQUIRE SHARES IN HAVFISK ASA AND NORWAY SEAFOODS GROUP AS
On 2 June 2016, the Group entered into an agreement to acquire 64.4% of the shares in Havfisk ASA and 73.6% of the shares in Norway Seafoods Group AS.
The acquisitions are subject to the approval of the Norwegian Ministry of Trade, Industry and Fisheries and the relevant competition authorities. The completion date for the transactions will depend on when the necessary regulatory approvals are obtained.
Completion will trigger a mandatory offer of NOK 36.50 per share for the outstanding shares in Havfisk ASA. The Group also intends to make a voluntary offer of NOK 1.00 per share for the remaining outstanding shares in Norway Seafoods Group. The total consideration for 100% of the shares in the two companies will be NOK 3.2 billion.
MARKET AND OUTLOOK
The Group is in a transitional phase within production of salmon and trout, with extraordinarily high direct and indirect processing costs, combined with increasing costs for infection prevention. The Group has made substantial investments, including in the use of cleaner fish, and is seeing good results from this. The Group is also investing in other tools to optimise production, including increased capacity for mechanical cleaning and freshwater treatment in well boats.
The Group notes to its satisfaction that the number of treatments for the first half of 2016 is significantly lower than in the corresponding periods of 2014 and 2015. It is also pleasing to note that, of the treatments carried out, there has been a significant increase in the share of mechanical cleaning. Towards the end of Q2 2016, the Group essentially carried out only mechanical treatments. The Group is now more confident that the measures taken are proving effective and that costs in connection with treatment will fall going forward.
The Board sees considerable potential for value generation in the global growth in demand for seafood, and believes it is important for Norway - from a socioeconomic perspective - to ensure that parts of this value generation can take place in Norway. The Board takes a positive view of initiatives from Norwegian authorities that aim to facilitate growth in Norwegian seafood production, but is uncertain as to the impact of the proposals launched to date. It is important to re-establish predictability in framework conditions for the Norwegian fish-farming industry; a 5- to 10-year timeframe is needed to secure future global competitiveness. Framework conditions of this nature must be based on an understanding of environmental sustainability and value generation. Future competition to win global consumers will leave no room for non-essential costs, or taxes or charges particular to Norway.
The Norwegian krone has weakened against key currencies. This dynamic is positive for prices realised for salmon but also means - other things being equal - higher feed prices. The best estimate continues to indicate that feed costs for fish harvested in 2016 will increase compared with 2015, though the Board of Directors still sees opportunities for cost reductions in other areas in the second half of 2016.
The Group currently estimates a total harvest volume of 173,000 GWT for 2016, including the share of LSG's volume from associates.
In view of the potential for better productivity and the positive market outlook, the Board of Directors and management currently expect the Group's earnings in the second half of 2016 to be considerably better than in the equivalent period last year.
Questions and comments may be addressed to the company's CEO, Henning Beltestad, or to the CFO, Sjur S. Malm.
