Henning Beltestad: Good morning, and welcome to Leroy Seafood Group Group's Second Quarter Presentation 2023. My name is Henning Beltestad, I'm a CEO of Leroy Seafood Group. And, with me today I have Sjur Malm, which who will take you through the financials for this quarter. I will start with this one. I normally talk a lot about our value chain and our goal is to create the world's most efficient and sustainable value chain for seafood.

And then this is what we do every day, going towards this goal. This, value chain is a unique boat for Salmon and trout, but and also for whitefish. From row to final product in the shop and from our [Indiscernible] to a final product in the shop or in the restaurants. We set some targets for 2025 and beyond, last year. And this is what's going to drive us going forward.

We still believe that it's possible to achieve all these goals and it's in front of us in the everyday operations. When it comes to, this quarter, it's been a record revenue and a healthy earnings. We had an operational EBIT of 28.7 per kilo, all inclusive, and 25 -- 20 last year. This quarter, we also had a situation where the resource tax was adopted by Norwegian Storting in May 2023. We expect harvest volume of 181,000 tonne, lower compared to earlier guidance, because of challenging situation in Leroy Sjotroll and also Scottish Sea Farm.

It's been a quarter with positive development in VAP sales and distribution and a much better result than the same quarter last year. And also a very good development in the whitefish, given lower quota, positive development in this segment. When it comes to the result, we had an operational EBIT of NOK950 million in second quarter 2023. Leroy Seafood Group reports in

three segments: Farming, Wildcatch, and VAP sales and distribution. We start with Farming part.

It's been a strong biological development Leroy Aurora and Leroy Midt, while shallowing in Leroy Sjotroll. We had an operational EBIT/kilo in farming of 25.90, compared to 29.30, same quarter last year. Development in second-half ‘22 impacts through low harvest volume and low average harvest rate in this quarter and the contract share of 70% in this quarter. We see significant increase in cost year-on-year with higher feed cost as a key driver. If we look at the operational EBIT for the farming, we had NOK767 million and EBIT per kilo of NOK25.90 in the quarter.

If we go into the different regions or the companies within the segment, we start with the Leroy Aurora, we see a strong improvement in biological performance, continues. And but this quarter is impacted by harvesting of relative low volume, but a much higher volume than same quarter last year. If we look at right there, we see that, the volume in the quarter is 8,300 tonne this year compared to 4,400 tonne. And we had a operational EBIT per kilo of NOK33, compared to NOK20 in 2022. So improved performance in Leroy Aurora and underlying biological situation is very good.

So and, we'll continue, going forward, delivering good results and also, lower cost. If we see Leroy Midt, there's also a strong biological performance, through this quarter. There's been a cost increase quarter-on-quarter impacted by the challenges that we faced the second-half last year. But we will see also here, with increasing volume in second-half 2023, a significant fall in cost is expected. We expect the harvest volume of 64,000 tonne in total.

And we harvested close to 10,000 tonne, compared to [14,000] (ph) tonne last year and EBIT per kilo of close to NOK28, compared to NOK30 last year same quarter. Leroy Sjotroll, good performance and good development for the trout, but somewhere more challenging situation for the salmon. But we have seen improved sea life situation following a number of initiatives, and there's -- it's a good potential for higher net growth, second-half ‘23. And, we see the last couple of months that the treatment is down, compared to last summer and also the sea life's levels is definitely much lower than, same the summer last year, so a good improvement there. Fortunately, we had a one incident in this quarter in third quarter, two sides confirmed with the ISA, and so we have to force, harvest with the low average rates will have a significant impact on the cost and price realization in second quarter.

And the best estimate today is negative result impact of around NOK200 million in a Leroy Sjotroll. The harvest volumes in the quarter 11,400 tonne, compared to 14,500 tonne and EBIT per kilo of 19.1. When it comes to Norskott Havbruk or Scottish, Scottish Sea Farms, there has been a weak, second quarter, low harvest volume, and harvesting from biological challenge sites affecting average harvest size, cost, and price achievement. High cost base affected by sites, which challenges in second-half and continuing into 2023. Incident based mortality in a quarter of 13,5 million pound or 2.1 pound per kilo.

60% of the volume is sold on contracts, we see still some biological challenges going into Q3, but improvements in the fish size and cost base is seen. And we expect that we will have, yes, much better results, going forward. And we also believe that we know the cause of the performance in Scottish Sea Farm in these sites, spin challenges with some groups of fish which didn't perform well in [Indiscernible], and mainland. But we strongly believe that, you know, this is -- will be much better going forward. When it comes to the result, we had a operational EBIT of NOK144 million and operational EBIT of close to NON23 per kilo and harvest volume of 6,300 kilo.

When we look at our farming volumes, we see that in Norway with Leroy Aurora 47,000 tonne; Leroy Midt 64,000 tonne, and Leroy Sjotroll 57,000 tonne. And this volume is reduced from last guiding, because of the situation with ISA. And Scottish Sea Farms is reduced to 27,000 tonne and our share is 13,500 tonnes, so a total of 181,500. The Wild Catch has been a good, very good quarter, on basis of lower [Indiscernible] quarter, a strong development in the quarter with catches of alternative species, high volume, and lower prices. And we see an impact from implement Leroy in land based industry, a year-on-year improvement in overall profitability is from improvement, in the land based industry.

So that's really positive. And we also see cost reductions from the operational view. Lower fuel consumption from using free trial for more species. And here we had operational EBIT of NON99 million, compared to NON93 million last year. And we see development on prices.

We see that there's been a strong increase from third quarter ‘21 to what we see in today for cod and we see the last quarters for haddock is going down and the status is pretty stable. If we look at the cash volumes second quarter 3,000 tonne cod 2,100 site 2,300 tons, haddock; 4,600 shrimps and others, 11,600. And the last part of that is Redfish. So a total of, 23,700 tonne, compared to 18,000 tonne last year. So a very good, performance from [Indiscernible].

If we look at the VAP sales and distribution record revenue and basis of, of course, higher prices, a significant improvement in profitability year-on-year with operational EBIT NOK1,113 million, compared to NO1,006 million minus NOK64 million in second quarter last year. So, we've been handling the fluctuation and prices in a much better way this year. While market demand measured and value remains healthy, the higher price are seen in lower volume and capacity utilization. With seasonality in salmon volume expectation are for improved capacity utilization and profitability in second-half. And this shows where we are -- where we have operation in all central markets in Europe and sale branches in North America and Asia.

So then I give the word to Sjur Malm.

Sjur Malm: Yes. thank you, Henning. This has been a special year for us. It's now, about one year, since the Norwegian government, launched the proposal to implement the resource tax in our industry, and that proposal was voted for in Norwegian Storting, 31st May.

That means that this is the quarter where we have to implement the impact from the resource tax. I think the best place to look for more details is in note 10 of our published report. There we will give an insight in more depth, depth than what I'm -- will do now on the consequences and our consideration. But shortly, there are two impacts in our P&L: One is the implementation effect, which is a one-off in connection with implementing a new tax regime, and one is the estimate of how large will the running tax cost be under the resource tax. In this report, we have implemented the implementation effect, and we have not given any estimates to running tax rate, and I will return to why? When it comes to the implementation effect, that is NOK1.7 billion, which is a very, very high number.

This tax impact is much related to -- it’s 100% related to the biomass and the change in taxation on a deferred tax on biomass. If our tax value of the biomass is the same, one year from now, that tax will not have to be paid. It will be put forward year-on-year. And on that implementation effect there's been a big debate in Norway, we and the industry believe that there is a massive lack of symmetry between cost and revenue, and basically the -- in the proposal from the government, they are saying that the cost of our biomass going into 2023 and what we can withdraw from the tax is zero. And, we do not think that is fair, but that is what we have implemented in our result.

Looking then on the key drivers, highlighting key value drivers on the latter lines. We see that we have harvested 10% less salmon and through the value chain, the margin on that salmon and trout is higher than last year. The key driver for that difference is a better performance in our downstream unit, which Henning already have described. Furthermore, we see the increase in catch volumes of wild catch, and those catch volumes are on lower value species, which impacts then the lower margin. In sum, this gives, operational EBIT of NOK950, which is an improvement compared to the same quarter last year.

Looking into the EPS, we see that the implementation effect of NOK1.7 billion already commented upon, results in a negative EPS of NOK2.11 earlier. Without the implementation effect, the EPS would be NOK77 early. And again, please refer to note a 10 in the report for more details. Another key factor in this report is the significant revenue growth, which is much helped by higher prices and thus inflation, and as a Henning showed initially, we have a very long value chain, which means that we own the fish for a very long time, which means also then that the business model require a lot of working capital. So that increase in revenue also impacts working capital, and those are basically the key changes when looking at the balance sheet this year compared to same quarter last year.

We see biological asset at cost is up NOK700 million. The key driver there is higher feed cost. We see inventories up because the value of the goods is higher. Account receivable is up. So there is a significant working capital built in this industry.

And this is also a point that in the proposal for resource tax in Norway, it was said that, this industry is not capital intensive. And from our point of view, in this balance sheet shows that there's no substantiality in such claims. This is a very capital intensive industry. The implementation effect impact the equity ratio, which this quarter is 49%. And net interest bearing debt around NOK6 billion.

And then showing the change grew quarter and net interest bearing debt, we see the EBITDA of around NOK1.3 billion changing working capital is derived from the higher revenue and higher prices of our goods and higher feed cost CapEx, it's around 50%, which is related to our acquisition of the operating company at -- in Leroy Sjotroll harvesting facility, and the 50% which is related to more running CapEx. We paid NOK2.5 in dividend this quarter, and you can see the impact of net finance and taxes paid and in sum, our net interest bearing debt is close to NOK6 billion and the quarter. Then some comments on why have we not given an estimate on a running tax or resource tax as share of profits so far this year. And obviously, we would like to do that, but it's also important for us that when we give an estimate, this needs to be a valid estimate. And at current time, we believe it's too early to give such estimate.

What's shown on the picture to the right is part of the value chain, which Henning started on. The black box is showing what is the farming segment. The red box is the part of the farming segment, which is seeing an increase in taxation to buy 25% to 47%. Historically, we have always measured profitability in the farming segment as a whole. We have moved the goods and services through the value chain at cost, and we have not focused too much on what is the value creation on each step.

The work we are currently doing is to update all the internal agreements to create a total transfer pricing documentation and be able to measure the correct value creation at each step in the value chain. Before we have finalized that work, and the challenge here is that for many of their goods and services, there is no open market. So there's a lot of work in the documentation, that means that at current point in time, we do not have a valid estimate on the tax rate in the farming segment, because we need to calculate then the value creation at each step. We will get back to that the soonest we believe we have a valid and good estimate. Then there is a debate maybe particularly in Norway related to the contributions from this industry.

This slide is from 2022 numbers, it is then before any resource tax, it shows, map of Norway, the blue dots, the red dots are where we're operating today. And the black dots are suppliers where we have made acquisitions of goods or services. And obviously, the impact, when it comes to ripple effect from [Indiscernible] in buying goods and services from NOK20 billion from 5,000 suppliers all over Norway that is substantial ripple effects. And core, of the discussion on resource taxes. Obviously, it doesn't make sense to withdraw investment fund from the coastal industries and transfer them into the central government.

And we fear that the long-term consequences would be negative when it comes to value creation. We also believe it's important to highlight that already, we're paying NOK2 billion in fees in Texas in 2022, and that we have more than 3,500 employees all over the Norwegian coastline. Second point is how does this industry appear in the global comparison. And particularly in Norway, we get some negative news on our environmental impact. And obviously, we work very hard to reduce it, and we believe we can improve, but it's important for us also to highlight that in a global comparison, this industry requires a very low, amount of water and very low amount of energy and that the GAG emissions are very low.

And in such international comparison, like [Indiscernible], we find [Indiscernible] rated as one of the world's three most sustainable protein producers, and you'll find the industry in general on top of that list. Knowing that around one-third of global GAG emissions comes from the food value chain. We strongly believe that we are part of the solution and we hope that the region politicians will start making framework conditions for this industry to continue its growth and we can't significantly impact the GAG impact from food production. We have a good starting point, but we're also working to improve. And it's, positive for us that in PVC's annual review of large Norwegian companies, letter was one of nine companies on route to reach the Paris agreement.

That is the second year in a row, we are on that list, and we're proud of that, and it shows we're working very hard to reduce our footprint. Then, Henning I'll give the word back to you.

Henning Beltestad: Yes. Then I will, take you through the outlook. We start with a supply side and we'll see for a 2023 globally, there will be zero growth, if we look at last year, there was minus 1.2% growth.

And, so for the last two years, there's not been any growth at all. And, the expectations for 2024 is 4.2%, but that's still early to say, it depends how -- the biology would be the second-half of this year. If we look at the consumption, year-to-date, June, we see that EU is going down by 7% a lot of the business in the EU is connected to retail and the fluctuation in prices that we have seen is making it difficult to make stability for the retail segment. If you look at other markets, it's up 3% and that's ASEAN markets, in general, they are more flexible in taking out the fluctuation in prices and for the first-half with extremely high prices, they are actually increasing, so a very positive trend in our market, and U.S. is stable.

Also, you know, strong performance with extremely high prices for 2023 so far. And I talk about fluctuations and here we see the last couple of years. There the prices has fluctuated from under NOK60 to over to up towards NOK130. So of course, it's hard for our customers, our partners to scale our business when we have this kind of fluctuations. So it's been challenging for our customers for our own operations, but I have to say that this year, we've been much better in handling this fluctuation than last year where we had a negative result in the second quarter.

And, so for outlook performing. Yes, like we said, proposed resource tax adds a lot of uncertainty we expect the 181,000 tonne of salmon and trout, a contract share of 15% and, yes and I will come back to the to last one, that's about, technology development in our farming sites. Wild catch demand development varies across the species, positive development in land-based industry, quota advice for 2024 is cut down 20, had cut down 25 and the sales sought up 25. For the sales and distribution, we expect the improved earnings in 2023 versus 2022 with further potential in the years to come. Resource tax also here adds uncertainty and [Indiscernible] to value-added processing activity in particularly in Norway.

Weakening demand in some market segments, but overall a very good demand for seafood remains strong. Then I will talk a little bit about investments, green investments in new technology, protecting the salmon from sea lace. Sea lace is one of the biggest biological and cost challenge, facing Norwegian agriculture and, but also in other regions. The increasing life pressure is a main challenge, reducing fish welfare, drives up production cost, and reduce growth. Reaching our goal for 2025 require us to find solutions to reduce the number of sea lace treatments.

And if you look at Norway on the right side, we see there is been a, yes, I would say a negative development in reported lace treatments in Norway and the highest year is 2022. And, we need to find a way to solve this situation. And the technology team and Leroy have over year’s work worked with the new technologies, looking at the alternatives, minus 70 alternatives and we have come up with some solution for our operations to solve the most challenging sites. And then I will show you some of them. And, like I said, we are investing in new production technology to protect against sea lace.

We had a submerged the cage syncing the containment for our exposed and our deep sites, down to 30 meter, that's, one example. And then we have semi closed containment, and we have different solutions for that, that we are started to implement at the moment. And, this is, you know, the two ways of doing it. We have the sub most cases, and we have the semi-closed containments, and within this year, we will have 51 units of submerged case in five sites, within end of this year. And we started the implementation in second quarter ’23.

And so far it shows really good results. And then from the semi-closed, we have, [Indiscernible] and tree different semi-closed solutions and started to implement that also on the locations, and we will have 13 units at four sites, beginning of -- in first quarter 2024 and 20% of our salmon stock to be protected that's our target to be protected by first quarter 2024. And we really means that this is, the way to go, and this is a good solution for us to produce in, near to the coast and in our fields in a sustainable way. And, you know, we [Indiscernible] if we're going to achieve our targets for 2025, which is 205,000 tonne, harvest volume 93% superior quality for 4.5 average harvest weight and 1.19 economic feed commercial rate and a cost reduction of close to NOK5. And, then we will show you, a video of these kind of technologies.

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