New Zealand King Salmon Investments Limited (NZK.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the New Zealand King Salmon Half Year Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Carl Carrington, Chief Executive Officer. Please go ahead.

Good morning, everyone. Welcome to the half year results for New Zealand King Salmon, we'll get into the presentation now. First of all, just the standard disclaimer, if everybody could read that in their own time to be familiar with the disclaimer we have there. Thank you. . Presenting today, myself, Ben Rodgers, our CFO; and Grant Lovell, our team of Agriculture be the team on the call today. Let's get into the summary of the results. So the first half net profit after tax result was a loss of $20.8 million. This GAAP result was predominantly impacted by noncash adjustments relating to a fair value write-down in the biological assets of $22.5 million after tax. The driver of the write-down relates to the summer biomass challenges where we experienced slightly elevated mortality, but more impactful was the reduced biomass growth. This had 2 impacts: the first is the reduction in the fair value of biological assets; and the second flows from the decision to reduce harvest volumes from April through to October in order to rebuild the biomass. The pro forma EBITDA, which is the metric which management prefers to put more emphasis upon reflects the underlying earnings and was a profit of $5.7 million compared with $13.5 million in the prior year period. This number was predominantly impacted by the reduced harvest decision that I mentioned before. And the level of earnings impact reflects the high operational leverage of the business to volume. Now despite the poor half result, we are increasingly confident in the growth pathway for the business at both Blue Endeavour and our inshore farms. We've previously framed our outlook as cautiously optimistic and this is a deliberate total shift. And in the aquaculture sections, we'll talk more about why our confidence is increasing despite the challenges that we have experienced this year. I want to talk specifically about Blue Endeavor, 2 pens have been constructed and are now at the Whekenui staging farm, a pilot farm first so also at Whekenui and growing well. We expect them to be transferred to the Blue Endeavor site in November or December. The service vessel, the Whekenui has been constructed with delivery expected in early October. And the design contract for the pilot RAS system has been awarded and the contract for the build will go to our Board in November or December. And finally, the SFFF partnership with New Zealand government is working very well. We have received approximately $2 million of grant funding within this period. The balance sheet remains strong with cash continuing to build to $58.4 million. CapEx at July 31 was $8.5 million with a September year-end forecast of around $14 million. The Blue Endeavor pilot has been $5. 8 million with the remaining $2.7 million that's been focused on stay-in business CapEx such as net replacements, moorings, various machinery and site works. The pro forma guidance for the full year remains unchanged at $1 million to $7 million of EBITDA with the board guiding to the upper half of the range on the back of an expected harvest for the 8-month period 3,250 to 3,350 tonnes. Just go to next slide. Revenue for the half year at $94 million reflects the reduced harvest of 2,691 tonnes. And in respect of our sales geography not much has changed, although China has lifted to 4% of sales as a result of increasing rate of sales as the salmon category grows. We're very confident of our ability to grow sales in our core growth markets of North America, China and Australia as the volumes start to rebuild. Move through to next slide. Talking about our brands. They are central to our ability to continue lifting category pricing and ensuring we are not merely a premium commodity. [ Aura ] team continues to build strength and recognition as a leading seafood brand in North America, evidenced by repeatedly being heroed in the most prestigious culinary events, whether it be Met Gala, Beyond Fresh or the world top 50 restaurant for North America. Our Regal brand is gaining more traction in China, where we are adopting a retail-branded strategy to establish recognition of both the King Salmon species and our Regal brand. Atlantic Salmon is growing at 40% MAT in China and reached 157,000 tonnes last month. And this is very encouraging for King Salmon. As the salmon category is becoming more established than China. It is frustrating that we don't have more product to accelerate our market development, lot anxiety that we don't have opportunities to grow. And finally, for our Omega Plus brand, it continues to build brand awareness and rate of sale across New Zealand specialty stores. Next slide. sales performance. The sales by market all tell the same story of constrained supply. China increased with product being reallocated from nonstrategic markets, but the growth has been modest, not due to lack of demand, but just the reality of not having fish. Next slide.

Yes. Thanks, Carl. So from a fish performance perspective, obviously, the no surprise to this particular slide. As we announced earlier in the year, we did experience a significant reduction in our feed volumes from slightly elevated mortality over that summer period as displayed in graph below. This has resulted in reduced growth and reduced biomass and that resulted increased FCR over the period and obviously had a major impact on the harvest volumes that were available for sale. One positive that did occur was that the price of feed has fallen significantly over the last 12 months and also the promising [indiscernible] trial, which we're trialing in [indiscernible] last summer, that will be implemented in the coming months to display significant performance improvements. But naturally, all good things to come with an increased cost.

Thanks, Grant. Good morning, everyone, Ben Rodgers here. Starting off with life science on sustainability. Sustainability is important to us. We are heavily on a high-quality natural environment to enable what we do. And it's well documented how changes in the environment can impact the biological performance of our salmon. As a company, we continue to make progress along our sustainability journey. Our in-house ensilage plant diverted organic waste from landfill and turned this into [ faceoff ] to produce by [ biogas ] and higher quality [indiscernible]. Grant will cover later some more steps we are taking to improve our fish performance. If these initiatives are successful, we will continue to achieve a reduction in our carbon intensity per KG is harvested, noting King Salmon, given its physiology is already a low carbon protein. Looking ahead further the acquisition of a new site for our future primary infilling processing needs, will provide another platform to adopt an advancement of technology to continue to reduce this carbon intensity. And there's a final note, we did submit our second CID report in May, which again includes our Scope 3 emissions, which make up over 90% of our GHG emissions. Next slide, please, Starting off with a quick clarification point. With the change in balance date to 30 September, we will end up having 2 FY '25 periods. The first one from 1 February '24 to 31 January '25 are being 12 months. We are calling this FY '25 January. The second one from 1 February '25 to September 25, which is an 8-month period, which we are calling FY '25 September. Now the vessel clear up, for the current half, we reported a net loss after tax on a GAAP basis of $20.8 million. And as Carl covered earlier, this includes a $31 million pretax noncash fair value loss on our biological assets. This compares to our preferred profit measure pro forma operating EBITDA, which removes these fair value adjustments of a profit of $5.7 million. The results reflect the well signal fresh performance challenges, which occurred over summer, where lower feed out resulted in the reduction of biomass on hand or simply put our salmon was smaller than expected. Although fees have recovered the situation creates an environment where to meet normal harvest volumes, we had to harvest more salmon. As we harvest for salmon, the common have least time to grow, resulting in smaller and smaller salmon. In order to break the cycle, the Board announced in May, a decision to reduce harvest volumes to enable a rebuild and our biomass. The result of the reduced harvesting less biomass to sell, as Carl mentioned earlier, the high operational leverage in the business results in any revenue reduction, having a disproportionate impact on profitability basis, the reduction in biomass impacts the fair value movement on our biological assets as we have less biomass to sell in the future. A key point to note would be a majority of the value of the biological assets on hand of salmon to be harvested in the next 12 months, which reflects longish salmon growth cycles of 30 to 36 months. So the first year they grow 100 grams small [indiscernible] cheap, but the last 12 months is where we incur a majority of our costs given as salmon get larger they eat more and our largest cost is feed. So if we execute according to our plan, we can expect this time next year we will have a large fair value noncash gain will be recognized in that period. And moving to the next slide. Looking at the bridge from the prior comparable period. Revenue was impacted by a 20% reduction in harvest volumes, with the supplier reductions being harder sell in our food service channels. This was partially offset by a reduction of finished goods on hand which reduced from $17.9 million to $11 million over the 6 months to July 31, '25. Revenue on a kilogram basis was up on the prior comparable period, attributable to both the change in product mix [Technical Difficulty]that is a greater proportion of our value-added products were sold, and this was -- we were able to do this through utilizing the after-mentioned finished goods on hand, and we were able to execute price increases during the period. As you may expect, when you grow this fish, the total cost of grow this fish decreased with the operational leverage, the cost of these fish on a per kilo basis has increased. This equates to the world campus operational leverage in the business. We do have high fixed and semi-fixed costs. So there's a rule of thumb the last ton of production is our most profitable. So any uplift in production is very accretive. And unfortunately the converse is true. Any reduction in production is very painful, and that is reflected in these results for the 6 months to date. As signaled previously, corporate costs have increased. This is consistent with the need to build additional capability and capacity to progress critical business initiatives, including the Blue Endeavour pilot and the new processing facility initiatives. Next slide, please, Graham. Last slide for me. Despite the reduction in the financial performance for the period. The balance sheet remains strong with net cash on hand of $58 million which is up from $50 million at the end of January. The main impact on the balance sheet for the period has been a large reduction in the value of salmon and sea. So closing inventory has dropped from 4,500 metric tonnes to 3.5 metric tons or 19% when compared to 31 January 2025. This reduction of salmon on hand reduces salmon available for harvest, which will impact future EBITDA, and that is the cause of the noncash fair value loss on our biological assets for the period. We do expect biomass to continue to recover through FY '26 and FY '27, which is consistent with the life cycles of the salmon. The decrease in our harvest volume has enabled us to focus on our finished goods on hand. Pleasingly these have continued to reduce over the last couple of reporting periods. They have continued to decrease to be down from $18 million to $11 million, which has provided a release of capital. Other current liabilities have predominantly decreased due to movements in our foreign exchange instruments in addition to the timing of insurance installments. So we -- at the moment, we pay our insurance and monthly installments with our insurance share ranging from November 1 to October 31. The other current liability balance also includes the deferred revenue recognized as part of the SFFF partnership of $2.6 million and that revenue will be released according to our ability to recognize that in accordance with accounting standards. Payables are temporarily elevated due to the timing of inventory purchases. Outside of that, probably only want to cover a couple of other things. The first being CapEx. From a CapEx perspective, a majority of investment is focused on growth CapEx associated with the BE pilot project, as Carl mentioned earlier. Pens have been constructed and are in the water, awaiting towing to the BE site mooring grid work is underway and service vessel has been completed and arrives in New Zealand next month. Another piece of the growth Jigsaw announced to the market in September was the acquisition of a commercial site in Cloudy Bay -- and the Cloudy Bay Business Park in Blenheim for future process requirements for $8.1 million. And the settlement of this site is expected to be on the 7th of October, so that transaction will fall into the FY '26 reporting period. Finally, a quick note on tax. We noted with our year-end results, we had utilized all available tax losses and the company was now in a taxpaying position. This position has changed as losses generated for the current period will be offset against the taxable profit for the period to 31 January '25, reducing the current tax payable position due to the change in balance date. So we will have a 20-month income tax period from 1 February '24 to 30 September '25. That's it from me, and I'll hand the mic back to Carl.

Good. Thank you. Okay. That's a nice segue into where we're heading from surviving to thriving. Next slide, please. So -- as mentioned previously, the guidance remains $1 million to $7 million EBITDA with Board guiding now to the upper half of that range. The harvest outlook for FY '26, so that's for the period ending September '26 with our new financial year is in the range of 5,200 to 5,800 as we continue to rebuild the biomass. We are now providing a harvest outlook for FY '27 of 6,800 to 7,400 and this reflects the increasing confidence management has that the range of initiatives that the business has been working hard on for the past few years are coming into the implementation phase where they will lift our aquaculture resilience and unlock the growth pathway. We continue to invest in the BE pilot and forecast FY '25 CapEx is at $14 million, of which $11 million is attributable to Blue Endeavour and $3 million for stay in business. Dividends will remain on hold as we continue to reinvest cash into the business. I'd like to just make one concluding remark before I hand over to Grant, and that is that there are no quick fixes in aquaculture. It takes time to understand the core issues and to work out how to address them. It then takes investment and then it takes time for those investments to play through, bearing in mind that it takes 3 years to spawn a fish if the investment is on the hatchery side and a further 2.5 to 3 years to grow a fish if investments are on the farming side. We have been working hard on those fixes to reduce volatility for several years, and they will start to play through from this summer. So management's total shift from optimistic to confident is considered and deliberate. And I'll now hand over to Grant to just work through a bit more of the aquaculture update.

Yes. Thanks, Carl. So I think the team here is doubling down on the core. And one of the key things we have been trying very hard over the last few years is to stabilize the core and some of the initiatives that is done there. And the picture there on the top right of the [indiscernible] which were installed at the end of last year is a great example of that, and that the improvements that we're looking at. So once they were installed, we undertook a summer diet trial last year, which actually showed a significant improvement on one particular diet, reduction in FCR, significant reduction in mortality and fish and improving fish welfare, fish health and growth. And that diet will be rolling out this summer. And I think it's a good example of what Carl was just saying is like that is a process that has taken well over 2 to 3 years to get through from the design, the implement of the CapEx to build to run the trial, to evaluate the results, then lock that in to put that through into the business, and we'll see that coming through this year. Our ongoing breeding work is really important to us. And actually, one of the first -- this will be the first year that we will be sporting fish that has been selected for some level of thermotolerance and d summer surviva work that has been done. So still 1.5 years away from coming to see, but that work is ongoing and in place. And we are obviously expanding our partnership with MBIE and Climate Adapted Finfish programme to include selective breeding for disease resistance as well as they're ongoing genomics work. Vaccine development is another key one for us. We've been working very hard on our vaccine development and collaboration with key partners. And our in-house veterinarian, Dr. Zac Waddington, is very confident that we will see some nice improvements in that in the next 12 months. This next point is actually very important to us. The [indiscernible] conditions, which is all of our Tory Channel farms plus Te Hoiere/Pelorus Sound and Kopaua and Waitata and had their conditions reviewed and with some modifications. This was primarily around the environmental monitoring to get us into the best practice, simplifying some of the compliance processes. But what has also occurred is we had our feed discharge staging requirements removed. What that has allowed us to do is gives us earlier access to 3,500 tonnes of potentially usable feed discharge down the Tory Channel and another additional couple of thousand tonnes of potentially usable feed discharge in the Pelorus. That's really important when we come to the next few slides because it does underpin a story of ability to grow more in our operations and reducing our reliance on Blue Endeavour. And the last point there is therapeutics. With the change in some of these conditions, therapeutants, which are medicines, we're now able to be admin 6 of our 8 active marine sites. This is obviously would only be undertaken with the direction and supervision of our in-house veterinarian, but that does give us a additional tool to manage biomass going forward. And just touching briefly on the processing and sales side. Obviously, we continue with their processing capabilities so that we can extract more value from health in biomass, and a key one there is obviously the investment into our Regal brand into the China market with very promising early results and very it's encouraging market for future growth for us. The executed growth, which is really around our Blue Endeavour side as well. I just want to do a -- definitely a bit of a shout out there for our primary sector growth fund or what was the SFFF fund, this project is progressing well. We have got a Blue Endeavour partner continues to proceed as planned. There's a slide coming on that one. The key one there is our RAS -- pilot RAS that we're looking to do [indiscernible]. We have had the design company on site this week. And we are expecting to have the basic design finalized a build to be in place over the end of this year, start of next year, and that will be a profitably a 12-month build process. And our well work for us is required for Blue Endeavour that is essential for growth, and we are looking at rent we can bring that forward to unlock some of these operational opportunities on inshore farms. From processing and sales, as previously disclosed, we have purchased their site in Cloudy Bay, and the design work is now underway for any processing facility, which will be our office and Philippine facility with obviously RTE remaining in Nelson. And then ongoing market development with some geographies and customers. And then on the corporate side, we continue to invest in capability we have got a growth story ahead of us, and therefore, we do need to invest in advance of that growth until that's really important. A little bit we talk about well-boat it will probably one of my favorite topics that I began to talk about a well-boat and live fish transportation vessel. So it really is what you described as a floating aquarium it's not enrolled in harvesting. And those were quite operate Blue Endeavour at scale. But we've been doing a lot of work about [indiscernible] to bring them forward timing of [indiscernible] and so see potential that it could do for NZKS that would support the internal volume increases by providing access to the unutilized feed discharge and for increasing into a modern capacity, an easy example of this would be transferring smolt to the Tory Channel and relocating especially over to the Pelorus in the colder months. That is something we are unable to do at the moment. Another key aspect here is that enables significant farming improvements under well enabled us to move ourselves very close to [ fish ] practice farming, single-year class sites, selling of all sites during that the wells of grading equipment for oil fish are able to be graded and counted resulting in a lot less volatility and to eliminate all manual towing to in that place [indiscernible] risk. As we work through this, this is not a fun you [indiscernible] file that we are working through these options and plans are becoming increasingly confident that this is a very good thing to do and looking to execute this next year. Yes, for me, just a quick update on Blue Endeavour exactly where we are. I would probably describe this a little bit of [ eye candy]. We've got a few nice pictures, obviously, 2 [indiscernible] sitting at our Waihinau site in the bottom left, the mooring grid work, which is currently underway. That is very much -- I mean till the pens are up there. The other boys are all that you will see on the site as we go through. And then the [indiscernible] piece on the right there is our services so [indiscernible] the is currently on route from Vietnam. It is due in New Zealand in a couple of weeks' time. And that will be undertaking the daily servicing of the Blue Endeavour. We do expect Blue Endeavour fish to be out November or December. One of those Philippines has just had the first from model Philippines they have been counted and growth into the [indiscernible]. We're now being farmed in the [indiscernible] Waihinau. That brings us to the end of our presentation. Next slide, we are now moving to the [indiscernible]. So we will go back to the beginning and answer questions.

[Operator Instructions] Thank you. There are no phone questions at this time. I'll now hand back to address any webcast questions.

There's no webcast questions at this time.

One has come through. Probably to Mr. Lovell. What do we think about fee cost going forward as regards to the, I guess, the decrease in volume at the moment against the higher cost of the diet.

So fee costs, there's 2 aspects to fee cost for us. And the first aspect is obviously the pure cost of the diet, but that needs to these be linked to the performance of the fish. So I am very happy to pay more for the diet if it produces an increased performance, and therefore, we end up with an overall lower cost per kilogram and a high quality fish. But I think on the terms of the basis, I'm not anticipating base feed costs to come down over the next year all indicators are that from the commodity market that tend to be flat to a slight increase. Hopefully, we're not seeing the large year going and what we've seen in the past.

There's no further questions?

One more come in. What is the total CapEx expected for the Blue Endeavour project? Really, really good question. I mean, at this point in time, the exposure to the project is just limited to the pilot. So from that perspective, we have a couple of pens, which we've instructed in paper, which get towed out up to the Blue Endeavour site with the mooring grids installed. Also got a service vessel, which arrives in October. So for the sea farm side of things outside of [indiscernible] investment at the moment, it just becomes an operational cost in terms of the cost to feed those first on a go-forward basis. We do have a couple of other associated projects. As Carl mentioned earlier, so looking to build out pilot [indiscernible]. But at this point in time, with our partnership with SFFF all that will be funded from existing funds and the balance sheet on hand. If the pilot works as we expect it to work, it is a significant investment, but we normally talk about we have a lot of wider investments to do. So there's obviously some more pins, there were some more boats and grants referenced well boat we'd also need feed barge out on site, and we've signaled before that other supporting infrastructure such as a new processing site would be required. So the project itself is very, very expensive. We haven't guided anything too specific numbers to it at this stage. The first part for us is to do a successful pilot. And once we get through that, we'll be able to speak to you lovely people around more detail around the opportunity for Blue Endeavour.

Questions are firing through for Mr. Lovell. So another question for you, what is the long-range harvest -- what is the long-run harvest range for ensure at the top end enabled by the increase in feed discharge.

It's a tough question to answer that one directly because it's going to depend a lot on how Blue Endeavour goes. As we grow far more Blue Endeavour, we will be utilizing inshore sites as nursery sites to take fish out, so that will obviously impact us. But if you looked at -- if there was no Blue Endeavour farm at all and we're only farming as an inshore farmer, we would have seen discharge to be farming between 10,000 and 11,000 tonnes, and that's usable feed dicharge.

Thanks, Grant. Another one to probably hand this to Carl. How does average pricing compare on like-for-like products in China?

That's a good question. On a like-for-like, it's historically comparable to the U.S. market. So we're not trading down margin by trying to grow in China what we are comparable to the U.S.

Just got a nice note from for Hamish. So thank you, Hamish. Another question have come through, I hand this to Mr. Lovell, what would be considered a successful pilot for Blue Endeavour?

That's a very good question, actually. So the reason we're only doing 2 pens and a pilot farm is that there will be unknowns that we will encounter. The main success for us is really going to be based on how the fish perform out there. We're playing a very conservative game on our performance, but we want to see the performance, particularly over the summer period align a lot closer to what we see in the dry channel than what we have seen previously in the Pelorus. So the temperature profile on that site is a lot colder than Pelorus. It's slightly warmer than the Tory Channel, about excellent flow, excellent flushing. So it's all around fish performance for us, and that is having such performance that's comparable to what we're seeing in the Tory Channel.

Okay. So no further questions have come in. So that will conclude the half year results. Thank you, everyone, for attending.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.