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

Thank you for standing by, and welcome to the New Zealand King Salmon Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Grant Rosewarne, Managing Director. Thank you. Please go ahead.

Thank you, and good afternoon, everybody. Let's make a start on Page 3 of our pact. Obviously, we are impacted by COVID-19, many businesses around the world and in New Zealand are. I think the good news as far as King Salmon is concerned is, we are through the worst of that now and the effects that remain are temporary. Certainly, our profitability has been impacted that is brought about by increased airfreight costs. We had excess inventory, which is very unusual for us. Normally, demand exceeds supply by a great deal, but we had -- during the COVID situation, we had excess inventory that we had to take care of, dispose off. We've worked our way through that, and I'll comment on that as we go through a bit further. We also took the opportunity, if we were going to have some so-called disposal sales, why not invest in our brands. So the Regal brand in New Zealand, and our smoked products and use some of that money to increase our market share, and I'll take you through that. And that's being highly successful. The pro forma operating EBITDA results that we had for the first half was $10.5 million. That compares to $16.5 million last year. Our pro forma NPAT was $3.7 million compared to $8.7 million in the prior half. And the statutory NPAT was a loss of $4.3 million compared with $20.8 million in the first half of 2020. That is impacted by -- greatly by a fair value calculation of our growing biomass in the water, and Andrew will comment on that further as we go through the presentation. Further good news to me is that we brought on an Atlantic program a few years ago now. As I mentioned, we've traditionally had a shortage of fish. One of the ways to address that was to import salmon, and we're pleased that that's now making a positive contribution to our profitability. And then flipping over to Page 4, first half summary continued. So we've had strong domestic and international recovery in sales. So our sales of about 3,440 tonnes is similar between the 2 halves. That's good news. A really important point is, none of our brand and products have seen a decrease in their base price. So we've held on to our pricing for Ora King. We've held on to our pricing for Regal. So the excess inventory has either been cleared with a temporary price promotion that doesn't affect the base price. There was no, for example, renegotiation with the retailer to try and reestablish that price. That just goes back automatically once we don't have as many price promotions on or it was cleared in foodservice or retail channels unbranded. So the good news is Ora King has remained at its premium price and Regal has also. We're pleased with the way that our business in North America has handled the pandemic. That business is incredibly dynamic, as I think the whole American economy is actually and been able to pivot away from [indiscernible] restaurant towards home delivery. Also fishmongers, which is more into retail, they never really had Ora King in fishmongers but they do now. And that probably puts us in a good place for the COVID recovery, and we think we will retain that business going forward. I mentioned that we have had some price promotions, and we've seen our market share increase from 49% to 56% as a result of that. And actually, during the COVID period, we did a calculation on what we think our position in that market is, and many of you know the number of 55%. They're 55% of the world's total supply of aquaculture king salmon. When we worked out what we are of smoked king salmon, it's about 95%. So we, as a physical company, supply about 95% of the world's most king salmon supply. So that's a really strong position. And because of that, that's why we get such a positive reception from retailers typically around the world when we go and present our Regal smoked salmon range. Something that has called us out though is during COVID, none of those supermarket chains are listing new lines and not setting up new line appointments. What they're doing is focusing on toilet paper, sugar, flour, the basics of life. But that will come back, and we will be able to rollout our international smoked salmon strategy going forward as the pandemic subsides. We had sales of $82.3 million, which is only down slightly on the comparable period. Something else that was really great during COVID or during the first half, we ran a concept, a trial on a new concept. So many of you would know, we have Ora King. We'll just use some round numbers. Let's say, that's worth $20 FOB Nelson and you know that we have some [indiscernible] fish called Tyee, and that's more like $60 FOB Nelson. So we didn't have anything in between. And so at the height of the pandemic, we got [indiscernible] trial on a concept called June Hog. And many of you are going, what the heck is June Hog. Well, it's a North American phenomenon. They come back in June. So they're 6 months out of cycle with the rest of the run. And they're as big as a peak, so they called it June Hog. And we had some of them available because fish would stay longer in the water. So these were 7 kilos plus up to sort of 11 kilo inside fish, and we said, well, can we get a premium. And we did manage to get a premium even though many of our restaurants were shut down, even though there was great financial uncertainty. So we are convinced now that we have an intermediate value-added proposition between the Ora King and the Tyee and it's called June Hog. So very pleased with that. Then our outlook. We'll certainly make further comments on our full year, which actually ends now on -- at the end of January. So we'll have further to say then. We haven't cleared all our excess inventory yet, but we're certainly taking a provision for it. And we've locked in loads of it. So when COVID happened and we had this surplus fish, we weren't sure what we were going to do with it. We've worked our way through that. We're pleased with the speed and the way our team has handled that. We are on track time wise. And we're pleased with our cash flow situation. So we thought we're going to have a bad cash flow situation, and we've managed that extremely well. The thing that has been more difficult is the margin on the disposal sales. So I think you all know King Salmon [indiscernible] company can get great margins on the product. Demand and stable supply, lots of great concepts to sell our fish [indiscernible]. So let's just use a theoretical number. Let's say, we make $8 margin per kilo on that. When we went to disposal sales, we thought we'd probably make just $2, but the reality is, it's more like minus $2. So if we stay true to our strategy, sales and marketing, we're the company -- we're like an $8 per kilo margin company. But if we stray into that commodity territory, we know that we'd go to great length to stay out of that, but COVID has forced a little bit of that. We're into a potential loss per kilo situation, and that was more than we anticipated. Then if you go on to the next slide, which is -- it's got a map there and some key financials. The only point I really want to talk to here is how little those volume numbers have changed there. So that shows our revenue per country or per region, and there really hasn't been much of a change. So there's a change in the mix of a couple of countries where those disposal sales have happened, but overall, the revenue split has remained remarkably constant. And now I'll hand over to our CFO, Andrew Clark.

Thanks, Grant. So turning now to Slide 7, which is the summary of financials. As Grant mentioned, the sales volumes have recovered strongly, and he'll talk a little bit more about that further into the presentation, but we had our margins very significantly affected in the first half by airfreight costs, disposal sales or the provisioning towards those sales. And the New Zealand retail brand building and the promotion that we carried out this summer. The other thing that has generated a difference between the GAAP and pro forma results is fair value of livestock, investing around a combination of slightly smaller fish in the water at [indiscernible] and also the margin squeeze from the airfreight and disposal sales. We do see this impact as temporary. As we've mentioned on the outlook slide, we expect to be through all of the excess fish -- frozen fish sales by about the middle of 2021 calendar year, so within the 6 months' time. And then by late 2021 calendar, we anticipate that we'll be back to what's a much more normal situation for us, which is that we don't have enough fish available to meet the demand from markets globally. And part of the reason for that is when you look at the U.S., for example, you see that we've sold the same or slightly more volume than we sold first half last year despite all the restrictions. So if our new channels to market and once some of those restrictions ease, there's a lot of opportunity to continue to grow our business. We anticipate being able to optimize our sales and tune-up profitability along the way. Slide 8 shows our harvest by farm and just a couple of comments there. So harvest up a little bit in this period. We slowed it during COVID, and we've accelerated it since then to get some of the fish back into the right position, balancing up our sales program and our frozen program. You might ask a couple of questions there around Kopaua that's been harvested in January, February and then Waitata, the current in at the moment. Slide 9, the balance sheet remains very strong despite having to fund a lot of extra livestock and inventory. During the period, we have taken on the business scheme loan that the government has provided, which is done through our bank, but with government support, that's $5 million. In addition, we've got our usual funding facility for $60 million. Plenty of headroom there, supportive bank and no compliance issues. We do anticipate selling down inventory during the first half, as I mentioned. Haven't seen any collection issues, which has been a combination of hard work, probably a little bit fortunate in some aspects. We had to work with 1 or 2 customers, but a very successful outcome there. And as previously advised, we've slowed the CapEx a little just to preserve cash. The focus has been on the Tentburn hatchery first feeding plant -- first feeding plant facility, sorry, and also some routine replacement items. Again, in the interest of preserving cash, we aren't declaring a dividend at this point. And that will remain under a view at each reporting period. Other comment to note on our balance sheet is -- with -- during the COVID period, so going back between March and June last year when the [indiscernible] against other currencies, we took the opportunity to significantly increase our hedging portfolio, and that's now created with the New Zealand dollar recently strengthening against U.S., in particular, but also yen. That's created a significant asset on our balance sheet. I'll hand back to Grant and Slide 11.

Yes. Thanks, Andrew. So the main point here is to have a look at the chart at the bottom. So '19 is in light blue, '20 in dark blue. You can see the effect that COVID had and where the excess inventory came from. As I mentioned, that's a pretty unusual situation for us. And it's something I've not experienced over the 11 years that I've been here. We have planned for all sorts of potential things that might go wrong and we have all sorts of freezing programs and other markets we might open up. But I must admit, we just did not see COVID coming, where every foodservice market in the world would go into a very difficult situation, being locked down and many restaurants even closed. And then also that retail that we normally engage with the world wouldn't be open for new business. So if you can see how we've fought our way back out of that and then you see again the effect of the second Auckland lockdown, and then the quick -- fairly quick recovery out of that one. And then you see, in our fourth quarter, we're back to a very normal situation or even in December when we ran those price promotions on our smoked products, a very good result there. So really, that picture paints a thousand words about the initial problem, some follow-up problems, how we've worked our way out of that and then with a good result at the end there when it comes to volume. Then to look at the individual markets. So our export markets, first off. So North America, always a bright star for us. So even though this country has been through a whole range of difficult things from election cycles, COVID, mismanagement, everything, our team there has done a stunning job. And as I mentioned, I think it's an incredibly dynamic market. They love the story that we tell. We get more questions and more interest from the U.S. than nearly anywhere else. In fact, you might have seen there was a Stuff article that we sold a seasonal fish at $1,700. We put it on a platform called Goldbelly. So it just goes to show. And I think the customer mentioned an email that he was aware of working from the various menus that he's been in a ship, that he's spoken to and really wanted to have one. And it's pretty rare that, that could be available [indiscernible]. So we're pretty pleased with that. And you can see the June Hog concept there. So it's still under the Ora King brand, but it's got very different delivery to both the standard -- they put it that way and the Tyee. And as I mentioned, we're very excited that once COVID is [indiscernible] -- the fact that we got a good premium in the very eye of the storm, means we'll be able to do even better than that once a more normal situation returns. And we're really pleased with the way that that's been embraced in North America, and we will also roll it out to other markets. Then looking at China. So China has always been difficult for us. We build our business, and then something goes wrong, some geopolitical thing, [indiscernible] decision or whatever it might be because things go wrong in this market. And our sales have been significantly decreased there. But the good news is, pet food goes from strength to strength. For some reason, salmon seems to have a geopolitical focus that pet food doesn't, and we've got 2 people in Shanghai in China. And their attention now is fully on pet food, and China is our most profitable pet food market. Then turning over the page, you can see all of our other markets here; Australia, Asia, Japan and Europe. And you can see generally a good result in all of them. So Australia is under -- we've got a new manager in there. We've been there a while now and the results are coming through, and we're making really good margins in Australia. Really, we've engaged with really top customers. They, like the Americans, appreciate the Ora King story, and you can see a lift in sales as a result. And that's not driven by low prices. That's at full price, high-margin products for Australia. So we're very pleased with that. You see some products in Asia, excluding Japan and China, and that's mainly airline and then lack of availability and problems associated with airlines into that market. So that market has disproportionately suffered as a result of that. Generally, once we got out of that initial COVID emergency situation, we've had enough airfreight but it's certainly been more expensive. So it can be anything like 50% or 60% up on what it was pre-COVID. Japan, we've had some great sales in Japan. So a nice lift on the base there and the same with Europe, and Europe likewise is a very high-margin product -- high-margin region for us. Then in the domestic markets. So this is Ora King in foodservice, plus New Zealand still has Regal in foodservice, but Regal is mainly our smoked brand. And it is the retail part of the business that has performed disproportionately well with a 14% year-on-year growth in that particular sector. So pleased with the way that that's gone. There's been some compression of margins there as we've run those steep price promotions. Some of you would have seen, our normal sort of $18 Regal 200-gram hot smoked might have been available closer to $10 during Christmas. So I hope you availed ourselves with that rare opportunity that's probably not ever going to come back. Right now, I hand over to Andrew.

Okay. So moving to Slide 15 on pricing and exchange. Our focus right through this challenging period has been around pricing, 2 aspects of our business separate. So as Grant mentioned, making sure that we're not undermining ourselves in our Ora King and Regal pricing and positioning. So looking for premium pricing, differentiation and branding all the way to the consumer, it has always been our strategy. So that has been successfully preserved other than our own choice to promote New Zealand retail during the period this summer. And then the second aspect has been looking to clear excess inventory as one-off sales to customers. And some of that's selling into Japan and some of that's selling into the U.S. Some of that is still to come in the coming months, but as we mentioned, we have provided for the cost of that. When you look at the selling price between domestic and export, there is a little bit of mix in there. And so the New Zealand retail, as I mentioned, that the smoked is a much higher proportion of the sales, but it's at lower margins. So the headline pricing there is up very slightly, but the product mix has reduced the margin. And then in the export markets, we have a little bit of pricing there with a small amount of disposal sales or excess sales, and then also a bit of support from exchange rates, which you can see down below. Moving to Slide 16, on fish performance. So we've appointed Grant Lovell as our General Manager of Aquaculture during this period, and he's got around 20 years of s King Salmon experience. And I guess his focus has been on combining the best of our various production models. So examples would be upwell, and we've been working very well on some sites. So we've trialed that last summer on all of our sites, and we've carried on with this where we've seen that successfully implemented this year, and some of the other practices. So it's his focus. Our fish performance has been distorted this 6-month period by COVID, frankly. So we had to slow the harvest during the lockdown. Then things increased it since then. The consequences of that, that we've been harvesting some very large fish, which allowed us to trial more on the positive side, as Grant mentioned, however, has led to some challenges around survival. So that some fish is maturing, and that represents about nearly 1/3 of our mortality in the period, and that's about $2 million worth. And we've also had other challenges around big fish, and that has also impacted our feed conversion ratio. So it's not really a like-for-like comparison there. Those are temporary impacts, and we are just about through those now. I hand back to you, Grant.

Yes. So then on to Slide 17, which is the future farming and harvest volume. So you're all aware that we've had so-called relocation proposal for many years now. I think it's 5 or 6 by about point. I suppose, one of the things to note is this proposal actually becomes more valuable with Blue Endeavour in the open ocean because the Pelorus is a fantastic place to grow salmon for the 9 months of the year. Yes, definitely, we have problems over summer and the larger the fish are, the more problematic that can be. But for the remaining 9 months, September in terms of growth, and when you grow King Salmon, it can be too cold and that affects fish performance. And of course, once you get above 16, you can definitely get problems with mortality and all sorts of issues can occur. But we're working closely Iwi. We're working closely with the government. We think we can get a great outcome, both economically, environmentally, with Iwi, socially. But we think it really can be the good outcome. And if we get Blue Endeavour, which we're highly confident about, by the way, the relocation becomes a more valuable prospect. So we're very keenly pushing it forward, but the main site is still the open ocean. So that's Blue Endeavour. That enables us to increase in the third phase by 4,000 tonnes. So I don't want you to be concerned about that. We know that, that volume is coming, assuming that we get the resource consent. And we would always put plans in place to ensure that demand exceeds supply from day 1. So great plans. We know exactly how all the metrics work around, how many people we need to put into foodservice. And I think most of you know, everyone of our foodservice people delivers between 350 tonnes and 500 tonnes per person. And we normally just add to a city that's got a great culinary situation on large population. I think the last 2 that we added, one in New Orleans in U.S.A., and we added one in Shanghai in China. And then we can develop that volume from there. Of course, we did have a hiccup in China, hence the focus on pet food. But normally, it's 300 to 500 tonnes per person. And also we can step up the retailers quite quickly. They normally need sort of 8 months notice to take on the increased distribution. But when we fund up and we've got a proposition that only we can supply a smoked King Salmon by hot and cold, we normally receive a fairly good reception around that. So very excited with Blue Endeavour, expecting the hearing to be June, the results in July, August and somewhere around the beginning of June, July for the hearing. July, August for the results. I've obviously seen our application. I think it looked really great, and we're very positive about that. So with that, we'll now hand over to your questions.

[Operator Instructions] Your first question is from Guy Hooper from Forsyth Barr.

Guy here. I just wanted to focus first, I guess, on the inventory and the clearance sales. So could you just give us a little bit of a guide as to -- I mean, you mentioned retail for some of the promo stuff, but we're asked -- some of your promo and unbranded products had gone into what markets?

Yes. I think I'll hand over to -- you know how I like to be very sort of open and candid and everything. But I do want to protect our other customers. I'm going to hand it over to Andrew.

Yes. So in the first half, Guy, there is a little bit under 200 tonnes or so of excess sales, and that's predominantly gone into Asian markets. And during the first half of calendar 2021, so the period we're now in, we do anticipate a combination of Japan and U.S. principally. And those are not normal customers. That's different versus the market. Again, that's trying to protect our core business, the premium price differentiated business and branded from what's essentially a clean-up operation.

Okay. And just on your -- I mean, you mentioned provisioning for those lower cost sales into the second half. So that's just reflected in your inventory value. You got a lower margin or lower value in there at the half?

Yes. Yes, that's correct.

Yes. On, I guess, U.S. retail, a few, I guess, news articles showing some investment. You signed up new distribution partner and made new hirings. Do you want to just touch on the success you've had in that market today? How -- I guess, how big it could be?

Yes. Okay. So yes, you might be alluding to Fresh Thyme, which is the 74 store Midwest America and big market chain. And I think we've now got -- for example, so they were open to business, despite the COVID situation. And I think we've now got 100% of their shelf space for smoked salmon, and I think they [indiscernible]. And we're really enthusiastic about our Fresh proposition as well. So that is a new chain that we've picked up. I think you're aware, Guy, there are 400 supermarkets in New Zealand, and picking up 74 in the State with a high market share is not bad. It's a pretty good outcome, given the situation. So that's probably the most -- the biggest most positive thing that occurred. Also, they've really handed category management over to us and said, look, you guys know more about smoked salmon and fresh salmon than us. So we would like you to be the category manager and help us to maximize the sales to our customers. So that's worked out really well, but as I mentioned, the other retailers, and we're aiming so many -- we're aiming a number of other retailers, but we just haven't been able to get appointments with anybody else to any great degree. Or if we get an appointment, they say, look, we're not making any decisions until the COVID situation is over. So that's put a bit of a handbrake on there, but we're very confident we can secure a number of those new chains both in the State, both in Europe, in Australia and other places once they're not in COVID thinking anymore, and they're thinking about the future.

All right. And just on your relocation process continues to be ongoing, but can you give us a bit of color as to -- I don't know what is MPI actually looking for? What do you think has been missing? Or what's the catch in the process that is making it so long?

Well, the RMA is just a difficult piece of legislation, where it aims to both enable people to earn a living or to develop, but also protect the environment. So it's trying to do both those 2 things, and we think aquaculture fits in beautifully with that. But in terms of people's ability to [indiscernible] and they might not have any local outcome in the situation. And then the ability for commissioners and people hearing the actual hearing. Whether they can stay focused on the points, or they just get run over by some of the emotions. A lot of that was in the mix in our view on the first time around, and we were not happy with the outcome. But we went back and refocused with Iwi. So in the first relocation process, I think we had -- only had the support of 1 Iwi. Now we believe we have the support of 7, which is quite positive. We continue to check that and to shore that up, and we think that's the real game changer. And the minister has the power under RMA to grant that space and to enable the relocation. And I note that the minister is also going to review the entire RMA. So he obviously thinks it's not fit for purpose. So I mean, we're positive about it, and we think it's a bit of a game changer to have that level of Iwi support. But as I mentioned, that space is more valuable with Blue Endeavour. So we're trying to get that one first. We'll -- because we'll move them both forward if there is an appetite for that, if there is an ability for that. But the main drive is Blue Endeavour and the relocation is a fantastic outcome for all stakeholders, both us and Iwi. I'm sorry, go on, Guy.

I was just going to ask, how to gain sort of additional support? Did they come with any, I guess, additional concessions for Iwi?

Well, what it came is, we said, look, as a result of the relocation, even though it was done on the basis of no increase in net space, we actually retire old space and we create new. That actually creates a fulfillment obligation. So we've got actually automatic -- new Iwi automatically get 20% of any new space that's granted. So if you were to support this application, you would be -- with the 20% coming to you was in the cash flow space, makes a preferred space. That could be put on the end of [indiscernible]. So that's the line that we've pursued. I said, okay, you would naturally obtain 20% of the resort. It's quite valuable. And that -- so that's not a concession from us, that's the concession from government, and I think that's what's really helpful in moving us across the line. Also, we've gone back and done more engagements, explaining what the impacts are for us laying any concerns. And what it really is demonstrating that the government has a $3 billion aquaculture strategy by 2035 for a reason. They both want green industries, and they want those green industries to protect the environment. So if the government has that view, does that change your views as Iwi. And the government didn't have that strategy in the first relocation template, it does now. So all the stars seem to be more aligned now.

Our next question is from Nick Mar from Macquarie.

Just a couple on the U.S. as well. Those other channels that you've developed, what's the kind of pricing and margin like on those compared to existing channels in that market?

Yes. So the pricing is exactly the same. The margin will be different because there is potentially higher freight costs to get it there. We've not, as Andrew and I both mentioned, that what we're selling at Ora King is at the same time as it ever was. We're not taking that down one set. And what we're selling through, say, the fishmongers is exactly at that old price. So there is no diminishing in unit value in that segment, for example. I'll let Andrew comment on it.

Yes. Nick, I was just going to say [indiscernible] We've got -- U.S. revenue is up very slightly on the prior comparable period. And so it's actually a slight price -- and that of course, includes effects in it.

[indiscernible] break off as well. Because it's a...

[indiscernible] So we cover the rate cost what pleases our margin rather than our selling price. And then what we're looking ahead, there will be lower prices on the excess product that goes into the U.S.

But because we ran that during trial, and it was in pretty dark days, we're very confident when we come out of it. We can use that concept to create a lot of additional value between the original or clean proposition and the timing proposition.

Yes. And do you think that those channels are something that you'll continue to invest when food service opens up more broadly in the U.S.?

Yes, we do. So the thing that we are very particular about is that Ora King is never in mainstream supermarkets. Now fishmonger, you could argue -- many people think it's fish, whether I want to get it from a fishmonger that's probably one of the most premium places to buy your fish. So we're very comfortable with Ora King being there. So if it's in fresh fishmongers and premium foodservice, we're comfortable with that. So we're going to retain that distribution channel once we're back into a normal situation.

Okay. And I guess the key, is we'll be back with access demand. So have choices around how we optimize that again.

Yes. No, that sounds good. And then just in terms of going forward, like I know you mentioned you not give any outlook commentary until the full year results, which will be next month. Just to confirm, you guys still comfortable with the previous -- I know you calendarize the production profile you updated at the last full year result?

In terms of harvest volumes, you mean?

Yes.

Yes. In principle goods, of course, is a change in the balance date period. We will be publishing some comparative historic data for January and July periods to assess understanding between now and when we come back with the full year results. So we put a bit of that out there, but I won't issue any volume guidance. But in principle, there is no reason to change it at this point around the harvest expectations.

Okay. That's great. And any update on what was happening at Waitata and whether or not you got those step-ups through? Or how you're working through that?

No. I think we haven't gotten step up at Waitata. We're going that goes back and reapply to that, but we haven't got that at this stage yet.

Our next question is from Christian Bell from Jarden.

So just more in the new balance date. And given the current monthly run rate, would it be -- would it have been correctly assumed that total sales volume would have been closer to something like 7,500 tonnes for the year to June?

Do you mean for the period ended June 2021?

[indiscernible] June just to ignore the new balance date.

So you can see from Slide 11 that we were actually selling quite a bit faster than that in December, but that's our choice around promotion. And then we'll also see sales out of inventory during the next 6 months or so for frozen excess sales. The underlying business, yes, it's recovered. It's probably running a better hit because we were previously restricted on fish availability, and that's been least of an issue this year. It's been the least of our issue, if you like.

Yes. Okay. And -- so obviously, you've been selling the new retail channel in the U.S. Have you any idea as to what the sort of sell-through to the end customer? What the demand might have been like there?

Yes. Do you mean, are we talking about in retail?

Yes. Correct. For example, the first time distribution, what has the actual end consumer demand been?