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

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

Good morning, everybody. First thing is to introduce our new CFO, Ben Rodgers, formerly of Z Energy and Kiwibank, and Ben will give part of the presentation today. Actually, Ben has been with us a week, so if you could take it easy on the financial questions, that would be much appreciated. Now first -- Ben's first action was to move our disclaimer from the back of our pack to the front of the pack. And with a few things I need to point out, we have, of course, put everything together with due care and attention. We don't expect any liability for any loss. There are forward statements regarding a variety of items. We can give no assurance about future results. Actual results may differ from those in the projections. We have non-GAAP financial measures, mainly pro forma EBITDA and pro forma NPAT, and we use those because we think they give insight into the business. The presentations of a general nature, and we're not giving financial advice and a full statement is there for you to read. All right. So with that, we'll move on to Slide #4, the summary. So the first thing to say is we certainly have had a difficult half. The first 4 months were impacted by our prior aquaculture model, the so-called single year class model. And the reason we attempted to do that was because it's recognized as best practice around the world. However, we do not have enough space, enough water space in the sea to effectively implement it. And as we've tried to do that, we've had some unintended consequences that were not foreseeable. And that mainly is smaller fish that became apparent in February. But when that has happened and the fish are too small, the only way to get them to be larger is to pull back on the harvest, retain more fish in the system, feed them and get them up to size. And if we continue to harvest at a higher rate, first of all, we're harvesting a small fish, the customer's paying for what they want. And also, there's not enough time for the remaining biomass to grow. So you get a double winding effect of smaller fish and in less biomass and in this case, also a more expensive fish. So therefore, if you're thinking about changing that production model was the fish in the Polaris still ate the feed, but they didn't put on the weight. And we've never attempted to do that before because we hadn't attempted to achieve single year fat across the entire company. And that was a very unintended consequence. And so we've had to abandon that practice. And we've brought in what we call now the prescient aquaculture model. That model is based on everything that we've done in the past. It's using our own local people. So we're using our internally promoted team, who know our genetics, they know our environment, our husbandry practices, and they're better able to predict outcomes based on that extensive local knowledge, hence, why we call the new model to prescient aquaculture model. The first 4 months were a loss situation, then -- and we manage to sort of overcome that or counteract that with our foreign exchange closeouts. Then we got to June and we hit breakeven, July was $1.3 million pro forma EBITDA and August $1.6 million pro forma EBITDA. Now regarding COVID-19, we really haven't been affected from a sales sense with COVID-19 for this half. So by the time we got to February, we had fully recovered our sales position, but that coincided with our lack of fish to be able to supply to the market. So the effect of lower sales wasn't brought on by COVID, it was brought on by that production model. The remaining major impact of COVID is escalated freight costs. And you can see there on Page 4, they've gone from about $2.50 a kilo to $3.41 a kilo. A further remaining effect is we've had to dispose of frozen stocks that built up during COVID, about 470 tonnes. And we've done with 2 discrete customers in the U.S.A. and Japan without affecting the pricing or the remainder of the business. We were able to implement a price increase around August, that's across New Zealand and the North American market, and that has partially offset a mitigated increased cost. I suppose we have minor effect from COVID-19, is there's a general inflation pressure on -- not only on freight, but on packaging, labor costs and those other things as well, but they are much to lesser degree. We can cover those with our price increases. There's going to be some time before we're able to overcome those freight issues and/or they come back in line, and we are hopeful that at some point, they will come back in line. All right. Then we turn to Page 5. Just the results. So we've had a sales result of 300 -- sorry, 3,629 tonnes in the first half of '22 versus 2,745 tonnes first half prior period, and that shows the recovery from the COVID impact. Sales were $80.1 million, 20% up on the prior period at $67 million. Statutory net profit after tax, a loss of $5.6 million compared to the same loss in the prior period. The pro forma operating EBITDA positive $3.3 million compared to $7.1 million in the prior period, and pro forma net profit after tax, $2.1 million compared to $6.1 million in the prior period. Then the outlook, our fish size, and I'll show you a chart on this shortly, has normalized now. So the restraint on the harvest saw an increase in the biomass and the size. And we have largely recovered our position there. The operating profit improved in July, as I mentioned, from July -- has actually started breakeven in June, $1.3 million in July, $1.6 million in August. We are, of course, affected by lockdown such as those that have occurred in Auckland, but the U.S. market is performing very strongly for us, and it's a bit of a counter to that occurring. And as I said, we're not seeing any relief in the freight area at this stage. Now then if we go to Slide 6. So this is our vision, purpose, mission and values. And our vision is to be one of the top of the south's most valued organization and the world's most inspirational salmon company. Our purpose is about creating the ultimate salmon experience. Our mission, we want every stakeholder who comes in contact with us to be better off as a result. Our values are all about maximizing the outcome for all stakeholders. So that's not only shareholders, that's team members, that's the environment, community, other stakeholders as well. We want a -- we're all about continuous improvement, operating with integrity. We have a real teamwork and team culture, and we aspire to high-quality based on innovative products. Then our supporting strategies. These are the same 8 that we tend to present at these meetings. I'll just point out a few things, obviously, health and safety and food safety strategy. So that's always #1. We only farm one species, and we're fairly unusual in that regard. If you have a look at Tassal, in Tasmania, they farm prawns, trout and Atlantic salmon. [indiscernible] have farmed kingfish, trout and salmon closer to home, sanded to farm oysters, [indiscernible] and salmon. We just do the one species because the King Salmon is extremely difficult species to grow. We want to just focus on that. We don't want our aquaculture resources defrayed over a large number of species. We need to be cost competitive while we're doing that and focusing on fish costs and bringing that down is really important. We want to dominate every premium salmon needs around the world. So whether that be in food service or pockets of retail or in the pet food area. We're looking for where is there a premium niche where our competitive and comparative advantages with the King Salmon species will give a premium return. You know that we're into branding. So we're moving all of our products to branded. The products that we put in the market as a result of COVID were unbranded, and that was buying intent. And we need engaged people and then measure our engagement if we're to achieve superior results, which only engage with our community and together with sustainability, that's very important for our social license to operate. Then on to Slide 7. You can see how our revenue has developed versus the past year with that top chart. 3,435 metric tons of harvest during first half '22. You can see our distribution around the world and the real importance of both the New Zealand and the U.S. market. So when we have a fish size problem, it's that U.S. market, and it's so large for us, that's why it causes a real difficulty. And you can see we're diverse across a range of markets there. You can see our first half pro forma operating EBITDA and the trend there. And obviously, some difficulties that we've had. We've restated that. So to be a like-for-like comparison, you're all aware that we changed our financial year. Then the pro forma operating EBITDA below that and this is some periods ending December, some periods ending in July and our first half statutory net profit after tax. Then on to Slide 8, our sustainable developments. First of all, we regained, I should say, retained our best aquaculture practice 4 star certification. Top of the South Community engagement to support our Blue Endeavour open ocean project. So we've been engaged in a really high-quality consultation process. It is all submitted. So there are 14 submitters against Blue Endeavour, that's a historically lower number, a more normal number would be maybe 140 submitters against and normally double in favor. So at this time, a much lower number of submitters. So we've been had to have a very high-quality engagement with and its underway now. We're continuing our progress towards 100% reusable, recyclable and compostable packaging, which is currently at 47%. We published our first anti modern slavery statement. And we launched an internal fund to enable our people to initiate and bring to fruition sustainability practices and goals within the area of influence. Achievements, we've centralized -- we were using our centralized procurement to support preferred suppliers who have like-minded sustainability and social responsibility and objectives and collaborating with the global product rules around environmental product declarations for finfish. Then looking at our brands. So firstly, just look at Regal. We've run quite a few accolades this year. So if I just focus perhaps on the first one, which is the Specialty Food Association award where we won, I think there were 1,500 products that were entered, and we won the top award for protein, and then we went on to win the top award overall. And so that's quite a prestigious award to win. And often after you win that award, there a lot of retailers who will want to list and range your product. So we tend to do very well with the European-based Superior Taste awards. And we won some rewards around food safety as well, which was great. One of our team members won that. We normally bring premium shifts in restauranters to New Zealand to show them what we do and to engage with them. We haven't been able to do that. So instead, we produced an Ora King documentary film, and that's been well received, and a number of you have attended and seen that. I think we've had 20,000 views now online, which is great. Then on to Slide 10. Further on our brands. We now have our Regal Fresh available in the U.S. through a multi-store premium retailer. We've done a trial on our Ora King Keiji product, that's a Japanese concept based around sashimi, and in our case, small fish that has a very unique flavor and texture and will yield a premium price in the market. We've -- launching our Omega Plus product range in Animates, New Zealand, and we have an imminent launch in the U.S. of our petfood treats. And there's a picture there of our Regal King dips products. There's 3 of those products coming. And obviously, it's got a really high percentage of salmon in it and tastes fantastic, and we think will do extremely well. And that product is also available for export. Okay. At this point, I'm handing over to Ben.

Thank you, Grant. I'm not sure, Grant mentioned or not, but on recently news, this is day 7 for me. And so rest assured that I'll make sure I can provide additional current context on full year results compared to what I provide today. In terms of the financial results, Grant has touched upon a number of these things already, but focusing on our GAAP numbers, half I'm not sure is reasonably consistent result of a $5.6 million net profit after tax loss. But moving on to our preferred way of measuring results, the pro forma results, which I'm sure you're all familiar with, but essentially, the main change there is taking the fair value gain or loss on our unsold fish and backing it out to look at our results just based on what we've sold and what we've achieved during the first half. As Grant mentioned, the change in filing models had a big impact on the first half. And within that first half, we would have split that down to the first quarter. So the key things, which is sort of how that's shown up is we've had small fish. Smallest fish sort of mean we have a deterioration in our food to conversion rates, which means it's costing us more to produce the fish we have, which results in a decreased gross margin. And also, Grant touched upon the mortalities from the change in the filing model as well. And when you combine that with the increased freight costs, a number of businesses, not only our sales are seen in the market, and that has a significant impact on our gross margin. To offset that, we sold a number of closeout and the money [indiscernible] contracts and that sort of split off our EBITDA that could breakeven a little from the first 4 months. And more recently, June results would lead to breakeven and we printed the profit in July, and that trend has continued in August. So we are looking forward to -- it will be a significant results in H2. So the full year story should be a story of 2 halves. Moving on to Slide 13, the harvest by farm. As you can see harvest was a slight down in the prior year. [indiscernible] as well, and that's partly to mitigate the smaller fish size. So if we give the delay the harvest, reduce the harvest, we could give the fish more time to grow, and it enables us to reduce product, which is -- which our customers are after, as Grant mentioned the key markets for us, being the U.S. and New Zealand. Moving on to Slide 14. It's not too much I'd want to call out on this slide at the moment, other than, big focus for the team, the sales force will be to clear the remaining excess frozen inventory in H2. So we got through close to 60% of that in the first half of the year, and 40% to go. That is pretty critical just in terms of generating a positive cash flow, which flows on from a poor first half results. So big focus on H2 for me will be on looking at optimizing our working capital, but also where we spend our money from a CapEx perspective. And so probably a little bit [indiscernible] for me, but looking forward to engaging with you on the future. I'll hand back over to you Grant.

Yes. Thanks, Ben. Okay. Now we're on Slide 16, sales performance. And you can see our monthly sales trend there in sales, GNG volume. We've marked on the chart, you can see in April '20, the effect of COVID, in August. '20, the Auckland lockdown, then December '20, NZ retail promotions. So we put a lot of heavy promotions on to Regal, both hot and cold smoke to bolster our position. We had excess fish. It was better to do that than put more of the volume into the U.S. and Japan against these discrete customers, so it made sense to do that. And so you can see we had a very nice sales trend up until December, January 2021. And then I've marked on the chart, the small fish size and then the harvest restrictions that we drew most of that half. And as we come out of that in June, July, August, our profitability has returned, which has been fantastic. Some further points about the U.S. market. So during COVID, so that's from April '20 onwards. We developed and pivoted towards fresh fish bundles over there. And we have now retained that business, and we see the return of the U.S. Food Service base, and that's why the U.S. is performing so well for us. Then we go on to sales by market, which is Slide 17. And this is the all-important North American market. And on this occasion, we've also put the forecast there in the lighter blue, so you can see what's going on. So this market has always performed extremely well for us. We could actually sell a lot more into this market than what we show here. We're always limited by the volume of fish that we can grow. And our Ora King is our top grade, and there's a limit on that as well. And that's largest market. The demand is always much higher than the supply. Except for that brief period right at the beginning of the first COVID lockdown. So we have run some trials there on a number of our concepts. We've mentioned Keiji before, so that went extremely well. We had the inlet launch of Omega Plus petfood over there with a treat in any case. So yes, this market is key to us. It's stable. They appreciate our branding. They know about our species. We've got a great reputation there. So we are very positive about the North American market. Then on to Slide 18. Okay. There we go, Slide 18 slipped out of the deck, but here it is here. I said this is the Australian situation. A little different to the U.S. So you can see the chart there and why is that so? So the Australian market wasn't aligned with the rest of the world regarding profitability. And so we basically increased our prices in the U.S.A. to make it equivalent to the other markets in terms of return. And that's why you see the volume coming back from '18, '19 down to '20, then we're into a stable situation. The volume of that generated went off to the U.S.A. and obtain those higher prices. But now we're indifferent if you put it that way, as to whether we sell in the U.S. or Australia because they are producing an equal return now. Some other highlights regarding Australia that we've now got a listing for the first time in a major retailer there. That's with our Regal smoked product, hot and cold in 800 Coles supermarkets. So really looking forward to seeing how that goes. And you see one of our chefs there, and whose probably just buying an Ora King filet. Then sales by market, Slide 19. This is the other significant markets for us, and we put these all in the same scale so that you can make a comparison. The first thing that always surprises everybody is that China, despite our case, is not a significant market for us. We've had problems, nothing is going well, then we strike some sort of market access problem. And so is a bit on again off again with China, but it is a small part of our portfolio. We're also engaged with China with petfood. Then if we move to the left, Asia is a strong performing market in general, that excludes Japan and China, Thailand, for example, is a very good market for us. So yes, we've performed well in that market over time. It's a really premium market for us, and you see us holding our position there versus the prior year and you see the forecast there again is to do the same thing. Then Japan, we have some product into this market, 2 to 3 customers again. The Japan -- and if you go back long enough, was our most important market and now is one of the relatively mid markets. And you see our development in Europe, which we will focus more on. There's no reason why Europe can't be as big and profitable as the U.S.A. But because of the terranea distance and the shortage of fish, we've never really had the opportunity to develop it. But we're doing more of that now than we did in the past. Then we're on to Slide 20. Again, sales by market. You know that the foodservice market was highly disrupted and is now coming back around the world, but especially in the U.S.A. We did refocus on the domestic market during that period. And you know to be around our price promotions. We also launched some new products, and you see [indiscernible] making some of our supporters and the advertises some of our products. You see a display to the right-hand side on the Omega Plus range. That's what's going into Animates there. Obviously, our volume development in New Zealand, so as the export, and particularly, the U.S. has become more important to us. You see the volume going down in New Zealand and increasing in export. And you can see that we've got quite a strong forecast coming out for the second half of this year. Then we're on to the next slide, which is this one? Right. So 21, here we go. Average sales prices. So the important thing to take out here, you see the trend there with our pricing. But we've never taken a price decrease on any of our brands. As I mentioned, we have quit frozen product in particular, but also some fresh to discrete customers in the U.S.A. and Japan, and that brings our average down. So to -- does it when we run price promotions in the domestic market. But because we never took our headline prices down either in Regal nor Ora king, we didn't have to adjust that as we came out of COVID. The pricing base was already established. And then as I mentioned, we actually took a price increase on top of that. And that has been very effectively implemented. So quite pleased with the way that's gone. Okay. Then on to fish performance. So I've put a chart there that shows the average size by month at harvest. And you can see the problem right in the middle that's when we really encountered a dramatic drop-off in our fish size. We really -- it's fair to say we just did not see that coming. We got to February, and we began harvesting those fish, also a little bit in January there. And we were surprised at how small they were. And the reason being, normally, you can tell how big a fish is going to be by how much it has eaten. But the learning is when you have fish in the floors over 2 summers rather than one summer and when the harvest size during that second summer, they eat the food, but they don't put any weight on. And that was the learning out of that practice, and that's why we're never repeating it again. So we're rolling back to -- we're taking the best out of that prior model like upwelling and things like that, but we're not going to try and achieve single year class when we don't have the space to be able to do so. Because it was the lack of space that forced these fish to go through 2 summers and be at harder size during that second summer. Now during the -- on September '21, October and going forward, you can see what we're projecting in terms of fish size. The key number for us is 3.6 kilos. If we can achieve 3.6 kilos, all other things being equal, that's a large enough size for us to meet our market requirements in the U.S.A. And so glad that it's up there, but you can see why we had such a good June, July, August, the fish size was excellent during that period. And other things to mention here. You can see the chart -- the next chart down, you can see how '19 grew and now 2020 grew. So the reason I wanted to show you this was the '19 brood was under the old model, the '20 brood is under the prescient model, the new one that takes the best of everything, doesn't try to achieve single year for us. But -- and we really focus on having the right fish, off the right size where they're most likely to survive. And then we get a good cost outcome. And you can see that the 2020 brood is vastly outperforming the '19 brood on the old model, and we expect this new brood to be back to normal performance and also back to a normal size, which is great. And as I stressed earlier, we have a local team managing Aquaculture. They've got 20 years' worth of experience. It's the total recently that we've had enough experience to appoint internally, prior to that, we used to have managers coming from overseas, but our industry has got to a state of maturity. And with people with enough experience to run the Aquaculture operations now, and that's what's happening. And you know that we do have these problems in the Pelorus Sound. The East Australian towers was coming down from Indonesia. It's getting on to the Pelorus more than it did in the past. It tends to be a bit warmer. So those 3 months for us, which are February, March and April, are problematic. But for this year around, we're going through it once, and they're smaller fish. So we're expecting a much better outcome from that situation. And future farming. Yes. So this is a map that shows our existing farms with a white circle around them, and then you see the Blue Endeavour. And you can see there's about 1,000 hectare site with the dotted rectangle, and you see the 2 farms, the southern phase and the northern phase. Each one of those can produce 5,000 tonnes of [indiscernible] salmon. And you can see it's about 7 kilometers off the coast due to the curvature of the earth, you can mainly observe something, which is if you're standing down at sea level, which is about 5 kilometers away. So if you're standing on the beach, you will not be able to see either of those 2 farms, which is one of the reasons we think it will be more easily consented. Then on to Slide 25, which is a bit more detail about Blue Endeavour. The hearing date is from the week of the 18th to the 22nd of October. It's very much in line with the government's Aquaculture strategy, which is aimed at growing the industry from $650 million to $3 billion by 2030, which is not only one way away, and that original target was $3 billion by 2035, and the government's recently sharpened that up, so they're more bullish, not less, which is great. This is obviously an extremely important initiative for the company. It not only is important for scale. It's really important, we think, also for improved fish health and higher grade fish. Also, we think we can take our unit value up ultimately as a result of this. It has a fantastic environmental outcome. Aquaculture has a very light footprint on the environment and even lighter in the open ocean. As I mentioned earlier, with the 2 phases in full production, 10,000 tonnes of fish can be produced. It is offset by a reduction, which I'll show you on the next chart in the inshore area. So now on to Slide 26 now. So there's 2 charts there. The upper one is a situation regarding harvest per annum without Blue Endeavour. And then you see if Blue Endeavour is brought in, and we've taken it out to FY '28, so you get the full picture there. So our plan would be to use our -- many of our insure sites. And certainly, those in the Peloris to be sort of nursery farms, that will grow the fish to, say, 1.4 kilos, something like that. And then prior to the summer, we transfer them to Blue Endeavour. So that's why you see the volume not getting up to 9,600, only getting at 8,000 because our plan would be to take fewer farms through the summer and transfer the fish to Blue Endeavour for the final grower. In that way, we get an improved mortality result. We think, obviously, in the Pelorus, but a great result have in Blue Endeavour itself and also we get a very good return on the infrastructure, reducing the cycle time actually on Blue Endeavour. So we have growth under all scenarios. Obviously, a lot more growth with Blue Endeavour as part of our farm portfolio. The first halve is that would come off, as you can see there is in FY '25, so end of calendar year '24. All right. And with that, that's the end of the presentation, was the appendices that follow. But with that, I think we're going to take questions.

[Operator Instructions] Your first question comes from Nick Mar from Macquarie.

Just in terms of the longer term outlook for the Waitata farm, just under the [indiscernible] scenario, has that kind of changed from the view that we can change for the 2,000 tonnes, given some of the consent challenges you've had in the last 12 month?

No, we don't think that's changed. You're probably -- there was some adverse publicity, I'm not going to say things never reflected well in the media. Actually -- we actually, the Council and New Zealand King Salmon were -- wanted the same outcome or on the same side regarding that application, which would have led to an increase in our Waitata farm. We are appealing that decision, and we think of the fact that the council is supportive is extremely helpful. We -- at this stage, we don't -- depending on when the hearing is heard or the appeal is heard, we don't think that's going to have an impact on the volumes that you see on this chart here. So they're broadly in line with what we said before. We've got further increases come in for our Waitata and Ngamahau farms. And we don't think any of the recent consenting issues are going to impact on that at this stage. It just so happens that we weren't planning to utilize that increased feed capacity for some time. In any case just because of the way we're operating the precedent model and where we want our fish to be. So for that reason, we don't think it impacts the volume outcome going forward. It will be if the appeal is unsuccessful.

Just relative to that long-term kind of number you had in case and how much was that impacted?

Yes. So you -- can't make out the numbers. Did you say -- what was the number you said there?

At 10,000 to 11,000 tonnes is what I think you previously disclosed is the theoretical maximum capacity around sites.

Yes. There are some further increases behind later than FY '28. I think it goes right out to believe it or not in '32. So there are some further increases after that, which we're not showing on this chart. But there's actually no -- yes, yes, everything is as it was before. I will go back and check there Nick that -- actually I remember 11 [indiscernible]. I can check. But the last increase is on Ngamahau, and I think it comes -- it's available in FY '32 or round about there.

That is all good. In terms of the inventory clearance during the first half, could you just break down how much was in Japan versus U.S. or just how much was Japan and upcoming stocks in U.S., is that right?

Yes. So we do have those numbers. I'm hoping one of my colleagues here have it. So first of all, much more has been sold into the U.S. than Japan. What we sold into the U.S. is frozen to one customer. What was sold in Japan has been a bit of frozen. I think that was to a discrete -- well, that was to a discrete customer and some fresh again to a discrete customer. So there's probably 3 actually involved overall with the majority being into -- the majority being into [indiscernible]. Yes. Yes. Okay. I'm just getting the numbers for you there, Nick, hang on. Yes, so Japan is 200 tonnes, and the U.S.A. was 259 tonnes. And I would say the majority of the remainder, which I think is about 350 tonnes -- but the majority of the remainder is going to U.S.A.

Just on pricing. You mentioned there's no kind of price decreases, which is good. But in terms of the first half, obviously, it's down. Could you just talk through the mix impact sort of [indiscernible] even excluding like frozen whole fish foods for the market and for the mix as well?

Yes. So let's have a thinking of how the mix impact could influence that. So obviously, if there's more smoked products sold, that has a positive influence on mix. In terms of margin, we've -- because of the -- again, the shortage of fish, we have equivalized all the markets. So the geographic mix doesn't tend to have so much an effect -- of an effect these days. And the same with New Zealand, by the way. So we make about -- with the freight savings in New Zealand versus export, the same profitability out of New Zealand. And again, the same profitability out of retail and foodservice. So yes, there's not a massive mix impact there. There can be in terms of, let's say, if we go to North America, and we've got a CIF price. So it's more expensive to get it and it's sold at a higher price, say in New York versus Los Angeles. And we definitely had the eastern seaboard drop off more than the western seaboard in the States, and that was adverse regarding price. I don't think that made any difference regarding margins. Now, does that answer your question in enough detail, Nick, or not?

Not really. It's more kind of why the first half of '22 is down than the first half '21, that's probably kind of 5% on average?

Yes. So the things -- the reasons why it's down year-on-year are just simply -- we've solved significant volumes, the volumes that we mentioned earlier at very low prices, and they are in a loss situation than we freeze or if we have to sell the fresh products under distress in Japan. So that's the major impact on our margins. Then as -- when we run the price promotions in retail New Zealand, again, the headline price is the same, but we're providing a greater case deal to bring it down. That has really brought it down. Yes and that fresh product that we sold to Japan was a promotional price point at a large sushi chain, which has reduced the margin. So they are the things that have brought the price down -- the average price down across the total portfolio based on what we did, clearing distressed or frozen stock into the U.S.A. and Japan.

Your next question comes from Christian Bell from Jarden.

The first question for me, the August EBITDA number of $1.6 million, is that -- they must include the elevated freight costs that you guys highlighted?

They're normal for -- yes, yes. So yes. So that's the elevated freight cost is included in that. So yes, we've gone from June breakeven $1.3 million, July $1.6 million, and we're putting that out there because we believe that, that's showing the emerging trend that we're on. We get all the freight costs into that. You can expect a further uplift into the traditional uplift in Christmas as well on top of that. So we're trying to sort of indicate to you where our running rate is at the moment.

Yes, So I mean, acknowledging you just site there quite typically encouraging [ the wrong ] questions anyway. If trade costs were to remain at what they are now, and you took the August run rate and time divided by sales, you did close to $10 million EBITDA plus $3 million in the first half, which would be higher than your current guidance. You guys have held back from actually providing more details on guidance. So I mean all those things considered, there's potentially upside risk to your current guidance, but you're holding debt just in case rates get any worse or -- yes, so just trying to understand why you kind of have that debt?

Yes. First of all, we've got a lockdown situation in New Zealand. We don't know how long that's going to play out for. We have had compensation in the U.S., but it's not -- it's still an issue and Auckland is probably our largest volumes sort of that we have out of all of them. So because of that, the uncertainty associated with that, we're not putting or updating our guidance. And you saw that we're on that threshold, $3.6 million is the magic number. And you saw from that chart we're on that threshold. So for those reasons, we're not updating guidance just yet, but your calculation, with the exception of those things, isn't far off.

Right. If there's cost savings [indiscernible] I think.

Yes. I'm not expecting freight to -- I'm not expecting freight to blow out further. We think it's at a high level and it may stay there, but the visibility we have around the government subsidies and what not is we're okay for the end of the financial year.

Okay. Cool. And then -- so, you closed out $13 million worth of FX contracts in the first half. Do you have any -- is that basically gone now, the outlook for any sort of FX exposure?

So the excess is all gone. So we -- when the dollar was at NZD 0.55 versus the U.S., we took out substantially -- a substantial amount of cover. And the amount, which is in excess of our sales, has been closed out. And that coincides beautifully with those distressed at 4 months that we had. And now, we're in a situation where we're back to profitability and don't require that. And we are rebuilding our book as -- if anything gets below USD 0.70.

Okay, cool. So I mean I'll just emphasize that the second half operating results should be -- look, it should be -- the profitability should be relatively clean versus [indiscernible], if you get what I'm saying?

Yes. Yes, we don't have a summer. That's the reason we changed to financial year, but we don't have a summer right at the end of the financial year. So that's good. But how long is Auckland going to be in lockdown? The 3.6 kilo fish, that's great. If that's 3.4, would be a problem. I'm not anticipating that, but no. That's a fairly small change in the biological system. It is possible that, that could happen. We're putting much more work into assessing our fish and we've got an improved camera for assessing the fish. We actually had some technical problems right at the time when we were moving into that -- into the Pelorus and started harvesting. So that was a further reason why we didn't have that visibility. So we corrected that now, but we're not going to redo our guidance until we've got that greater clarity about those 2 things.

Those forecast sales volume that you've got, are they based on contracted volumes?

Yes. So Christian, it's very rare for us to have contracts because they don't work out well for us. We often want more flexibility than a contract would allow. Remember, we're fully sold now, all right? It's not a sales problem. And so in that case, we don't want contracts because then if we want to move between markets or even move between product categories for some reason, if you want to move from fresh into smoke or whatever, a contract would prevent us from doing that. So we do have some. Therefore, a very stable product that flows in portions to the U.S.A. and something like that. But that's by far the minority. And I know that's unusual for a selling company. It's all about having certain contracts, but we find that, that reduces our profitability. So we do not seek contracts.

Right. I guess you don't need them [indiscernible].

Yes. Yes.

And then just the diagram on Slide 22, which compares live weight costs between the 2020 brood and the 2019 brood. While it sort of demonstrates that the 2020 brood was performing much better than 2019, how does it compare to historical average? Like what does it look like compared to 2018 or...

So I just had a look at that. Just so that's good. So if you take the last 7 years, it's our second best performance in the last 7 years. And the '19 brood is on track to be the worst performance ever. So we've still got some of the '19 retailers out, by the way. So it's a second worse right now, but -- and the thing is with that particular brood, it did benefit from 2 relatively cool summers. So it should have been a good result but the COVID -- those factors that we mentioned with fish in the Pelorus going through 2 summers instead of 1 and because there were harvest size during that second summer. We just had these perverse outcomes we've never anticipated. And we're -- obviously, we're never going to repeat that. We take the learnings. And the '20 brood is right back where we would anticipate. In fact, as I said, it's the second best performance in the last 7 years.

Got it. That's helpful. And then, sorry, I've got so many questions, but the next one would be in terms of inventory, given you expect to clear, I guess, the remainder of your excess disposing stock. Would that sort of require that -- I mean given you sold, in your commentary, that's $4 million in the first half of the disposal stock with a similar kind of volume in the second half. Does that mean that end of year inventory should be around somewhere like $39 million, $40 million?

So -- okay. Inventory on hand? Now that's a number I'm sort of right on top of. All right. So first, I'm going to go over why we haven't cleared it? So as I mentioned, we're clearing to one discrete customer in the U.S.A. And we would have cleared all of those, except there were freight problems getting contained up to the U.S.A. and because of those freight problems delaying everything, then the clearance coincided with the wild market coming on stream. And so when wild market comes on, so that's sort of Alaska, British Columbia, more than U.S.A., then that just comes on in a massive peak. And so, there's not the opportunity to create a product. And so the customer is now resuming the sales. We are carrying higher inventory -- so that's the reason for the delay, but is not a problem just resuming that post the wild season, which is now. So then, what's our inventory position other than that, we have built up quite a bit of smoked product, especially cold smoked products. And the reason we did that was that, that's a format that we get high value for. So if we are having to clear some products, and we can use like a frozen input to produce cold smoked. And so, we've run -- would run that ride up to a maximum. And that's why our inventory is higher than it historically is. Now the -- certainly, the inventory levels will reduce post Christmas. So it's normal for us to run-up both our smoked inventories prior to Christmas. And so, we've done more of that than the past, our inventory is higher, and then it will come down post Christmas. In terms of the numbers, I think we're talking to you later. So I'll have the actual number on all of that for our subsequent discussion.

Okay. That is basically helpful just to get a peak to where the final inventory number could land. And then just -- are you able to say how both the cost increases that you just got through?

Yes. So in the end, if we just take the U.S. market, that turned out to about $0.80 a kilo gilled and gut out fish.

So -- I thought you said...

We took a larger -- I think we took a larger increase in that, but with the mix effect, it works out effectively to $0.80, yes.

Sounds fair. And then just -- sorry, just final one for me. What would be the -- I know you guys have sort of stated some technical costs for Blue Endeavour more [indiscernible] like that. What was the all in cost for Blue Endeavour across both farm tops?

Okay. Well, they're the same, about $50 million and there's need a bit of contingency on that. There's about -- I don't know if I remember the numbers. Okay, so it's about 20 per farm, right, with the noise, yes that. So about $110 million actually, at $55 million per farm. And yes, there's working capital, of course, on top of that. So that's $50 million per farm. It's roughly about $10 million per barge opportunity too. It's about $10 million or $11 million for the penns and the warrens. In the first phase, we need a $20 million rowboat for both delivery of smoked and harvest. And in the second phase, we need $20 million, not for another rowboat, but for additional freshwater capacity. And then there's some production vessels and net cleaning vessels and those sort of things that may have the difference between that. So we're looking at $110 million all up for those phases with the initial phase, $20 million for the rowboat and the second phase $20 million on RAS facility. We found agricultural recirculation facility to increase our smoked [indiscernible].

Your next question comes from Joshua Dale from Craigs Investment Partners.

Just a few questions from me. On your premium pricing, you closed out which would be the favorable rates. But is there any comment you can make on sort of what would impact New Zealand dollar-denominated pricing going forward? It's clearly going to be less favorable?

Yes, there's no impact. So we are not taking down any of our pricing that we put a price increase in the 2 markets of particular focus on that within U.S. and New Zealand. We're not adjusting our pricing based on foreign exchange rates. We're still fully hedged. So our position -- our hedge to come into our policy, which is pretty much as we come up, which is the last 3 months, it's fully hedged. So we're not exposed to movements in the exchange rate, really, for very little between now and the end of the financial year. So we won't be making any adjustments based on the foreign exchange rates.

Right. So what you're saying is the unit closed out with surplus to requirements [indiscernible]. You didn't expect to use any of the hedging to possibly favorable rate compared what you're selling and increases there. Is that correct?

That's right. That's right. So when COVID came along and that opportunity arose to lock in some fantastic rates, we thought that the world's going to hell in a handbasket and we didn't bank on this. But we took out a lot of cover in case something went wrong. In case something did go wrong, and one time we had a -- it was way in excess of our sales requirements, and we're fully covered, also recovered the policy, which is basically fully covered for the remainder of our sales.

Okay. No, that makes sense. And just on the Blue Endeavour hearing, you say you made a lot of progress towards making the third parties an interesting products and things [indiscernible]. I'm just interested to hear whether if there's anything else in your view that might have [indiscernible] and also if you have any view on any potential conditions attached to that key thing?

Yes. Okay. And so we're still highly optimistic about Blue Endeavour. The reason is because the New Zealand government has an aquaculture strategy that we talked about earlier. And because they have a strategy, they will attend the hearing, and they will give evidence on their own behalf. And there's still 14 submitters against, which is also the government by the way. So you have the situation where you dock as the default position always opposes these sorts of applications. That's not because they think they're doing this, because they want to have a seat at the table in certain conditions, and drive the control of this to enact the government's strategies and together with New Zealand trading enterprise and whatnot. So you always have this sort of situation. This time around, I think we're going to get a whole -- I don't know this for effect, but I think we're going to get a whole of government response, and I'm hopeful of that, where different departments have got together and considered their position. They're running that independent of us, so I don't think that's been in absolute detail or for absolute certainty. But I know that they've got expert witnesses, and they will be at the hearing, and they will be giving evidence in support of their aquaculture strategy. So that is a key factor that gives us more confidence. Right. And I'll just give you a fairly diverse thing that can happen, and this actually has a reason. So there's other organizations that give evidence of some submitters. And for example, could be on landscape, and we anticipated there wouldn't be any issues on landscape because of the 7 K distance from the shore. But apparently, one of the values of landscape is wilderness and 7 K out wilderness exists, that's in a wild place. There's nothing out there and having a salmon farm would impact on the value of wilderness, for example. To which we point out, well, that would completely defeat the government's aquaculture strategy because, by definition, all open ocean aquaculture is in the wilderness area. And by putting a salmon farm, there is a small area of rudeness that's not wildness anymore. So the things like that arise, which we just didn't anticipate that happening. We're going back and having to look at that. And our experts are considering the merits of that particular argument. But there are the sort of things that can come up in a hearing like this. The aquaculture, because of the nature of it, because we're in new industry, because we're constantly updating and changing our practices, trying to improve them. Because we're going from inshore particular size to open ocean, we need the latitude to be able to move, use the best technology, use the best practices that come up. And the RMA is the exact opposite of that as you try to lock everything down, specify what you're going to do, then here's your resource constraint to make sure you stay within that parameter. And there's always these issues that centralize on the RMA. So it's just not a very good tool for us. And that's why these arguments about -- in this case, the one I'm giving you is on the landscape, can arise and take an unexpected turn. So what I do know is that we have a really, really comprehensive and well put together scientific case based on lots of modeling, lots of reports. And as we've engaged with those 14 submitters, we've done further work to try and understand their position and then to allay their concerns. But Josh, yes, can't guarantee. Nothing is guaranteed. We're highly optimistic. We've got more things on our side than ever before. And that's why we've got a high level of confidence. Is there anything else you want to ask about that specifically?

[indiscernible].

Josh?

Can you hear me right?

Yes, sorry just [indiscernible]. So go ahead.

Okay. No, that was a great explanation. Just one more question for me. Just conscious of time on changing your farming model back to the old version. But if something were undersized, and you need to [indiscernible], they're clearly getting older at the same time. But is the quality of the salmon purely resilient to the extra aging?

Yes. So sounds not a 100% there, but your -- the nature of the question is as salmon get older, are they less valuable? Is that the question there, Josh?

I think [indiscernible].

Yes. So no, the answer is the opposite of that. So I know there is some fish species. Red snapper is one that's also included. But as it gets older, not quite as sweet, not quite as good. The opposite with salmon, becomes more valuable. In fact, our most valuable salmon is a 30 pound plus fish called TYEE. So what happens with the salmon is it gets more fat marbling and better taste and richer color as it gets order. It's not like us, fortunately, although. So yes, there's no deterioration. In fact, the opposite of that. The thing that you might have heard about is we're trying to avoid maturation. So if the fish is bright and silver and as it continues to grow, it stays bright and silver, i.e., not maturing, then the value goes up. As soon as they start to mature, they start to really harvest the flesh and the oils out of their body to put them into their eggs and gametes. And then as a result of that, you get a diminishing of value. And that's what makes this species very -- more difficult to grow than some other business. You need to avoid this maturation process. So what you're saying can happen and that's the thing that we've learned over the last 30 years, and that's why we can grow larger and larger fish without maturation and we've got just a number of techniques to do that and the most predominant one being the use of light and when the fish are lit and when they're blocked in it. But the general rule is fish get more valuable as they get larger, bigger and older.

Your next question comes from Jamie Foulkes from Forsyth Barr.

Congratulations on what appears to be a pretty decent result. I'll keep my questions brief. Firstly, how should we think about feed cost inflation going forward, please?

Yes. Always interesting question. And Jamie, I've been here 12 years now. And I remember at the beginning, it was always birth and feed side of control, it's going to run ahead of inflation. We won't be able to recover the price. And in 12 years, I got to say, that never happened. In fact, I don't see it ever happening anymore. And the reason for that is that the technology around feed production has improved so much that a huge variety of additional inputs is now available that weren't there in the past. Now for example, we don't use a lot of soybean in our feed. They use a lot of it in Europe. And so there are anti nutritional factors in soybean for salmon and other animals that made it a terrible input for salmon feed. But with the advent of technology able to overcome that, it's now a massive potential input into salmon feed that didn't exist in the past. In fact, when the industry started, we were really subjected to the ups and downs of the commodity fish meal and fish oil markets. And it's now possible to produce salmon using none of that. So where can we get the oil from? We can now get the oil. It's a bit more expensive, but it's coming down. We can get the oil from algae now directly. So that's where it comes from normally. So we can grow algae, extract the oil, put them to the feed. We can -- anywhere that you can get a protein sort of animal based, that's plant based, as a result of that, you can get proteins from anywhere to put into salmon feed effectively. So this is what I say to some of the environmentalists who say, wow, you're using more fish to produce the salmon than the salmon generally. Well, that's definitely no longer true. And if you want, we can use none. Tell me what would you like us to use. But because of that, the price of feed standing like in NZD 2,400, NZD 2,500 per tonne for ages. And so we're just not worried about feed as an escalating price or cost input into our model like we used to be. So that's largely being mitigated by technology.

Great. And then secondly, on the other side of the coin, how confident are you on sustained price rises beyond kind of if we take a step back and we look at restaurants trying to look after their own cost base, have you seen any pricing pressure over the last few months or so as things reopened?

We certainly see pricing pressure. So -- but generally, we're able to overcome it. So Jamie, I think you're a bit newer on this or something. Or maybe haven't heard us how a conversation around plate costs. So typically, if we just take a $40 plate cost, $10 of that will be the food cost. And about $6.50 of that would be the center of protein cost. And as we get above those sort of levels, then people have to charge $45 for the plate or $50 for the place. And I think the old record used to be around $55, but I think we've had some plate costs pushing up against $70 or even $80 now, which is incredible. That's in the USA. So that's a limiting factor. And then what happens if we push the price increases too high. If we become a starter where you got a different -- you can afford a more expensive protein in a starter because there's so little of it versus a main meal. And so we can tell whether we're pushing that price too far by the proportion of main meals versus starters in any particular country. And you probably noticed because you go out to fantastic restaurants, I'm sure, that we're often a starter in New Zealand because, quite frankly, we're a poor country, and we're often the main in the U.S.A. So we know we can push the price more in the U.S.A. because there just we're often the main meal there, and we'll usually a starter here. So that -- we've got that mechanism built in. So it's rare for us to come off the menu completely. We just changed from a main to a starter. And then it comes down to, okay, how can we tell the story in such an engaging way that are covenants from New Zealand, this unique fish, King Salmon having all these amazing aging properties to get the plate cost up. So can we go from $40 to $45 to $50 to $55. And the answer to that is, yes, we can. So we talked about the KG concept, the KG concept delivers. The target for that concept that deliver an extra $2 margin per kilo and in the case do we achieve that. TYEE achieved a massively higher margin. So that proves that if you've got a more differentiated product and our plan with Blue Endeavour that we don't really talk about long-term is to grow a more differentiated product, that half of what we ultimately produce in Blue Endeavour will be these further value-added products. So for all of those reasons, because we have this built in mechanism between being a main and a starter, because we know when we tell the story better and provide further differentiation, we can go into the strategy with our price. So with TYEE, we saw those average prices there around $23, $24, while a TYEE sells to $60 per kilo. If -- with Blue Endeavour, we think it will have the same cost of goods as our regular fish, for example. So our ability to take further price increases is really strong. We see ourselves taking an inflation increase of the year depending on what inflation is. And then we see ourselves taking a increase probably based more on mix. And as we tell those stories more around KG, around TYEE, around [indiscernible], which is the new concepts we're bringing to market.

That does conclude our time for questions. I'll now hand back to Mr. Rosewarne for closing remarks.

Okay. So as ever, we've had this conversation a few times. We're incredibly enthusiastic about Blue Endeavour. And we see that being the first open ocean future's farm in New Zealand. We see it being right in line with the government strategy. We think it will ground truth of what we do. But we're saying we can go out there with a very benign effect. What is that benign effect is that we have an overall increase in biodiversity and abundance of many species. That's what we think we can achieve in the open ocean, okay? We've never done something. It's hard to definitively prove that. So we've got people submitted who are genuinely concerned about when something new is being done. Well, what if this lose effect, what if lose that effect? But there's quite a few of these farms around the world now. They're all relatively new. There's not enough data to definitively say what the effects are, but we know as you get into deeper water, and you get into cooler water, you tend to get a better environmental outcome. And so we think that ultimately they will prove that to be true, and we think Blue Endeavour will quickly prove that to be true. Because of that, we still think we can become New Zealand's most valuable industry, at the same time its greenest primary sector. So with that, I'll say goodbye, and we'll talk again in 6 months.

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