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

Hi. My name is John Ryder. I'm the Chair of New Zealand King Salmon, and I have with me Grant Rosewarne, the CEO of the company; Ben Rodgers, the CFO; and Grant Lovell, the General Manager of Aquaculture. I would like to welcome you to investors presentation for the FY '22 year. As you are aware, it has been a difficult year for us, the company, which we expect to rectify with a $60 million capital raise and a strategic and significant change to our farming model. However, to discuss the year further, I'd now like to hand over to our CEO to give the presentation.

Okay. Thank you, John. So this is our executive summary slide, and I'll just touch on the key points because we've got a lot of additional information in the slide pack further backwards and Ben and Grant will take you through that. So first of all, our FY '22 result, we achieved a pro forma EBITDA of $6.7 million, assisted by some foreign exchange closeouts. The year was impacted by our single year class model, that's our former production model and a severe mortality event right at the end of the year. And this has led to an impairment of goodwill and assets to the tune of $59 million. Then, FY '21, '22. COVID was a serious problem in terms of both sales and supply chain and freight costs, but we had resolved the sales problems by February '21. We still unfortunately have those ongoing supply issues and freight cost issues that most exported items confronted with. Our single year class model led to size and mortality problems right at the beginning of our financial year. And then we went into a better place, but then, at the -- right at the end of the year, we had the serious mortality event from a Marine heat wave, and it has led to the worst and earliest mortality event in the company's history started in mid-January. So I think you're all aware, in terms of our summer outcomes, if we have temperatures above 18 degrees, 4 weeks on end, that leads to mortality issues. In fact, half of our mortality is in 3 months of the year from our warm water sites. So given that, that's the case, we have decided, as John mentioned, to change our production model. So we've always had good reason to believe that we've either got new technology or practices or a good reason to believe that we will get a good outcome for our fish -- going through warm water sites on summer. We've used things like upwelling, rigorous net cleaning, but the fact that we've had this serious mortality event this summer has led us to change our strategy. So instead of trying to go through the summer using these various improved techniques, we're now changing to avoiding warm water summers. And for this reason, we're confident that we will become a more stable, reliable, reliable producer of King Salmon. FY '23 is very much a transition year for us. The mortality event that began at the end of last year has gone through to this year, so we're not going to have a good result this year. We're going to have a pro forma loss of $8 million to $12 million, but we believe our go-forward position after that, so from FY '24, is a $15 million to $19 million pro forma EBITDA profit. We are undertaking a write-off that John mentioned, of $60 million and this is to pay down all of our debt. The BNZ has been very supportive and has given us necessary waivers, and we will have a new smaller facility coming out the other side of this. Our revenue for last year was $175 million. Our harvest was 7,382. You can see the decline in our pro forma EBITDA there from around $25 million to $6.7 million. You can see our proforma net profit after tax, with the goodwill write-off included led to a loss of $55.7 million. Our distribution is around the world, with our quite famous Ora King brand, but also our, Regal brand. And the New Zealand and U.S. markets are about the same size, so that, of course, makes North America our most important export market. But we have a range of other markets, which helps make the company more resilient. Then, performance. You can -- This is the performance of our key markets. And the first thing to point out is North America and Japan. We had some clearances of distressed frozen stock there and some [ chilled ], also, into Japan. This was brought out by the first year of COVID for the first time in the company's history, demand did not exceed supply, just for that 1 year. We recovered out of that in the second year of COVID, as I mentioned. So the stock that went into the freezer during the first year of COVID was sold out last year. And we're able to do that to discrete customers without affecting our headline pricing on our branded products. So we're able to isolate that and not affect our branded prices on Regal or Ora King. You can see the Australian market has made a good recovery out of COVID there, and it remains a strong market for us. The domestic market has seen a decline, but we have a limited volume. We have to place it very carefully, and more has gone overseas, and you see that, that's primarily to North America over that time. And during the COVID last 2 years, we've certainly seen a big decrease in our foodservice volume, but a commensurate recovery or growth in our retail volume, and that's been evident in both New Zealand, but also, in North America. Japan, you see a big step down there -- sorry, the -- Asia, excluding Japan, you see a big step down there as the foodservice market suffered due to COVID and a recovery. And we see a good result in Europe as a result of that market excepting premium frozen fillet, so we took the opportunity to supply those products while we had them and the growth of our Regal brand in retail. So we do have very good price development in the market. So we were about $23.66 in FY '21, $22.11 in FY '22 and $27.35 is anticipated in FY '23. We entered one of our products, our Double Manuka Wood Roasted King Salmon in the Specialty Food Awards in North America, and out of 1,500 entrance, we won the top prize, so the team is very proud of that. Okay. Grant Lovell, GM of aquaculture.

Thank you, Grant. Just to run through the aquaculture summary for FY '22. So the summary is bookended by for shelf events. Initially, as we moved out of a single year class in the Pelorus, we had very large fish in the warmer water. And this impacted their performance, and we had a period of very low growth, which increased their FCR and also, an uptick in mortality. The middle part of the year would be described as business as usual, with good growth and low mortality. However, by the end of the year, we suffered a very early and significant mortality have been to the end FY '22, which obviously, has impacted FY '23. We can see the temperature profiles of our farms up here on the graph, showing our Waihinau farm, reaching 18 degrees in early January and remaining there right through. And just for comparison, the cooler water farm in the Tory Channel I have to show the difference here. Also, I guess, at the end of the year, we suffered a fee-related issue in Te Pangu farm, which saw an uptick in mortality there. That is not expected to continue and was exacerbated by COVID supply issues and very challenging to get feed into the country and on-site over the last period of FY '22. So just to run through those FY '22 results on the table there. The harvest volume, as mentioned, 7,382 tonnes. Our average weight was 3.5 kilograms. This was impacted by the Pelorus in the first quarter of FY '22, where we had an average weight of only 2.95 kilograms. The feed conversion ratio, again, impacted by the fish in the Pelorus, slightly elevated at 1.87%, and the closing livestock biomass down at just over 6,000 tonnes. Obviously, there's an impact of the mortality of being at the end of FY '22. On a more positive note, we did manage to maintain a lower cost of feed per kilogram. This was achieved by 2 pathways. One a renewed contract with our main supplier and also, second international player opening a mill in Tasmania, allowing us to consolidate feed supply out of Tasmania. Okay. Ben Rodgers, CFO.

Thank you, Grant. [indiscernible] to everyone. Just before we kick off, I just want to recognize standards of the New Zealand King Salmon team who have put in a lot of hard [indiscernible] to leave us in the position to present today. I just want to recognize them, especially my colleagues in finance. In terms of the financial year, as Grant Lovell mentioned, it was booking by two [indiscernible] related impacts, one stemming from our single year class and one stemming from a mortality event into FY '22. That has contributed to us recognizing net profit before tax loss $73 million. In addition to that, as a result of the mortality event and the proposed changes to the funding model, which we'll come on to soon. And we've also had a large asset impairment, so we've written off total impaired $59 million, that split between $39 million of goodwill and $20 million across our plant, equipment and intangibles. Look, like many -- one last thing on before I say that, but like many other exports have also been impacted by freight and it remains a significant headroom on a per kilogram cost, we're paying $1.20 more per kg when compared to pre-COVID levels that represents about a $7 million to $8 million headwind at our current sales levels. In terms of the FY '21 to '22 pro forma EBITDA walk, just a reminder that a reconciliation between our pro forma and GAAP results is provided in the appendix. And the intention behind this is to demonstrate what EBITDA looks like on a cash basis, so we back up a number of our fair value movements associated with in and between biological assets and in addition to treating our leases pre-IFRS 16. So those lease expenses go through as cash cost in addition to some FX closeouts we did. The kick out on the slide would be during FY '21, we were impacted by disruption to the foodservices market, which resulted in the large buildup of frozen whole fish on our balance sheet. The pleasing news was we were able to exit a significant amount of that whole fish during FY '22. So we met 1,000 tonnes on hand at the end of FY '21 to 840 tonnes at the end of FY '22. Now, the whole frozen that remains will be strategically used, given our -- the impact to our harvest model to our harvest in FY '23 from the mortality event. Noted before that freight remains a significant hit for us and the team has took to mortalities. The other thing we've called out on the slide was just in the first half of the year, we did early exit a number of FX contracts that were in the money to the tune of $13.5 million. From a balance sheet perspective, I would call out that even pre the mortality event New Zealand King Salmon did have high gearing, and following the mortality event and the need to transition to a new farming model, we do need to repair the balance sheet. So hence, the proposal to do to undertake an equity raise to the quantum of $60 million to repay our main term debt facilities and provide some liquidity for the business moving forward. Another couple of things I'd call out on the balance sheet would be the impairment, which we've talked about before. And in addition to that, we did have elevated levels of CapEx in FY '22. Those were broken down between $3.2 million Blue Endeavor resource consent when we'll come on to Blue Endeavor slide. We've also had a significant upgrade to our farming equipment and in addition to that, we did put just a new premise adjacent to our processing facilities in Nelson. I hand back over to Grant Lovell.

Thanks, Ben. So it's quite important for us just to touch on fish health, and go through a little bit of detail in this area. So apologies for what is in essence quite a wordy slide. However, look, the management of fish health remains an ongoing challenge, and we are continuing to build our understanding in this area. And adverse on negative fish outcome -- health outcomes are really straightforward events, and they almost always were involved a number of factors such as stress, the disease, the environmental conditions and husbandry and management decisions. So we've taken -- undertaken a significant amount of research, both in a clinical sense and in an operational sense to address these issues, and we have been able to exclude several risk factors, however, it is quite clear that significant issues do remain to be resolved. So just sort of run through some of the learnings we've undertaken. Water temperature, without the strongest correlation we have with mortality and significant adverse effects to occur when the temperature consistently exceeds 18 degrees. And this is obviously a key focus for us in regards to altering in the farming model. Looking at the single year class production, which we obviously have transitioned out of for all sites. It is a very good biosecurity measure for viral diseases. However, in relation to New Zealand King Salmon and it's very difficult to implement when we applied it in the Pelorus, which are more susceptible to thermal stress being exposed to the warmer water and the physical remediation systems in place, which were up well in, were not as effective as they are overseas. So consequently, we did not see the reduction in mortality. Stinging organisms associated with net fouling has been shown to induce lesions and creates fish stress and susceptibility. And this was a key theory of ours for quite a while. Have we've undertaken more clinical and operational trials and have eliminated this as the primary cause of mortality. We are aware that these organisms can still increase stress and potentially create some issues, and therefore, in hygiene and net cleaning is of clear importance to New Zealand King Salmon. However, in the trial, even took this year that it was perversely found that if we clean the net too frequently, it could increase the overall stress and overall mortality. Pathogenic microorganisms are very important, and they do play a part in our multifactorial mortality events. We have improved our sampling and diagnostic techniques over the last year. And undertaking, again, more clinical trials, and this has dramatically increased our knowledge of both the potential threats and our potential treatment options. We have some -- our ongoing immunization program is a key area and the key focus in this area to assist and has actually started to show some very positive results, which we'll come to shortly. And lastly, nutrition and the physical properties to feed, feed does play a major in fish health. It supports optimal performance, but it can have a potential for adverse impact. So we need to work closely with our feed suppliers and ensure we maintain a clear understanding of the feed quality and how the feed is performing in our environment. So this brings us to our mortality risk mitigation. And if I go straight to the graph on the right-hand side here, what we've undertaken there is we've got our warm water site, and cool water sites. So we've taken all the warm water sites in [ adverse ] temperature and in the red and then the blue done the same. And then we've undertaken the percentage mortality on those particular sites. And you do not need to be at efficient to see the absolute clear correlation between the warm water sites and the mortality. So the key part for us and the key focus is to eliminate those spikes and focused clearly on the cool water sites. So as such, we are changing the aquaculture model, and we are going to avoid farming at our warmer water sites and focus our production in the cooler waters of the Tory Channel. We are going to continue our vaccine deployment for known diseases and continuing our ongoing vaccine development, optimizing our feed quality, including pre-approval with a positive release testing system in collaboration with our feed companies. We are doing more work with our breeding program with our genetics partner, Xelect, with a focus on survival and thermal tolerance. And lastly, we're going to ensure that we have the appropriate resources and facilities within our fish health team. We have employed a new [indiscernible] for us for 1 year and who has been able to significantly improve our knowledge, 1 of only 2 fish feeds within New Zealand. So the key change to the aquaculture, the model. So as stated, we are going to avoid the summer in the warmer water sites, which is out the Pelorus farm and the Queen Charlotte Sound. This involves increasing our production focus on the cooler Tory Channel. Utilizing the geographically close region of the Queen Charlotte and Ruakaka and Otanerau to towing fish in March, April post the summer for grow-out and harvest pre-summer. As a result of these changes, we will be fallowing some sites in the Pelorus until we are able to activate Blue Endeavour where they're able to be utilized as a nursery or a harvest site. We estimate that these changes will reduce our mortality by approximately 50% by volume and believe that the reduction of harvest will be restricted to approximately 15%, maintaining our volume of around 6,500 tonnes. Our revised production volume does include 500 tonnes of seasonal harvest, and this is going to be achieved in 2 ways, transferring very large smolt post summer at approximately 500 to 600 grams to Waitata Farm, and growing this out at harvest pre-Christmas at between 2 to 2.5 kilos. And also, we are going to run an immunisation trial. Our new vaccine has shown to, so far, being relatively effective and mortality at the Waitata farm has been well under half of what we have seen on the other sites, and 60% of that farm was the first time to receive a new vaccine. So we do want to understand how this will perform on an ongoing basis. So we'll put some fish to see, then September, October at 100 grams, harvest out at 3 to 3.5 kilograms before the following Christmas. So if we look at that in an infographic sense, down there in the sort of bottom middle, we have our 3 Tory Channel farms. And that is where we'll be focusing main production, and that is where all fish will be over the summer months of the exception of our trial fish. You can see the tugboats and the arrows, those are our towing locations. We will to tow fish to post-summer, out to [ Ruakaka and Otanerau ] farms. Towing is something we already do and have been doing an ongoing basis. In fact, we completed a tow at the start of this week from Clay Point to Otanerau, the new model will increase the towing from 1/3 to a minimum of 2/3 per year, towing is a very controlled operation. It's probably it's a little bit more like controlled floating, utilizing large [ beams and tug ] that a takes it takes around 24 hours to go from the Tory Channel up to Otanerau farm at 1.5 knots and the fish actually realized that they are being moved. As we move to the farms up in the sort of middle top there in the Pelorus Sound, there we have our 4 farms there, Waihinau, Waitata, Kopaua and Forsyth, all farms other than Waitata will be fallowed -- may then will not be farmed in the near future. And Waitata, which we have seen very good results at this year in regards to first performance compared to the other Pelorus farms, will be utilized towards seasonal production and to run our trial through summer so that we can understand the effectiveness of the vaccine. If that is effective, that does provide us some nice upside in the medium term. And lastly, we've got our Blue Endeavour site up there. At the top, better, we have a slide coming up on that. Once that is underway and in use, we're able to convert the other Pelorus farms to nursery sites and a harvest site again, not farming them through summer. It's one of the advantages of the Blue Endeavour model, we're able to utilize those sites in the good farming months and then relocate those fish out to the Blue Endeavour site.

Thanks, Grant. So what that all means for FY '23 on a pro forma EBITDA basis? As noted by Grant Rosewarne earlier, FY '23 represents a transitional year for us as we transition to a new farming model. So one thing to call out is the expectation of the mortality benefit we expect to occur in FY '23. And that's because it is already happening or already happened to us in terms we have had a significant mortality event which has impacted our February and March results. Outside of that, the benefits of reducing our harvest size from 8,000 tonne business to 6,500 tonne business don't all flow through in FY '23. So FY '23 only represents a partial year of those savings. And the other thing to call out with the mortality event is the harvest we're looking at for FY '23 is around the 5,750 tonnes as opposed to what we see as a sustainable business moving to 6,500 tonnes. Next slide. Here. So what the business look like on a sustainable basis. The key benefits you can see here are obviously, a reduction in mortalities. We believe, by not farming those warmer sites over the summer months, we can reduce mortality in half. Also, moving to a smaller harvest gives us the ability to optimize our customers and our and NZKS. So make sure we are putting our salmon into our highest returning income streams. In addition to that, we see feed and freight benefits associated with lower sales levels or lower feed discharge from a harvest perspective. And in addition to that, we see some savings across processing and corporate from a reduction and the FTE footprint, from rightsizing the business. The other thing I'd just sort of call out on the slide is freight still remains a significant headwind when compared to pre-COVID levels and noting there is a significant amount of volatility for all our exporters who have exposure to freight. So whether it's COVID or crude oil volatility, there's lots of uncertainty and where freight prices will go in the future.

Okay. Thank you, Ben. So an update on Blue Endeavour. This certainly remains one of the most exciting projects within the company. There's a further 2 days of hearing right at the end of April, and then we can expect a result in June this year. There could be an appeal and that would take us another 6 months right to the end of the calendar year. Obviously, Blue Endeavour adds a lot of value to the company. It enables us to utilize those Pelorus fallowed sites as nursery sites, as Grant Lovell mentioned, that allows good asset utilization in shore and good use of our feed discharge consents that we've got, but also, it enables us to move a 1.5 kilo fish out into Blue Endeavour and get good utilization of those assets as well. The team are working through the final production plan and the technology. This time, we'll use existing technology that's used around the world. Importantly, this site has a very large thermal client, something we don't really have a strong term thermocline something we don't really have, a strong thermocline inside the sound. So what does that mean? It's much cooler at the bottom than the top. We've got a very deep water column here up to between 80 and 110 meters, which is 2x to 3x what we have inside the sounds. And because it's got that cooler water the further you go down, the trick for us is to use technology that enables our fish to access that cooler water, and the team are really turning their attention to that. Blue Endeavour has 2 phases of 5,000 tonnes each, so it adds 10,000 metric tons to the company. The earliest possible harvest is in FY '27, taking our total capacity at that time when fully built out to 6,500 metric tonnes.

Thanks, very much, just jump to the next page, please. Yes. So in terms of the equity raise, we're looking to the rights offer to raise of $60.1 million. Those permits will be used to repay our main total debt facilities and provide us with and liquidity to support the business through FY '23 as we transition to our new farming model. In addition to that, BNZ is providing us a new facility for $6.5 million, and we will be keeping our business finance guarantee facility as well for $4.3 million. And a key point to note with those BNZ facilities is that we will have covenants waived on those until April 2023. In terms of details on the rights offer, the impairments to do 2.85 for 1 every share owned rights offer, and that will approximate and around 401 million new shares. The offer price is $0.15 per share, and that represents a 55% discount to the theoretical price and 82% discount to the closing trading price, as at last month. Eligible retail shareholders to take up their rights, and so we'll have the opportunity to apply for additional new shares, which are attributable to any unexercised rights, allowing them to subscribe for additional new shares up to a maximum of 100% of their rights. And then a couple of other things to call out would be our major shareholder, Oregon, has precommitted to take up 100% of their rights. In addition to the directors also making a commitment as well, with the balance [ probably 100% ] by Jarden. Some key dates and the timetable, which would encourage you all to have a read through. Next slide, please, Grant. And just wanted to highlight, as of any investments, there are a number of risks, I would encourage you to read through the restrictions. So the intention now is to open it up for questions.

[Operator Instructions] Your first question comes from Jamie Foulkes from Forsyth Barr.

A couple of questions from me, please. Firstly, on Blue Endeavour. The obvious question is if the application is successful, would you be looking to raise further capital, please?

Yes. So Jamie, the first, we need to prove the new model. We are very confident in it that we think we need to do that. Blue Endeavour is therefore somewhat down the track. We're keeping every option open. Equity is one of those, but we will presumably have some cash by that time as well, and we probably will have an improved or larger banking facility also. So every option is on the table for funding Blue Endeavour.

Great. Secondly, on Blue Endeavour. I've read reports of temperatures reaching 18 degrees in the Cook Strait. How should we think about this in regards to the future model of mitigating warming waters?

Yes. I think Grant Lovell should answer that question. You there, Grant?

Yes, thanks. Thanks, Grant. Yes, I think Grant Rosewarne actually touched on this a little bit with regards to the commentary around the Blue Endeavour site and actually, the difference between that site and Endeavour site, the surface temperatures can reach 18 degrees at height of summer, but the surface temperature is not overly relevant to farming at particular site, and it really is the water temperature through the water column that is key. Blue Endeavour being 80 to 110 meters in depth, they'll have a significant thermocline right through. And an example of that would be in January when we measured the temperature, we saw a firm decline of 1.5 degree down to 20 meters. So it was down at 16 degrees versus an Endeavour farms would not have that at all. So the key part for us is to make sure that we are monitoring that and going forward. But even with climate change forecast of 1 to 4 degrees over the next 100 years, the site should remain in a good temperature profile for many years.

Great. Okay. And just on downsizing the business, are there any scale benefits that you could miss out on from being a smaller business? And secondly, can you give us a steer on what your FTE reduction profile looks like, please?

Yes, sure. So we were obviously looking at considerable growth through to 9,000 tonnes with our existing assets, and that's now not the case. We're going back to 6,500 tonnes. That does mean we have to rightsize the business. I don't see why -- I don't see any reason why we can't scale down appropriately. In fact, I know that we can. We're looking at about 100 positions being lost in the company. I will point out that certainly, in our production facilities, we have quite a high turnover. So it shouldn't be assumed that there will be redundancies necessarily. We're looking at all options, but natural attrition is certainly a factor there. And I was looking at that this morning. And I think we've lost about 35 people already just by natural attrition -- it might even be 40, actually, when I look right across the company. So we think we can scale down appropriately and we think we can get there largely by natural attrition, but we'll certainly monitor that and make sure we get a good outcome there.

So Grant, can I add to that, that by downsizing to, say, 6,500 tonnes, that puts upside pressure on prices because of the shortage of supply to our existing customers, and that could be a positive benefit.

Supplement base to answers, Jamie, would be. I think one way to think about it would be definitely pressure from a corporate overhead perspective, but on the flip side, if we have lower mortality levels, the efficiency of our feed goes up and it should be cheaper to grow salmon in terms of cost as well.

And lastly, on the efficiency side. Actually, we're consolidating a lot more into one area of the sound. So we do actually gain some logistics efficiencies as well.

Great. Final question for me. On the impairment charge, I saw, I think, $69 million. Could you walk me through the mechanics of this, please, particularly the goodwill?

Yes. So being here again. Like many corporates, you do, you have to do at an annual impairment test for them to annual impairment is done on a value and lease perspective. So we're looking at discounting the future cash flows of the business. One of the impacts of being having a smaller harvest profile means we would have lower free cash flows into the future. And as Grant talked about was looking at going from being an 8,000-tonne harvest business to a 9,000 tonne business to going from 8,000 tonnes versus [indiscernible] business and associated with that, a change in the risk profile of the company given its current financial position did impact the discount rates applied to those payment calculations as well. [indiscernible] Provide any additional color on that one-off one?

Understood. And thank you all for the transparency. That's all for me. Thanks.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Ryder for closing remarks.

Okay. I'd like to thank you for your participation in this presentation. We, as directors of the company, remain positive on the future of the company and hope that you are interested in the capital raise. And I'll now close the meeting. Thank you.