Oceana Group Limited (O1F.F) Earnings Call Transcript & Summary

Starting off with Neville Brink, Group CEO; Zafar Mahomed, Group CFO; and Trevor Giles, who is the IR Contact and Group Development Executive. I think many of you have seen the SENS, the trading update put out yesterday for the second half. But I'll hand over now to Neville to maybe just give us an overview, and then we can go into Q&A.

Thanks, Sumil, and welcome, everybody. I don't know what the number is, but welcome, everybody. As Sumil said, we put a statement out yesterday, 11-month statement. You saw the numbers. We expect to be around 40% down both at the HEPS level and an earnings level -- earnings per share level. And what I'd like to do is just talk a bit about the context, not the actual trading update and give you some insight in terms of where that -- what drives those numbers. So I'm going to start off with the fishmeal and oil market, just to give you some insight of what has happened over the couple of years and what's driving that market. Obviously, the main negative in our results has come from the fish oil price and the massive drop and spike in pricing for fish oil in particular, but to a lesser extent, fish meal. So -- as you know, Peru is the largest producer of fishmeal in the world, fishmeal and oil. It produces about 35% to 40% of the world's supply, and it drives that commodity market in terms of pricing and supply. In 2023, as you know, we had the El Niño effect and the first season of Peru was a disaster. They produced very little. And the second season, they produced about 1.5 million tonnes. Traditionally, they produce around 4 million to 5 million tonnes annually, and it is the main supplier of oil and meal to both the aquaculture and pet food industry. In '20, obviously, the pricing then in particular for oil spiked to well over $6,500 and we certainly took advantage of that late in '23 and in '24, and as the pricing started coming down, some of our forward-looking contracts extended into the first half of 2025. And it's interesting when we look at -- and we've done some research on the fishmeal and fish oil market and what drives that. And there's a bank, the Rabobank, which is one of the leading agricultural banks in the world that does a lot of studies on aquaculture and agriculture and is presented at the International Fishmeal and Fish Oil Conference every year for the last 20 years. And it's interesting because, obviously, when we did our base case analysis in terms of our investment in Daybrook, we had certain assumptions. And a lot of those assumptions have played out. But what has been interesting is that the elasticity of pricing, in particular for oil is enormous. So when there is a shortage, there is no major alternative for oil. And that's why the pricing has jumped up to a level it did over the last couple of years. And when the supply balances, it comes down. It is not as elastic in the fish meal pricing. And we've seen some pickup in pricing and some drop as the supply normalized, but not anywhere near what we've seen in oil. And Rabobank's analysis points to a demand that will exceed supply sometime where the curve actually crosses where demand will always exceed even normal situation in production in around 2028. And what in our base case planning was that we'd see a linear increase in pricing over time for both fishmeal and fish oil. And that has been very different from what we've seen now, this massive spike. The other point which we didn't factor in, which is positive and negative is this climate change and the effect of El Niño and La Niña and the frequency of El Niño. So certainly, they're predicting that El Niños and La Niñas are going to be a lot more frequent as climate change takes effect. So certainly, that is the main driver behind our drop in performance this year. And I'll talk a bit about Daybrook now in terms of the actual 11 months and how fishing has gone. But just to give you an indication of pricing and the effect of both oil and meal, on $100 movement on fish oil pricing, it means somewhere between $40 million and $50 million at an operating level for us. And at $100 in fish meal, it's somewhere between $50 million and $60 million. So that movement in pricing is enormous in our -- and obviously, we're not -- we are price takers. We don't drive price. Because we certainly have -- we can influence some of our production, but we can't influence pricing. And that is the major factor in our drop in earnings -- our projected drop in earnings for this year. As far as Daybrook is concerned, it's had a reasonable season so far. We are actually -- it's a 28-week season from mid-April to mid-October. We're in -- we've just completed 21 weeks, and we're currently at about 520 million fish. Remember, last year, we landed just over 528 million fish, so well ahead of last year and kind of on par with the 5-year average. Traditionally, what we know is September is generally a good fishing season, and we're averaging between 20 million and 30 million fish a week. And then October, subject to weather and the warming of the -- sorry, cooling of the water, we see fishing dropping off. So our predictions are at current and based on historical levels, a season of around 600 million to 650 million fish, aside from any major weather disruption. And so far, based on the short-term forecast, we can see 2 to 3 weeks ahead. There's no major hurricane warning or major storm warming coming into the Gulf of Mexico. So certainly catches are reasonable as of week 21. We opened this year, as you know, with reasonably good stocks of both fishmeal and oil, and that was contracted at reasonable prices. Obviously, the tail end of the '24 spike still came through, and we had long-term contracts. But this industry remains a volatile industry. We certainly invested in this industry, not for the short term, but for the long term. And our view is that this is still a good industry that long term, demand will outstrip supply, supply being finite in terms of wild caught catches and demand growing on an ongoing basis as the world grapples with food security and there's continuous growth in aquaculture. So certainly, Daybrook is still a very viable business. We have no major CapEx plan for the -- all our CapEx and upgrades have happened over the last 2, 3 years, and there's nothing major planned for the next couple of years. And the factory is -- in variable factories and vessels, obviously, we are a 25% shareholder in the fishing operations. But certainly from a vessels and factory point of view, they're all in good shape, and we have to try and take advantage of spikes in volume. And hopefully, we see an uptick in pricing. The one thing I will say about pricing with this Peru catch '23 and then a reasonable season last year. We've just come through the first season of 2025, and it has been a reasonable season. The expectation was 3 million tonnes for the first season. They only caught 2.5 million tonnes. The research trip is actually on the go right now with the second season to start in around October, late October, early November. There is some concerns that was pointed out at the end of last season that the level of juvenile -- by juvenile and anchovy in the catch was too high, and it may have an effect on the second season, but that's too early to tell. The other thing that happened in particular, in fish oil in the year -- in the last 2 years was because of the exceptional price of oil, a lot of producers, in particular, in Southeast Asia, started converting frozen production, which they would normally sell into the frozen market, either the canning market or the whole frozen market into fishmeal and oil, because of the advantage that the price and oil gave them. So what we saw is not only a good season from Peru, but certainly some good production coming out of the non-accredited species. It's not MSC accredited or any sustainability accreditation. And that has resulted in a fairly healthy level of inventory in the market now, either in the traders warehouses in China or in some of the producers, the feed producers own warehouse, in particular, oil because they were wary of being caught short again with any spike in. So our belief is that pricing, in fact, is overcorrected to a point, and it's going to take a while for that inventory to work through the market and see some sort of normalized price in both fishmeal and oil. So it is a volatile market. We've got to play the game. And the only thing we can do is obviously maximize catch and make sure our factories are equipped to deal with spikes in volume and price. On the fishmeal and oil side in SA, very similar picture. It's a mirror image of what happens in Daybrook. Obviously, a lot smaller. We have two operations here. Catches have been pricing, obviously, same effect. We have slightly different variables in our oil and meal, higher protein, slightly lower EPA and DHA levels, but same pricing and trends that we see in Daybrook. So good fundamentals in terms of our production efficiencies, but not enough to weigh up against the massive drop in price. So both the factories there, we've had good catches on the industrial side in South Atlantic herring. As you know, the two industrial species is anchovy and herring. We had a record herring season this year. The industry caught just only 200,000 tonnes. Normally it's somewhere between 70,000 and 100,000 tonnes, so double what is normally caught. And that certainly sustained the business despite the fact that we saw very little anchovy, very surprising. We were expecting anchovies to bounce back quite strongly this year. Catches were very poor of anchovy. And we are a bit concerned for the next season in terms of what's happening to anchovy. There is a current research trip, which is due in November, in the Africana, will go out and do its research. It was late last year. The November research trip didn't happen and it only went in March this year. Our concern is that the findings are skewed because of the lateness of the trip. But there's a research trip in November this year, which is planned. And certainly, that will give us an indication of what's -- what's out there as far as anchovy is for next year. So both Daybrook and SA Fishmeal and Oil both suffered from really the drop in pricing in particular world, but to a lesser extent on fishmeal, and that will reflect in the results. One of the positive things in terms of our new procurement policy in terms of where we will procure our frozen product for the canned operations, our Lucky Star canned operations is the ability for our two fishmeal and oil operations here to take advantage of a high fat content of the product. So the oil yields certainly have benefited out of the frozen production and the frozen procurement that we've changed in the last 2 years. Let me talk a bit about Wild Caught now, and you saw the numbers -- you saw the comments in the trading update. And I'll break it down by species just to give you some indication of what's happening for species. Hake catch had a phenomenal year and it continues to have a phenomenal year. And obviously, you've seen the results were out recently, and they're reflecting the same thing. Catch rates have bounced back strongly. Our vessels are -- we've invested in the vessels over the last couple of years. So we've had minimal downtime, only planned maintenance, no unplanned maintenance or breakdowns. And the catch rates have driven costs down exceptionally and the market remains strong. So we've had very, very good demand from our European customers for frozen hake. But also our strategy where we are maximizing production through those vessels where we ensure that the vessels maximize throughput to its capacity, either of hake or by catch. So it's not a target approach where we only target hake, we target pulling that vessel on a daily basis and maximizing production. That has certainly played handsomely to the hake performance, and that's driven Wild Caught performance largely against last year, which is a very poor year. Obviously, the euro does play a role in hake, because it's mainly exported to Europe, and the euro has remained relatively strong versus the rand unlike the dollar, which has weakened over the last couple of months. Horse mackerel, and you know we operate the only dedicated mid-water trawler in the fishery. Very, very poor year, last year. We had almost 0 catches and a lengthy unplanned breakdown, which took the vessel out. And last year's operating profit was in excess of ZAR 140 million loss. We certainly were hoping that, that would bounce back this year. It is certainly better than last year, but not anywhere where the levels that we're happy with. That vessel is expensive to run. It runs at over ZAR 1 million a day. We catch 0 fish, that cost bounced up very quickly. We've seen an improvement in catches, but what is disappointing is the biomass is not spread up the East Coast. Now traditionally, we would catch from anywhere from catch Port of P all the way down to Mussel Bay or Cape St. Francis and we'd see good schools of fish over a long period of time. Last couple of years, that has disappeared. Currently, the vessel is fishing in the deep south, so not in the traditional areas and finding pockets of horse mackerel, but very isolated pockets. So catch a decent quantity today and then nothing for 3 days. So it certainly improved, but it does mean that we really have to look at that operating model. Is it sustainable for the long term operating a vessel of that capacity, of that cost, daily cost and in terms of its future maintenance cost and continue to operations. So it's something we're going to look at. But certainly, it's an improvement on last year, but it's not anywhere we would like and certainly doesn't bounce back as strongly as we'd like. The Namibian Horse Mackerel, also not as good as we hoped, certainly not at the level that the Desert Diamond is fishing. Catch rates have been consistent with the previous year, but well below long-term averages. And in Namibia, obviously, we only have a portion of our own quota. The balance of quota we have to buy and we buy it from bite holders that don't operate in the fishery. And obviously, they're looking for prices that don't take into account the financial viabilities and pricing of fuel and markets, et cetera, and it is a pressure. So Namibian performance has been okay relative to last year, but again, not where we'd like to and it needs a real focus in terms of understanding the politics that's driving the Namibian allocation of rights. And we are working with government for them to understand that there needs to be more support for fishing operators, particularly the operators that run the vessels in factories. So it is an ongoing challenge, and we'll certainly continue to do that. On our Squid business, which -- and you know, we invested over the last couple of years in additional rights and vessels, and we've basically doubled up the size of our Squid fleet, and we've doubled up the size of our Squid permits. And we've used this year to almost match the best vessels to the maximum amount of permits that are available. And I think that business is in a good position now to take advantage of a resource that we believe is going to bounce back. Remember, Squid has two main seasons, the mid-year season, which is the low season and then the peak season, which runs from November through to February, March. And certainly, the vessels we invested in the brand-new vessel, which was commissioned and sailed a month ago. And right now, we're disappointing in the results, because we haven't seen the comeback. What's happening on the East Coast is in Horse Mackerel is similar on Squid. And we're certainly hoping that, that season will bounce back in November, December. Certainly, our vessels and our permits are ready, and we believe in the long-term viability of the Squid industry, and we will continue to invest in that. A small part of our business is the two lobster businesses that we have, West Coast and East Coast. Both those businesses performed reasonably well. There's still reasonable demand for a high-value item, in particular to China, Japan and parts of Europe. And then obviously, on the South Coast Lobster, which is our deepwater lobster Port of P and Cape St. Francis, that has performed reasonably well. The only problem there is, we're dealing with the bulk of that product is exported to the states in tail form, and we're dealing with the continuous tariff uncertainty, which exists between South Africa and the U.S. We've managed to ride some of that out. But with a 30% tariff increase, it does have some pressure on pricing in that fishery. So it's something we're working with right now. But Lobster on a whole performed reasonably well, but not certainly a large portion of our business. On the Lucky Star side, and Lucky Star continues to perform well. It has a dominant market share in excess of 80%. It is sold to a consumer. And as you would have read in many of the results presentations in the FMCG field that consumers are under pressure. And generally volumes are down, in particular in the second half of this calendar year. We believe that Lucky Star will end in a positive volume growth, marginal growth, but it certainly will still be positive. And that is given the consumer that we cater for, who's really, really feeling pressure across the board, we think that's a credible performance for Lucky Star. And secondly, we've seen an improvement in margin. So in the basket of products that we were expanding in certainly enhances the margin. We maintain on the pilchard, a margin of somewhere around 9% to 10%. And the other extensions that we've now started to embark on are giving us margin enhancement across the board. So Lucky Star was pleased with the performance, a lot of promotional drive. Certainly, we know that consumers at the moment, certainly at that level are buying 80% of their purchases on promotion. They buy on broad sheet and they shop around where they can get best prices. Certainly, we've seen some pressure in the second half on Lucky Star. We put a PI through in April. The PI was a moderate PI just over 4%. And when it went through, there was definitely some kind of resistance to the pricing, and we had to deal back slightly to try and pick up that volume. And it is very, very price sensitive. But we've been embarked on an extensive promotional program across all of the major retailers and certainly has paid dividends in the last couple of months. And September so far looks good for Lucky Star. So I'm pleased with the Lucky Star performance. It will show volume increase. It will show margin enhancement. And that is difficult when you own 85% market share and are trading in a tough environment. Obviously, the stronger rand against the dollar. Remember, 90% of our production is dollar-denominated, either we buy finished goods from one of the canaries in Thailand, one of our partners in Thailand or we buy in frozen production from all around the world and produce it in our own factories, and that is all bought in dollars. So the strengthening dollar -- sorry, the strengthening rand against the dollar certainly plays in our favor going forward. We've taken certainly some cover and you've seen the rand has strengthened consistently over the last 4 or 5 months. And as we've seen spikes of that, we've taken some forward cover to lock in some of that benefit. So just to conclude, it's been a tough year, in particular, for our two fishmeal and oil businesses. It's been a good year for our Wild Caught and Lucky Star businesses. Long term, fishing businesses by the very nature are volatile, and we've got to accept the volatility. We still believe in the fishmeal and oil business and certainly the Rabobank research that kind of -- that is in their view, indicating that there will be a particular point in time, whether they write in 2028, where supply on a long-term basis will not be sufficient to meet demand. It is certainly positive for us, but we've got to ride these waves through. So I think that covers all of it, and I'm, Sumil, happy to take some questions.

Thanks for the update, Neville. I see Anthony has got his hand up very quickly. So Anthony, please go ahead.

No questions on Daybrook really. I mean, the price volatility is what it is, but I appreciate the context that you've provided there. So my two questions are, firstly, I mean, you mentioned just tariff impact in respect of Lobsters, which is not a big part of your business. But if you could provide a little bit more context. It seems like the U.S. and Europe have kind of sorted out their issues. But just if there are any residual issues or threats from a tariff point of view insofar as U.S. exports to other parts of the world are concerned. And then if you can provide a bit more context to what you're seeing in respect of local protein prices in SA. So I'm curious to hear that the 4% price increase on Lucky Star that you received pushback on that, because it does feel like carbohydrate prices are down a lot, and that's unlocked a bit of spending power to be directed in the way of protein. And we're hearing that beef prices have gone up a lot, poultry prices, especially IQF have gone up a lot. So I would have thought that the canned poultry category would benefit a little bit. And then while we're talking about cans, if you can just give us an update on any issues around MDM supply, chicken livers, et cetera, coming out of Brazil and just in terms of the supply chain, how that's working?

Okay. Let me start with the oil question. It's a good question because it did worry us. I mean, obviously, our major customers for our oil production is Europe. And there was concern that they would impose a reciprocal tariff on the U.S., which hasn't happened. And as far as we know and obviously, we understand that, that has been put to bed now and there is now -- so all our oil productions are going at a 0 tariff level. So it appears that, that has been put to bed, which is a big positive for us. On the pricing on Lucky Star, I mean, it did surprise us, and we're very conscious about price increases and what we do, and we were hesitant to put a price increase, but we needed to cover some input costs. And when we put it through and just to give you an idea, so Lucky Star or canned pilchards on promotion ranges from ZAR 21 a can to ZAR 23 a can. Off promotion on a normal deal was at about ZAR 26 a can. The moment it kind of set at ZAR 26, we saw some volume drop off. So it is something that consumers are aware of. Chicken prices have -- in terms of comparative prices have gone up slightly. So our view was exactly yours that there was some room for movement. But it's interesting how consumers are so aware of promotions, and they almost wait for the promotion before they buy. And then they will buy more than they require for that particular period of time, and they stock up. So it is a dynamic that we're very, very conscious of. We want to continue growing the volume growth, and we can't steal more from the pilchard market. We have to steal from the competing proteins. Obviously, over the period where there was the avian flu in Brazil and there was the concern about MDM coming in and one major producer or one major competitor for us is the Polony market. That's a massive. So that certainly gave -- there was some impetus when there was this scare, and that has now been resolved. The one thing we have done is now widened our network of suppliers of MDM, both for the canned meat and the chicken livers, because of the reliance on one particular producer from Brazil. So it just gives us a little bit more protection and risk mitigation. But that seems to be put to bed and we had built up sufficient stock, so it didn't affect our production either of the chicken livers or the canned meat and we're back into normal supply and demand at the moment. And then your last question was...

I think we covered. Yes. Thanks so much, and thank you again for taking the time to speak with us. Appreciate it.

Just as a reminder to post the questions in the chat or just raise your hand please. But yes, just a question from me in the meantime. Just on Daybrook, it looks as if pricing in the second half has been worse than expected than what you originally expected. Would that be correct? Because I think towards the first half, you had decent pricing. It was down significantly, but it was still, I think, better than the long-term average. Maybe if you could just comment on that.

Yes. Obviously, the first half, a lot of those contracts were concluded in the latter part of last year, knowing our stock carryover, knowing what we had. And the industry basically was not sure about the opening season of Peru. They knew it was going to be better, because they've seen '24 being good. So those prices were better than the long-term averages. The prices that we've seen in the second half are below -- have certainly been below expectations. As I said earlier, I think there's been an overcorrection. The market at the moment, both from a Fishmeal and a Fish Oil, it's not only oil, it's also Fishmeal is sitting on the fence now. They're all waiting to see what's going to happen with the second season in Peru. In China, there's reasonable stocks of Fishmeal, certainly in the traders' warehouses. Obviously, all of these producers that produced on a spot basis, converting normal frozen, that has gone into the market. The oil buyers generally have sufficient stock to carry them forward for a while. So they are -- and so no one is committing to pricing. And we -- obviously, we have a fair amount of and we had to sell some oil in the second half, and those were probably $150 below where we expected them to be.

And just on that, on the demand. So look, I think from a production point of view, you'll have a normal year or in line with your average. So it will be up from last year. How much volumes have you sold into the second half? Are you holding back more for first half next year, maybe when pricing improves? Is that a strategy because I think you did that last year.

So, what we've always said is, we know what our demand from our -- we've got two major markets, one being the pet food market in the U.S., four or five key customers and their demand is fairly consistent. So we've presold and we have to presell and commit enough production for them until May next year. So that is a philosophy that I've pushed hard that we're not going to let our customers down. Even if there was an advantage for us to sell all the stock this year and not hold stock, we're going to hold stock, because long term, it is the right strategy. And the same on oil. So we've sold oil in the last 2 months to our oil producers. We would -- will have a reasonable carryover stock of oil and meal, probably slightly down on last year on oil and slightly up on meal. We think that we yield this year from Daybrook is just above 11%. It was just on 12% last year, and it's still remaining. So it's still at a very healthy level, but not as good as last year. Long-term average is around 10%. We're sitting at about 11.2% or 11.3% at the moment. So healthy. And last year, we ended at 12%. So that's why we think we will probably end up with slightly less oil this year than we ended last year.

Okay. I guess it's a pricing that affects the profits on Daybrook more into the second half?

Yes, agree.

And I thought that maybe with the inclusion of the additional boats and fishing on weekends, volumes could have been a bit better. Was there any issues on the fishing side? Or is it just the recovery that you're seeing is back to just normal levels? It hasn't...

There are a couple of things in terms of fishing. First of all, weekend fishing has been more difficult to achieve than we -- I think we -- and obviously, when I say that I'm talking about our partner, Westbank, control of fishing. We are using 100% Americans on our vessels now given the constraints around visas. And it has been difficult to convince our fishermen to give up weekend. So we have achieved some weekend sale -- weekend fishing, but not as we do in South Africa, where a vessel fishes until it's full. Certainly, there is a different philosophy there. And I think our partner and Francois is trying to find ways of convincing his crew to fish every weekend. So that has been difficult. The catching has been reasonable. We have lost something from the change in the buffer zone from the 0.25 mile to 0.5 mile. So that is -- but I think it is something we've got to continue to focus, because it's the one area we can control. Our factory has a capacity to do close to 1 billion fish a year. And when we're catching 580 million to 650 million, there's plenty of spare capacity. And that is going to be the focus to try and trying to increase the volume and volume increase means a drop in pricing as well. The production costs come down by the increase in catch rates. So it is a focus for us.

So the additional vessel, is that still fishing?

It is, yes. We've got 12 vessels fishing now. So it is -- it's vessel and skippers. This fishery is not just about setting out a unit and fishing, it's a skipper and the crew do make -- there's a skill in fishing, not just -- it's an art. It's not just an effort. So a lot of work around that.

Just before we go to Anthony Clark, we have a question on the chat from Regmi Govinda from BCP. Thanks for making the time this morning. Do you perhaps have any thoughts on whom the Libstar buyer might be?

I only saw the notice this morning and no idea. I saw the cautionary thing we put out and it was news to us as much as anybody.

Excellent. Anthony, over to you.

It's Old Anthony here. What I can tell you, it's not Premier. They told me the AGM, they had no intention of bidding for Libstar because there was too much risk. So that's one company not bidding. I do have names of some of the others, but I'll keep that to myself because, as you know, I get around. I was at Felix in Mo a couple of weeks ago, discussing their results. Great news on your hake side. A couple of things I just want to touch base of you, given what they said to me. They indicated first over Desert Diamond. You've mentioned the challenges you've had with that very large expensive vessel. And they seem to intimate to me, there might be plans going forward to perhaps restructure that vessel and to move it into more profitable areas of fishing given Horse Mackerel has been problematic, and it is a very, very expensive ship to run and seemingly going forward, more nimble smaller vessels may be the way to go in the fishing around SA. That's my first question. And the second question, Felix mentioned that given the lack of survey in hake, conservatively, perhaps the government may trim the hake quota next year by 0% to 5%. Would you concur with that? Or what is your current view, please?

Anthony, good to see you again, and you do get around. Let me answer the Diamond. And obviously, it's a tough one for me personally, because I've been around for a long time in this industry, and I know what Diamond is capable of when the resource is strong. When it's 100, 120 tonnes a day, it can generate 2 million to 3 million profit a day, but it also can lose 2 million. So it is something we have to look at. We -- we were concerned when the drop-off happened 2, 3 years ago that it was a temporary issue that the biomass, it was not because of overfishing. It was not because there have been excess effort on the fishery. The climate change and the La Nino, El Nino affected it moved the fish to a different area and it would return. Unfortunately, it's now 3 years in the making, and we really haven't seen the Diamond bounce back to its historical levels. So we are evaluating what we do with the Diamond and see also quite right, it may mean that a more versatile dual-purpose vessel is the right option. But at this point, we haven't made a final decision, but it is something we are considering very seriously. And then as far as the hake resource is concerned, the jury is out at the moment. Initially at the beginning of the year because of the lack of research and the latest research, all indications were that there would be a 5% cut in the TAC. The latest information, and this has not been confirmed by that, is that because of the very strong comeback of resources, it may not be a cut. It may be status quo, which would be very pleasing for us. So we haven't had any confirmation. There's another research trip, which is due in the next month or so, and we'll certainly see that. But certainly, hake catches across both East and West Coast have been extremely strong for everybody, I&J, and ourselves. It's not one particular vessel or one method.

Sorry, Neville, just to follow on, what would you actually do with Desert Diamond to repurpose? Could it be used to catch hake?

No, it's not yet. It's a mid-water trawler, you'd have to change gear. The factory is not gear. The factory has got vertical plate freezers, so they process it whole round, which is not ideal for hake. That vessel would either have to be used in another fishery. If we decided to exit, it would be in another fishery. In other words, a mackerel fishery one somewhere in the world where you can get international licenses or it could be sold or scrapped. I mean, there are various options. But it is an expensive vessel. So I think it's in good shape. So there's nothing wrong with the vessel. We've maintained it well and it's looking good. But if the resource has fundamentally changed, the nature of the biomass on the East Coast has fundamentally changed and you're only catching very sporadically, it doesn't lend itself for a dedicated mid-water trawler. That vessel needs consistent volume. And certainly, in the last few years, we haven't seen that.

And you would have to invest in more vessels, effectively smaller vessels as well in order to continue?

Or a replacement vessel, yes, it's a replacement vessel that has the ability to fish Hake and Horse Mackerel and Ribbon and Kingklip as our Beatrice does. But in order to do that, you need to have the ability to switch nets. So hake and the bottom trawlers have a different gear and mid-water trawler carries a different door. So you need what's called a net drum, so that you can carry the other gear and the other net separately from what you use when you're fishing on the ground. So it's a different philosophy.

Okay. And just coming to the Namibian resource, is that any concerns around the biomass? Or is it just a catchability issue or whether you see...

There are some concerns around biomass. I think what's happened over the last 10 years is, government has allowed a lot more effort into the fishery. And although it's controlled by quota, in order to manage fisheries correctly, you don't only control, you have to control both, both quota, so you allow so much per year, but also effort because effort means more nets disturbing the spawning patterns of the fish, the way they aggregate. So our concerns is there's too much effort in the fishery, and it has affected the biomass. That is easy to correct. Over time, you can restrict effort and when you expect the fish bounce back fairly strongly. But we have and certainly the association, the Horse Mackerel Association in Namibia has written to the minister and expressed the concerns of the industry that one is, there's too much effort and a lot of it is also to do with the coaching that's coming from Angola. There are vessels that operate out of Angola, come across the borders, switch their VMS off and start fishing. There have been visual sightings. There's been aerial sightings of it, a lot of information we sent to government to try and curb that level of poaching, because which is affecting the resource in Namibia. So it is all fixable over time, but you need a political will and a political drive to do something about it.

So it looks as if Horse Mackerel will be under pressure for the near term. That business looks to me is a concern. Would that be correct?

Yes, I agree. I agree. It's capital intensive. Those vessels are not cheap to run. They need a certain volume, not only from a volume point of view, for maintenance, they are -- they have to be maintained in a certain class. That means the statutory requirements in terms of putting the vessel on a dry dock and doing whole surveys and engine maintenance periods. So it is expensive to run, so you need the volume to sustain that kind of capital investment. It's something that Zaf and I constantly the allocation of capital is a key component to our business. Our balance sheet is at a level we are not concerned, but is at a level that we've got to be very vigilant in terms of managing that balance sheet. And when we have capital requirements from Horse Mackerel vessels that are not delivering on the return that does focus us in terms of is it the right way to allocate capital.

The one upside on Horse Mackerel is fuel prices have come off from last year. So we have seen some benefit from a running cost perspective.

Well, while we're on capital allocation -- Yes, Anthony. Anthony, please go ahead.

Yes, it's me again. Just a very quick question. I was on the Brimstone results call a few weeks ago. And the tech they mentioned to me a little while ago, has the minister made his mind up yet? Or is it still deliberating and cogitating regarding the once empowered, always empowered rule, which we know has been a sticking point regarding the potential transaction between Brimstone and its varying states. Anything you can enlighten us regarding the dear old Minister and his deliberations?

Unfortunately, Anthony, I can't. I have had -- I had a meeting with the minister 3 or 4 months ago, and he did say to me it was top of mind. We believe that they are deliberating. They've done all the -- they've evaluated all the comments. But we haven't got any indication -- clear indication of when they're going to finalize that transfer policy. And it is key for not Brimstone, for everyone. The South African fishing industry is probably the most -- one of the most transformed industries in the country, well above most other industries. And we need and then -- and businesses certainly black empowerment, businesses need some certainty to realize some value, which is Brimstone's past problem. So we, as a company and as an association have written to DAF and suggested certain changes to the policy, in particular, setting a level that is sustainable, once empowered or over 50%, some level, but we haven't had clear timeline in terms of when they'll finalize it.

Neville, just remind us, wasn't that also supposed to happen the transfer -- the change in the transfer policy happened around the completion of SRP. So aren't they over and above the deadline?

Well, the policy -- the request for comments came out, Sumil, probably 1.5 years ago and was submitted by the industry. And obviously, then there was a change in minister. We also have had a change in DDG. The current DDG or she has retired, she taking early retirement. So there's now an acting DDG and it would probably be on his desk. But I don't -- the problem is until that we have clarity on who is the new appointment of DDG, I don't think that policy will move forward, because it will be a recommendation from him to the minister or from that new full-time DDG to the minister. So it is concerning that it's taking so long.

Yes. So, it will drag out a bit more longer. Alright. Just a reminder, if you have any questions, just put up your hand or post question in the chat. We have a few minutes left. I think just coming back to Lucky Star, it looks as if it is performing well, but your poultry TAC reduced this calendar year. But I think you said that margin upliftment. Could you just maybe comment one on the poultry TAC, your own canning abilities and then the new product lines that you've launched, that's quite interesting.

Okay. Yes, poultry TAC a bit disappointing and it's for two reasons. One, what happened is DAF issued an interim allocation because of the lateness of the research. The AFRICANA was supposed to go out late last year and then they do an indication of biomass and then they do some research and then give an interim allocation and then generally they do another survey in the early part of the year and they do a final allocation. Previous year, it was run -- it was about 65,000 tonnes of quota. This year, they gave an interim allocation of 30,000 tonnes. And then because of the delay of the research, it only went out in March. And when they did the second one, supposed to be the second one was the first one, the indications are fairly poor on -- and so they didn't give a second allocation of pilchards. But what was interesting is the, as opposed to previous years where we sometimes didn't catch it, we caught all of our quota. The industry caught the full quota. And remember, the allocation is split 50-50, 50% East Coast, 50% West Coast. We caught it in record time. So anecdotally and from what our vessels were seeing, the resource is very, very healthy. We saw strong catches, very quick catches. We caught all our quota in record time, but because of the research being late and then not seeing signs, which we think is because of the timing, not because of the resource, we didn't get a second allocation. Very concerning from a -- obviously, own quota is a lot cheaper than bought quota, bought frozen products. So it would have certainly enhanced our profitability. What is positive is that the research -- I mean, anticipation of next year's quota because of the good signs of pilchards is that there will be a decent allocation next year, unlike Anchovy. So we're very positive about red eye and very positive about pilchards. Anchovy is a concern. But it is a short-lived species. It bounces back very, very quickly. It lives for 2, 3 years. So if you've seen the historical charts, when there's been a low of a couple of years, you see a strong resurgence. We were hoping that it would be this year. Maybe it will only be next year. So we'll have to see. And then the second question was on...

The value-added...

The new products, yes. So obviously, we have the two new meat products, chicken livers and canned meat, both are starting to perform well. Still early days. A lot of work has been done. We've had to do some work on both factories. The chicken liver business, we have enhanced the factory quite extensively in terms of increasing its potential output. That's starting to come -- is now starting to perform and it's running at maximum capacity. So positive, but still a long way to go. And on the corn meat, interesting a lot of good growth from the export markets, cross-border markets, as we call them, Botswana, Namibia, Zimbabwe. Obviously, we are facing -- we have a competitor in the local market, which is very strong being Bull Brand in the Rhodes Food Group. And certainly, it has been a challenge because they've been highly competitive and likely so, and we've had to fight them hard. So -- but both businesses are starting to build some nice traction and enhance the margins of overall Lucky Star business.

Thanks, Neville. I don't have any questions. We're almost close to the end of the call. I don't know if there's any last questions from the floor, either through the chat or if you could just raise your hand. Thank you so much. It doesn't look as if we have more questions. So Neville, Zaf -- well actually, Zaf, one question I just thought of now, I forgot to ask you what is the cash flow and the debt repayments. What exactly is happening with the cash generated there in the U.S.? Will any of it be brought back to SA? Would you pay down the debt there in the U.S.?

It's actually a good question. Thanks, Sumil. So we took the opportunity to take some of the proceeds that we got from the oil sales from the first half to settle more debt. So we settled a further $15 million of debt in the U.S. So over the last 2.5 years, we've brought debt down from about $95 million to currently about $55 million. So there's been about $40 million. So the profits that we've made out of the oil price movement we've taken to reducing debt in the U.S. So we're getting to a point now where we'll be able to move towards a revolving credit facility as opposed to a term debt. We're in negotiations with the American banks around what is that pivot point. So we will probably have some news on that later. With regard to South Africa, we've been managing our working capital given the change in procurement. So we're very, very tight on working capital. And to Neville's point earlier, we've been very tough on how we allocate capital within the business. And so cash in South Africa, we're managing very carefully. But it's very pleasing to see that the South African business is recovering at a time when the U.S. business is not doing so well. So we're very positive on cash and making sure that we spend our capital as we wish. As you know, we're a cyclical business. So we manage our CapEx and cut our clock accordingly. So we've been very disciplined about that. And we take long-term investments. So even though we have short-term cyclical movements, you've seen in the U.S. some movements. You saw 3 years ago in South Africa, what that's done for us and now that Well Court is doing better. So we try and manage our cash accordingly and cut our clock accordingly. But what we will not do is make short-term decisions around capital investment that affect the long-term sustainability of our business. And that's really been our strategy so far.

At half year, you invested quite heavily in imported fish inventories. I'm guessing that has turned into the second half as -- but your volumes have been lower into the second half. So I'm just curious about that -- how did that dynamics work out? Did you just procure less fish in the second half?

Yes. So we will procure less fish because we fundamentally changed the cycle of when we procure fish. So we have a 4-month window when we procure frozen fish, and that will continue going forward. So what you'll see is that our debt will start to reduce from what we had in half year towards what we expect in September. The volumes don't really affect us that much, because the procurement for the next cycle will only start post the year-end.

We used to manage sales volumes...

Yes. And we manage our working capital according to that. We also have, obviously, creditors in that mix as well. So we look at our working capital on a holistic basis. But to answer your question, our debt compared to half year in South Africa will reduce.