Sea Harvest Group Limited (SHG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the eighth Annual General Meeting of Sea Harvest Group Limited. I am Fred Robertson, your Chairman for the meeting. We will now proceed to the formal part of the meeting. At least 3 Sea Harvest Group shareholders are present at this meeting in person, representing 11,455,563 shares in the capital of the company. I advise that I'm holding proxies in respect of 305,364,474 ordinary shares in the company. The quorum of members required for the passing of ordinary and special resolutions is a minimum of 25% of the total number of shares capable of being voted present or by proxy. As these requirements have been met, I declare the meeting duly constituted. It is my intention to conduct voting on the resolutions proposed at this meeting by means of a poll. Furthermore, shareholders are encouraged to pose their questions in the text box by typing the question in the message icon on your screen. We will be taking questions after all resolutions have been proposed and probably during the voting period that you can then do your votes and ask your questions. The notice convening this Annual General Meeting has been in your possession for the prescribed period of time. Voting will be conducted by way of a poll and questions will be taken and answered after all the resolutions have been tabled. All resolutions have been proposed by Muhammad Brey and seconded by Felix Ratheb in their capacities as shareholders. Computershare will be acting as scrutineers for the meeting. The voting platform has been opened and will remain open while I read out all the resolutions. You will be allowed to vote on each resolution during this time. So kindly cast your votes accordingly. Ordinary resolution #1.1 to 1.3, reelection of nonexecutive directors retiring by rotation. In terms of the company's memorandum of incorporation, Ms. K. A. Lagler, Ms. C. K. Zama, Ms. T. Moodley retired by rotation and being eligible, offer themselves for reelection. Ordinary resolution 1.4, election of newly appointed Nonexecutive Director. Mr. Geoffrey George Fortuin is nominated for election as a Non-Executive Director. The Board of Sea Harvest once again welcomes Mr. Geoffrey Fortuin to the Board and believes that he will bring a wealth of knowledge and experience to the Sea Harvest Board. Ordinary Resolution #2, adoption of audited annual financial statements. The company and group annual financial statements, directors' report and Audit Risk Committee report, independent auditor's report and Social and Ethics Committee report for the year ended 31 December 2024 has been in your possession for some time. These cover fully the activities of the company, and I have nothing to add to the information contained in these documents. If there are any questions, I or one of my fellow directors shall do our best to answer them. Ordinary resolution #3, appointment of Ernst & Young as external auditor and appointment of Pierre Du Plessis as external audit partner. You are asked to consider the recommendation by the group's Audit and Risk Committee for the reappointment of Ernst & Young as auditors for the ensuing financial year with the designated auditor being Pierre Du Plessis. Ordinary resolution numbers 4.1 to 4.4, reelection of Chairperson and members of the Audit and Risk Committee. In terms of the Companies Act, the following directors of the company, namely Ms. K. A. Lagler, Mr. B. M. Rapiya, Mr. W. A. Hanekom and Ms. C. K. Zama are hereby nominated for reelection as members of the Audit and Risk Committee and as Ms. K.A. Lagler is nominated for reelection as Chairperson until the conclusion of the next Annual General Meeting. Ordinary resolution 5.1 to 5.5. Election of Chairperson and members of the Social and Ethics and Sustainability Committee. In terms of the Companies Act, the following directors of the company, including myself, F. Robertson, Mr. B. Rapiya, Ms. T. Moodley and Ms. C. K. Zama and Mr. Muhammad Brey are hereby nominated for election as members of the Social and Ethics Committee until the conclusion of the next Annual General Meeting. I remind members, please to cast your votes as you go along. Ordinary resolution #6, general authority to issue ordinary shares for cash. You are asked to approve only resolution #6, the effect of which is to authorize the directors to issue ordinary shares in the capital of the company for cash in accordance with the JSE listing requirements. This resolution requires the approval of at least 75% of the voting rights of shareholders exercised on the resolution. Please remember to cast your votes on the resolutions. Nonbinding advisory vote #1, approval of the remuneration policy. You are asked to consider as a nonbinding advisory vote, the remuneration policy of the company as set out on Pages 133 to 139 of the integrated report. Nonbinding advisory vote #2, approval of the implementation report. You are asked to consider as a nonbinding advisory vote, the implementation report of the company as set out on Pages 140 to 144 of the integrated report. Special resolution #1, general authority to repurchase the company's shares. You are asked to approve special resolution #1, the effect which is to authorize the company and its subsidiaries to repurchase its own shares. Special resolution #2, approval of nonexecutive directors' remuneration. You are asked to approve special resolution #2, the effect of which is to approve the nonexecutive directors' fees for the period from 1 July 2025 to 30 June 2026. Special resolution #3, general approval to provide financial assistance to related or interrelated companies and others. You are asked to approve special resolution #3. The effect of which is to authorize the company to provide direct or indirect financial assistance to related or interrelated companies and corporations in terms of Section 45 (3) and 45 (4) of the Companies Act. Special resolution #4, approval of provision of financial assistance for acquisition of shares. You are asked to approve special resolution #4, the effect of which is to authorize the company to provide direct or indirect financial assistance for the acquisition of shares in the company or a related or interrelated company in terms of Section 44 (3) of the Companies Act. Special resolution #5, specific authority to repurchase vested shares resulting from the company's profitable share plan. You are asked to approve [indiscernible] of which is to authorize the company through itself or any one or more of its subsidiaries to repurchase its own securities from participants of the Sea Harvest Group [indiscernible] scheme. Shareholders are asked that shareholders who are also participants in the Forfeitable Share Plan share plan scheme are precluded from voting on this resolution. 17, ordinary resolution #7, authorization of Directors and Company Secretary. You are asked to approve ordinary resolution #7, the effect of which is to authorize the Directors and Company Secretary to do all such things, sign all such documentation and take all such actions as may be necessary or incidental to the implementation of the ordinary and special resolution of this AGM. Ladies and gentlemen, I encourage you to vote. And while you are doing that and as all resolutions have been presented to you and you are busy voting, I will now ask Mr. Felix Ratheb to give us a business update with respect to the SENS announcement, which was released yesterday. Felix?

Thank you, Chair. Thank you very much. I'm sure there are lots of questions as well based on that announcement. But I think that I'll start with the positive in terms of what I term tailwinds. And you'll recall at the results presentation, I presented a graph which went back 20 years in terms of catch rates. And between 2004 and 2006, you saw 3 years of significantly declining catch rates, which ironically had the exact same effect that we've had in the last 3 years of decreased performance. And then we started to see a rebound in January and February. My view at the time was that these rebounds when they come after the 3 years continue. I'm happy to say that that was correct, and we have had that continuing all the way to the end of May. So we've had significantly improved hay catch rates in our core business. We've also had put a lot of effort in terms of efficiency improvements. You'll recall that we left close to 7,000 tonnes of fish in the water last year. And other than increased catch rates, we had put more effort in the water, and that has come through and showing dividends. And at the same time, put a lot of effort in terms of throughput through our facilities. So we've had very, very strong efficiency improvements in our business. We've also had a situation when I reported that we had a 20% reduction in the global cod quota. We, as Cape Hake compete globally against other whitefish species. More than 60% is sold internationally. And since then, the cod resource has declined further in terms of a TAC by another 30%, which creates a vacuum in the market of close to 600,000. The closest alternative would be Cape Hake. Those that are well aware of nature and groundfish will know that these are long-lived stocks. So an issue with cod does not change over a year. It's probably a 3- to 5-year phenomenon that we're seeing. So that all bodes very positive for our Cape Hake business, which is the main driver of the increased performance that we announced on SENS. We've also got very sound hedges in place. The rand has moved up and down depending on tariffs, et cetera, but we've got very sound hedges all the way to the end of the year. We've also had very good landings on our Pelagic operations, good throughputs, almost doubling of yields and sales that have been strong and managed to make most of the sales early to counter all the issues in terms of price that we've seen globally coming down on fishmeal and oil with Peru having a record season after the El Niño event has passed. So generally speaking, the performance was driven [indiscernible] by our fishing operations, both in Hake and Pelagic. We've also had a relatively good period on our Ladismith business. We've had increased [indiscernible] flow. The whole industry has seen that, driving production efficiencies and lower costs. and we are seeing the markets more in balance. So those have been the tailwinds in terms of what has contributed to the better numbers, very similar to the guidance we gave when we were presenting in the beginning of the year. However, we do face certain headwinds that have not managed to change, and that is in our abalone business. We continue to have tough trading conditions. Prices have declined further from the last time we spoke. China is facing a very difficult situation in terms of, number one, tariffs, but the housing crisis, and that has led to consumers not spending. So it's a spending issue more than anything else, and we are a luxury item. So we are seeing a 30% reduction in food service in high-end restaurants, and that has led to a decline in demand and a decline on price. And it's not only on abalone, the same phenomenon we are seeing with Louis Vuitton, Mont Blanc, Cuban cigars and anything else that is a luxury item. So until we have some positive signs out of China, I think that part of the world is going to continue to be tough. Fortunately, it's a much smaller part of our business. So that obviously has a much smaller effect. Lastly, on Australia, very early to tell. We only went fishing in the beginning of May, and it really is a half 2 business, and we'll only start seeing how catching is going because obviously, 2 drivers drive that business, and that is the catching of prawn and the price of prawns. So we'll see that later in the year and probably the next time we speak at the next results presentation. So it's very short and sweet chair. And -- but it gives a very good idea as to where the benefits are and where the business is heading in terms of the next quarter and the next half.

Thank you, Felix. Ladies and gentlemen, we are now -- while you are voting, we will now take any questions, and I -- one of my fellow directors will do our best to answer them. Are there any questions online?

Mr. Chairman, it's quite a long question. I'm trying to summarize it here in my -- in the notes. And it relates to the allocation of capital by management. And if you could expand on the allocation strategy, especially in the light of the performance of the acquisitions. And have your acquisitions were similar -- have that acquisitions met your return targets? And do you want to answer those first or you want me to...

Yes, let's take -- I think let's pause there. Let's rather just deal with those because it's a long question. I think -- but perhaps the best way of dealing with that particular question because I'm sure it's going to be most of the questions. It's absolutely normal when you have a poor year that these questions are going to be asked. So I think that maybe let's break it down in terms of the way we allocate capital and the decision-making around that, and I'll give that to Mo. And I think more importantly, when Mo finished, let's talk about the strategy around why we made certain acquisitions and what we've done. So Mo, maybe over to you for the first part.

No. Thanks, Felix. Thanks, [Chris], for the question. I think absolutely correct in the circumstances. So we do have a very robust investment criteria that we go through. Of course, management is an investment committee and Board and ultimately, even from a [indiscernible] perspective, the shareholder approval required for transactions at certain levels. As Felix has expounded on a number of occasions, the investment criteria started with some softer considerations before we get even into the numbers. And these go around security of tenure because we need to be able to establish that the sites that we own are available for a long time, allowing us to invest. The sustainability of the resources that we are pursuing. And certainly, we look at jurisdictions where the rules of law apply. So if we do run into trouble, we can always talk to the courts. Secondly, then we do look at vertically integrated businesses. We want to own the resource, which is becoming an increasingly scarce commodity. And thirdly, since most of our businesses were subscale, we will look at what do these acquisitions bring in terms of scale and management attention. So those are the sort of considerations before we get into the equally important number side of consideration. That then is really focused on looking at the long-term volumes. And if we look at -- we go back as long as 10, sometimes even 20 years in terms of looking at long-term volumes that are available to us from those businesses in order to take out cyclicality or even seasonality within those businesses. And we build our volumes up from that perspective. As you know, we're dealing with resources. So naturally, there will be ups and downs in those businesses. We then look back and forward from a price perspective, we look typically 3 to 5 years back from pricing and 1 year forward. And those are how we build the models. These then give us ultimately an outcome. And certainly, we seek a return above our average cost of capital, including building a margin of error. Of course, lastly, we will look at it from an earnings per share accretion perspective and acquisition would seek to be earnings accretive. So that really is a robust process, which we go through before ultimately a decision is made around an investment. These are supplemented, of course, with professional advisers who will assist us not only on the due diligence side, but even on the valuation side to establish appropriate values for these businesses. So yes, I mean, I mean, in summary, of course, some have come off. Some haven't yet returned the appropriate level of capital. But maybe I'll hand back to Felix to take us through that.

Yes. I think the more important issue is the strategic issues here. And I think we need to go back to the pre-listing statement, which we had 8 years ago. We haven't deviated at all from that prelisting statement in terms of having 4 pillars within our business that we wanted to build. And we're very clear. In terms of -- we're a small company on the West Coast and we needed to build a group. And we wanted to be one of the largest diversified fishing companies on the planet. The first thing that we needed to do is make sure we had scaled in our Hake business. So scale in a business particularly a fishing business makes a significant difference in terms of margins. And we did that. We bought #3 in the industry in terms of Viking that catapulted us to probably the largest Hake business in the Southern Hemisphere. And in my opinion, probably one of the strongest in terms of operating margins out of all whitefish companies. Even at very, very difficult times, it has very high operating margins, mainly because of scale. We then also wanted to be diversified [indiscernible] within species. And the reason is because you take out the fluctuations in terms of earnings. We've looked at this particular business that we bought 5 years ago, which was the West Point business. Unfortunately, we lost it at the time to Terrasan, but it came around 5 years later. This is a 105-year-old business. So it's seen the peaks and troughs of fishing, which is cyclical and a quality business, which we acquired. And again, it's proven to be a very resilient business, had a record year last year and even this year is doing particularly well. But saying that, I mean, I'm pretty sure that we will have poor years as well in our Pelagic business because you do have resources and nature that will change, and global pricing will change in that type of business. And that was the cornerstone. And I believe our journey has ended on that particular pillar from the perspective that we're probably too big right now in terms of doing more. You cannot be a fishing business and not look at aquaculture. And aquaculture is where growth is coming from. So that was the second pillar that we were very clear. We tried to get into oysters, we sold it; mussels, we sold; salmon, we sold. The business that we believe that had legs or the category was abalone simply because we've done it since 1994 in South Africa. Many don't know, I happened to be one of my first projects that I had to sell our abalone business in Sea Harvest. It was marine growers in [indiscernible], and we were expropriated, fortunately, with compensation. And that was the first time that we were involved in abalone. Many years later, nothing much has changed. It's the only specie we believe that has legs in terms of being farmed, economically viable in South Africa and has a massive market in terms of where to sell it, which is Mainland China and Hong Kong, Singapore with the big Chinese communities. The other advantage is that we don't play in that part of the world. Our business was very, very reliant on Europe and in Australia, and that was where growth was coming from. However, we bought, in our view, the best-in-class business in that category being Aqunion and integrated it with Viking. We are probably 40% of the volumes now that are produced. And if you do happen to go and see the farms out there, even our competitors would probably say we are the best-in-class farm and probably one of the larger abalone businesses. Now the question will be, was it the right strategy? And our view was that China was the growing market. And one has to look at it now and say that has been the reason for the nonperformance of that particular category. And it's really been since COVID where we've had it. So that's been the real problem there. It's been COVID and the recovery of the Chinese market. And it's not a capital allocation issue. That is an issue in terms of -- if we're taking a long-term view that China won't recover, then we will have a problem in this business. If we go to the next pillar, and I don't think we should stick to it as Australia because as Mo says, it's not necessarily Australia. We wanted to build our fishing business globally. We looked at many geographies, New Zealand, which was very attractive, the U.S., Canada. But unfortunately, you can never own the resource completely. You have to have partners, where Australia allowed us to be able to own it. We had a 25% of our export volumes were sold in Australia. And at the same time, we had a prawn business in Mozambique and [indiscernible]. So we understood prawning. And that was the rationale of moving into Australia. It had security of tenure, resources managed sustainably. We looked at the track record of the businesses also have been around since 1964, the one in 1960, one in 1964 and deployed capital to acquire those businesses. It has had some turbulence there in terms of heat waves. Again, very difficult to predict. We've had 1 or 2 years when we owned it, that was fine. But then we've had heat waves that have affected the seagrass, and we've seen a 50% -- 40% to 50% decline in the volumes that we've got, compounded by the same issues that abalone faces in the global pricing of prawns. Again, very difficult to predict those things. And it is cyclical. Again, if one looks forward, will prawn prices never recover and people won't eat prawns, will climate change continue and cause these heat waves on an ongoing basis. Again, we'll have to visit that because those are the issues. I don't think Mo's your capital allocation. I think it's got to do with all those trends going to persist in which case we can't get the required rate of return, or will it change, and what we've seen with resources is they do change. And the final one, which probably got the most attention is the last pillar in terms of us moving into dairy. And again, it wasn't an overnight thing where we said let's look at dairy. It was studying that category for 5 years and looking at very similar fundamentals to seafood, high margin globally, not necessarily in South Africa, not enough supply of milk and more demand with the protein category growing. And ironically, that has been the business in our care that has performed incredibly well and consistently. So really, the 2 areas where we have had difficulties have been the abalone sector and the Australian -- I wouldn't call it Australian, I would call it our prawn business. Those 2 businesses have had their own set of issues. So I think it's more of a strategic question than only a capital allocation question because it's not making the required returns because of the type of challenges that they are facing right now.

Thank you.

There’re more questions.

Yes, there were other questions attached to that one?

Yes. Thank you, Mr. Chairman. It's basically our management and shareholders aligned. In other words, does management own shares or enough shares in the group? And are the KPIs set for management aligned with value creation for shareholders?

Again, probably it's difficult because Andre is online, but I can answer that.

Let's give Andre a chance if he wants to -- first go ahead and then Andre can prepare himself, will add on.

Yes. I think it depends where you are in your cycle. So in the first couple of years, I think there were 3 areas where there was focus in terms of the KPIs. And that was retention of fishing rights. We were going through a fishing rights allocation process. And that was probably the most important KPI that we were facing because in our Horse Mackerel period, the basically 60% of the rights were taken away and given to new people. So if that had happened in Hake, we would have had a much bigger problem in our business. So there was a lot of focus on that. And at the same time, sustainability of resources was an issue. Our MSC was coming up for reassessment. And without MSC, which is global sustainability, we cannot access foreign markets. So all the rest is actually a result of making sure these are looked after. And then thirdly is obviously integrating the businesses that we were acquiring. There was a big focus on that. No business that you acquire is easy to integrate. You've got systems, you've got people, you've got cultures. When you go cross-border, even trickier. So a lot of that was focused on that. And at the same time, having the natural requirements that all of these schemes have in terms of [indiscernible] growth, return on capital employed and anything else that is required. So that is what was fit for purpose then. I do think going forward, as we've articulated in the previous results presentation that we've got 3 focus areas. The one is to address the capital structure, which is pay down debt as we move into a consolidation phase. The second one is turn around these businesses that are not performing or sell -- if they're noncore anymore. And to me, noncore is anything that's not making the required returns. And thirdly is optimize the businesses that have got the potential, which are cash cows. So I'm pretty sure that in the next -- let's call it, period, it will be aligned to those particular ones. And Mo, the last one, you'd know offhand what does management own in terms of total shares? I think it's close to over 20 million.

[indiscernible] and the implementation of MSR policy from this year.

So happy to have more though, no problem with that. So I think that answers the question, Konrad, unless Andre wanted to add to it.

Andre, you are online. Is there anything you want to add to it?

Chair, obviously, if you want to answer the question, there is lots of detail, but the committee once a year, maybe every second-year benchmark for what happens in the market. And then obviously, very important is the hurdles we set. And as Felix explained, had a serious effect on the hurdles we put in the last 5 years [indiscernible] exercise that we had to go through, which put quite a bit of shares from management. I think which they came out through quite well. But I think the big answer is we do benchmark and every year, we have a debate on what is the hurdles, what do we look for. So -- and then we get the answer we see sometimes it doesn't look like we came out to the right answers. But I think management is invested. And obviously, the big thing for us is to make sure that management and shareholder value is aligned.

Thank you, Andre. I could also add that we have introduced a minimum shareholder requirement for management. So that has been introduced in the last year. which will further go to a point of aligning management interest with shareholder interest. Whether it's sufficient, we don't know, Chris, but we will keep our eye as a Board, we will keep our eye on that as well.

Thank you. Is there any more...

No other questions online? Are there any further questions that shareholders might want to pose? Nothing else has come through. If there are no -- just a reminder, first of all, that the voting platform is still open and will close in the next minute. But if there are no further questions, we will ask that the voting platform be closed and the results to be displayed as soon as they are available. The results will be displayed online here, and the results will also be put on SENS as soon as it's available. Thank you. Are we going to see the results online here? It's coming up now. Right. Resolution have been passed with all the required number of votes. As we roll through, all of them have been passed. And the exact details will be posted online on our website as well as on the SENS. As all the votes have been received, I can confirm the resolutions have been passed by the requisite majority. There are no other business that has been requested of me to put on the agenda. So as all business has been transacted at this AGM and no other business is there to discuss, I can declare this meeting closed, and I thank you for your presence and your attention and support of Sea Harvest. Thank you.