Thank you for standing by, and welcome to the New Zealand King Salmon Investments Half-Year Results. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Grant Rosewarne, Chief Executive Officer. Please go ahead.
Good morning, everybody. First thing is to introduce our new CFO, Ben Rodgers, formerly of Z Energy and Kiwibank. Ben will give part of the presentation today. He's only been with us a week. If you could take it easy on the financial questions, that would be much appreciated. Ben's first action was to move our disclaimer from the back of our pack to the front of the pack. There's a few things I need to point out. We have, of course, put everything together with due care and attention. We don't accept any liability for any loss. There are forward statements regarding a variety of items. We can give no assurance about future results. Actual results may differ from those in the projections.
We have non-GAAP financial measures, mainly pro forma EBITDA and pro forma NPAT, and we use those because we think they give insight into the business. The presentation's of a general nature, we're not giving financial advice, a full statement there for you to read. All right. With that, we'll move on to slide number four, the summary. The first thing to say is that we certainly have had a difficult half. The first four months were impacted by our prior aquaculture model, the so-called single-year class model. The reason we attempted to do that was because it's recognized as best practice around the world. However, we do not have enough space, enough water space in the sea to effectively implement it.
As we've tried to do that, we've had some unintended consequences that were not foreseeable, and that mainly is smaller fish that became apparent in February. When that has happened and the fish are too small, the only way to get them to be larger is to pull back on the harvest, retain more fish in the system, feed them, and get them up to size. If we continue to harvest at a high rate, first of all, we're harvesting a small fish, which our customers not want, and also, there's not enough time for the remaining biomass to grow. You get a double whammy effect of smaller fish and less biomass, and in this case, also a more expensive fish.
The unfortunate thing about changing that production model was the fish in the pens still ate the feed, but they didn't put on the weight. We'd never attempted to do that before because we hadn't attempted to achieve single-year class across the entire company. That was a very unintended consequence, we've had to abandon that practice, and we've brought in what we call now the Prescient Aquaculture Model. That model is based on everything that we've done in the past. It's using our own local people. We're using our internally promoted team who know our genetics, they know our environment, our husbandry practices, and they're better able to predict outcomes based on that extensive local knowledge. Hence why we call the new model the Prescient Aquaculture Model.
The first four months were a loss situation then. We managed to sort of overcome that or counteract that with our foreign exchange closeouts. We got to June. We broke even. July was NZD 1.3 million pro forma EBITDA. August NZD 1.6 million pro forma EBITDA. Regarding COVID-19, we really haven't been affected from a sales sense with COVID-19 for this half. By the time we got to February, we had fully recovered our sales position, but that coincided with a lack of fish to be able to supply to the market. The effect of the lull of sales wasn't brought on by COVID, it was brought on by that production model. The remaining major impact of COVID is escalated freight costs. You can see there on page 4, they've gone from about NZD 2.50 a kilo to NZD 3.41 a kilo.
A further remaining effect is we've had to dispose of frozen stocks that built up during COVID-19, about 470 tons. We've done this to discrete customers in the U.S.A. and Japan without affecting the pricing or the remainder of the business. We were able to implement a price increase around August. That's across New Zealand and the North American market, and that has partially offset and mitigated increased costs. I suppose the other minor effect from COVID-19 is that the general inflation pressure on not only on freight, but on packaging, labor costs, and those other things as well, but they're much to a lesser degree, we can cover those with our price increases. It's going to be some time before we're able to overcome those freight issues or they come back in line, and we're hopeful that at some point they will come back in line.
We turn to page 5, just the results. We've had a sales result of 3,629 tons in the first half of 2022 versus 2,745 first half prior period, and that shows the recovery from the COVID-19 impact. Sales were NZD 80.1 million, 20% up on the prior period at NZD 67 million. Statutory net profit after tax, loss of NZD 5.6 million compared to the same loss the prior period. Pro forma operating EBITDA, a positive NZD 3.3 million compared to NZD 7.1 million in the prior period, and pro forma net profit after tax, NZD 2.1 million compared to NZD 6.1 million in the prior period. The outlook. Our fish size, and I'll show you a chart on this shortly, has normalized now. The restraint on the harvest saw an increase in the biomass and the size, and we have largely recovered our position there.
The operating profit improved from July, as I mentioned, through and from July. It actually started to break even in June. NZD 1.3 million in July, NZD 1.6 million in August. We are, of course, affected by lockdowns such as those that have occurred in Auckland. The US market is performing very strongly for us, and it's a bit of a counter to that occurring. As I said, we're not seeing any relief in the freight area at this stage. Right. If we go to slide six, this is our vision, purpose, mission, and values. Our vision is to be one of the top of the South's most valued organizations and the world's most inspirational salmon company. Our purpose is about creating the ultimate salmon experience. Our mission, we want every stakeholder who comes in contact with us to be better off as a result.
Our values are all about maximizing the outcome for all stakeholders. That's not only shareholders, that's team members, that's the environment, community, other stakeholders as well. We're all about continuous improvement, operating with integrity. We have a real teamwork and team culture, and we aspire to high quality based on innovative products. Our supporting strategies. These are the same eight that we tend to present at these meetings. I'll just point out a few things. Obviously, health and safety and food safety are sacrosanct, that's always number one. We only farm one species, and we're fairly unusual in that regard. If you have a look at Tassal in Tasmania, they farm prawns, trout, and Atlantic salmon. Givaudan have farmed kingfish, trout, and salmon. Closer to home, Sanford's have farmed oysters, mussels, and salmon.
We just do the one species because the King salmon is an extremely difficult species to grow. We want to just focus on that. We don't want our aquaculture resources defrayed over a large number of species. We need to be cost-competitive while we're doing that, and focusing on fish costs and bringing that down is really important. We want to dominate every premium salmon niche around the world. Whether that be in food service or pockets of retail or in the pet food area, we're looking for, where is there a premium niche where our competitive and comparative advantages with the King salmon species will give a premium return. You know that we're into branding, so we're moving all of our products to branded. The products that we put in the market as a result of COVID-19 were unbranded, and that was by intent.
We need engaged people, and we measure our engagement, if we're to achieve superior results. We're strongly engaged with our community, and together with sustainability, that's very important for our social license to operate. On to slide seven. You can see how our revenue has developed versus the past there with that top chart, 3,435 metric tons of harvest during first half 2022. You can see our distribution around the world and the real importance of both the New Zealand and the US market. When we have a fish size problem, it's that US market, and it's so large for us, that's why it causes a real difficulty. You can see we're diverse across a range of markets there. You can see our first half pro forma operating EBITDA and the trend there, and obviously with some difficulties we've had.
We've restated that, so to be a like-select comparison, you're all aware that we changed our financial year. The pro forma operating EBITDA below that, and this is some periods ending in December, some periods ending in July, and our first half statutory net profit after tax. On to slide eight. Our sustainable developments. First of all, that says regained, it should say retained our Best Aquaculture Practices 4-star certification. Top of the South community engagement to support our Blue Endeavour open ocean project. We've been engaged in a really high-quality consultation process with all submitters. There are 14 submitters against Blue Endeavour. That's a historically low number. A more normal number would be maybe 140 submitters against, and normally about double in favor. At this time, a much lower number of submitters.
We've been able to have a very high-quality engagement with them, and that's underway now. We're continuing our progress towards 100% reusable, recyclable, and compostable packaging, which is currently at 47%. We published our first anti-modern slavery statement, and we launched an internal fund to enable our people to initiate and bring to fruition sustainability practices and goals within their area of influence. Achievements, we're using our centralized procurement to support preferred suppliers who have like-minded sustainability and social responsibility and objectives. We're collaborating with the global product rules around Environmental Product Declarations for finfish. Looking at our brands. Firstly, just look at Regal. We've won quite a few accolades this year.
If I just focus perhaps on the first one, which is the Specialty Food Association Award, where we won, I think there were 1,500 products that were entered, we won the top award for protein, we went on to win the top award overall. That's quite a prestigious award to win. Often after you win that award, a lot of retailers will want to list and range your product. Also, we tend to do very well with the European-based Superior Taste Award. We've won some awards around food safety as well, which was great. One of our team members won that. We normally bring premium chefs and restaurateurs to New Zealand to show them what we do and to engage with them.
We haven't been able to do that, so instead, we've produced an Ōra King documentary film, and that's been well-received, and a number of you have attended and seen that. I think we've had 20,000 views now online, which is great. On to slide 10. Further on our brands. We now have our Regal Fresh available in the U.S. through a multi-store premium retailer. We've done a trial on our Ōra King Keiji product. That's a Japanese concept based around sashimi, and in our case, small fish that have a very unique flavor and texture and will yield a premium price in the market. We're launching our Omega Plus product range in Animates New Zealand, and we have an imminent launch in the U.S. of our pet food treats. There's a picture there of our Regal King Salmon Dip product.
There's three of those products coming. Obviously, it's got a really high percentage of salmon in it and tastes fantastic. We think it'll do extremely well. That product's also available for export. Okay, at this point, I'm handing over to Ben Rodgers.
[Non-English content] . Thank you, Grant. Not sure if Grant mentioned or not, but I'm reasonably new, so this is day seven for me. Rest assured that I'll make sure I can provide additional color and context for your results compared to what I provide today. In terms of the financial results, Grant's touched upon a number of these themes already. Focusing in on our GAAP numbers, half on half shows a reasonably consistent result of a NZD 5.6 million net profit after tax loss. Moving on to our preferred way of measuring results, the pro forma results, which I'm sure you're all familiar with, but essentially the main change there is taking the fair value gain or loss on our unsold fish and backing it out to look at our results just based on what we've sold and what we've achieved during the first half.
As Grant mentioned, the change in farming models had a big impact on the first half, and within that first half, we would have split that down further, the first quarter. The key things, which is sort of how that's shown up is we've had smaller fish. Smaller fish mean we have a deterioration in our feed conversion rates, which means it's costing us more to produce, which results in decreased gross margin and also Grant touched upon the mortalities from a change in the farming model as well. When you combine that with the increased freight costs, a number of businesses, not only our sales are seen in the market, that has a significant impact on our gross margin.
To offset that, we sold a number of, and closed out a number of in the money FX contracts, and that sort of split off our EBIT back to break even. We're looking at those first four months. More recently, June results were back to break even, and we printed a profit in July, and that trend has continued in August. We are looking forward to a significant listing results in H2, so the full-year story should be a story of two halves. Moving on to slide 13. The harvest by farm. As you can see, harvest numbers are slightly down on the prior year. Talked about this as well, and that's partly to mitigate the smaller fish size.
If we delay the harvest, reduce the harvest, we give the fish more time to grow, and it enables us to produce product which our customers are after, as Grant mentioned, key markets for us, being the U.S. and New Zealand. Moving on to slide 14. There's not too much I'd want to call out on this slide at the moment other than big focus for the team. The sales force will be to clear the remaining excess frozen inventory in H2. We got through close to 60% of that in the first half of the year, 40% to go. It's pretty critical just in terms of generating the positive cash flow, which flows on from our poor first half results. Big focus on H2 for me will be on looking at optimizing our working capital, but also where we spend our money from a CapEx perspective.
Probably a little bit brief rather for me, but looking forward to engaging with you all in the future. I'll hand back over to you, Grant.
Yeah. Thanks, Ben. Okay, now we're on slide 16, sales performance, and you can see our monthly sales trend there in sales G&G volume. We've marked on the charts, you can see in April 2020, the effect of COVID-19, in August 2020, the Auckland lockdown, then December 2020, the NZ retail promotions. We put a lot of heavy promotions onto Regal, both hot and cold smoke, to bolster our position. We had excess fish. It was better to do that than put more of the volume into the U.S. and Japan against those discrete customers. It made sense to do that. You can see we had a very nice sales trend up until December, January 2021. I've marked on the chart the small fish size and then the harvest restrictions that were during most of that half.
As we've come out of that in June, July, August, our profitability has returned, which has been fantastic. Some further points about the U.S. market. During COVID-19, so that's from April 2020 onwards, we developed and pivoted towards fresh fishmongers over there, and we have now retained that business, and we see the return of the U.S. food service base, and that's why the U.S. is performing so well for us. Right. We go on to sales by market, which is slide 17, and this is the all-important North American market. On this occasion, we can also put the forecast there in a lighter blue so you can see what's going on. This market has always performed extremely well for us. We could actually sell a lot more into this market than what we show here.
We're always limited by the volume of fish that we can grow, and our Ōra King is our top grade, and there's a limit on that as well. That's why this market, the demand is always much higher than the supply, except for that brief period right at the beginning of the first COVID lockdown. We have run some trials there on a number of our concepts. We've mentioned Keiji before, so that went extremely well. We have the inlet launch of Omega Plus pet food over there with a treat in any case. Yeah, this market is key to us. It's stable. They appreciate our branding. They know about our species. We've got a great reputation there. Yeah, we are very positive about the North American market. On to slide 18. Okay, there we go.
Slide 18 slipped out of the deck, here it is here. This is the Australian situation, a little different to the U.S. You can see the chart there, why is that so? The Australian market wasn't aligned with the rest of the world regarding profitability, we basically increased our prices in the U.S.A. to make it equivalent to the other markets in terms of return, that's why you see the volume coming back from 2018, 2019, down to 2020. We're into a stable situation. The volume that that generated went off to the U.S.A. and obtained those higher prices. Now we're indifferent, if you put it that way, as to whether we sell in the U.S. or Australia, because they are producing an equal return now.
Some other highlights regarding Australia are that we've now got a listing for the first time in a major retailer there. That's with our Regal smoked product, hot and cold, in 800 Coles supermarkets. Really looking forward to seeing how that goes. You see one of our chefs there, Ollie, in Noosa, proudly displaying an Ōra King fillet. Sales by market, slide 19. This is the other significant markets for us, and we've put these all on the same scale so that you can make a comparison. The first thing that always surprises everybody is that China, despite our attempts, is not a significant market for us. We've had problems. When things go well, then we strike some sort of market access problem. It is a bit on again, off again with China, but it is a small part of our portfolio.
We're also engaged with China with pet food. If we move to the left, Asia is a strong performing market in general. That excludes Japan and China. Thailand is, for example, a very good market for us. Yeah, we've performed well in that market over time. It's a really premium market for us, and you'll see us holding our position there versus the prior year, and you'll see the forecast there again is to do the same thing. Japan, we have quit some product into this market to discrete customers again. Japan, if you go back long enough, was our most important market and now is one of the relatively mid-markets. You'll see our development in Europe, which we will focus more on.
There's no reason why Europe can't be as big and profitable as the U.S.A. Because of the tyranny of distance and the shortage of fish, we've never really had the opportunity to develop it. We're doing more of that now than we did in the past. We're on to slide 20. Again, sales by market. You know that the food service market was highly disrupted and is now coming back around the world, especially in the U.S.A. We did refocus on the domestic market during that period. You know that we ran our price promotions. We also launched some new products. You'll see Al Brown there, he's one of our supporters and who advertises some of our products. You see a display to the right-hand side on the Omega Plus range. That's what's going into Animates there.
You'll see our volume development in New Zealand. As the export and particularly the U.S. has become more important to us, you see the volume going down in New Zealand and increasing in export. You can see that we've got quite a strong forecast coming up for the second half of this year. We're on to the next slide, which, is it this one? Slide 21. Here we go. Average sales prices. The important thing to take out here, you see the trend there with our pricing, but we've never taken a price decrease on any of our brands. As I mentioned, we have quit frozen product in particular, but also some fresh to discrete customers in the U.S.A. and Japan, that brings our average down. So too does it when we run price promotions in the domestic market.
Because we never took our headline prices down, either in Regal nor Ōra King, we didn't have to adjust that as we came out of COVID-19. The pricing base was already established. As I mentioned, we actually took a price increase on top of that, and that has been very effectively implemented. Quite pleased with the way that's gone. Okay, we're on to fish performance. I've put a chart there that shows the average size by month at harvest, and you can see the problem right in the middle. That's when we really encountered a dramatic drop-off in our fish size. It's fair to say we just did not see that coming. We got to February, and we began harvesting those fish, also a little bit in January there, and we were surprised at how small they were.
The reason being, normally you can tell how big a fish is going to be by how much it has eaten. The learning is, when you have fish in the pool over two summers rather than one summer, and when they're harvest size during that second summer, they eat the feed, but they don't put any weight on. That was the learning out of that practice, and that's why we're never repeating it again. We're rolling back to, we're taking the best out of that prior model, like upwelling and things like that, but we're not going to try and achieve single-year class when we don't have the space to be able to do so. It was the lack of space that forced these fish to go through two summers and be at harvest size during that second summer.
During the, you can see September 2021, October, and going forward, you can see what we're projecting in terms of fish size. The key number for us is 3.6 kilos. If we can achieve 3.6 kilos, all other things being equal, that's a large enough size for us to meet our market requirements in the U.S.A. Glad that it's up there, but you can see why we had such a good June, July, August. The fish size was excellent during that period. Other things to mention here, you can see the next chart down, you can see our 2019 brood and our 2020 brood. The reason I wanted to show you this was the 2019 brood was under the old model. The 2020 brood is under the Prescient Aquaculture Model, the new one that takes the best of everything, doesn't try to achieve single year class.
We really practice and focus on having the right fish of the right size, where they're most likely to survive, then we get a good cost outcome. You can see that the 2020 brood is vastly outperforming the 2019 brood on the old model, and we expect this new brood to be back to normal performance and also back to a normal size, which is great. As I stressed earlier, we have a local team managing aquaculture. They've got 20 years' worth of experience. It's only recently that we've had enough experience to appoint internally. Prior to that, we used to have managers come in from overseas, but our industry has got to a state of maturity and with people with enough experience to run the aquaculture operations now, and that's what's happening. We know that we do have these problems in the Pelorus Sound.
The East Australian Current is coming down from Indonesia. It's getting into the Pelorus more than it did in the past. It tends to be a bit warmer. Those three months for us, which are February, March, and April, are problematic. For this year around, we're going through it one, and they're smaller fish, so we're expecting a much better outcome from that situation. Right. Future farming. Yep. This is a map that shows our existing farms with a white circle around them, and then you see where Blue Endeavour is. You can see there's about 1,000 hectare site with the dotted rectangle, and you see the two farms, the southern phase and the northern phase. Each one of those can produce 5,000 tonnes of gilled and gutted King salmon. You can see it's about 7 km off the coast.
Due to the curvature of the Earth, you can only observe something, if you're standing down at sea level, which is about 5 km away. If you're standing on the beach, you will not be able to see either of those two farms, which is one of the reasons we think it will be more easily consented. We're on to slide 25, which is a bit more detail about Blue Endeavour. The hearing date is from the week of the 18th to the 22nd of October. It's very much in line with the government's aquaculture strategy, which is aimed at growing the industry from NZD 650 million to NZD 3 billion by 2030, which is not a long way away. That original target was NZD 3 billion by 2035, and the government's recently sharpened that up, so they're more bullish, not less, which is great.
This is obviously an extremely important initiative for the company. It not only is important for scale, it's really important, we think, also for improved fish health and higher-grade fish. We think we can take our unit value up ultimately as a result of this. It has a fantastic environmental outcome. Aquaculture has a very light footprint on the environment, and even lighter in the open ocean. As I mentioned earlier, with the two phases in full production, 10,000 tonnes of fish can be produced. It is offset by a reduction, which I'll show you on the next chart, in the inshore area. We're on to slide 26 now. There's two charts there.
The upper one is the situation regarding harvest per annum without Blue Endeavor, and then you see if Blue Endeavor is brought in, and we've taken it out to FY 2028, so you get the full picture there. Our plan would be to use many of our inshore sites, and certainly those in the Pelorus, to be sort of nursery farms where we grow the fish to, say, 1.4 kilos, something like that. Prior to the summer, we transfer them to Blue Endeavor. That's why you see the volume not getting up to 9,600, only getting it to winding up at 8,000, because our plan would be to take fewer farms through the summer, and transfer the fish to Blue Endeavor for the final grow out.
In that way, we get an improved mortality result, we think, obviously in the Pelorus, but a great result out in Blue Endeavour itself. Also we get a very good return on the infrastructure, reducing the cycle time actually on Blue Endeavour. We have growth under all scenarios, obviously a lot more growth with Blue Endeavour as part of our farm portfolio. The first harvest that would come off, as you can see there, is in FY 2025, so end of calendar year 2024. All right. With that's the end of the presentation with the appendices that follow. With that, I think we're going to take questions.
Thank you. If you wish to ask a question please press star one on your telephone and wait your name to be announced. If you wish to cancel your request please press star two. If your using a speaker phone please pick your handset to ask your question. Your first question comes from Nick Mar from Macquarie. Please go ahead.
Hey, guys. Just in terms of the longer-term outlook for the inshore farms, just under the status quo scenario, has that changed from the view that you could do 10,000-11,000 tons, given some of the consent challenges you've had in the last 12 months?
We don't think that's changed. There was some adverse publicity. I've got to say, things are never reflected well in the media. Actually, the council and New Zealand King Salmon wanted the same outcome. We're on the same side regarding that application, which would have led to an increase in our Waitata farm. We are appealing that decision. We think that the fact that the council is supportive is extremely helpful. At this stage, depending on when the appeal is heard, we don't think that's going to have an impact on the volumes that you see on this chart here. They're broadly in line with what we've said before. We've got further increases coming for our Waitata and Ngamahau farms. We don't think any of the recent consenting issues are going to impact on that at this stage.
It just so happens that we won't turn to utilize that increased feed capacity for some time. In any case, just because of the way we're operating the present model and where we want our fish to be. For that reason, we don't think it impacts the volume outcome going forward. It will if the appeal is unsuccessful.
Just relative to that long-term.
No.
number you had of 10 to 11, how much would that impact it?
Yeah, Nick, sorry, just can't make out the number. What was the number you said there?
10,000-11,000 tons is what I think you'd previously disclosed as the theoretical maximum capacity.
Yeah
for our sites.
There are some further increases later than FY 2028. I think it goes right out to, believe it or not, 32. There are some further increases after that, which we're not showing on this chart. There's actually no. Everything is as it was before. I will go back and check then, Nick. I can't actually remember 11. I remember 10. I'll go back and check. The last increase is on Ngamahau, and I think it's available in FY 2032 or around about there.
That is all good. In terms of the inventory clearance during the first half, could you just break down how much was in Japan versus U.S.? It looks like most of it's Japan and upcoming stuff's to the U.S. Is that right?
Yeah. We do have those numbers. I'm hoping one of my colleagues here has it. First of all, much more has been sold into the U.S. than Japan. What we sold into the U.S. is frozen to one customer. What we sold into Japan has been a bit of frozen. I think that was to a discrete customer and some fresh, again, to a discrete customer. There's probably three actually involved overall, with the majority being into the U.S. Yeah. Okay. I'm just getting the numbers for you there, Nick. Hang on. Japan was 200 tons, and the U.S.A. was 259 tons. I would say the majority of the remainder, which I think is about 350 tons to go, is going to the U.S.A.
Just on pricing, you mentioned there's no price decreases, which is good. In terms of the first half, obviously we're down. Could you just talk through the mix impacts, which would have meant that we're down, even excluding that frozen whole fresh for the export market and then for domestic as well?
Yeah. Let's have a think of how the mix impact could influence that. Obviously, if there's more smoked product sold, that has a positive influence on mix. In terms of margin, because of the, again, the shortage of fish, we have equivalized all the markets. The geographic mix doesn't tend to have so much of an effect these days. Yeah, the same with New Zealand, by the way. We make about, with the freight savings in New Zealand versus export, the same profitability out of New Zealand, and again, the same profitability out of retail and food service. Yeah, there's not a massive mix impact there.
There can be in terms of, if we go to North America and we've got a CIF price, so it's more expensive to get it, and it's sold at a higher price, say in New York versus Los Angeles. We definitely had the eastern seaboard drop off more than the western seaboard in the States, and that was adverse regarding price, but I don't think it made any difference regarding margin. Does that answer your question in enough detail, Nick, or not?
Not really. It's more kind of why the first half's, the 2022 is down, the first half 2021, by 5% on average.
Yeah. The reasons why it's down year-on-year are just simply, we've sold significant volumes, the volumes that we mentioned earlier, at very low prices. They are in a loss situation when we freeze or if we have to sell the fresh products under distress in Japan. That's the major impact on our margin. There's when we run the price promotions in retail in New Zealand, again, the headline price is the same, but we're providing a greater case deal to bring it down. That has really brought it down. Yeah, that fresh product that we sold to Japan was a promotional price point at a large sushi chain, which has reduced the margin. They're the things that have brought the average price down across the total portfolio, based on what we did clearing distressed or frozen stock into the U.S.A. and Japan.
Okay, great. Thanks a lot.
Thank you. Your next question comes from Christian Bell from Jarden. Please go ahead.
Good morning, Grant and team. The first question from me, the August EBITDA number of NZD 1.6 million, that must include the elevated freight costs that you guys highlighted?
The normal, yeah. Yes. That's the elevated freight cost is included in that. Yeah, we've gone from June breakeven, NZD 1.3 July, NZD 1.6. We're putting that out there because we believe that that's showing the emerging trend that we're on. Yeah, all the freight costs are into that. You can expect a further uplift. We get a traditional uplift in Christmas as well on top of that. We're trying to sort of indicate to you where our running rate is at the moment.
Yeah. I mean, acknowledging you just said that freight typically increases around Christmas anyway, if the freight costs were to remain at what they are now and you took the August run rate and times that by six, you get close to NZD 10 million of EBITDA, plus NZD 3 million in the first half.
Yeah
Which would be higher than your current guidance. You guys are held back from actually providing more details on guidance. I mean, all those things considered, is there potentially upside risk to your current guidance that you're holding back just in case freight gets any worse? Yeah, just trying to understand why you've held back there.
Yeah. First of all, we've got a lockdown situation in New Zealand. We don't know how long that's going to play out for. We have had compensation in the U.S., but it's still an issue. Auckland is probably our largest volume city that we have out of all of them. Because of that, the uncertainty associated with that, we're not updating our guidance. You saw that we're on that threshold, 3.6 is the magic number, and you saw from that chart we're on that threshold. For those reasons, we're not updating guidance just yet. Your calculation, with the exception of those things isn't far off.
Okay. Yeah, that's cool. You're just waiting for a bit more confidence on that end, maybe.
Yeah.
Yeah.
Yeah. I'm not expecting freight to blow out further. We think it's at a high level, and it may stay there. The visibility we have around the government subsidies and whatnot is we're okay for the end of the financial year.
Okay, cool. You closed out NZD 13 million worth of FX contracts in the first half. Do you have any idea, is it basically gone now, the outlook for any further excess closure?
The excess is all gone. When the dollar was at NZD 0.55 versus the U.S., we took out a substantial amount of cover, and the amount which is in excess of our sales has been closed out. That coincides beautifully with those distressed four months that we had. Now we're in a situation where we're back to profitability and don't require that. We are rebuilding our book as if anything dips below NZD 0.70 U.S.
Okay, cool. I guess that implies that the second half trading result, the profitability should be relatively clean, right? If you get what I'm saying. Yeah.
We don't have a summer, that's the reason we changed the financial year. We don't have a summer right at the end of the financial year, that's good. How long is Auckland going to be in lockdown? The 3.6 kilo fish, that's great. 3.4 kilo would be a problem, not anticipating that, but don't know. That's a fairly small change in the biological system. It is possible that could happen. We're putting much more work into assessing our fish, and we've got an improved camera for assessing the fish. We actually had some technical problems right at the time when we were moving into the [floors] and we started harvesting. That was a further reason why we didn't have that visibility. We've corrected that now. We're not going to redo our guidance until we've got that greater clarity about those two things.
Those forecast sales volumes that you've got, are they based on contracted volumes?
Yeah. Christian, it's very rare for us to have contracts because they don't work out well for us. We often want more flexibility than the contracts would allow. Remember, we're fully sold now, right? It's not a sales problem, in that case, we don't want contracts because if we want to move between markets or even move between product categories for some reason, if we want to move from fresh into smoke or whatever, a contract would prevent us from doing that. We do have some. They're for very stable products like frozen portions to the U.S.A. and things like that's by far the minority. I know that's unusual for a salmon company. It's all about having certain contracts, we find that reduces our profitability, we do not seek contracts.
Right. I guess you don't need them because you're the one in terms of supply and all of that.
Yeah.
The diagram on slide 22, which compares live weight costs between the 2020 brood and the 2019 brood. While it sort of demonstrates that the 2020 brood is performing much better than 2019, how does it compare to historical average? What does it look like compared to 2019?
Yeah. I just had a look at that, just so that's good. If you take the last seven years, it's our second-best performance in the last seven years. The 2019 brood is on track to be the worst performance ever. We've still got some of the 2019 brood harvest out, by the way. It's second worst right now. The thing is, with that particular brood, it did benefit from two relatively cool summers. It should've been a good result, but because of those factors that we mentioned with fish in the floors going through two summers instead of one, because they were harvest size during that second summer, we just had these perverse outcomes we've never anticipated. We're obviously never going to repeat that. We'll take the learnings. The 2020 brood is right back where we would anticipate.
In fact, as I said, it's the second-best performance in the last seven years.
Okay. Got that. Yeah, cool. Sorry, I've got so many questions, but, the next one would be, in terms of inventory, given you expect to clear, I guess the remainder of your excess disposal stock. Does that sort of require that, given you sold, well, in your commentary, it says NZD 4 million in the first half of the disposal stock. With a similar kind of volume in the second half, does that mean that end-of-year inventory should settle around somewhere like NZD 39 million, NZD 40 million?
Okay. Inventory on hand. Well, that's one number I'm sort of right on top of. First I'm going to go over why we haven't cleared it. As I mentioned, we're clearing to one discrete customer in the U.S.A. We would have cleared all of it, except there were freight problems getting containers up to the U.S.A. Because of those freight problems delaying everything, the clearance coincided with the wild market coming on stream. When the wild market comes on, that's sort of Alaska, British Columbia, northern U.S.A., that just comes on at a massive peak, there's not the opportunity to clear the product. The customer is now resuming the sales. That's the reason for the delay, not a problem.
We're just resuming that post the wild season, which is now. What's our inventory position other than that? We have built up quite a bit of smoked product, especially cold smoked product. The reason we did that was that's a format that we get high value for. If we are having to clear some product, and we can use as a frozen input to produce cold smokes, we've run that right up to maximum. That's why our inventory is higher than it historically is. Now, certainly the inventory levels will reduce post-Christmas. It's normal for us to run up both our smoked inventories prior to Christmas. We've done more of that than in the past. Our inventory is higher, and then that will come down post Christmas.
In terms of the numbers, I think we're talking to you later, so I'll have the actual numbers on all that for our subsequent discussion.
Okay. Yeah. That would be super helpful just to get a sense of where the final inventory number could land.
Yeah.
Just, are you able to say how big the price increase is that you just put through?
Yeah. In the end, if we just take the US market, that turned out to be about NZD 0.80 a kg gilled and gutted fish. NZD 0.80.
You're saying that?
Yeah. I think we took a larger increase than that, but with a mix effect, it works out effectively to NZD 0.80. Yeah.
Okay. Good. Just, sorry, the final one from me. I know you guys have sort of stated some capital costs for Blue Endeavour more recently, what, just a simple change, what would be the all-in cost for Blue Endeavour across both farms then?
Okay. Well, they're the same. They're about NZD 50 million, and there's a little bit of contingency on that. There's about I mean, I've forgot to remember all the numbers. Okay. It's about 20 per farm, right, with the moorings. Yep. About 110 actually, so NZD 55 million per farm. There's working capital, of course, on top of that. About NZD 50 million per farm. It's roughly about NZD 10 million per barge, of which you need two. It's about NZD 10 or NZD 11 million for the pens and the moorings. In the first phase, we need a NZD 20 million wellboat for both delivery of smolt and harvest. In the second phase, we need NZD 20 million, not for another wellboat, but for additional fresh water capacity.
There's production vessels and net cleaning vessels and those sort of things that make up the difference between that. So you're looking at NZD 110 all up for both phases with the initial phase, NZD 20 million on the wellboat, and the second phase, NZD 20 million on a RAS facility, aquaculture recirculation facility, to increase our smolt for going to sea.
Thank you. Your next question comes from Joshua Dale from Craigs Investment Partners. Please go ahead.
Good morning, Grant Rosewarne. Welcome, Ben Rodgers. Just a few questions from me. On your comments for premium pricing, your price out is actually the favorable rate. Is there any comment you can make on to what extent this will impact New Zealand dollar-denominated pricing going forward? It's clearly going to be less favorable.
Yeah, there's no impact. It's not taking down any of our pricing that we put a price increase in. The two markets of particular focus on that would be U.S. and New Zealand. We're not adjusting our pricing based on foreign exchange rates. We're still fully hedged, so our position, well, we're hedged according to our policy, which is pretty much as we come up to the last three months is it's fully hedged. We're not exposed to movements in the exchange rate, very little between now and the end of the financial year. We won't be making any adjustments based on foreign exchange rates.
Right. What you're saying is the hedging is closed out as surplus to requirements, like, you didn't expect to use any of that hedging to sort of get favorable rates compared to what you're selling at an increase of that. Is that correct?
That's right. When COVID came along and that opportunity arose to lock in some fantastic rates, we thought the world's going to hell in a handbasket, and it didn't, thank goodness. We took out a lot of cover in case something went wrong. In case something did go wrong, and we're glad we had it, but it was way in excess of our sales requirements. We're fully covered also. We're covered to policy, which is basically fully covered, for the remainder of our sales.
Okay. No, that makes sense. Just on the Blue Endeavour hearing, you've certainly made a lot of progress towards meeting with various parties and addressing price concerns as it is the hearing. I'm just interested to hear whether there is anything else in your view that might affect the likelihood of that consent being received, and also whether you have a view on any potential conditions attached to that consent.
Yeah. Okay. We're still highly optimistic about Blue Endeavour. The reason is because the New Zealand government has an aquaculture strategy that we talked about earlier. Because they have a strategy, they will attend the hearing, and they will give evidence on their own behalf. There are still 14 submitters against, which is also the government, by the way. You have the situation where DOC, as a default position, always opposes these sorts of applications. That's not because they think they're a bad thing. That's because they want to have a seat at the table when setting conditions. You have MPI, whose role it is to enact the government's strategies and together with the New Zealand Trade and Enterprise and whatnot. You always have this sort of situation.
This time around, I think we're going to get a whole of, I don't know this for a fact, but I think we're going to get a whole of government response. I'm hopeful of that, where the different departments have got together and considered their position. They're running that independent of us. I don't know that in absolute detail or for absolute certainty. I know they've got expert witnesses, and they will be at the hearing, and they will be giving evidence in support of their aquaculture strategy. That is a key factor that gives us more confidence. I'll just give you a fairly perverse thing that can happen. This actually has arisen.
There's other organizations that give evidence or some submitters, and for example, could be on landscape, and we anticipated there wouldn't be any issues on landscape because of the 7 km distance from the shore. Apparently, one of the values of landscape is wilderness, and 7 km out wilderness exists. That's a wild place. There's nothing out there, and having a salmon farm would impact on the value of wilderness, for example.
To which we point out, well, that would completely defeat the government's aquaculture strategy, because by definition, all open ocean aquaculture is in a wilderness area, and by putting a salmon farm, there is a small area of wilderness that's not wilderness anymore. Things like that arise, which we just didn't anticipate that happening. We're going back and having a look at that, and our experts are considering the merits of that particular argument.
They're the sort of things that can come up in a hearing like this. The aquaculture, because of the nature of it, because we're a new industry, because we're constantly updating and changing our practices and trying to improve them, because we're going from inshore protected sites to open ocean, we need the latitude to be able to move, use the best technology, use the best practices that come up. The RMA is the exact opposite of that. It tries to lock everything down, specify what you're going to do, then here's your resource consent to make sure you stay within that parameter. There's always these issues that seem to arise under the RMA. It's just not a very good tool for us.
That's why these arguments about, in this case, the one I'm giving you is on landscape, can arise and take an unexpected turn. What I do know is that we have a really comprehensive and well put together scientific case based on lots of modeling, lots of reports, and as we've engaged with those 14 submitters, we've done further work to try and understand their position and then to allay their concerns. Josh, yeah, can't guarantee. Nothing's guaranteed. We're highly optimistic. We've got more things on our side than ever before, and that's why we've got a high level of confidence. Is there anything else you want to ask about that specifically?
The-
There, Josh?
the issues around it. Can you hear me, Grant Rosewarne?
Yeah, sorry. You just came back on then. Go ahead.
Okay. No, that was a great explanation. Thank you. Just one more question from me, just conscious of time, on changing your farming model back to the old version. If salmon were undersized and you had to reseed them to lift their weight again, they're clearly getting older at the same time. Is the quality of the salmon fairly resilient to that extra aging?
Yeah. Sound's not 100% there, but the nature of the question is, as salmon get older, are they less valuable? Is that the question there, Josh?
Effectively, yes.
Yeah. No, the answer is the opposite of that. I know there are some fish species, and snapper is the one that's often quoted, but as it gets older, it's not quite as sweet, not quite as good. The opposite with salmon. Becomes more valuable. In fact, our most valuable salmon is a 30+ lbs fish called a Tyee. What happens with a salmon is it gets more fat marbling and better taste and richer color as it gets older. Not like us, unfortunately, all day. Yeah, there's no deterioration. In fact, the opposite of that. The thing that you might have heard about is we're trying to avoid maturation. If the fish is bright and silver, and as it continues to grow, it stays bright and silver, i.e., not maturing, then the value goes up.
As soon as they start to mature, they start to really harvest the flesh and the oils out of their body to put them into their eggs and gametes. Then as a result of that, you get a diminishing of value, and that's what makes the species more difficult to grow than some others is, you need to avoid this maturation process. What you're saying can happen, and that's the thing that we've learned over the last 30 years, and that's why we can grow larger and larger fish without maturation. We've got just a number of techniques that do that, the most dominant one being the use of light and when the fish are lit and when they're not lit. The general rule is our fish get more valuable as they get larger, bigger, and older.
Thank you. Your next question comes from Jamie Foulkes from Forsyth Barr. Please go ahead.
Morning, all. Congratulations on what appears to be a pretty decent result. I'll keep my questions brief. Firstly, how should we think about feed cost inflation going forward, please?
Yeah. Always an interesting question. Jamie, I've been here 12 years now, and I remember at the beginning it was always, "Feed's out of control. It's going to run ahead of inflation. We won't be able to recover the price." In 12 years, I've got to say, that's never happened. In fact, I don't see it ever happening anymore. The reason for that is that the technology around feed production has improved so much that a huge variety of additional inputs is now available that weren't there in the past. Now, for example, we don't use a lot of soybeans in our feed. They use a lot of it in Europe. There are anti-nutritional factors in soybeans for salmon and other animals that made it a terrible input for salmon feed.
With the advent of technology able to overcome that, it's now a massive potential input into salmon feed that didn't exist in the past. In fact, when the industry started, we were really subjected to the ups and downs of the commodity fish meal and fish oil markets, and it's now possible to produce salmon using none of that. Where can we get the oil from? We can now get the oil, it's a bit more expensive, but it's coming down. We can get the oil from algae now directly. That's where it comes from normally. We can grow algae, extract the oil, put it into the feed. Anywhere that you can get a protein, so that's animal-based, that's plant-based. As a result of that, you can get protein from anywhere to put into salmon feed effectively.
This is what I say to some of the environmentalists who say, you're using more fish to produce the salmon than the salmon generate. That's definitely no longer true. If we want, we can use none. Tell me, what would you like us to use? Because of that, the price of feed has been like New Zealand dollars, NZD 2,400, NZD 2,500 per ton for ages, we're just not worried about feed as an escalating price or cost input into our model like we used to be. That's largely been mitigated by technology.
Great. Thanks. Secondly, on the other side of the coin, how confident are you on sustained price rises beyond COVID? If we take a step back and we look at restaurants trying to look after their own cost base, have you seen any pricing pressure over the last few months or so as things reopen?
We certainly see pricing pressure. Generally, we're able to overcome it. Jamie Foulkes, I think you're a bit newer on this than some of the others, so maybe you haven't had as powerful a conversation around plate cost. Typically, if we just take a NZD 40 plate cost, NZD 10 of that will be the food cost, and about NZD 6.50 of that will be the center-of-plate protein cost. If we get above those sort of levels, then people have to charge NZD 45 for the plate or NZD 50 for the plate. I think the old record used to be around NZD 55, but I think we've had some plate costs pushing up against NZD 70 or even NZD 80 now, which is incredible. That's in the U.S.A. That's the limiting factor.
What happens if we push those price increases too high is we become a starter, where you've got a different. You can afford a more expensive protein than a starter because there's so little of it versus a main meal. We can tell whether we're pushing our prices too far by the proportion of main meals versus starters in any particular country. You probably notice, because you go to fantastic restaurants, I'm sure, that we're often a starter in New Zealand because quite frankly, we're a poor country and we're often a main in the U.S.A. We know we can push the price more in the U.S.A. because we're often a main meal there, and we're usually a starter here. We've got that mechanism built in. It's rare for us to come off the menu completely.
We just change from a main to a starter, then it comes down to, okay, can we tell the story in such an engaging way, provenance from New Zealand, this unique fish, King salmon having all these amazing eating properties to get the plate cost up. Can we go from NZD 40 to NZD 45 to NZD 50 to NZD 55? The answer to that is, yes, we can. We talked about the Ōra King Keiji concept. The Ōra King Keiji concept delivers. The target for that concept is to deliver an extra NZD 2 margin per kilo, in the test, we achieve that. Tyee achieves a massively higher margin. That proves that if you've got a more differentiated product, our plan with Blue Endeavour that we don't really talk about long term, is to grow a more differentiated product.
About half of what we ultimately produce on Blue Endeavor will be the further value-added products. For all of those reasons, because we have this built-in mechanism between being a main and a starter, because we know when we tell the story better and provide further differentiation, we can go into the stratosphere with our price. You saw those average prices there around NZD 23, NZD 24. Well, a Tyee sells for NZD 60 per kilo. With Blue Endeavor, we think it'll have the same cost of goods as our regular fish, for example. Our ability to take further price increases is really strong.
We see ourselves taking an inflation increase every year, depending on what the inflation is, and then we see ourselves taking an increase, probably based more on mix, as we tell those stories more around Keiji, around Tyee, around June Hog, which are the new concepts we're bringing to market.
Thank you. That does conclude our time for questions. I'll now hand back to Mr. Rosewarne for closing remarks.
Okay. As ever, and we've had this conversation a few times, we're incredibly enthusiastic about Blue Endeavour, and we see that being the first open ocean finfish farm in New Zealand. We see it being right in line with the government strategy. We think it will ground truth what we do. We're saying we can go out there with a very benign effect. What is that benign effect? That we have an overall increase in biodiversity and abundance of native species. That's what we think we can achieve in the open ocean. Okay. We've never done something. It's hard to definitively prove that.
We've got people, submitters, who are genuinely concerned about when something new is being done. Well, what if this is this effect? What if it is that effect? There's quite a few of these farms around the world now. They're all relatively new.
There's not enough data to definitively say what the effects are. We know, as you get into deeper water, as you get into cooler water, you tend to get a better environmental outcome. We think that ultimately they will prove that to be true, and we think Blue Endeavour will quickly prove that to be true. On top of that, we still think we can become New Zealand's most valuable industry and at the same time its greenest primary sector. With that, I'll say goodbye, and we'll talk again in six months.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.