Huon reports AUD 128 million annual loss, addresses JBS takeover bid
Dover, Tasmania, Australia-based salmon-farming firm Huon Aquaculture reported a loss of AUD 128 million (USD 93.4 million, EUR 79.2 million) for the fiscal year ending 30 June, 2021, on the heels of a takeover bid from Brazilian meat processing giant JBS.
In a letter to shareholders sent in advance of its FY2021 results issuance, Huon Chairman Neil Kearney said the company’s board is backing JBS’ offer of AUD 3.85 (USD 2.82, EUR 2.39) per share, and said rival suitor Tattarang Agrifood “was invited to participate further in the strategic review process (on the same customary terms as other process participants) and submit a final and binding offer but declined to do so.”
“Your directors will continue to act in the interests of Huon shareholders. We are focused on providing our shareholders, particularly retail shareholders, with the opportunity to secure proper value for all their Huon shares. We will not be distracted by external noise that does not provide Huon shareholders with that opportunity,” Kearney wrote.
In his letter, Kearney defended Huon against Tattarang owner Andrew Forrest’s criticism of Huon’s environmental approach. Forrest continued that criticism on 24 August, issuing a statement saying his lower bid for Huon had incorporated the cost of shifting its operations out of Tasmania’s Macquarie Harbor.
“Tattarang wanted to remove the pens from Macquarie Harbour where they are environmentally destructive, and have caused deep upset to the local community,” Forrest said, according to The Age. “Our offer was predicated on fixing the environment, focusing on production in deep water high current environments, or on land.”
Forrest has called for Australia’s Foreign Investment Review Board to reject JBS’ move to acquire Huon, and both he and a third interested party, Cooke Aquaculture, appear to be waiting for the result of the board’s decision before launching more formal acquisition efforts.
In its FY 2021 results, Huon said it had taken a non-cash impairment charge of AUD 113.9 million (USD 83.1 million, EUR 70.5 million) in February 2021 “due to downgraded cashflow projections based on the decline in salmon prices, high freight costs, the uncertainties within the global economy, and its reduced expectations for operating earnings (EBITDA) in FY2021.” A November 2020 fire that resulted in the escape of 50,000 salmon and an accident nine days later during a net-clearing operation that caused the escape of another 130,000 fish, along with the January 2021 theft of 250 metric tons (MT) of its salmon valued at AUD 4 million (USD 3.1 million, EUR 2.6 million), also hurt the company.
Reduced global demand for salmon caused by the global COVID-19 crisis resulted in lower prices, which heavily impacted the company due to its 39 percent increase in harvest tonnage in 2021, which had been planned as part of a five-year strategy to expand capacity to meet growth in the Australian market, it said in its annual report, delivered 26 August.
“The reduction in global demand for salmon resulted in the international salmon price remaining depressed for much of the year,” it said. “This impacted pricing across all Huon’s distribution channels, particularly the lower-priced spot export market. The scheduled increase in production resulted in the channel mix shifting towards the international market (44 percent of total volume) and contributed to a 10 percent drop in the overall average price to AUD 11.97 [USD 8.73, EUR 7.41] head-on gutted per kilogram.”
The price Huon found on the international market fell even more – by 12 percent in FY2021 compared to the previous year, according to the company – and increased freight costs due to limited international flights resulted in the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) dropping 65 percent year-over-year to AUD 16.7 million (USD 12.2 million, EUR 10.3 million). Huon reported an AUD 3 million (USD 2.2 million, EUR 1.9 million) negative operational cash flow in the year, citing a doubling of its freight costs to AUD 66 million (USD 48.1 million, EUR 40.8 million). Huon did receive support from a program from the Australian government designed to aid companies, the International Freight Assistance Mechanism, but with the company’s freight costs doubling, the company’s earnings still took a hit.
It was the Australian market that provided the best performance for Huon, with the company reporting “strong, direct gains” in the country’s retail segment following an advertising campaign and the launch of a new range of value-added products. Huon sold a record 7,200 MT, or 25 percent of its total production, in FY2021, up from 4,400 MT, or 19 percent of its sales in FY 2020. The Australian market helped Huon notch a 24 percent increase in revenue to AUD 426.4 million (USD 311 million, EUR 263.9 million) in the fiscal year, and aided the company in staunching its much steeper losses from the first half of the year, when it recorded an AUD 95.3 million (USD 73.6 million, EUR 61.1 million) loss for the six months ending 31 December, 2020.
“Volumes in the domestic wholesale market quickly recovered from the downturn in the second half of FY2020, with volumes sold through this channel up 18 percent in FY2021 compared to the previous year. However, pricing was significantly impacted (down 15 percent year-over-year) due in part to the ongoing disruption to the foodservice sector from COVID,” it said. “While tonnages during the year were the highest on record, this channel now represents 38 percent of sales revenue compared to 47 percent in  due to the fall in price and overall increase in production.”
But the company said Australia’s foodservice sector is improving its performance as 2021 advances, and demand for its salmon at retail has returned to its long-term average growth rate of 10 percent. Huon also benefitted from the initiation of three-year contracts signed with Coles and Woolworths, which it said will help boost the company’s percentage of its sales via retail from 20 percent in 2020 to 32 percent in 2022.
In August 2020, Huon completed a capital raise of AUD 64 million (USD 47 million, EUR 40 million) raised through a sale more than 21 million new shares of its stock, underwritten by Credit Suisse. The sale helped Huon reduce its net debt by 20 percent decrease in net debt, but in its FY 2021 results, it said its gearing remained unchanged from a year prior, standing at 54 percent. Huon said it “remained well-capitalized” but said its dividend to shareholders will remained suspended “until the business returns to profit.”
“The company continues to have the support from its lenders, agreeing in August 2021 to extend the revised terms for its banking facilities agreed in February 2021 for the period until 30 September, 2022, on and from such date the previous financial covenants recommence,” it said.
Looking forward to the next year and beyond, Huon said its improving farming efficiency and its lower cost of production – which fell from AUD 10.20 (USD 7.46, EUR 6.32) to AUD 9.65 (USD 7.06, EUR 5.98) year-over-year – would help it regain profitability. It said it intends to maintain its total volume of annual salmon production over the next two years at its current level of 35,000 MT, “given the ongoing constraints in the global market associated with the pandemic.”
Huon said it remained confident of achieving its strategic objective of balancing its sales mix, hoping to achieve around equal sales to the domestic retail sector, the Australian foodservice sector, and the export market. It said it hopes to sign more long-term contracts and reduce its sales on the spot market, and said its new processing facility in Western Australia, opened in December 2020, will strengthen its ability to obtain and meet major retail contracts and create new value-added products to meet local demand.
“As Huon continues to diversify its markets over time, this will limit its exposure to the more volatile pricing environment of the spot export market,” it said. “The move to a more stable production profile in the short- to medium-term, combined with a better balance in the channel mix, will deliver greater certainty of volume and more predictable pricing that should underpin more stable group financial performance in the future. Huon remains confident that the underlying fundamentals within the global salmon industry of a long-term structural shortfall in supply remain in place and the business has the capacity to meet the increasing demand as the global economy emerges from the pandemic.”
Photo courtesy of Huon Aquaculture