Huon Aquaculture Group Limited Annual Report 2017 | Chairman's Message and MD's Review | Chairman's Message

CHAIRMAN’S MESSAGE


Photo of Neil Kearney
Neil Kearney
Chairman


  • Investing for long-term growth
  • Managing risk in a volatile environment
  • Securing our sustainable future


In August 2016, I was honoured to succeed Peter Margin as Chairman of the Board of Huon Aquaculture (Huon), having served as a Director of the Company since ASX listing in 2014.

As founding Chairman of Huon, Peter guided the business through a volatile period and having co-operated closely together around the Board table for nearly two years, my transition to the role of Chairman has been smooth.

It is a pleasure to review our performance in FY2017, a year of record earnings for the Company. Our financial performance improved significantly over that of FY2016, as the positive impacts of the full implementation of the Controlled Growth Strategy (CGS) and strong increases in market demand enabled us to improve margins significantly, resulting in substantial growth in Operating EBITDA.

The completion of the CGS in FY2016 substantially de-risked the business and introduced long-term and sustainable efficiency gains. Domestic demand for salmon continues to grow at around 10% p.a. and, with strengthening margins and stable market conditions, Huon has sound prospects for further healthy earnings growth in FY2018 and FY2019.

However, the Company believes that, if it is to grow and prosper over the long term, it must maintain broad social acceptance of its operations. Consistent with that approach, a key goal of the CGS was the introduction of new hatcheries, seal-proof offshore Fortress Pens, feed barges and mooring systems and lease site optimisation to reduce Huon’s impact on the environment.

Business Performance

In FY2017 Huon’s operating EBITDA, at $62.8 million, was $36.4 million higher than in the previous corresponding period (pcp), as ongoing efficiency savings and strong sales growth led to substantial margin improvement.

Huon achieved a statutory net profit after tax (NPAT) of $42.2 million, a substantial improvement on the unsatisfactory FY2016 NPAT result of $3.4 million, which was severely affected by that year’s early harvest (necessitated by climatic factors), poor feed performance and by adverse market conditions.

We believe that the earnings volatility that has affected our business in recent years is now largely behind us, although Huon, in common with all aquaculture businesses, is subject to the effect of local and international growing conditions.

Board and management expect that the combined effect of buoyant prices, strong performance from the 2016 Year Class and productivity gains being delivered as forecast from the CGS will underpin further growth in profit in FY2018.

The Company’s balance sheet remained strong at the end of FY2017, with Huon’s total gearing ratio declining to a comfortable 14.7% (net debt/net assets) from 24.8% a year earlier.

The Huon three pillar business strategy
Growing the market Growing production and operational efficiency Growing safely and sustainability

Strategy

It is hard to overstate the importance of our 2014-16 CGS investment, which has strengthened each stage of our production process, including our ability to respond quickly to extreme weather events and other risks.

However, the Company is not resting on its laurels and we are continuing to invest significantly in research and development to secure our sustainable future. Huon is not only getting the production basics right but is also creating opportunities through technical and market development and innovative efficiency projects.

Huon is currently considering the potential of greater species diversification that leverages the Company’s technological advancements and applies its aquaculture expertise, demonstrated by Huon’s current Yellowtail Kingfish trial in NSW.

The production of high quality farmed salmon remains Huon’s core business and we will ensure that our salmon farming production techniques continue to be benchmarked to the world’s best. We will continually improve our business efficiencies and maximise Huon’s channel marketing opportunities.

In this context, it is pleasing that in FY2017 the proportion of our salmon production sold into the Australian retail market channel increased to 22% from less than 10% in the pcp.

The Company’s over-arching business strategy remains clear. Huon intends to:

  • Grow the market through increased consumption, better channel mix, enhancement of sales and brand value, and innovative species diversification;
  • Build production and enhance operational efficiency as a result of investment made via the CGS program and marine lease optimisation; and
  • Safely and sustainably grow the Huon business through development of our people, a strong safety culture and unwavering commitment to continuous improvement and community participation.

Dividend Policy

In light of the significant turnaround in Huon’s earnings performance in FY2017 and following consideration of the capital needs of the business, Directors have declared an inaugural dividend of 5 cents per share for 2017, franked at 50%. The dividend will be paid on 12 October 2017 to shareholders as at the record date of 22 September 2017.

It is the Board’s intention to maintain an annual dividend payout ratio of up to 35% of net operating profit after tax, subject to the financing and capital expenditure requirements of the Company.

Huon’s ability to pay dividends and the extent to which they are franked, will depend on a number of external factors, such as extreme climatic conditions and issues relating to animal husbandry which are beyond the Company’s control.

At Huon’s current stage of growth, it is likely that tax payable by the Company will remain low. As a result, it is expected that future franking rates will remain consistent with the 50% rate provided in the current dividend.

Litigation

My review would not be complete without a brief comment on recent and ongoing legal matters.

The Board is pleased that the commercial dispute with Ridley AgriProducts was resolved through a mediated settlement agreed in June 2017. This resulted in compensation payable to Huon of $4.5 million, which was recognised in the FY2017 accounts.

Early in 2017 Huon commenced proceedings in the Supreme Court of Tasmania and in the Federal Court of Australia seeking review of the decisions of the Tasmanian Environmental Authority that set biomass levels for the Harbour and for declarations that the current Federal Minister’s decision is invalid in that it leaves the determination of biomass to the Tasmanian Government and the Tasmanian Environmental Protection Authority and that they are failing in their duty to protect World Heritage listed Macquarie Harbour (and the endangered Maugean skate) by permitting biomass levels in the Harbour to remain at unsustainable levels.

Huon’s view, based on publicly available reports from the Institute of Marine and Antarctic Studies (the best available scientific evidence), is that the Harbour cannot currently sustain a biomass of greater than 10,000 tonnes and we are continuing to pursue the legal means available to us to protect this precious Tasmanian water resource and the endangered species that it contains whilst ensuring its long-term viability for salmon-farming.

The litigation is ongoing.

Conclusion

Your Directors are confident that the turnaround in Huon’s earnings performance in FY2017 reflects the soundness of the Company’s business strategy and that continuing growth in revenue and earnings is sustainable.

The full impact of our CGS investment, as measured by substantially improved operating efficiencies, is expected to deliver further earnings growth in the current year and beyond.

On behalf of the Board I wish to thank our customers, suppliers, local communities, employees, and our shareholders for their support.

Neil Kearney Signature
Neil Kearney, Chairman

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