STATEMENT OF EVIDENCE OF ANDREW CHRISTOPHER CLARK IN RELATION TO DEMAND, EFFICIENCY, AND OWNERSHIP
OF NEW ZEALAND KING SALMON CO LIMITED 22 JUNE 2012
D A Nolan / J D K Gardner-Hopkins Phone 64 4 499 9555
Fax 64 4 499 9556 PO Box 10-214 DX SX11189 Wellington
IN THE MATTER of a Board of Inquiry appointed under section 149J of the Resource Management Act 1991 to consider The New Zealand King Salmon Co. Limited's private plan change requests to the Marlborough Sounds Resource Management Plan and resource consent applications for marine farming at nine sites located in the Marlborough Sounds
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INTRODUCTION
Qualifications and Experience 3
Scope of Evidence 3
THE DEMAND FOR KING SALMON 4
Early development of our market 4
Growth in New Zealand market and overseas 5
The new Ōra King brand 6
Market supply and demand – additional details 8
Conclusion as to demand 11
WHY NZ KING SALMON IS APPLYING FOR 9 SITES NOW 12
Long term consequences of lack of waterspace 14
PRODUCTIVITY OF NEW WATERSPACE, AND OTHER ISSUES 17
NZ KING SALMON - OWNERSHIP 20
EXECUTIVE SUMMARY
Kofi Annan congratulated the industry for its focus on improving sustainability, with initiatives such as the Aquaculture Stewardship Council, then asked for more attention to the potential long-term impacts of climate change to increase productivity in conditions to come, in the developing countries as well as the developed world. Reviewing the industries current approach to improving productivity and sustainability he commented; “I do not ask you to change direction, but I ask you to accelerate progress. We need to work together if we are to overcome world hunger.”1
A. I am Chief Financial Officer of NZ King Salmon. In this brief, I focus first on explaining NZ King Salmon's present, pressing, need for additional salmon farm space.
B. NZ King Salmon has a high level of understanding about what sites are productive for King salmon. We are continuing to develop our marketing and branding to stimulate demand in the market for our product.
C. In the retail market, primarily in New Zealand, we have built the Regal and Southern Ocean brands and we have recently launched a new premium foodservice brand called Ōra King into selected markets.
D. However, NZ King Salmon is currently at or near maximum production capacity on its existing farms. With such a relatively small amount of waterspace presently available to us the growth prospects of the company are limited and the future of the company is actually brought into question. E. I believe that NZ King Salmon can achieve the projected growth in sales
(rising to approximately $320 million and in the order of 21,000-22,000mt in 2020 on a biosecure basis). The mix of markets appears likely to be different to the Report, with China and Europe likely to be a higher percentage of sales than outlined in the Report, however I believe these recent developments only serve to reinforce there is strong evidence of ongoing demand growth sufficient to support the total projected level of sales by 2020.
F. In order to achieve this, however, it is critical not only that we secure more waterspace, but that it is quality waterspace, so that we can achieve the productivity necessary to remain financially viable in the long term, and continue to grow the business. The Tory Channel/Queen Charlotte sites are the most productive. However, providing sites in a range of locations for biosecurity and to ensure we can supply all year round is also very important for us.
1
Kofi Annan: http://aquavision.org/kofi-annan-recognises-potential-aquaculture-sustainable-food-production.
INTRODUCTION
Qualifications and Experience
1. My full name is Andrew Christopher Clark.
2. I hold a Bachelor of Commerce in Accounting and Business Administration from the University of Canterbury, and am a CA member of the New Zealand Institute of Chartered Accountants.
3. I have previously held roles in Deloitte and Toyota in New Zealand; various financial roles in Fonterra and its antecedent New Zealand Dairy Board in New Zealand, the United States and Venezuela with my ultimate role in Fonterra being acting Commercial Director for Fonterra Ingredients covering US, Europe and North Asia as well as various specialty ingredient and nutritional businesses; and was Chief Financial Officer of NZ Farming Systems Uruguay. I have had extensive international experience during my career, including with joint ventures, mergers and acquisitions, management boards, investment projects, and financial performance / business development.
4. I am Chief Financial Officer of NZ King Salmon, a role I have held since February 2011. Although this is relatively recent, I believe that I know and understand the company well and I am responsible for ensuring that it remains a long term financially viable business.
5. I am authorised to give this evidence on behalf of NZ King Salmon. Scope of Evidence
6. The purpose of my evidence is to explain:
(a) Why it is that NZ King Salmon is confident in the demand for King Salmon and why NZ King Salmon has sought 9 sites in one application.
(b) Efficiency, from a financial perspective, in terms of productivity and other issues.
(c) The shareholding, and management procedures of New Zealand King Salmon – given that the ownership and control of NZKS has been raised in a number of submissions. I understand that may be
of limited or no relevance to the resource management issues, but it may be of interest to the Board of Inquiry to understand the facts. 7. My evidence should be read alongside that of the other NZ King Salmon
managers, Mr Gillard and Mr Preece. Aspects of my evidence are also supported by the analysis of Mr Nystoyl from Kontali Analyse. Kontali Analyse is an independent international provider of analyses of aquaculture and fishing markets.
THE DEMAND FOR KING SALMON
8. Mr Gillard has introduced NZ King Salmon in his evidence, and its history from humble beginnings into the expanding business it is today. His evidence in respect of the company was focused on its experiences at a practical level in farming, and in particular what it has learnt over the years in terms of site selection. Mr Preece's evidence covers the basics of salmon farming (in one brief) and addresses certain issues that have been raised from a management perspective (in his second brief).
9. In this brief, I focus first on explaining NZ King Salmon's present, pressing, need for additional salmon farm space.
10. Before turning to that, however, I should acknowledge the quote I have included at the very start of my evidence. It is a very recent reference to a presentation made by Kofi Annan, former Secretary-General of the United Nations and co-recipient of a Nobel Peace Prize, at a conference held in early June 2012. He recognised the potential for aquaculture in sustainable food production, as NZ King Salmon does.
Early development of our market
11. It is appropriate to first explain our product, and how it has evolved over time as we have developed our brand and looked to develop new markets. 12. In the early days of NZ King Salmon, a great deal of effort went into
developing the intellectual property of growing the King salmon species. This was the species that became established in the wild in various rivers in the South Island of New Zealand in the early 1900s. The rest of the world has primarily focused on growing Atlantic salmon, a more docile and easy species to farm, with a more efficient feed conversion ratio and thus lower cost to farm.
13. Even though King salmon is more difficult to farm, we are absolutely committed to King salmon as it provides a valuable point of difference compared to other countries and competitors, with exclusivity (less than 1% of the world's farmed salmon), higher levels of Omega 3 and, in our opinion, better taste and texture.
14. Having operated a King salmon classical breeding program for some 19 years, NZKS has significant intellectual property and leading knowledge in the farming of King Salmon.
15. In the 1990s, NZ King Salmon focused on the domestic New Zealand market, with any excess production exported as a frozen commodity mostly to Japan. Over time we have upgraded our offering and approach to selling our product as a fresh "premium commodity" and today increasingly as a branded food delicacy. In the retail market, primarily in New Zealand, we have built the Regal and Southern Ocean brands and we have recently launched a new premium foodservice brand called Ōra King into selected markets. Our objective is to have Ōra King on the menu of the world's top restaurants. Growth in New Zealand market and overseas
16. Sales in New Zealand have grown strongly over the last decade, with average growth of nearly 13% annually, more than tripling our sales in that time.
17. I attribute the growth to several factors, including:
(a) growing awareness of the health benefits of King salmon (eg Omega 3, selenium absorption);
(b) other protein sources such as red and white meats having increased in price by significantly more than price increases of salmon (in the New Zealand market);
(c) increased focus on quality food through media (TV programs such as Masterchef);
(d) repositioning of salmon by NZ King Salmon from an entertaining "treat" to a healthy everyday choice;
(e) an active development of the category by NZ King Salmon and other competitors, for example development of hot and cold smoked products.
18. By way of an example of how we are able to stimulate our market, in late 2011 and early 2012 NZ King Salmon used a TV Commercial to assist repositioning of the Regal brand. That resulted in sales revenue in New Zealand up approximately 26% in January to March 2012 compared to the same months in 2011.
19. I believe that NZ King Salmon has excellent opportunities to continue to grow its sales in New Zealand by at least the historic rates of around 12-13% annually over the coming years, with ongoing development of the category, increased brand awareness and awareness of the health benefits of salmon. I am confident that we can continue to grow in the New Zealand by double digits into the foreseeable future.
20. In terms of exports, we presently export around 45% of our production, to three main markets – Japan, US/Canada and Australia. Historically the exported percentage has been slightly higher however sales in the New Zealand market have grown relatively faster than export with international salmon prices depressed in the last year or so, leading to slower sales in some export markets.
21. However, to continue to develop our brand overseas, in the last two to three years NZ King Salmon has appointed staff or worked with contacts in those countries to develop sales, with an emphasis on moving from frozen commodity sales into fresh premium commodity sales. Whereas in the early years NZ King Salmon would have sold its product to importers / wholesalers with little visibility of the end user, our in-market staff and contacts are now actively working with end users (restaurants, premium supermarkets, and delicatessens) to understand their needs and reinforce the benefits of NZ King Salmon's product. We intend to gradually move our product up-market; as a tiny percentage of global production there is ample room for us to grow sales with premium end-users provided we can work alongside them.
The new Ōra King brand
22. We have also recently developed a new brand, Ōra King, which is targeted at premium (white table-cloth) restaurants globally. Our intention is to launch
this brand in all our markets, however, we have had to delay this as we do not have sufficient production to be sure we can supply new customers.
23. Accordingly, at this time we are using the Ōra King brand in two new markets, Europe and China, with extremely positive feedback. These markets are new to NZ King Salmon and only small volumes at this time, which is why we have been able to use the Ōra King brand:
(a) We started selling into China in late 2011, with current sales only at an annualised rate of approximately $NZ300,000 per year as we have deliberately held back sales whilst we resolve market access issues. We have partnered with a Japanese corporation to access the market, with their eventual plan being that China will represent around $NZ 100 million of sales within 5-10 years. This potential demand is not included in the NZ King Salmon Report produced in 2011 in support of our application, as we had yet to commence sales in China at the time that report was prepared. We are currently in a number of top restaurants in Shanghai, including a 3 Michelin star restaurant. Our customers are passionate about our product, liking the Ōra King provenance, the exclusivity of less than 1% of global salmon production, and the taste and texture of our salmon. We have positioned our product at a price about 50% higher than we sell in New Zealand, and more than double the Atlantic salmon price in China. I am confident that we can continue to grow sales rapidly based on feedback from our customers and partners in China. Our target for 2012/13 financial year is to sell $1.8 million of salmon into China.
(b) We started actively trying to increase our sales into Europe in late 2011, targeting premium foodservice fresh and frozen salmon markets in several western European countries. Current sales are at an annualised rate of approx $500,000 per year and we expect to sell $4.0 million into Europe in 2012/13. This potential demand is also not fully reflected in the NZ King Salmon Report produced in 2011, as the market opportunities we have identified in Europe have arisen since preparation of that report. We have positioned our product at a price also approximately 50% higher than we sell in New Zealand, and substantially above the Atlantic salmon price, in markets near to the world's largest salmon producer Norway. I am
confident that we will be able to grow our sales rapidly in Europe, again based on feedback from customers and partners.
24. We have recently had to postpone our planned launch of Ōra King in the US, Japan and Australia, as we do not have sufficient fish to be able to guarantee supply to customers.
25. At a simple level, the fact that NZ King Salmon has markets "waiting" for us to enter, but insufficient fish supply to develop those markets is a strong indicator that NZ King Salmon needs additional waterspace if it is to grow. 26. I have mentioned above the new markets we are developing. Those markets
(China and Europe) differ to those indicated in the NZ King Salmon Report provided in support of the application. While the ultimate mix of markets may change, I believe only reinforces that NZ King Salmon can achieve the projected growth in sales recorded in that Report – if we secure the water space we have sought.
Market supply and demand – additional details
27. I now provide some further detail as to our present production capacity and how it is insufficient to serve the needs of the market.
28. NZ King Salmon is currently at or near maximum production capacity on its existing farms. The NZ King Salmon Report produced in support of our application states our present capacity at around 9,000mt capacity. However, our monitoring to date suggests that our present maximum production capacity is lower – more like 8,750mt from all existing sites including approximately 500mt from Crail Bay which is currently mothballed. Our expected production in the 2012/13 year will however only be around 7,200mt. This is attributable to the decision to discontinue farming Crail Bay, together with a below average production season (which occurs from time to time). In that regard, salmon farming is no different to most other agricultural industries in that there are seasons of relative abundance and less productive seasons. This can be due to a whole range of factors such as temperatures, storms, the presence of predators etc, and as a consequence supply has certain variability. The elevated mortalities we are experiencing at Waihinau (which we are investigating, thoroughly) have also reduced our productivity for the 2012/13 year.
29. Evidence of the limits on production capacity can be seen in NZ King Salmon’s production volume, which:
(a) was 7,539mt in 2009/10 financial year; (b) was 7,546mt in 2010/11 financial year;
(c) is projected to be approximately 7,800mt in 2011/12 financial year; and
(d) is projected to be approximately 7,200mt in 2012/13 financial year. 30. Our sales over the same period have been:
(a) 7,651mt in 2009/10; (b) 7,660mt in 2010/11;
(c) an estimated 7,200mt in 2011/12; and (d) approximately 7,700mt in 2012/13.
31. It should be noted that production and sales volumes do not necessarily match up within particular financial years, as we may freeze excess fish then sell or further process it later.
32. Except for a brief period between July 2011 and February 2012, demand for NZ King Salmon's product has consistently outstripped supply. Projected demand for 2012/13 is around 9,000mt however we are unable to supply about 15% of that demand. In other words, our sales for that period are likely to be around 7,200mt. The demand would in fact be higher than this number but there is no point in continuing to develop sales when supply is constrained. Clearly, we are missing out on existing demand while we do not have additional space to farm. We are effectively standing still and at risk of losing market share, and certainly we cannot expand our exports into markets we know we can successfully serve. This is a significant loss in export earning potential for the company and for New Zealand.
33. Our salmon life cycle is 19-31 months from spawning to harvest; on average about 24 months. Lead times and planning are therefore very significant and important in our business.
34. With such a relatively small amount of waterspace presently available to us the growth prospects of the company are limited and the future of the company is actually brought into question. This year, 2012, provides an example of how this can happen.
35. The 2011/12 financial year started poorly in July 2011, following a material reduction in the international Atlantic salmon price. Prices fell from just over Norwegian Krone (NOK) 40/kg (approximately $NZ 8.50/kg) in April 2011, to slightly below NOK 20/kg (approximately $NZ 4.00/kg) by October 2011. This had a significant negative impact in the Japanese, US and Australian markets, and as a consequence we completely rebalanced our demand by stimulating both the domestic and some export markets. However, for most of the 2011/12 financial year our fish size has been smaller than in prior years, together with higher mortality than usual at our Waihinau Bay farm. Therefore at a time of peak demand our supply actually decreased and this is projected to continue into the 2012/13 financial year.
36. With variable and at times decreasing supply this puts huge pressure on customer relationships. Since April 2012 we have been rationing supply to all of our customers with a preference given to our New Zealand customers. This has damaged all of our customer relationships. In some cases we have lost customers altogether and in other cases competitors stepped in and filled part of the demand. At the same time it is very difficult for NZ King Salmon to pass on its cost increases when our customer service levels are so low. In this way the profitability of the company is dramatically affected and this is exactly what is happening as of June 2012.
37. Our preferred position is to always have some extra water space and to farm additional volume in case of a poor season. It is better to grow salmon slightly in excess of current customer demand just in case of a poor season. Surplus can generally be sold into discrete markets at a reduced profit without affecting our numerous premium markets and customers. As a rule of thumb, we prefer to have some 500mt annually of surplus balancing volume available to ensure normal customer orders can be met. There is always demand for our King salmon and so when I am talking surplus I am meaning only in respect of our priority premium market and any salmon we can produce is generally readily taken up for other export or domestic supply, if it is not needed for that premium market.
38. In an attempt to meet anticipated sales demand and because of our shortage of water space, NZ King Salmon purchased the Crail Bay farm sites from Pacifica in mid 2011. That provided us with some additional volume. However, the Crail Bay sites have very small production capacity (as stated above, currently around 500mt, although if that farm was economic and we had continued to farm that site we may have been able to increase the productivity slightly) and are in low-flow water areas with warm summer temperatures, so are far from ideal for farming salmon (Mr Gillard has explained the temperature and water flow issues in detail in his evidence). In short, Crail Bay is uneconomic except in years with high selling price and even so it needs careful management to ensure good growth and minimise mortalities. I go into more detail on site profitability below.
39. In light of the demand, we therefore have also had additional fish in the hatcheries in expectation of successfully obtaining the White Horse Rock farm site. That site is part of the present application but was previously subject to an earlier consent application. While we were awarded consent by the Council, that decision was appealed. The delays in hearing that appeal (which was complicated by a jurisdictional decision, appeal to the High Court and law change), meant that it made sense to incorporate the appeal into this Board of Inquiry process, so we have not been able to bring White Horse Rock online. This has all meant that we have had excess fish for transfer to seawater, which have then had to be harvested early as there was no waterspace available to grow the fish through to maturity to meet market demand.
40. NZ King Salmon’s sales growth projections over the coming years are summarised in the original NZ King Salmon Report filed in 2011, at pages 32-35. I believe that NZ King Salmon can achieve the projected growth in sales (rising to approximately $320 million and in the order of 21,000-22,000mt in 2020 on a biosecure basis). The mix of markets appears likely to be different to the Report, with China and Europe likely to be a higher percentage of sales than outlined in the Report, however I believe these recent developments only serve to reinforce there is strong evidence of ongoing demand growth sufficient to support the total projected level of sales by 2020.
41. The projections for 2015 of $220 million and 15,000mt of sales on a biosecure basis are likely to be optimistic however, given that it took us longer than anticipated to file our applications and commence the EPA process (as we were waiting for the legislative reform to be complete); our projections
originally expected that NZ King Salmon would obtain the White Horse Rock farm site (which was consented by the Council, but which, because of the length of time taken to resolve the appeals, was withdrawn and included in the EPA process); and we now expect that consenting / monitoring requirements may require a more gradual build up to full production than originally anticipated.
Conclusion as to demand
42. I believe that it should be clear that there is existing and clear future demand in the market (and that demand can be further stimulated, such as it has already been in the early days of our new Ōra King brand) if NZ King Salmon can supply it, and that NZ King Salmon desperately needs waterspace if it is to grow. The lack of additional waterspace puts us in a very difficult position. Our need for new space is urgent (and has been for some time).
43. As I explain below, that is one reason we have sought to use the EPA/Board of inquiry process.
WHY NZ KING SALMON IS APPLYING FOR 9 SITES NOW
44. I believe that some people may question why we have sought approvals for 9 sites now, rather than seeking (say) 4-5 now, and then coming back later for further sites.
45. To put the number of new sites sought in context, it may be helpful to explain what productive capacity those new sites are expected to provide. As recorded above, our present production capacity is around 8,750mt (including Crail Bay), but we presently expect to produce around 7,200mt in the 2012/13 year.
46. If all the sites are approved we have projected that would give us a maximum capacity of salmon production in the order of 27,000 -29,000mt per annum by 2020. This level of production could only be achieved if all proposed sites (plus all existing sites) were able to be developed to their full potential, and in good years. NZ King Salmon will probably not achieve these levels because it is likely to choose to operate a more conservative "biosecure" approach. Mr Preece explains this in more detail, but a biosecure approach could involve operating three biosecure areas, as well as moving to single year class fish at each farm, with voluntary fallowing, and other measures.
47. The consequence of this is that under this more conservative biosecure approach, the level of production from all of NZ King Salmon's farms (both existing and proposed) would only be expected to reach in the order of 21,000-22,000mt per annum by 2020.
48. We have a number of reasons for seeking to approve 9 sites now, through the EPA/Board of Inquiry process.
(a) The first point is that we needed space urgently, and, given our experience with our earlier application for White Horse Rock, we could not afford to complete the usual 2-step process (ie council hearing and appeal), which can take two years or significantly more. (b) Additionally, as the evidence of Mr Gillard demonstrated, other than
White Horse Rock (and Crail Bay – but that site has its limitations), there were little or no options remaining for the conversion of mussel farms to salmon farms. That meant a plan change (and waiting for the legislative reform to take effect). A plan change process can, as I understand it, take even longer than a consent application.
(c) We knew that a plan change process would be controversial in some quarters, with appeals likely, and so that weighed in favour of coming straight to the EPA/Board of Inquiry.
(d) If we were going down the EPA/Board of Inquiry route, we knew it would cost us significantly. In fact, this EPA application is the single biggest investment that NZ King Salmon has ever made.
(e) Given that the cost of the application would not be substantially less for fewer sites, we decided to apply for the number of sites we believed we could initiate over the next three years (consistent with the starting point of a three year lapse period for aquaculture consents), and fully develop over the next 5-10 years.
(f) Knowing the number of sites available to us would give us greater certainty and ability to implement our strategy around developing our new brand and opening up new markets. Consumer trends and awareness of health benefits of salmon have created increasing demand for our product that we are currently unable to meet. The nine sites, managed with the rest of our sites on a biosecure basis, would give us in the order of an additional 12,000-14,000mt, which
we consider will be needed to meet the markets we already have and can develop by around 2020.
(g) The increasing focus on biosecurity. Major salmon farming countries have had issues with disease and New Zealand is fortunate that it does not have any known salmon diseases present. NZ King Salmon would like the opportunity to periodically fallow even its high flow farms to break any latent disease cycle. To achieve best practice NZ King Salmon is hoping to be able to farm single year class sites if necessary (ie one brood year of salmon per farm, rather than the current mix of two brood years), with fallowing between – this requires substantially more space to achieve. It also requires farms in separate geographic areas. That is why it is important for us to have farms in the Pelorus/Waitata Reach area, at Papatua in Port Gore and in Queen Charlotte/Tory Channel. (h) Finally, there is a recognised need for gradual buildup for new sites
– this requirement has developed in respect of our existing sites, and we accept that new sites will require gradual buildup, monitoring of environmental effects and staged increases provided effects are within consented limits. This means it may take several years for new sites to achieve full production. We back ourselves to achieve compliance and therefore are willing to invest in new sites, but the gradual ramp-up means that we do need a number of waterspace sites immediately.
49. The combination of very significant investment commitment, favourable consumption trends and evolving biosecurity / new waterspace staging requirements mean that NZ King Salmon needs to apply for the 9 sites now, rather than in stages.
50. NZ King Salmon intends to commence development of farms obtained through the EPA process within the three year timeframe required under the aquaculture legislation. On top of the consenting costs, each farm costs around another $4.8 million to develop the sea farm structure and plant & equipment, with livestock cost on top of that. For NZ King Salmon, each farm is a significant investment and would be funded through a combination of bank loans, reinvestment of profits, and potentially some form of public offering at a later date.
Long term consequences of lack of waterspace
51. If NZ King Salmon is unable to secure further waterspace via the EPA process, we will need to consider what options are available. I believe these include:
(a) Immediate exit of some markets we have developed and could otherwise continue to serve and grow, to focus on higher returning markets, and then an ongoing continuing exit of lower-returning markets over time. Initially this is likely to result in a focus on New Zealand, Europe and China, with only selected sales in US, Australia or Japan, but may in time lead to an exit from the New Zealand market if eventual targets in high returning export markets are achieved. This represents a loss of markets which we have built up or are building up and which could otherwise earn good foreign exchange to help New Zealand meet its export targets.
(b) NZ King Salmon may have to import Atlantic salmon from Norway, Canada or Australia. We are currently pricing up options and availability but this would force a difficult strategic choice as our company mission is “Inspiring people around the world to experience superb King salmon dining”. It is not a decision we would take lightly.
(c) NZ King Salmon may have to farm King salmon overseas and invest there. This is also a difficult strategic choice as we believe that our current image benefits from, and is beneficial to, New Zealand. We have a point of difference in sourcing product from New Zealand, and I also believe that our success internationally helps to build New Zealand's international reputation. An example of this would be the recent International Taste and Quality Institute awards in Brussels – the Institute reviews around 1,000 products annually across all food and beverage categories. Two of our hot smoked portion products were awarded Crystal awards in 2012, by having been awarded the maximum three stars in each of the last three years. Only 28 other food and beverage products across the thousands tested have ever achieved this award. Customer response in international markets has been very gratifying. I believe that people internationally are starting to see Marlborough as a region that produces top quality sauvignon blanc wines and the finest salmon, and believe this will
ultimately attract people to New Zealand, in the same way that tourists now visit France or Italy for "foodie" holidays.
(d) Awaiting further reform of Marlborough District Council’s Marlborough Sounds Resource Management Plan (MSRMP). My understanding is that there is no certainty an MSRMP plan review would free up new waterspace suitable for salmon farming.
52. Having invested such a material amount of money in the RMA/EPA process, I also believe the reality is NZ King Salmon would be extremely reluctant to commit further funds to securing other waterspace under the future review of the MSRMP, as such waterspace is unlikely to be available if the current sites are declined (Mr Gillard has explained how few options exist in the Sounds) and would be inferior. In any case the company would take 2-4 years to recover financially from the investment in the EPA process, before considering further investment in planning processes – knowing the time and money that would need to be again committed to application.
53. We note the NZ Government’s identification of aquaculture as a priority growth sector, with the “Government’s Aquaculture Strategy and Five-year Action Plan” released this month. The plan seeks to enable the aquaculture sector to achieve $1 billion in annual sales by 2025, from the current approximately $400 million sales (of which approximately $300 million are exported)2. My observation is that various Government agencies including Ministry for Primary Industry and NZ Trade & Enterprise have been strongly supportive of NZ King Salmon’s efforts to grow our business internationally through increased waterspace, new branding and premium positioning. 54. I note the Minister for Primary Industries, the Honourable David Carter, wrote
in his foreword to the Government’s Aquaculture Strategy and Five-year Action Plan that, “Within an international market characterised by strong demand for safe and sustainable seafood products, the aquaculture sector has significant growth opportunities. This growth has to be industry-led and the industry’s opportunities and aspirations are reflected in their own goal of growing annual sales to NZ$1 billion in value by 2025. The aquaculture industry has established a strategy to deliver that growth. The Government is committed to environmentally sustainable, primary sector-led strengthening of the economy and is committed to enabling the aquaculture industry to reach its goal.”
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55. I have also experienced first hand the enthusiasm and passion that NZ Trade & Enterprise staff have shown in order to assist NZ King Salmon become established in new markets such as China, and to grow sales and move to a more premium position in existing markets such as Japan and the US. 56. I believe that NZ King Salmon can play a key role in realising the
Government’s strategy, if we are granted waterspace under the current process. Even with the use of the EPA process, NZ King Salmon will only reach full production from the new sites by around 2020, just five years before the Government's target to increase annual sales to $1 billion from its present $400 million. No other major new aquaculture activities have commenced that I am aware of under the RMA since since the legislation was amended last year, so the hurdles are significant for industry to grow and meet this challenge. So far, NZ King Salmon is the only company seeking to grow the market significantly.
PRODUCTIVITY OF NEW WATERSPACE, AND OTHER ISSUES
57. Part of my role as the Chief Financial Officer of NZ King Salmon is to ensure that the company makes prudent decisions about investing capital. The objective must be to generate a long term financially viable business, able to provide fine salmon to our consumers, to secure the employment of our staff and suppliers, to generate a return for our shareholders, and to be a responsible member of the communities we operate in.
58. As Mr Gillard has explained in his evidence, NZ King Salmon and other companies have exited sites over the years, due to their proving too difficult and uneconomic to farm. These include Port Ligar, Hallam Cove, Crail Bay (NZ Marine Farms) and NZ King Salmon recently mothballing Crail Bay. It will be clear from Mr Gillard's evidence that lower flow, higher temperature, sites face significant difficulties for salmon. They are not as productive and face higher mortalities. It is clear from Mr Gillard's evidence and his extensive analysis and evaluation that sites in the CMZ2 are not suitable, or at least are not ideal, physically, for salmon farming. The reality is that we can only look to CMZ1 area.
59. Within that area, Mr Gillard also explains how higher flow cooler water sites in Tory Channel and Queen Charlotte are strongly preferred. They are easier to
farm (there are, for example, no difficulties over the summer months, as experienced at Waihinau and Forsyth) and productivity is much greater. 60. From my perspective, it is critical not only that we secure more waterspace,
but that it is quality waterspace, so that we can achieve the productivity necessary to remain financially viable in the long term, and grow the business.
61. In broad terms, productivity (and the cost of production) is significantly less for a high flow site such as these, compared to low flow sites. This arises from a range of factors. For example, high flow sites have better feed conversion at high flow sites. As feed is the single biggest cost of producing fish, this factor is significant. To illustrate the issue with feed costs, feed raw materials have increased in cost by around 17% since 2007. NZ King Salmon and its feed suppliers have managed to mitigate some of the impact of these increases by reformulating feed to more cost effective ingredients, however the cost pressure is relentless. High flow sites also face fewer mortalities during smolt transfer. This reduces hatchery costs, as fewer numbers of smolt are required to stock a high flow farm. To illustrate the sensitivity of smolt, in the November smolt transfer, we only transfer smolt to our Te Pangu farm in Tory Channel rather than the Pelorus Sound farms, as otherwise the mortality is unacceptably high. Previous experience in the 1990s and early 2000s of smolt transfer into the warmer Pelorus sites in early summer resulted in up to 50% mortality rather than the normal near zero. 62. The issue with productivity and viability is also well illustrated with the Crail
Bay examples. NZ King Salmon, having only recently acquired the Crail Bay ites, mothballed them in late 2011 when it became evident that the difficulties with the site were so pronounced and productivity so low. It should be noted that the farming method (circular separated pens rather than square adjoining pens) is considered less efficient by NZ King Salmon, however the small size of the sites and low productivity due to warm water / low flows combine to generate sites that are likely to be economic only in the best years rather than sustainably. Accordingly, Crail Bay is likely to only ever play a limited role in production going forward. It is likely to be a research and backup site if waterspace is secured under the current application, or would be a possible backup in times of high international salmon demand if further waterspace is not able to be secured. (In contrast the nature of the site proposed at Papatua in Port Gore which is proposed to have circular net pens, although still a low flow site, is still expected to be workable and productive due to its
larger production capacity and slightly lower summer temperatures than Crail Bay).
63. Our best existing sites, from a productivity and efficiency perspective, NZ King Salmon's best sites are in the Tory Channel at Te Pangu and Clay Point. These sites are capable of up to 2,500mt annual production, which generate significant economies of scale.
64. The analysis work that NZ King Salmon has done in preparation for obtaining new waterspace shows very clearly that the productivity of waterspace is a critical success factor for the company:
(a) poor quality waterspace will only be economic in periods of high prices, putting the company at risk during other stages of the price cycle;
(b) ongoing cost increases exacerbate this point. As noted above, feed raw materials have significantly increased in cost over recent years. In addition the NZD has fallen by 10% against the AUD in that time, increasing the cost of feed accordingly. There is ongoing creep in salary and wage costs, monitoring costs, and discussion of possible rating of waterspace. Freight of finished products and raw materials is around 12% of our revenue, with rising fuel prices being a major component of this cost. Unless good quality waterspace is secured, these cost increases are simply unsustainable; and
(c) the increasing strength of the New Zealand dollar (relative to historic levels, against most major currencies other than the Australian dollar), and likely further increases in future, has and will erode the profitability of export sales.
65. From this, it can be seen which of the new sites are more productive, and therefore more efficient to farm than others. Clearly, from a financial management perspective, and the efficient investment of NZ King Salmon's limited resources, we would prefer sites with the highest productivity. We are seeking to move our product positioning up-market and thus secure premium pricing internationally, however lower productivity sites would always carry the risk of imperilling the company’s financial viability in years of low international market prices and / or strong New Zealand dollar relative to major currencies.
66. However, other issues such as bisecurity are of course also very important. From a financial management perspective, I am also concerned in particular: (a) To limit the risk arising from some sort of Biosecurity issue.
Currently NZ King Salmon's sites would be considered in four separate biosecurity zones: Tory Channel / Ruakaka, Otanerau, Forsyth / Waihinau Bay, and Crail Bay. However some of these zones have low production capability currently – Crail Bay is only about 500mt annually at present. Together with Papatua in Port Gore, which will be a new biosecure zone, waterspace is being sought in nearby bays to increase the size of each biosecure zone. The possibility of farming each site with a single year class would increase the waterspace required, and thus decrease productivity / profitability, further reinforcing the need for high quality waterspace in order to be financially viable. .
(b) To ensure a mix of waterspace is secured to enable year-round harvest. I have explained earlier how necessary it is for our customers that we can supply all year round. While there is some seasonality in sales particularly in New Zealand, with December being around 12% of the year’s sales, and other summer months being typically stronger than winter, there is otherwise generally little seasonality. Accordingly, if NZ King Salmon were only able to obtain new waterspace in Pelorus Sound rather than a mix of Pelorus, Queen Charlotte and Tory Channel (and, to some extent, Port Gore), the inability to transfer smolt to farms in Pelorus in summer (due to high mortality) would result in a significant distortion in the month by month harvest program. Salmon would be ready for harvest in the July-November period in particular, which would require the sales program to be tailored seasonally, or fish to be frozen for later sale, both of which are likely in my experience to result in a lower return. Customers generally will pay a premium for fresh product, and seek guaranteed supply year-round.
NZ KING SALMON - OWNERSHIP
67. NZ King Salmon is currently owned by Evergreen Holdings Limited, a Malaysian-registered entity fully owned by the Tiong family, Direct Capital – a New Zealand-based investment manager, and directors and senior managers. The following table illustrates:
Evergreen Holdings Ltd (Tiong family) 50.88% Direct Capital and funds managed by Direct Capital 41.63% NZKS Custodian (NZ King Salmon directors and management) 7.49%
Total 100.00%
68. NZ King Salmon legal structure currently comprises:
(a) New Zealand King Salmon Investments Limited, the holding company for the Group;
(b) The New Zealand King Salmon Co. Limited, the main New Zealand-based operating company and Parent company for the Group; (c) The New Zealand King Salmon Pty Limited, a 100%-owned
subsidiary of The New Zealand King Salmon Co. Limited and registered in Australia. This is the sales entity for NZ King Salmon's Australian sales;
(d) Several non-operating companies, primarily to reserve the brands: Southern Ocean Salmon Ltd, Southern Ocean Seafoods Ltd, Regal Salmon Ltd, Maccure Seafoods Ltd and King Salmon Ltd. These companies are all 100%-owned subsidiaries of The New Zealand King Salmon Co. Limited; and
(e) NZKS Custodian Limited, which holds the directors' and senior managers' shareholdings on their behalf and is owned by New Zealand King Salmon Investments Limited.
69. The Tiong family purchased Regal Salmon and Southern Ocean Seafoods in 1996, at a time when both companies were in financial difficulties, investing via its company, Oregon Group Limited ("Oregon"). The Regal and Southern Ocean companies were combined to form NZ King Salmon. Since then, the Tiong family's New Zealand representative Thomas Song has had responsibility for and oversight of the company, and since Direct Capital invested in NZ King Salmon, has been a Board director.
70. The Tiong family has supported NZ King Salmon over the years, including being willing to accept no returns / dividends for several years at critical points of financial difficulty, including a feed-quality related financial crisis in about 2001, which would have otherwise likely seen NZ King Salmon in liquidation. I believe it is not an exaggeration to say that without ongoing support from the Tiong family over the last nearly 20 years, New Zealand would not have a commercial salmon farming industry. At the very least, NZ King Salmon as a strong industry participant over the last few years has provided stability for a relatively new and developing industry, with people working in the industry able to develop expertise in New Zealand and associated benefits for competitor companies and suppliers to the industry. 71. It is my understanding that the majority of dividends received by the Tiong
family have been re-invested in its other New Zealand-based businesses, predominantly forestry.
72. In 2008 the Tiong family wished to sell down part of its shareholding in NZ King Salmon in order to free up capital. Direct Capital purchased a cornerstone shareholding via various funds it manages. Several directors and senior managers also invested in NZ King Salmon via a new company NZKS Custodian Limited, which was set up to hold the Board / management shares as one holding for ease of administration.
73. A shareholder agreement was drawn up between Oregon and Direct Capital. Key provisions in this agreement include that:
(a) Oregon and Direct Capital are each permitted to appoint or remove a maximum of two directors;
(b) Oregon and Direct Capital shall jointly appoint an independent Chairman, and a director who shall be CEO of the company unless otherwise agreed;
(c) Voting rights in proportion to shareholding, however many strategic and operational matters require a supermajority (75%) approval, effectively meaning both major shareholders must agree. These matters include even such relatively day to day operational (rather than major strategic) issues as approval or modification of a business plan or budget; capital expenditure over $500,000; let alone key control issues such as changes to the constitution,
changes to shareholder rights, or changing of business purpose or activity.
(d) The extensive list of items requiring a supermajority (approval by both major shareholders) prevents either major shareholder from exercising unilateral control over NZ King Salmon.
(e) Rights in event of sale by one shareholder (pre-emptive, tag along), 74. I also note that in the Oregon financial statements for June 2009, its majority
shareholding in NZ King Salmon was treated as a joint venture as Oregon did not consider it exercised control over NZ King Salmon sufficient to consolidate into its financial statements. Oregon has since sold its shareholding in NZ King Salmon to another Tiong family entity, Evergreen Holdings Limited, which is the current shareholder in the NZ King Salmon Group on behalf of the Tiong family. This change has not resulted in any change to the Tiong family director representatives nor to the management or control of NZ King Salmon.
75. In my opinion NZ King Salmon effectively operates as a 50/50 joint venture between the two major shareholders, albeit Direct Capital's main director has been more actively involved in oversight and direction of NZ King Salmon than the Tiong family's directors. I have been involved with a number of joint ventures in Fonterra and consider that I have considerable experience in the dynamics of these entities.
CONCLUSIONS
76. I believe that the international and local sales demand and opportunities identified by NZ King Salmon represent a compelling combination: marketing premium salmon internationally which strongly enhances New Zealand’s reputation as a producer of quality food products, generates substantial export revenue and creates significant employment, all from a relatively small area of new waterspace. NZ King Salmon has immediate demand for more salmon and an urgent need for more good quality waterspace to meet that demand, which I hope that the Board of Inquiry will see fit to grant.
Andrew Christopher Clark 22 June 2012
