Oceana : optimistic about prospects after a difficult half

• Neville Brink appointed as CEO, second-half performance an immediate priority
• Inventory levels, supply chain disruptions, poor fishing conditions and rising costs impact H1 performance
• Favourable pricing and demand across product lines remains strong
• Indications of good recovery in traditionally stronger H2

The Oceana Group has appointed Neville Brink, who has served as interim CEO since February this year, as its permanent CEO. His immediate priority will be to deliver a strong operating performance in the second half.

Neville brings a wealth of experience to the role and valuable institutional memory. He has had an illustrious career in the fishing industry that spans more than 38 years, 27 of which have been with Oceana.

The company endured a difficult first half but recovering inventory levels, improved pricing, better fishing and continued strong demand across its product lines point to a stronger second-half performance.

Low opening inventory levels, continued global supply chain disruptions and poor fishing conditions saw revenue decline by 11%, with gross margin 3,7% lower at 30,2% for the six months ended 31 March 2022.

Operating profit declined by 41% to R345 million and profit after tax by 52% to R166 million, after also incurring R42 million in additional audit and legal fees related to the delayed publication of its 2021 results. Borrowing decreased by 11% in line with the Group's debt-reduction strategy. Headline earnings per share was down 51% to 126,4 cents. The Group declared an interim dividend of 55 cents.

"We've weathered a perfect storm but demand for affordable, healthy protein remains undiminished and this combined with improved fishing, better pricing and recovering inventory levels all indicate a better second half, traditionally our stronger period," says CEO, Neville Brink.

He points to above average catch rates at the Group's US subsidiary, which in the first six weeks exceeded 5, 10 and 20-year historical averages. Locally, improved pilchard landings and increased cannery production volumes benefitted operating margins. Lucky Star inventory volumes and strong demand are being sustained by a consistent and diversified supply of frozen fish.

"While input cost pressure remains, this is offset by increasing production and circumspect price increases on canned fish, which we're careful to keep affordable as it is a healthy staple in so many households.

Globally, the demand and price for fish meal is good and fish oil prices have substantially increased."

Supply chain disruptions and opening stock levels caused an 8% decline in revenue at Oceana's flagship brand, Lucky Star, but operating profit increased by 1%, benefiting from a more than doubling of production to 2.4 million cartons (March 2021, 1 million) as the business worked to restock. The brand strategy remains to grow volumes by delivering affordable, available product to meet continued consumer demand.

At the Group's US subsidiary, Daybrook, low opening inventory following poor catch rates and weather disruptions in the previous season resulted in declines of 33% in fishmeal and 15% in fish oil sales. This was somewhat offset by price increases of 5% of fishmeal and 4% for fish oil. An insurance claim of R63 million related to Hurricane Ida was recognised in the period, partially offsetting the impact of the stock position. Daybrook now has all 12 vessels operating, manned by experienced crews, landing above-average catches. The plant is performing well, and fish oil prices are significantly higher due to lower yields in Peru and restricted global oil supply.

Lower catch rates and scheduled maintenance affected horse mackerel sales volumes, although this was partially mitigated by strong demand-led pricing. Hake sales volumes increased by 8%, but fuel costs and a stronger rand reduced margins. Lobster and squid catches were lower. There is continued demand and firm pricing for horse mackerel. Hake fishing rights have been secured for the next 15 years and sanctions on Russia have created opportunities in the UK and Europe. Squid prices are at a record high following poor global catches and 15-year fishing rights have been secured for squid and south coast rock lobster.

The decline in revenue and operating profit at the Group's Commercial Cold Storage (CCS) business was due to an 9% decrease in occupancy levels and a 16% reduction in capacity following the closure of two stores last year. Ongoing global supply chain constraints have reduced storage volumes and duration. Gauteng occupancies have since improved considerably and imports to the coastal regions are expected to stabilise as freight disruptions and inventory levels normalise.
"Throughout this difficult period, we have never forgotten the responsibility we have to our investors, lenders, employees, consumers, the communities in which we operate and the South African fishing sector," says Neville.

"As we anticipate the second half, our commitment to invest in and develop South Africa's oceans' economy remains unwavering as does our brand purpose of positively impacting lives."

Neville said that the auditing issues Oceana has experienced over the last 7 months have not impacted the performance of the business. "We have remained focused on our operational performance throughout this period."

Following PwC's resignation last week, the Board had already begun a process to identify a potential alternative to PwC. Discussions with one of the "Big Four" auditing firms is now at an advanced stage and the Company is confident that it will be able to appoint new auditors within the required 40 business days.

"As we work to focus the organisation on our future, the business is working on a culture initiative which will focus on strengthening Team Oceana's pride in the business. We have also taken steps to enhance controls and policies and strengthened and updated our whistle-blower policy and undertaken extensive training on documentation and signatures."

The Board is acutely aware of the uncertainty at Exco level. As well as confirming Neville Brink as the permanent CEO, the appointment of a new company secretary is underway. Further announcements on these appointments will be made in due course. The outcome of the disciplinary procedure brought against the Group's suspended CFO is expected to be concluded imminently and bringing this matter to a close will be critical as Oceana works to create stability within top management structures.