Seafood Industry Impacted by the COVID-19 Disruptions: A Look at CSS’s Strategy

Summary

• The disruptions caused by COVID-19 has significantly impacted the players in the seafood industry.
• Clean Seas Seafood Limited expects sales for FY21 to be lower than earlier expectations.
• CSS expects After-Tax Statutory Profit of $1.5 million to $2.0 million.
• CSS is optimistic due to its exceptional product offering and strong balance sheet along with the capacity to leverage inventory as a source of funding as well as for strategic growth in current uncertain times.

The worldwide leader in full cycle breeding, production and sale of Yellowtail Kingfish, Clean Seas Seafood Limited (ASX:CSS) witnessed a material impact on Q4 FY20 sales. The effects of COVID-19 lockdown measures and post lockdown restrictions were evident.

However, the Company’s focus on non-restaurant channels in Australia has assisted in bolstering sales during the shutdown and subsequent re-opening of restaurants with limited capacity.

Going into Q3 FY20, the impact of COVID-19 resulted in lost sales during H2 FY20 of approximately $13 million, and resulted in 10% lower full-year sales volumes compared to full-year FY19, after tracking 14% ahead of FY19. Therefore, the Company now expects total sales volumes to be around 2,424 tonnes in FY20.

Notably, due to the closure of in-restaurant dining worldwide in late Q3 FY20, Clean Seas sales went down to around 20% of the prior year sales figures. However, the Company focused on growing sales in non-restaurant channels, especially with smaller fish, through Seafood retailers and small supermarkets. This initiative helped improve sales in Australia to 49% of the prior year in May.

In addition to this, as the restaurants started to re-open in June, although with a limited capacity, sales returned to an encouraging 105% of the prior year. Also, the Company reported that global sales for June recovered to 77% of June FY19.

Although there has been a recovery, Clean Seas Seafood believes that recent escalation in COVID-19 cases in Victoria are likely to impact the sales for July.

FY20 NPAT Expected Between $1.5- $2.0 million

Other than the approximate loss of $13 million in sales in H2 FY20, the Company anticipates that sales for FY21 will also be lower than earlier expectations. This is, however, subject to the rate of recovery in every market and the impact on global air freight services.

More importantly, CSS expects an impairment of Clean Seas Live Fish and Frozen Inventory from $74.5 million to $58.0 million, a reduction of $16.5 million, because of the following:

• Anticipated clearance of inventory not sold during COVID-19 shutdown.
• Lesser selling prices to support market entry into new retail sales channels.
• Lesser farm gates from increases in air freight costs.

CSS’s expects full-year FY20 Statutory Net Profit After Tax (before impairment of inventory) to be within the $1.5 million - $2.0 million range, which includes the net settlement from the Feed Litigation of $13.95 million. Moreover, the Company anticipates for a Statutory (SGARA) Net Loss After Tax for FY20 in the range of $14.5 to $15.0 million, after the inventory impairment of $16.5 million.

Excess Inventory Offering Strategic leverage

Notwithstanding the reduced live fish biomass growth in H2 FY20, CSS anticipates approximately 2,000 tonnes of excess Live Fish and Frozen Inventory due to the lower sales in Q4 FY20 and FY21.

Furthermore, the Company is optimistic about the strategic opportunity put forward by the planned impairment of this excess Live Fish and Frozen Inventory to drive trials and target long-term growth by way of fresh channels and under-developed foodservice markets, especially in North America as well as Asia.

Vision for Next 2 Years and Outlook

CSS’s emphasises shall be on maximising the conversion of excess inventory into cash for the next 1-2 years to support operating cash flow until markets return to normal.

Furthermore, the Company is also optimistic about developing a bigger and more diverse revenue base through the strategic targeting of excess inventory to facilitate the Company’s entry into fresh retail channels.

With the ongoing disruption and uncertainty, the Company is currently unable to provide prudent guidance beyond FY20 and believes that the timing of achieving its growth strategy can be impacted by the continuing COVID-19 disruptions.

On the optimistic side, the Company is the advantage of an extraordinary product and is set to enter FY21 with a robust balance sheet and has the capacity to leverage inventory for strategic growth and as a source of funding during the ongoing period of uncertainty.

CSS has been engaged in the development of a new retail product with a leading Australian supermarket chain that is anticipated to be launched in Q2 FY21 and continues to explore new sales opportunities in unexplored markets.

On 03 July 2020, CSS stock was noted at $0.580, up by 4.505% compared to the previous close. The Company has a market cap of $58.82 million with approximately 105.98 million shares trading on the ASX.

NOTE: $ denotes Australian Dollar unless stated otherwise.