Good morning, everyone, thank you for joining us this morning. My name is Andrew Reeves, Managing Director and Chief Executive Officer of Ingham's, and it's my pleasure to welcome you to Ingham's' 2023 Interim Results Presentation. On behalf of Ingham's, I'd like to respectfully acknowledge the traditional owners, both past and present, as custodians of the land we are meeting on today. Joining me for today's presentation is our Chief Financial Officer, Gary Mallett. At the conclusion of the formal presentation, we'll happily take any questions you may have on our results and the business. I am pleased to report that our business is continuing to a path to full recovery. While our results, as you have seen from our announcement earlier today, are below the prior corresponding period, they represent a significant across-the-board improvement over the second half of FY 2022.
While our operations are making a good transition out of challenging conditions that have prevailed in the last couple of years, with our primary and further processing activities running to a normal operating rhythm and producing a full range of products. There are still some headwinds that we have to manage our way through, however. Our lower reported volumes reflect a combination of factors, namely lower bird numbers available for processing in Australia, and in New Zealand, labor and CO2 supply-related processing constraints had an impact on primary and further processing operations. The lower number of birds in Australia is attributable to a reduced level of farming performance during the first half. At our FY 2022 results, we noted the shortage of high-quality eggs in Australia.
This shortage, which we understand is a widespread issue, is a result of a small reduction in fertility levels due to the performance of breeding roosters, exacerbated by the effects of the Omicron wave in early 2022. Accordingly, less high-quality eggs have been set, which has a flow-on impact on hatch rates with subsequent reduction in day-old chicks. Day-old chick numbers resulting in less chicken meat available for processing. We have addressed the issue by, firstly, increasing the supply of high-quality eggs with the new New South Wales breeder farm that has now commenced operations. Secondly, by increasing breeder and hen rooster numbers. Finally, we have implemented husbandry improvements and diet changes. Pleasingly, as of February, the combined effect of these initiatives is delivering good improvements with positive trends continuing in day-old chick numbers.
However, it will be later in the second half before the benefits of more chickens being available are seen and the final financial benefits accrue. The cost environment is challenging for all businesses, and our costs remain elevated, with some of the more meaningful increases, in addition to feed prices being seen in fuel, freight, packaging, and ingredients. Our wide range of continuous improvement initiatives go some of the way to offsetting these inflationary impacts, and the program remains a major focus for FY 2023 and beyond. While continuous improvement is a very important offset to inflationary pressures, our prices must also adjust. As you will see later in the presentation, our average selling prices have shown good growth, reflecting our success in applying the price increases that we spoke about in our FY 2022 result.
These price increases are delivering positive earnings outcomes, combined also with the positive effect of market demand strongly outpacing chicken supply during the period. We remain focused on ensuring our pricing levels appropriately reflect ongoing feed and broader cost pressures, and will pass on further price increases as required. With a focus on the future, we are in the process of making a series of investments in automation and our network, future-proofing the business to improve capability to meet current and future consumer requirements. In respect of our business transformation program, following our recent completion of the design phase, we have decided to postpone, for the medium term, the implementation stage to maximize our focus and investment on those priorities that will support the further recovery and future growth of the business. Turning now to an overview of the business and update on the first half.
As many of you know, Ingham's is the largest integrated protein producer across Australia and New Zealand, providing chicken, turkey, and plant-based products to major retail, quick service restaurants, food service distributors, and wholesalers. Our diverse national network provides us with a number of important advantages, including no poultry products can be imported into Australia, with the exceptions of certain fully cooked items from New Zealand, which ensures continuity of local supply through a network of regional operating facilities, fully service national and local customer requirements, allows us to manage agricultural biosecurity and operational risks, and it gives us the optionality and flexibility for future growth. Ingham's' operations are vertically integrated and hard to replicate. Aside from the obvious barriers to entry that this creates, there are other important benefits that we derive from this model.
By effectively controlling all elements of the production process, we're able to realize efficiencies across all aspects of our supply chain, which you can see being realized through the years of our continuous improvement strategy and process. Our positioning is further enhanced by the fact that the complexity of such an operation, combined with the significant costs that would be required to replicate our platform, create meaningful barriers to entry for potential competitors. Following from this, we're able to ensure we achieve the appropriate production balance in our operations, which, combined with operational excellence, are keys to growing margin over time. I would like to spend a minute or two outlining the case for poultry. We are seeing a significant acceleration in inflation in recent times, the result of a variety of simultaneous, yet somewhat independent, domestic and international factors.
Against this backdrop, the long-standing affordability of poultry, we believe, is an important factor that will underpin future demand for the sector. As you can see from the chart on the left, chicken consumption has been steadily growing for the better part of the last 60 years. With significant pricing differentials that continue to be observed, as shown by the chart on the right, we believe the poultry sector is well-placed to deliver future growth. The health and versatility benefits of poultry are well-established, which aligns very well with the ongoing trends and consumer preferences for healthy lifestyle options. The third key element underpinning the future of the industry is the sustainability of chicken.
With a carbon footprint that is estimated to be around five times smaller than red meat, chicken is the green animal protein, and this will continue to be an important additional underpinning for the sector as we move into the future. As I mentioned at the outset, the business remains on a recovery path while we are also managing the ongoing effects of general market headwinds, including supply chain disruptions and the impact of broad-based cost inflation on the business. Core poultry volumes were slightly lower than the prior period, down 0.6%, reflecting the impact of the farming issues I noted earlier in Australia and labor and CO2 supply-related processing constraints during the period in New Zealand that both affected our primary and further processing activities.
Despite the small decline in volume during the half, I'm encouraged by the fact, if we look back at the most recent pre-COVID period to the first half of FY 2020, volumes during the first half of FY 2023 have still grown at 3% per annum since that time. Contributing strongly to our earnings recovery is the initial round of price increases we completed in calendar year 2023, with the first half average selling price growth of 8.5%. The inflation headwinds are reflected in our 10.9% increase in cost of sales during the period, which includes growth in feed, packaging and ingredients, fuel, and distribution costs. Net debt has increased modestly to AUD 294 million. Due to the lower second half FY 2022 EBITDA, our leverage has increased to 2.5x.
We expect this level to reduce for FY 2023 as the second half of FY 2022 earnings are replaced in the rolling 12-month earnings calculation. We have declared an interim fully franked dividend of AUD 0.045 per share, maintaining dividend payout ratio of 63%, which is within our policy. Taking a look at selling prices, the following charts paint a very clear picture of the recovery that's underway, the benefits of the price increases applied across all customers and channels across the business over the past four months or so.
At a group level, monthly average selling prices, as shown by the chart on the left, have recovered strongly over the last 12 months from the January 2022 low point, which was a function of the Omicron-related channel and products mix changes. Our first half FY 2023 average selling price has increased by 8.5% versus the PCP, and is up 10.7% on the second half of FY 2022, with these results primarily reflecting the benefit of broad-based price increases that we have previously discussed. Now turning back at the conditions across the channels for the first half. As you'll note from the volume slide, the key changes that occurred in our channels during the first half were a decline in retail volumes and a broad-based recovery across other channels versus the prior corresponding period.
In retail, volumes were lower than the PCP, primarily as we cycled stronger volumes results in the period. In New Zealand, the prior period was similarly elevated as a result of a 100-day lockdown in Auckland, which drove a shift in volumes into retail from the lockdown which impacted food service and wholesale channels. There was also some evidence that the recent price increases resulted in some slight softening in demand as consumers adjust to the higher inflationary environment. Importantly, retail volumes showed modest growth of 4.6% versus the second half of FY 2022 as production capabilities, and hence customer service levels, continued their recovery. In QSR, Australian volume increased compared to the prior period, with customer demand continuing recovery that commenced in the fourth quarter of FY 2022.
Similarly, the New Zealand QSR channel performed strongly during the first half, with customer promotional programs being a strong contributor to these results. The food service channel recorded strong volume growth versus the prior comparative period and the second half of FY 2022, with demand improving as restrictions eased and domestic travel activity resumed. New Zealand demand growth was stronger during the period, particularly as all channels were able to operate more normally and demand has remained strong against the backdrop of poultry price increases. The wholesale channel, which we have previously noted has quite a diverse customer profile, saw healthy volume growth versus the prior period. Prices have continued their recovery, which commenced in the fourth quarter of FY 2022 as consumer demand has continued to normalize.
Volumes in the export channel declined versus the prior corresponding period as trading conditions continued to recover, resulting in the lower clearance volumes. I'll now hand over to Gary to present the financial results in a little more detail. Thanks, Gary.
Thank you, Andrew, good morning, everyone. Turning to our profit and loss for the first half. As noted earlier, the group recorded a small decline in core poultry volume of 0.6%, with declines in both Australia and New Zealand during the half. Despite the small volume decline, revenue growth was strong at 8.9%, reflecting the benefits of the price increases that have been applied across all customers and channels. The group delivered EBITDA of AUD 197 million, representing a decline of 10.6% on PCP, while NPAT was AUD 17 million versus the PCP of AUD 38 million. Our cost of sales increased 10.9% due to broad increase in input costs, notably at cost of feed, packaging ingredients, and freight distribution costs.
Our EBITDA also includes costs incurred in relation to our business process and IT transformation project, amounting to AUD 16.2 million this period. As Andrew noted in his earlier comments, now the design phase of the program has been completed, we've decided to postpone the next phase for the medium term. Offsetting this was the reversal of a previous impairment in relation to the Cleveland further processing facility in Brisbane, where the lease has now been assigned to a third party. Interest expense increased AUD 4.2 million versus PCP as a result of a few key factors, including an increase in our external debt during the period, the impact of higher interest rates, the signing of new leases and grower contract extensions, all of which were partly offset by an FX gain on New Zealand dollar hedging. Turning to the balance sheet.
With regards to our balance sheet, total inventories increased during the year by $12 million due to an increase in biological assets during the period, reflecting higher cost of feed cycling through. Feed inventory was similar to June 2022 at $97.3 million. Our receivable balance increased $51 million from June 2022 due to a few different factors, including the effect of higher seasonal sales, higher average selling prices, and the timing of the annual insurance prepayment. The group's payable balance has also increased, largely due to an increase in the inventory procurement payable of $11.6 million as a result of the increase in the underlying unit cost of feed and timing of grain shipments to New Zealand. Our AASB 16 right-of-use assets and lease liabilities continue to decline as expected in line with the lease periods.
Our net debt from period has increased AUD 27 million on June 22, largely due to the effect of working capital increases. Moving now to cash flow. Our cash conversion ratio of 74.8% was lower than the PCP, due to an increase in those biological assets as the higher cost of feed cycles through the asset class and an increase in trade receivables due to the average selling price growth for both total poultry and external feed sales. Non-cash items relate to the reversal of a previous impairment relating to the Cleveland facility lease assignment. Capital expenditure for the half was AUD 23.5 million, in line with the PCP, which reflects capital discipline as the business performance recovers.
Key expenditure items during the half were AUD 5.4 million on the WA primary processing facility water treatment plant and AUD 9.3 million on our New South Wales breeder triangle. We received processes relating to the realignment of our interest rate hedges following the extension of our key debt facility to a further two years during the period. Turning to our capital management outcomes. Already noted, our net debt at December 31 was AUD 294 million, with our leverage above the top end of our target range at 2.5 x on the back of the low FY 2022 second half profitability. I would note that this level is expected to reduce for the full year FY 2023, as the low second half FY 2022 earnings are replaced in the rolling 12-month earnings calculation.
During the period, we extended our debt facility tranches maturing in November 2023 for two years out to November 2025. Our sustaining capital spend this period of AUD 14.2 million represented 53% of depreciation, which is similar to the rate we reported in FY 2022, but below the target rate once again due to the capital discipline and the ongoing supply chain disruptions. Andrew mentioned, the fully franked interim dividend of AUD 0.045 has been declared, representing a payout ratio of 63%, which is within our target range. Growth CapEx in the half was focused on the ongoing development of our New South Wales breeder triangle, with the rearing stage of the farm now operational. I'd now like to make some comments on the feed market. We have seen feed prices stabilize more recently.
However, they've remain very elevated versus historical levels. During the first half, wheat prices were fairly flat, and in Australian dollar terms, the soy market pricing has increased by 6% during the half. As you can see from the charts on this page, wheat and soy prices are up significantly versus PCP, rising 19% and 33% respectively over that period. Global wheat supply remains tight despite limited exports resuming from Ukraine, as demand remains firm and adverse Northern Hemisphere weather conditions will continue to negatively impact a number of key growing areas. Australia appears to be on track for a third bumper harvest year, with production expected to again surpass 30 million tons. The extensive rains and flooding experienced across the Eastern Australia wheat growing areas appears to have resulted in only minor crop damage, thus limiting the potential for price discounts for lower quality wheat.
World soy meal demand for feed is expected to remain strong, which combined with persistent dryness in Argentina and the United States, will continue to underpin global pricing. In addition, freight and logistics costs remain high, which is an additional cost on top of the prices shown in the chart. As there is a period of time between securing the feed and it being fed to our poultry, and then the poultry being processed, there is a lag before the cost is recorded in our P&L. The feed prices shown in the chart for the first half will largely be expensed later in FY 2023 and into FY 2024, and the P&L expense recorded this half was largely from feed secured in the second half of FY 2022 as shaded.
Ingham's continues to maintain forward cover of between three and nine months to secure supply in line with our procurement strategy. I'll now hand back to Andrew to discuss the segment performance.
Thanks, Gary. In Australia, volume declined 0.3%, driven mainly by lower bird numbers we've been referring to that were processed, and that was as a result of a shortage of high-quality eggs attributable to a small reduction of fertility levels from the performance of breeding roosters, resulting in a reduction in day-old chick numbers. We continue to see a decline in external feed volumes, which were down 3.6% for the period as customers continue to transition in preparation for the closure of our WA feed mill.
Despite a small decline in volume, revenue grew a healthy 9.6%, driven by two factors being an 8.5% increase in total poultry prices as we progressively applied price increases across all channels and growth of 29.6% in external feed prices, reflective of the steep increase in commodity prices. Our underlying results pre AASB 16 reflect the benefit of our operational efficiency programs in partially offsetting the cost pressures being experienced and the impact of these broad cost pressures across key inputs including feed, supply chain costs, packaging and ingredients. In New Zealand, core poultry volumes were down 2.4% as a result of the adjustments we needed to make to egg settings early in the period.
Revenue, on the other hand, increased 4.8% due to meaningful increase in poultry and feed net selling prices, which increased 14% and 37% respectively. The New Zealand business continues to respond to this rising cost environment. The decision to reduce egg settings reflected the challenging operating environment we experienced in New Zealand early in the period, driven by both an acute shortage of labor, which affected our primary processing activities, and the ongoing CO₂ shortage that we have noted previously, which affected further processing and product mix. I'm pleased to report that we saw good improvements in labor availability as the first half progressed, with vacancy rates back to more typical levels. During December and through January, the Kapuni CO₂ plant had temporarily shut down, with the resulting shortage of CO₂ constraining production volumes at our Cambridge facility through January and February.
To address the general CO₂ shortage that has been a feature of the New Zealand market, we converted the Auckland processing plant to nitrogen cooling in November, and with work underway to convert the Cambridge plant, which is expected to be completed later this month. Cost pressure in New Zealand mirrors the experience in Australia, with significant cost pressures bearing upon key imports of feed, supply chain costs, packaging, and ingredients. It is pleasing to report that we saw an improving performance trend taking hold during the second quarter. At our AGM last November, I broadly discussed some of the work the board and the leadership team were undertaking in relation to looking for opportunities to improve the structure and efficiency of our network, including through continuous improvement, automation, and specialization.
Our continuous improvement program remains a core part of our business approach and is backed by a dedicated team which is operating under the lean manufacturing rules and principles. The team has a whole of business responsibility, focus, focusing on drive accountability throughout the supply chain to identify process improvements, cost savings, waste elimination, which are all aimed at lowering overall operating costs. While our progress on some initiatives had slowed a little due to COVID, the overall program has continued, and importantly, the financial benefits of those programs we previously implemented continued to accrue to the business. FY 2023 brings renewed focus to the program as it becomes fully operational once again, with 300+ projects identified and underway. Turning now to look at a few of the investments we are making in our network and automation.
I am pleased to report that our breeder triangle is progressing well with the Yorklea rearing farm now operational. Owned and operated by Ingham's, this important investment in our network is located in the Casino area in Northern New South Wales. The triangle will service the Queensland market as an important part of growing our capacity and enhancing the overall resilience of the network. When fully operational, the triangle will comprise of one rearing farm and two egg-producing farms and will produce approximately 700,000 eggs per year. As I noted, the rearing farm is now operational, with the first egg-producing farm due to commence operations in April of this year. Followed by the second production farm in November, later in 2023.
The introduction of high levels of automation has been a key consideration for Ingham's as a part of our network analysis and planning. The importance of which was demonstrably clear as we navigated the myriad of challenges brought on by COVID. In executing our network plan, there are two key investments that we will start with regard to automation. The first of these is the acquisition of a number of Direct Stream Injection, or DSI, waterjet cutters. We have committed to purchase four new DSI machines at a total cost of $30 million. The purchase of these machines, which will be spread over a three-year period from FY 2023 to FY 2025, will be funded from group earnings, with installation expected over the next two to three years. The machines are expected to deliver a number of benefits to the business.
From a product perspective, they will enable us to expand our capability in the provision of whole muscle, portion control products that are important to both QSR and our retail customers. From a processing perspective, the new technology will provide higher throughput, yield, and capacity outcomes across the business. To ensure we maximize the value derived from each of these machines, we are also augmenting our capability with the introduction of standalone slicers and dicers at our Murarrie and Bolivar plants to process stir-fry and diced products, thereby releasing additional capacity on the DSIs. The next investment in automation that I'd like to share is based on the expected increase in demand for deboned thigh and drumstick meat. Ingham's currently utilizes various semi-automatic processes to harvest leg meat, processes which are labor-intensive and have throughput limitations.
Over the next two years, we will purchase four modern leg deboning machines, replacing the current semi-automatic processes at three sites and also creating capacity to meet future demands.These machines can handle large variations in leg size using an X-ray measuring system to precisely measure each leg, automatically adjusting in real time, enabling precision cutting, which ensures a very high yields and minimum labor for trimming. There are numerous benefits that we see from this investment, including but not limited to improvements in yield, product quality, as well as supporting future products and customer opportunities. Today, we agreed to the conditional purchase of the business working capital and fixed assets of Bromley Park Hatcheries for approximately NZD 8.6 million, with a third-party lessor to acquire land and facilities and to enter into a long-term lease with Ingham's.
Bromley Park own and operate a number of breeder farms as well as a hatchery in New Zealand and currently provide Ingham's with 10% to 15% of our day-old chick requirements. The purchase provides the opportunity for Ingham's New Zealand to become self-sufficient in respect of its day-old chick requirements and is very efficient and cost-effective solution versus undertaking a greenfield development. It also improves our hatchery contingency with a modern hatchery, reduces network risk while providing for future growth. The acquisition is subject to a number of purchase conditions, including Commerce Commission and Overseas Investment Office approval, and settlement is currently expected to be in the first quarter of FY 2024. The poultry sector remains an attractive and growing one, underpinned by a number of significant advantages, including a large consumer price advantage over red meat and seafood.
Poultry is a strategic focus area for our key customers, reaffirming our optimism for the category over the medium to long term. Ingham's results for the first half represent a significant improvement for business over the second half of FY 2022. We expect this positive momentum to continue as we proceed through the second half of this financial year. It is clear the business is successfully transitioning from the FY 2022 operational challenges, with our processing activities running to a normal operational tempo and producing a full product range. That said, we still have work to do. We have implemented a series of initiatives to improve farming performance levels. We are now seeing an improving performance trend with the benefits of more chickens coming off the farms to be seen in volumes and financials later in FY 2023.
To ensure the necessary focus of our efforts and prioritization of investment on high-return projects that will support the further recovery and future growth of the business, the Business transformation program has been postponed following the completion of the design phase. Broad inflationary pressures continue to be felt across the business, with further increases expected for key inputs. While the pricing of feed ingredients stabilized in the first half, wheat and soy meal prices are expected to remain elevated versus longer-term levels due to tight global supply and higher logistic costs. The successful application of price increases can be seen in our revenue growth, with strong growth in average selling prices of 8.5% versus the prior corresponding period and 10.7% versus the second half of FY 2022.
We remain focused on ensuring customer pricing levels appropriately reflect these ongoing feed and general cost pressures and will pass on further price increases as required. With a firm focus on the future of the business, we're investing in our network and automation, future-proofing the business to improve capacity and capability to meet current and future customer and consumer requirements. This includes the Bromley Park deal in New Zealand announced today, which provides the opportunity for Ingham's New Zealand to become self-sufficient in respect of its day-old chick requirements, reduce network risk, improve hatchery contingency with a modern hatchery whilst providing for future growth. Overall, our new investments are being undertaken in a disciplined way, with capital expenditure expected to progressively return to a normal run rate, with our leverage expected to improve over the remainder of this financial year.
Finally, we are planning to hold an investor day later this calendar year, and we'll be setting a date in the coming months, and we would be delighted if you could all join us for that event. On behalf of the management team, I would like to thank you for joining us today, and I'll now hand back to the operator and we'll take your questions. Thank you.
Thank you. If you'd like to ask an audio question today, please click the Request to speak button at the bottom of the broadcast window and follow the instructions on your screen. If you are currently watching the broadcast in full screen mode, you may need to return to the split screen view to access this button. If you've joined via our phone line and would like to ask a question, please dial star to join the queue. If you'd like to ask a written question, select the Messaging tab at the top of the Lumi platform, type your question in the box and press the send arrow. We'll firstly take questions from the phone line, followed by any online audio questions, and finally written questions.
Our first question today is from David Pobucky from Macquarie. David, please go ahead after the beep.
Morning, Andrew and Gary. Good work on the ongoing recovery of the business. I mean, it appears earnings are recovering quicker sequentially half on half than the market expected, I think. Keep your normal first half, second half, EBITDA skew is I think 51-49, but it's clearly not a normal earnings year. How should we think about that skew this year and the continued earnings recovery to the second half, please?
Yeah, I don't think it is a normal year, and I think we probably won't, you know, we won't probably see that normal pattern. We're quite optimistic that the trends we've seen in the first half are continuing to the second half. That's certainly been the experience we've had. That gives us confidence that the recovery will continue. I think the key issues that we've got to resolve over the second half are getting these farming operations back on track, and the most recent trends would suggest that we're doing that and the coming on stream of the new breeder complex in Northern New South Wales is going to be a major contributor to alleviating the shortage of eggs, which ultimately flows through to the availability of products.
That will be a real strong feature for the half. The other thing we have to continue to be, you know, work hard on is price recovery. The inflationary environment is still pretty tough. Probably is not easing as quickly as I think some might have expected. We've got pressures in that regard, so we'll have to be taking additional price increases, most likely to customers through the half, and that will be an important part of maintaining our margin and recovering those costs. I think thirdly, I think we will, as supply normalizes, as demand comes back, and we've seen some since Christmas, we've seen, you know, good signals on demand in the marketplace in the critical channels and customers.
I think if that continues through the half, that will also underpin some positive momentum for the business.
Thanks, Andrew. It sounds like there, you know, still some headwinds there. You know, sounds like you probably won't get back to that normal, kind of EBITDA pre AASB 16 kind of run rate for the half of I think it's, you know, seems to be around AUD 100 million, second half 2023. It's probably a little bit premature, it sounds like, getting to that normal run rate.
I think I would be giving guidance, David.
Yep. Thanks, Gary. Just second one for me, please. You noted that EBITDA includes business transformation project costs, AUD 16 million, and that AUD 3 million benefit from the Cleveland facility. Can you just clarify if that's been stripped out of your underlying pre AASB EBITDA number of AUD 84 million, please?
Both of them have been.
Sorry, didn't hear that. Couldn't quite hear that.
Yes, both of them have been excluded from the underlying-
Yeah.
EBITDA pre AASB.
Great. Thank you, Andrew and Gary.
Thank you. Our next question is from Michael Peet. Michael, please go ahead after the beep.
Hi, Andrew and Gary. Thanks for taking my questions. Just firstly, just on, could you give us a bit more information on this supply disruption? Maybe can you sort of give us a sense of how much that's disrupted you in terms of volume, what you could have potentially, you know, where you should have been in terms of volume set with the issues in the breeder part of the business?
Yeah. Look, I mean, it actually goes way back into sort of December, January of 2021, 2022. The whole cycle, the breeding cycle of a flock is about up to 65 weeks. If you have problems early on in that, it takes you quite a while to work your way through them. You know, the lack of labor at that time meant that some of the, you know, the normal good attention to husbandry details wasn't able to be practiced, and it led to some less than ideal conditions, which ultimately had effect on the breeding roosters. That flowed through to fertility, hatchability and meat availability.
We worked our way through that, and we're coming out the other side of that one. It is tricky though, because it's quite long lead times. It's a bit difficult to sort of exactly precisely say what sort of volume did we miss in that regard. I mean, if you look over the last, let's take a view to try and give you a pre-COVID view here. If you look over the last three years, we take all the ups and downs out, we've still been averaging around about a 3% volume growth. I think that's pretty healthy.
Yes, you know, through the half we've, you know, we've been below that, so that's clearly the missed opportunity was there. We are seeing as that supply situation improves and as demand is starting to normalize, we're sort of getting back on that sort of trend line, and we're quite confident that's where we'll be over the balance of the year and into the years ahead. Yeah, it's much more, it's more of a supply issue than probably a demand issue to be fair. There, you know, that gives you a sense of what we might have lost.
Yes, I.
Yeah, sorry.
I was just gonna add, it's probably a couple of percent off our production that we would've liked to have had.
Yeah, thanks, Gary. Just further to that, I mean, is this a particular issue with the Ross bird or as they've imported the sort of genetics, is it an issue industry-wide? Is there something you can do to sort of... You've mentioned New South Wales, clearly sounds like that's gonna help, but I'm just interested in sort of learning a bit more about how you or the industry can respond to this to sort of prevent it from happening again.
Yeah. I don't believe it's a fundamental problem with the choice of bird or the variety of bird. In fact, you know, historically, the performance of our Ross bird has been exceptionally good and benchmarks very well. I think it's a transitory problem. Anecdotally, there are certainly industry issues and, you know, you've only got to look at some of the retail outlets to see holes and gaps in the shelves of product and some notices, you know, advising shoppers that there are farming issues that are causing shortages. I think it's very much a transient issue that goes back to, you know, disruption to the whole supply chain and husbandry issues. We've identified those.
I'm very confident they've been very well addressed. The recent trends show that we're getting back on track. I don't think it's a systemic or a long-term issue we've got to address. It's a, it's a part of the whole disruption we've been, we've been experiencing and, you know, I'm pretty confident, like very confident that we've put it behind us, and we don't need to be making any fundamental changes to our choice of breeds.
Just finally on price. I mean, has this sort of shortage helped you get price rises, do you think? Just looking forward, should we expect a similar trajectory that's gonna be required to recover the costs that you've sort of highlighted today?
Clearly, I mean, every, you know, the, the broad inflation environment is affecting everyone and our customers are certainly, they understand it and in fact, they've been, you know, they've worked closely with us as we, as we navigate through those price increases. There is a general understanding in the marketplace that these things have to be recovered and passed through. I guess the shortage of meat, where it shows up in our business most significantly is in the wholesale market, which is very much driven by availability and supply and demand issues. You know, if we go back a year when the market was being flooded with excess because we couldn't process birds, the prices in wholesale were significantly depressed.
We roll forward to now. Because the market is a little short, then wholesale prices have significantly improved over that time. The combination of working with our customers, understanding the environment we're in, that is, and that's been a productive process and the recovery in the wholesale market pricing, those two things have really helped us get to that level. What the price increases will be over the balance of the year, not really prepared to predict that. We are already engaged in conversations with different parts of the market and how we continue to recover those recover those cost inputs through price.
Thanks, Andrew. Thanks, Gary. That's all I have.
Thank you. Our next question is from Craig Woolford from MST Marquee. Craig, please go ahead after the beep.
Hi, Andrew and Gary. I wanted to follow up on that question around price. With that, you know, what seems to be a shortage in the wholesale market, it's probably helping the results that we've seen there on price. You know, is there anything we should be mindful about in where that pricing settles in the wholesale market and how that could contribute to maybe less ASP growth in the second half?
Yeah. Well, I mean, it's a difficult one to predict, Craig, obviously, because it's quite a volatile part of the market. Our forward view is that it is going to stay relatively strong over the second half because as supply continues to recover. We, you know, we think it's gonna be a contributor to ASP improvement across the half and therefore across the full year. You add to that, you know, increases we'll need to get in other channels. You know, I think the full year will show a, you know, pretty strong performance on ASP.
Yeah. Not trying to get too caught up in individual months, but as an analyst, we love seeing the detail like you've got on slide 10 there around pricing. It does sequentially increase. Can we conclude two things? Can we conclude from that there were price rises that were put through later in the first fiscal half?
Yeah.
Looks that way, just eyeballing the chart, particularly for Australia. Oddly, why did Australian pricing dip in December versus November? It wasn't the case in New Zealand.
On the, yeah. I'll get Gary Mallett to do that last bit 'cause it's more, the... The pricing was phased because it's very difficult and I think we talked about this at the full year results. It was very difficult to get pricing away when you're not supplying the market. When you've got you know, severe supply pressures, it's pretty tough to have those sort of, you know, implement price increases with customers. We had to get back to stability. We had to give them confidence that supply was coming back on stream, and then we could get price increases implemented. There was a little bit of a delay.
If you go back to the second half of FY 2022 into the first half of FY 2023, you know, we were sort of stymied a little bit by the supply issues. Once we got stability there, once we thought, "Outlook, we've got confidence in," we were able, particularly in Australia, because New Zealand was ahead of the curve on that one, we started to get those price increases implemented, and that's why you see the rise up in the chart. Of course, those price increases will continue to benefit us as we go into the second half. That was the delay was really caused by our supply challenges. Maybe Gary would address that second part of that question too.
Yeah. I know why you're looking at it. Is it a long-term trend? I'd say it's more of a December factor. We have more seasonal products. In December, we have large turkey sales. In September, there's a bias, sorry, in December, bias to more whole birds during that period of time, which on an overall average price per kilogram are at the lower end. It's really a mixed question, I would say, Craig. I wouldn't be thinking that's a trend.
Yeah, I suspected so. That's fine. What are the consequences of deferring your business transformation program? You would've said it for a reason. There's obviously some legacy systems, some outdated systems that you're trying to improve. What are the challenges?
Yes. That's, I mean, you expressed the case there. It'll take longer before we see those improvements coming through the business, and we'll need to manage our legacy systems for a little bit longer. Yeah, you outlined exactly what the consequences of that would be.
It's not as extreme as any of them are end of life and it's difficult to get service from IT providers?
I don't think we would make that decision if that was the case. In saying that, it is, they are legacy systems and that does become challenging the longer that you leave it. Yes, we wouldn't have made that decision if we thought it was an acute issue now.
Lastly, should we expect any further restructuring costs periods?
That's on a business transformation, you mean?
Yeah, I guess so. I mean, I guess in my mind, the debate is whether they should be below the line or above the line. You know, if they're one-off restructuring, it makes sense. If it's about business improvement, most companies are trying to do that year in, year out.
Yeah. I think it was more driven by the AASB 16 than what you would normally have been capitalized is now being expensed. In answer to your question for the second half, as we sit here today, I'm not expecting anything material in that line.
Thanks, Gary. Thanks, Andrew.
Cheers, Craig.
Thank you. Next, we have David Errington from Bank of America. David, please go ahead after the beep.
Morning, Andrew. How are you?
I'm great, Dave. How are you?
Yeah, good. Thanks. Good. Thanks. A bit simplistic, but you've got a shortage of chicken, and chicken is the cheapest form of protein. Your cost increases. Your cost to sales are increasing by more double digits over 10, but you can only put through 8% price increases. Why can't you get full cost input? Why can't you get the full price increase? I mean, it's a dumb question. I know Mr. Banducci probably is a pretty tough bloke to compete against. Why can't you get the because as you say, you've got everything going in your favor. Protein's going through the roof, meat's going through the roof. Why can't you get full? Because if you can't get full price, coverage from your cost increases, you're up against it.
Why can't you get the full price co- recovery?
Dave, I mean, I agree with your point, and that's what we've got to keep working. We've got to get full cost recovery. I think, you know, that's, that's our ambition. The issue was the, it was my answer to Craig's question. It was the delay in being able to get those price increases through that.
Mm.
sees the average come out at a little less than the inflationary cost. It's a bit more the timing and the arithmetic there. You know, we talked to our all of our customers about the full spectrum of costs that we're dealing with. You know, yeah, they're tough negotiators, right? There's trade-offs and, you know, gives and takes in all of that. The critical issue there is the timing issue.
Okay. You can get recovery, but probably not all of it. It is this particular instance is a bit more on the timing side, the price increases came through a bit late. That's what you're saying?
Yeah. That's my-
Yeah. That's what Craig... Yeah.
Yeah.
Yeah. Okay. Okay. Now on the cost line, now, I mean this is a pretty, again, a pretty simplistic way of looking at it, but your gross profit increased by 10%, thereabouts, but your EBITDA fell by 23%. Which means that when you look at that, your cost line increased, your cost of doing business line increased by 33%. I know that there was some AUD 16 million of restructuring, but you got a AUD 3 million benefit there. There seems to have been a pretty significant blowout in cost of doing business. Is that the right way to look at it? Because it looks like it's a double-digit increase in cost of doing business, which then coupled with, you know, not being able to get your full price recovery, you're up against it there, Andrew. What's going on in that cost line?
Can you spell that out for us a bit?
Yeah, I'll get Gary to do that for you. Yep.
Thanks, Andrew.
Hi, David.
Hi, Gary.
Cost of sales was up 10.9%. Also, you may have seen that our distribution costs are up substantially as well. The main areas where costs have come through, and you talked about business transformation, which wasn't there in the prior year. Feed costs, we talk about going up nearly $60 million year on year, which is a cost of doing business. We saw around about $12 million in our packaging and ingredients, and we saw almost $30 million coming through in essence in our freight and distribution cost lines. They would be the biggest ones. I can go on a list item. I'm sure many organizations that you all got an eye on are showing cost increases. You've got labor, you've got-
Mm.
You've got gas. We have particular with CO2, there's been a shortage and some significant prices there as well.
Yeah.
We're seeing, pretty across the board cost impulse, but I've called out the biggest ones there to try and help you.
Yeah, they're the heavy ones. It's hitting you pretty hard. Just the final one on the balance sheet. I'm looking at, you know, your receivables versus your payables, and I've tried to do it on a December to December to wipe out seasonality. It looks to me that the receivables as the prices are going up, it means that you're not being able to receive your money any shorter. You got to carry the receivable. It looks to me that you're not getting any relief on the payables. You've got to pay your suppliers probably a bit quicker. I mean, I've. Another retailer, I think Metcash called that out. They've got to pay their suppliers a bit quicker, but their receivables are growing quite significantly because of the price increases.
Are you finding that too, that you're carrying a greater level of receivables now because of inflation, but you've got to pay your suppliers a bit quicker, hence you're carrying the working capital increase and the impost on the cash flow? Is that the dynamic that's unfolding here?
I wouldn't say... I mean, definitely on the receivables, and you're seeing that the impact of the price increases going through there. I think if you do the DSO calculation, it would be pretty similar. I think we're a bit up in this period, in addition to the ASP.
Mm.
Collection has had, I guess, some mild challenges, but, remember we are pretty quick DSO, and our bad debts is/are extremely low. We certainly haven't made a conscious decision to be paying suppliers early. I probably just need to have a look at that, to give you a better answer.
Well, just explaining the cash realization dropping, it means that working capital, and it just looks like your receivables are increasing at a faster pace than what your payables are. That's just an observation. It's common. I mean, basically it means that you're carrying the receivable because you've got the higher value of the sale, but the, the suppliers need to be paid a bit quicker because they're under a bit more troubles. It's common. I just wanted to know if that's a thread that's gonna be a pressure on your cash flow coming forward, because there's gonna be working capital challenges in these current inflationary times.
I think there'll be an element of that. There's probably two other factors in there as well. One is we have our biological assets, in essence our eggs and birds that are in the field growing but before processing. Also our breeder network as well. If you can imagine with this, we're saying close to AUD 60 million increase in feed, all of those assets that are.
Yeah.
Field also are being fed as well. We do carry some working capital and higher costs there. Of course that's also in, some of our inventory of the product inventory as well. Inventory would be the third leg of the equation.
It just makes high.
If you-
High inflationary time. Yeah.
Yeah. If you assume biological-
Sorry.
Inventory. Yeah.
Yeah. High inflation, it causes secondary challenges, and working capital is obviously one of them as well. Yeah. Thanks, Andrew. Thanks, Gary.
Okay. Talk later.
Thank you. We have time for one more question today. Our final question comes from Richard Amland from CLSA. Richard, please go ahead after the beep.
Morning, guys. Just two quick questions to wind up. Can you just explain a little bit further the business transformation expense? I'm not clear on exactly what it is. It seems like, you know, there's a charge for deferring, business improvement. Can you just flesh that out a bit for me?
It's costs that we've incurred in essence, getting up to the end of our design phase. We were looking at implementing an ERP, and then at the same time, modernizing our business processes that go with that, largely replacing legacy systems and then building some business capability, to match, to improve operations and match, future strategic intent. The AUD 16 million is the cost that we have spent on that during the half.
It
What, but what the deferral relates to, is that we're the next phase would be then implementation, and we've deferred that implementation phase.
You have in fact expensed costs associated with system migration, eventual system migration, but you're deferring the actual implementation?
Correct.
Okay. I understand that now. Thank you. There's numbers dotted around the presentation and I'm just trying to get a concise number. What is the annual CapEx at this point in time?
Half year CapEx was AUD 23.5 million.
Yep. Okay. We should look at annualizing that? Or did, and did that number include the business transformation or is that, are we treating that separately?
Business transformation cost was expensed and expensed through the P&L. So the AUD 23.5 million-
Okay
CapEx, it excludes the business transformation. Other two biggest things in there are the water treatment plant in our Western Australian primary processing facility, and the largest is our continuing spend on the New South Wales breeder farm up in northern New South Wales. As far as the next year, we have had low-ish CapEx over the last few years, but we were more running in around that AUD 80 million mark for a full year. I think what Andrew talked about automation, we will have some payments coming through for that equipment. I think it would be reasonable to expect that number will be higher in the second half than the first half.
Okay. That's great. I will save everything else for later. Thank you very much.
All right. Thank you.
Thank you. That does conclude today's Q&A session. If you didn't get to ask your question today, please contact Brett Ward after today's meeting. Back to you, Andrew and Gary, to sign off.
Okay. Thank you, everybody, and some of you we'll be speaking to later in the day.