Thank you for standing by, and welcome to the Inghams Group Limited Full Year 2021 Conference Call. All participants are in listen only mode. There will be a presentation followed by a question and answer I would now like to turn the conference over to Andrew Reeves, CEO and Managing Director, please go ahead.
Thank you, and good morning, everyone. 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 2021 full year results presentation, my first results presentation since taking the reins of the company earlier this year. I would like to take this opportunity to acknowledge that I am hosting this presentation from the lands of the Gadigal people of the Eora Nation. I would like to pay my respects to Elders past, present and emerging and recognize Their ongoing cultures and connection to the lands, waters and community.
Joining me today is our Chief Financial Officer, Gary Mallett. And at the conclusion of the formal presentation, we will both take any questions that you may have on the results and the business today. So now turning to the highlights for 2021. Just as a quick reminder, as we announced in November last year, our financial results are reported inclusive of the leases accounting standard AA SB 16. So all references to the underlying results are post AA SB 16 unless otherwise stated.
Today, we have the pleasure of reporting a solid set of results with EBITDA and net profit after tax coming in within the our earnings guidance range that was issued in May. These results have been achieved despite the ongoing impact of the pandemic on our operating environment. Our results are underpinned by resilient demand for poultry and the positive operational outcomes arising from the delivery of our strategic plan. Core poultry volume grew in line with our expectations. Demand across the majority of our channels resulting from a recovery in trading volumes ahead of pre COVID-nineteen levels.
Our Optimize the Core strategy has also contributed strongly to today's results. Our dedicated team remains focused on process improvement, waste and waste elimination, managing around 200 projects in FY 2021 with 320 improvement project opportunities also identified for FY 2022. Throughout the COVID-nineteen pandemic, Inghams has focused on keeping our people safe. Our high safety standards enabled us to keep operating throughout COVID-nineteen with minimum operational disruption and perform our role as an essential service provider. Our ability to respond quickly and effectively to the challenges that COVID has placed in front of us continues to speak to the resilience And agility of our business and our unwavering commitment to our people to deliver great outcomes for our customers and consumers as well as profitable growth and returns for our shareholders.
So we can move forward now to the financial highlights On slide 4, while Gary will cover the financials in more detail shortly, there are a few key highlights I would like to note. Group core poultry volume grew by 4.2% on the prior corresponding period, with volume growth in New Zealand particularly strong at just over 6%. The result reflects growth in retail, Coverage expansion in wholesale and a solid recovery in QSR and Foodservice, which were particularly impacted by the COVID-nineteen containment measures. Our statutory EBITDA of $443,900,000 increased by 14.5%. Supported by volume and revenue growth, combined with continued operating efficiencies, net feed cost benefit and frozen poultry inventory reduction.
Our statutory NPAT of $83,300,000 also recorded a strong increase of 108%. The company paid total dividends of $0.165 per share, an increase of 17.9% And reflecting a payout ratio of 71% of underlying NPAT in line with our policy target of 60% to 80% We move into FY 2022 With a very strong balance sheet, our net debt having been reduced by 24% during the year. Moving now to review our customer channels. Overall, despite the ongoing effects of COVID-nineteen containment measures that remain a feature of the markets we operate in, we saw demand strengthen across most channels as restrictions eased. In retail, the effects of pandemic containment measures have been particularly visible.
Following strong growth in the first half, Australian demand in the second half moderated versus the prior corresponding period due to elevated demand that arose from COVID-nineteen restrictions in mid-twenty 20. In New Zealand, we have previously noted the impact that the lower tourism levels are having on this channel due to ongoing border closures. We saw the performance of our QSR channel improve as lockdowns were lifted. In addition, promotional activity and new product launches provided additional performance benefits. Similarly, our foodservice channel saw the benefits of easing restrictions with a stronger second half performance.
While this channel continues to feel the effects of the absence of international tourist arrivals due to border closures, Increased domestic tourism has helped fill the void, driving demand growth, particularly in regional areas. We are also seeing growth in wholesale with the performance in the second half particularly strong driven by the addition of new customers and expansion of our coverage. Despite the headwinds of the pandemic, Our focus on the customer and broadening our customer relationships is helping us achieve good growth in this channel. The export channel has been a key channel for managing excess inventory. Australian export volumes were lower versus prior period due to partial export market closures impacted by a bird flu outbreak in some farms outside Ingham's network.
While in New Zealand, volumes improved as we utilized this channel to clear excess inventory. We anticipate volumes to slowly grow as export markets reopen. In late 2019, the business presented its strategic framework, which comprised of 3 pillars: to optimize the core, transform to tomorrow and create the new. Over the last 2 years, this framework guided our efforts and shaped our plans to deliver more consistent, predictable and reliable returns. The benefits of the initiatives and actions taken under This plan can be seen in our results today.
Optimizing the core, our program of continuous improvement is delivering strong outcomes, driving lower costs, enhancing yield and reducing waste. Through this program, we are delivering greater asset efficiency and return with relatively modest capital spend. We announced at the half year that in December, we entered into an agreement for the sale of our Hamilton Feed Mill and associated dairy feed supply business. The feed mill was dedicated to production of feed dairy feed solely for external sale and was non core to our operations. This sale has released capital that we will deploy to higher value opportunities.
Under our pillar of Transform for Tomorrow, we are making good Progress with our 2 Hatch Tech Hatcheries in Victoria and Western Australia, and I will talk more about Hatch Tech later in the presentation. As discussed earlier this year, our Redland Bay Research Farm is fully operational with a number of successful calibration trials conducted. Future trials will be supported by our feed and farm R and D strategy, focusing on optimizing feed and raising the bar on animal welfare standards. Finally, our 3rd strategic pillar to create the new is delivering some excellent outcomes. During the past year, we had an enhanced focus on premium market through branded and private label product innovation as well as the launch of plant based products.
This included the launch of a new brand, the Free Ranger in April last year, which is now present in over 300 supermarkets. Product innovations such as our Supercrunch range of frozen products has been Very successful with healthy sales volumes and strong positive consumer feedback. Our plant based range is also experiencing Continued access across QSR and Retail channels. I'll now hand over to Gary to present the financial results in more detail.
Thanks, Andrew, and good morning, everyone. As Andrew noted earlier in the presentation, our financials are presented inclusive of 16 adjustments unless we have stated otherwise. In the appendix to this presentation, you will find additional information and reconciliations on our AASB 16 impacts. So turning to Slide 8 and our profit and loss. The group delivered EBITDA of 444,000,000 representing growth 14.5%.
The improvement in EBITDA during the period and also our gross profit margin percentage was driven by a combination of volume and revenue growth, improved operational performance, the contribution from continuous improvement across our farming, primary, further processing and supply chain activities, procurement savings and the change in our inventory position or provision versus the prior period. Gains from these areas were partially offset by increases in insurance costs and legal settlements. Stripping out AASB 16 adjustments, underlying EBITDA pre AASB 16 grew at a slightly higher rate of 16.6% to $210,000,000 Statutory NPAT for the year was $83,000,000 which is a significant increase of $43,000,000 on the prior year, which reflects the benefits I've already outlined and also the absence of asset impairments this year. The company's effective tax rate was 26.4 percent due largely to the receipt of an R and D tax credit related to a prior year, the benefit from which was partially offset by a provision that we made for an uncertain tax matter from prior years. The impact of AASB 16 on NPAT reduced in FY 2021 versus prior period to $14,500,000 as expected versus 23,700,000 Turning to the balance sheet.
I'm pleased to report that our balance sheet is in good shape. During the New Year, total inventories fell 24,000,000 As we successfully reduced excess frozen poultry inventory, and we are now holding at levels we are comfortable with. This was offset by an increase in feed on hand as we secured physical supply post harvest. This is simply a timing associated with physical delivery and we maintain forward cover between 3 9 months. Our receivables increased 19,500,000 $225,000,000 in line with higher Q4 sales compared to the prior period.
In regard to leases, We added new growers and extended leases at some facilities, including Turkey Farms in our Cambridge, D. C. In New Zealand. These increases were offsetting our right of use assets and lease liabilities by amortization and cash lease payments, respectively. As Andrew noted in the financial highlights Earlier, we have recorded a significant improvement of net debt, declining by $74,000,000 due to solid trading cash generation and prudent capital management.
Moving to the cash flow on Slide 10. Our cash conversion ratio was just over 100% during the year, with an increase of 3 40 basis points to 102%. This includes the level of our inventory procurement payable facility falling $12,000,000 over the year. Capital expenditure of $66,000,000 during FY 2021 was lower than the prior year As we maintain discipline given the challenges associated with COVID-nineteen that we experienced during the year, which also meant that we weren't able to access some of the sites during this period. The investment we are making in our 2 hatchery projects are progressing well with the Victorian Hatchery now operational The Western Australian facility expected to commence operations around mid year FY 'twenty two.
We also commenced investing in a new fully cooked line at our Auckland Further Processing Facility. This project is expected to complete in the first half of FY 'twenty two, increasing our capacity to service As we announced in December and Andrew mentioned, we entered into an agreement sell our Hamilton Feed Mill for New Zealand $11,450,000 with the sale now completed. Now looking to our capital management outcomes. We presented our framework at the half in February, and I'm pleased to report how we have Formed against the key principles of the framework in FY 2021. As already noted, we are in a strong financial position with net debt of $240,000,000 And our leverage is well within our stated range at 1.2x as a result of solid trading cash generation and prudent capital management.
This represents a strong improvement on our leverage level of 1.8x as at June last year. During the year, we declared total dividends of $0.165 per share fully franked, placing us within our stated payout range of 60% to 80% of underlying NPAT, an increase of 18%. Our return on invested capital improved by 400 basis points to 22.4%, showing The impact of significantly higher profits. Our ROIC is calculated on a pre AASB 16 basis, taking underlying NPAT, Deducting after tax interest and dividing by average capital invested. Moving to Slide 12.
Late in late 2020, we bought a bumper wheat harvest in Australia, and this was reflected in wheat prices easing from historical highs, with the benefit of these lower feed prices being realized as expected in the second half. Prices, however, didn't fall as much as could be anticipated Given the level of the harvest due to strong international demand driving high exports and competing domestic keeping domestic stocks low. In the first half of the twenty twenty one calendar year and continuing through into FY 'twenty two, domestic wheat prices stabilized And have been firming. In contrast, as you can see in the chart on the right, soy mill pricing has started to ease from the highs seen in the year, however, still above historical levels. Inghams continues to maintain forward cover between 3 9 months to secure supply, which is in line with our procurement strategy.
I will now hand back to Andrew to discuss the segment performance for FY 'twenty one.
Thanks, Gary. So now turning to the Australian segment results on slide 14. The Australian business delivered good results in FY 2021. Core poultry volume growth of 3.9% was driven by general recovery of as restrictions were eased and removed mid-twenty 21. With good growth in QSR and Foodservice channels and greater coverage in the wholesale channel, also contributing to this result.
Revenue growth was 4.8% for the year with statutory EBITDA growth of 13.4 percent to $371,800,000 As you can see, We also achieved improvements in margin during the year. This was driven by the realization of operational cost efficiencies, Procurement Savings and the Year on Year Benefit in Stock Obsolescence. I've already outlined the performance across various channels where we saw good growth, particularly in Curacao Foodservice and Wholesale. Looking at New Zealand, we recorded strong poultry volume growth of 6.3%, driven by recovery Wholesale and Foodservice channels and continued strength in QSR. As the market exited the strict national lockdown and result in closure of most channels that have been placed in the final quarter of 2020 and which saw demand decline by approximately 50%.
Total revenue grew to approximately $394,000,000 representing a growth of 2.2%. Poultry revenue grew by a solid 5.3%, while feed revenue was down Minus 10.6 percent due mainly to the sale of the Hamilton Mill. Statutory EBITDA increased 20.2 percent to $72,100,000 while underlying EBITDA pre AAASB 16 grew by a faster rate of 32.2% due to improving demand, Further operational efficiencies and cost control measures. The royalty payment from New Zealand to Australia, which represents a charge for various head office support and other services provided throughout the year reduced by $6,000,000 for FY 2021 with a neutral outcome for the group. It is worth noting, inventory was very high coming into FY 2021 due to the lockdowns and resulting diversion of product to freezer Storage.
We used export channels to good effect to successfully reduce inventories to normal levels. I move now to strategy in action. I'd like to spend some time looking at our strategy in action and some of the key outcomes delivered during the year. This program has been in Inghams for several years And more recently, we established a dedicated team, which operates under the lean manufacturing rules and principles. The team as a whole has a whole of business responsibility focused to drive accountability throughout the supply chain to identify process improvements, cost savings, waste elimination and lowering overall operating costs.
In FY 2021, the team managed approximately 200 improvement projects. In some cases, improvement opportunities will represent Large scale projects, while many others are found in the simple daily things that can yield efficiencies. Looking ahead, The business has identified 320 improvement project opportunities for FY 2022. So So I'd like to turn to look at a few examples. In March of this year, we opened our newest hatchery located at Pakenham in Victoria.
The hatchery takes eggs from our breeder farms and hatches the chicks before they are sent to our farms who continue to support their welfare led growth and care. The installation of HatchCare technology Within the new hatchery is an Australian first and leads the way with regards to animal welfare standards. HatchCare is an automated system that provides immediate access to light, feed and water with a Generally more spacious environment for the chicks. In addition to providing improved health and welfare benefits And operational efficiencies, the hatchery is critical to ensuring that Inghams has the capacity to meet future projected demand. We commenced operations at the Victorian Hacktree in mid-twenty 21 and we expect to commence the commissioning of the WA facility in the second half of twenty twenty one.
We are investing $17,000,000 New Zealand in a new further processing Plant in Auckland, which is another great example of the group's ongoing focus on for ensuring for future growth, capacity and efficiency of the network. The plant, which is due for completion in the first half This financial year not only significantly improves our maximum potential production capacity, but it also greatly improves our processing capabilities in the provision of fully cooked product at scale. This in turn will support our partnering with customers in the development of new products for the market with the new production line enabling us to drive While the plant is yet to commence production, Our discussion with customers on new product opportunities has been very encouraging to date. Optimizing the core, I wanted to highlight a couple of other meaningful projects that have been underway across the business. The first project, one that you may have heard of us touch on previously, is the introduction of a spin chiller At the Osborne Park facility in WA.
The spin chiller is like a giant water bath that chicken is put through and is a significant piece of equipment in our facility. The purpose of the machine is to reduce the temperature of chicken meat from around 34 Degrees Celsius to less than 4 Degrees Celsius within a few hours. There are a number of important benefits that come from the Introduction of this piece of equipment. From a safety standpoint, the working environment for our team is greatly enhanced. The rapid lowering of meat temperatures improves the shelf life of our end products.
And as this process requires a significant amount of water, The introduction of this new equipment enables us to reduce our water usage providing clear environmental benefits. And importantly, it supports throughput growth at this facility. The other big Project we have underway is the development of a new distribution center in Victoria, which is a great example of how we're investing in our network, ensuring we maintain and improve the efficiency and capacity of our business into the future. The current Lyndhurst facility was deemed to be too old and has become too small for the needs of our Victorian process as we plan ahead. In 2020, we commenced planning for our move to a new facility, one that is located in close proximity to our Customers' distribution centers and closer to rail and transport infrastructure that provides nationwide distribution.
In addition to these benefits, there are solid financial benefits that will accrue to the group over time. In addition to rental savings, we expect to achieve significant savings through reduced transport costs and labor efficiency gains. Similar projects are also planned for South Australia and Western Australia. Turning now to review our sustainability activities. At Ingham, sustainability is about doing good for our people, our community, our environment and our business.
We have embedded sustainability into our business and we have become recognized industry leaders in water stewardship, Sustainable Agriculture and Sustainable Food Production. We are committed to progressing our approach to environmental sustainability. This year, we have set 2,030 targets, which include a commitment to science based target setting for Scope 1 and Scope 2 emissions, which will ensure that we deliver meaningful reductions in greenhouse gas emissions, Water usage and landfill waste by 2,030. In determining our approach and setting these targets, We work closely with our sites, suppliers and customers to identify environmental and social risks. In collaboration with many of these same stakeholders, we also invest in research, which underpins our ability to identify and develop innovative approaches that result in sustainable practices, high quality and food safety practices, people safety and the highest animal welfare standards.
This year, we'll also mark our first step in reporting against The task force on climate related financial disclosures recommendations will be published in our annual report. We will also outline the steps we will take in the future to progress our reporting against TCFD recommendations. Our plan is to set meaningful targets and report on our progress transparently. In FY 2021, despite the ongoing disruptions caused by COVID-nineteen, we have made good progress on a range of sustainability initiatives across the business. As you can see, our greenhouse gas emissions, water usage and landfill waste generation have all improved year on year.
We continue to take a leadership role in animal welfare with the launch of the key welfare indicators. These indicators comprise 15 outcome based welfare measures and are reported both internally and shared with our customers. The high the health, safety and well-being of our people will always come first and safety is integral to everything we do. Our Safety for Life program provides the foundation for driving safety performance across our business and our safety performance improved for the 2nd consecutive year. Tragically, however, in May of this year, one of our people died In a truck incident at our South Australian Bolivar site.
We are assisting SafeWork South Australia in their investigations and continue to provide support to the affected employees' family. As an essential food production During COVID-nineteen pandemic, we have taken additional steps to support our people to protect well-being and our operational continuity. During FY 2021, we enhanced the pandemic paid pandemic leave, extending additional paid days off work for our people We also recently introduced paid vaccination time, which removes a key barrier to our people getting vaccinated. I'd now like to make some comments on my time in the CEO seat and observations about the business. I commenced as CEO at the end of March and it has been an incredibly busy 5 months since.
During that time, I've immersed myself in the business, visiting many of our Australian operations. I have not yet been able to visit our New Zealand operations due to travel restrictions. However, I've been able to spend a lot of time communicating with the New Zealand leadership team. I'd like to take a few moments to share some of my observations and thoughts with you. In addition to spending time on the ground across our operations, I've been working with members of the executive team to review our strategic priorities for the business, and we are currently developing the next iteration of our strategic plan.
We have a strong business platform and market position and a key task for us will be to identify opportunities to leverage this into future growth opportunities. The growth will come from a number of different places, including doing our part to drive Growth in the poultry category, including through product development and differentiation. In addition to internally driven opportunities, We will also seek to assess appropriate external opportunities aligned to our core business or suitable adjacencies to expand our existing operations. Operationally, we are in a strong position and the business is focused on the right things. Our optimize the core strategy is performing well and we continue and will continue to be a focus for us.
I see this strategy work stream as continuing to deliver meaningful benefits for the group into the future. There are good opportunities to further integrate and enhance both our business planning process and network optimization initiatives. As you have seen earlier in the presentation, the Optimize the Core program has delivered great outcomes for FY 2021 And we have significant pipeline of projects into FY 2022. I've also launched 3 Key work streams across the business. The first is focused on our brand architecture with the goal of delivering a suite of brands that will be backed by appropriate investment.
There are opportunities in all channels to further elevate our customer focus and bring more of a partnership approach to these key relationships, which will support the work under the next two work streams. Our product portfolio work stream is aimed at identifying pathways and strategies to grow profitable volume and create new products, While the Growth Roadmap work stream is focused on the poultry segment more broadly supported by deep customer engagement, leadership and Insights. Overall, I believe we have a very capable and engaged team in place. I'm very happy with the composition of our leadership team, and I believe the skills and experience within both the executive team In closing, we have delivered a strong set of financial results underpinned by solid poultry volume growth and recovery in key channels. The Ingham's balance sheet is strong with leverage reducing by a material amount in FY 2021.
I would like to take this opportunity to update you on the status of our supply agreement with Woolworths. I'm very pleased to advise that Inghams and Woolworths have an in principle agreement for an ongoing supply agreement for poultry products. As I'm sure you'll appreciate, The details of this contract are commercially and competitively sensitive. And while we are not in a position to discuss it in detail, The new agreement replaces the existing supply agreement on broadly similar terms. The current lockdowns have created some uncertainty.
And while it is difficult to precisely predict when they will ease, Our performance in FY 2021 has proven the resilience and agility of our business and people to respond quickly And effectively to the challenges that COVID-nineteen continues to throw at us. As vaccination rates increase and restrictions ease, We would expect to see a normalization in consumer activity. Elevating sustainability across our business activities is a key focus area for us moving forward. While we have delivered good outcomes to date, we have more to do in embedding sustainability practices across the business, including enhancing our reporting of targets and outcomes. As we move into FY 2022, we expect volumes to show continued growth, also benefiting from new business across various channels.
Feed costs have stabilized. However, volatility in international commodity markets has resulted in domestic pricing holding firmer. As we have discussed with you previously, our procurement procedures ensure we continue to hold between 3 to 9 months of forward cover. Finally, our Optimize the Core program will continue to deliver meaningful benefits to the business through implementation of operational efficiencies across the business. We are also investing in our network through larger scale products projects, forgive me, including the WA Hatchery, Our Auckland Further Processing Plant, the Murruree Red Area Replacement, a new breeder Triangle Service in Queensland and a new water treatment plant at our Osmond Park facility.
On behalf of the management team, I'd like to thank you for joining us today. And with that, I will hand back to the operator to take your questions. Thank you.
Thank you. We will now begin the question and answer session. Our first question comes from Alexander Patton of Citi. Please go ahead.
Good morning, Andrew and Gary. How are you going?
Good. Good. Thank you.
Good to hear. Just a couple from me. Just on pricing, Seems like Australian pricing was only very slightly up in the second half despite what seems to be good growth in those QSR and foodservice Can you maybe talk about some of the moving parts there? It's Gary here, Alex.
We don't really go into the channels In these presentations or publicly. So you can see there's a bit of growth in there, which was promising in the QSR. But, yes, the mix of channels does move that number around a little bit, so I can't really expand too much.
Okay. Just given there was, I guess, lower demand in the supermarket channel versus the PCP and Recovery in QSI Foodservice, it kind of seems like the recovery should have been a bit stronger, but Yes, okay.
Well, there's a balance. There's exports in this wholesales as well. So there's the balance of all of our channels.
Okay, got it. No worries. And I guess, keen to hear what you're currently seeing now in Q1 'twenty one. Have you seen a kind of a similar drop off in demand in those QSR and foodservice channels So the first wave last year, has it not been as severe? And then I guess your comment around Volume growth, your expectations for that to continue.
Maybe just elaborate on what kind of customer wins You're seeing across the channels you might be able to point to and that doesn't seem to be as much of a supermarket retail surge this time around. So Also keen to hear about the volume side of things as well into FY 'twenty two.
Sure. Pretty tricky to be talking about Q1 in FY 2022 at the moment. As you know, it's a moving target. Unfortunately, You'd be aware that New Zealand went into Level 4 lockdown this week, which if you think back to Q4 last year, Had quite a large effect on that business and level 4 lockdown in New Zealand means the only thing open is supermarkets. So absolutely, from that basis, you're going to see a drop off in your foodservice, your QSR, etcetera, in New Zealand.
Hopefully, that doesn't go on So too long. Coming back to Australia, probably I mean the thing difference here we've got, which what we've seen probably in the last 12 months, is A more widespread lockdown across the country and affecting more people. So we are seeing similar trends. So we are seeing a Bit more through retail, and a bit of a drop off in some of the other channels, and then that supply, that ultimately is probably down a little bit due to COVID, finds its way into the wholesale market. So they're very similar trends to what we saw through various stages of COVID impacts along the way, but no one to no one week is the same at the moment.
So, yes, definitely seeing pretty similar impacts as before, slightly up in retail New Zealand, severe impact Australia down a little bit with the volume finding its way into wholesale.
Sure. But I guess is the magnitude of the impact Similar or slightly kind of less on a net basis?
No. Well, Compared to what is the problem in answering that in that question? So we've had a number of impacts along the period Of time. New Zealand, the impact is similar, albeit it's been less than a week at this point in time in Australia. So I wouldn't say it's not as much as when it first COVID first hit back in
sort of
March, April last year, But it's similar to what we've seen in those rolling lockdowns in Australia since, albeit, we've got it happening across more places At once at the moment than we've had in the past.
Great. That's very clear. Thank you.
Our next question comes from Michael Peat of Goldman Sachs. Please go ahead.
Hi, Andrew and Gary. Congratulations on the result in a tough time.
Thanks, Michael.
Could I just ask the first question? Just on the provision on warrant from the oversupply issue you had previously. Did you end up sort of getting out of that better than you thought? I'm just trying to think about is there any sort of one off sort of margin benefit that you might have got last year that may not This year?
Yes. So we called out the impact year on year, was that sort of $13,000,000 $14,000,000 So if you recall, we made a provision around 9 last year, and we wrote back sort of 4.5 in the first half. So we've called that out. So your math would tell you that we still retain some of that provision through June 30. As far as I would say it's fair to say that we had pretty orderly reduction of that inventory that we called out in the first half.
So We did probably end up a little better than we hoped in regard to that, but does that mean there's a one off this year? Not necessarily, because what we sold that inventory For this year, we would sell that sales products for similar amounts into the future as well. So the main impact is probably the change in the provision. Okay.
Okay. Maybe just a comment if you could on industry consolidation. I think it's one of the smaller competitors you have up for sale at the moment. Do you believe Could Ingham participate in that and potentially take out that competitor? Or do you think ACCC would be a block?
As a general comment, we've obviously assessed any opportunities that come our way to advance the strategic agenda or create long term value. But I don't think it's appropriate for us to comment on that specific transaction at the moment.
Yes. No problem to understand, Andrew. Just final one from me. New Zealand, fantastic Performance there notwithstanding lockdowns right now, but I guess double digit margin there in the second half. Is that sort of where you feel the business Should be or is it was there anything that we could you should call out that sort of helped that margin that may not sort of repeat?
Just trying to get a sense of where that could be longer term.
Yes. So it was pleasing. I mean part of the reason for the increase in margin, but this is doesn't attract that it will continue, Is the royalty charge between Australia and New Zealand reduced? So you saw a boost in the margin this year as a result of that, But I would expect that royalty charge would be more similar to this year going forward. So not a reason to not think it will continue.
Right. Thank you very much.
Our next question comes from Craig Woolfords of MST Marquee. Please go ahead.
Good morning, Andrew. Good morning, Gary. Hi, Craig. Hi, Craig. Hey, guys.
Just wanted to clarify, I mean, there's always lots of movements in your channels, and I know you don't want to give us detail, but just trying to get a feel for How those channels contributed in 2021 versus where they were pre COVID? Is there quite a difference That channel mix in your business in both Australia and New Zealand still in the FY 2021 results compared with what it was pre COVID?
Big picture, not really. Not a massive change in big picture terms. Right.
So is wholesale any sort of bigger or smaller or is that that tends to be a bit of swing factor overall?
Yes. And we've alluded to that we've been growing some share in wholesale, but that's probably from the growth rather than cannibalizing other areas.
You've got someone like a customer like HelloFresh in wholesale as well, which is characterized in there, which is quite a strong growing business that we're participating.
Yes. Understood. You mentioned, Andrew, in your comments on the business, You'd consider adjacencies for Inghams. I'm sure you don't want to go into too much detail, but is there anything you can help us understand like where would you not Play, is it just proteins? Is it non protein food products that you would consider?
Is it Upstream, the value chain, is it downstream? There's quite a few things we could consider on that adjacencies.
That's a pretty broad spectrum you put there, Craig. Look, I think at the moment, our focus is going to be very much on the core business. I think that's where it's that's where there are still very good opportunities for long term growth and returns there. So I think as we Develop our strategy into the next phase, it will be still very much around the core business.
Okay. And it's a broad question to ask on capacity utilization. There's a whole bunch of projects you've outlined there. Is there anything we should be mindful about over the next few years around Capacity tightening up given the strength in volume growth for poultry. Is there any We see there's another major CapEx project coming because you need to expand capacity.
So Andrew did call out, for example, that we were making some investments. One of those, for example, was a breeder triangle servicing Queensland. So that's part of Increasing in ultimately our network, our end to end network, which we need to deal with that ongoing demand. So Yes. We were making investments in the Red Rock line area whilst the replacement will also help with that capacity.
Ultimately, the hatcheries now coming online to help with that capacity as well. So yes, but if your question is, are we about to announce The building of a new primary processing plant, then that's not on the agenda in the short term.
Okay. Right. Thanks. Thanks, Gary. Thanks, Andrew.
Our next question comes from David Populacki of Macquarie Group. Please go ahead.
Good morning, guys. Congratulations on the results. Just a couple from me. Just on your operational efficiencies,
Are you able to provide
a bit more color around the quantification there? I mean, what benefit can we expect in the next few years? If I can ask in another way, what margins are you targeting and when do you expect to get there?
Thanks, David. The if you look at our margins and we got up to Sort of just shy of 8% for the group. And if you look back over the last few years, probably The highest margin, I think, might have been in FY 'eighteen was at 8.8%. So we've certainly got sites on Reaching the sort of the peak rates that we've had before. So it's probably the best way of thinking about that now.
Operational efficiencies will be one part in increasing those margins. So yes, we'll just try and make
as big a margin as we possibly can. That's helpful. That makes sense. Thank you. And I think you touched on this a bit already, but the last time we were in serious lockdown margins So we're impacted in the most seriously impacted periods.
Are you seeing I mean, what are you seeing currently? Are you seeing any Inventory issues pop up over the last month or so. What are you seeing This time around or what's different this time around, is there anything that you've been doing internally That may offset those impacts.
Yes. So I think what's different is we're Better practice at it. We're more nimble. We're more familiar with the things that we've done Before and then how to enact those things quickly. In saying that, we haven't had restrictions Across sort of the Eastern seaboard for a while since the first one.
So we are seeing a bit of Extra supply in the market. As I was talking about, so one of the earlier questions, so there does have an overall demand impact, and We are seeing some increase in our inventory post year end as a result of that for the similar reasons. I think what is different is we're not seeing the same degree of sort of panic buying and there's still supply changes, of course, but we're not Seeing it to the same extremes, as what we were seeing last time because whilst the week when the Panic buying set in and you sell a lot of chicken in that week, then there's a couple of weeks later where people have got fridges and freezers full of chicken and there's not so many sales in that period. It's a little more smoothed out now, which is easier from a supply chain and from an operational perspective to manage. But long and the short of it is, yes, we are seeing a bit of an increase in inventory again.
The margin that you referred to in the Q4 is probably more in, Yes. How do you dispose of that? How do you clear of that as the market comes back into balance? So there's possibly a little bit of that coming.
Thank you. And just one last one, if I may. Just on the R and D tax credit, it's Typically been less than $1,000,000 What can we expect in FY 2022?
I wish I knew. So that was in a prior period. It was in relation to principally husbandry and nutrition and feed research through that period of time. It's we have carried out similar activities to that through into More current period, so I think there's the potential, for some further R and D claims, but that's not locked in and not certain at this stage. All
right. Thank you very much. All the best in the year to come.
Thanks, David. Thank you.
Our next question comes from Phil Kimber of Evans and Peters. Please go ahead.
Hi, guys. I just had a few questions just clarifying some of The accounting, with the inventory provision, I know in your preso, you've said that you utilized Roughly $14,000,000 of it. But if I look in the $9,000,000 in the accounts, the inventory obsolescence Provision falls from $14,800,000 to $10,600,000 So it doesn't fall by that $13,000,000 or $14,000,000 that you talked about. So Can you there are other things going on. So there's more all we really benefited from was about $4,000,000 reduction in inventory provision because there's some other factors happening.
I just wanted to sort of be really clear on how much the Inventory provision helped in FY 'twenty two 'twenty one, sorry.
Yes, happy to. So you're correct, it did drop that $4,000,000 in FY 2021. And then why I called out that 13 point whatever it was 6, I think, Is that in the prior year, there was like a $9,000,000 provision that we made. So when you Compare the 2 years and the impact in total is how you add the 2 together and you get to the 13.6
Right. But in the actual year we're talking about this year, all that you used in in there, it's 4. Correct. Yes. Okay.
And then just to be clear on how that works,
that I mean, you provide for it because You and the
auditors are of the view that you're going to basically not be you're going to sell at the low cost effectively to clear it. Is that effectively what happened? I think that's what Michael was asking. And I interpreted what you said that You might have done a bit better out of clearing that inventory than what you thought. Is that in a profit sense, I.
E, you wrote $100 down to $80 And then you sold it for $90,000,000 I guess that's the bit that we're trying to understand because we're trying to work out what's the maintainable earnings.
Sure. So you are correct. What you just said is correct. So yes, We make a provision because in essence, we made it because we thought we're going to have to clear this possibly through channels that we don't normally use, could be some distressed Sales, so in your example, you cost $100 to make, you provide $20 to bring it down to 80 And then I would say on balance, on average, it's not the same for every product, but on average, yes, we did a little better than that 80.
Right. I mean, can you sort of and I will give hypothetical numbers there. Is there any way to quantify that? Just We don't want to and that's fine and it's perfectly accurate to include that in your earnings this year. It's just, I guess from our point of view, it's a particularly large number that isn't necessarily going to repeat.
We probably wouldn't mind knowing about it. So that's a bit Is there a way to sort of get a bit more color on how much that dollar amount was?
Yes. So I think the material bit to focus on is that, if you're comparing year on year is the 13.6% that we've called out. The other benefit that we're talking about or the other difference we're talking about, I wouldn't say is significant.
Okay. So you got a $14,000,000 benefit in This year's result from
Just to repeat, and that was your first question. So just to repeat, in comparing FY 2021 to FY 2020, there was a $13,600,000 improvement. Purely in the FY 2021 results, It was a $4,000,000 benefit from the reverse inventory. However, that is also offsetting Some sales that we made, so when in your example of going to $100,000,000 to $80,000,000 and then Say we sold them for $90,000,000 then we made in essence a loss on a bunch of those and that reversal of inventory offsets that loss.
Right. Okay. So basically what you're saying is the numbers as we see them are reflective of Going forward, there's not some sort of unusual number, but we have to think about to exclude from your reported EBITDA Well, underlying EBITDA because you had this unusual situation where because of COVID inventory Basically built up and you had to clear it at lower prices. That's not artificially improving your profit in FY 2021?
It would be somewhere between $4,000,000 of that impact.
Okay. Yes. Cool. And then and sorry to harp on about this because I'm getting lots of questions On the R and D, I understand the tax credit and you've called it out. I know you didn't strip it out of your Sort of underlying numbers, but you've called it out.
But there was also another sort of provision, another matter that you said Partially offset it? I mean, when you say partially, I mean, the vast majority of it? Or is it still really An item that's benefited your profit this year by $8,000,000,000 as you say, maybe you'll get some more in the future, maybe you won't, who knows. Just trying to get sort of the net benefit that you got from the R and D and the other provisions that you took this year.
Sure. So we called out the $8,500,000 I'm not going to call out specifically the number on the other one, but I'll direct you to note 5 in the financial statements. And you'll see there's a prior year adjustment in there. And from memory, I think it's about $2,900,000 benefit. So that I think gives you a pretty good indication.
Okay. Yes, yes. No, that's good. That's very helpful. Thank you for all that.
No worries. Thanks, Phil.
Our next question comes from Rod Sleece of Rimor Equity Research. Please go ahead.
Hi, guys. Thanks very much for taking my questions. I have a couple. First of all, I just want to come back to Good question with regard to potential margin. And I guess this is perhaps a qualitative rather than quantitative question.
But to say that you are targeting potentially getting back to 8.8% margins, which is the previous peak that the business Has made. It doesn't seem a particular stretch when you're close to 8% this year, and we've also got some negatives in terms of Lack of export of what is effectively high margin sale of extra bits of the chicken, But also given the debottlenecking that's been taking place combined with the volume growth that we're seeing in chicken, Just and some of the larger capital investments such as the new hatcheries, that 8.8% doesn't seem a stretch At all. So I guess a couple of questions. Would you should we one of the comments made was with regard to Perhaps improved brand visibility, which I'm reading as more spending On brand, are you seeing this as an opportunity to reinvest at least some Of the benefits from efficiency gains into product development and brand development, a more visible brand perhaps?
Yes. So just before jumping into brand, I'll let you decide whether that's a stretch or not. It's about $30,000,000 At an EBITDA level, so is that sort of delta if you just get the calculator out. But I'll let you decide whether that's a stretch or not. On the brand question, I'll get Andrew to Yes.
I mean clearly we would like to drive the contribution to volume from higher margin products over time And typically that's done with differentiated value added branded product, not always because sometimes we can do that with Some of our customers like QSR were not necessarily as branded, but the general ambition we'll have as we think about our strategy and our product portfolio In the years ahead is how do we create a better mix from higher margin products. So that will be certainly one of the things that we'll be looking very closely at.
Okay. But no sort of defined expectation to increase Spend in that area, so we're not looking at a shift of cost spending?
Look, if you're going to do that at some point, you need to make an investment, But that's not determined at this point. So at the moment, it's largely where the spend levels are largely where they've been historically. If they were to change, would be because there was something worth investing in that was going to drive a better return.
Sure. Okay. So and Gary, just With regards whether $30,000,000 additional EBITDA is a stretch or not, I guess that depends on the time frame, which we didn't quantify. So I was assuming 8.8% over medium term.
Sure. Okay.
Just sort of one clarification. With regard to the inventory Trade payable facility reduction of $11,700,000 Is that sort of showing a change in policy? Or do you see that as a sort of general deleveraging because you had available cash flow?
No, it's probably more. I called out that we're holding some more feed inventory At year end physically as well. So it's a combination of what we hold physically versus what we have in forward contracts. So no, not really a change. It's just a timing difference.
I know that the level of that facility show has interest in Amongst some stakeholders within groups, so just being transparent as to how that had moved.
Sure. Okay. So That's something we should just expect year to year. There can be some fluctuation in your working capital as a result of the use of that facility?
Correct.
Great. Okay. Just one more question, sorry, apologies. With regard to the new hatchery in Victoria, You mentioned that capacity is 850,000 eggs, I presume. What are you actually running at in that hatchery today?
So I guess how much growth potential or growth capacity Sits within that investment.
The hatchery is still in the start up phase, so it's clearly not at 850,000 at this point because it's only started operating In a few months ago in June. So we're not I'm not exactly sure what's where it's at today, but it's not operating at Full capacity. And it has capacity to grow beyond 8.50 if we had need for that in time.
Okay. All right. So is $850,000,000 sort of a level that you would expect to use within the relatively Near term, I don't mean the next few months, but within the next couple of years?
Yes, yes, exactly. Yes.
Yes, yes. Okay, great. Thank you very much.
Thanks,
Ross. Do we have any questions from the webcast?
We do have one question from the
Okay.
So we have Obviously, been supporting our people in terms of whole variety of measures in terms of how we deal with the COVID pandemic. One of them has been around vaccinations. We have provided paid leave, particularly for our Frontline and factory people, so that it makes it easier for them to take time off work and to get vaccinated. So that's a good initiative and people are taking that up. The other Question was whether we would consider moving down the path of mandatory vaccinations.
Look, we've got an open mind on that at the moment. We're doing all we can To encourage vaccination, certainly our workforce by and large is enthusiastic about getting vaccinated. So At the moment, we don't feel the need to make that mandatory, but we'll keep watching brief on it.
There are no other questions online at this time.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Reeves for any closing remarks.
Okay. Thank you very much. We hope that you've enjoyed what we've In front of you today in terms of some very solid results and hopefully we've been able to give you some clarity through the question and answer session. So look forward to further conversations. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.