Thank you for standing by, and welcome to the Inghams Group Ltd H1 2021 financial result teleconference. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Jim Leighton, Managing Director and CEO. Please go ahead.
Thank you operator, and good morning, everyone. I'm Jim Leighton, Managing Director and Chief Executive Officer of Inghams, and it's my pleasure to welcome you to our results call for the FY 2021 first half-year period. Joining me today is our Chief Financial Officer, Gary Mallett, our Chief Executive Officer for New Zealand, Jonathan Gray, and our Chief Agribusiness Officer, Anne-Marie Mooney. All of us will be available after the presentation today to answer any questions you have on our half-year results. Moving to slide three, and for clarity, I would like to note that as announced in November of last year, we have reported today's results inclusive of the new lease standard AASB 16. Therefore, all references to underlying results as we move forward through the presentation are post AASB 16, unless specifically stated.
I would like to repeat that again, all references to underlying results as we move through the presentation are post AASB 16, unless specifically stated. As we move on to slide five, outlining group performance highlights over the first half-year period. I guess if there are three things that I would ask you to take away from this presentation and from this slide is that we have built a solid foundation and we've delivered solid volume growth and strong financial performance despite the continued impact of COVID-19 on our business, particularly during the first quarter and ongoing high feed prices in the half. We have reported very solid results today, underpinned by resilient demand for poultry and operational momentum being delivered as we execute our five-year strategic plan. We saw the Australian market recover strongly in the first quarter.
New Zealand, where the COVID impact was magnified, this recovery continued throughout the first half with the business well positioned by period end. Our core poultry volume grew as we saw strengthened demand across our channels and the return of total trading volumes to pre-COVID-19 levels. Importantly, we successfully performed our critical role as an essential services provider despite disruptions associated with the second and subsequent waves of COVID, particularly in Victoria, where these impacts were most severe and prolonged. We maintained our operations and sustained supply to our customers and in turn, the people of Australia and New Zealand. This is really a testament to our dedication and expertise of our people, and I remain extremely proud of what they continue to achieve in such uncertain times. Our focus on health, safety, and wellbeing of our people continues and always will be a top priority.
This deeply embedded safety culture has enabled us to keep our people safe throughout the changing and challenging COVID environment. I am very pleased that off the back of a significant improvement in safety measures in FY 2020, we have further reduced both our lost time injury frequency rate and the total recordable injury frequency rate, which are down by 26% in the half, we've delivered strong growth in earnings as explained in further detail in slide six. As foreshadowed at our AGM in November, we saw strong growth in core poultry during the half. Group poultry volume was up 4% on the prior corresponding period and up 5.6% on the second half of FY 2020, reflecting strength across all channels.
We made great progress in the reduction of excess poultry inventory that had built up during the first wave of COVID-19, with poultry inventory down AUD 42.3 million since June of 2020. Gary will provide further color on the inventory reduction shortly, but I'm pleased to say that we have made excellent headway during the first half. Our statutory EBITDA of AUD 215.6 million was up 5% on the first half of 2020, with underlying EBITDA of 4.3%, supported by solid revenue growth despite declining external feed volume sales and improvements in operational efficiencies. Our statutory NPAT was up AUD 9.1 million on the prior period and underlying NPAT up AUD 8.3 million with AASB 16 impacts contributing AUD 3.8 million to this uplift.
We have today announced an interim dividend of AUD 0.075 per share, which is an increase on the 2020 interim dividend of AUD 0.073 and a final dividend of AUD 0.067. The interim dividend reflects a payout ratio of 74% of underlying NPAT, which is within our adjusted target payout range of 60%-80%. Gary will speak to our cash flow and balance sheet shortly, but our net debt and leverage remain at similar levels. While we discussed the impacts of COVID-19 on our business in great detail during our 2020 results, it is worth noting that the solid results we achieved during the first half of 2021 were through a time of ongoing COVID challenges. If we move to slide seven, while we continued to see volatility during the half, particularly during the first quarter, we saw demand strengthen across our channels as COVID-19 restrictions eased.
Across retail, COVID-19 restrictions continued to drive volatility, particularly freezer stocking during lockdown periods in Australia and New Zealand, as well as the ongoing shift in consumer demand from deli to tray pack. Despite this volatility, our retail channel saw strong growth throughout the period. Lockdowns increased in-home dining across Australia and New Zealand, supporting this volume growth. We were also able to assist other processors when they encountered some COVID issues and production issues in Victoria, supporting our reputation in the market as a trusted and reliable supplier. Our QSR channel rebounded strongly during the half as COVID restrictions eased, further enhanced by the successful launch of new product ranges and customer promotions, including a new chicken menu at a large QSR customer that launched in October. During the half-year period, our food service channel recovered slowly as dining-in restrictions eased.
We have seen reduced demand associated with the loss of international tourism, we are broadly seeing overall volume back up to pre-COVID levels across this channel. We achieved higher volumes across our wholesale channel throughout this period, driven by broadening customer relationships, which have enabled greater coverage in this market. Pleasingly, we get asked this question a lot, we've observed rational behavior across the wholesale market over the last 6 months in both Australia as well as in New Zealand. Across our export channel, Australia volume growth was constrained by the closure of some international markets during the period due to an avian influenza outbreak in Victoria in July and August. New Zealand did benefit from this, which has supported the reduction in surplus inventory. I think this further demonstrates the benefit of our having operations in both Australia and New Zealand.
As we set out in slide eight, the first quarter was mostly impacted by the second COVID-19 wave. Easing of restrictions across Australia and New Zealand led to the recovery across QSR and food service throughout the first quarter. Government restrictions in response to the second wave in Victoria created challenges in terms of rapidly changing customer demand, workforce restrictions, and of course, the proactive two-week closure of our Thomastown further processing facility. New Zealand was also not immune to COVID-19 challenges, and in August, alert level 2 restrictions were imposed across the country, with level 3 restrictions implemented in Auckland, where the vast majority of the population reside. I'm pleased to say that we were able to effectively apply the lessons learned, which there are many, during COVID-19 in FY 2020, to quickly adapt to these changes in the first half.
Through close engagement with the Victorian government, we were able to educate and positively influence restrictions implemented for the meat processing facilities. That enabled us to maintain continuity of supply while providing a safe work environment for our people. Our sales and operations team worked hand in hand with our customers to meet their rapidly changing needs. Across retail, for example, a collaborative streamlining of product lines during periods of panic buying enabled us to maintain production efficiency and supply, even with a reduced workforce. Our ability to respond quickly and effectively to the challenges that COVID continues to throw at us speaks to the resilience and agility of our business and our people, and the unwavering commitment of our people to deliver great outcomes for our customers, consumers, as well as profitable growth and return for our shareholders.
Before I hand it over to Gary to take you through our financial performance for the half, I would like to briefly just revisit our five-year strategy and the progress we've made across a number of initiatives over the last six months. Slide 10 recaps the strategic framework we presented back in late 2019. This strategic framework underpins our objective to deliver more consistent, predictable, and reliable returns, as you can see in our results to date. We are gaining tremendous traction from the initiatives that we've implemented over the last 18 months. Our strategy, as you know, has three key pillars. One is to optimize the core, and we're seeing the benefits of that in the results in the first half. Number two is to transform for tomorrow, and three is to create in the new.
Our key focus so far has been on embedding strong foundations across the business to support future growth opportunities. As such, we are well progressed with our strategic initiative to optimize the core. We are optimizing the core through continuous improvement, and I think this is a critical point because we are starting to deliver great outcomes in enhanced equipment effectiveness and in unlocking a lot of capacity and capabilities at our processing facilities. This is driving lower costs, enhancing yield, and reducing waste. Importantly, we are delivering greater asset efficiency and return with very modest capital spend. During the half, we commenced a culture project to transform our already strong organizational culture towards an ideal culture.
This will drive even more advanced workforce engagement, efficiency, but most importantly, innovation for every person in our organization that will allow us to accelerate and improve its business performance as we move forward. We now have an integrated business planning up and running across Australia and soon to be implemented in New Zealand. I want to pause there about the importance of having this process in a business like ours. We have created, in my estimate, one of the best in the world that I've ever seen. Which allows us to extend our planning horizon to 72 weeks to enable us to better forecast performance, mitigate risks, and execute our strategy both in the short and the long term.
Key to this is reframing our customer relationships to be more of a strategic long-term focus, which in turn is driving product optimization and enabling us to better align our production volume and timing with customer requirements. As announced in December, we have entered into an agreement for the sale of our New Zealand Hamilton feed mill and associated dairy feed supply business. This feed mill is dedicated to the production of dairy feeds solely for external sale, does not materially contribute to earnings, and is non-core to our operations. This will release capital for deployment into other higher value opportunities. We have made solid initial progress with our second strategic pillar to transform for tomorrow. Throughout the half, we made good progress in the construction of our two HatchTech hatcheries in Victoria and Western Australia.
These hatcheries are global best practice when it comes to animal welfare and will drive lower costs of production. We expect the commissioning of these to take place in Victoria in mid-2021 and WA in the second half of 2021. Something that I've been really excited about is that our research farm in Redland Bay in Queensland is now fully operational with a number of successful calibration trials that have been conducted. Future trials will be supported by our feed and farm R&D strategy, focusing on optimizing feed in what we call raising the bar on animal welfare standards. In this business, finding the sweet spot between feed, breed, and feed conversion in a controlled test facility provides us with a competitive advantage. Finally, we have made excellent progress on our third strategic pillar to create the new.
Over the last six to nine months, with an enhanced focus on the premium market through branded and private label product innovation, as well as the launch of plant-based products. This has included the launch of a new brand, The Free Ranger, in April of last year, which now is present in over 300 supermarkets. Our new Super Crunch, and if you haven't tried it, you should. It's great. It's a new range of frozen products that have also been a great success, with sales volume currently exceeding our expectations. Further to our branded products, we successfully launched a number of private label plant-based products across our retail and QSR channels. We are targeting very specific adjacent protein categories across animal, plant, and others in which to grow.
The delivery of strong results in the half against a backdrop of COVID challenges with high feed prices demonstrates the value of our five-year plan. Delivering strong results in the half against a backdrop of ongoing COVID challenges with high feed prices demonstrates the value of our five-year plan, its impact on increasing the resilience of the business, and our ability to deliver profitable growth for our shareholders. With that, I will now hand it over to Gary to present the financial results in further detail. Gary?
Thanks, Jim. Good morning, everyone. Looking at slide 13, our statutory P&L shows NPAT of AUD 35.3 million, which is up by AUD 9.1 million or 35% on the prior half year period. Given the adoption of AASB 16 in FY20, these numbers are presented on a like for like basis. Part of the increase in NPAT includes a favorable variance associated with AASB 16, which was AUD 3.8 million, largely due to a lower lease liability. The balance of the increase is due to trading, and you can see good growth there. On slide 14, we've provided you with a reconciliation between statutory EBITDA and NPAT through to underlying, which as Jim mentioned, now includes the impact of AASB 16, then to underlying pre-AASB 16, which we have provided to assist with comparisons as this standard has a material impact on our numbers, especially at the EBITDA level.
As you can see in the reconciliation, the underlying adjustments we made in the first half are quite minor and reflect AUD 3 million in redundancy costs arising from restructuring activities undertaken in the period. Moving to slide 15 and our financial performance on an underlying basis, which is post AASB 16. Our total poultry volume is up 4.8% on the prior period, reflecting solid growth. Core poultry volumes were up 4%, and we also saw strong growth in byproducts, with volume up 8.1%.
External feed volumes were down 13.3% during the half due to favorable pasture conditions in New Zealand and COVID-19 challenges being navigated by our external feed customers. Our total revenue of AUD 1.4 billion grew by 4.6%, with total poultry revenue up 6.1% and external feed revenue decreasing AUD 12 million or 10.3%. Underlying gross profit was AUD 357 million in the half, up AUD 19 million on the prior period.
The gross profit margin increased to 26.2%, supported by volume growth and improvements in operational efficiencies. This is a very strong result given the continued high realized feed prices in the period and COVID-19 volatility. We made good progress in reducing frozen poultry inventory that had arisen in the last quarter of FY 2020 by more than AUD 40 million, and as a result, released AUD 3.7 million from the obsolete stock provision raised in June 2020. While the gross profit margin increased, the underlying EBITDA margin fell slightly to 16% due to increased SG&A expense, mainly from higher insurance premiums. Underlying NPAT was AUD 37.5 million in the half, up AUD 8.3 million. Around half of this was trading, while AASB 16 had a AUD 3.8 million favorable impact on the NPAT improvement. Our effective tax rate remains unchanged at around 29%.
Looking at our balance sheet on slide 16, total inventory fell by AUD 29 million in the half, with the reduction in poultry contributing AUD 42 million to this decline. With excellent progress made in the period, we have only around AUD 5 million of excess frozen inventory to clear in the second half of the financial year. This was offset by an increase in feed inventory of AUD 9 million as we secured supply post-harvest. This does not reflect a material change in our forward cover for feed materials, but simply timing associated with physical delivery. Our receivables increased AUD 63 million to AUD 266 million during the half, which is typical of December, and comparable to the December 2019 position of AUD 264 million. This reflects seasonally stronger sales leading into Christmas, as well as the close of our reporting period on the 26th of December.
We expect this to reverse in the second half as normal, noting we collected AUD 55 million of cash between the 27th and the 31st of December. In regard to leases, we added new growers and extended our Cambridge DC in New Zealand. These increases were offset in our right of use assets by amortization and lease liabilities by cash payments. Turning to our cash flow slide on 17, our cash conversion ratio, including our AASB 16 lease payments, was 59.8% for the half. While low compared to the FY 2020 full year, this does reflect the negative seasonal impact of higher receivables and is consistent with cash conversion at December 2019 of 59.5%. Our capital spend in the half was AUD 31.5 million, which is lower than what we would typically incur as we maintain discipline in this area, given the challenges associated with COVID-19.
We continued to invest in our two hatchery projects and expect to commission the Victorian hatchery around the middle of 2021 and Western Australia during the first half of FY 2022. As we announced in December, we have entered into an agreement to sell our Hamilton feed mill for NZD 11.5 million and received a deposit of NZD 1.2 million during the half in relation to this sale, which is expected to complete in March. Moving now to slide 19 and our capital management metrics. Our net debt finished at AUD 327.5 million, with leverage of 1.7 x. Leverage was lower than June 2020 at 1.8 x, and debt was AUD 13 million higher, reflecting our hatchery investments and seasonal working capital. Our inventory procurement payable, which is included in our working capital balance, was similar to June 2020.
Our interim dividend of AUD 0.075 per share, fully franked, puts us within our guided payout range of 60%-80% of underlying NPAT post AASB 16. We've also introduced a measure, our return on invested capital, which was 18.6% at the half year. Our ROIC, which we will report going forward, is calculated on a pre-AASB 16 basis, taking underlying NPAT, deducting after-tax interest, and dividing by average capital invested. Now moving on to slide 20. As foreshadowed at the AGM, we are today introducing you to our capital management framework. Our core objective is to deliver consistent, predictable, and reliable returns. Our capital management framework supports this through a number of key principles. Firstly, to ensure we are investing at an appropriate level to maintain our asset base to sustain our business. Secondly, to maintain a balance sheet that appropriately balances risk with opportunity.
Our target dividend payout range provides shareholders with predictability around dividends, which we aim to fully frank and to increase over time as earnings grow. Maintaining discipline around the use of capital enables us to retain flexibility, to take advantage of future growth opportunities, and to ensure overall that capital is deployed in a way to maximize shareholder value. Moving to our framework on slide 21. Taking you through the pretty graphic on the slide, our business is a consistent cash generator, driven by cash flow from operations, as well as cash from other strategic activities, such as the sale of non-core assets, with, of course, interest and tax being a cash outflow. Our priorities for the cash we generate from business activities flow through the funnel and cover three key areas.
Firstly, capital expenditure to sustain our business activities, e.g., business as usual CapEx, with a target range for annual spend of around 75%-90% of depreciation pre-AASB 16. Secondly, to maintain a strong balance sheet with a target leverage range of one to two times. Lastly, to deliver reliable dividends to shareholders with a target payout ratio of 60%-80% of underlying NPAT post AASB 16. Our framework then sets out our approach to the next deployment of cash. Initially, to invest in growth opportunities and major projects where this investment is aligned with our strategy and is expected to deliver returns in excess of particular hurdles. Remaining cash is then intended to be returned to shareholders in the form of capital returns, special dividends, share buybacks, and the like.
Over time, the objective of our capital management framework is to maximize shareholder value and deliver a return in excess of our weighted average cost of capital. We have set out our first half outcomes against this framework on the right-hand side of the slide. I've covered all of these points earlier and therefore won't take you through them again. However, they are there as an easy reference. On slide 22, Inghams has a history of generating cash and delivering solid returns to shareholders while continuing to invest in our business. Since the IPO, we have returned over AUD 440 million to shareholders through dividends, buybacks, and capital returns, enabled by cash flow generated through the cycle.
This has been achieved while continuing to invest in both sustaining and growing the business through disciplined capital expenditure totaling around AUD 400 million over this time, and we have maintained stable leverage that has generally been within the target range. With that, I'd like to hand back to Jim to take us through our performance in Australia for the half.
Thank you, Gary. Moving on to slide 24. We saw Australia deliver pleasing results in the half year, with total revenue growth of 5.2%, despite the closure of some export markets and reduction in frozen inventory, as well as COVID impacts. Across poultry, our revenue grew by 6.5% on a 5% increase in total poultry volume. External feed sales were down in the half due to the impact of COVID-19 on customer demand. If we look at the results on a pre-AASB 16 basis, we delivered margin improvement in the half, with the gross profit margin up 30 basis points and EBITDA up 60 basis points, driven by volume growth and improvements in operational efficiency.
Performance across our poultry channels is consistent with the observations I discussed on slide seven, with good growth across channels, with the exception of the export channel, which remained flat as a result of COVID. Further, we saw strong demand from pet food sector, which has delivered growth in the sale of our by-products during the period. I would now like to hand over to Jonathan Gray, our Chief Executive Officer in New Zealand, to talk about our performance in his segment. Jona?
Thanks, Jim. Good morning, everyone. Our New Zealand business delivered underlying EBITDA, pre- AASB 16, of NZD 15.8 million, which represents a decrease of NZD 1.8 million compared to prior year, as we responded to the flow-on impact from the hard lockdown during Q4 of last year, alert level 3 restrictions in Auckland through Q1 of this year, the absence of tourists. This was always going to be a challenging period for the New Zealand business following such major disruption. It was also an important period of consolidation as we adjusted to the new normal of rolling lockdowns and took deliberate action to adjust supply in order to meet anticipated changes in demand.
These adjustments included reducing processing or bird numbers for a period of time, operating our primary processing plant at four days a week as opposed to five through July, August, and September, and making significant progress in reducing the surplus inventory built during the full national lockdown. The reduction in surplus inventory is very pleasing but did have a negative impact on margin for the period. Core poultry volumes sold were up 4.3%, despite bird processing numbers being down. This sales volume growth was due to a combination of successfully reducing the surplus inventory, in addition to what remains resilient underlying demand for poultry. Total revenue at AUD 203 million was up AUD 2.5 million or 1.2%, with poultry revenue up 3.2% and revenue from external feed down 6% on the back of reduced sales volumes.
From a channel perspective, we saw strong growth through the QSR and export channels. It's worth noting the increased volume into export played a role in helping reduce our surplus inventory. Retail was a mixed bag. Strong demand across frozen poultry and some fresh lines, including tray packed, but softer fresh demand in areas such as serve over counters or cooked chicken. Food service remains constrained in New Zealand and impacted by the absence of tourists, and also by the periods we spent at alert levels 2 and 3, respectively. These alert level periods include restrictions placed on hospitality, such as limiting allowable dining numbers. Whilst the overall food service channel is constrained, we have seen a lift in certain areas, including home delivery meal solutions. Turning now to other parts of the business.
Cost out initiatives and operational improvements in areas such as yield performance, labor scheduling, and plant reliability helped limit the impact of the reduction in bird processing numbers through H1. Whilst these operational improvements helped reduce the impact, they did not fully offset the disruption. You will have noted that underlying EBITDA post AASB 16 was ahead of prior year, despite the pre-AASB 16 result being AUD 1.8 million behind. This is due to changes in our leases. You'll remember from previous market updates that in New Zealand we needed to rebuild our broiler infrastructure, which included bringing on new growers. As advised previously, that rebuild is now complete. However, when we look at the comparative period last year, we were still completing that rebuild. Additionally, during H1, we made the strategic decision to increase the footprint we lease for our Cambridge DC.
This increases our lease costs but reduces operating costs through limiting our need for off-site external storage and freezing capability.
In closing, despite a challenging period as we felt the aftereffects of the full national lockdown, pleasing progress was made with reducing surplus inventory and minimizing the impact of the lower bird processing numbers. We believe the deliberate action taken enabled us to effectively respond to what was an extremely disruptive, hard lockdown event. With that, I'll hand to Anne-Marie for the feed market update.
Thanks, Jonathan. Before I take you through our recent feed market observations, it is worth just recapping the key inputs to our feed costs, which include cereal grains, protein meals, vitamins and minerals, as well as an energy source. In addition, we also have our cost to mill and transport our feed across our national farming network to make up our total delivered feed cost. Also worth noting for New Zealand, given we import grains into our operations in New Zealand, feed cost is impacted by grain pricing set off the international market. Looking back at the external feed market and our recent observations, we saw last year a welcome break in the drought, with a bumper wheat harvest exceeding 30 million tons, providing much-needed price relief for all domestic consumers. We are also observing the international commodity market rally on the back of increasingly strong demand from China.
As a result, Australian wheat is priced competitively in the international market, which is fueling offshore demand and is likely to result in a record export of Aussie wheat. The impact of this strong demand is flowing through to stabilize wheat pricing in early 2021, as you can see highlighted in yellow on the graph. While observing solid relief in wheat pricing, we aren't seeing this translate to anticipated lows due to strong demand from the international market. In relation to soy meal, as shown in the graph, prices have also rallied on the back of demand from China and political issues in South America. The level of soy meal we include in our feed varies, but averages around 20% of the diet fed to our chickens. Moving to slide 28 and looking at our feed cost outcomes during the first half of FY 2021.
As you're aware, feed costs were negatively impacted by very low wheat stock position on the back of a 3-year drought. The low wheat stock position resulted from a small wheat crop and an aggressive export program, with 9.4 million tons exported versus 8.4 million in the prior year. Inghams did, throughout this period, maintain forward cover between 3 and 9 months to secure supply, which is in line with our procurement strategy. Moving to slide 29. During the second half, our delivered wheat price will reflect the easing that we saw in the first half, which has now stabilized in 2021. We expect the impact from this to fully flow through the poultry network by Q4 FY 2021. This time lag reflects our 3 to 9 months forward cover and the poultry life cycle.
This benefit will be slightly offset by higher soy meal pricing that we are experiencing in both Australia and New Zealand. We have previously spoken about our cost pass-through mechanisms, and whilst we don't provide specific information relating to customer pricing, I can say that these mechanisms, which are designed to share the impact of changes in particular costs, are working as intended. With that, I'll hand back to Jim to take you through our outlook.
Thank you, Jona and Anne-Marie. If we now turn to our outlook slide on slide 31, we expect ongoing resilience in poultry demand as chicken continues to be a protein of choice for consumers across Australia and New Zealand. Our continued focus on the execution of our five-year strategy is delivering operational momentum to support future growth. The net impact of lower feed prices is expected to be modest, as Anne-Marie had mentioned, during the second half, given the recent surge in international demand and our customer pass-through mechanisms and the way that they work. With great progress made in the first half, we will continue with an orderly reduction of our remaining surplus inventory and expect to have this cleared by the end of the financial year. As previously mentioned, the sale of our Hamilton feed mill is on track to be completed by the end of March.
This sale will not have a material impact on earnings going forward, but will firm up capital to be redeployed. Ongoing volatility in operating conditions and/or consumer behavior due to COVID-19 will remain as we move forward into the second half of the year. As we have already seen play out in Melbourne and Auckland and around the world, we're not out of this yet. The timing of re-opening Australia's remaining export market also remains uncertain, although we are anticipating some progress during the second half. We expect the second half to be subject to the seasonal influences that typically occur in our business historically.
In closing, while we cannot perfectly predict the ongoing impact of COVID and other events, we have proven the resilience of our plan, our business model, and our people as we continue to work hard to deliver more consistent, predictable, and reliable returns to our stakeholders. We move into the second half of 2021 with a strong foundation upon which to build our future success. Now, with that, I'll hand it back over to the operator for any questions that you might have. Thank you. Operator?
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michael Peet from Goldman Sachs. Please go ahead.
Morning, Jim and team.
Michael.
First question, just on margin. When I look at Australia and New Zealand, pre-AASB 16, sorry, if I look at that margin you historically have had, it's been, sort of in Australia, it did get almost to 9%, sort of 8.5%, 8.75% a couple of years back. New Zealand was at 10%. You're significantly below that in both regions. I can sort of see why in New Zealand maybe, just interested in your views on, is this sort of current margin, roughly, we might work a little bit on the upside, but those historic margins, are they possible to get back to or to get above? It's the question.
Hi, Michael. It's Gary. Nothing's impossible and, of course, that's the goal. Yeah, you can see there was an improvement in this half in Australia from 6.7% - 7.3%, which I assume is what you're looking at. Yeah, the ambition is to still increase those margins, but we've been pretty consistent saying it's not going to happen immediately. We're pleased with the progress that we've made.
Yeah, Michael, this is Jim. The other thing I would add, in an environment that we spoke of and that you're aware of, with these higher feed prices, it is typically you'd see a bit of a dip in margin. To answer your latter question, absolutely achievable.
Maybe, Gary.
Any other-
One follow-up just on inventory. If I do some of those adjustments from the AUD 191, take about AUD 15 million out for feed and frozen excess, about AUD 175, say, but that's still about AUD 20 million above where you were in the PCP. Is inventory able to get back down to that level? And obviously just thinking about second half cash conversion, should we expect a much stronger number in the second half?
Yeah. Inventory's got a bunch of things. Our biologicals, it's got feed in it. It's also got our poultry in there as well and ingredients that we have. There's a number of things in inventory. From a poultry sense, as far as excess, yeah, we've estimated we've got about AUD 5 million at the half year that we still need to clear. We're confident that we'll be able to do that through the second half. Feed and the other areas, probably pretty similar to where they are at the half.
The other one.
From a cash conversion, yeah, that will continue to assist. The main impact we'll see on cash conversion is the seasonal impact of our receivables will reverse in the second half.
Yeah. Great. Understood. That's all I have for now. Thank you.
Thanks, Michael.
Thank you. Your next question comes from Craig Woolford from Citi. Please go ahead.
Morning, Jim. Morning, Gary.
Hey, Craig.
Good day to you. You've highlighted that you're optimizing the core and there's been an improvement. Do you have any metrics you could share, perhaps, on OEE with us?
Yeah, we don't have hard metrics that we can share, but we've made significant improvements relative to being able to. It took us about 6 months to roll this out, to be able to measure this across our entire operations end-to-end supply chain. We are now being able to, just beginning to aggregate that, perhaps we can share that with you going forward. You definitely saw it in the results in the first half, a lot of the improvements we made, and most of those were not capital related because most of the capital was deployed towards these two new hatcheries that we're building. Things like we've talked about, Craig, before, on the spin chillers and just continuous improvement, having Green Belt people in our plant and so forth, we're seeing just tremendous results.
Yeah. The gross margin result is very good. Would you put that down to operating efficiencies? Is there anything in mix of sales that's benefited gross margin?
No, I'd put it down mostly towards operational improvements.
Right.
Mix was quite, with the half, with COVID and everything, there was a lot of shifting of mix in our business.
My other question was the impact of the Vic lockdowns, say compared with New Zealand, obviously, it looks like a lot less, but it's probably hard to do. How would you quantify the net impact of the Victorian lockdowns? Was it a positive or a negative? You probably had some volume benefits given some of the other customer issues, as Thomastown saying, there's quite a few moving parts there.
Yeah, maybe Gary will address that in a second, but I think it's important to understand the difference between New Zealand and Victorian lockdown and the impact and the actions that we've taken. I think Jonathan mentioned in his remarks, as a result of the dramatic change in consumption, meaning QSR shutting down, hard lockdown in New Zealand, we had to adjust supply, where in Australia, we did not have to do that. Gary?
Victoria, as you'd be aware through the half, has had a few goes, unfortunately. The one that was happening at the beginning of the, or in the first quarter, we had our Thomastown facility shut down for a couple of weeks. Simultaneously, with that, there was the avian influenza, and then we also had some of our, the other processors in Victoria had some shutdowns of their primary plants. Is it a positive or a negative? It does really depend on which week you're looking at. Some weeks it definitely is a positive for our results, and we see a great demand for our product. In other weeks, it's quite challenging to deal with that. Our biggest challenge throughout is the volatility. We said that the Thomastown impact wasn't material and it wasn't.
As far as the results during the period, it's the volatility that's hard. Some weeks it's good, some weeks it's not so good. Auckland was far more severe last year in the level 4 lockdowns. In Victoria, Auckland was far more severe. Also, in New Zealand, we don't have the same spread of networks that we have in Australia, so we can't get the benefit of being able to help out various states from different locations and different facilities as much in New Zealand as we can in Australia. I hope that answered your question.
Craig?
Thank you. Your next question comes from Aryan Norozi from UBS. Please go ahead.
Hi. Thanks for your call.
Hi.
Just first one from me. Sorry to harp on about the cash flow again, but if I look at FY 2020, you averaged out your seasonal impact in the first half, and you averaged that around sub 80%. Do we expect cash conversion to move back into that 100% mark by the full year of FY 2021, or is that still subject to timing, et cetera?
Of course we don't give projections, but the receivables, you can expect, you saw that at December 2019, it was pretty similar to last year. It would be fair to assume that it would be somewhat similar to the June 2020 position will be similar to the June 2021 position. In inventory, we expect to see a little bit benefit. Yeah, definitely close-ish to that 100% due to those two things.
Perfect. Just small accounting piece, just in terms of prepayments, I think there was about an AUD 40 million prepayment within the receivables piece. What is that?
Awesome detail question. We tend to have things like insurance prepayments and other things come through at the beginning of the financial year that then work their way through the end of the year. We do tend to have higher prepayments, obviously, in July, and then by the time you get to December, they're only somewhat wound through. Insurance prepayments is the thing that comes to mind, but I'd have to dig in and get you some more details on that.
No, that's perfect. Last one, just in terms of volume, I mean, group volumes in the first quarter were up about 6% year-on-year, and then the result implies about 2% for the second quarter. Given you're clearing the inventory or you made very good progress. What caused the slowdown, please?
You can present the numbers like that and call it a slowdown. I guess the quarter two in FY 2020 was a pretty strong quarter. To be growing on that quarter, we're actually really pleased with that result. Yeah, if you just go back to the gross volumes, you'll see there was growth in the second quarter versus the first quarter. The percentages are probably a reflection on what the prior corresponding period was a little bit. Yeah, remember, there is some inventory sales in those volume numbers as well. Yes, in comparison, slower growth rate, absolute higher amount of volume sold. A little bit of maths is distorting that picture.
Yeah. If I can take one more, just on the gross margin, please. Just following on from Craig's question, is there any chance you can give us an idea on the magnitude or in terms of the gross margin improvement that was from the operational piece? You've obviously had a lot of headwinds in that half and you've delivered a really good result on the margin.
Yeah. I think it's important to understand something relating to the drawdown in inventory during the half. The inventory was created because of the COVID situation, but then we were very intentional relative to the reduction of that inventory, and we were very successful in bringing it down. During that period of time and doing that to meet that demand, we had less product going through our facilities from the front end to the back end, which had an impact on the margin for the half as well. I think that's something that is very helpful to understand when you're looking at the financial results. Now that the inventory is down, as Gary said, we have about AUD 5 million in finished goods inventory frozen to go off of a much higher number. We're back in balance.
Perfect. Thanks, Jim.
Yeah. Thank you.
Thank you. Your next question comes from David Pobucky from Macquarie Group. Please go ahead.
Good morning, everyone. Congratulations on the strong results. Just a few questions from me. Could you unpack your outlook a bit further in terms of what you're expecting for volumes and pricing across end markets? Would you say that retail is moderating, but that's being more than offset by improvements in QSR and food service?
Yeah. If you look across all of our channels, food service is coming back. In my remarks earlier, I said that we are back to pre-COVID levels. You just lock wait and see what happens with restrictions and so forth. That channel's come back. Wholesale markets are strong. Retail has done well. In QSR, a lot of it has to do with the promotional activities half -to- half, but it's strong for the year. Gary, do you have anything to add to that?
Yeah, David. In regards to volumes, probably the other two factors to think about is, and we talked about in our receivables, we do have seasonal highs coming into Christmas, which aren't there in the second half. We also had the inventory impact of volumes in the first half, which we won't see as much of that in the second half as well. Clearly, as Jim mentioned, you and I have no idea where COVID's gonna lead us in the next six months.
David, to your question, in the ASX release this morning, I think it's in the last bullet point, we stated that we do expect that the second half of FY 2021 to experience our normal seasonal influences and that has to do with trading, as Gary said, on what the first half normally looks like versus the second half.
Can you just remind us what the typical first half, second half skew is, please?
What we've said in the past, and this is in no way guidance for this year, but in the past what we've seen is sort of 52/48 or 51/49, is what we've typically seen in the past. I repeat, I'm not providing any guidance this year.
Okay, thanks. Just one last one from me. Are there any contracts that have come up for renewal or are coming up for renewal that you can call out and talk to?
Not that I can talk to. We don't talk and share where we are with customer contracts. I can tell you there's nothing material in Australia. We have a couple in New Zealand. I can tell you that if there were anything material that we anticipated or had realized, that we would've had them in my remarks or our remarks. Thanks.
Okay, thank you very much. That's it from me.
All right, thanks.
Thanks.
Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Phillip Kimber from E&P Financial Group. Please go ahead.
Hi, guys. First question, just to clarify on soy meal, so not wheat, do you also forward buy there on a three to nine-month timeframe? I'm just trying to understand timing of that particular commodity.
Hi, Phil. Yes, we do. It's included in our three to nine months cover.
Okay. In theory then, let's just pick the midpoint, that's maybe more of an FY 2022 headwind than a second half 2021 headwind, just that on its own? I know there's a lot of moving parts, I'm just sort of focused in on one.
No, Phil. When you see where it actually rallied, and you see the price, it actually went up 20% in the back half, so there will be an impact. It will actually offset some of the benefits of our grain position in this year in Q4.
Okay. It's, just to confirm, 20% roughly, give or take, of feed costs?
Yeah, on average. It can be higher, it can be lower, but we sort of typically, as an industry, will talk about 20%.
Sure. Just on quarterly profit momentum, I know you had that great slide last time where you showed quarterly numbers and I can understand why you don't want to get into a habit of doing that, but just conceptually, on a pre-AASB 16 EBITDA basis, it used to look like somewhere between AUD 50 million to AUD 55 million was a, inverted commas, "normal quarter." I think you dropped to AUD 36 million, from memory, in the fourth quarter last year. I was just trying to understand by the second quarter of this year, so the half that you just reported, were you back to normal levels or are you still sort of heading on that journey? Was Q2 a lot better than Q1 in a profit sense?
It's Gary. Thanks, Phil. Yeah, Q2 was a lot better than Q1. Q2 was a good quarter. Was definitely a good quarter.
Yeah. Just to clarify your seasonality comment, can I assume you're talking EBITDA there? Depreciation shouldn't really move, shouldn't be seasonal. I just wanted to check which line you were talking about there. Was it EBITDA or more lower at the NPAT line?
EBITDA, which, as you know, flows through. Probably another example of what that seasonality factor could be is there's a bunch of public holidays that we have across both markets in the second half compared to the first half. If you think about our business with public holidays, we aren't producing chicken on those days. Of course, running the plants and still paying our people. Our cost of production have an impact, for example, due to that fact, which is not insignificant for us.
Yeah. I think you guys refer to them as short weeks. Is that right?
Yeah. However you want to refer it. Yes, we have a lot more short weeks in the second half.
Yeah. The last one, just to clarify, I was writing something down, so I'm not sure I heard it correctly. When I think you just got asked before about contracts, I was just surprised by the answer because my understanding, and I think it was in the prospectus, is the Woolworths contract comes up for renewal later this calendar year. I don't know if you can I know you sort of can't talk specifics, but am I right on that thinking?
Yeah, you're right in the thinking, and my comment was relating to the second half of this year. It does come up for renewal, extension or otherwise in the first half of next year. Our conversations are, yeah, again, if I had anything material to say, I'd say it.
Yeah. Okay, great. Thank you.
Thanks.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Leighton for closing remarks.
Great. Thank you, operator, and thank you for everyone who's participating and your great questions. I think the first half results demonstrate that we have a solid strategy. We've got the right structure in place. I can't tell you how proud I am of the resilient team that we have in place and everything that they've done in order to deliver these results. With that, I really do want to thank our people. I want to thank the board for their support. I want to thank all of our customers and consumers, and the support of our investors. Very much appreciate your time and your investment and your time today. Thank you very much.
That does conclude our conference for today. Thank you for participating. You may now disconnect.