Thank you operator, good morning. I'm Jim Leighton, Managing Director and Chief Executive Officer of Inghams. It's my pleasure to welcome you to Inghams' 2020 full year results call. I assume you all have a copy of the results presentation because I will be referring it to as I go through that deck. I want to thank all of you for taking the time out of your day and joining us in your interest in Inghams. Joining me to present the results today are Chief Financial Officer, Gary Mallett, our Chief Executive Officer for New Zealand, Jonathan Gray, our Investor Relations Director, Craig Haskins. Slide one is our standard notice and disclaimer. Let's move on to Slide two.
Before I discuss our financial results, I want to briefly recap on our five-year strategy because it underpins the resilience of our FY 2020 financial results. Going back to our investor presentation since October last year, we have been sharing what I believe is a solid five-year strategy that clearly sets our sights on delivering more consistent, predictable, and reliable returns to our shareholders. Our purpose is to nourish our world and our success in supporting our people, planet, profits, and partners. Together, position us to deliver profit to our shareholders. This purpose connects to our strategic pillars to optimize the core, transform for tomorrow, and create the new so we can deliver on our objective to our shareholders and achieve our ambition to be the most trusted food producer in our market.
It is this five-year strategy that is building resilience of our organization and the resilience of the people who benefit from this clarity and work together to deliver more consistent, improved financial results. Moving to Slide four, our group performance highlights. We have delivered resilient financial results in 2020, underpinned by a solid and clear five-year strategy. We achieved an underlying operating EBITDA pre-AASB 16 leases of AUD 179.7 million. While our EBITDA full year results is below where we had originally planned, it is consistent with our May business update, which highlighted the potential impact of uncertain trading conditions in our markets and the many supply chain and operational challenges brought on by COVID-19. Whilst Inghams has shown its resilience in adapting to COVID-19's world in the second half, we are not immune.
This result includes all of the impacts of COVID-19 on our supply chain and operations and the impact of the decline in demand and oversupply and inventory issues that we faced. I am proud of the Inghams team for what they have achieved. At the half year, we told you that we had resolved operational issues in our further processing network, and that added significant costs and the inefficiencies to our business in the first half. That is behind us. We started solidly in the second half despite the call-outs of bushfires and floods. We said that our recovery in New Zealand was well underway, in which it was. The real pressure testing of our strategy, our organization, and our people came in the form of COVID-19.
I've often said that we should never waste a good crisis, and while we're not leaving any opportunity unturned by the challenges that COVID-19 has thrown at us, the challenges that we have overcome have included, one, making very important changes to our supply chain and operations, which kept our operations running during COVID-19. Two, a continuation of high feed prices that we dealt with. Three, the bursts of panic buying during COVID-19, which was dealt with by an agile sales and operations team who met consumer demand for poultry, which is still valued as the most affordable animal protein. Four, the complete lockdown of all of our out-of-home channels as a result of Level 4 restrictions in New Zealand, as Jono will go into more depth on in a minute.
Five, managing the excess supply of poultry products in both Australia and New Zealand as our supply chain adjusted to lower customer demand in that last quarter in the closing of some export markets. Slide five talks the tale of two halves. Again, speaks to our resilience and unwavering commitment to achieve our objective to deliver profitable growth. The first half was marked as one of building momentum with the obvious headwinds, which really impacted volume and profitability in the second half. We achieved 3.3% growth in core poultry volume, which, as I said, recognizes poultry as an affordable source of protein. Gary will talk more about our cash and balance sheet later. Our debt remained within our targeted range. As we said in May, we have been closely watching cash and costs and working with our customers to ensure that debtors' balances are well managed.
We have announced a final dividend of AUD 0.067, which takes the full year dividend to AUD 0.14 and is in the middle of our targeted payout ratio of 66%. Before I hand it over to Gary, I think it's useful to have more context for you around COVID-19 and how it's impacted our people, our operations, and our sales channels. If we could move now to Slide seven. The health, safety, and welfare of our people has continued to be our number one priority and always will be. I want to commend the Inghams team for how quickly they worked together to make the necessary changes at work to stay safe throughout COVID-19.
I also want to praise our incident management team who set the safety benchmarks for all of our people and our business high from the very beginning. Creating a safe work environment also kept our people engaged and our absenteeism very low. Agile operations and sales meant we could, at least to the extent possible, meet the pantry stocking demands whilst dealing with the restrictions or closure of much of out-of-home customer base. It's been a volatile period. As I said before, a clear strategy has meant we still have been able to continue to focus on profitability and growing the business in creating the new. We have pleasingly developed new products for both the Australian and New Zealand markets this year, including The Free Ranger in Australia, and new plant-based protein products, including Let's Eat in New Zealand, and the Plant Collective in Australia.
Slide eight provides an overview of how we manage the many logistical costs and productivity challenges across the supply chain. Now, rather than go into too much detail, I'll give you just a great example of how our people minimize the impact of many of the issues that they face. It relates to our primary processing plants, which are by far the most complex and labor-intensive of all of our operations. In addition to implementing measures to allow us to continue to operate safely and at a social distance, we are also faced with the challenge of accommodating significant switch to supplying more of our fresh poultry products in trays. Our customers told us that that's what they needed to satisfy consumer needs, and we listened, and we responded accordingly.
Successfully delivering this material change required redesign of our plants to enable our people to physically distance while packaging our products. This added costs, complexity, and created some negative impact on plant productivity, but it was absolutely necessary to deliver those products to our customers, and we did it without compromising our safe work or our environment. Another consequence that we had was to temporarily suspend the productions of some other value-enhanced SKUs, as we simply could not properly reconfigure our plants in the short term to meet our objective. All of this may sound straightforward, but for those of you, and I know many of you have been in a chicken plant, you will know and appreciate how well the team responded. Turning to slide nine. This slide summarizes the demand volatility across our sales channel.
Every channel, both in Australia and New Zealand, have been impacted by COVID-19 restrictions in some way. As you know, retail surged in the third quarter due to panic buying. This material volume surge was temporary. As demand normalized, albeit at higher levels than normal, industry oversupply, including our own excess volume, became an issue in the fourth quarter. QSR was more resilient than food service and wholesale markets, which were hit by shutdowns. While we have opportunities to move products in the export market, we have also lost volume when borders were closed in some of our traditional markets. On slide 10, we have shown how the year has shaped up graphically. Now, we would not normally show this much detail on a quarterly basis, but we thought it would be helpful to show the flow of the year.
Again, the building of volume and financial momentum from a slow start to the first quarter due to the FP operational issues that we spoke about at the half, and lost margins from some of our channels. Moving to a traditionally stronger second quarter due to some positive seasonality and solid performance in operations. Followed by strong customer demand showing in the third quarter, and then negative impact on the fourth quarter on core poultry demand, excess supply, lower margin, and export volume. The decline in profitability of the business in the fourth quarter also reflected the higher cost and the write-down of some inventories, as Gary will discuss. I cannot emphasize enough how exceptional the Inghams team has worked given these challenges. To deliver profitable results in this environment is a credit to the resilience of our strategy, our organization, and our people.
I will now hand it over to Gary to present our financial results in more detail. Gary?
Thanks, Jim. Looking at slide 12, our statutory P&L shows NPAT of AUD 40 million. As you can see, our numbers are significantly impacted by the adoption of AASB 16. You will also note on the slide that we have adopted the modified retrospective approach, so we have not restated our FY 2019 comparatives. This makes year-on-year comparisons difficult. As previously reported, the FY 2019 year also included the gain on sale of Mitavite and some other smaller assets.
EBITDA has increased AUD 146 million to AUD 388 million. AASB 16 required lease expenses of AUD 230 million to be removed from EBITDA, but offset by a depreciation expense of AUD 209 million, an interest charge of AUD 55 million, and a tax effect of AUD 10 million. AASB 16 results in a decrease in NPAT of AUD 24 million for the full year, which as you know, has no impact for cash on our business.
Turning to slide 13, which gives you our underlying pre-AASB 16 financial performance. As Jim noted, core group poultry volume is up 3.3% for the year. This volume reflects growth of 4% in the first half and slowing to a 2.6% growth in the second half. Notably, our second half sales volumes are a little lower than the first half, which, given we had birds in the third quarter set for growth, has created oversupply in our market in the fourth quarter. External feed sales volume is down in the second half as a number of customers reduced orders as COVID-19 impacted their businesses. By-products volume showed a small increase over the year. Core poultry revenue growth was up 3.5% for the year. Revenue growth exceeded volume growth in the first half as we saw better pricing in several channels. The Australian wholesale market is a good example of that.
In the second half, revenue growth was 2.1%, so below volume growth of 2.6%, which reflected a softening wholesale market, greater export sales, and clearance and promotional activity in the local market to deal with the fourth quarter market oversupply. By-product revenue was lower by AUD 3 million, with external feed revenue up AUD 1 million compared to last year.
A gross profit of AUD 460 million was down AUD 20 million on last year. In the appendix, we've provided a breakdown by half of our results, including gross profit. Unpeeling the gross profit line a little, the first half showed our group revenue growth was up 4.7%, but our cost of sales grew by 7.3%, which is attributable partly to an increase in feed costs, but mainly the operational issues in our further processing business, which we discussed at the half. This contributed AUD 14 million of our year-on-year decline in gross profit.
The second half has shown modest improvement despite COVID-19 impacts. Costs are up 2.4%, below total poultry volume growth of 3.3%. Revenue grew 1.5% due to the impact of pricing I just mentioned. The margin decline was lower in the second half at AUD 6 million. Included in cost of sales in the second half is an increase in our inventory provision of approximately AUD 9 million. As Jim has stated, our underlying EBITDA pre-AASB 16 result of AUD 179.7 million takes into account all the positive and negative impacts of COVID-19 above the line. There are some positives, like the brief third quarter surge in retail volumes, that is offset by decline in out-of-home volumes, sales clearances in Q4, and costs including the additional inventory provision and higher costs of distribution, cleaning, workforce, physical distancing, and PPE required to safely produce our products. Our depreciation has significantly increased.
AUD 900,000 of this is attributable to catch-up depreciation as we reclassified our Wacol feed mill from asset held for sale. The balance reflects the cumulative effect of CapEx spend over the past couple of years. Our tax rate remains unchanged at 29%. Underlying NPAT is AUD 79 million, which is down AUD 24 million on last year. On slide 14, we provide the reconciliation from statutory to underlying EBITDA and NPAT pre-AASB 16. The reconciliation takes out the AASB 16 impact of AUD 230 million. The other key call-out on this slide is that we've taken an AUD 20 million impairment charge relating to a couple of assets. These impairments are not related to COVID-19. Firstly, the Cleveland further processing facility closed last year.
The site remains vacant, and we now do not intend to use it for operations in the future, so it is appropriate to fully write down the value of this leased asset. The Wacol feed mill was purchased in 2017 as part of our self-sufficiency feed strategy. This asset has been held for sale since that date, as it was originally intended to be sold or leased back. However, that is no longer the case. The asset has been reclassified in the balance sheet, and the valuation has been revised to reflect its current valuation. Looking at our balance sheet on Slide 15. This slide reflects the impact of the new lease standard with land and buildings and grower contracts recorded as right-of-use assets. We've previously explained at the half year the grower contracts, and I'm happy to answer any questions on this later.
You will see that inventories have increased by AUD 56 million, which is a result of industry oversupply in the fourth quarter in both Australia and New Zealand. We have chosen to hold the majority of this inventory increase as further processed products. As it is frozen finished products like Chicken Kievs, schnitzels, and nuggets, it has the longer shelf life and the FP network is our most flexible. You'll also see that feed inventories increased year-on-year as we are holding greater stocks from grower direct purchases and year-on-year pricing increases. Our total receivables balance has decreased year-on-year. However, in the detail, our financial statements highlight an increase in trade receivables of AUD 16 million over last year. We feel this is an excellent result given the natural increase you get with higher revenue and the situation with COVID-19 that some of our customers found themselves facing.
Our debtors days outstanding only increased two days, and our overdues greater than 30 days increased AUD 5 million to just under AUD 10 million in total for the group. In our business update in May, we noted we were working with our customers to support them where they were in distress due to COVID-19 changes, and in certain cases, this has resulted in payment plans being established which are being met. We are quite comfortable with our debtors position and continue to monitor cash closely. Turning to our cash flow on Slide 16. Cash conversion has improved from 60% at the half. We closed our books on 27 June, and we are pleased with our cash collection at year-end. Conversion was negatively impacted by the working capital build in inventories, but we are satisfied with the 97% we have achieved.
We've also provided a conversion ratio which considers the benefit we accrued from the increase year on year in our inventory procurement trade payable. This ratio of 81% is a solid number in the context of operating in a COVID-19 world. We spent AUD 87 million during the year on capital expenditure, which is well below where we suggested at the half. Like many other companies, we were more judicious in spend in the second half, and there was a deferral of some work due to restricting access to our sites to essential visitors only.
We continue to invest in the Victorian and Western Australian hatchery projects, which are on track to be completed in FY 2021 and 2022 respectively, pending any possible impacts due to COVID-19. On Slide 17, our net debt finished at AUD 315 million, with leverage increasing to 1.8x , primarily with the hatchery investments and higher inventories.
Net debt decreased AUD 9 million from December 2019. You will see that the inventory procurement trade payable has increased by AUD 26 million to AUD 120 million since June 2019. This reflects a few factors. The first is that there was about AUD 15 million which fell due for payment just after balance date, reflecting the timing when we took delivery. The second is that as we built feed inventories on our balance sheet, it is reflected in that payable. The inventory procurement trade payable was AUD 98 million at the half year, so the increase was mainly in the second half. Our final dividend of AUD 0.067 per share, fully franked, sits us in the middle of our guided payout range of 60%-70% of underlying NPAT pre-AASB 16. With that, I'll hand back to Jim. Thanks, Jim.
Moving to Slide 19, I'll turn over to our segment performance for Australia and New Zealand. I will start in Australia, I'll turn it over to Jono, who can update us for New Zealand. The big call-out in the Australian business is the 6.5% growth in core poultry volumes in the third quarter, which quickly dropped to be up only 1.2% in the fourth quarter to finish at 4.3% growth overall for the year. This drop in the second half revenue and profitability was impacted by an excess in supply in the fourth quarter, creating pressure on pricing and additional promotional and clearance activity in inventory provisioning, which lowered margins. We experienced higher costs due to COVID-19 measures and slightly higher feed costs. Pleasingly, our costs overall were slightly below volume growth and in absolute terms, were down from the first half.
The team has done an excellent job to keep costs down through very tough conditions. Our external feed sales were also down on the half as some customers responded to weaker demand in their businesses and the loss of some unprofitable business. I've already talked about the impact to our channels, so I won't go over this again. However, I think it is important to understand that the balance of our volumes by channels does not net out to zero. Whilst the poultry category is resilient, it is not immune. I would now like to hand it over to our Chief Executive Officer in New Zealand, Jonathan Gray, to talk about our segment performance in New Zealand. Jono?
Thanks, Jim, and good morning, everyone. Our New Zealand business delivered underlying EBITDA pre-AASB 16 of NZD 28.6 million, which represents a decrease of NZD 1 million or 3.4% compared to FY 2019. At the half, we told you about the progress made in our New Zealand turnaround plan and the momentum that had been established. Looking at the full year result, it was not so much a game of two halves as it was three quarters of pleasing results as we progressed our turnaround plan, and then one quarter that was severely impacted by the response New Zealand as a country took to meet the challenge of COVID-19. Core poultry was down 2% for the full year.
Looking at the second half breakdown of that, we see a lift in demand of 3.8% in Q3 before a significant drop in Q4 of 13% compared with the corresponding period in FY 2019. Poultry revenue growth, which had built nicely and above volume growth through the first three quarters, then slowed in the final quarter due to excess supply that I will talk to shortly. It's worth taking a couple of minutes to explain the detail and impact that the Alert Level restrictions had on our Q4 performance, particularly the impact from Alert Level 4, given the significant impact that you see on Slide 10.
From March 26th, the country moved to Alert Level 4, which was a full national lockdown. This lasted for four and a half weeks. Two and a half weeks of Alert Level 3 followed before moving down to Alert Level 2 and then an extended period at Alert Level 1. Alert Level 4 restrictions meant all non-essential businesses were closed completely. For us, that meant no QSRs open at all for four and a half weeks.
Likewise, no restaurants or cafes open at all. Aside from a few minor exceptions, every out-of-home channel, including food service and the wholesale market, closed overnight and did not reopen in any capacity for four and a half weeks. When they did reopen at Alert Level 3, it was in limited capacity, such as drive-through and takeaway only. From there, restrictions continued to ease further until just last week. During the Alert Level 4 period, supermarkets remained open as an essential service, and we saw an increase in demand. However, this increase in retail demand did not nearly offset the drop from out-of-home channels. Our total demand was down by over 35% during this Alert Level 4 period.
In addition to the challenges of that extreme demand decline, we had to move decisively to reconfigure our processing facilities to meet the site-specific protocols required, including social distancing of workers in our factories. We also faced declining attendance levels as schools were closed and carpooling was heavily restricted. Our plants ran less efficiently through this period. Of course, with birds in the field still coming and demand having significantly declined, there was a resulting oversupply in the market. Our sales volumes dropped, our margins were negatively impacted, and we rapidly built inventory. At this point, I'd just like to mention the enormous pride I have in my New Zealand team, not only for the way they responded to the challenges that COVID presented and continues to present, but also for the leadership, guidance, and support they provided to their respective teams.
We have received excellent feedback from many of our key customers, and strategic partners around how we performed, communicated, and conducted ourselves through this very difficult period. Now, before passing back to Jim, the last time we spoke, I highlighted the progress made in New Zealand against our turnaround plan. While we continue to manage the unpredictable challenges of COVID-19, we remain committed to that plan. I believe we are a more nimble business and a stronger team as a result of what we have been through. With that, I'll hand back to you, Jim.
Thanks, Jono, congratulations to you and your team. This is a great job. Turning to our feed markets, which are on slide 22. Our feed costs have remained elevated as the tight inventory of old crop forcing domestic buyers like Inghams to pay more for supply certainty. The low inventory was further exacerbated when exports entered the market as the Australian dollars temporarily declined, creating an opportunity for aggressively bidding limited available stocks. As Gary noted, in such a tight market for old crop, we have made the prudent decision to secure supply to feed our birds, given the visibility to these low stock levels. We anticipate that stock levels will improve as conditions remain favorable for the new crops that are due to be harvested the beginning November in the regions where we source our supply. That would, if that happens, lead to lower costs.
It will take until the fourth quarter of FY 2021 before lower feed costs fully flow through our supply chain and into cost of goods sold. Moving to slide 24. I feel like a broken record when it comes to COVID-19, the unfortunate reality is that it will challenge our economy for some time, even beyond a vaccine being found. We've proven that we have a resilient strategy, a resilient business model, and highly adaptable people to help us work in these highly volatile situations. We've noted that government restrictions continue to impact our customers and therefore the consumption of poultry and products in both Australia and New Zealand.
Whilst our diversified network leaves us well-positioned to maintain supply, we are not able to predict the impact that COVID-19 may have on the poultry industry or Inghams' capacity in our poultry supply chain in the future. Again, we are resilient but not immune. This point is made because, as you are aware, we have completed a 10-day closure in our Thomastown further processing facility in Victoria. As we speak, we are currently managing and managing well, I might add, the government-mandated reduction in workforce in our Victorian operations. We will continue to focus on being agile and ready to respond to customer and consumer demand for all of our products in the context of lockdowns and international and state borders closing.
As poultry remains a competitive and affordable source of protein, by the way, even more so in a depressed economy, we are optimistic that we can continue to fulfill our role as an essential service provider, and we're proud to do so. As I noted earlier, we would anticipate the improved outlook for feed pricing to fully flow through in the fourth quarter of this financial year. As always, we remain focused on efficiency, productivity, and cost management across our supply chain. Now moving to slide 26. This brings me back full circle to the beginning of this presentation. Strategically and operationally, we are on the right track.
We have managed the challenges well. We are applying lessons learned going forward. We have been able to do this because we have a clear strategy that builds resilience and points us in the right direction to achieve profitable growth for our business. Our principles and purpose help us focus on our strategic pillars to optimize the core, transform for tomorrow, and create the new. While there's no crystal ball on what the new normal will look like post-COVID-19, what is clear is that our five-year strategy is building the resilience of our organization, the resilience and adaptability of our people, and enabling us to focus on what we need to do to deliver more consistent, predictable, and reliable returns to our shareholders. With that, I will hand it back over to the operator for your questions. Thanks.
Thank you. Ladies and gentlemen, we're now beginning the question and answer session. 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 pound or hash key. Once again, it is star one and wait for your name to be announced. Thank you. We have multiple questions in the queue. Our first question is from Mr. Michael Peet from Goldman Sachs. Please ask your question.
Morning, Jim. Can you hear me?
I can, Michael. How are you, sir?
Good, thank you. Yourself?
I'm well, thanks.
Good. Look, thank you for your time. Just on the indicated sort of oversupply in the fourth quarter, could you just give us a sense of where we're at at the moment? Maybe how long you think that might take to clear? Maybe a sense of what wholesale channel pricing is doing at the moment?
Yeah, I can. That's a great question. As we stated in our remarks, we did have quite an inventory build of, I think Gary mentioned about AUD 56 million, and then there was a provision. I can tell you, for the first through seven weeks or so of this financial year, we've been able to push out about AUD 9 million of that. Relative to the wholesale market, we are seeing it come back to a more normalized pricing in that channel.
Okay, thank you. Maybe just one for Gary, maybe, slide 10. Thank you very much for that quarterly breakdown. That really helps quite a bit. Just in thinking about coming into 2021, the first quarter was impacted by the FP issues that you highlighted. I just wanted to get a sense of roughly where normally you would see your EBITDAs per quarter. Would it be a little bit flatter than that across the quarters? Obviously, I think first and fourth would probably be the weakest. Is that the right way to think about it?
Yeah. As we've talked about, quarter one was impacted heavily by the further processing networks we've talked about at the half, and Jim's mentioned today in Q4 was heavily impacted by COVID. Your thesis makes sense.
Thinking about first quarter this year, you're still going to have some impacts, obviously, with what's going on in New Zealand, Victoria, and still around the rest of the country. You are cycling that FP, but do you expect some sort of a little bit of a normalization there?
Yeah. You're going to hear this lots of times about, we're not providing guidance, and clearly we're sitting in a very uncertain world with COVID-19. Our Thomastown plant was shut down for 10 days because we had some COVID cases in the plant, and we're also in Victoria operating with a 20% lower workforce per government regulations, and New Zealand has moved back to higher alert levels as well. Making predictions even in the first quarter is very challenging for us, because those things actually do make quite a difference for us, as you could see in Q4.
Michael, Jim here. I would add to that, typically, and we've talked about this quite a bit, the seasonality of this business typically would be, say, 51% of our EBITDA generated in the first half, 49% in the second half. Based upon Cleveland, we had indicated that it might be a little bit different this year, as a result of the first half Cleveland issues, which are, as we stated at the half, are behind us. The good news is we have lapped Cleveland. The bad news is what Gary was just talking about, what we had to do in Thomastown to close that facility for 10 days.
Right. Thanks, Jim. Thanks, Gary.
Thanks, Michael.
Next telephone question is from Craig Woolford from Citigroup. Please ask your question, Craig.
Morning, Jim. Morning, Gary.
Hey, Craig.
Just wanted to understand, there's lots of moving parts as we can imagine. In the second half of 2020, what was the impact from the COVID costs that you're alluding to? What other costs fell? As you noted, the cost growth, just the difference between revenue and EBITDA in Australia, cost growth was lower than volume growth, which seemed like a good result. Yeah, a bit surprised to see that given some of the cost issues that we've just talked to. Kind of related to that, was there any government subsidies in New Zealand?
Sure. Craig, I'll take that one. In New Zealand, we had NZD 200,000, I think it was, of government subsidies last year. Pretty immaterial, and we didn't receive any subsidies in Australia. In regard, we haven't broken out the impact of COVID-19, and frankly, that would be a very difficult thing to do because it has just spread right throughout the business. I did mention that we did have some benefits in the sales surge kind of at the beginning of COVID when there was some pantry stocking, but we have had a number of costs in the operations, but we haven't pulled out a number probably except for the increase in the inventory provision of AUD 9 million, which we saw that build in inventory very concentrated across that April, May period.
Yeah, Craig, this is Jim. I would add to that, as per our previous conversations, and I think you noted, yes, there are a lot of moving parts, especially with COVID impacting this business. I will say that we are realizing some of the benefits that we thought we would realize given some of the new operational talent that we brought into the organization and leadership. I think true to our form, that's starting to show up as well.
Okay. Yeah. The inventory provision is another line which in the past that you believed you couldn't sell, and then this elevated inventory position that you have, which is in FP products, what does it all mean in terms of how you're setting the eggs or the outlook for the supply chain for this first half 2021?
Just with the inventory, I wouldn't say it's because we can't sell the product. It's actually a net realizable value adjustment. It's where we think we might be having to promote or clear some products. I wouldn't say it's because we don't feel that we can sell it. Just for that point of clarification, I'll let Jim talk about the balance of our supply chain.
Yeah. I'll talk it in terms of balances. For commercial reasons, we don't talk about settings and so forth on supply for obvious reasons. We will, per our previous comments, we're making sure that we obviously bring this back into balance. As we bring inventory down, obviously then we'll start increasing more supply through our primary and further processing plants. Craig?
That's clear. Just lastly on this feed cost commentary, just want to set the question the right way, is your feed cost outlook now better or worse than what it would've been back in, say, February of pre-COVID?
Yeah, I'll answer it in general terms. As you know, that we, by three to nine months is kind of from a risk management perspective, how we manage feed. As I mentioned in my earlier remarks, because we had so low stocks coming into the year based upon a three-year drought, we were very cautious to make sure we had continuity of supply. That influenced how far out we should go. Now, of course, we're just waiting to see what the results will be. We know how many hectares have been planted, but we're waiting for the harvest to see what the yield off of those hectares and acres are. Gary, do you have anything to add?
The major impact we saw with COVID on feed was probably at the beginning where the Australian dollar weakened.
Our grain became more attractive to overseas markets, and we saw quite a lift in price at that point in time. That's been probably the main thing we saw. Now that's normalized back a little bit now, and that's probably the main COVID thing we saw on feed.
Thanks, guys. Appreciate it.
All right, thanks Craig.
Our next telephone question is from Matt Johnston from Macquarie. Please ask the question.
Good morning, Jim, and all. Hope you're well. Might just go back to, I guess, the Q4, Q1 question into FY 2021. Appreciate you're not giving guidance. Could you maybe talk to the different challenges between what you saw in the first wave versus the second wave in Victoria and NZ?
Yeah. Why don't we start with NZ? Jono, you want to talk to the impact on Q4 into Q1? Of course, we don't give guidance, but I think we can give some flavor for what's going on with restrictions and so forth.
Sure. Hi, Matt. I think firstly, over the last three or four months, we've spent time in New Zealand at periods at Alert Level 4, Alert Level 3, 2, 1, and then back again. Currently, Auckland is at Alert Level 3. Rest of the country is at Alert Level 2. The reason I start there is there hasn't been an extended period at any alert level for long enough for us to definitively understand all of the impact at those levels. What I will say, and you would've picked up hopefully through my commentary, is the Alert Level 4 restrictions, which is the only level that closes out-of-home channels for New Zealand, they obviously have a far deeper impact and further reaching impact for us than other levels.
That's not me saying that Alert Level 2 or 3 doesn't have an impact, but clearly Alert Level 4 is next level. We would all be hoping that we don't move back into Alert Level 4. Otherwise, as we come into Q1, I'd use the word choppy again. The visibility that we have ahead is short visibility. It remains volatile and impossible to predict.
Yeah. Matt, as far as Victoria, to your question, it is a great question. I think the way I'd characterize Victoria, I'd call that wave two is similar to what we saw across Australia for wave one, with panic buying and so forth and so on. The good news is we learned a lot through wave one. We learned a lot in Australia from New Zealand and what they went through, and we applied many of those learnings to our business in a very positive way. Yeah. We're hoping that Victoria wins and can get out of this as soon as they possibly can.
Matt, I'll just add. You asked directly from Q4 into Q1. They're not directly comparable, clearly the Alert Level 4 impacts that Jono talked about are not as severe that we're seeing in Q1. We're still seeing that very choppy market position, and I think we use the word short visibility as to demand forecasts coming through. Definitely, that's pretty similar through the period. Whilst we had quite a number of operational impacts in Q4 in Australia, the Victorian situation is probably more challenging in Q1.
Yeah, and the other thing.
That helps you get a sense between the two.
Thanks, Gary. Matt, the other thing I'm pretty sure you're aware of is in poultry, there are two primary processing plants that, as a result of COVID and positives within those plants, had to shut down for a period of time. That also impacted both the demand and overall supply, which made it even choppier.
Okay, great. That's helpful. Maybe just a couple of quick ones. Can you actually comment on where you sit on your forward cover for feed at the moment?
Matt, not over and above what we normally say. We say that we have, and when just repeating for everyone, we physically buy, and we have between that three and nine months that we have. You would note that we've got a little bit more in our balance sheet. That gives you a small indication that we've probably been building a bit in this last half and we're still sitting between that three and nine months.
Yeah, and where that will manifest itself, Matt, as I stated earlier in my comments, is we're anticipating if in fact we have a good, robust, which by all indications it sounds like we will, but we won't know until the harvest, that will flow through, and we'd probably think that it would flow through sometime in later in the fiscal year, Q4.
Okay, that's clear. Final one from me, just around operating leases. Has there been any discussions with landlords in the past six months as many businesses have around, I guess, changes or flexibility?
We've had discussions, but I wouldn't be factoring any significant changes into the forward look.
Okay, great. That's helpful. Thanks, guys.
Thanks, Matt. Hope you're well. Take care.
Just a reminder, ladies and gentlemen, if you wish to ask a question and enter the Q&A queue, it is star one. Our next telephone question is from Scott Ryall from Rimor Equity Research. Please ask your question, Scott.
All right. Thank you very much. Jim, firstly, I wonder if you could just give us a sense of how your Victorian employees are now, health-wise. Have they recovered?
Scott, that's a great question, and thank you for asking, and the answer is yes. We are very fortunate. I talk about a lot about our purpose is to nourish our world, but during COVID-19, especially internally, the communication is not only do we nourish our world, we have a dual purpose, and that is to stop the spread of COVID-19. We are very fortunate, and I'm going to spend a little time on this, I'm sorry, but that our employees have really embraced that we are an essential service provider and the importance of them staying healthy and safe, not only in the workplace, but also limiting their activities outside the workplace. As a result, as I mentioned, our absenteeism has not impacted our business. People are showing up. They're doing whatever they can. Fortunately, those that were impacted by COVID-19 have fared fairly well.
I think we only had one individual who was hospitalized, and that had to do with some other conditions that that individual's dealing with. Thank you for asking.
All right, good. You didn't spend too long on it. That's good. I think you've done a pretty good job, Jim and Gary, probably your numbers in particular in terms of helping us understand some of the impacts. Thank you.
Can I ask a quick question on slide 10, on the chart on the right-hand side? You've called out the AUD 14 million worth of costs that we talked about at the half-year result in the first quarter. If I look at quarter one, quarter two, quarter three, adjusted for that, each one of them was over AUD 50 million of EBITDA. Is it fair to assume that the difference between your actual result in Q4 and another result that would have been greater than AUD 50 million was essentially the COVID impacts that you talked about?
I'll turn it over to Gary, but I want to reiterate something, and that is if you look back over the history of this company, at least for some period of time, typically what you'd see is a 51%-52% in the first half, and then 48%-49% of EBITDA being delivered in the second half. Gary?
Scott, I know I got to agree with your analysis that you go through. There is the AUD 9 million inventory provision in there. When you say COVID, you've got to consider the impacts through demand, through cost, through mix, through margin. It's the logical statement that you made.
Okay, good. Then just on slide 28, which was also quite helpful to have in your pack. I'm just checking, I'm not asking you to quantify anything in particular, but in the first half, as you called out, you had poultry volume up 2.6% and revenue up 4.7%. The volumes were up 3.3% in the second half. Revenue is up 1.5%. Is it fair to assume most of that pricing change, the effective price reduction which you saw in the second half, is due to mix and the inventory position that you've talked about? I know it's not the inventory cost, sorry, Well, I guess it's mix mostly, but also some of the inventory that you built up that was unable to be sold.
I thought you'd find page 28 helpful. Just one thing on that one is you mentioned, the total poultry volume of 3.3%. The like-for-like in revenue is 2% at total poultry level. The actual 1.5% takes into account the external feed sales that we have as well, 3.3% comparing two is the apples and apples.
You really, again, you're well informed. I think the other part we've got in there is with the oversupplied market, it would be fair to say there was clearance of product and promotional spend that we needed to do to help with that oversupply position, which impacts our revenue.
Yep. Then looking at gross profit, I am correct that that AUD 14 million in the first half comes in in the gross profit line, right?
Gross profit margin was impacted in both halves due to the varying impacts in addition to feed cost inflation, I understand that. That's where most of the impact comes in terms of the margin, I think from COVID in the second half in particular. Is that fair?
Yes.
Yep. Okay. All right. They were my numbers questions. Thank you. Could you, maybe this is a question back for Jim, could you just talk to what you've seen as, and I take Jonathan's answer before in terms of the different levels of restriction that you've seen in New Zealand and how each one of them has differed, and there's been changes quite regularly. Just in general cases, can you comment about how you've seen your mix change as restrictions have been relaxed relative to what your mix was, say, six months ago before the impact here? Maybe the other question, you've got a couple of photos of your Free Ranger product in the pack, but you didn't talk to them too much.
Can you just talk to Free Ranger and some of your plant-based protein products that you're looking at and what the impact of those have been in the market so far? Obviously early days.
Why don't I start with that? We are very pleased with the results we're getting with The Free Ranger. Specifically launched it in one retailer and expanding distribution there. We are also, I think I mentioned in October, in Strategy Day, we've opened the lens of our organization to not just be a poultry company, chicken, turkey, but we're also looking at proteins. We've been working on a number of products that are plant-based proteins, and those are the two first launches, although they've only been in market a short period of time, they are exceeding our expectations as well as our customers' expectations. That's good. We have a number of other things in the pipeline, but there has been no material impact based upon those because it's a, as you know, a slow build.
Just in general terms, what I've seen since the impact of COVID-19, which is new to all of us, and just in general terms, it's almost to state the obvious, but as restrictions go up, there is, to your point, a huge change in shift and mix. As Jono mentioned, when we supply QSR, we supply all the big QSRs. You can imagine that we're producing specific products for those specific customers. When those close down for four to five weeks, that has a significant impact on everything from live birds in the field all the way through finished product. Typically, the higher the restrictions, the first to close are QSR and food service. There's a major shift, and then we see the huge uplift for a temporary period of time in retail as people continue to panic buy.
We've seen this out in both currently in Victoria, we're seeing it again in wave two, and we saw it initially in New Zealand. Scott, I don't know if that answers your question, but that's the way I view it.
Have you seen, though, as restrictions have been relaxed, have things gone back to, and I'm talking in inverted commas here, "normal"? Are you seeing still, and it's early again, we haven't relaxed things for very long, but are you seeing things switch back to how they were? Is it a bit of a long, it's a quick change when restrictions are tightened, but it's a slower change as things get relaxed?
Yeah, I think the impact on QSR is quicker, but the impact on food service, meaning out-of-home consumption in restaurants and pubs and so forth, is much, much slower.
Yeah. Okay. All right, good. That's all I had. Thank you.
Okay, great. Thanks.
The next telephone question in the queue is by Mr. Phillip Kimber from Evans and Partners. Please ask your question, Phil.
Hi, guys. Also, I just want to pass on my thanks for the extra info in the slide deck. It is really helpful. On that point, just looking at the fourth quarter, and exploring this inventory provision, I heard you mention before, it's not a write-down as such. It's more around, you look at your closing stock and maybe the prices that you can sell it for going forward aren't as high as they otherwise would've been, you have to adjust. Is it as simple as just adding that back in Q4 and saying, that was sort of a one-off as such?
Should we think that in the first quarter of this financial year, you've still got COVID issues, suppliers still in an excess position, that you may have to continue to readjust inventory through that first quarter, and so it's more of an ongoing cost that's representative of a tough market rather than a one-off type expense? I guess I'm just trying to understand that a little bit better when thinking about FY 2021.
Yeah. I'd be happy to. I'll turn it over to Gary here in a second. I see that there's quite an interest in slide 10, and I do want to emphasize something relative to the fact that historically and going forward, we normally won't be talking about quarters. In any time there's an extraordinary situation, we want to make sure that we're providing people as much information to understand what's going on as we possibly can. That's the reason we put that in there, and I think your questions are spot on. Gary?
Okay, Phil. Thanks for the feedback on the deck. In regard to inventory, the way I think about that going forward is, as our levels of inventory decline, then naturally the provision will decline as well. Now, I accept that there is some mix in that question. I think the answer is, it's a bit of both. It's partly due to just the market at the moment under the COVID demand signals. It was also the build, which will reduce over time. For it to completely go away, we need both the inventory down and the market to come back to normal demand, if that helps answer your question.
Yeah. No, it does. I just didn't want to take the, whatever it was, AUD 36 million in the fourth quarter, add back nine and say, "Okay, that's your first quarter starting point." Because I got the sense maybe that's where some of the questions were heading, and I just wanted to understand for myself how to think about that.
Yeah. I am sorry. Another quick way to think about this is, as we are taking finished product out of frozen inventory, obviously we are not producing it in the plant, that does have an impact on overhead absorption and everything else. Structurally, if I understand your question correctly, ongoing, if we ever get back to normal, we do not see any structural changes in our cost of inventory.
Yep. Just on exploring the feed costs, you said you've got typically three to nine months cover, and you're sort of implying the market's tight at the moment. You've been having to buy some, which is why feed costs are probably going to stay elevated in the first half, or maybe three quarters. Hopefully with the drought breaking, wheat prices potentially come down as the crop starts to look better. Would it really come through in the fourth quarter? If I take the three to nine months, just call it six, add, what is it, 15 weeks or 13 weeks to grow the chicken. I sort of was getting more first quarter FY 2022, I just wanted to understand that a bit better.
You're right. A lot of people talk about poultry in 12 weeks, because from the time you hatch a chick until it goes through the process. It's even further out than that because we are physical buyers of grain, we physically buy the grain and then it has to be delivered to one of our feed mills. It's converted, taken to the farm, fed to the chickens, I could go on and on. I think it's an interesting insight that you have that, yes, there will be, assuming a good crop, impact on Q4, but it will definitely, again, assuming good crop in the first quarter of FY 2021. Gary?
Yeah. I'll just add a little bit more color to that. First, that we do hold stock, we start buying, hopefully, reduced cost grain when new crop comes through. We'll still have some old crop to run through as inventory through our feed. Possibly the thing that people don't think about is when we're feeding chickens, we're feeding both chickens that are growing and coming into meat, we're also feeding the breeder chickens as well. By the time it goes to the breeder hens, then into eggs, then into growing, and then into the plants, there is a longer lag than you might initially think.
I'd like to take this opportunity to congratulate Gary on knowing so much about the poultry business in his first year here. Thanks, Gary.
That's great. Yeah, it's more that it hopefully starts to benefit from Q4, but it sounds more like it's the following year, as in FY 2022, where it really kicks in. That's w here I was going. It starts in 4Q, but it really kicks in in FY 2022. That we have a good crop and all the things we just spoke about.
That is correct. I've said this before, and again, one of the purposes of answering these questions and having this dialogue and being open, honest, and collaborative with everyone we deal with. I think a good way to look at this business is on the procurement and grain side. That will impact this business significantly. There's three parts of it. In the middle of it is how well you do in an operations mix and all of that. On the right side of it is keeping an eye on the wholesale markets and what the pricing is there.
Yeah, that's great.
You're asking all the right questions.
Thanks, Phil.
Is that it, Phil? Okay, thanks.
Our next telephone question is from Paul Buys from Credit Suisse. Please ask your question, Paul.
Morning, guys. Thanks for your time. I know there's been a lot of questions. There's just a few quick ones from me. The first one just on, you've given some great commentary on some of the ongoing challenges, including managing supply and the Victorian situation. I was just keen for maybe a little bit of color on, obviously, you guys have got a national supply chain. Just a bit of color on how you think that sets you up from a competitive perspective with the advantage of having that national supply chain versus your competitors, obviously one big one of which is national as well, but just interested in a bit of flavor in that regard as to how you cope versus the rest of the market?
Yeah. Being not only in basically every state, national in Australia and across New Zealand, which is unique to Inghams, it's a huge competitive advantage. It's pretty obvious that if we have a problem in one area, you can go to another plant and ship across state lines and so forth, assuming that they're open and being an essential service provider, we've been able to do that. Yes, the larger scale producers are in a much better position to manage through this, I would imagine, than, say, if you had a single processing plant in Victoria, which in fact happened, and if you have to close that plant, it's going to have a fairly significant impact on your entire business. Does that answer your question?
Yeah, thank you. I was just thinking that there are obviously some regional players that are Victorian-based. Just interested to see how if you can use that supply chain to some extent in your advantage.
Yeah. I will, but I also want to make sure that everyone understands that the last thing I want or anyone wants is for anybody to be impacted by COVID-19. We don't want anyone in the poultry industry to have to deal with closing their plants and so forth.
Of course. Understood. Thank you. Just a quick one in terms of your CapEx plan. Just given your comments around the ongoing obvious challenges from COVID and some of those residual uncertainties, does that have any impact on how you think of your CapEx plans over the next 12- 18 months?
Yeah. I'll have Gary give you some specifics on it. We had a couple capital projects, we've talked about the spin chillers. We talked about those two spin chillers in two different plants that were to be installed. COVID has impacted that. They basically were sitting in the parking lot because we couldn't get people internationally here to help us install them and so forth. That has impacted our capital spend because we've had to halt a number of projects for a period of time. Gary, do you have any more specifics on that?
That's the factual situation. Our major spend at the moment, and looking forward, is the Victorian W.A. hatchery projects. We've continued with those throughout this period. We gave some dates when we think they're operational, but did have the qualification of their COVID access. What I could mean by that is some of the specialized HatchC are gear normally requires visitors from Holland to come and install and to test that. Assuming that we don't, they'll continue to the dates we said, and that'll be the bulk of the CapEx next year, probably a similar level to what we had this year, is one idea that you can think about there. Outside of that, I think we'll remain very cautious with our capital whilst the COVID conditions being demand are impacting us.
Really, it depends on that one. As we're in the current positions, we'll be keeping things pretty tight as we were through the second half of last year.
Thank you very much for that, Gary. Last one, just Jim, you mentioned some of the initiatives that you've been putting through, having some of the benefits throughout this period and obviously, probably somewhat lost in all the various moving parts and the market disruption. I just came for a little bit more color, I guess on specifically which major ones are working as you would hope and to the extent that you see further benefits or you've got them done where you need to be going into the next 12 months?
None of the capital projects that were underfoot that were paused, other than, say, the hatcheries, depending upon we bring those back online and complete those, would have a material impact on our results. It's mostly just the good practices and best practices that we're putting in place, new continuous improvement processes and so forth, that we're starting to see the results flow through to the P&L.
Okay. Thank you very much. That's all for me.
It's okay.
Can I just add, Ari from UBS is having a few technical issues getting through, so if I can just pick up a couple of the questions that he's asked. Hopefully, that's all right, Ari?
Yeah. Thanks, Paul.
You talked about the impact between the different channels. I think Jim answered that one before. You were wondering how to think about CapEx, which I think just mentioned with Paul. You mentioned D&A, and you saw the uplift of D&A in the second half. Whilst there was a impact from a catch-up from Wacol depreciation, I think you can look at that, though, as a pretty clean run rate of that second half D&A. You talked about some flavor around the competitive intensity in the market and whether it's being rational, and I think I'll hand over to Jim for that one.
Yeah. In our two markets, Jono, you want to talk about competitive rationality in New Zealand?
Yeah, thanks, Jim. We talked at the half on that question for New Zealand, and I commented on evidence of more rational decision-making behavior from our largest competitor, perhaps relative to the prior two years leading into that, which got a bit of air time on these calls. My answer would be no different to what it was at the half in terms of the rational market. We do see it as being rational in New Zealand.
Yeah. Thanks, Jono, and I would say the same for Australia. No, we're not seeing any irrational behavior.
Hopefully, that answers your question, Ari. Could we go to the next question, operator?
Our next telephone question is from Belinda Moore from Morgans. Please ask your question, Belinda.
Hi, Jim and Gary. Look, I was just hoping, can you give us any sort of flavor of the extra costs of COVID impacting, that you've had to shut the plant and had to reopen? What sort of extra supply chain costs, et cetera, have you incurred from Victoria's restrictions in this first quarter, please?
Belinda, I'll take that one. Whilst we didn't quantify it in Q3 and Q4 last year, I'm not going to also try and quantify it in Q1. Sorry, I'm going to say I can't do that. Partly, it is actually a really hard thing to try and isolate what's specifically COVID as well. I think if I go back to trying to the theme that I was mentioning before, whilst the situations are different between the two quarters, we are still seeing that choppy demand, and we are seeing operational impacts occurring in different places. It's not like for like, but something solves in one place, and then it pops up in another place. We're seeing a continued run of those costs, would be the best way I could answer it.
Yeah, I would say, it's pretty obvious, but directly, when we had to close Thomastown, that would have a much more significant impact than anything else in the event that we were to have to close a plant. Fortunately, we closed that plant before anyone told us to close the plant. We just had, I think, three positives at that time, and we were very fortunate to only have to have closed it for 10 days. Again, I give the people at Inghams, all of our people who work so hard at this, I have to give them a lot of credit because managing this business with everything that's going on and the risk of the environment outside of work, is just absolutely a fantastic result to be able to get through all this.
I know a lot of people in this industry around the world who there are plants that unfortunately have had tens of people that have died. I think our team has done a great job. Thanks. Are there more questions?
No more further questions. Sorry, speakers. There's no further questions at this time. Please continue.
All right. Well, thank you, operator. I appreciate that. I just want to thank everyone for joining us today and your interest in Inghams. We look forward to speaking with many of you over the next few days, and I hope you all stay safe and stay well. Thank you.