Ladies and gentlemen, thank you for standing by and welcome to the Inghans Group Limited 2019 Annual Results Presentation. At this time, all participants are in a listen Please be advised that this conference is being recorded today. I would now like to hand the conference over to your first speaker, Jim Layton, Chief Executive Officer and Managing Director. Thank you. Please go ahead.
Thank you, operator, and good morning, and welcome to the 2019 Full Year Results Call. With me today, I have Jake Kate Chandler, our Head of Finance, Tim Singleton, Chief Operations Officer and Marie Mooney, Feed Business Director and Craig Haskins, Investor Relations Director. Before we move on to the FY19 results and FY20 outlook, I thought it might be helpful to share with you my perspective on the business since arriving here from the United States in January. When I arrived here, I was charged with delivering the following: first, deliver first half results second, deliver the full year of FY2019 and third, develop a vision strategy and operational plan to set the business up for success and growth. And today, I'm pleased to announce that we've delivered on all of those priorities.
Today, we have delivered a 2019 result that I would describe as solid despite some significant challenges and growing headwinds. On October 22, we will be sharing with you our vision, our strategy and our operational plans at a location to be determined. I said at the half that I would not have traveled halfway around the world, if I didn't see this as a fantastic opportunity for Ingram's. After almost 42 years in the food industry, including 1 of the largest poultry companies in the United States and having had the opportunity to travel internationally extensively. I know what the best poultry companies look like.
In my perspective on what is required to deliver the potential of inghams is extremely clear. The opportunity here is better today than I thought it was when I arrived, but there are a number of things missing that do require my attention. The challenge of unlocking the potential of this 100 year old company is one that I and my new team have brought together. We're really excited to get after that. So with that, now on to the results themselves.
Volume growth of 4.3% reflected the competitiveness of poultry as an affordable protein source despite price rises in various channels, with good demand from our customers and our consumers. The various contractual arrangements we have in place delivered the intended outcomes of partially passing through higher fee and other input costs. Our market position is strong and we've seen some benefits from working on optimizing our mix. We delivered solid returns despite higher input costs and the challenges facing our New Zealand business, which reflected both the market dynamics and also the inefficiencies across our network. Strong operating cash flow is a feature of the business and once again, we delivered solid result.
Cycling in the implementation of the payables facility in New Zealand, In the first half, our second half cash conversion was over 100% and at 84% for the full year. One significant call out is the fact that our further processing optimization project has not delivered to plan. Unexpected demand could not be served by the rationalized network, which resulted in increased costs and an unfavorable mix. Our Q4 performance softened as a result of this FP situation as higher grain costs negatively impacted across our business. Enghams is now on a solid footing with new leadership team in place with the exception of Gary Mallett, who's our new CFO, who will commence full time in October.
Critically, we've added new eyes and experience in our operations leadership. Today with me, Tim Singleton is our Chief Operations Officer, which is a new role here at Hinghams, and his job is to deliver on the operational upside that we have here. He and some of his recent hires, 2 of which are from the United States, bring a lifetime of experience from some of the largest and most successful poultry companies around the world. And I am confident we now have the right people with the right expertise and the right roles to drive some of you about the decision to wait until late October to share with you our vision for the future strategic and operating plans. My reason was really twofold, I wanted to wait until our entire new executive team was in place, and I did not want this earnings call to distract from what will be a great vision and strategy that we'll share with you on October 22nd.
Now turning to the financial highlights for the group. I will talk to and to exclude the impact core poultry volume grew at 4.3% with total poultry volume growing at 2.4% versus prior year. Underlying gross profit grew at 3 percent to $480,200,000 and underlying EBITDA grew to 2.9% to $208,600,000. The underlying NPAT of $103,200,000 was down 4.4%, on last year reflecting the impact of the previously flagged higher tax rate to 30%. Now, Kate will talk to these numbers more in detail later.
Underlying EPS was $27.8 per share and a final dividend of $0.105 was declared. There was a $0.33 capital return and also $36,400,000 was spent on the half on our stock repurchase. Our cash position and balance sheet remains strong with our underlying leverage at one 0.3 times. Now over to Kate to cover the financial results in some more detail.
Thanks, Jim. Looking first at the statutory results on Slide 5, revenue was up 4.9% whilst gross profit is up 1.4%. This is reflective of the prior year contribution of my device and the impact of 15 weeks of trading in FY 2019 compared to 52 weeks in the prior year. On a statutory basis, the EBITDA grew 14.2% and includes the benefit of the profit on sale of assets less restructuring. The dilution in the impact growth is attributable to the increase in the effective tax rate, which is well understood and now more closely aligned to the corporate tax rate.
Turning to Slide 6, where the underlying results reflect a more accurate picture of the trading performance. Group underlying revenue grew 5.9% in the year. In Australia, the revenue was 6.4%, up and in New Zealand, it was up 2.8%. Our gross profit is up 3%, which is broadly in line with our growth in EBITDA of 2.9%. The EBITDA margin, however, has been impacted by a range of factors, including a challenging market in New Zealand, whereby costs were not able to be passed on, record commodity prices and some inefficiency in the further processing network, including a self optimal channel mix.
The share buyback has had a positive EPS accretion, thereby seeing our underlying EPS down 2.2% compared to underlying NPAT, which was down 4.4%. On Slide 7, we've provided the standard reconciliation information between statutory and underlying results. Asset sales of my device, Cardiff and Mylan were disclosed in the half and mold and was sold in the second half. The impairment related to the sale of Malvern, a surplus chicken hatchery in New South Wales, which we bought and sold in the year. To permanently take out of the network.
You will see that we have incurred redundancies in relation to the management and structural changes in the second half. The majority of these are behind us, but we're still incurring some costs. Other network costs include crossover costs, as we commissioned the South Australian feed mill and our New Zealand Breata Plumb. At the half, we disclosed an onerous lease provision on the Cleveland further processing facility. And as Jim referred to, we've actually incurred some costs into the profit and loss in fourth quarter as the project has not delivered.
This has hit the operating cost line and will continue to do so for the first half of FY twenty twenty. Now turning to the cash conversion for the full year. We've actually prepaid some expenses, so this could have been slightly higher. The inventory financing facility, which we used to manage cash flow relating to raw material purchases, was extended to New Zealand in the year. This added $54,600,000 to the facility throughout the year.
And as at year end, the facility was fully drawn to 94,700,000 The full year cash conversion, excluding the impact of inventory financing, was 84.4% and in H2, was 99.7%. CapEx of $74,100,000 is in line with expectations. Of the capital spend this year, approximately $25,000,000 was spent on projects that will increase harvesting capability, automation, or throughput to drive efficiency and value. We spent $39,100,000 acquiring Wake Coal Carter, Pakenham and Maldum properties in the year. In addition, we spent some $9,000,000 on deposits relating to FY 'twenty capital expenditure, specifically automation and hatchery equipment manufactured in the Northern Hemisphere.
Moving now to Slide 9. Leases under AA's B16 are going to be accounted for from 1 July using the modified retrospective transition approach so we will not be restating prior years. As you will be aware, the adoption of AASB 16 leasing standard has no impact on the economic performance of the business, cash flow or debt covenants. The initial recognition of the right of use asset and lease liability will be circa 1,800,000,000, reflecting the long duration of our leasing arrangements. And as noted, the FY20 statutory impact is forecasted to be an estimated $21,000,000 lower.
Our continuing approach will be to present the statutory and underlying results so that you can see the performance of the business without the impacts of leasing.
Thanks, Kate. Now turning to an overview of the Australian and New Zealand segments. Australia performed well with poultry volume growth of 5% and revenue growth of 7.1%. Our ability to offset input costs was demonstrated and our margin was solid. Although towards the end of the year, as we recycled higher input costs, we did start to see some pressure.
Retail channel performed well in what was a competitive market. And as has been widely discussed, there were price increase passed to consumers on some lines and there was some impact on volumes. Positively, new product development and broadening of our customer volumes show good signs for the future. The QSR and foodservice channels continue to see strong demand, particularly for our further process products. You will have seen strong promotional activity in the marketplace, which is driving much of this growth.
The wholesale channel delivered to expectation, albeit some pricing softer in the second half. And we are opening up untapped export markets as we enter FY 2020. Overall, our feed business performed well but on lower volumes. Experiencing and are now realizing some positive momentum. And the new team is doing a good job in turning that business around.
As you can see, the numbers reflect what was a tough year with flat volumes in poultry and lower feed volumes. We saw a modest tick up in revenue due to some positive signs of pricing in the second half as the market moved to a position of lower supply. Costs were up mostly from feed, but we also incurred additional costs resulting from the loss of free range farming capacity that we discussed at the half. We did call out that we are on track for I think it is more prudent to assume though that the benefits will really start to be realized midway through the second half of the year You can see the significant impact to margin year on year. We expect year on year growth, but this is a multi year turnaround.
Now turning to the was to develop a 5 year strategy and operational plan. This plan had to be supported by organizational structure and people that have the right mindset, capability, capacity, experience and diversity to unlock the latent potential of this company, or someone said, Jim bring bricks, bring mortar, and bring your rolodex. What was clear to me was that there are many great people at Ingram's who are engaged and passionate about experience that is required to really pull the pieces of a poultry business together and to maximize shareholder value. Poultry operations experience is earned over many years and in many cases, generations of being in the business and seeing operations from every angle. It is both an art and a science.
A critical area that I spoke about at half was the importance of balance. You have to know your energy, capital, and even more importantly, where not to. Ours is a very dynamic business that requires deep expertise and experience to unlock potential. Our newly assembled leadership team brings world class experience and expertise from some of the biggest and best poultry companies in the world. Let me speak about His job is to ensure that all parts of the supply chain are aligned, that they're linked and synced, and that's what I call being imbalanced.
Anne Marie Mooney, who you will hear from shortly, manages our feed business and Calf Balding runs our technical services, including the crucial function of animal nutrition. These 3 leaders are working collaboratively to maximize the economic outcomes of our bird performance. This is a great example of why say structure needs to follow strategy. We now have Chris Cruz in the seat as head of sales in Seb Brandt to lead marketing strategy and product development. Both of these executives bring extensive experience in FMCG Marketing And Sales both domestically and Internationally.
Now let's move to the business update. The new operations leadership have quickly evaluated the operating performance from world class, but very competitive within Australia and New Zealand markets. Our focus is simple. In what some can be viewed as a complex supply chain. Our operations teams are after the opportunity to utilize the latent capacity of our assets.
I have referred many times that all the parts of our business are properly linked in sync so that we get our customers and consumers what they need when they need it as efficiently as possible at the highest levels of consistent food safety and quality and in the volumes required to meet their demands. We are moving from projects accelerate to operations excellence. Continuous improvement will be part of the DNA under this new leadership team. We have begun to significantly simplify our business, building and implementing best commercial practices, all with a growth mindset. As I noted earlier, the review of all CapEx plans has been completed and have been adjusted by our new team to focus more on getting more out of what we already have.
Now to the feed markets, now I'll hand this over to Anne Marie.
Thanks, Jim. Moving to Slide 15. Feed prices have remained high. They are off their peaks, but the outlook from here is dependent on the coming months and whether we get rain in the southern states. If we get that rain, prices are likely to moderate, but right now the market is relatively illiquid as farmers and buyers wait for more certainty of those crop yields.
Our strategy has remained flexible around our coverage, but we are well positioned for the range of market outcomes. We continue to investigate alternative procurement strategies, but our primary focus is ensuring that we get the balance between our feet and nutrition costs and paid conversion rates.
Thank you, Emory. Now moving to our FY 'twenty outlook. Poultry continues to be the animal protein of choice as beef, lamb and pork prices rise and are projected to do so well into the future. Our key customers are experiencing success in the market in poultry and with the products that we supply. As we have noted we are well positioned in feed strategy.
Waiting for the rain on what has been a multiyear drought. We are cycling through the highest feed costs right now and we'll continue to do so into the first half of FY twenty twenty. Our margins in Australia are being impacted as we cycle these higher input costs. We have a variety of mechanisms in place that are working, and we have longstanding relationships with key customers that we're partnering with to help them grow their business profitably. Our further processing network rationalization project has not it was under Project Accelerate.
I'm not sure there will be or I'm sure there will be questions on this, so let me summarize it as follows. Cleveland have shut in the third quarter with the production volumes and all associated complexities moved to other further processing sites. What was not anticipated in this planning with stronger customer demand. The result was higher complexity, higher costs, unfavorable mix on top of higher feed costs. Having demand outstripping supply could be a good news, bad news situation, but this really harmed the business.
We know the issues and we're fixing them both short term, midterm and long term the impact was starting to be felt in FY 2019, but there is a real financial cost in FY 2020. As noted, New Zealand outlook is positive, but we have a way to go before we see the sort of performance that we've seen in the past. As stated earlier, this is a multiyear rebuild. So what all this means is that we now expect EBITDA in FY 2020 to be below underlying EBITDA So in conclusions, number 1, Ingram's is a very healthy business. We have a great market position in a category that is growth.
We have solid balance sheet and excellent cash flow. Operationally and commercially, Ingram's has a tremendous upside Number 2, we performed well in FY19 and have largely mitigated costs to date, but now are facing headwinds in FY20. I have assembled a new leadership team who are aligned and passionate and capable number 3, I see more opportunities today than I did when I first arrived and we are after these opportunities. However, it does take time to see the benefits of all these changes flowing through to our financial results. And 4, the strategy is complete.
And whilst not to preempt our discussion in a few months, the simple objective of this strategy is to deliver consistent, reliable and predictable earnings and take advantage of the growth potential that exists in our markets so we can maximize shareholder value. And with that, operator, I will take I'll hand it over to you for questions.
Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Craig Woolford from Citigroup. Your line is open. Please ask your question.
So can I just understand the, I guess, 2 issues that you've highlighted with respect to the, Cleveland plant closure? 1, you called out higher costs and 2, you called out an unfavorable mix. With more volume, it's hard to understand how the price where the cost per kilo actually rose, but I guess that's what the inference is. So if you can give a bit more color as to what exactly increased the costs And what is the unfavorable mix actually referred to?
Yes, I'll highlight that for you, Craig, and then I'll turn it over to Tim Singleton to put some more color to it. But basically, what happened under accelerates, we had a project to consolidate our further processing network as a result, we closed a plant. And the reason that we, as I understand it, the reason that we are going to close that plant is we we're anticipating actually losing some demand in just the opposite happened. So we closed the plant and demand actually went up because the promotional activities from a number of our customers were extremely successful because we have longstanding relationships with those customers, our priority was to service them. But what that resulted in is us not servicing certain other channels, which did have a negative impact and mix.
So that's number 1. Number 2 is because we had a number of SKUs running through this facility, they were basically transferred to the other facilities, which increased the number of billing materials, number of SKUs that were being produced in those facilities and significantly impacted the financial performance of of those facilities, everything from downtime to just kind of trying to manage that complexity. So Tim, do you have anything else to add to that?
Thanks, Jim. I think he cleared up the biggest portion of it. I think that's fairly clear and fair to say that the overall income complexity and the time it took between making product adjustments on the line, created a tremendous amount of idle time within the plants, which drove our cost per kilo up, just simply because lower kilos being produced on a weekly basis. So Craig,
what we have, is a short, I mentioned in my comments, a short term and mid term and long term fix to this. Immediately approved putting some basically it's a minor capital been in one of our further processing plants to increase the capabilities and capacities within that plant. That will take place probably mid October or so. And then we have a midterm solution and then a longer term solution.
Yes, I mean, listening to you, it's interesting that you've retain more volumes, which is clearly a positive. I guess any question is whether you've got the capacity medium term to, service those customers or volumes?
Yes, I use the term with this new team in place. We've shifted the company to a more growth mindset. So we are going to make sure that we have sufficient, but not too much capacity available for us, especially our strategic customers. As I said, it's a good news, bad news situation. The good news is the demands there.
The bad news was we decided to close the plant and couldn't service that demand profitably.
Okay. And my other question was just on the pricing environment. A few of your comments suggest there's some challenges sort of building on pricing wholesale pricing has come off a bit. More recently, it looks more challenging to get fee costs pass through. What do you think is playing out there?
And kind of related to that, I'm interested in where you think any problems have emerged around pricing discrepancies between channels? It looks like different parts of the poultry market has seen different price rises over the last year, not just things that have cost the market, which can cause headaches around channel mix as well.
Yes, I'd be happy to talk about it. And before I get into the specifics, I talked in my comments about the importance of balance. Another thing that's really important in this business, pretty obvious, but it's mix. And it's not just mix of product, it's mix and channels. And it's also a close eye on the wholesale market to make sure that we keep that to the extent we can, healthy.
But a lot of conversation in the first half after I arrived was on the barbecue bird. And we did see at one time, I believe, barbecue birds and retail selling around $12 or $13 is my understanding. They were reduced in that channel to about $8 or $9 and significant mean, we couldn't keep up. And then so I'd say they're back around 10 dollars, 10 dollars, $11 and as water does, it kind of finds its level. So that's good news.
I think we are at, again, a relative balanced situation with that. But as I mentioned earlier, protein remains attractive relative to other proteins, beef, pork, everything is increasing significantly and poultry continues to be a very affordable or poultry continues to be a very affordable protein.
Yes.
Your next question comes from the line of Paul Baez from Credit Suisse. Your line is open. Please go ahead.
Good morning, Jim. Hi, Paul. Hi. First one, actually, just a follow-up on Craig's one there because So it still wasn't clear to me. Obviously, input prices, as you guys pointed out, there's still some uncertainty and they're down a bit close to historic highs, but maybe I'm reading this incorrectly.
It still feels that your rhetoric around prices now is that it's harder to pass them through than it has been over the last 12 months or so, whereas over that period, it appeared like you were doing that relatively successfully. I just want to put for absolute clarity, kind of establish it actually gotten harder or you're kind of calling out more of the same as regards input prices and the pass through implications?
No, the mechanisms that we had in place, and we I think related earlier that we were able to about pass about 60% through that are on those mechanisms. Those mechanisms work well. 100%, but one of the things that I've kind of brought into this company is the experience I have in poultry. And one of the things we have to realize is that when feed costs go up, you're basically growing the chicken and you're selling about half of it, with the breast meat, the thigh meat, the wings, and in the different parts through the various channels. The for instance, defeat as an example or the pause, as I refer to them back in the States, It has those higher input costs in those, but you're not those those that part of the bird is not on mechanism.
So the impact of higher feed costs going to impact about 50% at least 50%. And then of the parts that we sell with 60% on mechanisms, So the our ability to pass through price is working. And I also mentioned that when initially we at retail, when the retailers increased the price, it did have an impact on volume, but now volumes are coming back for barbecue birds and it's quite healthy. Because I think we're kind of, again, back in balance. Does that answer your question?
Yes, that does. Thank you. And And on the, the retail price increases that went through that you called out had some impact on volumes. Is that very product specifically, talking about barbecue bird specifically, are you talking about kind of poultry as an overall class? Because I always thought that the step up for the consumer to other proteins in terms of dollar per kilogram outlay is still material that wouldn't have eroded poultry's competitiveness, but are you saying those specific products or more broadly?
No, I was specifically talking about the barbecue bird because of the first half. That was really the conversation because that's about right at time that, that feed costs were hitting us and the price was going up and there was a disparity in the market relative to what certain retailers selling their products for. But no, the rest of it's pretty healthy. We're seeing really good volume growth in breast meat and thigh meat and so forth across the complex.
Got it. Okay. And Jim, just one on New Zealand then, which you've indicated is returning to year on year growth a little bit below historic levels. I was just keen to break that down into two segments in terms of or 2 drivers, one being the market and the relative rationality therein. And the other being, I guess, kind of being in specific issues that were incurred around, on the growing side last year.
Just keen to know how each of those are playing out and sort of the trajectory for recovery.
Yes, I'd be happy to. So most of you know that we are the number 2 competitor relative to size in the New Zealand market. And there have been some ownership changes in who we compete with there. And as we mentioned earlier that we kind of viewed a them as having a flawed strategy during some of this transition where it appeared to us at least that what they were going after was to basically put in additional volume and sell it internationally. It appeared to us that that didn't really work.
That impacted the wholesale market that product was basically dumped in New Zealand. Therefore at the half, we talked about the fact that we were impacted by much lower wholesale costs The ownership of that company has changed. The leadership has changed. And publicly they've talked about this that it is and we're seeing this, it's much more of what we're referring to as a rational, rational decisions and rational market out there. So that's good.
Relative to the turnaround of the company, because New Zealand, we talked about this at half, has been historically at times a very, very solid business for us. But what ended up happening is during this then they're related to these 2 subjects. What happened when our competitor was increasing volume. They, some of our growers, especially our free range growers moved over to to help support them. We lost capacity and that significantly impacted us.
So we said at the half is by the end of this calendar year, we would have that back in place. We're holding to that. We are on track to do that. But my comment earlier was it, although we do have it and will be in place, it going to take a while
Yes, thank you very much.
Yes, thank you. And my last quick one is just, I think I heard earlier in your presentation you referred to perhaps looking to tap some untapped export opportunities for inghams themselves? I mean, that seems to be a bit of a departure from historic domestic focus. Just wanted to if I understood that correctly and if so, what the focus would be on?
Yes. So I'd be happy to. So it's amazing what happens when you bring people, especially with no background into the domestic market and they start asking questions like, I'm surprised we don't do this or I'm surprised we don't do that. And I was quite frankly surprised in the company I was with in the United States, for instance, I'd say 90% of what we there called the Paws were exported and sold in international markets. So international least from where I came from, it was a much bigger channel and a much more strategic channel for us than it is at Ingram.
So in answering those questions, I had some people go out and take a look at what opportunities there are and there are. And so, we're starting to realize that. And we also have relationships with international customers. So we're engaging with them relative to how we can help them grow their business internationally.
Understood. Thank you. That's all for me.
Okay, great. Thanks.
Your next question comes from the line of Ariane Narosi from UBS. Please ask your question.
Hi, Jim and team. Just first one for me, just around your gearing. I think when you adjust for some of the payables you've factored and you get up to about 1.8 times, if I'm not wrong. What level of basically my question is, what level of gearing are you guys comfortable with taking the business?
I'll take that question, Jim.
Yes, Keith, good. Thanks.
Our underlying gearing was 1.1.3, up statutory was 1.1. I think we're going to sit in that band of 1 to 1.5. Won't be moving past that, not for FY 2020.
Perfect. And on the fact that payables side or the inventory financing, do you get a gross margin benefit from obviously paying suppliers early from getting the finance? No. Yes. And just around the contract piece as well, Are there any contracts to call out?
Obviously, not naming any particular names, but just anything that's due to expire within the next 12 months? Know the Woolley's one is in 2021, but any other ones you can call it?
Yes, we're not going to refer to any, as you said, to any, any of our customers as it relates to contracts. But first of all, none are expiring at the same time and we don't have any significant Contracts expiring in the short term.
Perfect. And last one for me. Sorry. Did you guys get any sort of hedge in fiscal 'nineteen from feed prices? Any trading gains or losses?
No. So I'll take that question. Look, in FY19, you know, we are largely a physical buyer of Graham. We use a range of financial instruments, but there was, there was nothing that we would call out say that we were we made any significant profit or losses from any of the FEED contracts that we held.
Your next
question comes from the line of Scott Ryle from Remo Equity Research. Your line is open. Please go ahead.
Thanks very much. Thanks for the call. Jim, I was wondering if you could just comment a little bit further around the demand that you saw from some of your long standing customers that have had successful promotional activities. In your mind, are they literally just, opportunities that were due to improved relative affordability of chicken or is it more value add product and other things that seem to have been pushed as well?
Yes, I think what we've experienced mostly was the affordability of poultry as an affordable protein. However, we did have, especially with one customer, significant volume based upon some value added products as you referred to them relative to new product innovation some things that we're working there. So we're anticipating to keep that funnel full and making sure that we're showing our customers a lot of really good opportunities to drive their their volume and their profitability with some new innovative creative products.
Okay. And presumably that's probably please answer my second question, which is around, the capacity that you've talked to and trying to have capacity to service, the growth. Is it what in your mind is the key to, to operating with flexible or capacity flexibility to be able to, to go up or, you know, in the worst case down. And is that capacity Is it around what you do currently, or is it increasing the range of products to be more nimble, I guess, in the marketplace, depending on what the end customer demand is?
Yes. So there's a couple of things in that we're doing as it relates to capacity. First off, the way we talk about it, and I might have Tim jump in here. I've introduced a new term here, and I've introduced a lot of new term, that the new team is basically it's in their vernacular and it was not in the inghams vernacular. But I characterize what we're doing is we have too much complexity.
We have over around 2000 SKUs in this business that's way too many skews, which creates upstream, all kinds of issues relative to the bill of materials to support those downstream, all the complex these, everything from transportation to warehousing to conversion and everything else. But the term that we've introduced is this term of overall equipment effectiveness. And basically it's the proper way to look at any manufacturing plant in any supply chain And with that, Tim, maybe I'll turn it over to you relative to what you've seen since you've been here and going through some of our facilities. Sure.
Absolutely. Scott, we've looked at several items throughout our operations. And the biggest thing that we challenge first is is where our choke points, where our bottlenecks are throughout the process. And so when we go into looking at our expenditures, we want to be able to remove those bottlenecks through. And be able to improve our capacities within the system itself that we currently have.
By implementing the OEE process, We can regulate ourselves on a fair comparison between our locations of how we're absolutely running each individual facility on a regular basis and hold ourselves accountable to that.
Yes. So along those lines, I used to have Tim's job at a number of different companies. And one of the things that within those within those companies, if we went if and I was in operations for most of my career, So if we were going forward with a capital request, you would have to show an OEE of at least 75% world class is 85%. And what that is, is it's a measurement against theoretical max based upon the choke point of a process, which is defined. And I don't want to get into the details, but defined by the original equipment manufacturer.
So like in a further processing plant, if our fryers can only do so many nuggets as an example, that's where you would start. And so, we have so much unlocked capacity and capability in our plants now that teams here. And that's why I said in my earlier comments that although the capital plan was completed, I asked them to take a look at it and they came in and said, Jim, let's hold on this. Let's hold on that. At the first half, when Ian Brennan was with me, we were talking about the past ability of a fairly significant capital spend in a primary processing plant.
And we basically have put that on pause We are always going to make sure that we have the right capacity, but not too much, but not too little. But the big unlock for me that will flow into especially FY 'twenty one is the unlocking of this late what I call latent capacity that we have.
Okay. And are you able to quantify where you're running the moment of 75% is your benchmark that you and 85% is 15%?
No, I can't because we don't have the measurements in place yet. But as soon as I do, I'd be happy to tell you. But it's significantly lower than 85%.
Okay. Great. And then the last question I had. If I can, it's just around, and this is your, I guess, your typical analyst question, what do you mean by significant? So Are you able to quantify the impact you saw from some of the capacity shortages in the fourth quarter?
And give us a little bit more about what do you mean by the financial impact will be significant from your I guess the lack of capacity that you have comment?
Yes. So I think specifically, if I understand your question, it had to do with this project under Project Accelerate, which was the rationalization of further rationalization of our further processing facility. Is that correct? And then what the financial impact was and when we incurred it and to what extent. So, Kate, if you could take us through that.
Okay. Okay. So I think what you're asking for is really what does our commentary outlook mean? Essentially, the board's policy is not to give guidance. But to give you a sense of what we feel has happened to you.
The underlying result was 2086. You'll see in the remuneration report we didn't pay bonuses. The reason for that was that the board felt quite rightly that the senior executives didn't pass the gate. We had a lot of issues like the FP rationalization that simply meant that it wasn't warranted.
And if I may go back to a finer point on that remuneration report, of course, KMPs are the only ones that are required to be and are in the remuneration report. And Kate, I think that reflected about what $3,000,000 or something of short term incentives that were not paid and should not have been paid. And I totally supported the Boris's decision in that, a variety of reasons. But there are a long list of other people that are not in that report. So the number is much greater than that.
Yes. So if I take the KMP plus I take the other senior managers that are not disclosed in the RIM report, the operating number would have been, let's say circa 204 $1,000,000. And the cumulative impact of what happened in, Q4 whilst was not pretty with circa $10,000,000 off. So that has us off consensus by about, $214,000,000. The combination of Epi costs and lower margin are accelerating accelerated as we got to the end of Q4.
And we have a lower run rate. So looking to FY 'twenty and as we're cycling these issues into, into Q1 and Q2, we're looking at the turnaround plan that is taking some time in FP. The cumulative effect will be potentially greater than the $10,000,000. This plays not only to costs, but to some opportunity costs with our mix. We can't immediately address.
We're experiencing some higher input costs, and that's not unexpected, but it will endure for some time. The impact on margin is magnified by the fact that we are pushing through higher volumes through a network that is out of balance and won't not able to deliver the sort of unit cost reductions that we should be doing to offset these costs. So in summary In Australia, we have a demand problem or a cost problem that is simply too high. And in New Zealand, whilst the turnaround is underway, H2 is slightly ahead of H1. We are expecting mid single digit growth this year in New Zealand.
Does that answer your question?
Yes, it does. Thank you. So and just in terms of the additional costs around sort of processing, is that a twenty issue only. You expect to have that sorted by the end of this financial year?
I might hand over to our operations people, but I Absolutely.
Yes. So Tim, maybe you can speak to the short midterm and long term solution for capital. And From a strategic perspective, again, I think it gets back to the shift of having a mindset to work with our customers and really understanding consumers. In what the real drivers are, but we need to stay just ahead of the demand curve on this as far as our capability to supply. And that is the shift in mindset versus I think in previous years, it was more around accelerate cost out and now we're focused on growth, profitable growth.
Tim?
So we're looking at, I have the responsibility of looking at all of our CapEx and OpEx finances, what we spend, what we don't spend. We've challenged the teams with ROIs on every capital expenditure that goes out and hold ourselves accountable to make certain that we recover that ROI in the timeframe that we committed to. We have pushed off and pushed the pause button on several capital expenditures that have been requested simply because there was no return that was being shown or in the fact that it was growing in the wrong areas of where we at our business to go. So to Jim's point of where we grow, it needs to be based on a customer perspective as well as how we increase our productivity through the system.
So if I might, I'll put a finer point on that. In the United States, there are 144 poultry facilities that are in something called AGGRASTATs that measures their performance monthly. And those all roll up to I don't know, maybe about 50 or 60 different companies. And every month, this service, financial service called AGGRASTATs, provides those companies with everything from top line profitability bottom line profitability all the way down to how each one of their facilities is performing all the way down to a yield in plant as an example or your efficiencies of labor, all that stuff is reported. And then it basically gives you your relative ranking among those 144 plants.
As well as the different companies. And Art, who is now over from the United States, who has he's a multi generation poultry guy, basically, when he came back from one of our further processing plants, I said, where were you this week? He told me, and then he basically said to Tim's point, He said, Jim, with very little capital, he told me and he told me what he needed. He said, we can get double what we have in this plant out of that particular plant. And these are the things that we're coming across with now this new leadership team in place under Tim's Tim's Watch.
Okay. Understood. That's all I had. Thank you.
Okay. Thank you.
Your next question comes from the line of Phil Kimba from Evans And Partners. Please ask your question.
Hi guys. I was wondering, if you could provide some sort of guidance around what you think feed costs will increase in FY 'twenty versus, FY 'nineteen to sort of broad sense. You said that's still impacting. I mean, you're expecting it to be up another 10% in fiscal 2020 or some sort of broad view on fee costs?
Yes, Phil. I'll hand it over to Ann Marie in a moment, but I was happy when I woke up in Manly this morning that it was raining. Of course, I called Emory and Pfizer, it was raining in the right place. So we are right now, experiencing and converting our highest feed costs since we went public. And we have typically and we stated this publicly, our position at Feed and I'll let Amber talk more about this is from a risk management perspective, we typically go somewhere as far as physical purchases somewhere between 3 months 9 months.
And it depends if it's a rising market or a falling market and what our best outlook is relative to the crops and so forth. So that's kind of the context of which Ann Marie will talk about and answer your question.
Thanks, Jim. Yes, to answer your question, Phil, Look, at this stage, all indications, if you look at where we were in FY 2017 relative to where we are now, and where we have been, you know, prices has have nearly doubled, so just in terms of wheat prices. I guess the outlook's looking quite positive, but we're cautiously, optimistic. We still do need a fair bit of rain for this crop to actually finish. If the rain actually hits and the crop does finish, then we do expect that we will get some relief in our wheat pricing and, of course, our feed costs.
But really, the telling time will be in the next 4 weeks, and we'll have a much better indication going forward. As to whether our feed cost prices will actually sort of drop, but it is largely contingent on that crop.
Yes. So our outlook, it's said another way is basically, it's not best case and it's not worst case. It's we think it'll probably be somewhere in the middle.
And just to sort of understand that more, I mean, if you're, we're sitting here in, late August, you're saying 3 to 9 months. So let's call it 6 to make the the midpoint. And then it's gotta get through, obviously, the chicken has to grow the process and then sold. So I would have thought even if fee costs say we have a good season and fee costs start, spot wheat prices come down, you're not actually going to get a benefit that until FY 'twenty one, because if you're already hedged for 6 months now, plus it's got to get through the supply chain, we're sort of back end of 'twenty into 'twenty one? Am I got something wrong in my thinking there?
I just wanted to understand that a bit better.
I'll hand it to Danbury in a second, but Phil, let me let me compliment you on your poultry acumen. You spent some time learning how this actually works. So Anne Marie?
Yes. So to sort of shed some light on that, look, we obviously are more physical buyers. We don't hedge necessarily. So, when we look, when we take that outlook, yes, you're right. We will have, we have new crop coming in around that sort of November, December.
And we will be back into the market at that point buying up for what will be that new crop. So really, like, we will start to see if if the prices drop, we'll we'll start to see that certainly in the second half. Not we don't have to wait another 6 months before we see that.
Okay. And then maybe just one, because one sort of last one for me, just on, just how the, you know, flow through of those higher input costs through the selling process work. Was I right in, hearing you, Jim, you were saying basically the 60% pass through, which I've always talked about is only on 50% of your,
of your volume, or you might have
to say 50% of a bird, which might not actually sort of equate the same to selling volume. But is that right? So basically, it's only a media pass through on 60% of half of the bird and then you've got to try and get a price rise on the rest. Is that basically how it works?
Conceptually that is correct. And again, we're not going to get into exactly the details on what breast meat goes or what retailer that has pass throughs doesn't have pastors or QSR foodservice or wholesale or international or any of that. I think it's just more that to help you and help everyone understand how all this works. Because before I entered the poultry business, I didn't quite get that, but now I fully understand it. And that's why in this industry.
It's so important that you really understand why it's extremely important to value add your products. It's also very important. And Anne Marie has responsibility for this for always upgrading your byproducts. So especially in a situation where you have higher feed costs. Anything else from Tim or Ann Marie on that.
Okay.
All right. Thank you.
You're welcome. Thanks.
Your next question comes from the line of Rodney Forrest from W. H. Solpattinson. Your line is open. Please go ahead.
Good morning. Thanks for taking my question. Just on the performance of the Australian division, can you give us any flavor on how freezer is going? Just around depth of promo and, obviously, the frequency of the promo itself. Just wondering how you're managing that and is it performing to expectations?
I'm not sure I understand your question. I'm sorry. Breeze up.
The ingham SKUs that you're selling in the freezer in retailers, obviously you're procuring those, selling them to them. Just wondering how that is performing as a segment rather than the barbecue chickens. And how do you sort of manage the depth of promo and the frequency and you're happy with that side of the business, please?
Yes. So sorry, I think it's this, American coming over to Australia. I didn't quite understand your question. No worries. When I was in the States, I had the opportunity to work for Conagra Foods and I worked in operations and supply chain in general management for their frozen foods division, which was about $34,000,000,000, part of a $25,000,000,000 company.
And so I have a pretty good understanding of the opportunities in frozen. We're under indexed here, but there's tremendous opportunity, tremendous growth and Seb Brandt, who is now in, runs and has international experience, by the way, who is in charge of marketing and new product development as well as strategy. He's all over this. There's huge opportunity there. And so we're very much focused on it.
We don't have numbers against it yet, but it's something that I think is untapped and something that we should definitely be more involved with.
Okay. And is there a way to get any sort of knowledge on sort of how much it contributes to the EBITDA line? Like, have you given that historically or
No, I wish I could share that with you, but we don't.
And then just last question, please, is around this past row, obviously, a lot of commentary on the call today around that. Is there a what's the like in a probability sense of the retailer not allowing that to happen cowwater type of those sort of contracts, is there optionality for them to say, no, you can't do that or just trying to understand from their perspective, the ability to say no to you?
Yes, we don't talk about the specifics for obvious reasons of the even the conversations or commitments or the contractual obligations of ourselves and our customers, we're here to help them be successful and to profitably grow their business. So as we, in order to answer your question, as we see higher input costs come through and our costs are rising, we're continually having conversations with them because we want to make sure that, we have great relationships with them. We want to make sure that we both can grow profitably. And we have to be sensitive to the pricing histities of the product in the marketplace. So specific example, what happens when you take barbecue bird and you raise it by $4 have a pretty good sense of what's the impact that's going to have on us and our customers as an example.
So it's just We do have contracts, but they're the way I view those is we just put those away and we manage our relationship with them daily.
Thank you.
Thank you.
Your next question comes from the line of Rod Slee from BMO Equity Research. Please ask your question.
Hi, Jim. Thanks very much for taking my call. Just a couple of questions. Firstly, really just clarifications, but firstly, just with regard to New Zealand. I think on the last call, you did have an expectation that New Zealand would be returning to historic levels of profit in, I think you were suggesting sort of calendar year 'twenty.
Is that still broadly your expectation when you say multi year that over a couple of years, you should get back to where you were, or have things proved to be a little more complicated than you expected they would be there?
Yes, I wouldn't say there was a there was complicated, but I would say is that, by the end of this year, we will have will basically be back in balance. I use that term a lot, meaning, we'll have enough farming capacity to support our primary further processing plants and so forth. So then that will impact, more of FY21. And I think it'll probably even we'll see a ramp up probably be realized more in the back half of twenty twenty one. New Zealand is and Australia, both great markets relative to the EBITDA percentage of net sales that I see here.
But that market in particular, as we I think mentioned on the first half is is still an opportunity. It's just going to take us a while to get there.
Sure. Okay. The second one was just a, again, another clarification. You said you've reviewed CapEx spend. I know, obviously, one of the largest facilities upgrades that looking forward was the or is the New Hatchery in Victoria.
I just wanted to check that. Is that still going ahead?
Yes. I'll take that. Yes, sir. The new hatcher is moving forward and progressing more on target to complete that mid-twenty one.
Okay, great. And then finally, I'm, I'm just listening to your comments with regard to latent capacity, and I'm looking at your certainly, this year, 5% volume growth in core chicken, core poultry, just getting quite excited by that, to be perfectly honest. If we look forward 3 years and you continue with strong volume growth, and you're increasing the throughput of existing plants that has to pass through to, substantially increase margin surely.
Yes. I'm glad you brought that up because we're not going to talk about it today because I don't want to distract the earnings release and call in this conversation with strategically what we'll be sharing on October 22nd, but that's the kind of thing we're going to be talking about. That's why it came over here. And I mean, there's huge potential there. It's just there's a lot of work that needs to go into it.
And the other thing out of that strategy, as I said, it's one of the things that will come out of that and we will execute against it as we, as poultry volume grows, But the mix of products that we sell, the simplification and everything that we're going to get through, one of the outcomes of that was we will not be tied to these in I quite frankly have gotten tired of talking about feed through my career in the poultry industry. And there is a way to do this that you can actually reduce your reliance and the correlation between whatever feed prices are doing and whatever wholesale markets are doing and your profitability. And that's why I said the objective of that strategy is to drive consistent reliable, profitable growth. And we'll share that with you on October 22nd.
We look forward to it.
Great. Thanks.
Thanks.
We have no further questions from the telephone lines. I would now like to hand the conference back to your presenters for closing remarks. Thank you. Please continue.
Well, thank you everybody. I appreciate your time. And, as I said, it's been a lot of fun for us since I arrived here in January. So there's been a lot of changes, but future of this company is bright. We mentioned what FY 2020 is going to look like.
Hopefully, we gave you some color and you have a pretty good understanding of of how we bridge from FY 2019 to FY 2020. But the exciting part for me is, is we have a number of new people and we have a lot of great people within the company who are extremely passionate about the future of this company. We now know where we're going and we also know how to get there. So I appreciate everyone's time and thank you for your questions.
Ladies and gentlemen, that does conclude our conference for today. Thank you for