Ladies and gentlemen, thank you for standing by, and welcome to the Inghams Group Limited 2019 Annual Results Presentation. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that this conference is being recorded today. I would now like to hand the conference over to your first speaker, Jim Leighton, Chief Executive Officer and Managing Director. Thank you. Please go ahead.
Thank you, operator. Good morning, and welcome to the 2019 full-year results call. With me today, I have Cate Chandler, our Head of Finance, Tim Singleton, Chief Operations Officer, Anne-Marie Mooney, Feed Business Director, and Craig Haskins, Investor Relations Director. Before we move on to the FY 2019 results and FY 2020 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 FY 2019. Third, develop a vision, strategy, and operational plan to set the business up for success and growth. 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 22nd, 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 Inghams. After almost 42 years in the food industry, including one of the largest poultry companies in the U.S., and having had the opportunity to travel internationally extensively, I know what the best poultry companies look like, and 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. 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 feed 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 the implementation of the payables facility in New Zealand 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. Inghams 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 Inghams, and his job is to deliver on the operational upside that we have here. He and some of his recent hires, two of which are from the U.S., 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 the needed changes today well into our future. I've had a few questions from 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. Turning to the financial highlights for the group. I will talk to underlying our operating numbers here to remove the impact of asset sales and restructuring and to exclude the impact of Mitavite, which as you know, was sold in October of 2018. As previously noted, core poultry volume grew at 4.3% with total poultry volume growing at 2.4% versus prior year. Underlying gross profit grew at 3% to AUD 480.2 million, and underlying EBITDA grew to 2.9% to AUD 208.6 million. The underlying NPAT of AUD 103.2 million was down 4.4% on last year, reflecting the impact of the previously flagged higher tax rate to 30%.
Cate will talk to these numbers more in detail later. Underlying EPS was AUD 0.278 per share, and a final dividend of AUD 0.105 was declared. There was a AUD 0.33 capital return, and also AUD 36.4 million was spent on the half on our stock repurchase. Our cash position and balance sheet remained strong with our underlying leverage at 1.3 times. Over to Cate to cover the financial results in some more detail.
Thanks, Jim. Looking first at the statutory results on slide five. Revenue is up 4.9%, while gross profit is up 4.4%. This is reflective of the prior year contribution of Mitavite 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 aligns to the corporate tax rate. Turning to slide six, 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, 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 suboptimal 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 seven, we have provided the standard reconciliation information between statutory and underlying results. Asset sales of Mitavite, Cardiff, and Clyde were disclosed in the half, and Murarrie was sold in the second half.
The impairment related to the sale of Murarrie, a surplus chicken hatchery in New South Wales, which we bought and sold in the year to permanently take out of the network. You'll 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 commission the South Australian feed mill and our New Zealand breeder farm. At the half, we disclosed an onerous lease provision on the Clyde further processing facility. 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 2020.
Turning to the cash flow and balance sheet on slide eight. We have delivered 112.2% cash conversion for the full year. We've actually prepaid some expenses, this could've been slightly higher. The inventory financing facility, which we use to manage cash flow relating to raw material purchases, was extended to New Zealand in the year. This added AUD 54.6 million to the facility throughout the year. As at year-end, the facility was fully drawn to AUD 94.7 million. The full-year cash conversion, excluding the impact of inventory financing, was 84.4%, in H2 was 99.7%. CapEx of AUD 74.1 million is in line with expectations. Of the capital spend this year, approximately AUD 25 million was spent on projects that will increase harvesting capability, automation, or throughput to drive efficiency and value. We spent AUD 39.1 million acquiring Wacol, Camellia, Pakenham, and Murarrie properties in the year.
In addition, we spent some AUD 9 million on deposits relating to FY 2020 CapEx, specifically automation and hatchery equipment manufactured in the northern hemisphere. Moving now to slide nine. Leases under AASB 16 are going to be accounted for from 1 July using the modified retrospective transition approach. 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 AUD 1.8 billion, reflecting the long duration of our leasing arrangements. As noted, the FY 2020 statutory NPAT is forecasted to be an estimated AUD 21 million 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, Cate. 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. Towards the end of the year, as we cycled higher input costs, we did start to see some pressure. The retail channel performed well in what was a competitive market. As has been widely discussed, there were price increases passed to consumers on some lines, and there was some impact on volumes. Positively, new product development and broadening of our customer volumes showed good signs for the future. The QSR and food service channels continue to see strong demand, particularly for our further processed products. You'll 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. We are opening up untapped export markets as we enter FY 2020. Overall, our feed business performed well, but on lower volumes. Turning to slide 12 on New Zealand. As we noted in our first half call, we were 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 in 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 the full replacement of farming capacity by the end of the calendar year, and we're making good progress. 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 team and business updates in section three. As I noted, a priority the board charged me with was to develop a five-year strategy and operational plan. This plan had to be supported by an organizational structure and people that have the right mindset, capability, capacity, experience, and diversity to unlock the latent potential of this company.
Someone said, "Jim, bring bricks, bring mortar, and bring your Rolodex." What was clear to me was that there are many great people at Inghams who are engaged and passionate about our business. What we lacked was clear direction and alignment and a deep operations 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 where you make your money in any business, but especially one that's vertically integrated. You need to know where to invest your time, 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 our new leadership team. Tim Singleton is our Chief end-to-end Operations Officer. 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 in balance. Anne-Marie Mooney, who you will hear from shortly, manages our feed business, and Katherine Balding runs our technical services, including the crucial function of animal nutrition. These three leaders are working collaboratively to maximize the economic outcomes of our bird performance. This is a great example of why I say structure needs to follow strategy.
We now have Chris Croese in the seat as Head of Sales and 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. Let's move to the business update. The new operations leadership have quickly evaluated the operating performance of our network, and along with me, have come to the conclusion that we are far 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 to the importance of having a balanced supply chain.
That is making sure that all the parts of our business are properly linked and synced 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 Project 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 the 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. I will 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 feed and nutrition costs and feed conversion rates.
Thank you, Anne-Marie. Now moving to our FY 2020 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 multi-year drought. We are cycling through the highest feed costs right now and will continue to do so into the first half of FY 2020. 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 delivered to plan.
This is one of the projects that was under Project Accelerate. I'm sure there will be questions on this, so let me summarize it as follows. Cleveland was 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 was 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.
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 multi-year rebuild. What all this means is that we now expect EBITDA in FY 2020 to be below underlying EBITDA of FY 2019, and then to return to growth in FY 2021. In conclusions, number one, Inghams 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, Inghams has a tremendous upside. Number two, we performed well in FY 2019 and have largely mitigated costs to date, but now are facing headwinds in FY 2020. 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. We are after these opportunities. However, it does take time to see the benefits of all these changes flowing through to our financial results. 4, the strategy is complete. While 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. With that, operator, I'll hand it over to you for questions.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone keypad now and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Craig Woolford from Citigroup. Your line is open. Please ask your question.
Good morning, Jim.
Hi, Craig.
Can I just understand the, I guess, two issues that you've highlighted with respect to the Cleveland plant closure. One, you called out higher costs, and two, you called out an unfavorable mix. With more volume, it is hard to understand how the cost per kilo actually rose, but I guess that is what the inference is. If you can give a bit more color as to what exactly increased the cost, and what does the unfavorable mix actually refer to?
Yeah. I'll highlight that for you, Craig, and then I'll turn it over to Tim Singleton to put some more color to it. Basically what happened under Accelerate is we had a project to consolidate our further processing network. As a result, we closed a plant, and as I understand it, the reason that we are going to close that plant is we were anticipating actually losing some demand, and just the opposite happened. 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. What that resulted in is us not servicing certain other channels, which did have a negative impact and mix. That's number 1.
Number two 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 bill of materials, the number of SKUs that were being produced in those facilities, and significantly impacted the financial performance of those facilities. Everything from downtime to just kind of trying to manage that complexity. Tim, do you have anything else to add to that?
Thanks, Jim. I think you cleared up the biggest portion of it. I think that's fairly clear and fair to say that the overall 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.
Craig, what we have is, I mentioned in my comments, a short term, a midterm, and long-term fix to this. Immediately approved, putting some basically, it's a minor capital spend 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. Then we have a midterm solution and then a longer term solution.
Yeah. Listening to you, it's interesting that you've retained more volume, which is clearly a positive. I guess the only question is whether you've got the capacity medium term to service those customers or volumes.
Yeah. I use the term with this new team in place, we've shifted the company to a more growth mindset. We are going to make sure that we have sufficient but not too much capacity available for especially our strategic customers. As I said, it's a good news, bad news situation. The good news is the demand's there. The bad news was we decided to close the plant, couldn't service that demand profitably.
Okay. 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 feed cost passed through. What do you think is playing out there? Kind of related to that, I'm interested in whether 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 Inghams, but across the market, which can cause headaches around channel mix as well.
Yeah, I'd be happy to talk about it. 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. It's not just mix of product, it's mix in channels. It's also keeping a close eye on the wholesale market to make sure that we keep that to the extent we can, healthy. A lot of conversation at the first half, after I arrived, was on the barbecue bird, and we did see at one time, I believe, barbecue birds in retail were selling around AUD 12 or AUD 13 is my understanding. They were reduced in that channel to about AUD 8 or AUD 9 and significant. I mean, we couldn't keep up.
I'd say that they're back around AUD 10, AUD 11 and as water does, it kind of finds its level. That's good news that I think we are at, again, a relative balanced situation with that. 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 protein.
Okay.
Your next question comes from the line of Paul Buys from Credit Suisse. Your line is open. Please go ahead.
Good morning, Jim.
Hi, Paul.
Hi. First one, actually, just to follow up on Craig's one there. 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, but it's close to historic highs. 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, for absolute clarity, kind of establish, has it actually gotten harder or are you kind of calling out more of the same as regards input prices and the posture implications?
The mechanisms that we had in place, and we, I think, related earlier that we were able to pass about 60% through that are on those mechanisms. Those mechanisms work well, 100%. One of the things that I've kind of brought into this company is the experience I have in poultry. One of the things we have to realize is that when feed costs go up, you're basically growing a chicken and you're selling about half of it, with the breast meat, the thigh meat, the wings and the different parts through the various channels. For instance, the feet as an example, or the paws as I refer to them back in the U.S., it has those higher input costs in those. That part of the bird is not on mechanisms. The impact of higher feed cost is going to impact at least 50%.
Of the part that we sell, with the 60% on mechanisms. Our ability to pass through price is working. I also mentioned that when initially at retail, when the retailers increased the price, it did have an impact on volume. 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?
Yeah, that does. Thank you.
Yeah.
On the retail price increases that went through that you called out had some impact on volumes. Is that very product specific? Are you talking about barbecue birds specifically or are you talking about kind of poultry as an overall class? I would've thought that the step up for the consumer to other proteins in terms of AUD per kilogram outlay is still material that wouldn't have eroded poultry's competitiveness. Are you saying it was specific products or more broadly?
No, I was specifically talking about the barbecue bird because the first half that was really the conversation because that's about right at the time 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 were selling their products for. 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. Jim, just one on New Zealand then, which you've indicated is returning to year-on-year growth a bit below historic levels. I just was keen to break that down into two segments in terms of, or two drivers, one being the market and the relative rationality therein. The other being, I guess the kind of the Inghams 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.
Yeah, I'd be happy to. 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. As we mentioned earlier that we kind of viewed 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 because 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.
Publicly, they've talked about this, that it is, and we're seeing this, that it's much more of what we're referring to as rational decisions and rational market out there. 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 solid business for us. What ended up happening is during this, then they're related, these two subjects. What happened when our competitor was increasing volume, some of our growers, especially our free-range growers, moved over to help support them. We lost capacity, and that significantly impact us. What 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.
My comment earlier was, although we do have it and will be in place, it's going to take a while for us to realize that as it flows through the supply chain, the value chain, and onto our financial statements. Does that help?
Yes. Thank you very much. Yes, thank you. 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. That seems to be a bit of a departure from historic domestic focus. Just wanted to see if I understood that correctly, and if so, what the focus would be on.
Yeah. I'd be happy to. It's amazing what happens when you bring people, especially with international 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." I was, quite frankly, surprised. In the company I was with in the U.S., for instance, I'd say 90% of what we there called the paws were exported and sold in international markets. International, at least from where I came from, was a much bigger channel and a much more strategic channel for us than it is at Inghams. In answering those questions, I had some people go out and take a look at what opportunities there are, and there are. We're starting to realize that.
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 from me.
Okay, great. Thanks.
Your next question comes from the line of Aryan Norozi from UBS. Please ask your question.
Hi, Jim and team. Just first one from me, just around your gearing. I think when you adjust for some of the payables you factored, and you get up to about 1.8 times, if I'm not wrong. Basically, my question is what level of gearing are you guys comfortable with taking in the business?
I'll take that question, Jim.
Yeah. Cate, good, thanks.
Our underlying gearing was 1.3. Our statutory was 1.1. I think we're going to sit in that band of one to 1.5. We won't be moving past that, not for FY 2020.
Perfect. On the factored payables side or the inventory financing, do you get a gross margin benefit from obviously paying suppliers early?
No.
From getting the finance. No. Okay. 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? I know the Woolworths one is in mid-2021, but any other ones you can call on it?
Yeah, we're not going to refer to any, as you said, any of our customers as it relates to contracts. First of all, none are expiring at the same time, and we don't have any significant contracts expiring in the short term.
Perfect. Last one from me. Sorry. Did you guys gain any sort of hedge profits in fiscal 2019 from feed prices? Any trading gains or losses?
No. I'll take that question. Look, in FY 2019, we are largely a physical buyer of grain. We use a range of financial instruments, but there was nothing that we would call out to say that we made any significant profit or losses from any of the feed contracts that we held.
Perfect. Thanks very much, guys.
Thank you.
As a reminder, ladies and gentlemen, it is star 1 if you would like to ask a question. Your next question comes from the line of Scott Ryall from Rimor 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 longstanding customers that have had successful promotional activities. In your mind, are they literally just opportunities that were due to the improved relative affordability of chicken, or is it more value-add products and other things that seem to have been pushed as well?
Yeah, 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 refer to them, relative to new product innovation and some things that we're working there. 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 volume and their profitability with some new, innovative, creative products.
Okay. Presumably, that probably fades onto my second question, which is around the capacity that you've talked to and trying to have capacity to service the growth. What in your mind is the key to operating with capacity flexibility to be able to go up or in the worst case, down? Is that capacity, is it around what you do currently or is it increasing the range of products to be more nimble in the marketplace, depending on what the end customer demand is?
There's a couple of things 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 terms, that the new team is basically, it's in their vernacular, and it was not in the Inghams vernacular. I characterize what we're doing as, we have too much complexity. We have around 2,000 SKUs in this business. That's way too many SKUs, which creates, upstream, all kinds of issues relative to the bill of materials to support those, and downstream, all the complexities, everything from transportation to warehousing to conversion and everything else. The term that we've introduced is this term of overall equipment effectiveness. Basically, it's the proper way to look at any manufacturing plant and any supply chain.
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, the biggest thing that we challenged first is where our choke points, where our bottlenecks are throughout the process. 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.
Yeah. Along those lines, I used to have Tim's job at a number of different companies. One of the things that within those companies, I was in operations for most of my career. If we were going forward with a capital request, you would have to show an OEE of at least 75%. World class is 85%. What that is it's a measurement against theoretical max based upon the choke point of a process which is defined, and I won't get into the details, but it's defined by the original equipment manufacturer. Like in a further processing plant, if our fryers can only do so many nuggets as an example, that's where you would start. We have so much unlocked capacity and capability in our plants now that this team's here.
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 possibility of a fairly significant capital spend in a primary processing plant. 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. The big unlock for me that will flow into especially FY 2021 is the unlocking of this, what I call latent capacity that we have.
Okay. Are you able to quantify where you're running at the moment, if 75% is your benchmark that you, and 85% is best in class?
No, I can't because we don't have the measurements in place yet. As soon as I do, I'd be happy to tell you. It's significantly lower than 85%.
Okay. Great. The last question I had, if I can, is just around, and this is, I guess, your typical analyst question, what do you mean by significant? Are you able to quantify the impact you saw from some of the capacity shortages in the fourth quarter? 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 currently?
Yeah. I think specifically, if I understand your question, it had to do with this project under Project Accelerate, which was the further rationalization of our further processing facility. Is that correct?
Yes.
What the financial impact was and when we incurred it and to what extent. Cate, if you could take us through that.
Okay. I think what you're asking for is really what does our commentary outlook mean?
Yep.
Essentially, the board's policy is not to give guidance. To give you a sense of what we feel has happened here. The underlying result was AUD 208.6 million. 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.
If I may go back to the finer point on that remuneration report. Of course, KMPs are the only ones that are required to be, and are in that remuneration report. Cate, I think that reflected about, what, AUD 3 million or something of short-term incentives that were not paid and should not have been paid. I totally supported the board's decision in that for a variety of reasons. There is a long list of other people that are not in that report, so the number is much greater than that.
Yeah. If I take the KMP, plus I take the other senior managers that are not disclosed in the REM report, the operating number would've been, let's say, circa AUD 204 million. The cumulative impact of what happened in Q4, whilst was not pretty, was circa AUD 10 million off. That has us off consensus by about AUD 2 million-AUD 4 million. The combination of FP costs and lower margins are accelerated as we got to the end of Q4. We have a lower run rate. Looking to FY 2020, and as we're cycling these issues into Q1 and Q2, we're looking at a turnaround plan that is taking some time in FP. The cumulative effect will be potentially greater than the AUD 10 million. This plays not only to cost, but to some opportunity costs with our mix that 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 we're not able to deliver the sort of unit cost reductions that we should be doing to offset these costs. In summary, in Australia, we have a demand problem or a cost problem that is just simply too high. In New Zealand, whilst the turnaround is underway, H2 is slightly ahead of H1. We're expecting mid-single-digit growth this year in New Zealand. Does that answer your question?
Yeah, it does. Thank you. Just in terms of the additional costs around sort of processing, is that a 2020 issue only? You expect to have that sorted by the end of this financial year?
I might hand over to our operations people. Absolutely.
Yeah. Tim, maybe you can speak to the short, midterm, and long-term solution for capital. 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 and what the real drivers are. We need to stay just ahead of the demand curve on this as far as our capability to supply. That is a shift in mindset versus, I think, in previous years, it was more around accelerate and cost out, and now we're focused on growth, profitable growth. Tim?
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 then hold ourselves accountable, excuse me, 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 wanted our business to go. 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.
If I might, I'd put a finer point on that. In the U.S., there are 144 poultry facilities that are in something called AgriStats that measures their performance monthly. Those all roll up to, I don't know, maybe about 50 or 60 different companies. Every month, this financial service called AgriStats provides those companies with everything from top-line profitability or bottom-line profitability, all the way down to how each one of their facilities is performing, all the way down to a yield in a plant, as an example, or your efficiencies of labor. All that stuff is reported. Then it basically gives you your relative ranking among those 144 plants as well as the different companies. Art, who is now over from the U.S., 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." These are the things that we're coming across with now this new leadership team in place under Tim's watch.
Okay. Understood. That's all I had. Thank you.
Okay, thank you.
Your next question comes from the line of Phil Kimber 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 2020 versus FY 2019, just a broad sense. You said that's still impacting. Are you expecting it to be up another 10% in fiscal 2020 or some sort of broad view on feed costs?
Yeah.
Yeah, Phil. I'll hand it over to Anne-Marie in a moment, but I was happy when I woke up in Manly this morning that it was raining. Of course, I called Anne-Marie, and I asked her if it was raining in the right place. We are right now experiencing and converting our highest feed costs since we went public. We have typically, and we stated this publicly, our position on feed, and I'll let Anne-Marie talk more about this, is from a risk management perspective, we typically go somewhere as far as physical purchases, somewhere between three months and nine 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. That's kind of the context of which Anne-Marie will talk about and answer your question.
Thanks, Jim. Yeah, 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, prices 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. Really, the telling time will be in the next four weeks, and we'll have a much better indication going forward as to whether our feed cost prices will actually sort of drop. It is largely contingent on that crop.
Our outlook, said another way, is basically it's not best case and it's not worst case. It's we think could probably be somewhere in the middle.
Middle.
Just to sort of understand that more, if we're sitting here in late August, you're saying 3-9 months, so let's call it six to take the midpoint, and then it's got to get through, obviously the chicken has to grow, be processed, and then sold. I would have thought, even if feed costs, say we have a good season and feed costs start, spot wheat prices come down, you're not actually going to get a benefit from that until FY 2021. If you already hedged for six months now, plus it's got to get through the supply chain, we're sort of back end of 2020 into 2021. Have I got something wrong in my thinking there? I just wanted to understand that a bit better.
I'll hand it to Anne-Marie in a second, but Phil, let me compliment you on your poultry acumen. You've spent some time learning how this actually works. Anne-Marie.
Yeah. Phil, to sort of shed some light on that, look, we obviously are more physical buyers. We don't hedge necessarily. When we take that outlook, yes, you're right. 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. Really, we will start to see if the prices drop, we'll start to see that certainly in the second half. We don't have to wait another six months before we see that.
Okay. Maybe just one, because, one sort of last one from me, just on how the flow through of those higher input costs through the selling prices work. Was I right in hearing you, Jim, you were saying basically the 60% pass-through, which previous management have always talked about, is only on 50% of your volume, or you might have said 50% of a bird, which might not actually sort of equate the same to selling volume. Is that right? Basically, it's only immediate 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?
Well, conceptually, that is correct. Again, we're not going to get into exactly the details on what breast meat goes to what retailer that has pass-throughs and doesn't have pass-throughs or QSR or food service 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. Before I entered the poultry business, I didn't quite get that, but now I fully understand it. 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. Especially in a situation where you have higher feed costs. Anything else from Tim or Anne-Marie on that? Okay.
Great. Thank you.
You're welcome. Thanks.
Your next question comes from the line of Rodney Forrest from W.H. Soul Pattinson. Your line is open. Please go ahead.
Good morning. Thanks for taking my question.
Hi, Rodney.
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. Freeze up?
Freezer.
It's the product freezer.
The Inghams SKUs that you're selling in the freezer.
Oh.
Oh.
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. How do you sort of manage the depth of promo and the frequency, and are you happy with that side of the business, please?
Yeah. Sorry. I think it's this American coming over to Australia. I didn't quite understand your question.
Oh, no. It's quite all right
No worries. When I was in the States, I had the opportunity to work for Conagra Brands, and I worked in operations and supply chain and general management for their frozen foods division, which was about a AUD 3 billion-AUD 4 billion part of a AUD 25 billion company. I have a pretty good understanding of the opportunities in frozen. We're under-indexed here, but there's tremendous opportunity, tremendous growth. Seb Brandt, who is now in 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. 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. Is there a way to get any sort of knowledge on how much it contributes to the EBITDA line? Like have you given that historically or?
No, I wish I could share that with you.
Okay
we don't.
Just the last question, please, is just around this pass-through. Obviously, there's a lot of commentary on the call today around that. What's the, like, in a probability sense of a retailer not allowing that to happen? How watertight are those sort of contracts? Is there an optionality for them to say, "No, you can't do that?" Just trying to understand from their perspective, the ability to say no to you.
Yeah. We don't talk about the specifics for obvious reasons of even the conversations or commitments or the contractual obligations of ourselves and/or our customers. We're here to help them be successful and to profitably grow their business. 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 price elasticities of the private in the marketplace. Specific example, what happens when you take barbecue bird and you raise it by AUD 4? We have a pretty good sense of the impact that's going to have on us and our customers, as an example.
We do have contracts, but the way I view those is, we just put those away, and we manage our relationship with them daily.
Okay. Thanks a lot. Thank you for taking my questions. Thank you.
Thank you.
Your next question comes from the line of Rod Sleath from Rimor Equity Research. Please ask your question.
Oh, hi, Jim. Thanks very much for taking my call.
Yes.
Just a couple of questions. They're 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 2020. 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? Have things proved to be a little more complicated than you expected they would be there?
I wouldn't say there was complicated, but what I would say is that by the end of this year, we'll 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. That will impact more of FY 2021, and I think we'll see it ramp up and probably be realized more in the back half of 2021. New Zealand and Australia are both great markets relative to the EBITDA percentage of net sales that I see here. That market in particular, as we, I think, mentioned on the first half is still an opportunity. It's just going to take us a while to get there.
Sure. Okay. The second one is just 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?
Yeah.
I'll take that. Yes. The new hatchery in Victoria is moving forward, and progressing well. We're on target to complete that mid 2021.
Okay, great. Finally, 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, and I'm 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 increased margin, surely.
Yeah. 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. That's the kind of thing we're going to be talking about. That's why I came over here, and there's huge potential there.
It's just there's a lot of work that needs to go into it. The other thing out of that strategy, as I said, one of the things that will come out of that, and we will execute against it, 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. I quite frankly, have gotten tired of talking about feed through my career in the poultry industry. 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. That's why I said the objective of that strategy is to drive consistent, reliable, profitable growth.
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. As I said, it's been a lot of fun for us since I arrived here in January. There's been a lot of changes. The future of this company is bright. We mentioned what FY 2020 is going to look like. Hopefully, we gave you some color. You have a pretty good understanding of how we bridge from FY 2019 to FY 2020. The exciting part for me is we have a number of new people. 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. We also know how to get there. I appreciate everyone's time. Thank you for your questions.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may now disconnect.