Earnings Call: H2 2021

Aug 30, 2021

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Freedom Foods Full Year FY 'twenty one Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Michael Peric, Chief Executive Officer of Freedom Foods Group. Thank you. Please go ahead. Good morning, everyone. I'd like to welcome everyone to the presentation of the FY 'twenty one results for Freedom Foods Group. I'm the CEO, Michael Perich, and it's a pleasure to be with you here today. I'm joined by our CFO, Jose Alamoine, who will take you through the financial results. If you have the presentation in front of you, we will talk to each slide and refer to the page numbers as we progress. Slide 3 is the agenda for today's call. We will focus on the FY 'twenty one highlights and present the key parts of the transformation and evolution of the group. We'll then move into a more detailed discussion on our financial performance, I'll present the future strategy of the group after touching on the challenges and opportunities presented by COVID and some closing remarks. We will be available for questions at the end of the presentation. Moving to Slide 4, highlights for FY 'twenty one. In the last 12 months, there has been enormous effort by the Board and the executive team to reset the business under our reset, transform and grow strategy. This is being multifaceted across the entire business, and the results are starting to show, with significant change in the performance of the group. Adjusted operating EBITDA for FY 2021 was $22,400,000 That is a $76,000,000 or 141% turnaround in FY 'twenty. This was achieved on the back of revenue growth of 8% as we continue to focus on profitable products. We've seen growth in volume of both shelf stable dairy and shelf stable plant based Beverages, we're both delivering more than 5% growth from prior year. Lactoferrin sales are up 170% in volume We completed a full year with over 28 tonnes of lactoferrin sold in FY 'twenty one, aligning with our presentation earlier in the year. Moving through to Slide 5. FY 'twenty one was truly a defining year for Freedom Foods Group as we pursued our Reset, Transform and Grow transformational program. I'm pleased to report that Phase 1 of the program, the reset is substantially complete. In May, as you are all aware, the recapitalization of the group was complete with the raising of $265,000,000 with the support of our majority shareholder, our lenders and existing and new investors. This has given the group the ability to repay senior debt, providing a solid financial base to enable our transformation program to proceed. At the end of March, the sale of Sierra's and Snacks business was completed with the strategic plan developed for the core businesses, Dairy Nutritionals and Plant Based Beverages. As discussed previously, we are reviewing the Specialty Seafood business with divestment and option. We have recently launched 2 significant products, Milk Lab Oat in the out of home channel and Australia's Own Barista into Coles. Both of these products are credit to our team and have attracted a great interest in their The plant based beverage market in Australia continues to grow as consumers turn to healthier lifestyle choices with oat beverage category growing at 1 of the fastest rates. As outlined in our ASX release last week, We have completed the full executive team rebuild with the recent appointments of Dennis Phelps as Chief Customer Officer and Gerard Smith as Chief Marketing Officer. The transformation program, as I have mentioned, is very much underway, and these results demonstrate some early returns from the program. We're continuing to focus on the future and how we can grow the group and return to long term sustainable and profitable growth, utilizing our world class assets and brands. The Reset and Transform Grow initiative on Slide 7 Talks to the work the Board and the executives have focused on throughout FY 'twenty one. To summarize the program, The financial, structural, operational and cultural reset of the company was substantially completed in FY 'twenty one, providing the company with the platform and talent to transform the business. Actions to transform the company are now well underway with operational improvements across the business already driving improved sales and earnings performance. Those improvements Provide the springboard to grow the business throughout 3 streams, products, channels and geographies. Moving to Slide 8. What has been achieved so far as part of the reset? Firstly, there's been a major improvement in financial performance As we are focused on every aspect of the business, ensuring that we're operating efficiently, reducing wastage and pursuing profitable growth. Most importantly, at an adjusted operating EBITDA level, we have delivered a $76,000,000 turnaround from a loss to a profit. This is an outstanding result and is a testament to the effort of the team. We have built And we are executing a detailed business plan as part of our transformation program with a number of specific initiatives underway. We are working closely with Pollen Consulting, an expert in end to end company transformations to assist bringing further expertise into the group. As mentioned with our recent appointments with the CCO and the CMO, we've completed our executive rebuild, which commenced with my appointment 12 months ago and includes Jozse and a number of critical new finance roles. We've also refreshed our Board, which now comprises a majority independent directors led by Genevieve Grego. The cultural reset of the group has been fundamental we build the business. We have undertaken a company wide survey, our voice, to establish a baseline for our cultural change program. Even at the early stages, we are seeing improvements in engagement and retention. We employ over 550 people in Freedom Foods, And they are all key to our success. Through the cultural change, we are creating more accountability at all levels, And the team are enjoying the new opportunities that exist. On Slide 9, notwithstanding the early signs of the progress we've seen in FY 'twenty one, It is worth reinforcing that the benefits of the transformation program are not immediate and will be delivered over the coming years. The program has 3 streams focused on company wide transformation as we focus on our 2 main growth pillars, Dairy and Nutritionals and Plant Based Beverages. At a corporate level, we are very focused on ensuring our key brands have the right marketing support. Feeding Foods Group has a culture of innovation and new product development across our beverage and nutritionals portfolio. New product development is critical to our Finjan's success. We are well advanced on an ESG framework that talks through our ambitions into the future around sustainability and change. We're also investing in our e commerce channels, where we are seeing strong growth in segments such as consumer nutritionists. This is a natural hedge against COVID related movement restrictions. In Dairy and Nutritionals, we continue to drive focus At the operating sites around overall operating effectiveness, a key driver in asset utilization, last 12 months has been fundamental to our business. We directly contract over 230,000,000 liters in plant based beverages. Our objective is to capitalize on the significant market share And customer brand awareness of Milk Lab to launch new products leading consumers' evolving palate. To that end, we are undertaking disciplined capital investment to increase production capacity to meet growing demand. And within our facilities, we are working with our engineers to ensure equipment is efficient with extended run times, minimizing any downtime between products. I'll now hand over to Jose to present the financial results and the segment performance. Thank you, Michael, and good morning, everybody. The financial performance of our business during the year will highlight 3 key points. First, we've actively executed the key elements of our transformation strategy during the year. 2nd, benefits from the turnaround are being realized. And third, we have built a stronger balance sheet. You will find further details on impacts of accounting changes, Reclassifications and shared services overheads allocations in the appendices. Firstly, let me take you through The overall performance of the continuing operations, please turn to Slide 11. The table shows a summary of the income statement and other key metrics. Before I walk you through the detailed financials, Let me bring to your attention the following. With the reset of the business, which included this disposal of the sales and snacks division, The financial performance is reported on a continuing operations basis, which means excluding sales and snacks, except for certain retained products, which are now grouped with the Dairy and Nutritional segments. The reporting requirements of the balance sheet and cash flows are different as required by the accounting standards. We're also focusing on the adjusted operating EBITDA, meaning that we have adjusted for non trading and non recurring items and shown as free SBSB 16. I will expand on the non recurring items shortly. And for FY 'twenty, it was restated with the recent adoption of the Ifrit accounting interpretation for software as a service. Okay. As highlighted by Michael, the transformation is well underway and the company delivered an EBITDA improvement of 76,000,000 or 141% at an operating level from continuing operations in the past 12 months, and continued strong revenue growth across its key businesses in Australia and in export markets. While the company reported statutory net loss After tax of $38,800,000 the result was affected by several legacy one off items and the overall margin and earnings trends are positive. Three highlights include, following a difficult 2020, the business delivered an adjusted operating EBITDA of $22,400,000 compared to a restated loss of $54,000,000 in FY 2020 with a 4% EBITDA margin, an improvement of 14.4 basis points on the prior corresponding period. Cash at bank of $31,700,000 plus $47,900,000 of undrawn facilities provides sufficient liquidity for day to day business operation. I'll expand on the balance sheet and the restructured capital base in a moment. And a pro form a net equity of $252,500,000 as a result of the recent recapitalization, which includes the impact of the convertible notes if classed as equity. Let me take you through the impact of the significant items. Would you please turn to Slide 12? The FY 'twenty one financial results include a number of non recurring expenditure items related primarily to Costs related to accounts restatement and recapitalization, insurance claim related to product recall and Of the current nonrecurring items, we only expect some future costs in relation to litigation. Please turn to Slide 13 to get a sense of the revenue composition. The pie charts highlight the revenue composition relating to continuing operations excluding Syros and Snacks. As you know, growth for NSMCG Food Business typically comes from 3 streams: Products, channels and geographies. These charts highlight strong overall revenue diversification for our continuing operations. A couple of notable points. On the segment side, we've actively grown The relative revenue from plant base, which I will expand on shortly. In a regional context, we are continuing to drive our growth in export markets, particularly in Southeast Asia. And in brand revenue, 60% is derived from our own products versus Private Label and Contracts. This focus will help deliver positive margin. Please note that brands and private label typically cover both dairy and plant based products. Let's turn to Slide 14 to look more closely at our plant based segment. We are seeing strong momentum in our plant based performance. We've increased revenue by 15.6 percent to 152,900,000 with this business overcoming COVID impact on the out of home market to deliver growth across all channels and brands. We've driven strong growth in Milk Lab domestic sales by 50% and export sales by 46%, And we are now selling this brand in over 20 countries. We have driven adjusted operating EBITDA up by 194 to $25,600,000 and continue to further improve profitability as we improve operating leverage. Our market share and customer loyalty performance are continually building as consumers switch to plant based products. And we have successfully launched our oats product in retailers and out of home channels across Nick Lab, NoteLab and Australia's own brands. So overall, a strong performance in the plant based segment. Now to Slide 8 for our Dairy Nutritionals sorry, Slide 15. Apologies. As Michael mentioned, the transformation is well underway, as evidenced by both an increase in revenue for the 12 months by 6.8 percent to $394,300,000 and significantly improved profitability with an adjusted operating loss of $4,100,000 compared to a loss of $56,700,000 in the prior year. Our modern Shepparton plant is now operating on a much improved basis, And with increased sales of our consumer nutritionals by 5% during the year, despite the slowdown in sales caused by temporary closures of gyms and Significant improvements have already been delivered in key areas, operating efficiencies, cost reductions, Building profitable product portfolios by rationalizing unprofitable product lines, understanding our true cost per unit And reducing wastage and surpluses, we've also targeted better marketing spend. And you can clearly see the positive impact of our assets so far. Let's move to Slide 16 for an update on our last segment. Performance of our Specialty Seafood business was impacted during the year As COVID disrupted our supply chains and caused stock shortages, our revenue fell 21.7 percent to 11 Please turn to Slide 17. You'll note the significantly improved capital position. As underpinned by Michael's comments earlier, FY 'twenty one has been a defining year for Freedom Foods. The company has undergone a major reset, which has been multifaceted across the entire business. We changed the business model, namely through the divestment of Syros and Snacks And the simplification of the remaining business to focus on our core strength in plant based beverages and dairy nutritionals. We undertook a detailed review of our financial accounting, which led to a restatement of the company's financial statements and importantly, streamlined and improved financial and processes to improve governance. We reset the entire senior leadership team and Board. We amended and improved governance policies and procedures. We are setting operations to align with our new focus and to improve productivity. We're also reviewing and focusing our products and we have renewed our focus and engagement with suppliers and customers. These changes Enable the company to recapitalize itself with an oversubscribed $265,000,000 convertible note issue in May 2021 and amended senior debt facilities, providing financial stability and time to enable the company to execute its operational turnaround, Transform the business and pursue focused growth opportunities. With the successful completion of the recapitalization, The company has solid financial foundations, enabling it to execute its transformation and pursue growth opportunities. The company now has sufficient liquidity by its working capital facilities and cash at the bank from the capital raising to run the business on a day to day basis. As of 30th June 2021, the company had 349 dollars 900,000 of borrowings and dollars 41,000,000 drawn in off balance sheet facilities. The pro form a net assets at 252,500,000 when including the convertible notes of 251,000,000. Net assets had been unfavorably impacted by the convertible note, which under Australian Accounting Standards are treated as a hybrid instrument due to their conversion feature. This means that they are classified as a long term liability and accounted for at fair value in the balance sheet, with any change in fair value reflected in the profit and loss. You will note that in FY 'twenty one, the drop in the company's share price between the convertible note issue date and the balance date as a result of in a drop in the carrying value of the note of $14,000,000 If the convertible note was carried as equity And finally, If you may turn to Slide 18. Our improved operating performance has resulted In FY 'twenty one, cash flow from operations being $50,400,000 higher than the prior corresponding 12 months. While cash flow from operating activities for the years was negative, remove legacy creditors paid during the year relating to FY 'twenty And restructuring and interest expenses associated with the senior debt would have resulted in a positive cash flow. Our efforts to improve working capital management have reduced other days outstanding by 5 days to 55 days, decreased trade and other payables by 39% and reduced inventories by 24%. Cash flow from investing is lower by 19.6%, following a significant reduction in capital expenditures throughout the year. Cash and cash equivalents, as mentioned before, have increased by $14,500,000 to $31,700,000 following recapitalization. I will now hand back to Michael, who will provide an update on our strategic priorities. Thank you. Thank you, Jose. Referring to Slide 20, as mentioned earlier, we've completed the executive leadership team renewal And this brings in a team of enthusiastic and motivated executives with significant experience in FMCG. I'm personally extremely excited with the team and can see the leadership developing across the business. With our voice survey being led by our Chief People and Culture Officer, Fiona McGregor, we are communicating our new values within our business: respect, Excellent integrity, creativity, collaboration and accountability, all being key to driving performance within our business. Slide 21 showcases our key brands and how we will prioritize and categorize them. The focused brands we consider are true growth engines. Those brands that we are nurturing to deliver long term growth and trade brands where we are focused on maximizing profitability. Obviously, we are focusing on our marketing efforts In our new product development, as demonstrated by the recent successful launch of Milk Love Open. In all cases, Our focus is on brands that can deliver sustainable and profitable long term growth. On Slide 22, As important as our financial reset is the development of our ESG framework given our mission to create on trend responsibly produced Dairy and Plant Based Beverages, Nutritional Products and Ingredients. We are continuing to develop the ESG framework with key alignment to a number of UN goals. Our commitment is to protecting the planet and nurturing life with ambitions around water use and sustainable farming practices, together with reduction in non recyclable material and 0 landfill into the future. While we have already implemented substantive ESG initiatives, We will release further details on our ESG strategy at the AGM later in the year. At our AGM, we'll also ask shareholders to vote on a new corporate name for Freedom Foods, which is required after the sale of Cereals and Snacks Business and associated Frutar Foods Brands. The new name represents a clean break with the past and the Merchants of a reset and refreshed organization with significant opportunities ahead of its leading Australian Beverages and Nutritionals Company. Turning to Slide 23, a few comments on the impacts of COVID-nineteen on our business. COVID-nineteen has definitely brought challenges to our business In our community over the last year, the safety of our staff, customers, suppliers and stakeholders has been and remains our number one priority. As Freedom Foods is classified as an essential service, our 3 operating sites have been able to operate with only essential workers. All staff were not all staff that were not required on-site during the government restrictions have worked from home. We also have not had a positive case within our workforce during the pandemic within our current facilities. We are continuing to monitor the situation And are working with the authorities ensuring the safety of our staff and suppliers, especially our farmers who need to feed and milk the cows every day. The Casey's and regional township at Shepparton have placed approximately 1 third of the population into isolation as secondary close contacts. We've invested heavily into technology to ensure our staff can operate safe and securely away from the workplace. While it's too early to tell exactly what impact extended lockdown will have on our business, our experiences last year provide us with some insight. Prolonged lockdowns also have the potential to affect overall revenue and earnings by changing the revenue mix. During the lockdown in 2020, sales reductions in out of home export channels were partly offset by increases in others, such as pantry stocking via the grocery channel. Supply chain logistics were impacted with longer lead times and increasing freight costs. Vaccinations are key to being able to return to some form of normality. We are working closely with the government authorities to assist in the vaccination of our staff. Due to the nature of our business, we've been able to receive priority bookings and we are working with each to ask them to allocate time to allow them to be vaccinated. We'll be closely monitoring the COVID impacts with the changes in consumer behavior and other potential impacts to the business. As I close out the presentation, I want to take a moment to thank all of our staff, the Board, Our suppliers, customers and our stakeholders, existing and new, for their support over the past year, we wouldn't be here without your support. Looking ahead for FY22 and beyond, the reset is substantially complete. We are now focused on the transform and growth stages of our strategy. Internally, we continue to drive the transformation program and focus on our operational turnaround initiatives, which are critical to improving processes at site, particularly Shepparton. Externally, while there may be temporary headwinds from COVID-nineteen, There is no doubt that the long term, we are riding strong tailwinds. We see significant export opportunities as the demand for Australian produced foods We are well placed to participate in this market with a focus on operational effectiveness Asset utilization is key to delivery in this market. We see continued growth in demand for plant based beverages. We will leverage our market leading brands, Innovation and expertise in producing new products that respond to consumers' expectation. Milk Lab in Australia Zone will be key to this growth, And the New Hope Beverage will be a key initiative and an example of where we can find and deliver value. This focus will be supported by disciplined investment in new products and marketing support for them. And all of our efforts are underpinned by the Ongoing cultural transformation of the business and enhanced governance that prioritizes integrity and accountability. I'd like to thank you all for listening today and wanted to reiterate that a significant transformation in the group is well underway. The results we are delivering today is a testament to that, but be assured we are not finished and we are very focused on the opportunity to deliver long term sustainable and profitable growth. This concludes the formal part of the presentation. We'll now take questions. Thank As seen that there are no questions on the line, I would now like to hand the call back to your presenters for closing remarks. Thank you, Vincent. Thank you all for listening today and appreciate all the effort that all our stakeholders have put forward within this time. The transformation, as I mentioned, is significantly underway. So thank you for your time and stay safe. Thank you. Thank you. This does conclude today's conference call. We thank you all for your participation. You may now disconnect.