Earnings Call: H1 2021

Feb 23, 2021

Thank you for standing by, and welcome to the Ridley Corporation Limited FY 'twenty one First Half Results Presentation. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Quentin Hildebrand, Managing Director and CEO. Please go ahead. Thank you, Melanie, and good morning to everybody. I'm joined this morning by Alan Boyd, Chief Financial Officer and Amy Olsten, Company Secretary. For those of you who have not yet seen the ASX release today, after almost 12 years at Ridley, Alan has decided to start planning his retirement, and he's afforded us an extended period so that we can go through the process of appointing the next CFO of Ridley. And this has given us the capability to make sure we have an orderly transition. In the meantime, Alan remains fully engaged as CFO of Ridley and is heavily vested in the results that we'll be presenting today. As the first step in this transition, today, the Board has announced that Amy Alston will take on the role of company secretary in addition to her role as General Counsel. Amy has previously held the role of General Counsel and Corporate Affairs Director, which included company secretary at Murray Goldburn Cooperative, and she's had previous senior roles at Deutsche Bank, Singtel, Optus, Winter Ellison as and so she's well experienced with this role. The format for the presentation today, Alan and I will run through the first half results presentation, and then we'll hand over for some questions. So just following through from the investor presentation that's up on the ASX website, I'll be starting at Slide 2, the highlights. And we're very pleased to announce that today we have an EBITDA from ongoing operations and before significant items of $37,600,000 which is 12.9 percent up on the prior comparative period. This has been driven by the execution of our growth strategy and has been achieved even though we've faced the transition from drought and the seasonal impacts of that as well as the challenges of COVID-nineteen. So we're very pleased with the profit performance of the business in this half. Equally, our focus on cash management has delivered a $21,400,000 net cash inflow as we've reduced our working capital And as we advised at the 30th June, we were carrying quite significant COVID contingency stocks, and we've managed to reduce some of those, although we are carrying some additional contingencies for obvious reasons. This also signals a return to a normal CapEx environment after the completion of the major asset refresh with the opening of the Wellesford feed mill in July last year. If we move over then to the segment reporting, following the restructure that took place in the FY 'twenty year and with effect from the 1st July last year, we've adopted 2 reporting segments. These are the bulk stock feeds reporting segment and the packaged feed and ingredients reporting segment. So if we move through to those slides on Slide 5, you'll see that the bulk stock feeds performance in this period was $14,500,000 EBITDA, which is down 20% on the prior comparative period. This is a result of the drought feeding ceasing and a reduction in the beef and sheep sales in this period relative to the prior comparative period. And also, the abundance of pastures has also impacted the dairy volumes as dairy farmers have the benefits of good on farm grazing. Despite a reduction in that in the sales to the ruminants sector, we've seen an improvement in the monogastric sales. That's through the broiler, lab and pig volumes growing up, and that's been a welcome offset. As far as the margins are concerned, we've seen the mix changing. Obviously, we make more volume on more margin on the smaller sales as opposed to the large monogastric sales volumes. And also, there's been some impact as we've transitioned from the smaller grain crops and raw materials from the prior year moving into what has been a very good crop growing season. And the reduction in prices over that period has meant that we have carried through some of the higher value prices. So there's a bit of a timing contribution there, which has impacted us within this half. I also call out there that as part of our Northern Victorian organization with the transition to our new Wellsford feed mill, we have had a transition period whilst we've been operating the Marupno feed mill as well, and that will be closing at the end of this week. And so the costs of operating Marupne have been borne within this half that we are considering. Moving to the next reporting segment, and that's the Packaged Feeds and Ingredients. This segment had an EBITDA performance of $23,000,000,000 in this first half, up 52% on the prior comparative period. This is reflecting strong performance in rendering, driven by the prices. Obviously, this gas impact has meant that there's a drop in the red meat raw material supply into the rendering industry, and that has supported prices of finished product. But pleasingly, we've also seen good improvements in the operational efficiency and yields driven by the plant reliability and interventions in raw material segregation. So a good performance from the rendering business unit. The branded package sales through the rural network and the urban pet specialty store chains traded well and on the back of targeted marketing and promotional campaigns. The aquafeed sector continues to be highly competitive, and we with the construction of 2 new extrusion plants in Tasmania in the last two years, one of those being our Westbury plant. But we're pleased to say that even though that this is a highly competitive sector, we have grown volumes through our Aqua feed sales in this period. And finally, with the pick from the 1st July 2020, the Novak Thailand operation is no longer capitalized and is reflected in the numbers as a commercial operation, and we've sold all the available product in to Pawn Feed in Pawn Feed, predominantly into the Australian operations. So that's the breakdown on the segments as we had reported. Also, I skipped over Slide number 3, and I do want to just highlight that in addition to the financial performance that we've achieved and that we are pleased with, this has been complemented by a record safety performance within the business as well as an 8% improvement in our employee engagement score. And that really demonstrates the stability of our operations over this period. And I want to acknowledge the Ridley employees for their enormous commitment during what has been a challenging period, but we've kept customers fully supplied and also have managed to improve our efficiencies and grow profitability while dealing with the challenges of COVID-nineteen. So this set of results is something that the employees of Ridley should be proud of. So I'll hand over to Alan now to take us through the detailed financial results. Okay. Thank you, Quintin. If we move to the profit and loss summary, the first financial slide. Quintin has already referred to the segment reporting. So this is a format that we can follow now. It will be consistent with what you'll see in the annual report and the 4 d and the 4Es as we move forward. 37.6 to 33.3 year on year equivalent comparison, excluding significant items. We've got a 600,000 reduction in corporate costs period to period. That just reflects the FY 'twenty restructure that we did and ongoing cost control that flows down to the next line. Individually significant items before income tax, we sold the last remaining parcel of land at Lara in the period. So we recorded a $1,800,000 pretax profit on that. The prior year period of $12,000,000 that excludes last year when we reported that, we included a $2,600,000 favorable offset with regard to the introduction of the lease accounting standard. Because we've got 2 consistent periods with that new standard in operation, we've taken that $2,600,000 back out and put it up into the normal EBITDA from operations because that's how it's going to be reported going forward. So that's why that figure is different. There were $12,000,000 of adverse individually significant items at the half year last period. Our depreciation and amortization charge has gone up. That's largely due to the commencement of depreciation at the Wellsford facility, which was formally opened in July and depreciated from that month. The net finance costs reflect 2 interest rate reductions in November and 1 in March 2020 and lower debt levels as we start to pay back or pay down the debt that we've got, so a $400 reduction period to period. And then the income tax expense reflects the increase in operating profit for the period. Within that period, there's a $570,000 tax on the profit on sale of Laramie. There's an overprovision of tax reported at 30th June that comes in to offset that, but that gives a $5,000,000 charge for the period. The corresponding period last year was a benefit of 0.8 as a result of those individually significant items. So it drops down to a net profit of $11,560,900 compared to $396,000,000 in the prior period, so up $11,100,000 If we very then quickly move to the balance sheet assets, the cash and cash equivalents is simply a function of what's in the bank account based on collections and payments that cycle. So that does fluctuate on a daily basis. The important component there is net debt, which we'll touch in a later slide. We did have some contingency stocks at 30th June, which increased our inventory to $104,500,000 We're progressively working down that as we gain confidence in the supply chains to be able to withstand any further outbreaks of the pandemic. We've got nearly $10,000,000 reduction in the first half, and we want to make further inroads into that in the second half. And our receivables profile is very consistent from a debt to day perspective. We do operate within that 32 to 35 of sales outstanding. So again, that's just a function of timing around the half year close. As a result of the a lot of work that went into the finalization of the 2020 tax return in the after reporting the full year result, we've got a tax receivable position when we finally lodge an amended return for 2020, and that will be cash in the bank coming through in the second half year in and around that $2,200,000 mark. And the assets available for sale at 30th June that we had of $200,000 represents the Lara property that was sold in the period. That's why that's gone to 0. With the completion of the Wellswood Feed Mill, that concluded the major asset refresh program. So there hasn't been a great deal of movement in property, plant and equipment, the net carrying value over the period, but that's despite the increase in depreciation that we've talked about in the earlier slide. And again, the transition of the Novak operation in Thailand from an applied R and D project recorded as an intangible and capitalized moving now to operations means that, that expenditure that's previously been capitalized is now coming through in the operating result. There are some on current receivables. The tax assets on deferred tax, that's just a function of the timing of the tax assets and benefits moving forward in the future. All drops down to $631,700,000 total assets reported at 31 December. And in the next slide, we'll just touch on liabilities. Current payables, again, is just a function of our normal trading terms and the timing of how month end falls and our trading terms. At 30th June 2020, we were required on the accounting standard to report our borrowings as current, but we've reverted back to the noncurrent traditional disclosure further down the slide at $161,000,000 for 31 December versus the $193,000,000 as at 30th June. The important component is the net debt, which is reduced from 147.2 down to 125.8 when you offset the cash and cash equivalent balances. Hasn't been a great deal of movement in current provisions over the period or the current lease liabilities, But the noncurrent lease liabilities has gone up significantly as a result of the extension of a number of property leases, which are sort of long tailed. And therefore, the lease liability beyond 12 months of reporting date has increased by approximately $6,000,000 Overall, those numbers dropped down to a $275,900,000 net asset position. That reflects the earnings but also movement in reserves. And there was $1,600,000 worth of share capital issued in the period. That was consideration pretty consideration in payment in the 6 month period of accrued FY 'twenty short term incentive entitlements. So there are some components that you'll see within the appendix 4 d balance sheet reflecting those movements. And if we move to the cash flow slide, the next slide, we'll start with our consolidated EBIT. We add back the depreciation and amortization, which is noncash, to give us a consolidated EBITDA, which is a good surrogate for our initial cash. And then we look at what's happened to the movement in working capital, which is creditors and receivables. We've had a favorable movement for the period of 2.2. We've always reported our maintenance or stay in business CapEx as a mandatory sort of cash outflow. We have to maintain the assets and keep them safe. So we put that above the line, as we call it, to give us an operating cash flow of $30,000,000 And our development CapEx, you can see we've tailed off significantly following the completion of the Wellsworth feed mill opened in July 2020. So 24.8% in the prior period versus 2.6% in the current period. And I did mention before about Novak Thailand moving from an applied R and D capitalized intangible project to operations, and that's essentially the reduction from period to period in the expenditure in that regard. There was no final dividend paid in the period compared to the $0.275 paid in the prior period. And the net proceeds of the sale of property from Atlara was $2,000,000 for the period. Net finance costs and tax payments are just a function of timing of the bank facility interest payments and tax installment payments. And then lease payments now. So what we do now is we capitalize the right of use assets on the balance sheet with the equivalent lease liability as a current and non current liability and record the lease payments as a cash outflow in the cash flow. So the $21,400,000 that Quentin had in one of the earlier slides, that's where you see that number. That's essentially the overall cash inflow that we've had for the period that we've been able to apply against our net debt to take it down from 147.2 at 30th June to the 125.8th of 31 December. And the final financial slide, we've introduced a new slide here on net debt, gearing and leverage. So the first three rows of the table there talk about the development CapEx that we've had over the period, and you can see the extent of the major asset refresh with over $95,000,000 spent between FY 'eighteen 'twenty on Westbury and Wellsford together. The impact that, that's had on net debt is the next three rows. So we've got gross debt, again, just plucked from the balance sheet, less the cash and cash equivalents from the balance sheet, gives us a reported net debt. And then we've just gone and dropped that down to what our gearing is, which is a net debt to net debt plus equity calculation based on our banking covenants. So you can see we peaked at 36% at 30th June 2020 and reduced that down to 31.3 percent with hopefully further inroads in the second half of the year. And the other critical bank covenant that we operate against is the leverage ratio, which is our last 12 months of EBITDA performance at any reporting period against the net debt position. And that drops down to a it was peaked at 2.73 actually at 31 December, marginally reduced at 30th June to 2.63, but significant reduction with that 21,400,000 going up against the net debt for the 6 months, significant reduction to take that down under 2 and report a 1.9 leverage ratio at 31 December. So they're the key financial components of the result, and I'll hand back to Quintin. Thanks, Alan. So moving on to Slide 13. In keeping with the theme that we introduced 12 months ago, I've repeated the growth strategy slides just to remind shareholders of what we are doing to drive the underlying performance of the business. And if we flick over to Slide 15, starting at the top right hand side, we're making progress in driving the efficiencies of Nautic and progressing international sales. We've changed the coloring of the package the new range for packaged products as we've now commenced some the launch of some new packaged products, which will come to market in the second half. So that's now partially executed. And there have been some further customization of products out of the rendering business. Looking at the sales side, good progress being made driving our sales performance. And as indicated previously, this has been facilitated by our new structure and also the support we're giving from a technical basis through to the sales teams. I've reported previously that our bulk stock feeds meals are at about 80% utilization and our extrusion facilities at about 70%. So there remains opportunity there for us to grow and focus going in on the sales. Today, I thought we would I would focus a little bit more on our supply chain aspects and the optimization there. So if you move over to Slide 16, you can see the next round of optimization within our core business. You can see on the right hand side chart there just an illustration of how our rendering and note the ingredients from rendering and Novak flow into what is the 3 operating business units of stock feeds and packaged and subs and aquafeeds. Obviously, those ingredients from Rendering and Novak, a portion of them are flowing directly through our feeds to our customers, but we also have sales both domestically and export in the case of Rendering and export within Novak. So this level of integration within our business gives us the opportunity to really differentiate for our customers and the integration of our supply chain and the closeness with which we can work with our customers to get the optimization of their livestock performance. And then obviously, the relationships that we have with the processes giving us byproducts back through the rendering business. So where we're really focused now and in the next 12 months is really on driving our competitive advantage through our place in the market. We're focused on our nutritional capability, and we're the only provider with experts in each of the species. Leveraging our procurement volumes and the merchandising team within Ridley and the capability to take advantage of arbitrage opportunities across different ingredients in different parts of the country. Having completed the asset refresh, we have new large scale assets and to leverage technology across our whole operational supply chain to deliver more efficiencies and value. And then continuing to work at optimizing the ingredients coming out of the rendering business so that we can customize those for the needs of our customers. Moving on to Slide 17. This is the group of people, the leadership team behind the transition that we're going through and the successful change management that's being delivered. And as you can see on the slide with the years of service, there's a real mix of long term Ridley experience and some fresh approaches with 4 new additions over the past 12 months. So this is the team that's working hard on driving the next phase of our growth strategy. Moving finally to the outlook, which you'll find on Slide 19. We consider that we have the controls in place to manage employee welfare as well as protect against the potential business interruptions from the ongoing risk of COVID. And we've seen that this has stood us in good stead up until now, and we remain prepared for future disruptions. In the second half, we see earnings being supported by an improvement in the bulk stock feed segment from the ongoing strength within the packaged feeds and ingredients segment as we enjoyed in the first half and the continuing implementation of the growth strategy. And so the net upshot of this is we see operating cash being generated within the business and prudent management of working capital. We see that this should result in a further reduction in our term debt by the end of the financial year. So that concludes our presentation for this morning, and I'll hand back to Melanie to take any questions that anybody has on the call. Thank you. Thank Your first question comes from Paul Jens with PAC Partners. Please go ahead. Just main question is around the aquaculture space where there's obviously a major push on there, Quentin and Ellen. So you talk about the competition coming in. Are you able to talk about, I suppose, the way that you're winning new volumes down there in the short term and the medium term, please? Great, Paul. Yes. So as you know, we constructed and commissioned our Westbury operation in July 2019, and 1 or 2 that is down there constructed a new facility, which came online about this time last year. So we've seen the increase in capacity within the sector. We divide up the aqua sector into what we call temperate, which temperate species, which would be majority being salmon and then in Tasmania as well as in New Zealand. And then also the yellowtail kingfish in on the mainland. So that would be the temperate, and that's probably given the location and the 3 plants in Tasmania, that's a very competitive area. That segment also had some impact through the impacts on Foodservice. So very competitive market. And but despite that, we've managed to hold our position. Obviously, we would have liked to have grown that, but that hasn't been such the case. If we look at the tropical species, and so this is mostly prawn, barramundi, etcetera, we've seen good growth in that area with the expansions that are happening and the investments that our customers are taking. And so as a result, there's been quite significant growth in our sales into that sector as our customers have been growing. So the net of it all is that we've been seeing quite a we've seen a lift in sales volumes through our 2 Aqua Feed extrusion plants. We do operate them together. So we're optimizing production between the 2. And we've also focused on cost reduction in that in those operations. So the net of that is that we've actually had a positive contribution despite it being competitive and margins being under pressure. And just a couple of energy questions around that question. I suppose the amount of pet food that you're making with particularly the Tasmanian plant and then how you're leveraging Novak into expanding your Aqua feed, please? So the pet the companion dog food, which we're producing, is happening up in our Narangla plant. But as we've grown production through that plant, we've shifted some of the Aqua sales down to Westbury. So that's how we're operating together. But yes, that's a focus on the companion sector for us, and that's contributing volumes as well. As far as Novak's concerned, we're obviously the only domestic seller of product containing Novak, and the performance of our product continues to deliver good performance in the prawns. And so that has been a it's a competitive advantage in our offering, particularly in the early stage diets of what's been supplied into the prawn sector. So we're enjoying the benefits of being able to offer this bespoke ingredient through our Aqua sales. Thank you, Quinn. I'll go back in the queue. Great. Thank you, Paul. Thank you. Well, Melanie, if there don't seem to be any more questions, I know there will be opportunities in the coming weeks if there are any others. Paul, I believe, Melanie, that Paul's got another question there. If I could. I went back in the queue. I didn't realize it was a Q1. Quentin and Alan, Alan. Just on the, I suppose, the cash flow being very impressive performance there, Alan. Is that something that you can continue into the second half? And is this, I suppose, a step change in the way that you're dealing with your customers? Well, I guess there's 3 components to the answer of that, Paul. I mean, the first drop of cash flow is obviously earnings. So Quentin's sort of commented on that, that we think there's some strength in the second half from that perspective. The second component of that is working capital. We don't to be honest, we don't have a lot of leverage around our debtors and our payables if we stick within our trading terms. And as you mentioned before, the Aqua sector is under a little bit of pressure to extend trading terms as part of that competitive environment. But the main lever is inventory. And as I said in my in going through the financials, we did get nearly a £10,000,000 reduction from the 30 June levels. We'll have to see where what level of confidence we have at 30 June 2021 with regard to where the pandemic sits and any contingency levels that we have and also whether there are some opportunities in the marketplace that we might take positions on to go a little bit longer. But otherwise, we'd hope to squeeze a little bit more out of working capital from that perspective. And then I guess the 3rd component is CapEx. And we have a very tight process now and a monthly council where all business units are represented and put forward their case. So it's a capital allocation on a scarce resource basis. So by maintaining the control of that and it's probably worth pointing out now as well that, that sort of maintenance CapEx to depreciation nexus is well and truly broken with the major asset refresh that we've had. So it's no longer a valid comparison to say, oh, well, maintenance CapEx has gone below DA because DA went up a lot, and we would expect maintenance to go down a bit with regard to the new plants that we've got. But all I can say there is there's tight control over the maintenance CapEx. We're still open to receiving proposals from the development CapEx side. But the operating cash flow line that we'll be continuing to report in the at the full year, it should be positive on all three of those fronts. And then the other question there is around dividends, Alan. I've only had a brief look at the numbers, but I didn't see a statement there as to the change on the dividends because I think you stopped the dividend there at the second half last year. Is that what's the policy around dividends as we improve the cash flow? Yes. Paul, so as you're right, there was no payment at the end of last financial year. And again, the Board has taken the decision not to pay an interim dividend now. The our job really is just to keep focus on driving the performance of the business and the cash flows, and that will give the Board options down the track. So as you've highlighted, we're focused on cash generation, and we'll leave that up for the Board to deliberate at the end of the financial year. As part of the normal 100 and full year sign off mechanism, we put a detailed analysis up to the Audit and Risk Committee, which meets ahead of the Board meeting. And we look at all the forecasted cash flows, the threats and opportunities and the outlook with regards and our debt position. So those factors are all considered in a detailed analysis at that point in time. And then the decision is made as to and the payment timing will be at the end of October. But the Board is only in reaching its decision on this interim, has only considered the current scenario and decided that debt retirement for the second half of the year remains the priority. There are no further questions at this time. I'll now hand back to Mr. Hildebrand for closing remarks. Great. Thank you, Melanie, and thank you to those who've attended today. I wanted to just highlight this is after a significant business reset in the FY 'twenty year with some significant items that were incurred. This is a set of results which is clean and definitely demonstrate our focus on cash. So that's where we're focused, and we look forward to presenting to you our full year results in 6 months' time. Thank you very much. Thanks for your attendance today. That does conclude our conference for today. Thank you for participating. You may now disconnect.