Thank you for standing by, and welcome to the Scales Corporation Limited half-year results call. All participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Andy Borland, Managing Director. Please go ahead.
Good morning, all. I'd like to welcome you to the Scales half-year results announcement for the six months ending thirtieth of June, twenty twenty-four. With me is our CFO, Steve Kennelly, and Chief Operations Officer, Geoff Smith. Earlier this morning, we lodged our results with the NZX, which included a presentation pack. We'll base our comments on this morning on that presentation. We'll run through the slides and then take questions. An agenda is provided on Slide two. I'll start with an overview of the first half of this year on Slide four. I'm pleased to announce the group's earnings were in line with expectations and are recovering strongly from last year's cyclone-affected results. Horticulture is returning towards pre-cyclone performance levels, and Global Proteins delivered a result that was consistent with the first half of twenty twenty-three.
Underlying net profit after tax attributable to shareholders was up 97% on last year at NZD 28.5 million, and reported NPAT was up 167% at NZD 38.1 million. It was a busy six months from a strategic point of view, with a number of transactions for both Horticulture and Global Proteins. Logistics also expanded its operations with the commissioning of a new Auckland warehouse and chiller facility. We'll comment on the results for each of the divisions later in the presentations. Slide five summarizes the three transactions undertaken by Horticulture and Global Proteins in the last few months. The purchase of orchards from Bostock Group and the conditional sale of Mr Apple's Te Papa and Blyth Orchards to Craigmore Sustainables will result in a net increase in planted orchard area of approximately 54 hectares.
Importantly, these transactions increase the volume of premium varieties and, in particular, add Dazzle plantings. We were delighted to acquire the remaining 50% shareholding in Profruit as part of the Bostock transaction, and are pleased to welcome them as a fully owned subsidiary of Scales Group. These transactions are expected to have a combined net positive impact on Horticulture's underlying EBITDA, pre-IFRS 16, of around six-to-eight million over the medium term. We were also pleased to increase our investment in Meateor Australia in June from 33% to 50%, to now be fifty-fifty partner in the business with the Fayman family. The total cost of our 50% stake was AUD 11.5 million. This increases our foothold in the Australian market, which is strategically important to the Global Proteins division.
I'll now pass over to Steve to discuss the financial results for the first six months of the year.
Thanks, Andy. Slide 7 summarizes our financial performance for the group for the first half of 2024. As Andy previously mentioned, underlying NPAT attributable to shareholders was NZD 28.5 million, up 97% on last year. Underlying NPAT was NZD 38.4 million, up 55%, and underlying EBITDA was NZD 60.5 million, up 46%. It's pleasing to see group earnings recovering strongly. Moving on to a summary of our divisional performance, Global Proteins delivered underlying EBITDA of NZD 29.6 million, consistent with the first half of 2023. This result was generated while the division executed its strategic initiatives, including continuing to work through the start-up of both Meateor Australia and Esro Petf ood. Horticulture produced a very positive underlying EBITDA of NZD 30 million, up 162% compared to the same period last year.
This signals that the division has made significant progress following the effects of Cyclone Gabrielle. Logistics also produced an excellent result of NZD 3.8 million, up 44% on last year. Our financial position is summarized on Slide 9. Net debt was NZD 81.9 million as at 30 June 2024, compared to NZD 29.8 million as at 30 June 2023. This reflected the cost of the Bostock and Meateor Australia transactions, as well as the investment into Esro. We're forecasting a return to a net cash position at the end of the year, and that assumes the settlement of the orchard sales to Craigmore Sustainables. I'll hand you back to Andy, who'll give you a further update of the divisions.
Thanks, Steve. As you mentioned, Global Proteins produced a result consistent with the first half of both 2022 and 2023. Shelby delivered volumes that were up on the prior six months, and there was strong volume growth in edible proteins at Fayman. While Meateor Australia and Esro Pet Food are both in a start-up phase, they are delivering increased production volumes. Additionally, Meateor Australia has been improving yields, while Esro Pet Food continues to focus on establishing its customer relationships. Revenue and margin per kilogram of volume sold within our pet food ingredients businesses are remaining stable. A number of business units have actually generated improved margins in the first half of 2024 compared to 2023. However, this has been offset by start-up costs within Esro Pet Food.
Slide 13 summarizes nine of the key strategic initiatives that are being developed within Global Proteins, which we believe will help the division deliver on its growth targets. These initiatives are focused on executing on strategic pillars, including increase in capacity, expanding geographic locations, investing in product development, and securing raw material supply. We're excited by these opportunities and look forward to updating you on their progress. Moving on to the Horticulture division, which delivered a strong result with the underlying EBITDA that was up 162% on the first half of 2023. It should be noted that this result includes 100% of Profruit earnings for the full six-month period. The results from the 2024 growing season are a credit to the effort and determination exhibited by the horticulture teams following Cyclone Gabrielle.
It can also be, in part, attributed to our strategy of increasing our investment in premium apple varieties. Own-grown export volumes for Mr Apple for 2024 are forecast to be around three million TCEs, which is a return to 2022 levels and a projected increase of 11% on 2023. While this is down on expectations due to lower-than-forecast apple pick and smaller fruit size, in-market pricing is meeting expectations. Mr Apple is also forecasting a very pleasing 25% increase in premium volumes compared to last year. We continue to experience growth in our Dazzle and Posy volumes, with a forecast 45% increase in volumes compared to last year. These varieties are expected to account for almost 20% of all premium volumes in 2024, and we expect a further increase in 2025 as a result of the acquisition of the Bostock orchards.
The Asia and Middle East markets continue to be our most significant market area, expecting to account for around 80% of total fruit sold. Unfortunately, shipping disruptions have been a challenge for many overseas markets, and these disruptions are expected to continue next year. However, our current export packout is pleasingly back to more normal levels at around 78%. Lastly, logistics. Logistics benefited from our increased air and sea freight volumes, generating an excellent underlying EBITDA of NZD 3.8 million for the period, up 44% on last year. This was, in part, due to strong external customer air freight volumes being processed through the new Auckland warehouse and chiller facility, together with a return to more normal sea freight volumes.
The division continues to navigate ongoing supply chain difficulties, with these difficulties looking likely to remain in place over the short to medium term. Sustainability continues to be a major focus for the group, with progress being made on a number of initiatives. These included undertaking a Scope 3 screening exercise to assess the emissions footprint from our value chain, an assessment of our emissions inventory reporting process, identification of decarbonization options within our group businesses, and updated our climate scenarios. This work will contribute towards establishing our emissions base year in 2024 , and following this, and setting our emissions target in 2025 . Moving to the final agenda item for the full year outlook for 2024 .
I'm pleased to advise the directors have reconfirmed Scales' FY 2024 guidance of underlying net profit after tax attributable to shareholders of between NZD 30 million and NZD 35 million. In providing this guidance, the directors note that the combined impact of the Bostock and Craigmore transactions has been taken into account. This impact for FY 2024 is forecast to be a marginal loss in net profit after tax attributable to shareholders. Also of note, is that Mr Apple currently has around 14% of the export crop yet to be sold. And lastly, that the Global Proteins result for the year is forecast to be above original expectations, but the second half result appears unlikely to match the first half. I note some of this includes the impact of getting projects through the startup phase.
We continue to assess opportunities to grow Scales, particularly within Global Proteins, and we're excited for the future of the group. That concludes today's formal presentations. Please note that Appendix One of the presentation, which provides additional financial information and reconciles underlying earnings to reported earnings for the group in each of the divisions. We're now happy to take questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Montgomerie with Forsyth Barr. Please go ahead.
Hi, Andy, Steve, Geoff. Good morning. Well done on a solid result. Just if I start on outlook in the Proteins division, you're obviously talking to the second half, not repeating the first half. I'd just be keen to understand, I guess, the drivers of that outside of what you just mentioned in terms of projects ramping up. You know, have you seen a demand pull forward or... Yeah, I'm just keen to piece that together.
No, I think it's just, yeah, we've still got a couple of those projects finishing off. The transfer from one toll processor to another, that's underway or, you know, that's going to happen in the last quarter. And then, what we found in Melbourne, Matt, starting up, is the getting the plant commissioned and licensed, if you like, and pass the audits from both the customers and the regulators, just did take a bit longer than we thought. So we just factored in a bit of conservative and conservatism there. Yeah, so it's been really linked to those points.
Okay. So from, like, a demand-
I'm sorry. No, look, demand's fine. I mean, it's really more about, you know, us transitioning to, you know, these new facilities and bedding them in, and getting the volumes through them that are ahead or in Mr Apple's state, situation, the new plant we're heading to will do more volume than the one we're leaving.
Yeah. Yep. And just on the inventory rebalancing, is it, you know, fair to say that that has all washed through in the first half, like there's no issues there?
Yep. It's, yeah, it's back to very much the normal cycle that we'd expect.
Yep. And maybe sticking to proteins one more, you know, Fayman delivered what looks to be a very impressive first half. Yeah, what's driving that? Is it, you know, share gains? How sustainable do you think that Fayman strength is?
Yeah, look, it's across the board. I mean, some of the... You know, we've been moving product, you know, to the traditional markets for that business around Asia. But it's also been, you know, strong growth, and you've probably seen in the media there's strong demand for importing beef into America, and that's been a, you know, and a growth opportunity for the Fayman business.
Good. One, one more, if I flip to Hort. You know, obviously a pretty decent recovery there in terms of margins. I guess if we look out two, three years, you know, the, the company used to talk to doing sort of 40, 40 odd mil or, or more in pre-IFRS EBITDA. There's been a fair bit of change within that division over the last six months, obviously with the transactions. I suppose my question is, now that you've got foresight around, you know, the positioning of that business, yeah, are, are you able to give us a sense of, of where you think... Yeah, and even a range where you, of where you think Horticulture earnings may end up, noting that you've, you've sort of talked to that EBITDA uplift from the Bostock transaction?
Yeah, look, it's certainly expecting the business to continue to grow and improve those earnings as the higher paying varieties volumes kick in. And, you know, we would be hoping that business comes into definitely the high 30s. I mean, the year we did 40, I think it included some, you know, insurance and other one-offs. So, you know, the high 30s is our aspiration, you know, including to see the execution of the transition, I guess, to more premium varieties, you know, filled in.
And sorry, one more. I'm hogging here, but the phasing of the Bostock transaction in terms of EBITDA contribution, like, the NZD 6-NZD 8 million, is that FY 2025, 2026, 2027? How should we be thinking about that?
Yeah, well, it's certainly the net position after the buy of Bostock and the sale of Craigmore. Yeah. So that, that's our-
Yeah
... sort of, our net, net growth.
Yeah, but will that be all in FY 2025, or may it take a bit longer?
It's probably 2026, 2027, Matt, 'cause there's still... We've got to convert from organic to conventional. So there may be some impact there next year, so it'll be a bit more gradual.
I think the phasing of those plant things as well, coming into maturity, Matt, so we'll be more tuned in.
Perfect, thanks.
Your next question comes from Christian Bell with Jarden. Please go ahead.
Good morning, team. Yeah, well, well done on a really strong recovery this year, particularly in Horticulture. So just to start, on Horticulture, just curious to understand why. What were the sort of drivers that which led to the apple volumes being so much lower than the initial forecast of NZD 3.4 million? And then, what's your current view on longer-term volumes? I think that was around NZD 3.8 million on previous expectation.
Yeah, look, you know, I think it was a combination, Christian, of the overhang, if you like, or the apples were sitting in silt or, you know, the ones that were damaged by the cyclone, the ones that would recover. They were sitting in silt for six weeks or more, and that probably had an impact on them as the recovery. So, you know, in hindsight, that's probably has contributed to either lower volume or smaller count size. And it was quite a, you know, a difficult, cold spring early in last year's growing season, and, you know, that's obviously had an impact as well. And, look, our reduction is very similar to, you know, averaging the whole of the Hort space.
So it's not. It's certainly something we would see, would typically bounce back from pretty, pretty, pretty quickly. And so, you know, to your last point, yeah, we still see the NZD 3.8 million as a, as a, you know, a long-term position.
... Cool, nice one. And then, sorry, just, you mentioned before, when Matt was asking you a similar type of question, just on the where EBITDA could potentially you're hoping to sort of get to, as a target sort of range. The high 30s that you mentioned, was that on a pre or post IFRS basis?
Pre.
Sorry, say that again. Pre?
Yeah, it'd be pre-IFRS, and that would assume, you know, one of the important movements there would be that shipping rates would pull back from, or continue to pull back from current levels, so just be a bit careful there.
So if I... Oh, yeah, so sort of taking that into account, I think the post-IFRS impact has been about NZD 10 million. So if we were to take that, that sort of implies a post-IFRS EBITDA of close to 50, high 40s.
Yeah. Yep.
Okay, cool. And then just of the NZD 6-NZD 8 million EBITDA pre-IFRS that you provided for the Bostock transaction, how much of that was owing to Profruit?
Can you just say that again, Christian?
The NZD 6-NZD 8 million of EBITDA from the Bostock transaction, how much of that-
Oh, I see. Sorry.
What was the contribution?
The net increase.
What was the contribution for Profruit?
It's probably around about the incremental increase is probably sort of 2.5 to 3 , something like that.
Okay, cool. And are you... Can you give that on a-- can you give the overall guidance range on a post-IFRS basis, if that's possible?
Our range is post-IFRS 30-35m NPAT attributable.
No, no, no. Sorry, the Bostock guidance of NZD 6 million to NZD 8 million, that was provided on a pre-IFRS basis.
Oh, sorry. Sorry, no, look, we haven't got the calculations for the IFRS effect. It's not gonna be huge. But yeah, we haven't got the exact numbers yet.
Okay, no worries. But obviously the result in this half has already included a 100% contribution from Profruit. So we've sort of already captured a little bit of that guidance, I guess, in this result, would be fair to say, just to maintain-
We have, but yeah, bearing in mind, I think, and we pointed this out, that the net impact of the Bostock transaction, including Profruit and the sale of the two orchards, is just a net impact attributable loss, very marginal, you know. And that importantly includes increased interest expense.
Okay
... due to the acquisition.
Okay, cool. Oh, that's, that's cool. Thanks for clearing that up. And then just on proteins, while you're kind of expecting a slightly lower second half result, would you say... It sounds like on the demand side of things, it's still quite strong. Where would you place your -- would demand be ahead or meeting expectations at this stage?
I'd say meeting, Christian. Yeah. It's, I mean, we're just sort of reverting to, you know, it's obviously taken a while to wash through the COVID impact on inventories and that sort of thing. But, you know, we've... The industry is, you know, positive, you know, as you'd expect for a growing industry, and, you know, we're participating in that positivity.
Cool. And then, sorry, just what was... 'Cause you sort of pointed out that this first half included some startup costs for Esro. Firstly, are you able to sort of quantify what that, how big those startup costs were? And then, what actually drove... Despite that, your margins still improved. So what was the key sort of driver of the margin improvement?
I think the margin, I guess to answer that one first, the margin improvement was product mix, probably just a tick up in beef, but-
Yeah.
But yeah, the IFRS impact, Geoff, can you talk to that?
Yeah, so it's probably about a NZD 1 millon impact on the first half result.
Cool. No worries. Cool. Thank you. And then just, sorry, just one question. Just in terms of your guidance, you didn't, you didn't provide it on an EBITDA basis. Previously, it was, I think, your guidance was NZD 81-NZD 91 million, and NPAT attributable was 30-35. So can we assume that the NZD 81-NZD 91 million still stands, given you haven't changed it on the NPAT front?
Yep. Yep, we're still within that range.
Okay, no worries. Cool. Thanks, guys.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from David Oxley with the ACC. Please go ahead. David Oxley, your line is now live. Please proceed with your question.
Sounds like I've answered.
Your next question comes from Matt Montgomerie with Forsyth Barr. Please go ahead.
Sorry, guys, got one more. Just one of your listed competitors, I suppose, in the protein space last week, was talking to, you know, a closure of a competitor's site in the pet food ingredient business, opening up some supply opportunities in, you know, in their outlook. Have you, yeah, can you, is this something that you're experiencing or you're seeing as a potential tailwind? This is Australia and New Zealand.
The closure is in Australia and New Zealand.
One of the two. I'm just wondering if, you know, there are any competitors of yours?
We haven't seen any closures in Australia and New Zealand. I mean, to be fair, there is one in America, but we're transitioning to new plants in the States within the same company. So, you know, not a major concern.
No, I'm not talking about a Scales-specific closure, but a competitor of yours, which would potentially open up opportunities for Scales, is my question. But presumably you haven't seen that.
Given that it's listed, we should have a look at that ourselves and see if there's an opportunity for us.
Thanks.
Your next question comes from David Oxley with the ACC. Please go ahead.
Hi there. Sorry about that. Cut out last time. I just had one or two questions, if I may. On horticulture, can you explain how you've managed to... Or the accounting rules that allow you to consolidate 100% of that business for the six months, given that I thought it only completed in May, sort of well through the six-month period?
No, David, we sort of contracted it with a view to... We thought it would settle a lot earlier, but it didn't, but we'd already contracted it so that we would catch up or accrue all of the earnings from the first of January.
Oh, right. Okay. So it was just, it was just part of the contractual terms on the, on the takeover?
Yeah. Yeah.
Okay. That makes sense. Thank you. Secondly, you mentioned on the pricing front for horticulture, that pricing was beating expectations. Can you just give a bit more color on what that means in terms of what your expectations were? I know last year prices were pretty robust, I think, thanks to sort of supply chain challenges out of New Zealand, et cetera. Are we expecting underlying prices up, down, or flat versus last year?
I think from a pricing perspective, we're expecting it to be flat on last year. We haven't seen a major uptick in prices at all. It's really, you know, volume has recovered in this first six months compared to the price, and that's what's helped the first half as well.
Right. Okay. That's helpful. Thank you. And on global proteins, can you just give a little bit more color around it looks like Shelby's had a fairly strong half, given that minority interest charge did appear now, and sort of figuring out what that means for Shelby. A, is that fair? And B, is Meateor International contributing currently, and do we expect it to contribute positively for the full year? And obviously, you've made a statement that Matt picked up on about Fayman being strong in this half. Would we expect a positive net contribution to the underlying EBITDA from the associates in FY 2024, and did that happen in 1H 2024?
I think in general, yes, Shelby had, you know, a result in line with the expectations. We're pleased with it. Yeah, the new MFI business is still transitioning, you know, post the, you know, losing access to the pool of volumes. So that's, you know, just that's still happening and but likely to, you know, continue to decline.
Yes, it's for this year, it is contributing positively. It is, as you said, it's transitioning away, so it'll be less in future years. But you know, partially offsetting that is that Meateor Australia will be contributing more.
Yeah.
Right. Okay. So it looks like if Meateor International is positive, that there's gonna be a or there's likely to have been a modest positive from the rest of the same and plus the startup businesses within that associate line. Is that a reasonable perspective?
Yeah, it is.
Right. Okay. Thank you very much.
There are no further questions at this time. I'll now hand back to Mr. Borland for closing remarks.
Thank you all for participating in today's call. We look forward to providing you with further updates later in the year. Thank you very much.
That does conclude our conference for today. Thank you for participating. You may now disconnect.