Thank you for standing by, welcome to the Scales Corporation 2023 interim results announcement. 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 1 on your telephone keypad. I would now like to hand the conference over to Mr. Andy Borland, Managing Director. Please go ahead.
Good morning. I'd like to welcome you to the Scales half year results announcement for the 6 months ending 30 June 2023. With me is our CFO, Steve Kennelly, and also our Chief Operations Officer, Geoff Smith. Earlier this morning, we launched our results with the NZX, which included a presentation pack, and we invite their comments on that presentation during this call. Steve and I will run through the slides, and then we'll take questions. An agenda is provided on slide 2. Moving on to slide 4 with an overview of the period. Scales delivered an overall resilient performance for the first 6 months. An excellent performance by Global Proteins and solid earnings from logistics were partially offset by a commendable horticultural operational result, which was affected by Cyclone Gabrielle.
Underlying NPAT attributable to shareholders was NZD 14.5 million, down 43.5% on last year, and the reported NPAT was NZD 14.3 million, down 59.3% on last year. During the six-month period, we've continued to strengthen our board with the formal appointment of Mike Petersen as Chair in April and the appointment of Tony Batterton yesterday. Steve and I will comment on the results for each of the divisions later in the presentation. Slide 6, moving on to our recovery endeavors following Cyclone Gabrielle and the associated sustainability undertakings. As previously mentioned, we've committed to donate NZD 250,000 for cyclone recovery. Donations to date have been made to The Evergreen Foundation and Rural Support Trust, both of which provide a wide range of support services for cyclone-affected families and communities.
In terms of our orchards, a significant amount of work has gone into their cleanup and remediation, and we'd like to say a big thank you to our teams for their outstanding efforts. Current estimates are that our 2023 export crop will be down around 18% on last year, with total tree losses of around 5% or 50 hectares. However, less than 50% of this area will need to be replaced due to expiring leases. As mentioned previously, we're taking the opportunity to review our mix, and with continued focus on premium varieties in line with our overall strategy. In the slide 7, during the recovery, our primary focus has been our people and the community. This current slide summarizes a few initiatives that have been put in place, including well-being, workshops, counseling, and medical checks.
We've also provided financial assistance to affected staff and helped other growers with their harvest where possible. As I mentioned, a significant amount of work has gone into the remediating our orchards, and this has taken place in just conjunction with managing the day-to-day harvest and packing operations. Whilst the recovery was bigger than initially envisaged, the net impact of our earnings was consistent with our expectations. As an example of the scale of the recovery effort, it's estimated around 17,500 truckloads of silt has been removed from our orchards. Where possible, every effort has been made to dispose of material in a sustainable manner and minimize the amount of waste going to landfill.
We're pleased to note that around 50% of the recovered blocks have already been reseeded, and the horticulture team is a target to complete reseeding by the end of this month. I'll now pass over to Steve to discuss the financial results in the first half of the year.
Thanks, Andy. Slide 10 summarizes our group financial performance. We note that this result has been negatively affected by the impact of Cyclone Gabrielle. As Andy previously mentioned, underlying NPAT attributable to shareholders for the first half of the year was NZD 14.5 million, down 43.5% on last year. Underlying NPAT was NZD 24.8 million, down 28.3%. Underlying EBITDA was NZD 41.5 million, down 25.1%. As you'll see in the table, a combination of Cyclone Gabrielle and market conditions have resulted in increased interest and payments and asset write-downs. These have had a pre-tax earnings impact of NZD 11.2 million. Turning to slide 11, our divisional performance is summarized here.
Global Proteins earnings provided a strong base for the overall group result, with first-half earnings slightly up on the prior period to NZD 30.1 million. This was in part due to the division building on the operational improvements it made last year. Given the effects of the cyclone, horticulture generated a commendable underlying EBITDA of NZD 11.4 million, and logistics produced a solid result of NZD 2.7 million, notwithstanding lower volumes, also an effect of the cyclone. Slide 12 summarizes our financial position. Net debt as at June 30, 2023 was NZD 29.8 million, with significant expenditure over the past 12 months, including investment into the farming businesses in Asia Australia of NZD 29 million and CapEx of around NZD 15 million. Our forecast net cash position at the end of the year is expected to be around NZD 10 million.
The value of our agricultural produce inventory at June 30, 2023 decreased by NZD 22.7 million compared to June 30, 2022, due to a high proportion of apple sales compared to the prior period. I'll now hand you back to Andy to give a further update on the divisions.
Thanks, Steve. As mentioned, we saw further growth in Global Proteins, both in terms of underlying earnings and volumes. These results, including our share of a full 6 months of trading from the farming businesses. The transition of our Australian business to the Meateor Australia factory has begun, with the factory in Melbourne being commissioned this month. Slide 15 summarizes the results of the horticulture division. As previously mentioned, this has been an extremely difficult 6-month period for the division, for the industry in general. The division's earnings were predominantly impacted by lower volumes, with Mr. Apple total owned growing export volumes forecast to be down 18% on prior year. This is in line with reductions in estimates for the overall New Zealand crop. We continue to focus on our strategy of supplying premium varieties to the Asia and Middle East markets.
We're extremely positive about the returns from this strategy, with the, this year's end market pricing for our greener varieties supporting this approach. We also believe that performance in 2024 will, will return to more normal levels, with expected increases in volumes and increasing percentage of premium apples, as well as lower freight costs, FX rates, and improved labor availability. Our automation projects are also expected to deliver operating efficiencies. Moving on to slide 16, and Mr. Apple' premium volumes in market. We saw encouraging growth in our Dazzle and Posy volumes, with proportion of these varieties compared to total premium volumes, volumes continuing to increase. In fact, demand for Dazzle has outweighed supply in China. The Asia and Middle East markets continue to comprise a significant proportion of new Mr. Apple' total sales, and we expect increased demand in the forthcoming Mid-Autumn Festival in China.
Our export pack-out to date is down on last year at 70%, due to the effects of Cyclone Gabrielle. Turning to slide 17 and an update on logistics. The division generated a solid result with underlying EBITDA of NZD 2.7 million for the six-month period. This was down 25.7% on last year, with the decrease being in line with reduced apple and other crop volumes due to Cyclone Gabrielle. However, the business experienced higher air freight demand due to new customers and a change in the product mix being traded. Fortunately, the global supply chain has shown signs of improvement, with prices easing and delivery times improving, and this improvement is expected to continue. As a result of the growth in the region, we're exploring options for an improved Auckland facility. We hope to provide further details on this shortly.
I'd now like to talk a bit more about the Global Proteins division, the recently announced transaction with Esro Food Group, and the overall strategy of the division. Slide 19 shows, summarizes the Esro transaction. As announced, it is a 50/50 joint venture between Scales and Esro Food Group, with Scales providing lending facilities of up to EUR 15 million, initially funding this through cash reserves. The first site for the JV is in Belgium, where we're converting an existing Esro Food Group edible processing facility to a pet food ingredients operation. We expect this will be operational in the last quarter of this year. We're also considering a second facility in Europe, although a decision on this is yet to be made.
As you can see on Slide 20, from the map on, the initial site in Belgium is ideally located in the largest retail markets in Europe. Hoeselt is also located close to key customers, being Europe, being specific customers with whom Esro already has a relationship with, and other future, expected future customers, comprising existing customers of the Global Proteins division, who have operations in Europe. Slide 21 shows the global reach of the Global Proteins division now has, as well as the range of proteins available to it throughout these geographies. It's our intention to continue to build on this base and grow, further grow the division. Slide 22 illustrates how Esro Petfood JV aligns to the overall global protein strategy.
This can be summarized into four main categories: the provision of global supply and logistics excellence, diversification into additional protein species, the ability to add value through innovation, and deepening of our relationships with global customers with a view to position ourselves as the preferred global partner of choice. Slide 23 illustrates some of the new initiatives and opportunities available to us within each of our Global Proteins businesses. These initiatives span the value chain in which Global Proteins operates, from supply through processing, and to our customers. We believe there are many more opportunities available to the division, and we look forward to updating you as we progress our strategy. Moving on to the last item of our agenda, the full year outlook for 2023.
The directors would like to reconfirm that underlying NPAT, net profit attributable to shareholders for 2023 is expected to be within the previously advised range of NZD 14 million-NZD 19 million. This guidance takes into account the following: broader economic trends that are likely to affect the international markets for our group businesses. The second half results for the Global Proteins will be affected by initial trading losses for the Australian and European pet food ingredients plant, as well as the transition of the Australian operations to the new joint venture, and the level of apple crop still to be sold within horticulture. With opportunities to further expand Global Proteins and the expectation of a more normal performance for horticulture for 2024, we're excited for the potential of the group.
That concludes today's formal presentation, although I'd like to point you to appendix 1 of the presentation pack, which provides us additional financial information and reconciles underlying earnings to reported earnings for the group in each of our 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 Joshua Dale with Craigs Investment Partners. Please go ahead.
Morning, guys. just on Global Proteins, even, you know, it, it had grown in leaps and bounds from 2019 to 2022, now it's flattened out. If we think about organic growth only, do you think from here it's probably more in line with industry in terms of growth, rather than leaping ahead like it has been?
I think, we've sort of got a couple of initiatives underway already that will kick in for 2024. I'd say to say that the growth will, will stabilize, but we are still working on a couple of initiatives that will be, you know, earnings, earnings accretive, coming out of 2024.
Okay, thanks. Are those organic initiatives or are they sort of potential M&A type things?
No, they're we're really, just projects we're, we're doing now that we know will start producing, you know, more product in a different, or, or a different form, or a different place for 2024. They're, yeah, they're, they're more organic in nature at this stage.
Got it. Thank you. Have you actually had official confirmation that the supplier for M is exiting in December?
Yeah. Well, we have. We told you that a couple of years ago. It's just. Exiting is sort of a, as a, as a final sort of a word. We, you know, some of the product they'll, they'll start doing themselves, but we're also doing other products for them and past that date.
Yes, that, that's really what, what I was getting at. I think at some point you said they might find it difficult to actually exit from the, the services you provide. Just wondering if you had any sort of further thoughts on that?
Not really. That we sort of can't speak to them, but we, you know, our relationship's fine with them, and we've as I said, we're doing other, you know, the, the main products that we do with them, we'll be starting to do on our own account. Then there's some other peripheral products that we'll, you know, continue to service, you know, sell for, you know, through... We, we'll be getting at their product, and we'll be selling them.
Okay, thank you. Just switching to horticulture, the margin you earn from selling for third parties comes through in the second half, if I understand correctly. That crop will obviously be impacted this year. Do you know how material that will be to your second half horticulture earnings?
No, the, the margin from outside growers also comes through in, in the first half. It's, it's only what's actually sold in the second half that the, we get the margin on the outside growers. Most of that is already built into the result.
Got it. Okay, thank you. Just last question: You'd sat on a net cash balance for quite some time, but now it feels like you're closer to neutral. Do you feel like that's sort of it on the capital allocation front for the time being, or would you consider going into debt, you know, for some other acquisitions or expansion opportunities if they come up?
No, of course, we, we'll, we're gonna continue growing. We're gonna be very conscious of managing our debt conservatively. Some of the reasons we're borrowing is because of, you know, hedging the currency in, in the international, you know, wherever the, the country we're investing in. You know, we still, you know, I, I guess, have cash in our balance sheet. You know, because we've got the, the Mr. Apple working capital coming back. We've, we've still got on an asset listed, you know, we're gonna, we're gonna sell our Whakatu cool store in probably in next year when the market's more stable. We will still be in a strong cash, net cash position for a while yet.
I think we're pointing in the presentation to a forecast net cash position at the end of this year of around NZD 10 million, and that really is the, you know, 31 December is the time to look at that, as opposed to 30 June. Net cash position of NZD 10 million is still, you know, pretty strong and there's plenty, plenty of fuel, I think, in the tank for other acquisitions.
Sure. Okay, that's helpful. Thanks very much, guys.
Your next question comes from Guy Hooper with Jarden. Please go ahead.
Yeah, morning, guys. Well, well done on the solid start to the year. Just quickly, can you hear me okay?
Yep.
Yeah. No, good to go.
Cool. I'll just, I'll start with horticulture, if I could. So, are you able just to confirm that your future crop volumes are still only expected to be impacted by the 5% of tree losses, as you had indicated in your April update? I just wanted to clarify, because in your commentary, it seemed like the reseeding was for a wider area.
Yeah, look, I think we're, we did say we've got that, our crop, you know, volume and variety mix under review. That continues to be the case. It, it, we'll, we'll actually, we'll come out later in the year on, on some more definitive numbers. You know, our, our, our pullback out of, out of Europe, and reduction in, in crops like Braeburn are ongoing. Pulling a Braeburn out, which we have done, and done some grafting, et cetera, is, is net positive to profitability, in the future, because our, you know, the, the, the variety struggles to be profitable today. There's, you know, we've sort of got some, you know, that's the whole review process. We want to put more Dazzle and Posy are going incredibly well.
We're, we're investigating a new variety at the moment as well. And so we're just continuing that movement to premium, you know, branded varieties that we own the PBR of, and, you know, targeting Asia and the Middle East. Christian, I think we'll, we'll try and get more definitive for you on those crop areas, and the variety mix, later in the year.
Christian, also, that, that reseeding refers to, to grass on the orchards, as opposed to replanting of the trees.
Oh, okay. I mean, just, just to clarify, can we expect relative to your sort of previous, guided volumes, can we expect more than 5% lower volumes in the next 2 or 3 years? Or should it be still about 5%?
No, it's probably gonna be a bit more than that, because, you know, we've been, you know, revisiting the whole thing and pushing more for these high-value, branded varieties that are going to Asia. You know, you know, with grafting, we can get it, you know, if we've grafted a tree today, it'll be doing a relatively strong yield in 3 years. It's a couple years sooner than, you know, replanting a brand-new tree. We've sort of taken, you know, we're taking advantage of the, the, some of the damage that's been created to, to replace, some of the, you know, with the, with the, you know, redevelopment program for this year is targeted those developed, those damaged areas. Also, we've taken out some more of the low, low, low-returning traditional varieties, such as Braeburn.
Some of that land might sit vacant for a year or so, or some of it we have regrafted, and we're just in the process of analyzing, analyzing that, so we'll come back to you when we've got some more definitive numbers.
Just, just to ballpark, to give us a, some sort of starting point, could that be, is it sort of more like 10% for the next 2 or 3 years, just to give us some sort of-?
Yeah. Yeah, more, more in that area.
Okay, obviously, sticking one part on the horticulture, significantly higher apple prices this year. Is it reasonable to expect that these are carried forward? I know that you mentioned demand is outweighing supply in China, several varieties, and the overall New Zealand crop should be smaller going forward as well.
Look, I think we, yeah, we. The prices were good, and we were pleased with the prices. We do expect them to hold at those levels. They are, you know, the real, the real win back for 2024, so, is, for Mr. Apple and New Zealand, the New Zealand apple industry, is reduction in the freight rates. Normal, but, you know, we've still got to absorb extra labor costs, but the availability's there, so that's been a plus as well. Yeah, and it's sort of a, you know, obviously an improving currency position. We're expecting 2024 to return to a more normal level of profitability, and at those sort of prices that we've had this year, following on to next year, should enable that.
Okay, cool. If I could just move to protein, Global Proteins. Basically, your overall volumes are up, but pet food volumes are down. Can you just explain what that reflects? Is it lack of supply for raw materials specific to pet food? Is it product optimization between pet food and human edibles, or is it a slowdown in pet food demand?
I think it's a repositioning in pet food. I mean, The main area is offals, where the reduction has come through.
Yeah.
Where it is yet our, our higher, you know, the MDB, the mechanically deboned meat, particularly in America, the beef sector is, you know, performing strongly. It's, it's probably just a, you know, our customers are, if you like, taking stock post-COVID. There's no doubt about that. It's really, we would see these markets sort of returning to a more normal position. They do slow in the height of the summer. You know, the consumption's down for the dogs anyway, and the cats because of the heat. It's also, you know, most, a lot of people are on holiday. We're seeing a volume reduction, that what we used to see at this time of year pre-COVID.
There's also the transition in Australia to take into account there as well, on volumes.
Okay. You're not, you're not worried about a slowdown in, in pet food demand, that's where we are, basically?
No, no, we're sort of seeing it just, you know, sort of getting back into a normal supply/demand flow.
Are you able to sort of say what the final contribution was in the first half year?
look, it's, it's, to our expectations, can we say that?
Okay. Then, I guess the, the follow on would be obviously margin tell, but the NZD per kilo was down quite significantly. What does that reflect?
Well, the edible business is a.
Lower margin.
Lower margin sector for us. We, we knew that, and that is, we're still pleased with the way that's performing. It's just, you know, it's a, it's a lower margin game.
Given that margins were virtually flat, half on half, was edibles actually, was protein, sorry, was pet food margin slightly higher, and that was diluted by, edibles?
Yeah. That's a fair assumption.
Yeah. Pricing is offset some of the volume reduction.
Okay, cool. Sorry, just, just final question. Are you able to provide, so if you're wanting to support NZD 18.9 million in debt to scale shareholders, are you able to convert that into an EBITDAR range?
We, we haven't, we haven't got that at, at this stage, Christian. No.
Okay. Well, are you able to sort of indicate what the trading cost assumption would be for Australia and Europe as an EBITDAR margin?
Oh, it's pretty, it's pretty minimal. They're, they're, they're, you know, reasonably small startup losses.
Okay. just NZD a few million of EBITDAR?
It wouldn't be that. No.
Okay. Great. All right. Thank you, guys.
Your next question comes from Margaret Bei, with Forsyth Barr. Please go ahead.
Good morning, guys. Solid result. I just wanted to clarify, and probably just following on Guy's questions around tree losses. Can I just clarify that your current expectation is about 50%, which is what you've said previously. Is this expected to be the total impact, or are you actually waiting for more to come after budding?
Well, we're not really sure. I mean, there's, there's, we don't think, you know, we're gonna get the, you know, potential risk, but we, we really won't know that for much yet. You know, everything's gone so far. There's no old sign of it starting. There might be, still, you know, impact of, you know, the trees production because of, you know, how wet that, the season was. We don't know about that yet either. In the main, you know, we're not expecting any more losses than we've seen, but we'll have to be keeping a watching brief on, you know, the, as the spring budding, takes place. That's, that's over the next, couple of months.
Okay, brilliant. In terms of the 165 hectares that have been remediated that you spoke to in this result, can you give us a sense of what proportion of this is relative to the total land that needs to be remediated? In other words, how much more needs to be remediated?
That's, that's the total number. You know, we've, we've done a lot of work on that area. Some blocks, you know, with older trees, we've just, we've left, you know, we haven't touched them, and they will be part of the future redevelopment program, if you like. They'll, they'll have a crop next year, but, you know, we haven't really targeted them for, you know, the full cleanup, but that's, that's a small area. In the main, we've, we've pulled a massive amount of silt out. We've reseeded the grass in the roads between the trees, and we're expecting, you know, the vast majority of that area to be producing apples next year.
Okay, brilliant. Thank you. In terms of, you know, the historical planting that you've done into more premium varieties, and I guess that production now coming hopefully online from about the next year onwards, do you think that will actually offset some of the, you know, 10% decline in harvest over the next two or three years? Or is that 10% decline kind of a net number?
I hope that it will offset because we did have that, you know, those plantings coming to maturity, as I, I sort of said before, but then, then the offset of that is we're gonna have more, you know, the, the Braeburn that we've grafted or pulled out, it'll take two or three years to catch up as well. You know, it's sort of a. You, you've probably got to see it as an ongoing program, Margaret. You know, as I said earlier, we'll have to come out with some more definitive guidance on, on the, on the, you know, future crop profile when, when we've got that detail nailed down.
Okay, thank you. I guess, moving on to sort of a broader picture view. You mentioned, in your outlook comments about, you know, economic pressures in key markets. Can you kind of give us a bit of context on which markets you think would be most affected and by what?
Well, I guess we're just signaling that the world's in a pretty tricky spot at the moment. You know, if you think of what China's doing, for example, our assumption is that China carries on the way, you know, Last year, this time last year, you know, it went into a, you know, further big lockdowns, and really, you know, the market was very, very difficult. We're not expecting that. We're expecting the market staying where it is, not going particularly, you know, down or not going particularly up. So it's more and more of a macro, macro, economic outlook is, is pretty fragile in, in some of these markets.
Okay, great.
The good way-.
Thanks for more trying to focus.
I would reiterate that, you know, we're, you know, in saying that we're, we're way more advanced in our sales. Our sales of the apple crop are back to a more normal profile. Last year, they were very slow at this stage. We're in a better position in that regard.
Okay, brilliant. Thank you. Sorry, this is my final question. In terms of the geographical mix of what you sell in horticulture, can you sort of give us a rough indication of how much China is as a percentage of total?
Look, it's probably the biggest, and I think it's even pulled back a bit from last year, but it's still it's in the 20s.
Okay, brilliant.
Right.
Thank you. That's all from me.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Graeme Edwards with Hapuakoe Forests Limited. Please go ahead.
Hi, guys. I understand the horticulture's had a severe handling and economic impact as well, but you seem to be indicating that's going to recover. Can you explain the NZD 8.5 million goodwill impairment?
Yes, so that, that's a, I suppose, an IFRS accounting standard, adjustment for us. We're required at every reporting period to test for impairment. If there are signs of impairment, and obviously, the cyclone was a sign of impairment, increasing interest rates, you know, also puts pressure on, on valuations. The, the work we did, testing the, the carrying value of our assets against their recoverable value in accounting standard terminology, meant that there was a write-down required, and that was to the, the goodwill that we were carrying on the balance sheet in relation to Mr. Apple.
There are no further questions at this time. I'll now hand back to Mr. Borland for closing remarks.
Okay. Well, thanks very much for taking part in the call. You know, we're, we're very proud of the performance of the team in a very difficult environment. Yeah, we look forward to, you know, a return to normality for 2024. We'll be around today if anyone wants any other discussions with us, and we'll provide a further update later in the year, anyway.
That does conclude our conference for today. Thank you for participating. You may now disconnect.