Thank you for standing by. Welcome to the Scales Corporation half year results. 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'll 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. I'd like to welcome you to the Scales half year results announcement for the six months ending thirtieth of June 2022. With me today is Steve Kennelly, our CFO. Earlier this morning, we lodged our results with the NZX, which included a presentation pack, and that we'll both add comments on during this call. Steve and I will run through the slides and then take questions. An agenda is provided on slide two. Turning to slide four, there's an overview of the period. We're pleased to report that Scales delivered a resilient six-month result with an outstanding performance by food ingredients and steady earnings from logistics, but impacted by lower results from our horticultural division.
Underlying net profit attributable to shareholders was NZD 25.6 million, down 11.7% on the comparative period, and reported NPAT was NZD 35.1 million, up 7.5% on the same period. As a result of the sustained growth in the food ingredients division, together with our belief in its global potential, particularly in respect of proteins and the promising number of growth opportunities that are presenting themselves, we've made the decision to rename the division Global Proteins. I'll provide more information on this over the next few slides. Steve and I will also comment on the results for each of the divisions later in the presentation. Moving to slide six in our strategy for the renamed Global Proteins division.
Given the recent results of the division, its growth over the last few years, and its global potential, we believe that its name should better reflect its focus. As the graphs show, volumes of pet food ingredients sold through to the year-end of 2021 have increased by over 600% since 2015. Underlying EBITDA has increased by over 360%. The following previously outlined strategic objectives are delivering results. The divisional five-year EBITDA target of NZD 25 million set in December 2018 was exceeded last year. We're creating businesses dedicated to providing key protein ingredients. We're expanding the reach of our supply networks and the range of proteins provided. We're partnering to further develop our supply network, and we're continuing to seek additional products and services.
In short, our value proposition and competitive advantage, together with growing global protein demand, makes us confident about the future potential of the division. As you can see from the graph on slide seven, there's a distinct correlation between the growth in pet food and growth in human edible protein demand. We believe this is due to their related drivers, including a projected increase in the global population, a rise in pet ownership, and humanization of pets. As a result, the disparity between protein supply and demand is anticipated to grow. We're seeking to position the group to benefit from this anticipated growth. Slide eight depicts the current protein supply chain. As you'll see from this diagram, Scales currently operates in two of the three main areas of protein end products.
An opportunity exists to expand our operations into edible products using our supplier and customer relationships together with our logistics network and our reputation for quality products. Next slide summarizes our value proposition, which is our wide range of quality ingredients and supply chain excellence. Our global supplier relationships and specialized processing ability, together with the skills and expertise provided by Scales Logistics, mean we believe we can source and supply premium protein ingredients and deliver them on time in the desired form for our global customers. Turning to slide 10. The critical factors in becoming a global strategic partner to our customers and suppliers include securing global protein supply and accessing new markets to accelerate our volume growth. Expanding the types of protein offered in order to simplify the procurement process for our customers.
Expanding our activities within the value chain to lower the cost of production for our customers and add value to them through innovation. Having a global logistics network supporting our processing facilities, thus increasing the reliability of our end-to-end service and improving our brand. Slide 11 provides additional detail on our strategic objectives. We've already begun to action a number of the objectives and will continue to actively work on all of these over the short to medium term. It's an exciting time for the group, and we look forward to updating you on our progress in due course. Moving to sustainability on slide 13. Our focus for sustainability this year is to identify and confirm our future physical and transitional risks and opportunities. This will allow us to revisit our material issues and clarify our key areas of focus.
In addition, we're undertaking a group-wide baseline assessment for carbon and water, and the outcome of which will feed into our future carbon and water reduction roadmaps. We're pleased to report that our existing projects are all continuing to progress well. I'll now pass over to Steve to discuss the financial results for the first half of the year.
Thanks, Andy. Slide 15 summarizes our group financial performance. As Andy previously noted, underlying NPAT attributable to shareholders for the six months to 30 June 2022 was NZD 25.6 million, down 11.7% on the first half of last year. However, underlying NPAT was up 4% at NZD 34.7 million and underlying EBITDA was up 1% at NZD 55.4 million. Slide 16 provides a summary of our divisional performance. Our group results were underpinned by sustained growth in the Global Proteins division. The division's growth is attributed to increased volume sold together with product mix and margin changes. These result in an increase in underlying EBITDA of over 88%. In the horticulture division, strong early in-market prices were more than offset by reduced volumes and increased costs, with the division delivering an underlying EBITDA of NZD 24 million.
Logistics generated a very positive result, notwithstanding lower volumes and difficult market conditions. Its underlying EBITDA increased to NZD 3.6 million for the six-month period. Our balance sheet on slide 17 continues to show a strong financial position. Net cash decreased to NZD 16.8 million over the past year, due primarily to the following factors, higher inventory and receivables in Global Proteins, slower apple sales, and increased shipping charges. The value of our agricultural produce inventory at 30 June 2022 increased by NZD 11 million compared to 30 June 2021 due to the slower apple sales, and as of today, around 40% of the fruit remains unsold. I'll now hand you back to Andy to give a further update on the divisions.
Thanks, Steve. The graphs on slide 19 illustrate the significant half-year growth that has been experienced by the Global Proteins division over the last five years. Compared to the previous six months, underlying EBITDA increased by over 88%, and volumes increased by around 13%. We expect the earnings for the second half of 2022 will be similar to those achieved in the second half of 2021. We're also encouraged by the number of organic growth opportunities that the division is investigating and developing, and we believe that these will further add to the division's growth over time. Slide 20 summarize the results for the horticulture division. As previously mentioned, this has been a very challenging season for the division and indeed for the pip fruit sector in general. Significant headwinds were encountered, including weather, labor, logistics, international markets, and increased costs.
Despite the outstanding job that the Mr. Apple's team have done, the combined effect of these disruptions has impacted the first half result, with EBITDA down 36.8% to NZD 24 million. However, we're continuing to focus on the issues of our increasing labor costs and difficulties in labor availability, and our pack house automation program will help to address these issues. Moving on to slide 21 and Mr. Apple's volumes. As mentioned, this year's crop was affected by inclement weather during the growing season. Not only did it affect Mr. Apple, but it impacted the national crop, with current forecasts estimating the national crop will be down around 6% lower than 2021.
In addition to weather, Mr. Apple's volumes were impacted by the ongoing orchard redevelopment, non-renewal of some orchard leases, and cloudy weather that affected the size and Brix of the apples. As a result, Mr. Apple's total own grown export volumes were down 9% on prior year at 3.3 million TCE. Our forecast export pack out is also slightly down on last year at 75%, and we're forecasting a decrease in both premium and traditional variety volumes this year. Moving to slide 22 and an update on Mr. Apple horticulture's markets and pricing. The diversification continues to prove strategically beneficial and has helped to offset some of the effects of the difficult season. While global inflationary pressures and increase in the cost of living have curbed consumer spending, we currently expect positive demand for the China Mid-Autumn Festival, with steady demand in other Asian markets such as Thailand and Singapore.
Other markets are being impacted by matters such as high domestic volumes, low consumer confidence, and the Ukraine-Russia war. Pricing has developed, helped to mitigate the lower volumes and market pressures with prices above or in line with prior year in most markets, and Mr. Apple continues to focus on growing demand by branding and new varietals. Turning to slide 23 and an update on logistics, which has posted a strong result with underlying EBITDA of NZD 3.6 million for the six-month period and an increase of almost 32% on last year. Scales Logistics has once again shown itself to be strategically important to the group and to its external customers. The team's skill and expertise has provided vital services to and sourced solutions for its customer base.
We believe we can harness this knowledge and capability in order to support the expansion of the group and be a worldwide provider of logistics services. Unfortunately, it's likely that global supply chain disruptions will continue into 2023, so we're fortunate to have such a reliable and experienced resource within the group. Moving on to the last item on our agenda, the full year outlook for 2022. As a result of the first six months of trading, underlying net profit attributable to shareholders for 2022 is now expected to be at the upper end of our previously advised range of NZD 23.5 million-NZD 28.5 million. Due to the change in mix, earnings mix, the implied underlying net profit range has increased to between NZD 35 million and NZD 43 million, and the underlying EBITDA range has increased to between NZD 65 million and NZD 75 million.
This updated guidance takes into account a number of factors, including Global Proteins earnings for the second half of the year expect to be similar to the second half of 2021. Earnings from horticulture remain subject to the success of the Mid-Autumn Festival sales in China, and also a stronger finish to European market sales than was experienced last year. Mr. Apple currently has a higher level of fruit that is unsold compared to last year. The challenges in global logistics are expected to continue through to at least 2023. Also of note is that an increasing number of predominantly offshore opportunities to grow the Global Proteins division are being investigated, and we are excited for the potential that this could bring to the group.
That concludes today's formal presentation, although I'd like to direct you to Appendix one of the presentation pack, which provides additional financial information and reconciles the 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. The first question comes from Joshua Dale with Craigs Investment Partners. Please go ahead.
Good morning, Andy and Steve. Just a few questions from me. First of all, on the food ingredients division, just referring to slide 19, you've obviously nearly doubled EBITDA this half versus the same period last year. Why are you guiding to the second half being flat on the second half last year? It's quite a large deceleration.
Yeah, look, clearly we had a really strong start to the 2022 first half year than the first quarter. You know, I think there was definitely, you know, COVID impact in those performance around positively. We're just seeing now our big customers consolidating a little bit, so, you know, the demand slowed. It's just more of a, probably a reflection of, you know, a small slowdown, but not material, you know, in the our customers' demand.
Okay, great. Just looking at your food ingredient volumes are lifted 13%, your earnings lifted 89%. There's clearly a lot of operating leverage there. Can you help us understand, first of all, what's happened to pricing and mix? Second of all, of your food ingredients cost base, what does the split between fixed and variable costs look like?
Yeah, look, clearly we had a mix, you know, benefit from the mix change. I think I reiterate the real pressure that came on in with Omicron with globally meatworks struggling to you know find the staff, so it's harder to get something. We got the volume, and we were able to sell it for a good margin. Various, you know, change in mix in the products as well, which we're selling at a higher rate.
Just on your cost base and split between fixed and variable, I mean, presumably it's fair to say a lot of your costs are fixed, you know, on which you can get good operating leverage.
Well, that's showing out. I mean, probably have to, you know, come back to you with a more detailed response to that question.
Sure. That's fine. Last question on food ingredients. You sort of talked through the Scales value proposition and competitive advantage. I guess from the outside looking in, I'm keen to understand what you're doing differently from competitors. You know, you're just sort of taking offal from abattoirs, mixing it and freezing it and selling to pet food manufacturers. How do you differentiate in the industry?
Work harder. I think we're well-positioned in you know providing the product from here from Australia from particularly in America with Shelby. Look we're becoming you know very you know very important to our customers. The logistics program that we run to get the products out of the meat companies you know through our plants or into tankers and off to the various pet food manufacturers and brands that we sell to it's you know we believe our logistics performance is a key part of what we do there. It's certainly you know appreciated by our customers.
Okay, thanks. Just switching to horticulture. Just on the unsold fruit to date, the crop was already lower than last year. Your selling rates are still lower despite that. You know, it's clearly making you a bit cautious on the second half performance. Is there any sort of color you can provide on that? I suppose your confidence around being able to sell the rest of your crop over the balance of the year?
No, we're confident of selling the crop, I guess. Look, you understand our accounting process in that that we value the crop in full for this result. It's just the way we have to do it. We remain confident that we'll sell through the rest of the crop. Absolutely.
Yeah, great. Just last question on horticulture. You know, your volumes were clearly down. Just trying to get a sense of, you know, your view of what the normalized crop volume might look like if there is such thing as a normal year. Obviously, you know, fruit size and RSE availability and the cyclones, you know, impacted this result. You know, just trying to get a sense of to what extent the 4.3 million is abnormally low, and what do you think it should revert to, you know, assuming some sort of normality going forward?
Yeah, well, look, it's certainly. There's a chance for it to be what a normal for us would be, you know, a drier, hotter Hawke's Bay. I mean, that's normal, and we certainly didn't get that this year. I think we would be confident of it returning to, you know, what our normally expected volumes would be, for sure. It was, you know, summer was wet and cloudy, and it does impact fruit. We had a small cyclone event. We had Omicron through the harvest. There was a lot of, you know, challenges, let's just say. We feel like the labor thing's normalizing.
You know, clearly the RSEs are sort of an interesting one and talked about topic at the moment, but we are fully compliant with that scheme. It's a great scheme. It's a win-win for both, you know, our RSE workers and ourselves. You know, we pick a good healthy crop, if you like, you know, and good sunshine in Hawke's Bay next year, we'll have a higher volume. There's no doubt about it.
Brilliant. Thanks very much.
Thank you. Your next question comes from Christian Bell with Jarden. Please go ahead.
Yeah. Hi, Andy and Steve. Just a few questions from me, if I could. Sorry, the first one's a little bit long-winded, but I'll just kick off with that. Just on the Global Proteins division, it has sort of already been alluded to. Margins obviously expanded quite significantly alongside some better product mix. Can we also put this down to the fact that it is a fragmented supply chain and your ability to provide a superior service to your customers? Hence there is not one supplier that can put pressure on you, and your downstream customers can will be happy to continue to pay the prices that you're setting. Therefore, is there any reason why the margin gains seem so far should unwind in any material kind of way?
Look, it's a challenging, you know, if you like, we did sort of keep supplying our customers through an incredibly difficult period through Omicron, you know, through the COVID. I think there's certainly a higher margin and performance in the business through that period, and a great credit to the team. Our product mix is changing. We've made some different products in our Amarillo plant. We've commissioned our Dodge City plant. That's working really well. I was just up there last week. It's a very impressive automated plant. You know, and we're adding products, new products after, you know, in discussion with our customers.
You know, that whole, you know, becoming strategically important to our customers is sort of what we're working on and continuing to improve on. I think there is continuation. But yeah, we're sort of predicting, you know, the 2021 second half for 2022, but the, I guess, the gap back to our 2021 performance in the half year can be met by these future initiatives coming to bear in the near term. You know, like that, yeah, we do remain really positive about the division. And, you know, as we've said, number of new opportunities in the pipe.
Okay, cool. Just following on from there, because I mean, obviously you already earlier on, you sort of alluded to the fact that there has been a bit of consolidation, which might have, which could lead to, I guess, some less demand, I think you put it. I mean, like the second half, the half-on-half slowdown is a decline of 40%. It's just, can you just help us, and given that the downstream trends remain quite strong, can you just help us understand a little bit better, why there's a 40% decline when the I mean, there might be a little bit of volume decline, but then why would margins obviously, you know, is a kind of variable to.
Is the missing variable there to sort of get to that second half 2021 number?
Well, I think I said to Joshua, you know, the demand is slower, but, you know, just kicking in now. When we forecasted 2022, we said to you we didn't know how, you know, COVID impact was, you know, would have been positive because of supplying under urgency, supplying under difficult times, you know, certainly helped the performance of the business. But I think that's sort of starting to normalize now and the demand, you know, the, our customers are pretty well-stocked. So, you know, we're definitely seeing a slower performance, particularly, you know, it's the middle of summer over there in America at the moment and, you know, a lot of holidays taken. Their August is our January, if you think of it like that, or February.
You know, a lot of people are away from work, so it's just slowed down. We don't know, you know, what September, October, November, December are going to, you know, to be.
Is it it has slowed down versus July and August of last year?
Yeah.
Okay, cool.
Similar to last year, but I mean, you know, the not like April and May this year.
Yeah. It's slowed down in comparison to the first half of this year.
Okay. Could what, NZD 15 million-NZD 20 million of EBITDA, which is you did 19 in the second half of last year, with NZD 15 million-NZD 20 million, is that kinda what you're thinking for a more sustainable or annualizing that to about NZD 40 million, NZD 30 million-NZD 40 million of EBITDA? Is that kind of what you're considering a more sustainable level for that division now within the existing business?
Well, we haven't really arrived, I suppose, at that number. We haven't sort of you know come up with a new forecast long-term EBITDA for the division. But yeah, as we're saying, we're saying that the second half of this year is we expect to be more like the second half of last year. Just noting what Andy said previously, that there's a few initiatives happening in the division that you know can lift that number. Yeah, something that we need to work on, just what that long-term EBITDA target really is.
Okay, cool. Thank you for that. Just the final one around the RSEs, obviously in the news at the moment. Do you see any risk to those sort of tail operators that are, you know, mistreating the RSE workers? Do you see that as a risk to the overall scheme? Or do you think that because Scales is actually not, obviously not in that group and has, you know, provides a much higher standard of accommodation and stuff like that, could it actually work to your advantage in gaining more RSEs in the future?
Well, we think we're getting our right quota of RSEs. I mean, the government is looking at increasing it. You know, 100% we comply with that scheme, like, by the book. I mean, we were the first ever. We were the trial company that the RSE scheme was started on. We're absolutely committed to providing, you know, proper accommodation, proper treatment to our, you know, very important workforce. You know, we wouldn't be in our DNA to do anything different. We'd like to think that the government would make the scheme retain the elements of the scheme to make it an ongoing, viable, you know, and incredibly important labor source for us.
Okay. That's great. Just on that, are you confident that your number of RSEs will go back to the level that you require in 2020, well, the next season? What is that number versus what you've had to deal with this year?
I think we're circa 1,200 this year. You know, we would if we could get, you know, another 100 or 200 more on that, we would definitely probably take them. That's sorta what's likely because of what we're hearing out of the government lifting the cap. It's really just about, you know, keeping everyone on track around keeping the hourly rate, you know, viable for everybody. The terms and conditions viable. You know, it's just not a free hit for everybody, if you know what I mean. It's got to remain, you know, we have to remain our competitive efficiency out of the scheme, and that's important to us.
Cool. Thank you guys for answering my questions. That's it from me.
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 Margaret Bei with Forsyth Barr. Please go ahead.
Hi, Andy and Steve. Thanks for your time today. I guess just a couple of minor questions, given a lot's been already covered. On the Global Proteins section, you know, previously you've spoken to a NZD 25 million target for, I think, 2023. Given that you're working on what the long-term target is, do you still think that you'd be in that range or materially higher? Is there any sort of high-level guidance you could give us?
Well, as Steve said, it's clearly we're very pleased with the performance of the division and just couldn't be more pleased with the way the team are working. We're reassessing the opportunity, the potential of the division at this time. You know, we'll have to get back to the market, you know, once we've got firmer plans on that. You know, with the. We've mentioned that we've got some, you know, some good opportunities.
You know, we think we can get the earnings, you know, if you like, bridge the gap to the runway that we, you know, the first half we've had to get that into, you know, a more sustainable model in terms of, you know, the growth coming forward will backfill any sort of slowdown we have in the second half or next year. That would be an expectation, but we really need to get back to you with, you know, some more. Yes, monetizing those objectives. You know, right at the moment we're in, you know, really much, very much in, you know, assessing these new opportunities mode at the moment.
Okay, fantastic. Thank you. In terms of the horticulture division, I mean, what kind of mitigants or actions could you take as, you know, management operators to mitigate poor weather if we have that again next year?
Yeah, look, it's yeah, that's a tough one. We don't sort the weather out that well. You know, like, to your question, we could. Hail netting or netting across the crops would be a negative for that weather 'cause they'd take more sunlight out. The mitigations are really there today. Our natural mitigations are a diversity of where our orchards are. They're spread from, you know, near Napier right down to, you know, towards Waipukurau. So it's about 70 km. Their geographical diversification is their best protection against severe events. Look, the team did a great job in a very difficult season. I mean, I think you're seeing other crops also were impacted, you know, with quality.
You know, we'd like to think next year we see a return to the normal production and quality that we expect from that division.
Wonderful. Thank you. My last question is just around your CapEx plans for the full year and sort of how they look in relation to last year and if you have any major initiatives coming up.
Well, we've still got the ongoing automation of the Whakatū pack house, which, you know, we're continuing to, you know, do in a step-by-step or a stage-by-stage process. We've actually got our palletizing robot, palletizing part of that automation underway now, and there's more to do next year. I would say it would be similar.
Yeah. It'd be slightly higher than last year, given that we, you know, we were only in the initial stages of the automation project last year. It's, you know, some of the more extensive aspects coming through, so it'll be a slight lift in CapEx.
Brilliant. Thank you. That's all from me.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Borland for closing remarks.
Well, thanks, everyone, for taking part in today's call. We're actually proud of all the leadership groups and the teams within our group of businesses, especially the resilience that they've shown and results that they've generated in what can only be said, quite a difficult trading period. Look, we look forward to providing with a further update later in the year, and thanks very much for your support and interest.