Inghams Group Limited (ING) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Inghams Group FY '20 Annual Results Teleconference. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Mr. Jim Leighton, Chief Executive Officer and Managing Director. Thank you. Please go ahead.

Thank you, operator, and good morning. I'm Jim Leighton, Managing Director and Chief Executive Officer of Inghams. And it's my pleasure to welcome you to Ingham's 2020 full year results call. Now I assume you have all -- have a copy of the results presentation because I will be referring to it as I go through that deck. And I want to thank all of you for taking the time out of your day and joining us and your interest in Inghams. Joining me to present the results today are Chief Financial Officer, Gary Mallett; our Chief Executive Officer for New Zealand, Jonathan Gray; and our Investment Relations Director, Craig Haskins. Slide 1 is our standard notice and disclaimer, so let's move on to Slide 2. But before I discuss our financial results, I want to briefly recap on our 5-year strategy because it underpins the resilience of our FY '20 financial results. Going back to our investor presentation since October last year, we have been sharing what I believe is a solid 5-year strategy that clearly sets our sights on delivering more consistent, predictable and reliable returns to our shareholders. Our purpose is to nourish our world and our success in supporting our people, planet, products and partners, together position us to deliver profit to our shareholders. This purpose connects to our strategic pillars to optimize the core, transform for tomorrow and create the new, so we can deliver on our objective to our shareholders and achieve our ambition to be the most trusted food producer in our market. It is this 5-year strategy that is building resilience of our organization and the resilience of the people who benefit from this clarity and work together to deliver more consistent, improved financial results. Now moving to Slide 4, our group performance highlights. We have delivered resilient financial results in 2020, underpinned by a solid and clear 5-year strategy. We achieved an underlying operating EBITDA pre-AASB 16 leases of $179.7 million. While our EBITDA full year results is below where we had originally planned, it is consistent with our May business update, which highlighted the potential impact of uncertain trading conditions in our markets in the many supply chain and operational challenges brought on by COVID-19. So whilst Ingham has shown its resilience in adapting to COVID-19's world in the second half, we are not immune. This result includes all of the impacts of COVID-19 on our supply chain and operations and the impact of the decline in demand and oversupply and inventory issues that we faced. I am proud of the Inghams team for what they have achieved. At the half year, we told you that we had resolved operational issues in our further processing network and added significant costs and the inefficiencies to our business in the first half. That is behind us. And we started solidly in the second half despite the call outs of bushfires and floods. And we said that our recovery in New Zealand was well underway, in which it was. But the real pressure testing of our strategy, our organization and our people came in the form of COVID-19. I've often said that we should never waste a good crisis. And while we're not leaving any opportunity unturned by the challenges that COVID-19 has thrown at us, the challenges that we have overcome have included: one, making very important changes to our supply chain and operations, which kept our operations running during COVID 19; two, a continuation of high feed prices that we dealt with; three, the burst of panic buying during COVID-19, which was dealt with by an agile sales and operations team who met consumer demand for poultry, which is still valued as the most affordable animal protein; four, the complete lockdown of all of our out-of-home channels as a result of Level 4 restrictions in New Zealand, as John will go into more depth on in a minute; and five, managing the excess supply of poultry products in both Australia and New Zealand as our supply chain adjusted to lower customer demand in that last quarter in the closing of some export markets. Slide 5 talks the tale of 2 halves, and again, speaks to our resilience and unwavering commitment to achieve our objective to deliver profitable growth. The first half was marked as one of building momentum with the obvious headwinds, which really impacted volumes and profitability in the second half. We achieved 3.3% growth in core poultry volume, which, as I said, recognizes poultry as an affordable source of protein. Now Gary will talk more about our cash and balance sheet later, but our debt remained within our targeted range. As we said in May, we have been closely watching cash and cost, and working with our customers to ensure that debtor's balances are well managed. We have announced a final dividend of $0.067, which takes the full year dividend to $0.14 and is in the middle of our targeted payout ratio of 66%. Now before I hand it over to Gary, I think it's useful to have more context for you around COVID-19 and how it's impacted our people, our operations and our sales channels. So if we could move now to Slide 7. The health, safety and welfare of our people has continued to be our #1 priority and always will be. I want to commend the Inghams team for how quickly they work together to make the necessary changes at work to stay safe throughout COVID-19. I also want to praise our incident management team who set the safety benchmarks for all of our people and our business high from the very beginning. Creating a safe work environment also kept our people engaged and our absenteeism very low. Agile operations and sales that we could, at least to the extent possible, beat the pantry stocking demands whilst dealing with the restrictions or closure of much of out-of-home customer base. It's been a volatile period. However, as I said before, our clear strategy has meant we still have been able to continue to focus on profitability and growing the business in creating the new. We have pleasingly developed new products for both the Australian and New Zealand markets this year, including the Free Ranger in Australia and new plant-based protein products, including Let's Eat in New Zealand and The Plant Collective in Australia. Slide 8 provides an overview of how we manage the many logistical cost and productivity challenges across the supply chain. Now rather than go into too much detail, I'll give you just a great example of how our people minimize the impact of many of the issues that they face. It relates to our primary processing plants, which are by far the most complex and labor-intensive of all of our operations. In addition to implementing measures to allow us to continue to operate safely and at a social distance, we are also faced with the challenge of accommodating significant switch to supplying more of our fresh poultry products in trays. Our customers told us that that's what they needed to satisfy consumer needs, and we listened and we responded accordingly. Successfully delivering this material change required redesign of our plants to enable our people to physically distance while packaging our products. This added costs, complexity and created some negative impact on plant productivity, but it was absolutely necessary to deliver those products to our customers, and we did it without compromising our safe work in our environment. Another consequence that we had was to temporarily suspend the productions of some other value-enhanced SKUs as we simply could not properly reconfigure our plants in the short term to meet our objective. All of this may sound straightforward. But for those of you, and I know many of you have been in a chicken plant, you will know and appreciate how well the team responded. Turning to Slide 9. This slide summarizes the demand volatility across our sales channel. Every channel, both in Australia and New Zealand, have been impacted by COVID-19 restrictions in some way. As you know, retail surged in the third quarter due to panic buying, but this material volume surge was temporary. And as demand normalized, albeit at higher levels than normal, industry oversupply, including our own excess volume, became an issue in the fourth quarter. QSR was more resilient than food service and wholesale markets, which were hit by shutdowns. While we have opportunities to move products in the export market, we have also lost volume when borders were closed in some of our traditional markets. On Slide 10, we have shown how the year shaped up graphically. Now we would not normally show this much detail on a quarterly basis, but we thought it would be helpful to show the flow of the year. So again, the building of volume and the financial momentum from a slow start to the first quarter due to the FP operational issues that we spoke about at the half and lost margins from some of our channels, and then moving to a traditionally stronger second quarter due to some positive seasonality and solid performance in operations, followed by strong customer demand showing in the third quarter and the negative impact on the fourth quarter on core poultry demand, excess supply, lower margin and export volume. The decline in profitability of the business in the fourth quarter also reflected the higher costs and the write-down of some inventories, as Gary will discuss. Now I cannot emphasize enough how exceptional the Inghams' team has worked given these challenges to deliver profitable results in this environment as a credit to the resilience of our strategy, our organization and our people. I will now hand it over to Gary to present our financial results in more detail. Gary?

Thanks, Jim. Looking at Slide 12. Our statutory P&L shows NPAT of $40 million. And as you can see, our numbers are significantly impacted by the adoption of AASB 16. You will also note on this slide that we have adopted the modified retrospective approach, so we have not restated our FY '19 comparatives. This makes year-on-year comparisons difficult. As previously reported, the FY '19 year also included the gain on sale of Mitavite and some other smaller assets. EBITDA has increased $146 million to $388 million. AASB 16 required lease expenses of $230 million to be removed from EBITDA but offset by a depreciation expense of $209 million, an interest charge of $55 million and a tax effect of $10 million. AASB 16 results and a decrease in NPAT of $24 million for the full year, which as you know, has no impact for cash on our business. Turning to Slide 13, which gives you our underlying pre-AASB 16 financial performance. As Jim noted, core group poultry volume is up 3.3% for the year. This volume reflects growth of 4% in the first half and slowing to a 2.6% growth in the second half. Notably, our second half sales volumes are a little lower than the first half, which, given we had birds in the third quarter set for growth, has created oversupply in our market in the fourth quarter. External feed sales volume is down in the second half as the number of customers reduced orders as COVID-19 impacted their businesses. Byproducts volumes showed a small increase over the year. Core poultry revenue growth was up 3.5% for the year. Revenue growth exceeded volume growth in the first half as we saw better pricing in several channels. The Australian wholesale market is a good example of that. In the second half, revenue growth was 2.1% and saw below volume growth of 2.6%, which reflected a softening wholesale market, greater export sales and clearance and promotional activity in the local markets to deal with the fourth quarter market oversupply. Byproduct revenue was lower by $3 million with external feed revenue up $1 million compared to last year. Our gross profit of $460 million was down $20 million on last year. In the appendix, we've provided a breakdown by half of our results, including gross profit. Unpeeling the gross profit line a little, the first half showed our group revenue growth was up 4.7%, but our cost of sales grew by 7.3%, which is attributable partly to an increase in feed costs, but mainly the operational issues in our further processing business which we discussed at the half. This contributed $14 million of our year-on-year decline in gross profit. The second half has shown modest improvement despite COVID-19 impacts. Costs are up 2.4%, below total poultry volume growth of 3.3%. However, revenue grew 1.5% due to the impact of pricing I just mentioned. The margin decline was lower in the second half at $6 million. Also included in cost of sales in the second half is an increase in our inventory provision of approximately $9 million. As Jim has stated, our underlying EBITDA pre-AASB 16 result of $179.7 million takes into account all the positive and negative impacts of COVID-19 above the line. There are some positives like the brief third quarter surge in retail volumes, but that is offset by a decline in out-of-home volumes, sales clearances in Q4 and costs including the additional inventory provision and higher cost of distribution, cleaning, workforce, physical distancing and PPE required to safely produce our products. Our depreciation has significantly increased. $900,000 of this is attributable to catch up depreciation as we reclassified our Wacol feed mill from asset held for sale. The balance reflects the cumulative effect of CapEx spend over the past couple of years. Our tax rate remains unchanged at 29%. Underlying NPAT is $79 million, which is down $24 million on last year. On Slide 14, we provide the reconciliation from statutory to underlying EBITDA and NPAT pre-AASB 16. The reconciliation takes out the AASB 16 impact of $230 million. The other key call out on this slide is that we've taken a $20 million impairment charge are relating to a couple of assets. These impairments are not related to COVID-19. Firstly, the Cleveland Further Processing facility closed last year. The site remains vacant, and we now do not intend to use it for operations in the future, so it is appropriate to fully write-down the value of this leased asset. The Wacol feed mill was purchased in 2017 as part of our self-sufficiency feed strategy. This asset has been held for sale since that day as it was originally intended to be sold [ months ] back. However, that is no longer the case. The asset has been reclassified in the balance sheet, and the valuation has been revised to reflect its current valuation. Looking at our balance sheet on Slide 15. This slide reflects the impact of the new lease standard with land and buildings and grower contracts recorded as right-of-use assets. We have previously explained at the half year the grower contracts, but I'm happy to answer any questions on this later. You will see that inventories have increased by $56 million, which is a result of industry oversupply in the fourth quarter in both Australia and New Zealand. We have chosen to hold the majority of this inventory increase as further process products as it is frozen finished products like kievs, schnitzels, and nuggets. It has the longer shelf life and the FP network is our most flexible. You will also see that feed inventories increased year-on-year as we are holding greater stocks from grower direct purchases and year-on-year pricing increases. Our total receivables balance has decreased year-on-year. However, in the detail, our financial statements highlight an increase in trade receivables of $16 million over last year. We feel this is an excellent result given the natural increase you get with higher revenue and the situation with COVID-19 that some of our customers found themselves facing. Our debtor's days outstanding only increased 2 days, and our overdues greater than 30 days increased $5 million to just under $10 million in total for the group. In our business update in May, we noted we were working with our customers to support them where they were in distress due to COVID-19 changes, and in certain cases, this is a result of the impairment plans being established, which are being met. We are quite comfortable with our debtors' position and continue to monitor cash closely. Turning to our cash flow on Slide 16. Cash conversion has improved from 60% at the half. We closed our books on 27 June, and we are pleased with our cash collection at year-end. Conversion was negatively impacted by the working capital build in inventories, but we are satisfied with the 97% we have achieved. We've also provided a conversion ratio, which considers the benefit we accrued from the increase year-on-year in our inventory procurement trade payable. This ratio of 81% is a solid number in the context of operating in the COVID-19 world. We spent $87 million during the year on capital expenditure, which is well below where we suggested at the half. Like many other companies, we were more judicious in spend in the second half, and there was a deferral of some work due to restricting access to our sites to essential visitors only. We continue to invest in the Victorian and Western Australian hatchery projects, which are on track to be completed in FY '21 and '22, respectively, pending any possible impacts due to COVID-19. On Slide 17, our net debt finished at $315 million, with leverage increasing to 1.8x primarily with the hatchery investments and higher inventories. Net debt decreased $9 million from December 19. You will see that the inventory procurement trade payable has increased by $26 million to $120 million since June 19. This reflects a few factors. The first is that there was about $15 million, which fell due for payment just after balance date, reflecting the timing when we took delivery. The second is that as we built feed inventories on our balance sheet, it is reflected in that payable. The inventory procurement trade payable was $98 million at the half year, so the increase was mainly in the second half. Our final dividend of $0.067 per share, fully franked, sits us in the middle of our guided payout range of 60% to 70% of underlying NPAT pre-AASB 16. And with that, I'll hand back to Jim. Thanks, Jim.

Thanks, Gary. Now moving to Slide 19, I'll turn over to our segment performance for Australia and New Zealand. I will start in Australia, then I'll turn it over to Jono, who can update us for New Zealand. The big call out in the Australian business is the 6.5% growth in core poultry volumes in the third quarter, which then quickly dropped to be up only 1.2% in the fourth quarter to finish at 4.3% growth overall for the year. This drop in the second half revenue and profitability was impacted by an excess of supply in the fourth quarter creating pressure on pricing, and additional promotional and clearance activity and inventory provisioning, which lowered margins. We experienced higher costs due to COVID-19 measures and slightly higher feed costs, but pleasingly, our cost overall were slightly below volume growth and, in absolute terms, were down from the first half. The team has done an excellent job to keep costs down through very tough conditions. Our external feed sales were also down on the half as some customers responded to weaker demand in their businesses and the loss of some unprofitable business. I've already talked about the impact to our channels, so I won't go over this again. However, I think it is important to understand that the balance of our volumes by channels does not net out to 0. So whilst the poultry category is resilient, it is not immune. I would now like to hand it over to our Chief Executive Officer in New Zealand, Jonathan Gray, to talk about our segment performance in New Zealand. Jono?

Thanks, Jim, and good morning, everyone. Our New Zealand business delivered underlying EBITDA pre-AASB 16 of $28.6 million, which represents a decrease of $1 million or 3.4% compared to FY '19. At the half, we told you about the progress made in our New Zealand turnaround plan and the momentum that had been established. Looking at the full year result. It was not so much a gain of 2 halves as it was 3 quarters of pleasing results as we progressed our turnaround plan, and then 1 quarter that was severely impacted by the response New Zealand as a country took to meet the challenge of COVID-19. Core poultry was down 2% for the full year. Looking at the second half breakdown of that, we see a lift in demand of 3.8% in Q3, before a significant drop in Q4 of 13% compared with the corresponding period in FY '19. Poultry revenue growth, which had built nicely and above volume growth through the first 3 quarters then slowed in the final quarter due to excess supply that I will talk to shortly. It's worth taking a couple of minutes to explain the detail and impacts that the alert level restrictions had on our Q4 performance, particularly the impact from Alert Level 4, given the significant impact that you see on Slide 10. From March 26, the country moved to Alert Level 4, which was a full national lockdown. This lasted for 4.5 weeks. 2.5 weeks of Alert Level 3 followed before moving down to Alert Level 2, and then an extended period at Alert Level 1. Level 4 restrictions meant all nonessential businesses were closed completely. So for us, that meant no QSRs open at all for 4.5 weeks. And likewise, no restaurants or cafés open at all. Aside from a few minor exceptions, every out-of-home channel, including food service and the wholesale market closed overnight, and did not reopen in any capacity for 4.5 weeks. When they did reopen at Alert Level 3, it was in limited capacity, such as drive-through and takeaway only. From there, restrictions continue to ease further until just last week. During the Level 4 period, supermarkets remained open as an essential service, and we saw an increase in demand. However, this increase in retail demand did not nearly offset the drop from out-of-home channels. Our total demand was down by over 35% during this Level 4 period. In addition to the challenges of the extreme demand decline, we had to move decisively to reconfigure our processing facilities to meet such specific protocols required including social distancing of workers in our factories. We also faced declining attendance levels as schools were closed and carpooling was heavily restricted. Our plants ran less efficiently through this period. And of course, with birds in the field still coming and demand having significantly declined, there was a resulting oversupply in the market. Our sales volumes dropped, our margins were negatively impacted, and we rapidly built inventory. At this point, I'd just like to mention the enormous pride I have in my New Zealand team, not only for the way they responded to the challenges that COVID presented and continues to present, but also for the leadership, guidance and support they provided to their respective teams. We have received excellent feedback from many of our key customers and strategic partners around how we performed, communicated and conducted ourselves through this very difficult period. And before passing back to Jim, the last time we spoke, I highlighted the progress made in New Zealand against our turnaround plan. Whilst we continue to manage the unpredictable challenges of COVID-19, we remain committed to that plan. I believe we are a more nimble business and a stronger team as a result of what we have been through. And with that, I'll hand back to you, Jim.

Thanks, Jono, and congratulations to you and your team. This is a great job. Now turning to our feed markets, which are on Slide 22. Our feed costs have remained elevated as the tight inventory of old crop forcing domestic buyers, like Inghams, to pay more for supply certainty. The low inventory was further exacerbated when exports entered the market as the Australian dollars temporarily declined, creating an opportunity for aggressively bidding limited available stocks. As Gary noted, in such a tight market for old crop, we have made the prudent decision to secure supply to feed our birds given the visibility to these low stock levels. We anticipate that stock levels will improve as conditions remain favorable for the new crops that are due to be harvested at the beginning of November in the regions where we source our supply. Now that would, if that happens, lead to lower costs. However, it will take until the fourth quarter of FY '21 before lower feed costs fully flow through our supply chain and into cost of goods sold. Now moving to Slide 24. Now I feel like a broken record when it comes to COVID-19, but the unfortunate reality is that it will challenge our economy for some time even beyond a vaccine being found. But we've proven that we have a resilient strategy, a resilient business model and highly adaptable people to help us work in these highly volatile situations. Now we've noted that government restrictions continue to impact our customers, and therefore, the consumption of poultry products in both Australia and New Zealand. And whilst our diversified network leaves us well positioned to maintain supply, we are not able to predict the impact that COVID-19 may have on the poultry industry or Inghams' capacity in our poultry supply chain in the future. Again, we are resilient but not immune. This point is made because, as you are aware, we have completed a 10-day closure in our Thomastown Further Processing facility in Victoria. As we speak, we are currently managing and managing well, I might add, the government-mandated reduction in workforce in our Victorian operations. We will continue to focus on being agile and ready to respond to customer and consumer demand for all of our products in the context of lockdowns, and international and state borders closing. As poultry remains a competitive and affordable source of protein, by the way, even more so in a depressed economy, we are optimistic that we can continue to fulfill our role as an essential service provider, and we're proud to do so. As I noted earlier, we would anticipate the improved outlook for feed pricing to fully flow through in the fourth quarter of this financial year. And as always, we remain focused on efficiency, productivity and cost management across our supply chain. Now moving to Slide 26. This brings me back full circle to the beginning of this presentation. Strategically and operationally, we are on the right track. We have managed the challenges well, and we are applying lessons learned going forward. We have been able to do this because we have a clear strategy that builds resilience and points us in the right direction to achieve profitable growth for our business. Our principles and purpose help us focus on our strategic pillars to optimize the core, transform for tomorrow and create the new. While there is no crystal ball on what the new normal will look like post-COVID-19, what is clear is that our 5-year strategy is building the resilience of our organization, the resilience and adaptability of our people in enabling us to focus on what we need to do to deliver more consistent, predictable and reliable returns to our shareholders. With that, I will hand it back over to the operator for your questions. Thanks.

[Operator Instructions] Our first question is from Mr. Michael Peet from Goldman Sachs.

Jim, can you hear me?

I can, Michael.

Just on the indicated sort of oversupply in the fourth quarter, could you just give us a sense of where we're at, at the moment? Maybe how long you think that might take to clear, maybe give a sense of what wholesale channel pricing is doing at the moment.

Yes, I can. That's a great question. So as we stated in our remarks, we did have quite an inventory build of, I think Gary had mentioned, about $56 million. And then there was a provision. But I can tell you for the first through 7 weeks or so of this financial year, we've been able to push out about $9 million of that. So that's the good news. And relative to the wholesale market, we are seeing it come back to a more normalized pricing in that channel.

Okay. And maybe just one for Gary, maybe on Slide 10. Just looking -- thank you very much for that quarterly breakdown. That really helps quite a bit. But just in thinking about coming into '21 and the first quarter was impacted by the FP issues that you highlighted. I just wanted to get a sense of roughly, where normally, you would see your EBITDAs per quarter, would it be a little bit flatter than that across the quarters? But obviously, I think first and fourth would probably be the weakest. Is that the right way to think about it?

Yes. So as we've talked about, quarter 1 was impacted heavily by processing networks. We've talked about it at the half, and Jim has mentioned today, and Q4 was heavily impacted by COVID. So your thesis makes sense.

And then thinking about first quarter of this year, we're still going to have some impacts, obviously, with what's going on in New Zealand, Victoria and still around the rest of the country. But you are cycling that FP. But would you expect some sort of -- a little bit of a normalization there?

Yes. So you're going to hear this lots of times about we're not providing guidance. And clearly, we're sitting in a very uncertain world with COVID-19. So our Thomastown plant was shut down for 10 days because we had COVID -- some COVID cases in the plant. And we're also in Victoria operating with a 20% lower workforce per government regulations, and New Zealand has moved back to higher alert levels as well. So making predictions, even in the first quarter is very challenging for us because those things actually do make quite a difference for us, as you could see in Q4.

And Michael, Jim here. I would add to that, typically, and we've talked about this quite a bit. The seasonality of this business typically would be, say, 51% of our EBITDA generated in the first half, 49% in the second half. Based upon Cleveland, we had indicated that it might be a little bit different this year as a result of the first half Cleveland issues, which are, as we stated at the half, are behind us. And so the good news is we have lapped Cleveland. The bad news is what Gary was just talking about what we had to do in Thomastown and closed that facility for 10 days.

Next question is from Craig Woolford from Citigroup.

Just wanted to understand, there's lots of moving parts as we can imagine. In the second half of '20, what was the impact from the COVID costs that you're alluding to? What other costs fell because as you noted, the cost growth, just the difference between revenue and EBITDA in Australia, cost growth was lower than volume growth, which seemed like a good result. But a bit surprised to see that given some of the cost issues that you've just talked to. And kind of related to that, was there any government subsidies in New Zealand?

Sure. Craig, I'll take that one. So in New Zealand, we had NZD 200,000, I think it was Kiwi dollars of government subsidies last year, so pretty immaterial, and we didn't receive any subsidies in Australia. In regard, we haven't broken out the impact of COVID-19. And frankly, that would be a very difficult thing to do because it is just spread right throughout the business. I did mention that we did have some benefits in the sales surge, kind of at the beginning of COVID when there was some pantry stocking. But we have had a number of costs in the operations. But we haven't pulled out a number, probably except for the increase in the inventory provision of $9 million, which we saw that build in inventory very concentrated across that sort of April-May period.

Yes. Craig, this is Jim. I would add to that. As per our previous conversations. And I think you've noted, yes, there are a lot of moving parts, especially with COVID impacting this business. But I will say that we are realizing some of the benefits that we thought we would realize, given some of the new operational talent that we brought into the organization and leadership. So I think, true to our form, that's starting to show up as well.

Okay. Yes. It's -- so that inventory provision was above the line with [indiscernible] parts that you believe you couldn't sell, and then this elevated inventory position that you have, which is in FP products. What does that all mean in terms of how you're setting the eggs or the outlook for the supply chain for this first half '21?

Yes. So just with the inventory, I wouldn't say it's because we can't sell the product. It's actually a net realizable value adjustment. So it's where we think we might be having to promote or clear some products. But I wouldn't say it's because we can't -- don't feel that we can sell it, just for that point of clarification. I'll let Jim talk about the balance of our supply chain.

Yes. And I'll talk it in terms of balances. For commercial reasons, we don't talk about settings and so forth on supply for obvious reasons. But we will, for our previous comments, we're making sure that we obviously bring this back into balance. So as we bring inventory down, obviously, then we'll start increasing more supply through our primary Further Processing Plants. Craig?

Okay. So just lastly, on this feed cost commentary, just want to set the question the right way. Is your feed cost outlook now better or worse than what it would have been back in, say, February or pre-COVID?

Yes, I'll answer it in general terms. And as you know, that we by 3 and -- 3 to 9 months is kind of the -- from a risk management perspective, how we manage feed. And as I mentioned in my earlier remarks, because we got such a low -- we had so low stocks coming into the year based upon a 3-year drought, we're very cautious to make sure we have continuity of supply. So that influenced how far out we should go. And now of course, we're just waiting to see what the results will be if we know how many kind of hectares have been planted. But we're waiting for the harvest to see what the yield off of those hectares and acres are. Gary, do you have anything to add?

So the -- I wouldn't say -- I mean, the major impact we saw was COVID on feed was probably at the beginning where the Australian dollar weakened. And that our grain became more attractive to overseas markets, and we saw quite a lift in price at that point in time. So that's been probably the main thing we saw. Now that's normalized back a little bit now, and that's probably the main COVID thing we saw on feed.

Our next telephone question is from Matt Johnston from Macquarie.

I might just go back to, I guess, the Q4, Q1 question, FY '21. Appreciate you're not giving guidance, but could you maybe talk to, I guess, the different challenges between what you saw, I guess, in the first wave versus the second wave in Victoria and NZ?

Yes. So why don't we start with NZ. Jono, you want to talk to the impact on Q4 into Q1? Of course, we don't give guidance, but I think we'd give some flavor for what's going on with restrictions and so forth.

Sure, sure. So the -- I think, firstly, we've spent time over the last 3 or 4 months, we've spent time in New Zealand at period at Alert Level 4, Alert Level 3, 2, 1 and then back again. Currently, Auckland is at Alert Level 3. Rest of the country is at Alert Level 2. So the reason I start there is there hasn't been an extended period at any level for long enough for us to definitively understand all of the impact at those levels. What I will say, and you would have picked up, hopefully, through my commentary, is the Alert Level 4 restrictions, which is the only level that closes out-of-home channels for New Zealand, they obviously have far deeper impact and further reaching impact for us than other levels. That's not me saying that Alert Level 2 or 3 doesn't have an impact, but clearly Alert Level 4 is next level. So we would all be hoping that we don't move back into Alert Level 4. But otherwise, the -- as we come into -- coming to Q1, I'd use the word choppy again. And the visibility that we have ahead is a short visibility. So it's -- it remains volatile and impossible to predict.

Yes. And Matt, as far as Victoria, to your question, it's a great question. I think the way I'd characterize Victoria, I call that wave 2, is similar to what we saw across Australia for wave 1 with panic buying and so forth and so on. So the good news is we learned a lot through wave 1. We learned a lot in Australia from New Zealand and what they went through, and we applied many of those learnings to our business in a very positive way. So yes, we're hoping that Victoria wins and can get out of this as soon as they possibly can.

And Matt, I will just add. You asked directly from Q4 into Q1, they're not directly comparable. But clearly, the Level 4 impacts that Jono talked about are not as severe that we're seeing in Q1. We're still seeing a very choppy market position. And I think we use work of short visibility as to demand forecast coming through. So definitely, that's pretty similar through the period. And whilst we had quite a number of operational impacts in Q4 in Australia, the Victorian situation is probably more challenging in Q1.

Yes. And the other thing...

That helps you get a sense between the two.

Thanks, Gary. Matt, the other thing I'm pretty sure you're aware of is there are 2 -- in poultry, there are 2 primary processing plants that, as a result of COVID and positives within those plants, had to shut down for a period of time. So that also impacted both the demand and overall supply, which made it even choppier.

Okay. Great. That's helpful. And maybe just a couple of quick ones. Can you actually comment on where you sit on your forward cover for [ state ] at the moment?

Matt, not over and above what we normally say. So we say that we have and when -- just repeating for everyone, we physically buy. And we have between set 3 and 9 months that we have. But you would note that we've got a little bit more in our balance sheet. So that gives you a small indication that we're probably been building a bit in this last half and still sitting between that 3 and 9 months.

Yes. And where that will manifest itself, Matt, as I stated earlier in my comments is we're anticipating, if, in fact, we have a good, robust, which, by all indications, it sounds like we will, but we won't know until a harvest, that will flow through, and we'd probably think that it will flow through sometime later in the fiscal year, Q4.

Okay. That's clear. And then final one from me. Just around operating leases. Has there been any discussions with landlords in the past 6 months as many businesses have around, I guess, changes or flexibility?

We've had discussions, but I wouldn't be factoring any significant changes into the forward look.

[Operator Instructions] Our next telephone question is from Scott Ryall from Rimor Equity Research.

Jim, firstly, I wonder if you could just give us a sense of how your Victorian employees are now health-wise. Have they recovered?

Yes. Scott, that's a great question, and thank you for asking, and the answer is yes. We are very fortunate. I talk about a lot of what our purpose is to nourish our world. But during COVID-19, especially internally, the communication is not only do we nourish our world, we have a dual-purpose and that is to stop the spread of COVID-19. And we are very fortunate, and I'm going to spend a little time on this, I'm sorry. But -- that our employees have really embraced that we are an essential service provider and the importance of them staying healthy and safe, not only in the workplace, but also limiting their activities outside the workplace. And as a result, as I mentioned, our absenteeism has not impacted our business. People are showing up. They're doing whatever they can. And fortunately, those that were impacted by COVID-19 have fared fairly well. I think we only had 1 individual who was hospitalized, and that had to do with some other conditions that, that individual is dealing with. But thank you for asking.

All right. Good. You didn't spend too long enough. That's good. I think you've done a pretty good job, Jim and Gary, it's probably your numbers, in particular, in terms of helping us understand some of the impacts. So thank you. Can I ask a quick question on Slide 10? On the chart on the right-hand side, you've called out the $14 million worth of costs that you talked about at the half year result in first quarter. And so if I look at quarter 1, quarter 2, quarter 3, adjusted for that, each one of them was over $50 million of EBITDA. Is it fair to assume that the difference between your actual results in Q4 and another result that would have been greater than $50 million was essentially the COVID impacts that you talked about?

I'll turn it over to Gary, but I want to reiterate something. And that is, if you look back over the history of this company, at least for some period of time, typically what you'd see is a 51% to 52% in the first half, and then 48% to 49% of EBITDA being delivered in the second half. Gary?

So Scott, I got to agree with your analysis that you go through. So there is the $9 million inventory provision in there. And then when you say COVID, you've got to consider the impacts through demand, through cost, through mix, through margin. It's a logical statement that you made.

Okay. Good. And then just on Slide 28, which is also quite helpful to have in your pack. So if you -- and I'm just checking, there's -- I'm not asking you to quantify anything, but in particular, that in the first half, as you called out, you had poultry volume up 2.6% and revenue up 4.7%. But the volumes were up 3.3% in the second half, but revenue is up 1.5%. So is it fair to assume most of that pricing change, the effective price reduction, which you saw in the second half, is due to mix and the inventory position that you've talked about? I know it's not the inventory cost, sorry, but the fall in -- well, I guess its mix mostly, but also the -- some of the inventory that you built up that was unable to be sold.

Yes. So I thought you'd find Page 28 helpful. So just one thing on that one. You mentioned the total poultry volume of 3.3%. The like-for-like in revenue was 2% of total poultry level. So the actual 1.5% takes into account the external feed sales that we have as well. So 3.3% playing 2% is the apples-and-apples. Then you really again, you're well informed. I think the other part we've got in there is with the oversupplied market. It would be fair to say there was clearance of product and promotional spend that we needed to do to help with that oversupply position, which impacts our revenue.

Yes. And then looking at gross profit, I'm correct that, that [ $14 million in ] the first half comes in, in the gross profit line, right?

That's right.

So if I look then -- so gross profit margin was impacted in both halves due to the varying impacts in addition to feed cost inflation, I understand that. But that's where most of the impact comes in, in terms of the margin, I think, from COVID in the second half, in particular, is that fair?

Yes.

Okay. All right. They were my numbers questions. Then could you -- maybe this is a question back to Jim. Could you just talk to what you've seen what as? And I take Jonathan's answer before in terms of the different levels of restriction that you've seen in New Zealand and how each one of them has differed, and there's been changes quite regularly. But just in general cases, can you comment about how you've seen your mix change as restrictions have been relaxed relative to what your mix was, say, 6 months ago before the impact here? And then maybe the other question. You've got a couple of photos of your Free Ranger product in the pack, but you didn't talk about them too much. Could you just talk about the Free Ranger and some of your plant-based protein products that you're looking at and where -- what the impacts of those have been in the market so far, obviously, early days?

Yes. So why don't I start with that? Yes, we are very pleased with the results we're getting with the Free Ranger, specifically launched it in 1 retailer and expanding distribution there. We are also -- I think I mentioned I covered in Strategy Day, we've opened the lens of our organization to not just be a poultry company, chicken, turkey. But we're also looking at proteins. And so we've been working on a number of products that are plant-based proteins, and those are the two first launches, which have also been -- although they've only been in market in a short period of time, they are exceeding our expectations as well as our customers' expectations. So that's good. And we have a number of other things in the pipeline, but there has been no material impact based upon those because it's, as you know, a slow build. Just in general terms, what I've seen since the impact of COVID-19, which is new to all of us, in -- just in general terms, it's almost to state the obvious. But as restrictions go up there is, to your point, a huge change in shift and mix. So as Jono mentioned, when we supply QSR, we supply all the big QSRs. So you can imagine that we're producing specific products for those specific customers. And when those close down for 4 to 5 weeks, that has a significant impact on everything from live birds in the field all the way through the finished product. So typically, the higher the restrictions, the first to close, our QSR and food service, so then there's a major shift. And then we see the huge uplift for a temporary period of time in retail as people continue to panic buy. And we've seen this in both -- currently in Victoria, we're seeing it again in wave 2, and we saw it initially in New Zealand. So Scott, I don't know if that answers your question, but that's kind of the way I view it.

And have you seen though, as restrictions have been relaxed, have things gone back to, and I'm talking inverted commerce here, normal? Or are you seeing still, I guess -- and it's early again. We haven't relaxed things for very long. But is it -- are you seeing things kind of switch back to how they were? Or is it a bit of a long -- it's a quick change when restrictions are tightened, but it's a slower change as things get relaxed?

Yes. I think the impact on QSR is quicker. But the impact on food service, meaning out-of-home consumption in restaurants and pubs and so forth is much, much slower.

And the next telephone question in the queue is by Mr. Phil Kimber from Evans & Partners.

I'd also just want to pass on my thanks for the extra info in the slide deck. It is really helpful. And so on that point, just looking at the fourth quarter and exploring this inventory provision, I heard you mentioned before, it's not a write-down as such. It's more around -- you look at your closing stock and maybe the cost. The prices that you can sell it for going forward aren't as high as they otherwise would have been, and so you have to adjust. Is it as simple as just adding that back in Q4 and saying that was sort of a one-off as such? Or should we think that in the first quarter of this financial year, you've still got COVID issues, suppliers still in an excess position, but you may have to continue to readjust inventory through that first quarter? And so it's more of an ongoing cost that's representative of a tough market rather than a one-off type expense? I guess I'm just trying to understand that a little bit better when thinking about FY '21.

Yes. I'd be happy to -- I'll turn it over to Gary here in a second. But I see that there's quite an interest in Slide 10. And I do want to emphasize something relative to the fact that, historically, and going forward, we normally won't be talking about quarters. But in any time there's an extraordinary situation, we want to make sure that we're providing people as much information to understand what's going on as we possibly can. So that's the reason we put that in there. And I think your questions are spot on. So Gary?

Hey, Phil. Thanks for the feedback on the deck. In regard to inventory, I think the way I try and -- so the way I think about that going forward is, as our levels of inventory decline, then naturally the provision will decline as well. Now I accept that there is some mix in that question. So it's -- I think the answer is it's a bit of both. So it's partly due to just the market at the moment under the COVID demand signals. And then it was also the build, which will reduce over time. So for it to completely go away, we need both the inventory down and the market to come back to normal demand, if that helps answer your question.

Yes, yes. No, it does. I just didn't want to take the, whatever it was, $36 million in the fourth quarter, add back $9 million and say, okay, that's your first quarter sort of starting point. Because I got the sense, maybe that's where some of the questions were heading, and I just wanted to understand for myself how to think about that.

Yes. I'm sorry. Another quick way to think about this is as we're taking finished product out of frozen inventory, obviously, that volume is not -- we're not producing it in the plant. And so that does have an impact on overhead absorption and everything else. But structurally, if I understand your question correctly, ongoing, if we ever get to back to normal, we don't see any structural changes in our cost of inventory.

Yes. Yes. And then just on exploring the feed costs, you said you've got typically 3 to 9 months cover and sort of implying the markets' tight at the moment. You've been having to buy some, which is why feed costs are probably going to stay elevated in the first half or maybe 3 quarters. And then hopefully, with the drought breaking, weak prices potentially come down as the crop starts to look better. Would it really come through in the fourth quarter? Because, I mean, if I take the 3 to 9 months, just call it 6. Add, what is it, 15 weeks or 13 weeks to grow the chicken. I thought it was getting more first quarter FY '22, but I just wanted to understand that a bit better.

Yes. So you're right. And it's beyond -- a lot of people talk about poultry in 12 weeks because from the time you hatch a chick until it goes through the process. But it's even further out than that because we are physical buyers of grain. So we physically buy the grain, and then it has to be delivered to one of our feed mills. It's converted then taken to the farm, then fed to the chickens, and I could go on and on. So I think it's an interesting insight that you have that, yes, there will be, assuming a good crop impact on Q4, but it will definitely, but again, assuming good crop in the first quarter of FY '21. Gary?

Okay. I'll just add a little more color to that. So first, we do hold stock. So we start buying hopefully, reduce cost grain when new crop comes through, but we'll still have some old crop to run through in inventory through our feed. And then possibly the thing that people don't think about is when we're feeding chickens, we're feeding both chickens that are growing and coming into meat, but we're also feeding the breeder chickens as well. And by the time it goes to the breeder, hence then into eggs, then into growing and then into the plant, there is a longer lag than you might initially think.

And I'd like to take this opportunity to congratulate Gary on knowing so much about the poultry business in his first year here. So thanks, Gary.

That's great. Yes. So it's more that it hopefully starts to benefit from Q4, but it sounds more like it's the following year, as in FY '22, where it really kicks in.

Yes.

That was where I was going. It starts in 4Q, but it really kicks in, in FY '22, assuming that we have a good crop and all the things we just spoke about?

That is correct. And I've said this before, and again, one of the purposes of answering these questions and having this dialogue and being open, honest and collaborative with our -- with everyone we deal with. If -- I think a good way to look at this business is on the procurement and grain side that will impact this business significantly. And then there's 3 parts of it. In the middle of it, it's how well you're doing an operations mix and all of that. And then on the right side of it is keeping an eye on the wholesale markets and what the pricing is there. You're asking all the right questions.

Our next telephone question is from Paul Buys from Crédit Suisse.

Just a few quick ones from me. The first one, just on -- you've given some great commentary on, I guess, some of the ongoing challenges, including managing supply and the Victorian situation. I was just keen for maybe a little bit of color on -- obviously, you guys have got a national supply chain. Just a bit of color on how you think that sets you up. I guess from a competitive perspective, with the advantage of having that national supply chain versus your competitors, obviously, one big one of which is national as well. But just interested in a bit of flavor in that regard as to how you cope versus, I guess, the rest of the market.

Yes. So being not only in every -- basically every state national in Australia and across New Zealand, which is unique to Inghams, is it's a huge competitive advantage. And it's pretty obvious that if we have a problem in one area, you can go to another plant and shift across state lines and so forth, assuming that they're open and being essential service provider, we've been able to do that. So yes, the larger scale producers are in a much better position to manage through this, I would imagine, than say if you had a single processing plant in Victoria, which, in fact, happened. And if you have to close that plant, it's going to have a fairly significant impact on your entire business. So did that answer your question?

Yes. I mean just thinking that there are obviously some regional players that are Victorian-based. So just interested to see how, I guess, if you can use that supply chain, to some extent in your advantage.

Yes. I will, but I also want to make sure that everyone understands that the last thing I want or anyone wants is for anybody to be impacted by COVID-19. And we don't want any -- anyone in the poultry industry to have to deal with closing their plants and so forth.

Of course. Of course. Understood. Just a quick one in terms of your CapEx plans. I mean I guess, just given your comments around the ongoing obvious challenges from COVID and some of those residual uncertainties, how -- does that have any impact on how you're thinking your CapEx plans over the next sort of 12 to 18 months?

Yes. I'll have Gary give you some specifics on it. But we had a couple of capital projects that we're -- and we've talked about the spin chillers. We talked about those 2 spin chillers in 2 different plants that were to be installed, and COVID has impacted that. They basically are sitting -- were sitting in the parking lot because we couldn't get people internationally here to help us install them and so forth. So that has impacted our capital spend because we've had to halt a number of projects for a period of time. But Gary, do you have any more specifics on that?

Yes. So that's the factual situation. So our major spend at the moment, and looking forward, is the Victoria and WA hatchery projects, and we've continued with those throughout this period. And we gave some dates when we think they're operational, but did have the qualification of their -- of COVID access. And what I could mean by that in some of the specialized HatchCare here could normally require visitors from Holland to come and install and to test that. So we might run into some COVID issues down the track. But assuming that we don't, that will continue to the dates we said, and that will be the bulk of the CapEx next year, probably a similar level to what we had this year, is one idea that you can think about there. Outside of that, I think we'll remain very cautious with our capital whilst the COVID conditions being demand are impacting us. So that -- so really it depends on that one. But as we're in the current positions, we'll be keeping things pretty tight as we were through the second half of last year.

And last one, just, Jim, you mentioned, I guess, some of the initiatives that you've been putting through, having some of the benefits throughout this period. And obviously, probably kind of somewhat lost in all the various moving parts and the market disruption. But I just came for a little bit more color, I guess on specifically, which major ones are working as you would hope? And to the extent that you see further benefits or you kind of, you've got them done where you need to be going into the next 12 months.

Yes. So none of the capital projects that were under foot that were paused other than, say, the hatcheries, depending upon when we bring those back online and complete those would have a material impact on our results. It's mostly just the good practices and best practices that we're putting in place, new continuous improvement processes and so forth that we're starting to see the results flow through to the P&L.

Can I just add, we're having Ary from UBS having a few technical issues getting through. So if I can just pick up a couple of the questions that he's asked. Hopefully, that's all right, Ary.

Thanks, Paul.

The -- you talked about the margins between -- the impacts between the different channels. And I think Jim answered that one before. You were wondering how to think about CapEx, I think he just mentioned with Paul. You mentioned D&A and you saw the uplift of D&A in the second half. And whilst there was an impact from the catch-up from Wacol depreciation, I think you can look at that though as a pretty clean run rate as that second half D&A. And then you talked about some flavor around the competitive intensity in the market and whether it's being rational. And I think I'll hand over to Jim for that one.

Yes. So in our 2 markets, Jono, you want to talk about competitive rationality in New Zealand?

Yes. Thanks, Jim. We talked at the half on that question for New Zealand, and I commented on evidence of more rational decision-making behavior from our largest competitor, perhaps relative to the prior -- to 2 years leading into that, which got a bit of airtime on these calls. My answer would be no different to what it was at the half in terms of the rational market. So we do see it as being rational in New Zealand.

Yes. Thanks, Jono, and I would say the same for Australia. No, we're not seeing any irrational behavior.

Hopefully, that answers your question, Ary.

Our next telephone question is from Belinda Moore from Morgans.

Jim and Gary, look, I was just hoping, can you give us any sort of flavor of the extra costs of COVID impacting -- that you've had to shut the plant, I know they reopened. But what sort of extra supply chain costs, et cetera, have you incurred from Victoria's restrictions in the first quarter, please?

So Belinda, I'll take that one. So whilst we didn't quantify it in Q3 and Q4 last year, I'm not going to also try and quantify it in Q1. So sorry, I'm going to say, I can't do that. And partly, it is actually a really hard thing to try and isolate what's specifically COVID as well. But I think if I go back to trying to the theme that I was mentioning before, whilst the situations are different between the 2 quarters, we are still seeing that choppy demand. And we are seeing operational impacts occurring in different places. So it's not like-for-like. But when we fix -- something's solved in 1 place and then it pops up in another place, so we're seeing a continued run of those costs. That's the best way I could answer it.

Yes. I would say, pretty obvious. But directly, when we had to close Thomastown, that would have a much more significant impact than anything else in the event that we were to have to close a plant. Fortunately, we closed that plant before anyone told us to close the plant. We just had, I think, 3 positives at that time. And we were very fortunate to only have to have closed it for 10 days. So again, I give the people at Inghams, all of our people who worked so hard at this, I have to give them a lot of credit because managing this business with everything that's going on in the risk of the environment outside of work, it's just absolutely a fantastic result to be able to get through all this. Because I know a lot of people in this industry around the world who -- there are plants that unfortunately, have had tens of people that have died. So I think our team has done a great job. Thanks. Are there further questions?

Sorry, speakers, there's no further questions at this time. Please continue.

All right. Well, thank you, operator. I appreciate that. I just want to thank everyone for joining us today and your interest in Inghams. We look forward to speaking with many of you over the next few days, and I hope you all stay safe and stay well. Thank you.

Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect. Goodbye.