Inghams Group Limited (ING) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Inghams Group Limited 1H 2021 Financial Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Jim Leighton, Managing Director and CEO. Please go ahead.

Thank you, operator, and good morning, everyone. I'm Jim Leighton, Managing Director and Chief Executive Officer of Inghams, and it's my pleasure to welcome you to our results call for the FY '21 first half year period. Joining me today is our Chief Financial Officer, Gary Mallett; our Chief Executive Officer for New Zealand, Jonathan Gray; and our Chief Agribusiness Officer, Anne-Marie Mooney. All of us will be available after the presentation today to answer any questions you have on our half year results. Moving to Slide 3. And for clarity, I would like to note that as announced in November of last year, we reported today's results, inclusive of the new leases standard, AASB 16. Therefore, all references to underlying results as we move forward through the presentation are post-AASB 16, unless specifically stated. And I would like to repeat that. That, again, all references to underlying results as we move through the presentation are post-AASB 16, unless specifically stated. So if we move on to Slide 5, outlining group performance highlights over the first half year period. I guess if there are 3 things that I would ask you to take away from this presentation and from the slide is that we have built a solid foundation, and we've delivered solid volume growth and strong financial performance. Despite the continued impact of COVID-19 on our business, particularly during the first quarter, and ongoing high feed prices in the half, we have reported very solid results today underpinned by resilient demand for poultry and operational momentum being delivered as we execute our 5-year strategic plan. We saw the Australian market recover strongly in the first quarter. However, New Zealand, where the COVID impact was magnified, this recovery continued throughout the first half, with the business well positioned by period end. Our core poultry volume grew as we saw strength in demand across our channels and the return of total trading volumes to pre-COVID-19 levels. Importantly, we successfully performed our critical role as an essential services provider despite disruptions associated with the second and subsequent waves of COVID, particularly in Victoria, where these impacts were most severe and prolonged. We maintained our operations and sustained supply to our customers and in turn, the people of Australia and New Zealand. And this is really a testament to our dedication and expertise of our people, and I remain extremely proud of what they continue to achieve in such uncertain times. Our focus on health, safety and well-being of our people continues and always will be a top priority, and this deeply embedded safety culture has enabled us to keep our people safe throughout the changing and challenging COVID environment. I am very pleased that off the back of a significant improvement in safety measures in FY '20, we have further reduced both our lost time injury frequency rate and the total recordable injury frequency rate, which are down by 26% in the half, and we delivered strong growth in earnings, as explained in further detail on Slide 6. As foreshadowed at our AGM in November, we saw strong growth in core poultry during the half. Group poultry volume was up 4% on the prior corresponding period and up 5.6% on the second half of FY '20, reflecting strength across all channels. We made great progress in the reduction of excess poultry inventory that had built up during the first wave of COVID-19, with poultry inventory down $42.3 million since June of 2020. Gary will provide further color on the inventory reduction shortly, but I'm pleased to say that we have made excellent headway during the first half. Our statutory EBITDA of $215.6 million was up 5% on the first half of 2020, with underlying EBITDA of 4.3%, supported by solid revenue growth despite declining external feed volume sales and improvements in operational efficiencies. Our statutory NPAT was up $9.1 million on the prior period, and underlying NPAT up $8.3 million, with AASB 16 impacts contributing $3.8 million to this uplift. We have today announced an interim dividend of $0.075 per share, which is an increase on the 2020 interim dividend of $0.073 and a final dividend of $0.067. The interim dividend reflects a payout ratio of 74% of underlying NPAT, which is within our adjusted target payout range of 60% to 80%. And Gary will speak to our cash flow and balance sheet shortly, but our net debt and leverage remain similar -- at similar levels. While we discuss the impacts of COVID-19 on our business in great detail during our 2020 results, it's worth noting that the solid results we achieved during the first half of '21 were through a time of ongoing COVID challenges. If we move to Slide 7. While we continue to see volatility during the half, particularly during the first quarter, we saw demand strengthen across our channels as COVID-19 restrictions eased. Across retail, COVID-19 restrictions continue to drive volatility, particularly freezer stocking during lockdown periods in Australia and New Zealand as well as the ongoing shift in consumer demand from deli to tray pack. Despite this volatility, our retail channel saw strong growth throughout the period. Lockdowns increased in-home dining across Australia and New Zealand, supporting this volume growth. We were also able to assist other processors when they encountered some COVID issues and production issues in Victoria, supporting our reputation in the market as a trusted and reliable supplier. Our QSR channel rebounded strongly during the half as COVID restrictions eased, further enhanced by the successful launch of new product ranges and customer promotions, including a new chicken menu at a large QSR customer that launched in October. During the half year period, our foodservice channel recovered slowly as dining in restrictions eased. While we have seen reduced demand associated with the loss of international tourism, we are broadly seeing overall volume back up to pre-COVID levels across this channel. We achieved higher volumes across our wholesale channel throughout this period, driven by broadening customer relationships, which have enabled greater coverage in this market. And pleasingly, we're asked this question a lot, we've observed rational behavior across the wholesale market over the last 6 months in both Australia as well as in New Zealand. Across our export channel, Australia volume growth was constrained by the closure of some international markets during the period due to an Avian influenza outbreak in Victoria in July and August. However, New Zealand did benefit from this, which has supported the reduction in surplus inventory. And I think this further demonstrates the benefit of our having operations in both Australia and New Zealand. As we set out on Slide 8, the first quarter was the most -- mostly impacted by the second COVID wave. Easing of restrictions across Australia and New Zealand led to the recovery across QSR and food service throughout the first quarter. Government restrictions in response to the second wave in Victoria created challenges in terms of rapidly changing customer demand, workforce restrictions and, of course, the proactive 2-week closure of our Thomastown Further Processing facility. New Zealand was also not immune to COVID challenges. And in August, Alert Level 2 restrictions were imposed across the country, with Level 3 restrictions implemented in Auckland, where the vast majority of the population resides. Now I'm pleased to say that we are able to effectively apply the lessons learned, which there are many, during COVID-19 in FY '20 to quickly adapt to these changes in the first half. Through close engagement with the Victorian government, we were able to educate and positively influence restrictions implemented for the meat processing facilities. That enabled us to maintain continuity of supply while providing a safe work environment for our people. Our sales and operations team worked hand-in-hand with our customers to meet their rapidly changing needs. Across retail, for example, a collaborative streamlining of product lines during periods of panic buying enabled us to maintain production efficiency and supply even with a reduced workforce. Our ability to respond quickly and effectively to the challenges that COVID continues to throw at us speaks to the resilience and agility of our business and our people and the unwavering commitment of our people to deliver great outcomes for our customers, consumers as well as profitable growth and return for our shareholders. Before I hand it over to Gary to take you through our financial performance for the half, I would like to briefly just revisit our 5-year strategy and the progress we've made across a number of initiatives over the last 6 months. Slide 10 recaps the strategic framework we presented back in late 2019. This strategic framework underpins our objective to deliver more consistent, predictable and reliable returns, as you can see in our results today. We are gaining tremendous traction from the initiatives that we've implemented over the last 18 months. Our strategy, as you know, has 3 key pillars: One is to optimize the core, and we're seeing the benefits of that in the results in the first half; number two is to transform for tomorrow; and three is to create the new. Our key focus so far has been on embedding strong foundations across the business to support future growth opportunities. And as such, we are well progressed with our strategic initiative to optimize the core. We are optimizing the core through continuous improvement. And I think this is a critical point because we are starting to deliver great outcomes and enhanced equipment effectiveness and then unlocking a lot of capacity and capabilities at our processing facilities. And this is driving lower costs, enhancing yield and reducing waste. And importantly, we are delivering greater asset efficiency and return with very modest capital spend. During the half, we commenced the culture project to transform our already strong organizational culture towards an ideal culture. This will drive even more advanced workforce engagement, efficiency, but most importantly, innovation for every person in our organization that will allow us to accelerate and improve business performance as we move forward. We now have an integrated business planning up and running across Australia and soon to be implemented in New Zealand. And I want to pause there about the importance of having this process in a business like ours. We have created, in my estimate, one of the best in the world that I've ever seen, and we've -- which allows us to extend our planning horizon to 72 weeks to enable us to better forecast performance, mitigate risks and execute our strategy, both in the short and the long term. Key to this is reframing our customer relationships to be more of a strategic long-term focus, which, in turn, is driving product optimization and enabling us to better align our production volume and timing with customer requirements. As announced in December, we have entered into an agreement for the sale of our New Zealand Hamilton feed mill and associated dairy feed supply business. This feed mill is dedicated to the production of dairy feed solely for external sale, does not materially contribute to earnings and is noncore to our operations. This will release capital for deployment into other higher-value opportunities. We have made solid initial progress with our second strategic pillar to transform for tomorrow. Throughout the half, we made good progress in the construction of our 2 HatchTech hatcheries in Victoria and Western Australia. These hatcheries are global best practice when it comes to animal welfare and will drive lower cost of production. We expect the commissioning of these to take place in Victoria in mid-2021 and WA in the second half of 2021. Something that I've been really excited about is that our research farm in Redland Bay in Queensland is now fully operational, with a number of successful calibration trials that have been conducted. Future trials will be supported by our feed and farm R&D strategy focusing on optimizing feed in what we call raising the bar on animal welfare standards. In this business, finding the sweet spot between feed, breed and feed conversion in a controlled test facility provides us with a competitive advantage. And finally, we have made excellent progress on our third strategic pillar to create the new over the last 6 to 9 months with an enhanced focus on the premium market through branded and private label product innovation as well as the launch of plant-based products. This has included the launch of a new brand, the FREE RANGER, in April of last year, which now is present in over 300 supermarkets. Our new Super Crunch -- and if you haven't tried it, you should, it's great. It's a new range of frozen products that have also been a great success, with sales volume currently exceeding our expectations. And further to our branded products, we successfully launched a number of private label plant-based products across our retail and QSR channels. We are targeting very, very specific adjacent protein categories across animal, plant and others in which to grow. The delivery of strong results in the half against a backdrop of COVID challenges with high feed prices demonstrates the value of our 5-year plan. Again, delivering strong results in the half against a backdrop of ongoing COVID challenges with high feed prices demonstrates the value of our 5-year plan, its impact on increasing the resilience of the business and our ability to deliver profitable growth for our shareholders. With that, I will now hand it over to Gary to present the financial results in further detail. Gary?

Thanks, Jim, and good morning, everyone. Looking at Slide 13. Our statutory P&L shows NPAT of $35.3 million, which is up by $9.1 million or 35% on the prior half year period. Given the adoption of AASB 16 in FY '20, these numbers are presented on a like-for-like basis. Part of the increase in NPAT includes a favorable variance associated with AASB 16, which was $3.8 million, largely due to a lower lease liability. The balance of the increase is due to trading, and you can see good growth there. On Slide 14, we've provided you with a reconciliation between statutory EBITDA and NPAT through to underlying, which, as Jim mentioned, now includes the impact of AASB 16, then to underlying pre-AASB 16, which we have provided to assist with comparisons as this standard has a material impact on our numbers, especially at the EBITDA level. As you can see in the reconciliation, the underlying adjustments we made in the first half are quite minor and reflect $3 million in redundancy costs arising from restructuring activities undertaken in the period. Moving to Slide 15 and our financial performance on an underlying basis, which is post-AASB 16. Our total poultry volume is up 4.8% on the prior period, reflecting solid growth. Core poultry volumes were up 4%. And we also saw strong growth in byproducts, with volume up 8.1%. External feed volumes were down 13.3% during the half due to favorable pasture conditions in New Zealand and COVID-19 challenges being navigated by our external feed customers. Our total revenue of $1.4 billion grew by 4.6%, with total poultry revenue up 6.1% and external feed revenue decreasing $12 million or 10.3%. Underlying gross profit was $357 million in the half, up $19 million on the prior period. The gross profit margin increased to 26.2%, supported by volume growth and improvements in operational efficiency. This is a very strong result given the continued high realized feed prices in the period and COVID-19 volatility. We made good progress in reducing frozen poultry inventory that had arisen in the last quarter of FY '20 by more than $40 million and as a result, released $3.7 million from the obsolete stock provision raised in June '20. While the gross profit margin increased, the underlying EBITDA margin fell slightly to 16%, due to increased SG&A expense mainly from higher insurance premiums. Underlying NPAT was $37.5 million in the half, up $8.3 million. Around half of this was trading, while AASB 16 had a $3.8 million favorable impact on the NPAT improvement. Our effective tax rate remains unchanged at around 29%. Looking at our balance sheet on Slide 16. Total inventories fell by $29 million in the half, with the reduction in poultry contributing $42 million to this decline. With excellent progress made in the period, we have only around $5 million of excess frozen inventory to clear in the second half of the financial year. This was offset by an increase in feed inventory of $9 million as we secured supply post harvest. This does not reflect a material change in our forward cover for feed materials, but simply timing associated with physical delivery. Our receivables increased $63 million to $266 million during the half, which is typical of December and comparable to the December '19 position of $264 million. This reflects seasonally stronger sales leading into Christmas as well as the close of our reporting period on the 26th of December. We expect this to reverse in the second half as normal, noting we collected $55 million of cash between the 27th and the 31st of December. In regard to leases, we added new growers and extended our Cambridge DC in New Zealand. These increases were offset in our right of use assets by amortization and lease liabilities by cash payments. Turning to our cash flow slide on 17. Our cash conversion ratio, including our AASB 16 lease payments, was 59.8% for the half. While low compared to the FY '20 full year, this does reflect the negative seasonal impact of higher receivables and is consistent with cash conversion at December 2019 of 59.5%. Our capital spend in the half was $31.5 million, which is lower than what we would typically incur as we maintain discipline in this area given the challenges associated with COVID-19. We continue to invest in our 2 hatchery projects and expect to commission the Victorian hatchery around the middle of 2021 and Western Australia during the first half of FY '22. As we announced in December, we have entered into an agreement to sell our Hamilton feed mill for NZD 11.5 million and received a deposit of NZD 1.2 million during the half in relation to this sale, which is expected to complete in March. Moving now to Slide 19 and our capital management metrics. Our debt -- net debt finished at $327.5 million with leverage of 1.7x. Leverage was lower than June '20 at 1.8x and debt was $13 million higher, reflecting our hatchery investments and seasonal working capital. Our inventory procurement payable, which is included in our working capital balance, was similar to June '20. Our interim dividend of $0.075 per share fully franked puts us within our guided payout range of 60% to 80% of underlying NPAT post-AASB 16. We've also introduced to measure our return on invested capital, which was 18.6% at the half year. Our ROIC, which we will report going forward, is calculated on a pre-AASB 16 basis, taking underlying NPAT, deducting after tax interest and dividing by average capital invested. So now moving on to Slide 20. As foreshadowed at the AGM, we are today introducing you to our capital management framework. Our core objective is to deliver consistent, predictable and reliable returns, and our capital management framework supports this through a number of key principles: Firstly, to ensure we are investing at an appropriate level to maintain our asset base to sustain our business. Secondly, to maintain a balance sheet that appropriately balances risk with opportunity. Our target dividend payout range provides shareholders with predictability around dividends, which we aim to fully frank and to increase over time as earnings grow. Maintaining discipline around the use of capital enables us to retain flexibility to take advantage of future growth opportunities and to ensure overall that capital is deployed in a way to maximize shareholder value. Moving to our framework on Slide 21. Taking you through the pretty graphic on the slide, our business is a consistent cash generator, driven by cash flow from operations as well as cash from other strategic activities such as the sale of noncore assets with, of course, interest and tax being a cash outflow. Our priorities for the cash we generate from business activities flow through the funnel and cover 3 key areas: Firstly, capital expenditure to sustain our business activities, e.g., business-as-usual CapEx with a target range for annual spend of around 75% to 90% of depreciation pre-AASB 16; secondly, to maintain a strong balance sheet with a target leverage range of 1 to 2x; and lastly, to deliver reliable dividends to shareholders with a target payout ratio of 60% to 80% of underlying NPAT post-AASB 16. Our framework then sets out our approach to the next deployment of cash. Initially, to invest in growth opportunities in major projects, where this investment is aligned with our strategy and is expected to deliver returns in excess of particular hurdles. Remaining cash is then intended to be returned to shareholders in the form of capital returns, special dividends, share buybacks and the like. Over time, the objective of our capital management framework is to maximize shareholder value and deliver a return in excess of our weighted average cost of capital. We've set out our first half outcomes against this framework on the right-hand side of the slide. I've covered all of these points earlier and therefore, won't take you through them again. However, they are there as an easy reference. On Slide 22, Inghams has a history of generating cash and delivering solid returns to shareholders while continuing to invest in our business. Since the IPO, we have returned over $440 million to shareholders through dividends, buybacks and capital returns, enabled by cash flow generated through the cycle. This has been achieved while continuing to invest in both sustaining and growing the business through disciplined capital expenditure totaling around $400 million over this time. And we have maintained stable leverage that has generally been within the target range. With that, I would like to hand back to Jim to take us through our performance in Australia for the half.

Thank you, Gary. Moving on to Slide 24. We saw Australia deliver pleasing results in the half year, with total revenue growth of 5.2% despite the closure of some export markets and reduction in frozen inventory as well as COVID impacts. Across poultry, our revenue grew by 6.5% on a 5% increase in total poultry volume. External feed sales were down in the half due to the impact of COVID-19 on customer demand. If we look at the results on a pre-AASB 16 basis, we delivered margin improvement in the half, with the gross profit margin up 30 basis points and EBITDA up 60 basis points, driven by volume growth and improvements in operational efficiency. Performance across our poultry channels is consistent with the observations I discussed on Slide 7, with good growth across channels, with the exception of the export channel, which remained flat as a result of COVID. Further, we saw strong demand from pet food sector, which has delivered growth in the sale of our byproducts during the period. I would now like to hand over to Jonathan Gray, our Chief Executive Officer in New Zealand, to talk about our performance in his segment. Jono?

Thanks, Jim, and good morning, everyone. Our New Zealand business delivered underlying EBITDA pre-AASB 16 of $15.8 million, which represents a decrease of $1.8 million compared to prior year as we responded to the flow-on impact from the hard lockdown during Q4 of last year, Alert Level 3 restrictions in Auckland through Q1 of this year and the absence of tourists. This was always going to be a challenging period for the New Zealand business following such major disruption. It was also an important period of consolidation as we adjusted to the new normal of rolling lockdowns and took deliberate action to adjust supply in order to meet anticipated changes in demand. These adjustments included reducing processing of bird numbers for a period of time, operating our primary processing plant at 4 days a week as opposed to 5 through July, August and September and making significant progress in reducing the surplus inventory built during the full national lockdown. The reduction in surplus inventory is very pleasing, but did have a negative impact on margin for the period. Core poultry volumes sold were up 4.3% despite bird processing numbers being down. The sales volume growth was due to a combination of successfully reducing the surplus inventory in addition to what remains resilient underlying demand for poultry. Total revenue at $203 million was up $2.5 million or 1.2%, with poultry revenue up 3.2% and revenue from external feed down 6% on the back of reduced sales volumes. From a channel perspective, we saw strong growth through the QSR and export channels. It's worth noting the increased volume into export played a role in helping reduce our surplus inventory. Retail was a mixed bag. Strong demand across frozen poultry and some fresh ones, including tray pack, but softer fresh demand in areas such as serve over counters or cooked chicken. Food service remains constrained in New Zealand and impacted by the absence of tourists and also by the periods we spent at Alert Levels 2 and 3, respectively. These alert level periods include restrictions placed on hospitality, such as limiting allowable dining numbers. Whilst the overall food service channel is constrained, we have seen a lift in certain areas, including home delivery meal solutions. Turning now to other parts of the business. Cost-out initiatives and operational improvements in areas such as yield performance, labor scheduling and plant reliability helped limit the impact of the reduction in bird processing numbers through H1. Whilst these operational improvements helped reduce the impact, they do not fully offset the disruption. You will have noted that underlying EBITDA post-AASB 16 was ahead of prior year despite the pre-AASB 16 result being $1.8 million behind, and this is due to changes in our leases. You'll remember from previous market updates that in New Zealand, we needed to rebuild our broiler infrastructure, which included bringing on new growers. As advised previously, that rebuild is now complete. However, when we look at the comparative period last year, we were still completing that rebuild. Additionally, during H1, we made the strategic decision to increase the footprint we lease for our Cambridge DC. This increases our lease cost but reduces operating costs through limiting our need for off-site external storage and freezing capability. In closing, despite a challenging period as we felt the aftereffects of the full national lockdown, pleasing progress was made with reducing surplus inventory and minimizing the impact of the lower bird processing numbers. We believe the deliberate action taken enabled us to effectively respond to what was an extremely disruptive hard lockdown event. And with that, I'll hand to Anne-Marie for the feed market update.

Thanks, Jonathan. Before I take you through our recent feed market observations, it is worth just recapping the key inputs to our feed costs, which includes cereal grains, protein meals, vitamins and minerals as well as an energy source. In addition, we also have our cost to mill and transport our feed across our national farming network to make up our total delivered feed cost. Also worth noting for New Zealand, given we import grain into our operations in New Zealand, feed cost is impacted by grain pricing set off the international market. So looking back at the external feed market and our recent observations. We saw last year a welcome break in the drought, with the bumper wheat harvest exceeding 30 million tonnes, providing much in enterprise relief for all domestic consumers. We are also observing the international commodity market rally on the back of increasingly strong demand from China. As a result, Australian wheat is priced competitively in the international market, which is fueling offshore demand and is likely to result in a record export of Aussie wheat. The impact of this strong demand is flowing through to stabilize wheat pricing in early 2021, as you can see highlighted in yellow on the graph. Whilst observing solid relief in wheat pricing, we aren't seeing this translate to anticipated lows due to strong demand from the international market. In relation to soymeal, as shown in the graph, prices have also rallied on the back of demand from China and political issues in South America. The level of soymeal we include in our feed varies, but average is around 20% of the diet fed to our chickens. Moving to Slide 28 and looking at our feed cost outcomes during the first half of FY '21. As you're aware, feed costs were negatively impacted by a very low wheat stock position on the back of a 3-year drought. The low wheat stock position resulted from a small wheat crop and an aggressive export program, with 9.4 million tonnes exported versus 8.4 million in the prior year. Inghams did throughout this period maintain forward cover between 3 and 9 months to secure supply, which is in line with our procurement strategy. Moving to Slide 29. During the second half, our delivered wheat price reflects the easing that we saw in the first half, which has now stabilized in 2021. We expect the impact from this to fully flow through the poultry network by Q4 FY '21. This time lag reflects our 3 to 9 months forward cover and the poultry life cycle. This benefit will be slightly offset by higher soymeal pricing that we are experiencing in both Australia and New Zealand. We have previously spoken about our customer cost pass-through mechanisms. And whilst we don't provide specific information relating to customer pricing, I can say that these mechanisms, which are designed to share the impact of changes in particular costs, are working as intended. And with that, I'll hand back to Jim to take you through our outlook.

Thank you, Jono and Anne-Marie. If we now turn to our outlook slide on Slide 31. We expect ongoing resilience in poultry demand as chicken continues to be a protein of choice for consumers across Australia and New Zealand. Our continued focus on the execution of our 5-year strategy is delivering operational momentum to support future growth. The net impact of lower feed prices is expected to be modest, as Anne-Marie had mentioned, during the second half given the recent surge in international demand and our customer pass-through mechanisms in the way that they work. With great progress made in the first half, we will continue with an orderly reduction of our remaining surplus inventory and expect to have this cleared by the end of the financial year. As previously mentioned, the sale of our Hamilton feed mill is on track to be completed by the end of March. This sale will not have a material impact on earnings going forward but will firm up capital to be redeployed. Ongoing volatility in operating conditions and/or consumer behavior due to COVID-19 will remain as we move forward into the second half of the year. As we have already seen play out in Melbourne and Auckland and around the world, we're not out of this yet. The timing of reopening Australia's remaining export market also remains uncertain, although we are anticipating some progress during the second half. Further, we expect the second half to be subject to the seasonal influences that we have occurred and typically occur in our business historically. So in closing, while we cannot perfectly predict the ongoing impact of COVID and other events, we have proven the resilience of our plan, our business model and our people as we continue to work hard to deliver more consistent, predictable and reliable returns to our stakeholders. We move into the second half of 2021 with a strong foundation upon which to build our future success. Now with that, I'll hand it back over to the operator for any questions that you might have. Thank you. Operator?

[Operator Instructions] Your first question comes from Michael Peet from Goldman Sachs.

First question, just on margin. When I look at Australia and New Zealand -- pre-AASB 16, sorry. But if I look at that margin you historically have had, it's been -- Australia did get almost a 9%, sort of 8.5%, 8.75% a couple of years back. New Zealand was at 10%. It's significantly below that in both regions. I can sort of see why in New Zealand maybe, but just interested in your views on -- is -- this sort of current margin roughly we might work a little bit on the upside. But those historic margins, are they possible to get back to or to get above is the question?

Michael, it's Gary. So nothing is impossible. Of course, that's the goal. But yes, you can see there was an improvement in this half in Australia from 6.7% to 7.3%, which I assume is what you're looking at. So yes, the ambition is to still increase those margins, but we've been pretty consistent in saying it's not going to happen immediately. So we're pleased with the progress that we've made.

Yes, Michael, this is Jim. The other thing I would add, in an environment that we spoke of and that you're aware of with these higher feed prices, it's typical you'd see a bit of a different margin. But to answer your latter question, absolutely achievable.

And then maybe, Gary -- yes, one follow-up just on inventory. If I do some of those adjustments from the $191 million, take about $15 million out for feed and frozen, excess about $175 million, say, but that's still about $20 million above where you were in the PCP. Is inventory able to get back down to that level? And obviously, just thinking about second half cash conversion, should we expect a much stronger number in the second half?

Yes. So inventory has got a bunch of things. So our biologicals have got feed in it, and it's also got our poultry in there as well and ingredients that we have. So there's a number of things in inventory. From a poultry sense, as far as excess, yes, we've estimated we've got about $5 million at the half year that we still need to clear. So we're confident that we'll be able to do that through the second half. But feed and the other areas, probably pretty similar to where they are at the half.

And then the other...

From a cash conversion, yes, that will continue to assist, but the main impact we'll see on cash conversion is the seasonal impact that our receivables will reverse in the second half.

Your next question comes from Craig Woolford from Citi.

You've highlighted that you're optimizing the core, and there's been an improvement. Do you have any metrics you could share perhaps on OEE with us?

Yes. We don't have hard metrics that we can share, but we've made significant improvements relative to being able to -- and it takes -- it took us about 6 months to roll this out, to be able to measure this across our entire operations end-to-end supply chain. So we are now being able to -- just beginning to aggregate that. So perhaps we can share that with you going forward. But you definitely saw it in the results in the first half, a lot of the improvements we made. And most of those were noncapital-related because most of the capital was deployed towards these 2 new hatcheries that we're building. But things like we've talked about, Craig, before on the spin chillers and just continuous improvement, having green belt people in our plant and so forth, we're seeing just tremendous results.

Yes. Well, I mean, the gross margin result was very good. Is -- would you put that down to operating efficiencies? Is there anything in mix of sales that benefited gross margin?

No, I put it down mostly towards operational improvements. And mix was quite -- with the half with COVID and everything, there was a lot of shifting of mix in our business.

My other question was the impact of the Vic lockdowns, say, compared with New Zealand, obviously, it looks like a lot less, but it's probably hard to do. How would you quantify the net impact of the Victorian lockdowns? Was it a positive or a negative? You probably had some volume benefits given some of the other customer issues that Thomastown has seen. There's quite a few moving parts there.

Look, yes, maybe Gary will address that in a second. But I think it's important to understand the difference between New Zealand and Victoria lockdown and the impact and the actions that we've taken. I think Jonathan mentioned in his remarks. As a result of the dramatic change in consumption, meaning QSRs shutting down, hard lockdown in New Zealand, we had to adjust supply, where in Australia, we did not have to do that. Gary?

So Victoria, as you'd be aware, through the half, has had a few gos, unfortunately. The one that was happening at the beginning of the -- well, in the first quarter, we had our Thomastown facility shut down for a couple of weeks. And then simultaneously with that, there was the avian bird flu, and then we also had some of our -- the other processes in Victoria had some shutdowns of their primary plants. So is it a positive or a negative? It does really depend on which week you're looking at. So some weeks are definitely a positive for our results, and we see a great demand for our product. But then in other weeks, it's quite challenging to deal with that. So our biggest challenge throughout is the volatility. So we said that the Thomastown impact wasn't material, and it wasn't. But as far as the results during the period, it's the volatility that's hard. Some weeks, it's good. Some weeks, it's not so good. Auckland was far more severe last year in the Level 4 lockdown. So in Victoria, Auckland was far more severe. And then also in New Zealand, we don't have the same spread of network that we have in Australia. So we can't get the benefit of being able to help our -- help out various states from different locations and different facilities as much in New Zealand as we can in Australia. So I hope that answers your question, Craig.

Your next question comes from Aryan Norozi from UBS.

Just the first one for me. Sorry to harp on about the cash flow again. But if I look at fiscal '20, you sort of averaged out all seasonal impacts in the first half and you sort of averaged at around sort of sub-80%. Do we expect cash conversion to move back into that 100% mark by the full year of '21? Or is that still subject to timing, et cetera?

So of course, we don't give projections, but the receivables, you can expect -- you saw that at December '19, it was pretty similar to last year. So it would be fair to assume that it would be somewhat similar to -- the June '20 position will be similar to the June '21 position. And inventory, we expect to see a little bit benefit. So yes, definitely closer to that 100% due to those 2 things.

Perfect. And just a small accounting piece. Just in terms of prepayments, I think there was about a $40 million prepayment within the receivables piece. What is that?

Awesome detailed question. So we tend to have things like insurance prepayments and other things come through at the beginning of the financial year that then work their way through the end of the year. So we do tend to have higher prepayments, obviously, in July. And then by the time you get to December, they're only somewhat wound through. So insurance prepayments is the thing that comes to mind, but I'd have to dig in and get you some more details on that.

No, that's perfect. And sorry, last one, just in terms of volumes. I mean group, volumes in the first quarter were up about 6% year-on-year, and then they -- they result in about 2% for the second quarter. Given you're clearing the inventory or you did -- you made a very good progress, what caused the slowdown, please?

So I mean, you can't present the numbers like that and call it a slowdown. But I guess, the quarter 2 in FY '20 was a pretty strong quarter. So to be growing on that quarter, we're actually really pleased with that result. So yes, if you just go back to the gross volumes, you'll see there was growth in the second quarter versus the first quarter. The percentages are probably a reflection on what the prior corresponding period was a little bit. And yes, remember, there is some inventory sales in those volume numbers as well. So yes, in comparison, slower growth rate, absolute higher amount of volume sold. So a little bit of math is distorting that picture.