Inghams Group Limited (ING) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Inghams Group Limited Half Year 2022 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Reeves, CEO and Managing Director. Please go ahead.

Thank you, and good morning, everyone. My name is Andrew Reeves, Managing Director and Chief Executive Officer of Inghams. And it is my pleasure to welcome you to Inghams' Half Year 2022 Results Presentation. On behalf of Inghams, I would like to respectfully acknowledge the traditional owners, both past and present, as custodians of this land we are meeting on today. Joining me for today's presentation is our Chief Financial Officer, Gary Mallett. At the conclusion of the formal presentation, we will take any questions you may have on our results and the business. So turning now to the highlights of the first half. The results we have released this morning reflect the effective management of the challenging environment that the business has had to navigate during the first half of FY '22, which has been characterized by extended lockdowns and operational disruptions caused by COVID-19. Pleasingly, our headline results are broadly in line or ahead of the half year outcomes we presented in February last year. We also made good progress on strategic initiatives throughout the period. However, this progress was disrupted towards the end of the half due to COVID-19. This is a particularly pleasing outcome since during the half, while the company saw strong growth in volumes in part reflecting the seasonal demand that comes with the Christmas holiday period, the ongoing effects of the pandemic and associated impacts on various channels resulted in excess supply into the wholesale channel. As the first half came to a close, the impacts of the Omicron COVID-19 variant began to be felt with the main effects expected to be reflected in the second half of FY '22. Looking ahead, I believe the resilience and the agility of our business and the commitment of our people to continue to deliver great outcomes for our customers and consumers leaves Inghams well placed to respond to the future challenges the pandemic may present and capable of recovering relatively quickly as market and business conditions permit. Our balance sheet remains strong with leverage at this time prudently towards the lower end of our policy range. Moving now to the financial highlights on Slide 4. As in previous presentations, Gary will cover the financials in more detail shortly. And before I hand over to Gary, there are a few highlights I would like to note. As noted at the outset of this presentation, our key financial metrics are broadly in line or above the prior corresponding period. This is despite challenging market conditions that we continue to face with lockdowns and the effect of public health guidelines creating significant labor supply challenges, resulting in increased labor costs and impacting our manufacturing capability. Group core poultry volume grew slightly by -- strongly, sorry, by 5.6% on the prior corresponding period, with all the volume growth coming from the Australian business, with New Zealand volumes unchanged on the pcp. While volume growth was strong, the extended COVID-19 lockdowns in New South Wales, Victoria and Auckland have impacted customer demand, channel mix and revenue in the first half. Our statutory EBITDA of $220.4 million increased by 2.2%, while statutory NPAT increased by 8.8% to $38.4 million, which includes the reversal of a tax provision in the amount of $2.2 million. The company has declared a fully franked dividend of $0.065 per share, which is consistent with the pcp and represents a payout ratio of 60.9% of underlying NPAT. This is in line with our policy target of 60% to 80% of underlying NPAT post AASB 16 adjustments. The balance sheet remains well positioned, while net debt is up slightly on June 2021. It is $63 million or 19% lower than the pcp. I'd now like to make some comments about how the pandemic conditions have been affecting Inghams and what this means for the business. The first half was characterized by market and operational disruption due to extended COVID-19 lockdowns and isolation requirements. The new financial year commenced with Greater Sydney in a state of lockdown, a new lockdown in Victoria in mid-July, followed by regional New South Wales in August and border controls aggressively applied by many states and territories during the period. New Zealand remained close to international travelers, and heightened restrictions, particularly on the trading conditions of some of our customers, were in place for the majority of the period. The results we have delivered in the first half are underpinned by our considered response to the challenging operating conditions that enabled Inghams to maintain operations and continuity of supply. I would like to take a moment to acknowledge the efforts of our people during this period, who continue to show great resilience and the ability to respond quickly and effectively to the challenges faced by the business. While Ingham's health and safety policies and procedures have been very effective in protecting the well being of our people and our operational continuity, our Victorian operations did experience operational disruptions due to COVID-19, which impacted the supply of some products. In late December, Australia experienced a rapid spread of the Omicron variant, the effects of which have been widely reported and of which we provided a market update in early January of this year. While we have minimized the operational disruptions wherever possible, meaningful cost and operational pressures have been experienced through increases in overtime, transport and compliance costs, resulting from heightened health and safety procedures and operational adjustments that have been necessary as a part of our COVID-19 response. We expect such costs to remain elevated as a result of ongoing COVID-19 situation, general health and safety requirements and our desire to protect and support our people. While our approach to health and safety has been effective, Inghams has not been immune to the effect on staff availability as this new variant has spread with significant staff shortages across all major locations. This severely limited our ability to process both the volumes and the formats required to meet customer demand. We also needed to make volume and production mix adjustments, resulting in the temporary suspension of some products and a loss of sales. The combined effects of these also resulted in increased volume being directed through the wholesale channel, leading to a current oversupply in this area, while wastage rates have also increased. As a result of the combined effects of these factors, we estimate that for the first 7 weeks of the second half of FY '22, underlying unaudited EBITDA and NPAT are approximately $35 million and $24 million, respectively, lower than the same period last year. We welcomed government changes to public health guidelines, which relieves some of the workforce pressure being experienced. However, staff shortages remain a feature of the current operating environment and are continuing through the third quarter. While the challenges in the first half have been many and varied, we continue to work tirelessly to mitigate the impacts on our business wherever possible. Turning now to a review of the various customer channels during the half. In retail, Australian sales experienced stronger growth in the first quarter, driven by stronger consumer demand due to government restrictions in New South Wales and Victoria. The easing of restrictions early in quarter 2 saw a slowing in this growth. In New Zealand, retail demand remained elevated during the period as a result of the ongoing restrictions in place in the first half. In quick service restaurants, Australian volume levels were similar to the prior period, reflecting the effect of the COVID-19 restrictions on customer demand, with reduced promotional activity and limited in-store dining options, particularly in quarter 1. Demand improved in quarter 2, supported by new product launches and the easing of restrictions. New Zealand QSR demand was softer due to government-imposed operating restrictions. The foodservice channel recorded modest growth in Australia with demand improving in the second quarter as domestic travel activity reopened, resulting in stronger channel growth in regional centers. New Zealand demand growth was also stronger during the period. As we've discussed in previous presentations, the wholesale channel is quite diverse from a customer perspective. And during the half, we continued to make significant progress establishing new business relationships in this channel, which will support longer-term growth in this area. However, from a volume perspective in the first half, softer demand across other channels resulted in a sharp increase in supply from all producers to this channel, depressing wholesale prices. The export channel recorded some strong volume growth in the first half versus the prior corresponding period, which had been impacted by restrictions that have been imposed due to the avian influenza outbreak, while New Zealand recorded a decline in volume versus pcp as the prior period volumes were higher due to surplus inventory reduction. I'm going to now hand over to Gary to present the final results -- financial results in further detail. Thanks, Gary.

Thanks, Andrew, and good morning, everyone. As for the past few periods, our financials are presented inclusive of AASB 16 adjustments unless we have stated otherwise. In the appendix to this presentation, you will find additional information and reconciliations that provide some additional detail on the results we are presenting today. Turning to Slide 8, now profit and loss. As Andrew noted earlier, the group reported strong core poultry volume growth, driven by a 6.5% increase in Australian volumes as a result of growth primarily in the wholesale and export channels. Revenue growth was modest at 1.8%, reflecting an unfavorable revenue mix and lower net selling prices by 2.7%, principally from the oversupplied wholesale market in Australia. The group delivered statutory EBITDA of $220.4 million in the first half, representing growth of 2.2% on H1 '21 while statutory NPAT for the half grew 8.8% versus the pcp to $38.4 million. Those of you following Inghams would be well acquainted with our operational efficiency programs. And I'm pleased to report that these programs continue to contribute positive results for the group, as can be seen in our cost of sales growing at a slower rate than volume growth. However, there has been some disruption to some of these in the first half due to COVID-19 and more recently with the high staff shortages with the onset of the Omicron variant. The company's effective tax rate reduced to 24.9% following the resolution of a historical tax matter and the $2.2 million part reversal of the related provision. Turning now to the balance sheet. I'm pleased to report that our balance sheet is in good shape, and our leverage is towards the lower end of our target range. Total inventories increased in the first half by $45.8 million as we secured higher volumes of grain directly from growers during the period, accounting for a $46 million increase. In the same period, poultry inventory has decreased $12.2 million. The group's payable balance has also increased due to an increase in the inventory procurement trade payable, which offsets the inventory increase from those grain purchases for the [ 2 net ] each other. Our net debt at period end has increased slightly on the prior period. However, it is $62.9 million lower than H1 '21 or December 2020. Moving to the cash flow slide on Slide 10. Our cash conversion ratio was broadly in line with the pcp at 83.5%, and this outcome reflects the seasonal working capital requirements that we see every year. Capital expenditure of $24 million during the first half was lower than the pcp, reflecting capital discipline as the business continues to navigate the challenges of COVID-19 and related project delays and supply chain disruption. Key expenditure items during the half included the $5 million completion spend on the new hatcheries, $8 million on the New South Wales breeder triangle, which will service our Queensland facilities, and $4 million on the Auckland Further Processing fully cooked line. The group received $3.8 million in asset sale proceeds during the half, largely from the sale of the Bungonia property in New South Wales. Now looking at our capital management outcome. As already noted, our net debt is $264 million, and our leverage is at the lower end of our stated range of 1.3x. This represents a strong improvement on our leverage level of 1.7x at December '20 and just above the 1.2x level at June '21. Our sustaining capital spend this period of $7.2 million represented 26% of depreciation, below the target range once again due to ongoing COVID-19 lockdowns and delays in equipment being shipped and in accessing some sites. A fully franked dividend of $0.065 has been declared, representing a payout ratio of 60.9%, placing us at the lower end of our stated payout range of 60% to 80% of underlying NPAT post AASB 16 and $0.01 lower than H1 '21. The interim dividend reflects a solid first half and has regard to the financial results from the first 7 weeks of the second half of FY '22 and continuing uncertainty in the short-term outlook due to COVID-19. Moving to Slide 12. For the second season in a row, Australia recorded a bumper wheat harvest. While this is great news, as we have previously noted, grain pricing in the first half has remained firm as Australia continues to export a high amount of grain due to strong global demand for Australian wheat due to supply shortages and adverse Northern Hemisphere weather conditions. The market for soy mill has also seen prices begin to rise due to drier-than-expected conditions in the crop growing areas of South America, combined with higher shipping costs. While the first half external feed cost is similar to the prior corresponding period, feed costs in the second half will be higher than the prior corresponding period due to these market movements. Inventory levels for grain have also increased as we've increased physical holding of grain in the system, primarily as a result of buying direct from the grower. Inghams continues to maintain forward cover between 3 and 9 months to secure supply, which is in line with our procurement strategy. I'll now hand back to Andrew to discuss the first half segment performance.

Thanks, Gary. Turning now to the Australian segment results on Slide 14. The first half results of the Australian business were broadly in line with the first half of 2020. While core poultry volumes increased 6.5% during the period, revenue growth was more modest at 2.2% due to a shift in channel mix weighted to the wholesale channel, while feed revenue declined by 2% as customers transition supply away in preparation for the closure of our WA feed mill. Statutory EBITDA was flat versus the prior corresponding period at $183 million. Across the channels, retail, QSR and foodservice volumes were largely flat and were disrupted by COVID-19 lockdowns and softer-than-expected demand as lockdowns were lifted in Q2. By contrast, the wholesale and export channels volume growth was delivered through greater coverage of the wholesale channel and the reopening of export markets. However, pricing in wholesale softened due to oversupply and weaker quarter 2 demand conditions. In New Zealand, core poultry volumes were flat on the prior period, reflecting the reintroduction of lockdowns, including a period of Alert Level 4. Core poultry revenue grew by 3.6% as we were successful in introducing price increases across all channels to help offset increasing feed costs and inflationary pressures related to supply chain disruption. As we have noted in previous results, the decline in feed volumes of 28% reflects the sale of the Hamilton feed mill in March of 2021. Total revenue grew modestly to $205 million and underlying EBITDA growth of 13%, reflecting continued mix and operational improvements. As we noted in August last year, the royalty payment from New Zealand to Australia was reduced with a neutral outcome on the group. I would like to make a few comments on our progress on sustainability, specifically an exciting new product launch for the company in New Zealand. At the full year announcement in August, I talked at some length about the importance Inghams places on sustainability and some of the work we have done over a long period of time to embed sustainability into our business, which as a result in us becoming a recognized industry leader in water stewardship, sustainable agriculture and sustainable food production. Reflecting this philosophy and approach, I am proud to say that in November, as a result of a lot of hard work by our team members in New Zealand, our Waitoa Free Range Chicken brand became New Zealand's only independently certified product of net carbon 0 chicken. Waitoa commenced 14 years ago, receiving SPCA certification for the animal welfare practices in 2013 and has been at the forefront of free range chicken farming in New Zealand. Sustainability is the heart of everything we do, and the business there is well known for their focus on the natural environment and animal welfare. The internationally recognized certification was awarded by Toitu, a subsidiary of Land Care Research, and New Zealand government-owned Crown Research Institute and as a result of a stringent review process involving measuring the carbon footprint at every step of the supply chain from raw materials and production through to distribution and packaging. Waitoa has also partnered with Toitu-approved local projects in Marlborough and offshore to offset unavoidable carbon emissions to achieve net carbon 0 emissions. The financial year to date has not been without its challenges, and the first weeks of the second half have seen these challenges continue. The effects of the Omicron variant have been felt widely across the economy and the operations of most, if not all, businesses in some way. For Inghams, as I have noted earlier, operating conditions have been significantly affected by Omicron since the start of the new year, which has been more impactful than previous COVID-19 variants. We remain confident the longer-term prospects for Inghams -- of the longer-term prospects for Inghams and believe that as the operating conditions improve, in particular, staffing and transport, the business can recover relatively quickly to meet customer and consumer demand and with it, profitability. We are already seeing improvements in workforce availability, and we are working to promote confidence for our people when returning to work, supporting health and well being to drive increased attendance levels. Some pandemic-related adjustments to operational practices will be retained for a further period to ensure a safe work environment. And as I outlined earlier, we expect costs related to these initiatives to remain elevated as a result of the ongoing COVID-19 situation, general health and safety requirements and our desire to protect and support our people. There will be some adjustment to agricultural operations to bring farming stocks back into balance, the timing of which will depend on operating and demand conditions. From an inventory standpoint, we expect this -- to bring this back into desired levels and mix systematically over the 6-month period. We're also thinking about the implications of the last 2 years on the group's longer-term strategy, and work has already begun and is underway to understand how customer and consumer preferences have changed to identify emerging trends for new product opportunities, production enhancements and the future investment in our network. The first half has been a very challenging period for the business and for our customers and our consumers as a result of these prolonged lockdowns, COVID-related operational disruptions and more recently, the emergence of Omicron. While Australia continues its transition to a state of living with the COVID-19 virus, New Zealand is once again operating under increased restrictions, having moved to red traffic light conditions in early January following the detection of Omicron cases. We expect the pandemic will have an influence on economic and business activity beyond this variant wave, and the recovery in business conditions will be variable. Another strong wheat harvest in Australia has resulted in some recent price stabilization. Ongoing strong global demand for Australian wheat due to supply shortages and adverse Northern Hemisphere weather conditions is expected to result in price remaining firm. Combined with recent increases in soy mill pricing, we expect to see some growth in feed costs as we progress through the second half. As we have discussed with you previously, our procurement procedures ensure that we continue to hold between 3 and 9 months forward cover. In closing, while it's difficult to predict the exact timing of a recovery, we expect the business to recover relatively quickly when conditions permit. On behalf of our management team, I'd like to thank you all for joining us today. And with that, I'll hand you back to the operator, and we will take your questions. Thank you.

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

Just wanted to drill down a little bit further on the first 7 weeks and just the bounce back, maybe, I know it's hard to predict. But was that sort of -- have you sort of started to recover here? And I'm just sort of looking at what you made in the second half last year, sort of $55 million profit, it's about $2 million a week. That would say sort of $15-odd million or $14 million to $15 million in 7 weeks. So $24 million below, that's sort of suggesting the business is in losses at the NPAT line and probably EBITDA at the moment. Is that correct? I'm just sort of trying to get a sense of how quickly that can bounce back.

Michael, it's Gary. Thanks for the question. Not surprised that's the first topic on the agenda. So in short, at an NPAT level, yes, there was losses for the first 7 weeks at an EBITDA. It depends if you're talking about your post AASB 16, the $35 million EBITDA number we reported and the $24 million NPAT number we reported, a post AASB 16 as we report all of our numbers. But I can say that at a pre level, they are the same delta anyhow. So you are correct. It is a loss that we've been making in the last 7 weeks at an NPAT level. We are making a profit at an EBITDA level. As far as recovery, we've said that we can't predict the recovery. As far as the commentary about an improving trend, that is true. But I would caution that it is an improving trend. But we're still making -- the numbers are still quite challenging right at the moment as well. So slightly improving trend in the last couple of weeks, but you can work out the averages across the 7.

Okay. And just 1 follow-up, if I may. Just the inventory looks as though it's okay from a finished goods point of view. But is there inventory there that's going to be difficult to clear? Are we riskier? I know you've said you want to clear that rationally. Wholesale sounds like that's the channel you might do it through or I just want to get a bit more color on that finished goods inventory, which doesn't appear to be elevated in itself, but wondering what sort of products are there.

Yes. So at the half year, the poultry inventory was $12 million down on June, which was pleasing. And through the 7 weeks, it's actually fallen a little further. So we are conscious of moving the product through this period of time. So -- and you wouldn't have noticed that at 31st of December, our provision remained the same as at June. So I believe we're well covered to any risk of that inventory, and the actual levels have been falling. So I don't think we have any particular risk per se, although that is part of -- clearing some of that product is part of the financial results we've seen in the first 7 weeks.

The next question comes from Craig Woolford from MST Marquee.

I'm going to have another go at the, I guess, the current trading conditions. So just in terms of the impacts on EBITDA, there'd be both revenue impacts because of the mix of sales as well as cost of production impacts. Is the sales component that's caused a drop in earnings likely to improve more quickly? Or is that going to take a longer period of time? You've talked about better workforce availability, so we can probably make a judgment on the cost side. But I'm just interested on the revenue impacts and what's causing them and what sort of path we might see on recovery.

Craig, it's Andrew. I think we can be quite optimistic about the revenue and volume piece as we look forward. It really comes down to us getting people back to work and being able to get back to a full range of product offering. The demand is certainly there. Our customers are certainly looking to buy the product. And as soon as we can make it, they'll be buying it from us. So I think that element will bounce back very quickly and say the demand is out there and the fundamentals of the category haven't changed because of this short-term disruption. Cost issues are going to be, I guess, a bit harder to deal with as we get the whole network back into balance, and that's right across the supply chain. So it's -- and our supply chain, it's our customer supply chain. So it's quite a complex issue at this point. Maybe Gary might have some further comments on that.

Yes. I'll try and just give a bit more color on the first 7 weeks and the drivers of it. So it does stem with the very severe labor shortages that we've seen across our facilities, but also across our supply chain and also in the impacts that we've seen at some of our customers as well. And all of those short of labor rates have caused partly this result. And what that has ultimately meant is that we can't make some products that we would normally make, and our customers can't necessarily deal with some of the products that they normally want. So as a result, this is not a -- we're not seeing this as a demand issue coming from consumers. It's a lack of our ability and our customers' ability to get all the products that the consumers want available to them. So as a result, as you would know, we've still got our growing of our chickens coming through. So we're still producing largely the same amount of chicken coming through there. But if we're not producing the normal product mix, the balance or the oversupply or the difference between those 2 numbers is either going into our wholesale channel, into our export channel or into increased wastage rates or rendering. So that's the mix that you're seeing. What's then happening is you've got oversupply in those markets. So the prices are being quite impacted as a result of that. Further -- so that's on the revenue side. So we see that the demand will change. So when we've got the capacity to make the products, then we see that, that will recover very quickly. On the cost side, we're clearly not making the same mix as we normally do. With the labor shortages, we've got sick pay. We've got over time. We're running extra shifts, extra casuals. So our costs have increased quite dramatically as a consequence of that. We have some incentive payments for our workforce through this period -- of ensuring attendance through this period of time. So our costs have gone up, therefore, our unit cost of producing poultry has also increased in this period of time. So it's definitely an impact on both sides of the equation. There's a substantial impact in the revenue thus through to, I guess, your normal margin. And then there's a substantial impact coming through from the cost side as well, which extends to the other products. So hopefully, that gave you a bit more color on where the results come from and how we see that it will bounce back quite quickly when we've got those conditions improve from now.

Yes, it's very helpful. It does feel like if we see the case numbers reducing, then hopefully, your operations in your business have improved. Because the other -- you said the inventory was in a good position, but then that bullet on your preparing for recovery expect to bring inventory to the desired levels and mix systematically over coming months. What do you exactly mean by that?

Yes. So our overall levels are good. We just want to -- when we return back to, let's say, what we consider an efficient place or a good place in our operations, we want to make sure that we come into that period with the right chickens in the field at the right weight, at the right ages. And then we have our inventory levels at the right levels. We've got the right amount of products per customer. So we basically want to come out of this in a very good balanced position to go forward in the business.

Okay. Understood. And then what's your guidance for CapEx for the second half?

So you know we're not big on giving guidance. But if you look forward to the projects that we've got coming on, there will be more spend on the New South Wales breeder triangle. The hatcheries are done. There will be a bit more on the fully cooked line in Auckland. And back at the full year, we talked about our red area in Murarrie being replaced, and we'll kick that one off. And also a water treatment plant in Osborne Park in WA, which we'll kick that one off as well. But in saying all of that, it's not as easy to spend money as we would like to at the moment. Getting equipment from overseas is a challenge. Getting into some of the plants is a challenge, having available labor to put things into the plant. So I think looking at the first half level is a good indication.

The next question comes from Alexander Paton with Citi.

Just got a couple of questions. I'm going to try to dig a little bit, I guess, deeper into the first 7 weeks. I'm just keen to understand how volumes have trended, I guess, week by week. And then I guess your reference to a bit of a recovery, is that on the volume side or more, I guess, the sales side?

So we're not -- I'll say now, we are not going to give a week-by-week blow description on this. Volumes total probably haven't changed dramatically because we've still got our flock of birds coming in the front end. So volumes in total haven't changed dramatically. What we have seen is a bit of a change in mix into more of the products that we want to make and normally make. So that's where we have seen the improvement coming through. But volumes per se haven't changed much.

All right, guys. That's great. And then I guess same things are going to remain elevated on the feed cost side of things looking forward. You did flag potential increases in market pricing at your AGM last year. Has that materialized at all? And do you expect to be able to offset some of this feed cost pressure in Australia like you did in New Zealand in the first half?

Yes. Look, I think we do have that opportunity. We have been able to take some price increases in the Australian market as reflected in the presentation, and you've noted we've had some good price increases in the New Zealand market. And we'll certainly be looking at our price position with major customers over the balance of this half, which is not only going to be important for this year, but it will be important for next year as well. So it's certainly a part of our current thinking.

The next question comes from David Pobucky with Macquarie.

Look, I won't ask about the first 7 weeks. But look, gearing was 1.3x in the first half. How is your comfort around the balance sheet? And where do you expect it to land for the full year and what -- in relation to your target range?

So I think it's good having run into this Omicron issue and having a poor start to the second half. I think it's good that we're at the lower end of our leverage range and quite happy with where our net debt was. As far as guidance, I'm not going to give a guidance on a leverage rate. But I think you would know that leverage is calculated net debt on EBITDA. And if our EBITDA is under some pressure from the first 7 weeks, then that would show some corresponding increase in leverage through that period of time depending where we end up for the full year. So I'd say, based on that, directionally, your leverage might go up a bit.

And just in terms of New Zealand, the EBITDA margin was 9.3%, well above the pcp. What were the moving parts around that uplift? And maybe if you can just talk to the royalty payment from New Zealand to Australia as well, which I'm assuming you said into that?

That's right. I think we should be clear that we have reported the results as they land, but there is a $3.2 million swing between New Zealand and Australia in that first half compared to pcp. So if you take normalized for that, New Zealand was, in essence, flat. I think it was up 0.1. So their margin wasn't sort of at the 9.8%. That's probably, in comparison, higher because of the royalty. And the royalty, as we discussed at the half -- sorry, at the full year, was due to getting our -- discussions with our tax authorities across both sides of the [indiscernible] and getting that royalty at the right level. So you won't see that at the full year. It will be back in apples-and-apples by that point in time. So New Zealand was slightly up and Australia was slightly down when you take away those $3.2 million royalties. So it is actually a pretty major swing. So in New Zealand, you had inflationary pressures and you had fee costs pressure in New Zealand, which largely got offset with price with volumes that were pretty flat. In Australia, you had some of the inflationary pressures, had a much larger increase in volume, but we had more price pressure. So that would be the summary of the 2 segments. And the royalty is a factor given that it's quite close to the difference in New Zealand.

The next question comes from Rod Sleath with Rimor Equity Research.

I'm going to come back to the wholesale oversupply because of product mix that's resulting from difficulty in parts of your processing at the moment. Could you perhaps give us -- or perhaps I just want to -- I'm trying to understand what's happening there. So what you're saying is you still got the same number of chickens coming through the farms. And implicitly, what you're saying is that you are -- your primary processing is running at full capacity because it's still processing those chickens. But then you're short on capacity in further processing. Is that how I should understand that? So therefore, you're pushing out lower-margin product into the wholesale sector and have a shortage of high-margin product or further processed product. Perhaps you could give us some more anecdotes around that.

Sure. In -- I can see why you would say that. So in some parts, that makes sense. There's a bit of information that would help you is that a lot of products we make are in the primary processing facility. So the further processing facility is our cooked range. So all of our fresh products are made in our primary processing facilities. So it's impacting both our further processing and our primary processing facilities. And the range of products that are coming out of both of those is different to what we would optimally like and what we would normally do. Does that make sense?

Okay. And if I wish to really try and simplify that perhaps by exaggeration, does that mean there's more effectively whole chickens that have been going into the wholesale market rather than portions chickens?

I think absolutely. And whilst we can't comment on competitors and we -- and I don't know about competitors, what we're seeing in the wholesale market would suggest that, that's an industry-wide impact as well.

Okay. Great. Despite what you've just said about not being able to comment on competitors, I just want to check that you don't feel that there is a structural change in the competitive environment. I mean, obviously, [indiscernible] spent a lot of money in [indiscernible] to quite dramatically increase their potential capacity there during the pandemic. Has that flowed into any increased industry supply that wouldn't have been there otherwise -- industry acting rationally?

Yes. I think the industry structure is largely as it has been. That change is yet to come through into the market, to be honest. And it certainly hasn't been apparent in the first half in our results. So I'd just say that the industry structure is pretty much as it has been and is working as it has been in recent years. So no significant change there.

Great. Okay. And I just wanted to clarify just 2 other things that you mentioned in the presentation. Firstly, with regard to the increase in inventory, you said reflects higher volume of grain procured directly from growers. I just wanted to understand what that meant. Does that mean you've changed your purchasing process somehow? Or does that just suggest that you are holding more grain on stock than you have historically?

It's partially to do with accessing liquidity to grain because, obviously, with a very high and attractive prices from the export market, it's been easier to get grain directly from growers than it has been to get it through the trading companies and what have you. So it's just been our way of accessing it that's a little bit different from the past.

Okay. And by going direct, you tend to buy -- guarantee to buy larger amounts? Is that the dynamic that leads to the...

Yes. The dynamic that leads to it is -- tend to be when we buy direct from growers, we take physically delivery. When you buy it from the trade, you buy on a forward basis.

Right. Great. Okay. And the last thing I was just going to ask about was I think you mentioned in the presentation, probably in the appendix, but you mentioned the possibility of a new ERP system. I know, Gary, I think that's something that you spoke about not long after you arrived at Inghams. Could you perhaps just elaborate on what stage that project is at, if you're able to, any expectation of rollout time, cost, potential disruption risk, those sorts of general questions?

Yes. We're at the first phase of that. So we're doing a -- finalizing our scoping, finalizing our design, finalizing where we -- how we think we will implement it, how we'll deal with change in the organization, the benefits that, that will come, what it will end up costing, et cetera, et cetera. So that's the phase we're in now. So it's that detailed work phase. And from there, you then move into implementation, which will be a 3-year type program.

The next question comes from Phil Kimber with E&P.

My first question was just around -- you've done a good job on your inventory, but just wanted to understand industry inventory because I think I recall last time Australia had their lockdowns, the channels stayed oversupplied for a little while and it wasn't necessarily your problem, but obviously, you get caught up in that, if it's other people's excess inventory. So I just wanted to check whether the channels are still oversupplied. And is that a sort of 2 to 3 months -- once these issues stop, is it a couple of months before that clears through or can it be quicker?

Yes. So I think from our commentary on the first 7 weeks, you can conclude that some of our channels probably got less than they would like. So you would conclude that they don't have any inventories at all. And then, therefore, we've called out the export market, and we've called out the wholesale channel. So that would be where that potentially could be in the case. So I think on an expert side, we're a mere blip in the ocean of the export world. For the wholesale market, there's potentially that there has been some stock build within that market, but I have no visibility of what that is.

Okay. And then the second one -- thanks for the guidance around the first 7 weeks. Obviously, it's completely abnormal, but the air pocket is pretty big. I think pre-AASB second half, you don't normally make about $100 million of EBITDA. You said you're $35 million below the run rate so far. So [indiscernible] on how long it goes. The air pocket could be large. How do you work on that? I mean how does it work with bankers? Because -- do they take 12-month annual earnings? When they look at ratios, clearly, it's abnormal that they just ignore periods like this. So I just wanted to understand that will preempt because they are the questions we're going to get asked.

Sure. And I'm not going to disclose our covenants or our banking arrangements in detail. But yes, they tend to have a look at a 12-month period. I think we've previously talked about having substantial headroom in our covenants. I'm still happy to say that comment today as well, that we've got substantial headroom in that area. So I don't want to speculate on what would happen should things get closed or need to because I don't think that's the situation that we're in.

Okay. That's great. And then the flip side of that is these sort of issues present opportunities for growth and -- because if you're feeling pain everybody else in the industry isn't, you're probably better placed than most to absorb it. So do you think there's some material opportunities here, either people falling out, winning contracts, things like that?

There's no evidence of that at the moment. I mean we've got --our long-term supply agreements are in good shape. We're not -- we've got people knocking on the door asking us to pick up business that's been lost elsewhere. So I mean I think it's a pretty disruptive and very challenging time, but it is only a couple of months. And hopefully, we'll come out of it reasonably well. And we can't predict the end of it, but let's hope it's -- we're getting closer to that. But -- so at the moment, there's no obvious opportunities from those sorts of things turning up. But we don't want to -- we've learned a lot through this last couple of years, and we don't really want to waste the crisis. So I think we're thinking about our longer-term strategies. We're thinking about our product range. We're thinking about opportunities for automation, how do we create greater resilience in the network. Yes, there's going to be product opportunities, dealing with customers. There's going to be obviously conversations around that sort of thing. So it's a bit early to go into the detail of it, but certainly, we are turning our minds to how do we learn from this and how do we create longer-term advantage from this.

The next question comes from David Errington with Bank of America.

Andrew, can I get things back to a very simplistic basis? Because you've given a lot of detail, but [indiscernible], I'm a little bit confused as to what went on within your business. And as you know me pretty well, I like to keep things really simple. So Omicron basically cut your labor. Basically, that was the guts of it, like Omicron, absenteeism and the plants couldn't run the way you wanted it to. That's it, really, isn't it? That's it. Is that it in a nutshell? And because of that, it completely disrupted the efficient process and shut down -- it gridlocked it, basically. And it all stems to labor availability. Is that it in a nutshell?

That's where it starts, David. Absolutely correct. Now we've got a stack of knock-on effects, but when half of your workforce isn't available in a business that relies very much on a lot of people processing a lot of product, that is absolutely the fundamental issue that's caused all this problem.

And that was it. So everything was running according to plan. Everything is going well. And then Omicron hit you. Half your workforce goes down. You probably could process the birds, but you couldn't do any further value add because you didn't have the people to be able to do it. So you just have to pump it out in the wholesale market and everything just flowed on for everything you gave. I think Gary gave about 100 -- or 10 -- not being rude, but gave about 10 different flow-ons and there's -- obviously. But everything flowed from the fact that absenteeism went through the roof. Is that right?

Correct.

Right. Okay. So now why will it then, the next 1 on Page 20, it will take some time for the supply chain to return to normal operating levels? What do you mean by that? It takes some time. You've given -- made it very clear you're not going to give guidance. But once your absenteeism drops off and maybe we get back to normal people, hopefully, by about March, what are you saying? Why will it take time? Will it just get the machines going again? What are we talking, weeks? What are we talking? Because we...

The challenge, David, is we just don't know when this whole Omicron thing will end. And let me just -- a bit more color. We're just starting to get Omicron cases in our facilities in New Zealand in the last [indiscernible]. And we've got WA yet to come on stream. So where an absenteeism certainly is improving, absolutely. But it's still not where it needs to be. We're not where we are in terms of our normal staffing levels. And also just to remind everybody, there's just a significant ongoing trend of labor shortage. So you've got -- you got -- that's there already and you've got the absenteeism caused by people getting COVID. So it's just -- that's the key issue. When we can get fully rostered shifts, then it's not -- we can fire up the plants, and we can start producing product in the right formats, in the right mix. And as soon as we can get back to that, we'll get there. But it's just really difficult to know exactly when that's going to be.

Yes, yes, yes. And I suppose it's -- with the trucks and everything like that to right through the whole supply chain, it's just gridlocked.

Yes. And when we could have supplied -- I'll give you an example. Back in early January, we could have supplied Woolworths with whole birds. They could have cut up and put under glass in the delicatessen. But they said, "No use to us. We haven't got the people here who can process those birds." So we could have sold them to them, but they couldn't get them into a configuration that their customers wanted.

And I suppose the more efficient you're driven toward the machine, it's made it worse in effect because the machine, you can't get it running in that. So it's a complete, what you call, I won't say the word, but you know which way I'm going. It's all -- all at once. So hopefully -- so everything is just on labor. So there's nothing wrong. Everything -- so you can tell us as investors, it just -- you just got whacked because it just -- this 50% absenteeism just stone-dead gridlocked you. And once we're through that, hopefully, we get back to normal.

Yes. There's no other significant issue in the network that we have to worry about. We're just going to have the people that we can drive that network at scale and at its most efficient and get everything out into the marketplace that we can sell.

And there's nothing structurally damaged here. It's just a short-term thing that once you get the labor -- running the machines again, wastage, is it -- a big wastage built likely? I mean if you have to throw things out or anything like that or the birds, is anything there? Or that's all in -- everything is okay there, it's all going into the wholesale market?

Yes. I mean that's one of the issues. You've got birds on farm. They've got to be processed. You can't just leave them there. There were a period where birds came into the plant and they were rendered, for example, which isn't a great outcome. But those things will go away once we can process in, let's say, a relatively normal environment.

Yes. So David, all of those things can happen, but they've been included in those results, in those first 7 weeks and will continue to be included. So we're not building them up [indiscernible] later on.

Yes, yes. But hopefully, the faster you went down, hopefully, the faster you go back up. But it doesn't work that way as we all know. Hopefully, that did clear things up. It made me feel a little bit more comfortable.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Andrew Reeves for any closing remarks.

Thank you. Thanks for everyone's time this morning. I hope we've been able to help give you a little better understanding of the situation, and we're certainly looking forward to things improving in the coming months. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.