Inghams Group Limited (ING) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us this morning. My name is Andrew Reeves, Managing Director and Chief Executive Officer of Inghams, and it's my pleasure to welcome you to Inghams' 2023 interim results presentation. On behalf of Inghams, I'd like to respectfully acknowledge the traditional owners, both past and present as custodians of the land we are meeting on today. And joining me for today's presentation is our Chief Financial Officer, Gary Mallett. And at the conclusion of the formal presentation, we'll happily take any questions you may have on our results and the business. I am pleased to report that our business is continuing to a path to full recovery. While our results, as you have seen from our announcement earlier today are below the prior corresponding period, they represent a significant across-the-board improvement over the second half of FY '22. While our operations are making a good transition out of challenging conditions that have prevailed in the last couple of years with our primary and further processing activities running to a normal operating rhythm and producing a full range of products, there are still some headwinds that we have to manage our way through, however. Our lower reported volumes reflect a combination of factors, namely lower bird numbers available for processing in Australia. And in New Zealand, labor and CO2 supply-related processing constraints had an impact on primary and further processing operations. The lower number of birds in Australia is attributable to a reduced level of farming performance during the first half. At our FY '22 results, we noted the shortage of high-quality eggs in Australia. This shortage, which we understand is a widespread issue is a result of a small reduction in fertility levels due to the performance of breeding roosters, exacerbated by the effects of the Omicron wave in early 2022. Accordingly, less high-quality eggs have been set, which has a flow and impact on hatch rates with subsequent reduction in day old chicks, day old chick numbers, resulting in less chicken meat available for processing. We have addressed an issue by firstly increasing the supply of high-quality eggs with the new New South Wales breeder farm that has now commenced operations. Secondly, by increasing breeder and hen rooster numbers. And finally, we have implemented husbandry improvements and diet changes. Pleasingly, as of February, the combined effect of these initiatives is delivering good improvements with positive trends continuing in day old chick numbers. However, it will be later in the second half before the benefits of more chickens being available are seen and the financial benefits accrue. The cost environment is challenging when -- for all businesses, and our costs remain elevated with some of the more meaningful increases in addition to the feed prices being seen in fuel, freight, packaging and ingredients. Our wide range of continuous improvement initiatives go some of the way to offsetting these inflationary impacts and the program remains a major focus for FY '23 and beyond. And while continuous improvement is a very important offset to inflationary pressures, our prices must also adjust. As you will see later in the presentation, our average selling prices have shown good growth, reflecting our success in applying the price increases that we spoke about in our FY '22 results. These price increases are delivering positive earnings outcomes, combined also with the positive effect of market demand strongly outpacing chicken supply during the period. However, we remain focused on ensuring our pricing levels appropriately reflects ongoing feed and broader cost pressures and will pass on further price increases as required. With a focus on the future, we are in the process of making a series of investments in automation and our network, future-proofing the business through improved capability to meet current and future consumer requirements. In respect of our business transformation program, following our recent completion of the design phase, we have decided to postpone for the medium-term, the implementation stage to maximize our focus and investment on those priorities that will support a further recovery and future growth of the business. Turning now to an overview of the business and update on the first half. As many of you know, Inghams is the largest integrated protein producer across Australia and New Zealand providing chicken, turkey and plant-based products to major retail, quick-service restaurants, food service distributors and wholesalers. Our diverse national network provides us with a number of important advantages, including no poultry products can be imported into Australia with the exceptions of certain political guidance from New Zealand. It ensures continuity of local supply through a network of regional operating facilities, fully serviced national and local customer requirements and allows us to manage agricultural biosecurity and operational risk and it gives us the optionality and flexibility for future growth. Inghams operations are vertically integrated and hard to replicate. Aside from the obvious barriers to entry that this creates, there are other important benefits that we derived in this model. By effectively controlling elements of the production process, we are able to realize efficiencies across all aspects of our supply chain, which you can see being realized through the year -- through the years of our continuous improvement strategy and process. Our positioning is further enhanced by the fact and the complexity of such an operation, combined with the significant cost that would be required to replicate our platform, create meaningful barriers to entry for potential competitors. Following from this, we are able to ensure we achieve the appropriate production balance in our operations, which, combined with operational excellence, are keys to growing margin over time. I would like to spend a minute or 2 outlining the case of the poultry. We are seeing a significant acceleration in inflation in recent times, the result of a variety of simultaneous yet somewhat independent domestic and international factors. Against this backdrop, the longstanding affordability of poultry we believe, is an important factor that will underpin future demand for the sector. As you can see from the chart on the left, chicken consumption has been steadily growing for the better part of the last 60 years and with significant pricing differentials that continue to be observed. As shown by the chart on the right, we believe the poultry sector is well-placed to deliver future growth. The health and versatility benefits of poultry are well-established, which aligns very well with the ongoing trends and consumer preferences for healthy lifestyle options. The third key element underpinning the future of the industry is the sustainability of chicken. With a carbon footprint that is estimated to be around 5x smaller than red meat, chicken is the green animal protein and this will continue to be an important additional underpinning for the sector as we move into the future. As I mentioned at the outset, the business remains on a recovery path, while we are also managing the ongoing effects of general market headwinds, including supply chain disruptions and the impact of broad-based cost inflation on the business. Core poultry volumes were slightly lower than the prior period, down 0.6%, reflecting the impact of the farming issues I noted earlier in Australia and labor and CO2 supply-related processing constraints during the period in New Zealand that both affected our primary and further processing activities. Despite the small decline in volume during the half, I'm encouraged by the fact if we look back at the most recent pre-COVID period to the first half of FY '20, volumes during the first half of FY '23 have still grown at 3% per annum since that time. Contributing strongly to our earnings recovery is the initial round of price increases we completed in calendar year 2023, with the first half average selling price growth of 8.5%. The inflation headwinds are reflected in our 10.9% increase in cost of sales during the period, which includes growth in fee, packaging and ingredients, fuel and distribution costs. Net debt has increased modestly to $294 million. Due to the lower second half FY '22 EBITDA, our leverage has increased to 2.5x. However, we expect this level to reduce for FY '23 and the second half -- as the second half of FY '22 earnings are replaced in the rolling 12-month earnings calculation. Our dividends reflect the ongoing recovery in the financial performance and we have declared an interim fully franked dividend of $0.045 per share, maintaining dividend payout ratio of 63%, which is within our policy. Taking a look at selling prices, the following charts paint a very clear picture of the recovery that's underway, the benefits of the price increases applied across all customers and channels across the business over the past 12 months or so. At a group level, monthly average selling prices, as shown by the chart on the left, have recovered strongly over the last 12 months from the January 2022 low point, which was a function of the Omicron-related channel and products exchanges. Our first half FY '23 average selling price has increased by 8.5% versus the PCP and is up 10.7% on the second half of FY '22, with these results primarily reflecting the benefit of broad-based price increases that we have previously discussed. So now turning back at the conditions across the channels for the first half. As you'll note from the volume slide, the key changes that occurred in our channels during the first half were a decline in retail volumes and a broad-based recovery across other channels versus the prior corresponding period. In retail, volumes were lower than the PCP, primarily as we cycled stronger volumes results in the period. In New Zealand, the prior period was similarly elevated as a result of the 100-day lockdown in Auckland, which drove a shift in volumes into retail and the lockdown impacted by -- from the lockdown, which impacted food service and wholesale channels. There was also some evidence that the recent price increases resulted in some slight softening in demand as consumers adjust to the higher inflation environment. Importantly, retail volume showed modest growth of 4.6% versus the second half of FY '22 as production capabilities and hence, customer service levels continued their recovery. In QSR, Australian volume increased compared to the prior period, with customer demand continuing recovery that commenced in the fourth quarter of FY '22. Similarly, the New Zealand QSR channel performed strongly during the first half with customer promotional programs being a strong contributor to these results. The food service channel recorded strong volume growth versus the prior comparative period and the second half of FY '22, with demand improving as restrictions eased and domestic travel activity resumed. New Zealand demand growth was stronger during the period, particularly as all channels were able to operate more normally and demand has remained strong against the backdrop of poultry price increases. The wholesale channel which we have previously noted has quite a diverse customer profile, so healthy volume growth versus the prior period. Prices have continued their recovery, which commenced in the fourth quarter of FY '22 as consumer demand has continued to normalize. Volumes in the export channel declined versus the prior corresponding period as trading conditions continue to recover, resulting in the lower clearance volumes. I'll now hand over to Gary to present the financial results in a little more detail. Thanks, Gary.

Thank you, Andrew. Good morning, everyone. Turning to our profit and loss for the first half. As noted earlier, the Group recorded a small decline in core poultry volumes of 0.6% with declines in both Australia and New Zealand during the half. Despite the small volume decline, revenue growth was strong at 8.9%, reflecting the benefits of the price increases that have been applied across all customers and channels. The Group delivered EBITDA of $197 million, representing a decline of 10.6% on PCP, while NPAT was $17 million versus the PCP of $38 million. Our cost of sales increased 10.9% due to broad increase in imports costs, notably of cost of feed, packaging, ingredients and freight distribution costs. Our EBITDA also includes costs incurred in relation to our business process and IT transformation project amounting to $16.2 million this period. As Andrew noted in his earlier comments, our design phase of the program has been completed. We have decided to postpone the next phase for the medium term. Offsetting this was the reversal of a previous impairment in relation to clean room for the processing facility in Brisbane, where the lease has now been assigned to a third-party. Interest expense increased [ $4.2 million ] versus PCP as a result of the few key factors, including an increase in our external debt during the period, the impact of higher interest rates, the signing of new leases and grower contract extensions, all of which were partly offset by an FX gain on New Zealand dollar hedging. Now turning to the balance sheet. With regards to our balance sheet, total inventories increased during the year by $12 million due to an increase in Biological assets during the period, reflecting higher cost of feed cycling through. Feed inventory was similar to June '22 at $97.3 million. Our receivable balance increased $51 million from June '22 due to a few different factors, including the effect of higher seasonal sales, higher average selling prices and the timing of the annual insurance prepayment. The Group's payable balance has also increased largely due to an increase in the inventory procurement payable of $11.6 million as a result of the increase in the underlying unit cost of feed and timing of grain shipments to New Zealand. Our AASB 16 use assets and lease liabilities continue to decline as expected, in line with the lease periods. Our net debt periods increased $27 million on June '22, largely due to the effect of working capital increases. Moving now to cash flow. Our cash conversion ratio of 74.8% was lower than the PCP due to an increase in those biological assets as the higher cost of feed cycles through the asset class and an increase in trade receivables due to the average selling price growth for both total poultry and external feed sales, noncash items related to the reversal of the previous impairment relating to the Cleveland facility lease assignment. Capital expenditure for the half was $23.5 million, in line with the PCP, which reflects capital discipline as the business performance recovers. Key expenditure items during the half were $5.4 million on the WA primary processing facility water treatment plant and $9.3 million in our New South Wales Breeder Triangle. Finally, we received processes relating to the realignment of our interest rate hedges following the extension of our key debt facility to further [indiscernible] during the period. Now turning to our capital management outcomes. As already noted, our net debt, 31% was $294 million, with our leverage above the top end of our target range at 2.5x on the back of the low FY '22 second half profitability. I would note that this level is expected to reduce for the full year FY '23 as the low second half FY '22 earnings are replaced in the rolling 12-month earnings calculation. During the period, we extended our debt facility tranches maturing in November 2023 for 2 years now to November '25. Our sustaining capital spend in this period about $14.2 million, represent 53% of depreciation, which is similar to the rate we reported in FY '22, but below the target rate once again due to the capital discipline and ongoing supply chain disruptions. As Andrew mentioned, the fully franked interim dividend of $0.045 has been declared, representing a payout ratio of 63%, which is within our target range. Growth CapEx in the half was focused on the ongoing development of our New South Wales Breeder Triangle with the rearing stage of the farm now operational. I'd now like to make some comments on the feed market. Overall, we have seen feed prices stabilize more recently. However, they remain very elevated versus historical levels. During the first half, [indiscernible] prices were fairly flat. And in Australian dollar terms, soy market pricing has increased by 6% during the half. As you can see from the charts on this page, wheat and soy prices are up significantly versus PCP, rising 19% and 33% respectively over that period. Global wheat supply remains tight despite limited exports resuming from Ukraine, as demand remains firm and adverse Northern Hemisphere weather conditions will continue to negatively impact a number of key growing areas. Australia appears to be on track for a third bumper harvest year, with production expected to against surpass 30 million tonnes. Extensive rains and flooding experienced across Eastern Australia wheat growing areas [indiscernible] result to be in only minor crop damage, thus limiting the potential for price discounts for lower quality wheat. Well, soymeal demand for feeds expected to remain strong, which combined with persistent finance in Argentina and the United States will continue to underpin global pricing. In addition, freight and logistics costs remain high, which is an additional cost of poultry prices shown in the chart. As there is a period of time between securing the feed and have been fed to our poultry and then the poultry being processed, there is a lag before the cost is recorded in our P&L. The feed prices shown in the chart for the first half will largely be expensed later in FY '23 and into FY '24. And the P&L expense recorded this half was largely from the secured in the second half of FY '22 as shown. Inghams continues to maintain forward cover of between 3 and 9 months to secure supply in line with our procurement strategy. I'll now hand back to Andrew to discuss the segment performance.

Thanks, Gary. So in Australia, volume declined 0.3%, driven mainly by lower bird numbers we've been referring to that were processed and that was as a result of a shortage of high-quality eggs attributable to a small reduction in fertility levels from the performance of breeding roosters, resulting in a reduction in day old chick numbers. We continue to see a decline in external feed volumes, which were down 3.6% for the period as customers continue to transition in preparation for the closure of our WA feed mill. Despite the small decline in volume, revenue grew a healthy 9.6%, driven by 2 factors, being an 8.5% increase in total poultry prices as we progressively applied price increases across all channels and growth of 29.6% in external feed prices reflective of the steep increase in commodity prices. Our underlying results pre-AASB 16 reflect the benefit of our operational efficiency programs in partially offsetting the cost pressures being experienced and the impact of these broad cost pressures across key inputs, including feed, supply chain costs, packaging and ingredients. In New Zealand, core poultry volumes were down 2.4% as a result of the adjustments we needed to make to egg settings early in the period. Revenue on the other hand increased 4.8% due to a meaningful increase in poultry and feed net selling prices, which increased 14% and 37% respectively. And the New Zealand business continues to respond to this rising cost environment. The decision to reduce egg selling reflected the challenging operating environment we experienced in New Zealand early in the period, driven by both an acute shortage of labor, which affected our primary processing activities and the ongoing CO2 shortage that we have noted previously, which affected further processing and product mix. I'm pleased to report that we saw good improvements in labor availability as the first half progressed with vacancy rates back to more typical levels. During December and through January, the Kapuni CO2 plant had temporarily shut down with the resulting shortage of CO2 constraining production volumes at our Cambridge facility through January and February. To address the general CO2 shortage that has been a feature of the New Zealand market, we converted the Auckland processing plant to nitrogen in November and with work underway to convert the Cambridge plant, which is expected to be completed later this month. Cost pressure in New Zealand mirrors the experience in Australia with significant cost pressures bearing upon key imports of feed, supply chain costs, packaging and ingredients. It is pleasing to report that we saw an improving performance trend taking hold during the second quarter. At our AGM last November, I broadly discussed some of the work the Board and the leadership team were undertaking in relation to looking for opportunities to improve the structure and efficiency of our network, including through continuous improvement, automation and specialization. Our continuous improvement program remains a core part of our business approach and is backed by a dedicated team, which is operating under the lead manufacturing rules and principles. The team has a whole of business responsibility, focused drive account -- focusing on drive accountability throughout the supply chain and to identify process improvements, cost savings, waste elimination, which are all aimed at lowering overall operating costs. While our progress on some initiatives had slow and flowed a little due to COVID, the overall program has continued. And importantly, the financial benefits of those programs were previously implemented continued to accrue to the business. FY '23 brings a renewed focus for the program as it becomes fully operational once again with 300-plus projects identified and underway. Turning now to look at a few of the investments we are making in our network and automation. I am pleased to report that our Breeder Triangle is progressing well with the Yorklea rearing farm now operational. Owned and operated by Inghams, this important network investment in our network is located in the Casino area in Northern New South Wales. The triangle will service the Queensland market as an important part of growing our capacity and enhancing the overall resilience of the network. When fully operational, the triangle will comprise of 1 rearing farm and 2 egg-producing farms and will produce approximately 700,000 eggs per year. As I noted, the rearing farm is now operational with the first egg-producing farm due to commence operations in April of this year, followed by the second production farm in November later in 2023. The introduction of high levels of automation has been a key consideration for Inghams as a part of our network analysis and planning, the importance of which was demonstrably clear as we navigated the myriad of challenges brought on by COVID. In executing our network plan, there are 2 key investments that we will start with regard to automation. The first of these is the acquisition of a number of direct stream injection, or DSI waterjet cutters. We have committed to purchase 4 new DSI machines at a total cost of $30 million. The purchase of these machines, which will be spread over a 3-year period from FY '23 to FY '25 will be funded from group earnings with installation expected over the next 2 or 3 years. The machines are expected to deliver a number of benefits to business. From a product perspective, they will enable us to expand our capability in the provision of whole muscle, portion-controlled products that are important to both QSR and our retail customers. From a processing perspective, the new technology will provide higher throughput, yield and capacity outcomes across the business. To ensure we maximize the value derived from each of these machines, they will also -- we are also augmenting our capability with the introduction of stand-alone slicers and dicers at our Murarrie and Bolivar plants to process stir-fry and diced products, thereby releasing additional capacity on the DSIs. The next investment in automation that I'd like to share is based on the expected increase in demand of deboned thigh and drumstick meat. Inghams currently utilizes various semi-automatic processes to harvest leg meat, processes which are labor intensive and have throughput limitations. Over the next 2 years, we will purchase 4 modern leg deboning machines, replacing the current semi-automatic processes at 3 sites and also creating capacity to meet future demand. These machines can handle large variations of leg sizes using an X-ray measuring system to precisely measure each leg, automatically adjusting in real-time, enabling precision cutting which ensures a very high yield and minimum labor for trimming. There are numerous benefits that we see from this investment included but not limited to, improvements in yield, product quality as well as supporting future products and customer opportunities. Today, we agreed to the conditional purchase of the business, working capital and fixed assets of Bromley Park Hatcheries from approximately $8.6 million with a third-party lessor to acquire land and facilities and to enter into a long-term lease with Inghams. Bromley Park owned and operated -- own and operate a number of breeder farms as well as a hatchery in New Zealand and currently provide Inghams with 10% to 15% of our day old chick requirements. The purchase provides the opportunity for Ingham's New Zealand to become self-sufficient in respect of its day old chick requirements and is very efficient and cost-effective solution versus undertaking a greenfield development. It also improves our hatchery contingency with a modern hatchery, reduces network risk while providing for future growth. The acquisition is subject to a number of purchase conditions including Commerce Commission and Overseas Investment Office approval and settlement is currently expected to be in the first quarter of FY '24. The poultry sector remains an attractive and growing one underpinned by a number of significant advantages, including a large consumer price advantage over red meat and seafood. Importantly, poultry is a strategic focus area for our key customers, reaffirming our optimism for the category over the medium to long term. Inghams results for the first half represent a significant improvement for business over the second half of FY '22. And we expect this positive momentum to continue as we proceed during the second half of this financial year. It is clear the business is successfully transitioning from the FY '22 operational challenges with our processing activities run into a normal operational tempo and produces a full product range. That said, we still have work to do. We have implemented a series of initiatives to improve farming performance on this. We are now seeing improving performance trend with the benefits of more chickens coming off the farms to be seen in volumes and financials later in FY '23. To ensure the necessary focus of our efforts and prioritization and investment on high-return projects that will support further recovery and future growth of the business, the business transformation program has been postponed following the completion of the design phase. Broad inflationary pressures continue to be felt across the business with further increases expected for key inputs. While the pricing of feed ingredients stabilized in the first half, wheat and soymeal prices are expected to remain elevated versus longer-term levels due to tight global supply and higher logistic costs. The successful application of price increases can be seen in our revenue growth, with strong growth in average selling prices of 8.5% versus the prior corresponding period and 10.7% versus the second half of FY '22. And we remain focused on ensuring customer pricing levels appropriately reflect this ongoing feed and general cost pressures and will pass on further price increases as required. With a firm focus on the future of the business, we're investing in our network and automation, future proofing the business to improve capacity and capability to meet current and future customer and consumer requirements. This includes the Bromley Park deal in New Zealand announced today, which provides the opportunity for Ingham's New Zealand to become self-sufficient in respect of its day old chick requirements, reduced network risk, improve hatchery contingency with a modern hatchery whilst providing the future growth. Overall, our new investments are being undertaken in a disciplined way with capital expenditure expected to progressively return to a normal run-rate with our leverage expected to improve over the remainder of this financial year. Finally, we are planning to hold an Investor Day later this calendar year and we'll be setting a date in the coming months and we would be delighted if you can all join us for that event. On behalf of the management team, I would like to thank you for joining us today. And I'll now hand back to the operator and we'll take your questions. Thank you.

[Operator Instructions] Our first question today is from David Pobucky from Macquarie.

Good work on the ongoing recovery of the business. I mean it appears earnings are recovering quicker sequentially half-on-half than the market expected, I think. Look, your normal first half, second half EBITDA is, I think, 51-49, but it's clearly not a normal earnings year. So how should we think about that skew this year and the continued earnings recovery for the second half, please?

Yes, I think this is a normal year. I think we'll probably won't -- we are probably seeing that normal pattern. We're quite optimistic that the trends we've seen in the first half are continuing in the second half. That's certainly been the experience we've had. So that gives us confidence that the recovery will continue. I think the key issues that we've got to resolve over the second half getting this farm in operations back on track. And the most recent trends would suggest that we're doing that and the coming on stream of the new really complex in Northern New South Wales is going to be a major contributor to alleviating the shortage of eggs, which ultimately flows through to the availability of product. So that will be a real strong feature for the half. The other thing we have to continue to be -- work hard on is price recovery. The inflation in the environment is still pretty tough. Probably it's not easing as quickly as I think some might have expected. So we've got pressures in that regard. So we'll have to be taking additional price increases most likely to customers through the half and that will be an important part of maintaining our margin recovering those costs. And I think thirdly, I think we will as supply normalizes, as demand comes back and we've seen some -- since Christmas, we've seen good signals on demand in the marketplace in the critical channels and customers. And I think that that continues through the half that will also underpin some positive momentum of the business.

So it sounds like still some headwinds there. So it sounds like you probably won't get back to that normal kind of EBITDA pre-AASB 16 kind of run rate for the half of, I think it's typically around $100 million in second half '23. So it's probably a little bit premature, it sounds like getting to that normal run rate.

I think that would be giving guidance, David.

Yes. And just second one for me, please. You noted that EBITDA includes business transformation project costs of $16 million and that $3 million benefit from the Cleveland facility. Can you just clarify if that's been stripped out of your underlying pre-AASB EBITDA number of $84 million, please?

Both of them have been.

I didn't hear that -- quite hear that.

Yes. Both of them have been excluded from the underlying EBITDA pre-AASB 16.

Our next question is from Michael Peet.

Just firstly, just on -- could you give us a bit more information on this supply disruption? Maybe can you sort of give us a sense of how much that's disrupted you in terms of volume? What you could have potentially -- where you should have been in terms of volume set with the issues in the breeder part of the business?

Yes. So look, I mean it really go -- it actually goes way back into sort of December, January of '21, '22. So the cycle -- the breeding cycle of the flock is about up to 65 weeks. So if you have problems early on in that, it takes you quite a while to work your way through them. And the lack of labor at that time meant that some of the normal good attention to husbandry details wasn't able to be practiced and it led to some less than ideal conditions, which ultimately had effect on the breeding roosters and that flowed through the fertility, hatchability and [indiscernible]. So we worked our way through that, and we're coming out the other side of that one. It is tricky though because it's quite long lead times. Look, in terms of it's a bit difficult to sort of exactly precisely say what sort of volume did we miss in that regard? I mean if you look over the last -- I take a view -- trying to give you a pre-COVID view here, we look over the last 3 years, we still average around about 3% -- we take all the ups and downs out. We've still been averaging around about 3% volume growth. So I think that's pretty healthy. And yes, through the half, we've been below that. So that's clearly -- the missed opportunity was there. But we are seeing -- as that supply situation improves and as demand is starting to normalize, we're sort of getting back on that sort of trend line and we're quite confident that's where we'll be over the balance of the year and end of the year ahead. So yes, it's much more -- it's more of a supply issue than probably a demand issue to be fair. And so that give you a sense of what we might have lost.

And I guess -- yes, sorry.

I was just going to add, that's probably a couple of percent of our production that we would have liked to have had.

Just further to that, I mean, is this a particular issue at the rooster or -- and have they imported to sort of genetics? Is it an issue industry-wide? Is there something you can do to sort of -- you've mentioned New South Wales, clearly, some of that's going to help. But I'm just interested in sort of learning a bit more about how you or the industry can respond to this to sort of prevent it from happening again?

Yes. I don't believe it's -- I don't believe it's a fundamental problem with the choice of a variety of bird. Historically, the performance of our [ last ] bird has been exceptionally good and benchmarks very well. I think it's a transitory problem. And anecdotally, there are certainly industry issues and going to look at some of the retail outlets to see holes and gaps in the shelves of products and some notices advising shoppers that they are finding issues that are causing shortages. So I think it's very much a transient issue that goes back to disruption to the whole supply chain and husbandry issues. We've identified those. I'm very confident they've been very well-addressed and say the recent trends shows we're getting back on track. So I don't think it's a systemic or a long-term issue, you've got to address it. So it's a part of the whole disruption we be experiencing. And I'm pretty confident, very confident that we put it behind this and we don't need to be making any fundamental changes to our choice of breeds.

And just finally on price. I mean, has this sort of shortage helped you get price rises, do you think? And just looking forward, should we expect a similar trajectory that's going to be required to recover the costs that you've sort of highlighted today?

So clearly, I mean the broad inflation environment is affecting everyone and our customers are certainly -- they understand it. And in fact, they've worked closely with us as we navigate through those price increases. So there is a general understanding in the marketplace that these things have to be recovered and pass through. I guess the shortage of meat where it shows up in our business most significantly is in the wholesale market, which is very much driven by availability and supply and demand issues. So if you go back in the year, when the market was being inflated with excess because we couldn't process birds, the prices in wholesale were significantly depressed. We've rolled forward to now and because the market is a little short, then wholesale prices have significantly improved over that time. So the combination of working with our customers, understanding the environment we're in and that's been a productive process and the recovery in the wholesale market pricing. Those 2 things have really helped us get to that level. What the price increases will be over the balance of the year, not really prepared to predict that, but we are already engaged in conversations with different parts of the market and how we continue to recover those cost inputs through price.

Our next question is from Craig Woolford from MST Marquee.

I wanted to follow up on that question around price. With that, what seems to be a shortage in the wholesale market, it's probably helping the results that we're seeing there on price. Is there anything we should be mindful about in where that pricing settles in the wholesale market and how that could contribute to maybe less ASP growth in the second half?

Yes. Well, I mean, it's a difficult one to predict, Craig, obviously, because it is a very -- it's quite a volatile part of the market. Our forward view is that it is going to stay relatively strong over the second half because as supply continues to recover. So we think it's going to be a contributor to ASP improvement across the half and therefore, across the full year. And you add to that increases we'll need to get in other channels. I think that the full year will show a pretty strong performance on ASP.

And so not trying to get too caught up in individual months, but as an analyst, we love seeing the detail like you've got on Slide 10 now around pricing. And it does sequentially increase. So can we conclude 2 things, can we conclude from that that there were price rises that were put through later in the first fiscal half, looks that way just stabling the chart, particularly for Australia? And then oddly, why did Australian pricing dip in December versus November, it wasn't the case in New Zealand?

So first on the -- yes, I'll get Gary's view on that last because it's more of -- well, the pricing was phased because it's very difficult. I think we talked about this at the full year results. It was very difficult to get pricing away when you're not supplying the market. So when you've got severe supply pressures, it's pretty tough to have those sort of implement price increases with customers. So we had to get back to stability. We have to give them confidence that supply was coming back on-stream and then we could get price increases implemented. So there was a little bit of a delay. If you go back to the second half of FY '22 into the first half of FY '23, we were sort of signed a little bit by the supply issues. But once we've got stability there, once the thought outlook, we've got confidence in, then we will start up, we're able -- particularly in Australia because New Zealand was ahead of the curve on that one. We started to get those price increases implemented and that's why you see the rise up in the chart. And of course, those price increases will continue to benefit us as we go into the second half. So that was -- the delay was really caused by our supply challenges. Maybe Gary, you can address that second part of that question.

Yes. I know why you're looking at it, is it a long-term trend? I'd say it's more of a December factor. We have more seasonal products in December. We have [indiscernible] sales in September. There's a bias -- sorry, in December bias to more whole birds during that period of time, which on an overall average price per kilogram are at the lower end. So it's really a mix question. I would say, Craig, I wouldn't be thinking that's a trend.

So what are the consequences of deferring your business transformation program? You would have said it for a reason, there's obviously some legacy systems from outdates that you're trying to improve. But what are the challenges?

Yes. So that telling you -- you stressed the case there. So it will take longer before we see those improvements coming through the business and we'll need to manage our legacy systems for a little bit longer. So yes, you outlined exactly what the consequences of that would be.

It's not as extreme as any of the end of loss and it's difficult to get service from IT providers?

So I don't think we would make that decision if that was the case. But in saying that, that it is by our legacy systems and that does become challenging the longer that you leave -- but yes, we wouldn't have made that decision if we thought it was an acute issue now.

And then lastly, should we expect any further restructuring costs periods?

So the flow on of business transformation, you mean?

Yes, I guess so. I mean, I guess, in my mind, the debate is whether they should be below the line or above the line, if the one-off restructuring, it makes sense, but if it's about business improvement, most companies are trying to do that year in, year out?

Yes. I think it was more driven by the freight accounting standard and what would normally have been capitalized is now being expensed. But in answer your question for the second half, as we sit here today, I'm not expecting anything material in that line.

Next, we have David Errington from Bank of America.

Quick questions, a bit simplistic. But you got a shortage of chicken and chicken is the cheapest form of protein. Your cost increases, your cost of sales are increasing by double-digits over 10%, but you can only put through 8% price increases. Why can't you put -- why can't you get full cost -- why can't you get the full price increase? I mean it's a dumb question. I know [ Mr. Banducci ] probably is a pretty tough block to compete against. But why can't you get -- because as you say, you got everything going in your favor, proteins going through the roof, meats going through. Why can't you get full, because if you can't get full price coverage from your cost increases, you're up against it? Why can't you get the full price recovery?

I mean, I agree with your point and that's what we've got to keep working. We're going to get full cost recovery. And I think that's our ambition as well. The issue was -- it was my answer to Craig's question, it was the delay in being able to get those price increases through that is the average come out at a little less than the inflationary cost. So it's a bit more of the timing of the arithmetic there. So we're -- we talked about all of our customers about the full spectrum of costs that we're dealing with. And yes, they're tough negotiators, right? So there's trade-offs and gives and takes in all of that. But the critical issue there is the timing issue.

So it's mainly timing that you can get recovery, but probably not all of it, but it is this particular instance is a bit more on the timing side, the price increases came through a bit late. That's what you're saying?

Yes, that's...

That's for Craig, yes.

Yes.

Now on the cost line, now I mean, this is a pretty -- again, a pretty simplistic way of looking at it. But your gross profit increased by 10% thereabouts, but your EBITDA fell by 23%, which means that when you look at that, your cost line increased -- your cost of doing business line increased by 33%. Now I know that there was some $16 million of restructuring, but you got a $3 million benefit there. There seems to have been a pretty significant blow adding cost of doing business. Is that the right way to look at it or -- because it looks like it's a double-digit increase in cost of doing business, which then coupled with not being able to get your full price recovery, you're up against it there, Andrew. So what's going on in that cost line? Can you spell that out for us a bit?

I'll get Gary to do that.

So as cost of sales was up 10.9%. And then also, you may have seen that our distribution costs are up substantially as well. So the main areas where costs have come through and you talked about business transformation, which wasn't there in the prior year. Feed costs, we talked about going up nearly $60 million year-on-year which is a cost of doing business. We saw around about $12 million in our packaging and ingredients. And we saw almost $30 million coming through, in essence, in our freight and distribution cost lines. And they would be the biggest ones now. I can go on the list, I'm sure many organizations that you've got an eye on are showing cost increases. So you've got made the guidance. You've got gas, we have particular with CO2, there's been a shortage in significant prices there. So we're seeing pretty across the board cost in costs, but I've called out the biggest ones there to try and help you.

Yes. And they're the heavy ones, it's heating it pretty hot. And just a final one on the balance sheet. I'm looking at your receivables versus your payables, and I've tried to do it on a December to December to YPAT seasonality. But it looks to me that the receivables, as the prices are going up, it means that you're not being able to receive your money any shorter. You've got to carry the receivables, but it looks to me that you're not getting any relief on the payables. You've got to pay your suppliers probably a bit quicker. I mean have another retailer, I think Metcash called that out. They've got to pay their suppliers a bit quicker, but their receivables are growing quite significantly because of the price increases. Are you finding that too, that you're carrying a greater level of receivables now because of inflation, but you've got to pay your suppliers a bit quicker? Hence, you're carrying the working capital increase and the impost on the cash flow, is that the dynamic that's unfolding here?

I wouldn't say -- I mean, so definitely on the receivables and you're seeing that the impact of the price increases going through there. I think if you do the DSO calculation, it would be pretty similar. I think we're a bit up in this period in addition to the ASP. So collection has had, I guess, some mild challenges. But remember, we are pretty quick DSO and our bad debts are extremely low. It certainly hasn't been a conscious decision to be paying suppliers early. So probably just need to have a look at that to give you a better answer.

Just explaining the cash realization dropping, it means that working capital and it just looks like your receivables are increasing at a faster pace than what your payables are. That's just an observation. And it's common. I mean basically, it means that you're carrying the receivable because you've got the higher value of the sale, but the suppliers need to be paid a bit quicker because they're under a bit more troubles. And it's common. I just wanted to know if that's a threat that's going to be a pressure on your cash flow coming forward because there's going to be working capital challenges in these current inflationary times?

I think there'll be an element of that, but there's probably 2 other factors in there as well. One is we have our biological assets. So in essence, our eggs and burns that are in the field growing before processing, also our breeder network as well. So you can imagine with us, we're signing close to $60 million increase in feed, all of those assets [indiscernible] as well. So we do carry some working capital in the higher costs there. And then, of course, that's also in some of our inventory of the product inventory as well. So inventory would be the third leg of the equation. If you...

It just makes high -- in high inflationary time. Yes.

Yes, if you assume biological. Sorry.

Yes, high inflation, it causes secondary challenges and working capital is obviously one of them as well.

We have time for one more question today. And our final question comes from Richard Amland from CLSA.

Just a couple of quick questions to wind up. Can you just explain a little bit further the business transformation expense? I'm not clear on exactly what it is. It seems like there's a charge for deferring business improvement. So can you just flesh that out a bit for me?

It's costs that we've incurred in essence, getting up to the end of our design phase. So we were looking at implementing an ERP and at the same time modernizing our business processes that go with that largely replacing legacy systems and then building some business capability to match -- to improve operations and match future strategic intent. So the $16 million is the cost that we have spent on that during the half. And what...

So it's...

What the deferral relates to is that we're -- the next phase would be then implementation and we've deferred that implementation phase.

Okay. So you have, in fact, expensed costs associated with system migration -- eventual system migration, but you're deferring the actual implementation?

Correct.

Okay. I understand that now. Just there's numbers dotted around the presentation and I'm just trying to get a concise number. What is the annual CapEx at this point in time?

So half year CapEx was $23.5 million.

Yes. Okay. So we should look at annualizing that? And did that number include the business transformation? Or are we treating that separately?

Business transformation cost was expensed and expensed through the P&L. So the $23.5 million CapEx, and it excludes the business transformation are the 2 biggest things in there, the water treatment plant in our Western Australian primary processing facility. And the largest is our continuing spend on the New South Wales Breeder Farm up in Northern New South Wales. As far as the next year, we have had lowest CapEx over the last few years. But we were more running in around that $80 million mark for a full year. I think what Andrew talked about automation. So we will have some payments coming through for that equipment. So I think it would be unreasonable to expect that number will be higher in the second half than the first half.

That does conclude today's Q&A session. If you didn't get to ask your question today, please contact Brett Ward after today's meeting. Back to you, Andrew and Gary to sign off.

Thank you, everybody, and some of you, we'll be speaking to later in the day.