Inghams Group Limited (ING) Earnings Call Transcript & Summary

Welcome to the Inghams Full Year 2024 Results Call. Following the formal presentation, there will be a Q&A session for investors and analysts. [Operator Instructions] I will now hand over to Andrew.

Thank you, and 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 the Inghams FY '24 results presentation this morning. On behalf of Inghams, I'd like to respect to acknowledge the traditional owners, both past and present custodians of the land we are meeting on today. Also joining me today as of this moment is our Chief Financial Officer, Gary Mallett. And at the conclusion of the formal presentation, we'll be happy to take any questions you may have on the results and the business. I'm very pleased to report that Inghams has delivered a record set of financial results for FY '24. I'd like to take this opportunity to acknowledge the entire Inghams team for their hard work, dedication, and achievements that is the foundation of the results we're reporting today. As you can see here, our earnings, profit, and cash flow metrics have shown strong year-on-year growth. Capital expenditure and acquisitions totaled $168 million, and the investments we have been making have contributed to a very pleasing return on invested capital results of 21.3%. Reflecting the strength of our financial performance, we have declared a fully franked dividend of $0.08 per share which takes our total dividends declared or paid during FY '24 to $0.20 per share, which represents a significant increase of 38% on the prior corresponding period. Inghams strong FY '24 results are underpinned by growth in volumes, margin, and solid operating performances across both farming and production. Australia and New Zealand have both made strong contributions, resulting in a 31% increase in underlying pre AASB 16 EBITDA to $240.1 million, a 130 basis point increase in the underlying EBITDA pre AASB 16 margin to 7.4%, and a 27% growth in EBITDA per kilo. Our relentless focus on safety supported by our company-wide Safety for Life Program has resulted in another significant improvement in our safety performance with our total recordable injury frequency rate declining by 7% on a PCP. We saw poor poultry price growth across our 3 key channels groupings, resulting in an overall NSP growth of 5.4% on PCP. The general rate of inflation across the economy may have moderated a little, but costs are still rising and our costs, therefore, remain elevated. I'm pleased to say that we are seeing the cost of key feed ingredients and inputs, I should say, stabilize with our internal fee cost increasing a modest 1.3% in FY '24. Our New Zealand business delivered a very strong performance over the year to the credit of the whole New Zealand team. The performance was driven by a return to normal operating capacity compared to FY '23, resulting in the business achieving a pre AASB 16 underlying EBITDA growth of 100.9%. Our investment program is delivering some great outcomes with a number of important investments completed during FY '24 and in early July this year. We completed 2 important acquisitions, finished our WA distribution centre development, and installation and commissioning of 4 new automated leg deboning machines in Australia. We're also well over halfway through our water jet cuttering program, another key automation investment. Company leverage ratio increased only marginally to 1.5x and comfortably within the target range of 1 to 2x. And as I noted on the prior slide, we declared a $0.8 fully franked final dividend. This year, we are providing a table summarizing the key financial statistics that aligns to how we judge the performance of the business, and we intend on reporting consistently moving forward. While I have already touched on the majority of these metrics, we have also added a new measure, which is EBITDA per kilo, which I know many -- a number of you look at. In this regard, we have achieved a very solid growth at both the group and the segment level for FY '24. Before we get into more detail on financial results, I would like to talk briefly about our safety performance in FY '24. Safety is integral to everything we do and the safety of our teams, contractors, and visitors has come out to our success. In FY '24, our total recordable injury frequency rate declined a further 7%, which represents a very significant 56% reduction over the last 5 years. Our work, health and safety management system is helping us identify control hazards, conduct effective risk management, and maintain a chain of responsibility for injury prevention and health preservation. This year, we completed our 2022 to '24 Safety for Life program, and we have recently completed work on our next program. Okay. So group net selling price increased 5.4% versus FY '23, reflecting the full effect of increases applied later in FY '23 and during FY '24 in response to the significant growth in key input costs we have experienced. The movement in NSP in FY '24 has been influenced by a shift in channel mix. Retail channel share increased 3.1% to 51.1% of Core Poultry sold versus FY '23 as a result of the shift in consumption patterns toward in-home dining that we have spoken about at some length over the past 6 months. Turning now to other conditions across our various channels during the first half. Group Core Poultry volume increased 2.8% on FY '23. The growth comprised growth in Australia of 1.9% and a very strong growth in New Zealand up 8.4%. The growth in New Zealand was driven by a return to normal operating capacity compared with FY '23 when production volumes were significantly impacted by lower egg setting in response to acute labor shortages and supply constraints on CO2. The broad themes across the channels were consistent across Australia and New Zealand, with the first half '24 results we reported in February. Retail growth was stronger in both markets as consumers responded to the cost-of-living pressures by shifting consumption towards in-home dining options. The shift has been an extensive traditional out-of-home channels, including mainly food service restaurants and food service. Towards the end of FY '24, we agreed in principal commercial terms for the renewal of our multiyear supply agreement with Woolworths. Importantly, Inghams will remain Woolworth's #1 poultry supply partner. The key provisions of the new agreement will be phased in over the course of FY '25. The agreement does provide for a phased reduction in annual volume, which will facilitate the execution of our own customer diversification strategy for a broader and more balanced portfolio and aligns with Woolworth's approach to diversifying its supplier mix across its fresh poultry category. We have won significant new business for FY '25 and are actively working on additional new business opportunities across our broader customer base. Overall, we view the transition as a manageable one with the effect of the new agreement and a new business factored into our FY '25 guidance and outlook. I'll now hand over to Gary to present the financial results in more detail. Thanks, Gary.

Thank you, Andrew, and good morning, everyone. Mentioning with our profit and loss for the year. As you know, FY '24 was a 53-week trading period for Inghams. And as a result, all of the information we have presented, including the comparisons to FY '23 are on this basis, unless noted otherwise. We have also provided a normalized 52-week data in the presentation and supporting materials to assist with your analysis. Overall, our FY '24 results were very strong with EBITDA growth of 13% and NPAT growth of 68% on PCP. Andrew has already noted the strong growth in underlying pre AASB EBITDA of 31%. The Core Poultry volume increased 2.8%. New Zealand achieved significant growth of 8.4% as operations returned to a normal cadence, while Australia grew at 1.9%. The growth we have delivered in NSP combined with the increasing volume underpinned the 7.2% growth in revenue. Cost increased 6.2% or $163 million with fee cost growth of $10 million being fairly modest this year. Other costs increased 5.8%, which is a slower rate than what we reported at the half year and was due to volume growth and general inflation, partly offset by efficiencies and an improvement in operational performance. A more unusual element of our post AASB 16 costs reported on this page this year is the impact of the conversion of 66 grower contracts to performance-based variable contracts. Thus, they are no longer part of AASB 16. This resulted in a $19 million increase over the prior corresponding period in these post AASB 16 costs since more of our grower contract costs are now included within the post AASB 16 EBITDA having been previously included in AASB16 interest and depreciation lease costs. Naturally, this has no impact on our pre AASB 16 costs or result. While cost inflation has moderated a little during the period, higher cost growth has been observed across salary and wages, utilities, husbandry, ingredients, and repairs and maintenance. Depreciation declined 9%, due largely to a reduction in the AASB 16 contracts at the depreciation line. And then our interest finance expense increased 10% due to the effect of higher interest rates and a higher average debt balance. Turning to look at the drivers of performance between the first and the second half. Overall, FY '24 saw us deliver very strong financial results in both halves. As those of you who are following them closely will appreciate, our first-half to second-half earnings mix exhibited a larger half variation that is explained by normal seasonality, and I wanted to spend some time explaining the main drivers of this in a bit more detail. As you can see on the slide, we've provided a bridge to help reconcile the key factors that influenced the first-half and second-half split in FY '24. The first driver of this differential this year was normal seasonality. In volume terms, if you look back to our financial disclosures from prior years, you would find that normal seasonality drives second-half volumes that are on average about 7,000 to 8,000 tonnes lower than the first half in any given year. This always impacts both sales volume and production unit cost levels. The next factor in the movement between the halves was the wholesale pricing channel mix. In the case of the wholesale price, whilst it remained firm during the second half, it was lower in absolute terms versus the first half. This was partially offset by volume and margin growth, which was underpinned by a channel mix shift to retail. As we had advised at the first half result, we temporarily adjusted our settings to help address an element of the inventory increase we have seen due to the demand shift from the out-of-home channels. As a result of lower processing volumes, we saw some increase in unit costs. As we have also noticed, we have seen some reduction in average bird weights. So I would note, we started to see an improving trend as the second half progressed. Finally, there were some SG&A savings made, providing a bit of an offset to some of those other factors. Turning now to the balance sheet. Inventories and biological assets increased by $23 million versus PCP. This was due to an increase in processed poultry inventories to support improved customer service levels and the decline in demand from out-of-home channels commencing in the second quarter of 2024 and continuing through the second half. And this is largely what we saw in the first half. At June, it was partially offset by a decline in feed inventories during the period. Property, plant and equipment increased $100 million due to the acquisition of the Bolivar Primary Processing Plant in South Australia and the Bromley Park Hatcheries business in New Zealand for a combined $80 million, and the various core and high-growth investments we have been undertaking. As you can see here, we've recorded a significant reduction in right-of-use assets and lease liabilities of 19% and 17%, respectively. These items have reduced both due to the acquisition of the Bolivar Primary Processing Plant and the conversion of 66 contract growers performance-based variable contracts. We'd expect further grower contracts to move to a variable basis in the coming years. Net debt increased $85 million on PCP to $348 million, due mainly to the Bolivar purchase. Our leverage ratio increased marginally to 1.5x and remains at the midpoint of our target range of 1x to 2x. Moving now to cash flow. Starting with cash conversion, we saw an improvement to 98% due to strong cash collection. FY '24 was a busy period from an investment standpoint with total capital expenditure and acquisitions of $169 million. Included in this was an investment of $37 million In Core and High-Growth projects, including the Northern New South Wales Breeder Triangle and automation investments. Dividends paid in the period relate to the final FY '23 fully franked dividend of $0.10 per share and the interim FY '24 fully franked dividend of $0.12 per share. Tax paid increased $22 million due to higher FY '23 earnings. AASB 16 interest and principal payments declined $19 million, again due to that conversion of the grower contracts, but also the acquisition of the previously leased Bolivar Primary Processing Plant. Now turning to our capital expenditure. Our capital expenditure falls into 3 main areas: sustaining, investing, and strategic CapEx. Same business CapEx was 83% of pre AASB 16 depreciation at $48 million. Overall, the significant increase in total CapEx was in particular due to the various programs in the core and high-growth categories and the completion of those 2 strategic opportunities being Bolivar and Bromley Park. And we saw that strategic CapEx represents 50% of our total capital and acquisition expenditure during the year. Pleasingly, as I mentioned previously, the high tempo of investment and acquisitions in FY '24, which saw net debt increase of $85 million, our leverage of 1.5x remains in the middle of our range. Overall, we retained flexibility to undertake further investments for the total liquidity of almost $200 million. Overall, our capital management outcomes for FY '24 have been satisfied. And sustaining CapEx tracked well against our target range versus depreciation. And as I outlined on previous slides, we are successfully executing on a significant number of Core and High-Growth projects as well as our strategic investment completions. We have today also declared a fully franked dividend of $0.08 per share. Finally, our return on invested capital has again been strong at 21.3% for FY '24, which is higher than the 19% return we achieved in FY '23. Finally, now turning to the feed market. As you can see here, FY '24 has seen the observed pricing of key feed inputs moderate, have observed the wheat prices declining 4% and soybean prices 15% over the last 6 months. On a 12-month year, wheat and soybean prices have declined 1% and 14%, respectively. Global soybean production is forecast to grow by approximately 60%, and pricing is expected to moderate over the remainder of this year and during 2025 due to an increase in supply. In terms of wheat, ABARES is forecasting Australian crop production to increase by 12% in '24, '25 despite a mixed start to winter cropping season with pricing expected to continue to moderate in line with international prices. I'll now hand back to Andrew to discuss the segment performance.

Thanks, Gary. In Australia, Core Poultry volume increased 1.9%. Strong retail channel growth saw increases of 18 kilotonnes more than offsetting the decline in the QSR and other out-of-home channel volumes. The decline in the External Feed is due to a full-year effect of the closure of the Wanneroo feed mill in April '23. Revenue increased 6.3% on a PCP, driven by volume growth and a 5.3% increase in Core Poultry NSP, which was in response to cost growth across the business. The pre AASB 16 underlying EBITDA margin for the Australian business increased 80 basis points to 7%. Total costs on underlying pre AASB 16 basis increased 5.2%, driven by a small increase of 2.2% in internal feed costs and a 4.6% growth in other costs due to higher volumes and general inflation. Turning to New Zealand, as we noted in February, we have seen a significant and meaningful turnaround in the performance during this period, which is a great credit to the New Zealand team. As I noted earlier, Core Poultry volume increased 8.4% on PCP, reflecting a return to normal operating capacity compared with FY '23. Revenue was up 12.4% due to Core Poultry volume growth, an increase of 4.8% in NSP. External Feed NSP declined 4%, reflecting raw material cost reductions. Pre AASB 16 underlying EBITDA margin for New Zealand increased by an impressive 410 basis points to 9.3%. Underlying costs pre AASB 16 increased 7.5% PCP due to higher promotion and brand-related costs, distribution, load utilities, and repairs and maintenance costs. Due to a decline in international price for key feed ingredients, internal feed costs improved 5.2% for the period. Turning now to an update of our key investment initiatives during the period, followed by some closing remarks before we move to questions. On March 7, we announced to the market, the acquisition of the Bostock Brothers organic chicken business in New Zealand. The terms of the deal include 100% shares of the Bostock Brothers Limited, including the brand with respect to poultry products, 3 freehold farming properties, and a primary processing plant for NZ$35.3 million. The acquisition of Bostock Brothers aligns with Inghams strategy and provides growth opportunities, including greater domestic market share, export, and expansion into value-added and further processing categories. I am pleased to report that having received the required approvals, we settled on the acquisition of the business and the farms on the 1st of July 2024, which was slightly ahead of the forecast. Settlement of the processing plant is expected in the first half of '25 upon the completion of planning-related items by the Bostock Brothers Limited. Overall, the integration is well on track. As noted at the half year, we completed 2 key network-related acquisitions in FY '24. In October of last year, we completed the purchase of Bromley Park Hatcheries in New Zealand, an owner and operator of breeder farms as well as hatchery. This was followed by the opportunistic acquisition in December of the strategically important Bolivar Primary Processing Facility, aligning with the group's stated desire to own key operational sites on a freehold basis. The first is providing them with great control over future operations planning at the site and introducing greater flexibility into the broader primary processing network. We have previously spoken about Ingham's focus on investing to enhance our network capacity, capability, and efficiency. In February, we reported that the new distribution center in Hazelmere, WA had been completed and is operational. The Hazelmere DC represents the conclusion of a 3-year facility DC investment program that has seen us open up new distribution centers at Truganina, Victoria, and Edinburgh Parks in Adelaide as well this now new one in Hazelmere. Our automation investment program saw us complete the installation of our 4 new leg deboning machines towards the end of the first half of FY '24 and earlier than forecast and ahead of budget. Delivery and installation of the new water jet cutters is progressing very well and is due for completion in FY '25. I'd like to just share a couple of other projects we have underway, that while compared will be small in the amount of capital they require to invest are expected to generate significant benefits for the business over time. The first of these is the investment we are making in our Lisarow site to convert the production line to a fully cooked capability. Scheduled for completion this financial year, it will add a second fully cooked manufacturing site to our network, providing East Coast production capability and capacity, while also providing dual site contingency. This project will deliver savings in both transport and other production costs. The second project is the decoupling of our value-enhanced production processes across our network. Inghams is currently producing a range of value-enhanced products within its primary production operations. The project will be completed in 2 stages during FY '25 and is key to enabling the implementation of higher returning projects in the future across our primary processing network. Our commitment to sustainability has resulted in key performance indicators, some of which we have noted here, showing solid year-on-year improvements. As I noted earlier in the presentation, our intensive focus on safety has seen our safety outcomes improve significantly over the past 5 years and demonstrated that our total recordable injury frequency rate, which has declined under 56% over that period. In May, we launched our Reflect Reconciliation Action Plan as a part of our ongoing commitment to support inclusion, equity, and diversity. And we have a range of initiatives underway to support Aboriginal and Torres Strait Islander peoples in our business and in the community, including sponsoring career trackers and to support university students in our business. In what we believe will be our first transaction of its kind for a poultry company in Australia, in late June, we completed a transaction to convert our entire $545 million of debt facilities into a sustainable linked loan. The deal reaffirms our sustainability leadership position within the Australian poultry industry and demonstrates our ongoing commitment to achieving our ambitious environmental goals. On food safety, we are pleased to have achieved A or AA Global Food Safety Initiative British Retail Consortium ratings across all sites. We have also recorded further reductions in our greenhouse gas emissions and further reduced our waste to landfill. Our annual report, which will be published in October, will provide more detail and information on our ESG progress. Today, we are providing guidance for FY '25 to help the market arrive at an informed view, including assessing the effects of the phased introduction of the terms of our new Woolworths supply green. Importantly, I would like to emphasize that our guidance represents growth on what is a strong FY '24 result. We are guiding for Core Poultry volumes to decline in the range of 1% to 3% versus FY '24 based on the normalized FY '24 volume-outcome. And this largely reflects the effect of the phased introduction of the new Woolworths agreement. Our guidance for underlying EBITDA pre AASB 16 is between $236 million and $250 million. At the bottom of the range, this would represent an outcome which is in line with the normalized FY '24 earnings and at the top of the range, a growth of approximately 6%. Overall, our guidance takes into account several factors, including current operating performance, a sustained improvement in the price of key feed ingredients, and our wholesale market pricing slightly below the level that was established in FY '24. In terms of the overall operating environment, we expect consumer conditions to remain challenging due to the ongoing cost-of-living pressures and with inflation expected to remain somewhat elevated during FY '25. As discussed, our poultry volume will be a little lower due to the phase introduction of the new lower supply rates, and the ongoing effects of cost-of-living pressures on consumers. Similarly, channel mix will reflect the effects of these factors, though we expect some relative improvement in the QSR channel volumes during the period. Core Poultry net selling prices are expected to show modest growth, excluding the potential effect of any feed cost reductions. Based on current commodity pricing trends, Inghams expects some net benefits to be expected from lower key feed ingredient costs in FY '25. We are targeting to achieve annualized cost savings through both procurement, operational, and continuous improvement initiatives that will help us significantly offset general inflationary effects. Capital expenditure of between $100 million and $110 million is forecast FY '25, excluding the Bostock acquisition of NZ$35 million, which will be progressively settle throughout the first half of FY '25. We are now 7 weeks into the new financial year, and trading has so far been consistent with the outlook that we are providing today. So before I move to questions, I just would like to make a few general remarks about the business. We believe that Inghams represents a compelling proposition. We have deep relationships with our key customers who prioritize poultry. We operate at scale, which translates to efficiency in a large and growing market, executing against relevant consumer insights. This provides a platform for delivering robust and attractive earnings over the long term. We are leaders in safety, quality, welfare, and sustainability, and we have the right capabilities and experience to execute our strategic plan underpinned by financial strength and flexibility that enables us to invest for growth. That does include our formal presentation. So I'll now hand it back to the operator so we can take your questions. Thank you.

[Operator Instructions] Our first question comes from Ben Gilbert from Jarden.

Just the first one for me, just around this Woolworths contract. I appreciate there's obviously a lot of commercial sensitivities around it. But there are a couple of questions on it. One is the full-year impact effectively coming in from 1st of July, i.e., the volume impact that you've obviously talked to for fiscal '25, is that for full year? Or do we expect ongoing volume impact into next year into fiscal '26? And then the second part of the question as it relates to the Woolworths contract is one of my favorite slides you put up in your strategy a little while ago was around the opportunity through value add and moving to free range, etc. And obviously, there's a lot of Woolworths logos all over that. And it was a big margin and ASP opportunity. You did dilute that opportunity moving forward and your ability to sort of move to those aspirational 10% plus type margins?

Yes, let me deal with that second part of the question first, and I'll come back to the first part. During the course of last year, we worked with Woolworths on a quite significant the right term is the range creation project, which expanded space for poultry, and that did include expanding their range and space that they provided for free-range products. That hasn't changed. That's in place and the market, and that will continue to be there. And working with Woolworths is still our largest customer, and as their largest poultry supplier, those opportunities to continue to work on the range, to continue to work on improving mix on driving the category very much alive and well and we're working with the customer on those. So that hasn't changed, Ben. In terms of the new agreement, it is phased in over the course of this year. It's a one-time step down. We will still have an opportunity to grow with Woolworths as their business grows. That opportunity will still be there. And we anticipate that it's a manageable transition that we'll undertake throughout the course of FY '25, and it's reflected in the guidance that we've given you today.

Sorry, just to be clear on that, there will, all else equal, assuming we have any other contracts appreciate you said you had, there'll still be an annualization of the volume rebased lower into fiscal '26, all else equal?

Well, I'm talking about fiscal '25. We're not talking about fiscal '26.

Okay, okay.

Ben, it stays in over '25. So yes, that's the max.

Okay. And then maybe just could you tell it again, appreciate there's a lot of commercial sensitivity around this, but you've talked to winning some contracts. How much opportunity is there out there in the market? And particularly, obviously, you're quite specialized if you're dealing with a QSR versus a Woolworths in terms of different requisites around what they want and configuration of clients. How much volume is out there for you to win that is comparable that you might see the negative impact from Woolworths and is the expectation be at offset that in time?

Absolutely. Those opportunities are out there, and we certainly have all the operational capability to make the products that are currently in demand in the marketplace. We've continued to upgrade our capability to do that. So I don't have any concerns about that. There are certainly opportunities out there. We've already been able to secure some of those opportunities, and they're coming through. And I think over time, as I said, this is a very manageable change and won't have a long-term impact on the business.

And just a final one for me. At the Strategy Day and historically, you've talked to some of these operational 10% EBITDA margins within Australia through all the week to do around these productivity gains and mix, etc. I think you sort of probably talked to sort of 3 to 5 years or 2 to 5 years? Just how confident how you're still feeling about those?

Still we remain very confident those opportunities are there, and we continue to work on them. And our results today demonstrate that we've made progress in that regard. And that's why we've also included calling out this metric of EBIT per kilogram because that's why we measure to track how we add value to our volume over time. So we remain committed to that objective.

The next question is from Evan Karatzas from UBS.

Can you give us a bit more sort of how much of the loss or volumes you've actually replaced so far, please?

No, I'm not going to give you that detail.

Okay. [Technical difficulty]

You've got very bad line, Evan.

Moving on to the next question, which is from David Errington from Bank of America.

Hi, Andrew. Andrew, you and I have been around the block too many times to try to put a nice angle on a major shift with a major customer. I mean, whenever there's a major change in a contractual arrangement, generally, that leads to industry instability where basically everyone starts trying to place more volumes, etc. So that's generally a statement. So I'm very concerned whether this is an industry shift, whether this is a major industry change? Trying to understand why Woolworths would want to do this, given that there's growth in the on-premise, etc., etc.? And I suppose that's a statement I'd like you to comment on it, but my first question is with your capacity, how much excess capacity do you have? And with these new contracts that you're looking to win, which segments are they likely to be? My concern is that you'll need to just dump them into the wholesale market. So can you give us a little bit of an understanding? I'm trying to understand this industry change. Whenever I hear a major change with a customer, particularly as big as Woolworths, because Woolworths have always got motives to do it. They want to reduce costs. I'm worried about what this is going to do to the industry? Can you say -- if you can talk to us a little bit about that to calm us down a little bit, that would be really appreciated?

Yes. Thanks, David. You've sort of talked about adjective of major there. I think it's a change. I wouldn't characterize it as a major change. And the rationale that we have discussed with Woolworths on this is very much about supply security issues. It's very much a response to experiences that we all had through the last couple of years of disruption. And they have -- and quite rightly have a very high priority on their customer order -- sorry, customer service levels and security of supply. And as we work this through, then this is very much about protecting their supply security. So that's the motivation, and that's what he talked to us about and I completely understand that from their point of view. So yes, it is a shift. We won't be -- it's not going to put that sort of pressure on our system that we've got to go and just dump volume into the marketplace. That's not all going to happen. In fact, we've been very I guess, thoughtful about whether we look to place that value. And look, it's obvious we would go to the other retail customers, which we had, and we secured new business with them, and we're securing that in the regular segments of the market that you would expect that we would go after. So I would not -- from my point of view, this is a change, but I certainly wouldn't be reading it as a structural change in the market dynamic. And in fact, this whole issue of diversification of suppliers creates opportunity as much as it does create some strips away from our business. So I'm not concerned about it as a long-term issue. It's certainly in the short term, it's got some impact, which we've reflected in our guidance today. But again, I would characterize those as a manageable change, and I don't think it changes the underlying growth prospects of the industry or the stability of the market, or the attractiveness of the industry that we've talked about consistently. So yes, it's a change. So I wouldn't characterize it in the way that you'd probably characterized it in your statement.

Okay. That's pretty cool. So just understanding your guidance, you've got your volumes. So you've given us your volumes will be down at 1% to 3%. Can you give us a bit of guidance breaking it what you -- in that guidance, are you factoring in your core poultry net selling price to rise in FY '25? Or do you think that will remain stable and then you're going to have to work your costs a little bit harder because I'm assuming that there's going to be a little bit of negative leverage here because you've got lower volume 1% to 3%. So obviously, feed costs working your way. I'm trying to bridge what the earnings guidance makes. If you could help us with that bridge. Are you assuming in that council net sales revenue being relatively flattish, say, but you're looking at feed costs coming off that will support your earnings, but you've probably got a little bit of deleverage? Is that a good way of thinking about it?

Let Gary have a go on that one first.

So David Hi, we talked about showing growth in our net selling prices. So we expect that to come through. We also have talked about improvements in fee costs. So we expect that to come through. We expect to see some benefits of the automation and other good cost control coming through, which I can see why you're asking that. It's obviously, volume down, but then showing guidance that's higher than a record result. Clearly, something else has to change. So yes, it's all of those angles coming through.

And the next question is from Ajay Mariswamy from Macquarie.

Just on that FY '25 outlook, in terms of the improvement expected in QSR volumes. Would you be able to give us some color around whether that is expected to come through new customer contracts? Or is that general volume improvement on a like-for-like basis as QSR partners looked at promoting chicken given relative affordability?

Yes. We're really looking at a recovery in that channel. And in fact, interestingly enough, we've seen some of that in the first second or first 7 weeks. These large QSR customers, you've seen some of the reporting, and they're obviously doing what they can to help bring customers back, bring order sizes back. So the sentiment that we had talking with them is that we expect that we will see some general recovery in the channel across the course of the year. Hopefully, as there's some improvement in the broad economic environment. It's our comment there is not built on the idea of winning new business or significant changes to existing business.

And the other thing around the New Zealand business, how sustainable do we see that EBITDA margin given that we're all back to normal operating cadence? And can you comment on the operating environment there given the tough economic backdrop?

Well, I think if you look at the New Zealand business, and you look at -- they have had a good, consistent multiyear record of holding and improving margin. So I think that number is -- shows good improvement, and we would expect that we'll continue to maintain or improve into the future. And yes, the New Zealand economy is experiencing many of the same issues that we're dealing with within the Australian economy. So difficult cost-of-living environment, a lot of pressure on household budgets, people really looking at what their discretionary [ standard ] is like, the out-of-home consumption is down as it is in the Australian market. So the parallels are pretty similar between the 2 markets at the moment.

And the next question is from Phil Kimber from E&P Capital.

Just a question, and I'm really only looking for this directionally because I know you're not going to give specific half guidance. But you did point out you had an unusual first-half, second-half split in FY '24. Should we expect a more balanced between the halves in FY '25? Trying to understand how things might break down by half?

Yes, we don't expect to -- we expected to return back to that more normal range that we see with a bit of a higher first half and a lower -- slightly lower second half but not to the same degree as you see.

And then my second question, just you mentioned there to [indiscernible] question about pricing, and I was just trying to find the slide again here, it's on slide 10, which is a great slide Core Poultry Net Selling Prices. And I understand costs have gone up a lot. But is it fair to assume that Core Net Selling Prices are going to go up again in FY '25? I mean probably on that history, they've averaged sort of 520, 530 for a long period of time, albeit some of that was COVID, saw a significant step up in the last couple of years for reasons we're all aware of, but feed costs are starting to come back down. And one of the big drivers over decades of chicken consumption has been its price relativity to other proteins. So I just wanted to explore that pricing outlook a bit more.

Well, the price sell of other proteins hasn't really changed. So that, I guess, category tailwind still sits there. And as we've said on that guidance and outlook slide, we do expect to see some modest improvement in net-selling products across the course of the year. Clearly, the last couple of years have been quite abnormal in terms of the long-term cycle. So I don't think anyone would expect us to be achieving those sorts of improvements. Again, we are including some improvement in our outlook.

Our next question is from Richard Amland from CLSA.

I just want to have a pick at the cost of goods, please. The gross margin dropped pretty hard in the second half '24. And you've spoken about feed costs have moderated. There's been no mention of labor costs. So presumably, that's not been a factor. So your 2 largest costs are either flat or improving. Can you please shed some light on other parts of the business that have impacted the gross margin because the OpEx and the right-of-use assets haven't really moved collectively, except in your favor? So something else is going on that's really hit the profitability. And if you can provide some color to that, please?

Are you talking from Page 14…

No, I'm above that. I'm at gross profit. Just revenue less COGS, your gross profit fallen and this is the trouble with reporting 80% of your OpEx in one line, and there's a lot in there, but we don't know what it is, but it's had a material impact.

Yes. So I'll answer your question, Richard. I'm just trying to make sure I understood your question. So compared to FY 2023, which is what we've been reporting on. Yes, labor has gone up, which we call out. We also call out utilities, ingredients, R&M. We call all of those out, and then depending whether you're looking pre or post AASB 16, there was also a large impact of grower contracts coming back in the cost of sales that were previously being reported in interest and depreciation.

I thought those were going into the [Technical difficulty] the COGS?

Sorry, you cut out. I didn't hear your sentence.

I understand the reallocation of the grower contracts, but I was under the impression that was going into the OpEx of distribution and admin stuff, but you're saying it's going into the COGS line.

Absolutely. Which you can see fully through the appendix, you can see it split out there. It's always there for pre AASB 16. That's why I'm asking. But for post AASB 16, the cost that we kind of to grow Australian birds, which is part of the cost of goods sold. When it was treated as a lease, it got taken out of there and put down in depreciation and interest. You can take it offline if you want.

And the second sort of question is I'd echo the concerns put forward by one of the other guys earlier on regarding the Woolworths contract update. There's only 2 national providers of chicken or realignment of suppliers, interesting. But can you comment on would an offsetting impact through [ Coles ] contract update, would that be material enough for you guys to announce to confirm to the market that this thing has gone the other way? Or are we sort of just kind of sort of just watch volumes?

Well, I think your last one is the right one. We'll watch volumes and when it's appropriate, we'll inform the market on how volume overall is tracking. But there is -- I'll repeat what I said earlier, there is still opportunities for growth across the broader market, and there are specific opportunities in specific customers that we're working on. So I don't think there needs to be any cause for great concern. This is a manageable change. And it will work its way through the course of the year. And I think it doesn't really change the underlying characteristics of the market or our long-term prospects.

Our next question is from Craig Woolford from MST Marquee.

Good morning Andrew and Gary. You might expect I got to ask about the Woolworths contract. Can you just clarify what it means for your primary processed product or what's in the meat case versus frozen and other areas? Is it equally impacted across different product categories within the Woolworths business?

I'm not sure I totally understand the question. No, I mean our mix of products in...

The reduction in volume -- is it the reduction in volume across the broad portfolio that you supply to Woolworths, or is it just...

Well, I mean, we'll continue to provide to Woolworths the same portfolio of products that we've always provided. So it doesn't really affect the product mix that we're making for them. There's probably more to do with where they might allocate that volume on a regional or a store-by-store basis. But the product mix will stay very stable to what it is today. There will be some changes, there will be some modifications, but it's at the margins. And to add on what Gary said before, I mean, obviously, there is some impact on primary processing and we've moved to address that with a very significant attention to costs and other changes there to help mitigate some of those things. So again, that's factored into the guidance, which allows us to project that will show where we see a path forward to growth on this year's numbers. So we're able to mitigate those changes.

Okay. But I mean, what you said to saying in certain state-based outcomes where volumes are going to drop with or worse?

Yes, that would be my understanding of this probably is more and where it's allocated on a geographic basis rather than a product basis.

And moving on, our next question is from Eliza Mao from Goldman Sachs.

Just following on, I guess, from -- we've had the Woolworths agreement that it comes through in terms of looking to diversify their suppliers. Last period, we had major QSRs looking at the same thing. Is this a trend that you're seeing amongst your customer base that potentially will make it, I guess, more difficult to win incremental volume or heighten the potential to lose volume from existing customers?

We're talking about one customer. We're not talking about the entire market. So no, I don't think it has any impact on our ability to win volume elsewhere or to grow volume overall.

So there have been no discussions from other customers in terms of wanting to diversify their supplier base as well?

Actually, most of the customers have got modified diversified -- a reasonably well-diversified supply mix as it is. So no, I don't anticipate there being any particular issues coming out of other customers.

And then I understand you might be able to talk specifics on the contract, but kind of, I guess, on a general [indiscernible] or the industry level, are you seeing contracted supplies in terms of the tenure and timing that have shortened or have sort of moved to more variability?

Not particularly, no. There's been no real change in the length or duration of contracts across the market.

And our final question comes from Ajay Mariswamy from Macquarie.

Just a question around the shift to in-home and how we're seeing QSR volumes for Inghams looking to improve and the decline volumes away from Woolworths? Do we expect any margin impact there for the Australian business?

Not significant. No. Again, we've sort of we're covering that in our guidance. But I'm not foreshadowing any significant margin change away from what we normally used to experience.

We also have a text question from Michael Pate from Paradise Investment Management. The question is what pre AASB 16 EBITDA contribution should we expect from the acquisition in FY '25?

Seeing that's across stocks, and we've talked about around about $3 million from that.

That concludes the questions for today's call. I'll now hand back to Andrew.

Thanks, everyone, and I'm sure we'll chat with a number of you later during the day. So I appreciate your attention this morning. Thank you.