Inghams Group Limited (ING) Earnings Call Transcript & Summary

Welcome to the Inghams FY '26 Financial Results Briefing. [Operator Instructions] I'll now hand over to Ingham's Chief Executive Officer and Managing Director, Ed Alexander.

Good morning, and thank you for joining us today. As has just been said, my name is Ed Alexander, the Chief Executive Officer and Managing Director of Inghams, and it's my pleasure to welcome you to our financial year '26 results presentation. Before we begin, I would like to acknowledge the traditional owners, both past and present, as custodians of this land that we are meeting on today. As announced in May, after 7 years with Inghams, Gary Mallett will retire from his role as CFO with Grant Douglas joining us as new CFO from October. I'm joined today by Andrew Just in the capacity of Interim CFO, who will address the financial aspects of the results. Andrew and I will take questions at the conclusion of the presentation. The headline for financial year '26 is that earnings were below the prior year and below the expectations that we had entering the year. We revised our guidance at the end of the first half, and we then delivered to that revised guidance with underlying EBITDA pre-AASB 16 of $186.4 million, underlying NPAT pre-AASB 16 was $56.6 million. As I said at our Strategy Day in May and restated just now, those outcomes are not where we want the business to be, nor do they reflect the true potential of this business. But they need to be considered alongside the progress that we made, specifically diversifying the customer base, strengthening the balance sheet and improving the underlying operating platform as reflected by an improvement in underlying EBITDA from $80 million in half 1 to $106.6 million in half 2. The half 2 results should also be considered in the context of the Middle East conflict and a sharp deterioration of wholesale price in the final 6 weeks of the financial year. We returned the group to volume growth with core poultry volumes up 1.9%. Net debt reduced by $27.1 million to $403.3 million, supported by improved working capital and cash conversion. The Board has declared a final fully franked dividend of $0.061 per share, taking total FY '26 dividends to $0.101 per share and representing a 70% payout ratio. So while the earnings result reflects a difficult year, we exited FY '26 with a more stable operating platform, a more diversified customer portfolio and greater clarity around where the next phase of value creation is going to come from for Inghams. There are several key takeaways for FY '26 that are shown on this slide. First, we returned to volume growth. Volumes increased across both Australia and New Zealand, supported by new customer wins and growth across retail, QSR and foodservice channels. Second, we materially strengthened the customer portfolio. Australian retail volumes, excluding Woolworths, increased by 17.2%. That diversification is strategically important and creates a broader platform for future growth. In New Zealand, our brands of Inghams, Waitoa and Bostock continue to shine, driving over 100% of the freezer category growth in that market and achieving year-on-year growth of 26% through the frozen category. Third, we delivered substantial productivity improvements. We achieved $82 million of cost savings through procurement and continuous improvement, slightly above the top end of our range of $60 million to $80 million target. Fourth, we strengthened cash and working capital performance. Australian processed poultry inventory reduced by $32.4 million and cash conversion improved to 105.5%. These are meaningful achievements, but clearly not yet sufficient. Our operational performance is not sufficiently consistent. Waste across the supply chain remains too high. There's further opportunity in yield, labor productivity, plant reliability and cost to serve. And that is where our attention is now firmly focused. I want to spend a moment upfront on biosecurity and H5N1 Avian influenza, because this is a real and a significant risk for the poultry industry as has been well documented in recent media. We take this risk extremely seriously, and we are prepared for it. One of Inghams' fundamental strengths is the design of our network, as you can see there on the slide. We operate across multiple geographically separated regions with distinct clusters spanning feed mills, farming, hatcheries, processing facilities and distribution infrastructure. That means an outbreak in one location does not automatically translate into disruption across our broad network. We have the ability to isolate affected areas, protect other parts of the network and redirect production and supply. We've also invested considerable effort in prevention, surveillance, scenario planning and response protocols. Senior management have spent time in Europe understanding learnings from their experience. We know what we would do. We know how we would respond and we know where the critical decisions ultimately need to be made. I want to be equally clear on our guidance. Our FY '27 guidance assumes no material disruption from H5N1 avian influenza. There is no sensible way to predict precisely where or when an outbreak may occur. What I can say with confidence is that Inghams enters this period of time with the most resilient national network, well developed by our security controls and a team that is prepared to act quickly and decisively if required. We can't fully eliminate the risk, but we can control how well prepared we are for it. When we introduced our Horizon strategy, we were clear that sequence matters, stabilize first, optimize second, grow third. The scorecard you see here is how we intend on transparently measuring and reporting on our progress against strategy. In the stabilized phase, we have achieved some good foundational outcomes, many of which I've already referenced, including a return to growth, a reduction of inventory and improvements to customer service. The optimized phase is now the major area of focus, and we have significant work to do. Optimize is fundamentally about getting more value out of the existing core business. This means better productivity, better yields and better mix. As you can see, while some progress has been made, there's more work to do and performance remains below potential. And finally, growth. Australian retail volumes, excluding Woolworths, increased by 17.2%, demonstrating the progress we are making in diversifying the customer base. We've begun investing behind a small number of differentiated growth platforms where we have a right to win, and I will discuss these at the back end of the presentation. Our return on capital was lower in FY '26, improving returns from our existing assets is therefore central to the next phase of Horizon. This scorecard is how we intend to hold ourselves accountable. It is deliberately focused on the operating measures that translate into value per bird, strongest cash generation and ultimately improved returns. This EBITDA bridge provides the clearest picture of what happened in financial year '26. Volume and pricing contributed approximately $24 million, continuous improvement and procurement delivered $82.3 million of savings and lower feed costs provided a $27.6 million benefit. Those are meaningful outcomes and demonstrate that the commercial and cost out engines of the business are working. However, those benefits were more than offset by significant cost inflation. The significant drivers include $116 million of cost inflation, $50 million of which relates to volume and the remainder of embedded inflation, $13 million of gross Middle East-related transport and packaging costs that will continue through FY '27 and $40 million of one-off items required to stabilize the business. That included costs associated with the reduction to excess inventory and costs associated with the onboarding of new customers and new products. The key distinction is that some of these impacts were external, some were costs associated with resetting the business and some were execution gaps that we need to fix. Importantly, in H1, as I referred to earlier, we generated $80 million of EBITDA, and this increased to $106.6 million of EBITDA in H2, reflecting execution of our plan. Turning now to volume. Group core poultry volumes increased 1.9% with the business returning to growth during Q2 and momentum strengthening through the second half as new business was onboarded and we lapped the Woolworths adjustment, which took place in Q3 of financial year '25. Importantly, that growth was broad-based with Australia growing by 2% and New Zealand growing by 1.5%. Across our channels, retail grew by 1.1%, driven by non-Woolworths growth of 17.2%. QSR volumes increased 4.1%, supported by the onboarding of the Nando's contract. Australian Foodservice increased 10.3% and New Zealand export volumes increased 41.9% as offshore markets reopened. Overall, we exited FY '26 with a broader customer base, a stronger volume platform and a stronger volume platform than we entered it. Before I hand over to Andrew, I'll talk briefly to pricing. Group net selling prices increased 1.4% to $6.40 per kilogram. In Australia, NSP grew 2.4%, while New Zealand NSP increased 1.4% in New Zealand dollar terms. Pricing increased across all channels with the exception of QSR, which declined modestly due to customer mix and contract timing. As you can see from the chart, Australian wholesale pricing remained above the prior year for most of FY '26, but moderated materially during the final 8 weeks of the year as Australian conditions softened. This has continued through the first 7 weeks of financial year '27. With that, I'll hand over to Andrew to take you through the financial results in more detail.

Thanks, Ed, and good morning, everyone. Starting with our profit on an as-reported basis. Ed has already outlined the growth we delivered in both volume and net selling prices versus PCP. Revenue for FY '26 was just over $3.2 billion, representing growth of 2.4% compared to the prior period. This was driven by higher core poultry volumes and modest price growth. External feed revenue declined 8.7% due to lower sales volume and pricing, reflecting the pass-through of reduced feed input costs to our customers. Beyond the half 1 actions Ed noted to reduce inventory levels, there were significant inflationary pressures across our cost base. Total costs increased 6.2% compared to the prior year, comprising volume-driven production increases, structural input cost inflation, integration costs from new customer business and conversion of contract grower arrangements. We also saw a further benefit from lower feed costs during the period with internal feed costs declining $27.6 million. Depreciation and amortization declined 16.6% to $152 million, largely due to the conversion of grower contracts to variable performance-based arrangements in prior periods. These contract conversions also contributed to a decline in net finance expenses to $77 million. Net profit after tax was $34.6 million, down 61.5% versus PCP. Tax expenses reduced with lower earnings and included a $12.7 million tax provision. Inghams has lodged an objection to an amended ATO assessment relating to R&D tax offset claims paid for the financial years 2019 to 2021. The tax provision is based on assessing the likelihood of a range of outcomes that includes a successful objection. This amount has been treated as a significant item excluded from underlying NPAT due to its size, nature and relationship with prior periods. Inghams intends to fully defend its position. Turning now to the balance sheet. As we outlined at our half year results, we've made significant progress on addressing higher inventory levels. Australian processed poultry inventory was reduced by $32.4 million on the prior period, reflecting the deliberate reduction of elevated stock levels. Biological assets, on the other hand, increased $4 million, reflecting expected sales growth coming into FY '27. Trade and other receivables declined $36.6 million, driving an overall working capital improvement of $46.4 million with further potential to improve as planning capability strengthens. Capital employed declined $59.2 million to $648.8 million, driven by the improved working capital results, lower PP&E and the benefit of grower contract conversions to be variable performance-based. Grower contract AASB 16 impact has become very small, as you can see in the appendices to this presentation. As a result of these actions, net debt declined $27.1 million to $403.3 million, down $63 million from the half 1 result. While leverage increased from FY '25 to 2.2x due to lower earnings, the absolute reduction in net debt reflects the effectiveness of our capital management and a clear reduction from half 1. Our objective for FY '27 is to reduce leverage back within our 1 to 2x policy range through improved earnings and ongoing capital discipline. Tax balances increased to $6.1 million, mainly due to installments based on prior year profits, which reduced during the year. Moving now to our cash flow performance. Working capital management delivered material cash benefits during FY '26 and operating cash flow of $313.7 million remained strong despite the lower earnings. As a result, cash conversion improved significantly to 105.5%, an increase of 860 basis points. Capital expenditure was $77.4 million and below our $80 million target, and I'll discuss this in a bit more detail on the next slide. During the half, we paid the interim fully franked FY '26 dividend of $0.04 per share. And finally, tax paid reduced due to the lower earnings and an FY '25 refund, but it also included in tax paid as part of the R&D tax objection process. Inghams entered into an arrangement with the ATO, whereby 50% of the tax in dispute was paid to minimize interest if the objections are disallowed. Now turning to our capital expenditure. Our capital allocation continues to reflect our strategic priorities and disciplined approach to allocation and overall expenditure. Sustaining capital of $28.9 million was approximately 44% of underlying pre-AASB 16 depreciation. As we noted at the half, while this is somewhat lower than previous period, some of our investment expenditure is considered to also have a maintenance element to it. Optimization capital of $6.8 million included final amounts for the Lisarow Fully Cooked line upgrade, expanding capacity and enabling high-value product development and New Zealand automation projects, which drive yield and labor productivity improvement. Our growth and strategic investments are focused on automation, strategic upgrades and improved processing capabilities. We progressed the Queensland and South Australia Traypack automation projects, upgraded to Western Australia One Touch processing, which is an important enabler for WA's self-sufficiency and retail processing, and we largely completed the advanced ingredients facility in Victoria, which has established a high-margin pet food ingredients capability. And we've been investing in further capacity at Bostock Brothers in New Zealand, which in part will support the introduction of this premium organic brand into Australia during FY '27. Moving on to feed costs. The global feed commodity market is experiencing a pricing shift heading into FY '27. Global soybean production is projected to reach a new record in calendar '26, '27. Elevated global fertilizer and diesel prices are encouraging farmers to plant soybeans primarily at the expense of corn. Growing conditions remain generally favorable, particularly in Argentina and Brazil, despite some drought impacts in Brazil's Southeast region. Reflecting strong underlying demand, soybean prices are forecast to increase modestly in '26, '27. Wheat markets present a contrasting picture with global production forecast to decline marginally in '26, '27 from record levels in '25, '26. The Northern Hemisphere conditions are mixed. In Australia, wheat production is expected to decline on the prior period, particularly in New South Wales and Queensland, while West and South Australia conditions remain favorable. Wheat prices are forecasted to increase in '26-'27 due to this tightening supply. If we now move on to the segments, firstly, with Australia. Australia with revenue just under $2.7 billion, an increase of 3.5% versus the prior year, driven by volume and pricing growth, partially offset by lower byproducts and external feed revenue, as I mentioned. Core poultry volumes grew 2% with growth across all major channels. Core poultry net selling prices increased 2.4% to $6.50 per kilo, reflecting disciplined pricing and despite the wholesale market softening in the last 7 to 8 weeks of the period. Australian EBITDA was $232.4 million, down 29.2% with the underlying pre-AASB 16 EBITDA margin contracting to 5.1%. The decline in earnings on PCP reflected the cost inflation across packaging, ingredients, cooking oil, freight and labor, integration costs from new customer business onboarding, conversion of grower arrangements to variable performance-based contracts, largely offset by lower depreciation and interest and partially offset by $22.7 million in lower feed costs. On to New Zealand, who delivered revenue of NZD 573.1 million, representing 2% growth versus the prior year. However, this translates to a 3.3% decline in Australian dollar currency terms due to the strong AUD appreciation. Core poultry volumes increased 1.5% with growth across the wholesale, export and QSR channels and core poultry net selling prices increased 1.4% to NZD 6.81 per kilo. New Zealand EBITDA was $74.9 million, up 6.8% in NZD. The underlying pre-AASB 16 EBITDA margin moved to 9.5%. Costs increased just 0.2% on an AUD basis, reflecting the benefit of lower grain pricing, offset by volume growth and general cost inflation. SG&A costs declined 16.8%, reflecting the effect of acquisition-related integration costs included in the prior period and the further centralization of group functions. The FX movement reduced AUD EBITDA for New Zealand by approximately $3.5 million versus the prior period. I'll now hand back to Ed.

Thank you, Andrew. This next slide brings the strategy together. FY '26 is the base. The first job for us as a team was to stabilize the business by returning to growth, improving operational efficiency and reducing working capital. We've made progress with more work still to do. The next phase is to optimize by strengthening the core processes underpinning how we work. This covers planning transformation, a consistent operational excellence system, network optimization, revenue mix management capability and better and improved use of data and artificial intelligence, effectively introducing new capabilities that enable improved margins over time. Beyond that, we grow through differentiation and new sources of value. I've made no secret of the belief that over time, return on capital is fundamentally driven by the creation of distinctive and consumer-centered propositions, premium propositions, Bostock Brothers, Just Meat Protein and other platforms where we have the right to win. The sequencing is important. We do not need to choose between fixing the core and growing the business, but we do need to earn the right to grow by improving returns from the assets that we already have. Three key capital projects deployed in financial year '26 are now delivering operational benefits and unlocking value. At Osborne Park, our One Touch project has seen automated cut-up lines installed, which have created a fully integrated single-line processing flow, driving efficiency and labor productivity. Having been over in Osborne Park this week, I can say it's an impressive transformation of the facility to say the least. At our Lisarow further processing facility, we have invested in a new fryer and oven, which provides critical new capacity to support a market transition to fully propositions. This is delivering $4.6 million per annum in benefits and creating new product opportunities. Finally, we have installed automated tray packing lines in South Australia and Queensland, delivering efficiency and labor productivity improvements, along with an improved customer proposition. Whilst only recently finalized, all 3 projects on the page here are now operational. This next project will be familiar to those of you who joined our May Investor Day. This project exemplifies our strategy of maximizing the value per bird, which is premised on harvesting more usable material from every bird processed and then redirecting that material into the highest value channel. Our advanced ingredients facility in Victoria represents a tangible investment to deliver on this strategy. Backed by a new customer contracts, we have invested $8.5 million in a new ingredients facility at Somerville in Victoria. First orders commenced on the 31st of July 2026. We're targeting an incremental $5 million of EBITDA on the $8.5 million investment within the first year. The investment we have made in this type of freezing capability will also allow us to scale this opportunity as we develop new strategic partnerships with pet food manufacturers. Alongside optimizing the core, we're establishing positions in a small number of high-value growth platforms where we believe that Inghams has the structural right to win. Waitoa Bone Broth is an example of extending a market-leading free range premium brand into an adjacent category. Our investment in Just Meat Protein gives us exposure to new applications for protein -- for poultry protein and a differentiated technology platform. And Bostock Brothers provides a premium organic proposition that we are well progressed with expanding into Australia in the new calendar year. We are deliberately being selective. The objective is not to build a long list of incremental innovation projects that cannibalize the core. Instead, it is to focus attention on propositions where scale, integrated supply chain brands and customer relationships give us an advantage and where the opportunity can create attractive returns over time. Today, we are providing guidance for FY '27. We are changing our earnings guidance metric to underlying EBIT, which is a post-AASB 16 measure from underlying EBITDA pre-AASB 16. We will continue to provide the same detailed reconciliation disclosures in the appendices of future results presentations. Our guidance for FY '27 is for underlying EBIT of between $155 million and $180 million, representing growth of between 1% and 17% on the prior year. That outlook reflects a number of factors. We expect group core poultry volumes to increase, supported by underlying market growth and confirmed new business. Operating costs, excluding feed, are expected to increase by around 4% to 5%, reflecting volume growth, general inflation and the impacts of the Middle East conflict. We currently expect those Middle East impacts to be approximately $30 million, predominantly through higher fuel and packaging costs. As we noted earlier, feed is also expected to be a significant headwind in FY '27, currently estimated at approximately $40 million to $50 million based on current pricing. Against those headwinds, we expect benefits from pricing, continuous improvement, procurement and the operational improvement initiatives now underway across the business. CapEx is expected to remain broadly in line with FY '26 at approximately $80 million. So while FY '27 is clearly not without significant external headwinds, we're not relying on the external environment to improve our performance. Our focus is firmly on what we can control and on driving sustainable improvements and performance over time, improving farming performance, increasing yield, reducing waste and cost to serve through our supply chain, optimizing customer and product mix and maintaining disciplined capital allocation. We enter FY '27 with a strong operational foundation, a clear set of priorities and better visibility of the value that remains available within the business. That concludes the formal presentation. I will now hand back to the operator, and we will take your questions. Thank you.

[Operator Instructions] Our first question comes from Craig Woolford from MST Marquee.

I wanted to ask about bird flu. I'm sure you're not surprised by that. But perhaps 2 things come to mind. One is, are you seeing any impact on demand? In other words, consumers just concerned about consuming poultry? And secondly, when I looked at other countries, there seems to be a far more impact on the egg market than the chicken meat market. Is that -- you said you were in Europe. Is there any insights as to why there might be that difference?

Yes. Thanks for the questions, Craig. Yes, I mean, obviously, bird flu is very top of mind for us along with seemingly a great deal of the media. I mean, look, I'd say, firstly, we're not seeing any impact on demand at the moment. I think it's been well communicated that there's no food safety issue pertaining to bird flu. And certainly, we're not seeing that through any of our channels in terms of that impact. In relation to -- you're quite right, you certainly see a greater impact across the egg producers. And I say amongst other factors, there's 2 things that predominantly drive that. One is simply the age of the birds and that is an older bird is slightly more susceptible to catching Avian flu. And the second is that I think more generally speaking, there's a lot of sort of biosecurity controls that can be in place across our industry. But yes, we've certainly observed that across Europe as well.

The comments you made about the wholesale market with pricing, you can see in the chart, the pricing starting to dip. What do you put the shift in pricing in the wholesale market down to? Why is it starting to drop?

Yes. I'd say there's probably a couple of drivers, Craig. One, as you know also well, wholesale pricing is driven by supply-demand economics. I'd say there was too much production flowing in when producers saw a very attractive wholesale price in the market at the back end of Q3. I think there were more processing volumes that were set for, which led to the decline in quarter 4. I'd also say, there's been as Inghams has one business, it's created some instability across the industry as I would have said previously, at some level, instability, whatever way you turn it is a great for wholesale market. It just results in volumes and flows changing throughout, which impacts economics. We've certainly experienced pretty soft conditions through the first 7 weeks of financial year '27 and therefore, appropriately pulling levers to start addressing that, which will start impacting from the beginning of quarter 2.

And my last question is sort of related to that is just around the inventory position you now have. It seems like you're happy with you put a green dot against inventory. Is it at a position that's suitable? Or does it still need to drop further in terms of inventory levels?

Yes. The green there is probably more acknowledging, obviously, the efforts that we went to reduce it on a PCP basis. I'd say that we -- I mean, sorry, I'll say 2 things. Firstly, pleasingly, despite the oversupply in the wholesale channels, we're not in any material way adding to our inventory position at the moment. So I think there's -- as an organization, we've learned from previous mistakes. At the same time, I also think inventory can continue to reduce from a working capital perspective. I personally believe -- I believe that we are still carrying too much inventory.

The next question is from Ben Gilbert from Jarden.

Just interested in the decision around the factoring side of things, introducing that into the receivables book? And are you planning to continue to do that? And if you could just run us through how the economics in terms of we think about the P&L impact of that as well?

Okay. Thanks, Ben, for the question. So we did pull a variety of working capital initiatives as we do throughout the year. One we just discussed was around the inventory side having an impact on that. And we also did have a receivable financing facility in place as well. This is with selected customers that we have and effectively gives an early payment associated with those customers with some of their longer-term side. And it's really that combination of inventory reduction and that receivable payable that improved the net debt coming through into our results.

And what was the cost from the P&L side? How much did you have to pay for that?

So I'm not sure I can share the exact amount that we pay for that, but it's less than our syndicated interest facility that we have coming through. And it's normally for a few -- a number of days, typically around 2 weeks that we would be using that bring forward.

Okay. And the second one for me, just maybe just interested in the guidance, and so I'm going to look on the way you've done it now, but the exit rate that you had for Q4 probably looks like you're pushing above $220 million based on Q4. You obviously had a number of higher fuel costs, et cetera, already coming through in that. What's sort of the driver of that run rate moderating through the year? Is it around the feed side of things? Is it the ongoing strength of ongoing costs? Because it looks like -- as I said, it looks like you exited from a run rate standpoint, a bit better than the top end of that range you've given.

Yes. No, that's fair. And you recall that the EBITDA profile that we provided at the Strategy Day clearly showed our 2 best months last year were February and March, ultimately before the Middle East crisis hit. We certainly saw that run rate trail off in June, and that was really driven by the change to wholesale economics. In terms of then what's really driving guidance, I think you're quite right. The -- one of the reasons for the broad range and probably the slightly lower-than-anticipated guidance, one is just cost drivers, and that's predominantly Middle East as well as the feed cost in of $40 million to $50 million. And collectively, we're saying that kind of $70 million incremental versus what we probably anticipated at the beginning of the calendar year. And the second one is just wholesale pricing. So yes, wholesale pricing, it will improve. That's what happens in the industry. We're taking steps to reduce our exposure to that area of the market, but that's certainly playing in our mind relative to FY '27 performance.

The next question is from Richard Barwick from CLSA.

Just following on, just thinking about the commentary already provided on the wholesale pricing. And it seems like the prices improved, supply increases, that puts downward pressure back on prices. Is there a flow-through here? Or is there any sort of indicator what we're seeing in wholesale pricing? Will that impact broader chicken pricing, I guess, is the question?