Lynch Group Holdings Limited (LGL) Earnings Call Transcript & Summary

Okay, I would now like to introduce my fellow directors -- should I just mute that? [ Do you want me to mute ]?

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Thank you. We will address any questions on the specific resolutions as we consider those resolutions. There will also be an opportunity to address any general questions at the end of the meeting. You are reminded that only shareholders or their proxies present in the room, attorneys or their corporate representatives are entitled to ask questions. I will now turn to my address as the Chair of the Lynch Group. FY '23 witnessed the post-COVID bounce-back in Australia, with normalizing supply and logistics driving a recovery in margin. China had a much more volatile period, having been through drastic social measures to contain the virus in the first half before those were suddenly abandoned in the second. The initial post-lockdown spending burst petered out by June as macroeconomic factors became a drag on earnings in China. FY '24 was in large measure a continuation of these factors. Australia continued to experience a normalization of both product availability and supply costs. Airfreight remains elevated compared to pre-COVID levels, but other measures have seen a nearly full restoration of margin. Our supermarket customers continued to grow their overall market share, proving the resilience of both the product and the channel. End customer confidence in product quality, when married with the convenience and value offered by the supermarket channel, is likely to drive penetration rates closer to overseas markets. The group also supplies the florist and general wholesale channel, which was impacted by slowing consumer spend. China has not recovered from the economic headwinds evident late FY '23. Whilst the property crisis has likely bottomed, a continued lack of consumer confidence and demand persists. The government continues to search for means to stimulate demand and recognizes that increased domestic consumption is needed to rebalance the economy, yet no tangible progress is yet evident. Turning to Australia. The core of the Australian business is the national supply of floral and potted product to our supermarket customers. Whilst the group has been supplying the Australian supermarket channel for over 30 years, the supermarket floral category continues to have significant long-term growth potential. In the U.K., for instance, more than 50% of all floral products are sold through supermarkets. In Australia, that share has grown from 19% to more than 28% over the last 5 years, as the quality and value proposition of supermarket floral products has resonated with customers; and as value-added bouquets, arrangements and potted products continue to drive gifting demand, particularly during key events. Our scale, innovation, worldwide sourcing capability and continued investment in our in-store merchandising teams have greatly changed the perception of supermarket flowers, providing key support to our supermarket customers as they drive increasing share of the overall floral industry. The group continues to optimize its merchandising system to further improve merchandiser productivity and allow the business to capture increased sales opportunities while minimizing in-store waste. The group, with one of the largest independent merchandising teams in Australia, derives approximately 40% of its sales from sale-or-return stores, where the group heavily influences in-store range, volumes and presentation, in conjunction with our supermarket customers. Like prior years, growth in SOR store revenue was ahead of core store growth, the core stores being where ordering and display are managed internally by the supermarket customer. The value the group brings to its supermarket customers is our ability to plan and manage a complex category. We trade in a highly perishable seasonal product that is sourced from Tier 1 growers in Australia and from around the world. Growing conditions can often vary from season to season, and supply chains are prone to disruption. The group continues to focus on increasing sea freight as an alternative to air where quality can be maintained. This has the potential to make a material difference to the landed cost of product as well as reducing our carbon emissions. Our in-house quality team works closely with Australian biosecurity to ensure that imported product is effectively treated and screened to protect Australia from damaging pests and disease. We work actively with government authorities in each of our major countries of origin to achieve world's best practice in biosecurity process design and execution, minimizing rejection rates in Australia and building confidence in the quality of imported product. The group is the largest importer of floral product in Australia. Our; Markets sites distribute locally sourced products alongside imported lines to other wholesalers and florists. With our hub operations in Sydney, Brisbane, Adelaide and Perth; and 2 satellite sites in Newcastle and Canberra, our Markets operation leverages our procurement scale and provides additional flexibility in how we manage product flow. Additionally, the Markets business provides important real-time market intelligence on price and product availability, which feeds back into our supermarkets business. We continue to look at opportunities to expand our Markets footprint. China. Due to historical product quality issues associated with a fragmented and developing grower base, coupled with multilayer ambient product distribution networks, the consumer market for floral products in China has been slow to develop. Today, the floral market in China is many times the size of most Western markets. And consumer buying trends centered around self-consumption and gifting, particularly during key event periods, are emerging quickly. Per capita spend rates on floral product remains low on a comparable international basis. The group's China operation is the largest grower of premium flowers in the country, with 4 farms and a processing facility located in Yunnan province and distribution and bouquet-making facilities located in Shanghai and Guangzhou. The group's access to premium flower genetics, investment in advanced growing infrastructure and systems and direct distribution via its own contracted cool chain logistics provides year-round supply of a high-quality and unique product range to Chinese retail and wholesale customers at competitive prices. Our products are distributed across China throughout -- through wholesalers, online and off-line retailers; florists, via our web shop; and a small but growing B2C business. Export markets include Australia, Japan and Southeast Asia. The poor trading conditions experienced towards the end of FY '23 persisted throughout the whole of FY '24. Weak conditions domestically, impacted by the prolonged property downturn, higher unemployment levels for younger Chinese and low levels of consumer confidence and spending, meant realized pricing remained weak and below the prior year's levels across the financial year. Given China is an emerging market for discretionary spending on the floral category, we see a different picture to the more mature market in Australia where the category has proven to be resilient up and down economic cycles. China has been further complicated by the addition of new supply. In addition to the group's own greenhouse expansion over the last 3 years, a number of new large-scale projects have been established. We believe that we have a competitive advantage in growing and remain the lowest-cost producer of scale. This means that we continue to generate positive cash flow from operations, while many of our competitors will have significant cash deficits. Rose prices fell 18% on the year prior and 32% on FY '22. The fixed-cost nature of growing means the group is well leveraged to the upside when prices do recover. This is likely to happen from a combination of capacity withdrawal, increased penetration rate of floral products and a general improvement in consumer sentiment. In the meantime, we have paused our growth CapEx until we see a sustained improvement in operating conditions. We continue to value add our product and reduce the correlation with market pricing. This includes expanding the retail channel, including SOR stores, in China; increasing production of bouquets in Shanghai and Guangzhou; and the establishment of an online B2C business called Farm Flowers. Expanding our distribution footprint beyond Kunming, Shanghai and Guangzhou will support improved selling price and achieved margin. We would again like to recognize and thank our staff for the incredible role they played in our business during the year. Their continued ability to find innovative solutions to problems, create beautiful designs and produce year-round-quality product makes the group a global leader in floral supply. Now I'll hand over to Hugh Toll for his address as CEO and Managing Director of Lynch Group.

Thank you, Patrick. And good morning, ladies and gentlemen. Today, I will talk to you about our performance over financial year 2024, update you on the execution of our current growth strategies, outline the group's progress on sustainability and provide a trading update and outlook for the current financial year. Across FY '24, our committed teams delivered outstanding operational execution whilst continuing to advance our strategic initiatives across the business. In China, our group faced a challenging operating environment, with consumer sentiment remaining low during the year translating to low pricing on key products. In Australia, margin recovery initiatives and revenue momentum delivered a strong uplift in EBITDA with year-on-year improvement of 50%. The group's full year results finished in line with the updated guidance provided to the market in early June at both revenue and EBITDA. The results reflect continued recovery in margins in our Australian operations and a decline in China's performance due to ongoing weakness in consumer confidence and demand impacting realized pricing across our sales channels. Our FY '24 results reflect 1% growth in group revenue year-on-year; 2% when adjusted for an additional week of trading in our Australian segment in the prior year, FY '23. Australian customer demand remained resilient across the year, with the bulk of our demand generated in the supermarket channel where we again achieved particularly strong performance from our sale-or-return store network. Australian revenue growth was adversely impacted by declines in our wholesale markets channel which predominantly services florists. China revenue declined across the year off the back of weaker domestic and export pricing on higher production volumes. Subdued economic conditions impacted by the prolonged property downturn and low consumer confidence and spending meant pricing remained weak and below last year's levels across the financial year. Group EBITDA of $39.6 million fell short of last year's result by 7%. Australia's EBITDA result improved by 50%, with margin recovery initiatives across procurement, freight and labor delivering the strong rebound in earnings. China's earnings decline reflected persistently weak trading conditions, with real caution in consumer spending having a significant impact on realized pricing. The strength of our operating platform and team and the quality and reliability of our products enabled an $8.6 million EBITDA contribution, set against extremely challenging market conditions. The group recorded a noncash impairment charge against China's carrying value of goodwill of $30.1 million at the half year of FY '24. The group's confidence in the positive medium- to long-term outlook for the China floral industry remains unchanged. For the year ended 30 June 2024, the Australian operations achieved revenue of $329.6 million, 3% up on FY '23 when adjusted for an initial -- an additional week of trading last year. FY '24 EBITDA of $31 million, 50% up on the same period last year, reflected ongoing margin recovery initiatives and the moderation of international freight rates across the first half of the year. Customer demand for supermarket floral products remained robust across the year despite increasing pressures on consumer confidence and household spending. Sale-or-return store growth continued to outperform core store growth across the year. Our key second half supermarket events across Valentine's Day and Mother's Day were delivered in full and achieved very pleasing sell-through rates in store for our customers. Demand from other wholesale and florist customers remained subdued but stable across the year, with florists in general facing challenging trading conditions. Australian EBITDA margin recovery initiatives progressed to plan across the year. Steady improvement to overall buying rates via reductions in freight, ongoing range management initiatives and greater labor availability combined to deliver improved EBITDA performance. The bulk of international airfreight reductions were realized in the first half of the financial year, with rates on key supply geographies remaining steady across the second half but elevated compared to pre-pandemic rates. China achieved revenue of $85.4 million, 12% down on FY '23, with EBITDA of $8.6 million down 61% on FY '23. China's revenue decline resulted from a combination of strong farm production volume growth which tracked at around 10% across the full year; material declines in domestic pricing, which saw average pricing on our key rose products fall by around 18%; and export pricing declines reflecting the pass-through of reduced export freight rates to Australia. The FY '24 farm development program takes our total greenhouse space in production to 84 hectares. Weakness in local China floral pricing continues to be driven by very low levels of consumer confidence and spending, which is largely being impacted by the prolonged property market downturn and higher unemployment levels for younger Chinese. Discernible volumes available on market via auction have also been elevated around key event windows. Operational execution across growing, processing, sales and distribution continues to be managed efficiently and effectively, delivering a solid volume uplift over the year, with costs well controlled. Strengthening our downstream distribution capabilities remains a key strategic focus for us in China, allowing us greater opportunity to value add our products and reach a larger universe of customers across all market channels. In this vein, we successfully commissioned our second east coast production facility in Guangzhou early in the second half, which has immediately provided additional sales reach in this large market across our wholesale, retail and web shop channels. We are pleased to have issued the group's second annual sustainability report, FLOURISH, as part of our FY '24 annual report. This report provides detailed insights into the group's investment, activities and focus areas across our environmental, social and governance initiatives. Across FY '24, the group's multidisciplinary sustainability team focused on establishing visibility, baselines and processes that underpin our ESG platform. Some foundation achievements of this team include the establishment of 6 material sustainability pillars that constitute the framework for our longer-term ESG roadmap. These are waste, carbon emissions, water, packaging, biodiversity and people and community. Our team also formalized processes to approve and fund ESG projects and initiatives and formulated and released the group's public sustainability policy. We are proud to have entered into 2 important flora conservation partnerships with the Botanic Gardens of Sydney and the center for ecological restoration in Kenya. The botanical gardens of Sydney is custodian of 3 significant botanic gardens in New South Wales. And our support extends to the gardens' mission to protect and preserve Australia's native flora through research, land and habitat restoration. The center for ecological restoration in Kenya is a recently established not-for-profit organization in Kenya that has a core mission of restoring biodiverse ecosystems by engaging people, sharing knowledge and conserving local native flora. We continue to closely monitor and manage our emissions and energy consumption following the establishment of baseline emissions data in the previous year. Recognizing that a material contributor to our scope through emissions is air freight into Australia, we're investing in and have commissioned primary research and trials to examine the feasibility of enhanced sea freight capabilities. Waste reduction and management stands as a foundation of our sustainability efforts, reflecting our commitment to efficient resource utilization and environmental stewardship. Encouraging high staff engagement in our waste management activities has had significant positive internal cultural impacts and provides the model for rollout to a broader selection of sites. We launched our internal people plan, a 3-year working strategy to meet the business' long-term goals, with focus areas including diversity and inclusion; health, safety and well-being; development and succession; talent acquisition; engagement and retention; and management and compliance. The health and safety of our people remains a key priority for the group, with ongoing investments made during the year in our WHS roadmap to continue to support and protect our people. Following the recent developments on Australian sustainability standards, we are in the process of determining the nature and form of disclosures required under AASB sustainability standards. And our future reporting and disclosures are expected to evolve to achieve ASRS S1 and ASRS S2 compliance by the relevant adoption date. In August, we updated the market on performance and outlook, noting consistent margins in Australia and China margins continuing to be impacted by low domestic pricing. Current trade settings for the first half FY '25 are as follows. In Australia, ongoing stable floral demand trends with our major supermarket customers, with revenue growth expected to be around 4% for the first half. Demand for lower-priced supermarket floral products continues to be positive, with new brands launched during the first half delivering positive sales momentum. We're expecting stronger revenue growth across the second half driven by planned volume increases for the key Valentine's Day and Mother's Day events with our major customers. Potted products continue to underperform relative to floral, reflecting a downward reset in consumer demand for these lines following the peak demand years across COVID. Australian EBITDA margin has remained in line with last year levels across the first half. The SAP system upgrade is now well progressed, with the project's first phase expected to complete within FY '25 with costs in line with August guidance of approximately $1.5 million. In China, we note the Chinese government has announced policies designed to support economic growth and improve consumer confidence. To date, consumer confidence and spending remains weak for discretionary items, with no discernible change in conditions or sentiment during the half. China revenue is expected to increase on the first half of FY '24 from additional tulip and export volumes, offset by declines in domestic rose ASP of around 5%. Seasonal pricing improvements are evident heading into the winter season, with higher demand expected through the second half major events, commencing with Chinese New Year in January. Operational execution across growing, processing, sales and distribution, in line with expectations, with costs continuing to be well controlled. The first half financial outlook is for group revenue growth of around 5%: underlying group EBITDA in the range of $16 million to $17 million, excluding the impact of SAP project costs, reflecting stable margins relative to first half FY '24 in Australia; and China margins below first half FY '24, impacted by domestic rose pricing. In closing. The Board and I would again like to recognize and thank our teams across Australia and China for their ongoing energy, effort and dedication across the year. Their commitment to deliver quality, innovation and service for our customers remains our biggest strength. Thank you, ladies and gentlemen. I'll now hand back to Patrick.

Thanks, Hugh. We will now move to the formal business of the meeting. The notice of meeting has been made available to all shareholders and is also available on the company's website. The voting exclusions that apply to the resolutions in today's meeting are set out in the notice of meeting. As I mentioned earlier, the poll for voting is currently open on all items of business. Item 1 is financial statements and reports. The first item of business is to receive and consider the financial report, directors' report and auditor's report for the company for the year ended 30 June '24, a copy of which has been made available to shareholders on the Lynch's -- on the Lynch Group's website. While there is no requirement for shareholders to vote on these reports, this item provides an opportunity to discuss the reports; and for the Board or the auditor, Damien who's here on my right, to answer any of your questions on these reports. In particular, our auditor is available to answer your questions relating to the conduct of the audit, the preparation and content of the auditor's report, the accounting policies adopted by the company in relation to the preparation of its financial statements and the independence of the auditor. No questions have been received from shareholders prior to the meeting. Are there any questions from those present in the room? There being no further questions on item 1, we come to the items of business for which a vote is required. The next 3 items of business require a shareholder vote. Each of these resolutions is an ordinary resolution which will be passed if more than 50% of the votes cast by or on behalf of shareholders entitled to vote are in favor of that resolution. As noted earlier, I confirm that I will vote all undirected proxies in favor of each of the following resolutions. Resolution 1, adoption of the remuneration report. Item 2 is to consider and, if thought fit, to pass the following resolution as an ordinary resolution of the company: that pursuant to and in accordance with section 250R(2) of the Corporations Act and for all other purposes, approval is given for the adoption of the remuneration report as contained in the annual report for the financial year ended 30 June 2024. Please note that the vote on this resolution is advisory only and does not bind the directors of the company. Nevertheless, the Board will take into account the outcome of this vote when considering future remuneration arrangements of the company. In the interest of good corporate governance, the directors abstained from making a recommendation in relation to this resolution. Instructions in respect of the proxies received on this resolution prior to the meeting are as follows: 55,739,472 for, being 89.4%; 6,628,131 against, being 10.6%. No questions have been received from shareholders prior to the meeting. Are there any questions from those present in the room? There being no further questions, I ask that you place your vote in relation to item 2 regarding the adoption of the company's remuneration report. [Voting]

Item 3. Resolution 2 is the reelection of myself as a director. I will now hand over to Peter Clare to chair the meeting for this item regarding my reelection.

Thanks, Patrick. Item 3 is to consider and, if thought fit, to pass the following resolution as an ordinary resolution of the company: that Patrick Elliott, having retired from his office as a director in accordance with clause 20.2 of the constitution and ASX listing rule 14.5 and being eligible, having offered himself for election, be elected as a director of the company. Patrick's profile is set out in the notice of meeting. And I'll now invite Patrick to address the meeting.

Thanks, Peter. I'm a founding partner of private equity firm Next Capital. Next Capital and its co-investors acquired a controlling interest in Lynch Group back in 2015, and I became Nonexecutive Chairman at that time. In the past 9 years, I've worked with the executive leadership team on the transition of the business from a closely held family company, its investment in its industry leadership position in Australia and the expansion of its operations in China in particular, the acquisition of Van den Berg which was completed contemporaneously with the IPO in April in 2021. I have previously been Executive Chairman of listed SME financier Scottish Pacific Limited and consumer electronics retailer JB Hi-Fi Limited. If reelected, it's my intention to continue to work with the Board and the executive leadership group to see continued growth in the Australian market and continue the transition -- to transition our China business to incorporate a value-add distribution capability more in line with the operations in Australia.

Thanks, Patrick. The Board, other than Patrick Elliott who has abstained from making a recommendation on this resolution due to his personal interest, recommends that you vote in favor of this resolution. As Chair for this resolution, I confirm that I will vote all undirected proxies in favor of the resolution. Instructions in respect of the proxies received on this resolution prior to the meeting are as follows: for, 62,821,280, representing 99.8%; against, 126,738, representing 0.2%, against. No questions have been received from shareholders prior to the meeting. Are there any questions from those present in the room? There being no further questions, I ask that you place your vote in relation to item 3 regarding the reelection of Patrick Elliott as a director of the company. I now hand back to you, Patrick, to resume chairing the meeting. Thank you and congratulations, sir. [Voting]

Thanks, Peter. And thank you to the shareholders for their support. Item 4. Resolution 3 deals with the issue of options to Executive Director Hugh Toll. We'll now turn to the fourth and final item of business for the meeting. Item 4 is to consider and, if thought fit, to pass the following resolution as an ordinary resolution of the company: that for the purposes of ASX listing rule 10.14 and for all other purposes, approval be given for the grant of options to the Chief Executive Officer and Managing Director, Hugh Toll, under the company's long-term incentive scheme, in accordance with the terms of the company's long-term incentive scheme and as described in the explanatory notes. The Board, other than Hugh who has abstained from making a recommendation on this resolution due to his personal interest, recommends that you vote in favor of this resolution. Instructions in respect of the proxies received on this resolution prior to the meeting are as follows: for, 56,163,399 votes, representing 89.2%; against, 6,780,619, representing 10.8%. No questions have been received from shareholders prior to the meeting. Are there any questions from those present in the room? There being no further questions, I ask that you place your vote in relation to item 4 regarding the issue of options to Hugh. [Voting]

That concludes the formal business of today's meeting. I will now respond to any general questions from shareholders. No questions have been received from shareholders prior to the meeting. Are there any questions from those present in the room? There being no further business and no further questions, I declare the meeting closed. I do recommend those present in the room to take advantage of speaking to any of the nonexecs that are here. We also have Steve Wood, who is the Chief Financial Officer; and obviously Damien Cork as well, so please take advantage of speaking with those; David Di Pietro, who is the CEO of the Australian business, here. Representatives from our share registry, Link Market Services, will now collect your voting cards. If you have not yet completed your cards, please complete them now -- thanks, [ Reggie ]. The results of the voting from today's meeting will be released to the ASX and put on the company's website as soon as possible. Thank you all again, to all shareholders, for your support. And we look forward to another productive year. Thank you.