M.P. Evans Group PLC (MPE.L) Earnings Call Transcript & Summary

Ladies and gentlemen, it is now 12:00 noon or just a fraction afterwards, the time appointed for the Annual General Meeting, and I have great pleasure in welcoming you. Sadly, once again, as last year, not at our usual venue of the Tallow Chandlers Hall, but instead via this live webcast in our Tunbridge Wells office. But I would like to thank you all for attending. And we do hope that, certainly, by next year, we'll see you at our usual venue, and there may be an opportunity to meet up with you at some point before that. I can now go to the formal business. A quorum of 2 members is required, and I confirm that the required quorum is present. I'm joined in the room by Tristan Price, our Chief Executive; and by Katya Merrick, our company Secretary. And I'm also joined via this video link by Matthew Coulson, our Finance Director; by Jock Green-Armytage, who's our Senior Independent Director and Chair of the Audit Remuneration Committees; by Bruce Tozer; Philip Fletcher; and Dr. Darian McBain. As the notice has been in the hands of members for the statutory period, may I please take it as read? The independent auditors report of the members of M.P. Evans Group Plc is set out on Pages 51, 56 in the annual report and accounts. The report is on the group's financial statements, including the parent company financial statements. May I take these as read? To reflect the views of shareholders of the company, given the limited attendance due to the ongoing COVID-19 pandemic, voting today will be done by way of poll on each of the resolutions put to the meeting. Our registrars, Computershare, have been appointed as scrutineers. The reports and financial statements have been sent to all members, and I hope they provide shareholders with a clear explanation of the group's strategy, its activities and its financial position as at the 31st December, 2020. Before putting a resolution to the meeting, I'd like to refer briefly to the updated trading statement which was released to the stock exchange at 7:00 a.m. today, which is available on our website. But for those of you who haven't yet had a chance to read it, perhaps I'd just pick out some of the key points. So just running through, first of all, as far as the COVID-19 situation is concerned, I'm pleased to report immensely that the pandemic continues to have little effect on the group's operations. Preventative measures continue to be in place to protect the group's employees, including remote working at the Jakarta office. And all of states and mills have continued to harvest and process throughout the pandemic. Now with regard to crops, I'm sure you've seen that there's been a very pleasing increase reported for the first 5 months of this year compared with the same period last year. So as far as the group, the group's own crops are concerned, these are some 24% higher at 342,100 tonnes compared with last year. And the group's small holder co-operative crops are up by an even higher percentage, up 43% to 100,800 tonnes. The -- there was a particularly marked increase both at our newest project, Musi Rawas, where the total crop level was still relatively small. And this virtually doubled from this time last year as a result of the maturing hectarage and the more new areas coming into harvest. But there was also a very significant increase from the Bangka project, which is becoming increasingly mature now. That started in the early 2000s. And there was an 80% increase in the Bangka crop. This followed a period of rather drier than usual weather in 2020. And there's been a sort of compensatory effect with more recent rainfall. So the crops have really been surging through. And in terms of crude palm oil production, similarly, there was a pleasing increase with the equivalents of 132,400 tonnes of crude palm oil processed for the period. When I say the equivalent, we processed most of our end crop in our own mills, but we -- because not all the new mills have been built yet, we don't yet process all our crops. So that's why we call it the equivalent of that volume of production, but it's a 25% increase, which is also significant. The oil extraction rate achieved in our mills was an average of 23.6% -- sorry, 23.4%, which is very slightly lower from the same period last year when it was 23.6%. But the reason for that is we've been taking in more independent small holder and more outside crop to fill up the spare capacity in our new mills. And the extraction rate from those outside crops tends to be at a lower level, which reduces our overall oil extraction rate, but we still make a very healthy margin. As far as prices are concerned, the Rotterdam price has surged higher. And it -- for the first 5 months of the year was $1,127 per tonne, very substantially higher than the $659 per tonne for the equivalent period last year. But most of the benefit of this does accrue to the Indonesian government because they post a substantial export tax once the level hits us -- once the prices hits a certain level. But we have been able to get some benefit from the higher price. And the price that really matters to us is what we call the ex-mill gate price, the price we actually receive, and this was significantly higher at USD 715 per tonne compared with $550 per tonne last year. We also received a significantly higher price for the palm kernels, which are a byproduct separately sold and the price there was 57% higher. As far as sustainability is concerned, as you know, we've been a long-standing member of the Roundtable on Sustainable Palm Oil since the early 2000s, and everything that we do is in line with RSPO certification. But because it's not our states, but our mills, which are certified, and we haven't completed all our mills. And also because we buy in some outside crop from -- not from our end, smaller less schemes, but from independent small holders, this means that 53% of what we actually process through our own mills is RSPO certified. But we are aiming within 2 or 3 years and ideally by 2024 to have all of what we produce -- all of the oil we produce is being RSPO certified. So that is our current aim. As far as strategy is concerned, we are nearing the end of this very significant phase in our company's history. This massive growth that we've initiated since 2005. And we have now developed out most of the new project areas, and we have completed the building of 4 of the 6 mills. The other 2 mills are expected to have been completed by the end of next year, 2022. So things are continuing to move very well strategically. I might just read out the last 2 or 3 lines. The increasing maturity of the group's planted areas and the application of high-operating standards means the Board is confident in the ability to deliver crop growth, which is the foundation for improving results and a rising dividend. And in light of the strong performance achieved to date, it remains the Board's intention to recommend a dividend of 30p per share in respect of the year -- this current year, we're in 2021. I'd now like to hand over to Tristan, who's going to make a short presentation. Tristan?

Thank you, Peter. As we have started to do over the last few years, this is a short presentation that we'll look briefly at 2020, this is sort of the subject matter of the AGM before turning to look perhaps a glimpse of the future in terms of the mill building and -- that the group has been doing. Move to the first slide, please. So starting in 2020, the group's crops grew strongly, and that was because of the unplanned things that it has and the increase in mature hectarage as those plantings developed from seedlings into harvestable parts. Of course, the year began not so strongly with the emergence of the COVID-19 pandemic. And indeed, the group moved very quickly to protect its staff and to take precautions around its operations to enable it to continue harvesting and producing and has been able to do so very normally throughout the COVID-19 pandemic. As a result, crops grew by 9% in the group's own areas, by 12% in the scheme small holder areas. And in addition, the group was very successful in purchasing fruit from independent small holders, and that grew by 74%. So overall, the group processed 1.2 million tonnes of fresh fruit bunches, FFB, and that was a 21% increase from 2019. As you heard from Peter, that crop growth was particularly strong, as you would expect in the group's younger areas at Musi Rawas and Bumi Mas. In terms of the planting the group has been doing, we remain paused at Musi Rawas, which is the only area in which there is a significant amount of planting still to do. But even there, it's only a couple of thousand hectares. We've submitted everything that we need to in terms of evidence and paperwork to the Roundtable for Sustainable Palm Oil. And we fully expect to be able to plant in Musi Rawas what we planned, and we're awaiting the formal permission to continue. So next slide, please. So unsurprisingly, that very strong crop growth led to sharply rising profits as revenue and margin increased. So revenue was up 46%, not only because of the crop growth. But because the CPO price rose very strongly from the middle of May in 2020 right through the end of the year and ended up with -- on average 26% increase in the Rotterdam price by the end of the year. That increase in revenue, combined with continuing control of costs as the group actually managed to reduce by $5 to $340 a tonne, it's cost of producing a tonne of palm product, led to a 94% increase in operating profit. And the group remains extremely cash generative. There was a 19% increase in operating cash inflow, just a shade under $50 million. So very successful, both operationally and financially year for the group in 2020. Next slide, please. So now I'd like to turn to the group's milling development. And here in the chart, you can see what the group has done, what it is doing and where we might yet go. So the group's first mill was built in 2005 -- or commissioned in 2005 in Pangkatan. Since then, the group has added 3 more. So we have a mill in Bangka. We have 2 mills at Kota Bangun to deal with the crop there. And indeed, it's very soon going to have a fifth mill. The mill at the Bumi Mas is ready for commissioning next month. So that will bring it to 5 mills. And the sixth mill at Musi Rawas in South Sumatra, the groundwork has already started. And the group expects to be able to commission that mill before the end of next year, before the end of 2022. The group is also thinking about the seventh mill, the most northwestern on the map at Simpang Kiri. And it's exploring the feasibility of doing this, and that will rest on its ability to acquire more land, more plantation land to justify building the mill. Next slide, please. So the group has moved from having 1 mill to being on the verge of having 5 mills with a sixth mill within touching distance. And why do we do this? Or put bluntly, milling means margin. We have a direct margin gain from milling our own crop rather than selling the fresh fruit bunches to third parties. Now point of 4 particular things that are relevant to that. First is the cost itself is lower. If we mill a tonne of FSB, then that cost is perhaps $12 a tonne. If you send it under a totaling contract to a third party, they charge perhaps $23 a tonne. Moreover, if you send your fruit to third parties, there's always an automatic deduction in weight. It's called grading over past 2% or 3%. If you mill it yourself, you really mill 100% all of the fruit. If you send it away, there's a small deduction. And perhaps most importantly, it's the third point here. Milling contracts are based around an assumed extraction range. If you send your fruit to a third-party mill, that extraction rate is going to be a maximum of 22% of oil. Whereas we know from experience and as you would have seen from our publications that we are able to achieve extraction rates of 24.5% or more. And the final point in this direct margin gain is around sustainability. If you mill your fruit in the way that M.P. Evans does to the highest sustainability standards, you're able to charge premium for that. And that's only accessible to you if you mill the fruit yourself. So those are direct margin gains that you made. But there's also an additional effect, which is that when you build the mill, particularly in its early years, there's often a little bit of spare capacity. And that enables you then to purchase fruit from independent smallholders. But then the group is unable to get a value gain from that processing from turning that fruit into palm oil and palm kernels. And there's a wider indirect effect, which is the greater the volume that you process, the more you're able to spread the fixed cost of operating the mill across that wider volume. So overall, just as an illustration, as a mill gate price of $600 a tonne, these effects lead to a doubling of the margin that you make. Next slide, please. So the group has growing crop. It has a deepening margin through this increase in mill capacity. Deep crop grew annually at 17% through the decade to 2020 is still growing notably, albeit sustainably lower rate, but it's still going to anticipate that it will grow by 6% a year up to 2027. And at that peak crop of perhaps 1.4 million tonnes were going to be sustained for the best part of the decade. And the rising mill capacity means that the group is able to make the most of its own crop but also gives it that additional capacity, that spare capacity that enables it to buy independent crop. There is a penalty, and I think Peter mentioned this during his introduction. That's, of course, the oil extraction rate that we're able to report is then slightly lower because the quality of the independent fruit that's brought in is not quite as good as our own. But it's still a very profitable activity because the price we pay for that independent crop, of course, reflects what we expect to be able to extract from it. Next slide, please. And this is my final slide. Where does this bring us? Well, we feel M.P. Evans is very much at an inflection point. You see in the center of this slide, the earnings per share that we have already delivered in 2019 and 2020, 9p and 29p. But by way of illustration, the third bar there shows what we might be able to achieve by milling 1.6 million tonnes of fruit. And that's something that we readily anticipate for perhaps 2023. So the very near future. And if you are able to mill 1.6 million tonnes of fruit, and you made the assumptions on the left. So a palm oil price of $600 per tonne mill gate and a cost per tonne of palm product to $400, and both quite unambitious assumptions compared certainly with where the group is at the moment. And you make some other assumptions about tax and about central costs and the minority shareholders in the group. Then that leads you to an earnings per share of 81p per share. So what we have is that, that growing crop volume, a deepening margin and falling capital as we reached the end of our development program and also affording that, all leading to accelerating cash flows and a strongly accelerating cash flows that give the group the scope both to invest in its continuing activity and capacity. And additionally, gives us tremendous scope to increase dividends at the same time. So we really feel the group is at an inflection point, a very exciting moment in its development. To that point, can I hand back to Peter the end of the presentation now for the formal part of the meeting?

Thank you very much, Tristan. And at this point, I'm pleased to deal with any questions which have been submitted. And this particular year, we've received a single question. Sometimes there are more, sometimes there are fewer questions. I know that a number of shareholders did attend the webinar that we held after -- immediately after the results, and there were a number of questions submitted then. And this is actually available still if you go to the first page of our website. So if you're interested to see the presentation that we gave at that point with the Q&A contained in it. Then by all means do, it's still on our website. But a particular question that's been submitted from a shareholder, it is as follows: he has expressed his concern that what he describes is huge interest rates, which we are paying for bonds or loans. And he says, we're a business which generates cash, and he believes we have no need for these loans. Therefore, we suggest that the Board should bring them to an end. And he believes that, that way, we can help to build the share price up further from where it currently stands. I'm going to pass this across to our Finance Director, Matthew. But I mean, without stealing too much of Matthews thunder, I mean I would perhaps make the comment that we've always been conservatively financed when it comes to debt and some element of debt can actually add rather than to track -- add to rather than attract from shareholder value. But Matthew, perhaps you'd like to address this question more fully?

Thank you, Peter. Yes, I'm quite happy to do so. Perhaps, firstly, on the question of interest rates. This is something that we do disclose in our annual report. So in terms of the interest we pay on the bank loans the group has, we disclosed that overall in terms of the average across all of the loans, we have the interest that we pay and the rates that we pay has fallen. And the average interest rate that we paid in 2020 on all of our loans was 3%. And so that hopefully deals with the question around the interest rate. Secondly, on the wider point of actually having debt, yes, absolutely. And as we've already talked about, the group is cash generative. But we found that having some borrowing has been beneficial. And it's very much supported the group's investment plans and the group's development, particularly around something that Tristan was just talking about, enabling us to go ahead with development of the group's milling capacity and increasing that capacity. And as Tristan was just explaining, that enables us to increase the returns that we get and increases the margin the group achieves for its activities. And we're very confident that, that investment we've made in capital and in the group's milling capacity pays a return to shareholders and pays a return well in excess of the cost of that borrowing. And then perhaps the final point as to the amount of debt and the level of debt. As cash generation continues to increase, so we would very much expect that the level of net debt will fall. And of course, the level of debt that the group holds continues to be an area of focus for management and something we would, of course, continue to monitor. So hopefully, that covers the question. And I'll hand back to you, Peter.

Yes. Thank you, Matthew, and I hope that does indeed answer your question, and thank you for your question. We will now proceed to votes on the resolutions, which I will formally propose to the meeting. All resolutions are proposed as ordinary resolutions and require a simple majority to be passed. I will read out all the resolutions in turn. I am able to announce that we have received proxies in respect of 29,180,891 shares. Although voting on 1,731 shares has been withheld on resolutions 1 and 5, voting on 31,390 shares has been withheld on resolution 2, voting on 8,261 shares withheld on resolutions 3 and 4, and voting on 34,308 withheld on resolution 6. Notwithstanding this of the votes cast not less than 99% are in favor and not more than 1% are against all of the resolutions 1 to 6 put to the meeting. A schedule of the exact numbers for each resolution is available from our company secretary, but will also be announced shortly. I now propose as resolution 1, that the report of the directors and the audited financial statements for the year ended 31st of December, 2020, now laid before the meeting be received. I now propose as resolution 2 of the Directors remuneration report is set out in the annual reporting accounts of the 1st December, 2020, now laid before the meeting be received. I have pleasure in proposing as resolution 3 that Philip Fletcher, a director retiring in accordance with the company's Articles of Association be reelected a Director of the company. As the next resolution relates to my own reelection, perhaps I will hand over the Chair to Tristan at this point.

Thank you, Peter. I have pleasure in proposing as resolution 4 that Peter Hadsley-Chaplin, a director retiring in accordance with the company's Articles of Association, be reelected a Director of the company. I'll hand the Chair back to Peter.

Thank you. I now propose resolution 5 that a dividend of 17p per share being paid on or after 18th of June, 2021, in respect to the year ended 31st December, 2020, to all holders of shares, all the registered members of the company at the close of business on 23rd of April 2021. I now propose as resolution 6 that BDO LLP, chartered accountants and registered auditors, be appointed auditors of the company to hold office from the conclusion of the meeting until the conclusion of the next general meeting at which financial statements are laid before the company and in accordance with the Section 4371 companies Act 2006 at a fee to be determined by the directors. As there are no further votes to be added from this meeting, I -- in accordance with the proxy, I declare all resolutions passed. Now before concluding the business of the meeting, it's been customary for a vote of thanks to be proposed by a shareholder and it seems to me a bit of thanks to, well, talk to all the staff both in Indonesia, where, of course, the large part of our operations are. We still have the remnants of our operations in Malaysia, of course, and then we have our presence here in Tunbridge Wells. But this has been an extraordinary challenging year. As I said earlier, in the trading statement, we have been largely unaffected by this, but this is partly or largely thanks to the excellent management. In many case, the sacrificial gestures and loyalty of all the staff from the senior managers from our President, Director, R. Chandran, all the way down to all the people working on the ground on the plantations to their dedication and hard work during this difficult time. And I personally would like to say thank you on behalf of the Board, first of all, to all of you. And I know that some of our Indonesian colleagues and shareholders, fellow shareholders are attending. So thank you to all of you and to your colleagues for all you have done during this difficult year. And we have indeed received a vote of thanks from one of our long-standing shareholders, Christopher Bellew, who has written: "Chairman, after most successful year in which the company had to operate under difficult conditions, it seems especially appropriate to thank all the company's workforce for their hard work and loyalty on behalf of my fellow shareholders and myself." So thank you very much for that on behalf of for all of us. Well, this is really now just remains for me to say thank you so much to all of you for attending via this webcast. We do indeed hope to see you in person very soon and certainly by this time next year, and I very much hope there will be opportunities to meet up and be in touch in the meantime. So thank you once again from all of us.