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

Good afternoon, and welcome to the M.P. Evans Group PLC investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Peter Hadsley-Chaplin. Good afternoon, sir.

Hello, Lily, thank you very much. Good afternoon to everybody. Thank you so much. We -- this presentation follows the release of our 2023 full year results, which were released to the market yesterday. We will, during the course of the presentation, give you some background on the company, but the primary reason for this is to present our results for the year. If we can move to the first slide, many of you will be familiar with our story, but we've been around a long time, no less than 150 years. And indeed, we celebrated that historic milestone last year, which no doubt some of you here today will have attended. So it was very good to see those of you who did. We are a plantation company, but for the last 20 years or so, we've been focusing on the production of sustainable Indonesian palm oil. That is our business. That is what we do. And we have been growing to the extent that we now employ over 12,500 people, several of them in the U.K. and the rest in Indonesia. We have an absolutely fantastic team. We're very proud of our team at every level and we believe that is the reason we produce such excellent results because we really do have a brilliant team. And we've been growing not just in terms of employee numbers, but also in terms of our planted hectarage and last year, we were successful in adding another 10,000 hectares. We acquired another 10,000 hectares to our portfolio of group owned and group managed oil palm area. So a significant increase to our areas. You can see that our various projects are spread between Sumatra and East Kalimantan, where we have our plantations and indeed, our 6 crude palm oil mills. The blue dots represent our associates, a small joint venture, palm-oil interest in Sumatra and the remnants of the property company, which is now in its very mature stages of development in Malaysia near Penang, which has been around for 30-odd years, which is a former Malaysian estate owned by ourselves, in which we are a joint venture partners, which gradually has been developed into housing shops and indeed, a new township, but it's in the closing stages of that project. And we are extremely proud of our environmental or sustainability credentials of which Matthew will speak a little bit more a bit later. So perhaps we can now move to the next slide. These are our 4, if you like, principal strategic pillars, if you like, our core values, responsibility, excellence, growth and yield, and yield in a sense of yield returns back to shareholders. The primary and most important one of all is the responsibility we have towards all our stakeholders. We have been members of the RSPO, the roundtable on sustainable palm oil since the early 2000s when the RSPO was formed. Clearly, we do not engage in deforestation. We clearly have a policy of zero burning. We have an excellent zero waste policy, and we provide excellent housing and other community facilities, which helps towards retention of staff and managers. All 6 of our mills are up and running and are producing certified, sustainable output, that's palm oil and palm kernels. We have recently published our reports on TCFD and ESG, TCFD, Taskforce on Climate and Financial-related Disclosures and ESG, environmental, social governance, and we are indeed on track with our net zero targets. Excellence is something we strive for. We invest for the long term. We invest both in people and in our assets. And this helps us to deliver increasingly higher yields and extract oil that crude palm oil extraction rates from our mills. The most recent mill was opened in 2023 at the Musi Rawas project in South Sumatra. And we strive to continue to improve our extraction rates and our yields per hectare. We have strengthened depth across the company where we see successful transition of senior management roles. Our President and Director of our Indonesian Operations, who's one of our directors, Chandra Sekaran pass the baton on to Ravichandran, known as Ravi, who is doing an excellent job. Chandra is still working with us as a consultant as well as his nonexecutive role, but we've made -- there's been an excellent transition there and a number of other senior management roles. So as I say, strength and depth across the organization. Growth comes from 3 primary sources. The crops grow as the palms get older, as they continue to mature, we're still relatively young in terms of our average age. And also as with better and better agronomic practices, our yields improve and also, as we acquire new areas of land, of course, we have increased crop growth as well. So from those 3 sources, 3 different ways in which we are able to continue to grow. And indeed, this was evidenced in our record crop and crude palm oil production during the course of last year. And as I mentioned earlier, we added 10,000 hectares to our group portfolio. And we are continuing to plant more oil palms sustainably at our project in South Sumatra at Musi Rawas. And coming to shareholder returns. We have delivered and continue to deliver improving returns to shareholders. We have an ambition, a program of further improvement in growth and the strategy is to deliver further increases of shareholder returns. As Luke will speak more about, we generated over $100 million, $107 million in operating cash last year and we were able to increase our dividend -- our total dividend for the year by 2.5p from 2.5p from 42.5p to 45p, of which the final dividend payable in June has been increased from 30p to 32.5p. And not to be forget either is the earnings per share is enhanced by our ongoing program of share buybacks. We believe that buying back our own shares is an excellent investment have what we believe to be undervalued pricing by the market. I mean the market does what it does, but we believe this represents a good opportunity to buy a significant value in what we know to be excellent quality plantation land. Next slide. Just a snapshot or a few snapshots of last year's celebrations marking our 150-year anniversary, both in the U.K., Mansion House, where we had our AGM followed by a lunch and indeed in Jakarta and in other parts of Indonesia. And what was great was to see 15 or more of our Indonesian colleagues come over to U.K. Normally, they host us, but that once it was our chance to host a visit from them and it was great for them to see what happens over here in the sort of HQ and it was altogether a great success. I think morale -- a great morale booster all around, and it was great to have shareholders meet some of the Indonesian team as well. So if I may, at this point, pass across to Matthew, who's initially going to talk about the palm oil and the wider vegetable oil market.

Great. Thank you, Peter. So before we get on to talking about our own operations, I think it's helpful just to set the scene and put it in context in terms of, as Peter says, first of all, the wider vegetable oil market. And I think really, the chart on the left-hand side of this slide really does illustrate how much things have changed over the last few decades. The chart goes all the way back to 1990 and looks at what the world vegetable oil market looked like then and you can see that the total world market at that point, accounted for approximately 50 million tonnes, just over 50 million tonnes. And you can see the steady increase over several years since then and how the world market has increased all the way through to the last full year to 2023, where the world market for vegetable oil is now over 200 million tonnes, around 220 million tonnes. And importantly, the various elements of each of the bars represents the various vegetable oils. But the first part, the bottom part is in dark green. It is palm and you can see how palm has been taking steadily an increasing share of that increasing market over time. And when we sort of exploded out the most recent year on the right-hand side of the chart to look at it in a bit more detail. And you can see that by the time you get to 2023, palm is actually taking 40% of the world vegetable oil markets, and when you include the 2 key products that come from the 1 crop because palm obviously produces crude palm oil, but it also produces palm kernel oil, the 2 parts coming from the same crop. And between them, they account for 40% of the world's contribution to the main vegetable oils. So substantial part of the world's vegetable oil market. And if we then focus in a bit more on palm oil in detail and look on the next slide, I think -- the key thing I would take -- if we could just move on to the next slide. The key thing I would take from this next slide is just how productive palm is when we compare to the other major vegetable oils. The key thing that sets palm apart from the other major vegetable oils is that palm is a permanent tree crop. All of the other major vegetable oils are annual crops and palm is substantially more efficient in its use of land compared to the others. When we talk about that 40% of world's production of vegetable oils, that 40% of world production is achieved from only 8% of the land area that's given over to vegetable oil production, which I think is really quite a remarkable statistic. And if you look at the right-hand chart on this page, this really brings this point home. The other major vegetable oils will generally do less than a single tonne of oil per hectare of land given over to cultivation. And -- if you look at palm for an average, if you think about all of the hectarage given over to palm oil cultivation, obviously, the majority of which is in Indonesia and Malaysia. If you look at the overall average from the entire area given over to cultivation, the palm does a little bit more than 3 tonnes per hectare. But If you think about what we are able to achieve at M. P. Evans for every hectare that we cultivate that we manage, that we harvest, that we're able to achieve more than 5 tonnes of oil per hectare cultivated. So that's a substantial improvement on the average because of the agronomic practices that we deployed, because of the efficiency of the mills that we have within our group. And we're not happy with that. We're not satisfied. We want to keep working hard to improve that even further. We're committed to working towards pushing that up to 6 and beyond, and we think we can do that with the excellent quality of the hectarage that we have and the investment that we've made in our milling facilities. So that just gives you a bit of a sense of the vegetable oil and indeed palm oil in particular. It's extremely important for us then to focus on sustainable palm oil. As I said on the previous slide, only 20% of the world's palm oil production qualifies as certified sustainable production. Now of course, that doesn't mean the other 80% is not sustainably produced, but it's about certified sustainable production. Everything that we do is done on the basis of sustainable production and sustainable cultivation. And this has been an area of absolute focus for us. And of course, opening another mill enables us to push forward in this area. And we're very, very pleased to be able to report that by the end of 2023, all of our mills are now certified to produce sustainable output. And that will help us in our continual journey of driving up the proportion of our output that qualifies a certified sustainable output. And as Peter mentioned earlier, it's been very important to us to increase the amount of reporting that we do to enable all of our stakeholders, our shareholders and our other important stakeholders to understand what we're doing in this area. So -- over the last 12 months, we published a TCFD report. Last month, we published a new ESG report. And there's a huge amount of detail in both of those reports, around the area of sustainability in its broadest possible context and this is obviously designed to be a financial update for you. So I'll try very hard not to go on about this area for too long, but I do highly comment both of those reports to you. It's very valuable insights on to the work that we're doing in both of these areas. One point I can't but help mention is around our journey on carbon reduction. When we first published in this area, we set 2021 is our baseline year for measuring our what's called our carbon balance sheet. So our total carbon emissions as a group and we've obviously then moved forward. And in the annual report we published yesterday, we gave detail on our 2023 position on total carbon emissions. And we've already having really focused in on this area achieved a 19% reduction in our total carbon emissions. A lot of that comes from the fact that we've been busy investing in efficient mills of our own and increasing the proportion of our crop that goes through our own efficient mills more of that in a moment. In terms of operational impacts that has a big impact for us in terms of our sustainability credentials and our ability to draw it down carbon emissions that makes a big difference for us. So as I said, I'll try very hard not to go along this area, but I do recommend both of our recent reports to you for further reading in this area. If we turn to the next slide and really start focusing on operational metrics. This slide really tells the story of 2023. And in particular, again, the benefit of now having those 6 mills operational throughout the year. Over the course of 2023, we harvested 1.2 million tonnes of crop from the areas that we manage, those areas that we own directly and the areas that we manage on behalf of our associated scheme smallholders, and 95% of that crop was then taken to our own milling facilities to be processed, only 5% sent to outside mills. And we're extremely proud of that statistic. We're very nearly in the position where we're processing all of our own harvest, which operationally and financially is fantastic for us. Now that we have 6 mills, we have capacity to bring in crop from outside suppliers as well, and that's how you get from the 1.2 million of harvested crop to the total of 1.6 million total processed crop. And then you can also see on this slide the fact that from that combination of 1.6 million tonnes of crop processed, we achieved an average of 23.4% oil extraction rate in the year, which, again, is a figure we're extremely proud of. That was up on the previous year. And given that combination crop, given that 1/4 of our input is coming from outside suppliers, where the crop quality is not quite as good as the crop that we harvest for ourselves, delivering that 23.4% average extraction rate is something we're extremely pleased with. And similarly, ending up with production of over 360,000 tonnes coming out of our own group mills, again, is a big deal for us this year. That's up more than 20% on the production coming out of group mills in the previous year. So real operational progress in terms of what we've been able to deliver this year. So at that point, we should move on and look at some more of the detail and some of the financial consequences of all of that and at that point, I will pass over to Luke.

Thanks, Matthew. So just starting with the top row here, and Matthew has just touched on the group processed 1.6 million tonnes of crop in the year. So that's up 7% compared to 2022. And as a result, we increased our production from 2022, up by 11% as well as that increased crop being processed. There's also benefit there in relation to the opening of our new mill at Musi Rawas and also, as Matthew has already touched on an improvement in the extraction rate. And 2022 was a phenomenal year from a pricing perspective. So it was almost inevitable that 2023 was going to see some softening in that price environment. So the average price per tonne for CPO that we received in '22 was $854 and that reduced in 2023 down to $729. So somewhat inevitable. But I think it's important to stress that at that level of $729 per tonne, that still is a very good price and certainly by historical standards as well. So with that resulting price drop, the revenue did decrease. There was an increase in volume, but that couldn't quite offset that price reduction. So we saw revenue drop from $327 million, down to $307 million. And then that flows through down to our operating profit. So that price differential drop down to operating profit. And we did still see a little bit of heightened fertilizer costs in 2023. And we -- they are moving in the right direction, and we saw that through 2023. However, there's still a little bit of residual inflationary pressure on fertilizer costs in the P&L in the second half of the year. And that had a nicely leading to the cost management. So yes, we have seen an increase in our cost per tonne, but driven, as I said, by really that fertilizer increase. And we try and control what we can that's within management's control. So managing our labor, costs and also offsetting that any inflationary pressure there, hopefully, with some better efficiencies to really manage that cost per tonne level. So with that lower profit, again, earnings per share was down from 108p last year to 78.1p this year. But we're delighted, as Peter has already touched on, to be increasing our dividends for 2023, up from 42.5p to 45p, and as Peter has mentioned, an increase in that final dividend of the 2.5p. And I think then also just to touch on finally sort of how 2024 has started. We saw a relatively soft start to 2022 from a crop as there was some seasonality in our crop trends. But in the beginning of 2023, we've seen a really strong start, crop up 16% compared to 2022. And we're also seeing our own crop growing at a higher rate than 16% increase, which is good, which means we have to buy less independent fruit, which is of benefit to our margins as we look forward. So I think whilst some of these areas here are focused really on the P&L, I think it's also important to call out that, again, almost inevitably, some of those P&L metrics were going to fall. But actually, when you look at the cash generation of the group through 2023, the group has continued to be incredibly cash generative. So I'll just sort of walk you through this graphic here. So on the top line, the sources line, that really just shows the sort of cash that we had available to us in 2023. So we came in with a large chunk of cash on the balance sheet. And if we rewind 12 months ago, we were sat here saying that the reason for that was because we had quite a few irons in the fire in terms of acquisitions and having cash on our balance sheet and having cash readily available for acquisitions in Indonesia is a real selling point. So we had a big chunk of cash coming into the year. We then generated over $100 million from operations, $107 million of cash from operations in 2023. And that is 142% cash conversion. That's where if you take operating profit to operating cash. That's 142%, which is fantastic, and that's up on the 127% that we saw in 2022. And then finally, on the end of that top bar we did acquire some new borrowings through our acquisition in the back half of 2023. And we just kind of grossed up the numbers here to sort of make the maths work. So then if you look at that second line, the middle line, that's the usage line. That's what we did with that cash that we had available to us in 2023. And the first few bars are, unfortunately, some things that we can't avoid. So that's paying tax and also repaying the debt that we have, including interest payments. So those first 3 green blocks were kind of locked in for. But then you take the next section, the red section, and this is where we have a choice in terms of allocating our capital. And what we've tried to do as a management team is balance that allocation between focusing on getting it right today through improving our operational excellence. So that includes in CapEx terms, building the right housing, building the right roads, continuing with planting. Then we look to the long-term investment, so using some of our capital to make some acquisitions, which we're delighted to have done in 2023 that really then gives us additional hectarage for future returns. And then not least, we want to give back to our shareholders. So we focused in 2023 or increasing the dividend again. And also, as Peter has already mentioned, continuing with our share buyback program and might see modest in terms of the amount that we're putting there. But again, we are chipping away at that quarter-by-quarter, and we announced yesterday that we're continuing that for another quarter, which will take us up to the AGM in June. And then finally, that blue box on the end, we ended the year with a gross cash number of just over $39 million. And again, we're just keeping a little bit of cash from the balance sheet because we continue to assess opportunities for future growth in Indonesia and having that cash readily available is something that we think is of benefit. We did finish the year with a small net debt position due to that new borrowing we took on and our existing borrowing that we had already in the balance sheet. So a very modest 3% net gearing and a net debt number at the end of the year of $14.8 million. So in terms of some of those shareholder returns, just fixing on this slide, this is our track record on normal dividends. And this is something that the group is very proud of and as we've touched on, again, we've increased the dividend for 2023 to 45p in the year. This is a track record now over 30 years of maintaining or increasing the dividend. And I say that's something we're very proud of. It's something that the Board takes very seriously moving as we look forward as well. And I think also it's sort of even more remarkable, considering it's a commodity business to be able to have that stability as well. And we touched on that enhancement of EPS, that share buyback program as it continues -- will continue to do very much that enhance that earnings per share number. So that's an overview of some of the financial numbers, and I'll pass back to Matthew for a little bit of a view on the outlook.

Fantastic. Thank you, Luke. So I think Luke has already mentioned that we have made a very positive start to 2024. We've reported on where we are in the first 2 months of the year, so crop up in comparison to the same couple of months in 2023. As we look further into the future, we remain extremely positive. Obviously, our new acquisitions that we made in 2023 form a good basis for continuing crop growth as do the continuing increases in yields from our existing areas and you get a very strong and clear picture of that from the chart that we've put on the slide to illustrate that exact position. And of course, having made those acquisitions in 2023 whilst they are a significant increase in our planted hectarage that doesn't mean that we're not interested in looking for further opportunities to increase our planted area and to continue that story of ongoing growth for the group and there are a number of areas that we're currently looking at right now. We're continuing to obtain certifications for our mills and particularly the mill that we opened last year, securing RSPO. It already had 1 certification, but it secured it's RSPO certification last month, which is fantastic. And then from a pricing perspective, we started the year seeing prices in the sort of mid $700s, but it's very pleasing to be able to report just in the course of March, we've seen some tenders go above $800 per tonne. So both from an enterprising perspective, then we see very positive signs as we sit here talking to you today. So we're extremely enthusiastic as we report to you today in terms of both crop production and price and indeed, as you can get a sense from there, the longer-term prospects. So that concludes our presentation for today. I'll pass back just now to the IMC team before we then move on to questions.

Peter, Matthew, Luke, thank you very much for your presentation this afternoon. [Operator Instructions] As you can see, we have received a number of questions throughout today's presentation. Can I ask you to read out the questions to give responses to be appropriate to do so, and I'll pick up from you at the end.

Thank you very much, Lily. I should have mentioned or I should have introduced ourselves at the beginning. Many of you will be familiar with us. But if you haven't already worked it out, I'm the Chairman and Matthew is our Chief Executive; and Luke is our CFO. But I also perhaps should touch on the -- what was said in the announcement about my own role changing, which is a shift from an executive role, so that's a nonexecutive chair. My role as Executive Chair has been increasingly whaling, which I'm delighted to be able to have happened. I have huge confidence in the management team both here in the head office and indeed, in Indonesia. And I'm looking forward to stepping back a little bit, but continuing in my role as Chair, in a nonexecutive capacity. And I'm not sure whether prompted by that part of the announcement, there was a question regarding my own, like family, interest, I'm perfectly happy to answer that as to whether I'm looking to sell it. And I can say categorically, no, I'm not. Whether it's chair or indeed more appropriate as a shareholder, I have huge confidence in the company in its future. And I can genuinely think of no better investments in terms of the opportunity for increased growth and indeed, for increased earnings and shareholder returns. I may be biased, but I genuinely believe that to be the case. Let me now scroll down and we can between us perhaps address the various questions, which thank you so much for submitting. A gentleman who says he's proud to be a shareholder. Thank you very much. Can you claim carbon credits for your plantations, perhaps one for Matthew.

Yes, absolutely. So the situation at the moment is, as I said, we've been working very hard to establish what the position is with our carbon balance sheet. And this is a continuing and evolving exercise. The next step for us in establishing the requirements and the disclosures around carbon balance sheet is to look more closely at a significant area that we have of unplanted conservation land. Interestingly, what we've done is we've followed the guidance set out in the TCFD's requirements for recording our carbon balance sheet, and that whole concept of carbon sequestration in unplanted land kind of doesn't get covered, so this would be something we would be recording and measuring and capturing over and above what the TCFD expect you to do, but it's something we are looking at right now. What that would do would give us sort of offset and sort, albeit outside of the TCFD's expectations. So that's what we're doing at the moment. In terms of claiming carbon credits, and I think more for us, we see it as the potential to be, if you like, a credit to line on our carbon balance sheet rather than a sort of a carbon credit and perhaps the way you're thinking about.

Thank you, Matthew. Perhaps you could take the next one as well. Excluding the latest acquisitions, what percentage of our plantations will require replanting during the next 3 years?

Yes, absolutely. I mean the simple answer to that is a very small part. If you look at our plantations around Indonesia as a whole, the substantial majority of them are still very much within their first generation and won't require any noticeable replanting within the next 3 years. The exception to that is that our plantations in Northern Sumatra -- as the mature plantations that we've had in the group for some time in Northern Sumatra, which between them account for about 10,000 hectares. And there is an ongoing program of replanting those. And you would expect that there may be over the next 3 years, something like 5%, maybe a bit more than 5% of those might become due for replanting so that might be about 500 hectares or something like that, but that gives you a flavor of the amount of routine replanting that might be expected.

Thanks, Matthew. Perhaps this one for Luke. Apart from the buybacks and the strengthening of the year-end sterling rate against the U.S. dollar, is there any other reason why net assets increased less than profits after tax.

Yes. So I don't necessarily want to give an accounting lesson, so I will kind of keep it simple. But -- so our balance sheet is in dollars, our currency is USD. In terms of -- there are a number of moving parts that will move net assets, not just the profits after tax. Obviously, we use those profits after tax to fund other things, which will move other line items in the balance sheet. So I think I'll just leave it there on that one. So was there a second part, Peter?

May I just add one comment. I mean the big part of the reason is that I mean if you look at our statement of changes in equity in the accounts, it's opening net assets plus profit, minus dividends, minus share buybacks, equals there are other things. But fundamentally, you've got to knock off the dividends and the share buybacks.

Thanks. We are now trading not just below fair value, but also book value. Is the market wrong or are our shares an absolute bargain. Do you want to attempt that one as well, Luke. Do you have a view on that?

And I think the market is what it is. And I think we've been quite open previously with the fact that we feel that the market at the moment is undervaluing what we believe to have. We've touched on in the past about our net asset value as well that we put in the annual report. And we continue to buyback our own shares as we feel that there is an element of value in them at the moment. So the market will do what the market will do, but certainly, our view is that absolute value, but the certainly there's value in the share price at the moment.

Another question, is there anything to be gaining by change in the company's place of incorporation, for example, to New Jersey or Bermuda. We don't believe so. We've got no plans to do that. There has sometimes been the question as to whether we should shift all together to the likes of Jakarta, Singapore, KL. But we're very, if you like, lean and mean individuals, with the excellent communications with our Jakarta office. We believe that if indeed broke, don't fix it. We've got an extremely good structure in place, a very regular communication with our Indonesian office. I don't know whether you specifically, Matthew want to comment on any part of that question.

I will vote for Bermuda. But otherwise no.