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

Good afternoon, ladies and gentlemen, and welcome to the M.P. Evans Group PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so. Before we begin, as usual, we would just like to submit the following poll. And if you would give back your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the Board of M.P. Evans Group PLC. Peter, afternoon, sir.

Thank you very much, Jake. Hello, everyone. Thank you very much for joining us today. I'm Peter Hadsley-Chaplin, Chairman. As some of you may know, I recently transitioned, as they say, from an executive chair role to that nonexecutive. But nonetheless, I find forums like this a good opportunity to stay in touch with investors and indeed would-be investors. And I'm joined, as usual, by my colleague Matthew, Matthew Coulson, who's the Chief Executive; and Luke Shaw, who's our CFO. This is primarily a presentation on the 2024 interim results, but we will certainly touch on the group's strategy and operational developments as well. We'll speak for approximately half an hour. And then we're allowing, again, about half an hour to answer your questions. But we don't want it to run on any longer than an hour in total. I'm going to kick off with the first overview slide, and then I will pass over to my 2 colleagues to take us through the rest of the slides. So as I would just -- for those who are new to M.P. Evans, I would perhaps just give you a tiny bit of overview of us as a company. We're a 150-year-old plantation company listed on the AIM market. Our origins go back to tea and rubber, but in the last 20, 25 years, we've focused on the development of -- and the production of sustainable Indonesian palm oil. So with regard to the first half, this was a good set of results, as I'm sure you'll agree. In terms of the actual crop produced and processed, it was up by 5% to 759,700 tonnes compared with 721,700 tonnes last year. And our own crop, so crops from the areas owned specifically by the group rather than from the smallholder areas, was up by 7%. Total crude palm oil production was up by 6% to 177,000 tonnes compared with 166,200 tonnes last year. And pleasingly, the actual rate of extraction, the oil extraction rate, was up by 23.4%. CPO mill gate prices were up by -- slightly by 2%, but nonetheless, we've seen marginally higher at $771 compared with $755 last year. And incidentally, this is not the Rotterdam price, which is trading around $1,000 or so. This is after taking account of transport and other insurance, freight costs, et cetera. So this is the ex-mill gate price, the price we get in our pockets for the oil that we sell. Very pleasingly, the gross profit was up by 82% to $42.1 million due primarily to the lower costs and higher production, which Luke, I think, will talk to further later. And indeed, earnings per share up by a similar percentage to 44.9p compared with 24.8p. And the Board has agreed to increase the dividend by 20% from 12.5p to 15p. So at this point, I'll hand over to Matthew.

Brilliant. Thank you, Peter. So if we then think a little bit more about our operations in the first half of the year, as Peter said, we processed just over 0.75 million tonnes of fresh fruit bunches in the first half of the year. And you'll get a sense on this slide of where that fruit came from. Fundamentally, it came from 2 different sources. It came from the areas that we manage for ourselves, so the areas that we either own or manage on behalf of associated scheme smallholders, or it came from independent suppliers of crop to our mills. And you can see that just over 560,000 tonnes came from the areas that we manage. And then just over 190,000 tonnes came from those independent suppliers. And very nearly all of that crop was processed in our own group mills. We've been working very hard over recent years to increase our own milling capacity. In the first half of this year, we had 6 group mills running through the entire period. And so that meant there was only a very small, 5% of the group managed FFB, fresh fruit bunches, that were processed in external mills. And you can see that on the slide there. But very importantly, the vast majority is now processed in group-owned mills. And you can see the consequence there on that slide in terms of group production of crude palm oil and importantly group production also of palm kernels, a very important secondary product that we process through our mills. The 0.7% you can see mentioned on the mill itself is an indication of the increase in productivity in our mills in the first half of the year. Peter mentioned our oil extraction rate and the fact that, that went up to 23.4% in the first half of the year. That went up by 0.3%. But our palm kernel extraction rate went up as well. So that went up from 4.8% to 5.2% in the first half of this year. That may not sound like a very big increase, but it's a very important part of our overall group output and a very pleasing increase when we've also seen an increase in palm kernel pricing in the first half of this year. So we take all of those operations together, and then we start to think about what does that mean for us in financial terms. And at that point, I'll pass over to Luke to discuss our results in a little bit more detail.

Thanks, Matthew. So on this slide, we to start on the left-hand side and just sort of touch on the pricing that Peter has already alluded to. So we saw a slightly higher first half average CPO price per tonne at $771. That compares to the $755 that we saw in the first half in 2023, so a 2% increase. I think also, we should probably call out that we saw an increase in palm kernel pricing as well, up from $410 to $437 per tonne in the first half. So both of those elements flow into our increased revenue of 22%. And so an element of that is, as I said, relating to the price but also the increased production and also some additional dispatches from inventory, and we had a working capital benefit in the first half helped drive that revenue up $30 million to $164 million for the first half. And then pleasingly, as well as that increase in revenue, we were able to reduce our cost per tonne. And this figure here that we're quoting is the group cost per tonne of palm product. So that's the cost for the group to produce its palm kernel and its CPO. And really pleasingly, that fell from $535 per tonne to $458 per tonne in the first half. And I will go into a bit more detail on that on the next slide, but predominantly, that was driven by a decrease in fertilizer pricing. So if we look at the impact of that higher revenue and the lower cost, and that drops through to the gross profit. And here, we're just going to try and walk through some of those key variables that led to a substantial increase in gross profit in the first half. So if I start on the left-hand side of this slide, you can see the small green bar of $23.1 million. That was the gross profit in the first half in 2023. You then take the next 2 bars, the $5.3 million and the $2.5 million, and that gives us a net price benefit in the first half of $2.8 million. Now we always have a net price benefit on price movements because when we sell our CPO for a higher price, not only do we get the benefit of that, but we have to also pay our suppliers of fresh fruit bunches a higher price as well because the 2 are linked through a formula. So there will always be a net price benefit to us, and that would work the same way if the price went down. So if you take that $2.8 million of price benefit, you get to the next gray bar, which is $25.9 million. And then if you add $5.9 million, that's relating to our additional volume that was dispatched in the first half. So that's a combination of higher production and also some of the inventory that was on the balance sheet at the end of 2023 flowing out to customers. The next green bar is $4 million, and that reflects the benefit in dollar terms on gross profit from a lower fertilizer price. So it's probably worth worked at pausing here to reflect that fertilizer prices really peaked after the Russia and Ukraine incident in 2022. Now fertilizer pricing has been coming down since the early part of 2023. But in the first half in 2023, we were severely impacted by that higher fertilizer pricing as we were applying pretty much the most expensive fertilizer that we had purchased at that point. So really, as the prices come down, we've now seen a benefit to the tune of $4 million in the first half. The next bar is $2.5 million green bar, so that is the benefit of the extraction rate improvements. So Matthew just touched on that 0.7 that was in the middle of the mill. And it may not sound a lot, but that gives you an indication of just that small improvement to 0.7. 0.7 really does drop through to profitability and also importantly cash as well. And then the green bar also $2.5 million, lower operating costs. This is a little bit of phasing between H1 and H2. But predominantly, this was to do to the fact we actually applied a little less fertilizer in the first half in 2024 than we did in the first half in 2023. And that can vary. Our fertilizer application is reviewed annually, and there are some years where the palms and it's addressed on a state-by-state, almost block-by-block basis. There are some occasions where fertilizer needs to go up and some occasions where fertilizer needs to go down. So that was the main factor in that $2.5 million. We then have some other additional costs of $0.7 million, which then takes us up to a gross profit of $40.1 million. And then the final light green bar of $2 million is to do with the foreign exchange movement. So a large proportion of our cost base is in rupiah, predominantly our labor, and the rupiah weakened considerably through the first half of 2024 against the dollar. So we've got a $2 million benefit in the first half from a weaker rupiah. so if you add all of those green bars together, you get to the end on the right-hand side, the dark green bar, and that gets us to the $42.1 million of gross profit that we achieved for the first half in 2024. So that dropped through to an increased earnings per share of 44.9p, up 81%. And as Peter has already touched on, we were delighted to increase the interim dividend by 20% up to 15p from 12.5p. If we then move from profit to cash, the group continues to be significantly cash generative. And I'll just walk through this slide. So at the top bar, you'll see there's the blue section and the green section. So the blue section reflects the opening gross cash position that we entered 2024 with, which was just under $40 million. And again, a reasonable amount of cash on balance sheet despite a substantial outlay in 2023 predominantly through -- or due to acquisitions. You then have the green bar, which reflects the $60 million of cash, $60 million that was generated from operations in the first half. Now that does include that working capital benefit, but nonetheless, that's a cash conversion of 144%, which is a fantastic result in first half for the group. We then move to the bar below in terms of how we use that cash through H1. And we paid our taxes. We have to do that. And then we also continue to pay down some of our debt and service that debt with interest as well. You then get to the red section in the middle, and that is really where we are balancing our capital allocation. So we are continuing to invest in the group through our CapEx. So just under $10 million. Predominantly, that was an investment in further planting. That's new planting at our estate in Musi Rawas and then also sort replanting in relation to the acquisitions that we made at the start of 2023. That was known on the way in, and that's how we've gone about executing in the first half. We then have the next smaller red bar of $6 million. That is relating to the purchase of our -- one of our minority interests during the first half. And we'll touch on that in a little bit more detail later. But we paid a gross consideration of $14 million for the minority interest. However, that partner owed us $8 million, which results in that $6 million net outflow to the group as a result of that transaction. The next red bar is the dividend. So that is the final dividend from 2023 being paid in June 2024. And then the final red bar is the $3.5 million relating to our continuing share buyback program. We announced yesterday that we -- sorry, on Monday that we are continuing with that share buyback program for the remainder of 2024. So by the time we get to the end of 2024, we anticipate around about $8 million will be allocated to the share buyback program. That's slightly lower than the run rate we achieved last year, and that was partially due to the fact that in Q1 this year, we were a little bit restricted in terms of the volume of shares we can buy back due to that safe harbor rules. So all of that considered, we kind of leave H1 as we came in with a gross cash position of $35 million. And with a debt position of circa $43 million, we are around a net debt position of $7.3 million at the end of the first half and a very low net gearing level of 1%. And finally, I think it's always worth calling out that we tend to be more cash generative in the second half of the year. So this is a fantastic foundation for the rest of 2024. So with that in mind, I'll actually pass back to Matthew and talk a little bit about how we've been executing on our strategy through the first half.

Great. Thank you, Luke. So if we turn to the group strategy. We focus, first of all, on the group's strategic pillars. Many of you will be familiar with these. We've spoken about it many times. This has been our strategic priority for a number of years now. They're focused around 4 areas, those 4 areas being a responsible operator, being focused on excellence, continuing to deliver growth and extremely importantly, being focused on increasing the yield that we deliver as well. So nothing new, if you like, in this slide. But important to remind everybody of those strategic pillars. And then really, what we're seeking to do today is to provide an illustration of how we've continued to deliver on and how we've continued to live that strategy over the first half of 2024. And perhaps if we turn to the first of those and we look at what we've been doing under the banner of being a responsible operator and focusing on responsibility in the first half of the year, a few slides to share with you. So we talked about the fact that we now have 6 palm oil mills in full operation. It's very pleasing that all 6 of those mills are producing certified sustainable output. And as a result of that, we've seen a significant increase in the amount of CPO, crude palm oil, that qualify as a certified sustainable output. So up by almost 1/4 compared to the first half of last year, almost 120,000 tonnes of sustainable output from our 6 mills. When it comes to then thinking about those mills, we're also extremely focused on ensuring they are all accredited with the RSPO. That's the Roundtable on Sustainable Palm Oil, the main, well-recognized industry body that certifies and accredits you for delivering sustainable output. We received our fifth accreditation during the first half of 2024, which was very important to us. And then we're already a long way towards receiving our final accreditation at our sixth mill. We had the audit visit from the RSPO last month. Based on the output of that visit, we very much expect to receive our final sign-off and our accreditation before the end of this year. And that will be an absolute milestone moment for the group to be able to say that we have all 6 mills accredited by the RSPO. We continue to provide more reporting and documentation and disclosure around what we're doing in the whole sustainability arena. So 2 new reports were published in the first half of this year, one focusing on carbon and our carbon balance sheet, reporting on our carbon reduction journey. So that was published early in 2024 and a broader report, an ESG report focusing on everything in environmental, social and governance. And both of those reports are available via the group's website. Of course, this is a continually evolving and changing and developing area, whether it's in relation to reporting obligations or regulatory requirements. And this is an area we continue to monitor. We continue to do more and absolutely expect to hear more on this area from us over the course of the remainder of 2024. On perhaps a more sort of operational level, very important to note that we were very pleased to open the third of our community clubhouses for use by our staff in Indonesia. That was a community clubhouse at our Bumi Mas estate in East Kalimantan. And you can see a picture of that community clubhouse on the slide there. So turning from the responsibility pillar to the second one, focusing on excellence. Of course, we're not able to deliver the results that we're sharing with you today were it not for the extraordinarily hard work of the 12,000 to 13,000 of people we have working across Indonesia. So it's absolutely right that we continue to focus on the training, the development, the well-being of all of our staff across Indonesia. And it's only because we have very experienced, expert, highly motivated teams across all of our estates that we continue to deliver the yields that you're seeing from our estate areas. Those teams continue to respond to ongoing challenges, whether it's environmental, whether it's agronomic, whether it's weather related, whatever it is in terms of dealing with the agricultural environment they find themselves in. And then secondly, we continue to work extremely hard with the mills that we now have within our portfolio to work on delivering the very highest extraction rates across all of those locations. And you've seen the impact of that in what Luke has been talking to you about in terms of the consequences for our results. On the next strategic pillar on growth in terms of activity in the first half of this year, we were very pleased to be able to make the acquisition we made in the first half to acquiring the 5% minority interest in the vast majority of our operating locations. So by acquiring from our minority partner his 5% interest in almost all our operating locations, we effectively -- from a shareholders' perspective, we effectively acquired a further 1,700 hectares from that minority partner during the first half of this year. And one way of thinking about it is to say we increased our majority ownership in all of those plantations for a minority price. So we achieved that transaction at a price of around $9,000 per hectare. So an immediately value-adding transaction and immediately earnings enhancing. And of course, we've been working very hard during the first half of this year on integrating and assimilating the 10,000 hectares we bought during the course of last year. That's an ongoing project for the long-term benefit of the group. We're doing some replanting in the area we acquired close to Simpang Kiri, and we're working very hard on improving the yields in East Kalimantan, the 8,000 hectares we acquired close to Kota Bangun. But very importantly, we're already taking the crop from those areas into one of our Kota Bangun mills, which is fantastic in terms of being able to improve the input to those mills in Kota Bangun. We're continuing to plant at Musi Rawas in South Sumatra, which bodes well for the future growth of that estate. And we continue to look at new opportunities for further acquisitions, and we hope to have more to talk to you about on that in the future. On our last strategic pillar, not to diminish its importance. It's last but not least. We focus absolutely on yield. And perhaps, Luke, you may wish to comment further on yield.

Yes. So thanks, Matthew. So we've said -- I make no apologies to say again that our interim dividend up 20% compared to 2023, up to 15p. And I think this is a slightly shorter graph than perhaps we shared in the past in terms of the number of years on the chart. But nonetheless, I think you see a significant step-up in the dividend in recent years. But also to sort of call out that the group has added effectively still to the 30-year plus track record of maintaining or increasing its dividend. And it's something that the group is very proud of and the Board is very proud of at M.P. Evans. It's something that we absolutely would look to continue as we move forward. And I think it's important also just to touch on the fact that we do prioritize a sustainable level of dividend growth. And we do have periods where we have substantial profitability. And we have periods where it's not so profitable. But what we do try and do is even those out. What might seem a little stingy in those better years would tend to be offset with perhaps more generous dividend in those periods where it's not so good. But I think this is a track record, as I say, we're very proud of at M.P. Evans, and we look to continue as part of our capital allocation policy. So if we can now move to a bit of an outlook for the rest of 2024. Again, a great foundation at the start in the first half of 2024. Total crop, you may have seen our 8-month crop result that was in our interim report. That was ever so slightly down on 2023, just 1% down. That's a total crop process level. And predominantly, the reason for that is that we have the peak in crop in 2023 in the month of July and August. And we're anticipating slightly later peak this year, probably more around October, November. And that's really, as a result, waiting on some rainfall to help ripen the fruit. The good news is the fruit is on the trees, but we are requiring a little bit of rainfall in the second half to help ripen that fruit, which may result, if that doesn't come in time, in some crops slipping into 2025. But our anticipation at the moment and expectation is that, that rainfall come crop year-on-year would broadly be where it was at the end of 2023. In terms of price outlook, we reported a price at the end of the first half of $771 per tonne. And you can see there that first bullet point says that the price -- the average year-to-date price up to the end of August 2024 was $777. So you can see an improvement there on the $771. And we continue to see a robust and strong price environment into September as well. So there could be a softening in that price environment should the crops pick up. However, if maybe those crops don't come through, and I think our performance will be reflective of the Indonesian market as a whole, if that crop doesn't pick up, there could be some sustaining of that sort of stronger price environment, perhaps sort of hedging out any volume drop that may go into 2025. In terms of costs, so we've had that substantial $4 million benefit of fertilizer price reduction in the first half. But sadly, that won't be repeated in the second half. That will be a lot lower. And that's really because by the time we had -- we are applying fertilizer in the second half last year, cost has fallen dramatically. Not quite back to the level they were at before, but certainly have fallen away from the peak. But we do expect unit costs through the rest of 2024 to fall. And again, that is in line with historical performance, largely related to some of the cost phasing that we have in the group. So we expect unit costs to fall in 2024 -- for the remainder of 2024, I should say, based on the output levels projected. So I think there's probably 2 risks that I just mentioned. I said about the rainfall with some fruit perhaps touching or moving into 2025. And then also probably just worth calling out that, again, some of the benefit we saw in the first half from that kind of weaker rupiah, as the dollar has weakened against a number of currencies in the past couple of months, it's unlikely that, that level of benefit will be there in the second half. But I think outside of that sort of more short-term outlook, in the medium and long term, the group remains very confident in the growth -- organic growth as we have our plantations that continue to mature and also as we look to improvements in the yields for the newly acquired land that was purchased in 2023. So I'll just pass back to Matthew to summarize.

Thank you, Luke. well, I think just to conclude, to draw together some of the strands of the things we've been discussing so far, we're very pleased with where we got to at the end of the first half of 2024. We've seen crop production, price, all up in the first half of this year. And that's enabled us to really deliver a very pleasing result for the first half of the year. So as you can see, earnings per share up to just under 45p. And again, that's enabled us to push forward with an increase in the dividend to 15p per share, another step forward in our progressive dividend policy. We're pleased to have been able to increase our effective ownership by acquiring that minority stake I was discussing. And then as Luke said, as we move into the second half, very encouraging to see the higher pricing environment we've been experiencing. And that very much has offset the slightly lower crop we've seen. We think that puts us in a very strong position for the remainder of the year. We continue to look for opportunities to add further hectarage into the group. As we continue to grow, we're continuing with our share buyback program. And as we look to the longer term, we think that the ongoing crop growth trend will continue, supported by the increase in yields from some of our younger areas and also the increase in yield we expect to see from some of those areas we bought over the course of the last 12 months or so. Obviously, we absolutely continue to be very highly cash generative. And that does indeed support some of those strategic priorities and strategic ambitions I was talking about a little bit earlier. So we look forward to the remainder of the year with much enthusiasm and look forward to sharing that with you in our next presentation. But I think that concludes the formal part of our presentation for today. And we look forward at this stage to responding to some of the questions that you have.

Perfect. That's great. Matthew, Peter, Luke, if I may just jump back in there. Thank you very much indeed for your presentation this afternoon. [Operator Instructions] But just while the company take a few moments to review those questions that were submitted already, I'd just like to remind you that a recording of this presentation, along with a couple of slides and the published Q&A, can all be accessed via your investor dashboard. Guys, as you can see there, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But guys, at this point, if I may just hand back to you just to read out those questions and give your responses where it's appropriate do so. And if I pick up from you at the end, that would be great.

Thank you very much, Jake. And thank you indeed for your questions, which have been coming in during the course of the -- of our presentation. And they're reasonably diverse in nature. I don't think there are any overlaps. So I think the simplest thing is to take them from the top, and between us, we will attempt to answer them. So the first one is, many of your peers appear to be larger companies with higher production, whilst they seem to have fewer employees. Can you explain this, if I'm correct? Do you want to answer that one, Matthew?

Actually, pretty happy to do so, yes. I think it's quite difficult to do some reliable benchmarking in this area. What we tend to do is we look at the number of employees we have per hectare that we manage and then assess that based on industry norms, if I can call it that. And of course, what we also look at is clearly employee cost is a significant part of our overall cost base, feeding into our overall cost per tonne of palm product. And cost per tonne of palm product is, of course, a fundamental measure for us in ensuring we deliver our output at an overall low cost. But in terms of employees, we feel satisfied that we're in a good place when it comes to making sure we run an efficient operation whilst, at the same time, ensuring we live up to our own expectations in terms of quality standards.

Fine. The next question is, how far are we from having our growth strategy limited by the rules on the amount of planted land we can own as a foreign investor? I think I can probably answer this, and Matthew, Luke may want to add to it. But as the rules currently stand, a foreign company is not permitted to own more than 100,000 hectares. There are exceptions for foreign companies who've owned much more than that in the past as the rules stand in terms of new -- any new developments. But whilst we have been significantly increasing our hectarage, this only applies to the land we specifically own ourselves, i.e., it doesn't apply to our smallholder cooperative areas. So the actual land that we currently own ourselves is a little over 50,000 -- just over 50,000. So we're actually little more than halfway towards that 100,000 level. So we have plenty of room yet for further growth. The next question is, with a net gearing of just 1% and an increase in cash flow from operations, what are the group's capital allocation priorities for the next 12 to 18 months? Will we see further acquisitions or more aggressive share buybacks? I think any of us can answer that one but...

Of course, yes. I mean I think you're quite right to highlight the fact that, as Luke had indicated, our gearing has been extremely low, and we continue to be very cash generative. So that puts us in a very strong position as we look forward and think about our strategic priorities and what we want to be doing with the group over the course of the next 1 to 2 years, as you highlight. I think also what has been shown on the uses of cash analysis was something that we've been very clear about for some time as well, which is that we want to take a balanced approach to capital allocation in terms of investing in what we already have, making sure that we're doing the right things in terms of our existing portfolio of assets and at the same time, ensuring that we have, if you like, the firepower, if I can call it that, to look at opportunities for further acquisitions. And we absolutely do have that firepower. In terms of the last part of your question, at the current time, we don't have any intention to be, as you call it, more aggressive when it comes to share buyback. So I think it served us and served our shareholders quite well to continue with our, if I call it, steady approach to continual buybacks that continue reliably on an ongoing basis at the pace that we're currently doing it.

Thank you. Fertilizers is a major cost. That is true. As the group continues to build mass at any point, would there be any merits in bringing fertilizer production in-house? We do, of course, produce our own organic compost, which is more of a supplement than a replacement of inorganic compost. Matthew, would you like to comment further on that? I think it would be inappropriate for us to be able to produce the likes of potassium and phosphate and some of the inorganic fertilizers. It's very specialist and we need those inorganic fertilizers.