Noumi Limited (NOU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Freedom Foods market update. [Operator Instructions] I would now like to hand the conference over to Mr. Perry Gunner, Executive Chairman. Please go ahead.

Welcome, everyone, and thank you for being with us this evening, and we apologize for the slight delay but -- as a result of the ASX announcement not being uploaded until just recently, and I hope you've all had a chance to have a look at it. Before turning to questions, I would just like to make a few points in relation to that announcement. Firstly, we are committed at Freedom to resolving the current issues and ensuring that we regain the confidence of investors as soon as possible. The carb issues are having no impact on our operational performance. We previously stated on the 29th of May that COVID-19 was having a material influence on our performance. But these issues are not. And I think that needs to be made quite clear. I'm on the Board, and I'm sure investors will be very happy to welcome the statement of the Perich family that they totally support this business and will continue to do so whenever and whatever. It's a disappointing episode in the company's history, certainly not our finest hour. But we want to assure everyone that we will provide information on a timely basis and be as transparent as we possibly can, being fully aware of our continuous disclosure obligations. Also I want to ensure all of our customers, and I think there are some on the line, particularly including our dairy farmers who provide us with the top-quality milk that ends up in our products in the retail outlets and in our milk brands that we continue to stand by you and remain committed to honor and expand our partnerships. Ahead of handing over to questions, I want to advise that the company is not in a position to make any further comment at this time in relation to the employment position of Rory Macleod. A fair announcement will be made next week. Also, given the recent media and market speculation, the company wants to clarify that a total of 61 positions have been terminated and 41 staff have been made redundant as a result. In the ASX statement this afternoon, it should be noted that Freedom Foods is committed to ensuring it operates at the highest level of integrity and operational performance. One of the major issues in that announcement is that we are continuing to review our inventory levels. On the 29th of May, we indicated that we were likely to make a one-off noncash write-down of the carrying value of having inventory of approximately $25 million. We've undertaken further analysis since that date. And now we are suggesting that further write-downs will be required to reflect the provisioning, the obsolete stock, out of date stock and product withdrawals. The revised estimate now is an additional write-down of $35 million, bringing the aggregate inventory write-down for financial year '20 to be approximately $60 million. This revised estimate is still subject to further analysis, year-end review processes and audit as part of the finalization of the financial year '20 results. You'll also note in the announcement that we have sought and have been granted the suspension for 14 days to consider our financial position. So having said all of that, I now welcome some questions.

[Operator Instructions] The first question comes from James Tracey with Veritas Securities.

I've got 3 questions. I'll ask them one at a time, if I could. The first one is, could you please explain what happens with the departure of Rory and the CFO?

Firstly, in regard to Rory, we want to be transparent. And at the appropriate time, we'll inform the market. But please, we ask you to respect that we have employment obligations and continuing to review the situation. With regard to Campbell, he resigned, and that was announced to the ASX. And again, please respect the processes, and we'll update you if there is any further requirement in regard to Campbell.

Okay. And with regards to the delay between putting out the announcement on Rory's being put on leave and the trading halt yesterday, was there any reason why you didn't go into a trading halt on that initial announcement?

When we made that announcement, we were not fully aware of the situation that we now find ourselves in. We began investigations with our executive team. And as a result of those investigations plus the speculation that was beginning to occur in the media, we decided to go into a trading halt.

Okay. And do you have any suspicions? Or are you aware of any fraud occurring?

We're undertaking further investigations. And if we become aware of any errors or issues like fraud, we obviously would advise the market immediately.

Your next question comes from Josh Kannourakis with UBS.

Just a little bit further on the inventory issue. Can you talk a little bit more around the time line of events there and just maybe in terms of some of the systems issues apply [indiscernible], how it wasn't picked up earlier?

So this mostly came to light when we were consolidating our warehouses, and I think we've announced that before. We had 5 external warehouses, and we're now moving our stock to within our own warehouses. There was an amount of stock that has been put aside for rework. On further examination of the possibilities of rework, it became evident that it was not practical nor profitable to rework that stock. So we believe the appropriate decision is to write that stock off. That provision will need to include some disposal costs. And you can't just throw it away. You have to go through a proper process disposal. So that's why the provision has been increased. The likely provision has been increased from $25 million to $60 million.

Got it. And so in terms of the rework, so just to understand that a bit better. Is that because of you are looking to do as sort of protein fractionation from some existing product…

I mean the [indiscernible] of how the stock can be reworked, but the practicality and the profitability of reworking it didn't stack up. And therefore, we have decided to write that stock off.

Okay. I understand. And I know there's obviously lots of other questions around some of the other issues, but I would be keen to just get a quick update on the actual performance outside of this in terms of the lactoferrin commissioning out-of-home channel and the operational business just how track in the current environment, if possible?

I think as I said before, none of these issues are impacting our current operational performance. It is tracking as one would expect in the current economic conditions. Lactoferrin plant is producing lactoferrin as expected. Generally, sales are improving, particularly in the urban prime area as more and more cafés and hotels and places where people drink coffee come online. So there's still some impact, but it's much less than it was in May when we last made an update.

Your next question comes from Michael Peet with Goldman Sachs.

Just firstly, could you just confirm that your -- the Board is comfortable with the asset values at the moment, mainly the intangibles with capitalized development, NPD and then the fixed-asset values as well?

That's something that we would normally review as part of the audit process. That audit process is about to start. And clearly, when our end of year results are announced, that's a matter that will be thoroughly investigated. But just at the moment, we're dealing with other issues. And -- but you can be sure that will be properly evaluated as part of the annual audit process.

Okay. Great. And are the banks aware or your lenders aware of this latest sort of -- these latest developments now?

Yes. We have been in touch with our bankers and made them fully aware of the contents of the announcement. And at this stage, they are fully supportive of our situation. They are, of course, encouraged by the support that the Perich family gives to this business, and we don't expect any particular issues to arise with our banks.

Are there any contractual arrangements that you have with you, you may struggle to fulfill as you're looking forward here? Or is it separate…

In what regard?

Look, are there any -- I guess you've answered in terms of the lactoferrin is producing lactoferrin. Just wondering whether there are any contractual obligations around -- over that product or others, which you would have -- having any problems for fulfilling?

Well, the lactoferrin relies on the amount of milk that comes through our factory. We have more than adequate supply of milk. We do each year have a slight surplus and that will be, as -- given climatic conditions, which we can't predict. But we would be quite confident that we can produce all the lactoferrin we require to meet our contractual obligations.

Your next question comes from Sam Teeger with Citi.

Can you circle back to the inventory write-down? The release, it goes back to 2017, but to the best of my understanding, fractionation hadn't started at that time. So just kind of wanting to dig a bit deeper and find out what else is going wrong here? And to what extent have you produced stock for a customer who no longer wants it?

There's been undoubtedly canceled export orders. My background is the wine industry, and that's a very common problem in the wine industry. It's a little bit easier to dispose of that sort of wine. But there is -- part of that obsolete stock does relate to contracts that were in place, that were not fully utilized by the other party. And very difficult to do anything about that.

So how much of the $60 million is that?

I couldn't tell you. I couldn't.

Right. And I guess given that and then given the doubtful debt issue, to what extent will Freedom now rethink its Asian export strategy? And to what extent will you guys now demand a deposit upfront for future orders to avoid this happening again?

Yes. Well, certainly, that's -- I think you've hit the nail on the head there. That's the obvious answer to those issues. That probably is only going to relate to the packaging materials. And obviously, some of this obsolete stock includes packaging materials. But getting deposits or some security against the packaging materials that we purchased for our overseas contracts or even contracts within Australia will help out. But once the product is packed or some of the raw materials formulated, there's still going to be a potential issue if orders get canceled.

Got it. Okay. And then, I guess, I appreciate you don't…

But here it does go to -- the objective of this company is to develop its own brands, we're in control. And one of the issues with the expansion of capital that we've gone through, the first day when you turn on the plant equipment, you don't have enough of your own products to put down the line. So it does require you to seek at times outside orders to fill the -- all the production capacity. But of course, with time, you tend to develop your own brands to replace that contractual capacity.

Sure. And I appreciate that you don't want to talk about Rory's employment specifically, so I wouldn't ask on that exactly. But if we were to assume that Rory does not return to Freedom, what are the key things you'd be looking for in the new CEO?

Well, very obvious answer to that is someone who can drive this business forward and take advantage of the equipment we've installed, the brands we have, the excellent staff we have who are totally committed to the company, it's a point I don't think should be lost on anyone, it's the commitment of the staff and the quality of the staff within this business. So we would be looking for someone who drive the business forward. Most businesses like ours [Technical Difficulty] leverage on the Australian retailers. But I think the most important role that plant beverage is playing in our company is the out-of-home route trade nonretail business, food service, and behind our plant beverage products, e.g. MilkLab, we hope to develop other product opportunities. So it's the wedge that puts us into the door.

Sure. And then can you just give us an update of the key CapEx programs you're planning next year? And how much we should be expecting for CapEx?

We only have one more installation, which is a bottle line, PET bottle line. The majority of that equipment has already been purchased and paid for. So it's just the installation costs. And there's been some pre-work for that already. So we're not anticipating a large capital expenditure program for next year.

Great. And last question, just on the 61 positions that have been terminated. Are there any other executives besides CEO and CFO?

Just sorry, I didn't quite catch that.

Any of the 61 positions which you've terminated, excluding CFO, CEO, any like key executives of the company on the Executive Committee?

We had one other key management personnel who has left the business, Amine Haddad, but he actually resigned. He indicated some time ago he wished to retire. And he would effectively retire rather than being made redundant.

Right. And then -- sorry, I know I said probably that will be the last question, but this will be the last question. Given, I mean, Rory's gone and Camp is gone, how do you rate the bench strength at Freedom at the moment?

Well, we actually rate our bench strength. We have a lot of what we consider highly talented, younger people within our business, very skilled, very enthusiastic, and we're very confident they can step up to the mark. In fact, we see that as the lesser of our issues in today's world. Our issues are still to get out in the marketplace and succeed with our brands. But we have the people. We're very confident of that.

Your next question comes from [ Buma Kishori,] a private investor.

Just I have a question regarding stocktake. So like most of the companies have cyclic a stocktake or quarterly a stocktake or half-yearly or annual a stocktake. So this kind of inventory losses, what -- were not they picked up during the stocktake?

Yes. I just missed the last part of your question there. You're talking about stocktakes.

That's correct. Yes.

Yes. Clearly, that's a practice we can improve. We do stocktakes obviously. But there are a number of things that have come out of the current issues that we're facing that require improvement in our processes and procedures and stocktakes would certainly be one.

To me, it clearly suggests like just -- like $60 million write-off means there is something not right with your stocktake system, or maybe you are not doing a stocktake regularly?

I wouldn't be in a position to make a comment on that, what caused that level. I think the important thing is we have now recognized it and we're going to deal with it. But stock that was set aside for rework, of course, would have been stocktake. It's just the impracticality of that process that has caused us to indicate that we will have to make this provision.

Your next question comes from [ Gil Hedison], a private investor.

The question I'd like to ask is in relation to the stock rework. What's the nature of the stock? I mean, is it stock that's out of date or is it stock that's breaking down? Or what is the actual issue there?

Out of date would be the main cause. There's a limited shelf life for UHT milk. So that's the main cause there. As previously indicated, there are some packaging materials that have risen out of canceled contracts or delisted products. Some of those delisted products have come from local retailers. So that's -- it's basically out of date stock would be the predominant cause of this write-down.

And in terms of the rework, what have they investigated in terms of the ability of the company to rework the product? In what way that product was reworked or looked at reworking it?

I think the opportunities to rework milk would be to have it dried as powder, to put it through our protein fractionation plant. The difficulty is the cost of getting that milk out of the packages and into a bag, if you like, to allow it to be reprocessed does not justify the protein or the value of the milk powder that you would obtain from doing it. So there was a hope. But I think the practicality and profitability of it is not there.

My understanding is that UHT plants often have situations that happen like this. And reworking stock is actually possible. Has anybody investigated what's been done in the past?

We've had limited quantities of rework. So the difficulty here is the actual quantity. And as you would appreciate, there are start-up quantities every day, close down, changeover quantities that need to be reworked all the time. We have the capacity to do that and we probably have the capacity to do some, but not to the extent of the amount of out-of-shelf life stock that exists.

But my understanding is that you could probably rework 5% of it in new product. However, that's not practical. But my understanding also is that the product can actually be built very satisfactorily and it has been done in the past.

It can in quantities that we could deal with. These quantities are beyond our capacity to deal with.

My experience has been that a product like that, a million liters can be handled within a fortnight. So how many millions of liters are you talking about? What have you got in rework stock there?

I couldn't answer that question. We have identified an amount of stock in value terms. I don't have the details of where it is, what it is, there's packaging materials, there are cereals, there are a whole lot of things that are going to make up this amount. I couldn't answer that question at this point in time. But clearly, the company would want to rework it if it was possible, practical and profitable.

Your next question is a follow-up question from Sam Teeger with Citi.

Just a couple of quick other ones. What else are you guys investigating before the company comes back online next week?

I think you would note the suspension is for 14 days, so it won't be next week. I don't know if you caught up with the -- that we've sought and been granted an extension -- suspension for 14 days. We're looking at everything. These matters have only risen in the last 24 hours, 48 hours. I mean, we need to continue to investigate, continue to see what we can do about it.

Sure. And why is there a need for the reversal of prior year revenue recognition?

I think that's due to invoicing errors.

Can you elaborate on what that means?

Well, invoices that were raised that should have been credited and weren't.

Okay. And then you talked about before the importance of succeeding of brands. And to what extent do you think the company has underinvested in marketing as a percent of sales? I think it's roughly 2.5%. And do you think the marketing is spread across too many brands as opposed to be concentrated on a single brand?

I think you have identified one of the areas where this business will be changing. We will certainly be putting more effort into developing brands, having a less complicated product range, supporting the SKUs that are working for us, not developing new SKUs. And I think all of that will contribute to better profitability. And given inventory is an issue, we're facing at the moment, a lot less obsolete stock going forward. So your point is very apposite. That is what this business has to do now. But I would repeat what I said before. When you turn on a new production line, you don't actually have the brands to support that production line. So you tend to have to develop product SKUs if you like and diversify your product range. And you tend to find out what works and what doesn't.

Got it. And then can you please just provide a bit of background to that employee share plan comment? Just wanting to understand why are these shares issued and then issued to? And what you're looking into here?

Well, there are 2 issues that arise. One, we had one plan that the employees who are unable to exercise due to blackouts hadn't been accommodated in the share plan. So the Board thought it's unfair on those staff to miss out on the options because of blackout periods, and these blackout periods obviously were planned at the time. And the other one was due to the options not being properly recorded, and therefore not properly valued at the time. As you know, you take a charge whenever options are created. The charge was not properly identified and included in the accounts. So the -- one is due to blackouts and one is due to catching up on amounts that should have been put in the accounts previously.

Your next question comes from Russell Gill with JPMorgan.

Just one question on your inventory write-down at $60 million. You made a comment there that there are accounting matters relating to COGS that should have been expense that's obviously been taken to the capital number. That $60 million is obviously a huge number relative to your starting balance. Can you -- I mean, it says it requires further investigation. Does that investigation incorporate in that $60 million? And if it is, can you possibly quantify what that adjustment is each year so there's a better understanding of what, I guess, the real earnings have been overstated in the last couple of years?

We're not at the point where we could answer that question. We're still investigating. Yes. The -- what constitutes that amount when it occurred, so we're not -- we're still in an investigation pursuit. This has only come to the attention of the Board today, effectively. We had a Board meeting today where this amount was brought forward to the Board. So we've still got a lot of further investigation to undertake.

And then just a follow-up on that. Because you did mention that the employee expenses weren't even been expensed properly. Are there other areas of business that the Board will need to review in terms of the rest of the other parts, systems, operating procedures, et cetera, et cetera, just to get confidence on all the other carrying values in the business?

I think that would go without saying, but any business needs to continue to review its processes and procedures. And particularly, as you grow very quickly like we have, the ability to further keep up with the speed of growth is difficult. So we'll be investigating whatever we believe needs to be done for further improvement in the company.

Your next question comes from [ Kerry Vogel ] with [indiscernible]

I just -- you mentioned 61 positions were terminated and 41 staff were made redundant. I'm just wondering where the other 20 went? I mean 41 staff redundant…

Yes. Yes. So the other 20 were positions that haven't been filled at the time. I mean, during the COVID-19 lockdowns, it's very difficult to fill positions, so they were vacant positions. Our total staff at the -- for the 61 positions were made redundant was 760. So 20 was not a large percentage of those positions.

Right. Now the next thing is, how many -- I don't understand how you had so many canceled orders. Were these from your regular customers? Or these were new customers who were sort of encouraged to order and then canceled? Like how many -- how could you have so many canceled orders?

The -- so the -- first of all, if local retailers delist your product, and they do that on a fairly regular basis, they have a range of reviews, then that comes up not like effectively canceled order, but it has the same impact. You have the stock, the packaging materials, the raw materials that will be going to go into that product because you have to be working in advance. So that's one source of that issue. I don't think I'm saying we had that many canceled orders because some of it is just stock that expired. So yes, it is an issue. Remembering this goes back over more than 1 year. And I would think the -- our Asian markets would be a major source of the canceled orders, particularly China.

Well, I don't understand how -- when you had so many expert directors on the panel that it got to this stage. Like how did all of this occur? If this has been going on since back to 2017, we're talking about nearly 3 years. I don't understand how this hasn't been picked up beforehand. I'm sorry to say, it sounds like you've been asleep at the wheel.

Expert directors can only act on the information they're provided with. We were only provided with the information of the additional $35 million today. We were provided, obviously, with the information about the $25 million at our last Board meeting in May after which we gave an update.

So you believe what the employees told you. Is that what you're saying? They just told you certain things and then you believed?

I don't think the Board go after these stocktakes, particularly when there are a number of warehouses. I mean, to do a stocktake of our stock would take days. I don't think that's the role of the Board.

Perhaps it might have been, might have been rather than getting into this situation.

Well, that's hindsight. But I don't -- I'm not aware of any Board that goes and does stocktakes.

So you trusted what they said and they told you the wrong thing.

We trusted what they said, that was an audited figure.

Your next question comes from Chad Mikhael with UBS.

I guess part of my question was asked earlier by Sam with relation to the invoices. But the question I had as a follow-up was just with relation to debt, how far is debt doing at the moment? Is that $100 million facility, the additional liquidity facility, has that been drawn? And can you just touch on the capital requirements you mentioned or the potential capital requirements you mentioned in the first paragraph with relation to the Periches?

Part of that facility has been drawn. And the last part of your question about the Periches was…

With relation to whether there are actual capital requirements at the current stage for the business to continue?

Well, I think we did so. We've requested and they granted a suspension to consider those matters.

Your next question comes from [indiscernible] with [Indiscernible]

Perry, it's probably more of a comment than a question. But I just wanted to say that given the unprecedented period that we've been through with COVID, I just sort of thought -- I mean, I thought this would have been probably easy to digest if you had to come out with this -- without the prior 2 updates, which in May -- sorry, in March and April, we said that everything was largely. In fact, everything was going pretty well.

I'm not going to disagree with you there. Fair comment.

Yes. No, just as an investor, as a shareholder, I was just trying to -- the Board should have been highly alert to any irregularities in the current environment. And I have 2 market updates saying that everything was okay. So encouraging people to buy stock and then to turn around and say, actually, we've got a problem. And then now to have this one is incredible.

I think I don't know -- our last market update did say the full year earnings will be materially impacted by COVID-19.

It's an old story. The first place -- no, not the last one. I'm talking about the first 2 in March and April, which was generally benign. The last one wasn't. And the current one, the one in May wasn't the current one, so obviously the one in April. It's just a comment.

Yes. Okay. Thank you for your comment.

We have come to the end of our question-and-answer session. I'll now hand back to Mr. Gunner for closing remarks.

Thank you. Thank you for attending, and I hope we have answered your questions to the extent that we can. Clearly, this is fairly raw. We learned about a lot of this today. And clearly, there are further investigations underway, and we remain confident about our business. The underlying business remains very strong, very good people, very good brands. We're in a good place in the market. So we're hoping that this is the bedrock, if you like. And that when we next speak to you, it will be a more positive outlook than we are presenting to you today. But anyway, thank you for being on the line and participating, and good evening.