Noumi Limited (NOU) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining us today. With me are Trevor Allen; Genevieve Gregor; and Michael Perich, our interim CEO; and the rest of the Board are online. Firstly, I'd like to draw your attention to the disclaimer on Page 2 of our presentation. It's quite lengthy, but I'll allow you to read that at your leisure. We then move to the agenda. And you can see our presentation today is about our 2020 results released earlier today and which are now available on the ASX website. Please note, we will be taking questions at the end of the presentation, and we will not be going through the appendices. Let me say the results are confronting. We acknowledge they are deeply disappointing. And today, we wish to share with you what we have and are doing about it. In other words, we have a pathway forward. Let me assure you, as a Board, we take our obligations very seriously. Once various matters were brought to our attention, we acted immediately. Firstly, we called in Ashurst and PwC to investigate, and we are also working with ASIC and providing them with that information. But more importantly, we have set in motion a number of business improvements. And if you now go to Page 5 of our presentation, which is available on your screens, I'll go through some of the things we'd like to bring to you today. Firstly, our key messages. The financial position of the group has now been established following a rigorous process with independent advisers. However, the financial position necessitates a significant recapitalization. We believe shareholders will need time to understand the results before any recapitalization occurs. And Freedom shares will remain suspended until a recapitalization is announced. So what have we been doing? And this is not an exhaustive list. We've engaged with our customers and suppliers. We've secured a $45 million interim liquidity facility guaranteed by our majority shareholder and a standstill agreement with our lenders. We have conducted independent investigations into historical matters. I mentioned that previously. We've undertaken product range and operational reviews. We've been trying to simplify our business, which is something we noted on the 25th of June when we last spoke to you. We've been rebuilding our management team and our culture, including review and improvement of remuneration framework and policies. We've rebuilt the financial reporting, cash flow monitoring and improved our financial reporting tools. We've updated costing standards and accounting policies and practices. We've improved internal management processes, for example, inventory control, delegation of authority, clearer focus on operational KPIs and reporting. The external audit, as you will notice, included a restatement of historical financial audited accounts. We assessed recapitalization alternatives to provide the company with more flexible capital and a runway will turn around growth. We've kept the regulatory authorities informed, both ASIC and ASX. We've addressed matters and commenced legal actions relating to the almond paste supplier, Blue Diamond. We've reviewed and improved governance and risk frameworks and policies, and they have been released. So that's what we've been doing, but I'll just now give a quick overview of the results before turning to Michael Perich to go through it in more detail. Our total revenue was $580 million, an increase of 26% on last year. Adjusted EBITDA, that's pre-AASB 16, is a loss of $86.5 million compared to a loss of $88 million in the prior year. Statutory net loss after tax of $174.5 million compared to a net loss of $145.8 million in the previous year. Looking at sales performance. Dairy and Nutritionals revenue was up 37% to $363 million, with growing demand for lactoferrin. Plant-Based Beverages, revenue was up 30% to $132 million driven by strong growth in MILKLAB sales. Offshore revenue, up 29% to $110 million, now represents 19% of our overall revenue. Net debt at 30th of June was $275 million and is expected to increase to approximately $335 million at the time of recapitalization. We will go through in detail on Slide 9 of the presentation the reinstatement impacts, but I can tell you that it was $590 million of restatements and write-downs in finance year 2020 and prior years, reducing our net assets to $61 million. Just before I hand over to Michael, I'd just like to draw your attention to some Board composition details that are in our annual report. During the year, we appointed 2 additional very capable directors in Genevieve Gregor and Jane McKellar. They not only bring great skills but have increased our Board's diversity and independence. In my own case, as I alluded to at the last year's AGM, I would be due to retire by rotation at this year's AGM but would not seek reelection and, therefore, retiring. In addition, Trevor Allen has indicated he intends to retire at or around the AGM. So this will leave 2 vacancies that will be dealt with in the recapitalization process. So with that, I'll hand over to Michael Perich, who will now go through in more detail the results from last year. Michael, over to you.

Thanks, Perry, and good afternoon, everyone. I'd like to cover off some of the key operational metrics for FY '20. With our Dairy and Nutritionals business both processed over 300 million liters of UHT milk, and we had over 4% growth in UHT export volumes. The Shepparton factory produced over 13.1 tonnes of lactoferrin, and we now have the total capacity at the Shepparton site to produce 33 tonnes of lactoferrin. Within our Plant-Based Beverages, we saw a strong growth in MILKLAB, with sales increasing over 73%. We have new distribution pathways, including a partnership with McDonald's through McCafé for MILKLAB Almond and also lactose-free. For FY '20, we processed over 76 million liters of plant-based UHT beverages. Now Ingleburn site has the capacity of over 120 million liters, with potential to scale operations into the future. The FY 2020 performance was impacted by the following operational matters with mitigants put in place. With the delays in commissioning of our new capacity at Shepparton plant, resulting in higher wastage and under-recovery of protein and lower-than-anticipated yields of lactoferrin. At this stage, we are now achieving more consistent operational performance at Shepparton, with lactoferrin plant producing materially higher volumes and in line with our design expectations. Cereals and Snacks operating facilities at Leeton, Dandenong and Darlington Point have been underutilized, but the group is now completing a full strategic review of the Cereals and Snacks segment. Unrealistic operating costing budgets have resulted in sale prices being set too low for some of our products, resulting in unprofitable sales. The group has now commenced a full review of all product lines, focusing on lines that can deliver profit back to the group. Delays in plant commissioning and planning decisions resulted in surplus milk supply being traded at a loss. We have now implemented thorough planning processes to ensure that supply is better matched to demand and more strategic decisions around trading of milk for the benefit of all parties. Some of the trade spend within our retail channel, particularly in the Cereals and Snacks segment, was ineffective, which adversely affected profitability. Trade spending policies have been reviewed, with funding reduced and refocused. New product development expenditure on some products, particularly in the Cereals and Snacks segment, did not achieve anticipated returns. In line with the full review of product lines, the group has adopted a more focused approach on new product development decisions. I will now pass on to Chair, Finance and Audit Committee, Trevor Allen.

Thanks, Michael, and good afternoon, everybody. I'm going to give you some more detail in relation to the losses of $590 million referred to by Perry Gunner, and they're set out on Page 9 of the presentation. There are essentially 9 buckets into which we classify those losses. And as you can see, those losses [ grew ] from $370 million in the capitalized work-in-progress down to $4 million, $5 million in relation to share-based payments. In relation to the capitalized work-in-progress, we've reviewed the capitalization policies and have made amendments, with costs being reclassified from previously capitalized to operating costs. Now only directly attributable costs are to be capitalized. The commencement date for assets to be depreciated is when they start regularly producing saleable product. In relation to inventory, we advised in late June the $60 million write-down. That number is being confirmed today. We have reviewed our inventory stock take procedures, and our write-off policies and practices have also been reviewed and amended. In relation to new product development, capitalization practices have also been reviewed and amended, with costs reclassified from -- to an operating expense basis in many cases. Directly attributable development costs will continue to be capitalized, but impairment is also being recognized on underperforming products, and we have therefore written down new development -- new product development category by $38.9 million. We have looked at revenue cutoff practices and some of our long-dated receivables and between the 2 of them have had to recognize additional losses of $22 million. We've also had to look at our accrual recognition practices in relation to our trade promotion and trade marketing spend, and this has caused us to have to write down a further $12 million. On share-based payments, we had to recognize $5.5 million in relation to commitments made to staff some years ago, which we came across in March, and we have recognized the costs associated with that. Now when we deal with these write-downs and the implications of these write-downs, it has meant that we have had to reconsider the carrying value of goodwill and brands across a range of our businesses, particularly Cereals and Snacks. And that has caused us to have to take further write-downs of $76 million, giving us a total of $591 million that you see on Page 9. I'm now passing back to Michael.

Thank you, Trevor. I'd like to present the earnings and balance sheet summaries. The net sales increased 26% to $580 million from FY '19, with the domestic sales up 25% to $470 million and export sales up 29%. Adjusted EBITDA losses decreased slightly to $86 million for FY '20. The group has made a statutory net loss after tax for FY '20 of $174 million. While higher profitability was obtained from the group's plant-based products, particularly from MILKLAB, as well as the commencement of sales of lactoferrin in similar nutritionals products, these contributions were outweighed by the performance of Cereals and Snacks, Specialty Seafood and losses from operations of UHT dairy. Despite the impact of COVID-19 on international trade, overall export to Southeast Asian markets rose by 261% to $34 million, reflecting increasing market acceptance of Australia's Own and MILKLAB dairy brands. Export sales of UHT products to China rose by over 7% to $60 million led by sales to our contract partners. The COVID-19 impact on our FY '20 results, the next area I'd like to focus on. Staff safety, shift protocols and flexible work practices were enacted across all the sites. COVID-19 negatively affected revenue and EBITDA. The consumer demand temporarily shifting from out-of-home to the grocery channel, where the grocery channel is materially lower than the out-of-home margins. The closure of food services caused the drop in demand for cream. We also saw significant declines in exports to China in the second half of FY '20. With out-of-home customers being impacted through COVID, we have provisioned for expected credit losses. Throughout this period, we received accolades from our customers who acknowledged our support managing supply during this period, with OH&S practices and policies tested and proved to be well designed and communicated with no community transferred at our sites. At this stage, the group did not qualify for any job keeper payments due to the overall revenue across the group, growing from the previous year. I'd now like to drill down to the segment results of the Dairy and Nutritionals. Revenue rose 37% to $363 million, with the business experienced an unprecedented spike in demand for UHT milk as a result of pantry stocking caused by the COVID-19 lockdowns, a rise in export to Asia and increased industrial nutritional sales. The adjusted EBITDA losses increased to $46 million due to the number of factors, including selling prices not fully recovering costs for some products, losses from the sale of surplus milk and the delays in commissioning of the lactoferrin plant and UHT expansion in Shepparton. Underutilization of specialty packaging formats within the plant also caused a reduction in margin. There were also operational challenges at Shepparton during commissioning of expansion and lactoferrin plant integration, which led to increased costs. The state-of-the-art Shepparton plant is now operating on a much improved basis, with focused controls around yield and recovery implemented to review -- and a review on product lines underway. The group is focused on returning this segment to profitability in FY '21. Revenue in Plant-Based Beverages increased 30% to $132 million as the segment increased strong growth across all channels and all brands, particularly MILKLAB. Adjusted EBITDA of $117 million (sic) [ $17 million ] for FY '20. The strong performance came despite the impact of COVID-19, which caused major disruption to out-of-home demand during the peak lockdown periods. Volumes have since recovered and profitability continues to improve as economies of scale increase. MILKLAB has been the forefront of the shift towards consumption of plant-based beverages, generating strong brand loyalty in high-margin channel for the group, leading to increased profitability. The group continues to produce Almond Breeze milk under license from Blue Diamond Growers. Regarding the Cereals and Snacks segment, the group maintained its leadership position in the growing health food cereal market, where overall revenue declined by 14% to $70 million, with the adjusted EBITDA loss increasing slightly to $32; million. Revenues declined due to the exit of some of the contract manufacturing and lower-than-expected sales to Asia, offset by increasing grocery sales, which benefits from panic during COVID-19. Lower-margin grocery sales mix also impacted profitability. Profitability was affected by lower production levels and higher input costs due to the impact of the drought. A full operational review of the Cereals and Snacks business had determined that the business had been overly reliant on trade marketing to support new products, some of which have not achieved their anticipated returns. In line with the company-wide product rationalization program to reduce the number of low-margin or loss-making product lines, the group has adopted a more focused, strategic approach to new product development decisions. Revenue of $15 million in the Seafood segment was broadly in line with the FY '19 results, with the segment returning to profitability with an adjusted EBITDA of $0.2 million for FY '20. Brunswick Sardines maintained its #1 leadership position in Australia and New Zealand, and Paramount Salmon performed well. Sales were affected by reduced grocery sales caused by necessary price increases. The seafood pricing is in U.S. dollars, and movements in exchange rate will impact profitability. I think it's very important, as Perry Gunner spoke about the way forward. It's about how do we utilize our assets in our business better to drive profit back into the business. So I want to focus more now on the strategy going forward, talk about our leverage position and the proposed way forward. To driving the company's strategy is an important focus of mine. The company has reviewed the operations with a view on focusing on segments with the greatest opportunity for future growth. Freedom Foods together with advisers are reviewing all strategic options for its Cereals and Snacks businesses. While actively pursuing a fix and retain strategy, we are also exploring potential divestment. We are also reviewing all strategic options for the Specialty Seafood business, including divestment. There will be a go forward on branded based beverages and Dairy and Nutritionals business. We will continue the strong performance, focused on strong performance of key brands and product lines in FY '20 such as MILKLAB and lactoferrin that underpin the potential for sustainable, profitable growth in future years. We'll be focusing on the investment in the key brands such as MILKLAB, PUREnFERRIN, Australia's Own and Vital Strength. As mentioned previously, we are focused on strategic new product development. My focus will be on the consumer first, closely followed by our employees, ensuring that culture in the business values quality, honesty, trust and innovation. We want to have sustainable growth. We want to optimize utilization, yield enhancement and cost efficiencies. And improvement in controls and reporting across the entire business is extremely important to drive profitability and transparency back into this business. As I spoke, leverage position of this group is very important. Our plan is to refinance the existing senior debt facilities to reset the company's balance sheet and provide a more flexible funding structure, which is covenant-light and increased tenor, to provide a runway for the turnaround and future growth. The group has reviewed options to recapitalize the business through debt, equity or a combination of both, with proceeds used to retire senior debt and for general corporate purposes. The Board has undertaken an extensive process to select the right capital solution for the company given the uniqueness of its current situation. The company received several offers from credible parties and is now in exclusive, advanced discussions with a new investor to support both capital and operational turnaround of the business. The recapitalization process is incomplete and ongoing, and the group expects to provide an update by the end of the year. The group's majority shareholder, Arrovest, has indicated support for the recapitalization plan, and the Board intends to provide all of the group shareholders with an opportunity to participate in capital raising that is announced. The proposed way forward is one of the key to the success of the group. The recent unprofitability and material uncertainty as to the outcome of the Blue Diamond litigation means that it's prudent to raise capital in a secured debt form to provide equity linked to optionality and flexibility. With more traditional forms of raising capital, such as equity raising, considered but are more likely to be dilutive to the existing shareholder base. The capital intended to be raised via an ASX-listed secured convertible note underwritten by the new investor. The key benefits from the proposed structure include: It provides existing shareholders with an opportunity to participate; provides flexible, covenant-free capital; it protects the new capital with a secured instrument but with future equity upside; it also provides a premium valuation to other alternatives; and the new investor provides operational, governance and financial turnaround expertise. The next steps will be to announce on the recapitalization made hopefully by the end of calendar 2020. The capital raising needed will be up to $280 million, with the final sizing and transaction structure yet to be finalized.

So thank you, Michael, for a very comprehensive rundown on our business and the way forward. So we now turn to questions and answers, and we'd appreciate if you identify who you are when asking a question. And we will then give you the answers. So who is wanting to ask the first question?

[Operator Instructions] Your first question comes from Sam Teeger with Citi.

Just in terms of the divestments of the businesses you're looking to move away from, at this point in time, can you talk about the interest you've had from potential acquirers and maybe just some type of range or guide as to how much you think you might be able to achieve?

I'll ask Michael to answer that question. Michael?

At this stage, it would be inappropriate to comment based on the current negotiations that we're having with parties regarding that segment of our business.

Right. But is there a guide you've communicated to vendors that you could -- sorry, to potential acquirers you could share?

No. There isn't a guide that we could share.

All right. Sure. Okay. In terms of the pathway to profitability in FY '21 for the Dairy division, to what extent does this involve price rises? And what type of recovery are you factoring in for restaurants and cafes?

So there's been a considerable increase in recovery from the changing COVID-19 impact in out-of-home. So we are seeing some changes there. The main thing that we're looking at is reducing waste at the factory, managing the processing capability better. There will be a restructuring of the pricing on -- at the factory gate level. But at this stage, it's all about factory efficiencies, ensuring that we've got the right pricing models and looking at our customer base in terms of how we put the pricing forward at that point.

Right. And when you say that some of the products in that Dairy segment are not recovering costs, which products are you referring to?

At this stage, there's a range of products. It's more about just transparency of pricing as we go through our contracts and renegotiate it.

Sure. And then you talked about Arnold's Farm having some weakness in the China market. Maybe can you just elaborate on what's driving that? And then what proportion of the total sales for the group comes from that market?

In the China business, we have about 13% of our revenue is generated from that market, which is across Cereals and Snacks and UHT beverages. As I mentioned in the presentation, we talked about how some of the changes to Cereals and Snacks we saw are reduced forecast in our sales of cereals based on our forecast plan sales of cereals. So there was a general reduction of the format fit in the Chinese market.

Okay. Would someone else like to ask a question?

Your next question comes from James Tracey with Veritas Securities.

First one is -- given that the -- it looks like that the capital raise is going to be all convertible debt, so that means that the absolute level of net debt post the capital raise will effectively be unchanged. And there's some conversion that happens. Given that, that's the case, it's a relatively high level of absolute debt, can you give any guidance on operating cash flows, free cash flows or EBITDA on a sort of normalized basis going forward?

At this point in time, we can't provide that information. But as per the presentation, we're in exclusivity arrangements with a party, which is in advanced discussion. So it'd be inappropriate to comment on that.

And clearly, James, when we do the recapitalization, there will be another presentation where all of that will be revealed. So I think we said by the end of 2020, so we're getting close. And we are in exclusive territory, so that means, again, we're getting close.

Okay. Fair enough. And in terms of the UHT business, for China, it looks like there's been a -- I can understand the slowdown in the out-of-home category, but talking about UHT specifically, looks like it slowed to around 8% growth and it was north of 30% previously. Can you talk about reasons for the slowdown there?

Based on the conversations, it's been COVID that's been the slowdown within the China market.

Okay. And then just finally, on the cereal side of the business, it does look as though with the restatement, the losses, pretty big, sort of 40% to 50% negative EBITDA. How much of that is one-off versus simply sort of capitalizing stuff, which was new product launches, et cetera, trade spend?

So a lot of that was all one-off. Some of that has to do with -- but as per the presentation, some of that was to do with the operational piece being having reduced sales and reduced operational capacity through the sites.

Certainly, those write-downs and restatements are the major contributor to the losses. And if you really want to dig into the detail, it's all in the annual report. But I think we did indicate there have been very significant restatements, $590 million. So those restatements come out as expenses.

Yes. I guess the question is because all the EBITDA margins are quite -- much more negative than what had previously been reported and what you would expect. So the main question is what's the sort of underlying level? Because I know a lot of the inventory write-downs and things, you had to simply just write them off, but they're one-off. So I mean this may not be something that you talk about today, but if you could give a sense of what the -- sort of the underlying profitability is excluding those one-offs or ambitions around return on assets that you might hope to achieve in the future?

Again, I could mention that in the recapitalization presentation. Those are the matters that will be withdrawn out because, clearly, recapitalization has to look at the future performance of the business. We're not -- happy to tell you a little bit about that, James.

Your next question comes from [ Maureen Peterson ], a shareholder.

[ Maureen ], welcome.

Do you feel that all contributors to the write-offs have been identified now?

Yes, we do.

It has been a very exhaustive process, [ Maureen ]. And that's why we are right on the deadline of releasing our results because we've turned over every stone. We've turned over every pebble and turned over every grain of sand. We're very confident we have reached bedrock.

And internally, all employees have -- that may have managed the inventory write-offs, appropriately, have all been dealt with in your restructure earlier in the year?

We've continued, [ Maureen ], to work through all the staff and understand the policies and procedures and put the right procedures in place to ensure that all staff are very well aware of what's required. So at this point in time, we are comfortable with the decision to be made around the current staff that are in the business.

So new practices and processes and policies have been implemented in managing inventory. I did notice you mentioned earlier that the inventory processes and management of inventory has been assessed and reassessed, and moving forward, the practices will be -- new policies -- process and policy will be implemented?

Yes. So we have increased -- we have cycle counting across all the sites now. Stock takes across all of the -- at the end of the year as well. So ensuring that we've got the right processes in place to ensure that we can manage inventory correctly.