Noumi Limited (NOU) Earnings Call Transcript & Summary

Good morning, and welcome to the Noumi Limited Full Year '22 Results Conference Call. [Operator Instructions] And finally, I would like to advise that this call is being recorded. I'd now like to welcome Mr. Michael Perich, Chief Executive Officer, to begin the conference. Mr. Perich, over to you.

Thank you, operator. Good morning. I'd like to welcome everyone to the presentation of the full year results for FY '22 for Noumi Limited. I'm sorry for the delay, and we just had a technical issue regarding lodgment and release of the accounts. It is a pleasure to be with you today. I'd like to begin by acknowledging the traditional custodians of the land, which we make today. I'd also like to pay my respects to elders past and present. The results will be presented today by myself, and I'd also like to introduce Peter Myers, the Group CFO, who will go through the financial results of the company. I'm delighted to have Peter here today with me for his first results presentation for Noumi. Peter brings a wealth of turnaround experiencing in manufacturing and media together with ASX experience. We've already uploaded the presentation and you can navigate to the slides as you choose. We will talk to each of the slides and refer to the page numbers as we progress. Slide 3 is the agenda for today's call. We'll focus on the call outs on the results and discuss the key elements of the company's evolution. Peter will present the financial results for the period. I'll then talk to the future strategy of the company, followed by closing remarks and we'll then be available for Q&A at the end of the presentation. On Slide 5, we show our trading results have been impacted by the unpredictable effects of the COVID-19 pandemic, together with the geopolitical uncertainty that brought together a difficult trading environment with cost pressures and other impacts. Our plant-based segment had a standout performance with revenue and volume both up this financial year with revenues closing 7% up on previous year and EBITDA up 30%. As announced in February, we have resulted in U.S. litigation, which now frees our market-leading brand, MILKLAB, to continue its strong domestic and export trajectory. The Dairy & Nutritional segment still has challenges that we continue to focus on. While I'm disappointed with the results for the Dairy segment, although immensely proud of how the team have responded to the challenges we have faced during the year. In the first half, we saw COVID disruptions and in the second half, we saw impacts of cost inflation impacted from COVID. The Dairy revenue compared to previous year is lower, impacted with lower trade milk as our procurement strategy to contract milk from our farmers closer to our requirement comes into effect. The rigorous cost controls we have continued to implement have helped partially offset the broader macroeconomic and supply chain issues. We felt it prudent to take a noncash impairment of $95 million in the Dairy & Nutritionals business based on the current trading conditions, which include discount rates coming from global capital market changes and increased pressure on margins, especially in export markets as we work to offset cost increases. We are confident the changes we are making across the company will deliver a return to profitable and sustainable long-term growth. On Slide 6, we present the key financial and operational metrics. Revenue for FY '22 was down 4.6% with operating EBITDA of $7.3 million. The statutory loss was $161 million, including the litigation expenses and the non-cash impairment. As we have announced previously, we are focused on positive margin product lines, which has seen a 3.8% decline in Dairy UHT sales with 246 million liters for FY '22. Lactoferrin was below expectations as we had supply chain delays with processing materials for manufacturing due to COVID impact. This temporary issue was resolved during the second half of FY '22. Pleasingly, plant-based sales are up 3.4% with close to 90 million liters of sales as consumers continue to lean towards healthier lifestyle choices. We have seen export sales grow in the year over 15% to circa 130 million liters. This was led with MILKLAB up 18.7%, just shy of 50 million liters. Moving to Slide 7. 18 months ago, I laid out the transformation program to deliver long-term growth, despite difficult trading conditions and a disappointing Dairy & Nutritional result, I'm extremely proud of the attitude, the mindset and the effort that the team has done in executing to the plan. There are a number of key highlights I would like to talk through. Regarding reset, the Noumi AFMH shareholding sale was completed last week, funding the U.S. litigation and the sale of Specialty Seafood enabling us to focus on the core business. Moving into the transformation phase. We've seen new product launches through both MILKLAB and Australia's Own plant-based product lines. We invested in a number of areas across the business towards the transformed phase of our strategy. These have helped offset the challenges we faced during the year. We have seen numerous gains with a reduction in waste across our sites and overall productivity gains, more so in Q4. The transformation phase is beginning to be embedded into our business, and we'll continue to rebuild and maintain our margins. The plant-based business is poised for further growth with our strong brands and new product launches, looking into Southeast Asian markets for future growth. Moving on to Slide 9. As you're aware, we have continued to talk about our 3-part reset, transform and grow strategy. We are firmly in the transform phase and we move into the growth phase. As presented previously, the company's focus on great brands and world-class assets that we operate to produce our products. Actions to transform your company are well underway, with operational improvements across the business already driving improved sales with our new values incorporated into all work practices. These improvements provide a springboard to grow the business through 3 streams: products, channels and geographies. On Slide 10, we are doing what is in our control. We are setting up the medium to sustainable long-term growth. I wanted to talk to what has been achieved in the transform phase of the business since we last presented to the market. We are continuing to see our plant-based business gain market share in new markets. As previously announced, we have settled the U.S. litigation with the license agreement terminated on the 30th of June, allowing us to focus on our plant-based range, mainly MILKLAB as all restrictions on nut-based beverages are removed. We newly appointed CFO, Peter Myers as of 28th March this year. We have an executive team that is focused and aligned to the strategy. The leadership team are now embedded into the business and are continuing to focus on the transformation and growth parts of our strategy. We continue to focus on the cultural and governance change within Noumi. Overall investment in our people continues to pay dividends in this tight labor market. It is still not without its challenges, but we continue to build strength in the team, enabling us to be more resilient. I'll now hand over to Peter to go through the financial performance of the business.

Thank you, Michael. Good morning, and let me add my welcome to this Noumi results call. Before we get started, let me introduce myself. I joined Noumi in March, very excited about the challenge at the turnaround and rebuild represents. My experience extends to many sectors from manufacturing to media, from retail to satellite communications with all of those assignments, including some component of turnaround and change management and almost all of that time with ASX-listed entities. In my discussions with Michael and the Board prior to my onboarding, I was taken with the strength and clarity of the reset, transform and grow messaging. It creates a very clear compass for all of our stakeholders. The one thing I've learned over the years is that progress is never linear. Agility and resilience are key attributes, which seems like a decent segue into the results, which are the focus of today's call. As noted by Michael, we've made some significant progress during the year. We took a critical step in the reset phase, strategically and financially that was financed with the support of our noteholders and the recent completion of the sale of our AFMH shareholding, and it clears the runway for our plant-based business to continue to grow. Noumi's progress has not been linear this year, especially in Dairy & Nutritionals, a very difficult first half with COVID interruptions to key elements of the plan. And whilst we sit here today, looking forward to spring in a couple of days and lock down a thing of the past, we must not forget that just a year ago, in the first half of the year we are reporting on today, things were different. They were very different, lockdowns everywhere, impacting us in all sorts of ways. At one stage, we were [ transporting ] milk from Sheppard into our Ingleburn plant just to maintain supply to our customers. And even the post-lockdown environment delivered unexpected challenges, not just for Noumi, as the economies of the world faced the first serious inflation pressure for decades. So our plans for FY '22 remained strategically focused, but required us to be tactically agile also, and we will continue to be agile. The customer price reset and the margin resetting that Michael described earlier is now one of the most critical issues to Noumi as we pursue a successful transformation phase. But whilst the transformation phase was buffeted during the year, we have also achieved a great outcome with our plant-based business, which is leading Noumi into the growth phase of this turnaround, led by the exciting milk brand -- MILKLAB brand, plant sales grew 7% for the year, 24% since 2020, further expansion of our world-class margins and a successful investment in our sales team. So as I move to the detailed financial slides, I want to be clear on 2 key thematics I hope you'll take from the call today. First is that there is a very strong focus on turning the Dairy & Nutritionals business around in terms of both earnings and cash flows and noting that we must do that at the same time as we address new challenges around costs and our negotiations for pricing increases. The second key message is that we are continuing to drive the performance and prospects of our plant business, enjoying the tailwinds of consumer preference trends with a more subdued cost inflation environment, which means the pressure for price increases is less acute and with opportunities for growth in both range and geography. Let me now turn to some of the specifics of the results. First, a couple of grounding comments. We have generally referred to our adjusted operating EBITDA numbers as being the most useful for investors. This number includes only our continuing operations. It adjusts out the impacts of AASB 16, the leasing standard, so that the numbers are comparable with that that we have previously reported. It also excludes one-off style restructuring amounts such as the impairment charge and things like the U.S. litigation expenses. And there is a complete reconciliation of these adjustments to the statutory numbers in the appendix to the presentation. It seems like about half the companies I've looked at have focused on pre-AASB 16 numbers and about half are reported under the new standard will consider when it's appropriate to do so. Moving to Slide 12. It has obviously been a tough year for Noumi. Adjusted operating EBITDA down $15.2 million on the prior year. And whilst we're disappointed with the overall results, it's worth noting that essentially all of that shortfall to last year was reported in H1. So whilst cost inflation net earnings did not spring back in the second half as we had expected, we nonetheless remained ahead of the prior year. Revenue grew if we exclude the impact of a couple of decisions to reduce the extent to which we acquired and then trade out milk at no margin, and we dropped unprofitable 2-liter product lines. And within the revenue number, it's a story of growing plant revenues, up by 7.2%. Dairy & Nutritionals down in H1, especially in lactoferrin sales, which was a significant year-on-year impact in earnings in the first half, but up slightly in H2 for dairy, excluding traded milk. Costs were an issue, increased cost of working in the first half and cost inflation in this second. In terms of cash and capital, we've increased net debt, excluding the convertible notes by $21 million. Whilst the additional notes that were issued, covered the majority of the reset and restructuring items, we are nonetheless focused on improving earnings to cover our CapEx and financing requirements. And we have included a pro forma view of the balance sheet in the event that the convertible notes were converted. That would obviously make our balance sheet much stronger and reminds us all that improving our earnings and making conversion an attractive option is in everybody's interest. Moving to Slide 12. We are mindful that the $160 million headline loss for the year will capture people's attention. We've included some detail in the presentation to make sure that people appreciate that the vast majority of the headline result is attributed to 2 specific issues. First, the U.S. litigation settlement of $55 million, which was announced months ago as part of the first half results; and second, the $95.7 million impairment charge. It's important to note that this is a non-cash book entry. The impairment adjustment has been taken, having regard to the very recent change in circumstances as the pandemic is eased and the geopolitical situation has changed, especially in Europe. Cost inflation has emerged globally, and this has in turn impacted capital markets and interest rates. So the impairment charge arises primarily due to a combination of the discount rate for the impairment calculation, which has increased along with all of the global interest rate movements. Second, the consumer nutritional business valuation where the recent spike in protein prices, which seems to be trending back down, has not yet been fully offset with price adjustments. And the dairy impairment, which reflects the volatility of the current circumstances and the fact that we're still working our way through the price increases we're looking for out of our export markets. And as you know, if things improve, we can begin to write these assets back up. And more importantly, we should remember that we're not allowed because of the accounting conventions to have the group's most valuable asset on the balance sheet being our MILKLAB brand and the plant-based business, it's a massively valuable asset worth hundreds of millions, that's not recorded in our books. Moving to Slide 14, I think I said Slide 12 there before. So moving to Slide 14. This describes the diversity in our revenue base. We like the diversification of our channel mix and our brand mix. This has seen little change since we reported at the half year. And regional splits have also remained similar with a slight increase in Southeast Asia as we continue to build our presence in that region. To Slide 15. This is the opportunity to celebrate the progress that continues in the plant-based business. As I mentioned earlier, this is one of the key takeaways from the presentation today. Growth in our key brands, MILKLAB plant sales up 25.2%. Growth in Southeast Asia sales up 37%. Growth in margins, adjusted operating EBITDA margin to 20.4%. Growth in our range, oat milk and other new products getting traction and investment in our sales efforts to bring more of our brand control back in-house. We continue to believe this business has a great future. And as I noted before, it is a highly valuable asset that's not sitting on our balance sheet. Moving to Dairy & Nutritionals. This is the second big takeaway of the results that we are committed to improving our performance in Dairy & Nutritionals. We tend to think of the disruptions of the 2022 year is really having delayed our transformation effort for about a year. But within the '22 results and in the second half, in particular, there are some improvements that we can build on coming into FY '23. Revenue on a comparable basis was up in the second half by 1.5%. In the first half, we had a significant -- we had significant increased cost of working, many of which were pandemic-related [indiscernible]. These are no longer such a factor. And in the first half, we were unable to produce a normal level of lactoferrin, which cost us more than $10 million. And this has returned to more normal levels in H2. And we began to improve productivity in the last quarter and we are working hard to make that repeatable and reliable. So just as we began to overcome the issues that were hurting us in the first half as COVID -- and as COVID pressures began to [ wane ], we were then confronted in the second half by the early impacts of cost inflation, and that predated our ability to pass those cost increases on. This cost-inflation impact is estimated at $8 million in the second half alone. And we've seen cost increases pass through to consumers in Australia across a range of industries during this reporting season and we have been able to work with our domestic customers to achieve a similar outcome, importantly, addressing some instances of historical underpricing at the same time. And now we are actively engaged with our export market customers to achieve similar improvements across the whole portfolio. Turning to cash flow. Cash flows for the year saw net debt increase $21 million with reasonable cash conversion from our $7.3 million of operating EBITDA into $3.6 million of operating cash, which is satisfactory having regard to the inflation pressures on working capital late in the year. Restructuring and the U.S. litigation costs amounted to $35 million in the cash flow, and they were not fully offset by the $27 million we raised from noteholders. We are working hard to minimize the restructuring costs and improve our cash conversion. Net finance costs, mostly interest was $16 million, not including any interest on the convertible notes where interest was capitalized and rolled up for the year. And capital expenditure was restrained for the year and will continue to be carefully managed to projects that have strong payback economics like the [indiscernible] relocation project or our essential stay-in business requirements. With that, I'll hand it back to Michael for some further remarks.

Thanks, Peter. Moving to Slide 19. I'd like to talk further regarding our strategy in our plant-based segment. As highlighted, we continue to see our plant base grow year-on-year and delivered positive earnings across the group. With the launch of the Oat base product line together with our [ blends ], we are continuing to drive expansion into high potential markets with focus in Southeast Asia. The continued focus with our field team in Australia to grow and protect our market share, we have new products that are key to our strategy, and the team is focused on innovation within the plant-based segment. We can see in this with 2 recently ranged products with our power blend and Hazel nut range with leverage investment in the out-of-home market and build [ including ] production and capability. This is further evidence of our commitment to plant-based beverages. We continue to drive both innovation and targeted investments in our plant-based segment, and it is a credit to our whole team to see this continued growth in the background of the challenges that we have seen during the last few years. We have capacity to continue to leverage the growth trend and also the brands which we own, such as MILKLAB. On Slide 20, our suppliers across Noumi are key to our success. This is particularly the case with our farmers. We have across our business dairy farmers who with long-term contracts, but have also been put under enormous pressure. The bidding for milk in the last period of June was intense with significant increases on the previous year. This is really a reset for our dairy farmers, and it has been a long time coming. We've seen high prices in the global dairy market at the end of FY '22, which has since softened with demand coming off in export markets. We've continued to work hard with our customers on the price pass-through and the domestic customers for dairy making moves generally in line with farmgate milk price. This is a testament to the skill and dedication of our team who are able to work with our customers to secure price rises in a challenging market. Our export customers response to the milk price has been more subdued based on differing local conditions. We'll be working with our farmers in the coming months to secure mutually beneficial long-term partnerships and sharing in a price pass-through. I can say in my career, I've never seen movements in farmgate milk price at this level before. This has all come at a point in time when we are aiming to rebuild margins in our business, increasing operational efficiencies and growing our profitable product lines. We need to improve our Dairy & Nutritionals business to continue to be good partners with all our suppliers. This has been an important objective of mine. We've seen improved yields and improved quality, which we spoke about last year. So these have helped mitigate the challenging year. The Consumer Nutritionals portfolio has suffered the same challenges with increasing raw material costs. So the attention on this category is identifying the areas of focus. Timing delays of cost pass-through is challenging in these conditions, but with the global market softening we may see some [ relief ]. We are committed to improving yields and continue to improve efficiencies across the product lines. With the challenges that we faced, it is not surprising that we are working hard on the Dairy & Nutritionals business with further operational improvements to strengthen financial performance. On Slide 21, we have launched our Healthier Tomorrow Plan, which is focused on continuing to build on the work that the business has been focused on through the reset phase. Through healthier lifestyles, healthier planet and healthier workplace, the business is well placed to show all of our stakeholders how we can enter the third phase element of our strategy, that being the grown phase with disciplined activity. The Healthier Tomorrow Plan is an important part of our growth strategy. There are a number of focus areas with more detail in the annual report that has been released to the market this morning. With healthier lifestyles, we aim to create and offer resources to improve consumers and communities nutritional and social outcomes. By 2025, more than 75% of our flagship branded products will have a health star rating of 4 or above, or 4 to 5, all our proprietary branded plant-based dairy alternative products to match the calcium content of dairy milk by 2025. Under Healthier planet, we aim to continuously improve our environmental footprint for future generations. We'll do this by having 100% of Noumi packaging APCO compliant by 2025, zero waste to landfill from our operations by 2030. 90% of our farmers partnering with us on carbon reduction initiatives by 2030. By 2030, we will reduce [indiscernible] emissions by 50%. Under our Healthier workplace, our people live our values and are supported through positive work experiences. As we always have, we continue to focus on a diverse workforce with specific targets for diversity and inclusion, a 4% year-on-year improvement on employee engagement through our development plans. All of these activities built to a stronger business for our stakeholders that help protect the business and ensure its resilience. Moving to Slide 23. We continue to focus on the key drivers for future profitability. The key areas of the operational initiatives focus on rebuilding margins in export, growing volumes in plant based and investment into our brands and our people. The individual key drivers are listed with progress listed against these. I would like to highlight a few. With continued focus on the operational initiatives, we have launched an operational program that will embed these improvements to assist in bringing your company back into profit to consistency at our size. Launches of innovative products that are designed with the consumer in mind, utilizing our field force to continue to promote our products in the out-of-home market, growing our brands looking towards the Southeast Asian market as a growth area for our plant-based products. We have an update on the trading outlook on Slide 25. We continue to build on the great work from our team in the domestic market to rebuild our margins in our dairy business. We've seen our domestic market share well to have further alignment with farmgate milk price. Export is progressing but incomplete. The competitiveness of export dairy is being impacted with higher cost base domestically. The plant-based business is well into the growth phase. We are building from a strong brand platform with new product offerings and new markets. Global uncertainty creates concern around cost and market access. We are monitoring these areas to manage any changes. With farmgate milk prices at record high levels, we are seeing global demand soften, although our domestic market is positioned well. I want to thank you all for listening today, and I wanted to reiterate the significant transformation of your company is well underway. The results of Noumi is firmly in the transform phase of its 5-year Reset, Transform and Grow transformation strategy. Our market-leading plant-based beverage division set new records and while they have been delayed in some elements of our operational improvements program as a result of the external challenges we faced in FY '22, these are being overcome as we restore momentum, building the springboard to grow the business in the years ahead. That concludes the formal presentation, and we'll now hand over to the operator for any questions.

Operator are you there, are there any questions from the call?

[Operator Instructions] Your first question comes from the line of Tina Wilson for [ EME Capital ].

I wanted to start with lactoferrin, if possible. Firstly, just wanted to sort of clarify, it sounds like the challenges for this year were really sort of production for not producing enough natural faring? Is that sort of fair statement?

Yes. No, thanks for your question. Regarding the production of lactoferrin, it was some supply chain issues around the material to help production. It wasn't an issue regarding market of lactoferrin.

Yes. Great. So following on from that, you kind of mentioned that the productivity in lactoferrin sort of important going forward. I just wanted to understand a little bit more, does that mean sort of efficiency in having workers there or machinery is working like if you could give us a bit of color on like how do you improve productivity?

So in terms of improving productivity, as I mentioned, it was more of a supply material required for manufacturing of the product versus around people or equipment at the site. So overall, we continue to focus on the team. It's an important part of our business and we continue to work through the tighter labor market that we have, but continuing to build on the operational experience of the people at site and the equipment continue to get us back to the capacity at the site for our lactoferrin production.

Okay. So it's more that the capacity hasn't quite got there not that you don't have enough like raw material milk input. Is that right? Sorry just wanted to clarify?