Noumi Limited (NOU) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of the half year results for Noumi Limited for financial year 2025. I'm Michael Perich, Group CEO. And today, I'm joined by Group CFO, Pete Myers. It is a pleasure to be here with you today, and thank you for joining the call. We have already uploaded the presentation to the ASX, and you can navigate to the slides as you choose, so you can follow us on screen. [Operator Instructions] Please note that while you can submit questions from now on, we won't address those until the relevant time in the meeting. Slide 3 is the agenda for today's call. I'll focus on call-outs from the results and discuss the key elements of the company's evolution. Pete will present the financial performance for the period. I will then talk through the strategy, followed by closing remarks. The key points for today's presentation is consistent execution of our strategy, continued operational improvement and focus on growth opportunities, another record revenue and earnings achievements for the Plant-based Milks segment. Our Dairy & Nutritionals segment has shown another positive increase in earnings despite challenging markets. I'm proud to share these achievements with you, but acknowledge there is more to do. The results we announced this morning for the first half demonstrate another period of solid progress against our Reset, Transform and Grow strategy, with all key operating financial metrics continuing to move in the right direction. We continue to execute against our plans. This is about constant delivery of our strategy and growth of underlying performance. As mentioned earlier, we've seen a record result. The Transform and Grow strategy continues to deliver improved results with EBITDA of $27.5 million, up 19% from FY '24. Plant-based Milks segment delivered a record EBITDA of $25.3 million, up 9.2%. Market-leading brand, MILKLAB continues to grow across both Plant and Dairy, with domestic and export up 6.7% overall. Dairy & Nutritionals delivered a $4.6 million adjusted operating EBITDA compared to $2.2 million in half 1 of FY '24. The outlook for MILKLAB remains strong. Commodity dairy prices recovering, but overall Dairy margins remain low. Working capital management delivered operating cash flow improvements, which Pete will take you through later. The statutory net loss after tax of $82.1 million includes two significant items: a $36.3 million charge for the convertible note fair value adjustment and the noncash impairment of the Dairy & Nutritionals of $50 million. Without these two items, net earnings would have been positive. The team at Noumi are critical to our success. I'm proud to say that with a focus on keeping everyone safe, ongoing initiatives to enhance the health and safety of our team members remain a priority. We continue to embed safety across all the sites to ensure that the 500 team members are safe and can perform their roles. We've seen increased participation in our leadership program, which we're using to develop our team and drive improved engagement. We've increased investment in programs to develop our leaders to drive growth, collaboration and success. We're upgrading technologies to make sure our team have better tools to do their jobs. At Shepparton and Ingleburn sites, we continue to build on operational excellence by developing our frontline leadership. Moving to Slide 9. Previously, I laid out the transformation program to deliver long-term growth. We've continued to build on the foundations we have established. There are a number of key highlights that are important. We are executing against our strategy. We've all but closed out the legacy items relating to the events prior to 2021. The only substantive reset item left is the shareholder class action. The court hearing is scheduled for the 17th of April. Resolution of the class action will allow us to focus exclusively on our future, including a review of the optimal capital structure that supports our growth ambition. Dairy & Nutritionals is progressing through transformation phase, and earnings have doubled through more consistent operations and sales in the target markets. There's increased focus on value-added opportunities in Dairy & Nutritionals and Consumer Nutritionals to supplement service and efficiency and reliability improvements. Key initiatives include -- I'm sorry, key initiatives contribute to strong sales growth in key export markets with MILKLAB Almond and MILKLAB Oat. With the launch last year of MILKLAB in retail, we are leveraging a strong brand position and the evolution of coffee in home for strong and growing results through the retail channel. Overall, there has been strong performance for the business in what has been a busy period. We are excited by the progress and the future. Pete will now take you through the financial performance. After that, I'll come back and talk more about the strategy and how it's shaping our future plans.

Thank you, Michael, and good morning to everyone. I'm delighted that we're able to again report significant progress as we execute on our Transform and Grow agenda. Our messages are similar to recent announcements. Our strategy is unchanged, and we are executing more consistently. And as a result, another record result for Plant-based Milks and Dairy operating result double last year's performance. We plan this next stage of growth around a set of clear initiatives, launching MILKLAB in retail, making MILKLAB an international brand, a new formulation for oat and more consistent execution. All of those initiatives are delivering in today's result, with more to come, and we're pleased with the outcome. But we're just as clear that we can't be complacent in an uncertain world. We love the fact that our Plant-based business is delivering record after record, but competition is fierce. And in Dairy, whilst global conditions have improved slightly, earnings are still small and there remains much to do. Overall, our results continue to improve, we're becoming stronger, and we're encouraged by our progress. As I turn to some of the specifics of the results, just a word on terminology. We consider the adjusted operating EBITDA numbers as being our most important measure of operating performance. It excludes all of the one-off restructuring such as impairment charges and things like the legacy litigation issues. It's the one we use and we consider it's the most useful for investors. So if Michael or I just say EBITDA this morning, that's what we mean. Moving to Slide 13. I'm pleased to report group revenue up approximately 1% compared to the prior period, led by a 6.6% improvement in Plant-based Milk sales. MILKLAB brand sales were up 6.7%. And in Dairy & Nutritionals, revenue was down slightly with the continued reduction in low-margin export sales, largely offset by improvements elsewhere. Adjusted operating EBITDA for the group of $27.5 million is up 19% on last year, and this comes on top of the 35% increase in EBITDA we announced at the same time last year. And in a moment, I'll take you through the highlights of the operating performance and the positive set of improvements we've announced today. The statutory loss of $82 million includes two significant items: a fair value adjustment on the convertible notes of $36.3 million and a $50 million noncash impairment write-down of the Dairy business. The earnings table on this slide highlights the fact that before we count the fair value adjustment for the notes and before the noncash impairment, we have made money, $4.2 million. This means that after we take into account normal depreciation, normal interest on all of our financing other than the convertible notes and even allowing for the $6.7 million we provided for the cost of closing out the legacy litigation, earnings were positive. We've taken the impairment notwithstanding the improvement we've made to the Dairy results. On the one hand, we're proud of the improvements we've made. Lactoferrin production has improved and prices for bulk commodities have picked up a little. But on the other hand, export markets for long-life milk remains subdued and the combination of excess processing capacity and intense competition means that the medium-term outlook for margins is not recovering as quickly or as much as we had previously anticipated. Accordingly, it's appropriate to take the $50 million noncash impairment charge against Dairy. And as far as the fair value charges on the notes is concerned, the convertible notes is concerned, these are not new, and more about those in a moment. Let's move on to some of the detail of the segment earnings. On Slide 14, we are once again delighted with the Plant-based Milks result with EBITDA for the period up 9.2% to $25.3 million. It's been a great period for the Plant business, with all our exciting strategic initiatives adding to the result. Total revenue up 6.6%, growth in our key brands, MILKLAB plant sales up 7.8% and growth in our range, the new Oat formulation delivered growth of 31.5% on the same period last year. A solid period for MILKLAB Almond, which is the foundation that underpins all of our growth initiatives and sales up 26.6% in export markets from the targeted initiatives underway to extend MILKLAB's geographic reach. Our operation teams have played their part in performance, too, having supported a 10.1% increase in volume and differentiated product formats. It was interesting to see recent developments aimed at easing the cost-of-living pressures for Australian households, together with reports of return-to-office practices receiving increased consideration. Whilst we know that the Australian love affair with coffee is a very strong bond, some relief for consumers would only assist our Plant-based revenue outlook. Of course, from our perspective, our diversified mix of branded and contract manufacturing volumes across different channels and geographies positions us well to meet consumer preferences however they adapt, primarily from shifts resulting from macroeconomic factors. In short, another record result, a clear strategy and a great future. Moving on to Dairy, Slide 15 demonstrates the progress of this segment. Positive EBITDA of $4.6 million, more than double the first half of last year and continuing the turnaround in earnings that began in FY '23. The result reflects a solid performance in long-life milk, improvements in lactoferrin and some recovery in commodity prices, most notably bulk cream. In long-life milk, domestic sales were up 7%, all volume related, whilst export sales were down 29.6% for the half. And in the current 6 months, export represents just 30% of long-life sales, down from 47% 2 years ago. In respect of lactoferrin, there are two important call-outs. First, sales rebounded to be up 16.6% in the first half following improved production efficiency compared to last year's disruptions. Second, we're only operating at around 80% of our lactoferrin capacity as a consequence of the lower export volumes of long-life milk going through our Shepparton plant compared to a couple of years ago. So any recovery in long-life sales will also allow us to produce more lactoferrin. Commodity prices for products such as bulk cream have recovered somewhat during the latest half year. In our case, revenue was up 6.2% despite a small drop in volume. And this means we've recouped around $2.5 million of the impact of the bulk cream downturn we reported in the first half of last year. Whilst it's been a tough period in Consumer Nutritionals with sales down 11%, we had some disruption to our inventory supply lines for Crankt and protein input costs are high, but we're yet to see that reflected in competitor prices. But with our data telling us that Vital Strength and Crankt both rank in the top 10 brands for their category, we continue to believe that Consumer Nutritionals contribute -- can contribute to our next phase of growth. The overall Dairy & Nutritionals result demonstrates progress, but the earnings are still relatively small and the Australian dairy industry is still facing change and challenge, hence, the impairment charge. It's critical that we get a price for our long-life milk that allows us to achieve reasonable returns that would enable us to invest to meet the expectations of our customers. So overall, great progress, but more to do to improve returns. In terms of cash and capital, we have $11.9 million more cash than we had at June '24, but we've increased our financial debt by $1.1 million. Convertible notes are now carried at $373 million, which, as with other years, is conducted at an independent fair value for the notes. In terms of the convertible notes, I want to pause on three important call-outs. The first is to remind you what we've said in previous presentations that the fair value adjustments, just like the amounts booked in this result and in previous results, will continue until the notes mature in 2027. These adjustments will effectively continue until the value of the notes on the balance sheet reaches the redemption value of a minimum of $600 million in May '27. The second call-out is to point out a change in the classification of the notes to a current liability in the balance sheet from now on. Now normally, liabilities are only current when you have to pay them back within 12 months. Now our notes don't get repaid until 2027, so have been previously regarded as noncurrent. During the year, the accounting rules changed regarding circumstances where liabilities, in our case, the notes; can be converted into shares at any time. So even though it would be most unlikely that our noteholders would convert into shares in the next 12 months, given current valuation and share price considerations, the mere fact that they can means we have to show them as a current liability. The main thing to remember is that the change has no impact on our liquidity position. Now for the third call-out. Planning has commenced for the maturity of the notes in 2027, by which time the noteholders will be owed a minimum of $600 million. This has not been possible whilst the legacy litigation has been unresolved. However, the agreement to settle the class action and the prospect of receiving court approval in coming months means we can now turn our mind to the future. The opportunity is to review the capital structure so that we identify future growth initiatives that will drive performance over the next few years and lay down a strategic plan, that we optimize the capital structure to support that plan and at the same time, we create liquidity for the noteholders that provided critical capital for the Reset, Transform and Grow phase. Whilst on the subject of the balance sheet, I'd also like to reiterate that Noumi's contribution of $11.6 million to the total class action settlement amount of $43 million, which was referenced in a recent AFR article, will be met in full by the company's insurers. In terms of the accounting, we've included the $11.6 million that will come from the insurers as a receivable on our balance sheet, and an equal amount is included in our provisions. And then lastly, in terms of the balance sheet. As we have said before, we don't carry any value in our books for our flagship asset, the MILKLAB brand. It's been built from scratch, and it's not yet 10 years old, and we consider it's worth hundreds of millions and that it continues to grow. Turning to Slide 17. Our cash flow performance was much improved. Net cash from operations was $40 million, up from $10 million in the same period last year. Now with $27 million of EBITDA and $40 million of net cash from operations, it's pretty apparent that the 6 months to December had some positive impact from timing differences as well as strong underlying cash conversion. The big driver was collections. Trade receivables are down from $63 million in December '23 to $45 million in December '24. Part of it is mix since Dairy long-life export sales generally have a longer collection profile. So lower export sales make a difference. And then finally, this time last year, we announced that approximately $9 million of debtor financing drawdowns were delayed from December '23 into January '24. So all in all, whilst the comparison is a bit noisy, we're pleased with our working capital management across the board. Inventory is well managed and in line with December '23, albeit a little higher than June, which is more a seasonal thing. And whilst payables were up a little, all of our suppliers are current in terms. Apart from working capital, our approach to capital expenditure remains disciplined with $2.1 million spent during the period. Our net finance costs, mostly interest, were $9.8 million, not including any cash payments on the convertible notes. And with all of that going on, borrowings, excluding our AASB 16 leases and the convertible notes, increased by $1 million during the period. So to recap the financials, group EBITDA up 19% to $27.5 million; Dairy & Nutritionals continues its earnings recovery against difficult industry conditions; another record result for our Plant-based Milks business, highlighted by the focused execution of recent initiatives; and capital structure and the maturity of the convertible notes on the agenda, subject to the court approval of the class action settlement. All in all, a period of progress executing against our strategy. And with that, I'll hand back to Michael for some further remarks.

Thanks, Pete, for the commentary on the results. Moving to Slide 19, I'd like to talk further regarding our strategy. We've developed our strategy to drive shareholder value. We're focused on developing high-quality and innovative Dairy and Plant-based products to meet the different nutrition and taste needs of customers and consumers across life stages. As many of you are aware, we have five key strategic pillars that we focus on, and they haven't changed. These five fundamental pillars remain consistent with the strategic priorities outlined previously. The outcomes we are delivering make it clear that we are concentrating on the appropriate areas, and these will steer the direction of the business. The priorities continue to evolve as we continue to transform and accelerate our growth. I want to bring your attention to a few priorities. Build Dairy into a profitable and growing business with expanded customers and products: this to strengthen and grow MILKLAB brand, including investing to accelerate global market expansion. We have aspirations for MILKLAB to become an international brand in the food and beverage sector, mitigate inflation through value creation to manage margins and cost to our customers, embed Noumi culture and values, develop future growth platforms based on emerging consumer trends. These priorities will assist in driving shareholder value and to continue to build a more resilient business. On Slide 20 are the highlights to our strategy for the Plant-based Milks segment. We are accelerating investment in brands and marketing activities. We will do this through leveraging MILKLAB brand campaigns, ambassador partnerships and high-quality range to increase sales and distribution. Investment in research and development to deliver high-quality, new innovative products that meet the taste and health needs of consumers will be key to drive future growth. We've established distribution agreements with key strategic partners in Southeast Asia to drive growth. Coffee culture is expanding in these markets, but we recognize this process will take time. Our recent activation with the Summer Sensations program has given consumers the ability to sample our products, with our Plant-based Milks being the core ingredient in the recipes. Over the last 18 months, we have launched a series of initiatives, both domestically and abroad. These are delivering great results already and will continue to do as we layer on more exciting projects to support the next phase of our growth. Moving to Slide 21 to highlight the strategy for our Dairy & Nutritionals segment. We are building on the improvements we have achieved. We will continue to collaborate with our suppliers in providing a sustainable platform for investment along the supply chain. We are moving Dairy & Nutritionals into the growth phase. And as mentioned earlier, we aim to continue building on the momentum of the previous years of investment. For Noumi, it is key to leverage off the growing demand for high-quality Dairy & Nutritionals products, and we look to invest further in the Noumi brands. We'll continue to focus on delivering high levels of operational efficiency to reduce wastage and increase earnings, maintaining focus on our supply chain, quality in our operations and delivering high levels of service to our customers. We're also accelerating innovation of new Dairy & Nutritionals products, satisfying increasing consumer demand across parts of the portfolio. This can be seen in our Australia's Own range, where we've seen an over 9% increase in the half-on-half. We are pleased with the improving performance of Dairy & Nutritionals, with EBITDA more than doubling. We've been able to maintain our focus on domestic channels over the past 6 months to mitigate the impact of the persistent weak export markets and the broader challenges for the Australian dairy industry. Our bulk ingredients have recovered, although margin pressure is still a key challenge. We are focusing on what we can control. Slide 22 is our ESG strategy and is brought together in our integrated Healthier Tomorrow Plan. This plan was released in 2022 following consultation with our Board, suppliers, business partners and our own team. Our ESG strategy is integrated across our value chain, from dealing with our supplier partners to manufacturing to delivery of our products to our customers, we are continuously improving processes. We'll continue to look for opportunities that deliver overall benefits to the business that are aligned to our ESG strategy and our customers. In terms of outlook, for half 2 FY '25, Noumi expects to continue to consolidate the progress it has made in the past 2 years, focused on the execution of its strategy across products, channels and geographies. In the Plant-based Milks segment, Noumi is investing in the continued growth of its MILKLAB brand, both in Australia and overseas. In Dairy & Nutritionals, the company is focused on executing for its domestic customers and consumers while closely monitoring developments in local and global dairy industries for their impact on the company and its products. While macroeconomic conditions create uncertainty and volatility, the consumer preferences continue to evolve. The company is positive about its progress. Whilst these factors can't be ignored, we are sticking to the strategy as we continue to see improved results. Our portfolio operates across a diverse range of geographies and channels, offering choices to all consumers however they want to engage with us. Key to acknowledge that in [ Plant ], we are growing. We are doing what's in our control. We are positioning ourselves for medium- to long-term sustainable growth. I'd like to thank you all for listening today, and I wanted to reiterate the execution of significant transformation of your company. The results we are delivering are a testament to that. There is still more work to do, and we have a clear road map. Execution is key. While considerable challenges remain from increased domestic and international competition to cost-of-living pressures on consumers, the operating improvements we have been making as a business are now reflected in a more consistent performance and have put us on a clear path to long-term sustainable growth. Right across the business, including the Board, we remain committed to the pathway forward, and we hope that is evident. I want to thank all stakeholders within the business. Our team are instrumental in our success. We would not be here today without them, and I want to thank everyone for their effort.

This concludes the formal part of the presentation. As announced at the start, we are available for questions. [Operator Instructions] We do have one question here, which I'll hand over to Pete for the initial part. I'll just ask the question now. How should we think about the litigation cash cost over the next 6 to 12 months as legacy issues are dealt with?

So the litigation costs that are sitting on the balance sheet as yet unpaid are around $5 million. Of that, a couple of million dollars is to be paid in the relatively near term. The balance I would expect to be paid over the course of the next couple of years on a relatively even basis. You can see that in the provisions note that's in the accounts, which includes the $11.6 million that would be in and out, if you like, in relation to the settlement monies and then the legal costs and so forth paid over a couple of years.

And we have another question from Jonathan Snape. What is the impact of the asset impairment on expected depreciation charges in the second half of '25?

So I think if you just take the depreciation charge in the first half, you will see some relief coming from the impairment charge would be -- I think if you assume it would be over the best part of, say, an 8-year period that, that depreciation relief would occur; I think you'd be getting a pretty good picture of it at that stage, Jonathan. Then the next question is in relation to operating cash flow and was strong, and debtor drawdowns were negligible and how sustainable is the improvement in the working capital. I was at [ pains ], I think, to kind of explain that we shouldn't imagine that we can continue to generate $40 million of cash out of $27 million of EBITDA. If I look at the period over the last 18 months, you get a much more balanced picture between the amount of EBITDA that we've reported and the net operations cash flow about -- the EBITDA is about $78 million and the cash from ops is about $81 million. So I think that reminds us we have excellent cash conversion occurring in the business and working capital is being very well managed and actively managed. But of course, imagining the net cash from ops to be higher than EBITDA won't occur. We'll have some investment back in working capital. But certainly, nothing out of the ordinary.

And the last question there is, how should we think about the recovery of cream related to earnings with continued strengthening of global milk fat prices? As presented in the results, we've seen a $2.8 million benefit compared to the previous half with cream. Cream does -- is a secondary product that comes out of the long-life milk production, and we are continuing to see strengthening in that global fat prices. So we should see that continue into second half.

I think just to dimensionalize that, we said that it cost us something like $8 million or so in the full year last year. So that will help dimensionalize that, I think.

I've got a question from Mitch Fogarty, which -- with the growth in profitability in the Dairy & Nutritional business, why was it prudent to impair the business unit by $50 million this half?

Yes. It's a very good question, and we appreciate it's a bit of a conundrum. The Dairy performance has been good, and we're very happy with it. The way that the impairment testing works is you've really got to sort of look out as to what you think the earnings and margin performance will be in the business. And what we would say is that with export markets not recovering perhaps as strongly as we had hoped and with a very competitive environment for domestic long-life milk, the margin performance out of those parts of our business is not improving back as fast or as much as we had thought. So it's really about a slight moderation of our expectations based on what we're seeing at the moment. But obviously, we'll be -- we are optimistically chasing improvements in margins and improvements if the export conditions would permit us to rebuild a bit of our volume there. I think the reality is there is also still a reasonable degree of turbulence in the global sort of Dairy business, and we're certainly not the only processor that's taken some impairments over the last year or so.

And on top of that, if I look at the work that we have done in improving our Dairy business, it's been instrumental being able to increase our performance. And with a reduction in the volume of milk in Australia, that has created some underutilized capacity in processing in Australia, so a little bit increased competition as other processes are looking to retain volume through their processing facility. At this point in time, we don't have any further questions. I'd like to thank everybody for joining the call once again, and I appreciate the interaction with the questions for this period. Thank you, everybody, for joining. And wish you a safe day. Thank you.