Olam Group Limited (VC2) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. It's nice to be here again. This is Hung Hoeng from Olam Investor Relations. Thank you for logging into our media and analyst conference on our announcement today of the renounceable fully underwritten rights issue to position for Olam's future growth. This call is also webcast live on our corporate website. Before we move on, I'd like to call out 2 pages of disclaimer notice to be read and understood. Now onto our speakers for today's briefing: Olam International Co-Founder and Group CEO, Sunny Verghese, to my left; and to his left is Group CFO, N. Muthukumar. Sunny will take us through the rights issue overview, the rationale and its purpose and the indicative dates for subscribers to note. This will be followed by an update on our business performance before ending with the key takeaways for today's presentation. Both Sunny and Muthu will then take your questions. Sunny, it is all yours now.

Thank you, Hung Hoeng, and good morning, everybody, and thank you all for joining our briefing on our renounceable underwritten rights issue. So as you are by now aware, this morning, we announced the launch of renounceable fully underwritten SGD 602 million rights issue. And I want to walk you through the main highlights of the rights issue transaction. The total gross proceeds expected is about SGD 601.7 million. In terms of the allotment ratio, it is 3 rights share for every 20 ordinary shares that you own. The rights issue price is $1.25 per rights share. The pricing that we have indicated of $1.25 is at approximately a 24.2% discount to the theoretical ex-rights price, which is SGD 1.65. And against the last traded price -- closing price of 21st June, it is a discount of 26.9% to the closing price of 21st June. The issue is fully underwritten. Primary underwriting is by the 5 banks, which is BNP Paribas, Credit Suisse, DBS Bank, Hong Kong and Shanghai Bank and Mizuho Bank, with the first 4 named banks being the joint issuers of this rights issue. The main reason and rationale for launching this rights issue is threefold. It is first primarily to partially repay the bridge loan that we had put in place to complete the acquisition of Olde Thompson, which, as you now know, was completed on the 17th of May this year. The second reason we are doing this is to strengthen the company's balance sheet and enhance our credit profile. And finally, as a result of that, we expect to have more financial flexibility to capture future growth opportunities. As I mentioned, the first reason is to partially repay the debt that we had put in place to fund the Olde Thompson acquisition. We had announced this on the 29th of April. And as you would know and just to refresh everybody's memory, Olde Thompson, or OT, is a leading U.S. private label spices and seasonings manufacturer. We acquired this company and completed the transaction on the 17th of May at an enterprise value of $950 million. And this rights issue will help us to partially repay the debt that we had put in place to complete the Olde Thompson acquisition. The Olde Thompson acquisition, as we explained when we announced the transaction, is right at the heart of OFI's strategy and future direction of travel. We have had a long association with this company. And for us, this was a critical asset to execute on OFI's new strategy of becoming a value-added ingredients and solutions provider -- food ingredients and solutions provider. And this, we believe, will accelerate OFI's growth strategy and strengthen its competitive position in a very key product, the spices product; in a very key category, which is seasonings; and in a very important channel, which is the private label channel. And this offered us the opportunity to acquire the leading private label spices and seasoning supplier in the U.S. with #1 market position in a very high-growth category. The spices and seasonings business, particularly the private label side of this business, is a high-growth category. And Olde Thompson has had long privileged access and significant customer franchise across many of the U.S. retailers. Thirdly, it had very strong financial profile in terms of attractive earnings with an EBITDA for 2020 of $80 million and potential EBITDA synergies in our hands of between $25 million and $30 million that we expect to realize over the course of the next few years. And finally, most importantly, it had a very experienced and motivated management team that had deep domain expertise in private label, spices and seasonings space and who can help us cross-sell our other Spices portfolio to their existing customers and vice versa and because of its bicoastal manufacturing facilities that give us good beachheads in both the East Coast and the West Coast of the U.S. The transaction was valued at about 11.5x EV/EBITDA or at 8.5x EV/EBITDA based on historical and forward earnings including expected synergies. This transaction we expect to be both earnings and margin accretive from the first year itself and it's a critical part of OFI strategy. This acquisition at that time was 100% financed by a bridge loan of $1 billion that we had raised. And the rights issue will help us partially repay some of the debt that we had raised to fund this transaction. So as I mentioned, the key highlights was that we are acquiring a leading private label spice and seasonings manufacturer in the U.S. with a relative market share, which is significantly higher than the rest of the competition. It was a full solutions provider both in terms of its innovation expertise, product formulation expertise, packaging expertise across multiple formats including pouches, sachets, glass bottles and plastic jars. I mentioned that it had bicoastal manufacturing facilities, which hedged and diversified our manufacturing footprint and base. And most importantly, it had very privileged access and a very solid customer franchise with the leading U.S. retailers. The indicative timetable for this rights issue is the last record date -- the last day of shares traded from rights for the rights issue will be the 28th of June. The first day of shares stated ex-rights for the rights issue will be the 29th of June. The record date will be the 30th of June 2021. We expect to dispatch the offer information statement along with the relevant application forms to all the entitled shareholders on the 5th of July 2021. The commencement of trading of nil-paid rights will be from the 5th of July 2021, so entitled shareholders will be able to subscribe to their entitled rights. If they don't choose to subscribe to the entitled rights, they will also have the opportunity to trade the nil-paid rights. They can also apply for excess rights even if they don't subscribe to their rights issue itself. The last date for trading nil-paid rights and splitting and trading of rights is 13th July 2021. And the closing date for the rights would be the 19th of July 2021 at 5 p.m. for physical applications and 9:30 p.m. for electronic applications. The expected date of commencement of trading on the SGX-ST for the right shares will be on the 28th July 2021. Given that we are now launching this rights issue and since we are reporting now on a half yearly basis to enable shareholders to understand the progress of the company during this period from 1st January to 31st March of Q1 and also any material developments from the 1st of April until today's announcement, we are providing a very brief overview, which has been accompanied by the Q1 or H1 operations and financial performance update, which is part of the announcements that we have released today. For the Q1, we have had top line growth in terms of volume of 2.4% to 8.6 million tonnes. And our revenues have grown faster than our volume growth as a result of higher commodity prices and higher sales realizations. So revenues have grown about 14.5% to $8.8 billion compared to $7.7 billion last year. Operating profit has slightly declined by 2% -- 2.2% to $255 million, while PATMI has declined by 13.1% to $156 million. That -- but operational PATMI has grown by 15.5% to $157 million. The reason of the difference in reported PATMI and operational PATMI is the absence of exceptional gains of about $42.3 million that we recorded in the first quarter of last year resulting from our disposal of the remainder stake in Far East Agri, which is our sugar refining operations in Indonesia, and also a partial divestment of a partial stake in our ARISE platform -- infrastructure platform in Africa. Given the absence of those exceptional earnings in the first quarter of this year, our reported earnings was down 13.1%. Our underlying operational earnings was up by 15.5% to SGD 157 million. We had a healthy cash and cash equivalents position of -- cash of $3.8 billion at the end of the year. We had readily marketable inventories of $8.3 billion including secured receivables. And we had unutilized banking facilities of $6 billion. So we had total available liquidity in excess of $18 billion at the end of the first quarter. Our net gearing was 1.72x, which is similar to the net gearing that we had on -- for the 31st December 2020. And our adjusted gearing after adjusting for readily marketable inventories and secured receivables, was at 0.5x in the first quarter. So in terms of the business outlook for the rest of the first half, we have seen a very sharp snapback from the worst pandemic impacts of COVID-19 that we experienced through last year, both in the major economies. While the recovery is a little bit patchy and uneven across the globe, we have seen strong recoveries led by China, U.S., Europe, Japan and many of the OECD countries. We have had a slightly more patchy recovery in the developing world, with South Asia in particular having us -- in India, being led by India, Bangladesh, et cetera, which have had a surge in COVID cases and, therefore, slightly lower growth and have not come back to full recovery and that applies to countries like Brazil and Turkey as well, which have this slightly lower economic recovery compared to the other countries that I mentioned. But overall, globally, we have seen a significant revival of growth and a sharp snapback from the worst impacts of COVID. So that augurs well for us for the prospects for the rest of the first half of this year. Within that, OFI is expected to benefit from greater demand for at-home food consumption as well as increase in the food service sector demand as a result of gradual opening up given the effectiveness of the vaccination drive in many countries. There is a partial opening up of these economies, and that has stimulated food service demand as well. In addition, shifting consumer patterns as particularly the greater emphasis on food, sustainability and also the increased contribution from our acquired businesses, as you know, last year, we announced towards the end of the year the acquisition just in the spices space of a large chili pepper business in the U.S. for $108.5 million, an onion ingredients business. So all of these newly acquired businesses will also start contributing as they are all earnings accretive immediately as well. So OFI will benefit from all of these developments. OGA continues its strong performance of last year in the current year as well. And there has been a significant revival as a result of the worst impacts of COVID now behind us for the Cotton and the Fiber business, which was severely impacted last year as a result of the worst impacts of COVID with manufacturing capacities in the textile milling industry significantly reducing. But that has changed in the first half of 2021, and therefore, OGA is very well positioned to benefit from this growth in demand and a restocking that is happening across the Food, Feed and Fiber segments. Overall, barring unforeseen circumstances, the economic outlook and the prospects for the group for the first half of 2021 is looking positive aided by growing demand and recovering demand as well as tight commodity supplies and, therefore, elevated commodity prices. So the 3 key issues -- the 4 key issues that we wanted to highlight for today's announcement is that we are announcing a renounceable fully underwritten rights issue. It's a 3 for 20 rights issue priced at $1.25 per rights share. This represents a 26.9% discount to the last traded price on 21st June 2021 and a 24.2% discount to the theoretical ex-rights price of $1.65. We expect to raise about SGD 601.7 million of gross proceeds from this transaction. As I mentioned, the rights issue will primarily be used to partially repay the debt used to complete the acquisition of Olde Thompson, which was acquired at an enterprise value of $950 million. In addition, it will also provide funding for working capital and other general corporate purposes. The proposed offering will therefore bolster the company's balance sheet, enhance our credit profile and provide us additional financial flexibility to capture future growth opportunities in line with our strategic plan. And our major shareholder, Temasek, has supported this transaction and has also fully sub-underwritten this transaction. We are now happy to take any questions that you might have.

[Operator Instructions] There is no question at this time.

As there are no questions, I'd like to take some questions has come through from the webcast. The first question is, congratulations on completing the acquisition of Olde Thompson. There are essentially 2 questions here. With the plan to float OFI and OGA and rights issues at the OIL level, what is the overall plan for OIL going forward given the impending listings of the 2 entities to be formed? And secondly, is there any update on the debt structure post the carve-out and restructuring?

So the first response to the question is that the reorganization plan, which we provided an update to you in February of 2021, is on course, on schedule, on target, on plan. So we expect to carve out OFI and OGA and OIL by the end of this year, December -- by the end of this financial year, December 2021. We are on track to then list and concurrently demerge OFI in the first half of '21. And as we mentioned, we will do that sequentially for OGA as well, and we are following similar strategic options for OGA. So today, there is only one OIL. The separation of OFI, OGA are all underway. So the rights issue is being done by OIL. On separation and carve-out, we will also be pushing down and restructuring our debt into the new operating entities. And that work has also started and is underway. Once the new entities are separated, carved out and stood on their own, this new capital structure in terms of the debt and equity will be clearly crystallized for both OFI, OGA and OIL. We have clearly targeted capital structure for OFI, for OGA, for OIL pre any transaction as the IPO -- like the IPO, pre any transaction and post transaction. And that will become more apparent as the reorganization plan progresses or proceeds.

Thank you. Related to the reorganization, is there any update on the IPO for the Food Ingredients business? Have there been any shortlist of any venues for the IPO and potentially the banks that we are hired for the listing?

Yes. So the 2 questions about the -- so as I said, OFI is on target to complete its IPO in the first half of 2021. In terms of the banks, we are in the process of selecting our joint global coordinators as well as our joint book runners. And that will be done in due course and announced when that exercise is completed. We have time to complete that activity. In terms of the listing venue, we have made further progress on the choice of the listing venue, but not made a final determination as yet. And we will be making that determination also in due course, but we have now got a shortlist of potential venues that we are considering for the listing.

Now there's a question on the rights issue. Will the directors be subscribing for the rights entitlement to align their interest with the other shareholders, including the minority shareholders and Temasek?

So I cannot speak on behalf of each director. I can speak on my own behalf. I'm a director and a shareholder of the company as well. So I intend to fully subscribe to my rights. Each director will speak for themselves. So the rights issue has just been announced today, and we will see how that develops. But I can speak on my behalf, and I intend to fully subscribe to my rights. Was there a second part of the question?

No, that's it.

Okay.

I'd like to turn back the attention back to the call, the callers on the conference line. Are there questions on the conference line, operator?

[Operator Instructions] Our first question comes from the line of Uma Devi from Business Times.

Can you hear me?

Yes.

Yes. So I just have one question, and that is why does the company feel that the current environment is a good one to conduct a fundraising exercise? Do you have any concerns that unitholders might be a bit -- or shareholders might be a bit hesitant to pump more money into the company at this point in time? And did you not consider holding of this rights issue until a later date, perhaps when the economy is more stable?

So I don't know if I heard the second part of your question, Uma, clearly. So can you just help me -- just repeat that question, particularly the second part?

Okay. So I wanted to ask why the current environment is a good one for fundraising and if you are concerned in any way that it might not get such a good reception from unithold -- or from your shareholders or if you had even considered in the first place postponing this rights issue to a later date where the economy will be more stable and perhaps shareholders would be more willing to pump a little extra money to the company?

Yes. So I think the first point that I want to make is that this transaction that we did of Olde Thompson, the acquisition of the U.S. private label spices and seasonings manufacturer, was very central to our reorganization plan and our new strategic plan. And it was available at this point in time for us to transact because it is a public process. And if we didn't participate in this, we could have lost this deal, which was, I think, quite important and fully aligned with our strategic plan. So we felt it was necessary for us to make this investment now as a result of the fact that it was right in the sweet spot of OFI strategy and what OFI was trying to become and pivot to. So we see OFI as becoming a more value-added natural, plant-based, on trend, fully sustainably sourced and traceable food ingredients and solutions company. And Olde Thompson was right in the sweet spot of that strategy. So we wanted to make sure that we are in a position to be able to complete this acquisition, which signals the course or the direction of travel that OFI wants to take. And this is beyond our business-as-usual plans that we had for the year. So all our CapEx that we had planned to invest this year of roughly $900-plus million was being supported by our existing resources. This was over and above the current business as usual. This was in line with our future strategic plan. And therefore, when this opportunity came along, we felt it was the right thing to do as it was fully aligned with OFI's strategic plan, with our reorganization plan and right in the sweet spot of that strategic plan. And therefore, we decided to act now. We were able to put a bridge financing in place to complete that acquisition by the 17th of May. And now we are putting in place this rights issue so that we can partially repay the debt that we took on to finance the Olde Thompson's acquisition transaction. So as I mentioned earlier to you, we have a clear boundary condition in terms of the targeted capital structure that we would like OFI to be at before its carve-out and IPO and post its carve-out and capital raise via the IPO. The same thing we have for OGA and OIL as well. So in order to be within those boundaries, we felt that doing this would help us and support that. So those are the reasons why we did this now. And since it is a fully renounceable and it is a rights issue, we are rewarding also our existing shareholders who have supported us all this while to be having an opportunity to participate in this capital raise exercise at a fairly attractive discount to yesterday's closing price, 26.9% and a 24.2% discount to the theoretical ex-rights price. So we think it is attractive for all our shareholders to participate in Olam's reorganization plan and Olam's growth story. And for those shareholders who might not want to take up the rights, they can still trade in the nil-paid rights. That is the additional option that they have. And they can also subscribe for excess right applications as well. So given these reasons, we felt that this was the right time to get this done as it's consistent and in line with our reorganization plan.

Next in line?

There's no more question at this time.

While we wait for the questions on the line, let's get back to the webcast questions. Would you like to comment if the other significant shareholder, Mitsubishi Corporation, would be taking up their rights entitlement as well?

Again, as a management team, we cannot speak on behalf of any shareholder. Each shareholder will assess the merits and make their own determination. So unfortunately, we cannot speak on behalf of any other shareholder at this point in time.

Just want to clarify the target listing for OFI, it's the end of the first half of 2022, not 2021.

Sorry. I meant 2022, first half 2022.

Yes. There's a follow-up question on the listing as well, whether you like to elaborate on the possible listing venues.

No.

Thank you. So the other question is about the use of proceeds to partially pay down the debt to finance OT, will the company also be retaining some for working capital purposes? The answer is yes. Let me just take this question. It's not really related to today's topic, but let's see if we can take this question. This question is for Sunny. Could you comment on the logistical challenges on the containments and the freight costs that are currently plaguing the local -- the global commodity trade? How is that affecting Olam International and the rest of the industry players?

Yes. So it is a serious issue that increase in freight rates, both on the container side as well as bulk freight rates. And this is a combination of multiple factors. One is a sharp rebound in demand and growth from the worst impacts of the pandemic has contributed to imbalance between supply and demand. But secondly, there has been significant congestion in various ports, both origination ports as well as destination ports, as a result of COVID-related disruptions that has taken out capacity as a result of this increased congestion. We saw what happened in the Panama Canal with the container shipping -- container ship that was stuck as well. So there are many factors that have contributed to this rise. It will take some time to work through. So the second part of the question in terms of direct impact on Olam's business, so that puts pressures on prices for us. But most of the freight costs we have to pass through to our customers. That might, in the medium, long term, if it sustains and remains at an elevated level, have some impact on demand. But in terms of our own profitability, freight is a pass-through cost, but that depends on our forward book and our forward contracts. So if you've already sold forward freight, then we will have some impact. If you're selling spot, then that is a pass-through. So I would say that it is a headwind generally for the industry. We don't expect it to seriously impact our profitability because of the nature of -- the pass-through nature of freight cost for us.

And there's a question on the restructuring of the debt, how it's going to be allocated across OFI, OGA. And what about the perpetual securities? Muthu, would you like to take the question?

So as Sunny was earlier indicating, we are in the process of planning for the reorganization of our debt portfolio as the reorganization plan progresses through the year. And we have, again, as Sunny had indicated, very clear boundary conditions for targeted capital structure for OFI, OGA and OIL. And that will determine the reorganization and restructuring of our debt portfolio going forward. And that will include where we will restructure or reorganize our perpetual securities as well.

Just a comment -- they are asking for comments with the right price at $1.25, which is near the 3-year low. Are you concerned that the market price will go down along with the rights price?

We cannot forecast what market prices will do, but this is an entitled offering only to -- this is an offering -- a renounceable rights offering only to entitled shareholders. So the price at which the offer is made, if there's an advantage, disadvantage, is all to entitled shareholders. How the share prices will trade is not just a function of the rights issue price, it's a function of what investors see as the performance and potential of these businesses both as one Olam today and has carved-out new entities going forward. We believe there's a lot of value that we will unlock through our reorganization plan as we execute that reorganization plan. And that will be to the benefit of existing shareholders and any new shareholders that might enter our register down the road.

There are currently no more questions on the webcast. Can we get back to the conference line if there are any outstanding questions?

[Operator Instructions] There is no question at this time.

Thank you. With no questions on both ends, I would like to bring this briefing to a close. If speakers have any closing remarks before we bring this to a close?

Thank you all for attending this briefing. Thank you very much.