Ricegrowers Limited (7H0.F) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SunRice Group Full Year 2021 Financial Results Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to the conference call host, SunRice CEO, Mr. Rob Gordon; and the company's CFO, Mr. Dimitri Courtelis. Please go ahead.

Thank you, and welcome, everyone, to this morning's call. We appreciate you taking the time to join us following the release of our full year results for financial year 2021 yesterday. My name is Rob Gordon, CEO of SunRice, and I'm joined in Sydney by our CFO, Dimitri Courtelis. Our plan for today's call is to provide an overview of our full year 2021 financial results, then open to questions to all participants who have dialed in today. Along with yesterday's announcement, we've also launched an investor presentation on the ASX, which I would encourage you to read for more details on the results. I'll start today with some high-level commentary before handing over to Dimitri. The results announced to the market yesterday are a demonstration of our strategy in action, delivering a significant -- a resilient set of financial results against the background of most challenging of circumstances. The year in review was the second consecutive year of near record-low production in the Riverina, with just 5% of demand supplied from Australia in the past 2 years, and it coincided with the crippling effects of the pandemic in many of our markets. The business showed that it can deliver through the cycle and now stands to quickly rebuild off the back of improved seasonal conditions and benefiting from the steady progress that has been made in the execution of our strategy. Despite the challenging circumstances, which impacted financial performance in the year, we still launched new products, maintained core skills in our Riverina operations and pursued an ambitious acquisition agenda. The coordinated efforts led to a creditable net profit after tax, which allowed us to pay a fully franked dividend in line with the prior year while maintaining the strength of our balance sheet, and this is the sixth year of consistent dividend, illustrating the resilience of our business model. Now let me go into more of the details. As we reported yesterday, group revenue was $1.03 billion for financial year 2021. That's down 9% on the prior corresponding period. And EBITDA and net profit after tax were $49.1 million and $18.3 million, down 25% and 19% on financial year 2020, respectively. We always knew the 2021 financial year was going to be difficult, and we planned accordingly. Coming off the back of the critically low Australian rice crop for 2019, which was just 54,000 paddy tonnes. Conditions were pointing towards an even worse planting for the 2020 crop, which would be processed and marketed in the financial year 2021. This eventuated with a crop of just 45,000 paddy tonnes able to be planted due to worsening drought, water availability and high water prices. We took the difficult decision to reduce our cost base in the Riverina in the prior year, given the anticipated low production while offering record fixed price contracts to secure enough rice to maintain baseline production, retain core skills in our operations and replenish seed stocks to enable the planting of a larger crop in future if conditions improved. There's no escaping the significant impact of 2 years of extremely low production in the Riverina has had on our Australian Rice Pool business and some of our other businesses. With such a low volume of rice available to be milled, costs were significantly under recovered in that segment, which is shown in the $22.1 million pretax loss. We've executed a strategy to build our international sourcing capability over the last 10 years to prepare for this exact scenario where drought severely impacted Australian production. This included establishing our successful Ricegrowers Singapore trading business, stepping out into Vietnam with the acquisition of our mill in 2018, increasing capability in our SunFoods facility in California and entering into significant supply arrangements from countries including China and India. Indeed, we sourced rice from 12 countries in the last financial year, which enabled the business to meet global demand in excess of 1 million paddy tonnes, even though such a small volume of that rice was available from our Australian supply chain. The group's global sourcing strategy has helped keep markets open despite the low production in the Riverina. Pleasingly, improved conditions have seen Australian rice production increase for the 2021 crop just harvested to a crop size of approximately 420,000 paddy tonnes, and we are now able to reintroduce our value-added and branded Australian rice products to our premium global markets. The variety of high-quality origins of rice across our international supply network now provides an opportunity to not only have maintained positions in premium markets for Australian rice when production returned, but to meet demand in the future for bulk and branded products targeted at different price points for different markets. We will continue to maintain and build our capability in multi-origin, multi-price international rice sourcing as this improved capability makes our business model stronger. The increased earnings in our international rice segment more than offset the deteriorating results in the Rice Pool and Corporate segments combined. Now aside from the ongoing challenges of drought, we also had a myriad of challenges related to COVID-19, and these included the incredible disruption to global shipping lines in the year, when as discussed, we were leveraging our significant international sourcing capability to move rice products from 12 different sourced countries and complex supply chains to meet demand in approximately 50 markets. We had unprecedented challenges for our people with different regulatory requirements, restrictions on movement and other complexities across the countries where we have operations around the world, continuing limits on travel, which made it difficult for our teams to maintain relationships and build new partnerships face-to-face, although they have done an admirable job of this through virtual means and economies and sales channels in key markets, particularly those relied on tourism being decimated by the impacts of COVID-19. In the last year, we've maintained our focus on the future, leveraging the strength of our balance sheet to execute against our growth strategy on a number of strategic projects, investments and acquisitions. In fact, financial year 2021 was our most significant year of investment in strategic acquisitions in recent history, with some $66 million in capital committed to purchasing businesses focused on building scale, diversification and consistency of earnings, particularly for our Riviana Foods and CopRice segments. This included acquiring 3 new businesses. In September, CopRice acquired the dairy and beef business of Riverbank Stockfeeds in the strategically important region of Gippsland in Victoria for $5 million. In December, we acquired branded food imported KJ&Co Brands for $51 million, which is a transformative acquisition for our Riviana Foods segment. And in March, we acquired a dairy nutrition business in New Zealand for $11 million, making the operational expansion of CopRice into its first overseas market. We also continued the integration and upgrade of acquisitions from prior years with growing benefits from Roza's Gourmet in the Riviana Foods segment and upgrades to our Wangaratta CopRice facility and Leeton Specialty Rice Foods Facility. These initiatives, along with the investments in the $10 million Bran Stabilisation Plant in Leeton and conversion of the former Coleambally Rice Mill to a CopRice facility from the prior year are expected to progressively realize benefits in the next financial year. We also undertook a significant amount of work in planning to optimize our Australian Riverina production base for low cost-efficient production. This will maintain our global competitiveness and see us further invest in value-added processing capabilities in coming years. Organic growth initiatives were also progressed, such as the launches of the Riviana Basmati microwave range, SunRice's new Flavour your Rice sachets, Brown Rice Chips and Rice Cracker Chips in multiple international markets and the new more affordable Asian-sourced rice brand, SunGold, into the Australian food service market. SunRice also maintained its focus on key ESG initiatives, including further work to respond to the task force on climate-related financial disclosures recommendations, the release of our inaugural Modern Slavery Statement and defining the 6 priority issues and targets that support our sustainability framework. Now with that, I'll now hand over to Dimitri to discuss each of our business segments, and then I'll cover off on our outlook for financial year 2022 before taking your questions. Thank you, Dimitri.

Thanks, Rob, and good morning to everyone joining us on the call today. The first segment I'll discuss is our Australian Rice Pool business, which is aligned to our A Class shareholders and deals with the receival, milling, marketing and the selling of Riverina rice. With the second consecutive year of drought, low water availability and high water prices, the 2020 Riverina crop was the second smallest on record at just 45,000 tonnes, which led to a significant under-recovery of costs in the Rice Pool in financial year 2021. Revenue was $114.8 million, down 49% on the prior corresponding period, primarily volume-driven. And pretax loss was $22.1 million compared with a loss of just over $4 million in FY '20. Now clearly, this has weighed significantly on the group profitability as well. In order to incentivize a minimum level of production to maintain baseline operations and build seed inventory levels, the group offered record fixed price contracts of between $750 and $1,500 per paddy tonne. While approximately 300,000 paddy tonnes were carried over into the previous financial year of FY '20, there were no comparable carryover for FY '21, driving a heavily underutilized milling program. The lack of rice also negatively impacted the CopRice and Rice Food segments due to reduced volumes of byproducts and other inputs. The Rice Pool business remained focused in the last year on minimizing its costs whilst prioritizing the supply of Australian rice to our premium markets. The Rice Pool remains a key element of the SunRice business model and is well positioned to resume its role as a supplier of premium rice to key markets during financial year '22. I'll now move on to our International Rice segment, which sources, processes and markets rights to global markets as well as into Australia when varieties cannot be grown here or when supply is low. Revenue increased by 3% year-on-year to $548.5 million, with net profit before tax of $22.6 million, significantly rebounding from a pretax loss of $1.4 million in financial year '20. The increased profits of our International Rice segments more than offset the combined downturn in results in the Australian Rice Pool and the Corporate segments in financial year '21. Now as Rob said earlier, we have executed a strategy as a business to build our international supply network to still be able to deliver and service growing demand in global markets, even when Australian rice production is low, and it's pleasing that the strategy has delivered. In our traded rice business, Ricegrowers Singapore successfully increased its international sourcing capabilities in response to the small Australian crop and sourced from 11 other countries to meet the demand for SunRice's products in key markets. This maintained positions for Australian rice to return to these markets in FY '22. Our United States subsidiary, SunFoods, also positively contributed to servicing the markets that typically purchase Australian rice in financial year '21 with better asset utilization, additional stabilized bran processing capabilities, supporting significant upturn in performance. This increased performance more than offset the downturn in Hawaii market due to COVID-19. New territories for rice sales were also established in the International Rice segment, and our SunGold brand was released in Australia to service the import of Asian grocery and food service markets. We also negotiated significant agreements with strategic commercial partners in China and India to ensure supply of rice to our key Pacific markets in the next financial year. However, sales and margins in key Pacific markets suffered from difficult and deteriorating economic conditions, unfavorable foreign exchange rate movements and aggressive competition. Turning now to our Rice Food business, which manufactures, markets and distributes value-added rice products. Revenue was 4% lower year-on-year at $96.1 million, whilst the segment recorded a pretax loss of $1.9 million compared with a pretax profit of $4.6 million in financial year 2020. Performance was negatively affected in part due to the lack of inputs available from the Rice Food business due to the smaller Australian crop. The high cost of inputs, notably the record high paddy price of $750 per tonne also weighed on profitability of the segment, as did other one-off launch costs and increase in manufacturing overhead allocations due to the contraction of the Rice Pool business. Despite the strong innovation pipeline, sales volumes in a number of categories, in particular, rice flour and microwave rice products were down on the prior corresponding period due to volume. COVID-19 and resulting lengthy restrictions in Victoria also contracted food services demand, which compounded with missed sales opportunities in the early part of the year as production constraints limited the ability to meet the surge in consumer demand for food products with the panic buying. Despite the challenges, the segment significantly expanded its offering in the financial year, progressing initiatives, including the launch of our Brown Rice Chips and Cracker Chips in a number of key markets and launching Australian Infant Rice Cereal. Work continued in the year on strategies to improve efficiencies, reduce costs and further support innovation in the segment. This included the completion of a $4.5 million upgrade of the Leeton Specialty Rice Food Facility, which is expected to bring benefits to the group with the improved quality of our microwave rice pouch products and manufacturing efficiencies. Now to the Riviana Foods segment, our specialty gourmet and entertainment food business. There was a strong focus in the year on value-accretive acquisitions, while the segment still made a significant contribution to group profitability. Riviana recorded revenues of $148.4 million, up 9% on the prior period, and pretax profit of $9.2 million, up 14% year-on-year. This increase in profit was delivered despite headwinds, including adverse foreign exchange movements, but also despite Riviana's rice business being transferred to the International Rice segment. The acquisition of KJ&Co for $51 million in December was transformative for the Riviana Foods segment and further diversified its presence across new categories within Australian retail. KJ&Co has already generated revenue and profits for the Riviana Foods segment in financial year '21 and is expected to be earnings per share accretive in the first full year of ownership. Improved underlying performance of the Riviana Food business reflected strong brand performance across retail, with an uplift in sales volumes due in part to COVID-19 restrictions and driving demand for in-home entertainment products. Performance also improved by Roza's Gourmet having an uplift in sales volumes, with Riviana doubling the revenues attributable to Roza's since its acquisition. This demonstrates Riviana's ability to successfully integrate and scale acquired businesses, leveraging its brands, marketing expertise and the supply chain partnerships. Financial year 2021 also saw the launch of Always Fresh Sweet Biscuits, the additional ranging of 12 products in New Zealand and the positive effect on costs of recently achieved operational efficiencies and synergies. These factors more than offset the challenges of a significantly contracted food services sector due to COVID-19 restrictions and local and global supply chain disruptions, notably on freight costs. Turning to our animal feed business, CopRice, which had a very challenging year, with revenues down 18% to $114.5 million and a pretax loss of $4.5 million compared with a net profit before tax in the prior period of $3.6 million. Despite gains in companion animal sales and a favorable product mix, the segment faced multiple headwinds. Falling commodity prices, exacerbated by an unexpected step change in international trade conditions, impacted the business negatively, as did the shortage of Australian rice byproducts used as one of the main components in CopRice's manufacturing process. The lack of rice byproducts also affected the performance of the newly commissioned Leeton Bran Stabilisation plant, which temporarily operated at suboptimal levels in year, while still incurring all of the depreciation and the other associated costs. [Audio Gap] provided farmers with an abundance of natural pasture to feed its remaining stock. This significantly reduced the demand for supplementary feed products of CopRice and placed additional pressure on margins due to increasing pricing competition in the significantly contracted market. Despite the challenging conditions, CopRice continued to pursue its growth initiatives, acquiring, upgrading and expanding well-priced assets during the low points of the drought cycle. These investments have set solid foundations for the future and are expected to yield benefits as the key markets recover. In particular, CopRice expanded its international footprint and expertise into the New Zealand dairy feed market for the first time, through the completion of the acquisition of the Inghams' dairy nutrition business in March 2021. CopRice also invested for growth via its FeedRite operation in Wangaratta, and this was acquired last year. The reopening of this facility was delayed due to COVID-19. However, it's now operational as a second extrusion facility to support the fast-growing pet food business. CopRice also completed the acquisition of the beef and dairy assets of Riverbank Stockfeeds for $5 million in September 2020, including a feed mill at Leongatha and dairy and beef business across Gippsland and Southwest Victoria. CopRice has historically been a strong contributor to group profitability and is expected to be well positioned to rebuild, particularly given strategic investments and acquisitions, capital expenditure and new product development. Finally, turning to the CopRice segment -- sorry, the Corporate segment, which captures the income and costs of holding and financing assets that are used by both the Rice Pool business that are represented by the A Class shareholders and to the profit businesses represented by the B Class shareholders. Pretax profit for the segment remains primarily driven by a range of intersegment charges, such as brand and asset financing charges as well as items that are not allocated to other segments, such as the costs or the income associated with various corporate activity. Pretax profits for the segment was $14.6 million, a contraction of 20% on the prior corresponding period. Factors that reduced profitability included significantly lower levels of the asset financing charge received from the Rice Pool business with the reduction of inventory due to the low crop. Furthermore, a drop in the cost of capital driven by the low interest rate changes. The offsetting effect of these lower charges, however, helped contain the Rice Pool's loss. Also, lower levels of brand charges received from the other segments of the group following the drop in revenue across the period and increased consulting costs to support and improve the information technology systems and security across the group and transaction costs with M&A activity for the KJ&Co Brands, Hamilton New Zealand and Riverbank Stockfeeds acquisitions. These factors were partly offset by costs associated with COVID-19 pandemic not being initially as high as expected at the 30th of April 2020. I'll now hand back to Rob to cover our outlook for the next financial year.

Thanks very much, Dimitri. As I mentioned earlier, the company's earnings are anticipated to improve in financial year 2022. Following improved conditions for rice production, the 2021 Riverina crop that has just been harvested is anticipated to be approximately 420,000 paddy tonnes. That's nearly 10x the size of last year. This increased volume means the Australian Rice Pool business should again be in a position to absorb its share of overhead costs for the financial year. The crop is currently being processed in SunRice's Riverina facilities and will allow the Australian Rice Pool business to reenter premium export markets, which have been serviced from SunRice's international supply network. The return to more favorable seasonal conditions will contribute to an upturn in the profit businesses that, in part, rely on Rice Pool inputs and other investments are expected to yield higher returns with better asset utilization and increased throughput as a result of increased Riverina production. The strategic acquisitions I outlined earlier in the CopRice and Riviana Foods segments are also expected to realize additional benefits in financial year 2022. As a consequence of these factors and other strategic and organic growth initiatives progressed in the year, we are anticipating improvements in earnings. Although I note that the anticipated upturn in performance is likely to occur gradually across the year, with the first quarter expected to be relatively slow as markets recover from COVID and international shipping disruptions abate. This is primarily due to significant levels of inventory being in place, which includes stock held by distributors in some of SunRice's key markets as financial year 2021 closed, and this was driven by COVID-19-related disruptions to international shipping. This inventory will need to be utilized before rice from the larger CY '21 Australian crop and other origins can support additional sales. Given the strength of the group's balance sheet, we're continuing to explore further acquisition opportunities that have the potential to meet our strategic and financial investment criteria in the coming year. Lastly, the Board recently confirmed that the core fundamentals of the group's growth strategy remain appropriate and have extended the time frame for delivery from 2022 to 2024. I'll now hand back to the operator.

[Operator Instructions] Thank you. There are no questions at this time. I'll now hand back to Mr. Gordon for closing remarks.

Thanks very much, operator. On behalf of myself and Dimitri, thank you again to everyone for joining this morning's call and for your continued interest in our business.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.