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

Thank you for standing by, and welcome to the SunRice Group FY 2022 Annual Financial Results Conference Call. [Operator Instructions] I would now like to hand 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 the financial year 2022 yesterday. My name is Rob Gordon. I'm the CEO of the SunRice Group, and I'm joined in Sydney by our CFO, Dimitri Courtelis. Plan for today's call is to provide an overview of our full year 2022 financial results, then open for questions to all participants who have dialed in today. Along with yesterday's announcement, we've lodged an investor presentation on the ASX, which I'm sure you have in front of you. I'll start today with some high-level commentary and a snapshot of the results before handing over to Dimitri to step through the detailed performance of each of our segments. Financial year 2022 saw strong performance with revenue, naturally determined paddy price and dividend, all at the highest levels in the group's history, and net profit after tax more than doubled compared with the prior year. The business has delivered an outstanding result, which followed 2 years of near record low Australian rice production, a period in which the company diverted resources to maintaining supply of key markets with rice from other origins while still progressing investments in new acquisitions and other organic growth initiatives. This improved performance was the consequence of the return of Australian rice to key markets, thanks to a rebound in production, the accretive contribution of recent acquisitions and the group's multi-origin multi-price point international rice supply capability. The strong performance was delivered despite the ongoing disruption to global supply chains and uncertainty caused by the COVID-19 pandemic and, of course, the impacts of the Ukraine conflict as financial year 2022 closed, which has led to inflationary impacts on key business inputs. Let me now go into more of the details. Group revenue was $1.3 billion for the year, up some 30% on the prior period. Earnings before interest, tax, depreciation and amortization was $91.3 million, up 86% on the prior year. And net profit after tax was $48.7 million, up 167%. Earnings per B class share was $0.772, up 123% on the prior corresponding period. A naturally determined pool paddy price of $428 per tonne for our popular medium-grain variety was also delivered while fixed price contracts of $475 per tonne was paid for medium grain as well as higher prices for specialty varieties. As mentioned, this was the highest naturally determined paddy price in the group's history. The improved performance allowed the group to distribute total dividends of $0.40 per B class share for the year, also a record and includes a special dividend of $0.05 per share. There were a range of key contributors to the strong financial results, including the return of Australian rice and performance of some of our profit businesses as well as realization of benefits from the ongoing execution of our growth strategy. Dimitri will step through our segment performance shortly. However, overall, the improved performance across the group was delivered in the face of significant headwinds and uncertainty. COVID-19 remained at the forefront and has been an uneven recovery across our markets, particularly in the foodservice sector. We continue to face unprecedented and escalating increases in freight and other manufacturing input costs, which were worsened by the Ukraine conflict and are continuing into the current year. The disruption to shipping also led to situations where demand was at times unable to be fulfilled in some markets throughout the year. And despite all of these headwinds, our people continued to demonstrate extraordinary resilience 2 years into an extremely challenging period to deliver this outstanding result. Execution of our growth strategy has remained at the forefront of our minds. No sooner had we set the growth strategy some 5 years ago, then the core Australian rice business went into the second and third worst droughts on record. We leveraged our international rice supply capability to continue meeting demand in our approximately 50 global markets from other origins. We remained profitable and still delivered dividends consistently at record levels. We also continued investing against our growth strategy, including through acquiring value-accretive businesses and a rice processing mill in Vietnam that further bolsters our international rice supply capability. Using our consumer insights and product innovation capability, coupled with organic growth and acquisitions, we've also been able to build a complementary portfolio of brands with a number of leading positions in 14 countries. With Australian rice back, we've seen a bounce in performance because we had Australian rice as well as our multi-market, multi-origin rice capability and strategic investments, all realizing benefits. An example of this was the Pryde's EasiFeed acquisition in our CopRice segment for $38 million. Pryde is a leading supplier of branded feeds for the Australian equine market and will scale CopRice while supporting its diversification into new geographic regions and increasing its presence in the high-value equine market. Looking back at our growth strategy since its adoption in financial year 2017, we've invested $113 million in strategic value accretive business acquisitions, and we have pursued organic growth initiatives, investing $151 million in capital expenditure. And all the while, we've delivered against our key objectives to optimize returns for both classes of our shareholders. In fact, we paid out close to $1 billion in paddy price payments to our A Class shareholders and growers in the 5 years between 2016 and 2021 and delivered a total of $121 million in dividends to our B Class shareholders for the 5 years to this last financial year. Our total shareholder return over that period was 150%, and this compares to the ASX 300 Accumulation Index of just 81%. I'll return to outlook more later. But looking ahead, we continue to assess a pipeline of strategic and organic growth opportunities against our financial investment criteria. We have built balance sheet strength and flexibility, and we remain committed to leveraging it to invest in further growth initiatives aligned with our strategy. The success of that strategy has been demonstrated by our ability to pay consistent dividends through the cycle. As mentioned earlier, this year, we've declared a record dividend of $0.40 per B class share inclusive of a special dividend of $0.05 per share. And prior to that, we've been able to maintain a consistent dividend of [ $0.33 ] per share over the last 4 years despite having faced the dual impacts of 2 years of Australian drought and COVID-19. And this is something we're very proud of. Something else we're proud of is our commitment to sustainability. Sustainability is at the heart of our business and remains integral to how we create value for our stakeholders. We continued making significant progress during the year against our sustainability strategy, including the finalization and adoption of specific targets underneath each of our 6 priority areas. They are water efficiency, climate resilience, waste reduction, resilient communities, respecting human rights and food security and quality. And we were pleased to release these targets to the market yesterday. And with that, I'll hand over to Dimitri to discuss our key financial performance indicators and each of our business segments, and then I'll cover off on our outlook for financial year 2023 before taking your questions.

Thank you, Rob, and good morning to everyone on the call today. As Rob highlighted, group EBITDA was up 86% on the prior period to $91.3 million and driven largely by the return of Riverina rice, allowing the Rice Pool business to fully recover its overheads as well as strong performance in the key profit businesses. International Rice contributed an additional $9.9 million in EBITDA, while Rice Food and Riviana Foods contributed an additional $7 million and $3.6 million, respectively. On to cash flow. The group continued to exercise strong financial discipline, particularly in managing the net working capital requirements as the inventories increased in line with the Riverina volumes. Having largely depleted inventories during the drought years, financial year '22 was a period of rebuild and inventories increased accordingly from $375 million at April 30, 2021, to $525 million at the end of the financial period this year. Despite the significant increase in inventories, we were able to generate net cash inflow from operating activities of $24 million. We have built a strong balance sheet. Net debt and gearing were higher primarily due to the rebuild of inventory that I just outlined and also the fact that we financed the Pryde's EasiFeed acquisition through existing cash reserves and financing facilities. Our net debt to EBITDA was 2.2x, down from 3x last year and remains well within our target range of 2 to 3x and our gearing ratio ended the year at 28%. We've also highlighted our core debt-to-EBITDA of 0.8x, given the significant components of our debt that largely relates to seasonal financing of working capital. I'll now step through each of the key business segments. The first segment I'll cover off is the Australian Rice Pool business, which is aligned to our A Class shareholders and deals with the receivable, the milling, marketing and the selling of Riverina rice. As Rob has outlined, the Rice Pool business saw a significant improvement in performance due to the increased Riverina rice production from 45,000 tonnes in CY '20 to 417,000 tonnes in CY '21. Revenue from external customers was $246 million, up $131 million or 114% on the prior year. Following 2 years of losses, the pool was able to absorb all of its overheads and deliver a naturally determined paddy price of $428 per tonne for the Reiziq varietal for our CY '21 crop. The bumper harvest also underpinned the return of larger volumes of Australian rice to premium export markets and the participation in world trade organization tenders in contrast with the past 2 years in which these markets were primarily supplied from the international rice segment. Volumes in the Middle East were particularly encouraging as the region embraced the return of Australian rice, the Sunwhite brand trading at premium prices in the Gulf states despite the market competition shifting to value brands. Now given these factors, we were able to deliver a record naturally determined paddy price despite margins being affected by ongoing supply chain disruption and escalating freight costs, as well as the overhang of previous year inventory in some markets due to COVID-19 related shipping delays, particularly in the late financial year '21. At year-end, the Rice Pool business had incurred approximately $17.5 million in additional and unplanned freight costs, which impacted the final paddy price by approximately $50 per tonne. Domestically, COVID-19 restrictions continue to contribute to strong retail sales volumes. And while new national contracts to service sushi and in-home meal customers were secured towards the end of the financial year, the overall foodservice sector remained depressed and has not yet returned to pre-COVID-19 levels. As the year closed out, Sunrise welcomed the New South Wales government's decision to renew the rice vesting arrangements for a further 5-year period ending 30th of June 2027. I'll now move on to our International rice segment, which sourced, processed and marketed rice to over 40 international markets this year, and supplies into Australia as well when varieties cannot be grown here or when the supply is low. Revenues in that segment increased by 13% to $620.9 million, while EBITDA was $43.6 million and net profit before tax, $34.2 million, which were both 29% and 51% higher on the prior year. After 2 consecutive years of sourcing rice to maintain key markets for the Australian Rice Pool business during the drought, the switch back to Australian rice in premium markets in financial year '22 demonstrated the complementary nature of Sunrise's business model in action. Despite losing volume, as Australian rice progressively returned to international markets, the International Rice segment renewed strategic sourcing contracts and used this to return to international tender markets. In the Middle East, the launch of our SunRice family rice capitalized on a new medium-grain variety from Asia with encouraging early sales results. In the United States, our SunFoods business commenced a supply agreement with the central value Ricegrowers Association which underpinned its transition into a more independent business, where previously, SunFoods has largely operated as a hedge for the Australian drought. The rice volume secured allowed it to refocus on global tenders and its domestic markets in the U.S., including the reopened Hawaiian market. Increased sales and marketing efforts, coupled with recent deployment of strategic initiatives, such as the development of a stabilized rice brand processing capability at the SunFoods mill in Sacramento supported the ongoing strong performance of the business. Increasing sales volumes and margins in the key Pacific markets of ours supported improvement in profitability due in part to the continued performance of the SolRais Famili range in Solomon Islands and a range of successful initiatives to grow sales and contain costs in our Trukai business in PNG. New markets were also developed in Europe, leveraging SunRice's Asian short grain supply chains. COVID-19 significant and uneven impact on global economics as well as inflationary pressures on inputs due to the disruption of global shipping and the Ukraine conflict did put pressure on costs. However, overall, the division managed to expand its margins, driven by price increases and strong cost containment in key regions. Turning now to our Rice Food business, which manufactures, markets and distributes value-added rice products. Revenue was 11% up on the year at $106 million whilst net profit before tax of $5.9 million was up from a pretax loss of $1.9 million in the prior period. EBITDA of $7.9 million, significantly up on last year. The greater availability of Australian rice used as an input in a number of the segment's products played a key role in the performance uplift of the segment. This was, however, felt only part way through the period due to the time required to process the crop after stocks were fully depleted in late financial year '21. Good milling yields in the Rice Food business also led to more expensive head rice being needed for flour manufacturing, given brokens were not readily available. The segment also benefited from strong growth in the convenience category and snacking products, supporting both revenue and profitability. And internationally, our Rice Cracker Chips continue to gain momentum in the markets of Singapore and in Hong Kong. Innovation and quality improvements resulting from the investments in new cooking technology in Leeton in financial year '21 further underpinned both volume and sales uplifts in microwave rice and the new premium product range of Riviana's microwave rice was launched contributing to incremental market share gains. Rice Foods local manufacturing capability also meant that it was not hampered by the supply challenges faced by manufacturers of competing products that were sourced offshore. However, operational challenges due to the delay in raw material inputs and packaging as well as labor shortages affected the manufacturing products of rice chips and resulted in supply shortages at some points during the year. Within our Riviana Foods segment, our specialty gourmet and entertainment food business, revenue of $196.5 million were recorded in financial year '22, which is some 32% up on the prior period. EBITDA and net profit before tax of $14 million and $12.5 million were each up 35%. The strong growth in revenue and profitability were driven by the full year impact of the KJ&Co Brands business acquired in financial year '21. KJ&Co contributed $68 million in revenue and $6 million in net profit before tax and in top scale, whilst diversifying Riviana's presence across new categories in Australia and New Zealand, becoming earnings per share accretive and performing ahead of our sales projections. Other positive drivers of the result included Roza's Gourmet, and those products were arranged for the first time in mainstream retail via Woolworths and progressive recovery in foodservice with sales growing 6% on the prior year. Always Fresh and Fehlbergs largely maintained sales and market share in key categories despite significant supplier shortages and the reduced promotional programs. These positive factors partially offset a number of challenges, including local and global supply chain disruptions, inflationary impacts on European products, and internal one-off restructuring costs incurred as part of streamlining our local operations to drive efficiencies. In our Animal Feeds business, CopRice, revenue increased 41% to $161.1 million, while the segment recorded a pretax loss of $5.5 million compared with a pretax loss of $4.5 million last year. There was revenue growth across most of the product categories with increased volumes and prices at the Hamilton mill in New Zealand, which was acquired in financial year '21 and that contributed revenue of $15.6 million compared with just $1 million in the prior period. The recently acquired Pryde's EasiFeed was also a strong contributor generating revenues of $7.4 million and pretax profit of $1.3 million within the first 3 months of ownership. Greater availability of Australian rice byproducts also had a positive impact on the business, and the performance of the Leeton brand stabilization plan. Despite these gains, a range of factors continued to impact CopRice's profitability. These included continued wetter-than-normal conditions in Eastern Australia, contracting the supplementary feed market, driving more aggressive price competition and putting additional pressure on margins. There were also COVID-19-related operational delays on supply chains for ingredients, capital works at the Leongatha feed mill, which was delayed in its commissioning and commercial and operational challenges with the integration of newly acquired assets. Now finally, turning to our Corporate segment, which captures the income and costs of holding and financing assets that are used by both the Rice Pool business, representing A Class shareholders and the profit businesses representing our B Class shareholders. Pretax profit for the segment remains primarily driven by a range of intersegment charges, such as the brand and asset financing charge as well as items not allocated to other segments, such as the costs or incomes associated with various corporate activities. Pretax profit for the segment was $12.6 million, down 14% from FY '21 while EBITDA was $26.4 million, up 1% on prior year. Asset financing and brand charges from the Australian Rice Pool business was up 31% on prior year to $18.6 million, thanks to the return of Riverina rice and the corresponding increase in activity and branded sales. This increase was partly offset by a corresponding decrease in brand charge from the International Rice segment. Despite higher charges, profitability was lower due to an increase in overheads, including labor and recruitment costs, as the group implemented strategies to attract and retain talent in financial year '21, benefiting from nonrecurring items as well. I'll now hand back to Rob to recap on our strategy and cover our outlook for next financial year.

Thanks very much, Dimitri. Before I touch on the outlook for next year, I think it's worthwhile recapping our growth strategy given it underpins the overall direction of the company and our business decisions. At its core, the strategy is designed to optimize returns for both classes of shareholders by increasing profits and reducing earnings volatility, adapting our product range to take advantage of changing food trends and securing a sustainable and reliable global supply chain. As demonstrated over the last few years, our people have made significant progress against each of these key objectives despite significant headwinds, including 2 consecutive years of near record low Australian rice production and COVID-19, and all of this can be seen in these results, and we are as committed as ever to continuing to drive shareholder value by delivering against these core objectives and our 2024 internal growth targets. As an organization, I'm proud that we've been able to set clear and measurable goals, which have not changed despite significant global disruption over the last 2 years, and we've demonstrated consistent delivery against these. We're proud of the fact that we told you what we were going to do and have delivered and continue to deliver against it. Now looking ahead to financial year 2023, we expect top line revenue to continue to build. And while last year finished strongly, this one has started with worsening inflationary pressures on key business inputs and costs and continuing volatility and disruption to global shipping, which is placing pressure on earnings. However, we will seek to recover the additional costs incurred progressively throughout the year. And against that backdrop, the continued resurgence of Australian rice, coupled with SunRice's multi-origin multi-market rice capability, has us well placed to benefit this year from an environment where key markets are undersupplied due to factors, including broader disruption from the Ukraine conflict and a number of rice growing regions, either in or entering drought around the world. Delivering a crop just harvested should underpin positive contribution to both A and B Class shareholders, through strong returns in the Australian Rice Pool business and favorable inputs in a number of profit businesses, further demonstrating the complementary nature of the group's business model. Looking ahead to planting for the next Australian Riverina crop, which will be processed and marketed in financial year 2024, seasonal conditions, water availability and water pricing remain highly favorable with water storage levels in the Southern Murray-Darling Basin connected system, the highest at this point in the season in more than 20 years. The foundations laid since financial year 2017 under our strategy have so far delivered positive outcomes through the cycle and should see the business well positioned for this financial year and the future. In addition, our diversified portfolio and strong balance sheet mean we're currently well placed to take advantage of further expansion opportunities either organically or through acquisitions and continued execution of the SunRice Group's sustainability strategy remains a key priority for financial -- for the coming financial year. Having completed significant work across the group to articulate the 6 priority ESG areas and related ambitions and targets, all business units have now developed individual sustainability plans and actions aligned to the business plans and the broader growth strategy for financial year 2023. I'll now hand back to the operator. We'll look to take your questions. Thank you.

[Operator Instructions] Your first question comes from Allan Franklin with Canaccord.

Rob, can I just kick off with a couple of questions around the rice dynamics globally, please? Perhaps just starting on the supply side, just in terms of how you're feeling about the different international agreements and the ability to, I guess, get the actual rice out of those agreements in the coming 12 months?

Yes, certainly, I think we're particularly well positioned, frankly. When we have a look at the various sort of supply side dynamics, clearly, we've come through a couple of years of bad droughts in Australia in this last year. We've been delighted to see the rebound in rice production. And from my comments earlier, you'll note that the outlook for water is pretty favorable. We've also positioned ourselves with regard to other supply origins well and are typically long at this point in the year. And when I have a look at the Northern Hemisphere in particular, the Californian crop is at least 50% down. We're seeing reports of the Italian and Spanish and other European origins likely to be short with very hot dry conditions, effectively drought conditions in those markets. So we're actually well positioned. However, of course, we need to get rice from here -- from other origins to those destinations. And therefore, the international shipping is probably a fly in the ointment. Shipping costs are still extraordinarily high and shipping availability on some of the routes that we rely on is problematic. So we're well positioned. There's some sort of storm clouds ahead still. Still some remaining from the last lot, but we're well positioned on the basis that we're -- we've got a good supply side. We believe that we can rely on that supply side, and there's a good strong demand in global markets.

Interesting. And then perhaps just on the demand side, I guess, 2 little pieces to it, but just in terms of how you're feeling about the pricing -- the tail pricing in the coming period and the demand for your products on the sort of branded rice side. It feels like there is some buoyancy there, but just sort of checking in if you think that carry through?

Yes. Clearly, there is a very strong demand. We've had to clearly take price in order to recover some of the costs in some key markets around the world. We always seek to offer a sort of a good, better, best approach. And obviously, in the wealthier economies, the best tends to still be very affordable. But in some of the economies around the world that are perhaps slightly more stressed, we make sure that the people drop out of the best proposition. There is still another couple of levels to go where we can catch that consumer demand and certainly in some of the more impoverished nations around the world, it comes to baseline food security work. They know they can rely on an affordable, high-quality and food-safe product from us, even they can't afford to indulge in the higher value propositions that we take to market. So it's a constant sort of shuffle through the year as we sort of gauge the demand, the elasticity at the price points that we've had to take in various markets and then we satisfied with some part of our portfolio looking to, of course, always make a good return for the shareholder on the way.

Perfect. And then maybe just to sort of follow-up question on the cost side. You did touch on, perhaps you sort of lifting prices in some markets where it's allowed or just interested in terms of the mechanisms you have at hand to try and cover off on some of these cost pressures, rising prices is sort of 1 element. Is this sort of the ability to change production patterns or locations of production in some of the different businesses to sort of try and lower costs?

Yes. What we always do is look to work with our customers because often we have to pass these prices on through customers, and we need to make sure that we work with our customers to make sure the offering to the end consumer is always appropriate. And we do that in a very collaborative manner. I have to say that some of the costs that have come at us recently associated with the Ukraine crisis are quite extreme. So if you think about some of the range of in Riviana, particularly with the KJ&Co acquisition, when we are importing baked goods from Europe that have a very high providence, nevertheless, they have weak sunflower oil and energy in them. And as you might imagine, with what's happening in those -- to those pricing metrics around the world, and that puts a lot of pressure on. So we certainly look then for not only to maintain that range for its high provenance but potentially to onshore some production to try and reduce some of the cost base and potentially back up with range extensions that may not have quite the same provenance but still offer a very good quality product to consumers. So you might see that coming from us during the course of this year as we work that through.

Helpful. And then just last 1 for me, please, just the shape of recovery that we should be thinking about within CopRice. I understand the priority to feed, and that's sort of annualizing through this year, but perhaps just some sort of commentary how you're feeling about the New Zealand business and separately, the sort of Australian business coming out of tougher conditions?

Yes. We're very comfortable with the various acquisitions that we've made in this segment we bought well, and they're strategically well placed. What we had counted on, which didn't deliver is that the wet cycle and, therefore, good seasonal pass-through conditions are probably hung around for longer than we might have anticipated, and that's reflected in this year's results. We're gradually building market share in the dairying sector, some of the sheep sectors coming back. And therefore, even though the pasture conditions are looking still as though they're very buoyant and good for farmers that -- so therefore, some of that recovery might still be a bit slow in the coming year. The Pryde's EasiFeed business is far less sort of weather dependent. You see -- you can see in the results for the quarter that we own the business is profitable. Its sales are going well, and it's more branded, more consistent earnings. So you should expect to see us to build those parts of the CopRice business over time, whilst also looking to build market share in a depressed complementary feed sector and look forward to the recovery of that sector where perhaps more normal seasonal conditions allow us to take advantage of the assets that we're holding some of these key areas.

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

Thank you very much, operator. I'd just like to thank everybody who's taken the time to attend the call today and for the questions. We look forward to another challenging year coming, but nevertheless, one in which I think we have the skills to navigate the challenges thrown at the business. So on behalf of myself and Dimitri, I'd like to thank you for joining. We appreciate you taking the time.

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