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

Thank you for standing by, and welcome to the SunRice Group FY 2023 Half Year Financial Results Conference Call. [Operator Instructions] I would now like to hand over to your speakers today, SunRice Group CEO, Mr. Rob Gordon; and the SunRice Group CFO, Mr. Dimitri Courtelis. Please go ahead.

Thank you, operator, and welcome, everyone, to this morning's call. We really appreciate you taking the time to join us following the release of the financial results from our first half of financial year 2023. My name is Rob Gordon. I'm the CEO of the SunRice Group, and I'm joined this morning in Sydney by our group CFO, Dimitri Courtelis. Our plan for today's call is to provide an overview of our financial results, then open for questions to all participants who have dialed in. And along with yesterday's announcement, we've also launched an investor presentation on the ASX, which I'd encourage you to read for more detail on the results. Now I'll start today with some high-level commentary before handing over to Dimitri. The results announced to the market yesterday demonstrates strong growth in earnings driven by the improved availability of rice in the Riverina, sales price increases across most segments and product categories and the continued recovery of the CopRice business. The group's performance in the first half reflects the strength of our brands and market positioning, especially as we are currently seeing consumer spending being impacted by the high inflationary environment. We've continued making investments in strategic and organic growth initiatives over the last few years, and these initiatives are delivering benefits to the group, which have enabled us to withstand some of the challenges that are affecting other industries and companies. We anticipate that the revenue growth achieved in the first half of financial year 2023 will continue into the second half of the year despite underlying operational and inflationary pressures continuing in the near term. Given the strong performance achieved in the first half and the favorable outlook for the remainder of the year, we're pleased to have declared an interim fully franked dividend of $0.10 per B Class share. The SunRice Group also made further progress against its sustainability strategy in the first half of the financial year 2023, including the establishment of Rice Breeding Australia and the development of other collaborative initiatives focused on sustainable rice production. I'll now go into the results in a little more detail before handing over to Dimitri to step through our segment performance. As we reported yesterday, EBITDA and net profit after tax were $42.6 million and $19.6 million. This is higher than the prior corresponding period, up 16% and 17%, respectively. Building on last year's growth in revenue, the strong growth in earnings for the first half was underpinned by 34% growth in top line revenue to $758 million. We also updated the estimated range for the 2022 pool currently being processed and marketed to $435 to $470 per tonne for medium-grain Reiziq. This represents a naturally earned record price. There are range of factors drove the strong financial performance in the first half. Firstly, the improved availability of rice in the Riverina with the CY22 crop of approximately 688,000 paddy tonnes being more than 50% larger than the CY21 crop. This supported strong sales volumes in key premium markets and enabled us to supply new markets which have been affected by drought, including the Middle East and Europe. There were sales price increases across most of the group's segment and product categories in response to the escalating cost base. These increases were complemented by the favorable changes in product mix in some markets, particularly the United States, where the SunRice Group focused on supplying branded rice for consumers instead of the lower-value bulk export business. Our CopRice business continued its recovery and was able to increase its market share, grow volumes and improve its product mix. And we also saw benefits of the Pryde’s EasiFeed acquisition flow through, which contributed 41% of CopRice's uplift in performance. It is also supporting CopRice's diversification into new geographic regions and increasing its presence in the high-value branded equine market. And the ongoing recovery in key Pacific markets also enabled the SunRice Group to grow rice supply volumes despite a challenging economic environment. The group was able to deliver profitable growth despite facing a number of continuing headwinds, and these included the ongoing disruption to domestic and global supply chains and operations as this made sourcing and shipping of products more complex and costly as evidenced by the 108% increase in freight and distribution costs in the first half. Widespread and worsening inflationary pressures on key business inputs and costs and general inflation in the economies in which the group operates and volatility in exchange rates, in particular, the weakening of the Australian dollar against the U.S. dollar. With that overview, I'll now hand over to Dimitri to discuss each of our business segments, and then I'll cover off on our outlook before we go to any questions.

Thank you, Rob, and good morning to everyone joining us on the call this morning. The first segment I will discuss with you today is the Australian Rice Pool business, which is aligned to our A-Class shareholders and deals with the receival, the milling, marketing and the selling of Riverina Rice. At approximately 688,000 paddy tonnes, the CY22 crop was the largest in 5 years, and substantially larger than the CY21 crop of 417,000 paddy tonnes. This supported a strong increase in revenue to $145.8 million, which was a 62% increase on the prior corresponding period. The larger crop provided the base for higher sale volumes in premium markets, both domestically and internationally, especially in the Middle East. It also provided opportunities to supply new markets, which have been affected by drought such as Europe. Sales price increases across the segment's product portfolio, coupled with the weakened AUD, also contributed to revenue gains in both domestic and export markets. Now this helped to partially offset the significant inflationary pressures incurred during the period, particularly in relation to freight and labor costs. On the back of this generally positive background and outlook, as Rob mentioned, we further revised the paddy price range, which now sits at record levels for a naturally earned paddy price of $435 to $470 per tonne for medium grain Reiziq. I will now move on to our International Rice Segment, which sources, processes and markets rice to both Australia and our global markets as well as offering choice to consumers. Revenue in the segment increased by 32% from the prior corresponding period to $334.8 million. This was driven by strong sales in premium markets, particularly the Middle East and also across our Pacific markets; a favorable change in product mix for our SunFoods subsidiary in the U.S.; sales price increases and the weakening AUD against both the USD and PNG kina, which supported revenue translation. The significant increase in revenue reflects the strength of our multi-origin, multi-market business model and strategy. This has enabled the group to build and maintain international supply chains over the years, supporting demand growth even in periods of large Australian rice production. However, profit margins for our International Rice segment were constrained by the delay in being able to pass on price increases arising from the increased international rice prices, shipping costs, in particular, global supply chain disruptions and general inflation. Consequently, EBITDA decreased from $16.8 million in the prior corresponding period to $12.9 million and net profit before tax decreased from $12.2 million to $7.5 million. The International Rice segment remains well placed to benefit from market dynamics in the second half of the year with the increasing risk of undersupply in drought-affected markets, opening potential new trading opportunities for the group. Turning now to our Rice Food business, which manufactures, markets and distributes value-added products. Revenue was $55.8 million, up from $53.8 million in the first half of last year. And net profit before tax increased from $2.6 million to $3.5 million, and EBITDA improved from $3.5 million to $4.5 million. Sales price increases across a number of categories, particularly rice flour and microwave products, contributed to the uptick in performance in the first half of FY '23. The significant increase in profitability was driven by a reduction in the cost of source materials associated with these products, notably due to the returning availability of lower-cost broken rice, which is used in rice flour. The segment's performance was further supported due to other suppliers experiencing supply shortages on imported products. However, profitability in the first half was partially impacted by COVID-related labor shortages, staff absenteeism and delays in access to some raw materials and packaging inputs, notably in the cakes and snacks categories. The segment continues to work on innovation and new product initiatives, which will further unlock growth. Our next segment, Riviana Foods, which is our specialty gourmet and entertainment food business, there were a number of contrasting dynamics which affected the performance of the segment during the first half of FY '23. Top line revenue grew 10% to $107.3 million, which was driven by good volume growth in various product categories, which primarily stems from the acquisition of KJ&Co. We had sales price increases and the ongoing recovery of the Australian food service sector following COVID lockdowns. However, Riviana Foods faced several major challenges during the first half, which prevented the growth in revenue to convert into profit. These include the sharp and rapid cost of imported products, European inflation, wheat prices, the Ukraine conflict, demurrage costs, energy costs, the weakening AUD against the USD and the ongoing systemic disruption to the global shipping industry. As a result, EBITDA decreased from $6.7 million in the prior period to $2.1 million, and net profit before tax decreased from $5.8 million to $1.4 billion. Now despite this challenging environment, Riviana Foods was able to bolster its onshoring capability during the period through its acquisition of the Australian Waffle Company, and it continues to explore strategic growth opportunities. We do, however, expect a recovery in the second half as price increases take effect. Our animal nutrition business, CopRice, continued its recovery during the first half of FY '23 with top line revenue up from $68 million in the prior period to over $112 million. This was supported in part by the acquisition of Pryde’'s EasiFeed in January '22, which contributed an additional $17.7 million in revenue. CopRice's EBITDA and net profit before tax also improved from the first half of FY '22 and both moved into positive territory at $4 million and $0.5 million, respectively. Volumes grew in the majority of product categories driven by the improved availability of rice by-products from a larger CY22 crop. The segment also grew market share and achieved increased sales prices particularly on packaged products, which helped offset the rising cost of inputs and commodities. This pleasing outcome was delivered despite the continuation of wetter than normal conditions across Eastern Australia, which limited the demand of supplementary feed as the La Nina weather pattern enters its third year in a row. CopRice's recovery continue to head in the right direction with a number of actions being taken to optimize its cost base and unlock high-value markets to further increase volumes, setting a path for future growth. 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 represented by A Class holders and profit businesses represented by B Class holders. Net profit before tax for the period was $10.9 million, which was up from $5.1 million, while EBITDA was up from $12.1 million to $19 million in FY '23. Higher levels of brand and asset financing charges were received from the Australian Rice Pool business in the first half and the combined charges of $10.7 million, which were up 26% on the prior corresponding period were driven by the improved availability of Riverina Rice and the corresponding increase in branded sales levels. This again demonstrates that a strong Rice Pool business benefits both A-Class and B-Class shareholders. The Corporate segment also benefited from a $3.4 million contribution from the divestment of surplus non-core assets in the group in the first half of FY '23. I'll now hand back over to Rob to cover our outlook for the rest of this financial year and beyond.

Thanks very much, Dimitri. We expect the revenue growth achieved in the first half of financial year 2023 to continue into the second half of the year, supporting profitability as the sales price increases implemented during the first half are expected to be fully realized. However, some of the current headwinds we are facing, including rising inflation, global supply chain disruptions, labor shortages and other challenging global economic conditions are expected to continue in the second half although there are some early signs of shipping costs abating. The combination of the increased availability of Australian rice and secured global supply sources positions the group favorably to take advantage of any undersupply in key drought-affected markets, notably in Europe and the U.S. Now the rice planting window for CY23 is now closed. And whilst it's being disrupted by flooding across the Riverina, the group is expecting ample Riverina rice supply in CY23 and the current outlook for water also points towards a large crop of Australian rice in CY24. This should provide us certainty of a decent Australian supply for at least the next 2 years. The group is well positioned to take advantage of these favorable conditions and current global market dynamics to help deliver positive returns to both our A Class and our B Class shareholders. The execution of the growth strategy has demonstrated the SunRice Group's long-term approach in positioning this business favorably to its multi-origin, multi-price point global supply chain. Continuing on this path remains a priority for the group. We will continue to explore further organic expansion and acquisition opportunities while maintaining a disciplined approach in light of the current underlying macroeconomic environment. Now finally, as you may have seen yesterday, I announced my intention to retire as CEO of the SunRice Group in August 2023. It's been a privilege to serve as the CEO of the SunRice Group. We've built an exceptionally talented and professional executive leadership team whose skills and dedication have helped position the SunRice Group as a global food group and one of Australia's leading branded food exporters. I'm proud of what we've accomplished for our customers, shareholders, employees and the rice industry. After spending the last 11 years as CEO of the SunRice Group and having led the company through a period of significant change and growth, I feel the time is right to hand over the reins to a successor and redirect my passion and energy into my other interests and enjoy spending more time with my family. I provided ample notice of my intention to retire and will continue to leave the organization until our AGM in August 2023, by which time, I expect to hand it over to my successor. This will help ensure stability and continuity for the business and support the process for a coordinated and effective transition to a new group CEO. The Board is conducting a global executive search and an announcement regarding the outcome of this process will be made in due course. Thank you. I'll now hand back to the operator.

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

Now to touch base again. Could I please just kick off on a question just around the supply into new markets you're alluding to? Just the extent to which that might just be a transitory opportunity that you're stepping into, or how do you sort of envisage building more longer-term relationships and market access?

Allan, thanks for the question. There's probably a mix of responses to this. On the first hand, into the U.S., for example, a shortage of supply from local players is now providing us with unique opportunities to break through into more of the retail branded space and having done that, I suspect we'll be able to hold on to those positions in the long term, and they will be more of an ongoing supply opportunity, both of U.S. rice and potentially rice from our multiple supply chain origins. When it comes to Europe, at the moment, the shortages there are so severe. That's certainly out of the Australian business, which does not enjoy a tariff-free entry to the EU. We're seeing customers there prepared to pay the tariffs on top of our pricing in order to secure supply. Now obviously, when local supply becomes available, you would expect that more challenged to hold on to. However, we are encouraged by progress with the FDA with the U.K. that early in the new year, there's likely to be all of the legislation passed at both ends, which may allow us to divert more supply into the U.K., which, again, would be more on a free market access basis, and therefore, our competitive supply chains would expect to enjoy ongoing success in that particular territory.

Helpful. And then just a couple of questions on acquisitions, acquisitions that have been completed. But just update on Pryde, it looks like that's obviously tracking well. Any sort of additional commentary you can make in terms of insights into that business post-acquisition?

We've been delighted with the acquisition. You can see the underlying performance in the results of the business has actually hit record volumes and pretty much every month since we've done it. And as a consequence of that, sales volumes are good, profitability is strong and certainly in line with our business case. We're seeing further synergy opportunities down the track of expanding into other geographies where perhaps CopRice was available but the Pryde wasn't present. And as you'd expect, those sort of distribution networks being leveraged across our existing equine business and then bringing in the product portfolio from Pryde's we see it gives us opportunities for the future. So not willing to provide any particular financial shape at that level of granularity. But nevertheless, we're delighted with the acquisition. Peter Pryde, who is the owner and founder of that business, I think, has passed over to us in a very professional manner. And the team there are doing a great job of keeping the momentum going. So we're delighted with the acquisition.

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

On behalf of myself and Dimitri, I'd like to thank you all for joining us on this morning's call. We do appreciate your time at what is a very busy time for everybody. And may I take this opportunity, on behalf of Dimitri and myself, of wishing you all a safe and enjoyable festive season? And we look forward to talking again sometime in the new year. Thank you.

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