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

Thank you for standing by, and welcome to the SunRice Group FY 2020 Half Year Financial Results Briefing. [Operator Instructions] I would now like to hand the conference over to SunRice Group's CEO, Mr. Paul Serra; and the company's CFO, Mr. Dimitri Courtelis. Please go ahead.

Thank you, and welcome, everyone, to this morning's investor call and webcast. We appreciate you taking the time to join us following the release of our half year results in 2024. My name is Paul Serra, CEO of SunRice Group, and I'm joined in Sydney by our CFO, Dimitri Courtelis. Our plan for today's call is to provide an overview of our half year financial results, open for questions to all participants who have joined online or dialed in. We have lodged an investor presentation on the ASX, which we will display on the webcast. I'll start today with some commentary before handing over to Dimitri to step through our segment performance. Just before we launch into the highlights for the period, I'd like to take a moment to reflect on my first 5 months here as CEO. I've greatly enjoyed visiting our sites in the Riverina and overseas, and I've really been impressed by the group's strategy and execution, along with the dedication and passion shown by our SunRice Group and growers. There's no doubt that the momentum we're seeing in terms of performance is due to the hard work and commitment of everyone here at the group. And so now turning to Slide 3 and the key highlights from our half year performance. This has been a period marked by solid progress and meaningful achievements despite some challenging market conditions. Our financial results in half year '24 are strong. We've seen an increase in revenue, EBITDA and net profit after tax compared to the same period last year. As I mentioned, these figures reflect our team's hard work and the effectiveness of our growth strategy. Each of this success has been our continued focus on these strategies, we've expanded into new markets, introduce new products and successfully participated in overseas tenders. These initiatives have played a significant role in growing our business. Operationally, we've seen improvements through cost savings initiatives and improvements in shipping conditions post COVID-19 disruptions. These, along with sales price increases across the group, have partially helped to offset inflationary pressures on our cost base. The recovery of our CopRice division has also been notable, considering contributing positively to our margins. However, we've also faced our share of macroeconomic challenges. For example, foreign exchange volatility has put pressure on the margins of the group's import business, including Trukai's business in Papua New Guinea. In terms of market dynamics, we've increased our advertising and promotional efforts to strengthen our brand in a competitive environment. Managing supply chain disruptions has been challenging, leading to higher inventory costs. However, I'm pleased to say the team has met this with diligence. Looking ahead, we're aware of increasing competition in our international markets given the Northern Hemisphere's recovery from drought conditions. But with our track record of successfully navigating through complex scenarios, I'm optimistic about our prospects, and we'll discuss the outlook in more detail later. I'm also pleased to announce that we'll be paying a fully franked interim dividend of $0.15. Turning to the next slide and looking at revenue and EBITDA for the period. Revenue grew $161 million or 21% compared to the previous corresponding period. This was primarily driven by a third year of strong rice harvest in Australia, expansion of our international rice business, particularly in the Middle East and the U.S. and higher sales prices achieved across our segments. EBITDA grew $21 million or 48%. Growth in EBITDA was achieved through the continued delivery of our strategy and successful information of a number of growth initiatives. Our margin was supported by cost savings initiatives as well as improvements in shipping conditions and costs. Sales price increases also helped to partially offset some of our inflationary pressures on our cost base. I also want to mention the contribution of the international revenues to the group, which for the 6 months to October contributed 59% of the group revenues, highlighting the increasing growth of our business as a global food company. I'll now provide a brief overview of how we performed on our sustainability strategy over the period. The first half of financial year '24 has seen meaningful progress in relation to our commitment to sustainability. Sustainability is an integral way to the way we create value for our stakeholders. The first half 2024 saw a continued focus on embedding sustainability across the group and improving upon the way we track our performance. I am particularly excited to share some of our standout achievements. Firstly, we are preparing to submit our science-based target validation, laying down a clear and robust road map to meet our net 0 commitment by 2050. Our new cross-functional packaging working group is spearheading initiatives to meet and exceed the Australian Packaging Covenant organizational targets. We're advancing our socioeconomic impact assessment project in partnership with Social Ventures Australia. The insights from this project promise to enhance our understanding of social impact across our operations with detailed findings to be shared in our next annual report. In addition, Rice breeding in Australia, a joint venture between the SunRice Group, Ricegrowers' Association of Australia and AgriFutures Australia has achieved a significant breakthrough in successfully identifying traits to improve the cold tolerance of rice. This advance is not just a scientific success, it's a sustainable step towards achieving higher water efficiency and rice production. Lastly, our collaboration with Deakin University and the support of the Department of Agriculture, Forestry and Fisheries are propelling us to new heights in measuring and understanding on farm greenhouse gas emissions. With that, I will now hand over to Dimitri to discuss our half year financial results and the performance of each of our business segments in more detail before I move to the outlook and go to any questions.

Thank you, Paul, and good morning to everyone who is joining us on the call today. Turning to the next slide. If you compare our performance over the first half to last year's, you will see the significant growth that the business has achieved, and I'm pleased to say that, that growth has been maintained. This has been driven by both volume and price growth, the expansion into new markets and the launch of new innovative products. Compared to the previous corresponding period, revenues have grown $161 million and NPAT has increased $11 million. This equates to 21% and 56% of growth, respectively. After adjusting for noncontrolling interests, attributable profits versus the first half of last year increased by 69%. And basic EPS has increased by 66% to just under $0.47 per B class share. Our closing share price yesterday of $6.42 and a rolling basic EPS for the last 12 months of $1.024 means that we are trading at a price-to-earnings ratio of a mere 6.3x. Moving to the next slide and an overview of our segments. You can see the significant role that the Rice Pool plays in supporting SunRice's profit business divisions by supplying rice and its derivatives. Strong performance of the Rice Pool business also has flow on impacts on the level of brand and asset financing charges supporting the profitability of the corporate segment. And secondly, you can also see the significant contribution of the other businesses to the overall group as the strategy to diversify earnings has continued to deliver EBITDA growth. Now I will spend some time on each of these in turn shortly. Looking at capital management. Our balance sheet remains strong, and we retain the flexibility to support further strategic investments. I would like to highlight the difference between our core debt and total debt. This may influence how you think about the company's gearing. Our total debt is impacted by the seasonal debt driven by the inventory of rice that we may hold over from year-to-year. Our gearing ratio based on total debt was 30% at October, whilst our gearing based on core debt was 10%. The improvement in these metrics reflects the strong EBITDA generated in the first half of FY '24 as well as a reduction in net debt, primarily attributable to the decrease in seasonal debt and net working capital. The group's capital management framework is designed to be flexible and enable the group to maximize value for all shareholders through optimizing our cash flow, prudent gearing, responsible capital investments reliable dividend streams and disciplined allocation of surplus capital. Now let's move on to each of our segments' performance. Starting with the Australian Rice Pool business. Following a strong harvest of 500,000 paddy tonnes, we've continued to expand our market presence. Our growth was particularly notable in premier markets in the Middle East and through increased participation in government tenders, especially in Japan. Financially, we've navigated a complex landscape. Our business has benefited from higher sales price and a favorable exchange rate environment with the weakening of the Australian dollar boosting our USD-denominated rice exports. Additionally, we've seen improvements in shipping conditions and a reduction in logistics costs. Operationally, the year presented unique challenges, particularly due to the New South Wales flooding. The wet to weather did affect our C-'23 crop yields and led to increased production costs due to the necessity for more intensive drying and aeration, compounded by rising energy prices. Amidst these challenges, we also celebrated significant milestones. The Australia and United Kingdom Free Trade Agreement, effective as of May 23, opens the door to new markets for our high-quality medium grain rice varieties. Through this, we've already seen some benefits, and we anticipate greater opportunities as we establish our business model and market roots. Furthermore, the renewal of the sole and exclusive export license agreements until June 2027 reinforces our ability to serve high-value markets outside of Australia with premium Riverina rice. Moving to our profit businesses and looking at the international rice segment. The first half of FY '24 has been a period of success marked by significant improvements in revenue and profitability over the previous year. This success was largely driven by increased sales volumes and targeted pricing reviews to address inflationary pressures. However, whilst we've seen margin relief from normalization of shipping costs, challenges in the Pacific supply chains have led to elevated inventory levels and, consequently, higher storage and handling costs. High global rice prices and currency fluctuations, particularly the depreciation of the AUD and the PGK against the USD have also squeezed margins, notably affecting our Trukai operations in Papua New Guinea. Despite these pressures, we've achieved volume growth in key markets including a record Ramadan period in the Middle East and continued sales momentum in the United States. Nonetheless, we're seeing increased competition in the U.S. due to a faster expectation of recovery of drought conditions in the Northern Hemisphere. Earlier this year, in June 23, the group also announced that Ricegrowers Limited had entered into an agreement to buy back the shares held in Trukai Industries Limited by the minority shareholder, making Ricegrowers the sole shareholder of Trukai. Completion of the transaction remains subject to the resolution of regulatory matters. Looking at our Rice Foods segment. The first half showed significant progress despite a complex economic environment, marked by cost inflation and rising energy prices, which have inevitably affected our manufacturing operations. Our flour category has shown resilience and growth, benefiting from an improved manufacturing process and overcoming previous supply shortages. This, coupled with our local production capabilities, has positioned us to take advantage of a market that is dependent on foreign exchange-affected imports. In our cakes and snacks offering, we're focused on enhancing manufacturing efficiency and asset utilization to improve profitability. The introduction of innovative products has also supported growth in this category. In the microwave rice segment, we faced intense competition, particularly with the growth of private label products in the market. The widening price gap between our branded products and private label has impacted volumes and the market share as consumer benefits and behaviors have shifted in a high inflationary economy. In response, we are actively developing initiatives to strengthen our market position and investing in marketing to enhance our brand's value proposition. Looking now to Riviana Foods. In the first half of FY '24, Riviana Foods has seen its revenue grow, thanks in part to the success of the Toscano brand and the robust sales in the food services sector. Yet, it's important to note that our profitability has faced challenges largely because our business is heavily dependent on imported products. While the costs for some imports have begun to decrease from the second half of FY '23, we've encountered sourcing challenges due to the drought conditions in the Northern Hemisphere. These challenges are further exacerbated by the weakening of the Australian dollar against major currencies, which has placed additional pressure on our margins. Despite enacting sales price increases to offset inflationary pressure, these measures have not fully mitigated the impact on our profit. Shipping conditions have normalized, providing some cost relief, but the increased pricing of Riviana's branded products, compared to private label, has led to heightened competition and some loss of market share, particularly in the pickled vegetables category. To address these challenges, Riviana is proactively developing initiatives to strengthen its market position, including ramping up promotional and marketing efforts to bolster our brand presence. Turning to our CopRice business. We have successfully leveraged the momentum from previous turnaround actions leading to significant achievements in the first half of '24. We've seen robust volume growth and market share gains, particularly in our companion animal pet food in Australia and New Zealand, thanks to increased market presence in agricultural retail and specialty pet retail channels. This growth is also bolstered by the rising demand for our private label offerings. Moreover, we have realized margin improvements across key business lines, driven by plant efficiency, better freight cost management, improved business terms in New Zealand and strategic price increases that align with the rising costs in the Australian market. Despite these successes, we've also faced some challenges that have moderated our results. Issues with weak quality due to a wet harvest required us to source more expensive alternatives impacting our horse feed volumes. And in New Zealand, the dairy stock feed market has contracted due to the subdued milk prices and higher farm operating costs, leading farmers to opt for less expensive feed solutions. This has affected volumes at the Hamilton mill, prompting us to focus on strengthening our direct-to-farm business. Now as we move forward, we're focused on rebuilding market share and margins and we continue to develop initiatives to adapt to market conditions and sustain CopRice's growth and success. Finally, coming to our corporate segment. Increased revenue from the Rice Pool business, together with higher interest rates, drove an increase in the brand and asset financing charges during the period. This increase was largely offset by higher financing costs for the same interest and freight environment, reduced proceeds from divesting noncore assets and an increase in the loss allowance to trade receivables. I'll now hand back to Paul to discuss the outlook for the group.

Thank you, Dimitri. Turning to the outlook SunRice is on track for a promising year. We remain committed to growth and see further opportunities for international expansion, capitalizing on our global footprint. The group continues to explore a well-developed pipeline of potential strategic opportunities, including acquisitions as well as divestments from noncore assets. We are expecting continued growth in both revenue and profitability in the second half of the year. The contribution of the second half 2024 to the full year results is, however, expected to be proportionately lower than that of the second half 2023 to the prior full year's results. However, maintaining momentum in the second half is dependent on our ability to navigate numerous headwinds and the most significant of which include higher interest rates and inflation impacting consumer spending across our markets, a weaker Australian dollar and a rapidly devaluating Papua New Guinea kina and the recovery from drought conditions in the northern hemisphere, particularly in the United States, which is increasing competition in some markets. The recent conflict in the Middle East is also creating uncertainty in a region in which the group has some of its largest markets. At this stage, the group has not been directly impacted by conditions in these markets. Turning to the outlook for the Australian Rice Pool business. As announced in November, the outlook for the Australian Rice Pool is favorable. And the SunRice Group was able to increase the lower end of the paddy price range for Crop Year '23 in November of 2023, with an updated range of $410 to $450 per tonne. We expect the fourth consecutive year of abundant Australian rice production in Crop Year '24, with the crop currently anticipated to be larger than that of Crop Year '23. The expected dry conditions in Australia and ongoing water reform initiatives in the Murray-Darling Basin have the propensity to affect the volume of Australian rice produced beyond Crop Year '25. However, the group is expecting a significant volume of the Crop Year '23 be carried over at the end of the financial year, complemented by a strong Crop Year '24. The positive benefits of carryover volumes will be managed with a midterm lens, and the group expects to have ample volumes of Australian rice to sell into premium markets over this time. In summary, we are pleased to have delivered a strong result in the first half '24. And I look forward to sharing with you all our refreshed growth strategy in our full year results. Thank you for your time today, and I'll now hand back to the operator.

[Operator Instructions]. Your first phone question comes from [ Andrew Tan ] with Canaccord Genuity.

Congrats on the great results. Just three quick ones from me. Maybe first off, we'll start on the international rice business. I appreciate lots of moving parts there. But could you please just detail couple of the key recent earnings drivers and if these are sustainable or not?

Sure. Thanks, [ Andrew ]. And so particularly in international rice, whilst the Northern Hemisphere has experienced dry conditions over the 12 months -- the last 12 months, we have had a bit of a tailwind due to our U.S. position, being able to export some Australian rice into the U.S. and then from the U.S. into the existing markets. So whilst we don't expect that to be repeated to the same level, we have created a bit of a positive wedge for ourselves in that market with the brand residents and the presence of our rice. But with the international rice or particularly the U.S. coming out of drought, we are seeing a little bit of pressure on tender markets. So we'll obviously experience some of that competition coming back into the full year that we're currently in. But also the Middle East market for us is very strong. The brand resonance of Australian rice is growing and has grown from previous positions. So we look to capitalize on that. And then, of course, through Asia and also into Europe, new markets that we're looking at. So exciting opportunities that the group has been working on and certainly something for us to call out from a market perspective in time to come.

Great. Now just on Riviana, that had quite a tough period. Could you please talk to some of the initiatives that you guys are looking to do to regain margin as well as drive future earnings?

Yes, sure. So as we called out, FX being a big impact in the Riviana segment. Whilst historically, we had 100% of those products imported, we're now down to the mid-80s. And the onshoring strategy is definitely something that we're working on so we can help balance out the reliance of imported products versus what we can manufacture locally, while still maintaining that brand resonance of those quality products. Whilst shipping conditions have started to normalize, FX is certainly the biggest challenge in that space. But as I said, with the onshoring opportunities, that will help balance that out. But in the first half of '24, we did actually incur about $1.5 million of nonrecurring costs. The lion's share of that was actually marketing investment spend. So certainly, standing behind the brand and investing in the brand, that cost came through in the first half. And obviously, future revenue will help being underpinned by that investment. So we're still very positive about that brand, the strength in the market, and looking forward to launching more innovative products. And the top line is still growing. So there's certainly a lot more opportunity in that segment.

Awesome. Just one last one then on CopRice. Could you please just talk to the differences in the operating performance and outlook for the companion animal and then also the stock feed business?

Sure. So CopRice at the moment, moving away from that ruminant heavily reliance in a heritage, which was essentially 100% in CopRice 5, 10 years ago. The ruminant revenue making up CopRice is probably around 55% at the moment. And the bottom line contribution of that ruminant segment is circa 40%. So we really are moving that business segment into the more branded pet food companion animal channel, and that's definitely an area of growth and certainly one where we see some future strategic initiatives to be underpinned by. And again, moving away from that pure byproduct play of excess byproducts coming out of the rice mills. We've been able to reposition CopRice in a branded segment that is far less exposed to cyclicality and the seasonality of not just the rice crop but of the ag cycle in Australia. So whilst ruminant is still an important strategy within CopRice, the core growth is certainly going to be coming from more of that companion animal pet food and one strategy as is evidenced by our Pryde's acquisition recently, which is performing ahead of business case, which we called out to the market a couple of years ago when we purchased it. And look forward to more growth in that segment to come.

Your next question comes from Finola Burke with RaaS Advisory.

Congratulations on the terrific results. I had a question on the dividend. Should we assume that having increased the interim dividend by 50% and given the company's history of only increasing lower than reducing dividends, but at the very least, we should expect to see a steady final dividend? And could you talk a little bit about the factors in framing that dividend policy?

Sure. So thanks, Finola. As is evidenced by the track record, we obviously spent a lot of time and effort in building that consistent dividend and rewarding our B-class shareholders. So the introduction of the interim dividend, I think, 3 periods ago, we're certainly demonstrating the resilience of the results and moving away from that seasonal profile of ag and moving this business, repositioning it into a more global FMCG players. So whilst we're not calling out a final year divi or any expectations there, I think our previous track record of a consistent and growing dividend should give investors comfort on where our minds are at. And again, pleased to underwrite the current dividend on the back of the very strong results in the first half. So looking forward to bringing some more news to the market in due course.

[Operator Instructions] Your next question comes from John Burgess with RaaS Advisory.

I'm just interested in your -- the overseas tenders, the increase in overseas tenders. Is that just Australian rice? Or is that a range of rice varieties and types?

Yes, I'll take that one. So the increase in competition for overseas tenders is predominantly impacting our Australian rice business. As Dimitri said earlier, I think we've had a strong year in this space. And with the increase in competition coming from the recovery in drought in the Northern Hemisphere, particularly in the U.S., we do expect and have expected for quite some time an increase in competition in this space. What I would say, though, is that this is by far the minority volume that would come from the Australian Rice Pool, most of our sales of Australian rice into international markets come through our own branded products. And it's through that branded positioning and the brand equity that we've been able to build in these products over time that we can extract the premium from the Australian rice.

Okay. Just interested in the turnaround in the -- let's call it the legacy CopRice business. Would you consider that turnaround complete? Or is there still a runway to achieve the sort of ROEs that you like in that business?

Yes. So we are incredibly proud of what the team's ability to deliver the turnaround to date. The last couple of years has been challenging, but pleasing to see that base business recovering and building up momentum. So there is a bit more runway ahead. There's a bit of work we need to do in New Zealand and a couple of the other ruminant sites in Australia, but we've improved utilization. We've gained market share. We've improved volume. So those mills are obviously absorbing overheads and contributing to the group. So the base business is really looking solid and steady with a bit more growth going forward. And that's really complemented by the pet food strategy and the move into companion animal and then, of course, the equine over the top of that. So quite complementary over the 3 or 4 prongs in the CopRice business and certainly looking for a lot more growth going forward. And working on a couple of exciting initiatives that we'll bring to the market when we're able to. But definitely to your initial question, John, a bit more runway expected in the base business recovery and sustainable building that momentum going forward.

Great. And just on working capital. The current -- you consider -- given you've sort of had a couple of much better harvest now in a row and you build that working capital level up as a result. Do you think the levels we see now are pretty much the sustainable levels for the next couple of years?

Yes. As we've called out in the past, the seasonal facilities are heavily influenced by the size of the Australian crop. So seeing a big uptick in seasonal debt is not a bad thing. It's really a direct impact of the size of the Australian crop. And where we find ourselves in the cycle at the moment, we certainly see that working capital improving and that seasonal debt level coming down towards the year-end. And that's because whilst we had a large harvest, we've essentially funded all of that inventory, paid the growers and we've got the next 12, 18 months to monetize the inventory and convert those sales into cash. So whilst we are calling out a slightly larger crop next year than the one we've had this year, it's quite different from where we were 18 to 24 months ago where we came off of a very low base. So I had to fund a significant amount of inventory. And hence required a big chunk of seasonal facilities for that. So certainly more normalized in terms of where we are in the cycle at the moment. And that's why we've also called out that seasonal and core separately. Core is fundamentally used for strategic CapEx and M&A in particular. And of course, seasonal for the funding of the Australian crop in particular and then, of course, international supply chain. So to your question, John, certainly, something that's more normalized and should improve going forward. And of course, the accretive operating cash flow going to help to bring that down even further.

Got it. And maybe just a final one. It's probably more complex than this, but I'm just interested in since the Indian sort of export bans in rice in July, is that -- have you seen that -- is that a net positive for your business? And there's obviously some pros and cons and all these sort of dislocations. But is that a net positive? And if those sort of bans subside, is that a risk?

It is a slightly complex answer. So I'll try and do it simply. For the Australian Rice Pool, I would say it's essentially a net neutral position as the medium grain markets. Whilst there is some pricing linked to the long grain markets, which were predominantly impacted by the ban of the Indian exports, they've not materially affected most of the Australian Rice Pools. Competition comes from the medium grain markets in North America and Europe and, to a lesser extent, China. In terms of the impact to our profit side of the business, the increase in prices that resulted from the Indian ban of non-basmati long grain had some negative impact and that we had to offset through looking at the way we price our products in the market. And so we do expect, coming into next year, if those bans bands were to lift, we would expect to see a depression in price in the global markets and some improvement there on the profit side of the business.

There are no further phone questions and no webcast questions at this time. I'll now hand it back to Mr. Serra for closing remarks.

With this in closing, on behalf of Dimitri and I, I'd like to thank you again for joining this morning's webcast. We really appreciate your time. Thank you.

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