Ridley Corporation Limited (RIC) Earnings Call Transcript & Summary

Thank you, Lexi, and good morning, and thank you to everyone for your attendance. This is the first time that we've used the Open Briefing service, having previously presented the results in person to the financial analysts in Melbourne, and as a result, we've opted to make this presentation available to be streamed to all shareholders so that you can follow the presentation uploaded on the ASX this morning. My name is Quinton Hildebrand, and I will be accompanied by Alan Boyd, Ridley's CFO and Company Secretary. If we move to the second slide. Today, it's been exactly 1 year since I joined Ridley, and with the support of the Board, I've taken the opportunity to reset the business. So the results we're presenting represent significant reorganization that's taken place within the business over the last 12 months. But this should come as no surprise as we've disclosed all these significant items along the way. A year ago, I identified that Ridley had a large overhead structure, which was slow to respond to the need of customers. We had Murray Bridge feed mill, which was highly underutilized, and we had a long-standing legal dispute with Baiada and also the NOVACQ business unit was underperforming. In the last 12 months, we've implemented a new organizational structure, made changes to the leadership team, we've completed the Wellsford feed mill construction and are partway through the Victorian rationalization and we've initiated a growth strategy, which is delivering bottom line benefits. But most pleasing for me is the fact that whilst the company is being set up for long-term success, we have already achieved a 13% increase in our financial performance from ongoing operations. So if we move to Slide 3 where we summarize the business reset in financial numbers. The group EBITDA from ongoing operations is $64.3 million, which is before lease accounting and significant items, which are summarized in this slide. As all the significant items have been disclosed previously, I'm not going to go through them individually, but the sum of these significant items for the year has totaled $43.2 million, 75% of which are noncash write-downs, and the outcome for the year is an $8.5 million loss for FY '20. As I've communicated at the half year, FY '20 was the last year of our major asset renewal program with the completion of the Wellsford feed mill construction. We also purchased the NOVACQ prawns and the remaining share of the Pen Ngern feed mill in Thailand. At the half year, I indicated that our net debt would peak before June 2020 at between $150 million and $160 million. So I'm pleased to report today that we're marginally below that level at the year-end at $147.2 million net debt. I'm now going to hand over to Alan Boyd, CFO, who will run through the high-level financial results for the year before I return to provide you with updates on the business, growth strategy as well as the outlook. Thanks. Alan?

Thank you, Quinton. And if we can move next -- to the next slide, please, the profit and loss summary, which starts with the $64.3 million highlight item that Quinton started with and ends with the $8.5 million loss, and I'll walk you through some of the key items in the middle. We -- the introduction of the new lease accounting standard gives rise to a favorable EBITDA impact of $5 million. That EBITDA impact reverses by the charging of depreciation and amortization on those newly recognized assets and results in an interest charge as well. The net result of that on the bottom line is an unfavorable $0.26 million. Corporate costs have gone down by $1.5 million, which reflect the cessation of the Baiada legal claim about halfway through the year and also the benefits following the internal restructures that Quinton's referred to. So we dropped down to a consolidated EBITDA before significant items of $59.5 million. And the next slide deals with the significant items one by one, and we dropped down then to a $16.3 million consolidated EBITDA. Depreciation has gone up from $18.9 million to $26.2 million as a result of 2 factors: the first being the full year depreciation of the new Westbury extrusion plant and the second being the first time amortization of the capitalized leases. So that's part of the reversal of the favorable EBITDA impact of $5 million, so up to $26.2 million. Net finance costs have increased commensurate with the higher levels of debt to complete the capital program. And the income tax benefit reflects the income tax effect of particularly the significant items as well as the ongoing business. The other comprehensive income item is the sale of the available-for-sale asset that we held that we sold for a profit in the year and that clears out of the balance sheet and gave us a profit. So if we can then move to the next slide, the significant items. The first one of those that we announced during the year was the Murray Bridge feed mill closure. We've estimated and provisioned all costs that we can foresee with regard to closing, demolishing, making safe that site and preparing for divestment of $7.2 million. The internal restructure of $4.2 million was completed in 2 tranches, one in the first half for $2.9 million and the second one in May and June adding to $4.2 million for the year. The restructure of Northern Victorian operations essentially involves the cessation of production at the old Bendigo mill and transfer to Wellsford, which has all been concluded by 30th of June. And then the progressive transition of production volumes from Mooroopna to Wellsford over the next 8 months with an anticipated closure date from Mooroopna of the end of February 2021. The settlement of the Baiada legal claim was fully reported to the market and brought to account in the first half year. The impairment of NOVACQ cash-generating unit, we raised that on the 13th of August and an announcement was put through to the market with regard to that. And that essentially reflects delays in development and installation of the processing technology as opposed to sales volumes. They've just been restricted by the lack of product. We've taken the opportunity as well to impair the carrying value of the Moolap investment property. The Victorian government's vision for that region at the Point Henry just west of Geelong doesn't leave us with a favorable commercial outcome. So we've impaired that. And then we had, in the prior year, $6.2 million of property segment profit from 1 July, all property activities have been absorbed within corporate. So if we can move then with 2 slides on balance sheet, the first one being assets. So the key watch-outs there, we've put a $20 million at-call account in place as a contingency from COVID. Just -- so the balance is consciously higher of cash and cash equivalents. Inventory, again, we've had an inventory stock build as, firstly, to reflect the -- some COVID contingency, but also the traditional seasonal stock build for the prawn season that's coming up and the increased demand anticipated from that. That's seen a significant rise in inventory for the period. Our receivables have maintained a very, very constant debtor day position. And available-for-sale assets, that's the Lara last -- residual parcel of land at Lara. As I've mentioned before, we impaired the investment property. The property, plant and equipment movement reflects the completion of the Wellsford extrusion plant, but also construction and commissioning of Wellsford and the Thailand land acquisition. The equity accounted investment is now fully consolidated with the acquisition of the 51% shareholding in Pen Ngern, and we sold the available-for-sale financial asset in the prior year of $1.7 million. The movement in intangibles reflects the impairment of $13.7 million as well as amortization and some capitalization of activity at Yamba and Chanthaburi during the year. And then the deferred -- sorry, the noncurrent receivables has gone down by $10 million. We've received the proceeds of sale from the prior year property as scheduled, and we've also capitalized the loan to related party at Pen Ngern during the period and that's the reason for the reduction. If we then move to the balance sheet liabilities. The current payable is very consistent, it just reflects the timing of normal payments within creditor terms. There's a technicality with regard to the borrowings. There's an anomalous requirement of the accounting standard. But even though we've received full waivers from our bankers with regard to impairing the assets, the accounting standard backdates that to the 30th of June and requires us to show the borrowings as current. So you'll see the $193 million gross borrowings as current compared to $118.9 million as noncurrent in the prior year. Essentially, if we were to do a balance sheet at the end of August, that would be back at noncurrent. The current provisions, we've got $6.3 million still there as provisioned to complete the Murray Bridge divestment and closure demolition and also the transition from Bendigo and Mooroopna across to Wellsford. And then employee entitlements have gone down as a result of the internal restructure effected during the period. The noncurrent payables, lease liabilities and provisions has gone up as a result of the bringing into account of the lease liability as a result of the new lease accounting standard. So you can see the net-assets-to-equity position, $277.5 million in the prior year, it's gone down to $261.6 million as a result. And then, finally, moving through into the cash flow. We start with the consolidated EBIT, so earnings before interest and tax, add back the depreciation and amortization to give us the consolidated EBITDA. The impairment of $22.8 million is noncash, so we add that back. We've got a movement in working capital, which largely reflects the increase in inventory. And our maintenance CapEx has been maintained at the same level as the prior year. Our development CapEx, you see $42.9 million and $60 million in the last 2 years to complete the major CapEx program. We've got some payment for intangibles, which is reasonably consistent. Dividends paid during the period. We did engage the DRP the interim dividend paid at the end of April and made a shortfall placement to leave that cash-neutral for us. We received the proceeds of sale from prior year property assets as scheduled. And then the net finance and net tax payments just flowed through from a timing perspective. And then we've got a new item there, again, as a result of the introduction of the new lease accounting standard of $5 million. So our cash outflow for the period of $45.8 million, which leads us to the $147.2 million closing net debt, which Quinton referred to on the first slides. And with that, happy to hand back to Quinton.

Great. Thanks, Alan. I'm just going to give you a business update starting at Page 11. So notwithstanding the significant changes that the business has undergone through the year and the significant changes in the world around us with COVID, I'm very pleased to report on the resilience of Ridley. And if we look first at the record safety performance achieved by our employees, whilst one injury is too many, I'm pleased to report that we only sustained 1.4 lost time injuries per million hours worked and a 3.5 total recordable injuries per million hours worked. So that's a record safety performance for Ridley. And the important thing about this as an indicator is obviously a safer working environment for our employees, but also it's a sign of the stability within our operations so that we can produce consistent product quality and avoid environmental incidents and make sure we're operating efficiently. So a really good indicator for us on that front. If we move to the COVID-19 response and our resilience in the face of the pandemic. We responded early to the news of COVID-19. We drew down on our international supply chains to make sure that we had plentiful supply of raw materials. And we put into place contingency strategies for operational shifts at our facilities, sanitation systems and teams and backup contingency production. And to date, I'm pleased to report that we've had no business interruptions to Ridley operations. We've had just one employee who contracted COVID-19 whilst working from home, and I'm pleased to advise that she's made a full recovery. With the temporary closures to some of the abattoirs in Melbourne recently, the supply of material to our Laverton rendering plant has been impacted at times. And on the customer front, we're very fortunate in the industry in which we are that there's ongoing consumer requirement for animal proteins. There's been some reduction in feed volumes by those customers who are reliant on the foodservice channel. And from time to time, some of those customers have also been directly affected by some of these temporary closures in Victoria, but all of this has been pretty diluted by the fact that Ridley has a diverse customer base. And from a financial perspective, Alan renewed our banking facilities prior to the pandemic and we sit in a position where we have adequate headroom to manage through this circumstance. So if we move to Slide 14, just want to give an update on NOVACQ. We continue to make steady progress in the journey to commercialize NOVACQ. My key emphasis has been on scaling up production. As we can see on the slide there, we're very confident in the efficacy of the product and that's through -- has been demonstrated through the work that CSIRO has done through third-party testing and is the commercial experience on the farms of our customers. The product enhances the growth rate of prawns by over 30% and improves their livability. Through our alliance with CSIRO, we continued to research the active ingredients and look at ways in which we can optimize its production and also assess the performance of NOVACQ in other species. But the key limitation for us has been in production. And that graph in the middle shows, whilst we've been successful in driving the productivity within the NOVACQ prawns and that's between FY '17 and FY '20, FY '17, we just had Yamba and then from FY '19 we have had Yamba and the Thailand operations. And so overall, we are making quantum shifts in the production per hectare per annum in a pond. So our productivity is rising and that's mostly been through optimizing the fertilization process and improving the aeration in our ponds. But the challenge has been how do we dry the product. And the graph shows the 3 primary drying methods that we've used along this journey, but at all times, drying has been the limiting factor. Today, we're drying as much as we can through solar drying in our Thailand operations, but given that you can only do the solar drying through the dry season, it does limit the amount of product that we can make available through this process. So the key is the rate at which we can mechanically dry the product all year-round. And we have installed a mechanical dryer solution in Yamba and that's been operational since April, and we're making steady productivity gains every day. And as a result of the progress we've made there, we are installing the same drying equipment in Thailand, which will be commissioned by March 2021. On the sales front, all the currently available NOVACQ stock is either committed for sale in Ridley feed for the upcoming Australian prawn season or allocated for trials with prospective domestic and international customers. So if we move on to Slide 15, I'm hoping that the explanation I've just gives you some understanding as to why it was necessary for the Board to take the decision to take a $21.6 million impairment on NOVACQ in FY '20 and essentially it's the delay in developing the mechanical processes, which have impacted production, which limits the amount that we have to sell and obviously delays the earnings. And in this environment, global uncertainty, trying to catch that up is challenging. Moving on then to the growth strategy, and aware that you've seen these slides before, so I'll go straight to Slide 18, which is the graph. And on the right-hand side, just provided a color coding to give you some update on those individual initiatives. And you'll see there that the initiatives that I've highlighted in green particularly in the optimization category is where we've already captured the benefits. We've executed and captured the benefits, and some of that is in the operational performance of FY '20 and the balance will be banked for FY '21 and onwards. Then there's the orange initiatives, which are partially executed and will start adding to our earnings in FY '21. And then the blue initiatives, which are still work in progress. But I thought today that instead of running through more detail on the overall growth strategy, I'd just highlight some of the sales growth opportunities and give you some perspective on those. So if we move to Slide 19 and focusing on the bottom left-hand graph, which shows the stock feeds -- the bulk stock feeds, mills utilization. I'll just explain that journey. A year ago, we had 15 mills and 77% utilization across those 15 mills. As you know, we closed the Murray Bridge feed mill and that we retained all the sales that were going through Murray Bridge and so that's improved our utilization up to 84%. And now with the Northern Vic rationalization, which we are partway through, we're replacing both Bendigo and Mooroopna with the Wellsford feed mill. The Wellsford feed mill's not only the latest technology, but it's bigger than the combined capacity of Bendigo and Mooroopna. So as a result, we will end up with 79% utilization. So the message really is that by February '21, when we've completed -- closed Mooroopna, across all 13 mills, we'll still have significant capacity to grow both our monogastric and our ruminant businesses. If we move now to the market disclosures, Slide 22. I just wanted to bring to your attention the ASX announcement that was released on Monday with the retirement of Dr. Gary Weiss as the Chair of Ridley from today and the appointment of Mick McMahon as Chair from tomorrow, and the appointment also of Rhys Jones who also joins the Board from tomorrow. I didn't think I would go through the background on -- of those incoming directors on this call. There is detail within the ASX announcement, but suffice to say they bring significant business experience and skills to the Ridley Board and are most welcome. In regards to dividends, the Board is determined not to pay a final dividend in respect of FY '20 and to apply these funds towards the retirement of debt. And you'll recall that at the half year, I indicated that we were seeking to reduce our net debt-to-EBITDA ratio from 3, which it was at the half year, down to 2x. And today, we're at a ratio of 2.5x. And the Board just believed that it was prudent at this time not to pay a final dividend and to reduce debt. We appreciate that some shareholders rely on this dividend stream from their investment in Ridley and I can assure you this decision wasn't taken lightly, but the Board believes it's prudent -- it's a prudent decision for the company at this time. Moving on to the outlook, Slide 24. Ridley is well prepared to manage both our employee welfare and the business interruption risks presented by the pandemic. We're fortunate to be an essential service and have a diversified customer base. So we expect demand for our products to be resilient despite the pandemic impacts on the economy. You'll be pleased to hear that the business reset with the many significant items in these results has been executed, and the focus now shifts to growing our sales. We've been asked recently what the favorable weather conditions mean for Ridley, and well, we see going forward prices -- grain prices are softening upon the expectation of a good crop ahead of us and this will be good for us and for our customers. Most graziers are also enjoying plentiful pasture, so they are likely to reduce their supplementary feeding going forward. And with these conditions, beef and sheep abattoirs have also reduced their processing numbers. So there are swings and roundabouts within the Ridley portfolio. But by and large, the outcomes are balanced across the group. And going forward, we're confident and expect the ongoing implementation of the growth strategy to continue to deliver improved earnings into FY '21. So that's the full extent of the presentation that we were making today. I'll hand back now to the moderator and look forward to some questions.

[Operator Instructions] Your first question comes from Paul Jensz with PAC Partners.

Okay. Quinton and Alan, just 3 quick questions. Just on volumes with beef, can you talk about volumes year-on-year? I know you have maybe around individual pieces, but can you talk about volumes year-on-year?

Great. Thanks, Paul, for the question. So the volumes are slightly down year-on-year. As you'll recall, there is the impact of a few months of supply into -- in previous years in poultry with the changes in the Murray Bridge supply. We've also had some softness, as I mentioned, in terms of the COVID impacts and those have been to poultry and to aquafeed just recently. But overall as a business across the different sectors, we are pretty pleased with the position that we've maintained across the portfolio. As I mentioned, there were swings and roundabouts. This was the second year of drought feeding with beef and sheep. So that was a strong performance from beef and sheep. Rendering volumes were also higher than the long-term historical average, although slightly softer than the prior year being the second year of drought. But on the positives, we are picking up additional volumes in aquafeed and peak volumes were strong. So that's how we would describe the volume impacts.

Just turning to the outlook statement and around those comments. So I know you're looking to grow margin more than volume, but can you talk about the, I suppose, the extent of growth in the 2021 year?

I think we're not looking to grow margin only, we're looking actually to get the asset utilization up. And so we're looking to grow volumes as well. We've addressed our cost base quite significantly. And we see these economic challenges ahead for FY '21 is going to require us to be very competitive in the marketplace. We think the cost base that we've addressed works for that and we've got the capacity, as I indicated, in both the bulk stock feeds business as well as the aqua package, et cetera. So we will -- and we have strategies in place to grow volumes. These aren't going to be significant growth numbers, but nevertheless, growth numbers on the back of reduced operating costs, which should secure margins.

And the final one, maybe it's for Alan, on the balance sheet and maybe are there any sale-and-leaseback opportunities to lower the debt apart from what Quinton is talking about with the cash flow coming through from increased utilization?

Well, clearly, we've -- in the last 7 or 8 years, we've spent $150 million on 4 brand-new state-of-the-art sort of world-class assets, Paul. Yes, there are -- that seems to be the flavor of the moment, a sale-and-leaseback. There are pros and cons with regard to that. The biggest pro is obviously if you can sort of sell those assets and get the right price for them coming back in, you can retire debt, but you do lose control -- ultimate control over those. So there's a lot of devil in the detail with those transactions. It is something that we look at. We have had several discussions at board level with regard to that over the last few years even prior to committing funds to building those assets on our own. So we never rolled that out. And we'll probably look at it again sometime in the coming year, but certainly, no decision has been made on that at this point in time.

[Operator Instructions] Your next question comes from James Ferrier with Wilsons.

First question is around the optimization slide, and apologies, I haven't actually got slide numbers on the one I'm looking at. But the elements of that optimization program that have been completed, can you just talk a bit about, or perhaps to the extent you can quantify, the contribution in FY '20 and then what's left to annualize in '21?

Yes. Happy to do that, James. So if you look at the first one of those that we've executed was the Murray Bridge feed mill closure and we explained at the time that there was an annualized benefit of $1.5 million there. That took place in October. So we've got part year contribution into FY '20. Then if you look at the internal restructuring and simplification, so these are -- that was the reduction in employee numbers within Ridley, a total of 90 positions were made redundant in those 2 periods. The first one has a contribution of about $5 million per annum, it was implemented in November. And the second, around about $3 million and that was in various changes that went through in April, May this year. So I think that probably gives you some of the detail on that. The Northern Victorian benefits, we've obviously commissioned the Wellsford feed mill and we closed Bendigo on the 30th of June. The Mooroopna feed mill hasn't -- we're still transitioning and we would hope to do that by February 2021. So whilst some of the benefits have come through, obviously, the real benefits only arise post the closure of the Mooroopna feed mill. So that provides you what you need?

Absolutely. Yes. No, that's very helpful. While we're looking at a few of the slides, if we go to the next slide -- sorry, following the extrusion facilities -- sales growth, extrusion facilities slide, that chart bottom left. Am I reading that right to suggest that your expectation is in FY '21 your volumes will almost double on FY '20? When I look at the red-shaded section, the utilized section, your volumes effectively double this year versus FY '20? Is that the correct way to interpret that chart?

No, not in terms of volumes doubling. So what that slide explains is that the one extrusion facility was Narangba, which was getting -- it was running at capacity in the last -- prior to Westbury coming online. With Westbury coming online in July 2019, that's increased the capacity that we have for extrusion capacity across the 2 facilities. And in this year, we think that we will be operating at about 71% utilization of the combined utilization -- into extrusion capacity. So there is increases in the production of -- and there has been year-on-year increase from FY '19 to FY '20. We anticipate that, that will continue to grow again given the growth of the individual customers that we have and some additional customers that we've won. But across both tropical, temperate and companion animal, we'll be utilizing both those facilities, the combined utilization is about 71%. So I suppose the message is we've still got a fair way to go to fill the capacity that we've invested in, but there is steady growth happening year-on-year.

Okay. That makes sense. And similarly, looking at the commercializing NOVACQ slide, back a few from the one we were just talking on. Again, looking at that chart, which was very helpful to sort of understand where the bottleneck is in commercializing this opportunity. But looking at that chart, is it right to assume that the volumes that you've -- or the yield you've generated of NOVACQ in FY '20 is effectively the volumes you have available to sell in FY '21?

Yes. That's correct. So we produced NOVACQ at Yamba, which we're supplying into Australian customers. We also produced product in Thailand, which we solar dried and then have imported that into Australia to meet the demand of the Australian prawn customers. So that had to arrive -- it's had to arrive in the last few months in order to be able to meet the oncoming prawn season. So it's all product that was produced in Thailand in the dry season at the start of this year, which is now flowing into FY '21 sales to Australian prawn customers, yes.

Okay. Great. And last one, perhaps just, Alan, could you give us some insights for the year ahead around CapEx, D&A, tax rate, et cetera, please?

CapEx. Well, then, I can say that the major capital program has been finished. There are some roll forwards that we've incurred, but not from a cash perspective spent some of that money. So there's still a couple of million to flow out of creditors with regard to that CapEx, but we want to bring that back down to sort of traditional maintenance-type levels. So in the past, we've had a correlation between maintenance CapEx and DA, that's well and truly broken with these new assets. So that's no longer a relative measure. So if you look at that maintenance level with -- of CapEx at $13.3 million, we would hope with closing older mills and replacing them with new mills that, that maintenance CapEx is going to go down for a little bit. But we have -- we are in the middle of an AX upgrade of our ERP system, that's going to take some CapEx coming through as well. But generally, we're going to be ramping right back down to make sure that EBITDA has a strong conversion through into cash. Sorry, what was your next one, James?

Similar topics, Alan, so D&A and tax rate likely?

Well, the DA has gone up from the lease accounting by $5 million. That's probably going to be maintained. So that's kind of going to be embedded in future results. The -- we went up in '20 as a result of a full year of Westbury. Well, we're going to have Wellsford coming on again as well from 1 July. So that will be another $3 million or $4 million going on top of that. So that's -- going forward, that's an ongoing.

And the tax rate, Alan?

Tax rate, the only -- we've provisioned -- as we talked about, we've provisioned and impaired significantly in this year. The tax effect of that was surprisingly lower at the back end of that. So you'll see in the tax note when it comes out there's only about a $700,000 permanent difference coming through that. So traditionally -- when we get through all of the restructuring from a tax perspective, we'll be going back to a sort of 28% effective tax rate by virtue of the continuing R&D activity that we do. It's just got to work through its system at the moment. So you'll see, again, when the accounts come out in the detail, there's the $13.5 million deferred tax asset to flow through.

Okay. So 28% is sort of the more underlying number. But in the next year or 2, you'll probably have a lower effective tax rate because of that DTA.

I would be modeling on a 28%. Yes.

Okay. So thanks, Alan. Thanks, Quinton.

All right. Thanks, James.