Ridley Corporation Limited (RIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ridley Corporation Limited Second Half Full Year 2021 Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Quinton Hildebrand, Managing Director and CEO. Please go ahead.

Good morning, and thank you to everyone for joining us. With me this morning, I have Alan Boyd, Ridley's CFO. Alan will be delivering his 12th and final set of Ridley annual financial results before he goes on retirement. And also joining me is Richard Betts, who joined Ridley at the start of this month and will assume the CFO responsibilities from tomorrow. The results from the present -- the results presentation that we will be taking you through today was loaded up on the ASX website this morning. And I'm going to start with Slide 2, the FY '21 highlights. I'm pleased to report that this is the strongest financial performance in over a decade for Ridley, our first full year following the extensive business reset that took place in FY '20. Not only has the business demonstrated its resilience to the impacts of COVID and maintained its focus on safety, but it's also improved on all financial metrics. The EBITDA before significant items, which is our key performance measure, was $69 million, which is up 16% on the prior year. Our focus on cash management has been rewarded with a 43% improvement in operating cash to $82 million. And this has allowed us to pay down $64 million in debt with our leverage ratio at the 30th of June down to 1.2x. With our balance sheet addressed and the favorable outlook for the business, the Board has resumed the payment of dividends with the declaration of a $0.02 per share final dividend. I'll now hand over to Alan Boyd, who will take you through the financial results in more detail.

Thank you, Quinton. So we'll move to the profit and loss summary. From 1 July 2020, we've changed our segment reporting structure, and we now report 2 operating segments. So we split out into Bulk Stockfeeds and into Packaged Feeds and Ingredients. So each of those now has its own EBITDA result, which you can see there in a particularly strong year for the Packaged Feeds and Ingredients business unit. So Quinton will talk a little bit more about that in later slides. The combination of those 2 segments has delivered an operating result of $79 million. Corporate costs are deducted from that value to get the $69.1 million that you saw in the previous slide, corporate costs being consistent year-on-year. Last year, we had a bundle of individually significant items, which we segregated from the operating result for clarity and transparency. That figure has moved up by $1.1 million as a result of a requirement to change our accounting policy for Software as a Service, which relates to the cloud computing change in interpretation of accounting standards during the year. That drops down to the $69.1 million consolidated EBITDA for 2021. Our depreciation and amortization has increased, as you can see, from $26.2 million to $29.6 million, mostly as a result of the commencement of depreciation of the new Wellsford feed mill, which was officially opened in 2020 in the first couple of months. Our consolidated EBIT of $39.5 million is $50 million up from last year's $11 million loss. The net finance cost reduction reflects the retirement of debt progressively during the year, plus a couple of small interest rate deductions. Our income tax position last year was a benefit as a result of the individually significant items and we've returned in FY '21 to a normalized result of $10.1 million. All of those numbers dropped down to a $24.9 million NPAT for the year compared to the $10.8 million loss in the previous year. And if we move across to the balance sheet, how that's reflected in the assets and the liabilities. Our cash has dropped a little bit, but the cash is just a function of the timing of repayments of debt and collections and receivables and payables at the time. The key item there, I think, is the inventory. So we've had a $23 million deduction since last year. Last year, we had some COVID contingency inventory levels that inflated the value to $104.5 million. Our target was to get back to the 30 June '19 position of around [ 5 ], and we've beaten that target internally, and that delivers a positive working capital adjustment for the period. Our receivables are pretty consistent from year-on-year, and our debtor days remain within that narrow banding in accordance with our trading terms. We have a $46.1 million item assets available for sale, and that reflects the fact the Westbury site extrusion plant in Tasmania was sold prior to the year-end, but completion was effective on the 2nd of August. So it needs to be reflected as a current asset available for sale at 30th of June. Similarly, we've got our former [indiscernible] mills at Bendigo. Murray Bridge and Mooroopna are also classified in there for this $46.1 million. Total current assets then have increased from $262 million to $281 million accordingly. And property, plant and equipment has decreased from $368 million to $320 million, largely as a result of that reclassification I've just spoken to. The key movement on the liability side of things is the reduction in gross debt. So we were required to report borrowings as current last year. We've reverted back to the normal non-current classification. And you can see there that there's $70 million of gross debt that's retired. And when you take the movement in cash balances, you get back to the $64.1 million that was on the first slide there. Not many other movements really in the liability side and all of that translates to an increase in net assets to for $287.5 million. We've put together a slide of cash management and net debt. So we generated an operating cash flow of $82.4 million for the year, which is a cash conversion of 119%. The table in the bottom left of this slide reflects that. We start with the EBITDA before significant items, $69.1 million. The decrease in working capital over the period of '21, that's largely a reflection of the movement in inventory. And we always report maintenance capital, so stay-in-business [indiscernible] capital above the line. We've taken that off to get down to the $82.4 million that I've just referred to in the top quadrant. So operating cash flow, 119%. The second graph on this slide in the middle there, inventory back to pre-COVID levels, it shows you for the FY '20 that despite that we had -- in getting above $100 million of inventory reflecting COVID contingency, we've gone back down to the historical levels. And actually, as I said before, we've beaten our target of getting back to the FY '19 level, and we hope to sustain that going forward. All of that means, on the right-hand side, the graph there, $64.1 million net reduction in net debt. And in -- on the 2nd of August, as I said before, the sale of the extrusion plant at Westbury in Tasmania was completed, and the gross proceeds of that was $54.85 million. And so there's a further reduction that you can see there from FY '21 30 June to the August '21 position where we're under $40 million. So with that, I'll hand back to Quinton.

Thanks, Alan. I'm going to take you through the segment performance just to assist you in interpreting these results. So if you can refer to Page 8, this is the Bulk Stockfeeds slide. This segment delivered an EBITDA of $32.5 million, reflecting a stronger second half. You will recall that in the first half, Bulk Stockfeeds were $3.5 million behind the prior year, with the prior year being a record year with all the drought feeding that we did for the beef and sheep sectors. Well, I'm pleased to say that, in the second half, we've closed the gap to less than $2 million on the year-on-year comparative. What's closed that gap has been our stronger sales in the pig and poultry sectors, where we're winning business and increasing the utilization of our mills. And as you know, in a business of this nature with high fixed costs, as you increase the volume, this is highly profitable. We also successfully consolidated the sales volumes from the Mooroopna mill into the new Wellsford mill, and we were able to close the Mooroopna feed mill in February. And the financial benefits of that have commenced since February. So with the increasing volumes over lesser assets, our ROFE has adjusted upwards, as you can see, an increase of 5% to 25.7% for the year. Moving to the next slide. The Packaged and Ingredients segment delivered an EBITDA before significant items of 46.5% -- $46.5 million, which is up 32% on the prior year. This was driven by a significant increase in the rendering returns and we attribute this equally to 2 aspects: the sustainable yield improvements and product premiumization, which is an ongoing journey within the rendering business, and they are making good headway; and secondly, higher market pricing for rendered oils and meals. We also had a strong contribution from branded package sales in the traditional rural channels. And we're also now accessing the urban pet specialty stores, and they have a number of new product lines through the -- that sector. So as a result of that, the packaged contribution -- packaged products contributions were higher. In the Aquafeed business unit, FY '21 was a challenging year for us insofar as the competition in the market with the surplus production capacity. Notwithstanding that, we did grow our volumes, but that came at some expense on margins. And I'll be talking in a subsequent slide to the impacts of the sale of Westbury in due course. Finally, included within this Packaged and Ingredients segment is the small loss made by Novacq in the FY '21 year. And this follows us moving to the commencement of commercial operations from Thailand in -- on the 1st of July 2020, whereas in prior years, these costs have been capitalized. If we can move to the growth strategy, and I'll give you an update, and so that's Page 11. This is the same slide that I've been presenting against for 2 years now. And on the right-hand side, you can see the different initiatives, and the color coding explains the status of those various initiatives. In the following 3 slides, I'm going to go through the initiatives that are going to be having an impact on FY '22. And I'll just start with the top being the expansion and innovation and then move through sales growth and then optimization. So if I can ask you to join me on Slide 12, the areas where we're going to have contributions in FY '22, starting with the rendering product development. In the next 2 months, we will be commissioning the $4 million plant that produces land animal protein concentrates. And these are [ valuable ] ingredients that are fish meal replacements as well as highly sought after by the premium pet food market. And so this is a product that we have been producing and has good uptake in the market, and now we're just increasing our production. So that's going to be boosting returns within rendering during the coming year. We've also, in our packaged products, launched 4 months ago, our new Food for Dogs range, which is in specialty stores, and we're also taking our well-established Cobber brand, which is well-known in the rural sector, into rural grocery stores by the end of this year. Furthermore, we've been successful recently in winning a tender to supply the house brand of a leading national grocery retailer, and so this is a new market for us. Also just to refer to Novacq, we continue to make progress on the production front having tripled our production from the same operating footprint the year before. And so we're pleased with that and obviously, as you increase production and the unit costs are coming down. And we've also launched a new prawn diet for the current season, which has both performance and environmental benefits. So as a result of these advancements, we're budgeting to breakeven for the first time on Novacq in FY '22. If we move to Slide 13, which is the sales growth, our monogastric growth initiatives are going from strength to strength, and we're increasing market share in both pig and poultry. And as a result, we're looking to take the new Wellsford mill from a 5-day operation to a 7-day operation from September. To give you some quantification of the extent of this growth, if we take the July monthly volume, which we -- just last month's monthly premium, it's up 10% on the same period last year. So July versus July is up 10% in pig and poultry volumes. On the Aquafeed front, as advised previously, we've recently commissioned -- completed the commissioning of the upgrade of the Narangba aquafeed facility. That's our Queensland facility. The business case for this upgrade was originally approved based on operational cost savings; but as an added benefit, it also gave us a 20% increase in capacity. With the recent sale of the Westbury facility in Tasmania -- and Westbury during FY '21 was underutilized and loss-making, but as a result of that, we have the sale now and consolidating all our production into the Narangba facility. We're forecasting a $2 million EBITDA benefit in FY '22 as well as a $2.7 million reduction in depreciation. If we move to Slide 14, which is the impact on FY '22 earnings from the optimization initiatives, we are expecting that there will be some quick wins. And that'll contribute in the second half of FY '22 from our supply chain review. This review is currently underway, and we expect that this will lead to improvements in our scheduling and our asset utilization and reduce some of the $44 million that we spend on both freight and storage costs. All of this needs to be achieved while maintaining the DIFOT levels. We're also establishing an ingredient sales desk, which will be leveraging off our procurement strengths. The idea here is that we can supply direct to livestock producers who are currently mixing their own feed. These are not currently customers of Ridley. And so this will give us access to new customers and also its pretty low capital growth option. So that's a new initiative that we'll be developing during the course of FY '22. I'm now going to hand over to Richard Betts, our incoming CFO, to run through the capital allocation framework that's been established by the Ridley Board. Thanks, Richard.

Thank you, Quinton, and good morning all. Firstly, I'd just like to say how excited I am to be joining Ridley at such an important time in the company's history. As the results show, the underlying business is in very good shape with excellent profits delivered in-year and a strong balance sheet. On the back of that, it is important that the business has a disciplined capital framework that supports the underlying operating performance and our growth objectives. To that end, on Page 15, we have outlined the capital framework that will underpin how we operate and how we prioritize reinvestment in our core business whilst balancing the need to deliver strong returns to shareholders by way of dividends, funding our growth objective and maintaining a strong balance sheet. As you can see, the framework prioritizes reinvesting in the base business through setting up processes that ensure that appropriate levels of capital are reinvested and, more importantly, tracked annually. The model then recognizes the importance of having a strong balance sheet through maintaining debt levels that are appropriate for a business like Ridley whilst allowing the business to make the correct decisions regarding delivering value for shareholders through a consistent dividend policy, while still providing the capital flexibility to deliver on our growth agenda based on prioritizing projects that align to strategy and deliver strong returns based on funds employed. Pleasingly, in 2021, the business has delivered strongly against the capital allocation model, which has allowed the business to resume dividends with the announcement of a $0.02 per share dividend in the second half while still reducing net debt to 1.2x EBITDA, which is down from 2.6x last year. This was reduced even further in August with the sale of the Westbury plant, as Alan referred to earlier. The strong returns and the discipline in which the business has managed its balance sheet has resulted in a very pleasing total shareholder return in-year of 57%. The framework is a critical element of how we will operate the business and therefore, report our performance against the framework, remains an important element for us going forward. I will now hand back to Quinton, who will talk about Project Boost.

Thanks, Richard. Leveraging off this new framework, the Board has approved a $15 million CapEx over and above our normal capital program with the idea that we accelerate multiple small profit improvement projects across the business over the next 18 months. These projects are all within our core business, adding capacity, capability and improving efficiency. And when complete, the combined project will add $9 million to our earnings per annum. This provides a payback of less than 3 years, and we expect that whilst there will be some of the benefits in FY '22, most of these earnings benefits will come online from FY '23 after the capital projects are complete. If we move to Slide 17, which is just to provide a summary for FY '21, we see this as being a very successful year for Ridley, and the business continues to build momentum. I wish to commend the employees of Ridley for the progress made in safety and the operational performance and the asset utilization that we're driving. As a business, we've generated strong cash flows and delivered EBITDA growth. Our EBITDA CAGR for the last 2 years has been 14%. We've addressed our balance sheet through disciplined capital management, and our key strategic initiatives are delivering. So with this progress, the Board's resumed the shareholder dividend -- has resumed shareholder dividends. So all in all, a pleasing platform for us to launch into FY '22, which leads me to the outlook on Slide 19. With the restructure that took place in FY '20, we've established [ a new platform which ] drives accountability and operational efficiencies, and today, we have a much more customer-oriented business. This has led to sustainable improvements and our underlying performance continues to gain in momentum. So Ridley is well placed to grow earnings and cash in the year ahead, and this is likely to come from the continued momentum in our underlying business segments. And by way, in the first 7 weeks of FY '22, we've enjoyed a strong start to the year. The growth will also come from the ongoing delivery of the growth strategy, which I outlined earlier today, the main aspects that will be delivering in FY '22 as well as the launch and expected returns from Project Boost. And then with the capital allocation framework that Richard outlined, we intend to deliver strong shareholder returns whilst maintaining a strong balance sheet and supporting the business growth. So that's all that we were going to share with you upfront today, but we would welcome the opportunity to hear your questions and to give you some more background on the performance of FY '21. So if I can hand back to the moderator now to manage the questions, thanks.

[Operator Instructions] Our first question comes from James Ferrier with Wilsons.

Congratulations on the results. First question is in relation to Slide 11, which is, as you said, Quinton, a familiar slide to us now. The optimization items that have been completed there, can you just confirm, there's probably a couple of them, particularly the Victorian -- the Northern Victorian footprint review where the benefits won't have fully annualized in FY '21, that there should still be some more benefits to come in '22? Am I right in saying that?

Yes, James, you're right. So that Northern Victorian footprint comprises of the closure of Bendigo at 30th of June 2020 and then the closure of Mooroopna in February '21. And the combination of those would have been in the order of $7 million and $8 million annualized. So there's the -- there's really only been 4 months of the second part of that benefit that's fallen into FY '21 at this stage. So there's still more of the annualized benefit to flow through in FY '22.

Okay. So if we were to assume another $2 million, is that a reasonable starting point?

Yes, that would be fair.

Yes, okay. Second question's around the packaged and ingredients segment. And on Slide 13 there, you talk about the Aquafeed reset. Can you just confirm that financial benefit to flow from FY '22 onwards? Is that a collective benefit of the Narangba expansion and the Westbury exit? Or is it just the financial benefit of the latter?

It's just the financial benefit of the latter. So what's transpired was that Westbury was underutilized, and we now have the ability to consolidate all that volume into Narangba. And so the operating costs of Westbury [ fall away ], and whilst one would ordinarily think, well, you've now obviously got a transport impost of product from Brisbane down to the Tasmanian market, which was -- where the sales out of Westbury were predominantly going. What happens is that all the product that -- the raw materials needed to be transported across the Bass Strait anyway. And so we're now just taking finished product across there. So that's not that much of an impost. And also some of the New Zealand and mainland customers that were supplied out of Westbury, that product doesn't have to cross the Bass Strait twice in terms of raw materials into Tasmania and finished products coming back. So net-net out of all of that is a $2 million EBITDA benefit.

Yes. Okay. That makes sense. Thirdly, Slide 9, Quinton, you talked about the significant uplift in earnings from the Packaged Feeds and Ingredients segment and in particular, the benefits that were received out of the rendering assets there to do with market pricing. Can you just add some more color on the current environment around market pricing and how you're thinking about the prospects of normalization in that pricing environment as it relates to the sort of the earnings for the year ahead?

Yes, that's a very good question. So if I can just repeat what's on the slide there just for clarity, the growth in the rendering performance we see is coming from 2 aspects: the sustainable yield and product premiumization journey that we're on, so those are -- those will be sustainable irrespective of market prices; and the second half of that uplift due to market prices has been driven by global price increases across all proteins. So that's both vegetable proteins and animal proteins. So soybean meal prices are at historical highs. That's sort of a substitute for the animal proteins. Animal proteins, supply's lower within Australia given that the beef sector is restocking. And so there's less meat going through, less cattle going through the [ butchers ]. And then on top of that, you've got the demand for oils, green fuel replacement with policy in the U.S. So tallows and all vegetable oils are at a higher pricing. So calling the -- how much of that is long-term structural change and how much is cyclical through supply and demand is very difficult, but our expectation is that the strong prices that we had in FY '21 are prevailing today. In fact, they've lifted further in the last few months. So it looks like we've got a pretty long, if not, permanent structural change in the demand. There's definitely a longer cycle on this pricing.

Our next question comes from Paul Buys with Credit Suisse.

First one from me, I'd just actually like to follow up on James' previous question. And I think you've made it pretty clear, Quinton, but just to clarify then. So it sounds like notwithstanding the strong FY '21 performance, given that price outlook and given you called out the yield improvements are sustainable, there's no reason why you wouldn't still be targeting growth in rendering notwithstanding a stronger FY '21 base. Is that fair?

That's correct, yes. We do expect that the other initiatives that we've got within rendering will continue to grow the returns from rendering.

And some of those yield improvements were presumably realized throughout the period as well, so implying some kind of carryforward into '22 as well, I'm guessing.

Yes, yes. And to provide a bit of context on that, we've been working very closely with our raw material suppliers to segregate product, and so what we're getting coming in is segregated product, which is then going through different processing plants at our rendering plant. And some of the capital that we've spent over the last few years means that, for example, instead of putting all our ovine sheep raw material going straight into a mixed product, we are now producing ovine meal -- low-ash ovine meal for the pet food sector. And so that's got a very different price proposition to something that's gone in a mixed animal protein meal. So those are the kind of initiatives that are sustainable going forward. And there's a -- there are a number of those that have kicked in during FY '22 as well -- FY '21 as well, which we'll get the full benefit of in '22.

Got it. And I think you called out second half '22 for -- time frame for some of those supply chain review benefits. I just wanted to get an idea if you can give us any color on the -- your intention to reduce that $44 million freight storage costs, just to get an idea of what kind of broad brush materiality those benefits might be.

I think, obviously, we've set some stretched targets. We would like to get the number above a 5% saving on that. And those -- we'll start pulling on those benefits in the second half of this year.

Okay. And then the last one, just on the prawn business or the prawn feed business, I guess, just interested in your thoughts, I guess, on the -- on how your customers are playing out. Obviously, Tassal has continued to increase production. It looks like a couple of other operators might have kind of exited sort of stage left, which [ isn't ] Tassal obviously. But just interested in, I guess, how you see that overall environment playing out for your prawn feed business.

Well, there is a bit of a consolidation happening within the prawn sector, but I think overall positive. The COVID impacts have delayed some of the expansion plans within -- with the prawn producers. But we're the majority supplier to 4 of the suppliers outside of Tassal, and we are pretty closely aligned with them on their growth plans. So we see this as an ongoing growth segment for us.

Our next question comes from Brad Rickard with Cranleigh Partners.

Thanks for talking through the presentation and certainly excellent results. The last caller actually sort of touched on the thing I wanted to ask about, but perhaps I can expand the question on Aquafeed in terms of -- would you be able to give us your perspective on how you see the demand and supply mechanics sort of playing out through this year, noting that you have some challenges, it's an oversupplied market, your production has increased threefold? And then secondly to that, would you be able to tell us a little bit about how Thailand has been going through the last 12 months and what you may see as sort of the next opportunities internationally for Novacq and including in Thailand?

Great. Thanks for those questions, Brad. So if I could just -- I'll deal with those in 2 separate sort of sections, one dealing with Aquafeed and our national position in Aquafeed. Ridley's got a majority market position in the tropical species. So our strength has always been in the tropical supplying those mostly north -- in the northern part of Australia and so barramundi prawn production, et cetera, where we've got the highest market share there. The salmon production was -- is the area where we've got a smaller -- or have had a smaller stake. If we look at the sector and following Ridley constructing the Westbury feed mill, BioMar put on another feed mill in Tasmania to add to one that's [ creating -- ] has already -- had already. And so within a period of 12 months, we had 2 new feed mills with increased capacity. So the way I -- the way we see the aqua market is we continue to see strong growth in the sector. It has taken a little bit of a pause with the COVID impacts, but predominantly in the tropical species, we're expecting to see high single-digit or double-digit growth in those sectors. The feed supply will continue to be highly competitive given the surplus capacity that's on the ground, but we're confident with our cost structure out of Queensland and our proximity to the northern customers that we're well placed to retain our strength there. And we've got a number of -- we've got well experienced people in tropical and well positioned to continue to participate in their growth. If I shift, Brad, to your second part of the question, which is Novacq and I might just start with Novacq's role within our domestic Aquafeed sales business. The diets that we're offering are of producing prawn feed that has lower levels of protein but still high performance. Those lower levels of protein mean that there is less nitrogen and discharge, which has got a significant environmental benefit for prawn producers. So I think we've -- not only have we got technical expertise, but we've got the Novacq ingredient to provide meaningful gains in both productivity and environmental benefits. Swinging to Novacq production in Thailand. We've tripled that production in the last 12 months, and we've increased the yield in the 14 ponds that we have there. And we are just commissioning now some of the drying equipment, which will help give us increased yields. Looking forward, we're looking to take some of our diets as early nursery production to supply into the international market. And on the back of this new diet that we're selling to 5 different prawn producers in Australia, this year, we'll be selling some of that internationally. So it's always been a game of making sure that you've got the product and developing the markets at the same time. It hasn't been easy to visit prospective overseas customers during COVID obviously, but there is significant interest still.

It's a very comprehensive answer. Just if it's okay, I might ask one very quick question just on the rendering business, which appears to be going very well if we think about where that's come from after the supply issues with the Ridley business closing down and impacting [ route ] some time back. Given it is going so well, have you thought about or looked at opportunities to move into other parts of Australia, for example, further up the coast into Queensland, where you have sort of [ arbitrary ] concentration that would warrant a potential plant or any opportunities there to look at M&A?

Yes. Brad, probably not going to be drawn into talking on M&A specifically in a public forum. But our position is that we're always looking at opportunities that present themselves. And yes, we do see rendering as a very attractive segment for us and has got lots of complementary synergies within our business. So always looking for growth opportunities. At this stage, most of the benefits that we've delivered to date have been improving the performance of our existing rendering plants but I wouldn't rule out growth in the future.

Our next question is a follow-up from James Ferrier with Wilsons.