Ridley Corporation Limited (RIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ridley Corporation Limited First Half FY '22 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. Thank you, Aman. Good morning to everybody, and thank you for joining us today. With me, I have Richard Betts, Ridley's CFO; and Kirsty Clarke, Company Secretary and General Counsel. The results presentation that we'll be taking you through today was loaded up this morning on the ASX website. And I'm going to commence at Slide #2 with the FY '22 first half highlights. I'm pleased to report another half with improvements in all financial metrics as the business continues to gain momentum. The underlying EBITDA before significant items, which we take as our key performance measure, was $39.1 million, up 21% on the prior year, with both of our reporting segments growing organically. This growth has been achieved through a period in which we've endured COVID-19 lockdowns and there are ongoing global supply disruptions. So I'm extremely proud of the Ridley teams for keeping our customers in full supply and for maintaining their focus on safety, which remains our top priority. The operating cash flow and the sale of the Westbury facility in the period allowed us to pay down $66 million in debt, reducing our leverage ratio to 0.2x. With our strong balance sheet, and the favorable outlook for the business, the Board has declared the payment of a $0.034 per share dividend, paying out 60% of net profit after tax before significant items, and this will be fully franked. If we move to the segment performance on Page 4, starting with the Packaged Feeds and Ingredients. This is the segment that comprises all products sold in bags to the market, ranging from 3-kilo bags all the way up to 1 ton bags. This segment grew earnings by 18% to $27.1 million, with the EBITDA ROFE increasing by 51%. Running through the contributions from the different business units that make up this segment, starting with rendering. Rendering continues to generate strong returns due to both the ongoing selling prices or ongoing high selling prices for protein meals and tallows, part of which we do share with the supplying abattoirs. And also the improvement in our yields and product premiumization, which is following the recent capital upgrades at our rendering facilities. Again, we've enjoyed strong sales growth in our branded packaged product volumes, and that's in both the rural farming and the growing urban pet food markets. The Aquafeed business continues to operate in an oversupplied market. But pleasingly, we are now achieving higher asset utilization having transitioned to the single facility operation during this period. And then from a Novacq point of view, we reported a loss in this period, and that's driven by the fact that our production in Thailand is skewed to their summer. So most of the production is delivered in the second half of our financial year. Moving on to Page 5. The Bulk Stockfeeds segment, which grew by 28% to $18.6 million and delivered a 29% increase in EBITDA ROFE. This was achieved through volume growth in all species, with significant gains in the poultry and the dairy sectors. We also had a successful transition from the old to the new season grain crop with our purchasing team managing that transition very effectively. And in this period, we also saw the benefit, the full benefit of the lower cost base that's arisen as a result of the replacement of the aging Bendigo and Mooroopna feedmills with the new Wellsford feedmill. So I'll now hand over to Richard, who will take us through the financial results in more detail.

Thank you, Quinton, and good morning, everyone. Turning now to the profit and loss summary on Page 7. As Quinton has already mentioned, the group has delivered a net profit after tax for the half of $22.6 million, which is an increase over the previous corresponding period of $12.5 million or 124%. EBITDA before significant items was $6.8 million or 21% up on the previous corresponding period at $39.1 million, with both operating segments delivering very strong results, as Quinton has already mentioned. Corporate costs were up on the previous corresponding period as a result of the higher accruals for the long-term incentives, which are directly linked to the improved operating results of the business. All other costs were well managed and in line with previous corresponding period. Individually significant items before income tax were a net gain of $7.4 million, which included gains from the property sales of $9.3 million, including $6.4 million from the sale of the Westbury facility in Tasmania. The benefits from these property sales were partially offset -- partially offset by a $1.9 million expense related to the successful implementation of the group's cloud-based ERP system Microsoft D365. The treatment aligns with the new accounting standard directive issued in April 2021 and our financial statements at 30 June 2021. Consistent with the financial statement in June, the prior year comparatives have again been restated. Net finance costs were well below the prior period on the back of the lower debt number and the lower interest rate. The increase in income tax aligned with the improved financial results. Turning now to Page 8 and the balance sheet. Net assets increased to $306 million, an increase of $18 million. This was due primarily to the focus on operating cash flow and the proceeds from the property sales, which we used to reduce net debt. Inventory did increase by $12.8 million, which included the inflationary effects of higher raw material prices. However, the primary reason for the increase in inventory was the commercial decision to invest in approximately $10 million of additional inventory to build a better position for the second half to allow us to offset potential impacts of COVID-19 and the supply chain challenges that potentially brings with it. Net debt at 31 December was only $17.2 million, a reduction of $66 million in the half. On Slide 9, we have provided further support for our working capital. Since 30 June 2021, working capital has increased by $6 million to $31.7 million. However, this number is still $18 million below the same period last year. As previously stated, in the latter part of the half, we made the deliberate decision to take positions in regard to certain inventory categories to better position the business for the second half. This contributed approximately $10 million to that increase in inventory. The inventory build related in part to the free purchase of some long lead items imported from overseas to help manage the potential concerns regarding the global supply chain. The group also made decisions to take positions regarding certain grain and meal stocks to position ourselves for the assumed rising cost markets in the second half. While receivables remain a focus in this challenging economy, these were also well managed in the half. Turning now to Slide 10, cash management and specifically cash from operations. Operating cash flow before significant items was $25.3 million, which was a slight reduction on the same period last year. However, this included the deliberate inventory build of $10 million, including the benefits from significant items, operating cash flow was $31 million. On Slide 11, we have reflected the reduction in net debt over the last 18 months. During this period, debt has been reduced by a total of $130 million, of which $66 million related to the last 6 months. $50 million of this number related to the proceeds from the sale of the Westbury facility in August 2022. However, the business has still generated a very healthy $31 million of cash from operations, which were partially offset by $6.2 million in dividends, which were resumed during the period and tax payments of $9 million, which aligned to the stronger earnings performance. Turning now to Slide 12, our capital allocation model. In August, we first introduced this model which diagrammatically reflects how the group aims to manage capital. As is shown on the slide, the business has delivered strongly against these metrics, beginning with the operating cash flow, which we have outlined already in this presentation. The group has maintained its focus on maintenance and ESG capital. Our discipline around review and approval processes was good. However, the actual spend was slightly below our targeted levels as a result of delays in securing capital equipment due to the challenges associated with COVID-19. Net debt is now $17.2 million, which represents a leverage ratio of 0.2x, demonstrating our strong balance sheet. On the back of the strong cash performance and the net debt reduction, the group has announced an increase in the dividend from $0.02 to $0.034, an increase of 70% with the dividend being fully franked. Pleasingly, the discipline with which the business has been managed over the last 24 months is now being reflected in the share price, which together with the resumption in dividends, the movement during the period has resulted in a healthy total shareholder return of 61% for the previous -- for the last 12 months. That completes the review of the group's financials. I will now hand back to Quinton who will talk you through the growth initiatives.

Great. Thank you. If I can move us to Slide 14 of the presentation. This is the same slide that I provided 2 years ago, which outlines the optimization, sales growth, expansion and innovation opportunities identified and that we've been progressively working through over the last 2 years. As you can see from the results, we're tracking to deliver on this plan by the end of FY '22, and we're well advanced in the development of the next 3-year strategy, which will take over from when this 1 finishes and it's planned to reap more rewards from this opportunity-rich business. So this is likely to be the final time that I'll speak to this slide. But 6 months ago, we outlined what we plan to deliver during FY '22. So I'll just give you an update on those specific initiatives in the following 3 slides. If we move to Slide 15. I mentioned to you that we were bringing online a new plant that produces high-protein animal meal, animal meals, which replaces fish meal and aqua diets, and also improves digestibility in premium pet food. This plant was commissioned and is now supplying the market. So all that initiative is on track. Our expansion into the new pet ranges also has good traction. During this half, we experienced double-digit growth in pet specialty sales as well as we've also been successful in winning a second house brand contract, which will commence in the second half. Then on Novacq, with our production tripling on the prior year and now achieving commercial scale up in Thailand, we've made the decision to close the pilot plant in Yamba, which is Northern New South Wales, and that will happen -- that will be finalized in the coming months. And the logic for that is that the Yamba pilot plant has now served its purpose, the learnings have been deployed to Thailand, and Thailand is now operating on a commercial basis. The other pleasing thing is that over the last 6 months, prawn season, we've supplied all 15 of our domestic prawn customers with Novacq. So it's now standard within our prawn diets to all customers, and we still expect to break even with Novacq probably end of the year. Moving to the next slide on sales growth. We've secured additional pig and poultry customers. And as a result, we've needed to increase the utilization of our new Wellsford plant in Bendigo, with this plant moving to 24/7 operation. And we're also considering debottlenecking options to accommodate future growth for this facility. On the Aquafeed front, we successfully transitioned to a single facility in the first half following the sale of Westbury. And we're starting to enjoy the benefits of a higher asset utilization of Narangba from both aquafeed and pet food demand. If we move to the next slide, I had advised 6 months ago that we had engaged the specialist consultants to review our supply chains. And whilst a fair amount of analysis has been conducted during this half, we did make the decision to defer this project as with the lockdowns that we were incurring as well as the disruption to supply chains and transport challenges. We decided that this wasn't the time to implement changes to supply chain. So the benefits that -- we had some quick wins that we expected to materialize in the second half, that won't be the case, although they were not that material. However, the supply chain opportunity remains ahead of us and when the time is right, we will get into implementing some of those changes. And finally, if we go to the Ridley Direct, which we introduced 6 months ago, this is our new service, delivering ingredients direct to customers who do on-farm mixing, they currently wouldn't buy much material from Ridley. So we've broadened our access to the market. We've kicked this project off in Victoria, leveraging on our established sales teams, and I'm pleased to say that we're on track to deliver the target, which is to supply ingredients totaling about 5% of the bulk stock feeds weekly volume by FY '23. If we move to Slide 18, this is separate to the growth strategy. In July last year, we announced Project Boost, which you'll recall was a $15 million investment in targeted CapEx over an 18-month period to generate annualized EBITDA returns of $9 million. And so those would have been projects -- those are projects with a combined payback of less than 3 years. On the right-hand side of that slide, we've provided a scorecard just to reflect the status of Project Boost. We've approved 14 projects to date. The total of those projects is $8.1 million although as of the 31st of December, we had only expended $1.1 million against that. And the annualized EBITDA contribution when these projects are commissioned, will be $5.5 million. So in essence, we're a little bit ahead of halfway on the deployment of Project Boost. If we go to Slide 19, the summary, this has been a period of great progress for the business. Behind the scenes we successfully delivered a D365 ERP upgrade, which went live in November and has been successful. We continue to grow the business. The EBITDA of both operating segments going up on the back of higher utilization and increased sales and efficiency gains across the business. With the strong cash generation, we've deleveraged our balance sheet, and we're pleased with our progress on the strategic initiatives. And finally, as has been covered already, the declaration of the dividend recognizing our focus on delivering shareholder value. So finally, if we go to Page 21, our outlook statement. For the second half earnings on an EBITDA basis, we're expecting to improve on the previous corresponding period with the business well positioned to grow earnings through maintaining the momentum in the underlying business segments as well as the ongoing delivery of the growth strategy. With our on -- cash generation, we expect to support the maintenance -- we expect to support maintenance capital requirements of the business, fund investment for growth, pay dividends and there is potential for other capital management strategies. This outlook is obviously subject to the ongoing impact of COVID-19 and the related inflationary pressures. However, we have taken proactive steps to reduce the potential impacts from these risks. So that concludes the formal presentation, and I'll now hand back to Aman, who will facilitate any questions. So open to questions.

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

Good morning, Quinton and Richard. Thanks for your time. Congratulations on the results. First question is about the Bulk Stockfeeds segment. I'm looking at Slide 5 here. Can you just give us a little bit more color around the significant gains, volume gains in the dairy sector? Historically, it's been a bit of a more cyclical sector. So I'm just curious as to what observations you're seeing there, whether this is a cyclical uptick this year or whether that's more of a structural growth result you're seeing?

Yes. Thanks, James. The demand from the dairy sector, we would think over this period has been relatively flat. There are good pastures, whilst the milk price is very strong, it hasn't led to an increase in feed demand across the sector. So we attribute our growth in dairy sales to an increase in market share. And that's happening in the Western Districts region and also in the Gippsland regions. So those are the 2 main areas where we have secured additional market share.

Very, very pleasing. And then directly below that point around successful raw material procurement. Is that -- can we read that as Ridley benefit in sort of an abnormal cyclical sense from that transition during the period? Or did you just get through it as per normal, and there weren't any adverse P&L impacts.

In this half, it's more the latter. So the reason for calling that out, as you'll recall that during the harvest, there was a lot of disruption due to rain across Victoria and New South Wales. So -- and probably mostly New South Wales. So as a result, there -- when everybody was expecting new season grain to be available, it was deferred by 2 to 3 weeks. And that was quite disruptive, and you saw the price jump quite significantly. Those sort of short-term spikes can impact us. And our team did a good job on both securing the supply during this period and holding the price and securing ahead on price. So it -- we didn't get the adverse that you would otherwise have expected in December. Looking forward, what also happened was there was some downgrading of wheat as some APW wheat has been downgraded to stock grade -- stock feed grade, and our trading team has taken advantage of some of that stock feed grain available, and that will be a benefit for us in the second half.

Yes. I think where you're going with that is probably my next question, that $10 million elevated inventory that Richard talked about part of that is about trying to sort of get a buffer in case of any supply chain disruptions. But I'm interested if that -- as you call it a benefit to Ridley, is it just about having that safety net of raw materials? Or do you think that the successful actions of your trading team is going to translate to a margin benefit for the business in the second half?

Yes. It's part and part, James. So the main driver for us was to secure the -- particularly the import supply chains. And so we extended our inventory position on some of the additives and vitamins, minerals and things that we import. So that would probably be half of that $10 million deliberate inventory build. And the other half would be a combination of our grain position as well as our meat meals positions just going through the half. I think moving on -- so just to end on. I think the other piece to this is probably it more demonstrates the opportunities stronger balance sheet gives us going forward as well. It allows the trading teams to take positions in certain markets and conditions. And we know that markets can be volatile in this space, and it just means that they have greater capability to take on positions which can help both our business, but also those of our customers as well. And so I think it's -- whilst it's not -- there is a piece that's specific to the conditions that existed at that time, it's also part of how we need to think about our business going forward as well.

Yes, it makes sense. Moving on to the packaged and ingredients segment on Slide 4. So most of the bullet points there look to us like their benefits coming through to the business that are sustainable benefits structural benefits -- is the first point around higher selling prices, some of the protein. That's perhaps partly more cyclical. Can you just talk a bit about the contribution that, that more cyclical element has had on the earnings uplift and the outlook for.

Yes. So global prices of protein meals are high as our tallows. And so just to expand on the -- we're obviously mostly exposed to the meat meal proteins out of the rendered business, but a diet substitute would be soybean meal. And if you look at the landed soybean meal prices into Australia, they're at highs. And that's both high commodity soybean meal prices, but also the shipping costs to get it landed into Australia. So protein prices are high. The global demand for tallow is driven by renewable fuels, primarily in the U.S. drive and that's knocked up tallow prices globally and is affecting domestic tallow prices too. And you can see that in canola oil as well and other sort of substitutes that go into animal feed diets. So we're at a -- this is -- this has been with us for over 12 months now. Some call that a structural change to tallow and oil prices going forward. We don't see it abating in any time soon. We would think that probably for this calendar year, these sort of prices are to remain with us. But ultimately, I'm sure there will be a market response in those commodity prices could drop. I importantly call out there that a lot of our raw material procurement is linked to indexes and there's a Jacobsen index. And so as these prices have gone up, we're paying more for our raw material as they come down, we'll pay less for our raw material. So the abattoirs supplying us and ourselves are benefiting from these increased prices, but we're obviously sharing that largely with the abattoirs. So we're not getting the full benefits in these results and nor will we get the full impact on it as it comes down as we pass through some of the reduction.

Your next question comes from Paul Buys from Credit Suisse.

A quick 1 from me first half. Just a bit of a follow-up, I guess, onto James's questions there. So you spoke a bit about dairy, which is obviously a market share gain story for you. You also called out in the bulk space. Good contribution from poultry. So I guess I want to understand that, I guess, in the same terms in terms of industry demand versus market share for Italy?

Yes. Thanks, Paul. So in terms of poultry, on the broiler side, we've picked up some additional volume from existing customers, and that's been in new geographies. So some of our integrators have shifted some of their requirements to Ridley in some geographies that we didn't use to supply them in, and then we've also gained some additional layer business, which is smaller, but some new customers there. On the downside, the supply to duck feed has reduced just during this period as there have been a number of disruptions from a food service point of view. So that has reduced our supply of duck feed. So that's the makeup of the poultry sort of composition net-net, we've gained volumes through our facilities.

Great. And then sticking with -- well, kind of a broader question actually, going to say sticking with Bulk Stockfeeds, maybe more across the whole business. I guess, obviously, a key focus, Quinton, that you've driven over the last couple of years is really driving up utilization kind of looking at capacity across the business. And that's obviously been playing out. And I guess I was just keen to kind of get an overview from you as to where you see the business now from a capacity/utilization perspective. So I guess how far are you into the journey and I guess, how much room is there to go further in that regard?

Yes, that's a great question. And that's where we've been really focused. So you may recall me putting up a slide when I joined around having 74% utilization across the business. And obviously, since that period, we've closed Murray Bridge, closed Mooroopna, closed Bendigo and built Wellsford, which was bigger than Mooroopna and Bendigo combined. Today, I would place us in the 90% on monogastric capacity -- capacity utilization. And that's 90% on a standard operating basis. So that's not 24/7 across what our facilities. We wouldn't do that because we just need to have contingency for supply to our customers. But from our accessible capacity utilization, I would put us in the 90% on monogastric. And in ruminant, we would probably be in the high 70s. So what does that mean for us? Within Project Boost, we call out debottlenecking projects. And so included in those 5 debottlenecking projects that are on Slide 18, we've got small incremental increases. So example would be [indiscernible] feed mill, $1.1 million capital to increase the [ diets ] at the mill, and that gives us a throughput game. Terang in the Western District, which is our dairy facility, a similar project happening there, to give us some more capacity actually for ruminant in that area. So -- and then if we go to the new Wellsford facility, we're well progressed on some debottlenecking of relatively small capital expenditures that we're putting in place across the network to anticipate future growth in demand. So I hope that gives you some color on that.

Yes. It was very useful. And then last one for me, just on your comments of -- on the -- I guess, on the delay for obviously understanding reasons for your supply chain rationalization initiative. I guess my question is just simply, originally, there wasn't going to be a big FY '22 story, but some of it might have flown through into second half '22. You've obviously given your -- also commentary that you expect the second half to exceed the PCP. My question just really is, does that represent, I guess, a diminution to your second half expectations because that's pushed out? Or is it -- it feels like momentum is likely going stronger in other areas. So I suspect it's been absorbed into everything else that's happening, but I just wanted to, I guess, get a context on the delay for that -- for this kind of next 6 months' impact?

Yes. The good thing about the supply chain changes are they just not -- it's not broken. I think I just indicated we've got a wide range of transport providers. We've got some network opportunities and things like that. But it really was the time to just make priority decisions. I think we've got enough going on in the business with the execution of boost other efficiencies, the volume growth that we're not going to miss this supply chain contribution in this half or in FY '23, but it's still ahead of us the opportunity to win the time is right to pull on those supply chain implementation opportunities.

Our next question comes from Paul Jensz from PAC Partners.

Thanks to Quinton and Richard. Very solid platforms as we've been talking about. Just some high-level stuff, if I can. Just on return on investment, Quinton, I think in the past, you've talked about a target. Are you able to talk about it in any more detail now, but you too used into it, obviously in half or so, you're in a stronger position?

Yes. So Paul, probably, I can give you some context. As you can see, our ROFE -- EBITDA ROFE for the 2 segments has improved significantly. And that's a result of both growing the earnings and working on the asset base and the sale of Westbury, the closure of those other feed mills. So we're getting the benefit on working on the balance sheet and improving the P&L. As far as -- so the ROFE, that's a NPAT level that we called out on the highlights slide of 10.5% is still well below where we think we should be operating -- and we obviously -- I mean, it's a jump up, but there's more ahead, but I probably won't put a target on it at this point.

No. Look, I think our focus is obviously to continue to deliver value, as Quinton said, both in terms of delivering on EBITDA contribution and looking at what we can do in those asset bases. But there are also opportunities for debottlenecking, which at different phases will impact on that ROFE. But certainly, as Quinton said, from a longer-term perspective, we see the benefit to continue to increase the return on funds employed from an underlying perspective, Paul.

With the improvement, you've got that growth for sure. Just 2 other follow-up questions. One is, what sort of variation do you see in return with seasons now and the diversity you've got? And maybe now my question is how much of you've got -- how much of your product is under long-term contract and how much is on spot?

Those are great questions. So I would describe the seasonal impact on us. So if I can split it into different components of the business, firstly, there's a first half, second half kind of impact, and that's most pronounced with Aquafeed more equity sales in the first half. And as we've called out more the financial returns from Novacq will come in, in the second half. So -- but in the scale of our overall business, those 2 are currently not big movers. So that's 1 seasonal impact. The second seasonal impact is commodity prices, raw material input prices, transitioning 1 season to the next season and wheat, et cetera, et cetera. Those kind of aspects, typically, we will get impacted on the carrying stock that we've got. Most of our product -- most of our sales are the higher volume is linked to pass-through pricing with what we would call on costs. So large poultry customers, for example, we will purchase grains for on their behalf and they're ultimately where the underlying risk. We would take a position, which might be we only want to keep 4 weeks worth of inventory just for certainty of supply, but we might extend that all the way up to, say, 16, or I suppose at the up 20 weeks. So we've got a few months' worth of raw material product, which if we get it right, will be a benefit for us if we get it wrong, will be tracked. But again, most of our sales are -- most of the volume is on pass-through. So that's not -- so I think you might have a $3 million to $5 million plus or minus in an annual result based on our current sort of inventory management profile. And the third seasonality cyclicality would be around droughts and the impact that has on the Bulk Stockfeeds supplying supplementary feeding to beef and sheep and dairy. And we -- the last time we had that draft, which was 2.5 years ago now, we saw the benefit of about $5 million EBITDA. So we think that's still, as I indicated to an earlier question, the capacity of our ruminant mills is not at full capacity. So if you hit a drought, we would typically go to 24/7 through the ruminant feed mills. And so there's probably a $5 million swing in a year where you go to an extreme drought situation. So that's how I would try to provide some context for the variation. Your second question was -- what's locked in, what's long-term supply contracts. It really does vary quite significantly across the business. In bulk stock feeds it would be the majority of our supply is contracted and greater than 12 months up to 7 years. And in other parts of the business, that would be more sort of -- and I'm thinking sort of packaged or Aqua sales they would typically be 12-month contracts or up to 36-month contracts. And that would probably be -- that would be the majority of the supply as well.

Our next question is from Brad Rickard from Cranleigh Partners.

My question is on Slide 4. There's a point in there about the Aquafeed market being oversupplied I was hoping you could just tell us a little bit more about that in terms of the dynamics that you're seeing and how long you might expect those conditions to prevail? And then following on from that, with the closure of the Yamba, were you -- just curious how your supply now back to your domestic customers? Will you be spending that product from Taiwan back to Australia?

Thanks, Brad. So just briefly, just to repeat a bit of the journey through Aqua, the Aquafeed, the Aqua sector is growing strongly, both in the tropical species, prawn, barramundi, yellowtail. And then in the -- sorry, not yellowtail just barramundi and prawn. And then in the temperate yellowtail and salmon also growing, but at a lower rate. The supply is made up of 2 international players based in Tasmania, 1 of whom we sold the Westbury facility to, and we've got our facility in Queensland. We built the Westbury facility 6 months later, 1 of the international players commissioned theirs in Tasmania. And so we went from a position that was balanced domestically actually with imports coming in -- feed imports coming in from other parts of the world. And we've now gone to a period to a domestic capacity that well exceeds demand. And if we extrapolate the growth trajectory, we think that this supply would take 5 years to fill. That's if you can extrapolate all things being constant. Unfortunately, as we know, that's not how the world operates. So in the meantime, who's to say that we won't do a little -- some more debottlenecking of our facility and those kind of things. So there might be some other capacity added on. But in theory, it will take 5 years. Now there are some growth projects in the aqua sector that would -- that are significant if they went ahead and that would change that dynamic quite significantly. So it's a hard one to call. But as we sit today, based on the recent past, we think it would take 5 years to supply -- to fill the capacity in the sector. Then if we go to your second question, which is Yamba, Yes. So Yamba was set up as a pilot. It produces -- it was producing much lower yields because of its geography. It's in a temp Northern New South Wales is not in the tropics like our Kanchanaburi, Thailand facility. And so lower temperatures, lower yields. And so we can produce a lot more -- a lot cheaper out of Thailand. That product from Thailand is currently coming into Australia. It has to pass all the phytosanitary requirements. We have to radiate it, et cetera, but that's the current program of bringing all the Novacq in from Thailand. So we've got enough inventory that we can support any supply chain disruptions. And so we don't see any limitation on the domestic supply, we'll prioritize that from our Thailand operation.

That's a really good answer and good background. Do you still -- just following from your explanation, is that still profitable by the time you obviously produce it at a lower cost in Thailand and go through those import requirements. Does that still make commercial sense if you do that?

Yes. Yes, it does. It's still significantly cheaper by virtue of the better yields we get in Thailand, the lower operating costs in Thailand and the scale we've got there.

Your next question comes from Anthony Kavanagh from Chester Asset Management.

Quinton, Richard, congrats to the team on another solid result. All the good question has been asked. I just wanted to ask about Novacq. You've reported that, that's delivered a loss in the first half, that it's supposed to be EBITDA positive. I was just looking for clarification whether that's an EBITDA positive run rate or EBITDA positive full financial year '22? And I guess to answer that question, I'd appreciate the color on how about the loss was in the first half?

So I'll just clarify so we all understand the process. So we feed the ponds with herbs and spices magic ingredients in the -- throughout the year, but in the wet season in Thailand, we're only able to do the mechanical drying and harvesting process. Whereas in the dry season, we actually maximize by doing solar drying. So we drain the ponds, evaporate and we dry the Novacq in the bottom of the ponds -- and so we get the lion's share of our production happens in the second half or the harvest happens in the second half. And you incur the feeding costs or the ingredients that go in, you pay for those throughout the year, but mostly in the first half and you get the benefit in the second half. So that's how that's structured. As far as the negative in the first half, we're obviously increasing our sales production, so there's more raw materials. So that was a loss of around $2 million in the first half, and we expect to recoup that as we bring product into Australia and that finds its way into diet into the next year.

And just further to that, we did -- in terms of when we did make that statement in August, that was where we expect it to be. So it's not like we're in a different position to our overall expectation around how the year would translate and get to that breakeven position by the end of the year. So we are in line with that run rate.

So I still -- is that a run rate? Or are you saying it's going to be $2 million positive contribution in the second half?

I was saying there will be -- yes, the full year contribution will be $2 million, yes.

The second half will be 2 and the full year will be breakeven.

Can I also ask, I mean, you're now servicing the 15 customers in Australia. I recall it being maybe 5 customers that journey. Is this customer-driven demand? Or are you suggesting to those customers here try to see that will give a bit of a benefit and what's providing the kind of like an incentive to trial it over just 2.

The journey has been that we had 1 major customer doing trials with us 3 years ago and then they keep coming back for more, and that's become a commercial arrangement. And then last 2 seasons ago, we had more uptake and we did some more trials. But this year, we're putting out in all our early season diets containing Novacq. So Ridley is that standard offering in the early season diets. And so all customers that bought early season diets from us are buying the product commercially. Sorry, -- they're not trials.

Just the economics, Quinton, like if they're buying normal fee versus fee with no back -- is it comparable price? Or are you actually kind of restructuring the economic value about it?

Yes. No, we are extracting economic value. And the -- so the price of our early season diets is higher, but the performances of the prawns on those diets makes it a commercially feasible proposition for the producer. The other benefit of Novacq is importantly, the nitrogen -- managing nitrogen in the water and nitrogen discharge rates is highly important in these production facilities. And the more -- in order to try and get the highest growth, you have to increase your protein levels, the higher protein levels, the more nitrogen discharge. But the Novacq diet containing Novacq means that you can actually drop your protein levels because the growth of your prawns is offset by that. So we've got -- there's an environmental or farming management sustainability benefit, which is driving the uptake of Novacq as well from the domestic industry.

The next question comes from James Ferrier from Wilsons.

Just a couple of financial questions to finish off from me. You explained why the corporate cost kicked up a little bit in the first half, it all makes sense and well deserved. Do we basically double it for the full year?

It won't be to exactly double that because obviously, some of that was to pick up some costs associated with the prior periods and to align those up to the performance that we're seeing. But we will still see probably in the range of somewhere between $0.5 million and $1 million in the second half in relation to that increase in cost.

Yes. Understood. And for the full year, what are you thinking -- what are you expecting around CapEx and D&A?

So in terms of, obviously, taking the D&A first because that's the simplest one. So we're expecting that it will be somewhere around sort of between $25 million and $30 million. At this stage, obviously, that is dependent upon how much capital that we're able to spend in the full year. I think when we talked in terms of August, we were talking about -- we expected to spend in the range of about $30 million in terms of capital for the 2022 financial year. In terms of where we are and the approvals that we've made, we're aiming to still spend around that mark, but that number may actually come out lower than that. Just simply because of some of the challenges associated with sourcing equipment. But those are the metrics that we're working on to be spending around about the $30 million, both on sustenance and growth at this stage.

Yes. Okay. That's helpful. And then looking further out on the D&A, we've obviously had a step down this year with the reset of the Aqua footprint. With Project Boost expenditure in particular, and the other growth projects, does D&A start to pick up over the next 2 or 3 years? Or does it stay flat or even go down? .

Look, I think it will probably tick up slightly, but it's not going to be significant. In reality, we are starting to roll off on some of the older parts of the spend as well. So we think $30 million is the right number from a total capital perspective, it will allow us to maintain the facilities in the current condition and also develop some growth as we roll off. But I don't see that number that we quoted, I don't see it significantly getting too much higher than the top end of that range over the next 2 to 3 years time.

Yes. Great. What was the balance of the securitized payables facility? I haven't seen in the account yet. Have you looked at that?

It's still the same $30 million.

Sorry, that was $30 million.

Sorry, did you say the payables facility or the...

Yes, securitized payables facility.

So we have a supplier financing facility, which is about $50 million. That's what I'm referring to a year. Yes. So that hasn't changed in the period.

Yes. Got it. And then last 1 on that SaaS expensing now that the ERP system is implemented, does that SaaS expense item essentially go away?

We primarily -- we're now 95% of the way through the full spend in terms of the SaaS, may be some slight spend in the -- more around the development type activities in the second half, but as I said, we're basically now the project was fully implemented in November, and it's basically around looking at just how we can develop -- how we can drive some further value out of the system, but that will not be significant.

There are no further questions at this time. I will now hand back to Mr. Hildebrand for closing comments.

Great. Thanks, Aman. Thanks, everybody, for your attendance today and for the suite of questions. I think that was very helpful. I really appreciate it. We're thankful for your interest in Ridley as we undertake this journey to take the business to its full potential. And thanks for your participation. Have a good morning. Thank you.

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.