Ridley Corporation Limited (RIC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Ridley Corporation Limited, RIC, 1H FY '23 Presentation. I would now like to turn the call over to Quinton Hildebrand, Managing Director and CEO. Please go ahead.

Thank you very much, and good morning to everybody. Thank you for joining us. With me presenting the results today is Richard Betts, Chief Financial Officer of Ridley.

Good morning, everyone.

Presentation that we'll be taking you through today was published on the ASX website this morning, along with the other financial disclosures. And you should be also be able to access this presentation through the open briefing platform. I'll now commence the results presentation starting on Page 2 with the FY '23 first half financial highlights. I'm pleased to report another successive period of growth, delivering an underlying EBITDA of $44.1 million, up 13% year-on-year. And underlying impact of $21 million, up 20% against underlying impact in the previous corresponding period. Complementing this earnings growth was a strong cash conversion which included a reduction in the strategic inventory that we've been holding as there had been pressures in our supply chains. And these did ease over the half. This performance culminated in an underlying ROFE of 12.3%, demonstrating the disciplined capital management that's been deployed within the business. And our leverage ratio lifted marginally to 0.3x as we committed $2.3 million to the on-market buyback during this period. Reflecting the confidence in the sustained performance of the company, the Board has opted to declare a $0.04 dividend, which is up 18% from the $0.034 in the prior corresponding period. Moving to the next slide, the segment reporting. The Packaged and Ingredients segment delivered an EBITDA before significant items of $33 million, up 22% on the prior corresponding period. And an EBITDA ROFE of 30.8%. This was primarily driven by our Ingredient Recovery business, which continued to access premium markets with differentiated products and also enjoyed higher selling prices for tallows and oils, offsetting the increased cost of manufacturing and the cost of raw materials paid to suppliers. As you know, our feedstock is indexed to finished product prices, so we share those gains with our suppliers. We also achieved strong volume uplift in our branded package sales in the traditional rural distribution channels and increasing sales in the urban pet food markets. With our Narangba extrusion facility operating 24/7, we made a shift in the allocation of capacity to the production of more dog food, which resulted in a decline in our Aquafeed sales versus previous corresponding period. Our NovaqPro operations in Thailand continue to make yield improvements, which are offsetting the rising costs. We saw an increase in the volumes of NovaqPro sold to domestic prawn customers during this first half. Moving to the Bulk Stockfeeds slide, Slide 4. This segment delivered an EBITDA of $17.9 million, down 4% on the pcp and an EBITDA ROFE of 31%. During this half, monogastric volumes grew 2%, which we believe is in line with the more modest industry growth during this period. And ruminant sales grew by 9% in a relatively flat market as we gained a number of new customers. As foreshadowed in our disclosures back in November, we expected Bulk Stockfeeds to have a softer half. And that was based on the wet conditions and the delay in the transition to the new grain crop. And as a result of that, we were -- had less opportunity to take advantage of arbitrage opportunities. And this impacted on our margins in quarter 2. But I'm pleased to advise that since we've had plentiful new season grains, our margins have improved. I'll now hand over to Richard Betts, who will take you through the financials in greater detail, as well as our capital management.

Thank you, Quinton. And again, good morning to everyone. Turning now to Page 6 and the profit and loss statement. As Quinton has already noted, the EBITDA of $50.8 million was up $5.1 million or 12.8% on the previous corresponding period. This result was underpinned by the trading performance of our operating segments, which were up 11.2% on pcp, underpinned by the strong growth in the Packaged Feed and Ingredients segment. Corporate costs increased slightly in line with inflation and included slightly higher accruals for the short-term incentive scheme. There were no individually significant items in the period compared with the $7.4 million of pretax gains in the previous period, which related primarily to the sale of assets, including the Westbury extrusion facility and the old Bendigo and Mooroopna land sales. Depreciation was slightly down following the sale of the Westbury asset, as mentioned above. This was partially offset by depreciation associated with the reinvestment in our facilities and our growth capital. Finance costs increased on the back of higher interest rates and slightly higher debt levels over the period. The effective tax rate of 28.9% was in line with the prior year. While the reported NPAT has reduced slightly, after eliminating the prior-year significant items, including the benefits from the gains of the sale of assets, the underlying NPAT grew by $3.5 million or 20% for the half. Turning to the balance sheet on Page 7, an inventory which totaled $111 million at 31 December. This is a reduction of $7.1 million over the period. While inventory was increased by the impact of higher raw material input costs, we were able to reduce our physical inventory as we gain greater confidence in the underlying supply chain environment and therefore elected to carry less inventory to manage that supply chain. Receivables also grew slightly on the back of the impact of higher raw material costs. However, the debtor days remained in line with 30 June, 2022. Property, plant and equipment grew as a result of the reinvestment in our asset base and the continued investment in Boost and debottlenecking solutions in our mills. The movement in payables is in line with the movement in inventory and receivables associated with the higher raw material input costs. Net debt increased to $25.7 million, an increase of only $2.8 million. This primarily related to the $2.9 million outlay for the share buyback that was implemented in the half. Turning now to Page 8 and the working capital summary. As noted on the previous page, the net movement in working capital was a positive $10.7 million, with the negative impact of rising raw material costs being more than offset by the volume reduction of strategic inventory previously held to ensure we were able to manage the challenging supply chains that existed in the previous 12 months. And even with the challenging macro environment, debtors remain well controlled. On Page 9 of the presentation we have identified the key items driving the strong cash results. Operating cash flow of $56.5 million was significantly above the prior period on the back of the improved operating results and disciplined working capital management. CapEx during the period of $15.2 million, although higher than the pcp, aligned to our capital allocation model with maintenance capital being prioritized to ensure the quality of our asset base is maintained. During the period, the business spent $7.1 million to acquire shares required for the long-term incentive program. The payment of these incentives to management align to the total shareholder return of 78% for the 3-year period of the scheme and the achievement of the required return on the funds employed metric. Net tax payments over the period totaled $17.1 million, an increase of $10.2 million over the previous period. The difference related primarily to a catch-up of tax payments for the FY '22 tax period. The dividend paid of $0.04 a share resulted in a cash outflow of $12.8 million or $6.2 million higher than the PCP. The items mentioned above were all funded out of cash from operations. And as discussed earlier, the movement in debt during the period related to the previously announced share buyback. On Page 10 is an overview of Project Boost. This is the project to manage a series of smaller projects that total approximately $15 million with paybacks of less than 3 years that are expected to deliver an annualized earnings benefit when fully implemented of $9 million. Good progress is made in relation to the delivery of these projects with a total of $14.2 million or 95% of the forecast expenditure now approved and $8.2 million spent to date. Pleasingly, of the projects approved, the expected annualized benefits are $8.7 million, which will be delivered as part of our growth plan that Quinton will discuss later in the presentation. On Page 11 is the capital allocation model which we have been presenting for a number of periods now, which drives the behavior under which we allocate our available capital with the aim of consistently delivering strong total shareholder returns. During the period, we continued to deliver against this model with the key highlights being, maintenance capital was 53% of depreciation and capital approvals progressed to a point that gives us confidence that we will be in line with our committed range at 30 June. The share buyback began with $2.9 million of shares purchased during the period which increased our leverage ratio slightly to 0.3x. The strong cash flow and disciplined capital management enabled the interim dividend to be increased to $0.04, and increase of 18%. The consolidation of the above resulting in a TSR for the 12-month period of 37%, which is well above our targeted level of 15%. That concludes the overview of the key financial slides. And I will now hand back to Quinton, who will run through the progress against our growth plan.

Thanks, Richard. Just moving to Slide 13. In the first half we got stuck into our FY '23-'25 growth plan, the growth plan that we announced back at the end of May '22. Work in this half is really focused on working on the sustainability pathway, which is the foundation stone to the plan and also on the key optimization and growth initiatives that are labeled on the right-hand side of the slide. I don't intend to go through the growth plan in much detail today. But just for context, and before I provide an update, I've included the next 2 slides which just give us the high-level summary. So on Page 14 is the Bulk Stockfeeds plan, which is focused on increasing our market share within the strategy to continue improving our customer experience, winning business, getting higher utilization and debottlenecking of our existing plants. And all of that will drive with that virtuous cycle and the flywheel effect to generate earnings. If we move to Slide 15, the summary on the Package and Ingredients reporting segment. And as we know, this consists of 4 business units. And the ingredient recovery strategy is about climbing the wall of value. The packaged product business has a particular focus on growing our share in the companion animal. And then in the Aquafeed, differentiating ourselves on sustainability solutions within the tropical aqua species. And finally, commercializing Novaq as we scale up production and expand sales internationally. So for the update on our progress on the growth plan, on Slide 16. I just wanted to update you on how we're doubling down on this plan and have announced internally within the business the transition to a new organizational structure which will sharpen our focus on the execution of this growth plan. The key drivers for this change are to service our growth in our monogastric volumes with a dedicate resource, to resource the growth in our ruminant business, to grow the package in aqua sales by optimizing our extrusion capabilities, to integrate our Narangba and Townville operations and to provide capability for future development of the company. And all of this is to be achieved without adding any overhead cost. So in the next couple of slides I'll just provide some of the rationale for this realignment. So on Page 17, just for context, monogastric volumes account for about 3/4 of our Bulk Stockfeeds volumes, and they're an important part of the business, bringing scale to our operations. However, they do have a different servicing model with many of the customers at the bulk of the volume being large corporates. And they have different and mostly pass-through pricing models. So in order to better service these customers, we're going to place our 5 large volume monogastric mills into a dedicated monogastric business unit, which is to be led by a new COO with monogastric experience. We expect that this business unit will continue expanding as the customers grow. And we're facilitating this growth with 3 debottlenecking projects in FY '23 that will increase our capacity by more than 10%. The remaining 8 mills split into Victoria, New South Wales and Queensland will be focused on growing our ruminant sales. And here we are also debottlenecking 2 of our largest ruminant mills to accommodate this growth. Ridley Direct will continue to support our growth aspirations in both these mono and ruminant sectors. The regional structure of the ruminant business unit will absorb the package product and the Aqua businesses and be run by our former Bulk Stockfeeds COO. And the rationale for integrating ruminant, Packaged and Aqua is outlined on Page 18. This makes sense because the Packages and Aqua products are produced by the mills within this business unit. And as mentioned earlier, our extrusion facility is operating 24/7. And so it's best to have these 2 business units, so Narangba producing dog food and Aquafeed. It's important to have that under one leader who can maximize the returns from this facility. By bringing together these packaged logistics operations, we also expect to deliver some supply chain benefits to Ridley and our customers. The Ingredient Recovery business unit is not impacted by these organizational changes and is making good progress on the growth plan, securing access to storage, to tallow storage, to facilitate higher-value exports and additional meal storage with blending capability to increase optionality. With the rising cost of energy, we've accelerated investments in both Laverton and Maroota, to reduce our energy use within the Ingredient Recovery business unit. So I hope this gives you sufficient insights into our approach 1 half into a 3-year growth plan. On the next slide, we have repeated a summary of our investment proposition. Firstly, the macro demand outlook is positive. Australian farm gate output is forecast to continue increasing. Ridley is a market leader in the animal nutrition sector, and this provides us with scale benefits and the capacity to employ specialists and adopt technology as we continue differentiating our offering and margins. We believe Ridley can have a competitive advantage in our sector as expectations rise in the area of sustainability. Ridley's geographical spread, multi-species offering, customer mix and disciplined risk management provide earnings resilience through weather, disease and market cycles. And finally, we have a well-defined growth plan, a strong balance sheet and a disciplined approach to capital allocation, which positions Ridley to execute on our growth opportunities that create shareholder value, which brings us to the outlook statements on Page 21. Second half earnings, EBITDA before significant items are expected to improve on the previous corresponding period with the business well-positioned to grow earnings through the momentum in the underlying business segments, increased asset utilization from debottlenecking solutions and the ongoing delivery of the growth plan. Cash generation is expected to support maintenance capital, investment for growth, dividends and the continuation of the share buyback. Whilst macroeconomic conditions are challenging, the business is taking proactive steps to reduce the potential impact of inflationary pressures. So that concludes our presentation for this morning. And thanks to everybody for staying on till the end of the presentation. I will now hand back to the moderator who can take your questions.

[Operator Instructions] First question comes from the line of James Ferrier from Wilsons.

Congratulations on the result, and thanks for your time. Can I first of all ask you about the margins in the Bulk segment. So I guess, if it's possible, can you sort of isolate the disruption to margins in the second quarter from the crop transition old to new, and the impact on merchandising there. You've referenced the volume growth in that segment. And I'm just curious to understand what the underlying trend rate was around earnings growth in the bulk segment relative to that growth rate. Are you still seeing operating leverage and earnings growing faster than volumes if you isolate the margin disruption.

Thanks, James. So I suppose, just to provide some context, if I go back to first half '22, which was the prior corresponding period, in that period we grew $18.6 million in bulk stock feeds over $14.6 million in its prior comparative year. So we had a strong growth in the prior comparative period. And in this half, Bulk Stockfeeds achieving $17.9 million is still a strong performance, but not on the -- not the growth that we would have hoped for and expected, given both volume growth and the operational efficiencies that we're driving. And I've described that to being in the prior comparative period, we did pretty well at the transition of the old to new season. And we do have at the margin opportunity to optimize during the harvest because when the headers are chewing through the crop, we're a good receivable location for a quick turnaround of vehicles, et cetera. So going into this year, as we shortened up our position, shortened up our grain position in anticipation of the crop, with the delay due to wet weather and the ongoing delays, we had to buy more of the old season product that was in storage. And that limited our opportunity before the 31st of December to take advantage. And we think that, that was an impact of roughly $2 million, $2 million to $3 million. So you see that we have ended up $0.7 million down against pcp. Given the volume growth and the efficiencies, we would have expected to have been growing. So if you add back the $2 million to $3 million, I think hopefully that answers your question.

It does. That's very helpful color. Second question is in relation to the sort of the growth initiatives. And perhaps, firstly, if you could just reconcile what's being articulated and quantified within Project Boost. And what's sort of included there versus what's incremental in relation to the initiatives that you've outlined on Slide 17 and 18.

Yes. So I assume, James, in terms of what you're talking about is the benefits associated with Boost in the period. What we had called out, obviously, the intention is that when Boost is fully implemented we expect a $9 million annualized run rate. We called out that last year we had about $0.5 million of benefit from the project. In this half, we think that the results were benefited to the extent of about $1.5 million. And then when you take that to a full year run rate for this year, it's going to be about $3.5 million of benefit. So of the $9 million of benefits associated with Boost, we think by the end of this financial year we will have seen about $4 million in total having come into our operating results with the expectation probably of about another $4 million next year and then finally the last million coming in, in FY '25.

And James, I note you referenced Slide 17 and 18. So if we just go to Slide 13, which is the growth plan, the shape of the growth, Boost is incorporated within the growth plan.

Our next question comes from the line of Apoorv Sehgal from UBS.

Great results, guys. Just to try and understand the second half versus first half, which is better. So if I'm right about this, Project Boost on one hand will give you another $2 million incremental in the second half versus first half. I think you said from $1.5 million in first half '23 to $3.5 million for the full year. So that's $2 million there. And then on top of that, with the Bulk business, the transition from the -- sorry, the wet harvest impact, I think on the previous action you might have said $2 million to $3 million, would I add that as well on in second half '23 versus the first half? Just want to check if those aspects are right.

Well, I think, AP, as you look at the second half of last year, I'm in Bulk, I'm expecting us to have growth on the second half of last year in the order of about $2 million, which will -- which won't mean plus $2 million on first half numbers. So we're -- in Bulk Stockfeeds, we're a little stronger in the first half than the second half. So that's how I would answer that one. What was the second part of your question?

I was just clarifying the Boost. So I think it has an additional $2 million coming in the second half versus the first half. We said $1.5 million first half, $3.5 million full year.

That's correct.

So I guess then the Bulk being $2 million better year-on-year, that is before the benefits of Boost?

The $2 million in terms of year-on-year would include some benefits associated with Boost, yes, because obviously the impacts we had in the first half in terms of the transition from old crop to new crop will have no impact in terms of if you're trying to bridge last year to this year. So when you take all of those factors into account in the second half, as Quinton said, you would expect probably Bulk to be up about $2 million on the same period last year, which will include some of the benefits from Boost in that number as well.

Yes. That makes sense. And then just on the supply chain rationalization project that you've talked about in the past, I think there might have -- going to be a small contribution in FY '23. How is that tracking?

Yes. AP, you're right. In Victoria, we have consolidated a number of our transport contracts into larger providers with some payload benefits and cost benefits. So some of that is -- has already been locked in, and there's more of those to come. I think in the environment that we're in with transport, inflationary pressures around transport and the costs there, we're definitely pulling on these initiatives which are giving us benefits. And some of that is going to offset the underlying inflationary components of that. But yes, couple of things, more of these initiatives will happen in the second half. And then with our restructure, having all our packaged business, that's the Packaged product going through the rural distribution network, the Aquafeed business and our ruminant business, that covers all of the packaged product, and that will give us some rationalization within the flatbed trucking logistics supply chain.

Okay. And one last question for me, please. Just on Novaq. From memory, I think I'm right in saying that first half is typically cost-heavy and in second half you sort of try and get the sales through. Just can you give us a feel, please, for the EBITDA loss or contributions in first half and expectations for the second half, please?

Yes. So in relation to -- now that you are right, that we obviously incur the cost in the first half. And in second half, we sell the product. What we did see in terms of Novaq though in the first half was we were able to drive and we've talked about this in terms of the ongoing improvement is that we would see efficiency gains. And we saw those. And so although we still had a loss in the period of about $1.5 million, that loss was an improvement on the prior period of about $1 million. So we're expecting that full year benefit from Novaq will be in excess of $1 million. So we're starting to see both the efficiency benefits from yield out of the production process, and we're also expecting to get some incremental volumes in the second half.

And that's a $1 million EBITDA for Novaq for the full year?

That's right.

Our next question comes from the line of Richard Amland from CLSA.

Just a couple of quick questions from me. Just interested in your observations around poultry growth. Just on poultry growth, you guys suggested that it's a little bit slower than perhaps we might have expected. I'm kind of bullish on chickens. And just wanted to get your sort of observation on the outlook for poultry in terms of what you guys are planning for.

Well, I think typically the poultry sector has sort of grown 3% to 4% over a sustained period of time. And I don't see that changing in the medium-term outlook. In this half that we've had -- and in our -- in the area of the poultry sector that we supply, and we largely have 100% of the supply of those customers or of the particular customer's region. And in the wet weather, wet conditions that impacted, particularly in Victoria, there was some disruption to some of those poultry operators. And across the board, I think volumes were slightly softer in Q2. And so our poultry volumes, and when we say poultry it's broiler layer. But it also -- and duck, but it also, business is predominantly broiler. And during that period, we saw volumes at 2% in this period. I would expect that to come back in the second half.

Okay. Just switching over to the Ingredients side of the business. Can you just give a bit of a color to tallow prices and meal prices, they've been rising over the last couple of years. But sort of what's driven that? And do we expect that that will maintain?

Great. So underlying driver for tallow prices has been the shift to renewable diesel, some legislation, both federal and state-based in the U.S. has really created strong demand for tallows, and that's having a knock-on impact throughout the world. And in fact some of our product, some product from Australia is going into those -- into both Singapore and into the U.S. So that's what's driving -- that's the fundamentals. And through this period we've seen a significant increase in tallow prices. Equally, protein prices have been high. And an indicator for that would be to look at the soybean meal prices and to see where those are trading. And meat protein meals that we sell track that protein pricing complex. And so both tallows and meals have enjoyed strong support. In this half we saw strong prices for both. We are seeing domestically an increase in the process numbers through the abattoirs. And that we expect to ramp up a bit more in the second half of this year. So that's positive for volumes. It probably and in the short term has taken a little bit of shine off the domestic tallow and meal prices. So the second half pricing may be a little more modest as we get more volumes. But as I indicated, there's a price-volume offset there that we -- from our position. If we look going more medium-term, we think tallow prices will remain firm. We don't see much upside as in increases, but we also don't see those tallow prices reverting back to anything like where we came from 2 years ago.

And just a final question for me at this moment. Just regarding the pet foods, can you sort of just give a bit of discussion around the efforts that you're making to try and get into the urban pet food manufacturing markets? So how far penetrated are you? Have you serviced customers a really long time and sort of -- it's incremental growth? Or over the next 5 years, do you expect that penetration will increase markedly and there's substantial volume growth? Just some comments around those, please.

Thanks, Richard. So our historical base has been in the rural sector, where we have the market leader brand, Cobber brand. And I would say we're roughly 1/3 of the market share through the rural sector distributed by the nutrient holders' independent networks. And we see further growth there. And one of the reasons for that is we've even seen, in the last 3 months, the withdrawal by some of the major multinational pet food customers' suppliers withdrawing from that rural sector as they have focused and had capacity constraints servicing both the domestic retail as well as the international market. So we see ongoing growth in our historical market. We also, in the recent times, have been supplying quite a lot of the urban chains, the likes of pet stock who we produce some of their house brands and product through that market. So we've been supplying them for probably 5, 6 years now. So there's ongoing growth in that sector. And we continue to participate in that. And in this current year -- sorry, so middle of calendar year '22, we commenced supply to one of the large retailers producing their house brand. And the logic of that was really just to underpin our volumes and our scale and assisted us in investing in a packaging plant at our Queensland extrusion plant, which was the last sort of keeping the platform to give us what we believe is a strong competitive base in pet food, dry pet food production. So we produce the meals through our Ingredient Recovery business. We've got a large-scale extrude. And now from the middle of this calendar year, we should have commissioned our packing plant. So the combination of all of that was -- it made sense for us to take on a high-volume simple product for the retail market. It's not a -- it's not a very competitive product production for us at the moment, given that we still have a number of manual interventions whilst we would await the commissioning of our new packing line. So that's all part of our -- us building our way forward.

Our final question comes from Paul Buys from Credit Suisse.

My first question, just I guess a little bit of a follow-up in a way to Richard's last question. So I understand the poultry impact, as you described it in the first half. My question is really just how do you see your monogastric volumes on the go-forward in terms of market share gains or growing in line with market. Obviously you're growing ruminants ahead of markets. And I understood previously that you guys had some scope to do more with the big national integrators and that might potentially see monogastric also growing ahead of market, but just wanted to understand how you see that into sort of medium term?

Yes. Well, I think the part of the rationale for the new structure and to have a dedicated monogastric COO is because we see further growth in that. So monogastric in terms of the broiler production, we see them continuing to grow. And the sort of 3% to 4% is what we would anticipate. And so as our customers grow, we'll grow with them. Those customers that we don't supply 100% of their production, we see that we will take a greater portion of their increase than we've had previously. So as a result, we see ourselves providing a greater service to the industry and gaining some market share as we get the overflow from some of the integrated poultry producers. Then within the monogastric segment is the pig customers. And there's been a fair consolidation there. And through those consolidations, we are picking up increasing volume. So yes, we would see quite -- while the pig supply has been modest growth, we are increasing our market share quite significantly in pork.

Got it. And then last one, just on the comments of the shift in extrusion capacity to pet food resulting in a decline in Aquafeed sales. Again, you've already discussed pet food and I guess the growth opportunity there. I'm just wondering, does that signal anything about Aqua per se? Is that kind of tactical? And you're allocating where the stronger growth is right now? Or are there longer-term implications in terms of what that's saying about your view for Aqua?

Well, the Aquafeed supply is still structurally oversupplied. So the 3 mills in Tasmania and our extrusion facility in Queensland has still got significant surplus capacity. And that will prevail for a number of years to come. And so we see some margin pressure in the Aquafeed sector ongoing. We have focused on the Queensland and northern territory customers. Because of our geographic advantage, because of our species advantage in prawn with Novaq and our barramundi production. And so -- but whilst others have surplus capacity, they will continue to make sure that those margins are pretty modest. And so I'll -- and we see that ongoing. And so it is a deliberate optimization to continue to allocate to our dog food production…

That does conclude today's questions. I would now like to turn the call over to Quinton Hildebrand for closing remarks.

Great. Thank you very much. Thank you to those who have asked questions. I sense that we lost a bit of the conversational part of that as we didn't necessarily get to assess that we've answered all of those questions to the full extent. Richard and I will be doing our roadshow in a few weeks’ time. So I'm sure that we could cover any of those unanswered questions. Thank you for your interest in Ridley, and thanks for your attendance today.

Thanks all.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.