Ridley Corporation Limited (RIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ridley Corporation Limited OMP Acquisition Briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Quinton Hildebrand, Managing Director and CEO, to begin the conference. Quinton, over to you.

Thank you, Paul, and good morning. Thank you for joining us at short notice and in the last week before Christmas. I'm very pleased to announce today that Ridley has entered into an agreement to acquire Oceania Meat Processors. And I'll be taking you through the slides that we loaded up on the ASX website this morning if you wish to follow along. If we can start with the second page of the presentation. Ridley entered into the sale and purchase agreement yesterday, which will see Ridley paying NZD 57 million or AUD 52.8 million for OMP. This is 5.4x multiple on the $10.5 million earned by the business in the 12 months to September 2023, and Ridley will fund this acquisition through debt. OMP is a premium producer of mechanically deboned meat or MDM, as we abbreviate it within the industry. And this product is sold through to global pet food customers. OMP has operations in Australia and New Zealand as well as a well-established supply chain into North America. And I'll go through a bit more detail in a later slide on the operations of OMP. The transaction is subject to key milestones and conditions, all of which we expect will be completed by the 28th of March 2024. And we don't expect that this transaction requires any formal regulatory approvals. Importantly, the transaction is expected to be positive financially with our expectation that it will be EPS accretive in the first year after acquisition. With the transaction being debt-funded, we expect Ridley's core debt and core net debt-to-EBITDA to be 0.7x at completion, which is well below the 1 to 2x target that we've outlined in our capital allocation models. If we move to Page 3, and importantly, I wish to guide you through the strategic alignment of this transaction. You'll note -- you will have seen the illustration that's on the left-hand side of that slide, and we've been putting that up in our results presentations for the last 18 months. But as part of the FY '23 to FY '25 growth plan for our ingredient recovery business unit, that is our strategy, the strategy of climbing the wall of value. And this means investing in processing capability to produce bespoke higher-value ingredients from our existing raw material so that we deliver higher margins to Ridley and to our suppliers. And so that is -- this is the emergence of that strategy through the focus that we've brought to the ingredient recovery business unit over the last 18 months. And so as you can see on that wall of value, the next step is frozen block MDM products, and that's exactly the business that OMP is. So this acquisition extends the scope of our raw materials that we buy from the suppliers. We'll buy both for our rendering business and for the OMP business. And it gives us a frozen block capability to produce premium products for the customers and meet their expectations and demands. And it extends for us our range of offering as Ridley into the pet food market. So we're already supplying meals and oils, but now we will also be adding frozen block MDM to that product range to pet food customers globally. And with this acquisition comes a ready-made business that Ridley can leverage rather than us having to invest in the capability from scratch. So it gives us a flying start for our further development of this business unit. If we move to Slide 4, which is an overview of the OMP business, OMP is a supplier to the global pet food industry. It's got contractual supplier arrangements both domestically in Australia and New Zealand and internationally with a particular strength in North America. The business provides multi-species products to these pet food customers. But the real strength is in the novel proteins. Again, this is a pet sector term for the specialized products. For example, the U.S. has a lot of beef and chicken supply, much in the way of lamb or grass-fed beef or venison or kangaroo. So these are novel proteins, albeit abundant in Australia and New Zealand, but they're novel to these international pet food companies that OMP supplies in North America. The OMP operations are in 2 production sites, 1 in Laverton, Melbourne, which produces 2/3 of their product. And fortuitously, this is colocated next to the Ridley Laverton ingredient recovery plant. So fantastic cohabitation opportunities for us there. And the second production facility is in the South Island of New Zealand at Timaru, producing 1/3 of OMP's product. The business has a well-established channel through to the North American market with the 3PL office in Arizona and storage facilities in Houston and Philadelphia. And importantly, this gives the servicing arrangements to customers such that all customers can be serviced within 3 days of order. And I think that's a competitive advantage of this business in these novel proteins. So if we move to the Slide 5 and summing up the rationale for the acquisition, I hope on this brief call that we've demonstrated that this acquisition is on strategy, that it puts us at the premium end of novel pet food ingredients. It gives Ridley access to blue-chip customers and the ability for us to co-sell meal and oils to these customers whilst also giving us the opportunity to optimize our raw material from suppliers, particularly with the colocation of the plants in Laverton, Melbourne. And finally, the acquisition is expected to be EPS accretive in the first year. With the completion of this transaction expected at the end of March, we'll have just 3 months of benefit in Ridley's FY '24 financial year. And as a result, we would expect to have roughly $2 million worth of earnings within FY '24 from the OMP business. And this is more or less in line with the transaction costs of approximately $2 million that have been incurred in this acquisition. So within FY '24, we're expecting the earnings to net off the transaction costs. And obviously, we'll be calling those out to give you visibility as nonrecurring matters. But nevertheless, within the first year of acquisition, we expect this acquisition to be earnings per share accretive. So I'll stop there. And Richard and I are available to take any calls that you may have. Thank you. I'll hand back to you, Paul.

[Operator Instructions] And your first question comes from the line of James Ferrier from Wilsons.

Congratulations on the transaction. Can I first of all ask you about the supply arrangements you have, the contractual commitments you have there? Just thinking back to the recent full year results where you talked about the renewal of some of the key raw material supply contracts and putting some of them onto multiyear agreements. Can you perhaps compare or contrast that position in the existing business with what OMP has with their supply commitments?

Thanks for that question. The typical pattern for OMP has been -- in line with the demand from these blue-chip customers has been a calendar year contracting cycle. So what OMP typically does is participate in a tender process whereby they would lock in for the 12 months, calendar months, sometime in sort of November, December. And at the time of contracting their sales, they would go to the raw material suppliers and lock in. So they typically had a back-to-back contracting arrangement. At Ridley, we have had longer-term contracts with a number of -- some of them being the same suppliers in Australia. And so as a result, these higher-value raw materials have been excluded from some of the red meat contracts that we've had. In poultry, we are taking 100% of the product, and we've locked that in for the long term. So that remains an opportunity. So I would say that this is quite complementary as it means we've got established arrangements with some of the raw material suppliers where we have multiyear contracts. And we will have the confidence to make offerings to some of these multinational companies to see if we can extend beyond the calendar year contracting cycle that they currently have. Now I do say that will take a little while to come into effect, and we may not convince all of them to go to longer-term supply patterns. But I think with Ridley now becoming involved in this supply chain and the counterparty benefits that we would provide to these pet food majors, I think that there could well be an opportunity for us to extend the contracting arrangements to longer term and allow us to really hone in on the -- optimizing the supply chain. So I think there lies some opportunity there for us. I hope that's answered the question.

That sounds encouraging. Second question was around the Laverton location, and you mentioned sort of the adjacency of OMP to the Laverton rendering facility that Ridley's been operating for some time. How are you thinking about the opportunity, the synergies there, whether it's colocation of shared facilities or the opportunity to actually expand capacity, whatever it might be? How are you thinking about the opportunities and the synergistic opportunities that might come from this situation?

Well, it's still early days for us, but I see straight off the ability to support with some of the shared resources through maintenance and project teams. And some of those shared services may be of benefit to the Oceania team just across the fence. I think in terms of optimizing raw material flows, there will be opportunities there for us to optimize between the 2 sites and make sure the freshness of the material and all the rest is optimized. So I think there are some operational gains there. Longer term and the opportunity for additional proteins sources to go through that site and expansion, I think we probably want to just do a bit more work on that. But ultimately, with our raw material partnerships that we have with the different abattoirs, I think we can look to expand that facility, but it's probably too early to speculate on that.

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

Just a quick follow-up to the synergies question. Just some other sort of thoughts I was having on maybe where the synergies could be and just sort of your thoughts on that. I was hoping, one, access to a U.S. supply chain, does that sort of help the broader rendering business you've already got to access that U.S. market better? Anything on maybe transportation costs in Australia as well and just buying power on key inputs with suppliers, any of those sort of areas make sense at all?

Yes. I would say the primary areas of opportunity are Ridley's selling meals and oils. Many -- a lot of our product does find its way to the U.S. and Europe but through intermediaries. So definitely into the U.S. with an established supply chain direct into the likes of Nestlé and Mars and other significant pet food producers in the U.S. and North America, they are also needing meals and oils. So the ability to be a one-stop shop and to leverage off that established supply chain, I think, presents good co-selling opportunities for our ingredient recovery business. So that's one key area. The second key area would be on the raw materials supply. So having established relationships with the suppliers, having vehicles going in and out, collecting the different raw materials and being able to adapt to dynamic production facilities in these abattoirs, I think, gives -- will be a good value proposition for our suppliers as well. And obviously, when needing to pay competitive prices for the raw materials, we've now got more optionality with this capability. So I think strategically, this is good alignment for Ridley and our suppliers. And thirdly, the last opportunity would probably just be around the sort of generic corporate costs. Richard's already looking at funding benefits and insurance benefits and all those other sort of more corporate overhead benefits.

Okay. The second question, are you able to give any detail on what the earnings growth trajectory of OMP has been in the last few years and maybe anything on EBITDA margins as well?

Yes. AP, we're not putting that information out at this point. I think we probably want to establish our own understanding of this business in more detail and get more -- get closer to how we're going to drive it. And then we do look to give you updates as we go as to how we're tracking with this acquisition. And I think when we get more confidence in what our trajectory looks like, then we'd be more comfortable to provide some of those indicators as obviously -- anything we quote on the past may be interpreted as views of ours in the future.

Got it. And one final quick question. If I -- within the ingredients recovery business, if I had to split the earnings contribution sort of by end customer, like your biofuel end customer, you've got your pet food end customer, is there a simple way to kind of split that?

As in value of our product going into these different sectors?

Yes. In terms of earnings contribution, like is ingredients recovery 70% biofuel, 30% pet food or something like that?

Yes. I would -- I don't have a specific split for you today, but the biofuels portion is really tallows, and it's not that significant percentage of the ingredient recovery. The bulk of the product going -- the majority of the earnings are meals and oils through to pet food, aqua feed, et cetera. So pet food would be our highest-value demand sector and would be a relatively high portion of that already as Ridley ingredient recovery pre this acquisition. With this acquisition, I would say this will bring pet food to the top of our sectors, supplied out of combined ingredient recovery. And then you're probably into the rest of animal feed and aqua feed, et cetera, and then you've got the benefits of biofuel customers. So that's sort of the size of the different sector exposures.

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

I just wanted to touch on the supplier to global pet food and just sort of what that means and ask how much of OMP's business goes to North America versus just domestic. Can you sort of provide a flavor of whether it's the majority or if it's less the majority? Sort of flesh that out a bit for us.

Yes. So the majority of OMP's business is into the North American market, U.S., Mexico, Canada. And it's a high proportion of their business. The real -- the benefits there are they've been growing strongly with some blue-chip customers there and meeting the demand as pet food's grown strongly as well as being the novel proteins into that market. Australia and New Zealand have a very strong proposition in terms of sheep given that they're not as predominant in other parts of the world. So that's the current situation. I think if we look at the business going forward and we see the growth in pet food in the Asian market and the fact that, that market has also got a number of these same blue-chip customers, the Nestlés, Marses, et cetera, we do see the opportunity to expand and diversify our product range into different geographies. So a very strong footprint into the U.S., Canada and Mexico, but no reason why over 5 years, 10 years, we can't expand that into Asian growth as well.

Very good, very good. Just a follow-up on that one. So in your DD, just would be a matter of curiosity, OMP is about 20 years old. How long have they been tackling the North American market? Is it relatively new? Or is it sort of 10 years old? Just a bit of flavor around that.

Yes. 2002, the business was established by a Kiwi called Peter Cowan and 2 partners in the U.S. who -- and they established this supply chain link between New Zealand and the U.S. market. And so that was the origins of the business. The 2 U.S. investors have retired over this period and sold out. The company up until -- well, up until the 28th of March next year is owned by 3 New Zealand entities: the original founder, Peter Cowan, as well as 2 others. And they've expanded into Australia and continued this supply chain into North America. So the North American link, the Nestlé, Mars and others, has been from early origins of OMP, and it's built over this period of time. You'd also expect that we've secured the services of the likes of Peter Cowan going forward as well to assist us in positioning this business.

Okay. That's helpful context. If I may, just a couple of quick financial questions. Are you able just to give us a broad revenue scale of the business? Is it $70 million, $90 million? Just to help us with our forecast for fiscal year '25 really.

Yes. Look, I mean I guess a bit -- sorry, Richard, it's Richard Betts. But those sorts of relativities are not out of the ballpark. But I will say that again, this is one of those businesses that has a very heavy link to input costs to final sales value. So again, we've not spent a lot of time and we've not deliberately not put a revenue number out there because margins are more fixed to a dollar margin than they are to a percentage of revenue. But the range of sort of $70 million to $80 million in the current environment is appropriate. But as I said, I do just caution that this business is very heavily tied to a dollar margin rather than a revenue percentage margin.

Understood, and that's consistent with you guys' business. I accept where you're coming from on it. Just -- so OMP, the site in Melbourne and the site in New Zealand, do they own that outright like you guys?

No, those are leasehold facilities.

Leaseholds. Okay.

Yes. So they own the -- obviously the plant and equipment but not the land and the buildings.

Given the nature of the works -- yes, nature of the business in Laverton, is there an opportunity to buy those just to sort of lock it up? Or not contemplated at this time?

It's not contemplated at this time. I think we're comfortable with the contractual arrangements that we have in the runway. So the capital-light model is working for us as it stands.

[Operator Instructions] And your next question comes from the line of Anthony Kavanagh from Chester Asset Management.

Congratulations on the deal. My first question on the deal was very much in line with your strategy. I was just interested in kind of the motivations behind the selling, whether or not Oceania was an active process, I presume, given how on point with your strategy was a Ridley-led acquisition, and you approached them, but I was just looking for clarification there. Also, whether there's any scrip offered as part of the deal. It reads as if it's straight task, but it's not definitive in the announcement. And also kind of the earnout that you've got with the vendor, just the lockup here and any KPIs that you've got to hit.

Right. Thank you. So just to say, notwithstanding that it was on our radar, the vendor did run a sale process and it's been a pretty protracted one. But we maintained our patience and our value expectations and are pleased to have ultimately been successful. The NZD 57 million price tag is the full price. It is in cash. There is no scrip, and there is also no earnout in this transaction. So the timing of this transaction is linked to some -- to what I explained in terms of the contracting pattern of the business. And we did want to get visibility on the OMP calendar year '24 contracting outcomes, and having achieved it, we've negotiated and agreed a fixed price for the business.

One more follow-up for me then. You mentioned in the intro that it will contribute $2 million of earnings and that it will net off in financial year '24, which is 3 months. Are you referring to NPAT? Because I mean EBITDA of $10 million kind of should see us 2.5-plus NPAT. I'd assume if it's NPAT, it's pretty good result in the quarter.

No, it's actually EBITDA. There is a level of seasonality attached to this business, Anthony. particularly the New Zealand business, which is obviously very heavy from a beef and a lamb perspective over the summer and spring months. So this lines up with their normal seasonal patterns at the EBITDA line for that particular quarter. And then obviously, the other number that we were talking about was just the transaction costs, which Quinton spoke about, which we're expecting will be in the range of sort of circa AUD 2 million, which we'll separately call out as significant items so that you guys can understand the impact in this financial year.

You have a follow-up question from Apoorv Sehgal from UBS.

Appreciate it. Just a quick one on the EBITDA skew. Richard, first half EBITDA skew for this business, can you give us any feel for what that percentage might be roughly?

Yes. Look, it's about 55% to 60% first half versus the second half and, as I said, more as a result of just the farming season in New Zealand from particularly sheep and cattle. So that's all.

Great. And while I've got you, can you tell us what the depreciation and amortization expense is within OMP? Just will help us with working out like the EPS accretion.

Yes. So that number is about -- sorry, just over $1 million a year.

And we have an additional follow-up question from James Ferrier from Wilsons.

I'm going to follow up if I may. That depreciation number you quoted, Richard, does that include the lease depreciation costs as well? Or is that purely the plant and equipment depreciation?

That's purely the plant and equipment, James.

Okay. And on an all-in basis given you have some lease depreciation to wash through, I think you mentioned earlier there were leased facilities, what's the all-in D&A expense likely to be?

Can I come back to you on those numbers? I just want to make sure that -- I've got a number in my head, but I want to be completely clear. I know I'm catching up with you guys later today. So I'll give you those numbers then.

Yes. Terrific. And then lastly, sort of, I guess, forward-looking here and noting the timing of this settlement or this announcement in December, and Quinton, you referenced the timeliness of now having visibility on the calendar '24 contractual arrangements. The capacity of the business in its assets to actually grow volumes, is that an expectation in the year ahead? Or is it a sort of a steady state-type business that's already running at full capacity?

Yes. The Laverton plant is operating on 2 shifts. And so there is capacity there to adopt an additional shift. In Timaru in New Zealand, currently, the facilities hasn't got a lot of spare capacity, but we are reviewing some options around opportunities that OMP have on the table, and we'll review those. But there could be some expansion opportunities in the New Zealand operation.

That concludes today's Q&A session. And I would like to turn the call back over to Quinton for closing remarks.

Great. Thank you, Paul. And once again, thanks to everybody for their interest in joining this call today. We see this as highly exciting for Ridley. For those in our business, it's the culmination of quite a long period of pursuing this outcome. And we're very pleased that this will augment our strategy and give us what we need within the ingredient recovery business to take our offering to the next level for customers and to underpin our supplier value proposition. So very pleased with this outcome and look forward to updating the market as we digest this acquisition. If I can just take the opportunity to wish everybody a good Christmas, and thank you for your support to Ridley over the last calendar. And we look forward to seeing you in 2024. Thank you.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.