Ridley Corporation Limited (RIC) Earnings Call Transcript & Summary

Good day, and welcome to the Ridley Corporation Limited Second Quarter Fiscal 2024 Presentation. [Operator Instructions] I would now like to turn the conference over to Quinton Hildebrand, CEO. Please go ahead.

Thank you, Dave, and good morning to you all. Thank you for your attendance at our results presentation today. Richard and I are pleased to present these results to you. It's been a year in which our diversified platform has come to the fore to deliver a solid result despite some challenging market conditions. We'll also update you on the progress we've made in growing the business during the last 12 months. For the presentation, I will be talking to the slides that were uploaded on the ASX website this morning and commencing at Page 2, the FY '24 financial summary. The business recorded an underlying EBITDA of $92.8 million, a year-on-year increase of 4.9%. This included a $3.2 million contribution in the fourth quarter from the O&P acquisition. So, the EBITDA growth from the corresponding business was 1.2%. This is in line with the trading update that we provided in May, where we stated that earnings growth in the bulk stock feeds segment was expected to offset the lower earnings in the packaged and ingredients segment. And I'll be speaking to the performance of each of the segments on the next few pages. Our disciplined capital management focus led to a high operating cash conversion and based on our view on the raw material pricing, at the year-end, we held a lower level of inventory. On the back of this performance, the strength of our balance sheet and the outlook for the business, the Board has determined a dividend of $0.465 per share, which will be fully franked and is also towards the top end of our payout ratio. In addition, the Board has also announced an on-market buyback for up to $20 million to commence on the 12th of September. Moving to Page 3, the segment reporting. The Bulk Stockfeeds segment delivered an EBITDA of $44.4 million, up 23% on the PCP. This was a pleasing performance driven by a 12.7% increase in ruminant volumes as we gained market share in the dairy sector enabled by the capacity from our de-bottlenecking projects. We also enjoyed a few months of supplementary feeding during the dry conditions back in quarter 1. The benefit from the high ruminant volumes was partially offset by the 1.2% decline in monogastric volumes which was mostly the result of the industry breeder -- of the broiler industry breed limitations. However, we did gain through some customer acquisition in the layer sector. All in all, a good performance in the bulk stock feeds segment as our flywheel strategy continues to deliver and achieved a 35% EBITDA ROFE. Moving to the next slide. The packaged and ingredients segment delivered an EBITDA before significant items of $59.7 million, down 9% on PCP and an EBITDA ROFE of 25%. The decline was primarily driven by the lower sales prices for tallow and meals and the costs incurred in the restructure of our underperforming Aquafeed business in the second half, where we've pivoted by reducing our exposure to Finfish whilst creating capacity to grow in packaged pet food. On the positive, our ingredients recovery plants both enjoyed higher raw material supply. The most significant of these being the Sydney plant, where we picked up the remaining supply in the Sydney Basin with the closure of the AJ Bush rendering plant. And our packaged products business had a favorable sales mix, which grew earnings year-on-year. Finally, we had the benefits of a $3.2 million contribution from OMP in quarter 4, which was ahead of what we flagged in December when we announced the purchase of the business. I'll now hand over to Richard, who will take you through the financial results in more detail.

Good morning, everyone, and thank you, Quinton. I'll present the financial results, beginning with the profit and loss summary on Page 6. As Quinton has already walked you through, the operating segments delivered a combined EBITDA for the financial year of $104.1 million, representing an improvement on the previous corresponding period of $2.3 million or 2.3%. The corporate costs decreased by $2 million to $11.3 million as remuneration costs associated with the group's incentive and retention programs were reduced and other key cost areas of salaries and insurance were well managed given the challenges of the inflationary environment. The business incurred individually significant costs of $2.8 million or $2.4 million after tax. These costs related primarily to the transaction costs associated with the acquisition of LNP that was finalized in March. These included the legal and financial costs to support the transaction. Depreciation and amortization for the period was $26.1 million, a $1.3 million increase on the PCP. This related mainly to the additional depreciation of assets acquired through OMP and the new amortization charge associated with the customer relationship component of the OMP intangible. Finance costs increased from $5.1 million to $7.8 million, driven largely by the higher interest rate environment. However, it also included the costs of the additional debt drawn to fund the acquisition in the final quarter. The decrease in the income tax expense of $600,000 was commensurate with the reduction in the underlying profit, which related in part to the increase in financing costs and the deductible component of the acquisition costs included as significant items. The net impact of the above was a reduction in the net profit after tax of $1.9 million or 4.5%. If the impact of the one-off individually significant items of $2.4 million is eliminated, however, the underlying net profit after tax increased to $42.3 million or by 1%. On Page 7 is an overview of the balance sheet, which shows an increase in net assets of $7.7 million from June 23. This increase in the balance sheet includes the assets acquired through the acquisition of RMP, which was fully funded through borrowings. The acquisition of RMP had the following impact on the balance sheet. Inventory increased by $11.6 million, receivables $9.1 million; property, plant and equipment, $43.1 million, which were offset by a small increase in accounts payable and the increase in the interest-bearing debt of $53 million. During the period, plants and equipment, excluding RMP increased by $13.6 million, which included the final benefits of Project Boost and the debottlenecking project at Pakenham and the premiumization upgrades within the ingredient recovery business and the new packing line at Narangba for the package business. As set out on Page 8, the working capital has decreased by $14.9 million versus the same period last year. This is broken into a reduction in the underlying working capital of $12 million, the benefit from an increase in the use of supply payments facility of $19.3 million, which was partially offset by the net increase in working capital associated with the acquisition of OMP of $16.7 million, which was discussed on the previous page. In relation to the movements in the underlying balances, receivables improved by $7.1 million on the back of strong collections. Inventory reduced by $13 million as the business reduced its strategic grains inventory on the back of a more stable commodity pricing environment and increased confidence in supply chains. The decrease in accounts payable was primarily commensurate with the reduction in the value of inventory. Turning now to Page 9 and the group cash flow. Net debt increased by $21.3 million to $50.8 million, which represents a leverage ratio of 0.55x, well below our targeted range of 1 to 2x and our covenant requirements of 3.25x. The increase in net debt relates to the additional funds drawn down to fund the RMP acquisition of $53 million. The underlying net debt decreased by $31.7 million, which is a result of the disciplined working capital and fixed -- disciplined working and fixed capital management and the increased use of the supplier financing facility due to the cost-effective nature of this facility. CapEx during the period was $32.9 million. We continue to prioritize reinvesting in the quality of our asset base with $14.5 million or 44% of our total CapEx relating to maintenance spend. The growth CapEx of $18.4 million included the investment in the debottlenecking projects at Pakenham and Clifton and the new packing line at Narangba. Net finance costs increased by $2.6 million on the back of the rising interest rate environment and the elevated debt levels. Tax payments were well down on the PCP. This was simply a product of timing as the prior year included additional payments in relation to the FY '22 year associated with the gains on the sale of surplus land. The strong cash position and the increase in earnings has supported the continuation of the progressive dividend policy. During the period, $27 million was paid to shareholders by way of fully franked dividends. Turning now to Page 10 of our presentation. Our net debt is only $50.8 million despite the acquisition of OMP being fully funded through debt. After deducting the impact of the acquisition, the underlying debt was only $3 million. The cash position and the associated balance sheet provides the business with the opportunity to support future growth and still be able to announce today a share buyback of up to $20 million to improve returns for shareholders. At the year-end, the gearing ratio was 20.8%. And as I mentioned earlier, leverage ratio is 0.55 both well below our covenant requirements. Turning now to Page 11 and the capital allocation model. This was first implemented in FY '21 and continues to support the prioritization of capital by aligning investment decisions to shareholder returns through our communicated metrics. During the period, the business delivered strongly against the model with the following deliverables, the prioritization of maintenance capital and a significant reduction in working capital. The business remains below the targeted leverage range, providing the flexibility to increase the final dividend to $0.465 per share, an increase of 10% on the PCP, representing 68% of our net -- of underlying net [indiscernible], the higher end of our range as well as announcing the $20 million buyback and more importantly, the delivery of the strategic acquisitions of both OMP and the Carrick feedmill. Bringing this all together, the business has delivered a shareholder return for the last 12 months of 11%. And while below our target level of 15% still represents strong growth on the back of very strong TSR growth in the preceding years. That concludes the financial component of the presentation. I will now hand back to Quinton to run through the growth strategy.

Thanks, Richard, and I'll be moving to Slide 13, just to provide an update on our 3-year growth plan, which is underpinned by the sustainability pathway. I'm pleased to report good progress in FY '24, which will support future earnings going forward. We gave a more comprehensive overview in May, where we provided the traffic lights on the right-hand side of the slide in front of you, and that will show you what our self-assessment is on progress. The majority of the initiatives are well in hand with some still to be delivered in the year ahead. And just one initiative requiring us to pivot and change our plan, and that's the Aquafeed pivot that I've already referred to. Since the May presentation, we've added a green dot to the regional expansion in box stock feeds as I'll outline the Tasmanian acquisition in the coming slides. So, moving to the next slide, which has the bulk stock feeds virtuous cycle strategy. And that's the strategy that you'll all be pretty familiar with. So, I'll just provide a high-level summary on the progress and a progress update. We continue to pursue more direct sourcing of raw materials as this gives us more arbitrage opportunities and is supporting our overall margin enhancement. The Ridley Direct business, which we launched 2 years ago as part of this growth plan, has grown to account for 6% of total volumes, and that's providing us access to new customers that we otherwise would have had contact with. As the final wheel gains momentum, we're gaining economies of scale, and we're sharing those benefits and our expertise with customers, and this value proposition is helping us win new customers. As we grow our volumes, we need new capacity. And on the next 2 slides, I'll just outline the 2 de-bottlenecking projects that we completed in FY '24 and the one acquisition that's on foot at this stage. There are a number of other initiatives and growth plans that we're working on and that we will progress in FY '25. But at this point, there is sufficient certainty to elaborate on most. So, moving to Slide 15. The Pakenham ruminant feed de-bottlenecking project was completed in November, giving us a 12.5% increase in capacity, and this mill is already operating at full capacity. So, since commissioning and the activity of our sales teams, we've been able to fill up that feedmill with supply into Gippsland as well as Tasmania. On the monogastric side, we're in the process of commissioning the Clifton feedmill, which the core part of the project was completed just at the end of the financial year, and we're just bringing all aspects online. And that growth was to accommodate the expansion of one of our poultry customers and gives us 25% increase in capacity at the [indiscernible]. Moving to the next slide. At the end of next week, we plan to take ownership of the Carrick feedmill in the north of Tasmania. This is a feed mill that's been owned by Pure Foods eggs and they have been producing some dairy feed for us over the past few years. The opportunity arose during this year for us to acquire their feedmill and enter into a long-term agreement to supply their needs. And under our ownership, we intend to take this feedmill from a single shift operation on a 245 basis through to a 3-shift operation. We currently have about 20,000 tonnes of dairy feed that we supply to Tasmania out of Pakenham in Eastern Victoria and we'll be transferring that 20,000 tonnes to be supplied out of the Carrick mill. And then as we will have local supplier status, we think that will support us gaining further market share of the dairy sector within Tasmania. So, the combination of growing our volumes in the Tasmanian market and having capacity to continue increasing our market share out of the Pakenham feed mill into the Gippsland market gives us a good return on this investment. So, in summary, it's a $6.5 million purchase, and we think that if we're able to execute on our plans, we should be able to generate a payback within the 5-year period. Moving on to Slide 17. For the ingredient Recovery business unit, we've enjoyed a year in which our platform has expanded quite significantly. The closure of the AJ Bush rendering business in Sydney has meant that we have received additional materials, and that will be supplied to our Maroota facility under long-term contracts. And so, we're now considering what investment opportunities there are to make better use out of those raw materials. We've also had raw material growth into our Laverton ingredient recovery facility, and we've committed there $1.9 million de-bottlenecking project just to give us some runway for that expansion. The OMP integration is well on track, and we've had some early wins and are extending our product offering both domestically and internationally. So, we're building our pet food expertise within the business so that we can be a preferred supplier to the multinational pet food customers. And lastly, we have committed to a new OMP facility in Timaru New Zealand, which has been constructed over the next 12 months. And if you turn to the next slide, Slide 18, when we acquired the OMP business, the facility in Timaru that we acquired was on an operating lease was producing frozen product in tubs out of a blast freezer. And in fact, it's still doing that today. The prior owners of OMP had considered the opportunity to move this facility, and we followed through on this and have also retained the prior owner of the business to oversee the project design for us of this new facility. So, the new facility will be a leasehold facility into which we will install $9 million worth of plate freezing equipment. And the rationale for this project is a supplies the preferred specification of the product to our customers. So that's in a block format that is the same as what OMP produces out of the Laverton facility. The second advantage is that as opposed to the blast freezer, the plate freezing is a lot more energy efficient and therefore, lower cost. And thirdly, the facility will have capacity for growth, and that's a key opportunity for us. So, we're very excited by the opportunity that this presents when it comes online before October 2025. Moving to Slide 19, a summary on our packaged products business units. We continue to develop new branded products for the rural market, an example being that we launched the 10-kilogram Barastoc Golden Yolk package, which is to penetrate the peri-urban sector. In December, we completed the new packing line at the Narangba extrusion facility, and this is being put to good use with its flexible packing options, and we now have the automated smaller pack sizes going through that line. Now that we have done the pivot at Narangba extrusion plant, we now have the capacity to produce pet food volumes under contract and take advantages of future growth opportunities in that area. And for example, we've already launched a cat product for specialty pet retailer. And so, whilst we have pulled back that facility from 24/7 to 24.5, we have started to incrementally add some opportunities at higher margin business. And lastly, our new offering, which is the Propel with NovaqPro, which is a supplement booster for pawn nurseries as that new product has been developed. We're in the process of gaining registration in some of the key pawn-producing countries, and we expect to have access to some of those countries within FY '25. But moving to the next slide, under our sustainability pathway or we've just repeated their, the sustainability pillars. And as we've said before, for Ridley, when it comes to sustainability, we want to action this in an integrated fashion. And by that, I mean, let's make sure that this provides really with a competitive advantage and delivers to the bottom line, whilst also being good for the environment and the community. On Page 21, we've repeated the scorecard that we presented at the May investor conferences. And as you can see, we're on track executing in FY '24 on all of our 2030 commitments. And in fact, we're ahead on 4 of them, where we've progressed well beyond what we expected to do in the first year. Since the May update, the only change we've made is by adding an extra leaf to our reduced CO2 equivalent per tonne. And that is, as we've progressed with our gas and electricity efficiency CapEx projects. So, we'll continue to push ahead with those and have commissioned further projects. So, we're well ahead on that item. And as per the footnote at the bottom, we've had this -- our baseline reviewed by KPMG who've given us limited assurance report on that. So, in the coming weeks, we'll produce our first stand-alone sustainability report, and that should give you good insights as to our approach to bringing a competitive advantage to Ridley through this. This brings us to the outlook. And on Page 23, we've just run through the areas of the business that we expect will drive value in FY '25. In the packaged and Ingredients segment, we would expect the uplift from the full year earnings contribution from OMP, also a contribution from increased raw material supply benefits in the ingredient recovery part of the business following the closure of the competitor in Sydney and also cost savings from the restructure of the extrusion operations. In the Bulk Stockfeeds segment, we expect increased volumes enabled by the Pakenham and Clifton de-bottlenecking projects as well as some market share growth from the acquisition of the Carrick feedmill in Tasmania. And with the improvement in the recovery from the industry breeder limitations within the broiler sector, we would expect broiler feed volumes to tick up. And so, these benefits, we're expecting will more than offset the cost increases that we would expect to incur in the business going forward, including employee, utilities and inflation costs which brings us to the outlook statement. Our business portfolio with its diversified spread of operations and markets provides a platform to deliver consistent growth going forward. And in FY '25 really expects growth in the package and Ingredients segment from continued premiumization in the pet food sector and in the Bulk Stockfeeds segment from volume increases enabled by the de-bottlenecking projects. The business continues to take steps to reduce the adverse impact of inflationary pressures via security events and changes in commodity cycles. And the cash generated from operations and the strong balance sheet will support the $20 million buyback and the payment of progressive dividends while still promoting investment in the business to pursue growth opportunities. So that's the formal part of our presentation. Thanks to those who stayed on for the completion of that, and I'll hand back to the moderator, who can then field your questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from James Ferrier with Wilsons Advisory.

Richard Thanks very much for your time. Could I ask you, first of all, about the bulk segment? I mean the second half of '24, EBITDA was up about 17%, it looks like. And as you've said, there's no growth. In fact, it went backwards a little bit the monogastric part of the business. Was there any sort of benefit from favorable margins? Or do you think that result in the second half is a good platform from which we can think about performance going into FY '25?

James, there is some improved margins, and that's come through our efficiency projects and making sure we're getting rightsizing shift structures for the volumes at hand. So, the boost projects that we did before, some of the de-bottlenecking projects, all of this has driven efficiencies. So yes, I think this is a reasonable -- the second half is a reasonable baseline for us going forward. And as you indicate, we hope to get some improvement in particularly poultry volumes going as things improve on that front.

Yes. Okay. Well, that's an impressive result and very encouraging to see for the OMP business. So, I mean, if you just simply annualize that June quarter comes out at about $13 million of EBITDA versus the last 12 months EBITDA that you presented at the time of the acquisition, which was, I think, 10.5%. Is there any reason why from a seasonal perspective or anything like that, is there any reason why we wouldn't extrapolate that run rate into FY '21?

Yes. Look, we're very happy with how we've started and we have executed quickly on some of the synergies. So -- and I think we had a little bit of time and a bit of a run-up to that. We don't think you can use that run rate directly. I think we do expect a competitive environment as we get to the annual recontracting at the end of this calendar year. So, the number that you used previously are, we acquired the business on $10.5 million EBITDA. We would expect to increase that, but I wouldn't prorate the $3.2 million over 4 quarters.

Okay. Understood. That's helpful. And then maybe just extending on that question, if I look at the outlook comments there that you finished on you're expecting earnings growth in FY '25 from the packaged and ingredients segment. If we exclude OMP, so on that basis, excluding OMP, are you expecting earnings growth from that business? And if so, that would come despite some of the headwinds that you saw in the second half of FY '24?

Yes. Well -- within the ingredient recovery, we're expecting upside from some increased raw material supply. So yes, there would be -- we think there'd be some growth outside of the OMP business and ingredient recovery. And then on top of that, we have done the restructure in the extrusion part of the business as we pulled back out of Aqua and provided the opportunity for growth in pet food and extruded pet foods. So, we would expect some growth in that aspect. And so those would need to offset any commodity cyclicality. We're -- we think meals and oils are at the sort of sustainable level and one would hope they would be upside before there's downside, but we're not planning on any of that in FY '25.

The next question comes from [indiscernible] with UBS.

Quinton, Richard, just a couple of questions from me. The first one is just on the avian flu. Can you talk about where things are with that, has there been an EBITDA impact so far? And is there something we should factor in for first half '25?

Thanks for your question, Suzi. So, there were the outbreak in just west of Melbourne. And there were impacts on us. And then there was a limited outbreak just outside of Sydney. And there wasn't any financial impact on us there. At a sort of a gross level, I would say that the other -- the proportions we had to take, the segregation of transport, the avoidance of these particular areas, all the PPE and the other biosecurity measures we had to take probably cost us maybe up to $1 million. Some of that, we were able to pass through. So, net would be about $0.5 million impact within FY '24. We haven't really called that out just given that it's only $0.5 million. And hopefully, we've seen the back of AI, but you never know, every year, we face something. So yes, that -- the net impact of about $0.5 million.

That's clear. And just the second one on tallow prices. So, it looks like tower prices have been soft for the last 6 months. Just wondering what's driven that? And what's the catalyst for the price to rebound? And should we assume some sort of positive EBITDA contribution in FY '25 from a tallow price rebound?

Okay. Well -- so there's a lot in that question. Tallow responded 3 years ago to the stimulus by the inflation Reduction Act. So as tallow a preferred substrate into the renewable diesel production in the U.S. The -- and that took the tallow price to double and it's come all the way back to where it started, and that's where it is today because there was a delay in the commissioning of some of the renewable diesel production plants. However, tallow is not the only raw material input, and there was a very strong response in soy oil production and canola production and other raw materials. So, what happened has happened over the last sort of 12 months is that all the increased raw material supply came online, but the renewable diesel facilities that are going to receive those raw materials plus tallow were delayed. And so, we saw a correction coming back. We -- we still are friendly to that thematic going forward. We -- when it's -- the pipeline starts pulling and the backlog or the surplus of raw materials dissipates, will take time. I think we're being pretty conservative here. We don't -- we're not planning or expecting anything in FY '25 from a tallow side. I'll just round this off a little. In addition to the tallow price softness, we've also incurred meal price softness because the meal prices do compete with soybean meal and the canola meals and all the other protein meals that are also produced as a response to this biofuel drive. So particularly over the last half and exacerbated also by some restrictions around ability to export poultry meal following AI, we have found that the softness in meal prices. So yes, I think we've digested that over the year, and that's why we're pleased with these results. I mean we've grown. We've still increased the business by 1.2% despite these significant market shifts. We think we're going to grow the business in FY '25, and we're not relying on a lift in tallow or meals.

And the next question comes from Max Andrews with PAC Partners.

Quinton and Richard, can you hear me okay? I had a question on the meal pricing. I was just noting it's off a little bit in the past couple of months. I was just wondering if that kind of has any flow-through on your MDM products for our OMP business, given it is the protein as well.

Yes, that's a good question. So, our MDM products out of the O&P business are going in as fresh into the pet food manufacturer supply chains. And they take both fresh as well as meals. But they're sort of compartmentalized as in where they set up to take frozen blocks of fresh material, they'll take that quantity. And then where they rely on protein in meal form, they'll continue to take that. So, there's not -- there's no short-term transferability, so to speak. If there was a structural change over a longer period of time than you would. But so, we're not experiencing any substitution at this point. As I say, if it was structural, you probably could see it going one way or the other.

And just one more. Do you have any kind of short-term outlook on the supplementary feeding mainly particularly Victoria, given it hasn't been...

Yes. So we haven't had a lot of supplementary feeding since the first quarter of FY '24, and that was mostly in New South Wales and Queensland. It has been dry -- a little dry in patches, particularly in Western Victoria, and that has supported our dairy sales to some degree, but nothing to that substantial.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect...

Thanks very much, everybody.