Scales Corporation Limited (SCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Scales Corporation Limited Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Andy Borland, Managing Director. Please go ahead.

Welcome to the Scales full year results announcement for the year ended 31 December 2023. With me is Steve Kennelly, our CFO; and Geoff Smith, our Chief Operations Officer. Earlier this morning, we lodged our results with the NZX, including a slide pack that we'll base our comments on during this call. We'll run through the slides and then take questions. If you have further questions after the call, we'll be available for the rest of the day. With respect of an agenda, we'll go through the results and performance for 2023, then provide you with our current outlook for 2024. Moving on to a summary of last year's results. After a disruptive year, we're pleased to report a very commendable group performance with earnings at the top end of guidance. Underlying NPAT attributable to shareholders was $19 million and reported NPAT attributable to shareholders was $5.2 million. Our performance was underpinned by strong Global Proteins result and also benefited from our strategy of diversification. Horticulture produced an admirable result despite the effects of Cyclone Gabrielle, and Logistics successfully navigated lower volumes and troubles in key trade routes to deliver a solid result. Turning to Slide 6. As in previous years, we've highlighted a few of our key items on slide. I'll go into these in more detail throughout the presentation. However, I'd just like to recognize the hard work, effort and resilience by each member of the Scales team that's gone into producing these results. I'll now pass over to Steve to run through the financial results for the year.

Thanks, Andy. The table on Slide 8 summarizes our group underlying and reported results. As Andy mentioned earlier, it was a testing year for the group. But our overall performance was positive with underlying NPAT attributable to shareholders of $19 million, which was at the top end of our previously advised guidance range. Reported NPAT attributable to shareholders was -- of $5.2 million was down on last year's $19.4 million. However, this year's results included goodwill impairment and asset write-downs at Mr Apple of almost $11 million, which were primarily due to the impact of Cyclone Gabrielle and related market conditions. Underlying NPAT and EBITDA were also below last year at $38.4 million and $67.5 million, respectively. Revenue was down 9% to $565.4 million on last year's record revenue. Slide 9 summarizes our 5-year performance graphs for underlying NPAT attributable to shareholders, underlying EBITDA and revenue. Slide 10 sets out our performance by division. Andy will elaborate later. But in summary, the expanded Global Proteins division produced a strong underlying EBITDA of $54.5 million. We received our first full year's contribution from Fayman and continue to invest in our 2 newer investments, Meateor Australia and Esro Petfood. Horticulture produced a robust underlying EBITDA of $14.8 million despite the effects of Cyclone Gabrielle. This was part due to higher end market prices, which helped to offset lower volumes. We expect the effects of the cyclone to be largely limited to the 2023 apple season. There was also a solid underlying EBITDA from Logistics of $4.3 million despite being impact by lower produce volumes as well as tensions in trade routes. Slide 11 shows the 5-year underlying EBITDA trends for each of our divisions, noting that both Global Proteins and Logistics delivered record earnings in 2022. Our financial position is summarized on Slide 12. Our movement in net cash mainly relates to dividend payments, including those to minority shareholders, CapEx, including cyclone-related CapEx, and investment into Fayman, Meateor Australia and Esro Petfoods. The movement in working capital primarily reflect realignment of trade and other receivables, trade and other payables, and inventories in line with more historic levels. I'll now hand back to Andy.

Thanks, Steve. Moving on to a more detailed look at Global Proteins. There were relatively small decreases in revenue and earnings compared to the last year's record results, with the division's profit margins remaining in line with last year. As Steve mentioned, this year's results included a full year contribution from our edible proteins investment in Fayman as well as the initial trading losses of Meateor Australia and Esro Petfood. Petfood ingredient volumes also decreased compared to last year, primarily due to customers returning to lower pre-COVID inventory levels and also our transition in Australia. We anticipate that for some proteins, inventory rebalancing will continue into the first half of financial year 2024. As you'll see from the table and graph on the right-hand side, we've incorporated the edible proteins volumes sold by Fayman as a separate data series. It's been a pleasing first full year performance by Fayman, and we believe that as an edible protein exporter and distributor, it complements our petfood ingredients operations well. The next slide illustrates the overall growth between the -- for our petfood ingredients operations in terms of revenue and underlying EBITDA per kilogram. As you can see, there's been a significant upwards trend from 2019 onwards with a 55% increase in revenue per kilogram and a 201% increase in underlying EBITDA per kilogram. The slight downward trend in EBITDA per kilogram this year can in part be attributable to the start-up losses of Meateor Australia and Esro Petfood. There are a number of factors that have driven the stream, which we've summarized on this slide, including an increase in processed product, a change of product mix, and the introduction of blending and new product development at key U.S. facilities. These factors have improved their product mix, increased their yields and produced higher margins. This has been complemented by continued performance in supply chain management, building on 20 years of excellent service for our customers. We thought we'd summarize the considerable strategic progress that has been made by Global Proteins in 2023. It's been a busy year for the division. The Meateor Australia plant was commissioned with its first sales being made in Q4. And the first processing line at Esro Petfood was commissioned in Q4 also with salmon and beef processing underway. Both these investments have been extremely strategically important for the long term, and we'll be investigating other locations and opportunities for site optimization through 2024. In addition, as mentioned in the previous slide, new blending capability has been introduced into Hastings and Dodge City facilities. Moving on to Horticulture. It's fair to say that was a difficult year for Horticulture with a number of challenges presented to the business. As previously mentioned, the Horticulture division generated a very commendable result given the physical, financial and volumetric impacts of Cyclone Gabrielle. Unsurprisingly, volumes were lower, resulting in a decline in revenue and underlying EBITDA. However, margin remains in line with 2022. The focus on the supply of premium varieties to Asia and Middle East markets continued with Dazzle and Posy performing strongly. You have heard the saying, a picture is worth a thousand words. And I think you'll agree that this slide encapsulates that phrase. These are just a couple of the images that capture the condition of our orchards immediately following Cyclone Gabrielle. As you can see from the before photos, the land and trees were devastated, which was upsetting and distressing to everyone involved. However, as we reported earlier in the year, thankfully, all of our team members remained safe. Thanks to the incredibly hard work and tenacity of our Horticulture team, together with support from local and national government, most of the orchards have been remediated. Only about 5% of the land that we've retained is yet to be replanted. In fact, if we didn't have photographic evidence, then when looking at the after photos, it would almost be hard to believe that the cyclone had such a devastating effect. Fortunately, the impact of Cyclone Gabrielle is expected to be largely limited to the 2023 season, with volumes and performance in 2024 anticipated to return to more normal levels. Slide 19 summarizes Horticulture's main KPIs. Mr Apple experienced a strong finish of the 2023 season, which was in part due to limited supply of fruit in key markets. This in turn contributed to higher end market pricing and an overall increase in the weighted average pricing for both premium and traditional varieties. Sales were supported by targeted marketing activities across the Asia and Middle East regions, including in-store sampling, branded displays, increased digital and social media, and season launch events. The increasing end market prices for our premium varieties such as Dazzle and Posy have reinforced our strategy to focus on these varieties. Development of these varieties was accelerated during 2023 following the cyclone, and we anticipate maintaining prices as plantings mature. Moving on to Logistics. The division produced a steady result despite the impact of reduced volumes of produce and the need to navigate difficulties in trade -- key trade routes. We expect some of these difficulties to remain in place during 2024. However, the division performed strongly, producing earnings that were in line with the results of 2019 and 2021. As we've mentioned previously, the strategic benefit that this division brings to the group can't solely be measured in KPIs, and it continues to be an extremely important part of Scales. Moving on to capital management. ROCE was affected by lower current year earnings, and it should also be noted that both Global Proteins and Logistics generated record results in 2022, which is, in turn, producing significantly higher ROCE percentages last year. Overall group ROCE was 10.8%, which is below our target of 12.5%. Horticulture accounts for the majority of CapEx, most of which was related to the remediation of the orchards post Cyclone Gabrielle. The main CapEx related to planting and regrafting, but this also included a tractor replacement and repairs to one [ of those ] RSE accommodation and irrigation. Shelby has invested collection and processing plant at a supply facility, further securing supply. Future investment will continue to be prioritized towards Global Proteins. Moving on to sustainability. We've continued on our sustainability journey this year, and we look forward to releasing our climate-related disclosure report in April. In the meantime, this slide summarizes some of the initiatives undertaken in 2023. People continue to be on top of mind, being the life blood of our business. In addition to support given to our employees post cyclone, Mr Apple has continued to make good progress on its people strategy with initiatives such as leadership programs and new digital systems. Our environmental programs included water and decarbonization initiatives at Meateor New Zealand and Meateor Australia and also water efficiency initiatives at Shelby and Mr Apple. We look forward to providing some additional information and an annual report in more detail in our CRD report. Finally, I'd like to touch on our outlook for the financial year 2024. Overall, we had a positive outlook for 2024. We anticipate that Global Proteins will continue to perform strongly despite some further rebalancing of inventories amongst its petfood manufacturing customers, as mentioned earlier. Whilst Meateor Australia and Esro Petfood made great progress in 2023, both these operators have some headway to make before they complete their start-up phases. However, once completed, we believe there will be a number of exciting opportunities to be realized, and we're looking closely -- working closely with our partners on these. The Horticulture season has commenced with the 2024 harvest in progress at Mr Apple. Current volumes indications are in line with those previously noted at 3.4 million TCEs. There's strong initial demand from the Asia and Middle East markets, and their first shipment are [ supposedly ] departing for China earlier this month. Taking above into account, we're pleased to reconfirm our previously advised guidance of underlying net profit after tax attributable to shareholders of between $30 million and -- to $35 million. Lastly, dividend payments are expected to be made in 2 installments this year. The first installment of $0.0425 per share was paid in January this year. And we'll review and advise on the second installment in early May 2024. Total dividend payments are expected to be between 50% and 75% of underlying NPAT, net profit after tax, attributable to shareholders. That ends our formal presentation today. However, please note that Appendix A of the slide pack provides additional financial information and reconciles underlying earnings to reported earnings for each of our divisions as well as the group. We're now happy to take questions.

[Operator Instructions] Your first question comes from Matt Montgomerie with Forsyth Barr.

Andy and Steve, I might just try to get into the de-stocking with customers in Global Proteins. I suppose you're reasonably clear on that. It's lingering at the moment in certain proteins. Are you able just to comment more on, I guess, how you see this phasing through the course of the year? What proteins it's concentrated in? And I guess, what percentage of the business you think still has to go in terms of just rebalancing inventories, et cetera?

Yes. Look, it's -- we're just anticipating in these first few months of FY '24 and really do think of the reverting to normal patterns by -- from the half year on. So it's just that, yes, there was the COVID effect. People picked up a lot more pets, which -- we're hearing the stats of people returning pets to shelters and those sort of things. So we feel those trends are starting to absolutely return to more normal. And particularly, the product is probably not specific to any one product. It's more about the overall trend in that. But the positive side is that our main customers and their premium products are strongly -- are still growing strongly, so we're not sort of seeing it as a major issue.

To add to that is -- I think in the start of this year, at least anyway, we've seen -- definitely seeing customers pulling the contract, which is a positive sign. So I think that we can be cautiously optimistic.

Perfect. I might stick with proteins, just on the margin front. It looks like a reasonable pullback in the half, which is probably expected, to more normalized levels. Are you able to comment on, I guess, the drag of the Meateor plant and Esro? And if you see sort of the second half run rate as indicative of the base heading into '24?

We sort of see the last quarter of this year as those 2 businesses having their more -- capacity would be what we'd hope them to be and really starting to contribute. So it's probably just the Melbourne plant is actually finished and operating, but it's just building up its volumes and getting those cost efficiencies in place. And in Europe, as the Esro plant is ongoing under construction, and it's going to -- we're seeing that opening 1 October this year -- not opening, but getting more operationally efficient. So yes, the full year impact for those 2 businesses would be in next year's results.

And then I might just go on the Horticulture side. Just on your volume assumptions for the year, the 3.4 million looks sort of 20% below guidance that you said a few years ago when you set out the medium-term targets. Can you just sort of talk through the basis of the volume assumptions? And if we, I guess, over the medium term, should still be thinking about that sort of low to mid 4 million number from a volume perspective on the Hort business?

Yes. Look, I think it's a -- yes, the older varieties are really battling in Europe. So we are pulling more of them out, the Braeburns and Pink Ladies. So we are in that process of redeveloping and continuing to redevelop into the Dazzle -- particularly Dazzle and Posy. So I sort of see the volume spreads not getting to the level that you -- at the prior targets. But more of the premium apples should show the results being -- overcompensating the loss in volume.

The next question comes from Christian Bell with Jarden.

So just if I could start on Global Proteins, following on from previous questions. It sounds like you're cautiously optimistic, I think, as you described it, or comfortable around underlying demand for your product. But are you able to just -- like are you sort of balancing the de-stocking that you're expecting to continue to see through '24 with, I guess, more plants coming online in the last quarter of this year? Are you expecting to return to growth in '24? Or is that more likely to be flat to a decline?

Yes, definitely, more likely to come through in 2025, the growth. And it's really because of that rebalancing being finished by half by June, say, and then this -- Australia gets up and running again. Obviously, it's replacing earnings we used to have at -- we had in Australia presently. So we get back into full operational rhythm in Australia, and Esro Petfood also kicks in. And that full year impact of those 2 businesses would be shown in 2025.

So I mean, are you able to sort of provide like a clear picture on what -- how to think about the growth through from here? So as you've sort of described, we've got Meateor Australia and Esro coming on. So like what type of volumes do you have capacity for? And would -- do you expect them to be due in 2025, all going well?

Well, we obviously got down to the specific tonnage as a number, I suppose. We -- if you add Meateor Australia and Esro Petfood with the growth projects we're working on in the USA, we would see reasonable growth coming from 2025 on. We've got a number of initiatives in the space as well that are going to be volume accretive in '25. And so pretty positive for post -- in addition to -- growth on 2022 would be a target for 2025.

Growth on 2022 in terms of volume or like earnings growth?

All of the above.

Okay. And so like with the initiatives you're talking about, like is that more volumes going to new customers or existing customers? Are you sort of expanding geographically? Like how should we think about how you actually achieve that growth?

Yes. I would sort of say it being volume out of new initiatives. But also -- and not so many -- we're probably -- we're growing capacity to match the capacity that our customers are already putting in place. Our biggest customers are continuing to build new plants, and we're trying -- our sort of goal is to help them build those plants with the raw material they need.

So basically, you're growing -- you're basically growing with your existing customers, which you've got reasonable kind of visibility over? Is that what you're saying?

Yes. Yes.

But then also additionally, obviously, new customer base in Europe as well.

And we'd also see fresh becoming a more -- a species that's going to contribute more volume.

Okay. And so how should we think about the mix of volume? Because obviously, quite a large contribution from edibles this year, which looks like a lower-value product compared to petfood. So how should we think about the future volume mix? Is that kind of -- is most of your growth coming from edibles or more petfood?

Petfood. It will be 2025 growth and just more species and more -- and trying to match our customer -- the demands from our customers, matching that supply. There is an element of -- we have an ability, I guess, to do dial up and down volume in particularly in America.

Awesome. This might be a question for Steve. I was just a little bit confused on the graph that you provided in your presentation on Slide 15, showing your sort of trajectory of revenue per kilo. It doesn't actually -- like it doesn't -- can you just explain it? Because it doesn't make sense. Because if you divide your revenue by your total volumes this year, there's actually a decline in revenue per kilo. But on your chart, it's showing that it continues to go up. So like I'm just -- I couldn't reconcile how you actually get your numbers.

Yes. So it's Geoff here. That graph only represents the petfood volume, so it doesn't include the edible part of our volume.

But if you take your $2.56 revenue per kilo and multiply it by petfood volumes, that's still more revenue than what you actually got for the year.

Yes. So we've had -- to make it comparative to petfood, we had to add back LP's revenues.

That Meateor LP, which we don't -- obviously, from an accounting point of view, we only include a share of Meateor LP's net profit before tax. So our reported revenue number doesn't include their revenue. But for the purposes of this script, to illustrate things accurately, we've included Meateor LP's revenue.

And that's mainly because their volume is included, so it was only appropriate to include their revenue.

Okay. So this is a bit of sort of underlying sort of factor of...

Yes. It would be misleading if we hadn't done that.

Okay. Okay. Cool. And sorry, just a few more questions on Horticulture. Can you just like -- so you're expecting a recovery normalization so more normal -- to more normalization of trading conditions in 2024. Can you just elaborate on your assumptions on pricing in comparison to 2023? Because obviously, you kind of do participate in the sort of -- or took advantage of lower supply. So what are your assumptions for pricing in 2023, basically?

2024? So we're assuming that end market pricing is back a bit on '23.

Okay. When you say back a bit, like so how -- is that negative 5%, 10%?

Yes. It will be single figures. Yes.

Okay, cool. And then I assume that you're sort of assuming a further cost normalization this year from better access to labor and freight costs coming down and things like that. Is that kind of baked in there?

Freight is probably the best one. It's coming down, but we still got the hangover of the prior government and [ foreseen ] wage rate increases across the group -- across the market. So that's been factored into our forecasting, but it's still disappointing.

Okay. Do you guys -- do you have an EBIT margin target? Yes, do you have an EBIT margin that you're targeting anymore? Because you used to provide that but you don't anymore.

Yes. No. We're just -- I guess, we're just looking at the overall forecast position.

We're going to do some more work on that during the year, sort of post the 2023 year impact.

Okay. But you say, look, it's probably pretty unlikely that we're getting anywhere close to 12.5% anytime soon?

Yes, we'd have to do some work on that before we can really make any sort of informed comment.

Okay. Cool. And sorry, just one last question. For apples, your distribution into China, are you exploring any new sort of way or any sort of new forms of distribution such as like online to offline or anything like that?

Well, our apples go into those markets but through people we sell to, so they're across all of the various avenues to the consumer. It's just that we're not doing it directly ourselves, but we're definitely selling to entities that are getting access to those markets. If talking about if -- does Mr Apple get sold over there, then absolutely. I mean we've got -- I was over there last year, and we went to a market that was auctioning off [ Lord Iver ] apples. And they're getting picked -- bought at the auction, online auction, and distributed directly to that customer. But one of our customers in China was facilitating that.

I guess, the recent sort of economic challenges in China. Your -- what kind of pressure are you seeing on your -- on the products that you're selling? Are you sort of -- are you feeling it? Or...

If you're talking about our new Posy and Dazzle, we couldn't be more pleased, the demand those 2 varieties are showing. I mean they're sort of a premium product that seems to look through the challenges the economy is having.

[Operator Instructions] Your next question comes from Joshua Dale with Craigs Investment Partners.

Just starting with Global Proteins, the outlook for Shelby specifically. Your guidance, particularly with regard to the [ tax ] helping in minority interest, would imply slightly down for the year ahead. I mean, is it solely attributable to some impact from inventory rebalancing in FY '24? Or is there something else going on?

No. It's definitely the inventory rebalancing, really. It's just we're following our customers' trends. But again, later in the year, we are anticipating that turning around and picking up.

Okay. Great. And on Meateor New Zealand specifically, they had quite a soft year this year in FY '23. I appreciate there's a rebalancing of lamb inventory going on and also a lamb supply glut in Aussie that affected that. How do you expect that to play out in FY '24?

Just if you like normalize, we would sort of say it's definitely being a transition year to get back to those equilibriums where we go -- the business performs better. So definitely, we see that those -- the volume and pricing stay normalized to the more traditional trends.

Okay. I mean do you expect Meateor New Zealand to post a stronger result over the coming 12 months versus what you've just delivered?

In '25, we would -- '24, I think, as Andy said, we -- it's still going to be subject to rebalancing, given the majority of its sales are lamb.

Right. And just the last one for me on Horticulture. You mentioned at one point after the cyclone that some trees have been flooded. They appear to be okay, but there was possibly a lingering risk of the tree dying at a later date. Is that risk behind you now, do you think?

We think, yes, pretty optimistic, I guess, that that's behind us. I mean, the trees look fantastic. They've got a good crop on them. So yes, it's just been amazing how resilient they have been, actually, given the treatment they got.

There are no further questions at this time. I'll now hand back to Mr. Borland for any closing remarks.

Well, thanks very much for attending the call. Obviously, we're available to take separate calls during the day. Yes, we thank you for your ongoing support and interest.

That does conclude our conference for today. Thank you for participating. You may now disconnect.