Scales Corporation Limited (SCL) Earnings Call Transcript & Summary

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

Good morning, all. I'd like to welcome you to the Scales half year results announcement for the 6 months ended 30th of June 2024. With me is our CFO, Steve Kennelly; and Chief Operations Officer, Geoff Smith. Earlier this morning, we lodged our results with the NZX, which included a presentation pack. We'll base our comments of this morning on that presentation. We'll run through the slides and then take questions. An agenda is provided on Slide 2. I'll start with an overview of the first half of this year on Slide 4. I'm pleased to announce the group's earnings were in line with expectations and are recovering strongly from last year's Cyclone-affected results. Horticulture is returning towards pre-Cyclone performance levels and Global Proteins delivered a result that was consistent with the first half of 2023. Underlying net profit after tax attributable to shareholders was up 97% on last year at $28.5 million, and reported NPAT was up 167% at $38.1 million. It was a busy 6 months from a strategic point of view with a number of transactions for both Horticulture and Global Proteins. Logistics also expanded its operations with the commissioning of the new Auckland warehouse and chiller facility. We'll comment on the results for each of the divisions later in the presentations. Slide 5 summarizes the 3 transactions undertaken by Horticulture and Global Proteins in the last few months. The purchased orchards from Bostock Group and the conditional sale of Mr Apple to Te Papa and Blyth Orchards to Craigmore sustainables will result in a net increase in planted orchard area of approximately 54 hectares. Importantly, these transactions increased the volume of Premium varieties and in particular our Dazzle plantings. We were delighted to acquire the remaining 50% shareholding in Profruit as part of the Bostock transaction, and I'm pleased to welcome them as a fully owned subsidiary of Scales Group. These transactions are expected to have a combined net positive impact on Horticulture's underlying EBITDA pre-IFRS 16 of around $6 million to $8 million over the medium term. We were also pleased to increase our investment on Meateor Australia in June from 33% to 50% to now be 50-50 partner in the business with the Fayman family. The total cost of our 50% stake was AUD 11.5 million. This increases our foothold in the Australian market, which is strategically important to the Global Proteins division. I'll now pass over to Steve to discuss the financial results for the first 6 months of the year.

Thanks, Andy. Slide 7 summarizes our financial performance for the group for the first half of 2024. As Andy previously mentioned, underlying NPAT attributable to shareholders was $28.5 million, up 97% on last year; underlying NPAT was $38.4 million, up 55%; and underlying EBITDA was $60.5 million, up 46%. It's pleasing to see group earnings recovering strongly. Moving on to the summary of our divisional performance. Global Proteins delivered underlying EBITDA of $29.6 million, consistent with the first half of 2023. This result was generated whilst the division executed its strategic initiatives, including continue to work through the startup of both Meateor Australia and Esro Petfood. Horticulture produced a very positive underlying EBITDA of $30 million, up 162% compared to the same period last year. This signals that the division has made significant progress following the effects of Cyclone Gabrielle. Logistics also produced an excellent result of $3.8 million, up 44% on last year. Our financial position is summarized on Slide 9. Net debt was $81.9 million as at 30 June 2024, compared to $29.8 million as at 30 June 2023. This reflected the cost of the Bostock and Meateor Australia transactions as well as the investment into Esro. We're forecasting a return to a net cash position at the end of the year, and that assumes the settlement of the orchard sales to Craigmore sustainables. I'll hand you back to Andy who will give you a further update of the divisions.

Thanks, Steve. As Steve mentioned, Global Proteins produced a result consistent with the first half of both 2022 and 2023. Shelby delivered volumes that were up on the prior 6 months, and there was strong volume growth in edible proteins at Fayman. Whilst Meateor Australia and Esro Petfood are both in a start-up phase, they are delivering increased production volumes. Additionally, Meateor Australia has been improving yields, whilst Esro Petfood continues to focus on establishing its customer relationships. Revenue and margin per kilogram of volumes sold within the [ petfood ] ingredients businesses are remaining stable. A number of business units have actually generated improved margins in the first half of 2024 compared to 2023. However, this has been offset by start-up costs within Esro Petfood. Slide 13 summarizes 9 of the key strategic initiatives that we have that are being developed within Global Proteins, which we believe will help the division deliver on its growth targets. These initiatives are focused on executing on strategic pillars, including increase in capacity, expanding geographic locations, investing in product development and securing raw material supply. We're excited by these opportunities and look forward to updating you on the progress. Moving on to the Horticulture division, which delivered a strong result with an underlying EBITDA that was up 162% on the first half of 2023, it should be noted that this result includes 100% of Profruit earnings for the full 6-month period. The results from the 2024 growing season are a credit to the effort and determination exhibited by the Horticulture teams following Cyclone Gabrielle. It can also be in part attributed to our strategy of increasing our investment in Premium apple varieties. Our [indiscernible] for volumes for Mr Apple for 2024 are forecast to be around 3 million TCEs which is a return to 2022 levels and a projected increase of 11% on 2023. Whilst this is down on expectations due to lower-than-forecast apple pick and smaller fruit size, end market pricing is meeting expectations. Mr Apple is also forecasting a very pleasing 25% increase in Premium volumes compared to last year. We continue to experience growth in our Dazzle and Posy volumes with forecast 45% increase in volumes compared to last year. These varieties are expected to account for almost 20% of all Premium volumes in 2024, and we expect further increase in 2025 as a result of the acquisition of the Bostock orchards. Asia and Middle East markets continue to be our most significant market area, expecting to account for around 80% of total fruits sold. Unfortunately, shipping disruptions have been a challenge for many overseas markets, and these disruptions are expected to continue next year. However, our current export packout is pleasingly back to more normal levels at around 78%. And lastly, Logistics. Logistics benefited from our increased air and seafreight volumes generating export underlying EBITDA of $3.8 million for the period, up 44% on last year. This was, in part, due to strong external customer airfreight volumes being processed through the new Auckland warehouse and chiller facility together with a return to more normal seafreight volumes. The division continues to navigate ongoing supply chain difficulties, with these difficulties looking likely to remain in place over the short to medium term. Sustainability continues to be a major focus for the group with progress being made on a number of initiatives. These included undertaking a Scope 3 screening exercise to assess the emissions footprint from our value chain, an assessment of our emissions inventory reporting process, identification of decarbonization options within our group businesses, and updating our climate scenarios. This will contribute towards establishing our emissions base year in 2024, and following this, in setting our emissions target in 2025. Moving to the final agenda item for the full year outlook for 2024, I'm pleased to advise that directors have reconfirmed Scales FY '24 guidance of underlying net profit after tax attributable to shareholders of between $30 million and $35 million. In providing this guidance, the directors note that the combined impact of the Bostock and Craigmore transactions has been taken into account. This impact for FY '24 is forecast to be a marginal loss in net profit after tax attributable to shareholders. Also of note is that Mr Apple currently has around 14% of the export crop yet to be sold. And lastly, the Global Proteins result for the year is forecast to be above original expectations, but the second half result appears unlikely to match the first half. Note some of this includes the impact of getting projects through the start-up phase. We continue to assess opportunities to grow Scales, particularly within Global Proteins, and we're excited for the future of the group. That concludes today's formal presentations. Please note that Appendix 1 of the presentation, which provides additional financial information, reconciles underlying earnings to reported earnings for the group in each of the divisions. We're now happy to take questions.

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

Hi, Andy, Steve, Geoff. Well done on a solid result. Just if I start on outlook in the proteins division. You're obviously talking to the second half not repeating the first half. I'd just be keen to understand, I guess, the drivers of that outside of what you just mentioned in terms of projects ramping up. Have you seen demand pull forward? I'm just keen to piece that together.

I think it's just -- we've still got a couple of those projects finishing off. The transfer from one toll processor to another that's underway or that's going to happen in the last quarter. And what we found in Melbourne meant starting up is the -- getting the plant commissioned and licensed, if you like, and pass the audits from both the customers and the regulators just did take a bit longer than we thought. We're just backed within a bit of conservatism there. Yes, so it's been really linked to those points. Demand's fine. I mean it's really more about us transitioning to these new facilities and beating demand and getting the volumes through them that are ahead in marathon [ state ] situation. The new plant we're heading to will do more volume than the one we're leaving.

And just on the inventory rebalancing, is it fair to say that, that has all washed through in the first half. Is that what is there?

Yes. It's -- yes, it's very much at a normal cycle that we'd expect.

And maybe sticking to proteins one more. Fayman delivered what looks to be a very impressive first half. What's driving that? Is it share gains? How sustainable do you think that Fayman strength is?

Look, it's across the board. I mean some of the -- we've been moving products to the traditional markets for that business around Asia. But it's also been strong growth. And you've probably seen in the media, there's strong demand for importing beef into America, and that's been a growth opportunity for the Fayman business.

Good. One more, if I flip to Hort. Obviously, a pretty decent recovery there in terms of margins. I guess if we look out 2, 3 years, the company used to talk to doing sort of 40-odd million or more in pre-IFRS EBITDA. There's been a fair bit of change within that division over the last 6 months, obviously, with the transactions. I suppose my question is now that you've got foresight around the positioning of that business, are you able to give us a sense of where you think -- an EBITDA range of where you think Horticulture earnings may end up, noting that you've sort of talked to that EBITDA uplift from the Bostock transaction?

Yes. Look, we're certainly expecting the business to continue to grow and improve those earnings as the higher paying varieties volumes kick in. And we would be hoping that business comes under definitely the high 30s. I mean the year we did 40, I think we've included some insurance and other one-offs. So the high 30s is our aspiration, including to see the execution of that transition, I guess, to more premium varieties [ getting filled in ].

And sorry, one more. I'm hogging here. But the phasing of the Bostock transaction in terms of EBITDA contribution, the $6 million to $8 million, is that FY '25, '26, '27? How should we be thinking about that?

Yes. Well, certainly, the net position after the buy of Bostock and the sale of Craigmore, yes. So that's sort of a net growth.

Yes. But will that be all in FY '25 or will that be longer?

It's probably '26, '27, Matt, because still we've got to convert from organic to conventional. So there may be some impact there next year. So it will be a bit more gradual. I think the phasing of those plantings as well coming into maturity, Matt. So we'll be more [indiscernible].

Your next question comes from Christian Bell with Jarden.

Well done on a really strong recovery this year, particularly in Horticulture. Just to start on Horticulture, just curious to understand what were the sort of drivers which led to the apple volumes being so much lower than the initial forecast of 3.4 million. And then what's your current view on long-term volumes? I think that was around 3.8 million on previous expectation.

Yes. Look, I think it was a combination, Christian, of the overhang, if you like. The apples were sitting in [indiscernible]. The ones that were damaged by the Cyclone, the ones that we've recovered, they were sitting in [indiscernible] for 6 weeks or more, and that probably had an impact on them as the recovery. So in hindsight, that probably has contributed to either lower volume or smaller count size. And it was quite a difficult cold spring early in last year's growing season. And that obviously had an impact as well. And [ air ] reduction is very similar to averaging the whole of the whole space. So it's not a -- it's certainly something we haven't seen we'd typically bounce back from pretty quickly. And so to your last point, yes, we still see the 3.8 million is a long-term position.

Last one. And then, just you mentioned before, when Matt was on to a similar type of question, just where EBITDA could potentially -- you're hoping to sort of get to as a target sort of range. The high 30s that you mentioned, was that on a pre or post-IFRS basis?

Pre. It'd be pre-IFRS. And that would assume -- one of the important movements here would be that shipping rates would pull back from -- will continue to pull back from currently I would say [indiscernible].

So if I -- yes, so just taking that into account, I think the post-IFRS impact has been about $10 million. So if we were to take that, that sort of implies [indiscernible] for us EBITDA of close to 50, high 40s.

Yes.

And then just of the $6 million to $8 million EBITDA pre-IFRS that you provided for the Bostock transaction, how much of that was owing to Profruit?

Say it again, Christian?

The $6 million to $8 million of EBITDA from the Bostock transaction. How much of that was -- what's the contribution from Profruit?

It's probably around about -- the incremental increase is probably sort of [ 2.5 to 3 ], something like that.

Okay, cool. And can you give the overall guidance range on a post-IFRS basis, if that's possible?

Sorry, our range is post-IFRS, 30 to 35 NPAT attributable.

Sorry, the Bostock guidance of $6 million to $8 million that was provided on a pre-IFRS [indiscernible] basis.

We haven't got the calculations for the IFRS effect. It's not going to be huge. Yes, we haven't got the exact numbers yet.

Okay. No worries. But obviously, the result in this half has already included 100% contribution from Profruit. So we sort of already captured a little bit of that guidance, I guess, in this result would be fair to say?

We have. But bear in mind, I think and we pointed this out that the net impact of the Bostock transaction, including Profruit and the sale of the 2 orchards is a net NPAT attributable loss, very marginal. And that importantly includes increased interest expense due to the acquisition.

Okay. Cool. And then just on proteins, while you're kind of expecting a slightly lower second half result, would you say -- it sounds like on the demand side of things, it's still quite strong. Where would you place -- would demand be ahead or meeting expectations at this stage?

I'd say meeting, Christian. Yes, it's -- I mean, we're just sort of reverting to -- it's obviously taken a while to wash through the COVID impact on inventories and that sort of thing. But the industry is positive. Now, as you'd expect we're a growing industry, and we're anticipating that positivity.

And then sorry, just what was the -- what was -- because you sort of pointed out that this first half included some start-up costs for Esro. Firstly, are you able to sort of quantify what that -- how big those start up costs were? And then what actually drove -- despite that, your margins still improved. So what was the key sort of driver of the margin improvement?

I think the margin -- I'll guess out that one first. The margin improvement was product mix, probably just a tick up in beef. Yes. But yes, the Esro impact, Geoff, can you talk to that?

Yes, so it's probably about -- had about $1 million impact on the first half result.

No worries. And sorry, one last question. Just in terms of your guidance, you didn't provide it on an EBITDA basis. Previously, it was -- I think your guidance was $81 million to $91 million, and NPAT attributable was $30 million to $35 million. So can we assume that the $81 million to $91 million still stands given you haven't changed on the NPAT front?

Yes, we're still within that range.

[Operator Instructions] Your next question comes from David Oxley with the ACC. Your next question comes from Matt Montgomerie with Forsyth Barr.

Sorry, guys, got one more. Just one of your listed competitors, I suppose, in the proteins space last week was talking to a closure of a competitor site in the petfood ingredient business opening up some supply opportunities in their outlook. Have you -- can you -- is this something that you're experiencing or you're seeing as a potential tailwind versus Australia and New Zealand?

The closure is in Australia and New Zealand.

Well, you know one of the two. I'm just wondering if they're direct competitors with you?

We haven't seen any closures in Australia and New Zealand. I mean, to be fair, there is one in America, but we're transitioning to the new plant within the same company, so not a major concern.

I'm not talking about a Scales-specific closure but a competitor of yours which would potentially open up opportunities for Scales is my question, but presumably you haven't been at?

Given that it's listed, we should have a look at that ourselves and see if there's an opportunity for us.

Your next question comes from Dave Oxley with the ACC.

Sorry about that, got cut last time. I just have one quick question, if I may. On Horticulture, can you explain how you managed to -- or the accounting rules has allowed you to consolidate 100% of that business for the 6 months given that I thought it only completed in May sort of well through the 6-month period?

David, we sort of contracted it with a view to -- we thought it would settle a lot earlier, but it didn't. But we'd already contracted it so that we would calculate or accrue all of the earnings from the first of January.

All right. Okay. So it was just part of the contractual terms on the takeover?

Yes.

Okay. That makes sense. Secondly, you mentioned on the pricing front for Horticulture that pricing was beating expectations. Can you just give a bit more color what that means in terms of what your expectations were? I know last year, prices were pretty robust, I think, thanks to sort of supply chain challenges out of New Zealand, et cetera. Are we expecting underlying prices up, down or flat versus last year?

I think from a pricing perspective, we're expecting it to be flat on last year. We haven't seen a major uptick in prices. Volume has recovered in the first 6 months compared to the prior half. So that's what helped the first half as well.

Okay. That's helpful. And on Global Proteins, can you just give a little bit more color around -- it looks like Shelby's had a fairly strong half given that minority interest charge to the P&L and sort of figuring out what that means for Shelby. A, is that fair? And B, is Meateor International contributing currently? And do we expect it to contribute positively for the full year? And obviously, you've made a statement that Matt picked up on about Fayman being strong in this half. Would we expect a positive net contribution to the underlying EBITDA from the associates in FY '24? And did that happen in 1H '24?

I think in general, yes, Shelby had a result in line with expectations. We're pleased with it. The [ NFI ] business is still transitioning post the -- losing access to [ call up ] volumes. So that's still happening but likely to continue to decline.

Yes. For this year, it's contributing positively. It's transitioning away. So it will be leased in future years, but partially offsetting that is that Meateor Australia would be contributing more.

Right. Okay. So it looks like this '23 information is positive. That's going to be a -- or this is likely to be a modest positive from -- in light of the [indiscernible] cluster start-up businesses within the associate line. Is that a reasonable perspective?

Yes, it is.

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

Well, thank you all for participating in today's call where we look forward to providing with further updates later in the year. Thank you very much.

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