Scales Corporation Limited (SCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Scales Corporation Full 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, everyone. I'd like to welcome you to the Scales full year results announcement for the year ended 31 December 2024. With me is Steve Kennelly, Scales CFO; and Geoff Smith, our Chief Operations Officer. Earlier this morning, we lodged our results with 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've got further questions after the call, we'll be available for the rest of the day. In respect of an agenda, we'll go through the results and performance for 2024, then provide you with our current outlook for 2025. Moving on to Slide 5, a summary of 2024's result. I'm delighted to report a record group performance with underlying EBITDA of $91.7 million, an underlying NPAT of $53.6 million, underlying NPAT attributable to shareholders towards the top end of guidance at $34.3 million and reported NPAT attributable to shareholders was almost up 500% compared to last year at $30.7 million. These results were produced whilst we delivered on our growth strategy. In respect of each of the divisions, Global Proteins delivered a strong result. Horticulture performance is returning to more normal levels, and there was a record result from logistics. Turning to Slide 6. As usual, we've highlighted a few of our key numbers, most of which I'll touch on further during the presentation. As ever, each of these numbers are a tribute to the skill and effort of our Scales team. They continued to deliver outstanding results in a period of change for the group. I'll now pass over to Steve to run through the financial results for the year.

Thanks, Andy. Slide 8 summarizes our group financial performance on both an underlying and reported basis. As Andy mentioned, the group achieved record underlying EBITDA and record underlying NPAT. Underlying NPAT attributable to shareholders of $34.3 million was towards the top end of our previously advised guidance range. Reported NPAT attributable to shareholders of $30.7 million was up significantly on last year's profit of $5.2 million. Lastly, group revenue was up 3% on last year to almost $585 million. The graphs on Slide 9 summarize our 5-year performance for underlying NPAT attributable to shareholders, underlying EBITDA and revenue. Slide 10 gives a divisional overview, and we're delighted to report underlying EBITDA growth across all our operating divisions. Global Proteins generated a strong underlying EBITDA of $55.4 million, noting that Meateor Australia and Esro Petfood are continuing on their start-up journeys. Horticulture performance is returning to more normal levels with underlying EBITDA of $37.7 million. More consistent fruit quality and recovering global markets resulted in increased volumes and higher average prices. And Logistics produced a record underlying EBITDA of $6.9 million, which was supported by higher volumes of both ocean and airfreight. Slide 11 summarizes our divisional performance. In addition to underlying EBITDA growth, there was also margin growth in each of the divisions. Slide 12 illustrates the 5-year underlying EBITDA trends by division, noting the increased earnings from horticulture compared to the previous 2 years and the record earnings from Logistics. Slide 13 gives a summary of our financial position, which continues to be strong. Net cash is in line with last year despite the cash outlay required for M&A transactions that were executed throughout the year. Other significant expenditure included dividend payments, including those to minority shareholders and CapEx. I'll now hand back to Andy.

Thanks, Steve. I'd like to start with recapping the key points of the transactions that Steve mentioned. In Horticulture, we acquired around 240 hectares of orchards from the Bostock Group and sold around 186 hectares to Craigmore Sustainables, a net increase of approximately 54 hectares. However, we're leasing back Blyth orchard from Craigmore until the end of 2027, which is around 98 hectares. There's a high concentration of Dazzle planting on the acquired orchard, which complemented our strategy of focusing on higher-margin premium apples. We're also delighted to acquire 50% of Profruit from Bostock to now make it a wholly owned subsidiary of Scales. In Global Proteins, we increased our investment in Meateor Australia from 33% to 50%, bringing our total investment in the business to AUD 11.5 million. All these transactions are strategically important and pleasingly, the overall net impact on our 2024 result was negligible. Moving on to the Global Proteins division. Whilst there was a slight decrease in revenue for the division, there was an increase in underlying EBITDA compared to last year. There was also increases in both pet food ingredient volumes and edible proteins volumes of 11% and 28%, respectively. I'd just like to mention that these volumes numbers include volumes from all divisional businesses, including our joint ventures. In terms of each of the businesses within the division, Shelby's result was strong again, in line with last year, a good result whilst it sets up for its next growth phase. Meateor New Zealand and Fayman produced strong volume growth. And as Steve mentioned, Meateor Australia and Esro Petfood continue to progress through their respective start-up phases. There was strong volume growth in both businesses with Meateor Australia operating profitably during 2024 and Esro expected to move into profitability by the end of 2025. Revenue and margin per kilogram of volumes sold within our pet food ingredients businesses have decreased slightly compared to last year, primarily due to increased volumes from Meateor Australia and Esro Petfood whilst they are still in start-up mode. Slide 20 gives an update on the 9 key strategic projects that underpin the growth target in Global Proteins. A number of them, as shown on the left-hand side of the slide, are nearing completion, such as the tolls processing plant in the U.S.A. that was commissioned last year and Meateor Australia, which moved into profitability last year. Other projects have a longer time frame associated with them, such as our second in-plant collection and cooling system in the United States and a second European location. We'll continue to update you with their progress. Moving on to Horticulture. Improved apple volumes, quality and average prices helped Horticulture's return to a more normal performance level. Its integrated business model and increased focus on premium varieties and overall variety mix also proved beneficial. Profruit has delivered an exceptional performance assisted by a high level of processed fruit and export volumes. There was an 11% increase in Mr Apple's own grown export volumes compared to last year. This was aided by the team undertaking numerous promotions and customer support in key markets, some of which I'll touch on later. The proportion of Premium apples volumes also increased compared to last year from 64% to 72%, in line with our strategy. There was growth across all premium varieties, but pleasingly, there was significant growth in Dazzle, Posy and New Zealand Queen. As I've mentioned, Profruit delivered an excellent result, selling a record volume of Juice Concentrate, which is up 35% compared to last year. These graphs on Slide 23 illustrate the 10-year summary of Premium Apple sales and of Mr Apple's own growing export volumes. As you'll note, the proportion of Premium apple volumes to total apple volumes shows a pleasing upward trend in line with our strategy. The graph on Slide 24 depicts our actual apple volumes from 2020 to 2024 and our forecast volumes from 2025 to 2027. It's estimated that premium varieties will account for around 75% of export volumes by 2027 as a result of acquiring the Bostock orchards as well as the ongoing orchard redevelopment program at Mr Apple. Slide 25 summarizes Horticulture's average apple prices and also the foreign exchange rates experienced by the business. There was overall price growth for both traditional and premium varieties helped by positive market sentiment, improved fruit quality, favorable exchange rate and also marketing and promotion activity. As mentioned, Mr Apple's marketing and branding team were very active during the year. They are focused on the China and other key Asian markets and the sample of activities are shown on this slide. Excitingly, Zoe Hobbs, the New Zealand track and field sprinter and Oceania record holder for the 60 and 100 meters is now a brand ambassador for Dazzle. We expect this to be a positive partnership for both Zoe and Mr. Apple. On to logistics and their record result. Both ocean freight and airfreight volumes were up on last year at 16% and 71%, respectively, which generated a 61% increase in underlying EBITDA. The new Auckland warehouse and chiller facility has been beneficial, processing a strong level of airfreight volumes and the division continues to prove its strategic value to both internal and external customers. Moving on to capital management. Overall group ROCE was 14.5% this year, above our group target of 12.5%. Global Proteins and Logistics both continue to produce excellent returns with Horticulture continuing to improve. Horticulture accounted for the majority of CapEx, which included several margin improvement projects such as the ongoing Orchard redevelopment program. As previously mentioned, Global Proteins also invested in a new toll processing plant as well as a new in-plant collection and cooling system in the United States. Now on to sustainability. We've continued to progress our sustainability goals this year, and we'll be pleasing -- we'll be releasing our second climate-related disclosure report in April, which will provide the detail behind our journey. In the meantime, this slide summarizes some of the initiatives undertaken in 2024 with people being a main focus. We made 2 significant appointments to the group being a Chief Risk Officer and a Global Safety Officer. Health and safety continues to be top of mind. We also progressed leadership development at Mr Apple and employed RSE workers from Fiji's Kia Island. This work helped them with rebuilding efforts back at their home after a devastating cyclone. Environmental programs were progressed, including a new wastewater plant at Shelby's Amarillo facility in the U.S.A. Mr. Apple also reestablished the regenerative trial at Kinross Orchard, which had been lost during Cyclone Gabrielle. Lastly, our outlook for 2025. We're pleased to confirm our previously advised guidance range of underlying NPAT attributable to shareholders of between $35 million to $40 million. In respect of Global Proteins, we expect that strong financial performance will continue. Meateor Australia and Esro Petfood will continue to progress through their start-up phases, and we expect Esro to join Meateor Australia into profitability by the end of the year. Within Horticulture, picking and packing has commenced for the 2025 season with initial crop indications being positive. A crop of around 3.4 million TCEs is forecast, and we expect a higher proportion of premium apples within that crop. Positive movements in pricing are also forecast. Profruit is also currently experiencing positive demand. We expect logistics to continue to perform well despite the ongoing geopolitical uncertainty that's expected to affect trade routes and market stability. In respect of dividend payments are expected to be made in 2 installments. The first installment of $0.0725 per share was paid in January this year, and we'll review and advise on the second installment in early May 2025. We expect total dividends will be split approximately evenly between interim and final and to be between 50% and 75% of underlying net profit after tax attributable to shareholders. As previously signaled, due to the increasingly offshore nature of the group's earnings, it's likely that dividends after 2024 will be partially rather than fully imputed. 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 Guy Hooper from Jarden.

Congratulations on a good result. On the horticulture side, I mean, you've previously talked to about a 15% margin as being like a sustainable level and a medium-term target. I mean how -- is that still the case? How should we think about Horticulture margins going forward, particularly given the change in the underlying orchards?

Certainly think we can head back in that direction, yes. It's really as we push all of the margin enhancement initiatives into play. I mean, clearly, the higher volume of premium apples is a big part of that. So as we get more Dazzle and Posy continue with the NZ Queen, we're expecting to see that margin return to -- yes. I'm not going to commit. I don't think it's quite 15% right at the moment, our target, but it's in that direction. And we certainly expect the overall ROCE to be into double figures sooner rather than later.

Okay. So still more room for improvement over the next couple of years?

Yes. Yes, definitely.

Great. And just one on the food ingredients side. I mean you've got a number of projects coming online over the next couple of years or come online in Q4. Can you talk a little bit about the incremental volume or incremental EBITDA you're expecting to see from these as we kind of bridge it towards that $70 million target that you have?

Yes. I mean it's hard to sort of comment on specifics in terms of the individual businesses. But I think as we see that volume come on, we probably will see margin depression just because we're probably moving into more pork. But yes, obviously, as that volume come on, we're expecting a reasonable uplift in EBITDA.

It's more about, I think, in this stage, Guy, getting these -- the factories up and running, all the implementation that goes on there with audits with customers and efficiency gain as the thing hits production levels, and that's when we'll see the margin uplift come when the factories are full and running double shifts, et cetera.

Great. And just one last one for me on the balance sheet. I mean $12 million of cash, you've talked about M&A multiple times in the past, salmon being a focus. I mean maybe just can you answer that a little bit now that the earnings base has sort of broadened out and appears to be a bit more stable, can you give us an indication of what sort of size you would look -- acquisition might look to do on balance sheet?

Without capital -- new capital?

Yes.

Yes. Well, we could probably handle $100 million transaction, but we certainly do not have a desire to be heavily geared. So whether or not -- yes, but certainly can handle $100 million transaction at the moment.

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

Andy, Steve, Geoff, first question on Meateor International, do you have the timing on the winding down of that this year?

Have been happening, hasn't it?

Yes. It's pretty much done, Josh. There'd be very, very small contribution in FY '25. And after that, we think it will probably be none.

Got it. Okay. And given your revenue from Global Proteins can only be from Shelby and Meateor International, did the wind down of Meateor International explain your 11% revenue drop in that division?

Yes, probably that contributed to it for sure, yes.

More of an accounting question. In the notes to the accounts, is there any reason why Fayman and Meateor Australia are combined whereas the other JVs...

No, not really. We'll endeavor to split those out in future reporting periods. It's just -- I think we have -- up until now, we've combined them, and we continue that practice, but I think it probably provides more information if we do split them out.

Okay. Yes, that will be helpful. Last question. I think you had some thoughts potentially at some point about maybe entering the poultry market. Just interested in how that thinking is going.

Well, we're in fish now, and we are working hard to investigate ways of getting into poultry. So yes, that's certainly a 2025 initiative.

Look forward to -- any further thoughts on that going forward. Well done on another solid year.

Thank you.

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

Just on Profruit, you've commented on you delivered very strong volume growth and can see in the notes to the accounts, you've disclosed the revenue in that business. Are you able to provide, I guess, a sense of underlying EBITDA and NPAT from Profruit in FY '24?

Yes. In '24, it's sort of probably -- it got to just early $5 million. And looking forward, it's going to be more like -- sorry, I'm being corrected here. It is $6 million in '24 for an EBITDA. But I mean you have to realize that the volumes did go up because of a bit of that extra volume come from the orchards being impacted by the cyclone. So the volumes are probably going to normalize a bit more this year, and that EBITDA performance will be more in the 4 range rather than 4 to 5 rather than 6.

Okay. That's useful. Then secondly, just on your guidance for FY '25, do you mind just commenting on what you've assumed in terms of the uplift from the Bostock transaction? I think we were talking about a $6 million to $8 million net pre-IFRS number, and that's to be phased. What of that is coming through in FY '25?

Yes. So that $6 million to $8 million, I think, is a long-term number. So it wouldn't be that number in FY '25. Obviously, there's an immediate positive impact from Profruit given that it's fully consolidated and then will be a positive impact from the orchards. We -- there will be an impact in the conversion from organic to conventional, and we've allowed for that. So yes, it's -- I don't have the exact number, but it certainly won't be at that top end.

Yes. Like might it be half of that number in '25 or like just trying to get a sense of underlying.

Yes. I'd say I think that would be fair, Matt.

And then just on corporate costs, Steve, there's quite a big step-up in the second half. Are you able to give us either guidance for FY '25? Or should we be annualizing that second half? Just trying to get a sense of what drove that and if it's reoccurring.

Pleasingly, I think for management, Matt, it's -- that uplift is STI bonuses because we've achieved our targets. So we don't assume that that's going to happen when we budget and put guidance into the market. So that wouldn't be included in FY '25 guidance, and that's why that's a big uplift in the second half.

Okay. So FY '25 might -- in your guidance might be back to, say, $7 million at an EBITDA level or something?

Yes.

Perfect. And then just on Proteins. So are you essentially saying in your guidance that you're expecting largely flat Global Proteins EBITDA in FY '25 versus FY '24?

Close to a little bit of increase. But again, it is this transition year again, we sort of -- as we push these new projects into full production.

Yes. Okay. And then just maybe a follow-up. When you set the $70 million FY '27 target back in June last year, is what you're saying now for FY '25 in line with your expectations? Like if you had have guided to FY '25 in June, is this roughly the number that would have come out?

Yes. I think, Matt, we're probably behind on the Esro start-up. As you would have noted from previous communications, we expected that to be operational last year. But obviously, we pivoted and decided to redevelop in the Netherlands. So look, that put us back a little bit. But I think if you look at the other projects that we've got online, they're largely on track with where we expected. So yes, we're tracking in the right direction.

Esro is more of a delay than [indiscernible]. Esro has just been delayed because we shifted the whole processing factory was going to be in Belgium and now it's in the Netherlands right beside the Edible plant of our partners.

Yes. And presumably, that's not overly material anyway.

No. no.

Sorry, just going to hold with one more. You've called out within your logistics performance, there was sort of a one-off impact around some airfreight volumes. Is that material enough to call out and then ultimately the flow-on impact into '25?

It was a material number. We haven't assumed a significant -- a similar impact in '25, no.

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

Well, thanks very much for joining the call, and we appreciate it, and we look forward to updating you again soon. Thanks very much.

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