Seeka Limited (SEK) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to this analyst briefing update and announcement of Seeka's full year audited annual results till the December 31, 2021. This is the first time we've made these announcements this way online. It's the first time we actually invited the investor community and our stakeholders on to this announcement. And so we welcome you to it. We have in this process poured our announcements forward a week. We are a small company, aspiring to be midcap, presenting itself well governed with a clear strategy and a growth pathway worthy of the investment community's support or consideration. And so we decided to bring the results forward to sort of stick ourselves ahead of the crowd. It's come at some significant effort from our finance team and accountants, as we acknowledge. And also we would acknowledge the support our auditors, PwC and tax advisers, BDO Auckland, in helping us get to this moment. One week early may seem not like not much, but it's come at a significant effort from our people. Here today with me are Seeka 360, I have our Chief Financial Officer, Stuart McKinstry; also our Acting Group Financial Controller, Nick Reynolds. Stuart will leave the company by retirement at the end of April. We will celebrate his service to us in our company closer to that time. He's been with us for 16 years. When he joined the company, our revenues was under $30 million. And here we are today about to tell you what's more than $300 million. So we acknowledge him and his service. Our Chairman is on the call, many of our directors are on the call, we have the media on the call and our analysts are here as well, more than 40 people have dialed in this morning for this announcement. So thank you. Thanks you for coming. So the agenda and talking you through it, we're going to talk a little bit about our highlights, talk you through the financials, talk a little bit about our capital management balance sheet. We'll run you through the operating segments performance, and then we will give you the context. In terms of the highlights, and the page catches up. We have focused on achieving excellence. We have delivered excellent performance to our stakeholders in our [ growth ] in spite of the COVID disruptions. We have made a big commitment to get the job done. We are very short of labor across New Zealand and Australia. All of our business has performed ahead of expectation and our orcharding business, a significant post-harvest infrastructure asset and service. Australian business has gone very well. Seekafresh and VLS Labs have all performed ahead of what we might have originally expected them to do. We have generated record profits for the company. And importantly, we have increased our operating earnings. Our revenue at $310 million, well ahead of last year, $56.8 million in EBITDA, profit before tax $23.5 million, well in the range $22 million to $24 million is what we advised the market would be, our profit range before tax level. Earnings to share is $0.43. We had paid or declared $0.26 in dividends in the time. And we also included in the results received or have accounted for $7.6 million of income from our share of the kiwi fruit claim from PSA. In addition to running the company and focusing on service and efficiency across our business, we also took a lot of time and a lot of effort to actually work on the business. 3 major kiwifruit acquisitions were completed; OPAC, Orangewood, NZ Fruits was substantially completed before the end of the year, conditional with balance date and has been subsequently completed in the New Year. The businesses that have been purchased have been integrated. We have delivered the synergies and they have been designed and in the acquisition process, they will be accretive to shareholders. In addition, we also took a 26% shareholding in an agri-tech startup called Fruitometry. It's digitizing the orchard growing process, provides us with accurate crop data, which aids us with labor management, with understanding exactly what we've got coming to our processing units before it arrives, helps us with our supply chain planning. There's a lot of work to go on there, but honestly, it's exciting. It's an exciting business and its exciting technology and we're happy to be there. Company also put in place a new banking syndicate. We moved -- previously we had the Westpac supporting really for a long, long time. They've been a fantastic supporter of the company. They lead a new syndicate to come in place with ASB, BNZ and Rabobank hit lines at $190 million compared to $148 million prior. And also early in the year, we considered our capacity, our post-harvest infrastructure capacity, our ability to handle the crop that is coming ahead of us. And we announced $20 million spend at KKP for a new [indiscernible] and a new upgrade at Transcool, which saw a cool store removed and a new 650,000 tray store being built and under construction at the moment. Any consideration of a major upgrade of infrastructure, which has been muted as Pukenga as the Pukenga [indiscernible] has been deferred until later this year to be considered by our Board at that time. In terms of the financials, as I said a moment ago, revenue $309.6 million, is up 23% on the prior year. Our EBITDA, $56.8 million, is up 22%, it does include $7.6 million from the Crown settlement of the kiwifruit claim, that's still up 32% nonetheless. Of course the previous year also had the one-off gain from the sale of the Australian orchards and leaseback. Our profit before tax at $23.5 million is up 44% on the year before, well in the range. And if you take off the $7.6 million that we've got from our share of the settlement of the PSA claim, our operating units at $16 million is well up from the prior year, which is around $7.5 million. Profit after tax of $14.9 million is down 2% on the prior year. In the prior year, there was a tax credit of $5.6 million with the reintroduction of depreciation in our buildings. And so actually, we're pretty happy. We're pretty satisfied with the results as they have been reported, significant improvement in underlying operational earnings, which you might have expected because the prior year was affected by the [ future ] of COVID and by drought. We are focusing on improving our return on capital employed in the year, closed off 7.4%, well up on the 4.6% year prior and a net tangible asset backing at $5.71, is well up on the $5.20 the before. And I would note to you the current share price of $5.6, is an 11% discount to current asset backing. Of course, accounts audited, everything is stated at fair value and so $5.71 is the figure that's been audited. The trends are good and healthy. You can see here from EBITDA perspective, the results have gone up 25% compound annual growth rate since 2017, $36.8 million in the most recent year. Net profit after tax, 26% compound annual growth rate up over the period, of course, FY '20 was an anomaly with that tax benefit coming in. In terms of EBITDA by division, in terms of orcharding EBITDA, $5.2 million, relatively flat. Costs are increasing and we've got inflationary pressure in our orcharding business. And the returns that we're getting through from the market aren't keeping track with the actual increase that we've got on orchard costs. And so that's something that's just important for us, and we're focused on how we can become more efficient in that orcharding process. On the right-hand side, you'll see the engine room post harvest, $61.6 million in EBITDA. That's nearly doubled in the last 4 years. Of course 2017 these results are pre-IFRS 16. SeekaFresh had a [ fatty ] year in EBITDA, $2.3 million. Actually it belies the fact that our SeekaFresh business is growing and is growing quite quickly. But avocados last year, last half of last year, market was very soft, very, very soft and so our returns and commissions that we're earning in handling downstream services for avocados was a lot lower. And although some of the decline has been offset by increased business. In terms of Australia, $1.6 million in EBITDA. I would note that the year before had a $6.2 million gain on the sale and leaseback of the orchards in Australia. So a true underlying EBITDA of $1.2 million, it has improved, though had tough operating conditions in Australia, lots of lockdowns, lots of disruptions with COVID, lots of isolations going on. Business has performed really, really well. Optimistic of what's going in Australia, and I'll talk to you about that a bit more in a few moments. In terms of our balance sheet, well, $97.1 million increase in capital employed. So that's net working capital plus taxes. So it's just on $429.4 million, $82.8 million increase in property, plant and equipment, which reflects the acquisitions that we've done with OPAC and Orangewood. We increased our investments, $2.6 million with Fruitometry and another $1.7 million that we've co-invested alongside long-term lease developments with Iwi or the [ PGF ] now called the Kanoa front. And we've got a $9.6 million increase in intangibles, which is mostly because of the goodwill from the acquisitions that we've acquired. In terms of the balance sheet further, $100.6 million in net bank debt to $22.8 million increase from the previous year. Fair amount of it is the acquisitions that we've undertaken, the debt, either the cash we've paid or the debt that we've assumed in those acquisitions. We have put in place the new banking syndicate Westpac, ASB, BNZ and Rabo with debt lines of up to $190.4 million, and we appreciate the support of our company in the process that we've went through and thank the Westpac for leading it. $20 upgrade at KKP and Transcool spoken about, made up of a new machine, new cool stores. It's about a $1 million of impairments in our results for writing off what was a year before. We hold still now $1.9 million of orchards that are held for sale in Northland. It's the last of those orchards that we've got to go that were from the previous T&G acquisition that we made up there when we purchased, we've been progressively selling all the orchards, got one to go. And so we're happy about that. So in terms of our EBITDA multiple, if you are interested in that, it's 1.74 to 1, debt to EBITDA where you're taking out the effect of IFRS 16 is 2.24 to 1. So well within the Board's range for the company. Debt management remains front of mind as we grow and as we manage our way forward. Earnings per share, $0.43 in the year completed. There's a $0.13 final dividend to be paid on the 23rd of February. We brought that date forward as a part of the acquisition of NZ fruits. Effectively NZ fruits have been paid the dividend that was owing to [ the income from the year ] in the acquisition price. So the shares that we've issued are ex-div. And so we brought our dividend date forward so that we actually didn't double pay dividend. $5.21 in net tangible asset backing I've spoken about already. This business continues to grow. We've got -- we didn't have all of OpEx results in this financial year because we reported on the 11th of May. We've got NZ Fruits coming this year. We completed it in February. And so the growth outlook -- the short-term growth outlook for the business is good. In terms of going through segment by segment, looking at the orcharding business, revenue at $77.1 million, is up 2%, as I said before, earnings are reasonably flat. EBITDA of $5.2 million reflects no growth, but also increase in costs. Assets of $73.7 million. But you can see that we have now a major growth, $14.4 million, New Zealand's largest kiwifruit grower. And our regional presence has increased greatly with the acquisitions in Northland and in OPAC. So Orangewood and OPAC significantly increased the size of this business. We do have 156 hectares that we are developing of kiwifruit with land owners, with Iwi and with the Kanoa front. And some of that is gold, but predominantly is Haywood and we have a big investment up in [indiscernible] with Iwi and the Kanoa front underway at the moment. That will develop and deliver us increased volumes of fruit to handle in the future and incremental earnings for this part of our business. In terms of post harvest operations. This is the engine room of the business, New Zealand post harvest operations. Revenue at $195.9 million is up 40%. Well, EBITDA at $61.6 million is up 47%. We've got volume growth and we've also got a focus on the business of improving operating margins. This business is in an inflationary period. We've got significant cost pressure on us. We hire human beings as a big part of this business. So it is -- they are really short of supply at the moment and are costing more. Electricity has gone up significantly, 43% on our last renewal. So we are mindful of the inflationary prices we're in. Of course, the charging growers more to handle their fruit. Of course we are, but also we are driving for efficiency as we go forward. $3.5 million trays of fruit was packed post acquisition for OPAC. That's about half year volume. So there will be another $3.5 million in our own box next year. The profits for the first $3.5 million will be in the opening balance sheet because that's what we acquired when we purchased it. We are significantly [ set win ] on the company to integrate these businesses. We are delighted now with significant work undertaken at OPAC and at Orangewood and both of those businesses are now fully integrated. NZ Fruits requires less integration with because it is really a standalone business ahead of a pretty lean management structure to start with. And of course, we're bringing the purchasing power that we have got, handling nearly 50 million trays to the smaller businesses and our shareholders and our growers have gained from it. This part of our business is set again for growth. Of course, we're just on the edge of harvest. It's not too far away. And we are ready to get going. The NZ Fruits acquisition brings us early fruit, a lot early than we'd normally handled here in [indiscernible]. And so we'll get underway 2, 2.5 weeks earlier than we've ever got underway before here in the Bay as we bring fruit over from [indiscernible]. SeekaFresh, this is really where we're handling our fruit that's not sold through [indiscernible]. We import produce to New Zealand. We export produce around the world depending upon what it is. $21.6 million in revenue was flat. This business was knocked around by COVID, the team has done a fantastic job to keep service up and keep delivery to supermarkets and retail in New Zealand. They've also kept export programs going, the avocados, kiwifruit to Australia, and importing produce to New Zealand. So in spite of the lockdowns, team's done a really good job. Avocado market has been very, very weak. Last year, the previous year to this, we never sold a tray of avocados in Australia for less than AUD 38. In this current selling season that we're just closing out now, prices have been between $12 and $19, so less than half of what we got the year before. So it's been a big hit in commissions. But we are still confident with this business. It's growing very well. It's got good leadership, with dedicated team. And so this is just the thing that happens occasionally, seasonally when you're handling in the fresh produce business. Australian business, we're delighted with the progress made there. Revenue of $13.9 million, up 6%. EBITDA $1.6 million compares to $7.4 million in like for like. However, the $7.4 million included $6.2 million gain on sale in Australia when we started those orchards in $28.5 million. And so actually there is improvement in returns here. Our Australian team have innovated. They've innovated around COVID. They've innovated with labor management. They've innovated with what they're doing there. We've still got 63 hectares of kiwifruit to come on stream. We've got new variety pears in Australia, which are just exciting. And we've got new nashi varieties coming through as well, new colored nashis, which we think are just -- when they get to market, we think they will be very good. And as a new innovation, we're growing jujube dates in Australia, they don't require a lot of water. They come to fruit quickly. We're going to learn how process and getting them through the market, but it's actually a very, very exciting innovation. And so had fantastic leadership from the Australian business. Very happy with how it's running and it's going very well. It has been very difficult for New Zealanders and the New Zealand management team to get across Australia because they don't know if they can get home. So looking forward to some relief from Board on when we can do that. So that brings us through to the end of the call. At the moment I'll ask if there are any questions, but I'll start by saying thank you very much for coming on to it. And thanks very much and Seeka guys who has worked hard through the year last year to actually make these results possible. And I acknowledge the efforts of the finance team in getting the audited results out today, which is a record for the company, record results, record timing and I thank the advisers, BDO and our auditors PwC. Stuart, are there any questions. So we've got a 100 people on the call now, and there's no questions. So look, you've got our contact details there. If you'd like to contact us with anything or the media want to contact us, we're available now through around 12:00. I'm so sure we can go find a beer at around 12:00, if that's okay. Otherwise, thanks very much for your attendance. And look, finally, also if you've got any feedback for us about what we could do better, the information, the presentation, what it is more that you might like to see from us, this is the first time we've done it this way. Please don't hesitate to let us know. We do have a question here. We've got one question. Stuart. Pretty come from one of our own people.

Michael, there's a question here which asks, if you could please speak on the main drivers for profitability for post-harvest this year?

Okay. So the main drivers of profitability for post-harvest this year are firstly volume. And so we think the volume numbers look pretty good. There was a wind event in Apotheke that knocked that crop in that region around a little bit. But generally, we think that the outlook for the crop is pretty good and the estimates that we've got, barring any disasters, at the moment is okay. Seeka in the matter around profitability is labor, [indiscernible] the labor and getting them at the right price. And so we think at the moment we've got approval to get 1,200 RSE workers into New Zealand. We're about 650-odd all the way through. Arrivals have been delayed from Tonga and from Saoma, 1 because of COVID and 2 because of an eruption. But they are still arriving. So we're confident to get the lot. Our sign-ups for labor look to be okay. But of course, we don't know that we've got them yet because we haven't actually started picking. At the end of the day, we've yet to set our pricing. But inflation is amongst us. And so the price to the grower is going to have to go up. We still go to work it through. We expect to maintain margins, and we are driving for efficiencies. So that probably covers the post-harvest profitability scenario looking forward. We've got one more.

Michael, the question is, are there further bolt-on acquisitions under consideration?

It's in the company's -- sorry, the question is whether or not there's any acquisitions in the pipeline that we're considering or bolt-on acquisitions. Well, I'd answer that question this way. This company has acquisitions in its DNA. It goes back to the very beginning. It's a growth company, positioned itself as a growth company. We're not growth for growth sake. When we consider an acquisition, it has to be accretive to shareholders or it has to be strategically aligned, so we're actually doing something special to make the company beyond, take it down a pathway of the boards and those will set for us in our strategy. At the moment, our focus is on bringing it all together, what we've got and getting successful harvest underway. But we have an open mind to future growth. We'll have an open mind to complete acquisitions that are consistent with strategy. We have a reputation for doing it. We've been able to do it to opportunities come to us. But at the moment our sole focus is getting this next stage of the harvest underway before we consider doing anything else. We don't want to -- we seem to don't like to do acquisitions during harvest because if we don't do a good job, it's going to hit our earnings around. We have another question.

With the ongoing increase in the New Zealand minimum wage, will Seeka be able to continue passing on costs? And would we be able to remain competitive globally?

Look, that's a fantastic question. So look, I can't stop minimum wages going up. And at the moment, we are really constructive for getting access to labor. We haven't been able to get the RSEs that we truly need. We would normally have 1,800. And so last year we ran the whole season with 480. And so it cost what it costs. We're steward in public money and so we have to prove ourselves as a company worthy of stewarding public money through our returns, through our behaviors, through our governance and through our strategy. And so it cost what it cost, and so it's going to have to cost what it costs. The picture's got to go back in [indiscernible] so that they actually return us more, so they actually -- the cost of inflation is offset or more than offset through the market returns, either through market mix, supply chain innovation, our developments to take cost out so that the growers actually have the money and that we're able to justify their own investment and to pay us for the services that we provide them and to pay us as a grower. And so it's a healthy tension that goes back on disease-free so that they are pushed to perform. We have another question.

Does the company have an active program of seeking to attract a greater institutional shareholder base?

Does the company have? The answer is yes. We actually want and we aspire to be a company that does that, that institutions are prepared to invest in. We employ New Zealanders. We are a large regional employer. We have good governance. We have a strategy. We have a close relationship with Iwi. And so one of the things as we've been growing, we might have stopped a little bit on is our presentation of the company to the institutional investors. That's something that we are focused on and very much the fact that we've done this, this way today, online, as part of the strategy to actually look at our profile with the [ youngsters ] and so as, yes. So what I'd also say to you is that we're not quite midcap. We probably need to be more than $250 million market capitalization to get to midcap, to get onto the radar. And so part of the growth strategy is to get us there and hopefully deliver some of the share price opportunity that seems to be latently there at the moment. Okay. That's us. Thanks very much for your attendance. Thanks very much for considering us as really to come on for half an hour and listen to the results. We very much appreciate it. And hopefully I've given you a good account of the company and you have found this enjoyable. Please feel free to contact us afterwards and its Michael signing off. Thank you.