Seeka Limited (SEK) Earnings Call Transcript & Summary

Good morning to you all. My warmest welcome to everyone who's on the call this morning. My name is Michael Franks. I'm the CEO here at Seeka. And this webinar is coinciding with the release of our 6 months interim accounts that did for 30 of June 2022. I have with me also in the room, Nicola Neilson, she's a Chief Financial Officer. She's replaced Stuart McKinstry in April of this year, coming back from maternity leave. And so we welcome you to your first reporting -- formal reporting to shareholders and stakeholders in the company. Alongside here, we have Nick Reynolds who is the Group Financial Controller. He's replaced Nicola in the role, and so we're [indiscernible] to have him on the team. He was with the company before. We also have Jim Smith, General Manager of Growers and Marketing, an experienced person within the company sitting alongside us in case we have any questions that are operational beyond our ability to answer. In the agenda today, we're going to talk about the highlights for the company in the first 6 months, the balance sheet. Our operating segments performance, our forward focus and your ability to contact us. This announcement -- this -- sorry, webinar this morning is coinciding right alongside our announcement. So I think in the future, we might do it a day or 2 later to give the analysts and readers a chance to digest and think about the accounts. But we would welcome and invite anyone on the call or any of our stakeholders to contact myself or Nicola directly subsequent to this call if they wish to. And so with that, we'll get on with the business. It's been a challenging 6 months for the company. We've had a lot of issues to contend with, a lot of headwinds. I don't need to tell you. They include COVID. A COVID actually still is impacting honestly at the moment as well as general [indiscernible] and our repack teams across the business. With COVID-19, we've run the full protocols within the business to keep people safe. At its peak impact on us, we had around 580 people out either isolating or sick with COVID-19, a reasonable number of people. Alongside that, we had a general labor shortage. We struggled to get our shared operations full. We've had to redeploy people and play them out a position to get the job done. We talked to people [ our ] support roles, and deployed them to post harvest. Orchard managers and the company also weakened post harvest and we've scrambled to innovate to get the job done and keep service up, particularly through the season. We would thank the government officials who helped us get access to more RSEs, I would greatly appreciate it. We've also had issues around inflation, or headwinds with inflation, I think it's best way to put it. Labor inflation has certainly gone up a lot. We've had inflation around transport costs and fuel. And so we had a significant number of headwinds to -- in front of us as a business. Weather hasn't helped. We had unseasonably late start to the harvest over in Gisborne. Normally, it would be very early in its maturity. This year, it was late and then it rained just to remind you. So that created a a maturity bubble for us to deal with. And we had a wind in Opotiki prior to Christmas last year, and that actually impacted orchards in that region particularly hard. And we lost an estimated 2 million trades through that weather event. And so if it's not one thing, it's another. Now later in the season, we are coping and continuing with shipping disruption as we work alongside Zespri to take the fruit that we've got in the store and ship it out to the market. We did have to continue with a late machine commissioning at KKP, that's a highly automated machine that we've got installed it now. It was supposed to be commissioned on the April 6. It was commissioned in the last week of harvest in early June. It was late because some key components for that machine were held up in the port of Singapore, and we couldn't get it down a commission until late. So we had to scramble, move capacity around, bring on extra shifts, run a lot harder to actually get the crop put away. Generally, with [indiscernible], we've got lower yields right across the catchment with a lower volume, not just because of the Opotiki wind but right across the business. And so we have had a volume impact in the business. Late in the year, crop quality has actually been quite poor. You would have seen that in the commentaries from Zespri and from myself, in the last few weeks that we are continuing with quality issues across the inventory at the moment. And so we're working pretty hard to get those out. The company is still operating at full capacity. We are repacking fruit right across the business. We are struggling to keep up with demand to load that fruit out. People are working very, very hard. I would, at this point, thank all of the people who work in the company, our employees. I would thank our contracting community who really did work and help us particularly well and it was appreciated through the season. And I thank our grower community who has tolerated what has been quite a challenging period for the company and the kiwifruit industry generally. To the high-level numbers, revenue at $247.3 million. Our EBITDA earnings before interest tax, depreciation and amortization at $49.4 million. Our profit before tax at $30.1 million, $0.32 EPS. I'll update those in a minute. We have now got a 5-bank syndicate in place where we used to have one before. We have available debt lines of $211 million, subject to us maintaining covenants. The lead bank is the Westpac. We've also got Westpac Australia, Rabo, ASP and the BNZ. We thank them for their support of the business. Company has got total assets now just under $600 million at $594.4 million. And we have net tangible asset backing per share at $6.7. We are continuing to invest in automation. We are making sure as we focus on core business, we're hunkered down at the moment. Focused on operations and maintaining and achieving efficiencies and good returns to the growers who support us, but we also have an eye on next year. So we are looking at capacity. We have got KKP in play now for next year. We have got Transcool, the coolstore up and available, it was through the season. We are upgrading Oakside machine #3 to put an automated [indiscernible] on the front of that machine. And we have got an investment going into NZ Fruits in Gisborne which is around palletizing and getting product away from machine. That last investment was agreed to when we purchased that business earlier in the year. Q3 volumes and yields, in particular, are down on the corresponding previous period. Hayward yields are down 21.5% as per hectare yields are down 21.5% and SunGold down 10.5%. It's true that the Opotiki storm is a contributing factor, but actually the yields are down across all regions. The company and the Board is determined that it's appropriate to pay no dividend at this time. We're really going to reserve that decision to later in the year. We want to see a bit more water to go under the bridge. We want to get a bit more certainty about the full year's earnings. And so appropriately, we have reserved the decision for the moment. We'll come back and address that later on in the year. And that's prudent given where the industry and where Seeka is at. We are continuing to look at capacity. We are continuing to look forward to make sure that we can make profitable investments that we will have the capacity to handle the fruit for our growers going forward. Understanding that it takes about 18 months to 2 years now, to get capacity expansion underway. So we happen to look at a lot further than we used to have. In the old days, we would decide something 6 months before and have it ready to be operated the day before. So it's a lot longer lead times now to get capacity and plants built. Looking at all options on that, the Board is reviewing it in October. Sustainability report has been released. The company is quite proud of the progress that we have made in understanding the sustainability of [indiscernible] for Seeka. We have verified 3 years of carbon footprint information using Toitu. So that's been independently verified. We understand where and what parts of our business and operations impact on the environment. And we have got targets set for -- to reduce our carbon footprint going forward. Also, the company is making strides to understand exactly what is the impact of climate change on our business. And as a publicly listed company, you will see us reporting more about that as we move forward. In terms of the numbers themselves, well, revenue at $247.3 million, up 10% on the previous corresponding period. EBITDA is before interest, tax, depreciation and amortization, up 5%. Our profit after tax, $30.1 million, is down 2%. Profit after tax at $21.5 million, is up 4% on pcp. And I would remind all people on the call that we are a seasonal business. The first half of the year is our core period for generating income and work. And so the second 6 months of the year, we are actually still [ loading ] our fruit, but it's largely cost management. I'd also say to you, as we talk about this, we have got a big yield -- sorry, volume variance in the company. We expected volumes to be far higher than what they are, and they are unseasonably down on where we might have reasonably expected. We have -- we'll call it unseasonably. It really reflects things that we don't understand. That's a [ term ] that we use. We know that we did have an impact with the storm in Opotiki and we have got growers over the -- whose yields have been really decimated. But volumes are well down where we might have reasonably expected them to be, particularly after the acquisitions we made last year. In terms of the financial performance, the [ growth ] probably look a little bit better than they are. EBITDA, 18% compound annual growth rate. Our expectation and hope expectation probably a bit of word is that next year, the volumes return to normal. And so therefore, these numbers will stay heading in the right direction again. NPAT, you can see the 23% compound annual growth rate over the last 5 years. Total assets just under $600 million at $594 million. So asset backing at $6.5 per share. In terms of segment performance, in terms of the orchards segment performance was down at $5.1 million EBITDA, really reflecting an increase in costs, reflecting a reduction in yield and an expected reduction in orchard gate returns from the market. There is a post harvest, $52.9 million compared to $49.1 million last year, really still going up, but we would have expected those volumes to pick up a lot more than that. And so therefore, that segment to perform stronger than it has. SeekaFresh retail services has suffered some market disruption. We had lockdowns in COVID and a whole range of things happening in that market. And so we're now rebuilding that business yet again. We're resetting it to a more profitable pathway. We have picked up some key accounts. We are a supplier, for example, to Costco, when it opens. And so that business is in a state of being reset. In terms of Australia, EBITDA at $2.6 million is similar to last year, $2.7 million. This really reflects what happens 2 years ago in Australia when we were tying down the crop that we've harvested this year. We're short of labor. It's a COVID issue. And so we tied down less canopy and less crop we damage it as we tied it down. So the volumes were affected with kiwifruit. This year, it's much better. They actually had a much better run with labor. They've actually got a lot better canopy tied down. And in fact, a 20% increase in buds tied down at this point in time. And so the outlook there for Australia, we're reasonably confident. Looking at the balance sheet. Capital employed at 30th of June 2022, $76.3 million increase in capital employed, a $54 million increase in property, plant and equipment reflects really Orangewood and NZ Fruits acquisitions. It also reflects the automation and capacity expansion that we've done at KKP with the canopy and building extension and a new 8-lane MAF Roda highly automated machine and the order was late. And we've got the coolstore capacity increase at Transcool, 650,000 [ trade ] store right across the road here from 360. $4.7 million investments. These are really reflected in the company's continuing investment in long-term lease developments. And to a large extent, alongside EV and alongside the provincial growth are now known as [indiscernible]. And so the balance sheet continues to strengthen the terms of assets. Bank did $161.3 million, that's up $33.4 million, includes $16.5 million of debt in cash for the Orangewood and NZ Fruits investments and a $20 million upgrade at KKP and Transcool. Also, 2 weeks after we actually reported, we received money back from Seeka Growers Limited. Seeka growers limited is our grower fund. We had in the early stage of season advanced money to growers, as they submit fruit into store. We do that from our own banking lines. So 2 weeks after we reported, we actually banked $38 million back into the account to bring the total debt down. We have got the 5-bank funding syndicate in place with a $211 million total debt line. And we have some assets that are held for sale from orchard assets. Some of these are the residual assets that we purchased when we purchased the T&G assets in Northland. The last of those and also 1 orchard for sale over an Opotiki that we acquired when we purchased OPAC. We have sold an orchard since that time, just a small sale of [ $500,000 ]. So that has been recorded now and got unconditional. So this happened outside the 6. And -- but we are progressing our way to sell those, not critical, but these are assets that don't fit. Our strategy is for the core driver of what we're trying to do in the business. And so we've largely acquired those as part of other acquisitions, and we're selling them. In terms of the EBITDA multiple, EBITDA to debt purely calculated [ 3.1721 ]. Our EBITDA multiple pre-IFRS 16 for leases, so calculating it the way that people who are like me old would calculate it, 3.71x, 3.71x. All of our banking covenants have been maintained through the 6-month reporting cycle. EPS $0.52 a share. We have issued more shares. Last year, at the same time, I think we had 39.4 million shares on issue. At the end of 6, we had $42 million. So there is some dilution effect. And there's no dividend payable at this time as we determined that we're going to see a bit more water flow under the bridge so we can see exactly how the year plays out and get a better understanding. We need to understand exactly what happens with our market returns to the last of fruit coming in. And so for EPS, $0.52, down from $0.65 at the same time last year. $6.07, is our net tangible assets per share, that's up 12%. Well, in terms of our full year operational guidance, we have maintained the range that we've previously advised to the market and stakeholders and shareholders. We're expecting our full year profit before tax would be between $9 million and $11 million. Now last year, also, we had a $7.6 million gain with the settlement of the kiwifruit claim. That's obviously not happening this year. So -- but it is a reduction and profit before tax. The acquisitions that we made all came with an overhead structure that we have tightened up and we've actually shortened up. So it's actually we've got control of our overheads. Really, what we're talking about here is the issue around volume and more recently, quality. So look, if I take some time now to go through the segment performance. In terms of our orchard operations. So in this part of our business and this panel of our business, we grow kiwifruit, avocados and kiwiberry in New Zealand. Largely for New Zealand orchard owners, we have a few orchard owners which is, but largely their land bank with our orchards for sale. $45.7 million in revenue, is down 15% on the previous corresponding period. And our EBITDA of $5.1 million is down 10%. We've got an increase in crop volumes because we've purchased new businesses. But actually, we've got lower yield per hectare than what we had anticipated. Our yields for Hayward are down 31% in this part of our business. Our SunGold yields are down 7.3%. So you've got this thing where people can say, "Well, how can you be saying you've got lower yields, but a higher volume or the higher volume has got more orchards." We've got a lower yield because each of the orchards we've got in the book is produced less crop than what we expected. We have had excellent kiwiberry performance. It's only a very small part of our business, but the orchard gate return and that part of our business has been maintained at more than $200,000 per hectare for the last 5 years. So that's pretty good. And we've got a reasonable amount of orchards that are in development that will come in to our production progressively over the next 2 or 3 years with some coming in next year. We've got 46 hectares of SunGold, 91 hectares of Hayward, a lot of that up in [indiscernible] in the Te Kaha region. Got 5 hectares of Red in Northland actually on an orchard, which is for sale and in diligence at the moment. Now post harvest operations, post-harvest revenue at $178.5 million, is up 23% in the previous corresponding period. EBITDA of $52.9 million is up 8%. Gisborne maturity was late. In each of the last 15 years, around 80% of the Gisborne fruit has matured in the first 2 weeks of harvest. This year was 15%, and then it rained. And so that gave us a hit because we had compressed capacity issues as the crop came on and we needed to pack it all over the place. We had the delay, as I said before, in the commission of the KKP machine. Look, we're delighted with that machine. It's absolutely -- as we're delighted with it, all who have seen it, it's a very, very, very good machine, problem was it was late. So we had to pivot and scramble and work out and get our contingency plans so that we could actually handle the crop as close to as optimal maturity as we could. At one stage, we had over 1,100 people short in this company through COVID-19. So we hire around 4,500 seasonal workers. A lot of them on the orchards. Most of the people we were short were in post harvest because people were -- people didn't mind working outside but working in a packhouse was difficult to recruitment to. And so we had a pinch point there. We actually went and had a conversation with the officials in Wellington. And thankfully, they gave us some relief. And so by giving us access to more RSEs, which was just desperately needed at that moment, and we have [indiscernible] them for, and we're appreciative of that. In terms of SeekaFresh retail services at $8.1 million in revenue, is down on previous year by 26%, $0.5 million EBITDA. We're continuing to innovate. It's a business where you have to innovate. We're getting new customers. We're increasing local market volumes. We're actually concentrating on the banana business at the moment. And we're getting actually quite good support. So we're expecting that to improve its profit performance over the last quarter of the year, given the innovations that were put in place, but still a disappointing result at the 6 -- in spite of the hard work going on in that business. In terms of our Australian operation, $14.4 million in revenue, up 4%. We've had an ongoing labor and market disruption in COVID-19. Well, I would say to you that the business environment in Australia has been actually quite good. A lot of support mechanisms over there to assist businesses. We've been able to bring in RSEs, which has been very positive. We have had inflation in and around labor inflation, you've been -- you've had to pay a minimum rate, not a piece rate. So that's -- we've been working through those issues, but the market has been good. The product has been well accepted. And the price that we're beginning for Hayward has been -- we're very happy with it. And so our issue is to actually get the yields up because we were yield impacted. You can see Q3 tonnes there at 1,765 tonnes, is down 17% on the 2,115 tonnes the year prior. So $1.17 million EBIT after the lease costs. So after allowing for the cost of leasing, our kiwifruit orchards over there, and we still made $1.17 million EBIT. And we're optimistic about going forward. And we've got some exciting new varieties, not necessarily kiwifruit that we're investing in that part of the world to innovate and bring new products through the market. So talking about our forward focus. Well, we have traded profitably through a challenging 6 months and continue to deliver service to our customers and growers and the people who consume our fruit who want to buy healthy, well-presented, high-quality fruit in the market, who want to share that passion with us. We've had to continue with COVID, weather, shipping, labor, harvest dynamics, volume and quality. And so just -- if it's not one thing, it's another, it seemed over the first 6 months. We are, of course, again, grateful for our staff who have worked extremely hard and at times unsustainably hard and who continue to work long hard hours now to work through the inventory we've got remaining in store. We do thank our contractor community. We do thank our picking contractors and orchard contractors who support and supply their guys who support the business. And of course, we thank our growers. Looking forward, we are all focused on next year pretty much outside of what we're doing today. So our primary focus, we're hunkered down. We're focusing our business day by day, but we're now focused on next year. We have secured an increase in RSE numbers, which we appreciate for next year. So that gives us even better certainty. We are investing an RSE accommodation and have list some additional facilities, and we're talking to people about getting access to additional facilities for lease to actually accommodate RSEs when they come in. So over [ 1300 ] RSEs confirmed for Seeka next year compared to 900 this year. So we're grateful for that. We are revising the forward capacity plan. We believe and that we have adequate capacity to handle the crop for next year with the investments that we've made in this. In addition, we have brought forward the planned completion date for SunGold from around the 18th of May to the 11th of May in the plan. We are, of course, looking at options for more cool storage that we will need in 2 or 3 years' time if the crop volume continues to go up. So we have some optimism going forward, and we believe that next year, the yields on the orchards would return to normal, and this was a seasonal fluctuation that we don't truly understand. If you need to contact me, you will be welcome to. And so that is my number. And of course, you've got Nicola Neilson there. Or you can e-mail us nicola.neilson@seeka.co.nz and michael.franks@seeka.co.nz, you're most welcome to. Now I understand because a I've seen a flash up on my screen that there is a question. You don't?

This is [indiscernible]

Yes. So for those of you who don't know, RSEs, regional seasonal employees -- registered seasonal employees, recognized seasonal employers is a system that we can run that can bring people in predominantly from the Pacific Islands, but -- and this year, again, from Malaysia. And so the way that it works in the modern age and today is that we largely haven't been recruiting these people that have been recruited for us. And so the arrivals are not regular. We might get told on Friday that we've got people coming in on Sunday, and we need to find some accommodations for them. And so what we're doing is actually investing in facilities that we're going to build one of [indiscernible] and Kerikeri. We've leased the facility out here in Te Puke. The one in Kerikeri, we have 140 beds. The 1 we've just leased here in Te Puke has got 112, I think. And so just to give us really access to a combination that is of good standard that we can accommodate these people when they come in.

The next question is from [ Adrian Alba ]. If you comment more on the current harvest issues and when you expect to get the visibility?

So I think when [ Adrian ] has asked about the current harvest issues, well, there's 2 aspects to answering that question because it's a little bit broad. Firstly, we've got reviews happening across the company as we would normally do across all aspects of harvest to work out the things that we could have done better and getting the fruit into the shed. And so that's normal around scheduling or monitoring or the decision support tools we might have around deciding whether we should harvest or delay in and around the pricing and how we price for service and how we incentivize or penalize [indiscernible] issues in the shed. More recently, however, the fruit that we've got in store and actually probably throughout the whole harvest has shown some issues in the inventory. There are 3 issues predominantly that's led to those challenges. Firstly, we've got fruit, which was damaged in the process of packing it. The fruit for whatever reason this year seems to be more delicate than it has been in any other time that we've handled fruit -- a lot more delicate. So the process of packing it may have damaged that fruit in spite of how delicate or otherwise, our packing contractors might have been. And so that's led to issues in and the inventory around [indiscernible] or fruit being of [indiscernible]. The second issue that we've got as like a skin [indiscernible] called a superficial skin [indiscernible], actually is what we're calling it. And it's a rash on the fruit that's occurred sometime after the fruit has been handled. So in the process of either packing it and putting into a bun and then transporting that bun to the shed when the process of tipping the bun, rolling it across a grading machine and putting it into a box, that fruit has got some discoloration on it, it's 2.2 or 3 weeks later. Not all of that fruit has been able to be captured in New Zealand, some has been explored offshore. And so what we're doing at the moment is making sure all of the fruit that we have in store as we light it out is checked is in speck, meets the quality requirements. We'll go to the market, support the brand and deliver our premium proven return. Slightly higher loss rates were actually a lot higher loss rates than we had in the past, and there will be a number of industry reviews undertaken after this year to understand exactly what's happened and what we can do next year to avoid it, and we'll sort that out.

Our next question is, when [indiscernible].

The debt peaks at the 30th of June. So when do we expect the peak debt as at the 30th of June and largely heads back down from that point to the end of the year. So the 30th of June is the peak. And given that we've really invested in a lot of our capital already in terms of the KKB machine and the Transcool coolstore upgrade, so the peak has peaked. The 2 upgrades we've got going at the moment, and we already paid deposits on and we are paying as they go is the machine over in Gisborne at NZ Fruits. We're calling it Seeka Gisborne now and at Oakside 3. I mean we don't have a heavy capital outlay going forward for the rest of the year.

I got a question from [ Sam ], asking if you could comment on Hi-Cane [indiscernible] at Seeka.