Seeka Limited (SEK) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen. Thanks to you all for joining this update to analysts today updating you on our Interim Results for the 30th of June. And commencing and starting this presentation, I would like to introduce to you Nick Reynolds. Nick Reynolds is the Group Financial Controller. He's standing in for the other Nic at the moment, Nicola Neilson, who unfortunately is sick. She's a young mom with a toddler at home and any of you who have those know that they will come home from day care with new and novel diseases to experience. And unfortunately, she's under the weather and unable to be here because she is ill. So welcome. It's been a challenging period for the company at the last 6. We've had every challenge thrown at us over the time. We've had wet summer. We've had -- followed by cyclones, hail at harvest time, much lower volumes than what we had ever predicted. And we've had flooding down in the Hawke's Bay and in Gisborne. And so it really has been a difficult period. On top of that, it was a low dry matter year for the industry. So the fruit characteristics had lower [ lychee ] weight, lower dry matter and it was at a time that the maturity standards were increased to try and improve quality. And so some of the fruit that we would normally have picked didn't get picked. We've had the lowest Hayward yields across the industry in the last 10 years and the lowest yields for SunGold on record once orchards have got to full production. So today, as an introduction, that is the introduction to us really for a large part of our business, we are [indiscernible] for fruit and our occupancy rate was much lower than what we had expected, predicted or would have liked. So going through presentation today, push my own buttons. I'm going to run you through the highlights for the 6 months, a little bit about the balance sheet, give you an insight to the operating segments' performance, each parts of our business and talk to you a little bit about our forward focus. Without being completely depressed about us, I'd also say to you that we've had a complete change in the weather pattern more recently. It's got much more calmer, less rain, colder particularly through the second half of the winter. In June, we're reasonably satisfied with the work we've done and what we're seeing in the orchards at the moment. So in terms of the highlights. So firstly, challenging 6 months, as I introduced, right across the industry. We're not immune to it, right across all regions. We are big regional players in Northland and [ Aldon ] to Tauranga and to Gisborne and so and down to the Hawke's Bay. So the impact of those weather events with a warm winter, the frost, the cyclones, the flooding and the hail was that our occupancy rate through our packhouses was down. Revenue was $212.7 million. EBITDA, earnings before interest, tax, depreciation and amortization at $36.4 million, $13.6 million profit before tax, $0.25 EPS and the Hayward yields and SunGold yields down on what we expected and on last year and much slower than what we would have liked. Now of course, we made a profit for the first 6 months, but we've also told the market that we're expecting a full year loss between $20 million and $25 million. That's because normally, our cold stores would be sort of 60% to 70% or 60% to 80% before at the end of June. And this year, they were something much lower than that 50% to 60%. And so therefore, as we head to the second month -- second 6 months, we don't have so much fruit in store to rework out. We've got all of the cost of leasing stores. We've got all of the cost of maintaining those facilities and the staff with the expectation that next year, the volumes will bounce back and hopefully, and we are predicting that we will head back into the black. Operationally, at the last annual meeting, we talked about the things that we wanted to do better. We're concentrating on as a company, both of which was to be operationally excellent and we're improving our operational performance. We have achieved that. Improvements that we've put in place in the company to address [indiscernible] from last year have delivered good results. We've got new automation commission, particularly at KKP. We delivered growers a very timely harvest this year with few exceptions. We got very low fruit loss, extremely low fruit loss below 1% in both categories, so excellent and our quality delivered to the markets across all categories and particularly disease-free has been nothing sort of excellent. So freshly things have worked well. And I'd also say to you that the margins that we expect to make on a per trade basis across our business actually has been achieved. Our issue simply is that we didn't have enough volume and it is an industry-wide phenomenon. Assets grew to $582.7 million, asset backing is at $6.01, a significant premium to the current share price. And so a key issue for the company was getting back to a state where we can pay dividends. We have $182.2 million in bank debt. Bank debt remains a focus. And we have got full banking support. We have done a number of things I'm going to talk about in this presentation to focus on being [ dense ]. It's a little bit like the Titanic. You've got to do things well in advance or when you actually start to see the results. We have dramatically slowed our capital expenditure and we've taken some cost reduction mix into the company. We are also looking at sale and leaseback opportunities. And with by way of example, have got a new facility that we are building in Sharp Road that may well be sold and we intend to do that with a leaseback in place. We have early on in the 6 months, we spoke to our banking syndicate. We explained to them the situation. We did a joint presentation with East Vic to talk about an industry-wide issue that we were facing and we got -- we put in place and negotiated some banking covenants waivers with them and for us, cover ratio and leverage ratio are the 2, and they are planned to come back next year. We have, as a highlight, put in place and negotiated a sustainability-linked line as part of our suite of banking facilities. And so effectively, that put some penalty or a premium or a reward should we achieve certain sustainability-linked targets. And so that for us, is a highlight and is a big important step for the company. We have taken steps to control and innovative steps to actually get over the top of cost and cost inflation. We have gone through and restructured nearly all of the company and trimmed out the overheads. We also put in place a captive insurance structure. With effect we've actually setup our own insurance company, Seeka Insurance Management or Risk Management and we have gone and placed that cover directly into the insurance market, both in New Zealand and in London. And with a significant saving in costs. Costs haven't gone down, costs just haven't gone up by as much as we might have expected given the sort of assets that we are seeking to protect through insurance. We have got capacity in place to handle well more than the 30 million trays of kiwifruit we handled. It's not just about kiwifruit, but that's the big game in town for us. It is our foundation business. And so, we've got the capacity to handle well much, much more than that, more than 50 million. And so, we're able to actually look for and do sensible things now to make sure we reflect that. Short-term outlook has improved. We are experienced much better weather at the moment. We've got winter chill here in New Zealand. For the first half, it was probably lackluster and during ordinary in terms was quite mild and wet, if you recall. But the second half of the chilling period has been cold and we've actually caught up. From now on, it doesn't really matter because we've already got the budbreak at harvest runs or applies, being applied now or just finishing it. And so really, pretty heavy with what we're seeing here in New Zealand. Australia looks tremendous. We're really happy what's happening over there. The team over there have done a good job. So we are planning for resurgence in volumes. That is the expectation. Life seldom works like it does on a spreadsheet. But if it works like it does on spreadsheet, in this case, we will be very happy. Not foreshadow where we have focus on some things, particularly around our retail services business. That's really bounced back in more favorable trading conditions. So we're happy with the work that the team has done up here in Auckland. And of course, our new developments in Australia taking place. In terms of group financial performance, as I said, $212.7 million in revenues, down 40%, $48.4 million in gross profits, down 22% on the previous corresponding period, $36.4 million EBITDA, is down 26%, a $13.6 million profit before tax, down 55%, but really it's all about volume because we didn't have the stores anywhere near as full as they were last year or previously in terms of percentage terms. And so in the second 6 months, we haven't got so much fruit to lay out and make money and kiwifruit is the big part of our business. Then we've got some graphs and as some of you like graphs, just really showing you the same information again as bars, but a little bit going back a bit over time. You can see the EBITDA down to levels, which we haven't seen since 2020. But of course, we're a much bigger business now. And so, it's not really a relative. NPAT at $10.5 million. Total assets of $583 million, we've already gone over that. In terms of operating segment performance, I'm going to talk more about the operating segments in a minute. So effectively, in the first sigma in Orcharding you will see we made a loss. Well, quite simply, we've been frosted and hailed. The yields are down. And look, we've got to take a prediction of what we think the fruit is going to sell for. And if the fruit returns go up later in the season, then perhaps that loss will reduce. But it's a reasonably small part of our business, $5.1 million and EBITDA the year before is now negative $1.9 million. So it's quite sensitive to changes in yields, in particular, [ NAGRs ]. In terms of post-harvest, $47.4 million at the 6, realized effect that we're not full. We had a busy first 6 months but the stores aren't full. So the fruit isn't in the store to work the second 6 months to make money. As a positive note, SeekaFresh retail services really bounced back with vengeance. The strategies that were put in place and the management team there and the operational people on the ground done a great job, concentrating on key varieties, avocados, citrus, kiwifruit, tropical, some cherries and eggs. And so they've done a good job for that to bounce back. Australia has had a harder year. Many of the issues that we've had here in New Zealand, we had there. And so -- but the outlook actually in Australia -- I was there last week with Jon Van Popering and the team and pretty happy with the work they've done. Those orchards look as good at the time of the years they ever looked. I'd say to you that the next 6 weeks across both countries in terms of our kiwifruit orcharding business is critical. As we head into budbreak and into flowering and into fruit set, it's a critical time for us in terms of the growing seed and see what fruit we will get to pack. And look, I think last year, industry got caught with a late spring frost. It's the first one we had in a very long time and maybe 9 or 10 years. It's unlikely that we'll be caught to that same extent again. We're far more prepared and far more aware of it. In terms of the balance sheet and looking at our balance sheet in total, $14.3 million increase in capital employed in the half year. Of course, we're building the accommodation facility out there in Sharp Road. That Sharp Road facility has been opened at 10 o'clock this Friday at the facility. Any people who are around are welcome to attend it. But then our intention is to put that facility and that property on to the market and lease it back. It's one of the opportunities that we're looking about sale and leaseback. We had a $6 million increase in property, plant and equipment since the half year last year. Well, of course, we have slowed our capital expenditure. We have got a lot of automation now into the business. And so you get the hangover. We put the investment in last year, we got to pay for the last of it this year. So the things that we're doing now will save money going forward because we've actually slowed down to [ a thin ] where we expect depreciation to be. So total capital employed here $540.5 million compared to $526.2 million the previous year. Continuing on the balance sheet theme, talking about bank debt, $177.0 million at the end of June 2023. We had a lot of money going out to [indiscernible] you get paid back, of course, as advances in around the 15th of July, so that's all back into the bank now. I think there's about $30-odd million. We had -- there's $15.7 million increase in the year before, but that's following the investment that we had in automation and capacity. We've got the new sustainability-linked line with the measures around greenhouse gas emissions, around increasing our solar generation, which is happening at the moment and to target our health and safety crisis. We have got $201 million of bank facility from the banking syndicate. We've got covenant waivers in place for 2023, they come back into being next year. They staged their way back in, so 4.5x for the first -- for next June for leverage is EBITDA to debt and then down to 4x at the end of the year. So reasonable. Banks have been sensible in supporting the company as we come back and the same with interest times cover. And so actually, we would commend the banks for their approach with the whole industry really through this process. Dividends we will be planning to recommence when our Board thinks it's reasonable to do so. And one of the 3-folds for that will be making sure that we're compliant with our covenants. Interest -- sorry, earnings per share and dividends, well, at the 6, $0.25 a share, asset backing is $6.01, just down 1%. There's some property revaluations going on, just reflecting the general property market in New Zealand and interest rates and there's no dividend. Prudently, the Board has said no dividend. And we'll always just work our way forward to next year really. In terms of the guidance, as I said earlier, the guidance range is for a profit or loss before tax of between $20 million and $25 million. In terms of operating segments and getting into this part of the presentation, just switching through. We're getting on the right page in the notes in front of me. Revenue at $39.9 million is down 13%, really reflects the impact of lower yields, frost, hail and lower OGRs from Zespri. EBITDA negative $1.9 million, as I previously said. SunGold is down to 22%. You can see the SunGold yield there is less than 10,000 trays, hitting 9,353 trays. You can see the Hayward yield, 6,750, really reflects orchards that have been hit with frost or partially hit with frost or neighboring orchards that have been hit with frost. And so what tends to happen is that the flowers get affected by the cold weather and we get misshape in fruit and the yields go down. And so look, we wouldn't expect that to happen again. We have done a lot of innovation in that part of our business. Picking innovations have created operational improvements. We have got $19 million invested in longer-term orchard developments, will start coming into production from next year and effecting the Long Ridge, they actually are coming in now. We're sort of slowing our investment in those developments because they'll start to paying back. And of course, we've got big partnerships with Iwi and regional operations to actually get those away. Our orcharding business provides secure supply through to our post-harvest business, which is really the facility has a hotel for free. In terms of the post-harvest business, $151.1 million in revenues, down 15%, $47.4 million of EBITDA is down 10%. Kiwifruit volumes are well under capacity. We've got to handle a lot more fruit that had been there for us to handle. A very big highlight for us is KKP machine turned on and delivered numbers from day 1. So very happy. We've also got Oakside and Transcool capacity upgrades completed. We've got a new camera grading operation actually on Oakside 3. It's done a good job. We've also got carton handling facility over in Gisborne, which actually removes a lot of labor and a site that at some point, we will run 24 hours a day. So it just takes the labor pressure of us. Having a balance on machines are highly automated with alongside machines, which are traditional manual graders, actually serve the company and it growers really well this year, because those lines that were compromised by hail needed a more intense visual grade were able to be done on machines without compromising the efficiency of the big machines that actually took high-value and high-volume fruits. Margins on a per trade basis has achieved and these guys are obsessed with actually achieving through quality, which is one of our brand attributes and have done a good job really. A key question for us or the key mission for us is the volumes as an industry. And so this is where we generate the cash that actually pays back the investment that we've got in this part of our business. Nearly $400 million invested in this part of our business needs to be earning more than it does and it will. In terms of the SeekaFresh retail business, really a bit of a highlight, maybe not quite, but nearly a lone highlight for us, just under $10 million in revenues, up 15%. This business so far, week 34. This year has only missed weekly budget sales rates 4 weeks. So tremendous really because it's quite challenging. The EBITDA of $1.7 million is up 240% on previous year. Business is rebuilding after COVID-19 disruptions, got a good relationship running with its customers and good supply lines and we've got a reputation for quality. The team has done a great job. Niche market supplier, delivering incremental returns to growers across New Zealand. Key categories, avocados, kiwifruit, citrus, importers, tropicals and actually, we're now today selling our own pears that we grow in Australia on the floor here in New Zealand. So we're just expecting that business to keep building and building and so well done. I can say that to the analysts, you can draw your own conclusion. In terms of the Australia business, well, they've been challenging over there, many of the same issues that we've had here in New Zealand. $11.6 million in revenues, down 19%. We had a flood there, surprisingly how much effect that it's had with a pattern over there settled down. The winter shoulder just been through is more than double what we have here in Te Puke, more than 850 chill units over there in Shepparton, so it looks pretty good. And Jon and the team have done a good job in tying down a good [ Kennedy ] looking forward. Unfortunately, the EBITDA was up for 6 months of $900,000 is down 65%. But we have got some new developments there. We've got the Jujube dates coming into production, which looks really good. And we've got 63 hectares of orchards coming through into production, which actually takes a bit longer in Australia, but it's a very good market. It's a very good market and the market for Hayward kiwi in Australia very strong. At that time of the year, there's only really Australian Hayward kiwifruit available for sale. In terms of our forward focus, well, we continue to focus on being operationally excellent. We've talked about this at the annual shareholder meeting in April. And so making sure that our process that we put in place there and delivering the focus we have put in place around inventory management has done well, some of the new reporting tools we've got in the company are excellent. And we've got an end-to-end focus now. We're focusing not just on what's happening while we've got the fruit or what's happened to the fruit once we've dispatched it to the market. And so we will continue to push in that part of our business and our orcharding business to get the results right. We have actively managed our costs and we'll continue to do that. We're a leaner business. We expect to save $3 million in personnel-related expenditure this year by restructuring or reducing headcount planned by attrition. That $3 million has not come from vacancies. That's come from roles where people used to work in them. And so we've been through that business. We haven't been through that process. We haven't quite finished it yet, but we're nearly there. And there may be no other changes, but we continue to review things. We're reasonably pleased with what the captive insurance company has done for us. It's set to save us over $1 million annually. We will continue to visit the market and make sure that our underwriters are happy with us. And we're pretty happy with the team at Lockton who have taken us through that process. Capital spending will continue to be within annual depreciation. We'll continue to slow that. We believe we've got enough money there to do any automation that we need to do to do capital maintenance and to manage our risks. We don't have a lot of deferred maintenance around, so we can actually focus on a structural way. We've put in place a new role in the company, which is a facilities manager looking at 11 packhouses and 30-odd coastal sites and putting in program maintenance to make sure that we're over the top of it to manage the state of our maintenance evenly across the business. We are focused very much on bank debt reduction. I'm sorry to be so vague about it, but that is a key focus for us. We continue to be focused and on it. We have got the line facility in place with those covenants waived for 2023. I'd want to say that the leverage ratio actually is 4.25x next June and 4x next December, not 4.25x. The interest times cover goes 1x and then 1.5x, because you needed to know. We have continuing support from our banking syndicate. We are investigating sale and leaseback options. And for example, as one of them is the sale and leaseback of the Sharp Road formulation facility that we are just completing building and our opening this Friday. We've got the capacity to handle more than 50 million trays. That's not finite number because it does depend upon the house and it does depend on the shipping program that rests around the harvest as to how full we get to constrain actually exists in our cold stores, not in our packing engine. We have invested in the quality accommodation for RSE workers up here in Sharp Road. We've got that one. We've also leased one here, spread master down in Tepui, which complements the local -- those RSE complement the local workforce for our own orchard and post-harvest work that we have, particularly around our unpalatable workhouse or working conditions out in the orchards when it is wet. The winter and labor is much more improved this year we have ever seen it, although it comes at a cost with a relentless drive by the government to push the costs up. Our winter conditions and the El Nino weather pattern, if it is exactly what we've got, it seems to be there, has changed and it's much more favorable the kiwifruit since the stark contrast to 2023 growing conditions that we had. I'd make one other point, if I could just step back to the bank reduction. Company has been working with Northington Partners. The Board has taken some advice of about debt, appropriate debt targets, how we might get there. And so we've appreciated the work that Greg Anderson and Jonathan Burke have done in terms of giving the Board some things to consider going forward. So in case you don't now, is our contact details where they're in the pack that was put up on the website. And I'm happy to answer any questions that you might want to ask. And if I don't know the answer, I'm sure that Nick can first time into the chair. Are there any? We'll give you a few more minutes. If you want any questions, feel free to. If you don't, then we're all good, hold your peace. You're most welcome to contact Nicola or myself after the meeting by e-mail or telephone, if you like and I will answer any questions that you've got. No questions, Jamie? Right. Thanks so much everybody. Thanks for hopping on to the call and taking interest in our company.