Seeka Limited (SEK) Earnings Call Transcript & Summary

[Foreign Language] If I may briefly explain what I talked about, I started off by mentioning the shining cuckoo bird, the bird that jumps from branch to branch looking for the strong firm branch to stand on and in that way, being able to make a difference, the tree being Seeka, the branches through Seeka to make the tree vibrant, healthy, fertile and a high producer of the fruits that the tree bears at this time of harvest. I acknowledged all those people who have passed. Condolences and our thoughts go out to all who have lost loved ones. I come to delivering and welcome all of you, the ipurangi, the Internet. To all of you who are watching this afternoon, welcome, welcome, welcome. And lastly, I introduce the tumuaki himself, Mr. Michael Franks. Kia ora tatou.

Thank you, Turi. Welcome, everybody, to this analyst briefing for our audited financial results to the end of 31st of December 2023 and the first year that Grant Thornton have audited our results. I just like to pass my thanks on to them for the work that they have done and supporting the company get our results confirmed as well as acknowledge the work that our own finance team have done in getting to the numbers. Turi, also, I'd just like to compliment you on your open. Also yesterday, Turi blessed our harvest. We're underway this year. We have got our red just sort of trickling into the sheds right now, and we expect to head into gold at some point next week. And so as I talk about last year's financial results, I'll also give you an introduction to where we think -- what we think is going to happen this year. Of course, we've got an annual shareholder meeting happening on the 18th of April here at 2:30 at 360. There will be a ribbon after that as well. And so we will also give shareholders and stakeholders an update then about how the harvest is progressing and what the numbers look like and all important, the volumes. The things that we will talk about today in terms of the agenda, we will run you through and just remind you about our strategy, our short-term strategy for the moment and the company values. We'll give you an overview of 2023. Really no news there. You'd be surprised if there was. But no new news because it was really talking about last year's harvest and volumes, overview of our financials and reflection to our capital management, talk you through each of the operating segments of the company, talk about the new climate change disclosures that the company has made and give you some insights as the early outlook for the current financial year. Our short-term strategy is outlined in front of you now. Firstly is to deliver operational and financial excellence to our growers and shareholders. We do that through excellent planning, being rigorous in our planning and curious about the things that as we work through our operational planning, been very disciplined in the execution of our plans and delivering excellent fruit quality to the market and our marketer, predominantly Zespri. Our second short-term strategy is to focus on and improve our financial performance. Last year, quite simply the volume of fruit that we transacted through our infrastructure business wasn't enough to even break even and we've recorded a loss. We have used this as an opportunity to reinforce a low-cost structure. We proactively and in an early sense reduced our capital expenditure to within and slow it down below depreciation. We are now focusing on lowering our debt. I aim to achieve adequate returns on capital and saying that adequate returns for the risk that we take and the capital that we have employed in the company. Financial performance is very much foremost target we've got for improvement in the current year. And thankfully, the volumes that we think we're going to handle look a lot better than what they did last year. Of course, we want to optimize our post-harvest capacity. We want to automate where it makes sense and where it delivers efficiency and delivers us a return on capital, but we want to optimize every space in every lane that we've got. And of course, alongside that, given that we've got the infrastructure in place, we want to build revenue streams around the side of our infrastructure so that if we've got vacant capacity, capacity that we've utilized, contract packing for other crops or things that we can do to earn new revenue streams that provide complementary services or products, we will go and chase those. Finally, one of our [indiscernible] our byline, select excellence. Our aspiration is to deliver excellent service, produce and value to our stakeholders and returns to our shareholders. And so that's what we are focused on doing and that is our short-term strategy as agreed with our Board. In terms of our values as a company, actually is depicted in our motif and the motif is all about each one of these arrows pointing in and pointing out as a brand attribute, a value that we're chasing. Of course, safety always. We're running across 12 pack houses, more than 400 orchards in New Zealand, 7 orchards in Australia and 2 pack houses there. We want to be safe always right across the whole spectrum where we're working. We care about the health and the long-term welfare of our people, our land and our communities. In relation to the land and communities, we were in front of the EPA this week talking about the continuing use of hydrogen cyanamide, which is important. Our business is founded on relationships. We connect the world with sustainable fruit production. It's all about relationships, relationships with our growers, relationships with Zespri, relationships with our consumers. We want to have inspirational people. In this company, people need to be able to achieve their career aspirations and their life aspirations. We are passionate about what it is we do. We are professional fruit handlers and professional fruit growers, and we are passionate about the service that we deliver to all of our stakeholders. We want to be and we aspire to be independently ingenious. We want to be curious about what's happening around us, and we want to think outside the square. Our current drive in the business is to simplify, to render down the complications in our operations to that is which is most simple and delivers us the outcomes we want and returns value to our stakeholders. We are obsessed with quality. Last year, our quality statistics were excellent; our fruit loss statistics, low; our offshore fruit quality, exceptional. And so our drivers to continue that quality obsession as one of our brand attributes. And finally, our growing sustainable futures is our sustainability goal. It is about making sure that our activities have a beneficial effect on the environment and not a detrimental one. And in introducing that brand attribute, we have gone a long way with our sustainability drive. We've got clear goals. We've got clear targets. We have a sustainability line. Team's well down the track of working towards and changing what we do to improve our environmental impact. Looking into the year just gone, 2023 year, well, it was a hard year right across the horticultural sector. You just [ don't -- have ] to look at our results to see how tough it was, very tough and probably capped off 30 tough months with COVID and weather events affecting on the business and labor restrictions. Our volumes at 29.8 million trays packed, where we make our money predominantly packing kiwifruit in New Zealand, were well down 42 million in the year before and so below the breakeven point. It's a fact. We're impacted by multiple severe weather events. The winter of 2022 was very mild. It was very warm. It was very wet. Kiwifruit plants didn't head to senescence, didn't go to sleep, didn't get the winter chill they're looking for. We had frost. We've had hail. We had Cyclone Gabrielle. And so all of those impacted on our production and volumes through in 2023. Kiwifruit volumes were very low. The yields were low. Hayward conventional yields below 7,000 trays a hectare and Gold below 10,000 trays a hectare, these are numbers, which we haven't seen in a long, long time. Both New Zealand and Australia were affected. When we realize that we're facing a loss, we proactively engaged with the banks early. So the banking syndicate knew what was coming ahead of us. And we work with them and so -- and we got their support early. We suspended our dividends to minimize our cash going out. We restructured the company to lower cost, and every part of the company was reviewed. And we have delivered $3 million in annual cost savings through that process and a process where everyone was dealt with due care and respect as we actually reviewed. We put in place a captive insurance company. That captive insurance company is seeing 65% of our insurance portfolio placed into the international market. That has avoided $1.2 million in cost increments that we would have had if we hadn't had taken that step. We slowed our CapEx. And in doing so, we have prioritized the money that we're spending to make sure that we have not got deferred maintenance in critical areas, particularly in electrical switchboards and plant rooms. There is a renewal process underway in the company to make sure that we have prioritized our capital spend to the right place. We did deliver excellent financial operational performance, albeit on a reduced volume. We'd be pretty unhappy if we didn't. We had low onshore fruit loss, 1% for Gold and 0.64% for Hayward conventional, excellent. We had the best offshore quality performance as measured and reported by Zespri. And our [ orchard gate ] returns to growers were amongst the highest. And so in terms of an operational perspective, I think we can be quite satisfied with what we've done. Our company has a mix of highly automated machines and manual graders, traditional grading technology, which actually proved to be quite useful when we had distressed lines needing to be packed, sorted and put away into cold store. We have got a highly automated machine at KKP as good as you'll see. We have had automation upgrades at Oakside and Seeka Gisborne within the capital expenditure. The rest of which -- of our packing suite, we'd say, is balanced, and we will sensibly invest in automation where we can see value return and payback and benefit for our growers and financial benefit for our shareholders. Our forward focus is all about profitability. Our forward focus is about getting the debt back into a normal range. And if we have the year ahead of us as it looks like it is, we'll take a giant leap in that direction in this 12-month period. We are driven to maintain our excellent operational performance, and we are pushing now and focusing on earning our risk-adjusted return on capital employed. The environment we operate in now is far more risky from a climate perspective than what we've had in living history. And so even though we're in El Nino at the moment, it won't be that long before we swing back to La Nina. And if and when that happens, the company needs to be in a position where it can cope with any shocks that might come. The current harvest that we're looking at, at the moment, the Hayward volumes that we have in front of us from the crop estimates is confirmed as best as we can through technology like Fruitometry, our look to be high for Hayward conventional and back to average for SunGold, which means good. And so both of those look better in terms of volumes and certainly much better than last year. Company has been through its normal preparedness processes, has been through its normal planning processes, has been through its normal operational setup yesterday to ensure that we've got the systems and personnel and accountability is right, right across the company to make sure that we deliver a good result in the year and harvest that we're heading into. Something's gone wrong. Just a button stuck. How's that? So good. Just give me 1 minute. I'll go back. Right. In terms of the group financial performance -- I had a sticky finger. I don't think it was me. The group financial performance. Revenue of $300 million is down from $348.4 million. That's all about volume. Revenue is down 14%. Our EBITDA at $26 million earnings before interest, tax, depreciation and amortization, a surrogate for cash flow from the operating business at $26 million is down from $46 million the year prior, so down 44%. We recorded a loss before tax of $21 million, and the range was $20 million to $25 million in our guidance. So it's a tough pill to swallow booking -- we've booked a loss. $14.5 million is a loss before tax, down from $6.5 million profit after tax the year before. But in a COVID and pandemic environment where labor is very tight and our expectation is that the current year is heading back to a normal environment. Labor is certainly freed up. And so -- and the volumes look like they were abounded. Return on capital employed is negative 2%, but the tangible asset backing per share at $5.71 is where it is at, asset backing per share, as confirmed by valuation and those numbers are audited. In terms of the trends and financial performance, just to show you, our revenue bounces down in 2023. Our hope, it is it will go back to a normal trajectory in the current year. Net profit after tax is all about heading back into profit. And our total assets around $549 million, we do expect to say that reasonably stable because we are investing around depreciation or behind depreciation in terms of our investment book. In terms of operating performances, you can see here in terms of orchards, orchard EBITDA at $1 million, really reflects high costs and higher costs of growing, lower yields, particularly in the Hayward book. And so while we're getting record fruit tray returns, actually, we're growing per hectare and the yield, the number of trays per hectare were down, low. And so that's what impacts on orchard. In terms of post harvest, it's all about the volume. It's all about less than 30 million trays packed and down from 42 million the year before. SeekaFresh is a highlight. Business has been going well. It has traded well. It's recovered after COVID, those 2 years before, really impacted by COVID. It has built new channels to retail that has made good -- that's got a good service and a niche service in terms of providing its customers with product that they want at the right price. In terms of Seeka Australia, fully integrated business. That business has suffered like ours has with climate and COVID. However, the last stakeholder update we gave the shareholders and stakeholders an update and insight what we think happens next in Australia, and our mission now is to deliver that. In terms of capital management, in terms of the balance sheet, $7.1 million increase in capital employed in FY '23, so we're at $518.3 million total capital employed. We got $3.4 million increase in biological assets, which is the crop that we've grown, we expect to harvest this year. We have $11.9 million increase in property, plant and equipment, which is our normal capital spend. And look, we've got a negative -- we've got a reduction in inventories and water rights. We sold some water shares during the year in Australia. They were excess beyond what we needed. And funnily enough, in Australia, it's -- having been predicted that we're heading to drought, it's rained. And so we've hardly used any water in Australia, full stop. So that in itself is intriguing. And I'm sure the farmers in New Zealand would echo that sentiment. It's just continued to be wet here. I see the questions are popping up. I'll answer all the questions at the end through the CFO. In terms of our bank debt, $172.4 million in bank debt at the end of December, so it's a $25 million increase in December 2022, well within our limits. We have got a syndicated 5-bank funding line in place with the Westpac New Zealand, Westpac Corporation Australia, ASB, BNZ and Rabo. We thank the input and support of the company and their understanding earlier in the year, and we thank them for their proactive responses to us when we needed them, particularly earlier in 2023. We have secured a sustainability-linked loan, which we entered into in June 2023, just under $201 million debt line. It included a covenant relief through to December 2024. That sustainability-linked loan penalizes the company if we miss sustainability targets and provides us with a rebate if we achieve the targets we've agreed and can negotiate with the bank. We have secured an additional $20 million debt line through to July 2024, but that is solely because we advanced money to growers through the harvest, and the volume looks like it's going to go up. And so to keep up with the increase in volume [ currently ] of the business, we have to have a slightly bigger debt line to cope with it. We have a small amount of assets held for sale, $3.2 million, and they remain being marketed. Earnings per share is negative $0.34, so that's just a simple function of the loss divided by the number of shares. There's no dividends being paid in the 2023 year. We had a little hangover dividend that came over from 2022, and the asset backing is $5.71, so significantly in advance of the current share price. If I go into each of the segments, which I will do now. Orchard operating revenue is up 7%, really some -- we've got more orchards in the book and so therefore, more revenue. But $1 million EBITDA is affected by the lower yields, lower trays per hectare and lower avocado returns and yields as well, has been a very hard year in the avocado market everywhere. We have got $16 million by a wave of investments and orchard developments that are yet to produce. That's not in the year. That's in the life of developing those orchards to where they are. So 68 hectares on long-term lease lands and 97 hectares with long-term supply agreements, where we've got co-investors and landowners and funders, including the Provincial Growth Fund in Kanoa alongside iwi. And so we thank you for that. And at some point, those orchards will come into production and are starting to now, though the orchards look to be holding a very good crop for harvest in 2024, somewhere between 40% and 50% more fruit than what we handled last year. And so we're looking in that part of our business for a turnaround. It looks like it's there barring disaster. The volumes look good. You can see there that the SunGold yields on average per hectare and 2023 year were 9,295 and that compares to 12,000 the year before and even then, the 12,000 was low. In terms of Hayward yields, conventional Hayward, 6,730 trays per hectare, down on the 9,650, and in recent years, it's been 12,500. So it just gives you an insight to how tough a season it was growing in 2022 and harvesting in 2023. Those yields are typical, not [indiscernible]. In terms of our post harvest business, the toll processing part of our business, this is where the hotel is for fruit. We schedule the fruit into our cold stores, into our pack houses at a rate that we can take it. We gently grade that fruit and put it into a tray and put it to sleep in a cool store. Hayward volumes, down 36% and SunGold volumes, down 25%. Our EBITDA at $43.8 million, down 26% and just lower volumes across all categories. We're looking forward to that number being far more exciting in the current year. It's a toll processing business. If we toll process more, we make more money. And if we toll process below the cost to serve, then we make a loss, and that is exactly what has happened to our company in harvest 2023. Thankfully, this year, it looks a lot more positive and a lot more successful. Company is well set to handle increased volumes. We've got the new pack line at -- automation projects at Seeka Gisborne and at Oakside automation. Of course, we've got the KKP machine, which was just really delivered for us in 2023, and we will use it, of course, in '24 and try and schedule more fruit. We've got the network to handle more volumes with less labor, but thankfully, labor availability looks to be very good. Yesterday, in the operational planning meeting all sites reported in there, there or thereabouts with their staffing numbers. Of course, it does depend on us starting early, and we intend to do that. In terms of SeekaFresh, we're marketing the fruit that we don't supply through to Zespri, marketing Class 2 kiwifruit in New Zealand and Australia, avocados, packing and selling kiwiberries and is -- our marketing of Kiwi Crush. Revenue at $20.7 million is up 9% on the year prior, essentially starting to hit its [indiscernible] business. $2.6 million in EBITDA was up 226% and has started the year well again in 2024. We've got growth in our tropical fruits business. It's our importing business, where we're importing pineapple, papaya and bananas, and we are adding new categories into the domestic marketing that we're doing, including kiwiberries, cherries, everything else, avocados, kiwifruit. And so that business seems to have a momentum of its own at the moment. Staffing there are doing a very good job. And we thank our customers actually because we're getting more and more business. That business EBIT, $1.5 million in the reported year, compares to a loss of $80,000 the year before. In terms of Australian operations, $10.4 million in revenues, down 26%, tough growing condition, tough volumes, tough season, thankfully looks better again in the current year. $700,000 in EBITDA compared to $1 million a year before, so it's there or thereabouts. We've got good pricing and demand for Australian-grown fruit. And so -- and actually, the volumes look good for the current year, and we have been harvesting and well through our Nashi pear harvest and European pear harvest, and we're heading to kiwifruit shortly, but the volumes look good. We've got 63 hectares of kiwifruit in development on their way to being to production and so $13 million invested in those year-to-date -- not year-to-date, in the years to date. And of course, we're pushing forward with our jujube developments over the year and the new red nashi, which we are growing in Australia. We have been an early adopter for the climate change reporting under NZ CS 1-3. We've had a subcommittee running for some time, the Sustainability Subcommittee, which oversees the climate change strategy and reporting, and we have released that report. We consider 3 -- the impact of 3 warming scenarios on growing conditions, vine health and communities. We have considered building strategies to address the effects of climate change, including irrigation, shelter protection, hail netting and other research and development, new varieties. We've had a 21% reduction in Seeka's carbon footprint in 2023. So we're at 17,987 tonnes of CO2 from around 20,000 tonnes prior. Of course, some of that is volume related. So our job is to restrict it even with a volume increase. We have got carbon reduction strategies underway in the company, which includes the solar installations, which we've put in place. We've got 750 kilowatts of solar down -- put on roofs. We have been retrofitting cold store gas with new synthetic refrigerants. So if they leak, they don't damage the ozone layer and come with a huge carbon cost, and we continue to focus on waste reduction. So our third sustainability report will be released in June of this year. Sustainability is a real momentum of the company. It's a real initiative. We're passionate about it. We've got a team of professionals working their way through it, who focus on it, and they actually got good momentum and good progress. So we're disappointed to report a loss. We run a hotel for fruit for a big part of our business. We're a toll processor. It's not all we do, but it's a big part of what we do. And so we would say that disappointed that the volumes we handle were below the breakeven mark. Thankfully, the 2024 kiwifruit volumes looked better. Industry forecast is at 193 million. Importantly, the regions look good, whereas in 2023, Gisborne and Northland and the Coromandel looked poor. Hayward volumes looked very good, although there are some shape out there, but it looks good. SunGold is back to normal average, which means good. Our Australian crop looks excellent. There has been a game changer over there. The team has innovated. They worked with the Australian authorities to get access to a spray called Actigard, and we've used that spray predominantly on our orchards. And we've got a much, much better crop set in yield and volume of fruit to handle. And in the few areas where we haven't used that product, it's been terrible. So maybe, maybe, just maybe, we've cracked it. We've had a wet summer, although it's 41 degrees today, I think. We've had a wet summer. It's been reasonably mild. We haven't had a drought, and the crop estimates look pretty good. And so Jon van Popering has done a fantastic job, to be honest, with his team. Operationally, we're ready. The labor supply has improved. We've got the infrastructure set for 50 million plus kiwifruit trays. The health and safety focus continues. Our #1 priority is restoring the profitability of the business and getting our debt down. And the first thing will lead to a quantum leap in the second. And so that is the presentation. I'm happy to take some questions and no doubt, there are some because I can see them flicking up on the screen. And if there are hard ones, I'll get Nicola to answer, and if they're easy, then I'll answer them.

Okay. So our first question is when will the company be reconsidering dividends.

The resumption of dividends is really a matter for the Board, but management's job is to fight the company back into a position where it is -- the Board is able to consider paying a dividend. And so I think the answer is we'll see how we go through the first 6 months, and then we'll have a chat to the Board about the second 6 months. And it will be determined, I think, by the Board's view and the company's view around its debt loading at that time, whether we've made satisfactory progress in getting our debt down and putting ourselves away from any covenant requirements and getting ourselves to a situation where the Board considered that it's sensible and prudent to pay a dividend. In the absence of that, the prudent thing to do is to repay debt and get -- and just hold on for a bit longer. Our focus is on earnings right now.

So a few questions here from [ Peter Truman ]. First one, in the half year to June, we had a negative revaluation. That was reversed at December. Can you comment on why the half year devaluation was reversed at year-end?

You might be best to answer that, Nicola.

So the June 2023, we don't get valuations performed, but we get advice from our valuers as to what's happening in the market. The advice at the time back in June 2023, interest rates were rising. It wasn't clear when they were going to start coming down again. And given the specialized nature of our land and buildings, there weren't many sales to support the value of the properties. The indication we were given is that our valuations would be headed down. And so therefore, we did a desktop calculation, which came out about 10 million. By the time we got through to December, interest rates had settled. There was an indication that forward looking, they would start coming down into '24 or '25. And the kiwifruit season had bounced back. Crop volumes were looking good, so there was better confidence in our land and buildings. And therefore, when we got the official valuations through, they had reversed a similar amount to what was derecognized at June. So our next question, in an earlier presentation, there was a mention of disposing land and buildings on a sale and leaseback basis. Is that still under consideration?

Yes. So the Board is considering any -- all opportunities to reduce debt. Our first focus is to do it by earnings. We had been investigating a sale and leaseback. And I guess it's still on, but we need to be -- make sure that when we sell a property and lease it back, we're just switching one form of debt with another. And so we need to make sure that the terms of the sale and leaseback are better than bank debt. Otherwise, we're better to stay with Bank debt. We just one -- it's just one form of debt with another. At the moment, we haven't been able to get to a situation where the Board has thought that it is prudent to do that, so we have not done it. But we wouldn't rule anything off the table.

And is there any consideration of a capital raise?

At the moment, there isn't any consideration of a capital raise, and it's not on our planning horizon for the moment. We could never say never. We wouldn't rule it out. But the Board will consider that at some point, but at the moment, there's no consideration on that.

No further questions.

Turi, are you going to close this one? If there are any other questions, you should ask them now. Otherwise, I'll ask our Kaumatua, Turi, to come up and close our meeting now. Thank you, Turi. And Turi, honestly, knocked out of the park this week at the EPA, so thank you so much for doing that.

[Foreign Language] Let it be a great year. [Foreign Language] Let it be a year of great achievement. [Foreign Language] Let's have a good year. [Foreign Language] Let's have a better harvest, a great harvest this year. [Foreign Language]