Seeka Limited (SEK) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Michael Franks. I'm the Chief Executive here at Seeka. It's my pleasure to welcome you all to this analyst briefing for our unaudited 6 months results to the 30th of June 2024. Alongside me, I've got Nicola Neilson, our Chief Financial Officer; and also Nick Reynolds, our Group Financial Accountant, who -- both of whom are sitting here to help me out in case we get any difficult questions coming in through the stream. And of course, Nicola is about to leave us shortly to go on maternity leave for the second time. So fantastic news for us. Nick Reynolds will be hopping into the hot seat for a little while, while she's away supported by Ian Burt and Nick Andrew. So I'm assuming these 3 males to do the job of one female whilst she's away on maternity leave. And so -- but we welcome them all here to help us out. We've got a fantastic accounting and finance team, and I'm sure they'll do a good job in her absence. Our material this year, a little bit easier to work with, if it was -- if we could get it to go to the next page. Someone's going to -- thank you, finally. Material this year a little bit easier to work with than last year. And so I'll just give you a quick run through the 6-month highlights, talk a little bit about our performance, our balance sheet, our focus and run you through to the end. Hopefully, out of this, you'll get a good understanding of where the company is at and what we've been through, we had fairly hard months before this year and seemingly much, much better results in the first 6 months of the year. So in terms of the highlights, we've had a rebound in kiwifruit volumes in New Zealand and Australia. And for a big part of our business, we're a toll processor. We process units of kiwifruit. We've grown 17 million trays ourselves. That's up 53% as a grower. We've handled 43 million Class 1 trays, up 44% of the 29.8 million trays last year. Australian kiwifruit volume is up 164%. So that all gives us good tailwinds to work with as we went through the financials. And the bigger volumes increased our revenue, our key metrics, financial metrics, $284.2 million in revenue, $68.4 million in EBITDA, earnings before interest, tax, depreciation and amortization, $45 million profit before tax compared to $13.6 million last year. And that works out to be a 74% earnings per share when you remove the impact of the deferred tax on depreciation buildings. We've had -- we've delivered excellent performance to our growers, but it reflects the excellent fruit that most of them provided us with. We also have full labor availability for the first time in a number of years. We actually are able to deliver the efficiency gains from automation, but we've actually got a balanced post-harvest operation running. So we've actually also got more traditional graders using humans, and we've got some very highly automated machines that actually have worked well for us. To date, we've got low fruit loss. Fruit loss was lower than last year and last year was remarkable. And our quality, when we look at comparatively what we've delivered Zespri to the markets, our quality is actually excellent. So lots of things to be happy about, always things to fix, but we're pretty happy with what we've achieved so far, pretty satisfied with it. $625.6 million in total assets, our tangible asset backing per share of $5.92. So well ahead of the actual current share price. Just under $171 million in net debt -- sorry, net bank debt. But I should note to you that -- and when we run a season, when we run a harvest, we're actually advancing money to growers to actually cash flow them through that harvest, give some of the money from Zespri, but we're also providing services. And so we actually don't charge for that until some time when we got the money. And typically, it's around the 15th of July, and that is a phenomenon that happens every year. So it's right to consider the $53 million that we banked, record banking for us on the 15th of July this year. Last year was $35 million. We noted to you at the same time. So we now have been reading some analyst reviews that actually missed that point. Our cash flow is actually very strong in the 6 months and actually very strong for the year. We have having been through a loss last year and some hard times through COVID and the pandemic with a focus on cost management, and we're focused on our capital expenditure. So we have leaned the company up last year, as we told you, we have been innovative with mechanisms like the captive insurance mechanism we put in place, which has delivered significant cost savings. The insurance mechanism itself estimated to have saved us over $5.3 million over the 2 years. We've got the capacity and systems in place to manage our forecast volumes. But noting it takes around 18 months to actually get capacity put in place. We're now thinking 2 years out about what we need to be doing. We're still pretty positive about the outlook. We've had a favorable weather pattern, albeit it's been a storm in Australia, thankfully hasn't affected the crop, has affected some structures though. We have had great winter chill, double what it was last year and in some places, massively ahead. And so we're actually quite buoyed by that. We've got a long way to go to get a crop. But if you don't start well, you can't end well, and we have started well. Our focus is all about quality. We've had success in our retail services business, it has been a tough game in that part of our business but actually it has gone quite well, and we've got a continuing developments in Australia. So to the numbers, in terms of the group financial performance, revenue up 34% at $184.2 million. Our gross profit, $79 million is up 63% from the previous corresponding period. EBITDA, $68.4 million is up 88%. We've got $45 million profit before tax is up 30%. And $17.1 million profit after tax, that's after allowing for the deferred tax adjustment of some $13.9 million. Also noting that while we've gone, had the tax consultants go through that number and assess it, that will be subject to order at the end of the year. That's our best number at the 6. We operate in a seasonal business, it's the same business we have operated in every year. And so the second part of the year, typically, we go backwards, but we're pretty happy with where we're at. If you like to see that graphically, here it is in front of you, you can see the EBITDA, how that has progressed over time. So at $68.4 million is the highest it's been in the last 5 years or 6 months, same with a net profit before tax and same with the total assets. So if you like graphs, they all look pretty good. Here in terms of our operating segment performance and our orcharding business. Last year, we booked a loss at the 6 -- this year, we've rebounded at $3.2 million. Of course, when we do the 6 months results, we actually don't have a forecast from Zespri to work with, so we're estimating what that forecast will look like. And so over the next little while, we'll take a look at our forecast again to make sure it's an alignment, whether we've been too conservative or not. Post-harvest EBITDA, $69.3 million is the highest it's been in the last 5 years. SeekaFresh at $1.1 million, a little bit behind where it was last year, tougher grading conditions. If you look at the other listed companies that operate in the wholesale retail services space, actually quite a good performance there, still ahead of the line. And Australia, $4.9 million, much better than where it was last year and a very good performance on the back of much improved kiwifruit volumes. Our new crop protection program over there using a product for the first time last year that we hadn't had before had good effect. And so we're pretty confident about what's happening in Australia. Looking at our balance sheet in terms of capital employed, $18.5 million increase in capital employed at the half year at $559 million, $18.6 million increase in property, plant and equipment since the half year last year, but that also includes end-of-year revaluations of plants and buildings. It also includes the automation and capacity investments to put in place which I'm about to talk about again. It also talks about employed investment in switchboards and plant rooms. We have deliberately controlled our capital expenditure. We do it every year, but we've actually cut it back all the way. And so what we've done in doing that is we're focused. So $2 million a year has been spent on our plant rooms and switchboards to make sure that we don't have deferred maintenance building in the business and, therefore, increasing our risk profile. As part of our captive insurance program, we've also focused on risk areas in the business and diverted money to go and make sure that we're addressing any plant, any switchboards that needs to be addressed and renewed in the process. And so pretty happy about that. Orchard developments continue to be invested in. Strategically, they will deliver us more fruit in the future, and they are coming on stream this year and next. In terms of our balance sheet, continuing $771 million of bank debt, only $6.1 million lower than last year. But actually, these are taken into account the fact that we banked $53 million on the 15th of July, and that's actually a true reflection of our debt because we actually take money and we actually advance money to our growers through the harvest. We've harvested more fruit, more money advanced. And so we've actually banked more money on the 15th of July, and that brings it all down. $201 million is a facility from the banking syndicate. We increased it to $221 million along the way. So we can actually fund the advances going to growers, debts come back down on the 16th of July, so $201 million is at facility now. Our ratios, our leverage ratio, all of our ratios are back within banking covenants, understanding that they are calculated on a 12-month basis, not on a 6-month basis. And our forecast is that they will be well within the long-term banking covenants by the end of the year. So our EBITDA multiple calculated on a 6-month basis, 2.37x. If we take out the leases, so to make it pre-IFRS 16, 2.69x and so well down on where it was in all cases the year before. Our forecast is for the end of the year that will be well within our banking covenants. EPS, $0.41 per share, understanding that, that is after the deferred tax adjustment. It's up from $0.25 in the PCP, and it includes that $0.35 one-off noncash adjustment for the deferred tax change. $5.92 net tangible assets down to 2%. At this stage, our Board has decided it is not appropriate for us to consider a dividend just yet. Boards resolved that they'll think about a dividend just a little bit later on in the year when we have confirmed full year guidance just to make sure that we're not stepping ahead over the edge and declaring a dividend right now and making sure it's a prudent thing to do. And they'll assess our operating performance, our financial performance, our debt, our ratios when they come to make that decision to think about it again a little bit later in the year. So it won't be too far away, I think, for that determination. Company has increased its full year guidance. The guidance was $15 million to $19 million at a profit before tax level. As a result of more recent information, their guidance was an increase between $17 million and $21 million. So we looked at it both ends by $2 million. And so that's a positive signal to the market that we would think we're at. That's a profit before tax and reminding you all last year, a negative $21 million. So effectively, if we get to the -- it's something like a $40 million turnaround in 1 year. Looking into the segments as part of that business that makes us all up. Our orcharding operations, $56.9 million in revenue, up 42% previous corresponding period. Total volumes are at 7 million trays, I think, 17.1 million. It's up 53% on 11.2 million trays a year before. That's what they've grown. EBITDA of $3.2 million was up from a loss last year. We've seen much improved yields in SunGold and Hayward. That's occurred right across the industry, but importantly, it has occurred here. Orcharding team's done a fantastic job with this network of regional orchard managers led by Barry Penellum. Top 20 SunGold orchard exceeded 21,500 trays a hectare. Top 20 Hayward orchards exceeded 14,200 trays a hectare. The division packed around 170,000 bins of fruit. We have invested $19.3 million in orchards, which will provide us with fruit in the future. And we've continued our partnerships with iwi and regional investments and the government. And so pretty satisfied with the performance in the rebound in that part of our business. There'll be some refinement in those numbers going forward when we get the individualized orchards get returns calculated for each of the orchard that we see. Has service operations likewise has a very good network of regional post-harvest managers who are in irrespect fruit handling professionals led by Paul Crone, just under $194 million in revenue, up 28%, $69.3 million in earnings before interest, tax, depreciation and amortization of 46%. Total volumes SunGold up by 36%, Hayward by 60%. Upgrades were undertaken and initiated at Oakside and Transpack that are camera grading and presizing at Oakside, Camera grading at Transpack and of course, we've got the continuing performance from their investment in KKP which has gone very well. This season in spite of much higher volumes delivered across most regions a timely service for our growers, perhaps a little bit of a queue in Northland, that's something that management is looking at, at the moment. We've achieved our operating margins and we've done it with a keen focus on quality. And when we look at our quality statistics delivered to Zespri in the market, we've got every right to be really proud of them. We're amongst the best of the fruit quality delivered. So that crew has done a great job really, we had very hard season stretched out through early start with the read and quite a late finish, and so they've done very well. So it took a little way to go, maybe 6 or 7 weeks of loading to go and to get the kiwifruit done. And of course, now we're packing avocados and citrus just to keep your lives complicated. Third part of our -- third panel of our business, part of our business is SeekaFresh. This is where we connect fruit to the market that's not supplied to Zespri. So it's more than just kiwifruit, it's also avocados, kiwiberry, so imported fruit bananas, pineapple and papaya. We're producing and selling Kiwi Crush. Revenue of $13.4 million, up 36%, $1.1 million and EBITDA is down 34%, but that's really about the margins sales prices. Prices for avocados is very low so our commitment comes down. And so as growers aren't making money, we can't make a lot of money in terms of running that business. And so it's really reflective of what's happening in the domestic market, supply and demand. We have got some things happening excited in that business. We are in the process at the moment of tendering for the food stuffs, banana supply. If we get our share of that, with some share of that, then that will be positive to earnings and net part of our business. The team lead under Kate Bryant with Melissa Hopping, team in Auckland is doing a great job. And so we are continuing to focus on that business, and we do expect further success has been through a tough 6 months. In terms of our Australia business. $19.5 million in revenues, up 67%; EBITDA of $4.9 million, that's up some 455%, so it just shows you how tough it was last year. EBITDA last year at $900,000, this is $4.9 million. They have benefited by being resilient. They've had a rebound in yields that had a much better crop and the kiwifruit primarily from the new crop protection program they're running over there with new sprays available to them. Last year, they were not available to them before and they prevent and help plants in a Psa environment. They are products that we use here regularly in New Zealand. Kiwifruit volume was up 164%, 2.3 million kilos. We've got exciting new developments over there with the jujubes and red nashi from [indiscernible], which is exciting. With $16.4 million invested in orchards, which are going to produce us full volumes as we move forward. So the team over there has done a great job. Happy that it's back to positive. And if and when those orchards get into production, more volumes to handle, that's a sign of what could happen next. Closing out to our focus and looking at our forward focus going forward. Well, we are very much sticking to our noting at the moment, very much trying to be boring and doing a good job operationally and deliver operational excellence and improving financial results. So we're there. We've got active cost management underway in the company. Last year, we did restructure, saved some $3 million. We have innovated with mechanisms like the captive insurance structure, we've deployed into our insurance book for material damage and business interruption. We are putting in place a new HRIS, a new payroll and human information system. So we know about what we've got where, so we can better manage it. We're also being very happy about the latest announcements from the government about the RSEs that we now can spread the 30-hour per week, even before that, we had to pay an RSE, a minimum of 30-hours every week regardless of whether they work or not. Now we can make it 30-hours per week on an average over 4 weeks. Prior, we were very exposed to weather. We had bad weather for 3 or 4 days, it meant probably couldn't get them to work 30-hours a week out in the orchards because the work wasn't there, and we're having to cope up. This way we can manage the work program and make sure they're going to earn to 34 hours a week on average without having to be topped up by the company. And so there is perhaps some significant improvement next year when that actually kicks into gear. So we're happy about that. We are looking at capacity always. We are looking at projects, and we're working through those ahead of next year's harvest. We believe we've got the capacity in place in the current footprint of around 50 million trays. We are looking at ways to expand that perhaps leasing facilities or coolstores or automating further to actually increase that without further indebting the company. We're continuing on our -- looking at any deferred maintenance to make sure it's not happening. The focus on our switchboard and plant room upgrades, which will give us further savings in insurance. The material damage and business interruption policies this year cost us less than last. It have been going up by more than $1.5 million a year prior to that captive and of course, we're looking at further consideration of automation opportunities, taking a measured approach to automation because when you make that investment, you've got the depreciation and interest cost regardless of whether you've got the crop or not. At the moment, we've got a balanced book. We've got a balance number of machines, which are highly automated and manual. And so what sensible changes can we make to our manual machines or our automated machines to improve their performance with investments that actually financially pay back. We did build a facility at Sharp Road, which accommodates 140 RSEs. That's up there by -- between Turanga and Katikati, Aongatete. We built that with always the intention to sell it and lease it back. At the moment, we've been to the market. We tended it. We didn't get a price back to us that was compelling enough for us to take the deal. In fact, it was significantly more than debt. So that property remains at market -- remains on the market. And when the right offer comes up, we intend to sell it. And so we're being patient about that and not just taking any deal that comes in the front door, we don't need to do that. The current winter conditions support good kiwifruit yields for next year. But of course, we've got some way to go. We're expecting good budbreak, but we're going to get through pollination, when we get through summer. We're going to get through next year's harvest. And so there's some way to go. But as I said before, if you don't start well, you can't end well and we started extremely well and much better than last year, and last year was a good return. In the current year, we've had some issues in the regions where they've got a lingering hangover from water pressure. So in Northland, Coromandel all towards Gisborne and the Hawke's Bay, we've had yields perhaps lower than what we might normally expect because of the lingering effect of the water on those plants. We expect that to come back to normal as time goes on. So perhaps some more cause for optimum -- measured optimism, nonetheless. Sustainability and our ethical ethos remains part of the company. We have got a carbon footprint reduction plan underway. We are working on it. We are investing in solar. We are diverting waste. We are retrofitting harmful refrigerants with new hybrids. And we will continue to do that and measure our performance 5 years. Now we've been doing that with an independently verified carbon footprint data. We have got a further solar installation plan for Kerikeri that will take us over 1,000 kilowatts of generation on the roof. We -- there'll be a lot of conversation in New Zealand about power prices at the moment. A few years ago, we signed what I thought then was an expensive contract -- term contract for electricity. It was suggested to us by total utilities, our advisers, around $135 a megawatt. 5 megawatts of that expires or terminates at the end of next year 2025, 40 megawatts of that expire sometime December 2026. So with a little bit of a time in the saddle before that runs out. Probably we'll test something next year with the 5 megawatts as it renews to see what's going on. But luckily, we don't have that exposure to the peak power prices right at the moment. So that's pretty much we were up to you. I'm going to leave my name up there and Nicola up there and conveniently, they haven't put Nick Reynolds up or Ian Burt up or Nick Andrews, but don't panic. We'll put that up next time. I'm happy to answer any questions if they come through. They're going to be read out from the back -- from the front.

[indiscernible]

Well, the optimal debt level from the company is probably measured at the moment in our leverage range -- leverage ratio. And while it's not a prerequisite for a dividend, is actually not in the dividend criteria that the Board considers. The stated range is somewhere between 1.5 and 2.5x. So at the moment -- sorry, debt is 1.5 to 2.5x, our pre-IFRS 16 EBITDA. At the moment, we're suggesting was slightly above that, but a significant improvement on where it's been for a long time, and perhaps not really a constraint from paying a dividend, but it's something the Board's got us mind on, soonly towards the end of the year, we'll be much closer.

[indiscernible]

I'm 100% confident that we will sell it if the right price comes in. If the right price doesn't come in, we'll hold on to it. I should also point it out to you, that selling it is not necessary because if we sell it, we're going to lease it back. You're going to switch an interest cost with a lease cost. So you've still got the cost of the facility there that is paid for by RSE people who stay there at the moment. If I sell it, we'll pay off some bank debt interest will go down, but we've got the least to pay. And so when we actually consider that at the moment because the lease cost is quite a bit more than the interest cost, commit it doesn't make any sense. But I'll commit to you, if we're getting good enough offer or sell it right.

[indiscernible]

Company is able to use controlled atmosphere storage and has a capability to do it. We've done it traditionally for Hayward. We set up to do it this year for SunGold, and we're quite happy to do that, but actually decided not to do that, management decided that we're right up over the top of the harvest, didn't need to put them to CA. The amount we could put into CA is half a days packing. So it wasn't worth it. Our fruit quality in the market that reportedly much better than the fruit that's delivered to the market through the CA. So management's come to the conclusion apart from some marketing to our growers, it's a little benefit in doing it this year. We'll set up to do it again next year. And if we need to, then we'll use it as one of our contingency plans.

[indiscernible]

So as per a normal process in October, and I don't have the date in front of me, we will have our stakeholder update. That will be the next time the company formally talks to its shareholders and stakeholders. If we have some reason to adjust guidance, then we will announce that as required to the market, and we will tell our shareholders immediately. If there's any determination around a dividend at that time, that doesn't coincide with the stakeholder update, we will specifically tell you.

[indiscernible]

At the moment, we've got a strategic network of post-harvest sites from Gisborne, Opotiki, Te Puke, Katikati, Coromandel and Northland. If you think about it, it's actually quite a very good network. We've moved fruit around between those sites, coolstores and packing, just to keep everything running when we need to in the season. Perhaps if we're thinking about rationalizing anything, perhaps Coromandel would struggle. But we've actually got a big market share in the Coromandel there in their facility. It doesn't cost us a lot to run it. We don't own it, it's a lease. And we're able to give the growth in that region very good service, very close. Outside of that, probably nothing that we would rationalize out at the moment. We constantly are looking at our book of coolstores. We lease about 30% of the coolstores that we use. So we're constantly thinking about a zero better configuration of course, as we could use. Should we be building one or leasing one somewhere else or getting someone else to do that. That is coolstorages are a real constraint, not packing. And so we're constantly thinking about that, and we're constantly testing the network of coolstores that we use.

[indiscernible]

So has the company considered doing a low market share. So the answer is no because we -- when we have the volumes down, we're up your eyeballs in debt and there is a big difference between asset backing and share price. And so seemingly, if we did do a buyback, the other shareholders will be benefiting by it, but we're probably better to close that gap through performance, and we don't have to spend any money and take more debt on. And so that's what we're focusing on doing. There is a big gap between the share price and asset backing. And we can close that gap with performance and perhaps when a dividend comes back on stream. That's what we're focused on doing. So on the screen in front of you, you have got both my contact and Nicola's contact. You can e-mail also us [email protected] or [email protected] if you want to e-mail us instead. Is there one more question, right? And so thanks very much for taking the time to come on to this call. We appreciate your support. We appreciate the support of all everyone associated with the company but very much our shareholders, thanks very much for that.