Seeka Limited (SEK) Earnings Call Transcript & Summary

I'd like to ask Turi Ngatai to open the meeting for us, please.

[Foreign Language] It is written in the skies. It is written on the land. It is written in the heart of every person in this room today. What is the most important thing, why it is love? Love to the great one. Love for those who have passed, and we acknowledge them. Love for our land. Love for one another. And that is the way [Foreign Language] has gone and been said this afternoon. [Foreign Language]

Thank you, Turi, and welcome, everybody, and thank you for taking the time to come and join us today in person and online. My name is Fred Hutchings, and I'm the Chair of Seeka, and it is my privilege to welcome you, as I've already said. I'll also take this and acknowledge and welcome those who are joining us online. And I welcome the members of our Board, some of whom are online as well as in person here today. We need to acknowledge our advisers and partners, and I welcome the representatives of Harmos Horton Lusk; Tompkins Wake; our banking syndicate, important people, Westpac New Zealand, Rabo, ASB, BNZ and our Australian Westpac banking entity; also, our auditors, Grant Thornton; Seeka Growers Council Chair, Chris Jensen, and other members of the counsel who are here; Geoff Morgan from Kiwifruit New Zealand, who is also online; and all our growers, suppliers and stakeholders. For those of you in attendance, please turn off your phones. Please note the exits to the auditorium. If we need to evacuate, please make your way through the carpark. A designated Seeka representative will meet you and, no doubt, tell you what to do. So today, I will introduce and make some brief introductory comments. We'll have Michael, our Chief Executive, report in more detail on the 6 months. And also we will have time for questions. Those online can take questions and introduce them right throughout the meeting. And those who are in the room, obviously, we'll have those at the end. And I'll ask you to make sure you use a mic so that everybody can hear your question. So by way of introduction, just I know some of you will have heard this before, but we do have new shareholders and new people. So I just want to outline what we are about, and we are a produce business. So Seeka is an integrated produce business and grows, processes and supplies fruit to the domestic and international markets. Now as we all know, our primary product is kiwifruit supplied to Zespri. And in New Zealand, we have an orcharding business that secures to our network and to our post-harvest facilities and which we store and then supply to the markets. Seeka, we are a truly integrated produce company, growing and selling kiwifruit; pears, both Nashi and European pears; and a new fruit we are growing, or it's really a date called jujubes. And many of you have visited that site and have experienced what we are doing in Australia. Our strategy -- by way of introduction, I think I'd just like to remind you that it has been a tough 3 years in the horticultural business, both in New Zealand and in Australia. We have faced a number of challenges. And it sounds like a long list, but the reality is they all happened, including a pandemic, core crop yields, difficult labor markets, wet and windy weather, cyclones, frost and hail. And then you stop there and reflect on that and just makes me realize how vulnerable horticultural business is going to be. But on the other hand, there are many steps that we can take to mitigate that vulnerability. And our orchards are very good at putting in shelter, water, frost protection and there's other things to mitigate particularly those -- that climate risk. 2024 has dramatically changed for the positive. After enacting a clear strategy focusing on the company on performance, profitability and lowering debt, we have been helped by a rebound in kiwifruit, and you'll hear more about that shortly. And that fruit this year has been of excellent quality and is storing -- and has stored well. Seeka's short-term strategy remains, and that's about delivering operations and financial excellence to our growers, stakeholders; delivering financial performance; optimizing our post-harvest capacity; building new revenue streams around the core of the activities that we undertake; and always selecting excellence in everything that we do. We've built a fantastic culture at Seeka in delivering excellent service, producing excellent products and providing value to our stakeholders. But in the short term, because of the conditions that I outlined just before, we've had to have some really short-term targets to strengthen the company's financial position. So we've had to establish and maintain our excellence in our core operations. It's been a key focus, a focus on improving earnings and reducing debt. We've limited our CapEx to those where it's been innovative and to automate where it's been sensible and provides a greater efficiency to the infrastructure that we already have and also generating financial returns. We've been focusing on that infrastructure and also with a fair focus at some stage, we want to restore dividends because sometimes we paid dividends. Here are the highlights or the key takeaways for the 6 months ending June '24 compared to June '23. You can see the huge rebound in volume, from 30 million last year to 43 million this year. That's an uplift of 44%. Now as you would expect, that also reflects in the revenue for the 6 months, a 34% increase in revenue from $213 million to $284 million. And as you keep going down the P&L, it shows a net profit before tax, that revenue generated $45 million for the 6 months compared to $13.6 million in the prior year. So they are outstanding numbers. And it really does show you what volume does in our business. So that leads me on to what will be the outturn for the full year. This is the second time I think we've had to upgrade our net profit before tax forecast for the full year to -- somewhere in the range of $21 million to $25 million. I have to congratulate Michael and his team for the outstanding job they've done to achieve that result. So it's reflective of the excellent quality fruit that stored well; a continuing focus on reducing costs and improving margins; undertaking contract packing to utilize our facilities more than just processing kiwifruit and providing fresh fruit to the markets; higher orchard gate returns, creating greater orchard earnings than we've had in the past couple of years and improved earnings in Australia. So it's been tough speaking to you over the last 3 years, but in some ways, I should be smiling and doing a little dance when we think about this outstanding result. And Michael will break down for you more in the future in this presentation. So that leads me to some really good news. As we said, the Board met today, and we've actually -- they already announced to the market that we're declaring a dividend of $0.10 per share with the record date of the 20th of December '24, with payment on the 20th of January 2025. That, of course, will be imputed to the maximum value and the dividend reinvestment plan will apply to that dividend. So in summary, a very good year. It's going to be a very good year. Most of that -- or in fact, all of that really is really from excellent operations. Our business also involves orchard development, which includes development margins. There's very little of that in the results for this year. So this is a really, really a reflection of what our company can do when it gets the fruit that it needs to process. So with those -- with that final comment on the dividend, and I'll ask Michael to report to you in more detail on the company's performance for the 6 months.

Thanks, Fred. What a difference a year makes. And we kind of knew that we're into a good year at -- when we reported the 6 months results earlier. But certainly, we've got the wind at our backs and the down leg stretched, right? And so we're pretty happy and satisfied with where we're at. Really, I'm going to talk about the 6 months results, but in case you didn't work it out, we've never delivered a profit like the one we're just forecasting to make. We never delivered a profit that high and we never delivered what you might consider to be the earnings per share that we're going to report when you take the deferred tax adjustment out, as that's because the government changed the tax deductibility of buildings. So it's significantly above what we've ever reported before or made, and so it's a very good result. And it just shows, last year, I got up and made excuses. We didn't have enough fruit and we run a hotel for fruit for a big part of our business. Our occupancy rate wasn't high enough to make us breakeven. This year, it was, and so we are pretty happy about it. And the results are there for you and are tuning up, and with greater certainty as we head to the end of the year, that those results will go well. And thankfully, Zespri is doing a good job selling it. So it's not a big gig. Going back to the 6 months results. The rebound in kiwifruit volumes, old story now, but both in Australia and New Zealand. Our orcharding business produced. We grew 17 million trays in our right, either leased, managed or long-term leased. We packed 43 million trays through our network of post-harvest infrastructure here in the North Island, and we packed some 2.2 million trays -- sorry, 2.2 million kilos of kiwifruit in Australia, up 164%. We're getting on top of things over there. And so that business has really come good. Our financial performance has improved with the volumes, as you expect and as Fred just told you what he expects to be for the full year. But at the 6 months, revenue at $284 million, up 34%. Our earnings before interest, tax, depreciation, amortization of $68.4 million is up 88%. For those of you who are old school, you can take about $7.5 million of lease cost of debt to work out what an old school EBITDA number would look like, but still above $60 million. Profit before tax at the 6 up 230% at $45 million. The material is much easier to report this year than last. We had excellent operational performance for our growers. I think I can say that. There will be the odd case because we're on such a big scale that some growers may not think that. But generally, unanimously, I think it would be fair to say that everyone worked together well. Crops were harvested well on time that were processed. We've had very good fruit quality from growers. It's been well managed. It's been delivered to the market. Comparatively, our SunGold in the market is the best quality. Our fruit loss is very low and our earnings to growers are very, very good, and our own earnings are record. Of course, we've been very tight with our cost management. Our accounting team and our operational staff have been right over the top of the costs. We continue to innovate and think about things about how do we actually take costs out. Can we automate efficiently where we can actually get a return on the investment to make things go faster, smoother, cheaper? So we're thinking about those things. And already, we would have banged on previously about the captive insurance scheme company structure that we're running that has to date saved us an estimated $5.3 million over 2 years. So our insurance was previously going up for material damage and business interruption by about $1.5 million a year. This year, that policy is less than what it was last year. It's incredible. Then the outlook continues to improve. You see us guardedly when I wrote this, but we've had a pretty favorable weather pattern. We had great winter chill across the regions. We had a fantastic bud break, although there is an incident in some places about abortion, but really, generally, it still looks excellent. Our retail services is doing very well in the competitive sector that we are in, an economic downturn, in case you missed it. And so that retail services business, a wholesale market supplying produce through to retail, to supermarkets is actually going pretty well, to be honest, given those circumstances. And in Australia, we've got developments coming into production progressively and then some quite exciting developments that are undergoing over there. No surprise, I'll keep going on about it, volume has been good, so our profitability has gone up. In terms of total revenue, $284 million, it's up 34%, as Fred said. Our gross profit of $79 million is up 63%. We're focused on costs and got very efficient. EBITDA at $68.4 million is up 88%. Our profit before tax at $45 million; $0.41 is the EPS, earnings per share in an after-tax level. However, if you back out the deferred tax adjustment, which is a noncash tax adjustment because depreciation -- building depreciation is no longer tax deductible, just took that one item out. Actually, the 6-month EPS is $0.74. Amazing. It's actually -- the numbers are just like I'm punching myself to look as I read them out. Not truly, but you know. In terms of balance sheet, we had $18.5 million increase in capital employed on the first half of last year, so that's period-to-period. And we had some revaluation increases at the year-end. We've got our ongoing investment in automation underway. We did do upgrades at Oakside 3 and Transpack. And actually, in the last couple of days with the Board, have been talking about plans that we may consider and automating going forward, as we're working through that. We have an ongoing investment in our switchboard and plant room refurbishment as we reduced our capital expenditure to within depreciation, which is sensible in tough times. We've also focused to make sure that we haven't heightened the risk by not addressing the maintenance that needs to be done. So we've gone across the company. We've surveyed all of our plant rooms, we've surveyed all of our switchboards right throughout the company. We have ranked them by risk. The Board has put aside $2 million of our depreciation of our capital spend to actually attend to those items with the highest priority going first. Actually an important part of our captive insurance is actually addressing the risk profile in the company, so it's front of mind. And of course, we've got some orchard developments underway because we are an orchardist, we lease the land, we do the developments, and we have certainty of investment going into the future, certainty of fruit. And so all of those things are underway. So $559 million in total is the capital we've actually got deployed in the company. In terms of the bank debt, at the 30th of June, just under $171 million. Now I read some analyst report that told me off for that number. Well, I need to advise people and the stakeholders and the growers and the shareholders in the room. But actually, we finance our growers in the first part of the season, we actually pay them a sum of t payment. We actually handle the fruit and don't charge them for it to a bit later on. And so as the volumes go up, so does the advance because we're doing more volume. We get it all paid back on the 15th of July. And so, on the 15th of July, some 15 days of reporting, we banked $53 million, most of which was for those in advance. So it's kind of -- if you've got to read the fine print a little bit to understand it probably. We've had the support of the banks. It's true -- but actually, at the end of the 6 months, at the end of the 30th of June, Seeka was within all of its long-term banking covenants, all of them. And with the result that Fred has just forecast to you going forward, well within at the end of the year. And so that probably gives you some background as to why the Board considers it appropriate to consider paying some of the dividend out, some of those earnings out to shareholders because actually, we're in a much more conservative place financially than we've been in the last 5 years. We're not putting the bulk of the money out to you as dividends, but actually starting the process and reminding you that's what our game is. Our EBITDA multiple are straight there, as you can see, 2.37x at the end of the half year; 2.69 when you take the leases out. Actually, very conservative where we have been, if you look at the year before and the full year. EPS, $0.41, as already said, earnings per share; $0.74 when you back out the dividend adjustment, $13.9 million, I think. Asset backing at $5.92. Now the share price has bumped up this morning, you would expect it to. It's just trading at $2.90, up some $0.23 or thereabouts because there's a dividend on board and people realize what the earnings outlook is for the year, but still current share price at a significant discount to asset backing. So probably reflecting in the period we've been through, a little bit of a hangover. There's no dividend paid in the first 6 months, but the Board has declared a dividend, which will be all the shares on the record date on 20th of February will be eligible to receive and paid on the 20th of January next year. In terms of looking at the segments, just to get you through, I'm not going to go too slowly through this. But there's 4 components to our business. We're being integrated, we're an orchardist, then we handle the fruit, then we distribute the fruit, and we've got a fully integrated business in Australia. In terms of our revenue by segment, we have $57 million revenue in our orcharding business. It's headed up by Barry Panellum. Our post-harvest business is headed up by Paul Crone, $194 million. Our retail services business, which comes under the stewardship of Kate Bryant, $13 million. Australia, $19 million. Jon van Popering heads that part of our business. In terms of orcharding operations, 40% of the fruit that we handled in post-harvest was grown or handled by us as an orchardist. It's focused on delivering high-quality crops through to the post-harvest business as well as generating higher returns through for our orchard owners. In this year, if you were in that matrix in management, you made more money than what you did if you were actually as a contracted grower at Seeka. So it's a sign of success that actually teams are doing a good job. 17.4 million trays handled. It's up 11.4 million on the year before, a much, much better season. The EBITDA, $3 million at the 6 months compares to a loss of $1.9 million for the same 6 months last year. We got $19 million invested in developing orchards, around the districts, long-term leases, partnering with landowners, partnering with iwi, partnering with government. And so those investments are set to deliver fruit and financial return into the future. Some of those picking agreements go all the way out to 2050. This presentation will be up -- actually is up now on the NZX if you want to get it later. In terms of our postharvest operations, 68% of our revenue was generated, but it's where all of our investments are. We're stewarding some $800 million of insurable assets in this part of our business. It's around -- it focuses on supplying high-quality fruit and services. It's what is about, delivering excellent quality to the market. 43 million Class I trays of kiwifruits where we generated, up from 29.8 million last year. Also missing off this slide, but I should tell you, has a big business in and around contract packing: contract packed avocados, contract packed citrus, contract packed persimmons. And they actually use infrastructure that we need for kiwifruit at a time that we don't need to use it for kiwifruit. And so we get more turnover and we're making margin and each of those components is profitable. And so a lot going on in that world. Revenue of $194 million is up $43 million on much better volumes. As you expect, $69 million in EBITDA is up $22 million. Retail services completed the chain as she handles all of the fruit that we don't supply to Zespri. That's what it does. We're exporting kiwifruit to Australia. We're exporting avocados to where we can find a market. We're exporting kiwiberry. We're importing bananas, pineapple, papaya, any other fruit. We think there's a margin in our wholesale market in Auckland, integrated business, and it's busy. $23 million in fruit sales. It's had strong performance in the import of produce, particularly the tropicals. That's been a good business for us to be in. Wholesale market has gone well. We also produce and sell Kiwi Crush and our Avocado Oil through that business. We've been working with our partners and, particularly, Freshmax to optimize the sales of avocados after a very difficult year last year. It looks like that's successful. Last year, avocado returns was something like $8.40 per export tray. This year, it's expected to be somewhere closer to $17. So a remarkable turnaround. It has had difficult trading conditions. There is some economic turmoil in New Zealand. I don't need to tell you that. And so some of the trading has been subdued, but still we're pretty happy with the result. It's positive, at least. So our team there has worked hard and delivered a credible result given the circumstances they're in. Seeka Australia, so integrated orchard to market business in Australia. 2.3 million kilos of kiwifruit are grown and sold, is up 164%. We had to scramble over there to get it all done. Jon and the team did excellently well, and had to be innovative. We had quite a small size profile over there. And so they actually put in a new prepack program, [ punetize ] it all. And interesting enough, over there in Australia, it was the highest returning fruit size of all the sizes that we had. We do direct sales to the majors of our Australian produce and we also back up the supply lines from New Zealand for avocados, kiwiberry and kiwifruit. $19 million in revenue in the 6 months, up 67%. $4.9 million EBITDA, up $4 million. Did I say that correctly? Up $4 million. So honestly, they've pulled one out there. It looks pretty good. We've been looking at the 5-year plan yesterday with the Board and we had some confidence going to that business. We've got $16 million invested in new orchard developments that are scheduled to start coming into production from next year, fully in production in 2028. And some exciting new varieties for pears, and we've got a new red Nashi pear in Australia, which is just in the process of being branded and will be released next year with the first commercial crop. In terms of our sustainability drive, it's real here. It's not greenwashing. What we've been through in the last 30 months, particularly with the weather events, tells us it's real. Well, I guess you've got to do more probably as a nation, and we're going to do our bid as a company. So we've got to build ourselves up for climate resilience. We've got to get a commitment and more of a commitment to our people and our communities. We have got 5 years of verified emissions data from Toitu Envirocare. So we know as a company what we're doing and how it impacts on the environment. We know about our use of energy. We know about our use of artificial fertilizer. We know about our waste and we know about our energy use. And so we -- and we also know about our refrigerants, sorry, which is the last one. And so we understand we have plans to reduce our impact on each of those 4 areas. We are targeting net zero emissions ultimately. We've got sustainability projects in place right across the business, and we've got a sustainably-linked loan, which is set up to reward us or penalize us if we hit or miss targets. Although some of those targets might be a little bit tough, to be honest, but they are targets on the list. And if we achieve them, we'll get the benefit. And if we don't, we won't. So looking forward to next year, and we're in the end of my presentation. Now you'll be relieved for those of you who still awake. We remain focused on delivering operational excellence. We've already started our planning process for next year. We've already started our capacity planning process for next year. We put ourselves apart from the things that didn't go well this year. We make an art form of it and put in place the corrective measures to make sure that we're focused on improving what we've done this year and next. We've targeted our capacity. We know the capacity that we've got in the company. We know we've got our contingency plans in place. We've got automation opportunities set up for ourselves over the next 5 years and some options to increase packing capacity if we think they're sensible. We're reasonably satisfied at the moment, having come through a good winter, but also understanding that we haven't got the pollination yet. So we truly don't know with some certainty what it is that we've got until we get to fruit set in Christmas. But you can't end well if you don't start well, and it started well because we've had fantastic winter chill. And so although we have got some incidences and some orchardist issues. And we still are looking to sell and lease back at RSE accommodation and Sharp Road. We did receive an offer to do that, but actually wasn't economically sensible or commercially sensible that we did it. So we just put it in the back burner, and we will wait for the market to catch up to us. It remains for sale, but we don't need to sell it. We've got the full support of the banks. There's no requirement to sell it. We simply built the thing with the intention to sell it and lease it back, and so that was the strategy when we did it. It remains a strategy now. We're just patiently waiting for the market to catch up to us. So that's my presentation to you as quickly as I could do it, sensibly as I might. You've got a CEO standing in front of you not giving you any excuses about volumes. Through the Chairman, we have delivered, we believe what will be a record of profit for the company by some margin from our operations, and there's no one-offs at the moment. And we're also reasonably satisfied that we put the Board and the company in a position that they can actually consider and declare a dividend. And so we think that, that should build some confidence in the company as well. So thanks very much for listening to me. I'll give you back to the Chairman. Thank you.

Thank you, Michael. One of the takeaways from that is that we've got 4 key parts to our business and all 4 are performing at the same time. So that's a great outcome and when management can achieve that, we get the results that you've seen. I'm happy now to take questions if there are any from the floor, and we'll ask you to use the mic if you have one.

Firstly, as a shareholder, I'd like to congratulate Seeka for the great performance over the past year. I've got 2 very minor queries. One of them concerns something which I think I heard at one of the last meetings I attended about orchards being for sale up in Northland. The query is what's happening in that regard? The second query is according to the newspaper report, so I read the first boatload of kiwifruit which left New Zealand ended up being discarded because of rats or mice or something of that nature in the ship. How did that affect Seeka?

Okay. So the first question was orchards for sale in Northland. I think there's one left. So we started with close to 200 hectares, wasn't it Michael, of orchards when we bought Turners and Growers some years ago. And now we've got one orchard left of how many hectares, Michael?

Something like $3.5 million worth.