Scales Corporation Limited (SCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Scales Corporation Half Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Andy Borland, Managing Director. Please go ahead.

Good morning. I'd like to welcome you [ Scales ] interim results announcement for the 6 months ended 30 June 2026. With me is Ben Washington, Scales' CFO. Earlier this morning, we launched our results with the NZX, which included the presentation pack that we'll base our comments on for this call. Ben and I will run through the slides and take questions at the end. An agenda is provided on Slide 2. We thought we'd start our presentation on Slide 4 with a quick recap of the scales Group, 3 global operating divisions, which all have different business models, but all operate within the agribusiness sector. Global proteins has 2 main business areas, the manufacture and supply of petfood, ingredients and the supply of [ enable ] proteins. Horticulture comprises Mr Apple, our vertically integrated Apple business [ Furnifresh ] produce exporter, and Profruit, a premium juice manufacturer. And logistics provides air and sea freight services to both internal and external customers, primarily within the perishable food sector. And as you can see from Slide 5, we're a truly global business spanning multiple geographies, but with a focus on the North America and Asia markets. On to our results for the first half of 2026, and as you can see from Slide it's been another very positive period with record first half earnings. This has been driven by both organic and transactional growth, and in particular, the M&A activity that we undertook within global proteins last year. Putting some numbers to those record results. Revenue increased 105% to $762 million. Underlying EBITDA grew 18% to $102 million. Underlying NPAT rose 10% to [ $62 million ], and underlying net profit attributable to shareholders increased 7% to $52 million. As a result, earnings per share has increased $0.02 to $0.36 per share for the 6-month period. In respect of the divisions, on Slide 8, I'm pleased to report that we had top line revenue growth across all divisions. Within Global proteins, our EBITDA margin was impacted as a result of our increased shareholding in the Intel proteins businesses in the third quarter last year as this is a higher revenue, lower margin operation. However, Pet Food Ingredients margins grew strongly. Horticulture had another solid growing season with a further shift towards premium varieties targeted to the Asia and Middle East markets. Sales run rates were very strong in the first half of the year, and this offset a slightly lower packout rate. Lastly, Logistics performed well continuing to increase volumes despite ongoing geopolitical issues and continuing to deliver best-in-class service to both internal and external customers. I'll now pass on you to Ben, who will run through the financial results for the first half of the year in more detail.

Thanks, Andy. For those of you with a copy of the results presentation, we're now on Slide 10. This slide compromises the key financial metrics for the group for the first half of 2026 compared to the first half of last year. I'll refer to the financial results measured on an underlying basis, which includes the effects of IFRS 16 and that excludes the impact of acquisition accounting and certain one-off items detailed in the appendices of the presentation. I'd also just like to note impairment provision of $19.7 million has been recognized within our reported earnings in respect of the loan to the Esro Petfood joint venture. This impairment has been excluded from our underlying results. As you can see, revenue has more than doubled year-on-year, primarily due to the consolidation of the Edible Proteins from the third quarter of last year. This has also contributed to the change in gross margin mix between 2 periods. Whilst operating expenses increased with the consolidation of edible proteins business, we achieved operating leverage overall. As a result, operating expenses as a percentage of revenue decreased from almost 8% in the first half of 2025 to 5.5% for the year. As Andy mentioned, the group resulted a strong profit growth for the first half year. With underlying EBITDA increasing by nearly 18% to $102 million. The underlying net profit after tax attributable to shareholders increased by nearly 7% to $52 million. The next slide summarizes our financial position. Whilst there are several movements between June 2025 and June 2026, it's important to note that the balance sheet at 30 June last year did not include the Edible Proteins business or Meateor Australia. It is therefore important to consider the position as at 31st of December 2025 for [indiscernible] . In addition to the effects of bringing in the edible proteins businesses, net working capital at 30 June 2026 has increased by a faster sales run rate in water culture, increasing the June receivables balance. Net debt has also impacted our horticulture seasonal working capital, together with higher input costs of inventory for global proteins. Whilst the quantum of the net debt balance at 30 June 2026 has increased compared to both June '25 and December '25, it remains only 0.7x the rolling months EBITDA, similar to other periods. As in previous years, we expect net debt to reduce in the second half of the year as Horticulture seasonal working capital requirements unwind. In other words, as cash is collected from our horticulture [ deters ]. Finally, the group has extended its term debt facilities with Rabobank and we expect for a further 3 years. On to Slide 12. The movement in net debt between December and June can be portioned into 4 main areas. Firstly, strong cash earnings from each of the divisions, a disciplined approach to CapEx, predominantly within the water culture division. Payment of dividends including those in respect of our noncontrolling interests, and as I previously mentioned, an increase in working capital, largely seasonal from the horticultural division. Moving on to a review of the divisions, starting with Global Proteins. As you'll see on Slide 14 of the presentation, in addition to presenting Global Proteins underlying results for the 6 months to 30 June 2025, we've provided pro forma results as if the increased investment in Meateor Australia, [ Bain ] International and ANZ exports had taken place from the start, this offers a year-on-year comparison of the division on a like-for-like basis. Of particular note is the reduction in EBITDA margins in June 2026, which, as previously mentioned, is due to the higher volume, lower margin model of the Edible Proteins business. However, EBITDA margin is significantly more comparable between June '25 and June '26 when viewed a like-for-like basis. Most businesses, but in the division performed well. We're seeing strong demand for global pet food ingredients. However, supply remains tight across Australia and New Zealand. Shelby delivered a very strong result, driven by favorable product mix and a new in-plant collection facility. Media also contributed strongly, driven by positive demand. Unfortunately, the results -- the divisional results were impacted by the disruption of Esro pet food, which has provided us with some challenges. Our immediate focus is to stabilize operations and assess the long-term strategic plan within the region. On the edible proteins side, the same business continued to grow sales across Asia and the U.S. As you can see in the pie chart on Slide 15, around 57% of our total protein volumes were sold to the North American market. We source product in this market, both likely and globally to meet customer needs. Asia was our second biggest market at around 30% of sales with the addition of the Edible Proteins business growing sales into both Asia and North America. Petfood ingredient volumes grew around 11% due to our investment in production capacity in prior periods, reaching operation levels. This, along with improved efficiencies, also increased Petfood ingredients revenue and underlying EBITDA per kilogram. Moving on to horticulture on Slide 16, which produced another solid result. Whilst there was some disruption to Middle East sales, this was compensated by robust demand in Asia. As mentioned, Mr Apple sales run rate was higher than last year at around 56% of forecasted on growing export volume being sold as at 30 June 2026 compared to 54% last year. Profruit had another solid 6 months with healthy production levels compare sales volumes to last year and strong sales in the U.S. market. Increased fuel cost and freight from the Middle East conflict have impacted EBITDA margin. On Slide 17, we continue to see an increase in the portion of sales to Asia. We expect sales to the or Asian and Middle East markets to account for around 91% of export sales volumes this year. This compares to around 84% last year. Mr Apple's total export volumes are forecast to be around 3.5 million TCEs for the year with a packout rate of around 75%. Whilst both of these metrics are slightly down on last year, they have been offset by a continuation of our strategy to increase market exposure to Asia and Middle East and increase the proportion of Mr Apple's premium varieties, premium variety volumes to 79%. Once again, Dazzle and Posy have driven the premium volume growth and landing of these varieties approach maturity. Lastly, on to logistics, which reduced a robust result with underlying EBITDA down only 6% from last year's exceptional first half performance. This is particularly pleasing considering the ongoing geopolitical tensions and associated fuel price challenges. There was a significant increase in demand for air freight, primarily from the dairy sector, together with modest increase in sea freight volumes. I'll now pass you back to Andy.

Thanks, Ben. Sustainability remains at the forefront of our mind, and we continue to make progress on our ESG and sustainability projects and goals. A selection of projects, as shown on Slide 20, and I'd just like to touch on a few of them. The availability and efficiency of energy is important to us from both an environmental and cost point of view. Consequently, we're currently assessing our process and technology options in order to improve our energy efficiency and to ensure resilience towards energy availability and cost. . In respect of our people goals, we're committed to ensuring that scale is the best workplace that it can be. Mr Apple has had a peer strategy in place for several years, and I'm pleased to say that we've levers us knowledge and implemented our first formal group-wide people strategy, extending a common framework across the group. We also recently completed I think the pay gap assessment across our New Zealand businesses. Our first pay equity review was undertaken in 2020. So this more recent assessment provides us with an up-to-date baseline going forward. Lastly, I'd like to look I'd like to update you on our divisional strategic priorities and provide an outlook for the full year. On to Slide 22 now. Within global protein is 1 of the most processing priorities to stabilize Esro Petfood and in conjunction with that, assess the long-term plan for our European operations. We've also focused on broadening our supply base in Australia and what has become a relatively tight supply market. this would diversify any potential associated supply risk. Horticulture's long-term strategy of investing in premium varieties targeted towards the Asia and Middle East markets continues with ongoing orchard redevelopment program. We also continually assess efficiency in automation opportunities within our post-harvest operations. Lastly, Logistics is focusing on what it does best, which is deliver best-in-class service to both internal and external customers or navigating volatility in the global freight market. The division continues to actively pursue new customers whilst continuing to strengthen long-standing relationships with existing customer base. In respect of the full year outlook, the directors would like to advise an increase in the FY '26 guidance range of underlying net profit after tax attributable to shareholders to between $55 million and $60 million. And providing this guidance [indiscernible] would like to note, Mr Apple's sales run rate for the first 6 months this year was higher than the run rate in the same period last year, around 7% of Mr. Apple's export crops to be sold, which compares to around 18% this time last year. Ongoing geopolitical tension in the Middle East and final pricing remain areas of risk. We continue to remain cautious in global proteins due to ongoing geopolitical uncertainty and tight product supply in certain markets, but we remain confident with the medium-term outlook and strategic growth initiatives that we have in place for the division. Our logistics business has successfully managed the impact of geopolitical tension, increased fuel costs and ongoing freight disruption in the first half of the year. However, we will keep a close watch on the ongoing impact of this disruption in the second half of the year. That concludes today's formal presentation, I'd like to direct you towards the appendices, which provides additional information, including the reconciliation of reported line to underlying earnings for the group and each of our divisions. We're now happy to take questions.

[Operator Instructions] Your first question comes from Rob Morrison from Craigs.

Congratulations, Andy and Ben and the wider team for a really good result. kicking off kicking off with the guidance range. So you've obviously upgraded it, and there's a bunch of assumptions that book end the top and the bottom. Can you just run me through what you're assuming for the divisions at the top and the bottom end?

Yes. We've kept it pretty broad, as you know, with our guidance, Bob, in terms of not being directly specific about each of the divisions. But clearly. [Audio Gap] Favorable contracts through the first half.

Okay. Just on that global protein, so it looks like Shelby had a really good first half growth, so if you look at that UNPAT to minority shareholders, which is mostly Shelby, it seems to me, that was up about 32%. And the guide is assuming a pretty big deceleration in the second half it looks like the guide range is for a negative 3% to negative 16% fall in the second half for that UNPAT to minorities, again, which is mostly Shelby. So what's driving that?

There's a couple of things there, Rob. It's a little bit complex. With the Esro Petfood piece, we've obviously taken control of that for accounting purposes. So the minority interest is going to go through Esro Petfood in the second half as well. So that's sort of compensating. My observation or my comment on Shelby would be that we would expect to deliver some growth on second half of last year, we just don't think that it will repeat the run rate of the first half.

That's great. in terms of the guys for the improved disclosures. So just in terms of what the just in terms of what all the divisions I think global proteins. So I can see the organic Global proteins net profit is up 7%, but the net profit to shareholders is down a couple of percent. It looks like Meateor New Zealand is up about a more Shalby SBS is up a little, which is great. Esro Europe is down about $2 million. Can you just talk about what you're seeing in Fayman International Meateor Australia in the half?

Yes. The Fayman International business has grown year-on-year top line sales. The margins are under pressure in that business. Gross margin is under pressure a little bit year-on-year. the major Australian business had a very good first half. We have acknowledged that supply is tight. But I think a key beneficiary for us in that first half has been we carry some inventory over in the first half. but we don't have that same luxury in the second half in a tight supply market.

Okay. And then just in terms of the next steps for Esro Europe, it kind of sounds like your perhaps considering the viability of the operation. How soon could that be wound down? And what kind of losses would it incur while that's happening?

Look, pretty very manageable for us. We Yes, we're working through the -- obviously, our joint venture partner had some difficulties there entity that went into administration. And yes, we're in the process of, as Ben said, sort of like taking control of it. And yes, we look pretty confident of getting solution through this.

Our next question will come from Adrian Albon with Jarden.

This might be a tough question to just looking for a ballpark, and I know like particularly for like FX has kind of wrapped into the broader negotiations. But like how much of -- like is it possible to sort of call out, was there any sort of super normal benefit that you kind of, I guess, benefited from in the first half. Obviously, the end dollar was quite weak. Just wondering if there's anything you could isolate on that front for us.

Yes, on that one, we are hedged sort of 5 years out. So it's largely all hedged Adrian. There is a little bit of currency benefit, but it's not significant in the first half, but it's pretty modest.

Okay. All right, hopeful. And then just maybe staying with you, Ben, just in terms of those Isero challenges, are they sort of normalized in teens number and the underlying estimate that you provided for that division? .

Yes. So ingrate trading performance is included in the underlying result and it is included in the forward-looking view. So the only thing we've stripped out is the provision for the loan from the underlying performance.

Okay. And in the council, you convinced for the second half, given is that Esro will join the noncontrolling interest, is that right?

Correct. Yes. So from an accounting perspective, will consolidate 100% of the result and then 50% of it whilst we remain in the 50% joint venture, we'll go through that noncontrolling in the second half.

And have you got -- have you made a placeholder for that loan -- are you able to kind of -- like, obviously, it's hard for us to have any sort of idea or like how material is it?

Well, I think we've given you the first half performance, which is sort of a $3 million loss for our 50% share. We would expect to repeat that necessarily in the second half. So there will be an improvement on that in the second half. But we don't expect it to be profitable.

Okay. Okay. So there's -- yes, somewhere between a minor loss and half of that loss would be reasonable for us.

Yes.

Okay. Just in the apples business. Look, I guess you've recorded at this moment in time, you sold more and the packout rate is lower compared to last year. Like would it be reasonable -- would it be reasonable to kind of expect sort of like around about a $10 million loss at the part level for the second half?

Yes, it's within the ballpark. Yes.

And just in terms what the efficiency options that you talk about, I think that -- I think Andy was talking about that on Slide 20 -- sorry, 22, how linked or contingent are they on your sort of activities that were sort of quite watchful on the industry consolidation?

Not really. No. It's -- 1 of the ones is and Profruit. We're a big gas user there. The prices have gone up for gas and electricity. So we're just looking at ways to get more efficient than that with us. We've got some of the specialist equipment and there is getting quite aged, if you want to call it that. And so there's probably an investment to and the payback is super good because the new cat uses a lot less energy on a per kilogram, if you want of product. So it's really in those sort of areas, Adrian, that we're trying to look for improvement, not yes. So definitely.

I think the other one, Adrian, is there are some efficiencies we've identified in some of our protein businesses around plate freezing and the like. So we think we can invest some CapEx and get some efficiency over time.

Okay. No, that's helpful. So like in terms of horticulture, I guess the bug strategy that you've that you're calling out has driven the value is essentially the shift up into the premium varietals where you're running at kind of under 80% at the moment. And so this stuff is more just sort of backfilling just to kind of keep -- sort of keep a watchful on the costs and then I guess the industry consolidation allows you to sort of optimize the Orchard land that you've got and potentially take on a few more opportunities as they sort of fit in on the [indiscernible] the price front? Is that sort of how you would see that [ obstacle. ]

We've certainly picked up a number of leases, I think, in total, about 100 hectares, 80 to 100 of leases that have come out of that range of, if you want to call it, business failures and the Hawk's Bay .

On that is that over the first half? .

And it was a better last year as well. We picked up some late in the year, and we've picked up some more recently. And they are really just helping us target more growth for our premium varieties and help keep the volume stable as we redevelop .

Okay. And then maybe a final question on logistics. You're calling out like I think the air freight boost from a dairy sector. do you think that like that, they're sort of [indiscernible] like Willie Middle East? Or is it still ongoing? .