Inghams Group Limited (ING) Earnings Call Transcript

Welcome to the Inghams FY '25 financial results briefing. [Operator Instructions] I will now hand over to Inghams' Chief Executive Officer and Managing Director, Ed Alexander.

Good morning, and thank you for joining us this morning. My name is Ed Alexander, Chief Executive Officer and Managing Director of Inghams, and it's my pleasure to welcome you to our FY '25 results presentation. On behalf of Inghams, I would like to acknowledge the traditional owners, both past and present, as custodians of this land that we are meeting on today. Joining me for today's presentation is Gary Mallett, our Chief Financial Officer; and our Chief Operating Officer, Anne-Marie Mooney. At the conclusion of the formal presentation, we will take any questions you may have on our results, the business and our outlook for financial year '26. As you know, Andrew Reeves stepped down as CEO and Managing Director of Inghams at the conclusion of FY '25. I would like to take the opportunity to recognize the tremendous contribution made by Andrew to the Inghams business during his tenure. Andrew stepped into the role when Inghams needed him most, leading the business through the unprecedented challenges posed by the global pandemic, successfully stabilizing operations and returning the company to strong profitability. Andrew made major strides in reshaping and building the culture of the business. His commitment to doing things the right way set the standard for how we operate. Andrew leaves behind a remarkable legacy after an extraordinary 40 years in business. On behalf of the entire Inghams business, I would like to express our deepest thanks and gratitude to Andrew for his exceptional leadership and wish him every future success. Turning now to the results for FY '25. Inghams delivered FY '25 EBITDA pre-AASB 16 of $236.4 million, slightly above the prior corresponding period and representing a solid performance despite challenging market conditions in Australia in the final quarter. While group volumes declined, NSP increased slightly and EBITDA per kilo grew 1.8%. Feed costs declined $57.2 million, and our focus on cost discipline delivered good results with operational expenses, excluding feed costs, increasing by only 0.3%. The Australian business faced headwinds from the Woolworths supply agreement changes and broader cost of living pressures affecting consumer demand. That said, we made very strong progress diversifying our customer portfolio. Our New Zealand operation delivered exceptional growth with EBITDA pre-AASB 16 up 14.3% to $52.7 million, underpinned by volume and NSP growth and reflecting favorable market conditions and successful brand investments. We settled the acquisition of Bostock Brothers in July 2024. The integration continues on track, and the business is performing in line with expectations. While near-term conditions remain challenging, our operational discipline and strategic positioning support confidence in our medium-term outlook. This table summarizes the key financial outcomes during the period. You will notice that certain key indicators are lower than the prior corresponding period, notably in Australia. Our New Zealand business made a strong contribution in FY '25, and we are now realizing the benefits of the strategy that we have been implementing, including the acquisition of Bostock Brothers and investments in promotions and branding. FY '25 was something of a tale of 2 markets. Group core poultry volumes were down 1.4%, driven by a 2.5% decline in Australian volumes, partially offset by strong growth of 5.2% for New Zealand, which was aided by strong retail channel performance and the Bostock acquisition. Australia faced headwinds in retail, particularly during the second half, as we transitioned to the new Woolworths supply agreement. However, we did observe some positive momentum in QSR with new business wins driving growth in the second half. Group export sales were down 8.6%, largely due to temporary market closures due to avian influenza outbreaks at non-Inghams farms. Group core poultry net selling prices increased by 0.5% to $6.31. However, as you can see, group NSP declined sequentially in the second half, down 96 basis points. In Australia, pricing increased slightly across FY '25, but we saw pressure emerge in the second half, resulting in a 2.3% decline compared to the first half. In contrast, our New Zealand business delivered strong NZD-denominated price growth of 2.9%. The Bostock acquisition was a key contributor here, adding 2.3 percentage points to New Zealand growth and 32 basis points to group NSP overall. Looking at performance by channel. Retail remained solid with growth of 2.1%. Wholesale, however, declined by 9.2%, reflecting the broader dynamics in the Australian market. Before I hand to Gary to go through the financials, I wanted to comment on the performance of the business between the first and second half of financial year '25. In Australia, our trading performance deteriorated meaningfully as we progress through the fourth quarter. While lost Woolworths volumes were largely replaced, the shift to a lower margin mix, weaker wholesale pricing and softer retail demand late in the year drove a meaningful deterioration in Q4 earnings. In contrast, our New Zealand business delivered strong results with the successful Bromley Park integration, reducing farming costs; effective marketing investment driving brand performance; and higher red meat prices, improving poultry's relative value proposition. As a result, we saw margin expansion and improved demand. I will now hand to Gary.

Thanks, Ed, and good morning, everyone. Commencing with our profit and loss on an as-reported basis. Ed outlined the changes in core poultry volume and NSP. As a result of these movements and the 10.3% decline in external feed revenue due to the combination of lower feed pricing, which, of course, benefits our core poultry business and volumes, total revenue fell 1.5% to $3.15 billion. EBITDA on an as-reported basis declined 15.3% to $392 million largely as a result of the significant $60.8 million reduction in AASB 16 charges arising mainly from the planned conversion of 121 contract growers to variable performance-based contracts over the past 2 years. Underlying EBITDA pre-AASB 16 was $0.1 million higher than FY '24. Total costs showed modest growth of 0.8%. There are several factors in this outcome worth noting. Internal feed costs declined $57.2 million due to improvements in market pricing of key feed inputs over the past 12 months. There was an additional $60.8 million operating cost impact due to the above-mentioned conversion of contract growers, although this was largely offset by lower AASB 16 depreciation and interest charges, while total other costs, excluding feed and AASB 16 items, increased by only $7.2 million despite inflationary pressures. This was largely due to our stringent focus on cost management initiatives and operational efficiencies. In summary, despite volume headwinds, we maintained pricing discipline, demonstrated strong cost control and delivered significant feed cost savings, which has supported our underlying earnings for the year. Turning now to the balance sheet. Our balance sheet remains sound. Working capital saw an increase of $15.5 million from additional processed poultry inventory, reflecting the challenging fourth quarter Australian trading conditions and higher prepayments due mainly to the timing of annual insurance renewals. Right-of-use assets and lease liabilities have both declined significantly versus the PCP from the previously mentioned conversion of grower contracts from fixed performance-based variable contracts. Net debt increased by $82.5 million, including the settlement of the acquisition of Bostock Brothers Limited in New Zealand and the delivery of our capital investment program to support future growth. Moving now to cash flow performance. Cash conversion remains strong at 97%, slightly lower than FY '24. CapEx and acquisitions totaled $135.4 million with $42.5 million of core and high-growth project investment and as noted earlier, the settlement of the Bostock Brothers acquisition for $31.3 million in July '24. Dividends paid in the period were lower and relate to the final FY '24 dividend of $0.08 per share and the interim FY '25 dividend of $0.11. Both dividends were fully franked. AASB 16 interest and principal payments declined $77 million due to the conversion of contract growers to more performance-based variable contracts and the acquisition of the previously leased Bolivar primary processing plant. Tax and interest payments were also higher in the period. Now turning to our capital expenditure. Our capital allocation strategy demonstrates disciplined investment in both operational continuity and strategic growth initiatives. During FY '25, stay in business CapEx was $61.6 million, which is basically 100% of pre-AASB 16 depreciation and reflects a catch-up in outstanding projects, which arose as a result of the constraints we experienced during the COVID period. Our investing capital of $42.5 million has been focused on automation and operational efficiency improvements across both Australia and New Zealand. Notable projects included: completing the Amarina Breeder Triangle facility; automation initiatives worth $16.3 million in Australia; our Ingleburn Value-Enhanced decoupling project, enhancing our processing flexibility; the Lisarow fully cooked line upgrade, expanding our capacity; and $9.8 million in New Zealand automation projects. The capital investment is reflected in our balance sheet metrics on the next slide. Our leverage ratio sits within our target range of 1 to 2x, increasing to 1.8x due to the investments previously mentioned. We also strengthened our financial position during the period through a successful refinancing, as mentioned at the half. We've increased our total facilities by $200 million and extended the weighted maturity by approximately 2.4 years. This provides us with funding flexibility to progress our operational and automation investment programs whilst positioning us to capitalize on strategic opportunities as they emerge. This leads to our capital management outcomes. I've already covered many of the details in today's presentation, and our capital management strategy is serving us well. Our sustaining CapEx is tracking well above our target range versus depreciation -- sorry, well against, not above, and we continue to execute on several core and high-growth investments. As previously mentioned, today, we have also declared a fully franked final dividend of $0.08 per share. Turning now to the current feed market dynamics. Feed costs are one of our largest input costs. During FY '25, we benefited from declining commodity prices. Observed market pricing saw Australian wheat down approximately 10% and soy meal down around 17% year-on-year. Looking ahead, current external forecasts suggest continued good grain supply with record wheat production expected globally and strong Brazilian soybean crops. ABARES forecasts Australian wheat production at 30.6 million tonnes, which while down 11%, if achieved, would still be above the 10-year average. These forecasts suggest continued moderation in feed costs, though we maintain our prudent forward-purchasing strategy of 3 to 9 months coverage to manage security of supply and price volatility. As regular followers of Inghams will know, the market pricing data shown on the slide represents broad commodity benchmarks. Our actual feed pricing differ from these market indicators due to a variety of factors relating to the purchasing and pricing of delivered grain and soybean meal that we use as well as the level of forward cover that we may hold at any given point in time. I will now hand back to Ed to discuss the segment performance.

Thank you, Gary. Our Australian operations faced a challenging year with core poultry volumes declining 2.5% and revenue down 2.6% to $2.64 billion. The primary driver was the transition to the new Woolworths supply agreement, which has temporarily impacted volumes with retail volume declining by 4 kilotons. As noted earlier, we have successfully secured new business primarily across our retail and QSR customer base, and I believe we are well positioned to secure further new business in FY '26. While we were successful in replacing lost volumes, increased promotional intensity and pricing pressures have been margin dilutive in the short term. As a result, Australia recorded a small increase in core poultry NSP of 0.5%. On the cost side, our management initiatives delivered strong results. Total costs fell by $61.7 million or 2.4% with internal feed costs down $49.8 million on the back of lower input prices and SG&A reducing by 18.3%, more than offsetting cost growth in other areas. As a result, underlying EBITDA margin largely was broadly steady at 7%, reflecting the business' operational resilience during this period of transition. New Zealand delivered strong growth with core poultry volumes increasing by 5.2% and revenue rising 4.0% to $512.3 million. A key contributor was the acquisition of Bostock Brothers, which strengthened our market position, added 3 percentage points to volume growth and supported strong retail channel growth of 11.3%. Core poultry NSP in New Zealand dollars improved 2.9%. Retail pricing increased by 7.7%, although this was partially offset by declines across the combined wholesale, foodservice and export channels. External feed volumes fell 7.9% as a result of reduced external customer business, though this was partly offset by increased internal demand from Bromley Park Hatcheries. Total costs increased by $11.6 million. Internal feed costs improved by $7.4 million due to lower input prices, while our results also reflected a full year of Bostock Brothers operating costs of $19.8 million following the completion of the acquisition in July 2024. Pleasingly, our underlying pre-AASB 16 EBITDA margin expanded by 93 basis points to 10.3%, highlighting both strong operational leverage and the successful integration of Bostock Brothers. I will now hand over to Anne-Marie to discuss our investment program and sustainability.

Thanks, Ed, and good morning. Our network investment blueprint directly supports our aims -- our key aims of expanding capacity, improving efficiency and supporting value growth. It outlines a comprehensive multiyear investment program across our primary processing facilities, scaling to around $120 million over the program duration. Our investment focuses on automation, strategic infrastructure upgrades and new processing capabilities. We're prioritizing automation in areas with the highest labor demand and those that closely align with key customer plans to drive significant efficiency improvements across our processing network. These investments will strengthen our leadership position in the poultry industry, enhance our competitive differentiation, drive operational resilience, reduce labor costs and align with evolving customer expectations while demonstrating our commitment to quality, innovation and sustainability. At Osborne Park in WA, we are introducing an automated cut-up processing capability to increase speed and reduce bottlenecks. With a $12 million investment, this project is expected to deliver very attractive returns in both financial and capability terms. The scope includes new big bird and small bird overhead cut-up lines, automated boning machines and vision camera grading system. Key benefits include increased cut-up processing speed, elimination of manual double handling, removal of work in progress bottlenecks and significant labor and yield improvements. Importantly, this creates the foundation for stage 2 expansion as we move towards self-sufficiency in our Western Australian operations. Implementation is well underway with equipment orders placed in the second half of 2025, preinstallation works in the first half of 2026 and commissioning targeted for early FY '27. Our Murarrie facility represents our largest single productivity enhancement investment at $40 million. This comprehensive upgrade includes 3 automated cut-up lines with in-line deboning. The benefits are substantial, including yield improvements, significant reduction in labor reliance and improved safety and quality outcomes. Importantly, it also unlocks our ability to process big birds from the small bird line. Our implementation time line shows works commencing in September '26, equipment orders in Q1 2026 and installation beginning in Q1 2027 with completion anticipated in the second half of 2027. This project represents a transformational upgrade to our largest processing facility. The Te Aroha QSR automation project represents our continued commitment to operational excellence in New Zealand and is expected to deliver a compelling ROIC whilst positioning us for future QSR market growth. The new overhead cut-up line replaces 4 circular auto-saws, producing consistent 9-cut chicken portions to exacting standards in addition to labor efficiency and safety benefits. The project forms part of our broader New Zealand automation pipeline. Our KFC line is currently commissioning with an investment in water-jet cutters following in October. Looking ahead, we're progressing new business cases for other automation projects over the next 18 to 24 months. Each investment systematically addresses labor efficiency, yield optimization and capacity expansion whilst maintaining our focus on animal welfare and food safety standards. I'm proud to highlight Inghams' continued leadership in people safety, animal welfare, sustainability and food quality throughout FY '25. Our safety performance improved with total recordable injury frequency rate declining by 3.6% to 4.25. We maintained 100% RSPCA-approved and SPCA-certified certifications across all broiler farming facilities. And we achieved an average Global Food Safety Initiative BRC rating of A or better with 80% of sites earning AA ratings. Significant sustainability milestones include moving to 100% renewable energy in our New Zealand operations and achieving Climate Active Carbon Neutral certification for our Marion Bay brand, Tasmania's first carbon-neutral certified chicken. We exceeded our 50% recycled content packaging target, achieved 28% waste intensity reduction and reduced water intensity by 2.7%. Our 2025 sustainability report will be published with our annual report in October. I will now hand back to Ed.

Thank you, Anne-Marie. Turning now to our guidance and outlook. FY '25 was a year of significant change for Inghams with the completion of the Woolworths contract renewal, onboarding of new customer volumes and challenging market conditions, particularly in the fourth quarter. While lost Woolworths volumes were largely replaced, the shift to a lower margin mix, weaker wholesale pricing and softer retail demand late in the year drove a meaningful deterioration in Q4 earnings. We have been and will continue to act decisively to address these issues. We are reducing excess inventory and recalibrating production settings to match demand in each channel. And we are implementing cost reductions across the business. While these initiatives will impact H1 earnings, they are expected to underpin a stronger H2 performance. Inghams retains a strong competitive position built on attractive market fundamentals and industry-leading capabilities. The performance of our New Zealand business illustrates what is possible when the fundamentals are executed well with EBITDA doubling between FY '23 and FY '25, significant gains in customer partnership rankings and reduced staff turnover. This success was driven by a systematic focus on people, on partnerships, on innovation and on network strength. Our FY '26 strategy represents a disciplined approach to current -- disciplined response to current market conditions and will set a strong foundation for long-term value creation and a return to profitable growth. Our focus centers on 3 priorities: firstly, matching supply with demand to improve market economics and promotional effectiveness; secondly, delivering outstanding customer service to maintain existing volume and win new business; and finally, optimizing our cost base to offset inflation and rebuild margin. While FY '26 will be a year of disciplined execution through challenging market conditions, these strategic choices position us strongly for long-term value creation. Today, we are providing FY '26 guidance for underlying EBITDA pre-AASB 16 of between $215 million and $230 million. Earnings are expected to be significantly weighted towards the second half, reflecting both the impact of weaker Q4 '25 trading conditions and the timing of benefits from the operational changes underway. Our FY '26 outlook is shaped by the following factors. Group core poultry volumes are expected to be slightly higher in FY '26. In Australia, we expect growth in non-Woolworths retail and QSR, partially offset by a targeted reduction into wholesale. We expect New Zealand to continue to perform well, supported by strong brand performance and favorable category conditions. Net selling prices are expected to be slightly lower in FY '26, reflecting recent customer pricing outcomes, wholesale market conditions and competitive intensity for new business. Operating costs, excluding feed, are expected to rise modestly in FY '26. While general inflation would otherwise drive higher costs, our cost reduction initiatives across labor, procurement and site level operations are expected to deliver annualized savings of $60 million to $80 million below what costs would have otherwise been. Feed costs are expected to provide a modest benefit, contributing to second half margin recovery. And capital investment is expected to be between $80 million and $100 million. Overall, our FY '26 outlook demonstrates a disciplined response to current market dynamics while prioritizing customer relationships, disciplined cost management and positioning the business for sustainable, profitable growth looking forward. That concludes the formal presentation. I will now hand back to the operator, and we will take your questions. Thank you.

[Operator Instructions] Our first question today comes from Ben Gilbert from Jarden.

Just the first one, just really trying to dig into Q4. It looks like it's a pretty material deterioration. And one of your customers or a QSR operator talked to better margins in Q4 and it sounds like they got better terms on poultry. Just interested in what -- I appreciate the wholesale side, but have you had to give up more than you might usually have around feed price reductions, et cetera? Because if I then sort of connect that into '26, typically, you guys, when feed prices come down, you do get a bit of a tailwind. So I'm just trying to piece what exactly outside of wholesale pricing, if there have been any, terms impacting Q4? And why aren't you expecting to get any feed benefits into fiscal '26?

Yes. Thanks, Ben. I mean I look at the Q4 deterioration really driven by 3 drivers. The first, obviously, at the end of February, we had the final transition of the Woolworths volume. And whilst, as we said at the Macquarie update, that was largely replaced, there was a mix impact that then flowed through to the Q4 earnings profile. Secondly, we made an assumption that our competitors would switch supply to fund the new Woolworths business. But instead, they set processing volumes incrementally, which really drove the excess, I think, in Q4 and then subsequently impacted pricing, both at a wholesale economics level as well as from the effectiveness of our promotional levers. And then finally, we saw this retail market soften sort of materially, I suppose, in Q4 as well. And I think the whole combination of that really meant that we had less volume flowing through the retail channel. We had more volume flowing through the wholesale channel, all at a time when there was a pretty material decline in wholesale average sale price. That's really how I sort of picture the Q4 outlook.

And the feed -- and typically -- appreciate you've got some pass-through to consumers and your customers, but typically, you do get a bit of a benefit from feed costs on the way down. And in most case, I think you also typically have longer dated hedging than your peers. But historically, you've got a bit of a benefit as feed falls. It doesn't look like you're expecting that this time.

It's Gary. I think there's always that timing difference on the way down. So no, I don't think that's right. I mean we've absolutely shared some of that feed benefit with our customers, but I don't think it's different to the historical.

And then just final one for me. On this as well, just around the end market discussion. There's been a lot of -- if you look in QSR, just an enormous amount of people now talking about big rollout plans and McDonald's, et cetera, talking that poultry is outperforming within their portfolio. Poultry typically performs better within grocery, and I think they've called it out as being stronger given it's a lower-value protein. I'm surprised with the market situation. Is it the market or the competitive standpoint more so with your peers keeping -- putting more volume in?

Is that -- are you talking specific to our observation around a softening of retail volume in Q4, Ben?

Yes. Yes, broadly in the market as opposed to Inghams specifically.

I'd say 2 things. I mean, firstly, I think the long-term proposition of poultry remains very true, which is that we see long-term growth. It remains sustainable, versatile and has a pretty significant cost advantage versus other proteins, and we're certainly seeing the benefits of that in New Zealand at the moment. So from a long-term perspective, I don't see any change. From a short-term perspective, again, we also hear from the QSRs about driving poultry -- my sense is that there is -- in Q4, in particular, there was somewhat of a decline in consumer confidence and also there was a biding of cost of living pressures. And the combination of that meant that we saw an impact. And obviously, for us, that was also coupled with the changes in the Woolworths contract. So look -- so that's our observation. I don't think anything changes structurally on a long-term basis. Short term, we do feel like there was a softening.

Our next question comes from Craig Woolford from MST Marquee.

So can I just clarify the -- you referred to it as an operational reset. Just trying to wrap my head around the pressure that you see -- we saw in the fourth quarter and you see in FY '26. Do you see it as issues that are transitory in nature? Or is there a more fundamental point of pressure of competition because -- that comment you made in response to the earlier question around competitors switching supply, but instead increased supply does sound like a more fundamental concern?

No, just transitory in nature, I think, Craig. From what we've had to do, we built up too much inventory in Q4 because of all the reasons identified. So we're now having to slightly reduce our production settings to match supply with demand. And then we also need to continue to look at what our cost optimization activities are. And from that perspective, I see it as very transitory. There's also an element where whilst there's a lot of benefits with a more diversified customer base, you also have some supply chain inefficiencies that come as a result of that. And so that's something that is transitory and we'll just deal with particularly over the first half of this financial year.

Okay. That makes sense. The -- so just clarifying on pricing. I'm reading from Slide 9 as I ask this question just around the performance in the second half. It reads like NSP was down in the second half in Australia versus the first half due to weaker wholesale and foodservice pricing. The wholesale will have been more volumes in that wholesale channel as well as lower prices, no doubt, like a mix effect. Just explain some of the other factors because it looks like pricing was decent in retail. QSR, there's no comment. But was foodservice pricing down? Or was it just the wholesale component?

It was predominantly wholesale. So that's the main game here. And you can see that on the next slide on Page 10, what's happened. So yes, retail relatively flat. And yes, foodservice is just in the category, but it was wholesale that's the factor.

It's just how you define the category. Yes. Okay. So is there an update you can provide as to the share that wholesale has now represented? Because the overall volume share of foodservice wholesale export hasn't changed dramatically. Is there much of a channel shift in your volumes? Or is it just the pricing within that wholesale channel?

So big picture, not really. But on -- again, on that next slide, Page 10, you can see there's a shift from retail into wholesale over that Q4 period. I think we're expecting to see that, that will correct itself into FY '26 as well. So big picture, not really much change, but you can see on Slide 10 that in the detail, there's a little wink, especially Q4.

Our next question comes from Phil Kimber from EAP (sic) [ E&P ].

Just first question was just around -- you said that the fourth quarter, you really saw consumer value change. I'm just wondering if it was a change in the consumer value set, which I would have thought has been going on for a while. Or was it more a change in the supermarkets' view of that and reaction to the consumer environment? Just wondering if you could clarify what you meant around the fourth quarter change.

Look, Phil, what we just observed was a softening of demand, particularly through that retail channel in the fourth quarter. I don't think anything structurally changed as it relates to customer perception of poultry or otherwise. As I say, based on our information, it was a good consumer confidence from a macro perspective as well as a continuation of cost of living pressures. And to some extent, I think we're increasingly seeing the supermarkets responding as well to those 2 drivers.

Okay. So it wasn't -- it's not just your data. You're saying the overall market data as well is what you're...