Scales Corporation Limited (SCL) Earnings Call Transcript

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, sir.

Thank you. Good morning, everybody. Welcome to the Scales interim results announcement for the 6 months ending 30 June 2025. I'm calling in from Melbourne, meeting the teams and visiting our plant here today and tomorrow. And back in Christchurch, we've got Steve Kennelly, Scales' CFO; and Geoff Smith, Scales' Chief Operating Officer. So earlier this morning, we lodged our results with the NZX, which included a presentation pack and we'll base our comments on that presentation during this call. Steve and I'll run through the slides and then take questions. An agenda is provided on Slide 2. Moving through to the overview on Slide 4. This slide provides an overview of the first half of 2025. I'm pleased to say that Scales produced a very strong first half performance, which is supporting a further lift in the full year FY '25 earnings guidance. I'll provide more information about that later. So underlying EBITDA was $86.7 million, up 43%. Underlying NPAT was $56.9 million, up 48% and underlying NPAT attributable to shareholders was $48.9 million, up 72%. These results were a consequence of all our operating divisions successfully executing their respective growth strategies and in particular, both Horticulture and Logistics producing outstanding results. As a result, the directors are pleased to advise a further increase in Scales full year FY '25 earnings guidance from that advised in June. Underlying NPAT attributable to shareholders is now expected to be between $45 million and $50 million. So Slide 5, each of our divisions illustrated its respective strengths during the first 6 months of the year. Global Proteins continues to progress its strategic growth goal. Meateor Australia had a particularly strong first half performance, and we're pleased to increase our investment in Shelby. Horticulture is realizing the benefit of the long-term strategic investment into premium apple varieties that are targeted our key markets of Asia and the Middle East, with this strategy being fast tracked following the Bostock acquisition. And Logistics has benefited from a strong horticulture season. I'll now pass to Steve, who will run through the financial results for the first half of the year.

Thanks, Andy. Slide 7 summarizes the financial performance for the group for the first half of 2025. As Andy previously mentioned, the group generated significant increases in underlying earnings compared to the same period last year. Pleasingly, reported earnings have also shown an increase in all areas. In respect of the performance by division, Global Proteins delivered another steady result with underlying EBITDA of $29.7 million, which was consistent broadly with both the first and second half of 2024. The Horticulture division generated an exceptional result with an underlying EBITDA of $53.2 million, up 77% compared to the first half of last year. This was a result of both increased apple volumes and positive pricing due to variety mix and apple size. And Logistics produced an excellent result of $6.1 million, which was an increase of 60% compared to the same period last year, again, due to an increase in volumes. The next slide summarizes our financial position. There was a decrease of $14.4 million in net debt to $67.5 million as at 30 June 2025. This largely reflects income from earnings and proceeds from the sale of Orchards to Craigmore, offset by the cost of our additional 7.5% investment in Shelby. And I'd also like to note that the settlement of the sale of Whakatu coolstore will take place this month. I'll pass you back to Andy.

Thanks, Steve. As Steve mentioned, underlying EBITDA for Global Proteins was consistent with both the first and second half of 2024. However, underlying NPAT attributable to shareholders increased 14% due in part to the increased investment in Shelby. There were increases in both petfood ingredients and edible proteins volumes, as previously mentioned. Both Meateor Australia and Fayman produced strong first half performances with Meateor Australia, in particular, being ahead of forecast. There was a slight increase in the overall margin per kilogram sold of petfood ingredients in the 6 months to June 2025, whilst revenue per kilogram remained steady. Moving to Slide 13. This current slide provides an update to the 9 key strategic initiatives within the Global Proteins division. Those on the left-hand side of the slide are either completed and operational or close to completion, such as the Netherlands processing facility that was commissioned in the first quarter of this year. The projects on the right are ongoing, and we'll continue to bring you up to date as these progress. Slide 14. As previously mentioned, the Horticulture division delivered a significant increase in earnings with underlying EBITDA up 77% on last year. The division benefited from increased volumes and improved variety mix and apple size. Mr Apple's total own grown export volumes are forecast to be 3.7 million TCEs, which is a projected increase of around 21% on 2024. Horticulture continues to experience growth in premium apple volumes with the proportion of these apples increasing to around 75% this year, up from 72% last year. This included significant increases in our Dazzle and Posy volumes, which are forecast to account for over 25% of premium volumes in 2025. We expect the total premium variety volumes will continue to grow in future harvest as a result of maturing plantings. The Asia and Middle East markets are expected to account for around 85% of total fruit sold, and we are anticipating strong demand in Asia due to a short supply -- due to supply shortage and the upcoming mid-autumn festival. Profruit volumes reflect a more normal year compared to the overperformance of 2024 with continued strong sales into the U.S. Moving on to Logistics, which produced an exceptional result underpinned by increased freight volumes. Its underlying EBITDA of $6.1 million was up 60% on the first half of 2024. The division experienced high demand for sea freight, particularly from the Horticultural sector and a significant increase in air freight volumes, particularly across dairy. Our new Auckland coolstore and warehouse has also helped to facilitate this lift in volumes. Moving to our sustainability update. Sustainability continues to be of high importance across the group and having successfully delivered on our 2024 sustainability milestones, we're now developing new targets for the period ahead. A materiality assessment is underway to help us better understand key topics and issues for all of our stakeholders, and we're refreshing our sustainability strategy to allow us to build a longer-term sustainability road map. Specific projects include improving our Scope 3 emissions, implementing an enhanced parental leave policy to support our staff and reviewing our decarbonization work to help us set our next emissions targets. So the FY '25 and future outlook. Lastly, I'd like to update you on these 2 matters. As noted earlier, the directors are pleased to advise a further increase in the FY '25 guidance range of underlying Net Profit After Tax Attributable to shareholders to between $45 million to $50 million. In providing this guidance, directors note the following: Mr Apple has 18% of its export crop to sell, which compares to around 14% this time last year. We remain cautious in Global Proteins due to the current operating and geopolitical environment. However, we are confident with the medium-term and strategic growth initiatives that we have in place. So the pathway ahead. On this slide, we have summarized both where we are at currently and what we see as the pathway ahead for Scales. Where are we at? The recovery from Cyclone Gabrielle is complete with our long-term strategic investments, including the Bostock transaction, delivering results. Our revised guidance will increase to increased -- our revised guidance will give rise to increased dividends and our divisional strategies are ensuring enhanced diversification of earnings. Going forward, we've identified key drivers in terms of future growth, including the following: continued diversification of earnings, a focus on the expansion of Global Protein and Logistics, leveraging our established global footprint. Our global expansion will be facilitated by the supply chain excellence within the group, and we anticipate ongoing opportunities for growth through increases in our joint venture stakes. We're excited for the future and what it holds. That concludes today's formal presentation. However, please take note of Appendix 1 of the presentation, which provides additional financial information and reconciles underlying earnings to reported earnings for the group and each of our divisions. We are now happy to take questions.

[Operator Instructions] And our first question comes from Guy Hooper with Jarden.

Well done on a strong result. Can I just start -- there's quite a lot of moving parts, I guess, within the Global Proteins business. Can you sort of talk to how maybe some of the projects have been either completed at the back end of '24 and into '25, how well they're performing? And I guess, what the expectations are as that capacity Scales and the earnings contributions over the next, say, 12 to 18 months?

Thanks, Guy. Look, we -- obviously, we've noted the very strong performance of the new plant in Melbourne. So that's -- that was -- that project has gone really well and now contributing to earnings. The second toll processing plant in North America is running and operating very well. So strong -- it's doing as we expected it to do. And the plant in the Netherlands is sort of -- it's -- because we moved it from Belgium back to the Netherlands, it's sort of been delayed, but it's commissioned now and going through that phase towards profitability. So we're very pleased with all of those major projects where they're heading and they're contributing to EBITDA as expected and will be all, including the Netherlands plant, hopefully, by the end of this year. And obviously, the projects that are ongoing are working through the system going well and expecting to contribute in 2026.

Great. Another upgrade to the guidance range. Could you just sort of talk as to what is factored in there? I know I think you mentioned around some caution around macro and global trade challenges. I mean, have you seen to date, what sort of impact have you seen within the Global Proteins side? And what should we be looking for as the key risk factor here?

Look, I think it's broadly in line with what we're doing for the second half of '24. But I guess it's just a cautionary position around the uncertainty that's created by the tariffs, for example, I mean, we're working through that. I mean, clearly, Australia has got a small advantage now on New Zealand with the 10 versus the 15. And there has been disruptions -- slight disruptions in markets like Thailand because they haven't settled their tariff agreement yet or if they have, it's at a higher rate. So it hasn't been plain sailing, but the business has gone -- we're still very happy with the way the fulfillment -- the Global Proteins division is operating and the contribution it's making financially is strong.

Okay. Great. And is that the main risk that's sort of factored into that guidance range?

Well, I think that -- and if you like, just the demand for petfood is -- it's probably not as going at the same strong CAGR that it had been going, but we have no evidence that suggests that it's not going to, if you like -- bounce back, if you like, or improve going forward and hold that steady CAGR growth of around 6.5% that looks like it's holding in there.

Okay. And just one last one for me. I mean you emphasized the growth over the next couple of years within Proteins and Logistics. I mean we know the projects there in proteins. Can you talk a little bit about what expansion within Logistics looks like?

Look, we've just been consistent in saying we really like the industry. We like that freight forwarding model that we really scaled Logistics is really good at, and we are actively looking for opportunities to ramp that area up and particularly with more exposure to the global operations that connect up with how we operate globally with our apples and our petfood. And in all of those 2 areas, we've been able to pick up freight from other Horticulture businesses and other petfood businesses. So it's sort of a multiplier effect, if you like, if you can add Logistics to your export solutions.

Our next question comes from Matt Montgomerie with Forsyth Barr.

Just maybe one for Steve on guidance. Just I'd be interested if you could just provide a bit more specifics around where you see Hort EBITDA and NPAT for the year. Obviously, there's not much fruit to be sold as you've outlined. So I assume there's not too much variance in that. So just, I guess that would be a useful way of framing the second half and the guidance upgrade of just put more specifics on Hort earnings for the year.

Sure. We probably see reasonably flat second half, if not slightly down. There's been a couple of changes between last year and this year. So we've got more fixed cost and probably some -- just some more variable costs coming into the second half this year than last year. So we wouldn't see a repeat of last year's second half, and that's at an EBITDA level.

Okay. That's useful. And then just sticking on Hort, again, if we go back to Feb, I think we were talking 3.7 million TCEs in FY '27 and sort of post IFRS EBITDA of maybe $50 million to $55 million. Like I know this year has been, I guess, abnormally strong because of the growing season. But has, I guess, another 6 months or a strong growing season altered your view of sort of the medium term or the next few years in Hort?

I'll take that one, guys. Look, I think we're pretty -- we're very happy, I guess, with the performance of the business. And the strategy of growing -- well, a, having access to the varieties that we've invested in and how they performed in the market have really met and exceeded our expectations. So if you like, people talk about, oh, we're going to do this strategy or that strategy. we're sort of saying, well, we've done this strategy and it's worked. The premium -- selling premium variety apples into Asia and the Middle East is a good model, a successful model, especially spread across a diversified market range. It's not just one market. And we are lifting our volumes in those premium apples. So I think we sort of -- the goal we set wasn't sort of super cool, super -- it was achievable, and we're on track to get to it. But we're not lifting it above that, those ranges that we've set at the moment.

That's useful. And maybe, Andy, sticking with you, just on Proteins again, for the full year, I think we were talking to maybe flat to slight growth in the year overall. Has there been any change to that thinking? Like it feels like the underlying business stripping out Meateor International may be going a little bit better than expected. But yes, just any further color on Proteins earnings for the year?

Yes. Look, I think you're on the -- what you're saying is about right. I mean that's where we're heading is steady in probably a pretty patchy market. So we have had, if you like, the task of offsetting the reduction in Meateor International, but I mean that's sort of gone through pretty seamlessly. And the businesses are all going well. It's just a matter of keeping going on the execution of the various projects, Matt. We'll be broadly in line -- the result is going to be broadly in line with the second half of '24, we feel.

Yes. And just I suppose on the path to 70 in FY '27, would we still be expecting, I guess, higher growth in '27 over '26 than '26 over '25, i.e., just a little bit more back-end loaded?

Look, I think we've certainly got plans for solid growth in '26 because of the second in-plant cooling system kicking in. So that's going to be a good lift up for us. And I would say that momentum would continue into '27. But I don't think we have backloaded it totally. I think it's more like a growth in '26 and growth in '27.

Yes. Okay. That's useful. And I'll hog the mic and go one more. Steve, just on net debt for the year, just where you think it will land, I suppose, if we assume the midpoint of your guide?

We're looking probably at a slight increase on last year after the -- obviously, the Shelby acquisition earlier in the year. So we're probably around that $20 million mark net cash.

[Operator Instructions] And we'll go next to Rob Morrison with Craigs.

Congratulations on a very good result. So I think earlier, you spoke to hopes that the growth in the petfood market would get back to, say, 6%, 7% that it had been seeing a few years ago. And I think more recently, it's been, say, low single digits. What's going to drive that? And what's the timing on that?