Seeka Limited (SEK) Earnings Call Transcript

Good morning, everybody. Welcome to this analyst briefing update for Seeka's interim results for the 6 months ended 30th of June. Very pleased to be online, thanks very much for attending. We'll run you through the pack that was released yesterday. Alongside me in the room, I've got Nicola Neilson, our Chief Financial Officer; and Ian Burt, who is our Group Financial Controller, who really has been instrumental in bringing the accounts together for the 6 months. So welcome. Let me just run through the pack. Agenda today, we'll be talking about the highlights, running you through the capital management, talking about our operating segment performance of each of the business divisions that we've got running and our forward focus. Just running you through the highlights quickly. We're delighted and very pleased to report a record 6-month profit, $62.6 million at a profit before tax level, up 5%. Earnings per share at $1.07 is up 19%. So both of those good numbers, particularly given that we had lower kiwifruit numbers in New Zealand. Automation has helped us to deliver efficiency gains and actually improved our service to our growers. They had a very timely harvest. It wasn't a long wait. Technology has delivered an excellent pack out and excellent quality fruit. And so we're very happy with that. Three Reemoon solutions deployed. One is a front-end citrus machine at Orangewood. One is a complete fully automated machine at our Kerikeri site in Waipapa Road, and one is a machine at Huka Pak here in [ Totara ], which hasn't got all the automation in yet. We will be completing that this year, but we're very pleased with those. Our post-harvest EBIT, earnings before interest and tax, up 7% on 4% less fruit. So it gives you a little bit of insight to what could happen next. We've concentrated on our debt. We've concentrated on building our financial resilience. And our leverage ratio as measured by the bank is 1.22x, down from 1.6x, $11 million reduction in net bank debt over the 6 months and actually down $51 million on the same time 2 years ago, same for the same period 2 years ago. So really very strong performance, all delivered from cash flow. $685 million in total assets, up 5%. Net tangible asset backing per share up 11% at $7.12, which includes the revaluations from last year, also includes some exchange rate variation on our Australian held assets. New Zealand dollars dropped, value of those assets in New Zealand dollar terms has gone up. And so that's increased the value of those assets for that category. Importantly, we've achieved our sustainability milestones. We have achieved a 30% reduction in our greenhouse gas emissions, Category 1 and Category 2 from our 2022 base, which is what we targeted. And we are on track to deliver a 50% reduction by 2030, so may well achieve that ahead of our target. So remarkable performance by those involved. We've taken the time, as you would expect us to, to carefully consider and monitor our financial performance as we're going. Our profit before tax guidance for the year has been increased from $38 million to $42 million to between $39 million and $43 million. And we've announced the dividend, $0.20 dividend to be paid, and I'll talk about that again in a few minutes. Going through the numbers in some detail. Our revenue at $305.5 million is just down 1%. New Zealand kiwifruit volumes down 4%, that is the driver of our business. EBITDA, earnings before interest, tax, depreciation and amortization, [indiscernible] the cash flow up 3%, $86.3 million, largely driven by the investment and efficiencies. Gordon, I think I'll answer the questions at the end of the presentation when we get there, if you don't mind. But I'm happy to answer all questions when we do. Profit before tax, up 5% at $62.6 million. We are in a seasonal operating business. We earn most of our money in the first 6 months. But although we are operating in the second half, but to a lesser degree and actually, typically, we go backwards. We have now included more color literally in detail around our segments in terms of the graphs. So both revenue, EBITDA and total assets, you can see the increases we've achieved over time. Of course, 2023 was a difficult year. But outside of that, all of the metrics look good. And you can see that the bulk of our income and the bulk of our EBITDA and the bulk of our assets is in Post-Harvest. We've been taking some time to work with the analysts in initiating coverage of the company. They've asked for a bit more detail about our business, and we have moved to put those into this pack. And so that's one of the innovations that's been done at their request. Pushing through to capital management, balance sheet. $591.9 million in total capital employed, up 5%. Our property, plant and equipment is up 8% at $418.7 million. Our investments in post-harvest automation is there. We are building some RSE accommodation in Australia for our seasonal workers, which has been partially supported by the Australian government. And of course, the Australian -- strong Australian dollar and a weaker New Zealand dollar has revalued those Australian assets. We held $1 million of assets for sale at the end of June. Those assets now have an agreement for sale and will be shortly settled. And so not much, but really just working our way through. In terms of the balance sheet, $119.8 million in net bank debt at the end of June. It's a $10.8 million decrease on last year, $51.1 million on 2 years, same time 2 years ago. Our banking facility at $184 million, we have elected to reduce it by $20 million. We have got a very strong and supportive banking syndicate behind us. We are working with them. We decided that we didn't need to have facilities at over $200 million, given that we're operating well below that. And so we've sensibly brought it down. Our bank -- net bank leverage ratio. EBITDA to debt as measured by the banks continues to improve and actually below the bottom end of our targeted range. Our target range between 1.5x to 2.5x and now at 1.22x. Earnings per share and dividends. EPS of $1.07, as I previously mentioned, up from $0.90. Dividends paid out in the last 12 months of $0.50. We have announced an interim dividend of $0.20 a share to be paid on the 15th of October. It is fully imputed, and the dividend reinvestment plan will apply to that dividend for those who want to participate in it. $7.12 net tangible asset backing per share, up 11% from $6.44, understanding that between June 2025 and June 2026, we have the normal cycle of revaluations at the end of the year. We've got the asset revaluation in Australia, plus our normal capital expenditure program. And so that increase from $6.44 to $7.12 reflects all of those factors. Our guidance, as I outlined at the beginning, is creeping up like it did last year to between $39 million and $43 million. It's increased from $38 million to $42 million. But understanding that last year with a record crop and exceptional growing season and [ kiwi ] season, our profit before tax was $47.5 million. So we are forecasting to be below that for the full year this year, but still a very strong performance and would be our second-highest profit in the company's history. In terms of the segments, running through each of the businesses that we're operating in terms of our orcharding business, where we are growing kiwifruit avocados, kiwiberry in New Zealand led by Barry Penellum. Revenue of $63.6 million is down 8% on the previous corresponding period. We are a large Hayward grower, and the Hayward volumes are down. EBITDA, earnings before interest, tax, depreciation and amortization, down 16% at $8.11. At this point, we're using the midrange of Zespri's forecast in terms of our orchard gate returns and getting to that forecast. And so understandably, a little bit off. We are large Hayward growers, and so they are a little bit less than last year. EBIT, $6.3 million, down 20%. You can see the yields down in key varieties. Last year was a peak year in terms of high yields. So SunGold down 7%, Hayward down 18%, and it just follows such a strong year the year before. And reminding you that we have got 70 hectares of kiwifruit production in development in Raukokore in conjunction with the local iwi and Kanoa, and that will progressively come into production over time. And at this point in time, it is all Hayward. Post-harvest operations, really, which handles the packing, coolstorage, shipping of kiwifruit and all of the other varieties that we're handling, avocados, citruses and persimmons and kiwiberry, led by Paul Crone. $206.6 million in revenue is up 1%. EBITDA at $83.2 million is up 6% on the previous corresponding period. And EBIT at $73.3 million, up 7%. This is the engine room where we actually earn our money. And pleasingly, we have been able to drive automation efficiencies. Our strategy is to have a network of highly automated packhouses adjacent to where the fruit is growing. We have taken steps to achieve that in Northland. We are doing more now and thinking about it. But you can see at $450.4 million of assets, this is the bulk of where our investment is, as 66% of our assets is in this division. SeekaFresh, our retail services business, really where we are connecting produce through to customers and fruit that we don't supply through to Zespri. It's led by Kate Bryant. Revenue of $12.7 million is up 13% on the previous corresponding period. We've got momentum in this part of our business. EBITDA at $2 million is up 28%. $1.4 million is up 39%, but albeit on a lower starting number. We are continuing to grow in a challenging market. Economic environment in New Zealand is a little bit difficult for the population. And so -- and we're in the middle and running really a supply chain business and marketing business. And so it's pleasing to see that we've got growth in that part of our business, and we continue to push. We've got momentum and new categories coming into our markets. Of course, we've got LUVO, the avocado oil production and marketing business nestled into this business unit. That part is led by Jim Smith. We launched it in 2025. We have been patiently building that business. Marketing team has done a great job. And pleasingly, since -- or actually, we wrote this starting to achieve market momentum, we've actually got access to FreshChoice and Woolworths alongside the independents that we have been supplying with this new product, including the Bin Inn. So we have to wait for category reviews. We have to wait for the opportunity to sell. We have to wait for the market to want to take -- to demand our product. Team has done a great job in online marketing, doing promotions to get the market pull through. And if we are patient, this will be very successful. I'm very pleased with how it's going so far. In terms of our Australian business, fully integrated business in Australia led by Jon van Popering, very adequately managed and done a great job over there really, growing packing and retailing kiwifuit and other produce in that market in a very challenging growing season. $22.2 million in revenue really belies the category mix that we've been running over there. And I think we're having to learn to continually adapt in that market. It was very hot. And we probably hung a bit more fruit there than we probably would want to do in a normal case. We've reset ourselves, we're changing varieties into that environment. We've got new kiwifruit varieties coming. Our EBITDA at $4.5 million is down 29%. Our EBIT at $2.9 million is down 40%. Reasonably still very positive about that market, although we're heading into El Nino. We're preparing ourselves. Water supply is very good. I've been in Australia a few weeks ago and actually was delighted with the canopy that we're tying down, particularly in our kiwifruit business over there. So it's just been a harder year in that part of our business. And from time to time, that will happen in our business. In terms of our forward focus, well, we remain focused on delivering exceptional -- operational excellence and excellent financial results. We are driven to deliver good returns for our shareholders and stakeholders and excellent service to our growers and excellent returns to our growers. We are pushing to further automate to deliver more efficiency gains and return the money from our investment. We are completing the Huka Pak machine to make it fully automated. So it is the same as what we've done in Kerikeri. That machine in Kerikeri has been the most efficient machine in the fleet, which is quite remarkable in its first year of service because normally, it will take you a year or 2 to actually learn the technology, learn what you've got and how to drive it and really how to optimize it. So there is more to come. We continue to be focused on forward capacity planning. There is more risk in our business of being undercapacity, having more demand than we actually got capacity to handle. So in a disciplined way, we are looking forward, thinking about what happens next. Volumes are forecast to go up. What does that mean for us? Is there things that we could be doing that will earn the required rate of return for our shareholders, taking into account the risk profile that we might have to apply to that? And it's been a game changer introducing Reemoon to the business and into the industry. And so how do we further exploit that technology that we've brought and the efficiencies it's delivered? So that is underway, and we are thinking about that and thinking about how sensibly we can do that. Our Board is thinking about growth, how do we profitably continue to grow the business? How do we actually earn more and be bigger? But two things together, not to be bigger at the expense of earnings, but to actually grow our earnings and to be bigger. And we have looked at opportunities at growth. We have looked at all sorts of opportunities around. We haven't found anything that we have thought was sensible to pursue. But we kicked a few cans down the road, as you might expect us to. And so very much so that the growth component is on the agenda, but we haven't found anything worthwhile pursuing. And I'd make the point to you, we never get the credit for the bad deals we don't do. And so we'll just patiently wait and see if there are opportunities in the market for us to pursue to the benefit of our shareholders. Looking forward slightly more. After a reasonably warm and mild start to winter, actually, the end has come with a blast. And we've had good late winter chill. We're just in the final stages of Hi-Cane application across the orchards, reasonably pleased with what we're seeing there and pretty happy with the chill hours that we've got. So that doesn't mean we've got a great crop for next year. It's just one of the components that is useful to have to deliver a great crop next year. Understanding that we're heading to El Nino, that could mean good things and bad things in previous years actually meant good things. And so we will see how we go as we pursue the season and we go through the growing season. And of course, we remain focused on sustainability. It is important. We have got a carbon footprint reduction plan in place. We are pursuing that sensibly. We are continuing to retrofit coolstore refrigeration systems. We are -- we have got a program maintenance system running in the company. We are going through and reviewing switchboards and plant rooms continually, and we've got a program of renewing them. And as we renew those, we actually are switching out harmful refrigerant gases for more environmentally friendly hybrids and synthetics so that we don't damage the environment should they leak. And we've got ongoing solar installations underway, perhaps now smaller installations being contemplated. And in the case of our Peninsula packhouse, that installation will be financed by the landlord. So pretty much running our way through to the end. Of course, we are still busy, still packing avocados. We're still packing citrus. We're still busy in the orchards. We've got our SeekaFresh markets operating nearly every day. There's a lot happening. There's a whole lot happening right across the business, but these are the key things that we're focusing on as we push forward. If I just push through to a couple of more slides. So you can see in the appendices, we've put some new appendices in. Not that one, that's just a breakdown of EBITDA for those who are interested in looking at it and can't sleep at night. We've put this key metrics page in, which is really just talking about historical numbers to lay it out for the analysts in a way that you might understand more about the key metrics behind the business as you might try and interpret what's going on and what it might mean for the future. We've really enjoyed the interaction we've had with the analysts who are initiating coverage on the business because it's also given us an insight how we might better present ourselves so you can understand more about what's going on in your business. So that being the case, there's key contacts there in case you want to talk to us afterwards. There'll probably be some questions because Nick is looking at me sideways. And so I'm happy to take any questions now that you might have.

Okay. The first question from Peter Truman. Are the reduced avo and citrus packed volumes at half year just timing? And how do you expect full year volumes to compare to 2025?

I'll break both of those down for you. So in the case of avocados, funny enough, last year was a little bit of an off season. This year, we are expecting to pack more. We will have an export pack out at around 500,000 trays and perhaps total volume around 700,000 trays is the numbers in my head. Australia is having an off year in terms of its production of avocados, which means that we've got a fantastic opportunity for New Zealand avocados to make good money for the processers and for the growers because it's -- we're anticipating a strong market over there. Market returns last year to a grower was around $11.89. This year, we're predicting better than $20. So that is good. Volumes should be up. We're reasonably happy with that. In the case of the citrus business -- and I'm sorry, avocados, deliberately in the first half of the year, not much volume. We actually accelerated last year's harvest to get it out of the way before Christmas. It's a way for us and for the growers to make more money. So most of the avocados are being harvested. The harvest starts in July and runs through to sometime next February. And because it's a stronger market, we will spread that harvest out a little bit. In terms of citrus, there is some structural change happening in the citrus industry in New Zealand, and Seeka is benefiting from that structural change. So there is a volume increase coming through to our business as growers are changing alliances, changing their handler and marketer. And so with some certainty, we -- I can tell you that we have picked up bigger volumes in citrus, particularly in the Gisborne region.

Second question from Peter. The full year forecast for 2026 is predicting a weaker second half than 2025. Can you talk to the main reason for this?

Yes. So there is some seasonality in our earnings. And one of the things that will impact how much we make in the second half is how full our coolstores are at the 30th of June. And last year, at the end of the 30th of June, we were completely full. So as we load fruit out, we make more coolstore income. This year, because the volumes are down, we don't have so much fruit in-store to load out to earn coolstore income on. And so that's simply the answer. We don't have the volume to actually process in the second half of the year than we did last.

Third question from Peter. I'd just like you to talk to the decision to offer the DRP on dividends when net debt is tracking favorably.

Well, the answer is that when do you have enough resilience? And when is your financial ratio is good enough that you don't have to offer the discount or offer the DRP? And of course, in our case, coming from a period where we had such high debt, we are driven to lower debt. And we've got opportunities in front of us that we believe we can invest in and make growers -- sorry, growers -- make shareholders better returns. And so at the moment, we are still driven to lower debt a bit more so that we've got the financial freedom of action to make investments for the benefit of everyone.

A question from David Harris. Automation appears to have driven meaningful uplift in margins. Are these repeatable going forward? Or are there one-off benefits in 2026?

Well, they are repeatable going forward, given that we've made an investment and we've actually got those machines delivering at a much better performance than the others. In fact, the highest actually in the fleet. There are more investments that we can make. There is more automation that we can deploy. It's not just about packing machines. It's also about how you get boxes under machines and get product away from machines. But the technology we deployed in Reemoon has actually startled us because actually, before they met us, they didn't have that technology. We took a risk with them, and actually, it's delivered much better than we expected. So there's more opportunities now for us in an imaginative way to actually deploy more technology into our business and further improve the margins. And that's really important to us because the volumes look like they're going to continue to go up. Labor is a scarce and expensive resource. So if we can actually handle more with less labor input, we're going to make more money.

A question from Bill. Are you expecting to require significant new facilities or any greenfield investment?

The answer is not in the short term. We are always kicking the can down the road in terms of our capacity planning about what we should do next, whether we should do a greenfield or not do greenfields. No business case has gone anywhere near the Board yet, but we're always kicking that can down the road to say, look, is it sensible for us to build something and actually decommission something. We're always thinking about ways to do that. At the moment, a number of our coolstores are leased. And some of them are quite expensive, and so we would be better off to build something and actually exit some of those expensive leases and coolstores. So we're always looking at opportunities. But at the moment, we've got nothing that we're actually chasing.

Second part to that question, how do you assess any major capital investment in terms of the return that you require? And would it be serviced through operating cash flow or debt?

So we -- as you would expect us to, we understand that we are stewarding public money, not money that's our own. So it has a higher threshold for us to actually achieve in terms of doing any major capital expenditure. Business cases have to be brought forward to the Board. We have to make sure that it makes a sufficient rate of return, noting the risk -- risk-adjusted rate of return might be a better way to put that so that we know that any investment that we're making achieves -- is accretive to our earnings really is the best way to describe that. And understanding that in our industry, we're the only one that is stewarding public money that way, so we're going to be very careful and innovative how we actually do it.

Question from Gordon Sims on RubyRed. With the increasing production, does the harvest window clash with Gold? Or does it help to spread into the shoulder season?

Well, when RubyRed was first released, it was released on the basis that it would came -- enter maturity before SunGold. And so therefore, it was complementary. You could get going earlier, handle the Red and then go into SunGold. The reality is actually, it's not. It's actually butting up with SunGold and overlapping a little bit. In our case, actually, we can get away with it because we've got 17 or 18 machines in the fleet. And so we can actually set a machine to run for the Red or set two machines to run to Red while we've got everything else running SunGold. And so we can juggle our capacity to make it work. So it hasn't been a problem to date, but it is something we're conscious of. And Red is a much more challenging and tricky product to handle. You've got very short shipping times. You got -- or you got to rework it, it doesn't want to be -- it's a product that doesn't want to be reworked. And so we're going to be very careful and very disciplined in how we set our capacity up to handle it.

Second question from Gordon. Can you give any idea of the quantum of the third party used to provide coolstorage to this year?

Around -- the amount that we rented out?

Correct.

So this year, we rented out, I think, the number will be in this range, 650,000 to 750,000 static trays worth of coolstorage. It's one of those two numbers.

A question from Tony. Congratulations on a great result. Is there any interest in the Soul Patts horticulture assets in Australia?

Well, is there any interest in it? I don't think I'll be breaching confidentiality to say that I signed a confidentiality agreement and took a look at it. Those assets over there come at some risk. And given that we're stewarding public money, it doesn't make sense for us to actually deploy in that direction. There are some challenges in growing, in particular, the kiwifruit over in Western Australia Manjimup, which I'm familiar and taking a look at. But at the moment, I think our focus here in New Zealand, rather than looking at those assets. Redlands, of course, also have citrus and apples and adjacent to where we are in Shepparton. But at this point in time, we're not in the play.

A question from David Harris. So given we're issuing shares through the DRP and a proposed Grower Loyalty Share Scheme, how do we think about using balance sheet capacity to buy back shares as an alternative?