Company Interview / Inghams outlook clouded by cost-of-living pressures

Andrew Reeves, CEO of Inghams Group, highlights the company's strong performance with a 68% rise in full-year profit to $101.5 million and revenue growth of 7.2%. He acknowledges the challenging conditions shaping FY25 due to increased cost of living pressures affecting out-of-home sales. Andrew explains their core customer base which are supermarkets maintained steady sales. However, their biggest proprietary, Woolworths, has witnessed a temporary reduction in volume.

Andrew further delves into the company's major investment program in automation, budgeted at approximately $50 million. This has gone into improving their primary processing facilities, enhancing operational efficiencies. This strategy is on track and already producing tangible results, with future automation possibilities on the horizon. Regarding dividends, Andrew confirms Inghams' ongoing capital policy of allocating between 70-80% of impact towards dividends continues unchanged.

Andrew speaks on the general softening of sales within the fast-food sector, referencing brands like McDonald's and KFC. He anticipates an improved outlook throughout the year, especially if relief from cost of living pressures and potential interest rate cuts stimulate spending capacity. Andrew expresses optimism for feed costs, with the price of key commodities like wheat and soy showing promising signs. He concludes mentioning Ingham's capital expenditure projection for FY25, excluding the Boston purchase: an anticipated spend of between $100 to $110 million. Despite a drop in share price, Andrew maintains bullish expectations, focusing on steering the company towards future success.

Full unedited transcript:

0:11

Wholesale chicken supplier Inghams, posting a 68% jump in full year profit to $101.5 million, revenue rising 7.2% to $3.26 billion. Let's get, though, to the CEO now, Andrew Reeves. Joining me and Andrew, your share price taking a beating because of the outlook. Tell us what sort of challenging conditions you're seeing at the start of full year 25. Well thank you. I mean, you've noted we've posted a very good, very good result. Um, I guess the outlook is colored by a couple of things. One is just the general pressure on household budgets from the cost of living, um, pressures. And that's what we see in our businesses that's affecting what we, we talk about is out of home sales. So discretionary spend in quick service restaurants, cafes, hotels that type of type of thing. Whereas sales through supermarkets are actually holding up quite, quite, quite well. So there is a subdued environment out there that is weighing on, on, on

1:11

sentiment. We've also had our biggest customers, Woolworths. They remain our biggest customer and we are their biggest provider of poultry products. But there's been a change in that in that contract, which is seeing a short term down, um, a reduction in volume, which will work its way through the system across the course of the financial year. That's a very manageable transition. Uh, we will be able to mitigate that, that that change across the course of the year. We'll be able to, um, reallocate that volume elsewhere in the market. So I'm not particularly concerned concerned by that at the moment. All right. Not particularly concerned. Let's talk then, in terms of what you are seeing driving some of the growth as well. And I guess your investment too in automation.

1:59

Yeah. That was um, that was something we've we've talked to the market about over the last couple of years. It's been a very significant program for us. And in fact, it will be ongoing. We've spent in the order of $50 million in our primary processing facilities, um, investing in in the latest automation technologies that's going extremely well for us. Those projects are well and truly on track and that they're coming in on time and under budget. Uh, they're certainly, uh, producing the results that we had anticipated. So we're very pleased with that. There are there will be further opportunities for investments in automation into the into the future. And we're planning for those as well. You, um, declared a fully franked dividend of $0.20 per share. I know this is always based on revenue and profit growth, but what is the outlook in terms of continuing to pay fully franked dividends to shareholders? We um, well, we we have a stated capital policy or dividend policy of, of um,

2:59

between 78, 70 and 80% of our um, impact being, um, being allocated to dividends. We haven't changed that. We'll continue with that, uh, that same policy into the, into the future. And as long as the earnings are there, we'll be able to continue to pay those healthy dividends. You touched on cost of living pressures in terms of the outlook for people dining at home more rather than eating out. That's good news, I guess for the chickens that come from your the supermarket agreements that you have. But what are you seeing in terms of demand as well from some of the quick service restaurants. And we've had the likes of Guzman Gomez hit, uh, quite strongly this year as well. Yeah. I think you've seen some of the reporting from the, uh, that part of the market that they're seeing softer sales, certainly talking with our big customers like McDonald's and KFC in that part of the market. They are certainly seeing, um, some, some subdued trading. And we've been talking about that across the course of this year.

3:58

Unfortunately, that trend is still is still there. Our anticipation is, though, that it will improve across the course of the year. Hopefully there will be some, uh, relief in the in terms of cost of living pressures, hopefully some interest rate cuts, which would put some more spending power back into the economy. And we would anticipate that that will turn up in better sales in those channels. Uh, as I said, across the year how are those higher costs and higher interest rates affecting you in terms of having to pay higher salaries, wages, and of course, um, really affected a lot of your ingredients as well in terms of what you see for your bottom line. Yeah, I mean, obviously the last couple of years there's been, you know, it's, you know, everyone knows there's been enormous pressures on on cost. Um, as we look to the year ahead, we're factoring in we're thinking about, you know, our own costs being in that sort of 3 to 4% range, which is coming back to something that's more akin to it's a more normal environment. I guess one of the the

4:58

big issues for us is the feed ingredients, uh, cost. That's our biggest single cost. And the outlook for that is actually quite positive. Um, there's been some really good and encouraging signs in terms of price of, say, wheat and soy over recent times and where we're thinking that's going to be, you know, a real help for our earnings across the year. What about the price of commodities and as well and how that plays into feed costs.

5:24

Well, as I was just saying, um, the the two big, uh, commodity ingredients that we purchase our wheat, which we purchased domestically, and soy meal, which we purchased internationally And right now, both of those those commodities are showing encouraging signs of the prices coming off what has been historical highs. So we're quite optimistic about that cost input across the year. Now you have the bow stock acquisition as well. What's your CapEx looking like for full year 25? Yeah, we've we've guided the market to say we'll be spending in the order of 100 to 110 million. That excludes the Boston Purchase, which was, um, New Zealand dollars, 35 million. But, you know, we've we've upped our capital spend in the last couple of years, one coming out of the Covid disruption where we just couldn't get things done. And that automation program that we've talked about already was was included in that as well. So we're continuing to invest in the capacity and the capability of the of the business.

6:24

Andrew, I know as a CEO you're focused on the business, not the share market, but do you think you're being unfairly punished today? More than 20% drop despite a strong profit and dividend growth. I'm much more optimistic about the, um, the outlook for the business than that share price would, um, uh, would, would suggest. And you're right, I'll focus on the business and running the business and hopefully the share price will take care of itself.