(ASX: ING) Inghams.. pt.3

This will be final post on Ingram’s for a while. And I’m only posting because I was reading the Administrators Report by McGrathNicol for the Red Lea Group (a vertically integrated poultry producer and customer of Ingham’s). The report is dated 2nd July 2018. See reference for a link.

Within the report its asks and answers the question – “Why do the current and former Directors of the Red Lea Group believe it became insolvent?” The answer:

  • Margin compression arising from major supermarkets reducing the price of whole hot roast chickens from c. $11 to c. $8 (30% reduction).

Naturally, i looked into this and Wesfarmers had this to say in Feb 16:

  • During the half, we backed up our focus on customer service with continued investment in lowering prices. Chicken breasts and drumsticks went from $13 and $5.30 a kilo to $9 and $3.50, respectively…. roast chicken from $11 to $8”.

Noting the above represents c. 30% of Ingham’s product revenue. Which makes me think – if the reduction in price started in January 2016, how has Ingham’s been able to increase revenue & ebitda for FY16, FY17 & FY18. Easy, volume has increased and more importantly, the total costs continue to decrease.

The 2018 Annual Reports highlighted a decline in total revenue of $10m for FY18 against the FY17 Pro forma result.

The commentary for the underlying results stated continued growth in core poultry volumes were underpinned by Quick Service Restaurants & Wholesale segments.

Keeping in mind these segments make up a c. 25% contribution to revenue which asks the question what was the contribution from the important Retail segment that forms 53% of revenue.

  • QSR:17%
  • Wholesale: 7%
  • Retail: 53%

The 2018 CEO presentation highlighted a more accurate picture – “Core chicken and poultry volumes grew at 3.2% (total poultry volume grew at 2%)”. Why has volume growth slowed? We know the New Zealand has some challenges with oversupply.

The company goes further to state that Feed volumes also declined 10.7% due to the customer loss and closure of Red Lea Chickens. So what was the financial impact of the customer loss? And is this structural for the Feed business?

Below is a summary of the changes in segment revenue.

  FY18 FY17 (53 weeks) Change
Poultry $2,116,800 $2,138,700 -$21,900
Feed $256,100 $286,900 -$30,800

Note: If we adjust for 52 weeks – poultry revenue increased marginally as previously highlighted.

It’s worth noting within the Feed business c.57% of sales are poultry related. This suggests that c. $167m of the $286m in FY17 was poultry  revenues.

Red Lea had sales of $171m and based on Ingham feed costs averaging 25% of sales this implies $43m of Feed Costs for Red Lea.

The McGrathNicol report highlighted that Red Lea had been reducing poultry volume since May 17 & went into administration in March 18 with COGS halved by Feb 2018.

So when did Ingham’s stop supplying Red Lea? And will FY19 show further decrease in Feed revenues?

Final note. Since 2016 total revenues has increased 2.8% over the three years despite an 14% increase in poultry volumes. Noting. the simultaneous decline of 10% in feed volumes (13% of revenue).

  2016 2017 2018
Revenue $2,308 $2,383 $2,373
Poultry Volumes 444.2 kt 495.3 kt 505.3 kt
Feed Volumes 561.9 kt 565.2 kt 504.7 kt

Were starting to see the marginal benefit of increasing volumes is reducing. Future gains in profitability are going to be from costs savings which also has its limitations and can be competed away, costs savings is the easiest short-term lever to pull. And Baiada, its main competitor will be doing the same.


Click to access Administrators-Report-to-Creditors-dated-2-July-2018.pdf

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