Tuesday was confession time at a Macquarie investment conference in Sydney
Here’s a couple of companies which owned up to bad news – Cleanaway, the waste group; but first the chicken company, Inghams.
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Higher costs continue to bedevil Inghams, the chicken products group with the company warning of a ‘detrimental’ impact on profit margins from a long list of problems.
The company told the same Sydney investment conference (as Super Retail and Domain) on Tuesday that the war in Ukraine had increased feed costs, on top of the problems Covid infections were causing to production and marketing in Australia and NZ.
These problems are on top of problems the company reported in the December half and are putting extra downward pressure on already weakened margins and earnings.
In the six months to December, Inghams reported statutory after tax earnings of $38.4 million, up 8.8% and underlying after tax profits of $39.7 million, up 5.9% and for the 2020-21 financial year, it earned net after tax earnings of $83.3 million on a statutory basis and $86.7 million on an underlying basis up 57%.
From the tone of Tuesday’s update, the company looks like falling short of the 2020-21 performance when the books are ruled off at the end of June.
The update though was a bit more dramatic than it first seemed.
The company mentioned a long list of problems in the update:
- Inghams said that while it continue(s) “to show great resilience and the ability to respond quickly and effectively to the challenges faced by the business, 2H FY22 results have been seriously impacted by the ongoing effects of the COVID-19 Omicron outbreak, natural disasters and higher feed costs;
- While employee attendance levels have improved, COVID-19 continues to affect operations and role vacancies remain elevated due to general labour shortages;
- Costs remain elevated across the business, mainly driven by feed, supply chain and transport costs;
- Some price increases have been achieved, and the business is actively seeking increases across the market to offset cost pressures; wholesale pricing has recently improved from the lows earlier in 2H;
- Australian operations are slowly recovering from Omicron impacts experienced early in 2H;
- The pace and pattern of recovery in the eastern states has been variable due to ongoing labour shortages and the impact of flooding in NSW and QLD during February/March, which affected site operations and supply chain activity;
- WA operations were adversely impacted by Omicron – now through the worst effects after having exhibited a similar pattern to Eastern states;
- Production levels have significantly improved and approaching a full product range being produced;
- New Zealand is now through the worst effects of Omicron and into the recovery stage, with progression and effects similar to those experienced in Australia;
- Financial impact partially mitigated by price increases and pre-emptive SKU rationalisation (that’s shelf space on store shelves and coolers);
- In 2H, due to processing capabilities, there has been a volume shift from Retail to Wholesale channel; Product mix shift, which has had a detrimental effect on margins.
While Inghams said it had achieved some product price increases to offset the rise in supply chain and input costs, investors went ‘yuk’ and sent the shares down nearly 6% at one stage. They ended down 4.3% at $2.87.
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Shares of waste management group Cleanaway Waste Management were also sold off yesterday after it, too, downgraded its outlook in an update at the same Sydney investment conference.
Cleanaway blamed rising fuel costs, and the ongoing impact from recent flooding and COVID for its problems (a shortage of staff).
That saw the shares lose 6.3% to a low of $2.95 in early trading before scrambling back over $3 to end down 3.1% at $3.05.
Cleanaway said its second half earnings before interest, tax, depreciation and amortisation (EBITDA) will be $15 million to $20 million lower than forecast.
“Rising fuel prices are expected to result in approximately $10 million higher costs for the second half of FY22,” the company said in the update.
It said it will find to recovery the high costs quickly as it is not always able to immediately pass on higher costs as well “resulting in the lag in cost recovery”.
Cleanaway said that while it typically has specific rise and fall clauses in its contracts that reference relevant fuel, labour and CPI indices, these are mostly adjusted annually, meaning there is a lag in time before cost increases can be made up.
The company said its a new landfill is currently closed temporarily due to the floods which could cut between $5 million to $7 million from EBITDA impact in in the current June half year
“Damage to post-collections equipment in our Health Services business is expected to result in temporary increased working costs of $5 million to $7 million in H2, while the continuation of high pandemic related clinical waste volumes continues to impose additional costs and inefficiencies,” the company explained.
“Constraints on labour availability due to the pandemic also continue to place pressure on the business, impacting its ability to service customers and operate efficiently,” it added.
