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Edited Transcript of GNC.AX earnings conference call or presentation 13-Nov-19 11:00pm GMT

Full Year 2019 Graincorp Ltd Earnings Presentation

Sydney Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Graincorp Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alistair G. Bell

GrainCorp Limited - Group CFO

* Luke Thrum

GrainCorp Limited - IR Manager

* Mark L. Palmquist

GrainCorp Limited - CEO

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Conference Call Participants

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* Belinda Moore

Morgans Financial Limited, Research Division - Senior Analyst

* David Pobucky

Macquarie Research - Analyst

* Grant Saligari

Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director

* James Ferrier

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst

* Jordan Rogers

UBS Investment Bank, Research Division - Director and Small Caps Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the GrainCorp Limited FY '19 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to Mr. Luke Thrum for a brief introduction. Thank you. Please go ahead.

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Luke Thrum, GrainCorp Limited - IR Manager [2]

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Thanks, Len, and good morning, everybody. Thanks for joining us. I'm here today with Mark Palmquist, CEO; and Alistair Bell, Group CFO. We're broadcasting this via webcast, and we'll put an archive of this up on our website later today.

So we're going to start with a run-through of the presentation, and then we'll open to Q&A.

So I'll hand over to Mark now. Thanks, Mark.

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Mark L. Palmquist, GrainCorp Limited - CEO [3]

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Yes, thanks, Luke. Appreciate it. And certainly, our thoughts and support are with all the people being affected by the drought and the fires that are out here. I know all of us have family and friends that have been impacted, and for us, we have employees and customers as well. So I'd just really call out just our concerns and our support for that.

Before I get into the FY '19 overview, I just wanted to make a comment on the Slide 4, just noting out that our safety improvement really improved a lot in fiscal '19. Both our recordable injury frequency rate dropping to 7.7. Our lost time injury down to 2.2. That's really been a lot of hard work and effort and just improving engagements with everybody and preplanning any type of duties that are going on inside of our facilities and in our offices. And it's really having a major, major impact for us. So we're really, really proud of what our employees have accomplished.

So let's get on to fiscal '19 on Slide 5, next slide. The numbers that we have reported are on the top. Obviously, a dramatic change, a very negative change in terms of what we have been experiencing over the last couple of years. The big impact, of course, is the challenging crop that we have really hits us hard from an aspect of receivables that we have in the country to minimal exports and also depressing our oilseed crush margins. Those are all very impactful from a crop aspect. We also experienced disruptions in the grain trade flows, which exacerbated the results as well.

For Malt, we had a good year. Nice, solid demand coming off. Good utilization capacity and good operational efficiencies keep improving. And as we mentioned in the half year results that we're really seeing [in Malt], we have a large skew of earnings that go into the second half. And again, it's really the reflection of the increased beer consumption in the northern hemisphere in their summer months.

The Grains, I'm going to talk about that a little bit later because that's really the main issue that we have going on here. For Oils, again, we have a number of components inside of Oils, and I'll go through that as well in a later slide.

And I just wanted to call out, again, we've had the portfolio review going on over fiscal '19, all the way from our announced sale on the Bulk Liquid Terminals to integration of Grains and Oils and then the proposed merger announcement that we came off with earlier in the year. And just bringing up -- mindful of the fact that we also received nonbinding indicative proposal from LTAP in December, and that was withdrawn in May of 2019.

So the next slide just shows the earnings profile. And I just wanted to be able to show you the comparison to previous years and just the dramatic impact that we've had from going from a near record crop in FY '17 to a very small crop in fiscal '19, and it just shows how impactful that is on our earnings. Even with the diversified earnings stream, it's still a primary aspect of GrainCorp, and it certainly impacts us.

So you see the EBITDA on the left-hand side and the underlying NPAT on the right-hand side showing the loss of $82 million in underlying NPAT.

Going to the next slide. We'll just give you an earnings bridge. So you can see the comparison from fiscal '18 to fiscal '19, and you can see the corresponding EBITDA numbers on the bottom of that slide.

So if I just walk through Malt again, a good year, a $6 million improvement. Oil's going down $8 million. Again, that was primarily on the crush margins that really had that negative impact.

And then Grains, we've broken it down into the big issues that we faced in '19. And starting on the bottom, it's $114 million effect coming from the drought. That, again, is a reduction in receivables. It's a reduction in exports. And certainly, it's an impact for us in terms of moving around Grains to be able to fulfill the deficit issues that we had in Queensland and Northern New South Wales.

Nothing really on corporate. You see the lower CapEx at $11 million. That's just an impact of cutting back on projects and our depreciation and decline for the year. You see our net interest is up $8 million. That's really 2 issues going on in there. One is that, particularly in the first half, we had much higher commodity prices but also running supply chains from Western Australia around and bringing them into Queensland, New South Wales and also to our facility in Victoria, certainly means that we're carrying bigger inventories as a result of that. And then you see the tax benefits as a result of the losses that we have.

Just breaking it down into the segments. I'll go to Slide 9 so you can just see both the revenue and EBITDA next to each other. Primarily, the increase in revenue is really the impact of that higher commodity prices and also the movement that we had going across from WA and SA into East Coast Australia.

For Malt, that's primarily driven by a little bit of increase in terms of malt barley prices, but also, it's a full run on Pocatello. So it's an increase in sales force there.

For Oils, that's basically a higher price in canola that really impacted that. But also, we had part of Numurkah in there into fiscal '19. So we actually had an increase in volumes on the crush side.

For Grains, again, that's the higher price in commodities and also the longer supply chains that we have coming from WA.

So on Slide 10, I'd first talk about Malt. And again, Malt still is a nice, solid story for us in terms of the demand and high utilization. We're still seeing very good demand for our malt and brewing ingredients. So both brewing and distilling is a very important marketplace for us. That large skew, again, I mentioned before that it's really the northern hemisphere with the summer months. We did have a little bit of adversity we had to deal with in Malt. We certainly were impacted by the drought in Australia. We had to move more malt barley from WA than what we would typically do, so there's some increase in interests cost there.

We had a few quality issues in the province of Alberta, which meant we had to move product from -- more product from Saskatchewan and Manitoba. So we had some increase in some transportation costs. And we also -- it does snow in Canada, but we certainly had some heavy snow events that really put a kink for a period of time in our supply chains, both on a receiving base and on a delivery base. Particularly, rail was delayed for a period of time. But despite all those issues, we still experienced net growth for the year.

Craft beer, volumes grew by 4%. So it is slowing down, which you would expect as that market has gotten bigger. To maintain double-digit growth rates certainly isn't something that we were anticipating or expecting. We are seeing an evolution going on in the market segments in the craft business. We're seeing the area that is growing double digit is the microbrew or the brewpub area, and we're experiencing that, not just in the U.S. and Canada, but we're also seeing it in Australia as well.

And just as a reminder, we are having an expansion that we announced last October, a GBP 51 million investment in our Bairds' Scottish malting facilities. That will add close to 80,000 capacity for us. That's all underway. The vast majority of that capacity will be underpinned by long-term supply agreements. And Arbroath will finish in fiscal 2020. That's 20,000 expansion. And Inverness, which is a new tower, a new malt plant at an existing site, will finish by the end of calendar year 2021.

Going on to Grains. You have the numbers in front of. You just see the volumes down in the left-hand corner. It just shows you the dramatic change that we had going on. Receivables less than half, grain exports being very minimal, and a big uptick in the grain trans-shipments coming through our ports on the East Coast from WA and SA of 2.3 million. And you can see our nongrain handled was pretty stable.

I'll just show you in that first bullet point that -- just how dramatic the drop was in the production of winter and summer in our 5 core grains. On the East Coast Australia, dropping by 9 million tonnes from fiscal '18. And I'd just remind everybody that we typically have a domestic demand in East Coast Australia for 10 million tonnes to 11 million tonnes. So it's easy to see why exports were minimal and why we were importing into East Coast Australia. We've seen an uptick in domestic demand for the clear reasons that with less water, less grass available, there's been an uptick in feed and feed ingredients' consumption on the East Coast as well.

I also will touch on the crop production contract later in the presentation on Slide 21.

For Oils, again, we mentioned it's primarily in the crush margin aspect. We've got 4 segments in our Oils group just worth mentioning. First one is the Bulk Liquid Terminals, performing very well, very steady, good utilization of our capacity, great demand, and the range of our products continues to expand. As you all know, we announced a sale back in March to ANZ Terminals for an enterprise value of about $350 million. That's still currently under review by the ACCC. They have indicated to us that they will be giving us some decision tomorrow. So we wait to find out what that is. And from there, we'll make certain decisions at the Board. We'll be able to look at and really decide how we proceed.

I wanted to point out on the oilseeds just how dramatic the crop production was, going from 1.6 million down to 400,000 tonnes in East Coast Australia. That's a 25% crop size of what it was in fiscal '18. And so again, when you look at where our capacity is and the capacity of the oilseed crushing business in East Coast Australia, it was obviously very deficit last year, requiring canola coming from South Australia and Western Australia to meet those needs.

Foods business was stable and also getting some operational improvements in our food plant in West Footscray. So we're actually pretty pleased with the results coming out of there. And of course, our feeds had an improved performance, and that really is the case of just a situation of deficit of feedstocks and increased type of feed supplements that were being used.

So with that, I'm going to hand it over to Alistair Bell, and he'll take you through the balance sheet and CapEx.

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Alistair G. Bell, GrainCorp Limited - Group CFO [4]

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Thank you, Mark. And also, I extend my best wishes to those that are facing the challenging drought conditions as well as all the fires.

So I'm now on Slide 14. So during this section, I'll cover off the cash flows as well as the condition of the balance sheet. This will include additional commentary around the trends we are seeing as well as how we're managing the seasonal conditions that Mark's just talked about as well as the seasonal fluctuations.

So Slide 14, it compares our net debt and core debt and shows the seasonal fluctuations half-on-half and year-on-year. It also starts to show how the smaller crops lowers our free cash flow. And I'll come back to that in a couple of slides' time.

We also -- whilst we experienced the usual seasonal fluctuations in the commodity inventory levels, moving from the old crop to the new crop, and I reference that if you go to Slide 23, you'll be able to see some of those trends, we also saw a shift into other working capital and the demands around that piece and this has led to an increase in our core debt.

At year-end, our commodity inventory level was $513 million, and that's funded throughout our net debt. I flagged this because you'll recall from previous calls that this is a fungible item that we have to maintain our balance sheet flexibilities. And one of the key parts across our liquidity piece for the business, and we've previously reported, we refinanced $500 million of our term debt into a 4-year evergreen facility. And with the recent annual renewals, we also positioned the business to prepare for the demerger.

Now moving to core debt. Well, turning to Slide 15. And core debt measures our net debt excluding certain grains and oils commodity inventory, but it does include our malting barley. It's an important piece, that one. So core debt uses -- is used to manage our long-term liquidity as well as our seasonal working capital needs.

In recent years, we've often -- both Mark and I have often talked about how our free cash flow has been used to reduce the long-term core debt. One of our key priorities has been maintaining flexibility and disciplined approach to our balance sheet. So that's where we've been applying it, particularly post the large capital programs we had running through to the end of fiscal year '18.

Now that's coincided with the extreme East Coast drought, and that puts pressure on our cash flow. But also, as Mark alluded to, we've had other unusual and abnormal factors that have impacted. And that goes back to the bridge slide where Mark outlined it as well as significant items, which we've detailed.

As I touched on very quickly, we've seen a shift in demand for working capital. So I think it's a good point, this change to Slide 16. Slide 16 is a new slide, and we felt it was important to explain the core debt and the moving parts. Free cash flow or cash flow from operations is down because of the drought and the performance, and there's a couple of other factors that have shaped the level of the core debt. First one is the working capital levels. And normally, this fluctuates with timing of harvest, grain prices, moving from old to new crop. This year, the working capital levels increased by $150 million year-on-year, the majority of which is timing, but it is significant for our core debt levels.

So this slide includes details around 3 areas, in particular, where we saw those influences. Firstly, to support the grain import program to the East Coast of Australia. We have vessels that sail at the end of months. And there was 2 vessels that impacted the collectability of receivables. So it moved out of inventory and into receivables as well as in the working capital needs for malt, some of which is the barley prices that's reflected. But it's also the sales volumes that we picked up, some of which go to the big brewers. And I think everyone knows the big brewers have extended credit terms. And those increased sales volumes led to increase in their receivables.

In addition, the company incurred in cash terms about $30 million of significant items handling the portfolio review, responding to LTAP and preparing for the demerger. So this is the cash cost of the significant items that we've outlined on Slide 26. The other item is capital expenditure. When we started the year, we knew it was always going to be challenging with our funds from operations. So we had to set aside and moderate the level of our CapEx.

So if we turn to Slide '17. You can see how our CapEx levels of $97 million was substantially lower than in recent years, and we expect a conservative approach will be maintained in the year ahead. It's really important. We're facing a below normal crop production on the East Coast. And so we approach this planning period before and after the demerger plans to ensure we keep -- make the right decisions of allocating the capital.

We've foreshadowed what the possible growth CapEx will be in the year ahead. It relates principally to committed projects, the largest of which is the expansion and upgrade to the Scottish malt plants that Mark alluded to earlier. With the lower CapEx comes a decrease in depreciation and amortization, and that's reflected on -- in the charts in the trend lines we're seeing there as well.

I'll pass back to Mark now, who will cover off the outlook for the fiscal year '20.

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Mark L. Palmquist, GrainCorp Limited - CEO [5]

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Thanks, Alistair. So I'm on Slide 19. I'll start with Malt. We are seeing a little better global barley production. But quite honestly, most of that is mainly feeds. So we're not seeing really much change going on in the global malt barley supply. We're certainly looking at any quality issues. I would just tell you that the U.S. quality looks very good. Australian malt barley crop, we think, is in pretty good shape. But again, a lot of what we'll be drawing on will be coming out of Victoria. And we've seen kind of a slow start to the harvest down there just because of the last couple of weeks of cold wet weather.

U.S. craft beer market, again, it grew 4% in 2018. We do look for future growth going on into FY '20 as well. The Scotch Whiskey industry is experiencing continued good consumer demand and high value. The single malts, in particular, which is an area that we concentrate on, is really showing the majority of the growth that's happening in the Scotch Whiskey business. And we're also seeing continued good demand for the Mexican-style beer, and we look for that to stay very strong.

So when we look out into fiscal '20, we are very confident of continued high-capacity utilization of our malt plants. As most of you know, a good portion of our production sits under long-term agreements. And we continue to see good solid demand going on with our base, which is important for us. It's a high volume, but the specialty malt area continues to really grow with the customization going on in the craft business. And the innovation of new types of beers really requires specialty type malt. And of course, all our other craft and distilling products and ingredients remain in high demand.

We're benefiting in FY '20 with our warehousing and distribution network. We have 12 DCs now operating in the U.S. and Canada that is really hitting that area on a national basis. And it's hitting areas where we are seeing good continued growth, southeast U.S.; also in Mexico, we're seeing the craft business grow pretty well. And of course, with our acquisition of Cryer Malt, it's helping us in Australia as well.

Going on to Grains/Oils outlook. As we've been talking about, we are experiencing another below-average crop for FY '20. If we just take the estimate, which is a blending of ABARES' September numbers and ACF's November numbers, that estimate works out to about 11.5 million compared to our 6.5 million in FY '19. But that production is going to remain highly skewed towards Victoria and Southern New South Wales. So we'll still experience a deficit situation up in Queensland and Northern New South Wales, which means that we look to continue to export -- or import from WA, South Australia and also Victoria as we go through. And it also means that exports would be very low for FY '20 as well.

I just wanted to point out that the canola production estimate, improving at this point to about 1 million tonnes in the East Coast Australia versus the 400,000 tonnes we had last year. Again, I'd just be a little bit careful with the estimates right now because Victoria, where the primary supply is going to come from, is just really getting going inside of harvest.

So the FY '20 outlook. Year-to-date, we've received about 400,000 tonnes. That's primarily coming out of Queensland and New South Wales at this point in time. As I mentioned earlier, we expect minimal grain exports again from the last year going into this year, and we still will see good importation of grains coming in from WA, SA and VIC, not just through our grain port facility but also inland facilities because Victoria is certainly sitting in a surplus situation.

The crop production takes effect this crop year, so in fiscal '20. And I'll go through that on the next slide just to review again what that means. And we are continually diversifying our grain origination both in Canada and Ukraine, which has been a benefit for our overseas customers and for us to maintain our relationships with them. We are well on our way on the Grains/Oils integration that we announced back in April, which will be certainly a benefit to GrainCorp in fiscal year '20.

We do expect crush margins to stay under pressure. Obviously, a bigger supply closer to us, so we'll probably experience less transportation costs than what we did previous year. But we'll still be moving canola longer distances than what we do in a more typical type of crop production situation.

I want to just make mention again to the crop production contract that we have in place. You can see the contract terms on the right-hand side and just the information where we're at. It's -- the big thing for us is that this certainly will be very beneficial to us in FY '20 as we look at what the estimates are on crop side. More importantly, it really gives us that ability to smooth out the cash flows inside of a volatile industry. The one big uncontrollable that we have each year is what is the crop production, which as we well know in Australia, can vary by quite a bit just when you look at the difference between fiscal '17 and fiscal '19.

Just to finish up, and just mention again the portfolio optimization that we've been working on and that the Board has been going through a review of portfolio now well over a year. And again, just a reminder on the Bulk Liquid Terminals in that we are anticipating a decision from the ACCC tomorrow. Once we get through the ACCC, there's still a few other conditions such as FIRB approval that will have to go on depending upon what we end up with from the ACCC.

I've mentioned the Grains and Oils. Again, well advanced in front of our demerger process. And so we'll see good benefits on that as we operate before we reach the demerger.

The proposed demerger, again, announced in April 2019. Because of the long process with the ACCC, our original announcement was to have the scheme booklet out in calendar year 2019, and we've had to push it out a little bit into the first quarter of 2020 just to address the time frame because of the ACCC process.

So with that, I just -- I thank you for listening to Alistair and I this morning. We know that we are certainly disappointed with the financial results, but we are also very pleased with the tremendous effort that's gone on with our employees in really working through what is really a very, very trying period of time for the organization. But we have certainly come out of it and being a very good solid organization. And we have certainly adjusted a lot of where fiscal '19 was and how we handle fiscal '20, and we think those will bring benefits to us in the coming fiscal year.

So with that, Luke, I'll turn it back over to you.

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Luke Thrum, GrainCorp Limited - IR Manager [6]

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Thanks, Mark. I'll hand back to the operator, and we're happy to go to Q&A now, I think.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jordan Rogers from UBS.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [2]

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Just the first question around the rail contracts. In that preso there you've got the $15 million impact on the waterfall. Is that $15 million worse than FY '18, like an incremental or is that -- because I think you've talked in the past about it being sort of 15 and -- 10 to 15 in a normal year and more like the sort of 25 to 30 impact on a severe drought year. And so could you just clarify that and then talk about what the benefit is going into FY '20?

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Alistair G. Bell, GrainCorp Limited - Group CFO [3]

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Yes, certainly. Thanks, Jordan. So the $15 million is a net number of where we weren't able to recoup take-or-pay. So it's a direct impact of the runoff of the last year of the existing contracts. So as we start this new year, the new contracts are commissioned for the first quarter. And we see that we've got a minimal level of take-or-pay but far more flexibility, not only for us but also for the rail provider. There's a lot more greater operational efficiency for both of us in the planning -- planning-wise. So the $15 million was a one-off impact that we don't see reoccurring in the fiscal year '20.

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Mark L. Palmquist, GrainCorp Limited - CEO [4]

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Just another just another point, Jordan, I'd add is that the take-or-pay situation in 2019 is smaller than it was previous years, and that's because we had a roll-off of Queensland commitment.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [5]

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Okay. Yes. Okay. That makes sense. Another one just around the other cost-out you've talked to in the past with new GrainCorp rolling Oils and the Grains divisions a little more integrated, how far progressed are you? And sort of can you talk to anything on a run rate basis around those optimization targets or what you expect in the next 12 months?

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Alistair G. Bell, GrainCorp Limited - Group CFO [6]

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Jordan, I'll break it into 2 parts. One is how far progressed are we on the organizational changes. We're very well progressed to the extent that we've only reported the results into segments to close out this year. We've already organized and running the businesses into new segments. And as we prepare for the demerger and the half year, we'll start sharing those new segments with investors. So that integration piece is well advanced. And for the current harvest, we're running the new operating models and the decision-makings around our customers and growers to support that.

So the cost efficiencies have been [worn] in FY '19. And we're looking to have the benefits of that come through '20, and then following the separation of the demerger, the rest of that. We originally put out there $20 million of -- that we expected to come through. We're well on track to deliver that. Just remember that $20 million does include time after separation. We put 9 to 12 months after separation to fully have that baked into our run rate.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [7]

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Okay. Great. The next one is just around your comment around expecting more trans-shipments from WA. I guess how do we get comfort that there's not going to be a big grain trading issue again in FY '20 if you're doing the same thing?

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Mark L. Palmquist, GrainCorp Limited - CEO [8]

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Yes. I think that's a great question. So there's a couple of factors that are different on a go-forward basis. One is the trade disruptions that we experienced were, I would just say, very surprising to us and unanticipated. Those disruptions continue forward. So now how you set up your program incorporates those disruptions in place.

The other issue that I would tell you is that we will see more of the deficit of Queensland, Northern New South Wales being supplied by Victoria and less out of WA. WA crop is down from last year where Victoria is having a good and excellent crop again this year. So we'll see more of it coming out of our traditional dry areas, which means we certainly have more control over it, both in price inventory and positions than we do pulling across from WA.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [9]

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Okay. Yes. Sure. And then just appreciate you don't want to sort of preempt the ACCC decision for tomorrow. But have you been having much engagement with them? Or has it been left with ANZ Terminals? I guess, to what you can say, what are the areas -- I mean they gave their statement of issues, but what are the areas that are causing the holdup?

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Mark L. Palmquist, GrainCorp Limited - CEO [10]

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Again, the primary interaction would be with ANZ Terminals. Our interaction has been more about requests for information on the [155s], which we have done and we have provided. So it's just literally difficult for me to give you really what I think the ACCC is going to do. They're proceeding everything that we see, which isn't very much. They're being very methodical. And they're putting in, I guess, I'd call it the hard yards in that they're really looking at it. So outside of that, I just really don't have any indication that I can give you today. And we have great interest in seeing what the announcement will be tomorrow.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [11]

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Okay. But if it is blocked, would you rule out raising equity? Would you run a new process of divestment to other parties? Or can you talk a little bit around that?

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Mark L. Palmquist, GrainCorp Limited - CEO [12]

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Yes. Again, it's just kind of hypothetical, Jordan. I think we're just -- we'll take a look at what the ultimate decision is with ACCC. And whatever it is, then we'll work through that. We still believe the merger is absolutely beneficial to shareholders and the company. And so for us, it just is just looking at where the ACCC is at and what is the impact to us in terms of the terminals, and then we'll proceed from there.

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Operator [13]

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The next question comes from the line of James Ferrier from Wilsons.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [14]

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A couple of sort of more straightforward ones. First of all, perhaps for Alistair, that waterfall chart on Slide 16, the working capital increase there. Just from what you're saying, is it fair to assume in FY '20 that the higher malt debtors are more structural, they probably stay? And then what are you thinking around the unwinding of the domestic higher debtors? Does that occur in FY '20? Or is it maybe an FY '21 story?

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Alistair G. Bell, GrainCorp Limited - Group CFO [15]

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Yes. Great observations, James. The import program is an important piece to keep going whilst there is a deficit. As we approach the next year's harvest, whether it be the summer crop or the -- or even the winter crop, that will shape the unwind of that -- the timing of that unwind. The domestic demand is an important part of our new East Coast model, but the servicing these sort of programs for imports is a rare event, particularly at these levels. So we'll watch it, and I'd suggest you -- in your role, keep watching the summer crop as well as the winter crop next year, and that will shape the unwind of that sort of receivable.

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Mark L. Palmquist, GrainCorp Limited - CEO [16]

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The other comment I'd add, James, is that commodity prices, generally, in our origination areas are lower in fiscal '20 than they were in fiscal '19. And again, that has an impact in terms of what their work capital needs are.

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Alistair G. Bell, GrainCorp Limited - Group CFO [17]

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Yes.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [18]

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Yes. Okay. Makes sense. And Alistair, the D&A number, I think it was $142 million. It feels a bit lower than what you might have previously talked to. What are your expectations for FY '20?

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Alistair G. Bell, GrainCorp Limited - Group CFO [19]

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Not being specific, but I would imagine it will continue to decline now that the programs run off. A little bit of the insight. If you look at the actual split of the CapEx, this is in the annual report, in the software area, that's typically got a shorter life. And you'll see that we capped out a couple of the software projects during the year, focusing more on the customer platforms that go forward to help our growers and consumers. But that's typically about a shorter life, and part of that is run off and is probably better than we expected and indicated last year.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [20]

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Yes. Okay. And then the last topic I wanted to talk about is the domestic Grains business. Mark, for the economics of GrainCorp of participating in that West Coast to East Coast trade versus the economics of going south to north, what does it mean on a -- economics per tonne or whatever metric you might care to talk to?

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Mark L. Palmquist, GrainCorp Limited - CEO [21]

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Yes. I'm not sure I'd want to disclose a metric per tonne. What I would tell you is that the supply chain is substantially shorter. So to give you an example, for us to run from Western Australia all the way around through our port facilities and then distribute into Queensland is a supply chain that takes 90 to 120 days, if I think about running out of Victoria. That will be coming out of our existing assets and facilities. And most of that primarily will run by unit train south to north, which now you're talking about an overall supply chain and receivables running something closer to 30 to 40 days. So you're running about 1/3 of the period of time on the supply chain.

It also means that we've got more flexibility in where we would ship those trains out of because we've got all of our existing facilities here, and they're not having to go through export/import facilities. So we would certainly envisage that overall cost would be lower on transportation, and certainly, use of working capital would be less.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [22]

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Okay. So it costs lower. It stands to reason your earning is probably going to be lower as well?

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Mark L. Palmquist, GrainCorp Limited - CEO [23]

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I'm not sure what you mean. If cost's lower, are earnings lower?

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [24]

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I didn't mean -- just applying your typical markup on your costs in a reasonably competitive market, that's all.

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Mark L. Palmquist, GrainCorp Limited - CEO [25]

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I'm not sure I would draw that conclusion. I think it just ends up being a more efficient type of supply chain for us. And so I think there's more efficiencies that we can gain by having the ability to move out of Victoria to Queensland than what we can do coming out of WA.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [26]

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Okay. Yes, that makes sense. And the second part of that question was, historically, GrainCorp has been able to report sort of 5 million to 6 million tonnes of domestic outloadings. And that's been pretty stable for a long time back when you were disclosing those metrics, and almost regardless of the size of the East Coast crop. Mark, you made some comments around how that domestic market has changed a bit of late with the drought and increased feed demand. But I'm wondering how you see GrainCorp being positioned to participate in that domestic outloading market now versus perhaps what it's done in the -- sort of over the past decade?

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Mark L. Palmquist, GrainCorp Limited - CEO [27]

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Yes. That's a big part of the Grains and Oils strategy, is continually improving their participation in that. The interesting development that's really gone on over the past 3 years is that there is a sizable portion on the domestic market that actually moves straight off of on-farm storage. And so that's where the real emphasis has been. And Grains and Oils is increasing their participation coming straight off of on-farm storage.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [28]

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So actually, the grain not entering a GrainCorp receivable side but GrainCorp still getting involved in that supply chain?

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Mark L. Palmquist, GrainCorp Limited - CEO [29]

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That's exactly right.

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Operator [30]

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Your next question comes from the line of David Pobucky from Macquarie.

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David Pobucky, Macquarie Research - Analyst [31]

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Just a couple from me. The first one, we've seen some commentary in terms of unfavorable trends in beer demand in North America. I think one company noted a double-digit decline in beer demand in the U.S. Just wanted to know what you guys are seeing there and then whether that has had any impact on the malt business. Or do you expect any impact going forward?

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Mark L. Palmquist, GrainCorp Limited - CEO [32]

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Yes. There's been some very interesting trends, David, so it's a good question. What I recall, just a standard base beer, so a lager or a pilsner, out of the national labels has really struggled and has been losing market share. Craft has been replacing it. So if you look at North America, overall beer consumption has been relatively flat. It's been the growth in craft that is offsetting the decline in the more traditional-type of beer. So that's actually been advantageous for us considering what we produce in specialty malt and what we have in our craft distribution business.

And we look for that trend to continue, not at the big double-digit growth rates, but we see that trend continuing. And the reason why we see it continuing is not just that craft consumption is going up, but craft is becoming more and more a destination consumption outside the marketplace with the microbrew and the brewpubs. And so we continue to see that fitting us very well. So at this point, we've actually benefited and not been impacted negatively by what you're seeing decrease in some of the major beer brands.

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David Pobucky, Macquarie Research - Analyst [33]

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Great. And secondly, I think earlier in the year, like maybe in May, you mentioned that there was some serious interest on the malt side in terms of a trade sale. Has that kind of disappeared? And I'm assuming it's full steam ahead with the demerger plans.

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Mark L. Palmquist, GrainCorp Limited - CEO [34]

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Yes, we're full steam ahead on demerger. And we're not actively at all soliciting any sales on assets outside of liquid terminals, which we have in process. Certainly, the Board has a fiduciary responsibility to take a look at any credible type of proposal or offer. But we're well on our way in terms of executing the demerger.

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Operator [35]

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Your next question comes from the line of Belinda Moore from Morgans.

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Belinda Moore, Morgans Financial Limited, Research Division - Senior Analyst [36]

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Just a few questions, please. Can you clarify what the EBITDA contribution from the Bulk Liquid Terminals is in today's result?

Secondly, Mark, just with sort of what you were saying just around the anti-barley dumping. You're sort of confident that your marketing book can be profitable in FY '20?

Thirdly, despite what you're saying on Oils, are you still expecting a decent uplift in '20 just from sort of the growth projects restructuring initiatives offsetting some of the crop pressures?

Maybe if you can talk about how you're going about finding a new CEO for the new GrainCorp.

And then lastly, what your expectations are for corporate overheads? It was great to see them really fall in the second half.

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Mark L. Palmquist, GrainCorp Limited - CEO [37]

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Well, thanks, Belinda. And you'll have to remind me if we've missed something in there. So first question...

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Alistair G. Bell, GrainCorp Limited - Group CFO [38]

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First was liquid terminals. Belinda, given the proximity of the ACCC, we've not publicly disclosed that number. And our preference is not to start disclosing until we see the outcome of the process with the ACCC, if that's okay.

The next there is corporate costs.

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Mark L. Palmquist, GrainCorp Limited - CEO [39]

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Trading, I think, was the next one in terms of the WA and the -- our disruptions. Again, that was a major, major blow to the earnings in terms of what happened on that side. So my answer is a little bit similar, I think, to the one that James had asked. And that is, one, is we see our supply chain out of WA being smaller in FY '20 than it was in FY '19. We're still trying to ascertain what we think the full import needs to be in East Coast Australia. But again, considering that Victoria production looks very good, we would look to have that be a bigger part of our supply for the deficit areas.

The other component is that the marketplace is already reflecting a continuation of the trade disruptions. And the farmers are seeing it because their prices are lower because that demand base that would have been there in the past is expected not to be there on a go-forward basis. So we're just starting at lower price levels and I would just say lower participation out of WA fulfilling the deficit than what we saw last year.

I think the third question was corporate costs.

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Alistair G. Bell, GrainCorp Limited - Group CFO [40]

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Corporate costs, it started -- yes. We started to see the benefit of preparing for the demerger. You'll recall back when we announced the outcome of the portfolio we did on 4th of April, part of that was starting to reposition the role of corporate and preparing the 2 independent operating companies. We carried the costs through the balance of '19. But as we start fiscal year '20, we're starting with the lower cost base. And that will continue through, obviously, the separation. And then, as I've referenced earlier, we'll complete the positioning of both of the companies for the right cost base in corporate for [each of these].

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Mark L. Palmquist, GrainCorp Limited - CEO [41]

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Yes. So the way I look at it is kind of a waterfall of events. And so Grains and Oils started their integration back in April, and it's pretty much completed. The major restructuring in the functional areas of the organization, part of it is, I would just call it, taking down capacity but also getting prepared for the demerger. Most of that major restructuring was accomplished in September, and so there wouldn't have been much of -- hardly any of that, quite honestly, and in FY '19 that would show through. We'll start to see that as we go forward in FY '20.

And then there is a, I'll just call it, a section of capacity and costs that has to be held until we get demerged. And so those will be post-demerger. We still have a lot of work going on that's required for the demerger itself. We certainly still have a corporate structure of GrainCorp Limited. And so much of that just really can't be realized until we actually separate as 2 separate companies.

And then I think I'm missing one. I think there was 5.

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Belinda Moore, Morgans Financial Limited, Research Division - Senior Analyst [42]

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How are you going finding a new CEO for the new GrainCorp, please?

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Mark L. Palmquist, GrainCorp Limited - CEO [43]

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That's probably why I forgot that one. That is something that I know the Board is working on. I really have nothing I can give you. I'm probably the last person that will be told where they're heading in that process. But I haven't gotten any indications of concern in being able to attract and select a CEO in time for the demerger.

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Belinda Moore, Morgans Financial Limited, Research Division - Senior Analyst [44]

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Okay. Can I maybe just ask one more on the new GrainCorp? Have you thought more about sort of gearing ratios that you're targeting there? You've obviously given us guidance on Malt. But have you thought more about the new GrainCorp?

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Mark L. Palmquist, GrainCorp Limited - CEO [45]

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Belinda, it's a great question. And we will wait until we're through the ACCC outcome. And that gives us the right capital structure in the way we will approach the demerger. So it will be part of the scheme booklet. And obviously, once we know we're through the ACCC, we will be able to shape that structure.

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Operator [46]

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Your next question comes from the line of Grant Saligari from Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [47]

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Just a couple from me. I guess, Alistair, sort of cutting the chase a bit, as you sit here at the moment, with the information you got available, would you expect to be generating a positive free cash flow in fiscal '20?

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Alistair G. Bell, GrainCorp Limited - Group CFO [48]

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Well, we'll wait until we know the size of the crop once it's in. That will help us around that. That's the biggest gating item and shapes our guidance when we provide earnings. And obviously, the cash generation out of malt supplements it. So I'm not giving a guidance around your question, Grant, but it remains a desired principle of remaining free cash flow at least breakeven. But it is a low crop year, and we just need to see the size of the crop before we pass comment on that.

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Mark L. Palmquist, GrainCorp Limited - CEO [49]

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I would echo that because it's -- we have the crop production contract in place this year.

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Alistair G. Bell, GrainCorp Limited - Group CFO [50]

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Yes, that's right.

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Mark L. Palmquist, GrainCorp Limited - CEO [51]

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And so it just adds a little bit more sensitivity on understanding what the crop size is because that interplays with it as well. And so with VIC just getting going on harvest, we still have to try to see what's happening here and what acres end up getting cut for hay, what is the yields that are coming out of that area. It was wetter but it was also more variable. And so for us right now, it's -- we're just not confident in terms of what the Victoria crop is going to be. We need to get another 30 days into harvest at a minimum to really understand it.

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Alistair G. Bell, GrainCorp Limited - Group CFO [52]

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And it's a good point because this is the first year where the crop production contract is in place. It's obviously an important feature of smoothing out cash flows as we plan the year ahead but feel that we just need to see the real impact. The key dates to watch are ABARES put a report out in December, and then -- which is still an estimate and then in February, they put out a report reporting their first view of the actual. So it will shape a lot of our cash flows around that.

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Mark L. Palmquist, GrainCorp Limited - CEO [53]

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Yes. And just to remind everybody in terms of the workings of the crop production contract is initial payment comes off the February ABARES' number. And then there's a true-up in the June numbers. So that will be -- that February number will be the first time we can get quite definitive in terms of what is the impact of the crop production contract.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [54]

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Okay. That sounds like a fairly equivocating maybe on the free cash flow. I guess -- so just following on to the core debt position. I mean it was gratifying you're able to say that you're within covenant on the core debt. How long can you continue to carry that sort of level of core debt? And is there scope for that to increase if you did get a situation where free cash flow did deteriorate?

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Alistair G. Bell, GrainCorp Limited - Group CFO [55]

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The -- I'll go back on your free cash flows. We weren't -- we'd like just to see the real impact of the crop production. But I think if you run your math and take out the unusual or abnormal factors that impacted it, it puts us in a healthy position. We're just not making a formal forecast around that piece. So I just wanted to [reflect] your observation around that.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [56]

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That's gratifying. All right. That's great. And on the core debt?

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Alistair G. Bell, GrainCorp Limited - Group CFO [57]

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Sorry, on the core debt, obviously, funds from operation and your CapEx are your 2 big movers. And we plan around that, and the impact of working capital, it does fluctuate with grain prices. And as we've touched on earlier, we're carrying high levels of working capital across the business. It's assisted our business model. But obviously, there is scope around working capital to be able to remain really disciplined, not only on CapEx but also on the working capital. And that's a program in itself that will work.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [58]

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Okay. I guess finally, and I do appreciate it's early in the season and you don't want to give guidance, but to be completely pragmatic and to try to keep an informed market, we're going to have to come up with a number tonight. How will you help us understand and bridge the loss that you incurred in the Grains division in FY '19 to a potential outcome in fiscal '20? Like what sort of things should you suggest we should consider? What should we think about in terms of the potential contribution of the extra 5 million tonnes of crop production that's currently in the ACF forecast?

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Alistair G. Bell, GrainCorp Limited - Group CFO [59]

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Okay. So let's look at building blocks. If you go back to the earnings bridge, which Mark talked about Grains -- your question's around Grains, I think is the focus on that component. You can see 3 blocks which are nonreoccurring. There is -- therefore, the bottom of the red box is the impact of the drought. And there's 2 aspects that will work around that element. One is, obviously, if it's a larger crop on East Coast, Victoria, et cetera, compared to last year. That's our receivables, but also, the efficiency is supplying the outflow to the domestic demand. So I think that's an important block.

Furthermore, we've then got the crop production contracts in place. And you can form a view on comparing what that would look like in '19, if it was to have been in place, it is [however] in place for '20. So that's an aspect that is not reflected in those results, but is going to be a factor in fiscal year '20.

The other part that I -- when I look at the bridge is the Oils piece. Obviously, the crush margins last year and the performance of oilseeds were significantly impacted by the low, low levels of seed availability on East Coast. That's more finely balanced this year, as Mark indicated, around the crop forecasters. And that leads to crush margin, but also, we've got a full year of the upgrade of the Numurkah plant that will run this year. So that's -- there's an opportunity to have a meaningful contribution for the Oils as well.

So those are the building blocks. With Malt's steady performance with the -- making that, particularly in North America, the warehouse and distribution, a well-balanced platform, servicing the craft sector, but obviously, also having a baseload that goes to your commercial brewers, links you back to the receivables number a bit. But that's in terms of your cash flows, as you think about that. But it's -- we'll look to ensure we -- the Malt business continues to capture its performance around that.

Those are the components, and I lead that back to the outlook pages that Mark walked through, which -- and if you just reflect on my additional commentary in light of what was put there in the outlook section of our presentation, I think that just helps interpret it.

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Operator [60]

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Ladies and gentlemen, that is all the time we have for questions. I would now like to hand the conference back to Luke Thrum. Please continue.

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Luke Thrum, GrainCorp Limited - IR Manager [61]

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Thanks, Len, and thanks, everybody, for joining us today. We've got a pretty busy day ahead, so we do need to get going. But I'm happy to take any questions later through the day. So please get in touch. Thanks, and have a good day, everyone.

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Operator [62]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.