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Edited Transcript of GNC.AX earnings conference call or presentation 9-May-19 12:00am GMT

Half Year 2019 Graincorp Ltd Earnings Call

Sydney Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Graincorp Ltd earnings conference call or presentation Thursday, May 9, 2019 at 12:00:00am 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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* Adam Fleck

Morningstar Inc., Research Division - Director of Consumer Equity Research & Regional Director

* Anthony El-Khoury

Deutsche Bank AG, Research Division - VP

* 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

* Mark Wade

CLSA Limited, Research Division - Research Analyst

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Presentation

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Luke Thrum, GrainCorp Limited - IR Manager [1]

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Thanks, Rachel. Good morning, everybody, and welcome to our first half results of FY '19. The call today is being webcast and is on our website at the moment, and we'll have an archive on the website later today.

So today we'll be hearing from Mark Palmquist, CEO; and Alistair Bell, Group CFO, and there will be an Q&A afterwards. So then I'll hand over to Mark.

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Mark L. Palmquist, GrainCorp Limited - CEO [2]

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Great. Thanks, Luke. Good morning, everyone. Thanks for joining. You will see the agenda. We certainly want to go through our half year results. I'll talk about them a little bit deeper in our segment performance. Alistair Bell, our CFO, will take over at that point and go through balance sheet and CapEx and then I'll come back on FY '19 outlook and also have some comments in terms about some of the portfolio of review initiatives that we are working on.

But first I just want to point out that safety, we really made some great strides. We're very proud of how we have really gotten the trend back in the way that we wanted to with recordable injury frequency rate considerably lower than where we've been at in past years, and also getting our loss time frequency rate heading back in the right direction again. Great effort by a lot of people and initiatives we had on safety. We'll also point out is that our high potential near-miss incidents were down 40% as well, and that's really based on the critical risk management programs that we put in place.

So moving on to next slide, let's talk about the results. I'm sure you saw them posted earlier, very disappointing, but very much primarily around what's happened in East Coast Australia in terms of the drought, the worst that we've seen in over a decade. Greatest impact is on the Grains group, also slightly depressing our crush margins, but we also had the impact in the latter half of the half year for us in that we have some trade disruptions that were going on that certainly exacerbated the negative numbers that you see.

I am going to again talk about these on the segment performances. So I'm not going to spend much time reading through, but again I just highlight the fact that in March 2019 we announced agreement to sell our Liquid Terminals business in Australia and that it's still subject to some relevant approvals. We had also mentioned there that there was an exit clause that needed to be triggered by 10th May. So we're almost there. We'll be over that once we get to 10th May.

On the next slide, you can see the earnings profile and you can see it by the different business segments. And this really highlights just the tremendous change that went on in the Grains group that ran positive in years past, but with the drought situation that we had ended up being a very negative situation for us. And that's what's really falling through on the underlying impact at a negative $48 million.

Next slide, I'll show it to you on a bridge so you can just really understand the magnitude of what's happened to us on the Grains component. You can see just starting with Malt, a fairly steady, just a few minor issues in there for the first half that don't translate into the second half, and I'll walk through that a little bit later.

You can see the impact on slightly weaker oilseed crush margins, but then you see the big impact, impact on the EBITDA of negative $82 million on the Grains. And again, I will run through that on the performance issues by segment as we take it forward. And so that's just the bridge between '18 and '19 on the half year reported.

So let's go to segment performance. And I just have a slide here that just shows you the numbers so you can compare revenue issues and along with the EBITDA. The next page -- let me just go through Malt. You will see a growth in the revenue, primarily that's really involves more of the price of malt barley and malt going up. EBITDA is slightly lower than the half year '18. That's just a combination of a few factors. One is, of course, the East Coast Australian barley supply being down. We had to input a little bit more from Western Australia and Southern Australia coming in. We did have a few weather issues in Canada. One was it actually created some quality variability. So we had to move malt barley around a little bit more than we normally do to satisfy our Canadian assets. The other one is just the timing issue, and that's we had a pretty robust tail to winter up there that delayed shipments. And that's really a catch up into the second half of the year. Still seeing very good strong demand, we have 4% growth in the craft beer industry, seeing very good growth in the distilling components and we're seeing that growth basically across all of the areas that we participate in the global market. And so we'll continue to have an extremely high utilization across all of our assets.

I'll just make mention again, we had announced the capacity expansion in Scotland to deal with this increased demand in distilling in that area. That's all proceeding well, just to remind everybody that, that would be completed in the calendar year 2021. We are presently working on our Arbroath facility and we'll have the new malting plant built in Inverness.

Now going on to oils. And again, our oils group has a number of components to it: liquid Terminals, our crush, our foods and our feeds areas. Liquid Terminals continue to operate at a very high utilization rate, very strong customer demand across all of our range of product segments.

The oilseeds side would be the negative area with the decline in the crush margins. What I'd highlight to you is if you look at the difference in the crop of canola in East Coast Australia from '17/'18, '18/'19, you can see we went from 1.3 million tonnes, which was even down from the year before, down to 400,000 tonnes. Our capabilities at the market today is running at about 350,000 tonnes per annum capacity. So you can realize how tight supply has got on canola.

Our Foods actually continues to improve its performance. We're getting better at running our plant. We keep reducing our costs and we keep gaining efficiencies. The plant I'm referring to is in West Footscray. So we're very confident in terms of continuing improvement in our Foods.

Our Feeds actually benefited from the drought situation with more supplemental feed usage going on, and we certainly experienced positive results from that increase in demand.

Just highlight again on the sale of the Australian Bulk Liquid Terminals, we feel that, that is on pathway. We are getting prepared to move forward with ANZ. I'll just tell you the process of getting approvals has already started on that site subject to us not exercising our exit clause tomorrow.

Moving on to Grains. Again, this was the big impact. Providing you some numbers so that you can understand a little bit better of why it's been so negatively impactful for us. I'd just start up on the right side on the bullet points. You can see the impact on the production in East Coast Australia. This fiscal year being 7.7 million tonnes winter and summer combined in comparison to the 16.7 million tonnes in fiscal year '18. That means our crop is about 45% of what it was last year. We made an announcement back on the 18th of April just in reference to continuing deterioration due to some international trade disruptions, and that's been part of this downdraft and showing an EBITDA at the point that it's at. What that really did is it disrupted a lot of the grain flows. It changed what was being used in the feed ingredients at East Coast from wheat to barley. And so we really were in a position where we had to change our supply chains at the same time. So that's where that disruption comes from.

The international trade tension issues will continue to be an ongoing event. We have to watch, but the market at this point anyway with what we know in front of us has pretty well adjusted, and that's reflected mainly in the first half year.

Our continuing progress on the international growth keeps going forward. We have been expanding our origination coming out of the Black Sea, our Canadian investment that we have at Zen-Noh Grain. GrainsConnect Canada has completed its third country elevator facility out of the 4 that we had announced we were planning on doing. That opened up just last month. And we, of course, also announced securing our port access at Fraser Grain Terminal in the Port of Vancouver. We've also made the announcement on opening up a marketing office in India and getting into that high growth market as we go. We're still focused very well on running very well on our cost reduction, our customer engagement and asset utilization. So those improvements continue to go forward. And I would just highlight the utilization or take-or-pay rail contracts. Again, of course, it is a very big burden for us with the low grain volumes. I'm happy to say that, that contract expires at the end of this fiscal year. It is -- has been a big drag on us in the low crop years over the past 6 years.

So with that, we will move on to the balance sheet and CapEx. Alistair, I'll pass it up to you.

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

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Thank you, Mark. Good morning, everyone. Just turning to Slide 14 now of the pack. The next 2 slides are going to discover the condition of the balance sheet. In essence, it's going to talk about the gearing and liquidity as well as how we're managing the seasonal fluctuations that's associated with our core debt and net debt.

On Slide 14, this slide highlights the seasonal trends between the half-year on half-year as well as the year-on-year balances as well. It is an important piece how we have to deal with the seasonal fluctuations. This last year has been characterized by -- over the last 6 months been characterized by really tight grain supplies. So owning of the inventories, we've had to carry higher inventory levels and that's come up with the time where commodity prices have been higher as well. So that's led to the seasonal fluctuations on higher values in our commodity -- dedicated commodity facilities that fund the inventory levels.

Slide 26 sets out more data around those commodity levels and how we're funding that through the dedicated facilities.

Just to remind everyone, these commodities are typically associated with the Grains and Oil business units. The underlying commodities are fungible and can be liquidated at short notice that goes with it. The other key point about this slide I like to highlight is during the 6 months, we finalized $500 million of refinancing of our term facilities. We've refinanced the $500 million into a full year Evergreen and that's obviously extended the average tenure of our term debt. That accommodates us and puts our balance sheet in good position for the future.

Turning to Slide 15, the core debt. Core debt is important to shareholders. Just to remind everyone, we see it as our longer-term planning. It's our liquidity piece around that, making sure that we've got the right long-term leverage in the balance sheet. We use it to manage any CapEx programs and to deal with the seasonal fluctuations. And I mentioned the seasonal fluctuations that [are] covered by the inventory facilities that I just touched on in the last slide, and it's an important phase.

So core debt measured in essence our net debt excluding certain grains and oils commodity inventories. So if we actually look at the amount of core debt at the end of the half, the $80 million, it's higher than the previous half this time last year and that's been principally arising because of 4 items. Mark's touched on the operating performance; our operating cash flow is down. We know that. We know barley prices have been -- have increased and that's reflected not only in our barley inventory facilities, which is up $30 million period-on-period, but also the malting barley that we have in Canada, that's not part of that, we've also had an increase in balance there. We've funded $47 million of capital expenditure as well as the timing issues of receivables of $140 million, which is just timing. It course-corrected in April, but when we were doing the 31 March reporting, it's a variable to the change there.

In recent years, our focus has been using the free cash flow to reduce the long-term core debt, particularly as the large capital programs have been finishing. This has coincided with the East Coast Australia droughts where that hasn't been generating a lot of operating free cash flow. So the focus still remains on being disciplined around our balance sheet and ensuring that we have good headroom to any banking covenants. We still maintain very good headroom between any of these ratios that you see here and our banking requirements.

Turning now to the capital expenditure. As investors will recall, for some time we've been scaling back the amount of new capital projects. We've got some new ones being commenced in Scotland to support the customer demands around distilling malt. And other than that, we continue to have an early program around East Coast Australia network in servicing the right sites in capital programs that would take going through a number of years. So you can see in the period, we spent $47 million, of which only $18 million relate to stay-in-business, and for the full year, we see stay-in-business down around to $40 million to $50 million. It's a conservative approach of ensuring that we are using our free cash flow where it's required, but it is also a reminder that we're been rationalized in the East Coast network and as we do that, the same business is sized appropriately to ensure the network of the future. And we maintain that disciplined approach around any new capital projects.

With the CapEx programs coming down, the DNA is now starting to come off as well.

With that point, Mark, I will hand back to you to cover off the outlook.

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

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Great. Thanks, Alistair. So on to Page 18. Just outlook on Malt. We are still paying attention to the global barley crop production. We still see some areas that continue to decrease its acreage. We do have a few spots in Europe that we are watching just to see how that comes off. For where we are located, we actually are in pretty good shape. In North America, Canadian crop is getting in a little bit late, but not concerning to us and U.S. actually looks pretty good. Just to remind everybody that we contract a majority of our malt barley. So we've got pretty stable supplies and readily available acreage for us.

Growth still continues for us in our real important markets. Craft beer market was up 4%. Even more important than that, the microbrewery sector inside craft continues to grow at very strong rates, fits in very well with our distribution system that we refer to as Country Malt. I have mentioned distilling demand continues to grow. We're very well focused on that and trying to make sure that we get capacity fitting what that demand growth looks like. And of course, Mexican-style beer still remains very strong, particularly in the U.S., and that works well for us.

I'm still dealing with elevated energy costs in Australia. I would say as important for us, it's kind of an uncertainty of what energy costs are. We certainly are looking for ways to improve our efficiency and use of energy. And some of that really we'll have to look at maybe some capital requirements to be able to get that done.

For '19 going forward, we're on a very high-capacity utilization rate with most of our capacity already in contract with our customers, very strong demand for the specialty products as there gets to be even more creativity with type of beers being brewed, boutique distilleries. There's a high demand for a lot of the specialty products that we produce and/or distribute, things such as the specialty malts, roasted type of malts, hops, yeast and a number of other products that goes into that mix. And we're confident we'll experience, like we did last year, just a strong increase in demand that lines up very well with the Northern Hemisphere summer. So we'll definitely see a pickup in shipments into the second half of the year.

For grains, we've actually gone through a lot of these market fundamentals. I'm not going to come back through them again, just highlight that we still are sitting in a deficit situation in the ECA. So we still see more imported products coming in, barley and also wheat, highly dependent upon -- how much will come in the second half is dependent upon what the weather profile is for the coming fall and winter. And so we'll, obviously, watch on that. And of course, we'll just keep looking it if there's going to be any further disruptions in the global grain-trading conditions. As of today, we feel what's in front of us is pretty well built into the market, but we'll have to wait and see what happens going forward. Just reminding here, to date, our grain receivables is 2.3 million tonnes compared to 5.6 million tonnes from the year before. And year-to-date grain exports were just 200,000 tonnes up East Coast. We look for really a very minimal increase in that through the rest of the year. Also mentioned that the take-or-pay rail contracts are done as of fiscal '19 and that we'll continue to capture our benefits through a simplification programs that we've been running since the beginning of November 2018.

For oils, just highlighting again the difference in the crop sizes and what we had to deal with on that. On a go-forward basis, we'll still see pressure on the crush margins. As most of you know, we still have to compete against export priority basis. So substitution in oils and substitution in some of the meal products. We won't see much relief on the crush margins until we get into a new crop improvement. But we do look for the ongoing benefits that we've experienced in the first half on our foods group, and we look for those to continue to improve into the second half.

So going to Slide 20. The big second half variables that we are watching, just any changes in receivables, elevations and grain import volumes certainly will have an impact. I've mentioned the crush margins on edible oil sides. So let's see where that goes. Any other global-grade trading conditions, either plus or minus, we could have effects on both sides. And then the new season grain trading opportunities in the fourth quarter, if it appears like the crop is in good condition, we'll start to see a lot of our buyers change from a hand-to-mouth type of buying process and we'll have some more port contracting that could take place. And as always, the foreign exchange movements definitely has an impact on how we report our earnings at the end of the year.

Just a few comments or updates on where we're at on our portfolio optimization and the demerger process. Slide 22 just highlights some of the announcements we had and just puts the dates on there for you. I want to go on to Slide 23 and just talk about where we're at on the separation process inside the portfolio. Again, we did announce that we want to do the demerger. The work streams are on place. We are definitely proceeding to that. We had mentioned that we're looking at a derivative, we're in negotiations on that derivative and we certainly hope to complete that before we would be filing a scheme of arrangement for the demerger. If for whatever reasons we don't believe we should proceed with the derivative, then we will deal with the separations in capital structure. And again, we're targeting to have that implemented by the end of the calendar year 2019.

On 24, it just highlights the implementation of the demerger, where we're at today as we are building up the Scheme of Arrangement booklet. We've engaged with the ATO for -- in regarding the demerger tax relief. We'll have to wait and see how they respond, but we have confidence that we won't have issues with that.

And as we mentioned at the demerger that I will go across as the Managing Director and CEO of MaltCo, hence the reason that I resigned from the GrainCorp Board to remove any conflict of interest remaining on the Board. Klaus Pamminger that ran our Grains area, have appointed him as the Chief Operating Officer. And at Demerger, he would succeed me as the Managing Director and CEO of the GrainCorp. We will be certainly putting out more information on the proposed merger, the set up on that, and that will be provided to all shareholders in due course.

So with that, Luke, we're ready to entertain questions.

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Luke Thrum, GrainCorp Limited - IR Manager [5]

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Thanks, Mark. I'll just hand back to the operator and we'll go to Q&A, please.

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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 Anthony El-Khoury of Deutsche Bank.

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Anthony El-Khoury, Deutsche Bank AG, Research Division - VP [2]

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I just want to start off with a question on malts. You called out some winter impacts which delayed some shipments. Do you have a call out of what that revenue impact was in the first half?

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

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Yes, Anthony, we haven't quantified that for the simple reason that we just think it's a make up. What happened is that we had a number of customers that got behind just because of the fiscal issues. The commitments are still on place, and certainly considering that we're operating at basically full utilization of capacity, it's just the timing issue between the 2. I wouldn't tell you that it's a big material number, but you don't see a big difference between fiscal year -- or half year '18 and half year '19.

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Anthony El-Khoury, Deutsche Bank AG, Research Division - VP [4]

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Okay. So safe to say you still expect a normal second half skews for earnings?

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

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Yes, absolutely. We don't see anything in front of us in the market and our operating that skew last half '19 really any different than we saw the impact in last half of '18. It's a sizable increase that's really based up on the seasonal demand of customers.

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Anthony El-Khoury, Deutsche Bank AG, Research Division - VP [6]

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Great. And then secondly, on your malt loan sales agreement, if I go back to 2013 when you had the scheme put out, you said that about 1/3 of malt sales was under tolling agreements. Are you able to give us an update, just in light of some of the weakness in margin that come through today from the barley supply issues. Are you able to give us an estimate as to what the percentage of sales which is under the tolling agreements looks like today?

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Mark L. Palmquist, GrainCorp Limited - CEO [7]

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I guess the way I would reference it is we do have a sizable portion of our volumes that sit under long-term agreements. I'm not sure if I could call them tolling agreements, but they're under long-term agreements, and if you remember back, Pocatello was anchored under a couple of major customers. We see that the LTA type of process actually increasing over the past 3 years and quite honestly, the result of that is that demand has been growing for malt and the malt barley crop has not been growing, and so I think we're seeing customers have greater concern about the security of supply. And so we are seeing a good portion of our business in all of the areas operating under LTAs.

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Operator [8]

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Your next question comes from the line of Jordan Rogers of UBS.

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

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First question is just around the grains side. Could you just walk through on the net unrealized losses on the commodity inventories, I think you said about $85.8 million, how much of that is realized post down state and whether there is any chance of sort of getting some of that back on some of those grain trades in the second half?

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Alistair G. Bell, GrainCorp Limited - Group CFO [10]

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Jordan, I take it you are referring to the other income note displacement. And rather than the $85 million, the way we look at it given all the accounting pluses and minuses that go into that note, it's the $58 million is more relevant number. Because it's a blend of how the accounting flows. And just to remind folk, when we put out the market update just before Easter and referenced the $40 million that arose in the last 6 weeks of the half, that's in essence this note here where we saw material movements in the underlying markets and then being able to mark-to-market the grains book that we have. So as we think about the next 6 months, all of the market conditions that prevail at year-end are reflected in the mark-to-market and in that note there of other income. Since we go through the second half and the execution of the physical grain into contracts, there are pluses and minuses go with that. You're moving some of it out of phases into sales contracts and you pick up some gains and as you close out other contracts. So to answer your question how much of the unrealized has been realized already, the unrealized represents the mark-to-market at year-end and now as we execute that grain into sales contracts ahead of the new crop, then we will see the pluses and minuses that will go there. That note represents the marketplace at the end of the half.

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

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Okay. And then just on the, I guess you mentioned the $40 million, how does that relate to this resulting around $80 million worth in BCB on the grains side?

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Alistair G. Bell, GrainCorp Limited - Group CFO [12]

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BCB, I'm not sure what that is, but I'll reference the $58 million rather than the $85 million because that's just one component of it all. The $40 million flows through that note of other income. So the $58 million, if we hadn't experienced the market conditions of the grain flows in that 6 weeks, the $58 million would have been $18 million, that's a way to think about. And we saw that change and updated the market. We put the mark-to-market and it will move from unrealized to realized, and part of offsetting whatever goes through this note goes through the sales revenue. You could be making more gains on the fiscal contracts as opposed to through the other income.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [13]

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Yes. Okay. And then can you talk a little bit more around the $40 million, the number you referenced in April, the impact on the grain trading side? Just walk through exactly how that happened, because some people have spoken to an industry -- it's always hard to say exactly where basis changes have been, but it doesn't look like it's been as severe. It did catch us by surprise the size of that number. Can you just walk through again what's happened operationally there?

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Mark L. Palmquist, GrainCorp Limited - CEO [14]

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Yes, maybe a little more detail, Jordan, on just the particulars in the trade disruptions. And quite honestly, this starts back a process that's been, I would say, going on for the past year but has not been impactful on Australia up until very recently. So we have had on a global basis disturbances in sorghum and in soybeans, and recently for us on barley. And what's happening is that we've got some delay in shipments. We have had a anti-dumping investigation coming out of China that we all dealt with, not just us but the industry. That's all filed. Now we are waiting for response of China, how they are going to rule on anti-dumping. But the net result is this uncertainty of delivery and delays in shipments is what's disrupted the marketplace and the grain flows. So to give you what happened again in the kind of last 6 weeks to 2 months of our first half year was a dramatic change in the type of grain that was flowing through East Coast Australia to handle the feed deficit issue. So case in point, barley trading into China in particular, resulted in prices where barley was at a premium to wheat. Wheat became the choice going into feed channels and was being imported across in East Coast Australia in the first 3, 4 months of the fiscal year. With the delays and uncertainty about being able to execute contracts, barley contracts to China, there was a, I'll call it, clogging of the supply chain and a reversion of barley prices that actually dropped underneath wheat and now became part of the commodity mix in the feed rations in East Coast Australia.

For us, that wasn't a big impact. Impact to us was removing wheat out of the feed mix rations in East Coast Australia. So we had to change our grain flows from wheat coming into the domestic market going into the export market and most of the importation we're bringing into our facilities actually changed to barley. When we started the year coming off of the beginning of the new crop, the ration was primarily wheat. By the time we got basically within 6 weeks of the end of the first half year, it was primarily barley. So that was a big change that created a lot of disruption, not just in value, but in logistics and in transportation. And that's what we are referencing it to. So when the question was really asked as to where are we sitting on all of this, today I can tell you that mark-to-market reflects where the market is today. It's adjusted itself for barley being in the feed ration. It reflects the change in the markets and the value between barley and wheat. And so if there is no new further development then it's priced in to the unrealized category that you see. But I certainly can't forecast if there is going to be a change in any of those developments.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [15]

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Okay. That's good color. Could you also just give us a rough idea without being specific around how this Grains division performance would look under your proposed derivative structure. You've given the charts without the numbers on it, but sort of broadly how would it look?

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

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Yes. So all of that is, first of all, it's in negotiations and second, it's all very confidential. So we are in a confidentiality agreement. So I can't display the numbers to you. That's why we show the chart to just give you a sense of what would this derivative do for us in terms of managing the cash flows and smoothing them up. I guess what I could say is, we wouldn't be sitting here producing results that we have put forward today if we had the derivative in place. So we feel...

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [17]

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To confirm though, it wouldn't take into account some of these trading issues that would be on the supply chain earnings?

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Mark L. Palmquist, GrainCorp Limited - CEO [18]

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Well, it's an interesting question asked because the drought and the supply chain disruptions are intertwined. Reason for the grain flows going into the domestic side was the deficit of production that we had in East Coast Australia. So I'm not sure I could give you a good answer on that.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [19]

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Okay. I'll let someone else have a go but just 2 comments on the last conference call around you receiving interest in part or all of the businesses, has any of those conversations continued following LTAP walking away?

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Mark L. Palmquist, GrainCorp Limited - CEO [20]

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Absolutely. We still active engagement going on with very serious interested parties. And those continue to run, Jordan. As I said, we're primarily focused on the demerger pathway but that has nothing -- it has no interference in the very active engagements we have going, yes.

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Operator [21]

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Your next question comes from the line of Adam Fleck of Morningstar.

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Adam Fleck, Morningstar Inc., Research Division - Director of Consumer Equity Research & Regional Director [22]

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Just wanted to follow up on the grains side. So Mark, you had mentioned, of course, the ongoing simplification programs, the cost out, the asset rationalization. Are you able to quantify that impact in the half? I'm just trying to understand in a more normal environment what this might look like.

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

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Yes. On the first half. we're proceeding very strongly in what we're doing. It didn't have a big impact on the bottom line because what we are gaining in savings, obviously, there's a number of redundancy costs, and a lot of that is going to carry forward into the last half of '19. So there will be more impact, savings impact, in last half '19 and there will be a lot more that will follow through into fiscal 2020.

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Adam Fleck, Morningstar Inc., Research Division - Director of Consumer Equity Research & Regional Director [24]

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Great. That's helpful. And then just a big picture question for me. Moving past the drought and the challenges that that's presented this year, is there any reason in your mind to expect that Eastern Australia will continue to be structurally lower as a contributor to overall wheat and grain production? Or is what we have seen here just seasonal factors that you would expect to reverse over the long run?

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

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That's a great question. I'll kind of give you my personal attitude, not so much the company attitude. First and foremost, the economics is really what makes the difference. I don't see really any change in overall acreage, it's just a function of what you put on that acre and that's where you can see some different changes. If there is genetics that improve crop resistance in wheat as an example, there would be a reason to tip more towards that or if that was in barley you'd see more tip for that. So East Coast Australia will continue to be a very important grain production area for the long foreseeable future. I'd also just bring up and highlight that we had a climate change impact study that was done to actually take a look at that and say what does that mean to us between now and 2050. And what we found was that, we actually could see a slight increase in production in East Coast Australia, but we'd also see more volatility from year-to-year. So just another reason why we are trying to find way to either do a derivative or set capital structure up so that we can deal with that longer-term volatility but it still gives us confidence being invested in grains business in East Coast Australia.

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Operator [26]

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

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [27]

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First question is on the trading book. Looking at that commodity inventory number on Slide 26. I guess once you remove that malting-barley figure, it's still a very large number and probably bigger than it ever has been before. And I am just wondering if you can just give us some comments around being in that position at the end of the first half relative to a pricing structure where new crop prices have been dropping lately and they're well below old crop prices. How are you managing that dynamic in the next 6 months?

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Mark L. Palmquist, GrainCorp Limited - CEO [28]

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Yes. Thanks, James. Maybe I'll give kind of more of a commercial color and Alistair can follow up with it more financially. So the main component of this going up is the fact that we are dealing with the domestic market, but also includes in essence an export shipment to it. So there is just a longer, longer time in the supply chain to get it in place and that combined with very high prices certainly in the first 3, 4 months of our fiscal year. So it's a combination of higher commodity prices and longer supply chains. Instead, if we are just exporting, supply chain is a lot shorter, it goes off, we get full payment on it. With us having to pull grain across and put it through our system where we first got the sailing time that we're carrying, the debt on the inventories, and it has gone through the facility and they're literally going out truck by truck.. And so there is just a longer tail in terms of it being delivered to a customer and then getting paid. So that's the big impact that we see going on here. That's why our inventory doesn't necessarily correlate with the size of the crop and necessarily with how it's being shipped, because we could have a very big crop, which means we're primarily export oriented, can actually get us into a much more, what I'll call, turnover on inventory, and so that we're not carrying as much inventory that's financed by debt. Alistair, you have any comments?

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Alistair G. Bell, GrainCorp Limited - Group CFO [29]

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Yes. It's a great question. So as Mark was alluding to, not only the supply chain having to hold grain longer, which has been part of the accumulation program, you also originate grain when grows for selling. So not much grain was available on East Coast. So you had to buy when it was available, get the out turn, could, as Mark mentioned, could take longer than originally planned or not even longer than you expect it to take -- taken through to the new crop availability. Also WA with a large crop and you need to secure coverage over there. One of the biggest differences year-on-year, or even year-end to -- or even half year has been commodity prices. They've been up. So not only the volumes are higher, yes, but it's also a big impact just been the price itself. We expect that timeline throughout the second half. A lot of Australian grain, if you follow the grain markets, typically look to be exported by the time the Northern Hemisphere new crop come in. So the June quarter is a busy shipping period that runs through the July, mid-August as the outload programs kick into the Northern Hemisphere. So that's just some additional comment about the size of the inventory levels.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [30]

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Thanks, Alistair. On the malt business, I was following on from one of the earlier questions too. Obviously noted, Mark, you commented there around a few minor issues in the first half but if I understood you correctly, not necessarily material. Compare that to your comments at the end of FY '18 where the Pocatello expansion had only really benefited full capacity in the second half of FY '18 and you ended FY '18 with quite a sizable malting barley inventory position in a rising price environment. All of that would tell us that first half earnings should have been stronger?

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Mark L. Palmquist, GrainCorp Limited - CEO [31]

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Yes. So I think it's -- I'll go back to this timing issue again, that it definitely is having a negative impact on the first half that will get recaptured in the second half. So I'm not at all worried and don't want to send any message out there that there is anything going on different than what we would expect to happen in '19, and it will have a favorable profile to it in terms of how you can see first half '18 versus last half '18. So it really is a timing issue. It's just a slowdown of some shipments. The other issues that we had with increase in malt barley prices in Australia and a little bit of quality variability in Canada, they're just points to note but they didn't have a big impact on the bottom line.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [32]

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Yes, understood. So in the last few years, the first half, second half earnings split for this business is sort of have been a 46%, 47% versus 53%, 54% in the second half. So your comments around the timing issues, it's likely going to be a greater skew to the second half than what we've seen in the past few years?

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Mark L. Palmquist, GrainCorp Limited - CEO [33]

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Yes. I would say really we've seen in a marketing and a demand type of base is that we will run a high correlation with how '18 stacked up between the first half and the last half.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [34]

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Understood. And finally, from me, perhaps Alistair, could you just give us a couple of insights to the extent you can on your expectations for the full year on DNA, growth CapEx and the tax rate?

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Alistair G. Bell, GrainCorp Limited - Group CFO [35]

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So the DNA, I think, the first half is a good indication of how to think about the second half. Those programs -- the last of the big projects was commissioned, which is the numerical expansion in the December quarter. So that's a good indication for the full year, take first half, second half. Growth CapEx, there is a modest amount of growth CapEx to go into the second half. The biggest influence will be the timing around the startup of the Scottish malt plant, which is more 2020 than it is 2019 and we've indicated to stand the system out there. So it's a modest second half on growth CapEx. I think the other one was tax rate. On the tax rate, we've got operating losses and would expect that to be consistent with first half with second half.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [36]

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Okay, granted that yes, I think your first half tax rate looked like implied at about 33% or 34%, so you would expect similar rate in the second half assuming you turn to positive earnings?

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Alistair G. Bell, GrainCorp Limited - Group CFO [37]

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We are indicating the similar rates between the first half, second half.

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Operator [38]

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Your next question comes from the line of Mark Wade of CLSA.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [39]

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Couple from me specifically on the segmental disclosures. It looks like you've expanded that level of disclosure on the revenues. It's now a breakdown on sale of commodities, finished goods, service revenue and other. How should one interpret that breakdown and specifically as it pertains to the Grains unit, and does that speak to the former business units that sat within Grains?

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

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The new reporting segment revenue is the new accounting standard requirement of showing the split-ups. The service revenue, I think what you're referring to, to Grains, does not reflect the old S&L, so I wouldn't read into that. That's just provision of services that we are doing throughout all of the Grains unit whether they're the old S&L, old markets. As you can see it's not a substantial number at all.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [41]

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Okay. Also on the -- just turning to the forthcoming winter crop, any indication there what you're seeing around planting intentions for the calendar year '19 winter crop?

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Mark L. Palmquist, GrainCorp Limited - CEO [42]

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Yes. Pretty premature, Mark. I don't need to tell you where we're at today, and as we certainly have had some more positive weather events in the last 30 days, and that I also see that Queensland profile certainly is better than where it was 60 days ago. So there appears to be pretty good progress on plantings, New South Wales as an example, Queensland. We do have some delays sitting at Victoria right now just because there are still some dry areas down there, but there is still plenty of time to be able to get the crop in. The issue for us, though, is that there is not a lot of subsoil moisture, so it's great to see some of the moisture events we've had. It's giving confidence for plantings to proceed. But we are just going to have to see what happens on further weather events. That will be the first ABARES forecasts out on the 12th of June, and so that's probably the time where we will be taking a look at it and see how that compares with some of our own private ideas. So I guess another way of putting it is, we are 30+ days away from having a very good look for the next year.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [43]

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Yes. It's certainly unprecedented to have a third drought year in a row, so I think it's tough for the whole industry that things turn around there. And last one, on the dividend policy, I've noticed you've cut to 0. And is the policy still in 46% -- 40% to 50% payout on your mid-cycle earnings?

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Mark L. Palmquist, GrainCorp Limited - CEO [44]

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Yes. Nothing has changed in the policy at all. We just went through this with the Board yesterday and they just decided that considering where we are at, first half year results, that the interim dividend would be 0. Obviously, we will take a look at things when we get to the year-end.

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Operator [45]

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There are no further questions at this time. I would now like to hand the conference back to Mr. Luke Thrum. Please continue.

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Luke Thrum, GrainCorp Limited - IR Manager [46]

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Thanks, Rachel, and thanks everybody for joining us today. I'm sure I will be talking to many of you in the coming days, so thanks again.

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Operator [47]

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Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect.