Ladies and gentlemen, thank you for standing by, and welcome to the Ingham's group first half twenty twenty financial results conference call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded for Friday 21st, 2020. I'd now like to hand the conference over to your speaker today.
CEO and Managing Director to Mr. Jim Latham. Thank you. Please go ahead.
Thank you, operator, and welcome to Ingram's first half twenty twenty results call. With me, I have Gary Mallett, our CFO, Jonathan Gray, our New Zealand's CEO and Craig Hastings, who is our Investor Relations Director. I'm pleased to report that our operating result that is underlying EBITDA before the impact of AA SB16 of $91,700,000 is in line with our expectations. You are all aware of the issues that we spoke of as a full year result in the operational and financial headwinds that we experienced as we exited the second half of FY twenty nineteen. We described in some detail the impact on our earnings that would carry through to the first half of FY 'twenty as we fixed the performance of our further processing network following what was a poorly executed restructure and a number of other associated issues As anticipated, the hard work and changes have now resolved the issues and our business momentum has improved throughout the second quarter.
Our FP volumes have significantly improved, costs are under control and importantly, we are delivering far better customer service. Which have had a positive impact to our mix, but wheat, our largest commodity input continued to trade at close to historic highs. Our New Zealand business, as Jonathan will talk about in a moment, is well on track and turnaround plan is delivered strong year on year growth. This performance was achieved despite the headwind of market oversupply that resulted from the outbreak infectious dispersal disease virus, IV DB, which closed New Zealand market to poultry exports to 4 countries, including Australia. Core poultry volumes across the business that is chicken and turkey volumes that we sell for human consumption are up 4.1% on year.
This reflects the attractiveness to consumers of poultry versus other proteins and pleasingly the success of our key customers in growing their volumes. As we talked about on strategy day in October, we have now shifted our focus to be more strategic with our customers. And some of that benefit is starting to emerge. There are significant upside in supplying the right products through the right channels and at the right price. And we have constructive discussions with our customers around mitigation and feed input costs.
Australia volumes were up strongly. 4.7%, but as expected, New Zealand grew only 0.9%. Feed costs remain at close to all time highs as the actual result of the 2019 wheat crop fell well below earlier expectations. You recall at the strategy day, we talked about a crop expectation of 17,500,000 tons, and it looks like it is finished somewhere below 15,000,000 tons. 1 of the worst 3 years in the last 2 decades.
But despite this, our peak cost was broadly within our anticipated range. At our strategy today, we talked about our 5 year plan for growth, and we introduce you to the leaders who are steering that growth and change throughout the business. It is a quality and a coordinated team. The team is working hard to move the business forward and the results are favorable. But there is still much work to do.
There always is in poultry, giving the complexity of the integrated supply chain that I hope you are all now coming to better understand. I will leave a broader discussion of our financial results to Gary, but a few obvious call outs. Our statutory accounts reflect the full adoption of AA SB16, and this is not new news but given the magnitude of the asset liability that is recognized, some $1,600,000,000 and the related impact on reported profits and EBITDA It is worth making a number of We bring about Our grower contracts are also captured under the standard, and we recognize approximately $700,000,000 of assets onto the balance sheet. As I've said, our growers are key stakeholders in our business, and we work closely with them to support them. The 3rd party grower model is an industry standard, and the contracts give security to the grower.
And to us. You can see the impact a lot of that in a few minutes. The cash conversion at an operating level is 60%. This is about in line with where we thought it would be. Given our early close to the books on December 28.
And Gary will go into more detail, but what I've meant was that we didn't collect some cash on our strong December sales till later. Some $44,000,000 was collected after our books closed but prior to 31 December. We spent $40,000,000 on CapEx during the half, including our hatch care hatchery projects, the spin chillers in Victoria and WA and our newest breast deboner in New Zealand. Cash conversion is always a focus in our business. So there is no underlying issue here that we or you should be concerned about.
We have indicated that our debt may rise with capital invested at $323,000,000, and it is well manageable within our leverage of one 0.7 times. Our business has had to overcome some dislocations and disruptions with the bush fires. While that obviously occurred prior and after the half, I can report that our business has been resilient and our team have managed through this this to service our customers and deliver against expectations. Prior to Christmas, our growers and employees at our turkey and chicken assets in Fargo and Tawmor were in the eye of the bush fires. Our bush fire plan was flawlessly executed, including evacuating our Tom Moore plant, and well sustained we sustained zero loss to harm to our people or our facilities.
We had to deal with an issue in Perth being cut off to road and rail in the week leading up to Christmas. And we worked hard to make sure that our valued customers there had stocking their stores to feed a hungry public in their business, no chicken, no business. The major dislocation of people from the coastal communities from both residents and tourists, created challenges to the supply chain and also planned demand patterns. I'm very proud of the Ingram's team for going above and beyond to make sure that our customers were looked after, and the consumers could find our products where and when they needed them. Turning to our strategy update on Slide 6.
We are well progressed and to reduce volatility where we can deliver more consistent, predictable and reliable growth the 3 pillars of our strategic framework that we shared with you are on this page. Optimize the core, innovate to grow, and to invest in the new. They are all interrelated in the protein markets they're evolving, so we need to ensure that we are fit to be able to take advantage of the opportunities that we see quantitative and qualitative framework in measuring operations, and we can see the runway to improvement. Our farming team is on the path to improvement. We have made changes fee team whose job it is to procure feed ingredients and formulate at the best possible cost, performance and conversion.
Our sales and marketing teams are thinking strategically, and we have had productive dialogue with many of our customers. We will partner to grow the poultry category and help our customers deliver great products to consumers. But what we won't be are all things to all people. We have installed a new chilling system at Summerville in Victoria, which has led to the defileting of that plant and allowed expansion of production capacity in Perth, which is next. We also installed a new deboner in New Zealand and our new hatchery projects are well underway.
We've talked about the capacity unlock for modest CapEx, but we are very mindful of balancing that capacity growth with demand as we see it. It is up to us to see the opportunities and create new growth as well as through innovation and that is exactly what we're doing. Our new product development process is now fully integrated where the whole supply chain is involved. We are targeting profitable and importantly accretive growth. We have an exciting pipeline of new products and innovations, some of which are very close to market launch.
Our new research farm is now operational, and as I mentioned, it is a key enabler to optimize breed, feed and conversion. The Hatchfire technology we are deploying is world leading for animal welfare. It will promote better growth outcomes for our birds. As well as more animal welfare and reduced live costs. We are in the first half of our turnaround in new strategy with a new team.
We are all enthusiastic and working very productively, but our first priority every day is on delivering consistent service product, quality, welfare, safety, and efficiently and profitability. On safety, it is mine and the team's priority everyday, every absolutely everyday to ensure that every one of our people operate safe environment and go home to their families every night and is a good condition is when they arrive. We had an accident, one of our facilities this week, and that one accident is one too many. We are well positioned to execute on what I call adjacent protein strategies. There's been much work going on in the background.
We'll get going on them when we are confident we can deliver accretive growth by investing in the new. Since Gary's arrival, he has been busy reviewing our capital plan and balance sheet. We intend to remain conservative and give ourselves headroom for future growth projects. Projects and network optimization, innovation are ongoing, and we'll be prudent in our capital management as well as allocation. I will now hand it over to Gary to review the financial results in more detail.
Thanks, Kim, and good morning, Slide 8 is our statutory P and L, and it shows an impact of $26,200,000. You can see the major impact that the adoption of AASB 16 has had on our financials. EBITDA has increased by $118,000,000 as lease expenses are removed, but offset by a depreciation expense of $105,000,000, an interest charge of $31,000,000 and a tax effect of 5,000,000. This results in a net decrease in impact of $12,800,000 for the half. And as you are aware, this had absolutely no cash impact.
On the business. In line with the accounting standards, we have not restated first half numbers to reflect the adoption of AASB 16, so period on period comparisons are difficult. You'll recall that in the prior corresponding period, we also had a significant positive P and L impact from the sale of the Motorbike business and other asset sales. Slide 9 gives you the reconciliation of the half. Prior to the, reconciliation of half to the prior corresponding period on an underlying pre WASP16 basis, which is a comparable way that we look at our business.
Underlying EBITDA pre-sixteen was 1,000,000 The reconciliation takes out the $118,000,000 impact of the leasing standard and modest adjustments for a loss on the sale of some small farms and the impairment of the Packaging, which we have demolished and are currently rebuilding. The prior period excluded the large gains on asset sales and other significant restructuring costs and the trading of Motorbike prior to the sale. Underlying NPAP pre-sixteen is GBP 42,000,000, down $13,000,000 on the prior period as further explained on Slide 10. Jim has talked about our 4% core poultry growth. Note that our 3rd party fee business is essentially flat.
Revenue reflects a stable pricing environment in Australia increases in New Zealand and increases in the prices of third party feed sales as we pass on higher input costs We're also seeing some benefit of the higher value in sales of what we call byproducts, for example. Depreciation is up in line with our capital plan and finance expense reflects lower interest rates. As expected, our tax rate of 29 percent and is in line with our prior corresponding half. Clearly, our profits are down. That is attributable to the factors that you're well aware of that have been impacted at a unit cost like throughput and FP, fee costs, lower bird weights and yields in the half in Australia, offset somewhat by improvements in the New Zealand business.
On the balance sheet on Slide 11, This also reflects the significant impact of the new lease standard with the amounts recognized for both land and buildings and our grower contracts. The land and building component is well understood and we have an average term of 13 years. Our grower contracts require some explanation. Our growers are key partners in our supply chain, and you will see that we have recorded $700,000,000 as the value of these contracts as both the right of use assets and lease liability at Valentine's Day. Our grower contracts have an average remaining term of almost 5 years We supply the day old chicks, the feed to the growers, and we collect the birds from the sheds when ready for processing.
We pay our growers for their services and under the test applied in the standard, capture this as a lease of shedding space, and we therefore recognize on balance sheet. The variable component of the grower payments are a small proportion and are not captured by this standard. Looking at cash flow on Slide 12, The main point I want to get across here is that our underlying cash conversion of 60% is impacted by the seasonal working capital build and the early close of our books on 28th December. We are a highly generative cash business, and I can add that we collected a further 44,000,000 cash on 30 31 December. Some may also recall that the conversion rate was about the same as the prior corresponding period, after adjusting for the cash benefit of the increase to the inventory procurement trade payable taken up in the New Zealand business Our CapEx for the half was $40,500,000, which included $17,000,000 on our hatchery projects, and other CapEx that has or will increase capacity and performance such as the spin chillers in the new deep owner in New Zealand, unusual levels of replacement capital.
Turning to Slide 13. We highlight our net debt increased by almost CHF 60,000,000. Our leverage is now 1.7 times, which is quite comfortable. Debt has increased through higher seasonal working capital, the CapEx program and the absence of major asset sales in the half. We currently have no plan to enter into sale and leaseback facility on our hatcheries, and the spend on these will increase in the second half.
We have given you details on our inventory procurement trade payable which closed at 98,000,000 and is basically the same level as June 19. To be clear, this is very common in our industry is not a factoring transaction nor does it disadvantage our suppliers of commodities in any way. Our dividend of $0.073 per share is based on 65% of underlying NPAT pre-sixteen And for clarity, our policy remains unchanged. They will pay 60% to 70% of annual under lock in PAD per ASB16. And just as a final point, Jim will cover outlook later on, but we haven't given guidance in, this half We're happy with the comments that we've made both for the strategy day and the full year.
And our message is we're trading on track.
Back to you, Jim. Thanks, Gary. Looking at the performance of Australia in the half on Slide 15, we have talked about good volume growth in core poultry. And if you adjust for the sale of my device in the prior year, feed volumes are up modestly. You can see that the margin was significantly impacted by all the factors that we've talked about But as I noted earlier, the run rate of the business has improved throughout the half.
Our retail channel was solid. Pricing has stabilized and our key customers performed well. QSR, which, as we talked about, the full year, continues to show growth is promotional activity and good execution drive sales. We have talked about the issues that we faced regarding our arrangements with some of these customers, and we are moving in the right direction. The fallout from ID DV, the issue in New Zealand, Australia saw us capture some of those volumes that were previously imported.
Delivery to our foodservice customers improved as we sorted out the FP issues that negatively impacted our volumes and created the negative mix impact that we've talked about. Export is in its early stages, but we have established markets now and the opportunities for byproducts such as the harvest and sale of chicken feet. Also, we are seeing broader opportunities to partner with some customers to supply further processed products into the Asian markets. But it's early in its days. I will now hand it over to Jonathan to talk you through what was a very, very pleasing result in New Zealand.
Okay. Thanks, Jim, and good morning, everyone. From a New Zealand perspective, we are pleased with the progress we're making in our turnaround plan. And just as we said, we would, we are now delivering year on year growth. The $3,400,000 improvement in underlying EBITDA its pre AA SB16 to $17,600,000 represents an improvement of 24% compared to the corresponding period last year.
I'd just like to acknowledge the fantastic contribution from our entire team. And while we saw plenty of work ahead, we're all energized to capture the latest potential in the business. As we look at volume, Growth was impacted by the rebalancing of the market as the IBDV issue that Jim referenced earlier saw our competitors clear excess stock domestically. The resulting oversupply and market rebalancing is still ongoing. However, despite this, we were able to secure some price rises through the first half in key channels to help partially offset high fee prices.
And this, together with product and channel mix improvements, saw our revenue grow nicely. Our focus on operational excellence is delivering positive results. We brought our broiler farming capacity back to where it needs to be, and we are a more balanced business than we were previously. Sales and marketing are aligned with operations, across both primary and further processing and safety, quality, and animal welfare, which are the key pillars of what we do every day. I'm proud to advise the positive trends have been recorded in each of these key areas also, which is accretive again to our leadership teams and to all of our people.
Our external feed business remains impacted by favorable growing conditions for dairy in the half and volumes were down as you can see. Once again, I'm pleased to report that we are delivering to plan and a return to year on year growth. Thanks, and back to you Jim.
Thanks, Jono, and a great effort by you and all of the team facing some pretty interesting short term challenges over there. Looking now at the feed markets on slide 18, to reiterate what I said in my opening remarks. When we talked to you in October, the outlook for 2019, the drought affected weak crop was forecasted to be lower in 2018 with wheat prices reflecting the uncertainty in stock shortages You'll recall that last year, Australian domestic wheat used with supply from WA this year, SA and Victoria had stronger wheat crops whilst once again, New South Wales and Queensland suffered the brunt of the drought. For inghams having access to wheat stocks in the regions where we have facilities is extremely helpful. However, we still need to import grain into our facilities in New South Wales and Queensland.
This map provides a view of this year's crop versus last year's the sorghum crops in Australia have also impacted us by drought. The lack of rainfall in the sorghum growing reach prior to Christmas will result in a small crop with delayed harvesting. As a result of the drought conditions, grain prices remain high. As such, the entire poultry and other ag industries are facing the same challenges for another year. We are a physical buyer of grain delivery into our feed mills in the various states in which we operate.
Our procurement strategy is flexible to take account of market condition The recent rainfall has been welcomed by all farmers and we have seen more encouraging grower selling, but the impact of the next harvest is still too early to Now turning to our outlook for the rest of the year on Slide 20. We continue to see poultry as the most competitive protein and we expect continue we expect continued growth in the category. Our 5 year strategic plan is now well embedded into our business. Our continuous improvement team and project teams are now established in building the foundations for our growth. There are multiple work streams and the intensity of activity is high.
We are critically evaluating performance across operations, sales and marketing, and we are asking for a high standard. Culture is critical to success, and I am very passionate that we have a culture that is open, honest, and collaborative. And that applies internally as well as externally. So we are having some hard conversations that needed to be had. We want to be successful and we will partner with customers who want to grow with us.
Internally, we are asking much of our people and this brings change, which is a good thing And as I've said, poultry is complex and it requires real attention to detail. Our team is energized and around the opportunity for the future. As I noted, the exit rate from the half in Australia was encouraging, but there remains a lot of work to do operationally. Like all consumer companies, we are closely monitoring the impact of bush fires, recent weather events and health issues on our consumers, as well as our customers. Our New Zealand's turnaround is well on track with continued momentum.
We anticipate market will remain close to exports to Australia, and the time frame is unclear at this stage as to when that might change. In the meantime, we continue to see supply rebalancing. Feed cost is elevated and we are working with customers to ensure that we And of course, we're focused on operational improvements, which help us offset this impact as well. And finally, I want to thank all of the Ingham's team for their hard work and the half and ongoing and our customers and those of you who support our business. And with that, operator, I'll turn it back to you
you. We have multiple questions in queue. Our first question is from Mr. Craig Woolford from Citigroup. Please ask your question, Craig.
Good morning, gentlemen and team. Just wanted to just wanted to understand the pricing realized in Australia. There's a bit of work to do to get to an underlying number, but it looks like it was broadly flat. It was 0.2 was my calculation on core poultry pricing growth, which is a step down from the June half run rate. So I'm just interested in what drove the low level of pricing growth and you have a little bit of a surprise given that there was still obviously some feed cost pressures that you're trying to mitigate?
Yes, Craig, it was basically the way to think about it was flat, first half to last year. And obviously, the things that impact that are things such as mix and so forth. But yeah, we think of it as basically flat.
Is that because you chose not to put any price rises through?
Well, it's a variety of different things. Again, a lot of it has to do with mix a lot of it has to do with channel. And we basically did not put a lot of price in place in the first half of this year.
Yes. Okay. Understood. And my second question at the Investor Day, there was talk about a capital management plan, which is still being developed. I don't see anything formally, presented that way in the results here.
Is there going to be a formal disclosure, what the capital management plan is, or is it just sort of waived into the commentary you made as part of this presentation?
Hi, Craig. It's Gary. I think I don't think we'll have a formal one, but it is waived in. I can make a few comments now. That would be helpful.
But certainly I've been reviewing our capital plan, also our process for allocation, ask lots of questions and ensuring all of our proposals are robust. The good news is there is money to spend in inghams on growth, maintenance and improving operations. We are considering the cost of funds, EG, funding the hatcheries from balance sheet, is our current thought on the basis that the cost of funding is much lower. We're reviewing the remaining noncore assets that we have We've been clear on dividend payout expectations. And from a a slightly look forward position for my comments.
We're spending more in the hatcheries in the second half. We've got spends around our Chiller in WA, we're also going to chiller into our Turkey operation. We're investing in our New Zealand FP plant in Auckland in a fully cooked line. So we'll see a rise in CapEx in the second half. But that will be offset somewhat or mainly by an improvement in working capital.
So we expect leverage would be about the same. I think we've got some headroom in leverage that we could go up a bit more, maybe up to 2%. But that would be broadly how we're thinking about it.
Yes, so just to clarify, I think the capital management plan is quite important because Jim had highlighted that they the company would like to have CapEx in line with depreciation, but, just want to get a feel for, is that where you're sleeping through the cycle?
Yes, Craig, this is Jim again. Again, we are 6 months into a 5 year plan. So my comments regarding where we would be is when we get to more of a business as usual, And we have, as Gary had mentioned, a number of continued major projects that are taking place right now, that will be completed over the next year or 2 years.
Our next question in queue is from Michael Pete from Goldman Sachs. Please ask your question.
Good morning, Jim and team. Just firstly on the fee cost side. I was wondering whether the summer crop and any of the recent rains sort of helps a little bit. And just how much visibility have you gotten? How much sort of forward buying do you have at the moment?
Hey, Michael, great question. Obviously, with the recent rains, I think there could be some speculation that feed costs would come down. However, as we've stated, we've been consistent in stating, we take physical positions somewhere between 3 9 months. And seeing that the rain is happening when it's happening is really has not and will not have an impact. Until we see what the impact of that new crop is.
So the only influence it would have is relative to people farmers who have, inventory in the bins and then it's up to them decide when or if they're going to sell it now or later.
Okay. And just on New Zealand, obviously, it held up very well, particularly on the margin. Have we, are we sort of through the worst there? And can you hold that margin going forward in
New Zealand, do you think?
Yes. So I'll let Jonathan weigh in on this, but I do want it because it's been an opportunity for me to say this is, is Jonathan has been in New Zealand just over a year. And he has done an he and his team have done an excellent job basically delivering against what we set forth to do and it couldn't be more pleased with the results, Jonathan.
Yes, thanks, German, and thanks for the question, Michael. Through the half, we had a combination of price, price increases. And also importantly, some improvements in both channels. And product mix, and we see that remaining as key focuses for us through the period.
Okay. And just a question on Australia. I mean, obviously disruption there with the FP issues and cost overruns that have been well disclosed, but, how are we looking at, are you still encountering those issues in the second half, or when do we sort of cycle out of those?
Yes. As we stated, the momentum that we saw throughout the first half from exiting the second half last year into the first half of this year is basically right where we thought it would be. So we're very comfortable with what we said at the full year.
Okay. Thank you. The next telephone question in queue is from Matt Johnston from Macquarie. Please ask your question.
Good morning, Jim and team. Maybe just first one, just on the fade again, could you just maybe comment about what the growers are doing on inventory and what that means when you go to forward cover, does that mean a realized price at spot or above or below?
Yes. So we, as I believe I mentioned in my comments, we're a physical buyer of grain. And procure that grain then is shipped to our feed mills and converted to feed that obviously go to to the sheds to feed the chickens. And so we typically go out 3 to 9 months. And for a variety of reasons, we don't state how far or short we are at any particular time.
So, yeah, I don't know if that answers your question, but that's our procurement strategy.
Okay. Great. And then just talking around the CapEx and sort of guiding some of those operating efficiencies you talked to before, Could you give it more clarity around what sort of efficiency timing do you expect it to pick up in the second half or is it more FY 2021 and beyond story?
Yes. So the operational improvements that we talked about, both in strategy and full year, I've been out to the facilities and I've seen the progress but it's going to be mostly towards FY 2021. But we have already unlocked some additional capacity But of course, we only utilize that capacity as demand requires. And we're only going to fill that capacity with with volume that it makes sense for us to do so. So 21 Okay,
thanks Jim.
Yes, thank you. Our next telephone question is from Paul Beyers from Credit Suisse. Please ask your question, Paul.
Morning, guys. Just a firstly, a follow-up question on New Zealand, please. Yeah, just, I mean, clearly an impressive performance. Just wanted to get maybe a little bit more color if I could, just as to exactly how you got those price increases through given the environment as you described was was one of, of oversupply. I mean, we can see the outcome.
I just want to understand how you achieved that.
Thanks for the question. You'll appreciate, I won't get drawn on specific customers. And conversations, but suffice to say we have a range, we have some pass through arrangements in place. And we have customers that we are in, we're constantly in having constructive discussions with an important note, as I mentioned in the previous answer is, in addition to some pricing movements across January, we also delivered mix improvements.
And then maybe just a comment on the industry landscape there post, I guess, corporate action changes a while ago now. The view was a more rational environment. Obviously, IBD didn't necessarily help, but just keen to understand how you're seeing the lay of the land from a kind of competitor rationality perspective now?
We talked through on the strategy day and previous commentary around evidence of a more rational market, in New Zealand, it's fair to say over the 12 months, the last 12 months, we've seen evidence of supply being more closely aligned to demand, which is encouraging, and then the recent market rebalancing, which is attributed to the IB DB issue, as well, which we understand and that rebalancing is is continuing to take effect. But no, we've seen clear evidence of supply being more closely aligned to demand through the last year. Thanks.
Thank you. And then just sticking with the topic of IVTV, Jim, I think you called out some volume gains related to that from an Aussie perspective as some of those exports were closed. Just keen to get an idea, I guess, of the of a quantum of positive impact there? And I mean, do you think you hold on to those now as kind of a permanent share gain, or do they revert as and when markets reopen?
Yes. Again, we're not sure when the markets are going to reopen, but we are advantaged in that we, of course, can be both in Australia and New Zealand. So the downside to IBDV did impact, as Jonathan mentioned, our New Zealand business relative to a, kind of a short term oversupply, but we were able to pick up volume on this end, but at the end of the day, it's not really all that material. But if, hopefully, like any, any volume that we grab hold of, we won't do whatever we can
to hold on to it,
where it makes sense to do so.
Thank you. And just my final one, kind of similar to one before in terms of the FP issues. How that flows through. Just wanted to kind of understand the mechanics as we go into second half twenty twenty now. It sounds like your FP issues are largely resolved and that run rate is on track.
Just wanted to clarify. I think last time around, you called out an offsetting in the fourth quarter last year. An offsetting factor was, reduced staff incentive and executive payments. So just want to get clarity as we go into 2nd half now, the FP run rate gives you, kind of a favorable comp in terms of PCP, but we're going to see an offset from a resumption of staff payments. Is that right?
Can you restate the last part of your question? Sorry. I didn't quite get it.
I guess I'm just looking for the mix of headwinds and tailwinds now into second half twenty twenty. So the And as you start to cycle second half twenty nineteen, so FP looks like you're cycling a positive one because you've now resolved those issues. But as I understand it, part of what you got last year was low, executive payments. So I'm just clarifying that I assume those come back on.
Yes. So we stated, we are seeing momentum and we're remaining very comfortable with what we anticipated would happen on half to half so that momentum continues and from the first half into the second half. You know, the only somewhat, I think, potential headwind. And it's really too early to call is, is consumer behavior relative the impact that bush fires and a lot of other things have had, because typically when you have a situation like that, it can throw the the demand supply a little out of balance. But the good thing is consumption of poultry continues to increase and we continue to supply it.
So Yes, those are the major ones.
The next telephone question comes from Mr. Phil Kimbo from Evans And Partners. Please ask your question.
Hi, guys. I just wanted to circle back if I could on Craig's earlier question on price in Australia just because if I look at, the CPI data for poultry. And I know it's not perfect, but, the last, the September quarter and the December quarter up, sort of 3% to 4%, but it looks like you guys haven't got a lot of price in the half. Is that because you took your price earlier and it just took time to flow through to retail, or is there something else that I should be aware of?
Yes, I mean, we're, and I'll turn it over to Gary here in a second. But, one of the things that I didn't say earlier, to add to what I said is that we're constantly in conversations with a number, I mean, all of our customers. And with some of those, as we've mentioned many times, we do have mechanisms for price pass throughs, use as grain escalates for instance. If we are able to pass that through, you will see that as it escalates. And Grain now is pretty much flat and has been for some time.
Gary, do you have anything to add to that?
So we have set it flat, but remember, it is a title in it is a mix. And we have had, a far bigger improvement in our core poultry volumes. So that total poultry volumes, which gives you a blue mix. So we have been upgrading some of our former products that weren't sold for human consumption. They aren't necessarily at the same price.
Some of the core products as well. So there's a mix impact as well in the pricing, but largely it's been flat.
Okay. And can I ask, no, you won't speak about specific contracts, but your biggest one, I think, comes up at some point in Australia? So I was just running, are you able to sort of talk to when over the next 12 months what are some of the big contracts coming up? And how does it work? In terms of you trying to manage your business for some of these big contracts, because you called out lower bird weights, which I assume is because you had to sort of sell birds early to meet demand because of some processing issues, that are well known.
If you were to either win significantly more volume or lose volume from a tender, you know, how do you set yourself up knowing that it takes time to obviously grow the birds. So I mean, I'm really talking about the Woolworths. Contract here. So I don't know if you can provide any color on that.
No, I'd be happy to. And you are absolutely correct. We don't speak specifically about any of our customers. Nor will we. But I will say that, with those customers in which we do have contracts, we are always in conversation with them about those.
And to answer your question relative to if we gain volume or lose volume, those decisions will be made and determined well in advance of any contract expiring. So we're already, I mean, we're always in conversations with them because it makes the it makes sense for them to make sure they have secure supply and it makes sense, for us to make sure that we can supply that demand. Does that help you?
Yes, yes. And then, but you can't, I mean, are there any big contracts of size that are coming up in the next 12 months?
Yes. So, we don't have anything significant coming up in the near term, no.
Okay. And one last one, if I can, just on the cash flow, I mean, you talked about an extra $44,000,000, just, you know, 2 days after you closed the period off. I mean, if we look at, say, the end of January to try and clear through the seasonality and and some of these timing of date ends, would it be a cash flow conversion come back to be more in line with circa 100%, which is probably where it should be?
Of course, over time, it'll be 100%. So January, we don't report on January, but we are still in a higher seasonal sales, so through that Christmas period, through the January period is historically seasonally high, period of time. So I'm not going to comment on January, but yes, we do expect to see that coming back. Through the next 6 months for June.
Okay. So we'll see a reversal effectively in the second half. On the conversion percentage or it's certainly an improvement.
We expect to see an improvement on that working capital, yes.
Our next question is from Ariane Rosie from UBS. Please ask your question.
First one for me. I think, last result, you made 2 comments regarding the outlook. Firstly, you said guidance, for FY 2020 to be less than 2019 and the return to growth in 2021. And also that the first half earnings will be lower than the second half. Can you please clarify if that still stands?
Yes, we're again, we remain very comfortable with what we said at full year. Absolutely.
And second one, can you please confirm me you expect cash conversion to move to that 9% to 100% for fiscal 2020?
So I think over time we'll be in that sort of 80 to 120 range. So you expect it to come back a lot closer
over time as in over the next few years or over time as in like for this fiscal year? So is that a medium term target or?
So over time, we'll be in that 80 to 120 range and it will depend on movements. By June 20, I would expect it will be coming back close to that 100%. Yes.
Cool. And can you just talk about the competitive backdrop just is the market rational between you and your major competitor? And have you seen any pricing pressure and maybe why the poultry was flat in terms of competitive pressure, please?
No. I mean, it seems to be very rational. And, unless there is a consumer issue, which we do not see anything in our future, or that's on our radar. Yes, it's business as usual, if you
Our next question comes from Rod Sleeff from Roumor Equity Research. Please ask your question, Rod.
Hi, guys. Just a few apologizing we'll be going back over some stuff you've already spoken a little about. The first one is just a clarification on Page 18, you show wheat price and you describe it as as observed by inghams. I just wanted to clarify, is that what you observe effectively as spot or is that effectively the rate that you have purchased at?
The difference
being, is there a
lead time before you get to those prices in your in your feed costs?
Yes. So that's what you see in the market.
Okay. So following on from that, I can clearly see the been relatively flat for some time, but have you still had PCP prior calendar year period on this period? Have you still had a reasonable increase in fee cost take place this half just gone?
So we don't really comment exactly on our fee prices. For the best guide that we can give you is the market, but I do note your point that, yes, we do have timings around that and we do have forward cover.
But we don't comment specifically on feed. Yes. The other comment I would make, which is one of the reasons we put that map in the deck is it's fairly complex relative to where we source it at what price and how we transfer it within a state and across state lines. But you're correct, Gary is correct. It's the best way to look at this is really what spot market is.
And then as I stated earlier, we typically go out somewhere between 3 9 months on our coverage from a risk management perspective.
Okay. All right. And again, coming back to the lack of price increase, that is suggesting that you have effectively have not had certainly large increases in feed cost come through in this period. Otherwise, it would be reflected. Okay.
Could I also, sorry, I know you did touch on it, but I'm not quite sure I understood the answer. Could Could you just explain to me what the negative mix effect is that you've seen over the last half? I mean, I guess I'm just looking at strong volume growth, strong market growth. So with limited supply, I would have thought your mix should have been, if rational should have been stronger?
Yes. So typically what I talked about on the mix, was we were upgrading some products that come from the bird, but we didn't necessarily sell into human consumption CG ports. So when you then sell pools into your call poultry option, you would probably expect that price supports will be at a lower level. So that's what I meant by mix. I'm not saying it's negative.
It's actually a positive thing for the business. We're realizing more for that part of the burden. Yes.
In addition to that, what we said in the full year is the impact of, the issues that we had in our further processing did affect our mix and it affected us adversely relative to one specific channel. So now that we're back in balance, that issue is behind us.
Okay, all right. And just on the pause there, that should be actually positive for margin on its own, all those remaining portion?
Yes. Anytime we upgrade our byproduct, which is critical to this business, it's always going to, the benefit. Absolutely. It's positive, but remember, it's a
pretty small component of the business.
Yes, it's very small.
Okay. You also mentioned the improvement in food nutrition moving to best practice. Are you able to give me any idea of what sort of improvements that potentially can lead to?
Yes, we don't share publicly what our fee conversion rates are for a variety of reasons. But, I will tell you that, as we stated at the investor day and at the full year, We are just in the throes of opening our research farm, of which I toured that farm about 3 weeks ago. And it is extremely impressive what we're what we've built and number 2, what we're going to get out of that. So we've only had about 2 or 3 flocks run through that so far. So It's kind of TBD, but the real benefit in that is to being able to test different breeds, different feeds, different nutritional programs in a test farm by not impacting the market.
So we don't now go out in the market and test it. And if you get it wrong, that stays with you for a very long time. So if upside or downside, we want to do it in a very controlled situation.
Sure. And once you have found a combination that works really well. How quickly can those innovations be rolled out to your growers?
Oh, having we're looking, probably a quarter or so, I mean, 3 months.
Okay. Thank you.
And our next relevant question is from Craig Woolford from Citigroup. Please ask your question, Craig.
Hi, guys. Maybe a question for Gary. I just want to follow-up on this CapEx issue. So, CapEx will be higher in the second half. So how much higher and where do you see CapEx versus depreciation over the next 2 years or so?
Sorry. Your question is for this year or into the future?
Well, I mean, both because I want to, yeah, there are a couple of programs that are specifically called out things like hatcheries, etcetera. But, how much does that fall CapEx fall away in FY 'twenty one? So we
talked about the hatchery we have in the slide when they're due to finish. So that's the Toryn Hatchery. 2nd half FY 'twenty one, Western Australia, first half FY 'twenty two. We'll see a large a substantial uplift in that CapEx in the next 6 months compared to the $16,000,000 that we spent in the first half. And that will then continue through for another year or so through to those timings that I mentioned.
So that's the hat trick. So you will see a fair heavy spend of that through this next half. And then into the next year as well. The other projects I mentioned were the chillers in both WA. So we put one in Victoria, chiller into our Turkey business as well and also an expansion, and they will be done in the half.
And then as the expansion into New Zealand that I talked about about the FP line, moving to fully cooked lines, that will occur over the next 6 months and then also into the following year as well. So I think it's a way to think about it. Jim mentioned that the depreciation in CapEx was a longer term aspiration of where we're heading. So we're working our way through a strategy and we'll be having we'll be running higher CapEx levels than that. In the next few
sense. And maybe, what if I can sneak in? The volume, the mix effects that you've talked about around some of the upgrading of product, but also the, further processing disruption. Would volume have been, if not for the, for the processing disruptions in the heart, volume growth, sorry?
I don't have that, available at the moment. So we'll have to get back to you on that one, Craig. So just on the on the CapEx, so I did mention earlier when I was answering your question around leverage. So we're shooting through. We do have that higher CapEx, but as other people have also been talking to we're speaking around the return in working capital.
So I see leverage is not moving that much, come June. And going forward, I think we can go up to about 2 times.
Okay. Thanks, Greg.
There's no more further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please continue.
Thank you, operator, and thank you all for your interest in Ingram's been a very busy and productive first half and we're looking forward to speaking with all of you in the coming days. So thank you.
Ladies and gentlemen, that does conclude the call for today. Thank you for participating. You may all disconnect. Goodbye.