Ladies and gentlemen, thank you for standing by, and welcome to the Inghams Group Limited Half Year Results Half Year Financial Results FY 2019. At this time, all participants are in a listen only mode. There will be a presentation followed by question and answer session. I must advise you that this conference is being recorded today, February 28, 2019. I would now like to hand the conference over to your first speaker, Mr.
Jim Layton. Thank you. Please go ahead.
Thank you, Edison, and good morning, everyone. This is Jim Layton, CEO ofinghams Group Limited. And welcome to the FY19 Half Year Results Presentation. With me today is Ian Brennan, Chief Financial Officer. And Quentin Heilborn, Chief Commercial Officer and Julia Seddon, General Manager of Corporate Affairs.
As Ian and I take you through the comments for the presentation, we will reference the page numbers for the first half results that were sent out. I will start on page 3 for group highlights There are 3 key operating highlights for the first half: firstly, a strong performance in Australia with poor poultry volume up 3.6% revenue up 4.9% and underlying EBITDA, excluding profit on sale and restructuring costs, of up 13.7%. Volume growth has returned to historical levels and feed price has been offset or pass through and accelerate benefits continue to deliver. Secondly, the New Zealand business has struggled with operational issues in farming and within primary processing as the business is grappled with the loss of 4 free range farms. And it's knock on issues through the integrated supply chain.
And thirdly, the group delivered strong operating cash flow through further working capital management. And this included $125,000,000,000 capital return in December. This meant that our leverage ratio finished the half year at one point one times. On underlying EBITDA basis. In terms of strategy, we made further progress towards self sufficiency in our mailing operations.
With the opening of our South Australia mill in Murray Bridge. We also divested the noncore midabyte business and the Cartip feed mill, which was not required post the closure of the processing operations 2 years ago. As previously announced, following the completion of the mid device divestment, and on market share buyback led by Macquarie commences following these results. Our capital investment plan and capacity and efficiency project continues on track covering the new feed milk, South Australia and Western Australia, breeder farms in New Zealand and Hatcheries in Victoria, and West Australia. On Page 4, financial highlights.
Ian will cover this in more detail in a moment, but let me share with you the key takeaways. Underlying EBITDA growth of 3.6 percent to $109,600,000. Profit on sale of 53,900,000 offset by one time costs of $13,700,000. Underlying net profit after tax decline of 5.3 percent to $55,400,000 due to the change in tax treatment
of the New Zealand Royalty.
Net debt increased to $89,100,000 to by $89,100,000 to $234,500,000 with leverage of 1.1 times based on underlying EBITDA after the return of capital of 125,000,000 EPS grew 27.7 percent to $0.22.6 per share, and the board has declared an interim dividend of $0.09 per share. The dividend policy for FY 2020 is under review given the impacts of AASB16 leases on net profit after taxes beyond market buyback commences today. And with that, I will now hand it over to Ian so he can run us through the detailed financial results.
Thank you, Jim, and good morning, everybody. So if we move to page 5, which is the profit and loss, So the compulsory volumes on a group versus return to the historical levels of circa 3%, while feed volumes declined 14%, and that's due to the losses of New South Wales feed customer in early 2018. Gross profit grew 3% and that reflected the pass through of feed costs and the continued benefits of Accelerate. With Australia rather than covering the shortfall in the New Zealand business. Underlying EBITDA of 1,000,000 is $3,800,000 better than a year ago, normalized for the sale of my device.
Page 6 shows the EBITDA and net profit after tax reconciliations. The finance costs of $8,900,000 include $900,000 related the recent refinancing of the debt facility and the $1,100,000 cost related to the funding of the new South Australia feed mill. Ongoing, the charges will be lower as it reflects the new facility terms, and we will have the long items Due to the change in the New Zealand tax legislation, which has been flagged, really for the last couple of years, Regarding the hybrid mismatch structure, the effective tax rate has changed from about 26.5 percent to 29.5 percent. And that obviously impacts both the impact and the underlying impacts. If I move to Page 6, which is needed there and impact reconciliation.
I don't propose to go through this in detail. I'm obviously happy to cover any questions on it. That you can see very clearly, what the reconciliation are. On page 7, you go to cash flow and the balance sheet. Another strong operating cash flow period, with a 98% cash conversion.
And that reflects further improvements in working at all management. We finalized what we call the inventory financing through New Zealand, and that gave us a benefit in the period of about $27,000,000. Capital expenditure for the period was in line with expectations of $27,000,000 And the net property purchases from sale of assets, gave us a $36,500,000 positive. As Jim said earlier, the net debt did rise to $234,500,000, which is an $89,000,000 increase but that did include the capital return of GBP 125,000,000 that we did in December of 2018. As a result, on an underlying basis, our leverage ratio is 1.1 times still where we expect it to be.
With that, I will now hand back to Jim.
Thanks, Ian. I'll now take you through our segment information for both Australia and New Zealand starting on Page 9. With Australia. Australia posted a strong result for the half, reflecting the core poultry growth of 3.6%. And the continued benefit of the Accelerate initiatives driving margin.
Feed cost and utility costs were offset where possible. Or pass through to the market. The price increase on barbecue burned retail saw volumes drop slightly, but strong growth in QSR food service and wholesale drove the positive growth. Page 10 for New Zealand, a disappointing result in New Zealand. Driven by the main internal factors of losing 3, 4 free range farms and the impact that this has had on our integrated supply chain.
The oversupply and competitive pricing in the market also contributed, but to a much lesser extent. The focus is very much on getting back to the business that we once had in New Zealand and we expect to do that over the second half and place ourselves in a much better position at the start of the next fiscal year. Turning to page 13, projects accelerate. The pipeline is strong and is definitely on track to as we advance many of the opportunities both with and without capital requirements being progressed. These include further automation, networking capacity improvements, consolidation with optimization improvements and efficiencies in farming, as well as our feed business.
Moving on to Page 14, strategy update, I've touched on the Accelerate program. However, BBB in our largest cost input has been subject to large increases due to the drought conditions experienced in Australia. Although we have tried to offset some of this costs with internal initiatives, the size of the increase has been significant. We have approximately 6 percent of our Australia poultry volumes contracted with feed cash through mechanisms, plus some other cost adjustments. We are covered forward at this point in time by approximately 6 months, and poultry prices in the market have increased as feed prices pass through this reflects historical trends that were previously shown in the prospectus and earlier results presentations.
We are seeing some soft meat and prices although it is very early to properly assess the impact that that would have in FY20. Moving on to Page 15, In terms of our feed business, we continue to progress the objective of self sufficiency for own use, and we look to improving our feed utilization and third party sales. The new mill in South Australia Murray Bridge is now fully operational and meeting our performance expectations. The old site at Mile End is in the process of being sold. In West Australia, we are well advanced with plans for a new feed mill, while in New York, South Wales, we have sold the Cartip mill and in line with reducing our feed production requirements.
As far as Page 17, our outlook We see growth back at historical normal levels and that together with Accelerate initiatives continues to support earnings growth. We are working with an external party to finalize the long term strategic direction and this will be finalized in Q4 of this financial year at which point I'd be happy to share with this market. The business has many opportunities and the strategy will reflect this. However, the focus will always be remaining that our engine room is operating at optimal, and consistent, earnings and cash flows. In terms of feed costs, we continue to watch carefully the Australian conditions, while seeking to explore all possible options to hold or reduce or possible.
The New Zealand business remains challenging, however, the operations are improving. We expect the market to improve slightly through the second half and more likely into Q4 of this financial year. The on market buyback will commence and the dividend policy will be reviewed post audit sign off of the impact of the new accounting standard ASB 16 leases, which comes into effect for us in July of 2019. And with that, I would like to thank you for your time and together with Ian Quinton and myself are happy to answer any questions you might have. Thank you.
Ladies and gentlemen, we'll now begin and Your first question is from Tom Kerritt from Morgan Stanley. Please ask.
Good morning, guys. Just a couple of quick ones for me. Obviously New Zealand's pretty tough. It looks like you had a pretty tough second half twenty eighteen. Do you think you'll get over that?
Like has the business rebased now or is there some more kind of pain to come in the near term?
Yes, Tom, this is Jim Layton. Yes, we expect, as I stated earlier, that the second half is, is going to, to look better than the first half. We have a new management team over there. We had a board meeting over there. Most recent board meeting prior to yesterday.
And, I'm pretty confident that throughout the second half, we're going to see better operational results And also there's been some impact in the market relative to the comments I made earlier on prices in the marketplace with the change that took place with one of our major competitors.
Yes. Hi, Tom, this is the yes, just to kind of consolidate that. So operating wise, we are seeing that come back through, through this quarter. And we expect that to gradually improve through Q4 with the market changes and obviously the change of ownership there with Teagle and some management changes. What we're seeing is different things occurring in the market, which should be positive.
Okay, great. Thanks. And just the second one, so you mentioned that 60% of your contracts are cost plus. Can you talk through what's happening in the other in the 40%, the ones that don't have cost for us if you're achieving price rises there, kind of the magnitude of those and how we should think about potentially some margin pressure as the feed costs kind of continue to come through?
Yes, look, I mean, one of the key areas within that 40% is what called the wholesale or the spot market, and really what what you've seen there is prices going up, for the last 12 months, really, and very, very aggressive. And so that as the market does, it kind of passes through immediately rather than through contracts. The balance of that would be into your QSR and foodservice customers, some of which have varied degrees of price increases, others have kind of fixed term pricing. But overall, you know, what you're seeing from the results is that feed costs, where we couldn't offset them and we certainly are trying. We've won over initiatives with that, to do.
We have passed them through.
Thanks, Tom.
Your next question is from Paul Baez from Credit Suisse. Please ask your question.
Good morning. First one from me, just on looking at segmental disclosure for poultry revenue, and just looking at the revenue numbers versus the core volume numbers and the underlying implied price increase looks like for Australia, it's in the order of sort of 2.5%, which is a little bit less than kind of the magnitude of price increases you guys have spoken about. I assume there's a fair bit of mix change going on there and as well. So I was just trying to a bit of color in terms of sort of underlying like for like price increases that have gone through and what mix change if any there has been, in your overall revenue base?
Yes. Look, and it is more than that, Paul, in terms of the carpentry business. I know that this kind of frustrates people, but when we do the segment, we've got fading there. And obviously, we lost a new South Wales, feed customers, our revenues gone in, which offsets the price increases that we've got overall. And we don't disclose the detail of that to be there.
Your segmentally, and as I understand, has actually gotten in the statuary, has got poultry and feed revenue broken up?
I'm looking at the presentation, but
Okay. Okay. So those are the moving factors. So the underlying price increase are obviously a fair bit higher?
Yeah. Like, I mean, if you look at wholesale, for example, it's been anywhere from 4% to 8%. Retail will be a little bit less than that, but certainly I've got 4. And then you've got varying degrees in QSRM So it's, at the end of the day, it's certainly higher than the number you mentioned.
Got it.
And there is, Nick. I mean, as we keep talking through this. As you mix out of, for example, retail into wholesale, you're definitely going to get a revenue mix shift, which will be negative, but the margin benefit is positive.
A quick one. I just spoke about the New Zealand competitive environment, which sounds like it's, signs of improving. Just a quick question on the Australian competitive environment, just specifically interested in this environment of higher input costs. That all the players have been observing. Have you seen any change in the competitive environment?
Competitors been under more or less pressure than you guys have and has that changed the dynamic at all?
Paul, it's Quintin. As you can appreciate, these are, pretty steep change in in feed prices. So, it is a challenging market environment. I think, you know, both the combination of our hedging strategy and our pass through mechanisms have, have stood us in good ground, on good ground, we, we expect that, it, you know, it is, a pretty challenging environment for, for other suppliers into the market are competitors, but, no, no signs of, material change in the, supply competition at this point.
Thank you. And then last one for me, just in relation to your comments on the dividend policy being under review. I mean, I understand that you the final comment will be once the review has taken place, but I just want to understand does that relate to a potential change in payout ratio? Or are you actually flagging that the dollar amount of dividends could be changing going forward?
So this is what we kind of grapple with, Paul, we don't see the dollar amount changing. It's, but obviously if you take it as a percentage, at year end, Pat, then, yeah, clearly that's not what I'm working there in the new environment. So we've just got to work through that. But definitely not changing some of the dollar amounts.
Next question is from Craig Woolford from Citigroup.
I just wanted to ask a question about the price rises. So, observing retail, we can obviously do more at supermarkets than other channels. There has been more significant price rises on shelf in poultry as of 1st January. Can you give us a feel for what pass through you saw from customer through to retail shelf prices in the first half? And has that changed in the second half?
Great. It's Quintin here. I think, there there is a bit of a timing issue that that happens, you know, we've got different mechanisms with just different customers. So ours doesn't always, tie up exactly with what's happening in the supermarkets. As you alluded to, we've seen, price increases during January, and the early parts of February.
Those happen on a staggered basis through the different retailers. And so you know, in in most cases, going to different pricing points, we've we've seen increases of sort of 10, 10 to 12%. In the retail selling process. Those, you know, were slightly higher, than the immediate increases in in some of the fee costs that we've passed through, but, you know, it, again, it's all about timing when those mechanisms cut through.
So would it be fair to sum it up though that there were price rises on the 1st July last year by inghams that didn't get reflected in retail? And there's a bit of catch up from January onwards where those retail prices have increased slightly more than the wholesale price increase. Your parking costs?
Frank, sorry.
I couldn't hear that very clearly. It's a little difficult to hear you, Craig. I don't know if you can change that.
Yes, sorry about that. So yeah, just wanted to clarify, is it fair to sum up the price movements that in the July to December period, there wasn't any there wasn't as much movement by retailers, but we've seen a bit of catch up by retailers from the start of January on their retail price movements?
Yes, I would say that's a fair comment.
Yes, Jeff, that's exactly right. And, it's pretty much across the board in the market, on certain categories.
So the obvious follow on question is what is your historical experience or what should we expect about the impact of volume given the movements in pricing at retail, customer either switching to different cuts of poultry or to different proteins given relative pricing?
Yes, there's no there's no doubt that there is some relative impact you'll recall when the price of barbecue bird was dropped, significantly, 2 years ago, we had a big uplift in in, demand for barbecue birds in with these recent increases with the prices going from, $9 to $10. Which is the 2nd increase that we've seen. There has been, some impact on the, on the demand. It's single digits demand reduction. But, we've seen strong, growth in tray packs.
So it's a it's it is a it's a a mixed change, and it's accompanied with that. And, you know, the other, prevailing factor alongside the draft impact is the price impact on land, beef, and pork more recently. So from a relative perspective, you know, there will there will be some migration to different skews But, you know, we don't think that, the relative competitiveness of chicken should, should, offset in the big picture.
Okay. And just on that inventory financing, so That was a benefit to cash flow. Just trying to make sure I'm interpreting the Yes.
That's correct. Thank you. Remember when the previous vendor payable financing. We did it through Australia. And then what we did in the first half is running through New Zealand.
So we're done now. That's what's done. We will have generated over the time nearly $80,000,000 it's cost us about 900,000 to do that.
Your next question is from Michael Pete from Goldman Sachs. Please ask.
Good morning, Jim and team. Just a comment there on like projects, accelerate some further savings you've identified. Could you maybe quantify those or just describe them, I guess? And I just wanted to get a sense of where you are, at least on phase 1, of that sort of 5 year plan?
Yes, I'll speak to it and then I'd ask Quentin to speak to it. Seen that fairly new to the business, but, Accelerate really is a, a continuous improvement process that we're going through. And we had identified very specific projects that given the name to accelerate and, and make sure that we are focused on those on a Pareto relative to making sure we're working on the right things at the right time. So we are in what I referred to earlier in my remarks of 2.0. So with that, I'll hand it over to Quinn.
Yes. So, to your second question first was how far are we through it with, you know, we're we're around the 4 year mark and we're tracking, 2 plans. So, you know, we've always indicated through the prospectus that it would be 160 to 200,000,000 in, in annualized benefits. And, we're on track for that. We also have always indicated that, you know, we'd we'd probably have a third of that that we would, need to offset cost inflation, a third that would go to to, plus through the customers, you know, to maintain our competitive position and and grow, and then a third and 4th at the bottom line.
As far as, the the pipeline of Accelerate projects, as Jim said, it's really an operations excellence, continuous improvement. So there's always going to be additional ones coming through. Our main focus at this stage continues to be within the, the processing and primate process, making sure that, we debottlenecking and improving on some of the batch processes we have there is is good opportunity. If we look at farming, a lot of work going in benchmarking individual grower contract performance, improvements in, in some of our planning and operations, with the the the vast network that we have in terms of heavy production and getting, making sure we're more efficient than that. There's, initiatives in, in New Zealand, just looking at how we can extract higher volumes out of our 3rd processed plant.
And then you would have seen an announcement around, a new hatchery in in Victoria, but in Australia, we've got 7 hatcheries and and, we look to rationalize there and keep them more efficient.
So Michael, this is Jim. I characterize this as I said earlier that Accelerate is, right where it should be in delivering results. The next step in this is to more formalize the Ingram way relative to how we approach continuous improvement. But as Quentin said, we will continue to take those savings to offset inflationary pressures no matter what they are, pass through where possible, to our customers and then hopefully to the consumer to drive volume. And then thirdly, we're going to do what we can relative to making sure that it creates fuel for growth.
Thank you. Jim, given you've not been too long in the chair, but just some impressions over the Australian market and the business itself versus your other experience offshore?
I wouldn't have come halfway across the world if I didn't think there was a huge opportunity here. So, it is somewhat, it's a lot the same, but, there are certain things that I think most people on the call really understand is the closed market I've heard the term duopoly more than once. But the favorability of things that can be done here are amazing. And the people within this organization are really the key to unlock that. And, we don't have time to get into the details of my thoughts on it now.
But, yeah, I think things are looking really solid here.
And just lastly, just on FEED, you've mentioned about month hedged. Is that a little bit shorter in terms of hedge book than you normally have? And maybe just a sense generally of what's yet to come at you in terms of the cost increases
Yes. It is,
you know, sort of 6 to 12 months ago, we were at 9, 9 months hitch. We did that deliberately, in, in, with the prospect of, with dryer conditions. And so we got in ahead of that. It makes sense whilst prices are at the high level to shorten up our book. We know, we're making sure we're well positioned in terms of logistics and supply, you know, assured supply.
And, but, it's a deliberate strategy to shorten up to the 6 months there.
Yes, and this is Jim. I would add to, feel like we're right where we should be relative from 9 months to 6 months is that if you look at the world market, and what's going on there coming off the highs and get started to slide down a little bit. So we're feathering in additional purchase. And I think strategically, it's the way to go.
But would you need sort of a similar sort of cost increases that you've seen in the last 6 months again in 6 months time in terms of quantum?
No. We've, you know, we've been in these, higher prices for some time now. So, you know, at this stage, we're seeing it plateauing,
on on the
base where we're at. There could even be, you know, prices in the last month of have dropped immediately in Australia, reflecting the international prices that Jim's talking about. And obviously, this year's crop is really in WA where they're sporting to the world market. So it's taken a little bit of a price pressure off in the last month, but, all eyes are on what what comes in the next next growing season.
Your next question is from Arin Narosi from UBS. Please ask.
Hi guys. Just the first one for me, may for Ian, on the provisions, can you please just remind us what the make good provision is for, I think there was about a $3,900,000 benefit that flow through to the P and L this year?
So the key provisions in there will be around the Cleveland closure, the FB facility. And then there's a few kind of restructuring provisions in terms of some people, etcetera, but the big ones that Cleveland provisions.
So the one down in the reduction in the make good provision from June 18 to December 18. Is that reflected in the below the line or above the line in the P and L?
It's all below the line. Solve kind of one time. So that's not part of the underlying EBITDA.
Okay. And where would you find that? It's in the restructuring part?
Correct.
Okay. Cool. And just secondly, in terms of your feed price mechanisms, what extent, Drake, and you've benefited from taking a longer hedge on feed for your 9 months, about 12 months ago, versus the market lifting its prices earlier? Because if you look at the wheat price chart, if you lag at 6 to 9 months, the price increase over this half was quite small, but you've been able to get your 2.5%, 6%, 7% price increases. So to what extent have you do you think you've benefited from that in this half?
But I'll, you know, typically we match up our 3 mechanisms broadly. So on, on those contracts that we've got, and mechanism, you know, we're hedging around those. So on the portion that aren't, yes, we've probably taken some advantage, through having locked in prices earlier. And as the market prices have moved, for example, on the wholesale markets, we have banned some of that benefits. Yes, that would be baked into the results.
But by and large, there's not it's not a huge, contribution to that.
No, I mean, you're always going to get some kind of like benefit or impact, but what we what we've really tried to do is historically to pass through, when the prices have gone up, feed prices have gone up, they're pull the prices have gone up and vice versa, etcetera. All we're trying to do is, is formalizing where possible. So that it becomes a bit more current formula than where it was previously. But, yeah, in wholesale, there's a possibility you could get a little bit of benefit.
Cool. And just my last one, please. Slide 7 in the presentation. Can you just clarify the non cash items of 47,000,000. I'm just trying to reconcile that with the one off you've provided to you booked a profit on sale of about $64,000,000 you've got restructuring costs of about $11,000,000 and other costs taken below the line around $2,000,000 So that leaves us with a gap of positive $7,000,000 to get to that non cash item.
Can you just go in a bit more detail what else is in that line, please?
Yeah. Look, to be honest, Harry, I can, but why don't we do that? Offline, we're going to have a separate problem about it to go through and to be fair.
Next question is from Phil Kimber from Eventon Partner. Please ask
Hi guys.
I just had a just on the hedging, the 6 month hedging, and what you'll see cost price increases were just because if I look at it a wheat price chart that didn't really spot prices didn't really start going up until the start of the half that you just reported. And if you've got 6 month hedging, I would have thought not a lot of the cost pressure would have come through in that half. And it's going to come through now in the second half. Where am I, what am I sort of missing on that thinking?
Well,
you're right. If you look at a spot market, we we're buying, in advance and the price pass through mechanisms that we have, are, you know, tied in with the the period in which we're buying forward in advance. So, you know, yes, price is only buoyed up at the start of the period in which we were reporting, but we were buying them, for where we're at now. So, they are better match than what you're describing in the spot market.
But when you buy the spot price, the sort of there's some sort of, difference or I assume you don't buy exactly a spot, but I would have thought spots the actual indicator price at the time. You might be buying in advance, but spot prices, what people think the price of wheat is at that time and wouldn't that set the price that you actually pay?
Yeah. So what we'll do is, you know, for example, to today, we're in February. We're buying for the end of August, and we're using the futures prices for, for the August period. And that's what's in our price mechanisms. And when we get to August, the grain we're feeding is the is the grain that we bought today for August, and, the price pass throughs will be for that August period.
Okay.
And, the only other question I had was just, understanding, I know you've been pretty clear and talked about for that effective tax rate. I think you said around 29.5 percent. I thought it might have been a little bit lower in the first half when you strip out all the normal type items. Is that I mean, is there going to be any sort of material difference to that in the second half of 'nineteen. The reason I asked is I think you had a particularly low tax rate in the second half of 'eighteen.
So want to make sure there isn't something that we need to think about for the second half on the tax rate.
Yes. And if you think about it, we've got a 30% county corporate tax rate. Normally, you have R and D benefits that most companies claim that which we do, that's about half percentage buy for us. And then what we had was the royalty, which was obviously a non deductible benefits that we had. So that took us down to the 26.5%.
So from here on in, we really are it's going to be 29.5 and it might be 5 more on either side of that, but that's where we'll be now.
And when you talk about that, that's stripping out any restructuring cost asset sales, which can have unusual tax benefits. That's an underlying effective tax rate.
We have, but we don't. I mean, we used to file our counter tax benefits, 18 months ago. So really, what you've gotten ahead of profit on sale on our kind of transactions, you're going to really going to be at the standard corporate rate.
Okay. And one last quick one. Might have I, I mean, it looks like was about $2,000,000 a quarter. Is that sort of run rate correct when we think about, the business or sort of an $8,000,000 EBITDA year business? Or was there some unusual timing that we need to be aware of?
No, no, it was a $7,000,000 to $8,000,000 a year, but a great little business for just non car.
Your next question is from David Rossenbaum from Arco. Please ask
Yes, thank you. I just wanted to go back to the balance sheet for a second, if I could. Looking in the notes, in the annual report, you've got like $1,300,000,000 in non cancelable lease payments, $900,000,000 of which is past 5 years. So I guess you'd probably be one of the most impacted by this accounting change. And I'm just wondering if you could just tell us how much debt you think will be coming on balance sheet when we see it June 30.
And I guess you give us the net debt to EBITDA, but it doesn't really mean anything in the context of these leases. What metrics do you guys use internally in terms of balance sheet capacity?
Yes. I mean, if we're going to have a sizable kind of move in terms of of an assets and liabilities, Circuits of dollars. The metrics we use is cash because at the end of the day, nothing's changing from a cash perspective from the business. But clearly, EBITDA is going to go up significantly then Pat will go down quite significantly. And all that depends on the leases that you've got as at the end of June this year.
And obviously, we're defending over the next few years. So it's, yeah, and those numbers have not signed up by our offices. You'd appreciate that. Point in time, but it's in that order.
So you said, do you use like a fixed charge cover ratio? What kind of thing do you actually used for I understand that the cash doesn't change. And this is an economic, but many people on this call would adjust for leases. I'm just wondering how you guys look at it internally. You give us a net debt to EBITDA number, which doesn't really tell us anything.
Yes. Well, then to be fair, we haven't done that and given that publicly at this point in time. So all we're doing is saying that this is what the impact is going to be, how we will look at that and the metrics around it. We'll finalize in the next few months and talk to the market about it.
Thank you.
Your next question is from Rod Sleeff from Rumer Equity Research. Please ask
Hi, guys. Thanks very much for taking my questions. I just wanted to come back to Project Accelerate. I know you've given quite a lot of information already on the call on the project. But as we come towards the end of it, I was just wondering if you can give us perhaps a broader overview of where you feel you are today, including the current projects that are in place, with regards to sort of global best practice, clearly, you must have come a long way from where you were in 2014.
So I guess the question is where you feel you are now and really try and give us a sense of what the runway is from here to go even further.
Hey, Rod. This is Jim. I don't have Quentin speak to, which I think is appropriate to where we are now and how we got here. And then I will address the future. Sure.
So, right, we've, we've, you know, Over the last few years, driven changes to the network program, we've, you know, closed the New South Wales chicken operation, grown in the volumes and in South Australia and, and, Queensland predominantly. With, improved efficiencies in the primary processing plant with labor redactions we've been the labor management, more flexible enterprise agreements. You know, we've we've done some automation projects but that's really, you know, we're just touching the tip of the iceberg there. So, you know, I think if we look at this business, and we benchmark ourselves against, you know, world class operations, which Jim can talk to. We've got a a long way to go.
If you go into our primary processing plants, still got a lot of people If you go into our, supply chain, warehousing, distribution, you know, very limited, automation and robotics, in that. So, you know, quite a journey ahead of us and quite a lot of opportunity.
Yeah. And, having spent 40 some years in the who the food space and maybe 15 or so in the poultry and animal protein space. I'd say the major opportunities going forward are really I used the term balance. So that was in South Australia as an example, and we, inghams, has one of the nicest and efficient, hatcheries that I've ever been in, sort of the brand new feed mill and so forth. So I think the opportunity go forward is to continue to drive improvement in cost through your basic efficiency and effectiveness curves on, a process improvement, what I refer to as continuous improvement process.
But the other thing is to step back, which we're now doing is to optimize the network, to make sure that that network is the, this optimal network for servicing our customers and consumers.
Can I just ask a couple I apologize if these are things that you've addressed in the past? Just ask a couple of questions on New Zealand and Firstly, just on the tax effect on the royalty flow, could you just explain to me what the royalty flow is and what direction it's going? And whether the change in tax on that will change the allocation between the Australian and New Zealand divisions of any revenue or profit,
Yes. So, effectively what it is, is when you have a parent in Australia or in thankfully a brunch structure and separate entity into New Zealand. It's the transfer of IP costs and specific costs that are incurred in Australia that relate to the brand and the Australian business and the now, etcetera. Normally, from an Australian up until 1st July, that was, not assessable for tax. From an Australian perspective.
What occurs, which ultimately then means that you lower your effective tax rate overall. Yes. So I've proposed in July, the New Zealand tax office came in with legislation ahead of the Australian tax We said, actually these are now these are taxable in New Zealand. So we basically have to pay the tax the higher tax in New Zealand, which overall increases our group effective tax rate. Now the problem with that for us is obviously when we pay more tax in New Zealand, we don't get the banking credit benefit
So we would have preferred it
the other way around that Australia would have led to an offset in New Zealand.
Okay. And there isn't the option to change that stream?
Well, we're looking at all the options, right, in terms of what costs really should be incurred in New Zealand, as a direct cost, for example, rather than pass through the royalties. So we're working with our car that's a top 4 partners to look at that, but But at the end of the day, I don't think there'll be too many options, to my honest opinion.
Sure. Okay. No worries. And just one more question on New Zealand. Can you with regard to the loss of the 4 free range farms in New Zealand, Could you expand on what happened there?
Why you lost those farmers to the competition? And just explain what the knock on effects and costs are that to the supply chain, which you mentioned?
Well, what happened this is, December 18, no, 17, the, negotiations with the, growth elective on the extension of the of the contract, led to a situation where, the gross were had a short window, which with which they could, exit the business, which was, you know, in our view, an an oversight.
Right.
And as a result of that, the competition teagle signed up those 4 rows. It was a, they signed them up at a significant premium in fees to to what we were paying. Those birds are transported, you know, 2 a half hours to the other side of Auckland. And and so, you know, I suppose we didn't see that as a we can see there's a there's a likely possibility up until that point. And the motive to try and understand why Teagle would have done that was, we we've we've made and we've continued to make great, strides in the white towa 3 range brand, and, they were they didn't have their own brand and they subsequently launched the, a free range brand, and this was a dual strategy to, a, get material or for their free range, launch as well as to try and set us back in terms of our volumes, as you we've managed to maintain our white collar brand and we've we've pretty resonated there, but, yes, we we've faced the consequence of that strategy that they've deployed
It's about online, the way that I understand that it was avoidable. We learned a lot from it and we will be back 100% by the end of the calendar year relative to balancing the supply chain in New Zealand.
And can I just ask what those poor farms represented a proportion of your, total volume in New Zealand Tree range?
Total of New Zealand free range, it would have been about between 15 26.
We have another question from Ari Narosi from UBS.
Another question. Can you guys just run through the cost headwinds in the first half specifically around electricity and gas? Because I think previously, you guys have mentioned there's about a $20,000,000 annualized impact in fiscal 2019 from the cost increases there. Can you just run us through that, please?
Yes, it's in, alright, the same way with our electricity could go up, but not to the extent we expected. So I think overall, we flagged that without a year on year impact in circa 10,000,000 to 12,000,000 in electricity. And we probably ended up probably right about $7,000,000, something like that. Because we went to a progressive purchasing model, That worked out really well for us. And on gas, yes, we saw an increase, but again, we probably thought it was 5% to 7%.
And we ended up getting about $3,000,000 or $4,000,000 through. So we've done better than we expected. And in the scheme of things, in terms of our cost of goods sold, that's not a lot to be done.
And how do we think about that in the second half of 'nineteen? Is that all done now?
Yes. Look, it is. We're locked in through the Progressive and somewhat you're seeing now, but we know further increments And actually, what we've got now, if I look ahead, we've also met some pretty good purchases with the team. So going into FY 'twenty will be a slight reduction, which is good.
We don't have
Thank you. So thank you, for your attendance this morning. We appreciate your time. And from Jim, myself, Quentin, Juliet, obviously, we'll be talking to many of you over the next few days
and look forward to that.
Thank you, everyone. Thank you.
Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.