Ladies and gentlemen, thank you for standing by. Welcome to the Inghams Group Limited 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, at which time, if you wish to ask question, you'll need to press star one on your telephone. 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 Leighton. Thank you. Please go ahead.
Thank you, Alison. Good morning, everyone. This is Jim Leighton, CEO of Inghams Group Limited. Welcome to the FY 19 half year results presentation. With me today is Ian Brannan, Chief Financial Officer, Quinton Hildebrand, 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 three for group highlights. There are three key operating highlights for the first half. Firstly, a strong performance in Australia with core poultry volume up 3.6%, revenue up 4.9%, and underlying EBITDA, excluding profit on sale and restructuring costs, up 13.7%. Volume growth has returned to historical levels. Feed price has been offset or passed through. Accelerate benefits continue to deliver.
Secondly, the New Zealand business has struggled with operational issues in farming and within primary processing as the business has grappled with the loss of four free-range farms and its knock-on issues through the integrated supply chain. Thirdly, the group delivered strong operating cash flow through further working capital management. This included AUD 125 million capital return in December. This meant that our leverage ratio finished the half year at 1.1 x on underlying EBITDA base. In terms of strategy, we made further progress towards self-sufficiency in our milling operations with the opening of our South Australia mill in Murray Bridge. We also divested the non-core Mitavite business and the Cardiff feed mill, which was not required post the closure of the processing operations two years ago. As previously announced, following the completion of the Mitavite divestment, an on-market share buyback led by Macquarie commences following these results.
Our capital investment plan and capacity and efficiency projects continues on track covering the new feed mill in South Australia and Western Australia, breeder farms in New Zealand, and hatcheries in Victoria and West Australia. On page four, financial highlights. Ian will cover this in more detail in a moment. Let me share with you the key takeaways. Underlying EBITDA growth of 3.6% to AUD 109.6 million. Profit on sale of AUD 53.9 million, offset by one-time costs of AUD 13.7 million. Underlying net profit after tax decline of 5.3% to AUD 55.4 million due to the change in tax treatment of the New Zealand royalty.
Net debt increased AUD 89.1 million to AUD 234.5 million with leverage of 1.1 x base on underlying EBITDA after the return of capital of AUD 125 million. EPS grew 27.7% to AUD 0.226 per share. The board has declared an interim dividend of AUD 0.09 per share.
The dividend policy for FY 2020 is under review given the impacts of AASB 16 leases on net profit after taxes. The on-market buyback commences today. 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. If we move to page five, which is the profit and loss. The core poultry volumes on a group versus return to the historical levels at circa 3%, while feed volumes declined 14%, and that's due to the loss of the New South Wales feed customer in early 2018. Gross profit grew 3%, that reflected the pass-through of feed costs and the continued benefits of Accelerate, with Australia more than covering the shortfall in the New Zealand business. Underlying EBITDA of AUD 109.6 million is AUD 3.8 million better than a year ago, normalized for the sale of Mitavite. Page six shows the EBITDA and net profit after tax reconciliations.
The finance costs of AUD 8.9 million include AUD 900,000 relating to the recent refinancing of the debt facility and the AUD 1.1 million 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, we won't have the one-off 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% - 29.5%, that obviously impacts both the EBITDA and the underlying EBITDA. I move to page six, which is the EBITDA and EBITDA reconciliation, I don't propose to go through this in detail.
Obviously happy to cover any questions on it, you can see very clearly what the reconciliation there. On page seven, we go to cash flow and the balance sheet. Another strong operating cash flow period with a 98% cash conversion, that reflects further improvements in working capital management. We finalized what we call the inventory financing through New Zealand, that gave us a benefit in the period of about AUD 27 million. Capital expenditure for the period was in line with expectations of AUD 27 million, the net property purchases, net sale of assets gave us a AUD 36.5 million positive. As Jim said earlier, the net debt did rise to AUD 234.5 million, which is an AUD 89 million increase, that did include the capital return of AUD 125 million that we did in December 2018.
As a result, on an underlying basis, our leverage ratio at 1.1 x are 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 nine with Australia. Australia posted a strong result for the half, reflecting the core poultry growth of 3.6% and the continued benefit of the accelerated initiatives driving margin. Feed cost and utility costs were offset where possible or passed through to the market. The price increase on barbecue bird in retail saw volumes drop slightly. 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 four 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, to a much lesser extent.
The focus is very much on getting back to the business that we once had in New Zealand. 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, Project Accelerate. The pipeline is strong and is definitely on track as we advance many of the opportunities both with and without capital requirements being progressed. These include further automation, network and 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. Feed being our largest cost input has been subject to large increases due to the drought conditions experienced in Australia.
We have tried to offset some of this cost with internal initiatives, the size of the increase has been significant. We have approximately 60% of our Australian poultry volumes contracted with feed pass-through mechanisms, plus some other cost adjustments. We are covered forward at this point in time by approximately six months. Poultry prices in the market have increased as feed prices pass through. This reflects historical trends that were previously shown in the prospectus in earlier results presentations. We are seeing some softening in prices, although it is very early to properly assess the impact that that would have in FY 2020. Moving on to page 15. In terms of our feed business, we continue to progress the objective of self-sufficiency for our own use. We look to improving our feed utilization and third-party sales.
The new mill in South Australia at Murray Bridge is now fully operational and meeting our performance expectations. The old site at Myalup is in the process of being sold. In West Australia, we are well advanced with plans for a new feed mill, while in New South Wales we have sold the Cardiff mill in line with reducing our feed production requirements. As far as page 17, our outlook. That together with Project 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 the market. The business has many opportunities, the strategy will reflect this.
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 where possible. The New Zealand business remains challenging. 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, AASB 16 leases, which comes into effect for us in July 2019. With that, I would like to thank you for your time and together with Ian, Quinton, and myself are happy to answer any questions that you might have. Thank you.
Ladies and gentlemen, we'll now begin the question and answer session. If you wish to ask question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question is from Tom Kierath from Morgan Stanley. Please ask.
Morning, guys. A couple of quick ones from me. New Zealand's pretty tough. It looks like you had a pretty tough second half 2018. Do you think you'll get over that? Has the business rebased now, or is there some more pain to come in the near term?
Tom, this is Jim Leighton. We expect, as I stated earlier, that the second half is going to look better than the first half. We have a new management team over there. We had a board meeting over there, the most recent board meeting prior to yesterday. I'm pretty confident that throughout the second half we're going to see better operational results. Also, there's been some impact on 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 Ian. Just to kind of console that, operating wise, we are seeing that come back through this quarter, and we expect that to gradually improve through Q4. With the market changes, and obviously the change of ownership, with Tegel and some management changes, what we're seeing is different things occurring in the market which should be positive.
Okay, great. Thanks. Just a second one. 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-plus, 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?
Look, one of the key areas within that 40% is what we call the wholesale or the spot market. Really, what you've seen there is prices going up for the last 12 months, really, at varying rates. 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 food service customers, some of which have had varying degrees of price increases. Others have kind of fixed their pricing. Overall, what you're seeing from the results is that feed costs, where we couldn't offset them, and we certainly have tried with whatever initiatives we've had to do, we have passed them through.
All right, great. Thanks, guys.
Thanks, Tom.
Your next question is from Paul Buys 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. I was just trying to seek 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.
Yeah, look, it is more than that, Paul, in terms of the core poultry business. I know this kind of frustrates people, but when we do the segment, we've got feed in there, and obviously we lost a New South Wales feed customer, so revenue's gone down, which offsets the price increases that we've got overall. We don't disclose the detail of that, to be fair.
Your segmental, and as I understand, has actually got in the statutory poultry and feed revenue broken out?
No, I can't. I'm looking at the presentation.
Okay. Those are the moving factors. The underlying price increases are obviously a fair bit higher.
Yeah, if you look at wholesale, for example, it's been anywhere from 4%-8%. Retail will be a little bit less than that, but certainly about four. Then you've got varying degrees in QSR and food service. It's at the end of the day, certainly higher than the number you mentioned.
Got it.
There is mix. 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, the margin benefit is positive.
Got it. Okay. Thank you. A quick one, you 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 being under more or less pressure than you guys have? Has that changed the dynamic at all?
Paul, it's Quinton. As you can appreciate, these are pretty steep change in feed prices. It is a challenging market environment. I think both the combination of our hedging strategy and our pass-through mechanisms have stood us on good ground. We suspect that it is a pretty challenging environment for other suppliers into the market, our competitors, no signs of material change in the supply competition at this point.
Thank you. Last one from me, just in relation to your comments on the dividend policy being under review. I understand that the final comment will be once the review has taken place, 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.
This is what we're kind of grappling with, Paul. We don't see the dollar amount changing. Obviously if you take it as a percentage of year-end, Pat, clearly that won't work in the new environment. We've just got to work through that, definitely not changing in terms of the dollar amounts.
Got it. Thanks, guys. That's all from me.
Thank you.
Thanks, Paul.
Next question is from Craig Woolford from Citigroup. Please ask.
Morning, Jim. Morning, team.
Hey, Craig.
Morning, Craig.
Just wanted to ask a question about the price rises. 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 of 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?
Craig, it's Quinton here. I think there is a bit of a timing issue that happens. We've got different mechanisms with different customers, 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 very parts of February. Those happen on a staggered basis through the different retailers. In most cases, going to different pricing points, we've seen increases of 10%-12% in the retail selling prices. Those were slightly higher than the immediate increases in some of the feed costs that we've passed through. Again, it's all about timing when those mechanisms pass through.
Would it be fair to sum it up, though, that there were price rises on the 1st of 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 or your pricing increase?
Craig, 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.
Yeah, sorry about that. Just wanted to clarify, is it fair to sum up the price movements that in the July to December period, 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?
Yeah, I would say that's a fair comment, yeah.
Yeah, that's exactly right. It's pretty much across the board in the market on certain categories.
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? Are customers either switching to different cuts of poultry or to different proteins given relative pricing?
Yeah, there's no doubt that there is some relative impact. You'll recall when the price of barbecue birds was dropped significantly two years ago, we had a big uplift in demand for barbecue birds. With these recent increases, with the prices going from $9-$ 10, which is the second increase that we've seen, there has been some impact on the demand. It's single-digit demand reduction. We've seen strong growth in the trade packs. It's a mixed change that is accompanied with that. The other prevailing factor alongside the drought impact is the price impact on lamb and beef and pork more recently. From a relative perspective, there will be some migration to different SKUs. We don't think that the relative competitiveness of chicken should offset in the bigger picture. Yeah.
Okay. Just on that inventory financing, that was a benefit to cash flow. Just trying to make sure I'm interpreting the
Yeah
million that was called out.
If you remember with the previous vendor payable financing, we did it through Australia. What we did in the first half is run it through New Zealand. We're done now. That's done. We will have generated over the time nearly $80 million. It cost us about AUD 900,000 to do that.
Yeah. Thank you.
Thanks, Craig.
Craig, thanks.
Your next question is from Michael Peet from Goldman Sachs. Please ask.
Morning, Jim and team. Just to comment there on Project Accelerate, some further savings you've identified. Could you maybe quantify those or just describe them, I guess? I just wanted to get a sense of where you are, at least on phase 1 of that five-year plan.
Yeah, I'll speak to it, then I'd ask Quinton to speak to it. Seeing that I'm fairly new to the business, Accelerate really is a continuous improvement process that we're going through, and we had identified very specific projects that, given the name to Accelerate, 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. We are in what I referred to early in my remarks of 2.0. With that, I'll hand it over to Quinton.
Great. To your second question first was, how far are we through it? We're around the four-year mark, and we're tracking to plan. We always indicated through the prospectus that it would be AUD 160 million-AUD 200 million in annualized benefits. We're on track for that. We also have always indicated that we'd probably have a third of that we would need to offset cost inflation, a third that would go to pass through to customers to maintain our competitive position and growth, and then a third and fourth to the bottom line. As far as the pipeline of Accelerate projects go, as Jim said, it's really an operations excellence continuous improvement. There's always going to be additional ones coming through.
Our main focus at this stage continues to be within the processing and primary processing, making sure that we keep bottlenecking and improving on some of the batch processes we have there. There's good opportunity. If we look at farming, a lot of work going in benchmarking individual grower contract performance, improvements in some of our planning and operations with the vast network that we have in terms of egg production and making sure we're more efficient in that. There's initiatives in New Zealand, just looking at how we can extract higher volumes out of our Further Processing plants. You would've seen an announcement around the new hatchery in Victoria. In Australia, we've got seven hatcheries, and we look to rationalize there and become more efficient.
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 Inghams Way relative to how we approach continuous improvement. As Quinton 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. 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. Be interesting.
Well, I wouldn't have come halfway across the world if I didn't think there was huge opportunity here. It's a lot the same, but there are certain things that I think most people on the call really understand, is a closed market. I've heard the term duopoly more than once. The favorability of things that can be done here are amazing. The people within this organization are really the key to unlock that. We don't have time to get into the details of my thoughts on it now. Yeah, I think things are looking really solid here.
Just lastly, just on feed, you've mentioned you're about six months hedged. Is that a little bit shorter in terms of hedge book than you normally have? Maybe just a sense generally of what's yet to come at you in terms of feed cost increases.
Yes. It is a bit shorter. Sort of 6-1 2 months ago, we were at nine months hedged. We did that deliberately with the prospect of drier conditions, we got in ahead of that. It makes sense whilst prices are at the high level to shorten up our book. We're making sure we're well positioned in terms of logistics and supplier assured supply. It's a deliberate strategy to shorten up to the six months book.
Yeah, this is Jim. I would add too, I feel like we're right where we should be relative from nine months to six months, is that if you look at the world market, and what's going on there, it's coming off the highs, and it's started to slide down a little bit. We're feathering in additional purchases, and I think strategically it's the way to go.
Would you need sort of circa the similar sort of cost increases that you've seen in the last six months, again in six months' time in terms of quantum?
No, we've been in these higher prices for some time now. At this stage, we're seeing it plateauing on the base where we're at. There could even be prices in the last month that have dropped a bit in Australia, reflecting the international prices that Jim's talking about. Obviously, this year's crop is really in W.A., where they're exporting to the world market. It's taken a little bit of the price pressure off in the last month. All eyes are on what comes in the next growing season.
Excellent. Thank you very much.
Thank you.
Your next question is from Aryan Norozi from UBS. Please ask.
Hi, guys. Just the first one from me, maybe for Ian. On the provisions, can you please just remind us what the make-good provision is for? I think there was about an AUD 3.9 million benefit that flowed through to the P&L this year.
The key provisions in there will be around the Cleveland closure, the FP facility. Then there's a few kind of restructuring provisions in terms of some people, et cetera. The big one's the Cleveland provision.
The one down in the reduction in the make-good provision from June 2018 to December 2018, is that reflected below the line or above the line in the P&L?
It's all below the line. It's all kind of one-time. It's not part of the underlying EBITDA.
Okay. Where would you find that? Is it in the restructuring part?
Correct.
Okay, cool. Just secondly, in terms of your feed price mechanisms, to what extent do you reckon you've benefited from taking a longer hedge on feed for your nine months, about 12 months ago, versus the market lifting its prices earlier? Because if you look at the wheat price chart, if you lag it six to nine months, the price increase over this half was quite small, but you've been able to get your 2.567% price increase. To what extent do you think you've benefited from that in this half?
Well, typically, we match our price through mechanisms broadly. On those contracts that we've got a mechanism, we're hedging around those. On the portion that aren't, yes, we've probably taken some advantage through having locked in prices earlier. As the market prices have moved, for example, on the wholesale market, we have banked some of that benefit. Yes, that would be baked into the results. By and large, there's not a huge contribution to that.
No. You're always going to get some kind of lagged benefit or impact here. What we've really tried to do is, historically, to pass through. When the prices have gone up, feed prices go up, the poultry prices have gone up, and vice versa, et cetera. All we're trying to do is formalize it where possible so that it becomes a bit more current formulae than where it was previously. Yeah, in wholesale, there's a possibility you could get a little bit of benefit.
Cool. Just my last one, please. Slide seven in the presentation.
Yeah.
Can you just clarify the non-cash items of AUD 47 million. I'm just trying to reconcile that with the one-offs you've provided. You booked a profit on sale of about $64 million. You've got restructuring costs of about $11 million and other costs taken below the line are around $2 million. That leaves us with a gap of positive $7 million 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, Aryan, our accountant, why don't we do that offline? We're going to have a separate call to crumble that if you go through it then, to be fair.
Sure. Thank you.
Great. Thank you.
Next question is from Phillip Kimber, from Evans and Partners. Please ask.
Hi, guys. I just have a query, just on the hedging, the six-month hedging, and what your feed cost price increases were. Just because if I look at a wheat price chart, spot prices didn't really start going up until the start of the half that you just reported, and if you've got six-month hedging, I would've thought not a lot of the cost pressure would've come through in that half, and it's going to come through now in the second half. What am I sort of missing on that thinking?
Well, you're right if you look at a spot market. We're buying in advance, and the price pass-through mechanisms that we have are tied in with the period in which we're buying forward advance. Yes, prices only went up at the start of the period in which we were reporting, but we were buying then for where we're at now. They are better matched than what you're describing on the spot market.
When you buy, isn't the spot price, there's some sort of difference. I assume you don't buy exactly at spot, but I would've thought spot's the actual indicator price at the time. You might be buying in advance, but the spot price is what people think the price of wheat is at that time, and wouldn't that set the price that you actually pay?
Yeah. What we'll do is, for example, today we're in February, we're buying for the end of August, and we're using the futures prices for the August period, and that's what's in our price mechanisms. When we get to August, the grain we're feeding is the grain that we bought today for August, and the price pass-throughs will be for that August period.
Okay. The only other question I had was just understanding, I know you've been pretty clear and talked about it before, the effective tax rate. I think you said around 29.5%. I thought it might have been a little bit lower in the first half when you strip out all the abnormal type items. Is there going to be any material difference to that in the second half of 2019? The reason I ask is I think you had a particularly low tax rate in the second half of 2018, so I just want to make sure there isn't something that we need to think about for the second half on the tax rate.
Yeah, no. If you think about it, we've got a 30% current corporate tax rate. Normally, you have R&D benefits that most companies claim, which we do. That's about a half a percentage point for us. Then what we add was the royalty, which was obviously a non-deductible benefit that we had. That took us down to the 26.5%. From here on in, it's going to be 29.5%, and it might be 0.1% either side of that, but that's where we'll be now.
When you talk about that's stripping out any restructuring cost, asset sales, which can have unusual tax benefits. That's an underlying effective tax rate.
Right. Yeah. We used up all our current tax benefits 18 months ago. Really, what you've got there, any profit on sale or any kind of transactions, you're really going to be at the standard corporate rate.
Okay. One last quick one. Mitavite, it looks like it was about $2 million a quarter. Is that run rate correct when we think about the business? Sort of an $8 million EBITDA a year business? Or was there some unusual timing that we need to be aware of?
No. It was an $ 7 million-$8 million a year business. A great little business, but just non-core.
Great. Okay. Thanks, guys.
Thanks.
Thanks.
Your next question is from David Rosenbloom from ARCO. Please ask.
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 something like AUD 1.3 billion in non-cancelable lease payments, AUD 900 million of which is past five years. I guess you'd probably be one of the most impacted by this accounting change. 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? 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?
Yeah, to be fair, we're going to have a sizable move in terms of our assets and liabilities circa AUD 2 billion. The metrics we use is cash, because at the end of the day, nothing's changing from a cash perspective of the business. Clearly, EBITDA is going to go up significantly and impact will go down quite significantly. All that depends on the leases that you've got as at the end of June this year, and obviously the fair thing over the next few years. Those numbers are not signed off by our auditors. You'd appreciate that at this point in time, but it's in that order.
Well, sorry, do you use a fixed charge cover ratio? What kind of thing do you actually use for I understand that cash doesn't change and this isn't 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.
Yeah. Well, to be fair, we haven't done that and given that out publicly at this point in time. All we're doing is saying, "Look, this is what the impact's gonna 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.
Right. Okay. Thank you.
Thank you.
Your next question is from Rod Sleath from Rimor Equity Research. Please ask.
Hi, guys. Thanks very much for taking my question. 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. 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 global best practice. Clearly you must have come a long way from where you were in 2014. I guess the question is where you feel you are now and really just try and give us a sense of what the runway is from here to go even further.
Rod, this is Jim. I'll have Quinton 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.
Rod, we've, over the last few years, driven changes to the network program. We've closed the New South Wales chicken operation, grown the volumes in South Australia and Queensland predominantly. We've improved efficiencies in the primary processing plant with labor reductions, but with better labor management and more flexible enterprise agreements. We've done some automation projects, but that's really just touching the tip of the iceberg there.
I think if we look at this business and we benchmark ourselves against world-class operations, which Jim can talk to, we've got 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, very limited automation and robotics in that. Quite a journey ahead of us and quite a lot of opportunity.
Yeah. Having spent 40 some years in 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 in, I use the term balance. I was in South Australia, as an example, and we, Inghams, has one of the nicest and efficient hatcheries that I've ever been in. Go to the brand-new feed mill and so forth. I think the opportunity go forward is to continue to drive improvements in cost through your basic efficiency and effectiveness curves on a process improvement, what I refer to as continuous improvement process. The other thing is to step back, which we're now doing, is to optimize the network to make sure that network is optimal network for servicing our customers and consumers.
Okay, great. 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?
Yeah. Effectively what it is, where you have a parent in Australia and effectively a branch 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 NOL, et cetera. Normally from an Australian law, up until 1st of 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.
Yeah.
From 1st of July, the New Zealand tax office came in with legislation ahead of the Australian tax, which said, "Actually, these are now taxable in New Zealand." We basically have to pay the tax, a 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 franking credit benefit. We would've preferred a deal that we're in Australia would've led to than us sell in New Zealand.
Okay. 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 as royalty. We're working with our top four partners to look at that. At the end of the day, I don't think there'll be too many options, is my honest opinion.
Sure. Okay, no worries. Just one more question on New Zealand. With regard to the loss of the four free-range farms in New Zealand, could you expand on what happened there, why you lost those farmers to the competition? Just explain what the knock-on effects and costs are to the supply chain, which you mentioned.
What happened, this is December 2018, 2017, the negotiations with the grower collective on the extension of the contract led to a situation where the growers had a short window with which they could exit the business, which was, in our view, an oversight.
Right.
As a result of that, the competition, Tegel, signed up those four growers. They signed them up at a significant premium in fees to what we were paying.
Yeah.
Those birds are transported two and a half hours to the other side of Auckland. I suppose we didn't see it as a likely possibility up until that point. The motive, we're trying to understand why Tegel would've done that, was we've made and we've continued to make great strides in the Waitoa free-range brand. They didn't have their own brand, and they subsequently launched a free-range brand, and this was a dual strategy to, A, get material for their free-range launch, as well as to try and set us back in terms of our volumes. We've managed to maintain our Waitoa brand, and we're pretty resolute there. Yes, we face the consequence of that strategy that they deployed.
Bottom line, the way that I understand this is 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. Yeah.
Okay. Can I just ask what those four farms represent as a proportion of your total volume in New Zealand free range?
Total of New Zealand free range, it would've been about between 15% and 20%.
15%-20%. Great. Okay. Thank you very much.
All right, thank you.
We have another question from Aryan Norozi from UBS. Please ask.
Hi, guys. Thanks for taking another question.
Sure.
Can you guys just run through the cost headwinds in the first half, specifically around electricity and gas? I think previously you guys have mentioned there's about an $20 million annualized impact in FY 2019 from the cost increases there. Can you just run us through that, please?
Yeah, it's Ian. Aryan, certainly we saw electricity go up, but not to the extent we expected. I think overall, we flagged that we'd have a year-on-year impact of circa AUD 10 million-AUD 12 million in electricity, and we probably ended up around about AUD 7 million, something like that. We went to a progressive purchasing model, that worked out really well for us. On gas, yes, we saw an increase, but again, we probably thought it was five to seven, and we ended up getting about $3 million or $4 million through. We've done better than we expected. In the scheme of things, in terms of our cost of goods sold, that's not a lot to be fair.
Not material. Yeah. How do we think about it in the second half of 2019? Is that all done now?
Yeah. Look, it is. We're locked in through the progressive, and so what you're seeing now, there'll be no further increments. Actually, what we've got now, if I look ahead, we've also made some pretty good purchases with the team. Going into FY 2020 will be a slight reduction, which is good.
Okay. Thanks very much.
We don't have any other questions as of the moment. Presenters, please continue.
Thank you.
Thank you for your attendance this morning, and we appreciate your time. From Jim, myself, Quinton, Julia, 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.