Ladies and gentlemen, thank you for standing by and welcome to the FY 2017 full year results conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday the 22nd of August 2017. Now I'd like to hand the conference over to your first speaker today, Mr. Mick McMahon, the CEO of Inghams. Thank you. Please go ahead.
Thank you, good morning, everyone. Thanks, everyone for joining. I'm Mick McMahon, CEO of Inghams and I'm here with Ian Brannan, our CFO, and Quinton Hildebrand, our Chief Commercial Officer, to present our FY 2017 results in what has been a landmark year in the long history of Inghams following our IPO in November. I'll be stepping through the slide pack that released to the ASX. I'm pleased to say we met or exceeded our prospectus forecasts, especially for volume and profitability, financial performance, with EBITDA of AUD 195 million versus the prospectus forecast of AUD 119.1. The outperformance largely driven by volume growth in Australia, continued progress on implementation of our strategy, and improvement in the New Zealand market in the second half.
Very strong volume growth experienced in Australia over the last 12 or 15 months driven by growth in retail and quick service restaurant chains, with chicken being the competitive protein against red meat and other proteins. As I said, New Zealand experienced a much improved market dynamic in the second half, which has continued into FY 2018. We were able to translate that volume growth in Australia through to profit growth, despite some of the challenges that arise in an integrated supply chain from rapid growth. Also very pleased to see the strong cash generation from the business and reduction in net debt as we finish the financial year. Project Accelerate is delivering as expected. We're now seeing the automation benefits really flowing through the performance of our primary processing plants, both in better yields and lower operating costs within those plants.
We've made good progress on labor efficiency, procurement benefits, and other initiatives which underpin earnings improvement over the next few years. We've extended our key customer contractual coverage and invested a lot of capital into capability and capacity over the last few years. Capability in terms of IT, capital investment in capacity, expanding our operations in South Australia, in particular, where good progress has been made in opening up the extended hatchery, the new breeder farms, and the South Australian feed mill well underway. Very good progress from the financial point of view. Over on slide four, that simply summarizes that total poultry volume's up 11.5%, but core chicken and turkey up 7.5%, which is the number to take note of. The difference between those numbers has to do with a change in the way we accounted for our rendering activity.
Core chicken and turkey volume's up 7.5% across the business. Revenue up 3.3%, remembering that revenue is not a good proxy for this business, given that feed prices tend to pass through and, in a period of deflationary feed prices, then your revenue will be lower than your volume growth. We were able to translate that volume growth through into gross profit increase of 8%, EBITDA increase of 16%, net profit increase of 22.8%, and a very strong cash performance, which pulled our net debt down below AUD 300 million, and a leverage ratio of 1.5 versus around 2.2 at the time of the IPO. A view that getting below 2 would be our objective by the end of the financial year. As we've said all the way through this process, this business generates very strong cash.
We sold a couple of assets as part of the execution of our strategy, the closed Cardiff plant and one other property, and some profit on sale from those was 100% offset by restructuring costs as we continue to implement our strategy. One offset the other, and the EBITDA performance is a clean performance, if you like, reflecting the operation of the business. We'll come to some of the provisions later in the presentation. That allowed us to deliver earnings a share up over 22%, and a final dividend of AUD 0.095 a share, which is at the top of the range forecast in the prospectus, being 70% of pro forma NPAT for the post IPO. Turning to the segments in Australia, you'll see the numbers there.
I won't go through each of them, very strong poultry volume growth again, overall volume showing 13.4%, but that was affected by the change, so the real number is the 8.8%. It's fair to say that the volume growth was a challenge to integrated supply chain, but we've managed to convert that through to profitability. More importantly, perhaps, is that our operations are much more settled as we enter into FY 2018. We're seeing the benefits of improved farming, improving yields, and efficiency off the bat strategy, which places us in a good position as we run into next year. Remembering that some of that volume in FY 2017 was not profitable volume, but growth in some product lines, it also creates fallout, as we call it, and a lot of product which ends up being cleared.
We're looking forward to a more settled FY 2018 when we can settle our operations and really get the benefit of that volume growth delivered in FY 2017. Chicken does remain the competitive protein. As we've said, our customers continue to invest in and driving chicken volume with chicken sales, through to their own consumers. We are now cycling that investment with the large supermarket chains as we run through FY 2018. Remembering again that some of that volume wasn't profitable. Even though our rate of volume growth will be affected by that cycling volume as we run through FY 2018. We would say also that QSR, the quick service restaurant channel, has also shown very strong growth. There is increased competition in the further processed segment from another smaller competitor who acquired a small player. Nonetheless, very good growth in QSR.
Market point of view, we've seen wholesale pricing recover on the East Coast in recent times as a lot of that EDLP through industry volumes, not just our volumes, flowed through the system. The wholesale channel has firmed up. Although we're seeing very significant improvement in a couple of years, we're still operating at an EBITDA percentage of around 7.9%, which is good progress, but we believe there are more opportunities over future years. Turning to New Zealand. New Zealand experienced a tough first half. Since we've seen that reverse, if you like, in the second half, where we're back to growing volumes, back to growing profitability. Point of view, one half offsetting the other, but importantly giving us a strong platform as we move through. That trend has continued.
The New Zealand team have done a particularly good job at growing a premium brand called Waitoa, which continued to support profit improvement in that business. I'm very pleased to say that we're off the back of new products. We've started, on a very small scale, but started the process of growing high-end premium exports with our first shipments going through into Hong Kong alone. Again, in New Zealand, turning to the EBITDA percentage, although they had a challenging first half, still delivering an EBITDA is the first benchmark we'd, of course, like to get the Australian business to over time. With that overview, I'll now hand to the financial results.
Thank you, Mick. On slide eight, the pro forma profit and loss, the stronger 3.3% year-on-year, the growth in New Zealand in the second half really helped us to drive the revenue line. That was up 3.3% and just slightly ahead of prospectus there. As Mick commented earlier, prices, so the lower feed prices did pass through in the FY 2017 year, that's how we demonstrated that in the prospectus. The EBITDA growth of 16.4% and 2.6% versus prospectus, driven by Project Accelerate, that continues to de-roll and obviously improves our margin. The key is the profit on sale that Mick spoke to. We also incurred the same cost in restructuring that completely offset that. Those costs were split between the cost of goods and administration expenses. The gross profit margin, which was in line with prospectus, also included that.
That was a pleasing result. The impact really shows the net financing cost pretty much in line with prospectus, just slightly ahead, and that relate to set up costs. The tax, the effective rate was in line with prospectus, obviously higher tax expense. On page nine, moving to the pro forma cash. Operating cash flow conversion at 105% did include the commencement of that inventory finance, in that it was 100% cash conversion. The net debt, as Mick said, became below AUD 300 million , certainly that's where we were aiming to be, below the two mark. Pleasingly, working capital, if you look at that from the half year, what we've seen is improvements offset by the north, predominantly you'll see through the turkey business. The capital program, we expected in the prospectus to spend AUD 85 million. It's slightly higher than that.
Part of that investment, however, includes customer requirements that we have to do that come up through the year, depending on different customers and initiatives. Third party, yet to be recovered, relates to the South Australian feed mill and the South Australian breeder farm expansion that was spoken to previously. As mentioned in the previous ones, the asset sales really relate to the Cardiff processing plant that closed in September last year and a Mornington hatchery that we sold at the end of the year. With that, I'll hand back to Mick.
Thanks, Ian. Turning to a quick strategy update. Essentially, our strategy is one of operational excellence, continuing to improve the business that we have. We're partway through a multi-year strategy, and we'll be continuing to execute against that strategy and restructuring the business as we go. On page 11, just reinforcing that our objective here is to create a truly world-class food company. For most of Inghams 100 years history, it's been the best in Australia and New Zealand. Increasingly, our customers are international in their outlook, whether that be ALDI or KFC or McDonald's or, increasingly, the likes of Coles and Woolworths, populated by people with international experience.
We need to make sure that we can be across what's happening elsewhere in the world, engage with our customers on what they're seeing elsewhere, and make sure that we're as good as anyone in the world, and we believe we're well on track to achieving that objective. Page 12 summarizes the Accelerate strategy. There's no change to this slide, we're now midway through, not only building stronger foundations for the business, but delivering on those initial Accelerate initiatives around automation, labor productivity, procurement, network rationalization, and the like, I'll touch on them in a minute. Increasingly, turning our focus now also to opportunities in farming, in our further processed network, which is still significantly underutilized in providing opportunities for growth. Exports, that I've touched on. We do see opportunities to grow our feed business, which I'll come to in a moment.
On page 13, just summarizing our progress, if you like. I've touched on automation. We're very pleased with automation, both from a labor efficiency point of view, but also from an improving yields point of view. Initially, we had assumed that with automated deboning and the like, that yields would decrease. We've now been able to get to the point where we're achieving yields consistent with those delivered prior to automation, and we believe still with improvement to come. Automation progressing well and further opportunity both in New Zealand and then across the rest of our network to improve the operation of our plants and farms and the like over time. Labor productivity, we've delivered on all the key EBA agreements through the primary plants. That gives us the platform for the next three years to continue to deliver labor productivity.
We're now seeing a significant reduction in overtime and extended hours, which is necessary to deliver the elevated FY 2017 volume levels. We expect, as I said earlier, for more settled operations to deliver an improved operational performance off the back of both automation and the platform that the EBA agreements provide us. Procurement is progressing really well from the targeted areas. We'll need that also to help offset some of the increases in cost, like electricity, which I'll come to in a moment. Increasingly, we'll be moving from a goods focus, if you like, to a services focus will be the next phase of procurement activity. We're also seeing cash flow benefits as a result of our procurement initiatives. For instance, inventory financing from our feed or grain procurement activity. The capital projects are going well.
We are seeing an opportunity to rephase some of them as our efficiency improves. The better performance we get from farming, the more yield we get from the existing number of birds through our plants, then the less need there is to expand capacity, or at least we can defer that in terms of time. There's a capital benefit, if you like, from the improved operations as well. We've touched on some of the other restructuring that's going on, remembering that we're midway through the execution of our five-year strategy. We expect to be able to, or our objective is to be able to, fund restructuring costs from things like asset sales and so on as we progress. Of course, if that's not the case, we'll let you know. That was the case in FY 2017.
We have some further asset sales in FY 2018 with Wanneroo in W.A., as we move to invest in a new feed mill, exit our existing operations and release that land for sale, and a smaller site in Lavington in New South Wales. Which, again, we would expect to go a fair way towards funding, not only generating cash, but funding restructuring, as we progress through FY 2018 on the execution of our strategy. Turning to page 14. Feed prices we've touched on. We're just reproducing a slightly updated graph there at the top that I think was in the prospectus. Over time, feed prices move. They typically flow through. We have that explicit in a large percentage of our volume in Australia, for instance.
Because we cover our nine months, we're at least as long, if not longer, than any of our competitors, and we're starting to see competitors push through price rises in the marketplace over the last six weeks or so. We followed that in the last week with a price rise letter of our own of some 3% going out to customers across the different segments. Electricity pricing is the key challenge for us. I think for reasons that are well-known, the failure of the market essentially here in Australia for what is an outstanding, sorry, not outstanding, amazing position to find ourselves in as a country. Nonetheless, we're seeing those sorts of electricity price rises coming through. Although they're tending at the moment on the futures market to peak in FY 2018 coming off in FY 2019, we've got a major focus on that through our procurement teams.
Fundamentally, we expect to both utilize Accelerate benefits to help offset some of that inflation, which was always the intent, if you recall, that Accelerate was always intended to fund both cost inflation across the business, as well as improve returns for shareholders. The other focus that we're taking is recovering those cost increases in the marketplace, and again, that was part of recent competitive moves to increase prices. Thirdly, we're set out to significantly improve our own energy efficiency across the supply chain, as well as ensure the robustness of our supply chain in the event of any shocks to electricity prices. They're the facts, both feed and electricity moving up. We believe that our strategy positions us well to offset some of those price increases and ultimately recover or gain benefit from price movements in the marketplace.
On page 15, we've just summarized our organization, which continues to evolve as we move through the implementation of our strategy. We've now simplified operations, particularly in Australia, under Janelle as COO, with an integrated view across the supply chain, farming, primary processing, further processing, and supply chain or distribution itself. Adrian running New Zealand, Quinton and Jonathan with the other key responsibilities, Ian, Meg, and Julia in support roles. That organization will continue to evolve, and we continue to find the right balance of deep chicken experience that we have in most of those key operational people, as well as people coming in from parallel industries or with experience elsewhere. Turning to outlook. Fundamentally, our strategy implementation remains on track, and we've had a good start to FY 2018.
We are seeing that the cycling of the customer, everyday low price initiatives, which we will see in the Australian poultry volumes. As I said, a lot of that volume last year was negative value, if you like, and we look forward to improving the profitability, if you like, from a more settled operation this year. New Zealand performance has continued into FY 2018, which is pleasing, and Accelerate benefits, as I've talked, expect to help underpin cost reduction and offset some of those inflationary pressures within the business. Asset sales support cash flow, generate or help reduce debt further, and we expect them to offset ongoing restructuring costs. We are looking to or carrying out a strategic review of our stock feed business. This, if you like, is our third-party feed sales, which we've talked about before.
We have a very significant feed network, 10 feed mills across Australia and New Zealand. Some of them doing a mix of our own use and third-party feed sales, two of them dedicated third-party plants. Around 40% of the volume, which totals around 1.6 million tons per annum, 40% of that going to third-party sales. We're the only player really with a national network in Australia. We're the only one across Australia and New Zealand, and we believe it's a growth opportunity for the business to not only leverage the network, but our expertise in procurement, nutrition, and the technical side of animal feed.
Although our focus will always be on supporting our core poultry business, we do believe there's potential to leverage the growth in protein, whether that be beef or pork, through delivery of or growth of our feed business rather than directly into some of those proteins themselves. We also have a very profitable horse feed business, which there are also opportunities to grow. We'll progress that review over the next six months or so and update you on progress. It is an opportunity for us to grow another part of the business. We do expect CapEx levels to reduce, as we've said before, FY 2017 was the peak CapEx level. Ian's touched on capital.
We did also see opportunities to continue to invest in the business, and especially as we lift our sights, if you like, onto some of the areas that I mentioned, farming, further processing, feed, and the like, there may well be opportunities to invest. From where we sit now, we expect CapEx levels to reduce. In the appendix, we've simply lifted a couple of sections of the stat results, or the accounts, sorry. The pro forma to statutory reconciliation is listed there on page 19. I won't go through it, but it's for your information. On page 20, we've tried to summarize the provisions and how they've moved through the period. You will see that the, I'll call them good provisions, if you like, around being conservative around the inventory, doubtful debts, and the like, we've increased provisions.
The closure of Cardiff and the restructuring of head office and moving from Liverpool to North Ryde, and the consequent change in headcount account for virtually all the remaining provision moves. You'll see they're both in employee benefit provisions due to the number of long-serving people in those locations, and then the specific provisions related to Liverpool and Cardiff that you'll see listed through the page. You'll also see that we're carrying some further restructuring into FY 2018. As we said earlier, we continue to execute our strategy, and that's not without restructuring costs. It's always healthy in a business to make sure that we can continue to restructure but also absorb those costs. On page 21, we simply summarize the risks in the business as per the financial statements and consistent with what was in the prospectus.
I'll stop there, and we'll go to questions.
Sure, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a 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 the hash key. Our first question is coming from the line of Craig Woolford from Citigroup. Please ask your question.
Morning, Mick. Morning, Ian.
Hey, Craig.
Morning, Craig.
Just wanted to start off with the comments around pricing, just get a bit more clarity about what you've seen in recent weeks. I think you said on the call there that there was a 3% price rise. Is that across supermarket and QSR channels, and has that been accepted by the customers?
Yeah. Two things, remembering that I guess there's two aspects to pricing. One is the deflationary effect of feed, which we've talked about, and that'll start to reverse simply through feed pass-through and the like. The price rises are slightly more complicated than that. What we've seen from at least three competitors is price rises in the marketplace. You tend to see them first in the wholesale channel, which is effectively a spot market, you see what's happening pretty much every week there. We have issued a price rise letter, which was for 3%, but that will flow out differently. That's more immediately affected within the spot market, the wholesale channel, obviously. It can flow through to parts of the food service channel and parts of smaller quick-service restaurants, smaller retailers, and the like.
Many of our supply contracts with the larger customers have clauses related to significant movements in cost. That then is, you sit down and you discuss those movements, and we'll work through that process over the next little while. Then, of course, some of them also have cost pass-through mechanisms, which are more automatic. That's the array of things, if you like, and that's what's playing out in the marketplace at the moment.
Would you say that this price increase that you observed in the wholesale market and from some of the competitors more reflects feed or electricity?
At this stage, we'd say feed, because in our own case, I probably should have said, electricity is still ahead of us because we're coming off longer-term supply contracts. That'll start to bite us in the second half, which gives us some time. We believe that our competitors perhaps might be feeling those price rises more immediately than us, there could be some electricity coming through. We would say it's probably more feed at the moment, remembering that we tend to have nine months cover, and certainly the smaller players would be two to three months at best, probably.
Right. I guess one question, and we'll have to, I guess, find a way to resolve this going forward as well, is how do we as outside observers look at and quantify your Project Accelerate savings? We know what you've said in the prospectus. How do we actually see that in the P&L?
Yeah. It comes through, I guess what Ian talked about there was the majority of it should come through in the cost of goods. We would expect and we are seeing it, but we would expect over time that you should be able to see progress there. At the higher level, just to remind people that we're midway through that five-year strategy. We said by about the end of this financial year, we've probably got roughly half the benefits flowing through into the P&L, remembering that we've improved earnings a fair bit through back end of FY 2015, 2016, and now 2017. Good progress. Those benefits are coming through.
We've not tried to forecast exactly what might get through to the bottom line except to say, well, we're still short of our double-digit EBITDA margin target. It's more a case of when we get there, and as you're well aware, different people probably have a different view of how much might get through to the bottom line versus what might get competed away or absorbed in cost increases. We're not commenting on that except to say we've got two or three years of hard work ahead of us to get to where we want to be.
Right. You said you're halfway through, and it's in the P&L. Of AUD 160 million, you've got AUD 80 million.
Yeah, roughly.
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Yeah.
Okay. Lastly, just on the working cap, the level of working capital that was seen at the end of FY 2017, is that a good barometer of how you see the working capital level going forward?
Hi, Craig, it's Ian. Yes. Yeah, it is. If you take out the inventory finance, which is really a vendor payable, but wasn't that significant at the end of June, you look at that working capital that drives that cash conversion to 100%, so we'd expect these levels to maintain. Obviously, if you have your revenue increases, you'll see a slight movement there, but it's fairly stable.
There's probably two just timing things that we tend to generate more cash in the second half because we're building inventory certainly into the busy quarter two when turkey products into Christmas, some of that then gets released in the second half. There'll be a bit of half on half and also, just timing of year-end because we run the 52, 53-week.
Yeah.
That does depend exactly when that year-end falls. Generally speaking, this is a circa 100% cash business.
It is. The good news is FY 2018 falls at the end of June, so it'll be a normal kind of year-end.
Okay. Yeah, of course. Okay. Thank you.
Our next question is coming from the line of Ben Gilbert from UBS. Please ask your question.
Morning, Mick and Ian.
Good day, Ben.
Just first one from me, I'm going to try this. We'll see how it goes. Just in terms of the Project Accelerate in terms of what you're realizing, just again, obviously it's sort of difficult for us from looking from the outside, but it looks like you probably realized more of that in the fiscal 2017 year than maybe you envisaged in the prospectus. Then instant comment on that, and then secondly, the additional restructuring costs that you had through fiscal 2017, I think about AUD 7 million more if we assume it nets out the property. Was that accelerating the cost out, so you're doing projects earlier to try and take cost out more quickly?
On the first one, we would say that it's not so much that we were ahead in FY 2017, I'd say we're broadly where we expected to be. There are probably two impacts there. I'd say we're probably ahead on many of the elements of Project Accelerate, but we got drowned out a little bit, if you recall, from the higher-than-expected volume growth, which then translates in the short term to more overtime and more labor cost. As our new EBAs kicked in towards the back end of FY 2017, we're starting to see some of those labor efficiencies come through. As we've settled the plants, that's what I mean. Sometimes volume growth is a double-edged sword in this business because you can get drowned out in the short term.
Probably towards the end of FY 2017, we started to see some of those yield benefits, labor benefits come through a little better than we would've expected. I'd say the main reason for the improved performance was that we weren't assuming an improvement in the New Zealand market, but it started to improve through the second half, which is really encouraging. The second question around restructuring, yeah, your numbers are roughly right. I like to run a business where restructuring just is normal. It happens every year, you don't want to be sitting there saying, "Look, I don't want to restructure even though it's the right thing to do because I'm worried about the restructuring cost." That's the way we like to run it. Our incentive schemes, for instance, the STIP assumes that we will manage restructuring costs in the normal course, if you like.
In other words, we absorb them, that's partly because we believe there's still assets to be released from the business as we become more efficient. Of course, that can be different if there's a significant restructuring, if you like, the closure of a plant or something, which we would aim to call out to investors before we do it. That's our approach, yeah, we absorbed AUD 6 million or AUD 7 million of restructuring in the accounts there, and we're carrying another 2 into FY 2018 with activities underway. In terms of bringing forward, yeah, look, there's probably a little bit of that, we always assume that we're partway through not just a capacity or a hard capital exercise, but a capability exercise.
We have great people in Inghams, we also need to renew and refresh, add key skills in critical areas, whether that be marketing or consumer insights or category management or new product development, and we want to be able to do that without adding to the total cost base. It's more about funding the evolution of getting to where we want to be over that five-year journey.
Great. Just following up from Craig's question about how you do the aspirational, that 10% margin target for Australia, you sort of mentioned there's two to three years of hard work to do from here. Does that suggest that, I suppose, sort of the aspiration is to be able to get to that sort of circa 10% margin in Australia by the end of fiscal 2020?
No. You'll have to draw your own conclusions there, because, look, there are so many variables in a business like this. All I can say is that we believe we can improve the fundamental performance of the business. We think we're demonstrating that over the last couple of years. You may always have a tough half or a tough year for some set of circumstances. If we look at both domestic benchmarks to the extent to which they're visible, either here or in New Zealand or international benchmarks, then yeah, you've certainly got to get up to the double digits, I would have thought.
Final, I have a quick one for me. Just on beef prices, they're sort of down quite materially in the wholesale channel over the last couple of months. How are you thinking about that dynamic in terms of demand? Because obviously quite a high level of substitution can happen in proteins if we're to start seeing that flow through to lower beef prices over the next 6-12 months. How's that sort of factoring into your thinking about returning to that sort of circa 3% type market growth for poultry?
Yeah. Two things. We would say in the short term, that relativity can be up a little bit or down a little bit. If you look at the broad sweep of history across 30 or 40 years, it's only been one way. Some of that beef is coming back in because a lot of the, I call it secondary cuts, have been in freezers for a long time. Some of it's coming up to use-by dates. If you look at herd numbers for beef, then no one's forecasting a significant increase in cattle numbers, because the herd has to be rebuilt, which will take a couple of years. While you're always subject to what's happening in the export markets, and there may be some short-term closing of the gap, we're not seeing it as a material impact at the moment. Not to say it couldn't be.
It might be, but across the medium to long term, that trajectory has only been one way, and we expect that to continue because of chickens' continued outperformance on the fundamentals of genetics, nutrition, and farming practices, which mean that in the end, the feed conversion rate of chicken continues to rapidly improve and beef and lamb is not getting any better.
That's great. Thanks, Mick.
Our next question is coming from the line of Paul Bassat from Credit Suisse, with ask a question.
Morning, guys.
Hey, Paul.
First one, just a quick one, probably for Ian. Just on the net interest expense, which was a bit above prospectus, and I think you called out, I guess, the setup fees for inventory finance. That was above prospectus, notwithstanding the fact that your net debt and cash flow were both better than prospectus. I just wanted to get an idea, I guess, I suppose of the non, well, A, confirm that those setup costs are non-recurring, and B, just get an idea of, I guess, the quantum, if any guidance you can give, so we can get an idea of what was the non-recurring elements in those net interest expense.
Yeah, I can. Hi Paul. Firstly, the cost of the inventory finance is certainly one-time, and in the order of a half a million AUD, just slightly over. The other kind of drivers against prospectus was purely the timing of cash flow. When we did the prospectus, we obviously estimated cash flows and impact in terms of that on your interest expense, and we were out by a couple of hundred thousand AUD at the end of the day.
Okay. Broadly speaking, because the second half was up on the first half. I'm still talking net interest expense. No higher than the first half and likely below, given your debt levels now on a sort of annualized basis going forward?
Yeah. Obviously, the way the facilities are structured as well, we have tiers in terms of where the interest rate drops down at certain points. You'd certainly not expect it to be worse.
Okay. Thank you. Next one, Mick touched on this a bit earlier, but just on kind of the next phases of the Project Accelerate benefits, those sort of other phases that you had flagged at prospectus and said you're looking at more and more. I'm just looking for a bit more color on that, I guess, how it's going. I know growing fees were one of the initiatives you're looking at there, but just to get an idea, I suppose, on a bit more color on those and when you expect those to start to flow through.
Yeah. Thanks, Paul. If I just quickly touch on a little bit of the flavor, because it is more a case that we're lifting our sights and getting to them now, if you like. Farming, for instance, we have moved farming in Australia to a national structure. We've brought in a very experienced person to run farming from the U.K., over 20 years experience in the U.K. industry. We're starting to manage farming in a much more efficient and joined up manner, which we always knew was a possibility. For the first 18 months or so that I was here, we were tied eggs, there was kind of a limit to what we could do. We're starting to see operational improvement. Secondly, we're working with the grower groups to restructure the contractual arrangements.
These are long-term contractual arrangements, as we improve the way those contracts work, mainly around the cost of capital and how we remunerate that cost of capital, you'll start to see that flowing through over multiple years. In other words, across five and 10 years, which is the length of the contract. Remembering that these contracts were premised back in high interest rate days, we're very dependent upon our growers. We want to work cooperatively with them. The days of 10% and 12% returns or needing 10% and 12% returns are clearly over. 7% or 8% is perfectly adequate. There's a lot of interest in investing in farming at those sort of returns. Across the 300-plus farms that we have, that's only a significant gap, but it will flow through over five or 10 years. Quite a bit going on in farming.
On FP, the further processed network, we've called out before that we run a very good FP network, very high quality, high standard. That we have spare capacity, and it's a case of you either utilize that capacity or look to more efficiently run our FP network. We'll work through that over the course of FY 2018. We were very focused on the primary processing network coming in because that was where we saw the biggest performance gap. Our FP network operates very well, but there are certainly opportunities there. Feed, I've talked about. We believe there's an opportunity. We're biased to growth in that third-party feed channel, so I won't repeat all that. Exports is very careful, very measured growth.
Some of you have heard me talk about exports and the risk of export volume in a business like this, and the challenge of competing on a cost basis out there in the big, bad world. High-end premium exports is something that we'll be focused on. That'll be a 5 or 10-year strategy. It won't be a 5 or 10-month strategy. That probably gives you a flavor, Paul.
Thank you. Yep, thank you. Last quick one from me, just a bit of a follow-up on Ben's one earlier, but just on your comments around Aussie volume growth expected to align more closely with historical trends. Do we read into that that's that sort of system level plus a little bit more for continued competitiveness for poultry versus other proteins? Just to get an idea of what your view of historical trends and when you say more closely, given that you are cycling a lot of volume upside this year, just trying to work out which way that lands.
Yeah. If you look at it, I guess if poultry volumes were increasing in Australia around, I think 8.8%, if you look back across a decade or two, you won't find too many years like that. It's more typically 3.5%, 4%, probably the industry growth. I don't want to be too specific because I'm less worried about volume growth in the short term, because our objective is more to extract profit from the growth we've already got, if that makes sense. We're comfortable with wherever it lands in FY 2018. To handle that volume increase in the course of last year, we had to limit sales or production, if you like, in order to look after our core customers. That meant, in some cases, that we were dropping even profitable volume because we had to make choices.
As we cycle some of those EDLP initiatives, for instance, the BBQ Bird at AUD 8 or AUD 7.90, that will start to level out. We've lost some of the other volume that we had to drop. At the same time, every day and every week, we're out there competing, so it will be what it will be. We're more focused on extracting value from that volume through FY 2019, FY 2018. I'm just making sure that no one thinks that 8.8% is normal.
Okay. Got it. Thanks, guys.
Our next question is coming from the line of Michael Pitt from Goldman Sachs. Please ask your question.
Morning, guys. Just noticing a promotion in Coles and Woolies at the moment, this AUD 4 whole birds, down from AUD 4.50. Is that another initiative out there? It doesn't look like massive volumes they're probably going to go through, who's funding that?
Typically, almost exclusively, the customer is. I can't speak for competitors, but for us, the customer is funding that. The only variance to that is that there may be times when we're long. For instance, in that particular case, we may be long on some small birds as the market has rebalanced, having cycled all that EDLP activity, and we may contribute to that extra drop from AUD 4.50 to AUD 4. I think there's only two cases where we've done that. One was around drumsticks through the course of last year because we're structurally long on drumsticks. Occasionally, we might look to shift more whole birds through that sort of promotion that you mentioned. You'll notice that they're typically for a week or a few weeks.
They're not typically, at least the ones that we're engaged with, they're not like BBQ Birds where they're a permanent price drop.
Okay. What are you cycling now? You've now cycled the BBQ Bird promotion. How far off have volumes dropped off that period that you're now cycling?
No, not really. Remembering, though, there's BBQ Birds, there's breast fillets. If you go back a little bit before that, there's drumsticks, there's whole bird that you talked about. Probably one or two others that I'm missing. What we're seeing is that the BBQ Bird introduced more seasonality into the business. When I first came in, I struggled to find much seasonality. We are seeing that there's more seasonality around that product, that consumers are more inclined to buy that product on a 35-degree hot day because they don't have to cook at home, and they can grab some salad with it, and it's a healthy meal for the family. That's less true on an eight-degree day in the south of the country in winter. We're seeing more seasonality would be the only thing we'd probably call out there.
Again, back to the overall volume comments, we're just looking to make sure that we are cycling that. That's just a mathematical reality, if you like, and we're more focused on extracting profitability from the volume we've got.
Okay. Just on your net debt, I noticed there's AUD 149 million of cash sitting there. Is that just a timing thing? Were you paying down the long-term debt there or?
Hi, Michael. I mean, the view at the moment is, we'll obviously sit on the cash. We're looking at a number of different options and opportunities. Clearly, we'll work out what the best way to extract value through the money markets is. Certainly, in the next six to nine months, it depends on what we're looking at to do with the business.
We won't be giving it away, though, Michael.
Oh, yeah.
We do expect that for all the cash generation reasons we've talked about, that we'll be in a good position on net debt, which gives us options, whether that be dividends or other opportunities that Ian's mentioned.
Excluding any other opportunities, do you expect your net debt should drop, obviously, for this year?
There's a little bit of timing in that without going through the detail. With the first half, you pay out dividends, and you have inventory build into Christmas and a few other things. Typically, you'll see stronger second-half cash than first-half cash. We expect that cash generation to continue.
Okay. Last one, I'm just looking at note five, the accounts say it's AUD 64, you've got that net gain on the divestment of the property of AUD 6.9. What's the AUD 3.5 of other there as well?
The AUD 3.5 relates to the Hamley Bridge farm that was destroyed in the bushfire. That was obviously subject to an insurance claim. What you get there, Michael, is where you recover more than what the book value is, you have to book that as an accounting profit. That was booked in the week 53 stat accounts.
Right. It's not in the pro forma number of AUD 195?
No.
Right. Excellent. Thanks, guys. Cheers.
Not a problem.
Our next question is coming from the line of John Purtell from Macquarie. Please ask your question.
Good morning, guys.
Hey, John.
Hi, John.
Had a couple of questions. To clarify your outlook commentary there on slide 17. Based on the factors you've identified, I mean, is it fair to say that you're expecting profit growth in the year ahead? I do note your comment that Accelerate benefits are expected to underpin profit improvement.
Yeah. We see no change in trajectory from what we would've talked about, although we were focused in the IPO process on FY 2017. We see no real change in trajectory to four years around what we believe we can do with the business.
Thank you.
That includes growing profit in FY 2018.
Yeah. Thank you. Look, the second one, just in terms of electricity costs, are you able to provide some form of quantification of what they represent on an annual basis pre-mitigation in terms of the step-up?
Yeah. Our total utility prices are circa AUD 60 million, but that includes gas, water, electricity. Around AUD 30 of that is electricity. Because we're covered partway into FY 2018, some of the price increases don't bite until the second half. That may give us some price timing issues, if you like, as it hits, and we're looking to recover it in the marketplace. That increase across two years, so across FY 2018 and FY 2019, on what we see now, is circa AUD 20 million. It won't all hit in 2018. It's progressively across 2018 and 2019. Broadly speaking, therefore, some 65%-70% unit price increases is what we're seeing, which we believe is consistent with what others are seeing. We've moved from a forward contract basis to more probably the way we acquire grain, which is looking to buy in tranches, lock in tranches as market opportunities develop.
We have coverage across a proportion of electricity all the way out into FY 2019. We'll continue to build that. We have a reasonable degree of certainty around that cost of that AUD 20 million full year, which is only half of that round numbers would be FY 2018. We're expecting to recover half of that or more in the marketplace and offset the other half through energy efficiency initiatives, is the broad plan. That's the challenge facing industries like ourselves, and I'm not entirely sure that everyone's aware of the extent of the market failure here.
Thanks very much.
Our next question is coming from the line of Phillip Kimber from Evans and Partners. Please ask your question.
Hey, Phil.
Your lines are now open. Please ask your question.
We've lost you on the phone. We can't hear.
Yeah. I'll move on to the next question. Our next question is coming from the line of Andrew Rooney from Morgan Stanley. Please ask your question.
Hi, Mick.
Hi, Mick. Hi. Morning, Ian.
Andy.
A question on, I know in the prospectus you disclosed your LTI targets. Are you willing to disclose what the threshold and max EPS growth is required to hit your LTI?
I don't believe we do. I might have to take advice on that. We'll publish our annual report and the REM report will be in the accounts. I don't believe we've published the LTIP targets, no. Apart from the fact that going forward, the LTIP scheme for FY 2018 looks like it's structured the same way as the FY 2017 in terms of EPS and relative TSR. I don't believe we've published the targets, except we expect them to increase. We expect the EPS to increase.
Okay, thanks. Maybe just secondly, are you willing, given the electricity price increases and the changes, are you willing to make a comment whether you're comfortable with FY 2018 consensus?
That's a different way of getting guidance. Look, if we were concerned about that, we'd say so.
Okay, great. Thanks for that.
Our next question is coming from the line of Phil Kimber from Evans and Partners. Please ask your question.
G'day, Mick. Can you hear me now? Phil Kimber.
Yeah, got you, Phil. Sorry about that.
Cool. No, no worries. Just was a follow-up to Michael Pitt's question around that AUD 3.5 million . That was in the 53-week, so it was not in the FY 2017 year?
Correct.
Will be in the FY 2018 year?
No. No. It's actually in the stat accounts. From a stat account perspective, it's obviously recorded in the 53 weeks, but not the pro forma 52 weeks that we've obviously spoken to here. Just for context, in case not everyone remembers, but we run a 52, 53 with the 4/5 calendar. FY 2017 was a 53-week year, but the prospectus forecast was 52 weeks. Yeah. Therefore, the pro forma account or the pro forma numbers that we're commenting on today are 52 weeks. The stat accounts will show the 53 weeks. Yeah. Then how you get from one to the other. Yeah.
Yep. Okay, that's great. Then just on feed costs, you'd mentioned them going up and, I mean, looking at wheat, it really spiked in July but has come back. Do you have, I think wheat's 60% or 65% of your feed cost inputs. With the Australian dollar where it is, are you expecting material feed cost increases over the years?
Certainly. Remembering, though, I repeat, we're covered for, on average, 9 months. We believe that that's longer than any competitor, and certainly longer than the small ones who aren't covered. There's 2 issues with feed prices. One is the absolute, and yes, on current numbers, there will be an increase in wheat. Soy's moved around a little bit, but not as much. Of course, wheat can move depending on weather forecasts and all sorts of things. It's hard to predict for obvious reasons, but we would expect feed prices to be moving up. Certainly, if we were trying to cover long now, it would be at higher prices. Let's put it that way.
The second, and the most important thing, is relative position on feed. We believe we're well positioned from a relative position versus competitors. That means that others need to be moving prices before we do, which creates the right sort of market dynamic for us.
Can you give us any sense, Ian, and then obviously it feeds back through the revenue and pricing line, in FY 2017, what feed costs would have moved by and what you'd expect, broadly speaking, them to move by in FY 2018?
Well, look, on the first one, I'll just give a logical rather than accounting answer, which is that typically you would expect if our volumes are up 8.8% in Australia, for instance, and revenue only 3.3%, then a fair bit of the difference there is feed. Some of it's mix, but a fair bit of the difference there is feed. It's harder to predict going forward, which is why we just put the history there as 10 or 12 years. You can see for yourself how it moves. We're comfortable that over time, feed prices, we expect to pass through for the reasons mentioned.
Some of it's hardwired in contracts, some of it's just the market dynamic. Your only real risk is price timing, which means in any particular half you might get squeezed because cost prices have gone up faster than your ability to pass it through, whether it be electricity or feed, by the way. Over the medium to long term, it balances out.
Okay. That's great. Thanks, Ian.
There are no further questions at this time. I would now like to hand the conference back to today's presenters.
Okay, thanks very much. Thanks, everyone, for your time. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.