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. I must advise you that this conference is being recorded today, Tuesday, 22nd August 2017. I'd now like to hand the conference over to your first speaker today, Mr.
Ming Mingman, the CEO of InHAN. Thank you. Please go ahead.
Thank you, and good morning, everyone. Thanks, everyone, for joining. I'm Nick McMancy, E. O. Of Ian's and I'm here with Ian Brandon, our CFO.
And Quentin Hildebrand, our Chief Commercial Officer, to present our FY 17 results in what has been a landmark year in the long history of Ian's following our IPO in November. So I'm pleased to say and I'll be stepping through the the slide back that released to the ASX. I'm pleased to say we, met or exceeded our prospectus forecast. Especially for volume and profitability financial performance with EBITDA of $195,000,000 versus the forecast of 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 challenge, with chicken being the competitive protein again red meat and other proteins. As I said, New Zealand experienced a much improved market dynamic in the second half has continued into FY 'eighteen. And 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 of our primary processing plants, but within better yields and lower operating costs within those plants and we've made good progress on labor efficiency, procurement benefits and other initiatives, which underpin earnings improvement over the next a 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 new or the extended hatchery, the new breed of farms and the South Australian seed mill well underway. So very good progress from the financial point of view over on slide 4. That simply summarizes that poultry total poultry volumes up 11.5%, but pork chicken and turkey up 7.5%, which the the 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. So core chicken and turkey volumes up 7.5% across the business. Revenue up 3.3%, remembering that revenue is not a good proxy for business given that feed pass feed prices tend to pass through. And, in a period of deflationary feed prices, then your revenue will be lower than your, than your, volume growth. But we're able to translate that volume growth through into gross profit increase of 8% EBITDA increase of 16 percent net profit increase of 22.8 percent and a very strong cash performance which pulled our net debt down below $300,000,000 and the leverage ratio of 1.5 versus around 2.2 at the time of the IPO and uh-uh a view that getting below 2 would be rejected by the end of the financial year.
So 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 kind of, plant in one other property And, some profit on sale from those was, 100% offset by restructuring costs as we continue to implement our strategy. So one offset the other and the EBITDA performance is a clean performance, if you like, reflecting the operation of the business. And we'll come to some of the provisions later in the presentation. That allowed us to deliver earnings per share, cents a share up, over 22%.
And a final dividend of $0.095 a share, which is at the top of the range, forecasting the prospectus being 70%. Of pro form a 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, but very strong poultry volume growth again, overall volume showing 13.4, but that that was, affected by the change to So the real number is the 8.8%. And it's fair to say that the volume growth was a challenged integrated supply chain, but we've managed to convert that through to profitability. More importantly, perhaps is that our operation to more settled as we enter into FY18.
We're seeing the benefits of improved farming, improving yields and efficiency of the strategy, which places us in a good position as we run into next year, remembering that some of that volume, in FY 'seventeen was not profitable, but growth in some product lines, it also creates a fallout, as we call it, and a lot of product, which ends up being cleared. So we're looking forward to a more settled FY18, when we can settle down operations and and really get the benefit of that volume growth delivered in FY17. Chicken does remain the competitive protein. As we said, our customers continue to invest in and driving chicken volume with chicken sales through to their own consumers. We are now cycling that invest the large supermarket chains at as we run through FY18, but remembering again that some of that volume wasn't profitable.
So even though our volume a greater volume growth will be affected by that cyclical volume as we run through FY18. We would say also that QSR, the quick service restaurant channel has also shown very strong growth. There is increased competition in the further process segment from another smaller competitor who acquired a small player. But, nonetheless, very, very good growth in in QSR market point of view, we've seen wholesale pricing recovering the East Coast in on the East Coast in recent times as a lot of that EDLP, the industry volume is not our volumes flowed through the system. So the wholesale channel has firmed up in recent And, although we're seeing very significant improvement in 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. Zealand experienced it's our 1st half with Since we've seen that reverse, if you like, in the second half, 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 into that trend has continued. We're seeing the New Zealand team has done a particularly good job at growing our premium brand called White House continued to supports profit improvement in that business. And I'm very pleased to say that we're off the back of the 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 in Rome.
Again, in New Zealand, turning to the EBITDA percentage, although they had a challenging first half, still delivering an EBIT is the 1st benchmark with, of course, that we'd like to get the Australian business to over time. So with that overview, I'll now hand the financial results.
Thank you, Mick. On slide 8, the pro form a profit and loss, the STRUGA 3.3 percent year on year and 0.4% and sorry, the growth in New Zealand in the second half. Really helped us to drive the revenue line. That was up 3.3% just slightly ahead of perspectives there. As Mick commented earlier, devices, So the lower fee prices did pass through in the FY 'seventeen year and that's how we demonstrated that in the prospectus The EBITDA growth of 16.4% and the and 2.6% versus perspective driven by project to accelerate.
That continues to dissolve and obviously improves our margin. The the key to the profit on sale the mix spoke to, we also incurred the same cost in restructuring that completely offset that. Those costs were split between the cost of Google and administration expenses. So the gross profit margin, which was in line with perspective, also included that. So that was a place in result.
The impact really shows the net financing costs pretty much in line with perspectives, just slightly ahead and that relaying setup costs and the tax is the effective rate was in line with prospectus, but of the higher tax expense. On page 9,
the pro form a cash.
Operating cash flow conversion at 105% did include the commencement of that inventory financing that it was 100% cash conversion. The net debt, as Mick said, became less than 300.5 times and certainly that's where we were aiming to be at below the 2 mark pleasingly working capital And 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 $85,000,000 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. And third party, yet to be recovered relates to the South Australian feed mill and the South Australian breed of farm expansion that we've spoken to previously.
And as mentioned in the previous ones, the asset sales really relate to the Cardiff processing plant that closed in September last year. And a Monington hatchery that we sold at the end of the year. With that, I'll hand back to Mick.
Thanks, and turning to a quick strategy update. Essentially, our strategy is 1 of operational excellence continuing to improve the business that we have with pathway through a multiyear strategy and we'll be continuing to execute against that strategy. 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 Ingram's 100 years history. It's been the best in Australia and New Zealand, but increasingly our customers are international.
In their outlook, whether that be Aldi or KFC or McDonald's or increasingly, the likes of cows and Woolworths populated by people with international experience. So we need make sure that, we can, be across what's happening elsewhere in the world engaged with our customers on what they've seen elsewhere and make sure that we're as good as anyone in the world. And we believe we are well on track to achieving that objective. Page 12 summarizes the Accelerate strategy There's no change to this slide and we're now, I guess, 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. And I'll touch on them in a minute.
And increasingly turning our focus now also to opportunities in farming in our further process network which is still significantly underutilized, providing opportunities for growth. Exports that I've touched on And we do see opportunities to grow our feed business, which I'll come to in a moment. On page 13, just summarizing 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, would would decrease. And we've now been able to get to the point where we're achieving yields consistent, with those delivered price automation and and we believe still with improvements come.
So so automation progressing well and further opportunity, both in New Zealand and then across the rest of our network to, 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 3 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 'seventeen volume levels.
And we, we we expect, as I said earlier, from more settled operations to deliver and improved operational performance, off the back of both automation and, the EBA platform that the EBA agreements provide us procurement is progressing really well, from the targeted areas. We'll need that also to help help offset some of the increases in cost like electricity, which I'll come to in a moment. And increasingly, we'll be focused moving from a from a good focus, if you like, to a services focus will be the next phase of procurement activity. And we're also seeing cash flow benefits as a result of the App Procurement initiatives, for instance, inventory financing from our seed or or grain procurement activity. The capital projects are going well.
We are seeing an opportunity to refi some of them as our efficiency improves. So the, the better performance we get from farming, the more yield we get from, the existing number of birds throughout, through our plants, then the less need there is to to expand capacity or at least we can defer that in terms of time. So there's a capital benefit, if you like, from the improved operations as well. And we've touched on some of the other restructuring that's going on, remembering that we're midway through the execution of our 5 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.
But that was the case in FY 'seventeen. We had some further asset sales in FY 'eighteen with Wanna ruined WA 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 Leppington 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 FY18 on the execution of our strategy. Turning to page 14. The 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 And over time, feed prices move, they typically flow through.
We have that explicit in a large percentage of our volume in Australia, for instance. But because we cover, our 9 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 6, 6 weeks or so. And we followed that in the last week with a a price rise, letter of our own of some 3% going out, to customers Across the different it essentially, here in Australia for for what is an outstanding, sorry, not outstanding, amazing, position to find ourselves in as a country. But nonetheless, we're seeing those sorts of electricity price rises, coming through. And, although they're tending at the moment on the futures market to peak in FY18 coming off in FY19, where it where it got a major focus on that throughout procurement teams.
But 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 The other focus that we're taking is recovering those cost rises, cost increases in the marketplace. And again, that was part of recent competitive moves to to increase prices. And thirdly, we're we're set were 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 process.
So 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 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 the supply chain farming, primary processing, further processing, and supply channel distribution, itself. Adrian, running New Zealand, Quintin and Jonathan with the other the other key responsibilities. Ian Meg and and Julia in support roles.
So that that organization will continue to evolve and we continue to find the right balance of deep chicken, experience that that we have in most of those key operational people as well as people coming in from parallel industries or 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 the the cycling of the customer everyday low price initiatives, which we will see in the in the Australian poultry volumes. But 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 from a more settled operation this year. New Zealand performance has continued into FY18, which is pleasing.
And accelerate benefits as I talked to expect to help underpin cost reduction and offset some of those inflation refreshes within the business. Assets 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 is the line is our 3rd 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 2 party feeds are 2 of them dedicated third party plants, and around 40% of the volume, which totals around 1,600,000 tons per annum, 40% of that, going to 3rd party sales. So we're the only player really with a national network in Australia. We're the only one across Australia and New Zealand And and we believe it's a growth opportunity for the business to not only leverage the network, but our our expertise in procurement, nutrition, and and and technical, 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 it be beef or pork, through, delivery of or or growth of that feed business rather than directly some of those proteins than themselves. And we also have a very profitable horse feed business, which there are also opportunities to grow.
So we'll progress that review over the next 6 months or so and update you on progress. But it is an opportunity for us to grow in part of the business. We do expect CapEx levels to reduce, as we said before, FY17, was the peak CapEx level and touched on capital. But we did also see opportunities to continue to invest in the business And especially as we lift our sites, if you like, onto some of the areas that I mentioned farming further processing feed and the like, then there may well be. Opportunities to invest.
But from where we sit now, we expect CapEx levels to reduce. In the appendix, we're we're simply, lifted a couple of sections of the step, results. So the, or or the, accounts, sorry. So the pro form a 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 we've tried to summarize the provisions, and how they've moved. Through the period, you'll see that the, I'll call them good provisions if you like around being conservative around the inventory doubtful debts and the like with increased provisions. Then the closure of Cardiff, and the restructuring of head office and moving from Liverpool to, to North Rhide and the consequence change in headcount. Account for virtually all the remaining, provision moons, that you'll see there 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 through the page. And you'll also see that we're carrying some further restructuring, into FY18.
As we said earlier, we continue to execute our strategy and that's not without restructuring costs. And it's always healthy in a business. To make sure that we can, continue to restructure, but also absorb those costs. And then on page 21, we simply summarized the risk in the business as per the financial statements and consistent with what was in the perspective. So I'll stop there and we'll will go to questions.
You.
Our first question is coming from the line of Craig Woolford from Citigroup. Please ask your question.
Just wanted to start off with, the comments around pricing. Just get a bit more clarity about, what you've seen in recent weeks. So I think you said on the call there that there was a 3% price rise. Is that across to the market and QSR channels? And is that has that been accepted by the customer?
Yes. So two things, remembering that I guess there's 2 aspects pricing. 1 is the deflationary effect of feed, which we've talked about, and that'll start to reverse simply through feed pasture and the like. But the price rises are slightly more complicated than that. I mean, what we've seen from, at least 3 competitors is price is in the marketplace.
You tend to see them first in the wholesale channel, which is effectively spot market. So you see what's happening pretty much every week there. We have issued price 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. So that then is you sit down and and you discuss those movements and and we'll work through that process over the next little while. And then, of course, some of them also have, price, cost. Pass through mechanisms which are more automatic. So that's the array of things, if you like.
And that's what's playing out in the marketplace at the moment.
And would you say that this price increase that you observed in the wholesale market? Some of the competitors more affect speed or electricity?
At this stage, we'd say feed because, in our own case, I probably should have said that that 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 that that those price rises more immediately than us. So there could be some electricity coming through, but but, we we say we would say it's probably more feet at the moment remembering that we tend to have 9 months cover and, certainly the smaller players would be 2 to 3 months at best probably.
Right. So the, 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 saving you know what you said in the perspective, how do we actually see that in the P and L?
Yes. Because it comes through, I I guess what Ian talked about there was, majority of it should come through in the cost of goods. So, we we we we would expect and and and, we are seeing it, but we would expect over time that you be able to see progress there. And, at the high level, just to remind people that we're kind of midway through that 5 year strategy. We said by about the end of this financial year, we'd probably got half the benefits, roughly half the benefits flowing through into the P and L, remembering that we've improved earnings sort of a bit through back end of FY 'fifteen, 'sixteen, and now 'seventeen.
So good progress here, those benefits are coming through. We've 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. So it's more a case of when we get there. And and, as you're well aware, different different, people probably have a different view of how much might get through to the bottom line versus what might get completed away or absorbed in in cost increases. But, so we we're not commenting on that except say we've we've got 2 or 3 years as hard work ahead of us to get to where we wanna be.
Right. So if you're half so you said you're halfway through and it in the P and L. So of $160,000,000, we've got $80,000,000.
Yes.
Okay. And 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, yes, it is. I mean, we obviously, if you kind of take out the inventory finance, which is really a vendor payable, but wasn't that significant at the end of conversion to 100%. So we'd expect these levels to maintain. Obviously, if you have new revenue increases, you'll see a slight movement there, but it's fairly stable.
There's a bit of, there's probably 2 just timing things that we tend to generate more cash in the second half because we're building inventory into certainly into the busy quarter 2 in Turkey products into Christmas with that some of that thing gets released in the second half. So there'll be a bit of half on half and also, just timing of the year end because we run the 52 53 week. That does depend exactly when that year end falls. But generally speaking, this is a circa 100% cash business.
And the good news is FY18 falls at the end of June, so it will be a normal kind of year end.
Our next question is coming from the line of Ben Gilbert from UBS. Please ask your question.
Good. Just first one for me. Just I'm going to try this and see if we can see how it goes. Just in terms of the project accelerate, terms of what you're realizing. Just again, it's sort of difficult for us in looking from the outside, but it looks like you probably realized more of that in the seventeen year, then maybe you envisaged in the prospectus?
And then just some comment on that. And then secondly, the additional restructuring costs that you had through fiscal 'seventeen, I think about $7,000,000 more if we assume that's out the property. Was that accelerating the cost out. So you're doing projects early to try and take cost out more quickly?
Yes. So on the first one, we would say that it's not so much that we were ahead in, in FY7. And I'd say we're broadly where we expected to be. There are probably 2 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 over time and more labor cost.
As our new EBA is kicked in, towards the back end of FY 2017. We're starting to see some of those labor efficiencies come through and as we've settled the plants that's what I mean. Sometimes volume growth is double edged sword in this business because you can't get drowned out in the short term. So probably towards the end of FY 'seventeen where we started to see some of those yield benefits, labor benefits come through a little better than we would have expected. But I'd say the main reason for the improved performance was that weren't assuming an improvement in the New Zealand market and but it started to improve through the second half, which is really encouraging.
The second question around restructuring, your numbers are roughly right.
I like to run a
business where restructuring just normal. You know, it happens every year and 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 costs.
That's the
way we like to run it. Our incentive schemes for instance, the stip assumes that we will manage restructuring cost, in the normal ports, if you like, in other words, we absorb them. And, that's partly because we believe there's still assets to be released from the business as we become more efficient. Now of course, that can be different if there's a significant restructuring, if you the closure of a plant or something, which we would aim to call out to investors before we do it. But that's our approach.
And and yeah, we we absorbed or $7,000,000 of restructuring in the accounts there. And we're carrying another 2 or 3 into another 2 into FY18 with activities underway. In terms of bringing forward, yes, look, there's probably a little bit of that, but we always assume that we're partway through not just a capacity or a hard capital exercise, but a capability exercise and And we have great people in Ingham's, but we also need to renew and refresh, and add key skills in critical areas whether that be marketing or consumer insights or category management or new product development or and we want to be able to do that without adding to the total cost base. So it's more about funding the evolution of getting to where we want to be over that 5 year journey.
Great. And just following up from Craig's question about how you do the aspirational 10% margin target for Australia and you sort of mentioned there's sort of 2 to 3 years of hard work to do from here. Does that suggest that I suppose sort of the aspiration be able to get to that sort of circa 10 margin in Australia by the end of fiscal 2020?
No. Well, you'll have to draw your own conclusions there. Because, look, there's 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 sort of circumstances, but 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 certainly got to get up to the double digits, I would have thought.
Final one, I have a quick one for me. Just on beef prices, it's sort of down quite materially in the wholesale channel over the last couple of months. Does it how are you thinking about that and making sense of demand because obviously quite a high level of substitution can happen in proteins. If we were to start seeing that flow through to lower beef prices over the next sort of 6 to 12 months, how's that sort of factoring into your thinking about returning that sort of circa 3% type market growth for poultry?
Yes. So two things we would say in the short term, that relativity can be up a little bit or down a little bit. But if you look at the broad sweep of history across 30 or 40 years, it's only been one mine. Some of that beef is coming back in because, a lot of the, upward secondary cuts have been in freezes for a long time. Some of it's coming up to to use by date.
If you look at, herd numbers for beef, then no one's forecasting a significant increase in, in cattle numbers, because the herd has to be rebuilt, which will which will take a couple of years. So while you're always subject to what's happening in the 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 to not 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 the chickens continue to 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.
Our next question is coming from the line of Paul Baez from Credit Suisse. Please ask your question.
Good morning, guys. Hey, Paul. First one, just a quick one probably for you. And just on the net interest expense, which was a bit of a prospectus. And I think you called out, I guess, the setup fees for inventory finance.
So that was above perspective, notwithstanding the fact that your net debt and cash flow were both better than prospectus. I just wanted to get an idea, I guess, of the I suppose that the non well, A, confirmed that those costs are, those set of costs are nonrecurring. 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 nonrecurring elements in those net interest expense?
Yeah. I can. So it's a high ball. Personally, the, the cost of the inventory finance is certainly one time. And in the order of $500,000, just slightly over.
The other kind of drivers against prospectus with purely the timing of cash flows. So when we did the prospectus, we obviously estimated cash flows and impact in terms of that as on your interest expense. And we're out by a couple of $100,000 at the end of the day.
Half was up on the first half. I mean, given I'm talking Edex, still talking to interest expense. No higher than the first half and likely below given your debt levels now on a sort of annualized basis going forward?
Yes, I mean, obviously, the way the facilities are structured as well, we have tiers in terms of where the interest rate drops down at certain points. So you'd certainly not expect it to be worse.
Next one, just on and Mick touched on this a bit earlier, but just on kind of the next phases of the, of the project acceleration the Project Accelerate benefits as sort of other phases that you had flagged at prospectus and said you're looking at more and more. I just looking for a bit more color on that. I guess how it's going on. Our growing fees were one of the initiatives you'll look at there, but just to get an idea, I suppose, on bit more color on those? And when you expect those to start to flow through?
Yes. Thanks, Paul. Just quickly touch on
a a little bit of
the flavor because it is more a case that we're lifting our sites and getting to them now, if you like. But farming, for instance, we, have moved farming to in Australia to a national structure with, bought in a very experienced person to run farming from the UK over 20 years experience in the UK industry. And we're starting to manage farming in a much more efficient and and and joined up manner, which we always knew was a possibility, but but for the first 18 months or so that I was here, we would type eggs. So there was kind of a limit to what to what we could do. So 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, so they'll 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, you know, across 5 10 years, which is the length of the which is the length of the contract. But remembering that these contracts were premised back in high interest rate days and, growers and we're very dependent upon our grass. We want to work cooperatively with them, but the days of 10.12% returns or needing 10.12% returns are clearly over. And, 7% or 8% is perfectly adequate.
There's a lot of interest in, in investing in farming those sort of returns. So across the 300 plus farms that we have, that's only significant gap that it will flow through over over 5 or 10 years. So quite a bit going on, informing. On FP, the further process network we've we've called out before that we run a very good FP network, very high quality, high standard. But that we have spare capacity in its case if you either utilize that capacity or look to more efficiently run our run our FP network We'll work through that over the next of the course of FY18.
We were very focused on the primary processing network coming in because that was where we saw the biggest performance gap gap. Now FP Network operates very well, but there are certainly opportunities there. Feed, I've talked about, we believe there's an opportunity with buy of growth in that 3rd party feed channel. So I won't repeat all that. And then 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. But and the challenge of competing on a cost basis out there in the big bad world. But high end premium exports something that we'll be focused on. And again, that'll be a 5 or 10 year strategy. It won't be a 5 or 10 month strategy.
So that probably gives you a flavor. Paul.
Thank you.
And then last quick one for me. Just kind of 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. So I mean, do we read into that? So that's kind of that sort of system label plus a little bit more for continued competitiveness for poultry versus other proteins? I mean, 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. So if you look at it, I guess, if poultry volumes were increasing in Australia, I think, 8.8%. That, if you look back across decade or 2, you won't find too many years like that. It's more typically 3.5 percent probably the industry, the industry growth. We'll we'll, and and I don't want to be too specific because unless 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.
So we're comfortable with wherever it lands in FY18. But, 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. And that meant in some cases that we were dropping, even profitable volume because we had to make choices. Now as we cycle some of those EDLP initiatives, for instance, the barbecue bird at $8 or $7 90, you know, you'll you'll you'll that will start to level out, but we we're we've lost the we've lost some of the other volume that we had to drop. So how that pan but at at the same time, it's, you know, every day and every week, we're we're out there competing.
So it'll it'll be what it will be. But we're more focused on extracting value from that volume through FY 'nineteen FY 'eighteen. So I'm just making sure that knowing thinks that 8.8% is normal.
Our next question is coming from the line of Michael Pitt from Goldman Sachs. Please ask your question.
Quick one on the, just noticing a promotion in Coles and Woolworths at the moment. This $4 whole bird down from 450. Is that another initiative out there? I mean, it doesn't look like massive volumes. They're probably going to go through, but who's funding that?
And so the, typically, almost exclusively, the customer is, I can't speak for competitive but for us, the customer, is funding that. Now that can 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 is rebalanced having cycled all that PDLP activity. And we may contribute to that that that extra drop from $4.50 to to $4. But I think there's only 2 cases where we've done that. 1 was around drumsticks.
Through the course of last year because we're structurally long on drumsticks. And, occasionally, we might shift look to shift more whole birds through that sort of promotion that you mentioned. But you'll notice that they're typically for a week or a few weeks, they're they're not, typically, at least the ones that we're we're engaged with. They're they're not like barbecue birds where they're a permanent priced
Okay. And, and what are you cycling now? You've now cycled the barbecue bird promotion, how far off of volume have volumes dropped off, in that period that you announced cycling?
No. Not really remembering. No. There's barbecue birds. There's, you know, breast fillers.
If you go back a little bit before that, there's drumsticks, there's whole bird that you've talked about, probably 1 or 2 others that I'm missing, but, so, And what we're seeing is that the barbecue bird introduced more seasonality into the business when I first came in, I struggled to find much seasonality, but we are seeing that that there's more seasonality around that product that consumers are more inclined to buy that product on a 35 degree update because they can 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 a on a on an degree day in the south of the country in winter. So we're seeing more seasonality would be the only thing we'd probably call out there But again, back to the overall volume comments, we're just looking to make sure that that we are cycling that. That's just a mathematical reality, if you like.
And and we're more focused on extracting profitability from the volume we've got.
It's And just on your net debt, I noticed there's $149,000,000 of cash sitting there. Is it just a timing thing where you're paying down the long term debt there or
Hi, Michael. No, I mean, the view at the moment is we'll obviously sit on the cash. We're looking at a number different options and opportunities. And clearly we'll work out what the best way to extract value through the money markets is But certainly in the next 6 to 9 months, it depends on what we're looking to do with the business.
We won't be giving it away though, Michael. But we do expect that from the for all the cash generation reasons we've talked about that that will be in a good position on net debt, which gives us options, whether that be dividends or, or other opportunities that Dean's mentioned.
So 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 that, first half you pay out dividends and you have inventory build into Christmas and a few other things. But So typically you'll see a stronger second half cash than first half cash, but we expect that cash generation to continue. Okay.
And then last one, I'm just looking at note 5 and the account's page 64. And you've got that net gain on the divestment of the property at 6.9. What's the 3.5 of other there
as well.
So the 3.5 relates to the Hamly Bridge Farm that was destroyed in the bush fire. And that was obviously subject to an insurance claim. And what you get there, Michael, is where you recover more than what the book value is, you to book that as an accounting profit, and that was booked in the week 53 status counts.
Right. So it's not in the pro form a number of $195,000,000? No.
Not a problem.
Our next question is coming from the line of John Patel from Macquarie. Please ask your question.
Just had a couple of questions. Just, just to clarify your outlook commentary there on on slide 17. So based on the factors you've 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
Yes. So we see no change in trajectory from what we would have talked about in although we were focusing the IPO process on FY 'seventeen. We we see no no real change in trajectory to, to 4 years around, what we believe we can do with the business. And that includes growing profit in FY 'nineteen. Thank
you. Look, the second one 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?
Yes. So electricity prices, our total utility prices are circa $60,000,000, but that includes gas water, electricity around 30 of that is, electricity. Because we're covered pathway into FYA, seen some of the price increases don't bite until the second half. And that may may give us some price timing issues, if you like, as it as it as it hits and we're looking to recover it in the marketplace. But, and that increased across 2 years.
Across 2 years, so across FY 2018 2019 on what we see now is circa $20,000,000. So it won't all hit in 'eighteen. It's sort of progressively across 'eighteen and 'nineteen. Broadly speaking, therefore, some 65 70 percent unit price increases is what we're seeing, which we believe is, consistent with what others are saying. We've moved from a kind of 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.
And so we have coverage across the proportion of electricity all the way out into FY 'nineteen, we'll continue to build that. But so we have a reasonable degree certainly around that cost. Of that $20,000,000 full year, which is, only half of that round numbers would be FY18. We were expecting to recover, you know, half of that or more in the marketplace and and offset the other half through through energy efficiency initiatives is is the broad plan, but that's the challenge facing industries like ourselves. And I'm not I'm not entirely sure that everyone's aware of the extent of of the market failure here.
Our next question is coming from the line of Phil Kimbla from Evans And Partners. Please ask your question.
We've lost you on a frame. We can't hear.
Is coming from the level of
morning, Ian. I have a question on, I know in the prospect as you disclosed your LTI target, Are you willing to disclose what threshold and max EPS growth are is required to hit your LTI?
I don't believe we do. I might have to take advice on that. We'll we'll publish our annual report and REM report or the REM report will be in the accounts but I don't believe we've published the the, the LTIP targets. No. Apart from the fact that going forward, Ltip scanning for FY18 looks like it's structured the same way as the FY 2017 in terms of EPS and, relative TSR, but I don't believe we've published the, the, the targets except we expect them to increase.
We expect ETS to increase.
Okay. And maybe just secondly, are you willing given the electricity price increases and changes that you're willing to make a comment whether you're comfortable with FY 'eighteen consensus?
That's a different way of getting guidance. Yes. Look, if we were concerned about that, we'd say so.
Our next question is coming from the line of Phil Campbell from Evans And Partners. Please ask your question.
Can you hear me now? Just was a follow-up to Mike Pete's question around, that $3,300,000. Just want to say, so is that, that was in the 3 weeks ago was not in the fiscal 'seventeen year. Correct. Correct.
But will be in the fiscal 'eighteen year?
No. No. It's actually in the stat accounts. From a stat account perspective, it's obviously reported in the 53 weeks. But not the pro form a 52 weeks that we've obviously spoken to here.
So just the context in case not everyone remembers, but we run a 52, 53,000,000 or the 4five calendar FY 'seventeen was a 53 week year, but the prospectus forecast was 52 week Yep. And therefore, the pro form a, account or the pro form a numbers that we're commenting on today are 52 weeks to state accounts show we'll show the 53 weeks. And then how you get from one to the other.
Yes. Okay. That's great. And 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.
I mean, do you have, I think, weight 60% or 65% of your, your feed cost inputs with the Aussie Dollar where it is, I mean, are you expecting material seed cost increases over the year?
Yes. Certainly, remembering neither where a repeat we're covered forward on average 9 months, we believe that that's longer than any competitive. If you and certainly longer than the small ones who aren't covered. So there's 2 issues with prices won't be absolute. And yes, there will be on current numbers, there will be an increase in weight.
So it's moved around a little bit, but not as much. But of course, we we can move to any on weather forecasts and all all sorts of things. So, we we you know, times predict for obvious reasons. But, we would expect fee prices to be moving up. Certainly, if we were trying to cover longer now, it would be at higher prices with that one.
The 2nd dose and the most important thing is relative position on feet and we believe we're well positioned from a relative position. Versus competitors and, that that means that others need to be moving prices or we do, which creates the right sort of market dynamic
And
can you give
us any sense, say, and then obviously it feeds back through the revenue and pricing line, in 'seventeen, what feed costs would have moved by and what you'd expect broadly speaking them to move by in 'eighteen?
We'll look on the first one. I'll I'll just give a logical rather than accounting answer, which is that, that typically you would expect if if our volumes are up 8.8% in Australia, for instance, and revenue only 3.3, then then the fair bit of the difference there is the some of its mix but fair bit of the difference there is speed. It's harder to predict going forward, which is why we just put the history there as 10 or 12 years. So that you can you can see for yourself how how it moves. We're comfortable that over time, feed prices we expect to pass through.
For for the reasons mentioned, some of the hardwinding contracts, some of it's just the market dynamic, and your only real risk is price timing is which means in any particular half you might get squeezed because cost prices have gone up faster than your ability to pass it through where there'd be your feed by the way. But over the medium to long term, it balances out.
There are no further questions at this time. I would now like to hand the conference back today's presentation. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may disconnect.