Earnings Transcript for GRCLF - Q4 Fiscal Year 2015

Executives: David Akers - IR Manager Mark Palmquist - Managing Director and CEO Alistair Bell - Group CFO

Analysts: Niraj Shah - Macquarie Jordan Rogers - UBS David Thomas - CLSA Grant Saligari - Credit Suisse Ramanan Sooriyakumar - Goldman Sachs Paul Jensz - PAC Partners

Operator: Thank you for standing by and welcome to the GrainCorp Full Year ‘15 Results Investor and Analyst Briefing Conference. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to David Akers, Investor Relations Manager. Please go ahead.

David Akers: Good morning everyone and welcome to GrainCorp’s FY15 results briefing. This briefing is for investors and analysts and being webcast live and a recording will be made available later today on our website. The result material is released to the ASX this morning are also available on our website. On the call this morning is our Managing Director and CEO Mark Palmquist and our Group CFO, Alistair Bell. There will be an opportunity to ask questions at the end of the briefing. With that, let me hand over to Mark.

Mark Palmquist: Thanks David. Good morning everyone and thank you for joining the briefing. The agenda for today, I’ll just walk through and present the results overview and a little bit of a segment performance and then I’ll have Alistair take you through the balance sheet and CapEx items for the year. And then I’ll give you a quick update on the highlights for the strategic initiatives from this year and then conclude with a current outlook for fiscal year ‘16. Moving on to slide 4, first and foremost, I shall now talk about values and safety and there are many examples across the business that highlight where our values derived behaviors and where we’re achieving positive outcomes. And first, I just want to talk about safety. We’re just really pleased to see that continued performance and safety. Our Lost Time Injury Frequency Rate is down 46% and our All Injury Frequency Rate is down 36%. And on that LTIFR, that’s on top of a 34% improvement from the year before. But we’ve still got long ways to go in achieving our vision as no harm and safer life. On the environment side, we had significant reductions in energy consumption and emission in Malt. We also ran a World Environment Day which really helped drive a shift in mindset towards continually looking for ways to improve the impact on us in regards to environment. And on the people front, we continue to develop our people and leaders this year, also achieved an important improvement in the number of women and management roles. And on the community side, we continue to support various community organizations. Moving on to the results overview on slide 5, we made announcement last week and the numbers are definitely staying the same we announced as headline earnings with EBITDA of $235 million and $45 million and NPAT on the statutory number that puts us at $32 million NPAT. So, today we’re just going to provide additional detail on the performance of the business units. We’ve also announced that the board has declared a dividend for six months to 30 September of $0.025 per share. And considering everything, we have to go through this year we really are pleased in terms of performing in that challenge, in the year particularly for our grains business. From the processing side, Malt had another strong performance this year, really reflecting high-capacity utilization. And in our oils and foods area, we had some challenges in different part of the business in terms of volumes and margins but still solid contribution. And as I mentioned, last week when we look at storage and logistics and marketing, certainly we had a challenging year with the below normal profit and carry-ins for the year. One thing I’d want to highlight on the slide you have in front of you is just looking at the charts on the right, and you can see how the EBITDA by segment is substantially different in 2015 than it was in 2009. In fact this year approximately 85% of our earnings came from the processing businesses, which really highlights our needs to continue our diversification. So, when I go to slide 6, and we viewed this slide a few times now, it’s just a good summary of our earnings profile. And if you look at the left hand on the chart, you can see the increasing platform we’re building in the processing businesses. That’s where a lot of our capital investment is going. So, we expect that base to grow further in the coming years. Unfortunately these charts also show the impact on earnings and our challenging years in the grains side of the business as we’ve had this year with reduced crops. Going on to slide 7, just outlining the dividends for the year, and again, we declared second half dividend of $0.025. That represents total dividend now represents a ratio of 51% of our underlying NPAT. And again, that’s consistent with the policy that we’ve had on board of really trying to stay in that range of 40% to 60% on the NPAT through the cycle. You can see the dates there on the lower right-hand side that show the record date and the payment date. Moving on to slide 8, I just want to use a bridge chart that just kind of shows where we went from fiscal year ‘14 to fiscal year ‘15. And just to highlight a few of the items on there. Notice at Malt achieved better results for ‘15. And then oils had a fairly flat result, whereas in the S&L marketing areas is where we really experienced a very challenging period. And again, when you talk about storage and logistics, it just has great sensitivity to the volumes that they’re able to handle. And again, they were down just because of the crop production in carry-in and for marketing, it’s all about the ability of Eastern Australia being competitive in the world markets and that was a challenge this past year as well. Otherwise, the other items that appear are largely what you would expect. So, I’m going to take you through just the segment performance for a little bit. I’ll just walk through each one of them. And starting on slide 10, I’ll just talk about Malt here for a little bit. Malt category here in ‘15, fiscal year ‘15, sales of 1.25 million tons means we continued on high capacity utilization although being slightly lower than the prior year. And one of the big challenges that Malt had and they performed very well on, if you just recall and remember that weather related events what we had in the last North American barley harvest in both Canada as well as the U.S., they resulted in a poor malting barley quality that we refer to as chided [ph] barley so it’s kind of a premature sprouting of the barley. And it threw up some huge challenges for us. But the team did a very good job and being able to work through this difference and continue to perform at high levels for our customer. We also had a foreign exchange impact which you would expect with the lower Australian Dollar related to the U.S. Dollar, translating favorably for us. And again, we do a lot on our Canadian and Euro as well, not nearly the same impact as the U.S. Dollar difference did. But we also had underlying improvements in the business. And when you take into consideration for quality of barley in North America, this is really an excellent result and I’m very pleased with what they were able to do with it. Moving on to slide 11 and talking about oils. From an earnings perspective they had a fairly flat year. Oilseeds had higher volumes but margins moved around a bit. They were better in the first half than they were in the second half which is fairly typical cycle inside of the crushing and refining business. Food volumes stabilized but the improved margins we had been expecting did not materialize in the second half. But our demand on liquid terminal capacity side was very good and we utilized at a very higher rate, which really produced some very nice stable earnings for us. One other thing to point out is the Australian feeds business, it performed well but this was offset by the overall challenges this year in the New Zealand dairy sector with lower prices, typically translates into lower feed rates. Moving on to slide 12, and talk about storage and logistics. And we’ve spent some time talking about S&L. So, I don’t want to lever the point much. But again smaller crops equals lower volumes and as far as the cyclical nature of this industry. But I do want to point out that the team performed well despite smaller crop and lower volumes. And one thing I would want to highlight is we really did have an improvement on our performance in respect to labor cost management. We’ve been able to lower the labor cost on a per ton basis as we’ve been putting it through our assets. Moving on to slide 13, and talking about marketing. Again, we spent fair amount of time talking about marketing, the challenges it faced. But just to run through a little bit, Eastern Australian grain was not particularly competitive this past year. There were periodic times where there was, other supply-chains around the world that was more competitive. And now, as a result of really two issues we had going on, one is, big crops and carry-outs in other parts of the world really made it the competition high and alternative origination sources greater than typical. This was exacerbated by lower fuel cost and higher capacity in ocean freight that resulted in the narrowing of ocean freight spreads that’s equivalent of just bringing physically areas around the world closer to some of our natural customers such as Indonesia as an example. We still got the volumes but the margins were not achieved as they were in previous years. And this was really an unusual set of circumstances. We expect more typical marketing patterns across Australia and the export pattern as well coming out of Australia. So far we’re seeing lower levels of export bookings on the front-end and relative year-to-year, it’s going to be based upon what the expected production comes in. And finally, just to touch on Allied Mills and, I’m on slide 14. And Allied’s strategy remains focused on continuing, expanding the value-added product initiatives. Pleasingly for the team at Allied, it was awarded a prestigious customer award during the year and again Allied, is just going to continue to diversify more into the value-added products and moving downstream on that value-chain. So, with that, that sums up the business performance. And I’m going to hand it over to Alistair.

Alistair Bell: Thank you, Mark. Good morning everyone. If we just turn to slide 16 and I’ll walk you through the balance sheet and how we’re seeing the funding activities for the growth. This a noted comment, our balance sheet shows we’re in good condition and position to handle the capital investment program underway as we continue to spend the CapEx ahead of the new earnings coming on stream. Just to remind everyone, the way we think about our debt is, we’ve got a core debt or long-term debt that’s important for the planning of the balance sheet and number of years ahead as well as debt in our short-term which is funding the commodity inventory through short-term facilities. And that deals with the seasonal and annual turnover of the inventory. So, slide 16, sets out the core debt and this has remained in line with our expectations. And it does reflect the implementation of the strategic initiatives as well as a real focus in the last year on reducing our working capital. So a case based there. We’ve also in the last year been focusing on our liquidity and maturity profile of that our debt portfolio. And this is in light of the commissioning of the strategic initiatives that have not only happened this year but also that will occur during fiscal year ‘16 and ‘17. So, it’s pleasing that in November this time last year we established $210 million construction facility. And as we shared in May, we took the opportunity to refinance our other term debt ahead of, well ahead of maturity. Though it’s mature in ‘16 but we’ve not pushed out maturities in a range of 4.5 to 7 years within that range of over 5 years. So, one of the things we highlighted at the Investor Day that would go to talk more about the net debt. So, as we turn to slide 17, we’ll set up a table here that we outlined at the Investor Day that shows both net debt and the core debt. So, with the net debt, it does include both short and long-term debt, of the line is the headline gearing but it is a key international metric for maintaining a present investment writing and good print of profile within the banking community. Also shows that we’re currently at 37% on a rolling basis, and it does show and capture the seasonal nature that takes within our business. We’re comfortable with this level and it does give us good headroom against our bank covenants and its desire to keep this below 45%. We expect this gearing ratio as it’s known to picture in the harvest of fiscal year ‘17. So this follows the commissioning of a number of projects ahead of new earnings. So we do expect this gearing ratio to stay similar or slightly higher albeit it is dependent on grain prices and volumes at the time. Moving on the slide 19 and the CapEx spend for the year. I passed out the slide 18 because it outlines and demonstrates the seasonal fluctuation in the levels of our commodity inventory which we fund through the short-term facilities. So, if we look at 19 and the CapEx spend, we spent $236 million of CapEx during the year. The staying business or the annual amount of the consistent maintaining CapEx has remained consistent around that $70 million. We’ve always said in the $60 million to $80 million, and it’s setting around that $70 million at the moment. As we think about 2016, it’s another busy year for CapEx, as we commission projects like bulk wheat terminal of [indiscernible] as well as the relocation of the old refinery capacity from Brisbane or Queensland in Brisbane, down into Victoria. So that comes on-stream this year. We also start the activities around standing the capacity at Numurkah as well as Pocatello and the Malt activities. So, in the appendix we’ve outlined that was, we’re indicating that the staying in the range of $195 million to$235 million in growth CapEx during fiscal year ‘16. So, it’s a big busy year. On that note, I’ll hand back to Mark and he’ll outline how we’re thinking around the strategic initiatives and the status of those projects.

Mark Palmquist: Thanks Alistair. I’m going to move to slide 21, just working off what Alistair is talking about. This slide as it helps you see in a short manner where our capital investments, where we’ve been and where we’re going. And we use this slide on the Investor Day. And it shows the capital investment plan by business area according to what’s already been invested and that’s in dark blue bars, what’s announced and are on their way, that’s in the lighter blue bars. And then the balance of what’s been announced but not committed. So, you can see that we’ve invested substantially in oils and Malt, oils in particular as Alistair mentioned is during completion on number of projects. And so we’ll look for cash flow to start up and those starting in ‘16 and then increasing in ‘17. The large items of CapEx to go for the Pocatello expansion which is a malt facility in Idaho, and the Numurkah expansion that Alistair just briefly mentioned. On project regeneration for us now, we announced earlier this year the first tranche of work. And we’ve spent approximately $13 million of the $60 million in that first tranche. Moving on to slide 22, just to highlight again some of the initiatives we have, and I’ll just touch on Malt. Again, Pocatello expansion announced and that’s getting started. We’ve got a number of operational excellence projects that were completed. And we got continued growth in the craft beer sector in North America and also emerging growth in other regions, where we’re ramping up our distribution and warehousing capabilities to handle that great growth. On the oils side, it’s the Numurkah cross expansion, that’s announced underway. And on the West Footscray which we refer to as project Delta, we’re meeting some significant milestones with the construction but also commissioning equipment and starting our first product and that’s all going, very, very well. With storage and logistics getting their first tranche of the up-country improvements and facilities, and also just to make mention the fact, we’ve got a new primary facility that is complete and receiving great compliment. And also receive some overhead bins by next year. And then finally, we’ve gotten a number of exemptions on our couch [ph] from the ACCC, which is helping us being able to perform better for our customers. So we’re really pleased with all these initiatives are progressing. The final array I want to touch on is just FY16 outlook. So, if you can go to slide 24, just walk through each one of the areas a little bit. First, storage and logistics, there is significant downside risk to the current forecast or estimates that are under par for crops, again experienced hot dried weather in Victoria, Southern New South Wales in September and October and that’s like why they have impact on the crop productions and volumes in that area. Also, have carry-in expecting receivables and exported similar levels or maybe slightly below fiscal year ‘15. So, year-to-date our receivables are at about 2.4 million right now, and there is low exports year-to-date with only about 2.1 million tons of exports so far. Switching to marketing, again, of course we’re going be facing, another small crop on the East Coast of Australia. But we do expect one fundamental difference from last year and that is we are seeing lower levels of export bookings across all of Australia relative to the size of the expected crop. And we expect this could result in more typical marketing patterns across Australia, which allows us to deal with any quality issues that we have and certainly make supply chains run a little bit more efficiently. Moving on to slide 25, and just talk about the processing outlook, first with Malt. We’re seeing a better barley crop in North America this year, few issues in Canada but we’re comfortable we could work through them. Our Malt crop sales are already 1.2 million tons for this coming year and we expect somewhere to have around 1.3 million total sales for fiscal ‘16. We’re still well positioned in the craft beer market again we are expanding our distribution capabilities on that side because we need to keep ourselves in a strong position in that customer statement. For oils, we’ll likely see a smaller Australian canola crop but potentially a slightly larger crop overseas. So this may know margins but it does point it’s probably a little bit too early to predict. But the foods business, there is potential for improved sales mix as we see sales in the inter-formula [ph] side materializing and actually increasing in the front-end so this is going to help our volumes and margins in that business. So, processing very well positioned. Just before I open up for questions, I just want to reiterate first that I think our business performed well in 2015 given the challenging year on the grain side. And the fact that 2016 is a year where we’ll execute our strategy, we will be including a number of our strategic initiatives particularly in oils and foods business. And finally, I’m excited about the opportunities that I see in front of the company. We’re getting on with delivering the promises we made and we’ll continue to keep a look of where we can create additional value for our shareholders. So, with that operator, if there are any questions, we’ll take those now.

Operator: [Operator Instructions]. The first question today comes from Niraj Shah from Macquarie. Please go ahead.

Niraj Shah: Hi guys, thank you. Just firstly from me, receivables to date are behind where they were sort of this time a year ago. I guess, the question is, what gives you sort of confidence in a potentially flat outcome for the full year, is it just around timing of the harvest or is there anything else at play?

Mark Palmquist: Thanks for the question. Yes, a lot of it is timing around harvest. We are getting ready to really get into if I look at Southern part of New South Wales, Victoria as an example. And then we’ve had some rain, it’s slowing down the harvest. We actually have some of our sites out there that harvest is shut-off and haven’t really received anything for a week. So, that area in particular is considerably behind last year. And if you remember last year, the harvest came early but it also came real fast. So, I think it’s just a timing issue now that we’re looking at. We’ll certainly have a better handle by far but we don’t see anything in front of us right now that says we’re not going to receive that some of our levels of last year.

Niraj Shah: Great, thank you. And just one more if I may. You mentioned I think in last week’s announcement that S&L was able to sort of take advantage of a strong Sorghum export program in the second half. Just wondering why the marketing business, if at all wasn’t able to sort of capitalize on that?

Mark Palmquist: Well, it’s an issue of where the sort of want, so it depends in terms of where our network was at. But the other consideration that we had is, there are some notable issues with final sanitary into China on the Johnson seat considerations. And so we held back on sales on the front-end until that got sorted out. We didn’t believe it was appropriate for us to take that risk until the final sanitary issue was settled.

Niraj Shah: Got it, great. Thanks.

Operator: Thank you. The next question comes from Jordan Rogers from UBS. Please go ahead.

Jordan Rogers: Good day, Mark?

Mark Palmquist: Good day.

Jordan Rogers: I just had a question I know you touched on it provide materializing last week and again today around the marketing side. I’m just still a little intrigued to why you tried the 6 million tons of grains, I mean, presumably you didn’t have to buy that grain to get it into your network given when you saw Australian grain was coming on competitive ways, still those sort of volumes. And if it’s on competitive next year, are you expecting in to be in a more normal. But should we expect dramatically lower volumes traded?

Mark Palmquist: No, I wouldn’t look for dramatically lower volumes. It is one of the reasons why we have to be diversified. And first and foremost is we got to stay relevant to our customers overseas. And so, when we see Eastern Australia grain handle being down, shifting to other areas, Western Australia, South Australia but also in some of the overseas supply chains was very important for us. We’ve got to stand in front of our customer every day of the year providing a competitive price but also quality and performance. And this is one of the ways that we can deal with the variability and in terms of weather and production in Australia and it’s very important we continue to do that.

Jordan Rogers: All right, guys. So, you meant that to be relevant to both customers you’ll still do trades are largely breakeven?

Mark Palmquist: Well, I wouldn’t say breakeven, it’s just a matter of mixture, we perform on that. And that creates other opportunities for us it creates arbitrage opportunities from different supply chains around the world. So, we’re still in a business to make money and that’s what we’re looking to do.

Jordan Rogers: Okay. And then, could you just draw a bit of an update on the grain roll loading stage, when you think you can get some of that share back that’s going to ride freight?

Mark Palmquist: Yes, we’re working on it now. Again, we’ve got 13 sites that we’re working on, on the first tranche. We really got some good traction with Numurkah and certainly Colleen. And we’re still somewhat dependent on the people that are on the track. So it’s government entities that we still got to get the track sightings improved and we still have to get the speed upon the mainline. So we’re little bit dependent on that in terms of the time schedule of one that’s all going to come in.

Jordan Rogers: Right. And then, just last question from me. Now let’s change the last few years, the target back at 2012 to put on $110 million additional EBITDA for FY16, and that’s very hard to compare any year versus historical year given different grain carry-in and other different market conditions. But could you still say that target is relevant or is that just too much changed in the industry or has that just been pushed out?

Mark Palmquist: I think what I’ll do is have Alistair answer that question since it goes back to 2012.

Alistair Bell: Yes, Jordan, as we’ve indicated, we’re not trying to break it down into the buckets that we’ve previously down. We still remain comfortable with the number that we put out there. The mix has probably changed along the way, as certain capital initiatives to have taken other capital initiatives as customer demands have changed. So we still feel comfortable with improving the underlying earnings of the business, that’s on track. And over the next couple of years you’ll see we feel comfortable that that will be reflected in our results.

Jordan Rogers: All right. Thanks Alistair, thanks Mark.

Operator: Thank you. The next question comes from David Thomas from CLSA. Please go ahead.

David Thomas: Hi guys. Quick question just around if you could give some color about. Clearly it’s been some tough volumes last year perhaps even this year. But obviously we’ve seen a lot of changes in the market dynamic as well in terms of competition. And I know you’ve sort of highlighted on the earnings bridge the impact of lower volumes and then the impact of competition. But I was just wondering if you can give some color of, if we get a decent volume back, whether or not that you’re going to see the same level of earnings recovery from better volumes given what is clearly a more competitive landscape out there?

Mark Palmquist: Well, thanks David. We’re pretty comfortable if we can get the crop back to more normal levels which is being interesting from me coming in Australia, I’m not sure what normal levels is. But we’re working through that. But still we are comfortable with it. So, if I take case and point this year, the production we’re seeing by state seems to fit our network a little bit better than the previous year. So, opportunity is sitting up in Queensland for us that didn’t exist at levels the previous years. So, when I go back and if I take a look at this from a normalized crop production and what that would look like inside of our numbers, we’re very confident that we can compete in the marketplace we’re taking our cost structuring down which helps us to be more competitive. And two things on the S&L side is that the consolidation of our supply chains from 6 to 4 is making us more effective efficient and integrating some of our FX movements, which really helps us walk through that. And known project regeneration itself in some additional facilities or improvement in capabilities, I think we’re well equipment to take on normalized crop.

David Thomas: Okay, thank you. And just secondly on the marketing, you’re obviously talking about change in the mix of sourcing for grains you get from East Coast to West and international. Can you just give a color of what that mix is today. And if you have a sort of aspiration target of where that might evolve to going forward?

Mark Palmquist: I’m not sure I want to break it down today. What I can tell you is we’ve increased our volumes in Western Australia and we look to continue to increase them next year as well. We have expanded origination particularly in Europe, Northern Europe area. And that has worked up well not just from a pricing aspect but also on a quality aspect. But if I look at Eastern Australia, we’re anticipating that we’re going to have better opportunities for us as an organization even though the crop may be roughly same-sized carry-in and same size. But it’s a mix of all. As each customer comes in, it depends what time of the year they’re buying because it could be impact on where bridge spreads are at, the timing of marketing by drawers and other areas around the world. So it’s a little bit difficult for me to predict what that mix would be going forward.

David Thomas: Okay, thank you.

Operator: Thank you. The next question comes from Grant Saligari from Credit Suisse. Please go ahead.

Grant Saligari: Thanks, I’ve got a few questions, I hope you don’t mind. The first one, maybe is probably for Alistair, it’s just around the funding arrangements. And I’m sort of looking at I guess ‘18 on the available facilities. And it just sort of strikes me that your utilization is basically your term facilities all quite highly utilized and you’ve got fair bit of headroom in the working capital facility. But maybe if you could just take us through how the CapEx program over the ‘16 and ‘17, it’s just going to be sort of financed relative to the sort of the facilities that are available?

Alistair Bell: So, there is probably two questions in that actually, so I’ll break it down. So, the CapEx, the remaining CapEx to be spent is out of the facilities. And the free cash flow that’s generated. The working capital facilities that are un-drawn including the inventory ones reflected the seasonal nature of the buying of grain. So, at the end of September, typically it’s the low end of the cycle. As we’re going to, and that’s also concise for the Bali in the Northern Hemisphere, the Bali’s bought and purchased through the September/October/November period. The East Coast crop with Australian crop happens now, so that’s where it kicks off. So, at times you switch between your working capital and free cash flow and how you may just breach some of your CapEx spend as well. So that’s how we think about it.

Grant Saligari: And I guess, just sort of follow-on from that, I think you’ve normally spoken about the way in which you sort of playing your facilities about being out of buffer against two, sort of drought years. Just where do we sort of sit within that sort of planning cycle to buying? We haven’t really had a drought year but I guess we’ve had a couple of sub-average years. So, how buffered are you against sort of those external circumstances over the next couple of years?

Alistair Bell: Yes, it’s a good question. And yes, part of our corporate planning is always run scenario planning around the year we’re in plus a couple of additional low-cycle years. And we still remain comfortable with our planning metrics around that.

Grant Saligari: Okay. Maybe sort of I did sink in a couple of questions here but maybe if I could just ask, just couple of others if you don’t mind. Just another one, just on the other income line in note 5, as always you have a lot of sort of unrealized gains and losses. Could you just comment briefly on what, what might change in the external circumstances I guess from a grain pricing or FX point of view that could cause any sort of significant change in the unrealized sort of guidance or losses actually as there you’re seeing?

Alistair Bell: Grant thank you for actually asking that question. It’s part of the accounting difficulties of reporting statutory versus how you actually run the marketing book, can I refer you to the additional explanatory note just underneath the other income. What you have here is the derivative part of the marketing book. The physical part goes through cost of goods sold. So, in the sales revenue and cost of goods part of the statutory reporting, so you end up with one part of just the derivative side thing reported here. So you’ll probably have an equal or gains offsetting that in the sales revenue of cost of goods sold. So, we encourage you to read the additional explanatory notes just underneath that table.

Grant Saligari: Okay. And maybe just on the operational side, if I could just ask what’s your sense of where the supply chain is in the, I guess Southern Central New South Wales from a competitive point of view with the Quattro facility. I mean, that facility is not actually running or open as I understand it, so what the trade it’s actually doing, are you still looking in volume through grain [indiscernible] or is there sort of a reasonable add of volume that you’re sort of seeing potentially locked in for that competing facility?

Mark Palmquist: Grant, so far we’re not seeing a lot of crop selling. So, I can’t tell you today where I think all that is going. We’re seeing big structures being relatively similar, so I’m not seeing any change in behavior in terms of competition to date. And you’re right. Quattro facility is not online yet. I guess you’d have to ask them when they think that’s going to come up. I think our viewpoint is it looks like it will be sometime maybe six months down the road. But we’re prepared to compete against that and then we understand that that new capacity is going to come in the marketplace. And so, places we’re trying to improve is continuing looking at our cost structure and taking that out of the supply chain. It’s also coming not just at country facilities but also on port side. And so we feel very comfortable we can complete the new capacity.

Grant Saligari: And just, sorry, finally, if I could, and I’m pressing the friendship. But on your pricing structures for storage and logistics and port, there was actually quite a substantial change in the way you’re structuring your pricing this year compared with last year. I was just wondering whether you could talk through the rationale for that price structure change.

Mark Palmquist: I’m not sure what you were referring to.

Grant Saligari: Or maybe I’ll take that offline.

Mark Palmquist: Yes, it would be good, yes. I’m not quite sure where that thing would go.

Grant Saligari: All right, then thanks.

Operator: Thank you. [Operator Instructions]. The next question comes from Ramanan Sooriyakumar from Goldman Sachs. Please go ahead.

Ramanan Sooriyakumar: Hi guys, thanks for taking the question. I just got a question on the storage and logistics business. Now, I know two periods are not comparable but if you look at the operating metrics there you’ve done receivables of $7.4 million and throughput volumes of about $14 million, the closest comparable period is probably 2010 where you did similar volumes and throughput, but back then the EBIT was about $48 million compared to about $10 million loss this year. So that’s despite making a few investments over the year. I’m just trying to understand if or what has changed structurally within that business or am I comparing the wrong two periods? And also does that imply that you might, like GrainCorp might not have a similar leverage when the market picks up or when the volumes pick up. So, I’m just trying to understand what’s changed there? Thank you.

Mark Palmquist: Yes, if I go back and look at the comparison to 2010 as you’re referencing, one of the things to point out is the carry-in is at a different level. And so for us it’s not just the volume that we handle but there is also other consideration such as storage, quality that really goes into that equation. And so we have very little storage opportunities in fiscal ‘15 and that would definitely have an impact negative impact on the EBITDA.

Ramanan Sooriyakumar: Okay, thanks for that. One more question if I may. On the oilseed processing margins, I think you guys talked about lower margins here due to the product mix. Can you talk a little bit more on what the mix was and what kind of margins should we expect going forward especially let’s say the oil or the summer crop volumes were impacted by El Nino like conditions?

Mark Palmquist: Yes, absolutely. So big difference between first half and second half on the margins and the crush refining, it was impacted by the product value, it wasn’t so much on the canola side. So, if I take the meal as an example, because of the reduction in demand for feed in New Zealand, there is less exports going on and so that way we had to find homes domestically. And so of course put pressure on the selling price of the meal. On oil side of the business, there is also competition coming on soy being pretty competitive during that time. So it’s really more of a product pricing aspect that added pressure on the margins in the second half. Going forward in ‘16, we think some of that pressure will be released. Again, we’re seeing pretty decent demand on the meal side with the dairy business growing in Australia. And we’re well positioned to be able to meet that. And on the oil side, we’re seeing a pick-up in our infant formula and shipments as well. So that’s helping us on that side.

Ramanan Sooriyakumar: All right, thank you very much Mark.

Operator: Thank you. The next question comes from Paul Jensz from PAC Partners. Please go ahead.

Paul Jensz: Thank you. Can you hear us Mark?

Mark Palmquist: Absolutely.

Paul Jensz: Excellent. Thanks for your time. Three quick questions, firstly with the debt side, Alistair, you mentioned that you were peeking debt around 2017 I think. So, what sort of core debt number are you looking for around that or long-term debt number in ‘17 assuming sort of average type free cash flows?

Alistair Bell: Our commentary is more around the net debt out there because that’s the more relevant one for.

Paul Jensz: Yes, net debt is fine, yes, fire away.

Alistair Bell: Yes, so that’s -- and that’s what we’ve said is, we’re keeping it below our target level of 45%. So, we’re currently tracking around the 37%, we expect that will probably go slightly high depending on how much free cash flow and the time of CapEx spend. It’s always a little bit difficult to get the staging by quarters’ right on those two points.

Paul Jensz: And you mean, let’s say you didn’t decide on slide 16, you got your core debt to EBITDA, and I imagine that’s one of the covenants you got. So are you looking to keep that below around 3, I think that’s the number that I’ve got in my head from previous discussion?

Alistair Bell: That’s international credit metric, it’s not one of our covenants, we outline our covenants albeit we don’t give the specific numbers, but the nature of our covenants, are outlined in our Annual Report. So there is banking covenants and corporate planning targets that we have.

Paul Jensz: Okay. So you’re very comfortable if it stays around that 45% in 2017, you’ve got a lot of headroom in your view?

Alistair Bell: We remain comfortable with our corporate planning, comments around headroom is that provides us good headroom against our banking covenants.

Paul Jensz: Okay, that feeds into the second area, which is the CapEx side. So you said there is a bit of swings around about say $110 million of EBITDA. So, maybe you can talk about what sort of ports of money you’ve sort of been taking out of storage and handling or storage and logistics and put into the downstream price. I was thinking can you give us an idea of that’s sort of $50 million or $100 million sort of swing?

Alistair Bell: A little bit hard to quite answer that but I think we’ve previously indicated that region of $110 million there is a circle of $15 million to $20 associated with ports deregulation. And what happened there with the government’s view on that, we saw that dissipate and we’ve been repositioning that with our confidence in other parts of business, focusing on marketing expanding origination capacity obviously with Malt. Not only on the operational excellence projects, just to remind you there were 70 odd of those projects and we’re down to the last 20% to 30% of those now. And then obviously in oil it was a two to three year program, that was employing more capital into that business. And we’re looking to commission the last of those big projects over the next 18 months. So that’s the sort of blend mix. In storage and logistics, where your original question I mentioned the ports, we have seen not only the regulation but the increased competition. And that’s caused us to launch project regeneration and whilst we’ve had two below normal crops, since then we were positioning ourselves to be able to capture the benefits when we get back to more normal sized crops.

Paul Jensz: So that $140 million to be spent in the next three years in storage and logistics, could that change as well, is that quite flexible depending on how the competition rolls out?

Mark Palmquist: Hello, it’s Mark, I’d be happy to talk about it. As each year as we go by, we’re learning from the market but we’re also learning from how we’re positioning things. So, absolutely if there was course direction going forward we’ll certainly take a look at that. The other aspect is, it’s dependent also on what the government will provide in improving their side of the assets has a big influence in terms of what we can do. Most of the projects that we did to $60 million tranche this year are pretty much in our hands however there are some areas that we needed some help. And I’m very, very pleased the State of New South Wales took forward with $21 million. And so, with them coming forward with that that really helped us go forward with some of the projects we have. We think we’re having good traction with the State of Victoria. And so that will help issues as well for us. We’re still working with Queensland and still looking for the Federal government to kind of step up and take almost the leading role and here and try to get the improvements that we need to see happen on the rail side, so that we can execute this million tons and we’re trying to get back on the rail. But again, those issues will make dependent in terms of what their $200 million spend is on project region.

Paul Jensz: And the final one is on the Victorian one that you just mentioned Mark. So how confident are you that you are going to be still the dominant player there with in Portland in Geelong, with obviously banging in others, looking to expand in those regions?

Mark Palmquist: We’re quite confident. Again, it’s the ability of our network because in the extensive country network that we have, it allows us to be able to flow the grain both from a volume and a quality aspect to go into different ports. And in the case of Geelong, we continue to look for ways to reduce our costing structure there. And one of the things we look at very hard is trying to get more and more of our cost structure to be on a variable nature and less looking on a fixed basis so that we can, ebb and flow the costing to more mimic what is the volumes that we’re handling.

Paul Jensz: Okay. Thanks guys. I look forward to the next few updates because I think it’s obviously a bit more of a positive swing but certainly pretty tough time for you now. Thanks.

Mark Palmquist: Thank you very much.

Alistair Bell: Thanks.

Operator: Thank you. The next question is a follow-up from Jordan Rogers from UBS. Please go ahead.

Jordan Rogers: Hi Mark, I just had another one on around that grain supply chain, grain rail loading side of things. Is it time to, are you considering rate negotiating down, your committed rail volumes on the, your take or pay contract when they come up for renewal?

Mark Palmquist: On the rail capacity contracts, is that what you’re referring to Jordan?

Jordan Rogers: Yes, your take or pay contracts on rail? I’m just guessing, there is a lot of factors outside of your control as to how you can lift your grain rail loading state and win back that share, I’m just wondering whether you’re going to renegotiate them down?

Mark Palmquist: Well, again, a lot of it will depend on what we can do in the shift from truck to rail. So, we’ll continually look at that. And so that really is a scenario of planning issue. So what we look at it, we’re always looking and to understand what we think the capacity line-up should be. We do have a number of contracts that will be rolling off over the next three years. And so, we’ll take a look at that again and see does it make sense to hold that capacity or not. If we get the shift going on that we think needs to happen and get it done, then we’re going to get back to a situation where we’re going to actually need that capacity to be able to shift the volumes that we think will do. But the one thing I just want to keep reminding back is, we’ve had two back-to-back subnormal types of crops and we got into a more normalized crop. The rail itself turns into a positive asset not a liability for us.

Jordan Rogers: Right. Thanks again.

Operator: Thank you. At this time I’m showing no further questions. I will hand back to Mr. Palmquist for closing remarks.

Mark Palmquist: Well, thank you very much for joining us today. And again, if there are any further questions, I would direct them to David Akers and he can handle those. And if any of you would like to have any more further conversations in the future, just let us know. We’d be very happy to entertain those as well. Thanks again for your time. And have a good day.