Earnings Transcript for GRCLF - Q4 Fiscal Year 2018

Executives: Luke Thrum - Investor Relations Mark Palmquist - CEO Alistair Bell - CFO

Analysts: Grant Saligari - Credit Suisse Belinda Moore - Morgans Jordan Rogers - UBS Adam Fleck - Morningstar James Ferrier - Wilsons Gregor Heard - Fairfax John Purtell - Macquarie Richard Barwick - CLSA

Luke Thrum: Thanks, everybody for joining us today. We've lodged the result materials now with the Stock Exchange and we'll be having an archive of the webcast on our website later today. As the operator said, we've got Mark and Alistair here to run through the presentation and take some questions at the end. So I'll now hand over to Mark.

Mark Palmquist: Great. Thanks, Luke. Good morning, everyone. Thanks for joining. I'll just do an overview of results and then go into more of it by segment. And then, I'll hand it over to Alistair and he can take us through some of the financials, CapEx and balance sheet, and we'll come back and recap of where we think we're headed for fiscal '19. So I'm going to start on Slide 4 with a top priority of ours, it's safety. The results on the frequency rates were disappointing for us ticking up in fiscal '18. Even though, the overall number of injuries was down, this is something we've got to continue to work at and we think we can drive it lower and we've got some programs that we're instituting as of right now and through fiscal '19 to really work on that improvement. On the next slide, just a recap of the group earnings. And you can see the underlying EBITDA at 269 million for fiscal '18 and underline NPAT at $71 million, resulting in a declaration of dividends of $0.16 per share of which is 100% franked. Our overall view, malt, again, performed very solidly. Oils, we saw some improvement in certain areas, particularly in our bulk liquid terminals operations and also in our feeds. But we did get a major reduction of about 40% in group earnings, primarily due to the East Coast Australian grain production being down which certainly lowered our grain exports that we had and that was just following a near-record harvest in fiscal '17. And that reduction in production also had an impact on our crush margins and our oilseed group. For malt, continued really good utilization of our capacity, and in the second half of the year, we had the full-on contribution from our expanded plant at Pocatello. And we still see very good strong demand going on at both craft business and an increasing demand going on with our distilling customers. For grains, as I mentioned earlier, a big impact was the smaller crop in East Coast Australia. A big impact on the grain exports declining considerably and I'll go through that a little bit later for you. And with that smaller crop, it certainly makes our take-or-pay rail contracts pretty challenging for us in terms of covering those costs. Nice development though, on the formation of grains where we combined our storage and logistics and our marketing group together. Not only reduced costs, but also we were able to achieve a higher share of domestic grain trade. And the cost of those integrations are included in the results that you see above. For oils, continued good performance on bulk liquid terminals. Most of our business is either under long-term agreements or it's internal demand that we have. Feeds, a very nice uptick, I'll talk about that a little bit later. And also, we are seeing improvement in our foods business with the continuous improvement program that we drove in '18 that will continue into '19. But the crush margins were weaker and again, were impacted by a lower supply of canola for the year, which did compress margin somewhat. And as in grains, we do have restructuring costs put into oils. On the next page, you can just see a seven year history of our underlying EBITDA, underlying NPAT. I would point out, just looking at the first half and second half results, particularly on the EBITDA side. And you can see we started off fairly weak, and again, that's primarily a grain impact but finished strong in the second half and that's primarily, again, due to the expansion that we had at Pocatello. Certainly in reverse from what we do historically through the years. Next page, it just defines dividends for you and also gives you a history of dividend payouts. The final dividend will be $0.08, a total of $0.16. That results in a payout ratio of 52% of our NPAT. Certainly fits well into the dividend policy that our board has, paying out 40% to 60% of full year NPAT through the business cycle. So we are certainly pleased with that. I want to point out the dates on the right-hand side, the record date is the 29th of November with payment date being the 13th of December. On Page 8, just show you a bridge between fiscal year '17 and fiscal '18, so that you can really see what were the big differences between the two years. I they'll translate down by segment so that you can see that EBITDA D&A, net interest of tax. If I start at the top, you can see the impact that malting had with a $12 million increase in EBITDA, again, primarily to the malt capacity, but also the demand was strong, so we're able to keep utilization rates up high. Oils, a net gain of about $3 million, primarily coming from our efficiencies in the foods, but being offset by, again, the crush margins as I mentioned earlier, that they were compressed and we also have restructuring costs absorbed in there. So you can see the big impact for us was really on the grain production side and the supply chain costs down $138 million from the year prior. And that's the big impact for us. Again, some good things going on in there, but the net result is, we just had less volume to deal with, so less revenue being obtained. And the only one I'd point out is just the tax, it's a combination of the U.S. tax rate change, which certainly is beneficial for our business in the U.S. and certainly, with the lower taxable earnings we have less tax liability that goes along with it. So you can see the NPAT, the difference is basically in half. Let's spend more time here just talking about the different segments for you. If you notice on Page 10, we just have them stacked for you just for comparisons for you, I'm not going to go through that. I'll split to the next slide and I'll start with malt. Some of the points I've already mentioned, but again, our utilization rate still stays high and that really has a very good positive impact for us on net contribution margins. We did get the full-on -- Pocatello came on towards the end of January, not only the expansion, but we also upgraded the existing facility. And so now the full capacity at Pocatello is 220,000 tons. We still continue to have good strong demand coming in on the malt and brewing ingredients, primarily driven by our craft market increase in the distilling market. The craft market itself, it continues to evolve. The big growth there today is in the microbrewers or we refer to as brew hubs where it is increasing demand, but it is also taking demand from some of the larger craft brewers. As a general basis of beer consumption in most areas, particularly in North America, it remains flat. So the U.S. craft beer business, the latest numbers that we have to date, shows a 5% growth rate. And those are all the sales volumes in 2017, the latest numbers that we have to work with. Also included in our numbers is our energy costs in Australia, continue to be problematic for us. We experienced an increase of about $4 million for the Malt group in the fiscal year 2018. One other thing worth noting is, included in all this during fiscal year '18, was we did decommission and sell our small malt facility down in Burnley, Victoria, which reduced our capacity by 23,000 tons as a result of that. Also wanted to make note that we made an announcement last month about our capacity expansion in Scotland. The equivalent of AUD 94 million, will increase our capacity in Scotland just slightly below 80,000 tons. We'll start working on that project in fiscal '19, completing in calendar year 2021. It really involves two different areas, one is upgrading our existing plan in Arbroath, that's for about 20,000 ton increase capacity and then building a new malting plant at our Inverness side, which is about 60,000 ton increase there as well. Considering what's going on in the distilling market in Scotland, this fits in very well. We've seen distilling capacity actually being built and increasing and we will, just like we did in Pocatello, we'll support this expansion through long-term malt supply agreements. Shifting onto oils on the next page. And again, we break it down into the four areas that we have inside of our oils group. First one being our liquid terminals area. Again, very good utilization there, very consistent customer demand. Much of that business is actually through long-term agreements or internal demand. So it's a very good stable business for us. For the oilseeds business, this is our crush side. Again, I mentioned that the crush margins were down, just very impactful on us in terms of what the canola supply is. This plant's located in Victoria in Numurkah, and so it's a nice area to be. It typically is a good production area and certainly a very good demand area being the heart of the very aspect of things for the meal. Food side, improvement through the year, primarily through a reduction in costs and improving efficiencies in our plant at West Footscray. We look for those to continue into fiscal '19. Got a very good continuous improvement program running down there and efficiency gains with the capacity that we have. I just want to make mention to our specialty oils, are going to hit the formula. Had a good start to the year. We saw increases and that started to taper off in the second half. So yet to be determined where this is going to end up for us for next year. I didn't want to point out these -- ECA had a really had a really good improvement in performance this year. A lot of it had to do just with the strength and demand and feed supplements. Certainly Australia because of the drought, but also in New Zealand in terms of improvement of yield and malt production. So very, very good results coming out of there. Also as malt, we increased energy costs in Australia of about $4.5 million. And in terms of restructuring charges, we have $2 million incorporated into those earnings for fiscal '18. Next page, I will go through grains. And we've talked about this and you're all well aware that the significant drop in production, around 40%, certainly had a big impact on us. It really gets into availability of supply for us. It really gets into availability of supply for us for the export business. The domestic demand in East Coast Australia, usually sits around a 10 million, 10.5 million ton-type of number. And so the reduced crop primarily means that there's less exportable surplus for us to work with. As a result of that, we ran with less silos in the country, 116 fiscal year '17 down to 145 in '18, '19 certainly won't require us to run 145 facilities coming up in the year. Also it has created an event we haven't done for quite a while, we've actually had to reverse our supply chain for being an export-driven supply chain to an import supply chain. And in fiscal year '18 alone, we've already brought in 0.5 million transshipment coming from South Australia -- Western Australia to meet the deficit feed arena that we have in Queensland and primarily northern part of New South Wales. I'll draw your attention to the numbers that sits on the lower left-hand side. So you can just see the impact going from fiscal '17 to fiscal '18. So you can see the grain production going from $28 million to just under $17 million. And then, the grain receivables going from $15 million to $7.2 million. That's not just only reduction in crop, it also recognizes the fact that on-front storage continues to increase and concerning concerns about the crop that was coming up, more of that was being held by farmers right on-site. Big impact on the grain exports dropping from 7.2 million to 2.7 million and you'll see the transshipments, that's the imports that we've done out of SA and WA [Indiscernible] certainly not the same. The net impact of the grain exports dropping is not just underutilization of export facilities, but it also has a big negative impact on our supply chain issues, primarily those take-or-pay rail contracts, which had a $20 million negative impact for us with Europe. Also to point out that with the integration of our storage and logistics and marketing, we did incur about $3 million in integration costs, it's also included in the results. One of the good news for grains, besides the integration, is that our international growth strategy is progressing well. We've got 2 of our facilities in Canada with our GrainsConnect group that were commissioned in June and we have 2 more that are under construction that we'll complete in the calendar year of 2019. We also opened up a flex-trading office in Kyiv, Ukraine in June and they have their first shipment in October and we look for that to continue as we go forward. So with that, I'll hand it over to our CFO, Alistair Bell.

Alistair Bell: Thank you, Mark. Good morning, everyone. I'm on Slide 15 in the package. So in this section, I'm going to cover a few points, so it's going to center around 2 of our strategic priorities but it will focus on how we're maintaining a disciplined approach to capital management, particularly as our large CapEx program comes to an end. And the other part is about portfolio optimization ensuring we improve our returns and our return on invested capital. The key about this, as we think about our balance sheet, is to ensure our balance sheet has the capacity to accommodate the seasonal fluctuations. And I highlight that upfront because when we were at half year, we were talking about the balance sheet and the need to remain flexible. But in the second half of the year, it was all about availability of grain supplies as well as higher grain prices coming in. So when we thought about the year and one of our priorities was to remain free cash flow positive for the year. And we finished the year this way, which was really pleasing and it assures our balance sheet remains in good condition. That's good to know because the net debt figure's moved and increased higher than what we've seen at yearend traditionally and that's all about the higher inventory levels that we're accounting, as I mentioned because of the tightness of grain supplies and the increase in grain prices. If you refer to Slide 25, you can see how we keep flexibility there by having commodity inventory facilities to fund the fluctuations in these grain levels. This is an important piece of keeping our balance sheet flexibility and ensures we're matching our asset life to the seasonal fluctuations. So that, the second half has really showed the benefit of our funding strategy of our balance sheet. Moving on to the next slide. This sets out our core debt, to remind everyone, core debt is important to us as it shows our long-term liquidity as well as for investors how you're considering grain core value. Core debt measures the net debt levels, excluding certain grain inventory, in particular, marketing and oilseeds. However, we lead the malt inventory in there. And, as I said, it's important for our long-term planning. Just to highlight the movement between the end of last year and the half year, really depends on the seasonal movements in malt's working capital. And the value crop has been a lot tighter than we've experienced in recent years, and so, we've accumulated more barley earlier in the season. The CapEx, this core debt also factors in the CapEx profile, that's 142 million, and I'll come back to that on the next slide as well as the decrease in earnings offset by reduced taxes. Core debt also caters for funding of the dividends and particularly the final dividend that Mark referenced earlier. As we turn to the next slide, which is Slide 17, this summarizes the split in the capital expenditure between stay-in-business or maintenance capital as well as our growth CapEx. In relation to stay-in-business CapEx in the year, we incurred 55 million. This was in at the lower end of the range that we updated at the half year -- half year, we reached it from the traditional 60 million to 80 million back into the 50 million to 70 million. So we've come in at the lower end of that range. And that's important because as we think about the year ahead, we expect stay-in-business to be in the 40 million to 60 million range. This is lower than what we've indicated, but it's important because of the challenging conditions and lower volumes and the newer facilities. We envisage managing our cash flows to fit within this level. If we think about the growth initiatives we've highlighted for a number of years that we've peaked in 2016, and the major capital works of coming to a conclusion. The large main one that concluded recently was the crush expansion at Numurkah. We've continued to maintain the grains network on East Coast of Australia. And in malt, we've had a number of initiatives that carried out throughout the year. With the reduction in '19 in our cash flows from the small crops, we'll remain mindful and expect that the level of growth capital will continue to decline. Any decisions around growth capital are tied to achieving a hurdle rate greater than 12% IRR. And the recent announcement to expand the malt capacity in Scotland meets its hurdle with the majority of the CapEx happening in the years 2020 to 2021. And just on the final point of depreciation, the right-hand side of the slide. This is increased in line with recent CapEx programs and we envisage that this will peak in fiscal year '19. So just to recap, it's a disciplined approach to looking after our balance sheet as well as maintaining the growth initiatives to improve our return on invested capital. At this point, I'll hand back to Mark who will walk us through the outlook for '19.

Mark Palmquist: Yes. Thanks, Alistair. And that's a good segue of the comments you're making about '19 from a capital financial aspect. I want to walk through just what we're seeing as market fundamentals and what we are looking at for the FY '19 outlook. So I am on Page 19 and I'll start with Malt. I've mentioned this before that we've been watching the global barley crop production, it just keeps dripping downward, so it's creating a tighter supply globally of malting barley. As important, there's a real tight supply in terms of quality, particularly as it exists for malting barley and regions around the world have experienced some numerous different types of weather events, Continental Europe and the Baltic areas had been very dry, resulting in a much smaller crop than what they're accustomed to. And so, we're particularly in the Baltic area when we look at the places like that Denmark that are usually a reliant exporter, won't have any exportable supply this year. Shifting to North America, you've got Canada, which has been experiencing weather events here right during harvest actually having snow on some of their crop. And so there's a mixed quality issue up in Canada. U.S. actually is looking very good. So a good shape there. And as we well know, in Australia, certainly a much-reduced barley crop. We'll see a lot of shift of malt probably coming across from Western Australia to feed the East Coast for us as we go forward. U.S. craft beer, as I mentioned, 5% growth in 2017. We see that growth to continue as we look forward. A couple of very positive aspects in terms of demand. Distilling demand definitely is growing, it's picked up even from last year. And that's also happening in the Scotch single malts, but also in urban as well. So we're seeing nice growth in overall demand and we're seeing a nice pickup in what I'll call the smaller distillers or petite distillers that actually fits in very well with our Country Malt distribution business. Mexican-style beer continues to grow particularly in both U.S. and Canada but we also see it in Australia as well. And then, energy costs are going to be an issue for us as we move forward for the year. So for '19, we're still going to continue at a very high utilization rate, which is definitely positive for us. A great demand on specialty products. It really fits in well with the type of facilities that we have. And also fits in well with the specialty products, be it roasted, or all type of products, hops. This really fits in well and goes into our distribution business. And has a very nice additive impact on the malt bottom line. And again, the full year contribution of Pocatello will be a very necessary for us, a very great place to have a plant. Really hits that Mexican demand, certainly hits the craft demand. And it's located in a great area in terms of supply chain efficiencies. For oils, bulk liquid terminal business will continue to run well, as I mentioned on the LTA contracts and internal management. Worth noting is the canola crop production, we're coming off of a, what was a smaller crop last year, estimates take it down to 2.4 million tons. We look for a lot of what we will be using coming from southern Australia and we are also looking at -- it will make sense for us to actually bring canola in from WA as well. Certainly elevated energy costs as the malt is experiencing. From a market point of view, we continue to see this ongoing shift and consumer preferences to dairy blends, And of course, we have capabilities and do produce dairy blends, so we're taking advantage of that. And as I mentioned earlier, in the presentation, we're just watching every formula because there's been a tapering off of demand here in the second half and we're just trying to understand what that means for impact into '19. So outlook for us, liquid terminals will continue at its utilization rates. We will experience pressure on our crush margins due to that lower canola supply. But we are seeing benefits extending for us in the foods' restructuring we had going on in our continuous improvement program. Final page that I want to go through with you before questions is just getting into the grains outlook. I know we've got a lot on this page, but there's a lot going on. So I just highlight the aspect of coming off '18 production being down, we're very sensitive to what '19 looks like. As of right now for winter crop production, the estimates are running between 5.9 and 9.4, but we would think ABARES numbers will be coming down, so on a weighted average base, we're looking at crop size that's just under 6 million tons. For the summer crop, right now, there are some pretty good optimistic news going on. It's estimated at 1.6 right now, but acreage is getting planted so we should have a good base to work with. Recent rains up there has given confidence that we will certainly get it to emerge out of the ground and have a good stand, but definitely need more rains in that area in order to finish that crop off. So it looks promising today but we're just going to have to wait until we get through to March to really have a good idea of what it's going to end up being. We certainly will have a very minimal export surplus in the Eastern coast of Australia. That in itself is actually creating demand for the importation that has been going on. We've been participating in that as you can see in the numbers. And it will work its way down from north to south as the year progresses. So we are using our facilities up in Queensland today, we have now moved into New South Wales and potentially we could be importing as well with our Victoria facility. We certainly look for the Black Sea area to continue to be the primary wheat exporter globally. It certainly is big impact in our backyard in the Asian region. Reasons why we are participating in there, we've got to be a very reliable supplier to our customers. And if Australia, it doesn't have the production for us to deal with, we'll certainly pull from the Black Sea as well. Well we see a lot of things going on, particularly this year, we're seeing increase in the volatility in the grain markets globally going through a period of 4 years of having big production, pretty stable-type of quality. That's starting to change a little bit here and so it's really creating some differences in grain flows. That volatility certainly has a risk element, but it also has an opportunity element for us. And so we'll be looking for that. Where we're sitting today in fiscal '19 year-to-date our grain receivables are at about 300,000 tons. Again, we start our fiscal year beginning of October, so that's about 45 days' worth of reporting. We have just gotten into receiving in Southern New South Wales and Victoria. Believe it or not we've had some rain there, so it's been slowing the harvest down. So we would look for that to pick up here over the next couple of weeks. We will continue to import grain imports. I can't predict for you today what those volumes will be, it's highly dependent upon what that [Indiscernible] on craft ends up being in Queensland and Northern New South Wales, in terms of what the full-on demand is going to be necessary to be importing in from WA. Year-to-date, our grain exports, so this will be starting at 1 October, is about 100,000 tons. We certainly have more on the books for the next 2 to 3 months. Our take-or-pay rail contract is really going to be a drain on earnings for us this year. Those contracts do end in fiscal year '19, so we've got one more year to go on the take-or-pay and then we'll have all our flexibilities to get through that. We will have a higher reliance on the grain origination that we will have coming out of Canada and Ukraine for the reasons that I've stated earlier. And that will certainly be necessary for us supplying our customers on an international base. We did announce a further simplifying of our grains business unit on 1 November. We definitely are seeing more benefits that we can capture. Most importantly is we see redefining how we are going to market and what our network is. So primary focus is really making sure, we are evolving with our customers. We do believe added benefits on that is that we will have cost reductions as we go forward. So just a final comment. Overall, fiscal '19 certainly will be a challenging year for us. We feel that we're very equipped to handle it. We certainly have levers that we can pull to bring down costs and adjust to what we see revenues coming in on the grain side. And certainly our processing businesses will give us the cash flows that we need to work our way through fiscal '19. So with that, Luke, I'll hand it over to you and we can handle the questions.

Luke Thrum: Great, thanks, Mark. I'm going to hand it over to the operator now and we'll take some questions.

Operator: [Operator Instructions] Your first question comes from the line of Grant Saligari from Crédit Suisse. Please go ahead.

Grant Saligari: Just a couple if I could. First of all, just on the balance sheet and the data, I guess, at the risk of sort of belaboring that point, maybe you could, Alistair, just outline how your fund has -- -- sort of think about the core debt credit metrics versus the inventory commodity financing that you highlighted is separate?

Alistair Bell: Yes, I'll just elaborate and remind folks. So we see net debt, you have two elements within your net debt. You have the long-term planning piece and then you have the flexibility that deals with the seasonal fluctuations. And that covers grains, the grain trading book. In oils, it's typically going to relate to oilseed and the canola seed when it's available during the harvest, as well as Challow. And then in the malting business, it's the barley that we procure when the seasons are there. And that changes timing and the nature of the storage varies from country-to-country. So when the financier thinks about it, they do see it as twofold, one is the core debt and then you've got the commodity fluctuation piece. We've traditionally included the malting barley as part of that core debt and we've found in the last season and the tightness of the supply of barley as well as increased prices, caused us to accumulate more in volume earlier than we'd envisaged, plus also more expensive. So that's how it fluctuates. And we quantify the amount of malt and barley in our notes, and so they can, as they look through, value to how the financiers would see the adjusted core debt.

Grant Saligari: And maybe just sort of following on the cash line. Could you just sort of indicate what sort of growth projects are locked-in for fiscal '19? I mean, you've got Canada, I guess, with the two additional cumulation sites there and a little bit as you indicated in Scotland, is that sort of the extent of the growth CapEx that you've got locked in?

Alistair Bell: Yes, it's the projects underway, or in flight as they go. There's some in Canada where you've got some of the project sites on East Coast Australia still underway. The tail end of the America. In malt, we've got a series of smaller projects supporting our strategies and customer demand that Mark referenced. And so they're are all modest in size. Obviously the new big project that was announced and kicking off is the increased malt capacity -- the malting capacity in Scotland. Although, most of the cash flows associated with that occur in 2020 and 2021.

Grant Saligari: And just one final one if I could, I know there'll be other people asking questions. It's just noticeable that the commodity inventory that you outlined on Slide 25, you finished with, I think around $500 million of -- so sorry, $600 million-worth of commodity inventory, which is sort of high for a fiscal year-end position. Could you just outline what's going on there? Whether that's a marketing grain that you've accumulated or whether that refers back to the barley that you mentioned earlier?

Alistair Bell: I'll pass it back to Mark.

Mark Palmquist: Yes, Grant, I'll handle that. It is really when we started to realize what was going on with the crops. We basically shut off the exports because the residual supply sitting in East Coast Australia were definitely going to be used in the domestic market, and it just made sense. One was from price market aspect that the domestic value started to go up hard in the export side. But the other component was, we could really see the need and that was going to be the most efficient grain to be used. So in order to stop that flow, we held the inventories and had them in our ownership and so that's where you're seeing the spike in working capital usage for inventories. That will roll off as we're working our way on the front end of fiscal '19. The East Coast Australia from last year's crop will be absolutely used up. And what isn't in commercial channels is going to be sitting on foreign, that's going to get pulled up. Barley is another example, and we're trying to hold whatever we could from a quality aspect and make sure that we have the malt barley that we needed. And so in Australia, certainly, we carried over from, on both crops, but as important because of what we saw going on in Canada, an erosion of quality out there, we made sure that we held on to what we had in the old crop of whatever we could find that had the malt quality. So that's the underlying impact of why that's up. Certainly, that will come off fairly quickly.

Operator: Your next question comes from the line of Belinda Moore from Morgans.

Belinda Moore: First of all, if we can focus on the grains business. Just thinking that to the severe drought years of days gone by. Can you talk about what the new sort of breakeven level of volume is? And is it sort of fair to say that '19, it's going to be an EBITDA loss? Then can you -- is there any way you can you just sort of quantify the further increase in energy costs across malt and oils you're expecting in '19? And then maybe a bit of color around the underlying tax rate for the growth in '19 too, please?

Mark Palmquist: I'll start on the first couple of questions that you have, this is Mark. So it's tough to compare to back -- going back into 2006, 2007 and 2007, 2008. And the reason why I say it's a little bit tough to compare that is because it's like an apples and oranges-type of comparison. For us, we have a lot more global business than we have had in the past, which certainly has a revenue generation aspect to it. We're also operating under market rates instead of tariff rates. And we certainly are operating with a lot less facilities, we would have been over 300 facilities back then, and we're operating I'd say '18 with 145 and we'll have less open in fiscal '19. So there is a difference in terms of that type of comparison. We're into it. We're still trying to understand how many facilities that we will operate with. Just giving an indication, in New South Wales as an example, in the northern part, we're just operating with a handful of facilities out there. And pretty good odds there that they're not going to open for very long, it's just going to handle the hard surge. And then, when that grain is needed for domestic feed demand, then we'll open up just periodically at certain times to discharge it. So I just can't give you just a PAT answer in terms of what type of reduction and costs versus back in 2007 and revenue differences to really outline that for you.

Alistair Bell: I'll just add and as Mark was saying, the revenue model has really fundamentally changed. Instead of all of the tariff rates, it's market rates. And the cost structure as was simplified around the customer needs, taking the fixed cost out. Mark referenced the number of sites and the flexibility that are operating, but also the rail contract. Making sure we're utilizing that as and when we can. The other question, there was one about the ongoing tax rates. At half year when with the change in the U.S. tax rates came through, that has probably reduced our effective tax rate by about 3%. So traditionally, we would said about 30%. So if you think about up from 27% to 28% on a more normalized basis. And I think there was a question on energy.

Mark Palmquist: Question on energy. So in '18, we showed you what we experienced, '19 the issues we have going on there is that we don't really see any relief on the natural gas prices and we're still experiencing increases on the electrical. The natural gas sits on, what I call a strip contracts. So we know what that is, that will be similar to what we experienced in '18. The electrical side just really depends a lot in terms of peak demand when you're using it. So we'll just have to wait and see when that comes in. But so far, we are experiencing increase in electrical costs.

Operator: Your next question comes from the line of Jordan Rogers from UBS. Please go ahead.

Jordan Rogers: Just the first one on the numbers. It's good to see you've got no significant items this year despite the restructuring charges. I just wanted to work out what's the $9.2 million of after tax gain on sale of noncurrent assets?

Alistair Bell: Sorry, I'm not sure where that one is. Wait, maybe I -- we'll pick that up off-line. I'm not sure where that is.

Jordan Rogers: No. Yes. Okay. Sure. All right, we'll come back to that. Also, just around -- your comments around the brew pubs, it's an interesting trend in North America. Can you just provide a little color around how material you think that opportunity is? And how many more you'll roll out through FY '19? And whether Australia sort of -- it started to take off here or that -- whether that's more medium term?

Mark Palmquist : All right. I'll handle that one, Jordan. It's material. So not so much in that it's creating more consumption of craft beer. It's just absolutely changing the segregation and where that growth lies inside the whole category. So give you an idea of when you sit inside of North America over the last 2 years, there's been basically a thousand of these brew pubs that have been put up. We expect basically, another thousand going up over the next 2 years. And so it does a number of things. Typically they consume malt at a slightly higher level, so there is an increase in malt consumption. It's a lot more around specialty malt and specialty ingredients. It is very customized type of product. And it also means distribution is a lot different. It's basically, buy the big or buy the tall. They run very small inventories, so it's increased delivery in shipments, but they're smaller. And also what you're shipping to them, goes into multiple products. It's not just malt, hops. It's yeast, it's flavoring, it's equipment, it's packaging. And all of that fits in very well with our distribution business that we refer to as Country Malt. So it's impactful of the shift, but it's also creating opportunity for us. In Australia, it's actually accelerating at a faster pace than what you saw in the U.S. It started later, but it's accelerating. Hence, the reason why we bought Cryer Malt last year. Very much in that segment of customers and fits in well with what we do for distribution in Australia as well. So we look for that as a nice growth and I would just tell you it fits in extremely well with the small, but key distillers as well, because that distribution channel and some of the products are very similar. And so that's just another area for us that we can look for further growth in our Malt group.

Jordan Rogers: Okay, great. And then just to come -- coming to the press side. Cargill around there potential divestment of the malt assets, could you just let us know whether they could be of interest, whether you're part of that process, if there is a process being underway?

Mark Palmquist: Well, we're always very interested in anything that's going on globally in the malt industry. It can be impactful on us regardless if we were to do something with their assets or not. It certainly could change some of the customer arrangement and certainly some of the malt flows that go on. Is there interest on our side? There are components of Cargill that would be interesting to us. And if there is a reason for us to take a look at it, we certainly would do that, but we're not going to comment in terms of how we would handle any future investments.

Jordan Rogers: And then just around West Footscray, I know your comments there for the outlook that crush margins will be tough again in FY '19, but can you just comment around the improvements you've made at the actual West Footscray plant? And what we should expect over '19?

Mark Palmquist: Yes. So they're two big buckets. The first one you would expect and that is that the more we run the plant, the more efficiencies that we're able to gain out of it. The second component is really around the cost. We're finding ways that we can actually reduce the amount of FTEs that we need to have when we start looking on a volume base of production. And then the third area is just the rearrangement of customers that better fit this efficient plant. And so that means reducing the amount of SKUs that you run, going with longer run rates. The net contribution margin tends to be higher in those even though the gross margin may look lower. So those are ongoing processes. Those type of customers are not typically spot customers. They're usually annual type of contracts. So it's just takes us a while to get that sorted out. We had some gains in that in '18 and we would anticipate we'll have gains in all three areas in '19.

Jordan Rogers: And then last one from me. When do you actually sign the new rail agreement? If you haven't already, I know it's coming to an end at the end of FY '19, but when do you actually sign the FY '20 agreement?

Mark Palmquist: Alistair is hesitating a little bit. So there is a confidentiality component that goes with the contract. So I ...

Jordan Rogers: Or have not already agreed or like?

Mark Palmquist: I'm not at liberty to say. I will tell you this I have great confidence in terms of the impact, positive impact it will have on us. Take-or-pay becomes very minimal in comparison with what we've had to run through over the past five years. And as importantly, flexibility in terms of adding on capacity or reducing capacity is much more flexible than what we've had in the past. The benefit is not just for us. The benefit also comes for the railroad companies. And that tremendous increase in velocity of the use of the equipment as a result of improvements that we've done in some of the facilities, certainly makes it economically worthwhile for them to be more flexible on the terms and have less underlying take-or-pay revenue with the contract.

Operator: Your next question comes from the line of Adam Fleck from Morningstar. Please go ahead.

Adam Fleck: I wanted to follow up on the new capacity for Scottish malts. Can you help us understand maybe the margin impact of that? Is it sort of similar to your other distiller capacity or it's maybe a little lower than craft, but higher than the base beer business?

Mark Palmquist: Yes, it's an interesting question. Here is a fundamentally different business. So even though we're malting and it's malt barley, what you do for distilling on malt is fundamentally different than what you do for a brewer. And there's two key components in here, that come in to this. One is prominence means a lot more. So as you can imagine, people paying premiums for single malt Scotch Whiskey want to know that the malt barley was grown in Scotland, that it was malted in Scotland and then it was distilled in Scotland. So that in itself drives a little bit different behavior in terms of margins. Also, the type of barley you use, the varieties, intentionally producing much more level of protein and higher enzyme activity because your yield are getting alcohol is the primary driver on the distilling business, where in brewing it has much to do with the flavor and the taste and the feel in the malt. So they drive differently. So when we look at the expansion in Scotland, it's trying to match the increase in the demand and the increase that we see in distilling production. But the other benefit is that most of the distilleries really exist farther north in UK and Scotland. And these facilities are actually better-positioned for that expansion in the distilling production. And also, better-positioned to where a lot of the barley that fits the distilling characteristics or quality in the malt barley that they're looking for. So we would certainly think that we'd be in a better margin position with these expansions. It's not just the demand, but it's the overall costs, particularly on supply chain costs that we're located closer to the barley production and closer to where the distilling capacity is being expanded.

Adam Fleck: And then going back to grains, I know it's maybe a bit optimist to think about past FY '19, but just in general, you've obviously taken a lot of cost out, reduce the capital employed, I think makes a lot of sense. But what is your flexibility to potentially ramp that back up past FY '19 if growing conditions in Australia start to improve?

Mark Palmquist: Yes. There's two issues going on. One's a fundamental change, and that is on-farm storage has been increasing. So that in itself changes fundamentally what our network needs to be not just today, but in the future. So one is tracking to see how that keeps increasing. We need less facilities to handle the export play in the future because a lot of it's on-farm, but those facilities need to be different in their capabilities. So it's less about storage. It's more about flexibility, speed and efficiencies, which means removing FTE costs out of that equation. The second issue is that shutting down facilities will have a certain portion of those facilities that will be available for storage situation if we get into a peak crop year and we certainly still have equipment and availability of equipment for expanding bunkers, loading bunkers and discharging bunkers. So we can ramp-up pretty quick if that's what we need to do. But the main thing is, is that we just got to take down the amount of capital on our overall fixed cost as well as in grain just to be able to handle the volatility in grain production in East Coast Australia.

Alistair Bell: I'll just add as well, Mark, that there is plenty of export capacity on the East Coast of Australia. The other facilities that were open in recent years. So -- and we see that in those bumper years, it's about having good -- the most efficient cost effective supply chain of moving grains from farm gate right through to the end markets, whether that's domestic demand or to export and support the exportable surplus.

Operator: Your next question comes from the line of James Ferrier from Wilsons. Please go ahead.

James Ferrier: First question, back on the commodity inventory balance at year-end. And with the malt part of that in particular, you referenced the increased inventory balance there. Do you feel that the reflection on GrainCorp getting ahead of the curve on the tighter global supply situation and possibly might give you a more favorable position on your margins in the year ahead?

Mark Palmquist: Thanks, James. Appreciate the question and we're certainly hoping that will be an impact. And then one of the values of really being the grain trader and being involved in most places around the world where they have the barley production definitely should use this knowledge. Not only for sales but also for our customers. And so we've been very into making sure that we not only have the quantity, but we have the quality because that is absolutely what our customers are going to be concerned about as they've watched the deterioration of barley happening around the world. So we would certainly hope that it has positive impact for us. Getting ahead of the curve as you say, certainly makes it a lot easier to perform for our customers. And quite honestly, they've got reliance on that. So we need to make sure we perform. We're comfortable in terms of how we position ourselves that we'll be able to satisfy our customers on quality. So we're not looking for really any concerns in meeting their needs. And we would hope that there could be some additive business that could come along with that.

James Ferrier: Yes. And starting with the commodities inventory, then moving to the grain segment. There's an elevated balance that you had at year-end, similarly in the elevated balance back at the half year. And I'm just wondering the different moving pieces in terms of the marketing business, the trading book. You've got that elevated inventory at the starting point fairly into a pretty favorable market. But on the other hand, there's not going to be much new crop volume around. So I'm just interested in your thoughts around those dynamics and what it might mean for the contribution to grains earnings from the marketing business?

Mark Palmquist: Yes. So there is two components in there. So very cyclically, we always bump up during the harvest time of the year. So that side it would be very normal for that to bump up. The other component that goes with it though is, again, we also are handling more in other areas outside of Australia, and so that would increase the working capital. Then you had a drawdown until we start to realize what was going on, we had to have a lot of that inventory not get exported particular in Australia. And so, it was buying that and holding those inventories and pushing them into a domestic market that has less of a kind of a spike and valley aspect of it. That will start to ramp down as we get into the beginning of the year from owning the existing inventories as they're being consumed. Hopefully, we will see grain and coming off the new harvest will actually come to market. So we could actually see some usage on working capital on that side. The other component I'd say, though is we're going to have to draw heavier on in Canada and Black Sea. And so there's going to be some working capital usage in the inventory in those areas as well. Alistair, from a financial aspect, market aspect do you have any comments to?

Alistair Bell: Yes. Mark has highlighted it, with the grains commodity inventory, obviously, supply on the East Coast is tight that we've got -- seen good harvest conditions in Western Australia, Canada and the Black Sea created opportunity. So we do think about it as an international grains book, and the role of Western Australia supporting the domestic demand in Australia has a very important part to play in the coming months.

Mark Palmquist: I've been re-missed because, currently, we kind of keep talking about barley -- malt barley and grains, but we carried a pretty good inventory forward on a canola side when it became pretty clear to us that the main drawing area around Numurkah, was going to be down considerably and particularly when we were watching a lot of the acreage getting cut for hay. We could see that, that canola production in the area is going to drop dramatically. So we carried a pretty good old crop inventory forward.

James Ferrier: Final question from me on the grains business. Can you comment on the profitability to GrainCorp on a say, maybe a per ton basis of that inbound transhipment activity? And then in the year ahead whether or not your view on the cost of the take-or-pay rail has changed as supposed to previous guidance?

Alistair Bell: Could you just ask the second question, again, just so I heard it correctly?

James Ferrier: Yes. The take-or-pay rail exposure you have for FY '19 whether or not your view of the cost of that have changed?

Alistair Bell: Okay. So the first one, with importing of grain at these times, difficult times, it's the -- being in Amsterdam, you're not looking to profit here on those sort of things. So we're very mindful of ensuring that as we reverse our supply chain that is a provider of the service where we're seeing to be supporting what our end consumer and customers require. And that's -- we're very mindful of that. In terms of the take-or-pay contracts, it's much consistent year-on-year to what we've indicated previously.

Operator: Your next question comes from the line of Gregor Heard from Fairfax.

Gregor Heard : Just on the inventory set of side of things. So you plan to go fairly aggressively during the brief harvest peak coming over the next couple of weeks? Further to the comments that having stocks in to the new year with potential tightening might be an issue?

Mark Palmquist: Yes. We certainly got customers that we need to supply. So for grain, this farmer isn't going to hold on-site or grain that he's not going to use for his own internal needs. We want to participate at a pretty aggressive level. We need to efficiently try to find grain that's being produced in areas, feed the domestic demand that's in that area. That is the most efficient way to make sure that we're meeting our customers needs. Outside of that, then it gets into the cost of importing from different states in Australia. So we certainly want to create good opportunity for the customers on-demand. The other component is we want to make sure that we're giving farmers full access to what's going on in the marketplace. Even though their production is down for a lot of farmers and devastating for a number of them, the prices are higher. And so they really should try to make an effort to capture the revenue on those higher prices.

Gregor Heard: Did you own some within your own network in that most of the grain produced sort of in the south and there's a lot of demand in the east. So is transhipment or road and rail, what way are you leaning there moving the grains south to north?

Mark Palmquist: Well, that's certainly been happening. And that started happening about 90 days in front of the harvest. And so those would be the primary movements back at the beginning end. So we were actually using our rail moving from south to north. There's been a fair amount of truck movement that has also done that. We have moved inventories for some of our customers at prestaged at north. But the big chunks, once you basically take that down to and even between demand and supply, same thing with SA, then the primary tonnage has to be moved by water. That's the cheapest way to go and that's exactly what's been happening. We've been discharging at our facility up in Brisbane, Fisherman Islands, Gladstone. We've been into Newcastle doing it, now we're in the Port Kembla. And as I said a little bit earlier is if it does deficit in certain commodities you'll see discharge going on in Geelong as well.

Gregor Heard: So satisfied with the way your network is set up, given though that's probably a legacy sort of export-focused. The hub-and-spoke, sort of, thing you don't want to do anymore work on greater efficiency overland in moving the grain?

Mark Palmquist: So the efficiency and the big changes in the overall supply chain. So we're able to convert our plans over pretty quickly. Albeit, we just keep learning more how to run it more efficient every week. The big task at hand as almost all of that goes off by truck. So we have a situation in Fisherman Islands, as an example, where we're loading up to 250 trucks a day that are going out to get into the country. So that's that big task. It's got a lot of complexity to it. There's a chain of responsibility issues that we have to be very cognizant of. And as importantly, we've got to make sure that when you're using trucks that they actually are going in the right place at the right time with the right type of quality to it. So that's where the big complexity comes in. That's the big biggest change in terms of reversing that supply chain around.

Gregor Heard: Just lastly, how's your FarmDirect program going linking in with the on-farm storage?

Mark Palmquist: It's actually going well. It's one of the big increase that we saw in fiscal '18. And as with further work we're going into '19, a lot of the restructuring that we announced on 1 November, really concentrates on that side of it. It's just getting much more intimate with the grower in terms of what their needs are. The services they need and making sure that they're getting full access to whatever it is the best market at any given day. So that's been the primary concentration. Obviously, the benefit inside of that is that there are some cost benefits that go along with that.

Gregor Heard: What's been the reaction from the buyer, customer arm in regards to the grain outturn from the on-farm storages?

Mark Palmquist: It's actually been very good. Because what it is, is removing some of the complexity that they have and it's allowing us to use multiple locations where we have inventory to reduce some of their supply chain costs as well as making sure that they've got the quality that they want and that's reliable going in. One of the big expansions for us going forward as we've been using CropConnect, which is our digital platform in the last couple of years. We're expanding the capabilities and functionality of that, that will actually make the grain transactions happen even more efficiently and provide better market access to the growers.

Operator: Your next question comes from the line of John Purtell from Macquarie.

John Purtell: Just had a question on portfolio optimization. I mean, Mark, you mentioned in the presentation slides that you continue to explore opportunities to optimize value. Is there any status update you can provide where are you progress there over the last six months?

Mark Palmquist: Well, I'm not going to comment on the things we're working on. I would just tell you is that we will continue to look for places that we can optimize our portfolio. And really, the two big issues to us is do we have capital invest in areas that are not primary or core to our business. And the second issue is, if they are what's the impact from a -- both the negative and the positive aspect, if we take a look at some things. So it is still a -- well, I'll tell you a very top priority not just for us, but with our Board as well. Because overall, we want to improve our returns on invested capital and portfolio optimization is absolutely one place that can really provide those results. So I don't have anything that I can give you, John, at this point. When it make sense to announce, we'll announce.

John Purtell: And just finally, obviously, the season is the main focus in grains. But any change in the competitive landscape to call out? Or any change to the sort of ongoing on-farm storage trend?

Mark Palmquist: Well, I think we've kind of covered some things here a little bit, I'd just put it all together. So one is, we are seeing on-farm storage increasing. What we are seeing is that there is a greater need to get growers really connected to the market, so that they're making better decisions. So we're trying to help them with how they segregated their qualities, help them that they are getting the right signals from the marketplace. So they're planting the right crops, the right varieties and going through that. We have found that there's an evolution just with the grower themselves and that's where the digital platform has come in. They want to be better connected. They want to have greater efficiencies in just how they're working with the market. And so that's what we're evolving to and that's what we're doing. From a competition level, I think Alistair coined it best, if we look on the export side, there's plenty of capacity out there. So I think just as an industry, we're trying to find ways that we can create efficiencies as we look at what capacity is out in the marketplace and how it's being utilized. And that's a straight net benefit that everybody that's on that value chain starting with the grower. So if I see anything happening out here is that if there is some industry work that needs to be done, it's not just by a company or by a competitor.

Operator: Your next question comes from the line of Richard Barwick from CLSA. Please go ahead.

Richard Barwick: Can I just pick up on -- I think, Jordan sort of heading this direction with one of his questions. Was there any profit on the sale of the Burnley malting plant captured within the malting result?

Alistair Bell: There is modest amount, nothing particularly to call out.

Richard Barwick: All right. And thinking into FY '19, you obviously announced the simplification program going on within grains. Is there anything you can say there in terms of the costs that we should expect coming through into FY '19 and then I guess, potentially into FY '20?

Alistair Bell: There's nothing -- the announcement I'll lead and then Mark may wish to add comments. We're not expecting any big impact in 2019. Obviously, it's dependent on what the next year's crop would be for 2020. One of the big benefits of the simplification was around ensuring we've got the right flexibility in our cost structure that suit our customers. And both those the customers, the grower customers as well as the demand side customers as well. So we're comfortable that this year the it'll be at least net-net as we go through and then it's really dependent on the second half of the year. To the East coast part of the business, this is -- I'm just talking about East Coast here as well and we'll get a better view of 2020 once we're into the second half of the year.

Mark Palmquist: Yes. Just adding a little bit of color to that. We are going through a reduction in FTEs of 50 people. So obviously, there is going to be some costs associated with that. Some people will be redeployed, but there will be a net reduction in FTEs. But because it's about restructuring and better fitting with the customer, we would anticipate that there's going to be benefits that will come in at fiscal '18. Will they -- I'm sorry, '19. Will that offset the total costs of the restructuring? I don't know, but I don't think it's going to be a lot different than what we went through at the integration in '18 that they will not be large costs and don't anticipate them being any handle differently in '19 than we did in '18, and that is -- will absorb them straight into the P&L. There won't be a significant item that will fall over.

Richard Barwick: Okay. Understood. And then just thinking about the dividend, obviously, you've been very clear that you -- the target you used to pay a dividend each year. If we look back to the last period where the crop was drought-affected. There was a period where no dividend was paid. To the extent that you've got visibility today on this crop, et cetera, is there any reason to suggest that you won't be paying a dividend in FY '19?

Mark Palmquist: Well, no, I certainly, wouldn't suggest that. And we'll just check to see how the year goes. But again, when you look back on the big drought years, most of the cash flow, the vast majority of the cash flow was really coming from the grain business. And what is different today, where sizable cash flows in the lower years are coming out of the process in groups. So we're just a different company today. So we're not trying to handle that big extreme like we would have back then.

Richard Barwick: And another one, just thinking, I'm not sure if you've disclosed this in the past or not, but it might be worthwhile giving us an update if you're able to in terms of what your debt covenants are and the way that perhaps they're expressed in terms of the key parameters?

Alistair Bell: We're not at liberty to express them, but they're in the annual report where we have a net asset test or just -- sorry, I don't have them right at my fingertips, but there's 3 tests that we have is the net worth and interest cover and our overall gearing test as well. Sorry, I just don't have it right in front of me. And there we had plenty of headroom, so where we've shared our corporate planning metrics in the past around both having a net gearing level less than 45% and core debt gearing of less than 25%. We have plenty of headroom between those measures in our any bank covenant.

Richard Barwick: And just the last one. Just a clarify comment you made, Mark. You talked about infant formula, I think, was down and that was something of a drag within Oils business. How many -- just trying to get some context there. How important is that category for the Oils business, how many customers do you have within that space?

Mark Palmquist: So I'll answer the comment you had, first. And that is, I didn't want to display it as being a drag at all. It's just that we're noticing the difference in where infant formula and demand for us in the specialty oils was actually up and trending up in the first half. And in the second half, we saw that trend actually round and start to track down a little bit. So we're not sure if that's just an adjustment and that we'll see it pick up again in '19. We're very cognizant that, that type of business typically runs in what I'll call it, a 90-day cycles, and the reason for that is because for the big infant formula producers, they have multiple global sourcing and it typically takes them about 90 days to switch. And the big driver there, quite honestly, sits on the dairy prices. It's on the milk part of prices, where they drives -- where they move back and forth. So just calling it out that, that trend has stock going up and it tapered off in the second half and we're just looking at the costing around the world, just to try to anticipate what does that mean for demand in Australia. For very specific type of brands that are many niche in nature. So if I talk like in a2 or Bellamy's, as an example, they're much more insensitive to that. I'm talking more about the bigger produces like a Nestlé, Mead Johnson, Danone, those are the ones that will swing their supply chains along. So just trying to watch what's going on with it. We do know there is a kind of whole another level of regulation process going on in China. And so we're just keeping our eyes on it to see what impact it has. The second part of kind of question you had for us is what does different formula mean to us? It's basically, less than 10% of our business, but it's the highest margin business that we have, so it's ...

Richard Barwick: So less than 10% of revenue therefore, is that what you…

Mark Palmquist: 10% of volume. And so when I talk about it on specialty oils, so I'm not talking about commodity oil that you put on a bottle, I'm not talking about that. So it's a category that's meaning you pull for us, but we're not dependent on that category for the bottom line.

Operator: Ladies and gentlemen, we are out of time. And so that does concluded the Q&A session. I will now hand you back to Mr. Luke Thrum. Thank you.

Luke Thrum: Thanks for that. And thanks everybody for joining us today. Sorry, we just ran out of time. We've got a pretty full day ahead of us. So please feel free to reach out to me anytime today. Cheers.