GrainCorp Limited (GNC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the GrainCorp Investor Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I'll now hand the conference over to your first speaker today, Mr. Luke Thrum. Thank you. Please go ahead.

Thank you, and thanks, everyone, for joining us today. And thanks also for your patience. It's a little bit later than what we were envisaging. You would have seen, we've lodged the scheme booklet and the investor presentation a short time ago. So we'll be going through providing a summary on that and then taking some questions and answers afterwards. So I'm joined by Mark Palmquist, our CEO; and Alistair Bell, our Group CFO, and we'll go through the presentation, and then we'll also put an audio recording up on our website afterwards. So I'll hand over to Mark now. Thanks, Mark.

Thanks, Luke, appreciate it and also appreciate the fact that we've had the scheme booklet and the investor presentation in front of you for a total of 1 hour. So I'm not going to really refer to those. The investor presentation will give you kind of a nice summary, really, what are the major points involved in the demerger and the 2 organizations, and it will introduce you to United Malt as the new company that we're setting up as part of the demerger. And certainly, the scheme booklet will give you a lot more detail. If I remember right, I think there's 385 really interesting pages to turn through. So I'm sure you'll enjoy that as well. But we have some weeks in front of us to be able to answer any of the detailed questions and comments that you have, so we're not going to get into too much of the detail today. But I do want to talk about, again, why we believe the demerger is a benefit to shareholders. Do want to take some time. And I'm going to have Alistair Bell, our CFO, just walk through the capital structure and why we believe it's appropriate for the 2 organizations and then give you some of our input on what it means to these 2 organizations on a go-forward basis and why we really do believe that is a benefit to the success of the companies and also certainly a benefit to the shareholders. I think our Chairman, Graham Bradley, said it quite well that we have quoted in the release, and it's that the GrainCorp Board believes that the demerger has the potential to unlock significant value for GrainCorp shareholders by creating 2 high-quality ASX-listed agribusiness companies, each with management teams focused on pursuing independent strategies and growth opportunities. And we really do believe that's an important component. One of the big benefits and one of the rationale that we have for doing the demerger is we really will have 2 separate boards and management teams that are empowered to pursue independent strategies and operational initiatives. This also allows the 2 organizations really to set their structure and their organization for best fit for the customers and the markets that they're participating in. And it also allows us to look at implementing the capital structures, which again, Alistair will refer to later and financial policies that are really appropriate for the 2 businesses because we really do operate in different industries. And it certainly allows shareholders to be able to look at these 2 companies and really align with the different investment strategies and preferences that they have. And the demerger by no way removes any potential for us to reposition either GrainCorp, United Malt or some of the portfolio businesses that we have into different type of organizations, be it into joint ventures, mergers or outright sales. So we do believe that there is future value in the organization as we go forward. So I just want to highlight the uncertainty of time frame that we have in front of us. The big component is the 16th of March, which is the date that is set for the demerger scheme meeting and general meeting, giving the opportunity for shareholders to really -- a time to take a look at how we're organizing it, what we believe the benefits are and for their approval at that meeting, of which then we'll hit the second court hearing on the 20th of March. From there, we have rather indicative dates put forward that we believe that we'll be trading in the open marketplace on a normal settlement basis by early April. So with that, I'm going to turn it over to Alistair. We'll talk about the capital structure because we certainly think that's important, and we'll give you the highlights on it. So as you're going through both the investor presentation and scheme booklet, we can hopefully put some context into the decisions that we're making. Alistair?

Thank you, Mark, and good afternoon, everyone. It's good to be back here, reporting back again about our portfolio review, and the most important part is how we've got the scheme booklet issued regarding the demerger of United Malt. It's strange to be calling our malt business United Malt, but it's a terrific name and a high-quality business. So the scheme booklet sets out plenty of detail, including an independent expert report, pro formas and new segment reporting. I think one of the key updates for our investors has been about -- and it's a key component of the demerger is about setting the appropriate capital structure post the sale of our Terminals business. Our Terminals business, as you'll recall, we announced at the end of November, that the competition -- the ACCC, the competition clearance had come through, and we moved quickly to finalize, close that on the 31st of December. And the proceeds received were just over $310 million. So that was a key component of setting our pro forma core debt that we've used in the scheme booklet. The pro forma amount of core debt is $515 million and allows for transaction costs that GrainCorp will incur this fiscal year. So as we set the UMG policy, it was about maintaining its strong investment-grade structure. We've previously stated that, and we've put out there a leverage ratio that United Malt would stick with in which is the 2 to 2.5x leverage now this preserves balance sheet strength and flexibility Also, it accommodates the seasonality of the business. So at times this ratio is likely to be exceeded, and that's around the seasonality and the working capital requirements of United Malt. So it's higher at 31 March, and then lower at 30 September. The Board of United Malt has got an initial dividend payout ratio of approximately 60% of NPAT, and this gives a pro forma net debt for United Malt of $433 million. For GrainCorp, the GrainCorp policy is about maintaining conservative structure, targeting investment-grade with minimal core debt. And the net debt will be there to accommodate seasonal fluctuations in working capital and commodity inventory. The Board of GrainCorp is targeting a dividend payout of 50% to 70% of NPAT, and this gives rise to pro forma core debt for GrainCorp of $82 million. That's all set out in the scheme booklet. But the other part is that GrainCorp is retaining a 10% minority interest in United Malt. This provides additional balance sheet resourcing -- resources and financing flexibility. There's no escrow or restrictions on this interest, and the intentions that we outlined in the scheme booklet around this interest will depend on our capital requirements post demerger for GrainCorp as well as the market value of the retained stake. At this point, I'll hand back to Mark. He'll introduce United Malt.

Thanks, Alistair. I appreciate that. Also, just some comments about GrainCorp when we are through the demerger. And then I'll come into United Malt. But the structure that we have set up leaves GrainCorp in a very good position. It's an organization that has a very strong position in East Coast Australia as a growing international business, as the largest oilseed processing integrated business in ANZ, all built on a very strong capital foundation that allows GrainCorp to be able to pursue its opportunities and its strategies as it goes forward. Based on over 100 years of being in business with a very experienced management team and the addition of a CEO that has a very strong background in terms of foods and agribusiness, has a very customer-centric attitude, which will be very additive to the team. For United Malt, it means a lot of things that can be new, but it also means that there's a lot of things that are still there. United Malt is a very strong business, been highly successful in the past with a very experienced team. Having it being organized into 2 segments is how we will report it. We'll have the processing segment, which is being led by Darren Smith as President of that group, who presently is the Chief Operating Officer in our business unit of malt. We have Bryan Bechard, who will head up the warehouse processing group -- or the warehouse/distribution group. Bryan actually started that business back in 1995 before we acquired that business, and he's been in charge of that business and growing it and now expanding it into the international craft business, where we see great growth going on in Asia as well as Latin America. And then we have Amy Spanik, who will be the CFO who has been with the organization before GrainCorp actually bought the Malt business and has been the CFO of that group since 2015. So well experienced and we go down through the ranks and then we have decades of experience that can run this business. This also is a business that's well positioned in the markets as a strong, diverse customer base and as Alistair pointed out, it's strong financially and very well set up for it to pursue any of the opportunities going forward. I think one of the biggest fundamental differences for United Malt is that we'll have the ability to think about strategy on a deeper and wider level than where we have been in the past. And we'll be able to look at opportunities both organically as well as externally and as we look at growing the business and expanding ourselves geographically as well as on the product base. What we end up with is a company that is more focused on its business, a pure play, and I can say the same thing for GrainCorp as well. So we're very excited about having this opportunity and being able to take it forward. Just on a functional note, I would also say that the corporate headquarters for United Malt will be in Vancouver, Washington as over 60% of our business is in North America. And also, it is, I would say, better centrally located from a time zone base. So it's just easier for us to conduct the business. However, we won't have a listed office in Sydney, and very importantly, our Investor Relations will be based in Sydney as we're very proud of the shareholder base that we have, that its vast majority is Australian entities and individuals. And we intend to make sure that we maintain that support and we deserve that support. So we're very excited about the changes that we have going forward. I think at this point, we've opened up to questions. But again, I would look at the questions being really more kind of high-level things that we can do to kind of help you as you're going through the scheme booklet. And as I'm looking across at Alistair, Alistair, I think you probably just have a few more comments that you'd like to make before we get to the questions.

Thank you, Mark. Maybe just touch on GrainCorp after the demerger. The demerger is another key milestone in GrainCorp's long and proud history. And so post demerger, GrainCorp will continue to be a leading Australian agribusiness. We all know it's got diversified operations, connecting the growers, the consumers, the significant supply chain and manufacturing platform and well-positioned asset base with international reach along the value chain. I mentioned these and recap it because the demerger repositions GrainCorp to focusing on leveraging this platform and to expand its presence along the value chain such as our feeds business. I touched on earlier about the importance of our capital structure and to be able to accommodate the business through the cycle and seasonal fluctuations. So there are 3 elements that I'd just like to remind people about. The first is, we executed a 10-year crop production contract as the way to smooth cash flows against the East Coast Australia crop production. This is a really important piece in our capital structure. Touched on maintaining a minimal core debt. Now this is because United Malt is kind of absorbing and servicing the majority of the core debt. And then we've retained a 10% minority interest, and this provides additional balance sheet resources and financing flexibility for GrainCorp's future. I think the other thing is, what else is changing and not changing? GrainCorp continues and has been for some time underway with a number of significant operational initiatives to strengthen our core business. We're well down the track on that, and we'll continue to pursue it. And we've outlined these plus our strategy in detail in the scheme booklet. As Mark mentioned, our management are the same other than we're welcoming in Robert Spurway as the Managing Director and CEO once Mark departs after the demerger is effective. And that -- and for GrainCorp's Board, we've got a well experienced Board of Directors, knowledgeable about the industry, including the new directors that have come with good industry knowledge. And the way we organize ourselves now as part of the new operating model means that we combine grains and oils, but the new segment reporting will be in 2 lines, agribusiness and processing. And once again we've reset the historical performance in the scheme booklet. So Mark [indiscernible] touching them, so what's different with GrainCorp, and I'll hand back to you.

Yes, but those are great points, Alistair. I'm glad the growth shows goes up. Miles, I think we're ready for some questions.

[Operator Instructions] But your first question comes from James Ferrier from Wilsons.

First question, going back to the settlement of the divestment of the liquid terminals. Alistair, what sort of tax is payable on that gross proceeds figure of $333 million?

So we've set out the detail in the scheme booklet. We've got carryforward tax losses, so there's minimal tax payable that arise as there was accessible profits, tax profits. However, we've been able to offset them against some of our carryforward losses.

Yes. Okay. That makes sense. Second question is around CapEx. I'm trying to keep this relatively high level, as you've referred to. Thinking about stay-in-business CapEx for the 2 business -- 2 businesses going forward. Thinking back to the FY '19 result for the combined group. You talked about FY '20 stay-in business CapEx being similar to FY '19, so about $42 million. And just skimming through the presentation just now, it seems you're referencing about $25 million for Malt for United Malt and about $40 million for GrainCorp, so $65 million in total. I'm just wondering if there's anything in particular that's driving what seems to be an increase in stay-in-business CapEx?

James, just to recap, the amount that we have included in the scheme booklet and also the Investor Presentation, they're consistent to how we've updated the market at the full year results that we've just split it out, obviously, within the 2 groups. United Malt is slightly higher than, say, 12 months ago, that is consistent. And that's because in the near term, we felt it's important United Malt complete a number of projects to assist them with their operational efficiencies. And in terms of GrainCorp, each business we've outlined on Page 58, $35 million to $45 million, that's a through-the-cycle number. Obviously, we've been through a period of 3 droughts in a row. So the spend or the demand on the business has been less, but we've indicated that if we are back to normal levels of production in the East Coast, that's the sort of money that we'd be spending in that sort of average year.

Yes. Okay. And that's helpful, Alistair. Last question, I saw some figures out of Nielsen suggesting that craft beer sales in the U.S. declined in 2019. I'm wondering if that's consistent with what you're seeing. And I ask you just because with the additional detail we've got around the outlook for United Malt in this presentation today, there's a bit of reference there to the opportunities to grow the distribution, grow market share and points of presence on the ground. So maybe you could comment on those 2 aspects, please?

Yes. There's no question that craft is slowing down in its percentage growth, but we haven't seen that and haven't experienced that. In Brewers Association, it's showing growth that's closer to 3% to 4% for the past year. So I'm not sure where Nielsen is getting their numbers from, and that hasn't been our experience as well. More importantly is that you're having -- this sector, the micro group is where the big growth is which fits in very well with our warehouse distribution network, and that is still growing by leaps and bounds. And so overall, their consumption is pretty flat in the U.S., and what you're seeing is a decline in market share of what we would call that kind of the mainstay big brewers, so you're dealing with kind of a standard lager or a pilsner type of beer. And the growth in craft is really skewed towards the microbrewery side where you are seeing flat, and you are seeing some decline by some of the big national craft brewers but the smaller side is where the growth is really going. And that's the part -- and that's the component of the craft business that really fits well with our warehouse and distribution.

Your next question comes from the line of David Pobucky from Macquarie.

I was going to continue on the last question, if I may. Just in terms of the split between craft and majors. So majors still have about a 53% share, but as craft with 33% in terms of your split, how do you see that changing out over the next few years, particularly with demand in that majors space not growing?

Yes. It appears that the consumers are still switching and drinking more craft. They are on what I would call the mainstay of regular type of brewer. So if we were looking at that and saying what we've experienced over the past 4, 5 years that we would look for further degradation in their market share. But again, from a pure volume base, it's still very huge. So we got to be kind of watchful of seeing that decline. It still is a tremendously big volume and it still is a big component of our business. But where the growth is really coming for us both from a volume base as well as a margin base is really coming out in the craft brewers. And it's really because their requirement has 2 components to it. Generally speaking, they have a higher inclusion rate of malt on a per barrel base, so we see malt volumes growing. And the second component is that they require what we would call more specialty malt. So they're either variety specific for their crystal malts, for roasted type of malts which, again, fits in very well with our organization. That's our specialty, and that's our leading position.

Great. And just one last question. Just in terms of retaining a minority ownership in United Malt of 10%. If you're just able to provide a bit more color around that, potentially relative to the other options of not retaining minority ownership there And then just what's meant by additional balance sheet resourcing and then financing flexibility?

Yes. Thanks, David. As part of my intro, I've referenced that the pro forma core debt of GrainCorp was $82 million, and GrainCorp was about ensuring we had minimal core debt moving forward, so our balance sheet capacity is around funding working capital and seasonal inventory demand. So as we thought about that and our future requirements, the Board decided to retain 10% of United Malt. So without additional balance sheet resourcing, just to add coverage around that future need, and it just gives additional capacity to -- and financing flexibility as we plan the year ahead.

Your next question comes from Adam Fleck from Morningstar.

I had a follow-up question. I think it's Slide 28 in the investor presentation. I appreciate that the EBITDA margins are both processing and the warehouse/distribution businesses have come off. I mean that's because of some of the costs are pass-throughs that you mentioned on the barley side. So I was hoping maybe if you could help us with just the direction of the tonne or sum per volume figure?

Well, you're right. We did have some circumstances that happened. One is we're dealing with the drought issue down here in Australia. And so there has been some additional costs that have gone in in terms of being able to satisfy our customers. Case in point, we ended up moving quite a bit of barley over from Western Australia to satisfy our needs. We've also had -- I know this is going to sound strange in saying this, but we had some winter events Canada, which you have every year. But in this particular case, the timing of the events were somewhat extraordinary for us. And not just for us but also for our customers. So we actually had -- 1 issue is a little bit with quality, with something that we call a chitted barley, which means that it pre-sprouts, and so we had some quality issues in having moved some additional tonnage in from Manitoba and Eastern Saskatchewan to our plant in Calgary. And then we also had a delay in some shipments going on, which is just kind of a downsizing of some of the volume that happened as well. Not experiencing those issues as we're going forward in this year. And we always do experience weather events in Canada, so I don't want to make it sound like we're not prepared for the winter. On the warehouse distribution side, that's really the ramp-up of our national distribution system that we've been going through. So as you know, we've got now 9 facilities in the U.S. We have 3 in Canada. We cover all the areas well. I was going to try to reference on Page 4 in the presentation. So you just see how we're situated in that marketplace, but we're pretty well ramped up now. And so the last one -- I'm sorry, Page 19. We're pretty well situated now to shift the areas that not just existing customers, but where we're seeing the further growth going on with the micro brewers and the craft side of the business. And so we certainly are anticipating that we'll be getting our returns on that ramp up. Those facilities, by the way, we're pretty well done doing a 3PL type of facilities. These are being owned and/or operated by us, which certainly gives us better intimacy with our customers, and we certainly give them better service out of it.

Great. That's really helpful. And then moving back to Slide 20, you had called out -- been, of course, talking about craft versus microbrewer, but you called out the distribution partners and the opportunity in Mexico and Lat Am there. I was just curious, we have seen Mexican beer really rising demand as well as craft in the U.S., and I was curious if you could discuss how that impacts your malt business in North America?

Yes, it's an interesting question because it does appear kind of strange in the front end. We're importing a lot of Mexican beer and only turn around -- and we're importing products for the craft side in Mexico. So the Mexican beer coming up, primarily when you see brands such as Corona, Pacifico, Modelo, Dos Equis, they are being brewed in Mexico, but a lot of the product is actually coming out of the U.S. So we ship a lot of malt into that. So that's a good category for us in terms of growth. What we're seeing on the craft side is similar to what we are having happen in U.S., Canada and also Australia is it's the microbrew side. So we're seeing a lot of small breweries springing up, and it's really growing at a very fast pace, albeit from a small kind of base starting point. So what we're shipping down into that area is a lot of the specialty malt, hops and other products, adjuncts that go into it so that they can produce that craft quality. So they're producing things from IPAs to ports to actually unique lagers, different types of qualities going into it. So that's the big growth that's happening not just in Mexico, but we're seeing in other areas like Brazil. And also over in Asia, big growth going on. And in Southeast Asia, it's really getting to be a big place. It's growing. We talked about a lot of the owners that are in there. A lot of them end up being nationals that have come to the U.S. and gone to university, and they go back there and they can't get their craft beer anymore, so they start up little microbreweries and grow the market over there.