GrainCorp Limited (GNC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GrainCorp Limited Half Year '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Robert Spurway, Managing Director and Chief Executive of GrainCorp. Please go ahead.

Thank you, Matt, and good morning, everyone. As we start, I would like to acknowledge the traditional custodians on the land on which we meet. For those of us here in Sydney, that's the Gadigal people of the Eora Nation. We pay our respects to their leaders, past, present and emerging. With me in the room here today is Ian Morrison, our Chief Financial Officer. I'll make some overall comments. We'll talk through our financial results, some safety and ESG updates. We'll talk about how we're delivering the results, including our progress against strategy. Ian Morrison will then talk through some of the detailed financial performance and the excellent results we're seeing across all areas of the business. We'll talk about the strength of our balance sheet, and I'll make some closing remarks on outlook and conclusion before answering any questions. For those following online, I'm on Page 4. Really recognizing that the numbers here speak for themselves. It is a record half year result for GrainCorp and a result that we're really proud of. Our earnings before interest, tax, depreciation and amortization, $427 million. As I said, we've had excellent performance across all areas of the business, and a notable feature of the result is the incredible resilience of the supply chain and the capability of our people right across GrainCorp. We have, of course, seen strong demand for soft commodities on top of 2 bumper crops on the East Coast of Australia. Importantly, we continued to employ disciplined cost control right across GrainCorp. And today, the Board has declared interim dividends totaling $0.24 fully franked. In terms of our outlook, just a few weeks ago, we announced that our earnings guidance reaffirmed today is an underlying EBITDA of between $590 million and $670 million for the financial year '22. That translates to underlying net profit after tax of between $310 million and $370 million. We are seeing very favorable conditions for the 2022/2023 crop, which is currently being planted by growers across Australia. Soil moisture conditions look very favorable, and we're wishing growers well for that period of planting. And as I said earlier, in terms of a feature of the half year results, we continued to see strong demand for Australian grain. Moving to Page 5 of the presentation. The headline numbers, $427 million of EBITDA, up from $140 million in the corresponding half last year. Net profit after tax up to $246 million from $51 million in the corresponding prior half and a very strong return on invested capital at 25.7%. The result has been driven by the greater activity in the business. Grain handled up to 38 million tonnes from 30.4 million. I think that reflects not just the strength of the GrainCorp business but the benefits of bumper crops to regional economies across East Coast of Australia. It's great to be part of the success for the whole sector. It's not just our Agribusiness that's performing well. In terms of the headline numbers in our Processing division, Ian will speak to the details of those. But you can see crush volumes at 232,000 tonnes are up 5% half-on-half. And the business is in a very strong position with a core cash position of $129 million, up from $90 million of core debt in the half last year. Talking about our people and our commitment to Zero Harm on Page 6. We are pleased to see a slight improvement in our recordable injury frequency rate. Every day, we arrive at work to make sure we keep our whole team safe and progress our commitment towards Zero Harm. It has been a busy period, and we've seen a number of challenges with the activity and the separation of people through COVID and pandemic restrictions. We have now started to accelerate and progress the injury management training and the behavioral safety programs for our people, and it's good to be able to get people back together to ensure we continue that progress towards Zero Harm. On Page 7, we were proud at the end of last financial year with the refreshed sustainability report that we released, and we're pleased to provide an update today that we continue to make progress in that area integral to our business across, not just environment but also social and government aspects of leadership at GrainCorp. You can all read the slide more quickly than I can take you through all the relevant points, but just to call out a few areas. We are making good progress on defining and measuring our Scope 3 emissions. Across the social areas, we're very proud of the GrainCorp Community Foundation, which in its first 6 months has awarded approaching $300,000 of grants and support to communities in which we operate across regional Australia. We've also, in the governance area, achieved certification for canola crushing at Numurkah that allows us to access sustainability and the growing demand we see in sustainable mandates for fuel and other areas of outputs from that supply chain. On Page 8, I do just want to take a moment to talk about our operations in the Ukraine and, most importantly, reflect on the small team of people that we have in Ukraine. Our priority has been on looking after and supporting their safety in what has been an incredibly difficult time for our colleagues in the Ukraine. Just to reiterate, though, GrainCorp has a small team in Kyiv in the Ukraine. We have no fixed assets, and we originate grain from that business for our customers globally. In that sense, our business is very well set up and protected with no forward financial exposure to Ukraine after a full provision has been taken for the small amount of grain inventory we hold in that market. That has meant that we can continue to focus on the safety of our team and our people, and we continue to support them through connecting them with humanitarian organizations and charities, including Save the Children. Whilst the Ukraine crisis has had much commentary about the impact on energy around the globe and in Europe, in particular, it also has a significant impact on global trade and food. The chart on the bottom right of the page here shows the production and, importantly, the exports associated with Ukraine and Russia. Whilst food is not sanctioned, the food supply chain is clearly disrupted with very few exports coming from the Black Sea in any sense at the moment. And that is creating a gap between supply and demand around the globe. It is also creating a sustained rally in commodity prices, and importantly, for GrainCorp, creating an opportunity to meet that growing demand for grain around the world in a supply-constrained environment. Moving to Page 9. Our strategic priorities very clearly focus on lifting return on invested capital and growing the business. We have deliberately called out our focus on strengthening the core and our progress on targeted growth opportunities. If we expand on those in a little more detail on Page 10. A result of 25.7% return on invested capital really is delivering on that commitment. It's obviously benefiting from the environment we're seeing around the globe at the moment and the conditions in which we're operating. But it also is underpinned by the ongoing progress we're making in the commitments we shared at our Investor Day in March of last year. Our international expansion is continuing to operate well and we're delighted to, earlier this calendar year, announce the completion of the Fraser Grains Terminal joint venture, which is now fully operational and connecting our supply chain in Canada. We're pleased with the progress and the lead indicators in terms of the performance of that supply chain. And we're very confident that as that market recovers from drought, the full financial benefit of that business will be realized. In terms of the core uplift, despite the exceptionally strong grain exports through the half, we've also continued to diversify and lift the amount of bulk materials outside of grain that we've handled from 900,000 tonnes in the half of '21 to 1.3 million tonnes in the first half of this financial year. We've also completed cement importing capacity and capability in place at our Port Kembla facility south of Sydney. Another area in which GrainCorp already participates and is a natural participant is the agri-energy sector. We've seen very strong growth in our Auscol oil recycling and upcycling business, and we remain very well-placed as a natural supplier and contributor to feedstocks and renewable fuels and a growing sector. I think it's an area that, not only is supporting our core earnings, but increasingly, we see as an area and opportunity for growth. In summary, we are on track to fully deliver the $40 million commitment and uplift and through-the-cycle earnings. So not only are we enjoying the benefits of the opportunities available to us at the moment, we are continuing to strengthen our core business. If I now move to Page 11 and talk about the growth initiatives and some of the announcements that we've made over the half. We're pleased with our alternative protein progress and the partnership that we've formed with CSIRO and v2food, including the provision of a government grant for $1.8 million in terms of research across plant-based proteins and the development and commercialization of that supply chain, an area in which GrainCorp already participates. We have continued pilot programs, testing applications and technology across crop quality characteristics and, indeed, carbon measurement in the agricultural supply chain. We completed a 15% investment in Hone, which allows us to measure through new technology and cheaper technology attributes of grain but also carbon measurements in soil. It's an exciting business with some exciting growth prospects. Today, we're also confirming and announcing our corporate venture capital fund, GrainCorp Ventures, that allows us to invest in Agtech start-ups and puts an umbrella, if you like, around an expected investment of around $30 million over the next 3 years. Just on Page 12, we go into a little more detail of our thinking around that. It highlights the 4 key investment areas of analytics and optimization, smart supply chains, biotechnology and sustainability in the circular economy. It's on top of the areas that we've already invested in, in those exciting and developing technologies, which should build long-term sustainable growth in the Australian agricultural industry. I'm now going to hand across to Ian Morrison, our Chief Financial Officer, who will talk through some more detail on the financial highlights and the segment reporting. Over to you, Ian.

Thanks, Robert. I'll now move on to Slide 14 to summarize the segment earnings breakdown for half year '22. It's pleasing to be able to report strong uplift and record results across both our Agribusiness and Processing segments, and I'll touch more on those shortly. Firstly, in terms of the corporate results, note that this includes a net loss of just over $7 million relating to the UMG holding. The corporate result also includes some one-off expenses totaling between $2 million and $3 million supporting our growth and innovation strategy. Overall, after adjusting for these items, the underlying corporate cost run rate remains between $9 million and $10 million per half. I'll now move on to Slide 15 to provide further detail on the Agribusiness segment, starting off with our East Coast Australia business. This year saw a second consecutive crop of over 30 million tonnes on the East Coast of Australia. And combined with the higher carry-in from last year's crop, this led to another increase in grain tonnes handled through our supply chain. Total receivables were 14.7 million tonnes in this half, and that's up from 14.5 million tonnes in the prior corresponding half. It's also pleasing to be able to highlight the outstanding execution by our teams in running the supply chain at close to full capacity. And the teams have had to work hard to overcome some flood-related disruptions to continue delivering for our customers. This saw us export 4.5 million tonnes of grain in the first half, and that compares to 3.1 million tonnes in the prior year. We also saw strong margins for our East Coast business through the first half, and that's off the back of strong supply out of the East Coast of Australia, combined with some of the challenges Robert touched on in the Northern Hemisphere. And that's really what's underpinning the strong demand for Australian grain. Finally, another pleasing highlight in the result is the growth in bulk material volumes that Robert mentioned earlier. Despite the ports being very busy outloading grain in a big export year, it really demonstrates the strength of our supply chain that we can continue to diversify our earnings streams in that area. Now turning to Slide 16 and the other businesses within the Agri segment. Our International business continues to play a key role in connecting Australian grain to global demand. And it's been pleasing to see a positive uplift in the performance of that business with both increased volumes and improved margins. And that's particularly off the back of exports out of Western Australia this year. The [ lower ] GrainsConnect Canada joint venture has been impacted by drought this year. It's pleasing to have completed the Fraser Grain Terminal in Vancouver this half, and we look forward to improved volumes and margins as production normalizes in Canada following drought. Now just touching briefly on our Feeds, Fats & Oils business. Our used cooking oil upcycling business, Auscol, has continued to perform very well, driven by good execution and also strong demand for renewable fuel feedstocks. Now turning on to Slide 17 and our processing segment, starting with Oilseeds. As you can see in the graph on the right-hand side of this slide, the first half of FY '22 has continued to deliver on the trend of increased crush volumes. The first half has seen 5% year-on-year increase in total crush volumes and that follows on from further efficiency improvements at our Numurkah and Pinjarra crushing plants. We've also seen excellent crush margins in Oilseeds in the first half of FY '22, continuing the strong second half we saw in FY '21. The large supply of canola seed in the East Coast of Australia, combined with challenges in production and supply of oils elsewhere as well as the increasing demand for renewable fuels and feedstocks are what's underpinned those strong margins. And now just briefly touching on our Foods business. We've also seen positive improvement there with increased Foods sales volumes in the first half, benefiting from an increased customer base. I'll now move on to our balance sheet and touching on Slide 19. We finished the first half in a strong position with a core cash balance of $129 million at the 31st of March. With the large crop and volumes handled, combined with higher commodity values, we have seen an increase in our net debt balance. And that's really about supporting grain accumulation and the export program. Also, as a reminder, we took the opportunity last year to extend our term debt out to March 2025. Lastly, we also continued to retain the additional financial flexibility of the 8.5% stake in United Malt Group. So overall, our balance sheet is in a very strong position. Now moving on to Slide 20 and capital expenditure. In FY '21, we saw higher CapEx partially as a result of additional capacity increases across our network to handle a large harvest. And we've seen really strong returns from that investment. With conditions looking favorable for the FY '23 crop and a high carry-out of grain this year, planning is underway for additional investment ahead of the 2022/'23 harvest. We, therefore, would expect to see FY '22 full year sustaining CapEx continued to operate above our through-the-cycle range of $35 million to $45 million. And just touching on the right-hand side, D&A in FY '22 is likely to end marginally higher than FY '21, and that's mainly due to increased harvest-related spend, some of which has shorter life, such as tarpaulins. On that note, I'll now hand back to Robert.

Thanks, Ian. And moving straight across to Page 22 with some comments on our outlook. In early April, we upgraded our earnings guidance for financial year 2022 to $590 million to $670 million in terms of the expected range with an underlying net profit after tax of between $310 million and $370 million. If we look at some of the underlying features, the charts on the right highlight what many of you in Australia will already be aware of. It's been very wet across the country, which leaves growers with a very positive and full moisture profile across many of the grain-growing areas. The outlook also remains for a wetter-than-average June to August period, providing improving confidence around the prospects of a strong crop currently being planted. We also expect to see high carry-out grain given the grain that we carried in and the very large collections that we've seen this season. It sets the business up for strength into the future. And as I touched on earlier, we're continuing to see continued disruption of the Northern Hemisphere supply, creating very strong demand for Australian grain across the globe. ABARES will announce their winter crop forecast for the current crop on June 7 next month. If I now move to capital management and our capital management framework, and importantly, the total of $0.24 in dividends that we've announced today, including the fact that they are all fully franked. We have announced a $0.12 per share ordinary dividend and a $0.12 per share interim special dividend. This is in addition to the previously announced $50 million share buyback, which is expected to commence shortly. Just in conclusion, on Page 24. It is a record financial result for GrainCorp in the first half of financial year 2022. We are on track for an exceptional result in the full year. Importantly, our supply chain remains incredibly resilient with disciplined cost control across the entire business. We are seeing ongoing strong global demand for Australian soft commodities and favorable East Coast Australia growing conditions providing positive momentum into financial year '23. The company is in a very strong financial position, well-positioned for investment in growth in the business and in capital returns to shareholders. Thank you for your time this morning. We look forward to answering any questions that may be there.

[Operator Instructions] Your first question comes from David Pobucky from Macquarie Group.

Robert, Ian and Luke, congratulations on the record half year results. Just a couple from me. The first launch, you talked to strong margins for the East Coast business due to strong supply out of the East Coast and then global challenges. Do you think those elements could continue into FY '23? I appreciate it's still very early on, but do you see a possibility of that continuing into next year?

I think the short answer is yes, David. We are seeing ongoing demand for grain around the world. If you look at the features behind that, the drought across the Northern Hemisphere has probably been the most significant feature in the half and prior to that, over the last 12 months. But more recently, the very significant disruption to the Black Sea probably has an even greater impact on medium-term supply and flows of grain around the world, which just extends that period of significant demand and strong prices for Australian grain. Whilst it's very difficult to predict exactly what's going to happen in the Black Sea, it's certainly our view that it's going to be disrupted for a significant period of time that could run to several years given the very disruptive hostilities on the ground in Ukraine, the infrastructure in that country that's been damaged, and, put bluntly, the risk of grains being exported from there even as things start to be rebuilt.

And just a couple for Ian. Operating cash was a $30 million outflow. And if you wouldn't mind just talking to the drivers of that and the ability for unwind in the second half to recoup their cash?

Yes. Thanks, David. We have in the investor presentation as well included some additional detailed cash flow statement in the appendix. And so that's a helpful reference point as well. One of the features in the first half that's typical is the higher commodity inventory funding, and that certainly does create some noise in relation to the operating cash flow. So we've tried to set out some additional detail in which you can take a look at. So yes, we would fully expect that to unwind into the second half.

And I think, Ian, if you exclude the impact of inventory, the operating -- net operating cash flow in the half was $211 million, so not positive.

That's right.

And just one last one. Just in terms of Ukraine, you mentioned that you've taken a full provision there for the grain held. What was the amount of that provision, please?

It was in the order of $10 million, David, and that was a partial vessel that we were accumulating. We still retain ownership of that grain, but we felt given the uncertainty and therefore the strong probability that it will be very difficult to export or recover value for it, we're fully provided for it. But we continue to explore opportunities to realize some, if not all, the value of that grain.

Your next question comes from Apoorv Sehgal from UBS.

Congrats on the results. First question, just has there been any feedback or potentially pushback from domestic growers around the pricing and revenue outcomes that they have been receiving. Like just in the context of the very strong margins and spreads that GrainCorp's generating, I'm just wondering about the potential of the headwind if growers start demanding more, particularly if the FY '23 crop maybe isn't quite as big as FY '22?

Look, I think the first thing to say is that when we talk with growers, the traditional things and the ongoing point they make is around service levels, turnaround times, and they're happy with the progress we're making in that space and the reinvestment in our network. There has been some noise from grower groups trying to understand the dynamics around the globe at the moment. The reality is, though, and the fact of the matter is that Australian growers are receiving record prices for grain at the moment. We are seeing the value of our supply chain and infrastructure assets, given we're dealing in an environment where there's plentiful supply in upcountry Australia and a shortage of supply around the world. The other factor is when you look at the time between when the grain's ordered and when it's expected to be delivered. There are significant costs associated with the funding of that grain, of course, but also the freight and transport and storage of that grain given many of the purchase contracts are now 4 to 6 months out from time of purchase. So I think given the very competitive nature of the East Coast market, the fact that we do have some very valuable assets in terms of moving storage and exporting of grain, generally informed growers are very understanding of the market and the way it's working and the prices they're getting, which as I said, are higher than they've been historically and at record highs. And I think that is important because growers are also facing increased input costs with escalation and fertilizer costs and other factors. So it means that they're able to recoup those higher input costs and the dynamics or the drivers to incentivize a full plant remain very strong.

Thanks for the data. And you also talked in the presentation back about the strong demand for these renewable fuel feedstock as it's supporting elevated pricing for used cooking oil and tallows and so forth. Do you think these pricing trends could actually be sort of sustainable on a multiyear view, just particularly given that the biofuels as in the policy, I think, in the U.S. underpin that?

Again, short answer is we have increasing confidence about the strong sustainability and the direction we've seen in that trend for some time. I think if we go back 12 or 18 months ago, we started to talk about the increase in correlation between fuel prices and edible oil prices. And that correlation is even stronger today. We are still seeing significant volatility in grain and oil and oilseed prices. But I think the growing trend around the world towards renewable fuels, the increase in mandates for sustainable fuel and particularly sustainable aviation fuel are absolutely growing a long trend -- a long-term trend in terms of opportunity in that space and strong demand for us given the natural assets we operate in that space being the largest crusher of oilseeds in Australasia, the strong supply chain capability we have, including, as I mentioned earlier, the Auscol recycling business. So that's an area that we will continue to access and we see as an ongoing opportunity for growth in the business.

Wow, that's really interesting. Final question from me, just maybe a real basic one. Is now the sort of time you'd want to see rainfall maybe ease up a little bit and then it sort of returns back in September/October just before harvest starts or not?

Look, I think there'd hardly be a farmer in Australia that would ever say that they've had too much rain. They're always aware that we do farm in one of the driest populated continents in the world. But it is a big area as well. And I think, overall, the conditions are very favorable. There are some isolated areas where it's probably a little wetter than growers would like. But those growers I've spoken to said that the choice between drought and too wet, they'd take too wet any day, and it's certainly not likely to have a material impact on planting. And I think more importantly, you look at the medium-term forecast, and it looks very favorable through the growing period, which is what's more important. So the other thing to remember is the vast majority of us are based on the coastal regions, and it's been much wetter in terms of coastal flooding than it has in the grain-growing areas, which do have a full moisture profile but, generally speaking, haven't had the same level of dramatic flooding that we've seen on some of the coastal areas and the very damaging impact that that's had on some communities.

Your next question comes from Grant Saligari from Credit Suisse.

Just a couple from me, if I could. Just first on the receivables volume, you're running marginally ahead of this time last year. Just curious, is your sense of the amount of viability of grain still on farm? Do you feel that there's enough grain on farm that you have a reasonable probability of meeting or exceeding the 16 million tonne of receivables that you achieved last year?

Yes, we are forecasting slightly higher receivables this year. It's always very hard to measure and therefore estimate on farm grain, Grant. But our view is it's probably very close to full, if not at full capacity on farm if you look at the size of the production numbers over the last 2 years. So we're very comfortable with the share that we've been able to achieve of grain and the prospect of the first tonnes from the new harvest likely coming to us given the full carry, not just in our business but across the industry generally. I think, Ian, if you've got any additional comments to make on that. The other thing we're seeing is a pretty strong summer crop in Northern New South Wales and Queensland in, Grant. So that is still coming in, and particularly in Central Queensland, some more to go on that. So we'll be in a position to update the market at the full year as to what the extent of the bumper crop has been. I'm pretty confident about it by summer and winter crop and the volumes that we're likely to receive and are set up for next year.

All right. That's helpful. Just a second one, if I could. Just on the $30 million investment fund that you've set up. Can you put some sort of parameters around financial returns or expectations or how you're sort of thinking about generating a return from that investment.

Yes. I might let Ian make some comments on the financial aspects of it. But I'll just reiterate, it is up to $30 million over a 3-year period. So it's a very modest investment. And it is designed, to some extent, spread our capability to access a greater number of technologies and bring benefits to our business and to the sector. But also by its design, designed to moderate the risk, if you like, of some of those start-ups as well. But Ian, perhaps you can talk to the financial benefits we expect to get because that's a very big part of our strategy.

Yes. And the way I think about it, Grant, is there's 2 ways we're thinking about the financial benefits. One is the direct returns from the investments themselves, and on that basis alone, we'd certainly be aiming for well above hurdle rates and certainly cost of capital. But the additional benefit that we're really aiming to get from that fund and the venture is, is the learnings and the benefit that can come back into our overall business and supply chain. So that way, you're getting the returns over and above what you could just get from a financial investment. So that's what some of the goals overall are from some of the areas we're looking at.

And I think prior to the GrainCorp Ventures, our investment in Hone is a really good example of that, where it reduces our testing costs, brings benefits to growers right now but also has some pretty exciting growth areas, particularly in the sustainability space and carbon measurement. And Grant, if I recall, you might have asked a question at the Investor Day as to what we were planning to invest in this Agtech area. And this is one way I guess to provide some additional disclosures and transparency around the envelope of funding that we're looking at, how we'll manage that, and I think it provides some certainty to the market in that space and also leaves us with the flexibility to look at other investments outside of that where they make sense.

Okay. And just one final one, if I could, if you don't mind. The on-market buyback. Robert, was it correct, did you say you expect to commence that on-market buyback shortly? Is that -- I'm not trying to put words in your mouth, but if that's what you said because that's pretty bullish on value expectations of GrainCorp?

You can put those words in my mouth. From the ASX release, Grant, we said the dividends are in addition to the planned on-market share buyback, which was first announced by GrainCorp in November and is expected to commence shortly. And the reasoning for that and the timing of that, as we said at the time of announcement, we were heading into the first half of the year where we see our peak inventory funding costs. I think we've certainly demonstrated the value of being able to fund that inventory and the result we're producing. The strength of the balance sheet and the forward cash generation now puts us in a position to commence that share buyback, which we I see as an appropriate return of capital to shareholders given the profitability and strength of the business.

Your next question comes from Owen Birrell from RBC Capital Markets.

Just a couple questions from me. First one on the FY '22 guidance. You've reiterated the guidance you provided last month. I just wanted to get a good sense of how far forward your visibility is. I think you said some contracts were out to 4 months, which would take you to the end of September. I'm just wondering what proportion of your sort of volumes have been sold out that far? Or how much certainty do you have around that guidance figure at this point?

I mean, that's a really good question, Owen. And I think a couple of comments that I would make is, first of all, I think the first half year result underpins the progress we're making towards that guidance. It does -- if you look at specifically the answer to your question, we're reasonably fully sold through quarter 3, and we're now selling into quarter 4. So there remains some uncertainty about quarter 4, but we're actually very confident about the conditions that exist in the market and the ability to sell quarter 4 in a positive way. Ian, you got some more comments just in terms of the timing of the way that works?

Yes. We tend to typically be sold a good quarter ahead and possibly a little bit more. And I think the biggest risk now is all about execution, and we're very confident with what we've seen in the overall ability to manage the supply chain that we're very comfortable with, with that overall risk.

And Owen, as we said at the time of the upgraded guidance, a couple of the factors that influenced that and certainly will influence the margins that are available in Q4 and beyond is the confidence and the growing confidence in the next harvest. So I think there's probably a firming view around that, and we'll be watching that closely through the growing period. And the second one is the availability of demand, and therefore, the pricing for Australian grain and the disruption we've seen in the world. Certainly, it's not a short-term impact. That's likely to endure for some time. So we're very confident about the conditions and, as Ian said, are very pleased with the very strong resilience of our supply chain and ability to execute against those plans.

I might just draw you on that comment. Just looking at your FY '23 outlook comments with respect to the planting outlook at the moment. As it stands today, how does this compare with what we saw last year and the year before, both record years in Australia. Is the planting conditions now better or worse than what we saw over the last couple years?

On average, we would say that the soil moisture temperatures across a much broader area of the East Coast are better than they've been for the last 2 years. But it's also fair to say that it is a long way to go before the crop's finished, and a lot can change. And that's why we don't and we won't commence forecasting what the crop is going to be. What we would say is the potential for a good crop is there based on that soil moisture profile alone. But I think ABARES are very well-equipped to provide that update in terms of the actual data on the 7th of June. They provide another update in September and then, of course, a more conclusive one in November or December, I think it is in terms of the final one. So Ian, if you got any other comments on that, I think it's always a long time ago, but conditions are as good and better than they've been for the last couple of years at this point in time, but it is a long growing season through to harvest.

Yes. And in addition to the planting conditions, it is that continued outlook around La Niña conditions and continued rainfall through that growing period that, that supports confidence in the outlook at this stage.

That's great. Thanks for that color. And can I just ask in terms of the GrainCorp Ventures business here, I know you said it was sort of very modest investment. But I'm just wondering how targeted you are going to be with these investments. Are we looking at a very broad platform of very small businesses? Or is it going to be much more targeted to just a handful?

Look, we're not disclosing the absolute specifics of it, but it's more likely to be in the order of 3 or 4 investments over an annual period. It really comes back to the drivers and the interest we have in those businesses, meeting the alignment, as we said, of the benefits it brings to our business and the sector, the financial metrics and making sure we don't spread ourselves too thinly. So a relatively targeted approach, I think, would be the best description of it.

Your next question comes from Richard Barwick from CLSA.

Can I just go back on to the buybacks. I understand what you're saying about the timing for why that was sort of -- has been -- well, I thought -- I was expecting it a little bit earlier, but I understand the need for the cash for the inventory and so on. And so as that unwinds, the buyback will actually be put into action. What's the thinking in terms of just keeping it up the $50 million? Is there upside to that? And has the Board considered increasing that amount?

It would be premature to comment on forward capital management plans at the end of the financial year. But what we have seen is the much increased profitability of the business means that we are likely to have more than enough franking credits to be able to provide fully franked dividends of a fairly broad level of range there, which in all likelihood means that we will form a view that a fully franked dividend is a more efficient return of capital to shareholders and the share buyback. And I think the share buyback was an appropriate return of capital given the profitability and the strength of the business at the end of the last financial year, and we spoke about it at that time. We're committed to following through on that. And as I said, we'll look to commence that shortly. But into the future, it is more likely that a fully franked dividend would be our view of a more effective -- or more efficient capital return to shareholders.

Okay. Okay. That makes sense. And then just picking up on you're talking about on track for the $40 million EBITDA uplift by FY '24. I think it was back at the Strategy Day. Last year, you talked about it through the cycle EBITDA once you took into account this EBITDA uplift. It equated to about $240 million so by FY '24. Is that still the appropriate way to be thinking about through-the-cycle earnings from FY '24 onwards?

It's an area that we need to look at, Richard. I'll just remind you the basis of that. It was on a scenario of the average input. So it effectively ignored carry from one year to the other. It looked at the 10-year average production and the likely share of that, that we were able to achieve across the East Coast. And clearly, the 2 bumper crops over time will change that average. And certainly, if we look forward to '23, it certainly won't be a normal year given we're starting the year with a significant carry-in and also in terms of the shape of the crop and the potential for it to be an above-average crop again based on current conditions. So I think it's something we need to think about in terms of what the through-the-cycle parameters are and what impact that has on the business over time.

And what -- so when you say you're giving some thought to it or think through it, what sort of time frame does that thinking through take?

Yes. Richard, I might just add, one of the things that the consideration is through-the-cycle is a set of parameters that Robert talked about. But I think what you're seeing in the earnings delivery at the moment is the ability to deliver really strong earnings in scenarios where you've got multiple large crops consecutively. Now FY '20 was an example of a year with 2 droughts in a row. And I think what we're doing in the business to ensure that we have the right variabilization of the cost base, the protection of the crop production contract really means we've still got a good business even in challenging conditions. But at the same time and the conditions that present themselves at the moment, we're able to take advantage of the opportunities and deliver really good returns, utilizing our supply chain assets. So I think it's really thinking through, well, is a normal or average year the same as when you have multiple cycles within a 10-year period, let's say.

The other thing, we're in the late stages of planning for our next Investor Day, which is likely to be in June. So that'll be an opportunity to share more progress on our strategy and the way we're thinking about the business into the future.

Thank you. Your next question comes from James Ferrier from Wilsons.

Robert, first question is on GrainsConnect. In the P&L, we can see that the loss from the equity investment increased modestly in the half. So can you put a bit of color on the structural position of that business as well as, I guess, the overlay around the seasonal conditions from last year and what you're seeing upcoming this year?

Yes, I can. So you saw really the full impact of the drought flow through to the accounts in the first half of this year. The crop that's in the ground now and to be harvested later in the year is looking much better. Again, it's a little bit too early to call it, but general sentiment is Northern Hemisphere will have a better year. And Canada will have a better year than it had last year based on accumulated snowfall and moisture levels in the ground. And certainly, we're starting to see early signs of forward sales at good margins in that business, which, as I said, support the operating metrics of their business, which is achieving all of its goals in terms of throughput, turnaround times on trains and capacities of the network. So I think we'll see a limited improvement in this coming half, and that's included in our outlook and guidance comments and more likely a return to full potential profitability and that full uplift we spoke of at least in the order of $15 million through financial year '23 would be our expectation.

Okay. That's very helpful. Second question is around originations for the new crop locally. When you think about balance sheets being in a much better position for growers, consecutive big crops, favorable seasonal conditions as you've alluded to a few times, and there's still quite sizable discounts on local grain versus global prices, what's your thinking around how that origination activity may play out later this year compared to how it played out in the prior year or 2?

Yes. I might get Ian to talk to that in the first instance, James.

Yes, James, we'd expect the dynamics to be similar given the carry-out to start the season, not just in our network but more broadly will mean that a large proportion of the next crop, the place it should go is to exports. So we still expect origination into export supply chains to be a key feature and continue to be a focus of meeting the demand that exists globally for Australian grain. So don't expect a significant difference in what we've seen this season and last season in terms of origination into bulk supply chains.

Okay. Great. Last question, is in the notes to the accounts, Note 3.4 in particular, there's a line item, deferred grower payments. I didn't see that in the interim accounts last year, and in this note, it's $357 million. Can you just explain what deferred grower payments are and sort of why it's in the accounts now and it hasn't been previously?

Yes. So I can answer that one, James. So it's effectively where we purchase grain from the grower, and then the payment for it is longer than it would normally be. So typically, our payment terms are short on purchases of grain from the grower, but growers do have the option to take up a deferred payment term and to post 30 June. And this year, we've seen an increased take-up of that. The reason we split it out is that because it is more material. And as I touched on earlier, in relation to some of the impacts on cash flow, that's certainly one of the benefits, and that's why we've split out the details in the appendices to the investor presentation to really highlight the movements you're seeing across working capital and cash flow in general.

And just to reiterate, it's not a new initiative. It's just at a higher value this year based on the volume, the takeup and also the value of the grains and the commodity prices relative to prior years. But it is an offering that we've had for a number of years that has been utilized by growers for a number of years.

Your next question comes from John Campbell from Jefferies.

Congratulations on a very good result. Just trying to understand, I guess, the impact of pricing, commodity pricing on profitability a little bit more. So at 31 March, you have commodity inventory at fair value of about $1.8 billion. Would I be right in thinking that, that -- all that $1.8 billion of commodity inventory is uncontracted and therefore at risk of price movements, either up or down, in the underlying commodities? Just a little bit of clarification on that.

Yes. I can take that one, John. So no, it wouldn't all be uncontracted. The way we would tend to operate our book is that we are hedged in terms of our overall positions. So if we do have purchases of grain on our books, we would typically have either a forward sale offsetting that or enter into a futures contract as a hedge against the movements in value. In terms of the detail in the accounts, what you'll see is the gross value of inventory on the balance sheet with the derivatives. You won't see a gross value for that. You would just see the fair value movement of the underlying derivatives. So that's why it would appear like that in the accounts but in terms of the price exposure, and that's why you can see in the notes that it's far less material in terms of movements in commodity values.

Yes. I mean, obviously, this result has been -- has benefited in some -- to some degree from that very sharp spike in commodity pricing that we've seen over the last 3 months in particular. But are you -- is your hedging policies effectively designed to give you a floor price on that inventory held at 31 March? Or is it not possible to say that you've locked in a floor price and you're carrying upside risk on if pricing sort of goes further upwards?

The way I would think about it, John, is where you see increases in global commodity values and relative to local values, that's what's driving increased structural margins. And that's the biggest feature of what's impacting our results at the moment in terms of those higher commodity values. It's the relativity from demand and supply that's driving those overall margins. It's not the direct exposure itself to the underlying commodity value.

We take a very conservative position on both upside and downside to actual commodity value, as Ian said, through either hedging on forward sales or financial derivatives.

Okay. So there's basis risk, I suppose, is what you're saying in terms of the sort of spread between local pricing and global pricing, not the underlying movement in the commodity, yes. Okay. I think it's probably one of the more challenging parts to understand of the business just exactly how the hedging works. And I understand that you do give a certain amount of clarity, but I must say I still find it pretty challenging to sort of navigate that. That's just a comment. I don't really expect any answer on that particular point. But so just moving on. Obviously, the balance sheet's in great shape, and you're undertaking the buyback. And I suppose is it possible to give us what you consider to be surplus capital that could either be utilized to further growth options that you've detailed or further capital management initiatives? I mean, is it possible to give us some sort of sense of what you consider to be surplus capital?

Look, I'll make some broad comments on that. We've talked post-demerger about the desire to maintain an appropriately conservative and strong balance sheet. And that's to the extent that we want to make sure we're protected against future droughts. But also, we've made it clear that we won't carry a lazy balance sheet. We haven't defined specific numbers around that. And the reason for that is it depends a little bit on the period in time. We still have the United Malt holding on our balance sheet as well, which we see as a pretty liquid asset in terms of cash and cash equivalent if we needed it. And in terms of the trading outlook, it depends on how favorable that is or otherwise as to what the appropriate level of balance sheet strength is at any given time. But I think if you put a range on the movement that you've seen over the last couple of years, anywhere in the order of sort of plus or minus $100 million we've been very comfortable with. We'll update that, of course, as we change and improve the diversification and reduce the volatility of earnings in the business, and I think we're making very good progress on that. Bear in mind, we still have the crop production contract, which is included as a payment in this half result. Not really a material feature of that, but it will significantly be a benefit in future drought years if and when they occur.

Okay. Last question from me. Just back to the Ukraine situation. Is it -- are you at all able to detail whether there's been some loss of ability of Ukraine to grow grain. I mean, has it been in the short term, obviously. I think longer term, I'm sure that productive farming land is still there. But is there a loss of ability to grow grain in the short term? Or are we really just talking about some of the export ports are obviously impacted by war and not possible to get grain out.

I think using the term in the fog of war, it's actually very difficult to get a fully accurate assessment. I think your assumption is correct that the actual growing areas are likely to be relatively resilient. There is, as we understand, some significant damage to road and particularly rail and bridge infrastructure within the country. So moving that grain around might require a significant period of rebuild and reinvestment, and that certainly appears to me that geopolitically the world will be up for supporting Ukraine on that, but it might take some time. And likewise, it depends where you are, but some of the port infrastructure remains very much intact and usable, but there are other factors, including mines in the Black Sea and areas where clearly Ukraine is blockaded at the moment. And I'm just not really that well equipped to talk about how long that will take to recover other than, as I said before, it's likely to be more like several years than several months I think would be the best description of that disruption.

Unfortunately, we don't have any more time for questions. I'll now hand back to Mr. Robert Spurway for closing remarks.

Thank you, Matthew, and I'll keep them very brief. Thank you for joining us this morning. We look forward to catching up with a number of you in investor briefings in the coming days, and I appreciate your time this morning. Thank you, and good day.