GrainCorp Limited (GNC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GrainCorp Limited Fiscal Year 2022 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Robert Spurway, Managing Director and CEO. Please go ahead.

Good morning, everyone. As said, I'm Robert Spurway, Managing Director and CEO of GrainCorp; and together with Ian Morrison, our Chief Financial Officer; we look forward to taking you through the FY '22 results, some commentary on our strategy and our outlook. Before we start, though, I do just want to acknowledge the traditional custodians of 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 elders past, present and emerging. I also will follow through on the pack for those that are following on screen and refer to the page numbers. Whilst we'll start on Page 6, I just want to highlight the fact that at the start of the pack, we've got some background slides on about GrainCorp that's particularly there for the benefit of those of you perhaps joining for the first time. And all of those slides have been shared in previous investor updates. My reflection on those slides would be -- it really highlights the strength of this business, the quality and integrated nature of our infrastructure assets, our processing division and the way our people work to produce such strong results as we've seen in financial year 2022. Just turning over to Page 7. It is a record result for GrainCorp with outstanding performance and $703 million in EBITDA. We've benefited from the second consecutive bumper crop on the East Coast of Australia. We've delivered strong supply chain performance and demonstrated resilience in a year of many challenges for others. In short, we have made the most of the opportunities that have been there and the strong demand for Australian grain around the world. Underpinning the strength of the result is our return on invested capital at a very strong 27.9%. We've seen strong payback on the additional capacity investments we've made in the East Coast of Australia, both recently and historically. We've seen record oilseed and food volumes, and we're seeing growth in our agri energy area, particularly the used cooking oil part of the business. We are driving our assets harder and doing what we said we would, and that is delivering significant value for shareholders. Dividends of $121 million in total in the '22 year, and that includes a final dividend declared today in total of $0.30 per share. It's in addition to the $50 million share buyback that we completed in July, and all the same leaves us with a very strong balance sheet with core cash of $177 million. Again, we're doing what we said we would -- we're positioned strongly to invest in growth and continue to deliver returns to shareholders. Just on Page 8, it's an opportunity to recap on the numbers, and I think the slide speaks for itself, $703 million in earnings before interest, tax, depreciation and amortization, up from $331 million in 2021. Net profit after tax, $380 million, up from $139 million, return on invested capital at 27.9%, up from 11.1%. In terms of the areas that our teams have contributed to across the business, total grain handled a very strong 41.1 million tonnes, keeping our supply chain moving throughout the year. We have lifted our oilseed crush volumes to 471,000 tonnes, up from $459,000 in the prior year. And as I said earlier, our core cash at balance date is $177 million, up from a core debt of $1 million at the close of the previous year. The business is performing incredibly well. Today, we also launched our sustainability report for financial year 2022. That builds on our sustainability commitment, and we're proud of the progress we're making and the commitments we've made into the future. Just on some of the highlights in that report, we have mapped our Scope 3 emissions, and we've progressed mapping the road map to adopt the TCFD recommendations. That allows us to develop further emission reductions plans across Scope 1, 2 and 3 emissions as we look to rapidly decarbonize by 2030. Importantly, the social aspects and our people are also an area we're performing well in. We've made progress on inclusion in our diversity action plan. And importantly, those people that contribute to the GrainCorp results are feeling satisfied and engaged with scores of satisfaction up to 87%. That's important not just in this result, but the confidence we have into the future with those people supporting us. In terms of our integrity, we've underpinned the progress we're making and the commitments we've documented by establishing a governance structure that supports that. We have a new Board Sustainability Committee, and we've appointed a new Head of Sustainability supporting a wide group of people in GrainCorp that contribute to this area. Just looking at a bit more detail at an important social aspect, our safety performance on Page 10. We're pleased to see the improvements in reportable injury frequency rate, particularly through the second half of '22 as we were able to roll out behavioral safety programs and spend more time with our people post-pandemic. Clearly, across the board, we've still got some distance to go to achieve our commitment to zero harm and there are many initiatives in the business every day aiming for that goal and improving our performance. Just on Page 11. Many of you will have seen this slide before. Our strategic priority is to drive higher return on invested capital, something where we've seen great progress this last year. That strategy is deliberately split into 2 clear areas, what we call strengthening the core, lifting returns, driving existing assets harder and leveraging our capabilities. That sits alongside our focus on some very targeted growth opportunities, and I'll update you on those over the next couple of slides. On Page 12, I think it's important to just reflect on the global trends and the environment in which we operate to call out 4 of those: population growth and changing demographics, decarbonization, disrupted global supply chains and technology and digital acceleration. In each one of those areas, GrainCorp has thoughtfully considered the areas, where we have a right to win and our response and how we'll access those opportunities. Our multi-origin strategy, our leading position in East Coast of Australia and indeed, the proximity of our markets to the -- the proximity of our production areas to the major markets around the world. On decarbonization, I've touched on the commitments we've made in our sustainability report and the progress we're making there. Importantly, we continue to partner with others, not just to improve our own performance, but to make a meaningful impact on the agricultural sector in general. Whilst many have faced the impact of disrupted global supply chains around the world, GrainCorp has demonstrated incredible resilience. Our end-to-end supply chain has operated well, meaning that we have met our customers' expectations through the year and made the most of the demand opportunities that exist. We're pleased with the platforms we have in the digital space. We're continuing to invest in areas like advanced and data analytics that will drive results and improvement into the future. We've also got our GrainCorp Ventures, which allows us in a very targeted way to partner and invest in opportunities into the future. We are strongly positioned as a food and agricultural business. Over to Page 13, just to give you the context of this slide, for those of you that followed our investor presentation back in 2021. About 18 months ago, we committed to a range of activities that would lift our earnings by $40 million through to '23-'24. As we touched on partway through this year, we are well on track to deliver that. In fact, we would say the examples here demonstrate it's been fully delivered. I'm not going to go through all the detail on this slide, but this spells out some of the examples of the sorts of initiatives we spoke about when we launched this program. Our investment in each East Coast capacity to leverage the opportunity of bumper crops has certainly returned well. We've upgraded our mobile fleet to make sure that we're servicing the needs of our growers and improving the efficiency in the way we operate. We're continuing to diversify our assets and in particular, our port assets with a new sand contract at Queensland amongst other initiatives that see us handle a range of bulk materials through our ports business. As I touched on earlier, we're controlling the areas we can control, lifting our performance in crush volumes and driving our assets harder with increases in food volumes. We've completed the full end-to-end supply chain in our Canadian business, and we're looking forward to continued improvement in our international business and the delivery from that area of the business. We're building capabilities. I touched on it in the strategic area around advanced analytics, improving the planning outcomes across our large and integrated supply chain. And our customer experience focus will underpin the reliability of those initiatives into the future, ensuring that we're using insights and data to respond and get ahead of the trends that our customers and growers expect from us. In a nutshell, we're doing what we said we would and delivering strongly. Just to expand on Page 14 on the pipeline of future growth initiatives that we're exploring. We've touched on these over a number of previous investor presentations, particularly the themes around animal nutrition, alternative protein, agri energy, digital and ag tech and grower services. I think most of you are aware of our investment in the FutureFeed business designed to commercialize asparagopsis and reduce methane emissions from the beef and cattle industries. We've continued to collaborate with CSIRO, v2food and others from our fats business to ensure that we're providing solutions to those participating in this exciting new market. We're increasingly pleased with our performance in the agri energy area and indeed the opportunity that presents for growth. We continue to explore areas to take advantage of those growth opportunities, and I'll touch on that in a bit more detail on the next slide. We've got partnerships that support decarbonization of agriculture and growing the connection that we have with our pharma growers. Just moving to Page 15. The agri energy area is being -- is growing strongly, and we're seeing really strong interest in renewable fuel feedstocks and the capability that GrainCorp has in that part of the market. On the right-hand side of the page, we're already a leading supplier in used cooking oil across Australia. [indiscernible] Our -- as coal business has more than a 50-year history and is upcycling in addition -- I am sorry -- in excess of 22 million liters of used cooking oil per annum. We're seeing great returns from that business. We are Australasia's largest crusher of canola seed, and this year have achieved over 475,000 tonnes of capacity through our plants. And indeed, we collect and consolidate tallow for customers around the world. On the left-hand side of the page, we're looking at opportunities to transform and grow that part of our business. We see strong ongoing demand as demonstrated in the table at the bottom left of the page, and we continue to explore growth opportunities in terms of how we meet that demand, grow our feedstock supply and increase our capacity. At this point, I'm going to hand across to Ian Morrison, our CFO, Ian will talk through the financial performance in a bit more detail and the strong performance we've seen across all segments of the business. Ian?

Thanks, Robert, and good morning, everyone. I'll now move on to Slide 17 to summarize the financial performance for FY '22. It's pleasing to report record earnings across all parts of our business, and I'll touch more on the details of the Agribusiness and Processing segments shortly. Just firstly, on the Corporate segment. We've included here on this slide, just a specific line, highlighting the impact of the loss of $24 million on the UMG investment, and that's really just to aid compatibility of the Corporate results. The underlying Corporate cost is tracking slightly higher than the long-term run rate we've spoken about previously, and that's mainly due to the impact of increased investment in some of the pipeline of growth initiatives and also the impact from higher incentives off the back of record results this year. Also on this slide, note that depreciation and amortization increased year-on-year, and that's largely due to the impact from some shorter life assets, and that's associated with the large harvest with items such as tarpaulins and mobile equipment. And lastly, on this slide, we also saw an increase in interest, and that's off the back of higher commodity inventory holdings, along with those higher commodity values and also, of course, interest rates. I'll now move on to Slide 18 to provide some further detail on the Agribusiness segment, starting off with our East Coast Australia business. FY '22 saw a record crop production of over 33 million tonnes on the East Coast. And combined with the high [indiscernible] cation from last year's bumper crop, this led to an increase in grain tonnes handled through our supply chain up to 41.1 million tonnes this year. Outstanding execution by our teams saw our ports operating at close to full capacity in exporting 9.2 million tonnes of grain. And that's our largest year of exports in the last decade. We've also seen very strong domestic outload, especially in the second half with customers turning to our network as they seek reliable supply of grain. Another feature of the result is the exceptional margins for our East Coast business, particularly in the first half, demonstrating the value of our supply chain assets. Finally, for the ECA, it was also pleasing to deliver strong returns from the investments we made over the last year in additional capacity to handle the large crop. Now turning to Slide 19. And international business delivered a strong result this year off the back of good margins from Western Australia following their large crop. And international business continues to play a key role in connecting both West Coast and East Coast grain to global demand. And this customer focus of GrainCorp as the largest exporter to a number of key destination markets, including Vietnam, Japan and China. Turning to Canada. Although our GrainsConnect Canada joint venture was impacted by drought in FY '22, we look forward to improved volumes and margins as production normalizes in that region. As Robert touched on before, we now have the full end-to-end supply chain completed following the opening of Fraser Grain Terminal earlier this year. Now just touching on feeds, fats & oils business. On the fats & oil side, we've seen continued strong results from ongoing demand for renewable fuel feedstocks, and that has more than offset the lower demand for liquid feeds across East Coast Australia. Now moving on to our Processing segment, starting with oilseeds. As you can see in the graph on the right-hand side of this slide, FY '20 has seen a continued trend of improved crush volumes with an ongoing focus on operational efficiency and maximizing the utilization of that assets. We also saw excellent crush margins in oilseeds continue into the second half of FY '22, and that's led to a record result for our oilseeds business. The supply of canola seed in the East Coast of Australia as well as the increasing demand globally for vegetable oils, that's what underpinned those strong margins. Turning to our Foods [indiscernible] business. We saw an increase in sales volumes of 11% year-on-year with good demand for refined vegetable oils. We're also really pleased to see the innovation pipeline in our Foods business delivering strong results with our customer base. I'll now turn to Slide 21 and through-the-cycle earnings. Before moving on to the balance sheet, I did just want to spend a few minutes talking about through the cycle earnings. As a reminder, this was a concept we introduced at our Investor Day back in March 2021. Through the cycle represents a view of earnings in a theoretical average year of grain production with typical conditions and margins. Based on those assumptions, we forecast EBITDA in a theoretical through the cycle year being in the order of $240 million. And as Robert noted earlier, we're confident we've delivered on the initiatives that underpin that $240 million by FY '23-'24. On the graph, the TTC [indiscernible] of $240 million is represented by the blue line. And you can see how this compares to the last 3 years of earnings since the merger. You can see that GrainCorp has significant operating leverage and large ECA crop years as demonstrated in FY '21 and FY '22. We're also confident we've protected the business on the downside by variabilizing costs and through the crop production contract. And you can see that from the severe drought year in FY '20. The key message from this slide is the ability to deliver substantially higher earnings in large ECA crop years from that operating leverage, supports longer-term average earnings being greater than a [indiscernible] through-the-cycle year. Now moving on to the balance sheet on Slide 23. We finished the year in a very strong position with a core cash balance of $177 million. We've also seen a decrease in net debt year-on-year with a closing net debt of $540 million. I'm just noting that this does remain above our longer-term average at year-end due to the elevated working capital and commodity inventory balances with the ongoing export program. Overall, our balance sheet is in a very strong position, which provides significant flexibility. Moving on to Slide 24 and capital expenditure. Similar to FY '21, we saw higher CapEx mainly to support additional capacity increases across our network to handle the large harvest, and we're delighted with the returns from those investments. On the right-hand side, on D&A, as I noted earlier, we did see an increase as a result of those shorter asset life CapEx associated with harvest. We expect to see FY '23 at similar levels to FY '22 before D&A continues to reduce over time. Now turning to Slide 25. And the key message here is we're delivering significant value back to shareholders. The strength of our balance sheet, current performance and confidence in the future enable the Board today to declare a final dividend of $0.30 per share, fully franked. That comprises a $0.14 per share ordinary dividend and a $0.16 per share special dividend. The increase in the ordinary dividend to $0.14 per share reflects the Board's confidence in average earnings being greater than those stated through the cycle earnings I touched on before. We also completed a $50 million on-market share buyback in the second half of FY '22. And along with the interim dividend of $0.24 per share, that equates to total capital return to shareholders of $171 million through FY '22. This demonstrates our commitment to both investing in the business and delivering returns to shareholders. Further capital management will continue to be assessed in FY '23 against growth opportunities and as franking credits accumulate. On that note, I'll now hand back to Robert.

Thanks, Ian, and I'll just make some closing remarks on the financial year '23 outlook. Just starting with that, conditions throughout the year have supported an above-average East Coast winter crop to '22-'23. In fact, [indiscernible] ABARES in their September report are forecasting a very strong and well above average 27 million tonnes. I think everyone is aware that ironically as good as that weather has been for the crop. It's also it's created some devastating flooding. And that's impacted some regions and delayed harvest by several weeks. We do expect the impact of that flooding to impact on both yield and quality in parts of East Coast Australia, and we're certainly seeing a higher level of feed-grade receivables. In light of that flooding and the delays, GrainCorp is continuing to support growers with the logistical challenges presented by that flooding, and we're focused on ensuring that our sites are well prepared for the delayed harvest. When the harvest does arrive, we will be ready, and our teams are working hard to make sure we're supporting growers in any way we can. I do just want to acknowledge that for those that have been directly impacted by flooding and indeed for those that, including our staff and others working in communities involved in the flood prevention and recovery effort, our thoughts and support are with you. Despite the flooding, we've already received over 1.1 million tonnes into our network and our year-to-date exports are already 600,000 tonnes. The supply chain is continuing to operate. Just in terms of the global outlook. As expected, the exceptional margins we saw in the first half of '22 have moderated in the second half, and [indiscernible] that's a supply in the Northern Hemisphere has improved. We do anticipate continued good demand for Australian grain and oilseeds throughout financial year '23, and that includes the feed grades that are going to be a feature of this current harvest. We will provide earnings guidance at our AGM on the 16th of February in 2023, similar to the cycle we used last year, by which stage, we'll have much greater visibility over the harvest and the outlook for the year. So just turning to the last slide of the main part of the deck, Page 28. In conclusion, you've seen GrainCorp produce record financial results for financial year 2022. We are doing what we said we would. We're delivering on our commitments. We're doing that in a way that executes against our strategy. Our teams are working hard to improve the resilience of the business and do what we said we would, and that is generating significant value for shareholders. We have a number of slides that follow through on our commitment to improve disclosures and transparency of our reporting contained in the appendix. But at this stage, look, I think we hand back to the moderator for any questions that might be there. Look forward to answering them.

[Operator Instructions] First question today will come from Richard Barwick with CLSA.

I just want to talk about the international business within Agribusiness. And just trying to get a sense of the -- but then also the -- I guess, the variation that we might see from year-to-year because if you look at it, the contracted grain sales are down. Revenues up materially, obviously, associated with the commodity prices. And obviously, this -- we've got some history, if you go back long enough to go look at the old marketing business. So I guess my question is, when we think about the earnings contribution from the international part, should we be thinking about it more as a sort of a dollar profit per tonne? Or should we be thinking about in terms of a margin applied to the revenue?

Thanks for the question, Richard. I'm happy to take that one. So in terms of our international business, there are a number of components to it. So you've got the [indiscernible] WA side and then you've got GrainsConnect Canada. We've got our business in the U.K., Saxon, and then we've also got origination from a number of other locations. But probably the best way to think about it is on a more margin, similar to what you said before, Richard, of how you thought about it in the past. In terms of the performance we've seen this year, that's been a lot stronger got off the back of a strong crop in WA. In the appendix slides, we have included an earnings bridge, and you can see a bit of the detail on the uplift there. And that does include the uplift from international and feeds, fats & oils, but a reasonable proportion of it is on the international side of the business. So hopefully, that gives you a little bit more of the context behind it. And similar to what we've talked about with East Coast Australia in previous reporting periods, the structural margins will be impacted by supply and demand dynamics. So it's difficult to put a specific view of a dollar per tonne margin on any given year just with some of those dynamics changing.

And I think in that respect, it's important to reflect that -- sorry, Richard, just on the strategy that it does provide for reliability of supply to customers. So they're not fully exposed to the Australian drought cycles and drought years. But it also provides some diversification, where we can access margins in years where the Australian crop is not so strong. So I think strategically, we're very happy with the way that business is performing and operating in line with our expectations.

Okay. And then my second question is going back to that Slide 21. And it was just interesting, there's a little bit in here. So I guess the suggestion here is that your downside in a poor crop year, like FY '20 is less than your upside in a good crop year. That $98 million of EBITDA in FY '20, is that the number you'd sort of stand by going forward on a similar sort of volume scenario, I would have thought there might have been a bit of upside to that given the $40 million EBITDA uplift. And obviously, I understand that's the $40 million is probably premised on an average crop year. But that $98 million, is that the number you'd steer towards on the downside? Or is there more color you can add on that?

I'll make a couple of general comments, and then I'll hand to Ian on that one, Richard. A couple of things to remember, financial year '20 was the end of 3 years of drought. So I think we've said before, it's about as bad as it gets in terms of just the cascading effect of drought rather than a first year. Secondly, you're right. That is before many of the operating initiatives that have been put in place, which obviously have leverage in a larger crop. So it's hard to lock that in at all stages of the cycle. But also in '19 and '20, we haven't fully finished the variabilization of costs, the variabilization of the rail contracts and some of the other cost-out initiatives that we had spelled out and have now fully delivered in the -- from the demerger scheme booklet. So -- and I think the context of that result and the timing of that is important. But Ian, you might like to add a little more color to that.

Yes. No, I think Robert's covered it pretty well. Certainly, we saw that as pretty much the double drought scenario at the low point in the cycle. So it is a good pedometer. And as Robert touched on, we've been working pretty hard since then to make sure we are well protected for that drought year and continue to deliver improvements in the variabilization of costs, the revenues that aren't as exposed to the East Coast business through some of the initiatives that we touched on earlier, like the non-grain and other bulk materials we handle. So that continues to be a focus, and that aim is to continue to lift that low scenario number.

And our next question will come from David Pobucky with Macquarie.

Congratulations on the record results. Just the first question, just on the rainfall, the disruptive rainfall that we've seen on the East Coast, do you think that it creates downside risk to the current ABARES estimate of 27 million tonnes? Or does it just cap potential upside to some extent. So just trying to understand whether it's more of a quality downgrade impact as opposed to a volume impact?

Look, that's a very difficult question to answer, David. What we do know, as I said, is that it's certainly delayed the harvest. We also know that it has impacted and reduced quality, and we've seen that coming through. It's much harder and perhaps unwise to talk on behalf of growers. Other than to say that if we look across the more than 6 million hectares of planted, on the East Coast of Australia, as devastating as the floods are for those that have low-lying areas, there are plenty of traditionally dryer areas or undulating country where the crops are looking pretty strong. And I guess that's one of the reasons that we're keen to get through the next number of weeks working with growers to see where the volume ends up. And as you know, in the past, we've avoided speculating on the ABARES number as a single source of the truth. But we're seeing pretty strong harvest numbers coming in, where harvest has started in Queensland and Northern New South Wales. I think the other thing I would say is, it depends a little bit on the weather patterns from here. A number of weeks of dry weather will certainly improve the situation for many and indeed all growers, ongoing wet weather will only make it harder for some of those that have already suffered flooding. I think the key issue and something that we work not just with growers on but local councils and indeed government is making sure that roading and logistics are repaired and recovered as quickly as possible so that farmers are able to move their grain around and get it to sites and out through the export channel. And we expect that will be something we're working with them on through what's going to be quite an extended harvest.

And just the second question. As you noted, exceptional margins achieved in the first half moderated in the second half as you expected. What would you need to see for margins to move higher or lower over the next year from current levels? So just trying to understand where margins in that marketing business are currently sitting relative to a more average margin, please?

Sure. Again, I'm not sure I can give you an exact answer to that, but I can talk about the fundamentals that have endured for some time, and we expect to prevail into the future. And that is one of a world with growing population and demand for grain products. And that's further supported by the fact that global inventories of grains still remain at record low levels. So not only have we got strong underlying demand, we've got countries likely to start to build strategic levels as inventory levels recover. So fundamentally, in the outlook, we see a picture of very strong demand and supply struggling to keep up. It's very clear over the last year, we've seen some particularly perhaps unforecasted supply shocks, particularly the conflict in the Black Sea and the impact that that's had on global supply chains overall. So look, going forward, it's too early to call what the next Northern Hemisphere crop is going to be. But we would say that prevailing La Nina conditions over the last couple of years have typically created very good production across Australia and created more downside risk in drought conditions across other large growing areas, including Argentina, admittedly in the Southern Hemisphere that's certainly impacted by La Nina conditions and the U.S. and Canada, which has seen an improved crop this last 12 months. But remains to be seen what that looks like, going forward. So hopefully, that gives you a bit of color on the way we think about it. Overall demand for Australian grain remains strong. We expect that to continue. And I think if anything, there's more risk of supply side risk and downside than there is a deterioration in demand, which is there for good fundamental reasons.

And our next question will come from Owen Birrell with RBC.

Good on you guys for the record results, again. Now I just had a question around the through-the-cycle commentary that you've put there on Slide 21 of $240 million. And I just want to confirm that, that's sort of an underlying earnings for the group and not just the Australian agribusiness. And how does the $40 million from initiatives play into that $240 million number? Should we be adding that to the $240 million?

I'll answer quickly and then hand to Ian, if he has anything to add. So first of all, yes, it is for the group. So it's a total bottom line number. To reiterate what Ian said, it is on a very specific set of assumptions. It's an average year with average crop production, average carry in and carry out. So no sort of movement or benefit from year-to-year. And the $40 million builds on back when we announced this 18 months ago, we were saying that the underlying business was probably at around $200 million at that point. So the $240 million includes that $40 million that we've spoken about. But it doesn't include any further upside of ongoing momentum and the continued work we're doing to find further efficiencies and improvements in the business. Ian, if you got anything to add to that? Or does that cover it?

No, I think that covers it.

Hopefully, that answers your question, Owen?

No, that's very clear. That's very clear. I guess a follow-on question to that is around the sensitivity of the underlying business to cost inflation. You talked about increasing the variabilization of costs. I'm just wondering, does that play out negatively in a high inflation environment. I just want to get a sense of how the business is positioned as we move into sort of high inflation over the next couple of years.

Yes, sure. We can both make some comments on that. I think our cost control over the last 12 months has been a good feature of the result and something we're very pleased with, despite the very high activity in the network, the teams at all levels have done a good job to manage the cost base through that. And as you'd expect with the high volumes we've seen in many cases, significant improvements on a cost per unit or cost per tonne basis, and we continue that culture across the business. More fundamentally, in terms of labor, we have a whole range of agreements that mostly have already been agreed and have got anywhere between 1 and 3 years to run. So we're not immediately exposed in totality to any type of wage inflation or pressure beyond the normal course of business and renewals of those agreements as they come around. And finally, and I think structurally across our business, we describe ourselves as extraordinarily resilient in an inflationary environment. And that's because commodity prices are set by global markets. And therefore, we're not even having to do anything to pass on the inflationary pressures. The vast majority of inflationary costs are set and included by the market, including the financing cost of commodities, and that's baked into every sale and purchase that we do in the commodity part of the business. So again, I think that sets us in a very strong position in an inflationary environment. And in the light of the fact that we are a stable product, people always need to eat, that provides a fair bit of resilience as well in the sector we operate in. Ian, anything to add?

No, that covers it really well. And across our business, a lot of the contracting is done on an ongoing basis off the back of the crop. So it's not the scenario, where we've got multiple years of revenue locked in and then having to tackle the cost pressures. It's able to be built into the commodity price effectively that you're paying for grain or what you're selling to an end customer. So that really does provide a lot of protection, both on the cost inflation, but also on interest. But over and above that, what we are focused on is cost control and regardless of that, it's all about being the most competitive and low-cost supplier and supply chain we can be so that we are in a strong position relative to other supply chains, not just locally but globally. So that's really the focus.

Can I just confirm that the labor agreements that you mentioned, you said like 2 to 3 years left to run. Are they inflation indexed or there sort of fixed escalators in those labor contracts?

They are all fixed and agreed amounts at the time that were negotiated. So to put it in context, we've got several tens of agreements across the broad aspect of our business. So the point I'm making is we're not exposed to any one single major enterprise agreement coming up for renewal.

And our next question will come from Apoorv Sehgal with UBS.

Just one question for me, please. Just to what extent do quality downgrades to grain actually impact GrainCorp in a negative way? Like my understanding is access to volume is the key driver. Can you just explain how downgrades to quality could impact you? And I'm also just curious if the changes in quality we're seeing could actually create any arbitrage opportunities for GrainCorp?

It's difficult to answer that in one single answer, but I'll try to give you some color on it, Apoorv. Generally speaking, it doesn't have any direct impact on us because the cost is borne by the grower or the customer. Pleasingly, and on an ongoing basis, there's very strong demand for feed grades. So that can help support the business into the future, particularly in an environment where there is such strong volume. Operationally, there are probably some benefits around the edges in terms of it simplifies the segregations that we need to operate at sites. So if you've got an overwhelming majority of the grain we're receiving, it allows us to reduce operational costs by consolidating that grain at our bunker sites. Ian, you've seen a number of these sorts of events over the years. Have you got any color to add to that?

Yes. No, I'd agree with those comments that the volume is definitely the much bigger driver than what the quality of grades come in at. So really, that's the main focus.

And our next question will come from Grant Saligari, Credit Suisse.

I've got a question around the sales volumes in Foods. So there was a really strong step up, as you noted, in Foods sales volumes to 236,000 tonnes. I guess, 2 aspects to the question. One is how close to capacity does that then put you in terms of thinking about further opportunity? And the second part to that would be just thinking about the stickiness of that volume. Can you comment -- you probably don't want to mention specific customers that the market segments that, that volume is going into and therefore, the stickiness of that potentially in subsequent years, please?

Yes. Look, in general, we have a number of key contracts with customers, and we won't name or specifically talk about individual customers. In addition to those contracts, we continue to work with innovations and new applications for those products and customers that we have, including the reference I made to some of the applications for plant-based fats being used in the growing area of plant-based foods. In terms of your question on capacity, if you look at the major food sites, we have our West Footscray facility in Melbourne and our New Zealand Foods business. It varies across the different lines and production lines. Each of those sites have a number of production lines usually linked to the type of packaging that we're doing in typically spreads or oils type products. And we can tweak capacity by relatively small investments in the packaging formats and the lines that we do. But what we would say overall is that particularly our West Footscray facility is running at a very healthy utilization rate, and it would require some modest investment to see significant step-ups in the volume through that plant in particular. And that's off the back of the hard work we've done to attract and retain the customers that we have.

And the stickiness of that volume would be -- should the expectation be that, that volume is sustained into '23 approximately?

In short, yes, we have strong contracts in certainly the short- to medium-term and a very long track record and history with most of those customers over a number of years.

I have a second question, if I could, just around the domestic grain sales, which stepped up quite a lot on the prior period and sort of led to a lower carryout that I've been forecasting. So I just wonder whether there's any additional color on the domestic sales volume, presumably, it would have been economically better if the grain is suitable to hold it over for an export pathway. So any color you can provide on the step-up in the domestic sales volume would be helpful, please.

Yes, sure. So that's the 6.4 million tonnes you're referring to and we did see strong growth in demand for that in the second half. Look, first of all, in terms of your comment on the margin of that versus future certain margin or demand for it, the pricing takes into account those considerations when we commit to those sales. I think the factor most likely driving that stronger demand that we saw in the second half was the reliability of our supply chain. We've seen many of the other channels to market, particularly on farm disrupted by the fact that individual operators are struggling to access transport. I think it again shows not just the strength of our assets, but also the strength and the scale of our network that we're able to reliably satisfy customer demand, both domestically and in the export channel. So I think they were a healthy contribution to the business in the period, and we'd expect ongoing good demand in the domestic markets as well.

And our next question will come from John Campbell with Jefferies.

Congratulations on a really strong result. Just a follow-up question related to the downgrading of at least some of the 2023 or '22-'23 crop into feed grade. Does that mean that -- or presumably that the feed grade product is supplied only locally. There's no export market for feed grade product.

Absolutely not, John. There's very strong demand globally for feed grades and indeed, very good pricing for that. And I think that's one of the mitigating factors for growers. They're seeing very high decile pricing for feed growth. And that's off the back of that strong global demand for feed growth. So I do urge some portion in thinking that feed grade is a downgrade necessarily. It's just a change in terms of a greater proportion of feed grade than we might see in any given year. But that certainly doesn't change the dynamics or the market opportunity that is prevailing for that product.

Yes. I mean I guess it was reading the -- that outlook slide. It seemed to be suggesting you were calling it out as a negative event. And now on the call, you're sort of essentially saying, no, it's not the case.

Yes, I certainly don't think we're calling out quality as a negative event other than bearing in mind the very important stakeholders here being growers, whilst they're getting record prices for feed grade wheat, in particular, it's kind of one of those things that if it were milling grade, it would be worth even more. So the farmer bears the cost of that in an environment where the input costs have been pretty high. So it is pleasing that, that feed grade still is providing good returns to growers. But to be clear, in terms of the impact on us, it's more an objective statement [indiscernible] around one on a negative or positive sentiment. The positive aspects of it is there is very good ongoing demand. And as I said, in answer to Apoorv's question, it does, in some respects, simplify and help us manage our cost base as well as part of an overall fee harvest.

And obviously, you've already said it's just too early to call exactly what the impact of floods and extensive rain will be on the -- on that ABARES forecast. So that's fine. You've already answered that part of my question. The other 2 questions I had, what are you seeing in terms of Ukraine's grain production status? And secondly, in terms of the export and the port operational status, I mean, are you getting a sense of how much it's been impacted both on the production and the shipping capabilities.

Yes, we are. We still have people on the ground in Ukraine, but it's fair to say we rely heavily on some of the externally available data as well. A couple of things. There has been quite a strong Russian production crop, and that is still finding its way to some markets across the Middle East and Africa, in particular. The areas of Ukraine that are under Russian control include some pretty significant growing regions as well. And therefore, it makes it much harder on a like-for-like basis to determine or forecast the Ukraine production in isolation. The typical numbers we're hearing are in the order of 50% to 65% of a normal or average crop. I think the greater challenge and difficulty for Ukrainian growers and supply chains is the ability to get that to market. And whilst we're seeing some growing come out through the UN brokered grain corridor, that has been quite volatile, as you probably read in the news. And it's fair to say that most of the major grain traders and operators, including ourselves, and indeed the vessel operators are not falling over themselves to go into the Black Sea, where significant risk and, in many cases, lack of insurance, makes it a highly speculative and risky business. So our view, and we've said this before, is we would see significant disruption from Black Sea disruption for at least the next 2 to 3 years. And I think even with a moderate recovery and that supplies are well short of where global demand is at. And that fundamentally sees us in a good position on the global supply-demand situation. One final comment I want to make just in relation to feed grades, to be very clear, there is still a significant volume of milling grade wheat that we would expect to come through, satisfying both domestic and international demand. And we've seen that in the harvest that's already been received in. So it's not all feed growth they are just a higher portion. We are running up against time, John, but I think you've got one more question, which we'll try to answer quickly.

And that question will come from [ Lee Wells ] with Grain Central.

I've got a question about rail. It's been impacted by La Nina. Moree, Narrabri is still closed when it was originally scheduled to open on November 1. The Hunter line was closed by sliding. Kembla has been out for -- was out for some months. Is GrainCorp taking any steps to up its rail capacity or lobby for better resilience or efficiencies in the rail network?

Yes, we continue to work with our partners who operate rail for us, also the various track owners in the different states to ensure that ultimately, we're representing the needs of growers and being able to efficiently move grain to export ports. I think the issues you referred to and in particular, the Port Kembla one and the line out through flooding there for a number of months is included in the exports that we've done. So I think the 9.2 million tonnes that we've exported over the 2022 year, demonstrate the reliability of the GrainCorp supply chain, irrespective of some of the disruptions, including the reduction in rail capacity through that period of disruption. So in answer to your question, we continue to work with our partners to ensure we maximize the amount of grain going on rail. And we're comfortable that, that will be a strong feature of the year ahead as well, keeping grain moving and maximizing the opportunity of the export program.

[indiscernible] and turn it over to you for closing remarks.

Look, again, I just want to thank everyone for joining us. We are delighted with the result. We look forward to catching up with many of you one-on-one over the next number of days for further questions and answer. Thank you, everyone, for joining. Good day.

Now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.