Nufarm Limited (NUF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Nufarm Limited Interim Results Briefing for 2020. [Operator Instructions] I'd now like to hand the conference over to your first speaker, CEO, Greg Hunt. Thank you. Please go ahead.

Thank you, Tara. Good morning, and welcome, everyone, joining us on this call. Joining me today, I have Paul Binfield, Nufarm's CFO; and Brent Zacharias, who is the manager of our Seed Technologies business. Before we start today's presentation, let me draw you to the attention -- or draw your attention to the disclaimer, particularly the section on forward-looking statements. Moving to the results, 2019 presented us with a number of challenges as I'm sure you would remember. And putting aside now COVID-19, which we'll comment on later, it's fair to say that the first half of 2020 saw a continuation of the challenging conditions that we experienced in 2019. We have, however, made progress against the priorities that we set for the business last year. We've improved safety performance, we've maintained our margins and we've improved cash flow performance. We've also improved product supply to our customers in Europe by transitioning the supply chain for the acquired portfolio now under Nufarm's control. The Australian performance improvement program is on track to deliver the projected annual run rate of AUD 10 million to AUD 15 million ahead of schedule, with AUD 5 million delivered in this first half. We have expanded this improvement program across the business and we believe that we can deliver similar improvements in other regions. We are on track for the first sales of our omega-3 oil in the second half and we see this as a significant growth driver for the business. And as I've said, Brent has joined us on the call today and he'll provide us with an update later. Importantly, the sale of our South American business completes next Wednesday and this will substantially strengthen our balance sheet. Before we move to the financial results, I'll just make a couple of comments in relation to safety. As you've heard me say before, the safety of our people is our most important priority and the improvement in performance during the half was the result of the continued effort and focus by our entire workforce. In terms of financial performance, as I said, it was a very challenging period and that is reflected in the results with revenues down around $100 million. You can see from Slide 5, it's a complex result due to the sale of South America and the changes in accounting standards. Underlying EBITDA is down from $121 million to $66 million and reported NPAT is a loss of $122 million. The positive for the half is the improvement in operating cash flow. We're making inroads to reduce our net working capital. We recognize there is still a significant opportunity for further improvement and that will be an ongoing focus for us. Looking at the drivers of the result on Slide 6. You can see that the majority of earnings in the first half typically come from the Americas. The difference in this half is the impact of weaker demand in North America where sales were down $60 million on last year. This was not unique to Nufarm as the U.S. crop protection industry was down around 10% for the 2019 calendar year due to extreme flooding. Although the floods were in the second half of our previous financial year, the impact carried over into the first half as customers ran down stock levels and we faced very strong competition due to the oversupply in the market. Earnings were steady in South America where the benefits of a strong market were offset by increased competition. And in Australia and Asia, earnings declined principally due to the continued drought conditions. In Europe, we grew share in a flat market with increased earnings from the acquired portfolios. However, this was offset by strong competition and higher costs. The Seed segment was impacted by poor weather in Australia and North America and delayed sales into Europe. I know that COVID-19 is an issue on everyone's mind right now, so I'd like to address that upfront. Crop protection products, along with seeds and fertilizers, are an essential import into the food production value chain. Farmers need to be able to plant their crops and many governments around the world have recognized the importance of this in our current environment. With the improved seasonal conditions, we are experiencing stronger demand for our products. We are well-stocked with finished goods in most regions to supply this demand. Australia is more challenging as we have driven inventory down due to the drought over the last 2 years and the sudden spike in demand coincided with delays in product out of China due to COVID-19. I do have to say that in order to satisfy this demand, we are reliant on continuity of our production facilities and international and domestic supply chains. As of today, all of our manufacturing operations are producing with the exception of a small factory in Malaysia. There may be interruptions in the future. We can't predict this. With the improved situation in China though, supply is progressively coming back online with government restrictions on domestic transportation being lifted in the past 3 weeks. Trucking capacity has recovered from around 20% to now well above 50%. There are new challenges with regional logistics due to border controls, particularly in Europe. So far, these have been manageable. However, they are putting upward pressure on costs and causing some delays of raw materials into our plants and deliveries of products to our customers. Volatility in FX rates in the current markets may also impact our business and Paul will expand on this later. This is obviously a unique and fluid situation. There has been no material impact on our business to date. However, given the constant challenges, the changes and the uncertainties, it is difficult to accurately predict what may happen over the coming months. So to summarize before I hand over to Paul, it has been a tough half for our customers, our suppliers and our own people. However, we're holding our ground in the marketplace. We've been disciplined and we've maintained gross margins. We've made headway in improving cash flows and we have launched a group-wide program to further improve cash flow and lift returns. Whilst these times are uncertain, we are entering the second half of the year with improved seasonal conditions in North America and Australia and, very shortly, we will have a much stronger balance sheet. I'll now hand over to Paul to review the financial results.

Thanks, Greg. I'd like to reinforce the comment that Greg made about this being a complex result. We provided a lot of information on this pack on the impact of the new leasing accounting standard, AASB 16, and the South American discontinued operations. And we'll be happy to work through any of your questions on the detail as you process those figures. The main point to take away from today are that while there is a significant decline in underlying earnings, much of this was driven by external market conditions. Furthermore, we recognize that with the divestments of our South American businesses, we have work to do to simplify the business, to improve efficiencies and to optimize our cost base. And as Greg has mentioned, we already commenced this work. We've improved cash flow and there's a significant opportunity to liberate more cash from our balance sheet over the next 18 to 24 months. Perhaps the most important message given the current context of financial markets is our balance sheet will be much stronger following divestment of the South American businesses. The sale is scheduled for completion next Wednesday and we will use the net proceeds of around $1 billion to immediately reduce net debt. Looking at the headline numbers on Slide 9, you can see that the decline in revenues from continuing businesses fed through the gross profit and EBITDA. As Greg has already called out, this was largely in North America, Australia and Asia where markets are recovering from difficult weather conditions. We increased revenue in both Europe and South America and gross margins will maintain in the continuing businesses. That was a very good outcome given how competitive these markets have been. Looking in detail at the results of the continuing businesses, we've set out the main drivers of performance on Slide 10. As you can see, we've lifted earnings in Europe from the acquired portfolios by around $8 million. The largest decline is in gross profit. This largely reflects the impact of reduced sales in North America, Australia and Indonesia. However, it also includes a margin decline from increased manufacturing cost in Europe. Sales, distribution and support cost also increased. And as Greg mentioned, we've kicked off what we believe to be an important group-wide program to simplify our business, to optimize our cost base and to improve efficiencies. The program acknowledges the reality that we are a smaller business following the divestment of our South American operations and we need to be a much leaner organization. We are still in the planning phase. However, the program will reach across every region and every corporate support function. It will expand on the program that kicked off in ANZ this time last year. That program has achieved an annualized run rate of $10 million of incremental earnings and we believe it sets a good framework for the rest of the company. The initial focus of the ANZ program was on back office and support functions. Shifting to procurement, manufacturing and sales of the program has progressed and this is broadly how we see the group-wide program developing. Before I move on to the cash flow and balance sheet, I want to clarify the impact of AASB 16 and material items. The adoption of AASB 16 gave us a $15.2 million benefit to EBITDA for the total group as we reversed out the operating lease expense. There was an offsetting impact from higher depreciation and financing costs of $16.8 million as the lease assets were brought on the balance sheet. Lease liabilities have also been recognized on the balance sheet and these will be included in net debt and our leverage calculations going forward. We've also recognized material cost of $27 million before tax during the half, with around half of this relating to disposal costs for our South American businesses. The balance relates to legal cost of the omega-3 canola oil patent cases and additional restructuring costs in Australia. We do expect further material items in the second half and we've outlined them here. Turning to Slide 12. The improvement in cash flow was a highlight for the half. Our business is seasonal, so we always see cash outflows in the first half as we bought inventories for the main selling season and cash inflows in the second half as we collect receivables from customers. This year, we achieved a small decline in net working capital balances compared to the prior half. This was due to a large improvement in Australia where net working capital reduced by around $170 million as inventories will return to more normal levels and receivables reduced due to lower sales, but more importantly, due to lower sales outstanding DSO. You can see on Slide 13 that average net working capital to sales has continued to increase. A lot of this is due to the impact of lower sales in the half. Improving net working capital will continue to be a priority and we estimate there is an opportunity to release at least $200 million of cash from our balance sheet over the next 18 to 24 months as we return to our medium-term target of 40%. With the sale of South American business, we believe that the longer-term target of average net working capital over sales of between 35% and 37% is achievable. I should however caution you that we may elect to deliberately hold higher inventory levels through the second half as a contingency measure for potential disruptions in the supply chain from COVID-19. However, we are holding our target of 40% for FY '21. So moving to Slide 14, net debt and financing costs. Interest costs were in line with the prior period and it was an increase in foreign exchange losses that drove the overall increase in net financing costs. Our exposure to South American currencies will be significantly reduced next year, however, we still have Nuseed operations in South America and ongoing currency exposures in Europe, not all of which we can hedge economically. There is significant volatility in all FX rates in these difficult times but particularly in certain emerging markets where hedging is often difficult or uneconomic. This may lead to increased unforecast FX losses in the second half. Net debt is up on the prior year. However, this is due to the inclusion of lease liabilities following the adoption of AASB 16. There was a small reduction in net debt when this is excluded. One week from today, we expect to complete the sale of our South American businesses and this will transform our balance sheet. After paying tax and transaction costs, the net proceeds of over $1 billion will be used to acquire the preference securities from Sumitomo for $97.5 million and to repay net debt of approximately $925 million. We will report net debt and all our metrics, including the lease liability, going forward. So we are adjusting our leverage target range for core net debt from 1 to 1.5x to a revised target range of 1.5 to 2x to accommodate this. I'll now hand back to Greg to take you through the operations.

Yes. Thanks, Paul. As I said earlier, the first half was a very challenging period for our regional operations. We saw little respite from the challenges that we faced during 2019. However, as I said earlier, despite these challenges, I'm pleased to say that we were able to maintain our position in most of our key segments and we held gross margins despite aggressive competition. We do expect the market to remain competitive and that's recognized in the group-wide performance improvement program that really is designed to build some contingency to deal with the competitive pressures and unforeseen events. So turning to the regional -- the regions by region, starting with Europe on Slide 16. We increased revenues in a flat market with market share gains, particularly in key cereal markets. This was achieved with improved product supply and better supply chain control of the acquired portfolio. However, the industry is still being impacted by China supply constraints and elevated raw material costs and this continues to negatively impact on our financial performance. Importantly, contribution from the acquired portfolio was up around $8 million on the prior year. However, this was offset by increased manufacturing SG&A and -- or in SG&A costs. In the second half, we will be revisiting every element of how we support the business as part of the performance improvement program that we've launched. Turning to North America on Slide 17. This market was severely impacted by record flooding in 2019, with industry analysts estimating that somewhere between 10 million and 12 million acres were not planted and the crop protection revenues across the industry declined by 10%. This led to an oversupplied market in the first half with very high channel inventories that impacted on our ability to generate sales in the period as our customers focused on de-stocking. In addition, the uncertainty around potential tariffs on imported Chinese ag chem products caused customers to delay purchases. Revenues in the half were down $60 million on the previous year. Gross margins were impacted by stronger competition on the sales that were available and we absorbed some cost increases as a result of the start-up of our Greenville operations. Demand has improved significantly in March and the challenge now really becomes a logistical exercise to get product to our customers before the planting window closes. The first half for Australia and New Zealand was one of the most difficult our industry has seen with yet another year of no summer cropping in Australia, resulting in a fall in revenues of $50 million over last year. Manufacturing under-recoveries continued to be a challenge in the half due to the reduced demand as a result of the prolonged drought conditions. This fed all the way through to gross margins. However, we were able to offset some of the impact with around $5 million of savings from the performance improvement program. We launched this program around this time last year with a target of $10 million to $15 million of annual improvement by the end of the first half of 2021. We've reached the lower end of that target with more than 70 individual projects, big and small, contributing to the improved performance. We also reduced our net working capital in this region by around $170 million, with most of the improvement coming from reducing inventory. What we are now experiencing is a spike in demand due to the rainfall that we've received across most of the major cropping areas in late January. Our sales in February and March are up on the same period last year. However, the challenge in coming weeks will be getting access to product and raw materials to meet the spike in demand. We know that there are some products where we may not be able to meet all of the current demand. As an example, there is a global shortage of trifluralin and herbicide, which contributed $5 million of earnings in financial year '19 which will not be delivered in financial year '20. The outlook for the second half is certainly better so far than last year but subject to the uncertainties of COVID-19. We do, of course, need follow-up rain over the next few weeks to ensure a successful winter crop planting. A couple of comments on Asia. It was also impacted by poor weather with drought and higher channel inventories in Indonesia particularly, impacting the results for the half. Sales into other countries were also delayed into the second half. And we have seen an increase in sales in February and March. South America, like most of our global competitors, we saw very strong sales growth in South America, particularly Brazil, where larger soy plantings increased demand. Competition has continued to be very strong in this market and earnings ended up slightly lower on the half as a result of this. We are very well progressed in our planning with Sumitomo for the handover of the business, which as we've said, occurs next Wednesday. So now let me just hand over to Brent for an update on Seed Technologies. Brent?

Thanks, Greg. Nuseed has continued to make positive progress on developing and commercializing unique plant output traits that deliver specific downstream benefits to customers and consumers, which we describe as our Value Beyond Yield strategy. For the half year, Nuseed encountered some headwinds that impacted sales and earnings in our core seeds portfolio. These were primarily driven by Australia drought impacts to summer crop sales and endpoint royalties related to the 2019 canola grain harvest. Despite the slower first half, sorghum, canola and sunflower sales demand remains on track to achieve strong global sales growth in FY '20, driven by the continuous launch of new products in our key segments. Of note, we have recently achieved our first hybrid canola registration in Canada, the world's largest canola market. Sunflower demand in Europe continues to grow strongly in 2020 but is more skewed to second half sales this year based on timing of supply chain delivery. We also continue to see strong growth in our sorghum businesses in the Americas. We are closely monitoring rainfall patterns in key canola-growing regions in Australia as next season canola plantings, typically undertaken in May, will be a key swing factor in second half earnings. In November, Nuseed acquired assets related to the commercialization of the oilseed crop, carinata, as a best-in-class plant-based feedstock for the production of biofuels. This is another very exciting Value Beyond Yield growth opportunity. Following small-scale testing and development in South America over the past 2 years, Nuseed is now working with growers in Argentina to substantially increase plantings of carinata under a closed-loop business model. Our first commercial crop in Argentina was harvested in the first half period and has been third-party-certified with achievement of greater than 100% greenhouse gas or GHG reductions versus petroleum diesel standards. We are in advanced commercial discussions with key offtake partners, with first downstream sales forecasted this financial year. We are projecting a small positive EBITDA contribution in FY '20 from our new carinata program with significant expansion plans over the coming years. Now moving to omega-3. Omega-3 canola is one of our most exciting Value Beyond Yield growth platforms with first commercial sales projected for the current financial year. We are utilizing the data from our extensive fish feeding customer trials to reinforce the value proposition of Aquaterra, with commercial preparations progressing very well. The trial data is being recognized by the industry as demonstrating important benefits over and above sustainability, reliability of supply and ease of use and also include key results pertaining to fish health and quality. The positive response from our target customers underpins the decision to more than double our targeted oil production this year through increased farm planting and introduction of higher-yielding varieties. While it has taken longer than expected, our regulatory filing with the U.S. FDA is progressing and we have a high degree of confidence that an approval is close at hand. Similarly, our Canadian filings are nearing completion of the review and approval process. We are also making important progress on supply chain initiatives, which will deliver greater efficiency and help drive down our cost of goods over time. We have partnered with one of the world's leading agricultural processors, ADM, to provide crush and processing services. And we have new seed varieties being introduced with improved oil and grain yield qualities that will positively impact our supply chain costs next financial year. Importantly, Nuseed has recently secured an Excellence Through Stewardship certification, which provides our partners and the industry with confidence in our trait stewardship protocols. While the aquaculture market remains our initial focus for commercialization, our omega-3 oil, to be marketed as Nutriterra, is also being developed for the human nutrition market and is in the final stages of a clinical trial evaluation. We have commenced preliminary discussions with potential customers in that important segment. Within the period, Nuseed and partners have also completed a U.S. Federal Court proceeding on a subset of patents that has reinforced the validity and the strength of our significant intellectual property estate. I will now hand back to Greg.

Cheers. Thanks, Brent. It is fair to say that we are in unique and uncertain times, so I guess accurately forecasting what will happen and what the impacts maybe on our business over the coming months is very difficult at the moment. What we do know is that we need to produce food and, therefore, farmers need to plant crops. The products that Nufarm produce are an essential import into farmer's ability to successfully grow their crops. While circumstances and challenges are updated daily, we are seeing stronger demand for our products. I believe our teams around the world are doing a fantastic job in proactively managing our response to the many challenges that COVID-19 has presented, in particular, our manufacturing teams who continue to turn up for work every day whilst most of their colleagues work from home. The challenges will continue. However, we believe that there is further opportunity to simplify and improve the efficiency of our business to create a stronger base for improved returns in the coming years, and we will be chasing these opportunities. As Brent has outlined, our first sales of omega-3 canola oil are expected before the end of the year, further progressing what we believe is a valuable growth and value-creating platform for Nufarm. And finally, before we open up to questions, I'll just repeat that we have received competition clearance from CADE, who are the Brazilian competition regulator, for the sale of our South American business. We are well progressed in the handover planning with Sumitomo and we will receive the funds from the sale next Wednesday. I'll hand back to the operator now to take some questions.

[Operator Instructions] Our first question comes from Andrew Scott from Morgan Stanley.

Greg, you mentioned improved seasonal conditions in Australia, offset by supply chain tightness. Just trying to understand how do you see that in a competitive context. Do you see Nufarm better positioned and potentially able to capitalize on a better supply chain and more domestic capacity? Or do you think everyone's on a pretty even level playing field here?

Well, I think it certainly calls out, Andrew, the value of local manufacturing in the times of tight supply. I'm not for 1 minute saying we will meet every order for every demand that is out there at the moment. As you know, as a result of the drought that we've had over the last 2 years, we have driven our inventories down to lower levels than we would normally hold at this time of the year. And if we go back to January, the forecast at that time was that we were not going to get any significant rains until April. So the rains that we had in late January have created an issue in terms of supply for us. We have 3,000 or 4,000 tonnes of product on the water at the moment that we expect to receive in the next week or 2. So if these current conditions hold and we get rainfall in 2 to 3 weeks' time, we're in a very strong position to meet a lot of that demand. If we were to get significant rainfall over the next couple of days, it is literally a hand-to-mouth -- it is literally hand-to-mouth. But I would expect, from what I'm seeing, that we're generally in probably in a more favorable position than some of our competitors.

Understood. And I guess, in that context, are we talking just a volume improvement here? I presume under that tight environment, I think your phrase was hand-to-mouth, pricing comes in and you should get some margin expansion if you do have access to that product.

Look, we're certainly seeing some upward pressure on prices at the moment. Clearly, with where the Australian dollar is at the moment, our -- we need to get those price increases anyway because we're buying a lot of that product in U.S. dollar terms. So certainly, our COGS is going to increase. And again, it's difficult to really determine just what might happen to our costs in terms of our manufacturing operations and logistics. So I think on one hand, we'll see prices improve, but on the other hand, it's just a little uncertain as to what cost may actually do over the next few weeks as well.

Got it. And finally, one for -- just for Brent, omega-3 and FDA approval. Any update there?

Yes. As I mentioned, we're pretty pleased with the progress that we're continuing to make. We're in constant dialogue and we're supportive of the diligence from FDA. And while I can't disclose the nature of the detailed conversations, it is moving forward and they are very actively working despite some of the current COVID situation. So we're quite encouraged. And as I mentioned, I think it's close at hand.

Our next question comes from Grant Saligari from Crédit Suisse.

Could you please just expand on some of the product registration challenges that you called out for Europe? And just so what would be the net effect on the business if that went adversely for you?

Yes, Grant. Thank you for that. I guess we were keen to draw out the fact that there are -- it's simply part of the life cycle management process in European context that there is significant regulatory pressure. And next year, we see there being restrictions or potential bans on a couple of key molecules, principally Bromoxynil and [ Bromethalin ]. That said, as some products come under more regulatory pressure, that does increase opportunities elsewhere in our portfolio. So it does give us the chance, in fact, to expand sales of other products. So at this stage, the European team is basically calling out the fact that, yes, there are some risks in terms of FY '21 around some fairly significant products, so it's under pressure, but they're also calling out to there are opportunities as well. But at this stage, we're not calling a net down in that circumstance. It's more a case of just flagging to the fact that they are, for us, under pressure and it's a continually evolving process that we have to actively manage within the context of the tough European regulatory environment.

And I think, Grant, look, just to add a little bit more to that one. Paul specifically called out Bromoxynil there, which is probably about $7 million of margin through our -- for our business in Europe. That's a direct substitute for those products were the SUs that we acquired as part of the Surf portfolio. So in many cases where we've got regulatory pressure, we do have -- and if those products we're in a position where we couldn't continue to sell them, in most cases, we have other products that we could sell.

It's probably a tough question for you to answer or to quantify, but how much worse do you think the environment or the regulatory environment is in Europe since -- even you acquired the portfolios here a few years ago, it's -- and how tough do you think it's going to get for you over the next several years? It is a very sort of fluid situation and it tends to be sort of going in adverse direction for you.

Well, I certainly think that the pressure will continue. But I think the fact remains that until there are alternatives, we hear a lot about biologicals and more natural substances, but the reality is that the efficacy of those products are just not to the same level that we see in our products. So the pressure is building, but when you then ultimately get to are we going to ban those products and what are farmers going to do, it's a very different situation. I mean I'd like to say, it's one of the, I guess, probably the bigger examples in Europe. And we hear a lot about governments banning it, then when you ultimately get to the decision, it becomes difficult when the farmers start saying, "Well, look, what am I going to use?" And there are no, I guess, direct or economical replacements for a lot of these products. And you're right. It is difficult because it is changing. We recognize that the pressure is increasing. And where we can, we're starting to evaluate other products that, over time, more sort of natural-type products that we can replace that chemistry with. But I don't think it's an armageddon. I don't think it's going to happen as quickly as some commentators would actually -- would have us believe.

I think, Grant, to your point, if you look at that portfolio, clearly, at the time of the acquisition, we made a number of causes to what we thought happens from a regulatory perspective. And I think if we look back in reflection sort of 2 years later, I think our view would be that we're probably overly pessimistic. We probably have had products -- have a better outcome from regulatory perspective than we perhaps we've expected at the time of the transaction. So it's a tough environment, but I think so far, our team is doing a pretty good job in terms of making the right calls and the right assessment.

And just quickly, your outlook for the European spring in terms of planting. And just clarifying on the ANZ FX impact, do you think you will get full cost recovery from an FX perspective?

I think, thus far, it's early days yet kind of in terms of how things are moving. But certainly, our expectation would be that given all of our competitors are pretty much in the same boat in terms of low channel inventory and most of them -- in fact, all of them with USD input costing, the ability to pass those prices on, those costs are relatively reasonable.

And I think just in terms of conditions in Europe, there are ups and downs depending on which country you're actually focused on. But if we look at this year versus last year, conditions are certainly no worse than what they were at this time last year. So we don't see any material downside weather-related issues in Europe at the moment.

Our next question comes from Richard Johnson from Jefferies.

Paul, can I just go back to your waterfall slide on Page 10? I just want to try and understand a little bit more what happened to SG&A. And I was just wondering if you could give me a feel for how that increase was spread around the region. So how much of that 23% was in Europe, for instance?

Yes, sure. I think it's fair to say the majority of that increase was in Europe. There's a little bit in North America. And it was probably by the net saving coming through from the performance improvement program in ANZ. In terms of Europe, one sort of accounting treatment change so with the new change in laws in France, we can no longer give rebates to our customers. So typically, we provide them with -- we typically provide them with promotional support instead. So there's a switch there between SG&A and gross margin, but that isn't inflating the SG&A figure there, Richard. If we look at the rest of Europe, there aren't specific major standout costs. So for example, we're seeing certain warehousing costs a little bit higher because we're holding more inventory on the ground there. We're seeing some increased costs around -- again, around promotional activity. There's lots of small pockets of cost increases. And I guess, the genesis of this cost improvement -- or performance improvement program that we're now running for the rest of the group is the fact that we think we can do a far better job in terms of making those costs work harder for us. So I think that's one of the reasons why we're looking at this and saying that we're not satisfied with what we're seeing in terms of the SG&A cost increase and seeing what we can do to get that under better control. And it's been so successful in the ANZ business. We're simply taking that same template and rolling it through the rest of the region.

Right. Got it. That's helpful. So when you look back, there’s nothing do you think that might have been voidable in that number?

I think hindsight is a wonderful thing. You look at the cost that we've built into the business in terms of some of the new portfolios coming in, and frankly, some of those costs went in probably ahead of revenue. So in hindsight, yes, I'd like to see perhaps a more thoughtful build in terms of those costs, Richard, but outside that, no significant growth.

Got it. That's great, Paul. It's helpful. And then just to clarify, are you suggesting that the -- what you're going to do going forward, the quantum saving would be similar to what you've -- you're planning on achieving in Australia?

I think it's going to vary region by region, which is we need to have a good look at the opportunities in each region and how we can best exploit them. And again, to be clear, this won't just be SG&A. We'll be looking at logistics, supply chain, manufacturing. We'll be having a good look at the business in the same way that we did in the ANZ region as well.

I think, Richard, just in relation to Europe specifically, we do feel as though we've worked through a lot of the issues in Europe over the last 12 months. The majority of our focus has been on product supply and vetting down the new ERP system. So our focus over the next 12 months will shift to improving our efficiency to offset some of the increases that we've seen in this last period.

Got it. And then just for Brent on omega-3, I'm sorry if you did this and I missed it, but could you just run through the thinking and perhaps put some numbers around the fact that you're doubling your volume production target in FY '21? I'm trying to understand what that actually means.

Sure. Thanks, Richard. Yes, I guess, what we're trying to describe is that we're both increasing our acres as well as introducing new genetics with higher green and oil yields and probably also moving into some higher production zones. So our overall target -- I know we've talked more about acres in the past, but our overall target is to more than double the amount of oil volume that we're actually going to deliver to the marketplace. So if you go back in our history, we went from 3,000 acres to 15,000 to 35,000 last year. And rather than just trying to quote an acre number, we think it's more meaningful to say that from a 35,000 acre base last year, we're now planning to more than double the amount of oil volume that we intend to bring to the market in this next year.

Okay. So just to clarify, that's for sale or delivery in the same year, not the following year.

No, sorry. Yes, we'll be planting increased acres in 2020 for sales that will impact our FY '21 period.

Our next question comes from James Ferrier from Wilsons.

First question is on gross margins. I think, in the presentation deck, you talked about the result having achieved a flat margin of 27% versus PCP. Can you just clarify, is that normalized as in ex the European rebate issue, ex any sort of movement around AASB 16?

It's a like-for-like basis, James.

Yes. Okay. So given that, Paul, you've got this environment where, certainly in the past, at least the recent past, you've had higher raw material costs and inability for Nufarm to increase prices, generally speaking, to offset that. So when we look to the second half, do you think it's a reasonable expectation that you would also see gross margins similar to PCP?

I think that's a pretty fair assumption, James. I think if we look at Europe by way of example, we've had a very good first half in terms of the Surf and Century portfolio, which tend to have higher margin than our foundational product, so that's a mix benefit. But I'd also call out, too, that because of some of the supply issues out of China that we suffered during '19 and just lack of availability of product, that resulted in some higher COGS. And we are still seeing some of those higher COGS coming through in '20, and some of that will still be the case in the second half as well. So I think the outlook we've got is, in fact, we are working through some of that higher-priced inventory now. We still see some of that persisting into the second half, but our outlook is probably more optimistic than this time last year where I think we felt we were in the mix until the end of the issues caused by those restricted supply issues.

Yes, okay. That's encouraging. On FX, with the heavy skew of the business activity to the second half and given the sharp weakness in the A dollar, it must be an expected big positive in terms of the translation benefit. Could you remind us what the average translation rates were in FY '19 for the major currencies, maybe the U.S. dollar and the euro?

Yes. I think we actually got a slide there towards the back, James, I think, Slide 30. So essentially, we're saying that for the half, it probably wasn't too different for the full year, USD was 68.5, euro was 62 and pound was 54. So if you look at rates today, you're talking a fairly substantial shift from the rates prevailing last year.

Yes. Okay. And then I think you made reference that if we move further down the P&L, that there might be some headwinds around hedging and FX losses, given the volatility, but what you're referencing there is the translation benefit that would come through EBITDA.

Yes. So essentially, we see it being tailwinds in terms of operating performance, exactly as you alluded to. But we are concerned. We've got some exposures in certain emerging markets, for example, Romania, Poland, Hungary, where there is quite consistent currency volatility. It is difficult to hedge, probably uneconomic to hedge and there is the potential depending on how currency is tracking in the next 4 or 5 months, that we might cut some higher FX losses in that period. But it really is a watch out. But yes, we'll be exiting LATAM obviously in a couple of weeks, but we still do have some smaller but still significant exposures. And in the current environment, that can be painful.

Okay, makes sense. At the time of the LATAM divestment announcement, there was some reference in the document to the potential risk of dis-synergies possibly around procurement costs as the scale of the group shrunk. Has there been any further development that you can provide comment on in that regard?

James, part of the agreement is that for the next 2 years, Nufarm will continue to manage the supply, to negotiate and continue to negotiate for the supply of products into Latin America. So we don't see any significant impact in that time. If over that period, Sumitomo decide that going forward, they want to do their own procurement, then there is potentially some -- I guess, our ability to negotiate if we were to lose those volumes may have some impact. And as I said, what Sumitomo do after that 2-year period is entirely up to them. And then our argument would be that by combining our buying power, we actually get a better result, which is, if you remember why, really 3, 4 years ago, we centralized that and put a team into China so that we were able to get the benefit having countries negotiate on their own. I mean everyone is trying to solve for their operations. No one's trying to solve for a one Nufarm. So that's the logic. We think it's compelling. And we'll be trying to convince our friends that they are going to be better off with Nufarm doing that. In terms of products that we develop in our portfolio, the agreement we have is that those products will be offered to Sumitomo. And if, for whatever reason, they decide that they don't want to distribute those products in Latin America, then we have the right to offer them to other companies. So we see little downside from that point of view.

Okay, makes sense. And just to finish a couple of points to clarify, the trifluralin issue in Australia. My understanding is, particularly in WA, that business is typically transacted in the first half. So the $5 million impact you called out, I'd assume some of that has already been incurred in the first half.

The majority of that is -- typically fall in our second half, James, so that is an H2...

That would be sales we've been normally making at this time of the year. Maybe a touch earlier but certainly after the first half.

Okay. Understood. And then just lastly, the reference to a doubling of oil production for omega-3 in FY '21, does that change the economics such that you would lift your earnings guidance for omega-3 for that year?

At this time, we're still providing the same guidance of EBITDA positive in FY '21.

Our next question comes from Alex Karpos from Goldman Sachs.

Can you hear me?

Yes, Alex, loud and clear.

Perfect. Just want to focus on North America for a little bit. I appreciate the color around the floods, obviously, carrying over on inventories. How far through that de-stocking are we? And if we haven't seen the end yet, how long do you think we have to go?

So in the conversations that I have with customers in North America, they have significantly de-stocked over the last 6 months, but what we have seen is a reluctance to purchase in what we would have normally seen in December and January. That has largely flowed into February and March. And we are seeing very strong demand. When we look at what we delivered last year, the real question is how much of that $60 million do we think we can make up in the second half. That's the challenge that I referred to. It really becomes a logistics exercise. When we're getting the demand, we're sitting on $400 million of inventory in North America at the moment and we have other products and other raw materials on the water, subject to restrictions that may happen with being able to move products from our factories to and across state borders, and they are issues that we're dealing with daily. With some tailwinds, I think we can make up quite a large part of the deficit that we've seen in the half. The demand is very strong.

Got it. And is it fair to say that most of your competitors are facing the same supply chain bottlenecks, i.e. if everyone's facing the same kind of tighter inventory situation, pricing should be pretty supportive across this region?

Well, Alex, I would assume that. I've been really focused on our business, so I haven't really been focusing too much on our competitors. But I would certainly assume that many of them are faced with exactly the same issues that we are.

Got it. And one final one. I may have misunderstood when you all were talking about seeds, but did I interpret it right when you said the lawsuits were largely kind of settled at this point in time, the litigation ongoing?

In relation to...

The patent infringement cases.

Sure. Okay. Brent?

Sure, I'll take that. Yes, what I'd mentioned is that in the first half, we did conclude a U.S. Federal Court proceeding. And that was based on a subset of our patents that reaffirmed both infringement and validity of those patents. So that particular case, there still are some post-trial motions and potential appeals, but that's where we stand on the status of that particular case.

Our final question will come from John Purtell from Macquarie.

Just had a few quick questions, if I can. Greg, just in terms of levels of competition in markets, you talked previously around North America and Europe remaining very competitive, and I suppose that's what weak demand does. But do you expect that to sort of settle down or has it settled down based on what you're seeing today? Obviously, a fair bit of product should go through in the second half, but I suppose everyone's competing for that as well.

Yes, John. I think it's still going to remain fairly competitive whilst consolidation actually settles down, but I do think in certain pockets there, as we already discussed, there will be opportunities to improve prices and improve margins. And where we're seeing product in short supply, that is happening. My watch out, my call out is that we are starting to see supply chain costs that are very difficult to get your arms around at the moment. But there are sort of anecdotal stuff everyday where we've got people that are not able to turn up or not turning up for shifts, logistic costs getting access to trucks, trucks that are trying to cross borders and lined up, having to wait 10 or 12 hours to get clearance. So I mean all of these things are going to add some cost to our business that it's just very difficult to quantify. But certainly, in terms of demand, in terms of sales and price increases, there's no question we are seeing that.

And just 2 other ones. In terms of the products you've talked about coming under more regulatory pressure, does that sort of relate to environmental issues? Or what's sort of actually happening to drive that?

This is principally in Europe, John. And it simply is the fact that the regulator over there is taking a tougher line, whether it be environmental issues or health issues. And it simply is, I guess, the continuation of the path that we've seen in Europe, probably over the last 5 to 7 years. So there's no real intensification of pressure, but certainly, it is a continual focus for the regulator. It is the toughest market without a doubt. And as l say, that provides us with hurdles and challenges but provides us with opportunities as well.

I think, John, it probably gets more airplay today. I mean, quite to say in the cases around that have sort of put all of these things on the map. Paul’s right. When you look at the challenges that we've had over Europe for the last 4 or 5 years, there's always challenges around products coming in and out of the market. Certainly, the -- when we look back at the Century and Surf so-called acquisitions, there are products in there that have given us a lot of upside, an upside that we wouldn't have predicted. Some of these products that are under regulatory pressure at the moment, products that we've acquired in that portfolio would be substitutes for a number of those products that are under regulatory pressure.

And just the last one, coming back to the FX question, just to sort of understand your flow of sort of, if you like, revenues and costs. I mean obviously you've got some element of products going across different geographies. So I appreciate the translation benefits there in Aussie dollars, but to what extent are you going to be seeing sort of local currency cost pressures here in Australia in other markets where you've got U.S. dollar product moving around and your ability to recover that?

The ability to recover, John, typically comes about as to whether you are different from your peers in terms of your manufacturing base and what you're doing. So if I look at the Australian situation, I think it's fair to say that pretty much all of our peers will be importing in U.S. dollars or euro. And therefore, they'll be facing similar issues in terms of FX. If I look at the U.S., essentially, not really too much of an issue because, again, it will be mostly USD imports, mostly USD sales. And again, the situation in Europe is far less significant, again, in the sense that you're talking about USD and euro imports and euro sales. The concerns -- the bigger concerns I've got around FX are really the FX gains and losses on sort of work -- in net working capital balances in some of those emerging markets where we might get a nasty shock and probably a bit of a one-off loss. That's the concern I've got, John.

Thank you. We have no further questions. So I believe that will be the conclusion of today's conference call. Thank you all for attending. You may now disconnect.