Nufarm Limited (NUF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nufarm Limited FY '21 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Greg Hunt, Managing Director and CEO. Please go ahead.

Thank you, Melanie, and good morning, everyone. Welcome, and thank you for joining us today. Before we start today's presentation, I'd like to draw your attention to the disclaimer on Page 2, particularly the section on forward-looking statements. Look, I'm joined here today by -- here in Melbourne with our CFO, Paul Townsend, who joined us -- he joined Nufarm earlier in the 2021 financial year. And we're also joined by Brent Zacharias, the Group Executive of our Nuseed business, and many of you would know him, of course, and he's joining us from Canada to speak to the Seed Technologies results. I'm pleased to report that 2021 has been a successful year for Nufarm. Though COVID continues to create challenges for our industry, the fundamental economic driver and the fundamental challenge to grow more food to meet the needs of growing populations remains intact. And with improved seasonal conditions across all of our markets, we have seen strong demand for seeds and for crop protection products this year. The impact of COVID for Nufarm has been somewhat at margin. And safety is, of course, our most critical priority, and the additional measures that we put in place, to keep our people safe has allowed us to maintain production largely without disruption. A number of our operations achieved significant safety milestones during the year. I won't list them all, but you can see them here on this slide. However, I would like to call out the renewal of our major hazard facility licenses here in Victoria. And this is an important milestone because it does reflect the hard work and the hard money improvements that we've made in process safety management over the last 5 years. We have made a systemic cultural shift and safety right across the company, not just here in Australia, and this does set the right foundation for making sure that every one of our colleagues returns home safely every day. In terms of the operational and financial impacts of COVID, the largest disruption has been to global supply chains. Agriculture is just one of many industries dealing with supply delays and sharp increases in sea freight and logistics costs. While Nufarm has not been immune, our strong financial performance is in part testament to the investment that we've made in our supply chain to establish boots on the ground in China. We have a well-credentialed and experienced procurement team based in Shanghai. Their efforts to develop long-term supply relationships rather than transactional buy/sell relationships has served us well during these turbulent times. We also called out at the half year result that COVID has caused a sharp drop in demand for salmon in the U.S., which did slow sales of our omega-3 Aquaterra product in the first half. In spite of this temporary setback, we are seeing steady progress in industry adoption of this technology with our customer base expanding. We are now seeing signals that salmon demand is improving as the U.S. emerges from the pandemic induced restrictions, and Brent will comment on that in more detail shortly. The lifting of restrictions in the U.S. is also increased demand for our U.S. turf and ornamental products and that business has returned to more normal operating levels. Another impact of the tight supply and logistics challenges has been the change in our earnings skewed. At the first half result, we noted that COVID-related disruptions and supply risk were changing customer buying patterns, with sales locked in earlier than usual. That skewed EBITDA more heavily to the first half. And whilst that is unusual, this trend of early buying looks set to continue into 2022 and with supply conditions remaining tight, and channel inventories at historically low levels. Turning to the financial results. As I said earlier, it's been a successful year, and we've achieved a solid financial result. Revenue was up 10% to $3.2 billion, and underlying EBITDA was up 51% to $370 million. NPAT $61 million is a turnaround from the loss last year and our cash generation continues to improve, and is a highlight of the result. Our balance sheet is in a much stronger position than it's been for many years. This, along with the improved cash generation and positive outlook that we have for financial year '22, enabled the Board to reinstate the dividend with $0.04 per share declared for the final dividend. Paul will take you through the detail of the changes to the dividend and capital management policy later in this presentation. Overall, I'm satisfied with our progress and the financial result. We have delivered on the priorities that we set for the year. We're continuing to make improvements in our safety culture. We have improved margins and cash generation. We delivered on the targets we set for the performance improvement program. We have restored sustainable earnings capability in our European business, with the acquired portfolio, pleasingly, contributing a meaningful percentage of the earnings recovery. Positive earnings and momentum continues in APAC and North America, and we have delivered on major milestones that will drive value from our Seed Technologies platforms. Pleasingly, here on Slide 7, you can see that every region has contributed to the EBITDA lift of 51% from last year. The newly created APAC region has benefited from strong demand with improved seasonal conditions and strong commodity prices, driving an increase in volumes. Industry supply has been tight, and in many instances, we have been able to supply product where others couldn't. With the headwinds of the drought now behind us, the benefits of our restructuring activities over recent years are also becoming more apparent with the increased revenues translating to the bottom line and cash generation. North America also benefited from improved seasonal conditions and high commodity prices, which, along with the lifting in COVID restrictions, drove increased demand for our products. Our team has done an excellent job in leveraging our manufacturing assets to win business despite the very challenging industry supply disruptions in this region. In Europe, we delivered a very large lift in earnings relative to the increase in revenues. The main drivers of earnings were the performance improvement program, improved product mix and the normalization of raw material supply and pricing for the acquired portfolios. As I mentioned earlier, resetting the European's earnings base was a key priority this year, and the European team has done an excellent job. And on Seed Technologies, we also delivered strong growth momentum this year with higher grain prices for canola and sunflower, generating strong demand across the base seeds portfolio. We've seen good adoption of our proprietary hybrid products, and this is lifting revenue and earnings. While we are very pleased with the earnings improvement this year, delivering sustainable and consistent returns is important to us. In the short to medium term, the diversification of our product portfolio and our geographical presence is a key mitigant to earnings volatility. Many of you will know that our portfolio is heavily weighted towards herbicide products that growers need year in and year out, and complemented by a lower proportion of higher margin insecticide and fungicide products, in which demand can be more volatile. This mix provides a good balance over the past few years, and we have invested in more differentiated higher-margin products, which complement our portfolio of foundational lower-margin products. In terms of geographical diversity, our footprint has changed significantly with the sale of the South American business. However, we retain a strong presence in key markets where we believe that we can be relevant to our customers and generate good cash returns. Growth from Seed Technologies business is expected to add to the diversification of our income streams in the coming years. I'd like to take this chance to make some comments in relation to sustainability. There is a need to reduce the impact of agriculture on global ecosystems, and we are taking steps now so that we can meet the future needs of our customers and our stakeholders. It is worth noting that our crop protection products provide solutions to some of the most significant sustainability challenges. The world is under increasing pressure from population growth, and crop protection products helps maximize crop productivity. Crop protection products also help farmers respond to climate change through minimum and no-till farming. This reduces on-farm fuel emissions and increases soil carbon, all of which help build resilience to dry weather conditions. We have sharpened our emissions reduction focus and committed to a 30% reduction in the Scope 1 and 2 greenhouse gas emissions from our manufacturing sites by 2030. We expect to achieve this through a combination of both operational efficiency and renewable energy contracts. We've also started reporting of climate-related risk this year, and we will report against the TCFD framework next year. We've also aligned our sustainability efforts to the United Nations sustainable development goals to help drive the focus of our contribution to the broader industry -- the broader industry goal of reducing the impact of agriculture. We believe that we're well placed to contribute to and benefit from this industry imperative. Our new seed business is based on a beyond-yield strategy which is focused on developing new solutions from plant-based products. Omega-3 canola oil is our most developed sustainable solution. It helps to protect marine environments and prevent overfishing by complementing canola oil and fish oil in salmon feed. Our most recent investment Carinata addresses the need for more sustainable fuel sources by sequestering carbon in soils and producing a nonfood oil that is used as a feedstock for biofuel production. In our crop protection business, our product development is increasingly focused on managing resistance, finding effective ways to reduce chemical application rates and expanding our portfolio of alternative products farms. In Europe this year, we launched our new Bio brand, which brings together our biological product portfolio, and makes it easier for growers to find the right biological solution using a digital platform. We're also making early-stage investments that we hope will expand our offering of additions to our traditional chemistry crop protection in the years to come. These investments include CROP.ZONE, Enko and research and development with universities and research institutions such as the CSIRO. And more information on this will be available in the sustainability report that we publish later this year. So with that, I will now hand it over to Paul to discuss the financials in some more details. Paul?

Thanks, Greg, and good morning, everyone. Before we get started today, I'd like to remind you that due to the change in our financial year-end, a lot of the comparative numbers we'll be discussing are pro forma numbers. You'll find a more detailed analysis of performance relative to the statutory comparative period in the materials posted with IAS [indiscernible]. I'd also draw your attention to the fact that we have made sales of $198 million at 0 margin to Sumitomo in Latin America under the transitional supply agreement. And where appropriate, the impact of this has been excluded in our commentary and figures. Turning to Slide 13. Disciplined expense management, coupled with favorable FX translation benefits has led to a year-on-year improvement in the SG&A cost position. It is pleasing to report that the company has delivered on its $25 million annualized cost reduction commitment under this program. As you can see on the chart, the $20 million released under this program has helped mitigate cost pressures that Nufarm has endured with respect to freight and warehousing expenses associated with COVID-19 and Brexit, with North America and Europe mainly being impacted. Travel and other savings related to COVID-19 restrictions has also offset safety provisions. We're also on track to deliver previously reported benefits of circa $10 million to $15 million associated with the closure of the 2,4-D plant in Linz and of the Raymond Road insecticide and fungicide facility. These benefits should materialize during the course of 2022 year as we unwind inventory. Turning to Slide 14. During the year, we completed a review of our capital structure and capital management principles. The overarching aim of this review was to ensure we understood the various cyclical cash flow scenarios Nufarm was exposed to, and to overlay a capital structure and funding platform to enable financial resilience through the cycles. This ultimately reduces Nufarm's balance sheet risk and enhances levels of liquidity. We expect this will also promote cost and capital management discipline across the business, together with a continuously proven mindset to net working capital management, given its significance to driving a sustainable operating cash flow position for Nufarm. Our capital management framework provides the basis for capital allocation decisions, including the application of free cash flow. It is intended that Nufarm applies a cascading approach to the use of free cash flow to these operations in the following manner: firstly, apply free cash flow to investment growth projects and/or small bolt-on acquisitions where the projected returns satisfy internal return on funds support measures that exceed Nufarm's weighted average cost of capital. Secondly, consideration of the payment of the dividend linked to free cash flow, subject to compliance with the core target leverage statutory range of a maximum of 1.5x to 2x under the adoption of the new dividend policy. And finally, consideration of any excess capital to be returned to shareholders in circumstances where Nufarm is below its tide of leverage metrics and there are insufficient growth opportunities that exist. These capital return measures may include special dividends and share buybacks. The Board has adopted a change in the dividend policy, ensuring elevated attention to cash generation, especially net working capital management and greater focus on maintaining an appropriate capital structure for the group. Now turning to Slide 15. I think this chart speaks for itself in outlining the various cash flow movements to deliver the $257 million of outcome. Obviously, EBITDA and net working capital inflow are the key contributors. In terms of working capital, the key drivers are improved customer collections and reduced inventory whilst payable days slightly deteriorated. The supplier financing facility utilization has increased during the course of the year, largely due to raw material price increases. This facility remains an important element in strengthening Nufarm's relationship with key Chinese raw material suppliers that assist in securing product supplies in the current tight market conditions. Tax and interest payments of $31 million and $55 billion overlooking expectations, while CapEx investment of circa $147 million is down on expectations due to time-related matters influenced by COVID-19 restrictions. In order to arrive at a net cash flow number for the group, payments under the Nufarm step-up securities of around $10 million need to be deducted from the total to arrive at a net $247 million inflow. Overall, an excellent cash flow outcome for the company. As mentioned earlier, Nufarm operates in a very working capital-intense industry, so active management of net working capital is very important, being able to deliver acceptable returns to shareholders. Through 2019 and 2020, poor seasonal conditions, particularly in Australia and interrupted supply chains in Europe, led to a buildup of working capital on the balance sheet. Over the past 12 to 18 months, we've seen a significant unwind in this position, and you can see from the chart on the left, average net working capital of the sales is now at 34%, ahead of our targeted position of 35% to 40%, a pleasing result for Nufarm. This focus will continue and will need to be balanced with ensuring continuity of supply given the global logistics and supply chain challenges. In terms of capital expenditure, the chart on the right depicts the distinction between investment in property, plant and equipment and intangibles. The overall CapEx spend is lower than previously communicated of around $180 million, which we flagged at the half year results, and is principally associated with lower property, plant and equipment spend like due to timing-related issues associated with COVID-19 restrictions. As well as property, plant investment, which is predominantly maintenance of Australian business CapEx there are important growth investments in new teams spend, in new products and in product innovation, which cover both crop protection and the seeds business units. For 2022, CapEx expense is estimated at $190 million, around $35 million of which is new growth projects across the manufacturing plants. This spend is part of a broader investment program over the next 1 to 3 years. Return on funds employed at 30 September was 5.9%. Turning finally to the balance sheet on Slide 17. As you can see, there has been a significant step change in debt and leverage following the sale of our South American businesses on 1 April last year. Leverage is at 0.9x EBITDA, and is lower than our maximum core leverage target of 1.5 to 2x, including leases. The company maintains a very strong liquidity with undrawn facilities at year-end of around $600 million and cash balances of more than $700 million. And finally, following a review of our capital structure and on the back of these strong financial results, we're now in a good position to consider refinancing options, obviously, subject to market conditions. I'll hand you back to Greg, who will provide you some further detail on performance in the regions.

Looking into the detail of each of our business segments. The APAC region had a very strong year. Headwinds of the past 3 years finally turning to tailwinds. Higher revenues, improved margins and lower SG&A costs delivered a 47% increase in EBITDA. This newly created region comprises of our businesses in Australia, New Zealand, Cropland spraying equipment business here in Australia, Indonesia and our operations in Malaysia, support sales into other Southeastern countries. It also includes our joint venture in China. Australia and New Zealand are important markets to us. They are our home base, and we have leading market positions in both of these markets. Many of you would be familiar with the restructuring that we've done in these countries over the last 5 years. We've closed 5 factories, consolidated 2 brands into 1 and removed costs from both back and front office. And over the last 2 years, the benefit of this restructuring work has been skewered by the impact of the drought, better return to seasonal conditions. And in the case of financial year '21, probably better than normal conditions allows us to showcase the true value of this business. EBITDA from the legacy ANZ business was $82 million this year, and this result highlights the leverage of this business, not just to the downside, but also the upside from improved seasonal conditions. We have very strong support from our channel partners and end-use customers in these markets. We believe it's important to maintain sovereign manufacturing capability and the essential role that we play to ensure that farmers have a reliable supply and a broad range of locally manufactured and locally formulated products to grow their crops. With the reset of our manufacturing footprint and the back office complete, we've now turned our focus to portfolio growth. We launched a number of new tailored products for the domestic market, including Crucial®, Terrad'or® and Saracen®. Each of these contributed positively to the FY '21 result. We're also working with local institutions such as the CSRI and the Queensland University continue to develop products to support Australian growers and we expect these products to be commercialized in the next 2 to 3 years. The legacy Asia business generated EBITDA of $30 million with increased sales volumes and reduced SG&A costs more than offsetting the impact of unfavorable currency translation. Through the combination of the Asia and the ANZ businesses, our ambition is to further leverage our manufacturing footprint across this region and reprioritize our growth opportunities in Asia. With the Asia Pacific region hosting the largest share of our global population, we believe that there are opportunities to further leverage our existing presence in this region. Turning now to Europe. As I mentioned earlier, resetting the earnings base in Europe was a key priority for us this year, and we have delivered the intended turnaround in earnings with EBITDA up 80% in local currency to EUR 108 million. This reestablishes profitability at the same levels as 2019, and is a solid first step to improving returns. The underlying drivers of the earnings improvement were better availability and lower raw material costs for insecticides and thumbicides, higher volumes and an improved product mix and lower SG&A costs. We are generating higher sales from the acquired portfolios. And while it's getting more difficult to split the earnings from these portfolios from the rest of the business, they contributed approximately EUR 62 million or around 57% of the earnings in euro terms. Whilst it's a solid result, there's certainly more to do. We have invested heavily in this region over the past 3 years, and the current return is not sufficient for that investment. I am aware that the farm [indiscernible] aspirations of a 50% reduction in crop chemicals and 25% production from organics by 2030 is a concern for me. However, these aspirations also provide opportunities for us. Our investment in the acquired portfolios, the investment in CROP.ZONE, the establishment of new buyout and our relationship with Sumitomo and their proprietary products are key elements of the existing European business that will allow us to deliver to these opportunities. CROP.ZONE is a German-based tech company that has developed a hybrid electric weed control solution. We have been working with them for some time and we formalized a very modest equity investment in the company during the year. While it's only a small investment, I call it out to highlight that we are looking to build greater awareness of the alternative solutions in our European portfolio. We recently, as I said, rebranded our biologicals portfolio in Europe to make the alternative options clearer to farmers. In the near term, the existing portfolio is capable of sustaining the current earnings, given normal seasonal conditions in spite of the regulatory headwinds. While we expect to see industry-wide supply chain disruptions and related costs to continue to impact into 2022, we believe that we are well placed to deal with these issues. Over to North America, our North American business has bounced back strongly from the historical flood since last year. In U.S. dollars, the top line growth of 19%, and a 25% increase in EBITDA reflects the underlying growth in item that has been up-skewered last year. The North American team delivered volume growth in all parts of the business segment with revenues up in crop protection in the U.S., Canada and Mexico. Turf and ornamental business also returned to more normal conditions and normal volumes with the COVID restrictions easing, particularly in the second half of the year. Channel inventories in North America are at the lowest levels that they've been for some time, which predominantly reflects the global and the domestic supply disruption that has impacted the entire industry this year. Our earnings growth reflects the benefit of our investment in domestic manufacturing capacity and logistics in this region. We are being rewarded by customers for reliability. While we have not been able to meet all the possible demand, we have maintained the confidence of our customers throughout what has been a very difficult period for them in terms of supply. While product is starting to flow more freely in October and November, particularly from China, domestic port availability is still challenging. We have sufficient inventory on hand or on the water to meet the majority of our first half demand plan. I'll now pass over to Brent to address the results in the Seed Technology segment.

Thanks, Brent. Thanks, Greg, and good morning, everyone. The Seed Technologies segment covers results of our new seat business and the sale of seed treatment chemistry. The full year results showed strong growth from the prior comparative period. The segment revenue is up by 21% to $241 million and underlying EBITDA by 57% to $46 million, reflecting improved margins. The key drivers of this performance were higher sales of canola hybrid seed in Australia, increased sales of higher-margin sorghum and sunflower products in the U.S. and South America and increased second half sales of Aquaterra and omega-3 canola oil to Chilean Aquaterra customers. The seed treatment contribution was slightly down on the prior 12 months with lower sales in Europe and APAC partially offset by a solid initial performance from the newly launched Trunemco products in North America. As the pie chart on the slide illustrate, the change in Nufarm's financial year now captures the majority of both segment revenues and earnings in the first 6 months of the period, coinciding with the major selling season of our core seeds portfolio. Turning to the next slide. Our R&D pipeline investment over recent years is delivering clear benefits as we gain strong grower support for our better performing canola, sorghum and sunflower hybrids. New canola offerings in Australia are delivering significant yield improvements, and we are successfully expanding our canola position in the Americas. New sunflower products, some featuring multiple trade technologies, to be launched in all our key markets. And we're also gaining share in the sorghum segment with the launch of new early maturity hybrids and hybrids offering other agronomic benefits. Moving to our omega-3 canola platform. As we reported at the half, COVID-19 impacted food service demand for salmon and consequently, our sales of Aquaterra Chilean agriculture customers were lower than expected. Encouragingly, we have seen salmon demand recover in the second half, and this has translated to stronger orders over the latter part of the reporting period and expansion in our customer base. Customers are also reporting a positive use experience with Aquaterra in their feed and farm operations. After pausing commercial plant use of omega-3 canola in the U.S. in financial year '21, we plan to resume production in 2022. Important milestones were also achieved with our development of an omega-3 canola oil for human nutrition markets, which will be marketed as Nutriterra. The FDA recognized Nutriterra as a new dietary ingredient, and important results were generated in a human clinical trial, which demonstrated both safety and efficacy. These results are proven pivotal as we continue discussions with potential commercial partners. And during this past year, both Aquaterra and Nutriterra, we see sustainability certification by Friends of the Sea, which is a preeminent certification standard for products and services that respect and protect the marine environment. And finally, a quick update on our carinata business platform. We see carinata is another of our Value Beyond Yield technologies and is being developed as a drop in feedstock for low-carbon biofuels. It is a nonfood covered crop that provides our contract growers with an additional source of revenue on existing farm line while protecting and improving soil health for their primary crop rotations. Carinata Oil is suitable for processing into renewable diesel for co-processing, and has now been certified by the International Civil Aviation Organization as an eligible feedstock for sustainable aviation fuel. This certification includes the default carbon life cycle reduction value similar to used cooking oil. Each step of our crop production is independently audited and certified to standards established by the Roundtable on Sustainable Biomaterials, known as RSB. With increased interest from potential offtake partners, we have scaled up production in Argentina and commenced development testing in other markets ahead of further expansion plans. And next calendar year, we'll commercially launch a new carinata hybrid that is exhibiting significant yield gains. We are anticipating further exciting developments in relation to our carinata platform and our Value Beyond Yield technologies in general over the next 12 months. I'll now hand back to Greg.

Thanks, Brent. So very encouraging developments over the past few months, which does reinforce our confidence in the long-term potential that the seeds business brings to the group. Before we move to the outlook, let me just take a minute to recap on our priorities for the new financial year. Our strategy remains unchanged, improving cash generation and returns continues to be the financial priority. We are growing volumes to build our scale and global footprint. We are improving margins by broadening our portfolio and product mix. We are investing in the efficiency of our supply chain and reducing our cost base. With the sale of the South American business, we have refocused on the regions where we believe that we can generate the best cash flows. Ultimately, we are focused on improving returns. Higher earnings from our existing asset base will improve returns in the short term and a disciplined approach to driving current growth investments as well as new investments that will improve future returns. Now to the outlook. Whilst we're not giving guidance, the outlook for grain prices remains positive, and favorable seasonal conditions in the relevant grain producing regions for Nufarm is resulting in continued strong demand for crop protection products. The increase in cost of raw materials as well as global logistics and supply chain challenges will continue to pressure margins. However, we expect price increases and volume growth will provide some offset. Strong demand has continued in October and November. Tight supply conditions and historically low channel stocks are likely to result in earlier-than-normal sales as customers look to secure supplies. With change in our financial year-end, the seeds business now delivers the bulk of its earnings in the first half. Higher prices for canola, sorghum and sunflower is driving very strong demand for seed, and this business will benefit or will benefit the base seeds business. As discussed, with the salmon market recovering, we expect expanded adoption of Aquaterra, and as such we intend to recommence commercial plannings of omega-3 canola in calendar year 2022. Fundamental market trends are supportive of expanded demand for carinata as a low carbon fuel stock, and we intend to expand commercial plannings of carinata in calendar year 2022. So in summary, we've delivered a solid result that puts the headwinds the past 2 years behind us. We are beginning to see the value of the steps that we've taken to reshape our business. We've started financial year '22 with strong trading conditions and results across all of our business segments. So with that, I'll hand back to you, Melanie, and we can take some questions.

[Operator Instructions] Your first question comes from Grant Saligari with Credit Suisse. .

Congratulations on the results. It's good to see the bounce back in profits across Europe, particularly. My question, I guess, is just on the regulatory outlook in Europe, and just specifically focusing on the product registrations. I mean it looks like there are a couple of important actives still to receive European Commission approval. And then I think in the U.K., our portfolio -- there's reregistrations required of your CPA-based products and several other products. So I guess that's a long leading, but I'd be interested in understanding sort of what percentage of your revenue is up for reregistration in FY '22. And I guess then just taking a slightly longer-term perspective over the next 3 years, what the percentage of revenues that needs to be replaced with new product or reregistration of existing product as it comes through, please?

Well, there's a lot in that, Grant. If I can sort of try and deal with it in chunks, if we look at the regulatory outs that we know of in financial year '22, they're probably close to -- probably EUR 15 million. But as I said earlier, what we've got in our current portfolio we believe will largely offset that. If we look out to '23, '24, '25, it's still very uncertain because we have the option of defending those molecules if we want to. And it's just too early for us to make that decision at this stage. That's the impact in '22. '23, '24, '25 is much more difficult. What we do know is the Sumitomo products that are due and on track at this stage to be launched in '24, provide us with pretty significant step up for some of the products that we see that are in our current portfolio. And the confidence around those products being registered will then influence our thinking about what we do and what we don't defend in the current portfolio.

Okay. That's helpful. And just to confirm, so the EUR 15 million is a revenue number?

Yes. Margin number.

A margin. So gross profit number.

Yes.

Okay. All right. That's helpful. And just a second question, if I could. Just on the revised dividend policy. I didn't quite care whether you mentioned a percentage of free cash flow. But I'm wondering if there's any -- if you did or didn't whether you could elaborate on that, please?

Yes. No, we didn't, Grant. And basically, what we're saying is that it's linked to cash flow. So to the extent that there isn't a positive cash flow then it wouldn't be considered other than we had capacity within our leverage. So there's 2 gateways, if you like. One is that positive cash flow and the other one is leverage as well.

Okay. So how should we think about the dividend payout ratio going forward then? Like with no percentage in mind, should we simply rely on the NPAT number with the free cash flow type of filter on that?

I think it's really around -- and I guess it comes back to this capital management possibly. So the -- what we're targeting -- if we can target breakeven in a low point of the cycle. So in theory, we're always looking to be cash flow positive, then it will be relative -- there's a dividend policy that we're not being public on in terms of a percentage, but we don't want to communicate that because we want to retain discretion as to how we go about it. But it will -- all I'm going to be saying is that it is absolutely linked to cash flow. So there isn't an impact rather. And the other aspect is we'll be looking at in leverage. So I know that's probably not helpful in how you model what dividends may be, I guess, in the future. But we want to be very strict in ensuring that the cash flow line leverage line are taken into consideration.

Your next question comes from Alexander Patent with Citi.

And yes, congrats on the earnings turnaround. It's good to see. It seems like every pesticide active ingredient is heading higher at the moment due to the energy situation in China. Are there any non-herbicide ingredients that you're worried about not being able to pass through price increases on? Just thinking of what happened to tebuconazole and prochloraz a year or 2 ago. Is there a possibility of that kind of pressure?

No. We -- part of the pressure that we had 2 years ago was the supplier, if you remember back to the famous explosion. So it was really a case of the factory being closed. So we just couldn't get access to the product. I mean product is now being produced and flowing albeit at the moment due to the power restrictions, we are seeing, in some areas of China, mainly on the Eastern sea port and the higher populated areas, we are seeing factories running at 50% and 60% of capacity. And that's as a result of the power restrictions. And we would expect post Chinese New Year post-Beijing Olympics, Winter Olympics, and post the Northern Hemisphere winter, we would expect the supply situation out of China to improve. So we're not seeing -- on those higher-value products, we're not seeing an issue. The issue today really is on the high-volume herbicide products.

Right. And presumably, those are more easy to pass through price increases on at the moment, especially given the demand.

Correct. And that's really where all the focus is as you move into the burn down so the preparation for cropping, the pressure is on those herbicide products.

Got it. And I guess on that point, with the massive price increase in glyphosate, have you seen a relative pickup in 2,4-D sales? Or any kind of substitution towards any of your other chemicals by growers in response to that price increase?

Yes. We're certainly seeing demand for 2,4-D and MCPA increase. Absolutely. Both [indiscernible]

Your next question comes from Richard Johnson with Jefferies.

Greg, I just wanted to start by asking you about growth over the next year or 2. I mean you partly touched on this. But if you -- hypothetically speaking, which I assume there was no change in the seasonal conditions year-on-year, I mean, where should we think about where you could generate growth, if at all? Profit growth that is.

Yes, yes. I understand the question. Well, I guess the easiest way is if we go around the grounds, Look, there could be -- there's certainly growth in the Asia region. I think it's just too early at the moment in Australia. We're only really 6 weeks in. The outlook for the summer crop is positive. It's really too early to call the winter crop. We have had in the benefit of sharp increases in commodity products in the last 6 months. And this could really reverse quickly in the second half if prices fall quickly. And I think we'll continue to see logistics challenges. So to repeat what we do this year in Australia is going to be challenging, not impossible, but for the reasons that I just mentioned, a challenge. I do think there's a growth in North America. We're expecting to see increased plantings. We're seeing very strong demand at the moment. The issue is getting access to supply. So we do see growth in North America. In Europe, as I've said, I think we can offset the regulatory losses from what we've got currently in our portfolio, and particularly the acquired portfolios. There are a couple of gems there. And then in the seeds business, as Brent was saying, the demand for -- in the base seeds business, the demand for particularly canola, sorghum and sunflower is positive. So I see some upside there. There'll be probably something for carinata in '22. But look, if you look out really to sort of beyond '22, I see very strong growth coming from the seeds portfolio, both in carinata, omega-3 nutraceuticals. And there's no reason why -- in the longer term, we don't see more growth come in Australia that will largely come from portfolio. So I sort of try to give you a bit of a feel for '22, but we're really thinking about medium to longer-term growth. And we see good runway in the portfolio that we've got coming over the next sort of 2 to 5 years. And pretty significant upside in the seeds portfolio.

Got it. That's very helpful. And then just a couple of technical things. On the software adjustment, the accounting adjustment, is there any reason to think that adjustment going forward is any different in quantum?

No. It would be the same amount year-on-year.

Perfect. And then finally, Paul, can you just run me through what happens to the tax charge in the second half?

Yes. Sure. Sure. So basically, at the first half, we had about 39% effective tax rate. And I guess the outperformance of APAC relative to what we thought at the time enabled us to book losses that were, if you like, are not on the balance sheet. So we're able to book losses that were on the balance sheet, which enabled a lower provided, if you like, an improved tax position there. Together in Europe, we had a different shift in the profits. So there was a shift, for example, in some of those countries where we cannot book losses, there was a shift in profits in the countries where we could be able to book losses or indeed have profits. So the Australian -- Australia is being able to take a tax credit for unbooked losses and Europe like shift in profits or shift in trading performance amongst the countries enabled us to reduce the rate.

Got it. So how should we think about it for this year?

Pretty much the sign. We think that in the medium term, that tax rate should hold up.

Okay. Does the annual rate stay the same going forward?

Yes. And it could be a shift in between the halves, but certainly for the full year, that's how I think about it.

Your next question comes from Evan Karatzas with UBS.

Greg and Paul, just on the price increases that you're passing through, can you just maybe touch on, I guess in percentage terms, how much price was it benefit to revenues? And if possible, what's the price expectation for FY '22 is?

Yes. Evan look, that's something that we're probably not willing to communicate, frankly, just -- we're quite sensitive about that. But what we can say is that -- Greg's comment on that is our ability to hold the prices given the current challenges we've got on that on the cost side.

Yes. That's fair enough. And then similar on the cost-out program, and you disclosed you've now owned $25 million. Can you just, I guess, provide some color on the expected benefits for FY '22? And I guess, what regions they'll be focused in?

Yes. Well, I guess we're probably done now, Evan, on those in terms of the $25 million, as we said, was analysis maybe $20 million this year. So that sort of should maintain, but there won't be any incremental beyond FY '20 -- between FY -- beyond FY '21. So what we're trying to do is on that, and that's essentially SG&A, $15 million of that was in Europe. So what we're trying to do is basically or our target is to really hold our SG&A but for volume growth, where we've got, obviously, freight -- and also there's obviously been some freight pressures with COVID and the likes as we called out.

Okay. And then sorry, just final one, maybe for Brent. Just on carinata, there's a lot of demand for SAF and low-carbon fuels. But Brent, I guess what's the expectation timing turned to become a material driver for freight? Or I guess, the other way to ask is how much of that expansion in Argentina is ready for commercial sale and what sort of volume increase will that be providing with?

Yes. Thanks, Evan. Yes, I guess just to put that in context, our carinata program is already commercial, and we're really pleased with what we've been able to achieve in a short amount of time since we've acquired it. The real focus right now, as you highlighted, this is now the expansion phase of that. And while we're focused on '22 expansion from Argentina. And I think as we noted the launch of one of the hybrid technologies that should speed that adoption. We're also doing development in other countries at the same time to expand beyond Argentina. So we're going to continue to see sales and margin increases each year as we go forward, including in '22. But I guess, really, as we think about the second part of your question, this materiality of that, that we really see 2023 and 2024 being years where we really start to get to greater scale both with the launch of our hybrids as well as expansion into other countries.

Your next question comes from James Ferrier with Wilsons.

First question, interested to sort of give a bit more color on the breakdown within the sales growth for FY '21 just around volume and mix and price. So I know on a constant currency basis, it was 19% growth overall. FX was obviously a headwind to that. But if you could provide a bit of extra color around the other drivers, volume, price and mix within that 19% constant currency growth.

Yes. Look, James, just on that one, it's probably -- we -- the dissection between those is a bit challenging given that the reasons that what we can say is pretty much that a lot of it -- a lot of it's been pricing related, then volumes being up a bit, but not as significant as what pricing is. So the relative mix would be higher pricing and lower volume some or a bit higher pricing would be, if you like, the key drivers.

Okay. That's helpful. And when you say price, is that you putting your prices up? Or is that just less discounting than would otherwise happen in a normal year given that demand/supply dynamics that we saw last year?

It's the former.

Yes. Second question, just a point of clarification around the trade finance facility. So if I'm reading the annual report right, there's $297 million on the securitized payables and $18 million on the securitized receivables. And am I right in saying they're both still off balance sheet facilities?

Yes. That's right. The receivables is actually unwinding. So that will be no longer a [ fatal ]. So the $18 million is actually unwinding as we speak, and that's predominantly New Zealand receivables. The supply financing one, that is still off balance sheet. As I spoke in the conference that call that we've grown that because of price. Obviously, with the cost of raw materials increasing, that the pricing has gone up. And therefore, we've had to increase that facility and into the port securing our supply because the Chinese suppliers enjoy the terms that it gives them.

Yes. Yes. Okay. Makes sense. And finally, just on the CapEx. You might have touched on it, and I probably misheard you. But within the CapEx guidance for FY '22, can you give us a breakdown between PPE, and then what you're spending on R&D across chem and seeds?

Yes. So think about it this way. So about all that $190 million, about $100 million of it is portfolio or investment in intangibles, sorry. Of that $100 million, about $60 million of it's crop protection and about $40 million of it's seeds. And the PP&E is about $45 million on, if you call it, staying business, and the rest of it is pretty much growth. I think I called out $35 million being right. So that's the sort of break out, if you like. Those growth projects, when I say growth, they are returning -- profit returning projects, cash flow retaining projects.

Your next question comes from Jonathan Snape with Bell Potter.

Just a couple. First one for Greg. Just on the -- I think you want to set note that has like a $16 million inventory write-off charge. And I was trying to find if there was a number in there in the PPE. I'm assuming that's been taken in the headline results.

The charge, is it, Jonathan?

Yes. And was there a material one last year because I couldn't find one. I think we gave 2 months side-by-side at that normal course of business or if that's something else?

Yes. Can we get back to you on that on the comparative but in terms of a pro forma comparative. But it's normal course of business.

Okay. Okay. And on the omega-3 side, was there any contribution from oil sales this year in the seeds business at all in terms of the performance? Or is that starting offset against capitalized costs still?

Brent?

Yes. I'll take that one, Jonathan. Yes, in terms of revenue and margin recognition from that business this year, yes, we have achieved that if that's your question.

Yes. Was there anything material though in this year's number? Because you're obviously restarting the program. You've signed up -- I think you've got 8 additional customers. I'm trying to figure out how to speak about omega-3 heading into, I guess, the contribution this year? And then with commercial plantings restarting, how do we start thinking about it for '22 and '23?

Yes. Yes. From an earnings contribution standpoint, it's not material in this current year, but we have to continue to, particularly in the latter part of the second half get much stronger sales conversion of that technology. And I think the second part of your question, is as we look out to FY '22, we'll continue to be running off our inventory that we have and that we produced in 2020. We'll, as we've mentioned, be producing -- back into producing omega-3 with followers in calendar '22, which will, we think, fit pretty nicely with the inventory available towards the end of calendar '22 to be able to really start having some of the impact into 2023. Like we've said, the recovery we're seeing in our markets is really encouraging. We still think it could take another 12 months before we see the full pricing and margin recovery of our customers. But at this stage, we're really pleased with what we've seen in the last few months, and that's how we're planning accordingly.

Your next question is a follow up from Grant Saligari with Credit Suisse.

One thing I was just noticing is -- speaking through the annual report is there still 36% of employees are in Europe. If I look at -- I understand big manufacturing facilities in Europe. But do you think that's sort of the right allocation of people just sort of thinking where the revenue and profit of the business is generated, and how might that sort of change over time?

Sorry, Grant, I'm just trying to get on your wave length. Can you comment again?

Yes. in the -- in your report that the sort of breakdown of where people are located in the organization and 36% of employees, I think if I'm reading it correctly, are in Europe, which seems like a fairly heavy allocation of employees to that segment, or perhaps I'm really getting correctly.

Yes. Well, I don't know. I haven't done the analysis. But I guess when I think about 46% of our earnings come out of the European business, I guess I'm not surprised.

There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.