Nufarm Limited (NUF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nufarm Limited FY '22 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Greg Hunt, CEO. Please go ahead, sir.

Thank you, Chad, and good morning, everyone. Welcome, and thanks for joining us on today's call. I'm joined today by our CFO, Paul Townsend. Also joining us are Rico Christensen and Brent Zacharias, who I think most of you know, and they'll take this opportunity to provide an update on the growth and the aspirational targets that we spoke during February this year. Before we start, I'd like to draw your attention to the disclaimer on page 3, particularly the section on forward-looking statements. Look, this is a great result for Nufarm with earnings up in all of our operating segments. We have benefited from seasonal conditions and attractive soft commodity prices. However, this result also demonstrates the benefits of our transformation program, our focus, deeper rather than broader approach and the recent investments that we've made in supply chain and portfolio. As you can see on this slide, record revenues, up 17% to AUD 3.8 billion and EBITDA up 24% to AUD 447 million. Crop Protection enjoyed stronger returns, thanks to an increase in prices. And as I said earlier, on our continued focus on core crops and key geographies. Our Seed Technologies continued to accelerate with earnings up 26% for the period. And importantly, we continued the building blocks for future growth. We continue to reposition the company and now see ourselves as more of an agricultural innovator where technology and innovation will play a greater role in driving the future of our business. Our activities in this area progressed strongly during the year, including recent expansions of our biopesticides, omega-3 and bioenergy platforms. We are leveraging our existing Crop Protection and Seed market presence to accelerate that growth. As a result, we expect modest earnings growth in financial year '23. And I'm pleased to say that we are on track to meet or exceed our FY '26 growth aspirations. So the outlook for Nufarm in both the short and long term remains very positive. I've already mentioned the record earnings and revenue. The other key highlights include working capital result, which reflects the continued focus and discipline that we've had in this area. Overall, a very positive result. Our balance sheet is strong, and we've had positive cash flow generation. This has allowed us to declare total dividends of AUD 0.10 per share, including a final dividend of AUD 0.06 per share. I'm pleased to say that each of our operating segments achieved revenue growth during the year, and I would like to reinforce that this result goes beyond attractive commodity prices from what you might refer to as [ pre-debt ]. While [ tolling ] might acknowledge that we have benefited from price increases, particularly in the first half, it has been our capacity to advance new products, navigate supply chain challenges, continue to invest in growth and meet key milestones. In Crop Protection, our geographic mix and our increased focus on higher-margin products, which complement our diverse portfolio are reducing risk. Our revenues are more linked to area planted and seasonal conditions than directly to the price of soft commodities. In Seed Technologies, our innovations are providing new and diversified revenue sources with strong growth potential. The technologies and products that we're investing in today are not those that you would have expected from Nufarm 5 years ago. Turning now to each segment; North America delivered strong revenue and earnings growth. We saw early demand in the first half, followed by some dry conditions in the South and the West, which tempered demand in the second half. Volume growth was also restricted by supply constraints, which I'm pleased to say have eased towards the end of the year. New product introduction supported margin expansion and an improved product mix across the business. Overall, the strong result also reflects the investments that we've made in domestic manufacturing capability. Our presence on the ground has allowed us to build stronger relationships with our customers. We are planning for another year of continued growth. Forecast from the USDA for 2023 show that planted areas are expected to increase, adding to our confidence as we head into FY '23. We anticipate strong demand in the first half as channel restocking occurs in preparation for the spring planting season. In Europe, we delivered strong revenue growth, up 15% despite losing EUR 33 million in revenues from products that were deregistered during the year. We offset this through introducing new products and organic growth. Unfortunately, earnings were dampened by procurement, logistics and manufacturing challenges, particularly at our site at Wyke. Operations were impacted by interruptions to raw material supply, mechanical issues and extended maintenance. And these issues will be progressively addressed through our CapEx program over the next 3 years. For FY '23, we expect [indiscernible] deregistrations to impact revenue by EUR 21 million. However, as we did this year, we believe that we can offset the revenue impact with what is in our current portfolio, organic growth and further new product introductions. Weather conditions have been favorable for winter crop plantings, and we expect to see strong demand in the second quarter as preparation for spring planting gets underway. APAC enjoyed another very good year. Higher revenues, improved margins and lower costs delivered a 21% increase in EBITDA. We continue to see benefits from our manufacturing footprint rationalization and the performance improvement initiatives that we've put in place over the last couple of years. We are now firmly focused on growth and driving synergies across the region. As previously discussed, these synergies revolve around manufacturing, logistics and portfolio. During the year, we launched a number of higher-margin products. Each of these contributed positively to the result. Active ingredient pricing softened for some of our foundational products in the second half, particularly glyphosate, but prices have now stabilized, and we have commenced restocking at the lower price levels. In the short term, current conditions on the East Coast support another positive summer fallow and cropping program. While it is too early to accurately forecast winter plantings, indications are highly positive for another large planting program. Looking further ahead, we continue to work with major local institutions such as the CSIRO and the Queensland University to complement our own resources to further develop our portfolio. And we expect these developments and investments to be a key path of our growth in this region over the next few years. Seeds Technologies result was very encouraging. Revenue and earnings were up by 25%, and this reflected the very strong demand for our sorghum, sunflower and canola seed in multiple markets. During the year, we continued to make progress with our Nuseed omega-3 canola. We've now produced and sold 16,500 metric tons of Aquaterra oil since commercial launch to key and repeat customers in Chile. We recently completed our first commercial sale in the North American market. We are on track to book our first sales of our Nutriterra product into the human supplement market in the next few weeks, another important milestone for this technology. As most of you know, during the year, we signed a strategic 10-year offtake agreement with BP our Nuseed Carinata. Over the past year, we have increased the area planted to over 35,000 hectares in Argentina and Uruguay and recently expanded our program into the Northern Hemisphere planting 6,000 hectares in the United States. As you know from our 2026 aspirations, Seed Technologies provides a very exciting and meaningful growth platform for the company. This result continues the earnings momentum of recent years. Rico will talk to our program over the next year and provide some more detail about our growth aspirations over the next few years, including our recent Energy Cane acquisition. I'll now hand over to Paul to take you through the financials.

Thanks, Greg, and good morning, everyone. As Greg noted, the financial year 2022 financial result was underpinned by strong demand for our Crop Protection Seed products. 17% revenue increase includes sales of AUD 193 million at zero margin to Sumitomo under a Transitional Services Agreement. This compares against AUD 197 million in the prior period. Underlying EBITDA was up 24% at AUD 447 million, while underlying EBIT also increased 55% to AUD 237 million. Underlying net profit after tax was also up significantly to AUD 133 million, an increase of 118%. Statutory net profit after tax also increased 65% to AUD 107 million, and material items [indiscernible]. Underlying net external interest decreased to AUD 52 million for the 12 months ended FY '22 largely reflecting interest savings achieved from the completion of the high-yield bond refinancing under total [indiscernible]. Our underlying effective tax rate is 6.9%, and we expect to see that fluctuate around the 30% mark. The average net working capital sales ratio sits at 28%, well below Nufarm's target and the improvement of 6 percentage points versus the prior corresponding period. This has been driven by our continued focus on customer terms, supply negotiations and effective stock management. On the back of the excellent earnings and strong balance sheet position, leverage improved further year-on-year. The positive earnings and cash flow outlook, together with our current low leverage of 0.8x has enabled the Directors to declare the final dividend of AUD 0.06 per share. At this point, we've decided to not pursue any further capital management options beyond the payment of this dividend for FY '22. However, we are continuing to evaluate appropriate capital management options in line with our capital management principles with the focus maintaining on growth. We remain disciplined in our expense management to ensure increases are aligned to support our growth agenda. As the chart shows, the increase in SG&A relates primarily to the increase in headcount and other costs associated with growth initiatives across both businesses. Increased selling and distribution costs, predominantly supply chain related, CPI increases in staff costs and an increase in employee incentive provisions associated with the strong earnings achieved. D&A expenses also increased relating to Europe and Nuseed and other increases, such as post-COVID increases in travel and insurance. Currency translation added a net benefit of AUD 5 million to our final SG&A outcome. The next chart reconciles our underlying EBITDA to free cash flow. Obviously, EBITDA and net working capital are dominant contributors to this bridge. I'll talk more to net working capital on the next slide. Tax and interest payments of AUD 32 million and AUD 60 million, respectively, were as forecast, while CapEx investment of around AUD 160 million, PPE, price intangibles has increased largely due to increased PPE spend, which was delayed through the impacts of COVID. As we foreshadowed at the half, the full year free cash flow generation was positive. Just as a reminder, free cash flow is the cash flow derived by the business before we distribute to shareholders, a very pleasing result of AUD 179 million pre-application to growth initiatives and dividends. This outcome afforded us the ability to deploy AUD 80 million of free cash flow towards growth initiatives, including increasing our investments in Enko and Crop.Zone and acquiring the energy cane assets from GranBio. Net cash flow post AUD 30 million in dividends paid to shareholders and payments under the Nufarm step-up securities of AUD 10 million is AUD 59 million, which leaves us well placed as we head into FY '23. In terms of inventory and payables management, the supplier financing facility utilization further increased during the year, largely due to raw material price increases. This facility remains the port element in strengthening Nufarm's relationship, key raw material suppliers, which helps secure product suppliers in the current tight market conditions. Inventory increased at year-end driven principally by price increases in active ingredient costs. We expect -- we experienced an improvement in payable days and saw a strong collections profile with a significant reduction in receivables days compared to the prior corresponding period. The focus on net working capital management has yielded an effective flat position over the past 2 years, which is an excellent result given the growth in sales and supply chain constraints. The average net working capital to sales ratio, as shown on the right-hand side of the chart has come down significantly since the prior year is now at 28%, well below our target range and in line with the outcome of the first half. While this is an excellent outcome for Nufarm, the focus on net working capital will continue and will need to be balanced with ensuring continuity of supply given the global logistics and supply chain challenges and the need to optimize our commercial relationship with our customers. Our CapEx spend is focused on supporting our growth ambitions. As you can see, CapEx has increased significantly versus the prior year due largely to investments in Enko, Crop.Zone and energy cane, as mentioned earlier and also to support organic growth. During the year, we commenced projects at Wyke and Chicago Heights aimed at optimizing productive capacity and efficiency measures. These projects will continue over the next 2 to 3 years and will enhance our reliability, competitiveness and market position. In line with our capital management principles, we assess growth opportunities with regard to return on funds employed and be able to see the target return on funds employed above Nufarm's weighted average cost of capital. Pleasingly, return on funds employed has increased significantly versus the prior year and is now at 9.5%. Turning to the debt summary; as you can see, net debt and leverage have continued to improve. Leverage is at 0.8x EBITDA on a rolling 12-month basis, which is lower than our core leverage target of 1.5x to 2x, including leases. Liquidity maintains strong with undrawn facilities at September 30 of around AUD 510 million and cash balances at around AUD 586 million. The high-yield bond refinancing has delivered interest savings as expected since March '22, following the transition to the new arrangements. In FY '23, we expect interest expense to remain stable on a constant currency basis with the savings from the high-yield bond to be offset by increases in interest-based rates. Post year-end, we announced that we have entered into an asset-based lending credit facility, ABL facility for AUD 800 million, an additional AUD 150 million available in a standby facility. The combination of the high-yield bond at ABL facility strengthened Nufarm's capital structure through funding, diversification and an extended debt maturity profile and therefore, supports our growth. To summarize, our balance sheet is in great shape. We have the capacity and flexibility to seize opportunities as they arise and support our growth aspirations. I'll now hand over to Rico to take you through our Crop Protection revenue aspirations.

Thanks, Paul. As Greg mentioned earlier, Nufarm is contributing to and also benefiting from the shift to more sustainable agricultural solutions. We are enabling our growers to produce more with less, while providing products that help them adapt to climate change and minimize unintended environmental consequences. Innovation and technology will drive Nufarm's sustainable growth. This slide showcases some of the innovations and technologies we are working on, which we presented in February at our Investor Day. We have a pipeline that will deliver across our core crops, our targeted geographies over multiple years. Over the past year, our product launches performed as planned, and we are on track to launch all scheduled NPIs for financial year '23. This is a pipeline that will continue to support our customer relevance and support our revenue aspirations. As a reminder, our top 22 projects have all passed proof of concepts with an estimated market size of $6.6 billion. We are no longer waiting for products to come off patent. We are driving our destiny by continuing to target opportunities in the areas we believe we can win. During the year, we launched a number of products, including as examples, new corn and several herbicides, such as Saracen, Tandus and Fierce EZ. These are product steps enhance our market position and all contributed positively to the FY '22 results. In our pipeline for FY '23 and what gives me confidence that we are at least on track to meet our 26th aspirations are some key launches, including a new corn herbicide, [indiscernible] and DROPZONE, a proprietary herbicide that has proven lower drift. These are just some examples of the new products and technologies that demonstrate benefits that are important to customers. In the relatively short time that I have been with Nufarm, I have been very impressed by the experienced and capable people that we have in our global portfolio development and regulatory teams. We've also been very successful at partnering with other technology providers and like-minded organizations to advance our portfolio offer. This will continue to be a feature of our growth aspirations. I wanted to take this opportunity to touch on a couple of investments that I believe could feature prominently in our future. The first is Enko. We invested in Enko for 3 reasons. The first is the rise of resistance to current Crop Protection products, which is slowly but surely becoming a major problem for farmers across the world. The second is the fall of innovation from the major R&D companies, which is mainly driven by inefficiencies and lack our priority in their approach. They have multiple choices for capital allocation, seeds, traits, digital platforms, biologicals, bio-stimulants and so on, which makes them jack of all trades but master of none. Lastly, Enko through the use of [ DEL ], which is DNA and coated libraries, which was developed for the pharmaceutical industry has shown that with the right enabling technology, you can deliver innovation faster, cheaper and with higher likelihood of success. We invested in Crop.Zone for similar reasons. Today, there are 4 ways weeds are controlled, with chemistry, mechanical control, annual control and biological control. Crop.Zone is completely unique in the sense that it combines a conductive liquid and mechanical control in a sustainable manner and approved for organic farming. It is an alternative and an economically viable long-term solution to control herbicide-resistant super weeds. As Greg mentioned earlier, these are exciting developments, and these are not technologies on would have expected from Nufarm in the past. They are, however, examples of technologies that will drive our future. I will now hand over to Brent, who will talk to -- more about exciting growth opportunities.

Yes. Thank you, Rico, and good morning, everyone. Greg has already taken you through the key highlights of the current year's results, so I will focus more on growth and outlook. Last February, I outlined our growth aspirations for the Seed Technologies business over the medium to long term. Today, I am pleased to share that we are well on track to deliver or exceed the internal targets on which these aspirations are based. Our confidence in continued strong growth is driven by the increasing rate of technology and market adoption, both at the farm gate and with our downstream customers. So looking to our core seeds platform outlook; market conditions remain positive for global oilseeds and our positions in canola and sunflower. Increase in global demand for oil seeds, combined with the conflict in Eastern Europe is driving greater demand for sunflowers in North and South America and greater canola demand in North and South America and Australia, all aligning with Nuseed market positions of strength and will further support our growth. Nuseed also aims to continue to grow share and value from our global position in sorghum as we expand our leading ultra-early animal nutrition and bioenergy traits within the crop. In summary, our seeds portfolio is highly strategic, holds a strong growth profile and is expected to remain a very important component of our growth aspiration delivery. Now looking to omega-3; having established strong technology adoption with leading industry players, we are now very focused on expansion of market share with existing customers while continuing to scale our operations, expand our margins and secure further import market approvals as key outcomes for the next 2 to 4 years. The scaling of market adoption is anticipated to continue in our now existing Chilean and North American markets, while we also plan to extend into further geography and other aquaculture species within the 2026 timeframe. With adoption trajectory established, we now intend to increase market adoption and produce more than 16,500 metric tons of oil in calendar year '23. Post calendar year '23, we will continue to accelerate market adoption and production of Aquaterra. Our trajectory in demand has us on track to meet or outperform our internal targets for the omega-3 platform contribution to our stated 2026 aspiration. The Nutriterra launch is on track with our first order expected in the next few weeks, and we are poised for growth in FY '23 and beyond. Within the next 2 to 3 years, we intend to expand our customer pipeline, grow sales and market share in North America and expand into additional markets as we achieve further regulatory approvals. Turning to our Bioenergy platform outlook; today, Nuseed Carinata is a drop-in feedstock solution to the European renewable fuel regulated market. Within the next few years, we plan to also access the valuable low-carbon renewable fuels market in the United States. With the success we are seeing in the 2022 harvest, benefits of our new hybrid technology and increasing grower adoption of Nuseed Carinata, we expect to at least double the hectares planted in FY '23 to greater than 80,000 hectares. Carinata trajectory is on track to meet or surpass the contribution required from Carinata to meet our 2026 seed technology aspirations. The newest technology in Nuseed's Bioenergy platform energy cane provides a significant opportunity to advance -- to enable advanced agriculture feedstock generation for energy transition, including a significant boost in productivity for the existing Brazilian sugarcane biofuel industry. Research indicates that with existing 1G mill infrastructure, energy cane can increase ethanol output by 20% to 30% per hectare and increased bioelectricity generation by 2x to 4x in degraded soil areas that are less suitable for primary crops. Over the next 2 to 3 years, we aim to complete the development and launch of these next-generation products in the acquired pipeline. Additionally, the combination of energy cane with advanced 2G processing has the potential to generate net zero ethanol, biogas, bio electricity, green industrial products and low-carbon feedstocks for sustainable aviation fuel. In FY '23, we will be advancing our research, development and commercial teams to further advance existing product adoption and demonstrate the next-generation products in the pipeline. To summarize, FY '22 has been a very strong year. Collectively, our financial, strategic accomplishments and growth outlook all indicate that we're on track to deliver on or exceed the AUD 600 million to AUD 700 million revenue aspiration by FY '26 at 20% to 25% EBITDA margins as we stated in February. Thank you. I'll now hand back to Greg.

Thanks, Brent and Rico. I guess, whilst elements of Rico and Brent's commentary don't sort of directly relate to the FY '22 result, it does underscore why we are confident that we are on track to meet or exceed our FY '26 revenue aspirations. We've now reported multiple periods of continued growth, and we believe that we've built the foundations and the building blocks to continue that growth. At a macro level, the drivers for our business remain very positive. Global food demand is set to rise significantly with the rise in the global population. At the same time, there is increasing pressure to meet our food needs more sustainably. Advances in science and technology are rewriting the way that we use land and plants to supply not just food, but energy and a wide range of other new products. And Nufarm's at the forefront of these challenges, and a large part of that is about our focus on innovation and technology. We believe demand for our products will continue to grow and drive our revenues. We have the balance sheet strength to deliver this growth and benefit from any opportunities as they may arise. Turning to the immediate future; the outlook remains positive. We've delivered a very strong result in financial year '22, and we believe that we can deliver modest growth in underlying EBITDA on a constant currency basis again in FY '23, assuming, of course, normal seasonal conditions. Full year earnings are expected to be proportionately weighted to the first half however, less skewed than in FY '22. The first 6 weeks of the new financial year have seen favorable seasonal conditions continue in most key grain-growing regions and the outlook for soft commodity prices remains positive. These conditions are likely to support continued strong demand for Seeds and Crop Protection products. Given easing supply conditions and higher channel inventories than this time last year, we don't expect to see the same level of pull-forward sales that we experienced in the first half of last year. So in summary, we have a clear plan for growth. We've shared our growth aspirations with you, and we are on track to meet or exceed those aspirations. We have delivered a very good result this year, and this builds on the momentum from previous periods. We've started financial year '23 with positive trading conditions across all of our business segments. So with that, I'll hand back to Chad, and we can take some questions.

[Operator Instructions] And the first question will be from Belinda Moore from Morgans.

Greg and the rest of the Nufarm team, congratulations on a great result today. Greg, just turning to the outlook -- I suppose can you just talk about how you're seeing sort of the current cropping outlook around the world but particularly, can you focus on Australia and the recent weather and slides, sort of like a short-term negative followed by being positive? And then also, can you talk about sort of what sort of maybe percentage skew we should see in '23 first half versus second half?

Thanks for the question, Belinda, and good morning. Let me take Australia first, I sort of understand that it could be causing some confusion or uncertainty. I guess the immediate impact is both a challenge for the winter crop harvest, which has got little to no impact on Nufarm. And of course, the prospects for the summer crop financing, so the summer crop for '22, '23. And I guess the main pain point there really is Northern New South Wales. There's certainly plenty of activity going on in the Darling Downs and Central Queensland. And the latest estimates are that we expect the summer crop of about 1.5 million hectares. But again, I'd sort of point out that, that's not really material to Nufarm because our prospects are more around the hectares of [ summer fellow ]. That's a country that's held over for the winter crop in 2023. It's actually a much bigger opportunity. In fact, we estimate that the [ summer fellow ] hectares is probably closer to sort of 5 million. So 3x, 4x the size of the summer crop, which is mainly sorghum and canola. So we would see summer weed spraying in sort of Victoria, South Australia and WA on the back of the rainfall that we've had to be pretty strong. I guess on a global level, grain and oilseed stocks remain pretty tight. I think the latest USDA expects global lending stocks minus China that is to be the lowest since 2013 and global stock-to-use ratios in almost the lowest it's been for 20 years. So I guess, with the uncertainty surrounding Ukraine and Russia -- we think that will support healthy grain and oil seed prices well into 2023, really encouraging farmers across the globe to continue to invest in their crops to improve their yields. And I guess that's the part that we play. Certainly, in the U.S., the projections are an increase in planted area by about 1%, including a 4% expansion in corn acres planted here in Australia. One of the benefits of the rain that we have had is that strong soil moisture on the East Coast, particularly is likely to set up a pretty large planting program for the winter crop. And in Europe, weather conditions although they've been a bit mixed for the last sort of 3 months, we certainly have seen weather conditions improve and a lot more favorable now for the winter cereal planting. So all-in-all, we think we're in a reasonably good position Belinda. And I think just on half-on-half, I think probably the best way to look at that is -- and it does vary by geography, of course. But I think at an aggregate level, if you looked at the sort of the split that we had in '21, it's probably a better indicator of where we'll see '23. It's certainly be less weighted to the first half, as I said, in '23 than it was in '22. So probably more in line with what we saw in '21.

And the next question will come from Grant Saligari from Credit Suisse.

Actually, just the first one on omega-3. Brent, I sort of gathered by your comments, and I might have misinterpreted the comments around expanding margin that omega-3 might have been breakeven or even slightly positive profit in the current year. So I was wondering whether you just clarify that? And also just what volume of omega-3 did you actually produce in the FY '22 year, please?

Yes. Thanks, Grant. Good question. So in terms of omega-3 what I can say is that we're pleased that our margins are expanding in the program year-over-year. And I think that's a reflection of both the marketplace and the appreciation of fish oil pricing and still the market getting stronger post COVID. So our margins -- gross margins from that technology continue to increase and are fully on track. So hopefully that answers your question. In terms of volumes produced, we're really looking and you can tell about my commentary that we've gone through a period now over the last 2 or 3 years where we've produced volume and now sold in that 1,500 tonnes and really what we're now focused on in our activity in going into FY '23 is to, I guess, another way of saying what we're trying to do is produce enough volume in '23 to meet as much demand and to generate as much demand on an annual basis is what we've seen all cumulative from what we've done so far.

Yes, that helps. And second question, Greg, if I could, on North America, could you put some building blocks by way of bridge around the second half because the second half EBITDA was lower than even the former '20. There could have been some pull forward, I would guess into the first half. But I was just wondering whether you could put some building blocks around that and into '23, your expectations as to whether you can continue to grow volume in the North American market, please?

Certainly, and thanks for the question. Certainly, the strong early season demand as we pointed out in the notes was followed by drier conditions in the second half. So we certainly saw some demand for. We were not able to have supply all of the product that we wanted, and we've taken the decision to move earlier, so we're carrying the higher levels of inventory in North America at the moment because channel stocks in '22 were low. They're still fairly tight, but higher than what we saw last year. We're seeing very strong demand in October and November in North America. And we would expect to see probably a similar split in '23 that we saw in '22, very strong demand at the moment.

And the next question will be from Richard Johnson from Jefferies.

Greg, I was just interested to hear your views on Crop Protection selling prices in very general terms around the world and really more specifically around what's been behind in your opinion, the positive trend? And given your commentary on some of the ingredient pricing coming off, how we should think about that going forward? And then extrapolating all of that into what assumption you've made on price and your '26 assumptions?

Yes. Well, let me take that part first. I mean gross margins have certainly returned to -- as we go into '23 to more normal levels, really post to some extent, the one-off gains that we experienced in '22. But that was mainly in Australia, and it was mainly glyphosate. It's been the most volatile active ingredient. But we've moved most or all of that higher-priced cost say in Australia. And I think, as I said, we will probably see a revision to more normal margins. So margins that we would have seen through '20 and '21 as we go into '23. But in terms of the overall demand, as I said, when you look at the forecast for planted acres, hectares, depending on which geography, demand is very, very strong. And with continued high prices for -- or attractive prices for soft commodities, we would expect that demand to continue.

Great. And then just finally on -- just to clarify on Europe, I just want to make sure I understand your message is that in '23, you expect to sort of very roughly to do the same again. I'm kind of interested to get a sense of what the margins are like between the business that drops off and the replacement of revenues.

So we talked last year, I think, about AUD 30-odd-million of margin -- sorry, revenue impact, EUR 33 million. And we're starting in '23, that impact is likely to be about EUR 21 million of revenue. I would expect that, that would be somewhere between a range of EUR 10 million to EUR 12 million in gross margin. And as I said, as we did this year in '22, we would expect to offset that through both organic growth and new product introductions.

And the next question will be from Ben Wedd from Macquarie Capital.

Congratulations on the result. Just a quick one just around the guide you put out for EBITDA growth on a constant currency basis. Can you speak to any assumptions you've made when you're hedging [indiscernible] around currency given first half FY '23, it looks like it could be quite a bit lower than FY '22?

Yes. In the Appendix is the constant currency assumptions we've made. So you can -- that's why we don't know what currency is going to do. Obviously, FY '23. So that's why we had set September our statement to make it very clear that we expect modest EBITDA growth on a constant currency basis. So those rates are actually in the appendices.

Sorry, just going to say, just in relation to the split, which was the second part of your question, I think, as I said earlier, if you look at the split in '21, it was 65% first half, 35% second half at a group level. That does change by geography. And I think that's probably the way that you should think about the split in '23. And in '22, of course, it was, I mean, about 75%, 25%. So much more heavily weighted to the first half. I don't believe we will see that same split in '23. So closer to the 65%, 35%.

Great. And then maybe just a broader question just on Carinata around the carbon credit piece. Just see if you could talk a little bit to your sort of assumptions around that and expectations for carbon pricing going forward into '23, '24 and beyond.

Yes. Thanks, Ben. Brent here. Yes, so I think the important aspect you want to understand is that with Carinata because of the way that we can certify it and build the data package around it, we're actually able to have it qualified to be sold into the high-value regulated markets. So today, as I think I might have mentioned, we're selling into the European regulated market under the Renewable Energy Directive. So that's a very high-value market as is the U.S. market, particularly in California, and that's an expansion market for us to go to next. So the challenge, of course, is that the European regulated markets aren't that transparent in terms of being able to just look at the values if you were to look at the California Air Resources Board dashboard that's an online reporting system, they do report the carbon values for that type of regulated renewable fuel program, and they've traded in this last year between $100 and $200 per ton for actual carbon. And I would just say that the European markets, the most valuable European markets generally trade higher than that. And sorry, I think just to add to your second part of your question is with the demand that we're seeing on energy transition and the amount of HVO facilities, the hydrotreating vegetable oil facilities coming online around the globe, our expectation that over time, that will continue to increase in the most valuable regulated markets.

And the next question will be from Steve Byrne from Bank of America.

Yes. Thank you. Your next fiscal year, do you have an estimate of how much deflation you might realize in your raw material costs?

You said sort of pricing impacts, we're able to pass through to the customers or we take it as a selling price reduction. So it's netted out so that we're, in effect, not impacted by deflation, but we certainly have got some estimates where we see AI prices coming off, and we reflect that our forward forecast. And I think Greg spoke about the underlying assumptions of our favorable conditions supporting pricing means that we believe that it's a robust position we're taking in our forward view.

So do I understand you correctly that your per unit profit is likely to stay flat, that the deflation in your raw material costs will not result in a margin expansion. Your pricing will drop commensurate with the raw material cost deflation.

Yes. That's right. So the margins, the relative margins are maintained.

Okay. No opportunity to hold on to that price without giving it back.

Well, I think there's always the opportunity when new in commercial discussions, but I guess we need to be a bit prudent in how we approach our forward outlook.

And just one quick one on Carinata. This is a winter crop, I understand. Can you comment on whether the existing crush infrastructure is suitable to crush Carinata or do those crush plants have to be modified to get the oil out of the Carinata. And can you comment on how much oil per acre you can get out of this crop?

Yes. Thanks, Steve. So yes, it has grown as a cover crop which is typically in the winter season, and that's how we're growing it currently in Latin America as well as the new plantings that we're putting into the Southeast and South Texas area of the U.S. We have had 3 years of commercial crush with it now. We've been working with commercial crushers in particular, Saint Paul as a European crusher, and we can move it straight into most facilities that already crush either canola or in a lot of cases, sunflowers. So it's a drop in to those commercial type of crush facilities with some specific operating procedures that we help them with. But it is readily able to move into those. The second part of your question is how much oil are we seeing? As I think I may have mentioned, we launched this year a full launch of now moving Carinata to hybrid technology. And we're just in the middle of our harvest in Latin America of that first hybrid crop, and we're seeing fantastic yield results, certainly genetic potential to push beyond 2 metric tons per hectare of grain and the oil yield out of it is almost 50%. So you're very, very close to a ton of oil per hectare when the environment conditions are right.

And the next question will be from Jonathan Snape with Bell Potter.

Can you hear me okay?

Very well. Thanks, Jonathan.

Can I just ask one question around the inventories, and particularly in Note 16, there's quite a material jump in the provisioning for obsolescent stock, I think it went up from like 19 million up towards 58 million in this year. Can I check, A, was that taken against this year's profit number? And I guess, B, is that bringing down the carrying value of stock to where market is on actives that you plan on selling it to next year?

Yes. Okay. So a couple of things on that. So the first part your question is that with the higher-priced inventory, when you back out the material item, which is the write-down of the inventory for Russia and Ukraine, which was AUD 16 million. Plus, we also have a residual amount for the glyphosate provision that we took up a writedown at March 31. That's about AUD 7 million or AUD 8 million. So let's call it AUD 25 million. Take that off your AUD 54 million and you end up with about a 2% provision, which is a normal -- when you look at last year, it's a very normal provision that we have for obsolescence. The growth, if you like, is really related to the increased pricing in inventory. So if you normalize it for the glyphosate provision and material item, it's pretty standard.

All right. Great. And look, can I just ask around seeds, just to make sure the numbers still hold. On the Carinata, 80,000 hectares. I think you guys said it was AUD 100 a hectare there on the seed sale back at the Strategy Day. Is that still the way we should be thinking about that in terms of revenue?

Yes. Thanks, Jonathan. Yes, there's 2 revenue streams from our Carinata business model. The first one is seed sales, and that's right. It's about AUD 100 per hectare, roughly speaking, of the amount of revenue that we would expect from the seed sale to farm at the front end of the contract. And then secondly, the piece that relates to the carbon value of the crop as we certify through a third-party who use RSB to roundtable sustainable biomaterials to audit us and we provide a sustainability certificate downstream that's attached right from every field all the way to the fuel consumption of the oil that's generated out of that and demonstrating that we can get to greater than 100% greenhouse gas reduction. And with that comes another significant amount of value stream from the downstream side for Carinata. So that's the other element that we continue to grow into with this business, which probably from what I could say from a value and earnings perspective is much more valuable than the seed sale to us.

And so did you say that, that acreage is doubling year-on-year?

That's right. So we wanted above 40,000 hectares in total this last year, and we're gearing towards -- aiming towards greater than 80,000 hectares to be planted in FY '23.

Okay. And look, while we're on oil seeds, 16,500 tonnes like if I look at the prices, I guess, soybean oil, it's what, 2 gram per tonne, if I looked at fish oil omega-3 or somewhere from 4,000 to 4,500. How should we be thinking around the pricing of the omega-3? Obviously, you're trying to get into the market. So I'm assuming it's not going to be the price points that you see fish oil trade or even the omega-3 stuff. Is it somewhere in the middle? Is it down closer to soy and canola or is it up closer to?

Yes, maybe I can add some comments to that, Jonathan, is if you look at the one that's most easy to benchmark to or to look at is the Peruvian fish oil market. This last year, it posted trades between $3,200 per metric ton and $4,000 per metric ton. But the thing you need to recognize with that market is that quite often what you see posted is usually for smaller volumes in the human health, and there is -- we know that for large bulk volumes going to aquaculture, it trades slightly lower than that. Then there's also several other sources of fish oil that have lower content and trades well below [indiscernible]. So on average, we estimate in 2022, the weighted average of all global fish oil to the whole market into aquaculture, probably traded at a range closer to $2,400 to $3,000 a tonne. So that's really the competitive market that we play in. With Aquaterra, we've built a premium value position because of its sustainability and fish oil benefits relative to that market. And we trade we typically are trying to price at a slight premium to the incumbent being fish oil to that $2,400 to $3,000 range. And then there's some adjustments for overall omega-3 content, but that probably gives you more of a ballpark in terms of the relative value of our product.

And I guess if you looked at that business, the oil you're selling this year is from last year's acreage, which I can't remember the number, but I seem to think it was like 20,000 acres or something like that that's put in. What's the intention or the discovery around acres going in this year, that would probably then support the '24 oil sales program?

Yes. So as I mentioned, we're significantly scaling. We've also launched hybrids or are launching hybrids to go into '23 planting. We actually planted more than what you just referenced in 2022. But the way I'd encourage everyone to think about it is it's far less in this case about how many acres we plant, what we're most focused on is the rate of market adoption with our customers and then we plan to match that. And what's different with the omega-3 than Carinata, growers know how to grow canola, and we can go access those acres so hence, why we've indicated more about the types of volumes as a minimum that we want to gear towards which is different than Carinata and the fact that you are convincing and helping growers to adopt a brand-new technology. And of course, we have the very large offtake agreement with BP. So in Carinata, it's all about how many hectares we can plant on market adoption at the farm gate. In omega-3, it's much more about how many metric tons of demand we can generate at the -- in the downstream and growing with the market adoption in aquaculture.

And the next question will be from Evan Karatzas with UBS.

Obviously, solid result, but just Paul, can you just expand a little on the comments you made in regards to the capital management in your prepared remarks? I may have misheard, but just what you're potentially exploring there?

Yes. I guess what we're saying, Evan, is that obviously, with the leverage that we've got, we're going to start looking at what our options are. But growth is a focus, and there are some growth initiatives that we're looking at as well. So it's something that we're weighing up as to whether we do something in terms of capital management. It's -- I guess the point we're saying is we're very alive to it in terms of that we -- it is an opportunity. But however, there are some growth opportunities that we're looking at as well, and that trumps any capital management for those principles. So you'll hear more from us over the course of the next half.

Okay. Okay, great. And then just quickly on the product deregistration headwind in '23. Obviously, thanks for that disclosure. Can you just remind us, broadly speaking on does that amount start to fall away in FY '24? I just can't remember the exact sequencing there. Any sort of color you can provide on the post FY '23 amount?

Yes. Thanks, Evan. There will be some more in '24 and '25, but significantly less. We'd probably be talking probably an impact of EUR 3 million or EUR 4 million in '24, talking margin now and maybe something similar in '25. And we're not -- we're really largely through it all in -- by the end of FY '25.

Ladies and gentlemen, this does conclude our question-and-answer session, and this concludes today's call. We thank you so much for joining. And at this time, you may now disconnect your lines. Take care.